UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual report pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended Commission file
December 31, 20112012 number 1-5805
JPMorgan Chase & Co.
(Exact name of registrant as specified in its charter)
Delaware 13-2624428
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. employer
identification no.)
   
270 Park Avenue, New York, New York 10017
(Address of principal executive offices) (Zip code)
   
Registrant’s telephone number, including area code: (212) 270-6000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common stock The New York Stock Exchange
  The London Stock Exchange
  The Tokyo Stock Exchange
Warrants, each to purchase one share of Common Stock The New York Stock Exchange
Depositary Shares, each representing a one-four hundredth interest in a share of 8.625% Non-Cumulative Preferred Stock, Series J The New York Stock Exchange
Depositary Shares, each representing a one-four hundredth interest in a share of 5.50% Non-Cumulative Preferred Stock, Series OThe New York Stock Exchange
Guarantee of 7.00% Capital Securities, Series J, of J.P. Morgan Chase Capital X The New York Stock Exchange
Guarantee of 5.875% Capital Securities, Series K, of J.P. Morgan Chase Capital XI The New York Stock Exchange
Guarantee of 6.25% Capital Securities, Series L, of J.P. Morgan Chase Capital XII The New York Stock Exchange
Guarantee of 6.20% Capital Securities, Series N, of JPMorgan Chase Capital XIV The New York Stock Exchange
Guarantee of 6.35% Capital Securities, Series P, of JPMorgan Chase Capital XVI The New York Stock Exchange
Guarantee of 6.625% Capital Securities, Series S, of JPMorgan Chase Capital XIX The New York Stock Exchange
Guarantee of 6.875% Capital Securities, Series X, of JPMorgan Chase Capital XXIV The New York Stock Exchange
Guarantee of Fixed-to-Floating Rate Capital Securities, Series Z, of JPMorgan Chase Capital XXVIThe New York Stock Exchange
Guarantee of Fixed-to-Floating Rate Capital Securities, Series BB, of JPMorgan Chase Capital XXVIIIThe New York Stock Exchange
Guarantee of 6.70% Capital Securities, Series CC, of JPMorgan Chase Capital XXIX The New York Stock Exchange
Guarantee of 7.20% Preferred Securities of BANK ONE Capital VI The New York Stock Exchange
KEYnotes Exchange Traded Notes Linked to the First Trust Enhanced 130/30 Large Cap Index The New York Stock Exchange
Alerian MLP Index ETNs due May 24, 2024 NYSE Arca, Inc.
JPMorgan Double Short US 10 Year Treasury Futures ETNs due September 30, 2025 NYSE Arca, Inc.
JPMorgan Double Short US Long Bond Treasury Futures ETNs due September 30, 2025 NYSE Arca, Inc.
Euro Floating Rate Global Notes due July 27, 2012The NYSE Alternext U.S. LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ý Yes o No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes ý No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
x Large accelerated filer
o Accelerated filer 
o Non-accelerated filer
(Do not check if a smaller reporting company)
o Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes ý No
The aggregate market value of JPMorgan Chase & Co. common stock held by non-affiliates as of June 30, 2011:2012: $159,285,259,081134,979,087,091
Number of shares of common stock outstanding as of January 31, 20122013: 3,817,360,4073,827,466,945
Documents incorporated by reference: Portions of the registrant’s Proxy Statement for the annual meeting of stockholders to be held on May 15, 2012,21, 2013, are incorporated by reference in this Form 10-K in response to Items 10, 11, 12, 13 and 14 of Part III.





Form 10-K Index
Part I
 Page
Item 1
Business
1
 
Overview
1
 
Business segments
1
 
Competition
1
 
Supervision and regulation
1-71-8
 
Distribution of assets, liabilities and stockholders’ equity; interest rates and interest differentials
312-316336-340
 
Return on equity and assets
62, 305, 312331, 336
 
Securities portfolio
317341
 
Loan portfolio
132-154, 231-252, 318-322134-159, 250-275, 342-347
 
Summary of loan and lending-related commitments loss experience
155-157, 252-255, 323-324159-162, 276-279, 348-349
 
Deposits
272, 325296, 350
 
Short-term and other borrowed funds
307351
Item 1A
Risk factors
7-178-21
Item 1B
Unresolved SEC Staff comments
1721
Item 2
Properties
17-1821-22
Item 3
Legal proceedings
1822
Item 4
Mine safety disclosures
1822
   
Part II
  
Item 5

Market for registrant’s common equity, related stockholder matters and issuer purchases of equity securities

18-20
22-23
Item 6
Selected financial data
2023
Item 7
Management’s discussion and analysis of financial condition and results of operations
2023
Item 7A
Quantitative and qualitative disclosures about market risk
2023
Item 8
Financial statements and supplementary data
2023
Item 9
Changes in and disagreements with accountants on accounting and financial disclosure
2024
Item 9A
Controls and procedures
2024
Item 9B
Other information
2024
   
Part III
  
Item 10
Directors, executive officers and corporate governance
2125
Item 11
Executive compensation
2126
Item 12

Security ownership of certain beneficial owners and management and related stockholder matters

2226
Item 13
Certain relationships and related transactions, and director independence
2226
Item 14
Principal accounting fees and services
2226
   
Part IV
  
Item 15
Exhibits, financial statement schedules
22-2526-29












Part I


ITEM 1: BUSINESS
Overview
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.” or “United States”), with operations worldwide; the Firm hashad $2.32.4 trillion in assets and $183.6204.1 billion in stockholders’ equity as of December 31, 20112012. 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 world’s most prominent corporate, institutional and government clients.
JPMorgan Chase’s principal bank subsidiaries are JPMorgan Chase Bank, National Association (“JPMorgan Chase Bank, N.A.”), a national bank with U.S. branches in 23 states, and Chase Bank USA, National Association (“Chase Bank USA, N.A.”), a national bank that is the Firm’s credit card–issuing bank. JPMorgan Chase’s principal nonbank subsidiary is J.P. Morgan Securities LLC (“JPMorgan Securities”), the Firm’s U.S. investment banking firm. The bank and nonbank subsidiaries of JPMorgan Chase operate nationally as well as through overseas branches and subsidiaries, representative offices and subsidiary foreign banks. One of the Firm’s principal operating subsidiaries in the United Kingdom (“U.K.”) is J.P. Morgan Securities plc (formerly J.P. Morgan Securities Ltd.), a wholly-owned subsidiary of JPMorgan Chase Bank, N.A.
The Firm’s website is www.jpmorganchase.com. JPMorgan Chase makes available free of charge, through its website, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after it electronically files such material with, or furnishes such material to, the U.S. Securities and Exchange Commission (the “SEC”). The Firm has adopted, and posted on its website, a Code of Ethics for its Chairman and Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer and other senior financial officers.
Business segments
JPMorgan Chase’sChase’s activities are organized, for management reporting purposes, into sixfour major reportable business segments, as well as a Corporate/Private Equity.Equity segment. The Firm’s wholesale businesses compriseconsumer business is the Consumer & Community Banking segment. The Corporate & Investment Bank, (“IB”), Commercial Banking, (“CB”), Treasury & Securities Services (“TSS”) and Asset Management (“AM”) segments. The Firm’s consumer businessessegments comprise the Retail Financial Services (“RFS”) and Card Services & Auto (“Card”) segments.Firm’s wholesale businesses.
A description of the Firm’s business segments and the products and services they provide to their respective client bases is provided in the “Business segment results” section
of Management’s discussion and analysis of financial condition and results of operations (“MD&A”), beginning on page 6364 and in Note 33 on pages 300–303.326–329.
Competition
JPMorgan Chase and its subsidiaries and affiliates operate in a highly competitive environment. Competitors include other banks, brokerage firms, investment banking companies, merchant banks, hedge funds, commodity trading companies, private equity firms, insurance companies, mutual fund companies, credit card companies, mortgage banking companies, trust companies, securities processing companies, automobile financing companies, leasing companies, e-commerce and other Internet-based companies, and a variety of other financial services and advisory companies. JPMorgan Chase’s businesses generally compete on the basis of the quality and range of their products and services, transaction execution, innovation and price. Competition also varies based on the types of clients, customers, industries and geographies served. With respect to some of its geographies and products, JPMorgan Chase competes globally; with respect to others, the Firm competes on a regional basis. The Firm’s ability to compete also depends on its ability to attract and retain its professional and other personnel, and on its reputation.
The financial services industry has experienced consolidation and convergence in recent years, as financial institutions involved in a broad range of financial products and services have merged and, in some cases, failed. This convergence trend is expected to continue. Consolidation could result in competitors of JPMorgan Chase gaining greater capital and other resources, such as a broader range of products and services and geographic diversity. It is likely that competition will become even more intense as companies continue to expand their operations globally and as the Firm’s businesses continue to compete with other financial institutions that are or may become larger or better capitalized, that may have a stronger local presence in certain geographies or that operate under different rules and regulatory regimes than the Firm.
Supervision and regulation
The Firm is subject to regulation under state and federal laws in the United States, as well as the applicable laws of each of the various jurisdictions outside the United States in which the Firm does business.
Regulatory reform: On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which is intended to make significant structural reforms to the financial services industry. The Dodd-Frank Act instructs U.S. federal banking and other regulatory agencies to conduct approximately 285 rule-makings and 130 studies and reports. These regulatory agencies include the Commodity Futures Trading Commission (the “CFTC”); the


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Part I

Securities and Exchange Commission (the “SEC”); the Board of Governors of the Federal Reserve System (the “Federal Reserve”); the Office of the Comptroller of the Currency (the “OCC”); the Federal Deposit Insurance Corporation (the “FDIC”); the Bureau of Consumer Financial Protection (the “CFPB”); and the Financial Stability Oversight Council (the “FSOC”). As a result of the Dodd-Frank Act rule-making and other regulatory reforms, the Firm is currently 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, at the same time, best meeting the needs and


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Part I

expectations of its clients. Given the current status of the regulatory developments, the Firm cannot currently quantify the possible effects on its business and operations of all of the significant changes that are currently underway. For more information, see “Risk Factors” on pages 7–17.8–21. Certain of these changes include the following:
Comprehensive Capital Analysis and Review (“CCAR”) and stress testing. In December 2011, the Federal Reserve issued final rules regarding the submission of capital plans by bank holding companies with total assets of $50 billion or more. Pursuant to these rules, the Federal Reserve requires the Firm to submit a capital plan on an annual basis. In October 2012, the Federal Reserve and OCC issued rules requiring the Firm and certain of its bank subsidiaries to perform stress tests under one stress scenario created by the Firm as well as three scenarios (baseline, adverse and severely adverse) mandated by the Federal Reserve. If the Federal Reserve objects to the Firm’s capital plan, the Firm will be unable to make any capital distributions unless approved by the Federal Reserve. For more information, see “CCAR and stress testing” on pages 5–6.
Resolution planplan. . In September 2011, the Federal Deposit Insurance Corporation (“FDIC”)FDIC and the Board of Governors of the Federal Reserve System (the “Federal Reserve”) issued, pursuant to the Dodd-Frank Act, a final rule that will requirerequires bank holding companies with assets of $50 billion or more and companies designated as systemically important by the Financial Stability Oversight Council (the “FSOC”)FSOC to submit periodically to the Federal Reserve the FDIC and the FSOCFDIC a plan for resolution under the Bankruptcy Code in the event of material distress or failure (a “resolution plan”). In January 2012, the FDIC also issued a final rule that will requirerequires insured depository institutions with assets of $50 billion or more to submit periodically to the FDIC a plan for resolution under the Federal Deposit Insurance Act in the event of failure. The timing of initial, annual and interim resolution plan submissions under both rules is the same. The Firm’s initial resolution plan submissions are due onwere filed by July 1, 2012, withand annual updates thereafter, and the Firm is in the process of developing its resolution plans.will be due by July 1 each year.
Debit interchange. On October 1, 2011, the Federal Reserve adopted final rules implementing the “Durbin Amendment” provisions of the Dodd-Frank Act, which limit the amount the Firm can charge for each debit card transaction it processes.
Derivatives. Under the Dodd-Frank Act, the Firm will be subject to comprehensive regulation of its derivatives business including(including capital and margin requirements, central clearing of standardized over-the-counter derivatives and the requirement that they be traded on regulated trading platforms,platforms) and heightened supervision. Further, some of the proposed margin rules for uncleared swaps mayderivatives will apply extraterritorially to U.S. firms doing business with clients outside of the United States. The Dodd-Frank Act also requires banking entities, such as JPMorgan Chase, to significantly restructure their derivatives businesses, including changing the legal entities through which certain transactionsderivatives activities are conducted.
Volcker Rule. The Firm will also be affected by the requirements of Section 619 of the Dodd-Frank Act, and specifically the provisions prohibiting proprietary trading and restricting the activities involving private equity and hedge funds (the “Volcker Rule”). On October 11, 2011, regulators proposed the remaining rulesregulations to implement the Volcker Rule, whichRule. These are currently expected to be finalized sometime in 2012.2013. Under the proposed rules, “proprietary trading” is defined as the trading of securities, derivatives, or futures (or options on any of the foregoing) thatas principal, where such trading is predominantlyprincipally for the purpose of short-term resale, benefiting from actual or expected short-term price movements
in prices or for and realizing short-term arbitrage profits for the Firm’s own account.profits. The proposed rule’s definition of proprietary trading does not include client market-making, orspecifically excludes market-making-related activity, certain government issued securities trading and certain risk management activities. The Firm ceased some prohibited proprietary trading activities during 2010 and has since exited substantially all such activities.
Money Market Fund Reform. In November 2012, the FSOC and the Financial Stability Board (the “FSB”) issued separate proposals regarding money market fund reform. Pursuant to Section 120 of the Dodd-Frank Act, the FSOC published proposed recommendations that the SEC proceed with structural reforms of money market funds, including, among other possibilities, requiring that money market funds adopt a floating net asset value, mandating a capital buffer and requiring a hold-back on redemptions for certain shareholders. On January 15, 2013, the FSOC announced that it had extended the comment period for the proposed recommendations at the request of the Chairman of the SEC. It is planning to ceaseexpected that the SEC will issue its remaining proprietary trading activities withinown rule proposal on money market fund reform in the timeframe mandatednear future. The FSB endorsed and published for public consultation 15 policy recommendations proposed by the Volcker Rule.International Organization of Securities Commissions (“IOSCO”), including requiring money market funds to adopt a floating net asset value. The FSB has stated that it expects to publish final recommendations in September 2013 and, thereafter, work on procedures for the


2

consistent implementation of the policy recommendations.
Capital. The treatment of trust preferred securities as Tier 1 capital for regulatory capital purposes will be phased out over a three year period, beginning in 2013. In addition, in June 2011, the Basel Committee and the Financial Stability Board (“FSB”)FSB announced that certain global systemically important banks (“GSIBs”) would be required to maintain additional capital, above the Basel III Tier 1 common equity minimum, in amounts ranging from 1% to 2.5%, depending upon the bank’s systemic importance. In December 2011,June 2012, the Federal Reserve, the Office of the Comptroller of the Currency (“OCC”)OCC and FDIC issued a notice of proposed rulemakingfinal rules for implementing ratings alternatives for the computation of risk-based capital for market risk exposures, which if implemented, wouldwill result in significantly higher capital requirements for many securitization exposures. For more information, see “Capital requirements” on pages 4–5.5.
FDIC Deposit Insurance Fund AssessmentsAssessments. . In February 2011, the FDIC issued a final rule changing the assessment base and the method for calculating the deposit insurance assessment rate. These changes became effective on April 1, 2011, and resulted in an aggregate annualizeda substantial increase of approximately $600 million in the assessments that the Firm’s bank subsidiaries pay annually to the FDIC. For example, in 2011, these changes resulted in an increase of approximately $600 million in assessments. For more information, see “Deposit insurance” on page 5.6.
Bureau of Consumer Financial Protection. The Dodd-Frank Act established the CFPB as a new regulatory agency, the Bureau of Consumer Financial Protection (“CFPB”).agency. The CFPB has authority to regulate providers of credit, payment and other consumer financial products and services. The CFPB has examination authority over large banks, such as JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A., with respect to the banks’ consumer financial products and services. The CFPB issued final regulations regarding mortgages, which will become effective in January 2014. For more information, see “CFPB regulations regarding mortgages” on page 7 and “Other supervision and regulation” on pages 7–8.
Heightened prudential standards for systemically important financial institutions. The Dodd-Frank Act creates a structure to regulate systemically important financial companies, and subjects them to heightened prudential standards. For more information, see “Systemically important financial institutions” below.
Concentration limitsDebit interchange.. The On October 1, 2011, the Federal Reserve adopted final rules implementing the “Durbin Amendment” provisions of the Dodd-Frank Act, restricts acquisitions by financial companies if, as a result ofwhich limit the acquisition,amount the total liabilities of the financial company would exceed 10% of the total liabilities of all financial companies. The Federal Reserve is expected to issue rules related to this restriction in 2012.Firm can charge for each debit card transaction it processes.


2


The Dodd-Frank Act instructs U.S. federal banking and other regulatory agencies to conduct approximately 285 rulemakings and 130 studies and reports. These regulatory agencies include the Commodity Futures Trading Commission (the “CFTC”); the SEC; the Federal Reserve; the OCC; the FDIC; the CFPB; and the FSOC.
Other proposals have been made internationally, including additional capital and liquidity requirements that will apply to non-U.S. subsidiaries of JPMorgan Chase, such as J.P.
Morgan Securities Ltd.plc. For further information, see “Risk Factors” on pages 8–21.
Systemically important financial institutions:institutions: The Dodd-Frank Act creates a structure to regulate systemically important financial institutions, and subjects them to heightened prudential standards, including heightened capital, leverage, liquidity, risk management, resolution plan, concentration limit,single-counterparty credit exposure reporting,limits, and early remediation requirements. Systemically important financial institutions will be supervised by the Federal Reserve .Reserve. Bank holding companies with over $50 billion in assets, including JPMorgan Chase, and certain nonbank financial companies that are designated by the FSOC, will be considered systemically important financial institutions subject to the heightened standards and supervision.
In addition, if the regulators determine that the size or scope of activities of the company pose a threat to the safety and soundness of the company or the financial stability of the United States, the regulators have the power to require such companies to sell or transfer assets and terminate activities.
On December 20, 2011, the Federal Reserve issued proposed rules to implement certain of these heightened prudential standards, including:
Risk management standards. The proposal would require oversight of enterprise-wide risk management by a stand-alone risk committee of the board of directors and a chief risk officer. Among other things, the risk committee of the board of directors of a bank holding company would be required to review and approve the liquidity costs, benefits, and risk of each significant new line of business and product.
Liquidity stress testing. The proposal would require a company to conduct a liquidity stress test at least monthly.
Stress tests. Stress tests would be conducted annually by the Federal Reserve, and semi-annually by the company.
Single Counterparty Exposure Limits. The proposal would limit net credit exposure of a bank holding company to a single counterparty as a percentage of regulatory capital. There would be a two-tier counterparty credit limit: (1) a general limit that prohibits a bank holding company (including its subsidiaries) from having aggregate net credit exposure to any single unaffiliated counterparty (including its subsidiaries) in excess of 25% of the company’s capital stock and surplus; and (2) a more stringent limit between a bank holding company with over $500 billion in total assets, and all its subsidiaries, and any counterparty with over $500 billion in total assets, and all of its subsidiaries, of 10% of the company’s capital stock and surplus.
For more information, see “Capital requirements” on pages 4–5 and “Prompt corrective action and early remediation” on page 5.6.


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Part I

Permissible business activities: JPMorgan Chase elected to become a financial holding company as of March 13, 2000, pursuant to the provisions of the Gramm-Leach-Bliley Act. If a financial holding company or any depository institution controlled by a financial holding company ceases to meet certain capital or management standards, the Federal Reserve may impose corrective capital and/or managerial requirements on the financial holding company and place limitations on its ability to conduct the broader financial activities permissible for financial holding companies. In addition, the Federal Reserve may require divestiture of the holding company’s depository institutions if the deficiencies persist. Federal regulations also provide that if any depository institution controlled by a financial holding company fails to maintain a satisfactory rating under the Community Reinvestment Act, the Federal Reserve must prohibit the financial holding company and its subsidiaries from engaging in any additional activities other than those permissible for bank holding companies that are not financial holding companies. So long as the depository-institution subsidiaries of JPMorgan Chase meet the capital, management and Community Reinvestment Act requirements, the Firm is permitted to conduct the broader
activities permitted under the Gramm-Leach-Bliley Act.
The Federal Reserve has proposed rules under which the Federal Reserve could impose restrictions on systemically important financial institutions that are experiencing financial weakness, which restrictions could include limits on acquisitions, among other things. For more information on the restrictions, see “Prompt corrective action and early remediation” on page 5.6.
Financial holding companies and bank holding companies are required to obtain the approval of the Federal Reserve before they may acquire more than five percent of the voting shares of an unaffiliated bank. Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Riegle-Neal Act”), the Federal Reserve may approve an application for such an acquisition without regard to whether the transaction is prohibited under the law of any state, provided that the acquiring bank holding company, before or after the acquisition, does not control more than 10% of the total amount of deposits of insured depository institutions in the U.S.United States or more than 30% (or such greater or lesser amounts as permitted under state law) of the total deposits of insured depository institutions in the state in which the acquired bank has its home office or a branch. In addition, the Dodd-Frank Act restricts acquisitions by financial companies if, as a result of the acquisition, the total liabilities of the financial company would exceed 10% of the total liabilities of all financial companies. For non-U.S. financial companies, liabilities are calculated using only the risk-weighted assets of their U.S. operations. U.S. financial companies must include all of their risk-weighted assets (including assets held overseas). This could have the effect of allowing a non-U.S. financial company to grow to hold significantly more than 10% of the U.S. market without exceeding the concentration limit. Under the Dodd-Frank Act, the Firm must provide written notice to the Federal Reserve prior to acquiring direct or indirect ownership or control of any voting shares of any company with over $10 billion in assets that is engaged in “financial in nature” activities.
Regulation by Federal Reserve: The Federal Reserve acts as an “umbrella regulator” and certain of JPMorgan Chase’s subsidiaries are regulated directly by additional authorities based on the particular activities of those subsidiaries. For example, JPMorgan Chase Bank, N.A., and Chase Bank USA, N.A., are regulated by the OCC. See “Other supervision and regulation” on pages 6–7 for a further description of the regulatory supervision to which the Firm’s subsidiaries are subject.
Dividend restrictions: Federal law imposes limitations on the payment of dividends by national banks. Dividends payable by JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A., as national bank subsidiaries of JPMorgan Chase, are limited to the lesser of the amounts calculated under a “recent earnings” test and an “undivided profits” test. Under the recent earnings test, a dividend may not be paid if the total of all dividends declared by a bank in any calendar year is in excess of the current year’s net income


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combined with the retained net income of the two preceding years, unless the national bank obtains the approval of the OCC. Under the undivided profits test, a dividend may not be paid in excess of a bank’s “undivided profits.” See Note 27 on page 281306 for the amount of dividends that the Firm’s principal bank subsidiaries could pay, at January 1, 2012,2013, to their respective bank holding companies without the approval of their banking regulators.
In addition to the dividend restrictions described above, the OCC, the Federal Reserve and the FDIC have authority to prohibit or limit the payment of dividends by the banking organizations they supervise, including JPMorgan Chase and its bank and bank holding company subsidiaries, if, in the banking regulator’s opinion, payment of a dividend would constitute an unsafe or unsound practice in light of the financial condition of the banking organization. Under proposed rules issued by the Federal Reserve, dividends are restricted once any one of three risk-based capital ratios (tier 1 common, tier 1 capital, or total capital) falls below their respective minimum capital ratio requirement (inclusive of the GSIB surcharge) plus 2.5%.
Moreover, the Federal Reserve has issued rules requiring bank holding companies, such as JPMorgan Chase, to submit to the Federal Reserve a capital plan on an annual basis and receive a notice of non-objection from the Federal Reserve before taking capital actions, such as paying dividends, implementing common equity repurchase programs or redeeming or repurchasing capital instruments. The rules establish a supervisory capital assessment program that outlines Federal Reserve expectations concerning the processes that such bank holding companies should have in place to ensure they hold adequate capitalFor more information, see “CCAR and maintain ready access to funding under adverse conditions. The capital plan must demonstrate, among other things, how the bank holding company will maintain a pro forma Basel I Tier 1 common ratio above 5% under a supervisory stress scenario.testing” on pages 5–6.
Capital requirements: Federal banking regulators have adopted risk-based capital and leverage guidelines that require the Firm’s capital-to-assets ratios to meet certain minimum standards.
The risk-based capital ratio is determined by allocating assets and specified off-balance sheet financial instruments into risk-weighted categories, with higher levels of capital being required for the categories perceived as representing greater risk. Under the guidelines, capital is divided into two tiers: Tier 1 capital and Tier 2 capital. The amount of Tier 2 capital may not exceed the amount of Tier 1 capital. Total capital is the sum of Tier 1 capital and Tier 2 capital. Under the guidelines, banking organizations are required to maintain a total capital ratio (total capital to risk-weighted assets) of 8% and a Tier 1 capital ratio of 4%. For a further description of these guidelines, see Note 28 on pages 281–283.306–308.


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The federal banking regulators also have established minimum leverage ratio guidelines. The leverage ratio is defined as Tier 1 capital divided by adjusted average total assets. The minimum leverage ratio is 3%4% for bank holding companies that are considered “strong” under Federal Reserve guidelines or which have implemented the Federal Reserve’s risk-based capital measure for market risk. Other bank holding companies must have a minimum leverage
ratio of 4%.companies. Bank holding companies may be expected to maintain ratios well above the minimum levels, depending upon their particular condition, risk profile and growth plans. The minimum risk-based capital requirements adopted by the 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 operations. In December 2010, the Basel Committee finalized further revisions to the Accord (“Basel III”) which narrowed the definition of capital, increased capital requirements for specific exposures, introduced short-term liquidity coverage and term funding standards, and established an international leverage ratio. In June 2011, the U.S. federal banking agencies issued rules to establish a permanent Basel I floor under Basel II/Basel III calculations. For further description of these capital requirements, see pages 119–122.4–5.
In connection with the U.S. Government’s Supervisory Capital Assessment Program in 2009, U.S. banking regulators developed a newan additional 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 Firm’s 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. In June 2012, the U.S. banking regulators revised, effective July 1, 2013, certain capital requirements for trading positions and securitizations (“Basel 2.5”). For more information, see Regulatory capital on pages 119–122.117–120.
In June 2011, the Basel Committee and the FSB announced that GSIBs would be required to maintain additional capital, above the Basel III Tier 1 common equity minimum, in amounts ranging from 1% to 2.5%, depending upon the bank’s systemic importance. In November 2012, the FSB announced that the Firm would be in the category subject to a 2.5% capital surcharge. Furthermore, in order to provide a disincentive for banks facing the highest required level of Tier 1 common equity to “increase materially their global systemic importance in the future,” an additional 1% charge could be applied. The Federal Reserve has issued a proposed rule-making that incorporates the concept of a capital surcharge for GSIBs.
The Basel III revisions governing the capital requirements are subject to prolonged observation and transition periods.
The transition period for banks to meet the revised Tier 1 common equity requirement willwere to begin in 2013, with implementation on January 1, 2019. 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.
In addition to capital requirements, the Basel Committee has also proposed two new measures of liquidity risk: the


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“Liquidity “Liquidity Coverage Ratio” and the “Net Stable Funding Ratio,” which are intended to measure, over different time spans, the amount of liquid assets held by the Firm. The observation periods for both these standards began in 2011, with implementation commencing in 2015 and 2018, respectively.
The Dodd-Frank Act prohibits the use of external credit ratings in federal regulations. In December 2011,June 2012, the Federal Reserve, OCC and FDIC issued a notice of proposed rulemaking forfinal rules implementing ratings alternatives for the computation of risk-based capital for market risk exposures. The proposal, if implemented as currently proposed, wouldexposures, which will result in significantly higher capital requirements for many securitization exposures. The Firm anticipates that the U.S. banking agencies will apply a parallel capital treatment to securitizations in both the trading and banking books.
Effective January 1, 2008, the SEC authorized J.P. Morgan Securities LLC to use the alternative method of computing net capital for broker/dealers that are part of Consolidated Supervised Entities as defined by SEC rules. Accordingly, J.P. Morgan Securities LLC may calculate deductions for market risk using its internal market risk models.
For additional information regarding the Firm’s regulatory capital, see Regulatory capital on pages 119–122.117–120.
CCAR and stress testing: In December 2011, the Federal Reserve issued final rules regarding the submission of capital plans by bank holding companies with total assets of $50 billion or more. Pursuant to these rules, the Federal Reserve requires the Firm to submit a capital plan on an annual basis. In October 2012, the Federal Reserve issued rules requiring bank holding companies with over $50 billion in total assets to perform an annual stress test and report the results to the Federal Reserve in January. The results of the annual stress test will also be publicly disclosed, and will be used as a factor in determining whether the Federal Reserve will or will not object to the bank holding company’s capital plan. On January 7, 2013, the Firm submitted its capital plan to the Federal Reserve under the Federal Reserve’s 2013 CCAR process. The Firm’s plan relates to the last three quarters of 2013 and the first quarter of 2014 (that is, the 2013 CCAR capital plan relates to dividends to be declared commencing in June 2013 and payable in July 2013, and to common equity repurchases and other capital actions commencing April 1, 2013). The Firm expects to receive the Federal Reserve’s final response to its plan no later than March 14, 2013. In reviewing the capital plan, the Federal Reserve will consider both quantitative and qualitative factors. Quantitative assessments will include, among other things, the Firm’s ability to continue to meet supervisory expectation for minimum capital ratios and a Basel I Tier 1 common capital ratio of at least 5% throughout the planning horizon under severely adverse stress conditions of the stress test, even if the Firm did not reduce planned capital actions. Qualitative assessments will include, among other things, the comprehensiveness of the plan, the assumptions and


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analyses underlying the Firm’s capital plan, and any relevant supervisory information. If the Federal Reserve objects to the Firm’s capital plan, the Firm will be unable to make any capital distributions unless approved by the Federal Reserve. Bank holding companies must perform an additional stress test in the middle of the year and publicly disclose those results as well. The OCC issued similar regulations that require national banks with over $10 billion in total assets to perform annual stress tests. Accordingly, the Firm will be required to submit separate stress tests to the OCC for its national bank subsidiaries that exceed that threshold.
Prompt corrective action and early remediation: The Federal Deposit Insurance Corporation Improvement Act of 1991 requires the relevant federal banking regulator to take “prompt corrective action” with respect to a depository institution if that institution does not meet certain capital adequacy standards. TheWhile these regulations apply only to banks, and not to bank holding companies, such as JPMorgan Chase. However,Chase Bank, N.A. and Chase Bank USA, N.A., the Federal Reserve is authorized to take appropriate action against the parent bank holding company, such as JPMorgan Chase & Co., based on the undercapitalized status of any bank subsidiary. In certain instances, the bank holding company would be required to guarantee the performance of the capital restoration plan for its undercapitalized subsidiary.
In addition, under the Dodd-Frank Act,in December 2011, the Federal Reserve is required to issueissued proposed rules which would provide for early remediation of systemically important financial companies such as JPMorgan Chase. In December 2011, the Federal Reserve issued proposed rules to implement these early remediation requirements on systemically important financial institutions that experience financial weakness. These proposed restrictions could include limits on capital distributions, acquisitions, and requirements to raise additional capital.
Deposit Insurance: The FDIC deposit insurance fund provides insurance coverage for certain deposits, which insurance is funded through assessments on banks, such as JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A. Higher levels of bank failures overduring the past few yearsfinancial crisis have dramatically increased resolution costs of the FDIC and depleted the deposit insurance fund.FDIC. In addition, the amount of FDIC insurance coverage for insured deposits has been increased generally from $100,000 per depositor to $250,000 per depositor, and until January 1, 2013, the
coverage for non-interest bearing demand deposits is unlimited.depositor. In light of the increased stress on the deposit insurance fund caused by these developments, and in order to maintain a strong funding position and restore the reserve ratios of the deposit insurance fund, the FDIC imposed a special assessment in June 2009, has increased assessment rates of insured institutions generally, and required insured institutions to prepay on December 30, 2009, the premiums that were expected to become due over the following three years.
generally. As required by the Dodd-Frank Act, the FDIC issued a final rule in February 2011 that changes the assessment base from insured deposits to average consolidated total assets less average tangible equity, and changes the assessment rate calculation. These changes became effective on April 1, 2011, and resulted in an aggregate annualizeda substantial increase of approximately $600 million in the assessments that the Firm’s bank subsidiaries pay annually to the FDIC. For example, in 2011, these changes resulted in an increase of approximately $600 million in assessments.
Powers of the FDIC upon insolvency of an insured depository institution or the Firm: Upon the insolvency of an insured depository institution, the FDIC will be appointed the conservator or receiver under the Federal Deposit Insurance Act. In such an insolvency, the FDIC has the power:
to transfer any assets and liabilities to a new obligor without the approval of the institution’s creditors;
to enforce the terms of the institution’s contracts pursuant to their terms; or
to repudiate or disaffirm any contract or lease to which the institution is a party.
The above provisions would be applicable to obligations and liabilities of JPMorgan Chase’s subsidiaries that are insured depository institutions, such as JPMorgan Chase Bank, N.A., and Chase Bank USA, N.A., including, without limitation, obligations under senior or subordinated debt issued by those banks to investors (referred to below as “public noteholders”) in the public markets.
Under federal law, the claims of a receiver of an insured depository institution for administrative expense and the claims of holders of U.S. deposit liabilities (including the FDIC) have priority over the claims of other unsecured creditors of the institution, including public noteholders and depositors in non-U.S. offices. As a result, whether or not the FDIC would ever seek to repudiate any obligations held by public noteholders or depositors in non-U.S. offices of any subsidiary of the Firm that is an insured depository institution, such as JPMorgan Chase Bank, N.A., such persons would be treated differently from, and could receive, if anything, substantially less than the depositors in U.S. offices of the depository institution. However, the U.K. Financial Services Authority (the “FSA”) has recently issued a proposal that may require the Firm to either obtain equal treatment for U.K. depositors or “subsidiarize” in the U.K.
An FDIC-insured depository institution can be held liable for any loss incurred or expected to be incurred by the FDIC in connection with another FDIC-insured institution under common control with such institution being “in default” or “in danger of default” (commonly referred to as “cross-guarantee” liability). An FDIC cross-guarantee claim against a depository institution is generally superior in right of payment to claims of the holding company and its affiliates against such depository institution.
Under the Dodd-Frank Act, where a systemically important financial institution, such as JPMorgan Chase, is in default or danger of default, the FDIC may be appointed receiver in order to conduct an orderly liquidation of such systemically


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important financial institution. The FDIC has issued rules to implement its orderly liquidation authority, and is expected to propose additional rules. The FDIC has powers as receiver similar to those described above. However, the details of certain powers will be the subject of additional rulemakingsrule-makings and have not yet been fully delineated.


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The Bank Secrecy Act: The Bank Secrecy Act (“BSA”) requires all financial institutions, including banks and securities broker-dealers, to, among other things, establish a risk-based system of internal controls reasonably designed to prevent money laundering and the financing of terrorism. The BSA includes a variety of recordkeepingrecord-keeping and reporting requirements (such as cash and suspicious activity reporting), as well as due diligence/know-your-customer documentation requirements. The Firm has established a global anti-money laundering program in order to comply with BSA requirements. In January 2013, the Firm entered into Consent Orders with the OCC and the Federal Reserve relating to its BSA and Anti-Money Laundering policies, procedures and controls.
Regulation by Federal Reserve: The Federal Reserve acts as an “umbrella regulator” and certain of JPMorgan Chase’s subsidiaries are regulated directly by additional authorities based on the particular activities of those subsidiaries. For example, JPMorgan Chase Bank, N.A., and Chase Bank USA, N.A., are regulated by the OCC. See “Other supervision and regulation” on pages 7–8 for a further description of the regulatory supervision to which the Firm’s subsidiaries are subject.
Holding company as source of strength for bank subsidiaries: Under currentEffective July 2011, provisions of the Dodd-Frank Act codified the Federal ReserveReserve’s historical policy JPMorgan Chase is expectedthat requires a bank holding company to actserve as a source of financial strength to its bank subsidiariesfor any depository institution subsidiary and to commit resources to support these subsidiaries in circumstances where it might not do so absent such policy. Effective July 2011, provisions of the Dodd-Frank Act codified the Federal Reserve’s policy that require a bank holding company to serve as a source of strength for any depository institution subsidiary. However, because the Gramm-Leach-Bliley Act provides for functional regulation of financial holding company activities by various regulators, the Gramm-Leach-Bliley Act prohibits the Federal Reserve from requiring payment by a holding company or subsidiary to a depository institution if the functional regulator of the payor objects to such payment. In such a case, the Federal Reserve could instead require the divestiture of the depository institution and impose operating restrictions pending the divestiture.
Restrictions on transactions with affiliates:affiliates: The bank subsidiaries of JPMorgan Chase are subject to certain restrictions imposed by federal law on extensions of credit to, and certain other transactions with, the Firm and certain other affiliates, and on investments in stock or securities of JPMorgan Chase and those affiliates. These restrictions prevent JPMorgan Chase and other affiliates from borrowing from a bank subsidiary unless the loans are secured in specified amounts and are subject to certain other limits. For more information, see Note 27 on page 281.306. Effective in 2012, the Dodd-Frank Act extendsextended such restrictions to derivatives and securities lending transactions. In addition, the Dodd-Frank Act’s Volcker Rule imposes similar restrictions on transactions between banking entities, such as JPMorgan Chase and its subsidiaries, and hedge funds or private equity funds for
which the banking entity serves as the investment manager, investment advisor or sponsor.
CFPB regulations regarding mortgages: The CFPB issued final regulations regarding mortgages, which will become effective in January 2014 and which will prohibit mortgage servicers from beginning foreclosure proceedings until a mortgage loan is 120 days delinquent. During this period, the borrower may apply for a loan modification or other option and the servicer cannot begin foreclosure until the application has been addressed. The CFPB issued another final regulation in December 2012 imposing an “ability to repay” requirement for residential mortgage loans. A creditor (or its assignee) will be liable to the borrower for damages if the creditor fails to make a “good faith and reasonable determination of a borrower’s reasonable ability to repay as of consummation.” Borrowers can sue the creditor or assignee for up to three years after closing, and can raise an ability to repay claim against the servicer as a set off at any point during the loan’s life if in foreclosure. A “Qualified Mortgage” as defined in the regulation is generally protected from such suits.
Other supervision and regulation:regulation: The Firm’s banks and certain of its nonbank subsidiaries are subject to direct supervision and regulation by various other federal and state authorities (some of which are considered “functional
regulators” under the Gramm-Leach-Bliley Act). JPMorgan Chase’s national bank subsidiaries, such as JPMorgan Chase Bank, N.A., and Chase Bank USA, N.A., are subject to supervision and regulation by the OCC and, in certain matters, by the Federal Reserve and the FDIC. Supervision and regulation by the responsible regulatory agency generally includes comprehensive annual reviews of all major aspects of the relevant bank’s business and condition, stress tests of banks and imposition of periodic reporting requirements and limitations on investments, among other powers.
The Firm conducts securities underwriting, dealing and brokerage activities in the United States through J.P. Morgan Securities LLC and other broker-dealer subsidiaries, all of which are subject to regulations of the SEC, the Financial Industry Regulatory Authority and the New York Stock Exchange, among others. The Firm conducts similar securities activities outside the United States subject to local regulatory requirements. In the United Kingdom, those activities are conducted by J.P. Morgan Securities Ltd.,plc, which is regulated by the FSA. It is expected that, during 2013, regulation of J.P. Morgan Securities plc will transition to the Prudential Regulation Authority (PRA), pursuant to the U.K. Government’s plan under the Financial Services Authority. The operationsAct 2012 to restructure regulatory competences as between the PRA (which will be a subsidiary of the Bank of England having responsibility for prudential regulation of banks and other systemically important institutions) and the Financial Conduct Authority (which will regulate prudential matters for other firms and conduct matters for all participants).


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Part I

JPMorgan Chase mutual funds also are subject to regulation by the SEC.SEC, in addition to the supervision already described above with respect to money market mutual funds.
The Firm has subsidiaries that are members of futures exchanges in the United States and abroad and are registered accordingly.
In the United States, two subsidiaries are registered as futures commission merchants, and other subsidiaries are either registered with the CFTC as commodity pool operators and commodity trading advisors or exempt from such registration. These CFTC-registered subsidiaries are also members of the National Futures Association. The Firm’s U.S. energy business is subject to regulation by the Federal Energy Regulatory Commission. It is also subject to other extensive and evolving energy, commodities, environmental and other governmental regulation both in the U.S.United States and other jurisdictions globally.
Under the Dodd-Frank Act, the CFTC and SEC will be the regulators of the Firm’s derivatives businesses. JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC and J.P. Morgan Ventures Energy Corporation have registered with the CFTC as swap dealers. The Firm expects that JPMorgan Chase Bank, N.A. and J.P. Morgan Securities LLC will also register with the CFTC as swap dealers and with the SEC as security-based swap dealers, and that J.P. Morgan Ventures Energy Corporation will register with the CFTC as a swap dealer.dealers.
The types of activities in which the non-U.S. branches of JPMorgan Chase Bank, N.A. and the international subsidiaries of JPMorgan Chase may engage are subject to various restrictions imposed by the Federal Reserve. Those non-U.S. branches and international subsidiaries also are subject to the laws and regulatory authorities of the countries in which they operate.
The activities of JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A. as consumer lenders also are subject to regulation under various U.S. federal laws, including the Truth-in-Lending, Equal Credit Opportunity, Fair Credit Reporting, Fair Debt Collection Practice, Electronic Funds Transfer and CARD acts, as well as various state laws. These statutes impose requirements on consumer loan origination


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and collection practices. Under the Dodd-Frank Act, the CFPB will be responsible for rulemakingrule-making and enforcement pursuant to such statutes.
Under the requirements imposed by the Gramm-Leach-Bliley Act, JPMorgan Chase and its subsidiaries are required periodically to disclose to their retail customers the Firm’s policies and practices with respect to the sharing of nonpublic customer information with JPMorgan Chase affiliates and others, and the confidentiality and security of that information. Under the Gramm-Leach-Bliley Act, retail customers also must be given the opportunity to “opt out” of information-sharing arrangements with nonaffiliates, subject to certain exceptions set forth in the Gramm-Leach-Bliley Act.

Item 1A: RISK FACTORS
The following discussion sets forth the material risk factors that could affect JPMorgan Chase’s financial condition and operations. Readers should not consider any descriptions of such factors to be a complete set of all potential risks that could affect the Firm.
Regulatory Risk
JPMorgan Chase operates within a highly regulated industry, and the Firm’s businesses and results are significantly affected by the laws and regulations to which it is subject.
As a global financial services firm, JPMorgan Chase is subject to extensive and comprehensive regulation under statefederal and federalstate laws in the United States and the laws of the various jurisdictions outside the United States in which the Firm does business. These laws and regulations significantly affect the way that the Firm does business, and can restrict the scope of its existing businesses and limit its ability to expand its product offerings or to pursue acquisitions, or can make its products and services more expensive for clients and customers.
The full impact of the Dodd-Frank Act on the Firm’s businesses, operations and earnings remains uncertain because of the extensive rule-making still to be completed.
The Dodd-Frank Act,enacted in 2010, significantly increases the regulation of the financial services industry. For further information, see Supervision and regulation on pages 1–7.
The U.S. Department of the Treasury, the FSOC, the SEC, the CFTC, the Federal Reserve, the OCC, the CFPB and the FDIC are all engaged in extensive rule-making mandated by the Dodd-Frank Act, and mucha substantial amount of the rule-making remains to be done. As a result, the complete impact of the Dodd-Frank Act on the FirmFirm’s business, operations and earnings remains uncertain. Certain aspects of the Dodd-Frank Act and such rule-making are discussed in more detail below. For further information, see Supervision and regulation on pages 1–8.
Debit interchange. The Firm believes that, as a result of the Durbin Amendment, its“Durbin Amendment” provisions of the Dodd-Frank Act, which limit the amount that the Firm can charge for each debit card transaction, the Firm’s annualized net income may behas been reduced by approximately $600 million per year. Although the Firm continues to consider various actions that it may
take to mitigate this anticipated reduction in net income, it is unlikely that any such actions wouldwill wholly offset such reduction.
Volcker Rule. Rule. Until the final regulations under the Volcker Rule are adopted, the precise definition of prohibited “proprietary trading”, the scope of any exceptions, for market makingincluding those related to market-making and hedging activities, and the scope of permitted hedge fund and private equity fund activities remainsinvestments remain uncertain. It is unclear under the proposed rules whether some portion of the Firm’s market-makingmarket-making-related and risk mitigation activities, as currently conducted, will be required to be curtailed or will be otherwise adversely affected. In addition, the rules, if enacted as proposed, wouldcould prohibit the Firm’s participation and investment in certain securitization structures and wouldcould bar U.S. banking entitiesthe Firm from sponsoring or investing in certain non-U.S. funds. Also, with respect to certain of the Firm’s investments in illiquid private equity funds, should regulators not exercise their authority to permit the Firm to hold suchcertain investments, including those in illiquid private equity funds, beyond the minimum statutory


8


divestment period, the Firm could incur substantial losses when it disposes of such investments, as itinvestments. The Firm may be forced to sell such investments at a substantial discount in the secondary market as a result of both the constrained timing of such sales and the possibility that other financial institutions are likewise liquidating their investments at the same time.
Derivatives. Derivatives. In addition to imposing comprehensive regulation on the Firm’s derivatives businesses, the Dodd-Frank Act also requires banking entities, such as JPMorgan Chase, to significantly restructure their derivatives businesses, including changing the legal entities through which such businesses are conducted. Further, some of the proposed margin rules for uncleared swaps maywill apply extraterritorially to U.S. firms doing business with clients outside of the United States. Clients of non-U.S. firms doing business outside the United States wouldmay not be required to post margincomply with the same rules in similar transactions. If these marginThis disparity in the application of the different rules become final as currently drafted,could place JPMorgan Chase could be at a significant competitive disadvantage to its non-U.S. competitors, which could have a material adverse effect on the earnings and profitability of the Firm’s wholesale businesses.
Heightened prudential standards for systemically important financial institutions.institutions. Under the Dodd-Frank Act, JPMorgan Chase is considered to be a systemically important financial institution and is subject to the heightened prudential standards and supervision prescribed by the Act.supervision. If the proposed rules that were issued onby the Federal Reserve in December 20, 2011 are adopted as currently proposed, they are likely to increase the Firm’s operational, compliance and risk management costs, and could have an adverse effect on the Firm’s business, results of operations or financial condition.
CFPB. CFPBAlthough the Firm. The CFPB has issued final regulations regarding mortgages which will become effective in January 2014 and which will prohibit mortgage servicers from beginning foreclosure proceedings until a mortgage loan is unable120 days delinquent, and will impose an “ability to predict what specific measures the CFPB may take in applying its regulatory mandate, anyrepay” requirement for residential mortgage loans. Other new regulatory requirements or changes to existing requirements that the CFPB may promulgate could require changes in JPMorgan Chase’s consumer businesses,


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Part I

and result in increased compliance costs and impair the profitability of such businesses. In addition, as a result of the Dodd-Frank Act’s potential expansion of the authority of state attorneys general to bring actions to enforce federal consumer protection legislation, the Firm could potentially be subject to additional state lawsuits and enforcement actions, thereby further increasing its legal and compliance costs.
Resolution and Recovery. . The FDIC and the Federal Reserve have issued a final rule that will requirerequires the Firm to submit periodically to the Federal Reserve the FDIC and the FSOCFDIC a resolution plan under the Bankruptcy Code in the event of material financial distress or failure (a “resolution plan”). In 2012, theThe FDIC also issued a final rule that will requirerequires the Firm to submit periodic contingency plans to the FDIC under the Federal Deposit Insurance Act outlining its resolution plan in the event of its failure. The Firm’s initial resolution plan submissions were filed in July
2012, and updates are due on July 1, 2012, with annual updates thereafter, and the Firm is in the process of developing its resolution plans.annually. If the FDIC and the Federal Reserve determine that the Firm’s resolution plan is not credible or would not facilitate an orderly resolution under the Bankruptcy Code, the FDIC and the Federal Reserve may jointly impose more stringent capital, leverage or liquidity requirements on the Firm, or restrictions on the growth, activities or operations of the Firm, or require the Firm to restructure, reorganize or divest certain assets or operations in order to facilitate an orderly resolution. Any such measures, particularly those aimed at the disaggregation of the Firm, may reduce the Firm’s capital, adversely affect the Firm’s operations and profitability, increase the Firm’s systems, technology and managerial costs, reduce the Firm’s capital, lessen efficiencies and economies of scale and potentially impede the Firm’s business strategies.
EliminationIn addition, holders of Use of External Credit Ratings. In December 2011,subordinated debt or preferred stock issued by the Federal Reserve,Firm may be fully subordinated to interests held by the OCC and the FDIC issued proposed rules for risk-based capital guidelines which would eliminate the use of external credit ratings for the calculation of risk-weighted assets. If the rules become final as currently proposed, they would result in a significant increaseU.S. government in the calculation of the Firm’s risk-weighted assets, which could requireevent that the Firm to hold more capital, increase its cost of doing business and place the Firm atenters into a competitive disadvantage to non-U.S. competitors.receivership, insolvency, liquidation or similar proceeding.
Concentration Limits. Limits. The Dodd-Frank Act restricts acquisitions by financial companies if, as a result of the acquisition, the total liabilities of the financial company would exceed 10% of the total liabilities of all financial companies.companies in the United States. The Federal Reserve is expected to issue rules related to these provisions of the Dodd-Frank Act in 2012.2013. This concentration limit could restrict the Firm’s ability to make acquisitions in the future, thereby adversely affecting its growth prospects.
The total impact of the Dodd-Frank Act cannot be fully assessed without taking into consideration how non-U.S. policymakers and regulators will respond to the Dodd-Frank Act and the implementing regulations under the Act, and how the cumulative effects of both U.S. and non-U.S. laws
and regulations will affect the businesses and operations of the Firm. Additional legislative or regulatory actions in the United States, as well as in the EU or in other countries in which the Firm operates, could result in a significant loss of revenue for the Firm, limit the Firm’s ability to pursue business opportunities in which it might otherwise consider engaging, affect the value of assets that the Firm holds, require the Firm to increase its prices and therefore reduce demand for its products, impose additional costs on the Firm, or otherwise adversely affect the Firm’s businesses. Accordingly, any such new or additional legislation or regulations could have an adverse effect on the Firm’s business, results of operations or financial condition.
The Basel III capital standards will impose additional capital, liquidity and other requirements on the Firm that could decrease its competitiveness and profitability.
The Basel Committee on Banking Supervision (the “Basel Committee”) announced in December 2010 revisions to its Capital Accord (commonly referred to as “Basel III”), which will require higher capital ratio requirements for banks, narrow the definition of capital, expand the definition of risk-weighted assets, and introduce short-term liquidity and term funding standards, among other things.
Capital Surcharge. In June 2011, the Basel Committee and the FSB proposed that GSIBs be required to maintain additional capital above the Basel III Tier 1 common equity minimum. See page 2 in Item 1: Business for further information on the proposed capital change. Based on the Firm’s current understanding of these new capital requirements, the Firm expects that it will be in compliance with all of the standards to which it will be subject as they become effective. However, compliance with these capital standards may adversely affect the Firm’s operational costs, reduce its return on equity, or cause the Firm to alter the types of products it offers to its customers and clients, thereby causing the Firm’s products to become less attractive or placing the Firm at a competitive disadvantage to financial institutions, both within and outside the United States, that are not subject to the same capital surcharge.
Liquidity Coverage and Net Stable Funding Ratios. The Basel Committee has also proposed two new measures of liquidity risk: the “liquidity coverage ratio” and the “net stable funding ratio,” which are intended to measure, over different time spans, the amount of the liquid assets held by the Firm. If the ratios are finalized as currently proposed, the Firm may need, in order to be in compliance with such ratios, to incur additional costs to raise liquidity from sources that are more expensive than its current funding sources and may need to take certain mitigating actions, such as ceasing to offer certain products to its customers and clients or charging higher fees for extending certain lines of credit. Accordingly, compliance with these liquidity coverage standards could adversely affect the Firm’s funding costs or reduce its profitability in the future.


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Non-U.S. regulations and initiatives may be inconsistent or may conflict with current or proposed regulations in the United States, which could create increased compliance and other costs and adversely affect the Firm’s businesses,business, operations or financial conditions.profitability.
The EU has created a European Systemic Risk Board to monitor financial stability, and the Group of Twenty Finance Ministers and Central Bank Governors (“G-20”) broadened the membership and scope of the Financial Stability Forum in 2008 to form the FSB. These institutions, which are


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charged with developing ways to promote cross-border financial stability, are considering various proposals to address risks associated with global financial institutions. Some of the initiatives adopted include increased capital requirements for certain trading instruments or exposures and compensation limits on certain employees located in affected countries. In the U.K., regulators have increased liquidity requirements for local financial institutions, including regulated U.K. subsidiaries of non-U.K. bank holding companies and branches of non-U.K. banks located in the U.K.; adopted a Bank Tax Levy that applies to balance sheets of branches and subsidiaries of non-U.K. banks; proposed that non-U.K. banks either obtain equal treatment for U.K. depositors or “subsidiarize” in the U.K.; and proposed the creation of resolution and recovery plans by U.K. regulated entities, among other initiatives.
In the EU, there is an extensive and complex program of proposed regulatory enhancement which reflects, in part, the EU’s commitments to policies of the G-20 together with other plans specific to the EU. This program includes the European Market Infrastructure Regulation (“EMIR”) which, among other things, would require central clearing of standardized derivatives and which is likely to be phased in starting in 2013. It also includes the revision of the existing Markets in Financial Instruments Directive (“MiFID II”) to deliver, among other things, the G20 commitment to on-venue trading of derivatives. Both EMIR and MiFID II include many other regulatory requirements that may have wide-ranging and material effects on the Firm’s business operations.
The EU is also currently considering significant revisions to laws covering: depositary activities; credit rating activities; resolution of banks, investment firms and market infrastructures; anti-money-laundering controls; data security and privacy; and corporate governance in financial firms, together with implementation in the EU of the Basel III capital standards. In addition, the Firm is monitoring any potential implications for its business of developments in relation to both bank structure (in respect of which both the EU itself and a variety of EU Member States unilaterally are considering new rules) and the EU’s plans for a single supervisory mechanism for systemic banks under the European Central Bank. For example, the U.K. Independent Commission on Banking (the “Vickers Commission”) proposed provisions, which are now set forth in draft legislation, that would mandate the separation (or “ring-fencing”) of deposit-taking activities from securities trading and other analogous activities within banks, subject to certain exemptions. The final legislation is expected to adopt and include the supplemental recommendation of the Parliamentary Commission on Banking Standards (the “Tyrie Commission”) that such ring-fences should be “electrified” by the imposition of mandatory forced separation on banking institutions that are deemed to test the limits of the safeguards. It is believed that the Firm will have the benefit of the above-referenced exemptions from the requirement to “ring-fence,” but this cannot be determined until the criteria are known with certainty.
Parallel but distinct draft provisions have been published by the French and German governments which could affect the Firm’s operations in those countries.
It is not possible to determine at the current time how these various proposals will affect the Firm’s businesses, or how each relate to the European Commission’s forthcoming legislative proposals on bank structure arising out of the Report of the High Level Expert Group on Reforming the Structure of the EU Banking Sector (the “Liikanen Group”). However, as regulatory schemes and requirements that are being proposed by these various regulators around the world may be inconsistent or conflict with regulations to which the Firm is subject in the United States (as well as in other parts of the world), thereby subjecting the Firm may, if these proposals are adopted, be subjected to higher compliance and legal costs, as well as the possibility of higher operational, capital and liquidity costs, all of which could have an adverse effect on the Firm’s business, results of operations and profitability in the future.
The Basel III capital standards will impose additional capital, liquidity and other requirements on the Firm that could decrease its competitiveness and profitability.
The Basel Committee on Banking Supervision (the “Basel Committee”) announced in December 2010 revisions to its Capital Accord; such revisions are commonly referred to as “Basel III”. Basel III will require higher capital ratio requirements for banks, narrow the definition of capital, expand the definition of risk-weighted assets, and introduce short-term liquidity and term funding standards, among other things. In June 2012, the U.S. federal banking agencies published proposed capital rules to implement Basel III.
Capital Surcharge. In June 2011, the Basel Committee and the FSB proposed that GSIBs be required to maintain additional capital above the Basel III Tier 1 common equity minimum. See page 5 in Item 1: Business, for further information on the proposed capital change. Based on the Firm’s current understanding of these new capital requirements, the Firm expects that it will be in compliance with all of the standards to which it will be subject as they become effective. However, compliance with these capital standards may reduce the Firm’s return on equity or cause the Firm to alter the types of products it offers to its customers and clients, thereby causing the Firm’s products to become less attractive or placing the Firm at a competitive disadvantage to financial institutions, both within and outside the United States, that are not subject to the same capital surcharge.
Liquidity Coverage and Net Stable Funding Ratios. The Basel Committee has also proposed two new measures of liquidity risk: the “liquidity coverage ratio” and the “net stable funding ratio,” which are intended to measure, during an acute stress, over different time spans, the amount of the liquid assets held by the Firm in relation to liquidity required. If the ratios are finalized as currently proposed, the Firm may need to incur additional costs to raise liquidity and to take certain mitigating actions, such as ceasing to


10


offer certain products to its customers and clients or charging higher fees for extending certain lines of credit, in order to be in compliance with such ratios. Accordingly, compliance with these liquidity coverage standards could adversely affect the Firm’s funding costs or reduce its profitability in the future.
Elimination of Use of External Credit Ratings. The Federal Reserve, the OCC and the FDIC have issued final rules for risk-based capital guidelines which eliminate the use of external credit ratings for the calculation of risk-weighted assets. This will result in a significant increase in the calculation of the Firm’s risk-weighted assets, which will require the Firm to hold more capital, increase its cost of doing business and place the Firm at a competitive disadvantage to non-U.S. competitors.
Expanded regulatory oversight of JPMorgan Chase’s consumer businesses will increase the Firm’s compliance costs and risks and may negatively affect the profitability of such businesses.
JPMorgan Chase’s consumer businesses are subject to increasing regulatory oversight and scrutiny with respect to its compliance underwith consumer laws and regulations, including changes implemented as a part of the Dodd-Frank Act. The Firm has entered into Consent Orders with its banking regulators relating to its Bank Secrecy Act (“BSA”) and Anti-Money Laundering (“AML”) policies, procedures and controls and with respect to its residential mortgage servicing, foreclosure and loss-mitigation activities. The Consent Orders require significant changes to the Firm’s servicing and default business; the submission and implementation of a comprehensive action plan setting forth the steps necessary to ensure the Firm’s residential mortgage servicing, foreclosure and loss-mitigation activities are conducted in accordance with the requirements of the Consent Orders; and other remedial actions that the Firm has undertaken to ensure that it satisfies all requirements of the Consent Orders. The Firm also agreed in February 2012 to a global settlement in principle 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 CFPB and the State Attorneys General, relating to the servicing and origination of
mortgages. ThisThe mortgage-related Consent Order and global settlement requiresrequire the Firm to make cash payments and provide certain refinancing and other borrower relief, as well as to adhere to certain enhanced mortgage servicing standards. For further information, see “Subsequent events”standards, and the BSA/AML Consent Order will require the Firm to make enhancements to its procedures, make investments in Note 2 on page 184,its technology and Mortgage Foreclosure Investigationshire additional personnel, all of which will increase the Firm’s operational and Litigation in Note 31 on pages 295–296.compliance costs.
In addition, any newNew regulatory requirements or changes to existing requirements that the CFPB may promulgate could require changes in the product offerings and practices of JPMorgan Chase’s consumer businesses result in increased compliance costs and affect the profitability of such businesses.
Finally, as a result of increasing federal and state scrutiny of
the Firm’s consumer practices, the Firm may face a greater
number or wider scope of investigations, enforcement actions
and litigation, in the future, thereby increasing its costs
associated with responding to or defending such actions. In
addition, increased regulatory inquiries and investigations, as
well as any additional legislative or regulatory developments
affecting the Firm’s consumer businesses, and any required
changes to the Firm’s business operations resulting from
these developments, could result in significant loss of
revenue, limit the products or services the Firm offers, require
the Firm to increase its prices and therefore reduce demand
for its products, impose
additional compliance costs on the
Firm, cause harm to the Firm’s reputation or otherwise
adversely affect the Firm’s consumer businesses. In addition,
ifIf the Firm does not appropriately comply with current or
future legislation and regulations that apply to its consumer
operations, the Firm may be subject to fines, penalties or
judgments, or material regulatory restrictions on its
businesses, which could adversely affect the Firm’s operations
and, in turn, its financial results.
Implementation of the Firm’s resolution plan under the U.S. resolution plan rules could materially impair the claims of JPMorgan Chase debt holders.
As noted above, in July 2012 JPMorgan Chase submitted to the Federal Reserve and the FDIC its initial plan for resolution of the Firm. The Firm’s resolution plan includes strategies to resolve the Firm under the Bankruptcy Code, and also recommends to the FDIC and the Federal Reserve the Firm’s proposed optimal strategy to resolve the Firm under the special resolution procedure provided in Title II of the Dodd-Frank Act (“Title II”).
The Firm’s recommendation for its optimal Title II strategy would involve a “single point of entry” recapitalization model in which the FDIC would use its power to create a “bridge entity” for JPMorgan Chase, transfer the systemically important and viable parts of the Firm’s business, principally the stock of JPMorgan Chase & Co.’s main operating subsidiaries and any intercompany claims against such subsidiaries, to the bridge entity, recapitalize those businesses by contributing some or all of such intercompany claims to the capital of such subsidiaries, and by exchanging debt claims against JPMorgan Chase & Co. for equity in the bridge entity. If the Firm were to be resolved under this strategy, no assurance can be given that the value of the stock of the bridge entity distributed to the holders of debt obligations of JPMorgan Chase & Co. would be sufficient to repay or satisfy all or part of the principal amount of, and interest on, the debt obligations for which such stock was exchanged.
Market Risk
JPMorgan Chase’s results of operations have been, and may continue to be, adversely affected by U.S. and international financial market and economic conditions.
JPMorgan Chase’s businesses are materially affected by economic and market conditions, including the liquidity of the global financial markets; the level and volatility of debt and equity prices, interest rates and currency and commodities prices; investor sentiment; events that reduce confidence in the financial markets; inflation and unemployment; the availability and cost of capital and credit; the occurrence of natural disasters, acts of war or terrorism; and the health of U.S. or international economies.
In the Firm’s wholesale businesses, the above-mentioned factors can affect transactions involving the Firm’s underwriting and advisory businesses; the realization of cash returns from its private equity business; the volume of transactions that the Firm executes for its customers and,


11
Part I

therefore, the revenue that the Firm receives from commissions and spreads; and the willingness of financial sponsors or other investors to participate in loan syndications or underwritings managed by the Firm.


9
Part I

The Firm generally maintains extensive positions in the fixed income, currency, commodities and equity markets to facilitate client demand and provide liquidity to clients. From time to time theThe Firm may have market-making positions that lack pricing transparency or liquidity. The revenue derived from these positions is affected by many factors, including the Firm’s success in effectively hedging its market and other risks, volatility in interest rates and equity, debt and commodities markets, credit spreads, and availability of liquidity in the capital markets, all of which are affected by economic and market conditions. The Firm anticipates that revenue relating to its market-making and private equity businesses will continue to experience volatility, which will affect pricing or the ability to realize returns from such activities, and that this could materially adversely affect the Firm’s earnings.
The fees that the Firm earns for managing third-party assets are also dependent upon general economic conditions. For example, a higher level of U.S. or non-U.S. interest rates or a downturn in securities markets could affect the valuations of the third-party assets that the Firm manages or holds in custody, which, in turn, could affect the Firm’s revenue. Macroeconomic or market concerns may also prompt outflows from the Firm’s funds or accounts.
Changes in interest rates will affect the level of assets and liabilities held on the Firm’s balance sheet and the revenue that the Firm earns from net interest income. A low interest rate environment or a flat or inverted yield curve may adversely affect certain of the Firm’s businesses by compressing net interest margins, reducing the amounts that the Firm earns on its investment securities portfolio, or reducing the value of its mortgage servicing rights (“MSR”) asset, thereby reducing the Firm’s net interest income and other revenues.
The Firm’s consumer businesses are particularly affected by domestic economic conditions, including U.S. interest rates; the rate of unemployment; housing prices; the level of consumer confidence; changes in consumer spending; and the number of personal bankruptcies. Any further deterioration inIf the current economic conditions, or the failure of the economy to reboundpositive trends in the near term,U.S. economy are not sustained, this could diminish demand for the products and services of the Firm’s consumer businesses, or increase the cost to provide such products and services. In addition, adverse economic conditions, such as continuing declines in home prices or persistent high levels of unemployment, could lead to an increase in mortgage, credit card and other loan delinquencies and higher net charge-offs, which can reduce the Firm’s earnings.
Widening of credit spreads makes it more expensive for the Firm to borrow on both a secured and unsecured basis. Credit spreads widen or narrow not only in response to Firm-specific events and circumstances, but also as a result of general economic and geopolitical events and conditions.
Changes in the Firm’s credit spreads will impact, positively or negatively, the Firm’s earnings on liabilities that are recorded at fair value.
The outcomeDespite improved financial market conditions, many of the EU sovereign debt crisisstructural issues facing the Eurozone remain and problems could resurface which could have significant adverse effects on JPMorgan Chase’s business, results of operations, financial condition and liquidity.
Notwithstanding improved financial market conditions, many of the Firm’s businesses,structural issues facing the Eurozone remain and problems could resurface which could have significant adverse effects on JPMorgan Chase’s business, results of operations, financial condition and earnings.liquidity, particularly if they lead to sovereign debt default, significant bank failures or defaults and/or the exit of one or more countries from the European Monetary Union (the “EMU”).
Despite various assistance packagesThe ECB’s Outright Monetary Transaction program continues to underpin an improved risk environment, shifting the focus of the crisis from immediate financing strains to the more structural challenges of fiscal retrenchment and facilitiesstimulation of GDP growth. However, financial market conditions could materially worsen if, for Greece, Ireland and Portugal, it is not possibleexample, consecutive Eurozone countries were to predict how markets will react ifdefault on their sovereign debt, significant bank failures or defaults in these countries were to occur, and/or one or more of these countriesthe members of the Eurozone were to default,exit the EMU. Yields on government bonds of certain Eurozone countries, including Greece, Ireland, Italy, Portugal and Spain, have remained volatile, despite various stabilization packages and facilities that have been implemented to assist various distressed Eurozone countries. Concerns have been and continue to be raised as to the financial effectiveness of the assistance measures taken to date and such a default, if it were to occur,concerns could intensify. Concerns could also be triggered by political developments, with key elections in Italy and Germany during 2013, and ongoing uncertainty about the tolerance of austerity across the Eurozone.
Continued economic turmoil in the Eurozone could lead to “market contagion” in other Eurozone countriesa further deterioration of global economic conditions and thereby adversely affect the market valueFirm’s business and results of securitiesoperations in Europe and other obligations held byelsewhere. There can be no assurance that the Firm’s IB, AM, TSSvarious steps that JPMorgan Chase has taken to protect its businesses, results of operations and CIO businesses. In addition,financial condition against the departureresults of anythe Eurozone countrycrisis will be sufficient.
Further, the effects of the Eurozone debt crisis could be even more significant if they lead to a partial or complete break-up of the EMU. The partial or full break-up of the EMU would be unprecedented and its impact highly uncertain. The exit of one or more countries from the EuroEMU or the dissolution of the EMU could lead to serious foreignredenomination of certain obligations of obligors in exiting countries. Any such exit and redenomination would cause significant uncertainty with respect to outstanding obligations of counterparties and debtors in any exiting country, whether sovereign or otherwise, and lead to complex and lengthy disputes and litigation. The resulting uncertainty and


12


market stress could also cause, among other things, severe disruption to equity markets, significant increases in bond yields generally, potential failure or default of financial institutions, including those of systemic importance, a significant decrease in global liquidity, a freeze-up of global credit markets and a potential worldwide recession. Any combination of such events could negatively impact JPMorgan Chase’s businesses, financial condition and results of operations. In addition, one or more EMU exits and currency redenominations could be accompanied by imposition of capital, exchange operational and settlement disruptions,similar controls, which could further negatively impact JPMorgan Chase’s cross-border risk and other aspects of its businesses and its earnings. See “Management’s Discussion and Analysis - Country Risk Management” on pages 170–173 for a discussion of the Firm’s European exposures.
Changes are being considered in turn,the method for determining LIBOR and it is not apparent how any such changes could affect the value of LIBOR-linked obligations of JPMorgan Chase, or how such changes could affect the Firm’s financial condition or results of operations.
Beginning in 2008, concerns have been raised about the accuracy of the calculation of the daily London Inter-Bank Offered Rate (“LIBOR”), which is currently overseen by the British Bankers’ Association (the “BBA”). The BBA has taken steps to change the process for determining LIBOR by increasing the number of banks surveyed to set LIBOR and to strengthen the oversight of the process. The final report of the Wheatley Review of LIBOR, published in September 2012, set forth recommendations relating to the setting and administration of LIBOR, including the gradual phasing out of certain currencies and maturities. In December 2012 the U.K. government adopted legislation enacting one of those recommendations, making it a criminal offense to attempt to manipulate the setting of benchmark rates. The U.K. government also announced that the U.K. Financial Services Authority (“FSA”) intends to incorporate the rest of the Wheatley Review recommendations in new regulations relating to the LIBOR process.
At the present time it is uncertain the extent of changes, if any, may be required or made by the FSA or other governmental or regulatory authorities in the method for determining LIBOR. Accordingly, at the present time it is not apparent whether or to what extent any such changes would have a negativean adverse impact on the value of any LIBOR-linked debt securities issued by the Firm or any loans, derivatives and other financial obligations or extensions of credit for which the Firm is an obligor, or whether or to what extent any such changes would have an adverse effect on the value of any LIBOR-linked securities, loans, derivatives and other financial obligations or extensions of credit held by or due to the Firm, or on the Firm’s operations and businesses.financial condition or results of operations.
Credit Risk
The financial condition of JPMorgan Chase’s customers, clients and counterparties, including other financial institutions, could adversely affect the Firm.
If the current positive economic environment were to deteriorate further, ortrends globally are not rebound in the near term,sustained, more of JPMorgan Chase’s customers may become delinquent on their loans or other obligations to the Firm which, in turn, could result in a higher level of charge-offs and provisions for credit losses, or in requirements that the Firm purchase assets from or provide other funding to its clients and counterparties, any of which could adversely affect the Firm’s financial condition. Moreover, a significant deterioration in the credit quality of one of the Firm’s counterparties could lead to concerns in the market about the credit quality of other counterparties in the same industry, thereby exacerbating the Firm’s credit risk exposure, and increasing the losses (including mark-to-market losses) that the Firm could incur in its market-making and clearing businesses.
Financial services institutions are interrelated as a result of market-making, trading, clearing, counterparty, or other relationships. The Firm routinely executes transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. Many of these transactions expose the Firm to credit risk and, in some cases, disputes and litigation in the event of a default by the counterparty or client. The Firm is a market leader in providing clearing, custodial and prime brokerage services for financial services companies. When such a client of the Firm becomes bankrupt or insolvent, the Firm may become entangled in significant disputes and litigation with the client’s bankruptcy estate and other creditors or involved in regulatory investigations, all of which can increase the Firm’s operational and litigation costs.
During periods of market stress or illiquidity, the Firm’s credit risk also may be further increased when the Firm cannot realize the fair value of the collateral held by it or when collateral is liquidated at prices that are not sufficient to recover the full amount of the loan, derivative or other exposure due to the Firm. Further, disputes with counterpartiesobligors as to the valuation of collateral significantly


10


increase in times of market stress and illiquidity. Periods of illiquidity as experienced in 2008 and early 2009, may occur again and could produce losses if the Firm is unable to realize the fair value of collateral or manage declines in the value of collateral.
Concentration of credit and market risk could increase the potential for significant losses.
JPMorgan Chase has exposure to increased levels of risk when 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. As a result, the Firm regularly monitors various segments of its portfolio exposures to assess potential concentration risks. The Firm’s efforts to diversify or hedge its credit portfolio against concentration risks may not be successful.
In addition, disruptions in the liquidity or transparency of the financial markets may result in the Firm’s inability to sell, syndicate or realize the value of its positions, thereby leading to increased concentrations. The inability to reduce the Firm’s positions may not only increase the market and credit risks associated with such positions, but also increase


13
Part I

the level of risk-weighted assets on the Firm’s balance sheet, thereby increasing its capital requirements and funding costs, all of which could adversely affect the operations and profitability of the Firm’s businesses.
JPMorgan Chase’s role as a clearing and custody bank in the U.S. tri-party repurchase business exposes it to credit risks, including intra-day credit risk.
The Firm is a market leader in providing clearing, custodial and prime brokerage services for financial services companies. In addition, the Firm acts as a clearing and custody bank in the U.S. tri-party repurchase transaction market. Many of these transactions expose the Firm to credit risk in the event of a default by the counterparty or client and, in the case of its role in the U.S. tri-party repurchase business, can expose the Firm to intra-day credit risk of the cash borrowers, usually broker-dealers; however, this exposure is secured by collateral and typically extinguished through the settlement process by the end of the day. The Firm actively participated in the Tri-Party Repo Infrastructure Reform Task Force sponsored by the Federal Reserve Bank of New York, which issued recommendations to modify and improve the infrastructure of tri-party repurchase transactions in order to, among other things, mitigate intra-day credit exposure. The Firm has implemented many of the recommendations and intends to implement the intra-day credit recommendations by the end of 2013. As a result, the Firm expects its intra-day credit exposure after implementation of all the Task Force recommendations to be substantially reduced. Nevertheless, if a broker-dealer that is party to a repurchase transaction cleared by the Firm becomes bankrupt or insolvent, the Firm may become involved in disputes and litigation with the broker-dealer’s bankruptcy estate and other creditors, or involved in regulatory investigations, all of which can increase the Firm’s operational and litigation costs and may result in losses if the securities in the repurchase transaction decline in value.
Liquidity Risk
If JPMorgan Chase does not effectively manage its liquidity, its business could suffer.
JPMorgan Chase’s liquidity is critical to its ability to operate its businesses. Some potential conditions that could impair the Firm’s liquidity include markets that become illiquid or are otherwise experiencing disruption, unforeseen cash or capital requirements (including, among others, commitments that may be triggered to special purpose entities (“SPEs”) or other entities), difficulty in selling or inability to sell assets, unforeseen outflows of cash or collateral, and lack of market or customer confidence in the Firm or financial markets in general. These conditions may be caused by events over which the Firm has little or no control. The widespread crisis in investor confidence and resulting liquidity crisis experienced in 2008 and into early 2009 increased the Firm’s cost of funding and limited its access to some of its traditional sources of liquidity such as securitized debt offerings backed by mortgages, credit card
receivables and other assets, and there is no assurance that these conditions could not occur in the future.
Bank deposits are aIf the Firm’s access to stable and low cost sourcesources of funding. If the Firm does not successfully attractfunding, such as bank deposits, (because, for example, competitors raise the interest rates that they are willing to pay to depositors, and accordingly, customers move their deposits elsewhere),reduced, the Firm may need to replace suchraise alternative funding with more expensive funding, which would reduce the Firm’s net interest margin and net interest income.
Debt obligations of JPMorgan Chase & Co., JPMorgan Chase Bank, N.A. and certain of their subsidiaries are currently rated by credit rating agencies. These credit ratings are important to maintaining the Firm’s liquidity. A reduction in these credit ratings could reduce the Firm’s access to debt markets or materially increase the cost of issuing debt, trigger additional collateral or funding requirements, and decrease the number of investors and counterparties willing or permitted, contractually or otherwise, to do business with or lend to the Firm, thereby curtailing the Firm’s business operations and reducing its profitability. Reduction in the ratings of certain SPEs or other entities to which the Firm has funding or other commitments could also impair the Firm’s liquidity where such ratings changes lead, directly or indirectly, to the Firm being required to purchase assets or otherwise provide funding.
Critical factors in maintaining high credit ratings include a stable and diverse earnings stream, strong capital ratios, leading market shares, strong credit quality and risk management controls, diverse funding sources, and disciplined liquidity monitoring procedures. Although the Firm closely monitors and manages factors influencing its credit ratings, there is no assurance that such ratings will not be lowered in the future. For example, the rating agencies have indicated they intend to re-evaluate the credit ratings of systemically important financial institutions in light of the provisions of the Dodd-Frank Act that seek to eliminate any implicit government support for such institutions. In addition, several rating agencies have indicated that recent economic and geopolitical trends, including deteriorating sovereign creditworthiness (particularly in the Eurozone), elevated economic uncertainty and higher funding spreads, could lead to downgrades in the credit ratings of many global banks, including the Firm. Any such downgrades from rating agencies, if they affected the Firm’s credit ratings, may occur at times of broader market instability when the Firm’s options for responding to events may be more expensive or of limited and general investor confidence is low.availability.
As a holding company, JPMorgan Chase & Co. relies on the earnings of its subsidiaries for its cash flow and, consequently, its ability to pay dividends and satisfy its debt and other obligations. These payments by subsidiaries may take the form of dividends, loans or other payments. Several of JPMorgan Chase & Co.’s principal subsidiaries are subject to dividend distribution or capital adequacy requirements or other regulatory or contractual restrictions on their ability to provide such payments. Limitations in the payments that JPMorgan Chase & Co. receives from its subsidiaries could reduce its liquidity position.
Some global regulators have proposed legislation or regulations requiring large banks to incorporate a separate subsidiary in every countrycountries in which they operate, and to maintain independent capital and liquidity for such subsidiaries. If adopted, these requirements could hinder the Firm’s ability to efficiently manage its funding and liquidity efficiently.in a centralized manner.
Reductions in the Firm’s credit ratings may adversely affect its liquidity and cost of funding, as well as the value of debt obligations issued by the Firm.
JPMorgan Chase & Co. and certain of its subsidiaries, including JPMorgan Chase Bank, N.A., are currently rated by credit rating agencies. In 2012, Moody’s and Fitch downgraded the ratings of JPMorgan Chase & Co. In addition, as of year-end 2012, Moody’s had JPMorgan Chase & Co., and S&P had JPMorgan Chase & Co., JPMorgan Chase Bank, N.A. and certain other subsidiaries, on “negative” outlook, indicating the possibility of a further downgrade in ratings. Although the Firm closely monitors and manages factors influencing its credit ratings, there is no assurance that such ratings will not be lowered in the future. For example, the rating agencies, have indicated that further control failures by the Firm (such as was evidenced in the Chief Investment Office (“CIO”) matter discussed below), deterioration in capital, liquidity and asset quality levels, or a significant increase in risk appetite could put downward pressure on the Firm’s ratings. Additionally, the rating agencies have indicated that they intend to re-evaluate the credit ratings of systemically important financial institutions in light of the provisions of the Dodd-Frank Act that seek to eliminate any implicit government support for such institutions.
Furthermore, the rating agencies continue to evaluate economic and geopolitical trends, including sovereign creditworthiness, elevated economic uncertainty and higher funding spreads, all of which could lead to downgrades in the credit ratings of global banks, including the Firm. There is no assurance that any such downgrades from rating agencies, if they affected the Firm’s credit ratings, would not occur at times of broader market instability when the


14 11
Part I

Firm’s options for responding to events may be more limited and general investor confidence is low.
Further, a reduction in the Firm’s credit ratings could reduce the Firm’s access to debt markets, materially increase the cost of issuing debt, trigger additional collateral or funding requirements, and decrease the number of investors and counterparties willing or permitted, contractually or otherwise, to do business with or lend to the Firm, thereby curtailing the Firm’s business operations and reducing its profitability. In addition, any such reduction in credit ratings may increase the credit spreads charged by the market for taking credit risk on JPMorgan Chase & Co. and its subsidiaries and, as a result, could adversely affect the value of debt obligations that they have issued or may issue in the future.
Legal Risk
JPMorgan Chase faces significant legal risks, both from regulatory investigations and proceedings and from private actions brought against the Firm.
JPMorgan Chase is named as a defendant or is otherwise involved in various legal proceedings, including class actions and other litigation or disputes with third parties. There is no assurance that litigation with private parties will not increase in the future, particularly with respect to litigation related to the issuance or underwriting by the Firm of mortgage-backed securities (“MBS”).future. Actions currently pending against the Firm may result in judgments, settlements, fines, penalties or other results adverse to the Firm, which could materially adversely affect the Firm’s business, financial condition or results of operations, or cause serious reputational harm to the Firm. As a participant in the financial services industry, it is likely that the Firm will continue to experience a high level of litigation related to its businesses and operations.
The Firm’s businesses and operations are also subject to increasing regulatory oversight and scrutiny, which may lead to additional regulatory investigations. For example, in Januaryinvestigations or enforcement actions. In 2012, the U.S. DepartmentFirm was the subject of Justice,Consent Orders from its banking regulators and entered into a global settlement with federal and state governmental agencies relating to its mortgage servicing and origination activities. In January 2013, the New York State Attorney General,Firm also entered into Consent Orders with its banking regulators related to risk management, model governance and other control functions related to CIO and certain other trading activities at the Secretary for HousingFirm and Urban Developmentwith respect to the Firm’s and certain of its bank subsidiaries’ policies, procedures and controls relating to compliance with BSA and AML requirements. As the SEC announcedregulators continue to examine the formationoperations of the Residential Mortgage-Backed Securities Working Group to investigate “those responsible for misconduct contributing toFirm and its bank subsidiaries, there is no assurance that additional consent orders or other enforcement actions will not be issued by them in the financial crisis” through the pooling and sale of residential MBS.future. These and other initiatives from statefederal and federalstate officials may subject the Firm to additionalfurther judgments, settlements, fines or penalties, or cause the Firm to be required to restructure its operations and activities, all of which could lead to reputational issues, or higher operational costs, thereby reducing the Firm’s revenue.
Business and Operational Risks
JPMorgan Chase’s operations are subject to risk of loss from unfavorable economic, monetary and political developments in the United States and around the world.
JPMorgan Chase’s businesses and earnings are affected by the fiscal and other policies that are adopted by various U.S. and non-U.S. regulatory authorities and agencies. The Federal Reserve regulates the supply of money and credit in the United States and its policies determine in large part the cost of funds for lending and investing in the United States and the return earned on those loans and investments. Changes in Federal Reserve policies (as well as the fiscal and monetary policies of non-U.S. central banks or regulatory authorities and agencies) are beyond the Firm’s control and, consequently, the impact of changes in these policies on the Firm’s activities and results of operations is difficult to predict.
The Firm’s businesses and revenue are also subject to risks inherent in investing and market-making in securities of companies worldwide. These risks include, among others, risk of loss from unfavorable political, legal or other developments, including social or political instability, in the countries in which such companies operate, as well as the other risks and considerations as described further below.
Several of the Firm’s businesses engage in transactions with, or trade in obligations of, U.S. and non-U.S. governmental entities, including national, state, provincial, municipal and local authorities. These activities can expose the Firm to enhanced sovereign, credit-related, operational and reputational risks, including the risks that a governmental entity may default on or restructure its obligations or may claim that actions taken by government officials were beyond the legal authority of those officials, which could adversely affect the Firm’s financial condition and results of operations.
Further, various countries in which the Firm operates or invests, or in which the Firm may do so in the future, have in the past experienced severe economic disruptions particular to those countries or regions. As noted above, concerns regarding the fiscal condition of certain countries within the Eurozone continue and there is no assurance such concerns will not lead to “market contagion” beyond those countries in the Eurozone or beyond the Eurozone. Accordingly, it is possible that economic disruptions in certain countries, even in countries in which the Firm does not conduct business or have operations, will adversely affect the Firm.
JPMorgan Chase’s international growth strategy may be hindered by local political, social and economic factors, and will be subject to additional compliance costs and risks.
JPMorgan Chase has expanded, and plans to continue to grow, its international wholesale businesses in Europe/Middle East/Africa (“EMEA”), Asia/Pacific and Latin America/Caribbean. As part of its international growth strategy, the Firm seeks to provide a wider range of


15
Part I

financial services to its clients that conduct business in those regions and to expand its international operations.
Many of the countries in which JPMorgan Chase intends to grow its wholesale businesses have economies or markets that are less developed and more volatile, and may have legal and regulatory regimes that are less established or predictable, than the United States and other developed markets in which the Firm currently operates. Some of these countries have in the past experienced severe economic disruptions, including extreme currency fluctuations, high inflation, or low or negative growth, among other negative conditions, or have imposed restrictive monetary policies such as currency exchange controls and other laws and restrictions that adversely affect the local and regional business environment. In addition, these countries have historically been more susceptible to unfavorable political, social or economic developments which have in the past resulted in, and may in the future lead to, social unrest, general strikes and demonstrations, outbreaks of hostilities, overthrow of incumbent governments, terrorist attacks or other forms of internal discord, all of which can adversely affect the Firm’s operations or investments in such countries. Political, social or economic disruption or dislocation in countries or regions in which the Firm seeks to expand its wholesale businesses can hinder the growth and profitability of those operations, and there can be no assurance that the Firm will be able to successfully execute its international growth initiatives.
Less developed legal and regulatory systems in certain countries can also have adverse consequences on the Firm’s operations in those countries, including, among others, the absence of a statutory or regulatory basis or guidance for engaging in specific types of business or transactions, or the inconsistent application or interpretation of existing laws and regulations; uncertainty as to the enforceability of contractual obligations; difficulty in competing in economies in which the government controls or protects all or a portion of the local economy or specific businesses, or where graft or corruption may be pervasive; and the threat of arbitrary regulatory investigations, civil litigations or criminal prosecutions.
Revenue from international operations and trading in non-U.S. securities and other obligations may be subject to negative fluctuations as a result of the above considerations, as well as due to governmental actions including expropriation, nationalization, confiscation of assets, price controls, capital controls, exchange controls, and changes in laws and regulations. The impact of these fluctuations could be accentuated as some trading markets are smaller, less liquid and more volatile than larger markets. Also, any of the above-mentioned events or circumstances in one country can, and has in the past, affected the Firm’s operations and investments in another country or countries, including the Firm’s operations in the United States. As a result, any such unfavorable conditions
or developments could have an adverse impact on the Firm’s business and results of operations.
Conducting business in countries with less developed legal and regulatory regimes often requires the Firm to devote significant additional resources to understanding, and monitoring changes in, local laws and regulations, as well as structuring its operations to comply with local laws and regulations and implementing and administering related internal policies and procedures. There can be no assurance that the Firm will always be successful in its efforts to conduct its business in compliance with laws and regulations in countries with less predictable legal and regulatory systems. In addition, the Firm can also incur higher costs, and face greater compliance risks, in structuring its operations outside the United States to comply with U.S. anti-corruption and anti-money laundering laws and regulations.
JPMorgan Chase’s results of operations may be adversely affected by loan repurchase and indemnity obligations.
In connection with the sale and securitization of loans (whether with or without recourse), the originator is generally required to make a variety of representations and warranties regarding both the originator and the loans being sold or securitized. JPMorgan Chase and some of its subsidiaries have made such representations and warranties in connection with the sale and securitization of loans, and the Firm will continue to do so when it securitizes loans it has originated. If a loan that does not comply with such representations or warranties is sold or securitized, the Firm may be obligated to repurchase the loan and incur any associated loss directly, or the Firm may be obligated to indemnify the purchaser against any such losses. InSince 2010, and 2011, the costs of repurchasing mortgage loans that had been sold to U.S. government-sponsored entities (“GSEs”), such as Fannie Mae and Freddie Mac, continued to behave been elevated, and there is no assurance that such costs will not continue to be elevated in the future. Accordingly, repurchase or indemnity obligations
to the GSEs or to private third-party purchasers could materially and adversely affect the Firm’s results of operations and earnings in the future.
The repurchase liability that the Firm records with respect to its loan repurchase obligations to the GSEs is estimated based on several factors, including the level of current and estimated probable future repurchase demands made by purchasers, the Firm’s ability to cure the defects identified in the repurchases demands, and the severity of loss upon repurchase or foreclosure.foreclosure, the Firm’s potential ability to recover certain losses from third-party originators, and the terms of agreements with certain mortgage insurers and other parties. While the Firm believes that its current repurchase liability reserves are adequate, the factors referred to above are subject to change in light of market developments,based on the GSEs’ future behavior, the economic environment and other circumstances.uncertainties. Accordingly, there is no assurance that such reserves maywill not be increased in the future.
The Firm also faces litigation related to securitizations, primarily related to securitizations not sold to the GSEs. The


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Firm separately evaluates its exposure to such litigation in establishing its litigation reserves. While the Firm believes that its current reserves in respect of such litigation matters are adequate, there can be no assurance that such reserves will not need to be increased in the future.
JPMorgan Chase may incur additional costs and expenses in ensuring that it satisfies requirements relating to mortgage servicing and foreclosures.
The Firm has, as described above, entered into the Consent Orders with its banking regulators relating to its residential mortgage servicing, foreclosure and loss-mitigation activities, and agreed to the global settlement with federal and state government agencies relating to the servicing and origination of mortgages. The Firm expects to incur additional costs and expenses in connection with its efforts to enhance its mortgage origination, servicing and foreclosure procedures, including the enhancements required under the Consent Orders and the global settlement. In addition, the GSEs impose compensatory fees on their mortgage servicers, including the Firm, if such servicers are unable to comply with the foreclosure timetables mandated by the GSEs, and such fees may continue to be imposed on the Firm in the future.
JPMorgan Chase’s commodities activities are subject to extensive regulation, potential catastrophic events and environmental risks and regulation that may expose the Firm to significant cost and liability.
JPMorgan Chase engages in the storage, transportation, marketing or trading of several commodities, including metals, agricultural products, crude oil, oil products, natural gas, electric power, emission credits, coal, freight, and related products and indices. The Firm is also engaged in power generation and has invested in companies engaged in wind energy and in sourcing, developing and trading emission reduction credits. As a result of all of these activities, the Firm is subject to extensive and evolving energy, commodities, environmental, and other governmental laws and regulations. The Firm expects laws and regulations affecting its commodities activities to expand in scope and complexity, and to restrict some of the Firm’s activities, which could result in lower revenues from the Firm’s commodities activities. In addition, the Firm may incur substantial costs in complying with current or future laws and regulations, and the failure to comply with these


12


laws and regulations may result in substantial civil and criminal fines and penalties. Furthermore, liability may be incurred without regard to fault under certain environmental laws and regulations for remediation of contaminations.
The Firm’s commodities activities also further expose the Firm to the risk of unforeseen and catastrophic events, including natural disasters, leaks, spills, explosions, release of toxic substances, fires, accidents on land and at sea, wars, and terrorist attacks that could result in personal injuries, loss of life, property damage, damage to the Firm’s reputation and suspension of operations. The Firm’s commodities activities are also subject to disruptions, many
of which are outside of the Firm’s control, from the breakdown or failure of power generation equipment, transmission lines or other equipment or processes, and the contractual failure of performance by third-party suppliers or service providers, including the failure to obtain and deliver raw materials necessary for the operation of power generation facilities. The Firm’s actions to mitigate its risks related to the above-mentioned considerations may not prove adequate to address every contingency. In addition, insurance covering some of these risks may not be available, and the proceeds, if any, from insurance recovery may not be adequate to cover liabilities with respect to particular incidents. As a result, the Firm’s financial condition and results of operations may be adversely affected by such events.
JPMorgan Chase relies on its systems, employees and certain counterparties, and certain failures could materially adversely affect the Firm’s operations.
JPMorgan Chase’s businesses are dependent on the Firm’s ability to process, record and monitor a large number of complex transactions. If the Firm’s financial, accounting, or other data processing systems fail or have other significant shortcomings, the Firm could be materially adversely affected. The Firm is similarly dependent on its employees. The Firm could be materially adversely affected if one or more of its employees causes a significant operational breakdown or failure, either as a result of human error or where an individual purposefully sabotages or fraudulently manipulates the Firm’s operations or systems. Third parties with which the Firm does business could also be sources of operational risk to the Firm, including relatingwith respect to breakdowns or failures of such parties’ ownthe systems or employees.misconduct by the employees of such parties. In addition, as the Firm changes processes or introduces new products and services, the Firm may not fully appreciate or identify new operational risks that may arise from such changes. Any of these occurrences could diminish the Firm’s ability to operate one or more of its businesses, or result in potential liability to clients, increased operating expenses, higher litigation costs (including fines and sanctions), reputational damage, regulatory intervention or weaker competitive standing, any of which could materially adversely affect the Firm.
If personal, confidential or proprietary information of customers or clients in the Firm’s possession were to be mishandled or misused, the Firm could suffer significant regulatory consequences, reputational damage and financial loss. Such mishandling or misuse could include
circumstances where, for example, such information was erroneously provided to parties who are not permitted to have the information, either through the fault of the Firm’s systems, employees, or counterparties, or where such information was intercepted or otherwise inappropriately taken by third parties.
The Firm may be subject to disruptions of its operating systems arising from events that are wholly or partially beyond the Firm’s control, which may include, for example, security breaches (as discussed further below); electrical or


17
Part I

telecommunications outages; failures of computer servers or other damage to the Firm’s property or assets; natural disasters; health emergencies or pandemics; or events arising from local or larger scale political events, including terrorist acts. SuchJPMorgan Chase maintains a global resiliency and crisis management program that is intended to ensure that the Firm has the ability to recover its critical business functions and supporting assets, including staff, technology and facilities, in the event of a business interruption. While the Firm believes that its current resiliency plans are both sufficient and adequate, there can be no assurance that such plans will fully mitigate all potential business continuity risks to the Firm. Any failures or disruptions mayof the Firm’s systems or operations could give rise to losses in service to customers and loss or liability to the Firm.
In a firm as large and complex as JPMorgan Chase, lapses or deficiencies in internal control over financial reporting may occur from time to time, and there is no assurance that significant deficiencies or material weaknesses in internal controls may not occur in the future. As processes are changed, or new products and services are introduced, the Firm may not fully appreciate or identify new operational risks that may arise from such changes. In addition, there is the risk that the Firm’s controls and procedures as well as business continuity and data security systems could prove to be inadequate. Any such failure couldclients, adversely affect the Firm’s business and results of operations by requiringsubjecting the Firm to losses or liability, or require the Firm to expend significant resources to correct the defect,failure or disruption, as well as by exposing the Firm to litigation, regulatory fines or penalties or losses not covered by insurance.
A breach in the security of JPMorgan Chase’s systems could disrupt its businesses, result in the disclosure of confidential information, damage its reputation and create significant financial and legal exposure for the Firm.
Although JPMorgan Chase devotes significant resources to maintain and regularly upgrade its systems and processes that are designed to protect the security of the Firm’s computer systems, software, networks and other technology assets and the confidentiality, integrity and availability of information belonging to the Firm and its customers, there is no assurance that all of the Firm’s security measures will provide absolute security. JPMorgan Chase and other financial services institutions and companies engaged in data processing have reported breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage systems, often through the introduction of computer viruses or malware, cyberattacks and other means. The Firm and several other U.S. financial institutions have also experienced several significant distributed denial-of-service attacks from technically sophisticated and well-resourced third parties which were intended to disrupt consumer online banking services.
Despite the Firm’s efforts to ensure the integrity of its systems, it is possible that the Firm may not be able to anticipate or to implement effective preventive measures against all security breaches of these types,


13
Part I

especially because the techniques used change frequently or are not recognized until launched, and because security attacks can originate from a wide variety of sources, including third parties outside the Firm such as persons who are involved with organized crime or associated with external service providers.providers or who may be linked to terrorist organizations or hostile foreign governments. Those parties may also
attempt to fraudulently induce employees, customers or other users of the Firm’s systems to disclose sensitive information in order to gain access to the Firm’s data or that of its customers or clients. These risks may increase in the future as the Firm continues to increase its mobile paymentsmobile-payment and other internet-based product offerings and expands its internal usage of web-based products and applications.
A successful penetration or circumvention of the security of the Firm’s systems could cause serious negative consequences for the Firm, including significant disruption of the Firm’s operations, misappropriation of confidential information of the Firm or that of its customers, or damage to computers or systems of the Firm and those of its customers and counterparties, and could result in violations of applicable privacy and other laws, financial loss to the Firm or to its customers, loss of confidence in the Firm’s security measures, customer dissatisfaction, significant litigation exposure, and harm to the Firm’s reputation, all of which could have a material adverse effect on the Firm.
JPMorgan Chase’s international growth strategy may be hindered by local political, social and economic factors, and will be subject to additional compliance costs and risks.
JPMorgan Chase has expanded, and plans to continue to grow, its international wholesale businesses in Europe/Middle East/Africa (“EMEA”), Asia/Pacific and Latin America/Caribbean. As part of its international growth strategy, the Firm seeks to provide a wider range of financial services, including cash management, lending, trade finance and corporate advisory services, to its clients that conduct business in those regions. In furtherance of these initiatives, the Firm is selectively expanding its existing international operations, including through the addition of client-serving bankers and product and sales support personnel.
Many of the countries in which JPMorgan Chase intends to grow its wholesale businesses have economies or markets that are less developed and more volatile, and may have legal and regulatory regimes that are less established or predictable, than the United States and other developed markets in which the Firm operates. Some of these countries have in the past experienced severe economic disruptions, including extreme currency fluctuations, high inflation, or low or negative growth, among other negative conditions, or have imposed restrictive monetary policies such as currency exchange controls and other laws and restrictions that adversely affect the local and regional business environment. In addition, these countries have historically been more susceptible to unfavorable political, social or economic developments which have in the past resulted in, and may in the future lead to, social unrest,
general strikes and demonstrations, outbreaks of hostilities, overthrow of incumbent governments, terrorist attacks or other forms of internal discord, all of which can adversely affect the Firm’s operations or investments in such countries. Political, social or economic disruption or dislocation in countries or regions in which the Firm seeks to expand its wholesale businesses can hinder the growth and profitability of those operations, and there can be no assurance that the Firm will be able to successfully execute its international growth initiatives.
Less developed legal and regulatory systems in certain countries can also have adverse consequences on the Firm’s operations in those countries, including, among others, the absence of a statutory or regulatory basis or guidance for engaging in specific types of business or transactions, or the inconsistent application or interpretation of existing laws and regulations; uncertainty as to the enforceability of contractual obligations; difficulty in competing in economies in which the government controls or protects all or a portion of the local economy or specific businesses, or where graft or corruption may be pervasive; and the threat of arbitrary regulatory investigations, civil litigations or criminal prosecutions.
Conducting business in countries with less developed legal and regulatory regimes often requires the Firm to devote significant additional resources to understanding, and monitoring changes in, local laws and regulations, as well as structuring its operations to comply with local laws and regulations and implementing and administering related internal policies and procedures. There can be no assurance that JPMorgan Chase will always be successful in its efforts to conduct its business in compliance with laws and regulations in countries with less predictable legal and regulatory systems. In addition, the Firm can also incur higher costs, and face greater compliance risks, in structuring its operations outside the United States to comply with U.S. anti-corruption and anti-money laundering laws and regulations.
JPMorgan Chase’s operations are subject to risk of loss from unfavorable economic, monetary, political, legal and other developments in the United States and around the world.
JPMorgan Chase’s businesses and earnings are affected by the fiscal and other policies that are adopted by various U.S. and non-U.S. regulatory authorities and agencies. The Federal Reserve regulates the supply of money and credit in the United States and its policies determine in large part the cost of funds for lending and investing in the United States and the return earned on those loans and investments. Changes in Federal Reserve policies (as well as the fiscal and monetary policies of non-U.S. central banks or regulatory authorities and agencies) are beyond the Firm’s control and, consequently, the impact of changes in these policies on the Firm’s activities and results of operations is difficult to predict.


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The Firm’s businesses and revenue are also subject to risks inherent in investing and market-making in securities of companies worldwide. These risks include, among others, risk of loss from unfavorable political, legal or other developments, including social or political instability, expropriation, nationalization, confiscation of assets, price controls, capital controls, exchange controls, and changes in laws and regulations. Crime, corruption, war or military actions, acts of terrorism and a lack of an established legal and regulatory framework are additional challenges in certain emerging markets.
Revenue from international operations and trading in non-U.S. securities and other obligations may be subject to negative fluctuations as a result of the above considerations. The impact of these fluctuations could be accentuated as some trading markets are smaller, less liquid and more volatile than larger markets. Also, any of the above-mentioned events or circumstances in one country can, and has in the past, affected the Firm’s operations and investments in another country or countries, including the Firm’s operations in the United States. As a result, any such unfavorable conditions or developments could have an adverse impact on the Firm’s business and results of operations.
Several of the Firm’s businesses engage in transactions with, or trade in obligations of, U.S. and non-U.S. governmental entities, including national, state, provincial, municipal and local authorities. These activities can expose the Firm to enhanced sovereign, credit-related, operational and reputational risks, including the risks that a governmental entity may default on or restructure its obligations or may claim that actions taken by government officials were beyond the legal authority of those officials, which could adversely affect the Firm’s financial condition and results of operations.
Further, various countries in which the Firm operates or invests, or in which the Firm may do so in the future, have in the past experienced severe economic disruptions particular to that country or region, including extreme currency fluctuations, high inflation, or low or negative growth, among other negative conditions. Concerns regarding the fiscal condition of certain countries within the Eurozone continue and there is no assurance such concerns will not lead to “market contagion” beyond those countries in the Eurozone or beyond the Eurozone. Accordingly, it is possible that economic disruptions in certain countries, even in countries in which the Firm does not conduct business or have operations, will adversely affect the Firm.
JPMorgan Chase’s acquisitions and the integration of acquired businesses may not result in all of the benefits anticipated.
JPMorgan Chase has in the past and may in the future seek to expand its business by acquiring other businesses. There can be no assurance that the Firm’s acquisitions will have the anticipated positive results, including results relating to: the total cost of integration; the time required to complete the integration; the amount of longer-term cost savings; the overall performance of the combined entity; or an improved
price for JPMorgan Chase & Co.’s common stock. Integration efforts could divert management attention and resources, which could adversely affect the Firm’s operations or results. The Firm cannot provide assurance that any such integration efforts would not result in the occurrence of unanticipated costs or losses.
Acquisitions may also result in business disruptions that cause the Firm to lose customers or cause customers to move their business to competing financial institutions. It is possible that the integration process related to acquisitions could result in the disruption of the Firm’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that could adversely affect the Firm’s ability to maintain relationships with clients, customers, depositors and other business partners. The loss of key employees in connection with an acquisition could adversely affect the Firm’s ability to successfully conduct its business.
Risk Management
JPMorgan Chase’s framework for managing risks and its risk management procedures and practices may not be effective in mitigating risk and loss to the Firm.
JPMorgan Chase’s risk management framework seeks to mitigate risk and loss to the Firm. The Firm has established processes and procedures intended to identify, measure, monitor, report and analyze the types of risk to which the Firm is subject, including liquidity risk, credit risk, market


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risk, interest rate risk, country risk, private equityprincipal risk, operational risk, legal and fiduciary risk, and reputational risk, among others. However, as with any risk management framework, there are inherent limitations to the Firm’s risk management strategies because there may exist, or develop in the future, risks that the Firm has not appropriately anticipated or identified. If the Firm’s risk management framework proves ineffective, the Firm could suffer unexpected losses and could be materially adversely affected. As the Firm’s businesses change and grow and the markets in which they operate continue to evolve, the Firm’s risk management framework may not always keep sufficient pace with those changes. As a result, there is the risk that the credit and market risks associated with new products or new business strategies may not be appropriately identified, monitored or managed. In addition, in a difficult or less liquid market environment, the Firm’s risk management strategies may not be effective because other market participants may be attempting to use the same or similar strategies to deal with the challenging market conditions. In such circumstances, it may be difficult for the Firm to reduce its risk positions due to the activity of such other market participants.
The Firm’s products, including loans, leases, lending commitments, derivatives, trading account assets and assets held-for-sale, as well as cash management and clearing activities, expose the Firm to credit risk. As one of the nation’s largest lenders, the Firm has exposures arising from its many different products and counterparties, and the credit quality of the Firm’s exposures can have a significant impact on its earnings. The Firm establishes allowances for probable credit losses that are inherent in its


15
Part I

credit exposure, (includingincluding unfunded lending commitments).commitments. The Firm also employs stress testing and other techniques to determine the capital and liquidity necessary to protect the Firm in the event of adverse economic or market events. These processes are critical to the Firm’s financial results and condition, and require difficult, subjective and complex judgments, including forecasts of how economic conditions might impair the ability of the Firm’s borrowers and counterparties to repay their loans or other obligations. As is the case with any such assessments, there is always the chance that the Firm will fail to identify the proper factors or that the Firm will fail to accurately estimate the impact of factors that it identifies.
JPMorgan Chase’s market-making businesses may expose the Firm to unexpected market, credit and operational risks that could cause the Firm to suffer unexpected losses. Severe declines in asset values, unanticipated credit events, or unforeseen circumstances that may cause previously uncorrelated factors to become correlated (and vice versa) may create losses resulting from risks not appropriately taken into account in the development, structuring or pricing of a financial instrument such as a derivative. Certain of the Firm’s derivative transactions require the physical settlement by delivery of securities, commodities or obligations that the Firm does not own; if the Firm is unable to obtain such securities, commodities or obligations
within the required timeframe for delivery, this could cause the Firm to forfeit payments otherwise due to it and could result in settlement delays, which could damage the Firm’s reputation and ability to transact future business. In addition, in situations where trades are not settled or confirmed on a timely basis, the Firm may be subject to heightened credit and operational risk, and in the event of a default, the Firm may be exposed to market and operational losses. In particular, disputes regarding the terms or the settlement procedures of derivative contracts could arise, which could force the Firm to incur unexpected costs, including transaction, legal and litigation costs, and impair the Firm’s ability to manage effectively its risk exposure from these products.
Many of the Firm’s hedgingrisk management strategies and other risk managementor techniques have a basis in historical market behavior, and all such strategies and techniques are based to some degree on management’s subjective judgment. For example, many models used by the Firm are based on assumptions regarding correlations among prices of various asset classes or other market indicators. In times of market stress, or in the event of other unforeseen circumstances, previously uncorrelated indicators may become correlated, or conversely, previously correlated indicators may make unrelated movements. These sudden market movements or unanticipated or unidentified market or economic movements have in some circumstances limited the effectiveness of the Firm’s risk management strategies, causing the Firm to incur losses. The Firm cannot provide assurance that its risk management framework, including the Firm’s underlying assumptions or strategies, will at all times be accurate and effective.
In connection with the Firm’s internal review of the reported losses in the synthetic credit portfolio managed by CIO, management concluded that during the first quarter of 2012 CIO’s risk management had been ineffective in dealing with the growth in the size and complexity of the portfolio during the first quarter of 2012. Among other matters, the Firm’s internal review found that CIO lacked a robust risk committee structure; that CIO’s risk limits were insufficiently granular and should have been reassessed in light of the positions being added to the synthetic credit portfolio in the first quarter of 2012; that CIO risk management was insufficiently engaged in the approval and implementation during the first quarter of 2012 of a new CIO Value-at-Risk (“VaR”) model related to the portfolio (before that model was discontinued and the previous model was restored); and that there was inadequate escalation to the Firm’s management of certain risk issues relating to the portfolio. The Firm has taken steps to correct such lapses, including, among other things, appointing a new Chief Risk Officer for CIO/Treasury/Corporate (“CTC”); adding resources and talent in CIO risk management; instituting new CTC risk committees to improve governance and controls and ensure tighter linkages between CIO, Treasury and other activities in the Corporate sector; and introducing more granular risk limits for CIO.


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Part I

In January 2013, JPMorgan Chase & Co. entered into a Consent Order with the Federal Reserve and JPMorgan Chase Bank, N.A. entered into a Consent Order with the OCC relating to the banking regulators’ reviews of the CIO matter. These Consent Orders relate to risk management, model governance and other control functions related to CIO and certain other trading activities at the Firm. Many of the actions required by the Consent Orders have already been, or are in the process of being, implemented by the Firm.
While the Firm has taken, and is taking, steps to correct the lapses in the CIO risk management framework, there is no assurance that new or additional lapses in the Firm’s risk management framework and governance structure could not occur in the future. Any such lapses or other inadequacies in the design or implementation of the Firm’s risk management framework, governance, procedures or practices could, individually or in the aggregate, cause unexpected losses for the Firm, materially and adversely affect the Firm’s financial condition and results of operations, require significant resources to remediate any risk management deficiency, attract heightened regulatory scrutiny, expose the Firm to regulatory investigations or legal proceedings, subject the Firm to fines, penalties or judgments, harm the Firm’s reputation, or otherwise cause a decline in investor confidence.
Lapses in disclosure controls and procedures or internal control over financial reporting could materially and adversely affect the Firm’s operations, profitability or reputation.
The Firm is committed to maintaining high standards of internal control over financial reporting and disclosure controls and procedures. Nevertheless, in a firm as large and complex as JPMorgan Chase, lapses or deficiencies in disclosure controls and procedures or in the Firm’s internal control over financial reporting may occur from time to time. On July 13, 2012, the Firm reported that it had determined that a material weakness existed in its internal control over financial reporting at March 31, 2012. This determination related to the valuation control function for the synthetic credit portfolio managed by CIO during the first quarter of 2012. As a result of the material weakness, management also concluded that the Firm’s disclosure controls and procedures were not effective at March 31, 2012. Management has taken steps to remediate the internal control deficiency, including enhancing management supervision of valuation matters. The control deficiency was substantially remediated by June 30, 2012, and was closed-out by September 30, 2012.
There can be no assurance that the Firm’s disclosure controls and procedures will be effective in the future or that a material weakness or significant deficiency in internal control over financial reporting could not occur again. Any such lapses or deficiencies may materially and adversely affect the Firm’s business and results of operations or financial condition, restrict its ability to access the capital markets, require the Firm to expend significant resources to
 
correct the lapses or deficiencies, expose the Firm to regulatory or legal proceedings, subject it to fines, penalties or judgments, harm the Firm’s reputation, or otherwise cause a decline in investor confidence.
Other Risks
The financial services industry is highly competitive, and JPMorgan Chase’s inability to compete successfully may adversely affect its results of operations.
JPMorgan Chase operates in a highly competitive environment and the Firm expects competitive conditions to continue to intensify as continued consolidation in the financial services industry produces larger, better-capitalized and more geographically diverse companies that are capable of offering a wider array of financial products and services at more competitive prices.
Competitors include other banks, brokerage firms, investment banking companies, merchant banks, hedge funds, commodity trading companies, private equity firms, insurance companies, mutual fund companies, credit card companies, mortgage banking companies, trust companies, securities processing companies, automobile financing companies, leasing companies, e-commerce and other Internet-based companies, and a variety of other financial services and advisory companies. Technological advances and the growth of e-commerce have made it possible for non-depository institutions to offer products and services that traditionally were banking products, and for financial institutions and other companies to provide electronic and Internet-based financial solutions, including electronic securities trading. The Firm’s businesses generally compete on the basis of the quality and variety of the Firm’s products and services, transaction execution, innovation, reputation and price. Ongoing or increased competition in any one or all of these areas may put downward pressure on prices for the Firm’s products and services or may cause the Firm to lose market share. Increased competition also may require the Firm to make additional capital investments in its businesses in order to remain competitive. These investments may increase expense or may require the Firm to extend more of its capital on behalf of clients in order to execute larger, more competitive transactions. The Firm cannot provide assurance that the significant competition in the financial services industry will not materially adversely affect its future results of operations.
Competitors of the Firm’s non-U.S. wholesale businesses are typically subject to different, and in some cases, less stringent, legislative and regulatory regimes. For example, the regulatory objectives underlying several provisions of the Dodd-Frank Act, including the prohibition on proprietary trading under the Volcker Rule margin requirements for certain non-U.S. derivatives transactions and the derivatives “push-out” rules, have not been embraced by governments and regulatory agencies outside the United States and may not be implemented into law in most countries. The more restrictive laws and regulations applicable to U.S. financial services institutions, such as JPMorgan Chase, can put the Firm at a competitive disadvantage to its non-U.S. competitors, including


20


prohibiting the Firm from engaging in certain transactions, making the Firm’s pricing of certain transactions more expensive for clients or adversely affecting the Firm’s cost


16


structure for providing certain products, all of which can reduce the revenue and profitability of the Firm’s wholesale businesses.
JPMorgan Chase’s ability to attract and retain qualified employees is critical to the success of its business, and failure to do so may materially adversely affect the Firm’s performance.
JPMorgan Chase’s employees are the Firm’s most important resource, and in many areas of the financial services industry, competition for qualified personnel is intense. The imposition on the Firm or its employees of certain existing and proposed restrictions or taxes on executive compensation may adversely affect the Firm’s ability to attract and retain qualified senior management and employees. If the Firm is unable to continue to retain and attract qualified employees, the Firm’s performance, including its competitive position, could be materially adversely affected.
JPMorgan Chase’s financial statements are based in part on assumptions and estimates which, if incorrect, could cause unexpected losses in the future.
Pursuant to accounting principles generally accepted in the United States, JPMorgan Chase is required to use certain assumptions and estimates in preparing its financial statements, including in determining allowances for credit losses, mortgage repurchase liability and reserves related to litigations,litigation, among other items. Certain of the Firm’s financial instruments, including trading assets and liabilities, available-for-sale securities, certain loans, MSRs, private equity investments, structured notes and certain repurchase and resale agreements, among other items, require a determination of their fair value in order to prepare the Firm’s financial statements. Where quoted market prices are not available, the Firm may make fair value determinations based on internally developed models or other means which ultimately rely to some degree on management judgment. Some of these and other assets and liabilities may have no direct observable price levels, making their valuation particularly subjective, as they are based on significant estimation and judgment. In addition, sudden illiquidity in markets or declines in prices of certain loans and securities may make it more difficult to value certain balance sheet items, which may lead to the possibility that such valuations will be subject to further change or adjustment. If assumptions or estimates underlying the Firm’s financial statements are incorrect, the Firm may experience material losses.
Damage to JPMorgan Chase’s reputation could damage its businesses.
Maintaining trust in JPMorgan Chase is critical to the Firm’s ability to attract and maintain customers, investors and employees. Damage to the Firm’s reputation can therefore cause significant harm to the Firm’s business and prospects. Harm to the Firm’s reputation can arise from numerous sources, including, among others, employee misconduct, compliance failures, litigation or regulatory outcomes or governmental investigations. In addition, a failure to deliver
appropriate standards of service and quality, or a failure or
perceived failure to treat customers and clients fairly, can result in customer dissatisfaction, litigation and heightened regulatory scrutiny, all of which can lead to lost revenue, higher operating costs and harm to reputation for the Firm.Firm’s reputation. Adverse publicity regarding the Firm, whether or not true, may result in harm to the Firm’s prospects. Actions by the financial services industry generally or by certain members of or individuals in the industry can also affect the Firm’s reputation. For example, the role played by financial services firms in the financial crisis, including concerns that consumers have been treated unfairly by financial institutions, has damaged the reputation of the industry as a whole. Should any of these or other events or factors that can undermine the Firm’s reputation occur, there is no assurance that the additional costs and expenses that the Firm may need to incur to address the issues giving rise to the reputational harm could not adversely affect the Firm’s earnings and results of operations.
Management of potential conflicts of interests has become increasingly complex as the Firm continues to expand its business activities through more numerous transactions, obligations and interests with and among the Firm’s clients. The failure to adequately address, or the perceived failure to adequately address, conflicts of interest could affect the willingness of clients to deal with the Firm, or give rise to litigation or enforcement actions, as well as cause serious reputational harm to the Firm.
ITEM 1B: UNRESOLVED SEC STAFF COMMENTS
None.
ITEM 2: PROPERTIES
JPMorgan Chase’s headquarters is located in New York City at 270 Park Avenue, a 50-story office building owned by JPMorgan Chase. This location contains approximately 1.3 million square feet of space. The building underwent a major renovation that was completed in 2011, achieving a LEED® Platinum rating from the U.S. Green Building Council, the highest rating possible.space.
In total, JPMorgan Chase owned or leased approximately 12.112.0 million square feet of commercial office and retail space in New York City at December 31, 20112012. JPMorgan Chase and its subsidiaries also own or lease significant administrative and operational facilities in Chicago, Illinois (3.7 million square feet); Houston and Dallas, Texas (3.7 million square feet); Columbus, Ohio (2.8 million square feet); Phoenix, Arizona (1.4 million square feet); Jersey City, New Jersey (1.1(1.0 million square feet); and 5,5085,614 retail branches in 23 states. At December 31, 20112012, the Firm occupied approximately 68.9 million total square feet of space in the United States.
At December 31, 20112012, the Firm also owned or leased approximately 5.85.6 million square feet of space in Europe, the Middle East and Africa. In the United Kingdom, at

December 31, 2012, JPMorgan Chase owned or leased approximately 4.3 million square feet of office space and owned a 378,000 square-foot operations center. JPMorgan Chase acquired a 999-year leasehold interest at 25 Bank Street in London’s Canary Wharf in 2010. 25 Bank Street, with 1.4 million square feet of space, became the new


  1721
Parts I and II

In the United Kingdom, at December 31, 2011, JPMorgan Chase owned or leased approximately 4.8 million square feet of office space and owned a 379,000 square-foot operations center. In December 2010, JPMorgan Chase acquired a 999-year leasehold interest at 25 Bank Street in London’s Canary Wharf. With 1.4 million square feet of space, 25 Bank Street will become the new European headquarters of the Corporate & Investment Bank in 2012. In addition, JPMorgan Chase purchased 60 Victoria Embankment in 2011, a 518,000 square-foot office building the Firm had leased since 1991.
In 2008, JPMorgan Chase alsohad acquired a 999-year leasehold interest in land at London’s Canary Wharf and had entered into a building agreement to develop the site and construct a European headquarters building. However, with the acquisition of 25 Bank Street, allows the Firm to accelerate consolidation of its Investment Bank personnel to one location by four years. In December 2010, JPMorgan Chase signed an amended building agreement in December 2010 for the continued development of the Canary Wharf site for future use. The amended terms extend the building agreement to October 30, 2016.
JPMorgan Chase and its subsidiaries also occupy offices and other administrative and operational facilities in the Asia/Pacific region, Latin America and North America under ownership and leasehold agreements aggregating approximately 6.05.4 million square feet of space at December 31, 2011.2012. This includes leases for administrative and operational facilities in India (2.1(2.0 million square feet) and the Philippines (1.0 million square feet).
The properties occupied by JPMorgan Chase are used across all of the Firm’s business segments and for corporate purposes. JPMorgan Chase continues to evaluate its current and projected space requirements and may determine from time to time that certain of its premises and facilities are no longer necessary for its operations. There is no assurance that the Firm will be able to dispose of any such excess premises or that it will not incur charges in connection with such dispositions. Such disposition costs may be material to the Firm’s results of operations in a given period. For a discussion of occupancy expense, see the Consolidated Results of Operations on pages 71–75.72–75.
ITEM 3: LEGAL PROCEEDINGS
For a description of the Firm’s material legal proceedings, see Note 31 on pages 290–299.316–325.

ITEM 4: MINE SAFETY DISCLOSURES
Not applicable.


Part II
ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for registrant’s common equity
The outstanding shares of JPMorgan Chase common stock are listed and traded on the New York Stock Exchange, the London Stock Exchange and the Tokyo Stock Exchange. For the quarterly high and low prices of JPMorgan Chase’s common stock for the last two years, see the section entitled “Supplementary information – Selected quarterly financial data (unaudited)” on pages 305–306.331–332. For a comparison of the cumulative total return for JPMorgan Chase common stock with the comparable total return of the S&P 500 Index, the KBW Bank Index and the S&P Financial Index over the five-year period ended
December 31, 20112012, see “Five-year stock performance,” on page 63.63.
JPMorgan Chase declared and paid quarterly cash dividends on its common stock in the amount of $0.25$0.30 per share for each quarter of 2011, and $0.052012, $0.25 per share for each quarter of 2010.2011 and $0.05 per share for each quarter of 2010.
The common dividend payout ratio, based on reported net income, was 22%23% for 2011, 5%2012, 22% for 20102011 and 9%5% for 2009.2010. For a discussion of restrictions on dividend payments, see Note 22 and Note 27 on page 276300 and page 281,306, respectively. At January 31, 2012,2013, there were 223,070217,055 holders of record of JPMorgan Chase common stock. For information regarding securities authorized for issuance under the Firm’s employee stock-based compensation plans, see Item 12 on page 22.26.
Stock repurchasesRepurchases under the common equity repurchase program
On March 18, 2011,13, 2012, the Board of Directors approvedauthorized a $15.0 billion common equity (i.e., common stock and warrants) repurchase program (the “2012 program”), of which up to $8.9512.0 billion was authorizedapproved for repurchase in 2011. The2012 and up to an additional $15.03.0 billion repurchase program superseded ais approved through the end of the first quarter of $10.0 billion2013. During 2012 repurchase program approved in 2007. During 2011 and 2010,2011, the Firm repurchased (on a trade-date basis) an aggregate of 24031 million and 78229 million shares of common stock, and warrants, for $8.951.3 billion and $3.08.8 billion, at an average price per unit ofrespectively. During 2012 and 2011, the Firm repurchased 18 million and 10 million warrants, for $37.35238 million and $38.49122 million, respectively. The Firm did not make any repurchases after May 17, 2012. As of December 31, 2012, $13.4 billion of authorized repurchase any ofcapacity remained under the warrants during 2010.program.
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.


18


The authorization to repurchase common equity will be utilized at management’s discretion, and the timing of purchases and the exact amount of common equity that may be repurchased is subject to various factors, including market conditions; legal and regulatory considerations affecting the amount and timing of repurchase activity; the Firm’s capital position (taking into account goodwill and intangibles);
internal capital generation; and alternative investment opportunities. The repurchase program does not include specific price targets or timetables; may be executed through open market purchases or privately negotiated transactions, or utilizing Rule 10b5-1 programs; and may be suspended at any time. For a discussion of restrictions on equity repurchases, see Note 22 on page 276.


22


Shares repurchased pursuant to the common equity repurchase program during 20112012 were as follows.
 Common stock Warrants      Common stock Warrants     
Year ended December 31, 2011 Total shares of common stock repurchased 
Average price paid per share of common stock(b)
 
Total warrants
repurchased
 
Average price
paid per warrant(b)
 
Aggregate repurchases of common equity (in millions)(b)
 
Dollar value
of remaining
authorized
repurchase
(in millions)(c)
 
Repurchases under the $10.0 billion program

 —
 $—
 —
 $—
 $—
 $3,222
(d) 
Repurchases under the $15.0 billion program 2,081,440
 45.66
 —
 —
 95
 14,905
 
Year ended December 31, 2012 Total shares of common stock repurchased 
Average price paid per share of common stock(b)
 
Total warrants
repurchased
 
Average price
paid per warrant(b)
 
Aggregate repurchases of common equity (in millions)(b)
 
Dollar value
of remaining
authorized
repurchase
(in millions)(c)
 
Repurchases under the prior $15.0 billion program(a)
 2,604,500
 $33.10
 —
 $—
 $86
 $6,050
(d) 
Repurchases under the new $15.0 billion program 2,867,870
 45.29
 —
 —
 130
 14,870
 
First quarter(a) 2,081,440
 45.66
 —
 —
 95
 14,905
  5,472,370
 39.49
 —
 —
 216
 14,870
 
Second quarter 80,309,432
 43.33
 —
 —
 3,480
 11,425
  28,070,715
 42.72
 18,471,300
 12.90
 1,437
 13,433
 
Third quarter 117,280,156
 36.69
 10,167,698
 12.03
 4,425
 7,000
  —
 —
 —
 —
 —
 13,433
 
October —
 —
 —
 —
 —
 7,000
  —
 —
 —
 —
 —
 13,433
 
November —
 —
 —
 —
 —
 7,000
  —
 —
 —
 —
 —
 13,433
 
December(a)
 27,201,553
 31.75
 —
 —
 863
 6,137
  —
 —
 —
 —
 —
 13,433
 
Fourth quarter(a)
 27,201,553
 31.75
 —
 —
 863
 6,137
  —
 —
 —
 —
 —
 13,433
 
Total for 2011(a)
 226,872,581
 $38.53
 10,167,698
 $12.03
 $8,863
 $6,137
(e) 
Year-to-date(a)
 33,543,085
 $42.19
 18,471,300
 $12.90
 $1,653
 $13,433
 
(a)
ExcludesIncludes $86 million of repurchases in December 2011, which settled in early January 2012.
(b)Excludes commissions cost.
(c)The amount authorized by the Board of Directors excludes commissions cost.
(d)
The unused portion of the prior $10.015.0 billion program was canceled when the $15.0 billion 2012 program was authorized.
(e)
Dollar value remaining under the new $15.0 billion program.


19
Part II

Repurchases under the stock-based incentive plans
Participants in the Firm’s stock-based incentive plans may have shares of common stock withheld to cover income taxes. Shares withheld to pay income taxes are repurchased pursuant to the terms of the applicable plan and not under the Firm’s repurchase program. Shares repurchased pursuant to these plans during 20112012, were as follows.
Year ended December 31, 2011
Total shares of common stock
repurchased

 
Average price
paid per share of common stock

Year ended
December 31, 2012
Total shares of common stock
repurchased

 
Average price
paid per share of common stock

First quarter442
 $45.89
406
 $45.81
Second quarter—
 —
32
 39.72
Third quarter35
 40.63
28
 35.98
October—
 —
—
 —
November132,874
 30.40
154,125
 41.10
December—
 —
—
 —
Fourth quarter132,874
 30.40
154,125
 41.10
Total for 2011133,351
 $30.45
Year-to-date154,591
 $41.11

ITEM 6: SELECTED FINANCIAL DATA
For five-year selected financial data, see “Five-year summary of consolidated financial highlights (unaudited)” on pages 62–63.63.

ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s discussion and analysis of financial condition and results of operations, entitled “Management’s discussion and analysis,” appears on pages 63–174.64–184. Such information should be read in conjunction with the Consolidated Financial Statements and Notes thereto, which appear on pages 178–304.188–330.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of the quantitative and qualitative disclosures about market risk, see the Market Risk Management section of Management’s discussion and analysis on pages 158–163.163–169.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements, together with the Notes thereto and the report thereon dated February 28, 2013of PricewaterhouseCoopers LLP, dated February 29, 2012, thereon,the Firm’s independent registered public accounting firm, appear on pages 177–304.187–330.
Supplementary financial data for each full quarter within the two years ended December 31, 20112012, are included on pages 305–306331–332 in the table entitled “Selected quarterly financial data (unaudited).” Also included is a “Glossary of terms’’ on pages 308–311.333–335.


23
Part II

ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A: CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of the Firm’s management, including its Chairman and Chief Executive Officer and its Chief Financial Officer, of the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, the Chairman and Chief Executive Officer and the Chief Financial Officer concluded that these disclosure controls and procedures were effective. See Exhibits 31.1 and 31.2 for the Certification statements issued by the Chairman and Chief Executive Officer and Chief Financial Officer.
The Firm is committed to maintaining high standards of internal control over financial reporting. Nevertheless, because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, in a firm as large and complex as JPMorgan Chase, lapses or deficiencies in internal controls may occur from time to time, and there can be no assurance that any such deficiencies will not result in significant deficiencies — or even material weaknesses — in internal controls in the future. For further information, see “Management’s report on internal control over financial reporting” on page 176.186. There was no change in the Firm’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that occurred during the three months endedDecember 31, 20112012, that has materially affected, or is reasonably likely to materially affect, the Firm’s internal control over financial reporting.

ITEM 9B: OTHER INFORMATION
None.Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), an issuer is required to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with individuals or entities designated pursuant to certain Executive Orders. Disclosure is generally required even where the activities, transactions or dealings were conducted in compliance with applicable law.
Carlson Wagonlit Travel (“CWT”), a business travel management firm in which JPMorgan Chase has invested through its merchant banking activities, may be deemed to be an affiliate of the Firm, as that term is defined in Exchange Act Rule 12b-2. CWT has informed the Firm that, during the year ended December 31, 2012, it booked approximately 30 flights (of the approximately 59 million transactions it booked in 2012) to Iran on Iran Air for passengers, including employees of foreign governments and non-governmental organizations. All of such flights originated outside of the United States from countries that permit travel to Iran, and none of such passengers were persons designated under Executive Orders 13224 or 13382 or were employees of foreign governments that are targets of U.S. sanctions. CWT and the Firm believe that this activity is permissible pursuant to certain exemptions from U.S. sanctions for travel-related transactions under the International Emergency Economic Powers Act, as amended. CWT had approximately $27,000 in gross revenues attributable to these transactions. CWT has informed the Firm that it intends to continue to engage in this activity so long as such activity is permitted under U.S. law.


2024  
Part III





21
Part III


ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Executive officers of the registrant
 Age 
Name(at December 31, 2011)2012)Positions and offices
James Dimon5556Chairman of the Board, Chief Executive Officer and President.
Frank J. Bisignano5253Chief AdministrativeCo-Chief Operating Officer since 2005 andJuly 2012. He had been Chief Executive Officer of Mortgage Banking sincefrom February 2011.2011 until December 2012 and Chief Administrative Officer from 2005 until July 2012.
Douglas L. Braunstein(a)
5051Vice Chairman since January 1, 2013. He had been Chief Financial Officer sincefrom June 2010. He had been2010 until December 31, 2012, and was head of Investment Banking for the Americas since 2008, prior to which he had served in a number of senior Investment Banking roles, including as head of Global Mergers and Acquisitions.
Michael J. Cavanagh4546Co-Chief Executive Officer of the Corporate & Investment Bank since July 2012. He had been Chief Executive Officer of Treasury & Securities Services since(now part of Corporate & Investment Bank) from June 2010 until July 2012, prior to which he had been Chief Financial Officer.
Stephen M. Cutler5051General Counsel since February 2007. Prior to joining JPMorgan Chase, he was a partner and co-chair of the Securities Department at the law firm of WilmerHale.
John L. Donnelly5556Head of Human Resources since January 2009. Prior to joining JPMorgan Chase, he had been Global Head of Human Resources at Citigroup, Inc. since July 2007 and Head of Human Resources and Corporate Affairs for Citi Markets and Banking business from 1998 until 2007.
Ina R. Drew55Chief Investment Officer.
Mary Callahan Erdoes4445Chief Executive Officer of Asset Management since September 2009, prior to which she had been Chief Executive Officer of Private Banking.
John J. Hogan(a)(b)
46Chief Risk Officer since January 2012. He had been Chief Risk Officer of the Investment Bank (now part of Corporate & Investment Bank) since 2006.
Samuel Todd Maclin55Chief Executive Officer of Consumer and Business Banking since June 2011. He had been Chief Executive Officer of Commercial Banking from 2004 until January 2012.
Jay MandelbaumMarianne Lake(a)
4943HeadChief Financial Officer since January 1, 2013. She had been Chief Financial Officer of Strategythe Consumer & Community Banking business (“CCB”) and Business Development.prior to the organization of CCB served since 2009 as Chief Financial Officer for the consumer business unit now part of CCB. She previously had served as Global Controller of the Investment Bank from 2007 to 2009, prior to which she had served in a number of senior financial officer roles.
Douglas B. Petno(a)
4647Chief Executive Officer of Commercial Banking since January 2012. He had been Chief Operating Officer of Commercial Banking since October 2010, prior to which he had been Global Head of Natural Resources in the Investment Bank.
Daniel E. Pinto50Co-Chief Executive Officer of the Corporate & Investment Bank since July 2012 and Chief Executive Officer of Europe, the Middle East and Africa since June 2011. He had been head or co-head of the Investment Bank Global Fixed Income business (now part of Corporate & Investment Bank) from November 2009 until July 2012. He was Global Head of Emerging Markets from 2006 until 2009, and was also responsible for the Global Credit Trading & Syndicate business from 2008 until 2009.
Gordon A. Smith5354Chief Executive Officer of Consumer & Community Banking since December 2012 prior to which he had been Co-Chief Executive Officer since July 2012. He had been Chief Executive Officer of Card Services since June 2007 and of the Auto Finance and Student Lending businesses since June 2011. Prior to joining JPMorgan Chase, he was with American Express Company and was, from 2005 until 2007, president of American Express’ Global Commercial Card business.
JamesMatthew E. StaleyZames5542Chief ExecutiveCo-Chief Operating Officer since July 2012 and head of the Investment Bank since September 2009, prior to which he had been Chief Executive Officer of Asset Management.
Barry L. Zubrow58Head of Corporate and Regulatory AffairsMortgage Banking Capital Markets since January 2012. He had been Chief RiskInvestment Officer since November 2007. Prior to joining JPMorgan Chase, he was a private investorfrom May until September 2012 and was Chairmanco-head of the New Jersey Schools Development AuthorityInvestment Bank Global Fixed Income business (now part of Corporate & Investment Bank) from March 2006 through August 2010.November 2009 until May 2012 and co-head of Mortgage Banking Capital Markets from July 2011 until January 2012, prior to which he had served in a number of senior Investment Banking Fixed Income management roles.
(a)On January 12, 2012,1, 2013, Ms. Lake was named Chief Financial Officer and appointed to the Operating Committee. At that date, Mr. Braunstein became Vice Chairman of JPMorgan Chase and retired from the Operating Committee; he is no longer an executive officer of the registrant.
(b)As of February 1, 2013, Mr. Hogan and Mr. Petno were appointed to, and Mr. Mandelbaum retired from, JPMorgan Chase’s Operating Committee.is on a leave of absence.
Unless otherwise noted, during the five fiscal years ended December 31, 20112012, all of JPMorgan Chase’s above-named executive officers have continuously held senior-level positions with JPMorgan Chase. There are no family relationships among the foregoing executive officers. See also Item 13.
ITEM 11: EXECUTIVE COMPENSATION
See Item 13.


22 JPMorgan Chase & Co./2011 Annual Report25
Parts III and IV


ITEM 11: EXECUTIVE COMPENSATION
See Item 13.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
For security ownership of certain beneficial owners and management, see Item 13 below.
 









The following table details the total number of shares available for issuance under JPMorgan Chase’s employee stock-based incentive plans (including shares available for issuance to nonemployee directors). The Firm is not authorized to grant stock-based incentive awards to nonemployees, other than to nonemployee directors.
December 31, 2011Number of shares to be issued upon exercise of outstanding options/SARs Weighted-average exercise price of outstanding options/SARs Number of shares remaining available for future issuance under stock compensation plans
December 31, 2012Number of shares to be issued upon exercise of outstanding options/SARs Weighted-average exercise price of outstanding options/SARs Number of shares remaining available for future issuance under stock compensation plans
Plan category            
Employee stock-based incentive plans approved by shareholders133,727,720
 $41.47
 318,020,415
(a) 
111,710,849
 $42.82
 283,322,413
(a) 
Employee stock-based incentive plans not approved by shareholders22,032,924
 35.18
 —
 4,194,767
 32.36
 —
 
Total155,760,644
 $40.58
 318,020,415
 115,905,616
 $42.44
 283,322,413
 
(a)Represents future shares available under the shareholder-approved Long-Term Incentive Plan, as amended and restated effective May 17, 2011.
All future shares will be issued under the shareholder-approved Long-Term Incentive Plan, as amended and restated effective May 17, 2011. For further discussion, see Note 10 on pages 222–224.241–243.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information to be provided in Items 10, 11, 12, 13 and 14 of Form 10-K and not otherwise included herein is incorporated by reference to the Firm’s definitive proxy statement for its 2012 Annual Meeting of Stockholders to be held on May 15, 2012,21, 2013, which will be filed with the SEC within 120 days of the end of the Firm’s fiscal year ended December 31, 20112012.
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
See Item 13.





Part IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Exhibits, financial statement schedules
1 Financial statements
  
The Consolidated Financial Statements, the Notes thereto and the report of the Independent Registered Public Accounting Firm thereon listed in Item 8 are set forth commencing on page 177.187.
   
2 Financial statement schedules
   
3 Exhibits
   
3.1 Restated Certificate of Incorporation of JPMorgan Chase & Co., effective April 5, 2006 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No. 1-5805) filed April 7, 2006).
   
3.2 Certificate of Designations of Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series I (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No. 1-5805) filed April 24, 2008).
   


26


3.3 Certificate of Designations of 8.625% Non-Cumulative Preferred Stock, Series J (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K/A of JPMorgan Chase & Co. (File No. 1-5805) filed September 17, 2008).
   
3.4Certificate of Designations of 5.50% Non-Cumulative Preferred Stock, Series O (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No. 1-5805) filed August 27, 2012).
3.5 By-laws of JPMorgan Chase & Co., effective January 19, 2010 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No. 1-5805) filed January 25, 2010).
   
4.1 Indenture, dated as of October 21, 2010, between JPMorgan Chase & Co. and Deutsche Bank Trust Company Americas, as Trustee (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No.1-5805) filed October 21, 2010).
   
4.2 Indenture, dated as of October 21, 2010, between JPMorgan Chase & Co. and U.S. Bank Trust National Association, as Trustee (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No.1-5805) filed October 21, 2010).
   


23
Part IV


4.3 Indenture, dated as of May 25, 2001, between JPMorgan Chase & Co. and Bankers Trust Company (succeeded by Deutsche Bank Trust Company Americas), as Trustee (incorporated by reference to Exhibit 4(a)(1) to the Registration Statement on Form S-3 of JPMorgan Chase & Co. (File No. 333-52826) filed June 13, 2001).
   
4.4 Form of Deposit Agreement (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No. 1-5805) filed April 24, 2008).
   
4.5 Form of Deposit Agreement (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No. 1-5805) filed August 21, 2008).
   
4.6Deposit Agreement, dated August 27, 2012, among JPMorgan Chase & Co., Computershare Shareowner Services LLC, as depositary, and the holders from time to time of Depositary Receipts relating to the 5.50% Non-Cumulative Preferred Stock, Series O (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No. 1-5805) filed August 27, 2012).
4.7Form of Warrant to purchase common stock (incorporated by reference to Exhibit 4.2 to the Form 8-A of JPMorgan Chase & Co. (File No. 1-5805) filed December 11, 2009).
Other instruments defining the rights of holders of long-term debt securities of JPMorgan Chase & Co. and its subsidiaries are omitted pursuant to Section (b)(4)(iii)(A) of Item 601 of Regulation S-K. JPMorgan Chase & Co. agrees to furnish copies of these instruments to the SEC upon request.
   
10.1 
Deferred Compensation Plan for Non-Employee Directors of JPMorgan Chase & Co., as amended and restated July 2001 and as of December 31, 2004 (incorporated by reference to Exhibit 10.1 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2007).(a)
   
10.2 
2005 Deferred Compensation Plan for Non-Employee Directors of JPMorgan Chase & Co., effective as of January 1, 2005 (incorporated by reference to Exhibit 10.2 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2007).(a)
   
10.3 
Post-Retirement Compensation Plan for Non-Employee Directors of The Chase Manhattan Corporation, as amended and restated, effective May 21, 1996 (incorporated by reference to Exhibit 10.3 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).(a)
   
10.4 
2005 Deferred Compensation Program of JPMorgan Chase & Co., restated effective as of December 31, 2008 (incorporated by reference to Exhibit 10.4 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).(a)
   
10.5 
JPMorgan Chase & Co. Long-Term Incentive Plan as amended and restated effective May 17, 2011 (incorporated by reference to Appendix C of the Schedule 14A of JPMorgan Chase & Co. (File No. 1-5805) filed April 7, 2011).(a)
   
10.6 
Key Executive Performance Plan of JPMorgan Chase & Co., as amended and restated effective January 1, 2009 (incorporated by reference to Appendix D of the Schedule 14A of JPMorgan Chase & Co. (File No. 1-5805) filed March 31, 2008).(a)
   
10.7 
Excess Retirement Plan of JPMorgan Chase & Co., restated and amended as of December 31, 2008, as amended (incorporated by reference to Exhibit 10.7 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2009).(a)
   
10.8 
1995 Stock Incentive Plan of J.P. Morgan & Co. Incorporated and Affiliated Companies, as amended, dated December 11, 1996 (incorporated by reference to Exhibit 10.8 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).(a)
   


27
Part IV


10.9 
Executive Retirement Plan of JPMorgan Chase & Co., as amended and restated December 31, 2008 (incorporated by reference to Exhibit 10.9 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).(a)
   
10.10 
Amendment to Bank One Corporation Director Stock Plan, as amended and restated effective February 1, 2003 (incorporated by reference to Exhibit 10.10 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).(a)
   
10.11 
Summary of Bank One Corporation Director Deferred Compensation Plan (incorporated by reference to Exhibit 10.19 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2005).(a)
   
10.12 
Bank One Corporation Stock Performance Plan, as amended and restated effective February 20, 2001 (incorporated by reference to Exhibit 10.12 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).(a)
   
10.13 
Bank One Corporation Supplemental Savings and Investment Plan, as amended and restated effective December 31, 2008 (incorporated by reference to Exhibit 10.13 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).(a)
   
10.14 
Revised and Restated Banc One Corporation 1989 Stock Incentive Plan, effective January 18, 1989 (incorporated by reference to Exhibit 10.14 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).(a)
   
10.15 
Banc One Corporation Revised and Restated 1995 Stock Incentive Plan, effective April 17, 1995 (incorporated by reference to Exhibit 10.15 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).(a)
   


24


10.16
Form of JPMorgan Chase & Co. Long-Term Incentive Plan Award Agreement of January 2005 stock appreciation rights (incorporated by reference to Exhibit 10.31 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2005).(a)
10.17
Form of JPMorgan Chase & Co. Long-Term Incentive Plan Award Agreement of October 2005 stock appreciation rights (incorporated by reference to Exhibit 10.33 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2005).(a)
10.18 
Form of JPMorgan Chase & Co. Long-Term Incentive Plan Award Agreement of January 22, 2008 stock appreciation rights (incorporated by reference to Exhibit 10.25 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2007).(a)
   
10.1910.17 
Form of JPMorgan Chase & Co. Long-Term Incentive Plan Award Agreement of January 22, 2008 stock appreciation rights for James Dimon (incorporated by reference to Exhibit 10.27 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2007).(a)
   
10.2010.18 
Form of JPMorgan Chase & Co. Long-Term Incentive Plan Terms and Conditions for stock appreciation rights, dated as of January 20, 2009 (incorporated by reference to Exhibit 10.20 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).(a)
   
10.2110.19 
Form of JPMorgan Chase & Co. Long-Term Incentive Plan Terms and Conditions for Operating Committee member stock appreciation rights, dated as of January 20, 2009 (incorporated by reference to Exhibit 10.21 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).(a)
   
10.2210.20 
Form of JPMorgan Chase & Co. Long-Term Incentive Plan Terms and Conditions for Operating Committee member stock appreciation rights, dated as of February 3, 2010 (incorporated by reference to Exhibit 10.23 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2009).(a)
   
10.23
Form of JPMorgan Chase & Co. Long-Term Incentive Plan Terms and Conditions for Operating Committee member restricted stock units, dated as of February 3, 2010 (incorporated by reference to Exhibit 10.24 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2009).(a)
10.2410.21 
Forms of JPMorgan Chase & Co. Long-Term Incentive Plan Terms and Conditions for stock appreciation rights and restricted stock units, dated as of January 19, 2011 and February 16, 2011.2011 (incorporated by reference to Exhibit 10.24 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2011).(a)(b)
   
10.2510.22 
Forms of JPMorgan Chase & Co. Long-Term Incentive Plan Terms and Conditions for stock appreciation rights and restricted stock units, dated as of January 18, 2012.2012 (incorporated by reference to Exhibit 10.25 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2011).(a)
10.23
Forms of JPMorgan Chase & Co. Long-Term Incentive Plan Terms and Conditions for stock appreciation rights and restricted stock units for Operating Committee members, dated as of January 17, 2013.(a)(b)
   
10.2610.24 
Form of JPMorgan Chase & Co. Performance-Based Incentive Compensation Plan, effective as of January 1, 2006, as amended (incorporated by reference to Exhibit 10.27 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2009).(a)
   
10.27Form of Warrant to purchase common stock (incorporated by reference to Exhibit 4.2 to the Form 8-A of JPMorgan Chase & Co. (File No. 1-5805) filed December 11, 2009).
12.1 
Computation of ratio of earnings to fixed charges.(b)
   
12.2 
Computation of ratio of earnings to fixed charges and preferred stock dividend requirements.(b)
   


28


21 
List of subsidiaries of JPMorgan Chase & Co.(b)
   
22.1 Annual Report on Form 11-K of The JPMorgan Chase 401(k) Savings Plan for the year ended December 31, 20112012 (to be filed pursuant to Rule 15d-21 under the Securities Exchange Act of 1934).
   
23 
Consent of independent registered public accounting firm.(b)
   
31.1 
Certification.(b)
   
31.2 
Certification.(b)
   
32 
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(c)
   
101.INS 
XBRL Instance Document.(b)(d)
   
101.SCH 
XBRL Taxonomy Extension Schema Document.(b)
   
101.CAL 
XBRL Taxonomy Extension Calculation Linkbase Document.(b)
   
101.LAB 
XBRL Taxonomy Extension Label Linkbase Document.(b)
   
101.PRE 
XBRL Taxonomy Extension Presentation Linkbase Document.(b)
   
101.DEF 
XBRL Taxonomy Extension Definition Linkbase Document.(b)
(a)This exhibit is a management contract or compensatory plan or arrangement.
(b)Filed herewith.
(c)Furnished herewith. This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section. Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.


25
Part IV


Securities Exchange Act of 1934.
(d)
Pursuant to Rule 405 of Regulation S-T, includes the following financial information included in the Firm’s Annual Report on Form 10-K for the year ended December 31, 20112012, formatted in XBRL (eXtensible Business Reporting Language) interactive data files: (i) the Consolidated Statementsstatements of Incomeincome for the years ended December 31, 20112012, 20102011 and 2009,2010, (ii) the Consolidated Balance Sheets asstatements of December 31, 2011 and 2010, (iii) the Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Incomecomprehensive income for the years ended December 31, 2012, 2011 and 2010, (iii) the Consolidated balance sheets as of December 31, 2012 and 2011, 2010 and 2009, (iv) the Consolidated Statementsstatements of Cash Flowschanges in stockholders’ equity for the years ended December 31, 20112012, 20102011 and 2009,2010, (v) the Consolidated statements of cash flows for the years ended December 31, 2012, 2011 and (v)2010, and (vi) the Notes to Consolidated Financial Statements.consolidated financial statements.



26 29

























Pages 26–30–60 not used


JPMorgan Chase & Co./2011 Annual Report27
Table of contents




Financial:
    
       
62
 
Five-Year Summary of Consolidated Financial Highlights
 Audited financial statements:
       
63


 
Five-Year Stock Performance

 
176


 
Management’s Report on Internal Control Over Financial Reporting
       
Management’s discussion and analysis:
 
177


 
Report of Independent Registered Public Accounting Firm
       
64
 
Introduction
 178
 
Consolidated Financial Statements
       
66
 
Executive Overview
 182
 
Notes to Consolidated Financial Statements
       
71
 
Consolidated Results of Operations
  
 
      
76


 
Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures
  Supplementary information:
 
      
79
 
Business Segment Results
 305
 
Selected Quarterly Financial Data
       
109
 
International Operations
 307
 
Short-term and other borrowed funds
 
      
110
 
Balance Sheet Analysis
 308
 
Glossary of Terms
 
      
113


 
Off–Balance Sheet Arrangements and Contractual Cash Obligations
    
 
      
119
 
Capital Management
    
 
      
125
 
Risk Management
    
 
      
127
 
Liquidity Risk Management
    
 
      
132
 
Credit Risk Management
    
 
      
158
 
Market Risk Management
    
 
      
163
 
Country Risk Management
    
       
166
 
Private Equity Risk Management
    
 
      
166
 
Operational Risk Management
    
 
      
167
 
Reputation and Fiduciary Risk Management
    
 
      
168
 
Critical Accounting Estimates Used by the Firm
    
 
      
173
 
Accounting and Reporting Developments
    
 
      
174


 
Nonexchange-Traded Commodity Derivative Contracts at Fair Value
    
 
      
175
 
Forward-Looking Statements
    
       
Financial:
    
       
62 
Five-Year Summary of Consolidated Financial Highlights
 Audited financial statements:
       
63 
Five-Year Stock Performance
 186 
Management’s Report on Internal Control Over Financial Reporting
       
Management’s discussion and analysis:
 187 
Report of Independent Registered Public Accounting Firm
       
64 
Introduction
 188 
Consolidated Financial Statements
       
66 
Executive Overview
 193 
Notes to Consolidated Financial Statements
       
72 
Consolidated Results of Operations
  
       
76 
Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures
 Supplementary information:
       
78 
Business Segment Results
 331 
Selected Quarterly Financial Data
       
105 
International Operations
 333 
Glossary of Terms
       
106 
Balance Sheet Analysis
    
       
109 
Off–Balance Sheet Arrangements and Contractual Cash Obligations
    
       
116 
Capital Management
    
       
123 
Risk Management
    
       
127 
Liquidity Risk Management
    
       
134 
Credit Risk Management
    
       
163 
Market Risk Management
    
       
170 
Country Risk Management
    
       
174 
Principal Risk Management
    
       
175 
Operational Risk Management
    
       
177 
Legal, Fiduciary and Reputation Risk Management
    
       
178 
Critical Accounting Estimates Used by the Firm
    
       
183 
Accounting and Reporting Developments
    
       
184 
Nonexchange-Traded Commodity Derivative Contracts at Fair Value
    
       
185 
Forward-Looking Statements
    
       



JPMorgan Chase & Co./20112012 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, 2011 2010 2009 
2008(c)

 2007
(unaudited)
As of or for the year ended December 31,
  
(in millions, except per share, ratio and headcount data) 2012201120102009
2008(b)
Selected income statement data            
Noninterest revenue $49,545
 $51,693
 $49,282
 $28,473
 $44,966
Net interest income 47,689
 51,001
 51,152
 38,779
 26,406
Total net revenue 97,234

102,694

100,434
 67,252
 71,372
 $97,031
$97,234
$102,694
$100,434
$67,252
Total noninterest expense 62,911
 61,196
 52,352
 43,500
 41,703
 64,729
62,911
61,196
52,352
43,500
Pre-provision profit(a)
 34,323
 41,498
 48,082
 23,752
 29,669
Pre-provision profit 32,302
34,323
41,498
48,082
23,752
Provision for credit losses 7,574
 16,639
 32,015
 19,445
 6,864
 3,385
7,574
16,639
32,015
19,445
Provision for credit losses - accounting conformity(b)
 —
 —
 —
 1,534
 —
Provision for credit losses - accounting conformity(a)
 —
—
—
—
1,534
Income before income tax expense/(benefit) and extraordinary gain 26,749
 24,859
 16,067
 2,773
 22,805
 28,917
26,749
24,859
16,067
2,773
Income tax expense/(benefit) 7,773
 7,489
 4,415
 (926) 7,440
 7,633
7,773
7,489
4,415
(926)
Income before extraordinary gain 18,976

17,370

11,652
 3,699
 15,365
 21,284
18,976
17,370
11,652
3,699
Extraordinary gain(c)
 —
 —
 76
 1,906
 —
Extraordinary gain(b)
 —
—
—
76
1,906
Net income $18,976

$17,370

$11,728
 $5,605
 $15,365
 $21,284
$18,976
$17,370
$11,728
$5,605
Per common share data            
Basic earnings            
Income before extraordinary gain $4.50
 $3.98
 $2.25
 $0.81
 $4.38
 $5.22
$4.50
$3.98
$2.25
$0.81
Net income 4.50
 3.98
 2.27
 1.35
 4.38
 5.22
4.50
3.98
2.27
1.35
Diluted earnings(d)
          
Diluted earnings(c)
  
Income before extraordinary gain $4.48

$3.96

$2.24
 $0.81
 $4.33
 $5.20
$4.48
$3.96
$2.24
$0.81
Net income 4.48

3.96

2.26
 1.35
 4.33
 5.20
4.48
3.96
2.26
1.35
Cash dividends declared per share 1.00
 0.20
 0.20
 1.52
 1.48
 1.20
1.00
0.20
0.20
1.52
Book value per share 46.59
 43.04
 39.88
 36.15
 36.59
 51.27
46.59
43.04
39.88
36.15
Tangible book value per share(d)
 38.75
33.69
30.18
27.09
22.52
Common shares outstanding            
Average: Basic 3,900.4
 3,956.3
 3,862.8
 3,501.1
 3,403.6
 3,809.4
3,900.4
3,956.3
3,862.8
3,501.1
Diluted 3,920.3
 3,976.9
 3,879.7
 3,521.8
 3,445.3
 3,822.2
3,920.3
3,976.9
3,879.7
3,521.8
Common shares at period-end 3,772.7
 3,910.3
 3,942.0
 3,732.8
 3,367.4
 3,804.0
3,772.7
3,910.3
3,942.0
3,732.8
Share price(e)
            
High $48.36
 $48.20
 $47.47
 $50.63
 $53.25
 $46.49
$48.36
$48.20
$47.47
$50.63
Low 27.85
 35.16
 14.96
 19.69
 40.15
 30.83
27.85
35.16
14.96
19.69
Close 33.25
 42.42
 41.67
 31.53
 43.65
 43.97
33.25
42.42
41.67
31.53
Market capitalization 125,442
 165,875
 164,261
 117,695
 146,986
 167,260
125,442
165,875
164,261
117,695
Selected ratios            
Return on common equity (“ROE”)(d)
          
Return on common equity (“ROE”)(c)
  
Income before extraordinary gain 11% 10% 6% 2% 13% 11%11%10%6%2%
Net income 11
 10
 6
 4
 13
 11
11
10
6
4
Return on tangible common equity (“ROTCE”)(d)
          
Return on tangible common equity (“ROTCE”)(c)(d)
  
Income before extraordinary gain 15
 15
 10
 4
 22
 15
15
15
10
4
Net income 15

15

10
 6
 22
 15
15
15
10
6
Return on assets (“ROA”)            
Income before extraordinary gain 0.86
 0.85
 0.58
 0.21
 1.06
 0.94
0.86
0.85
0.58
0.21
Net income 0.86
 0.85
 0.58
 0.31
 1.06
 0.94
0.86
0.85
0.58
0.31
Return on risk-weighted assets(f)
  
Income before extraordinary gain 1.65
1.58
1.50
0.95
0.32
Net income 1.65
1.58
1.50
0.95
0.49
Overhead ratio 65
 60
 52
 65
 58
 67
65
60
52
65
Deposits-to-loans ratio 156
 134
 148
 135
 143
 163
156
134
148
135
Tier 1 capital ratio(f)
 12.3

12.1

11.1
 10.9
 8.4
Tier 1 capital ratio(g)
 12.6
12.3
12.1
11.1
10.9
Total capital ratio 15.4
 15.5
 14.8
 14.8
 12.6
 15.3
15.4
15.5
14.8
14.8
Tier 1 leverage ratio 6.8
 7.0
 6.9
 6.9
 6.0
 7.1
6.8
7.0
6.9
6.9
Tier 1 common capital ratio(g)
 10.1

9.8

8.8
 7.0
 7.0
Selected balance sheet data (period-end)(f)
          
Tier 1 common capital ratio(h)
 11.0
10.1
9.8
8.8
7.0
Selected balance sheet data (period-end)(g)
  
Trading assets $443,963
 $489,892
 $411,128
 $509,983
 $491,409
 $450,028
$443,963
$489,892
$411,128
$509,983
Securities 364,793
 316,336
 360,390
 205,943
 85,450
 371,152
364,793
316,336
360,390
205,943
Loans 723,720
 692,927
 633,458
 744,898
 519,374
 733,796
723,720
692,927
633,458
744,898
Total assets 2,265,792
 2,117,605
 2,031,989
 2,175,052
 1,562,147
 2,359,141
2,265,792
2,117,605
2,031,989
2,175,052
Deposits 1,127,806
 930,369
 938,367
 1,009,277
 740,728
 1,193,593
1,127,806
930,369
938,367
1,009,277
Long-term debt(h)
 256,775
 270,653
 289,165
 302,959
 199,010
Long-term debt 249,024
256,775
270,653
289,165
302,959
Common stockholders’ equity 175,773
 168,306
 157,213
 134,945
 123,221
 195,011
175,773
168,306
157,213
134,945
Total stockholders’ equity 183,573
 176,106
 165,365
 166,884
 123,221
 204,069
183,573
176,106
165,365
166,884
Headcount 260,157
 239,831
 222,316
 224,961
 180,667
 258,965
260,157
239,831
222,316
224,961
Credit quality metrics            
Allowance for credit losses $28,282
 $32,983
 $32,541
 $23,823
 $10,084
 $22,604
$28,282
$32,983
$32,541
$23,823
Allowance for loan losses to total retained loans 3.84% 4.71% 5.04% 3.18% 1.88% 3.02%3.84%4.71%5.04%3.18%
Allowance for loan losses to retained loans excluding purchased credit-impaired loans(i)
 3.35
 4.46
 5.51
 3.62
 1.88
 2.43
3.35
4.46
5.51
3.62
Nonperforming assets $11,036
 $16,557
 $19,741
 $12,714
 $3,933
 $11,734
$11,315
$16,682
$19,948
$12,780
Net charge-offs 12,237
 23,673
 22,965
 9,835
 4,538
 9,063
12,237
23,673
22,965
9,835
Net charge-off rate 1.78% 3.39% 3.42% 1.73% 1.00% 1.26%1.78%3.39%3.42%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./20112012 Annual Report


(b)(a)Results for 2008 included an accounting conformitya conforming loan loss reserve provision related to the acquisition of Washington Mutual Bank’s (“Washington Mutual”) banking operations.
(c)(b)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)(c)
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.
(d)
Tangible book value per share and ROTCE are non-GAAP financial measures. Tangible book value per share represents the Firm’s tangible common equity divided by period-end common shares. ROTCE measures the Firm’s annualized earnings as a percentage of tangible common equity. For further discussion of these measures, see Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures on pages 76–77 of this Annual Report.
(e)Share prices shown for JPMorgan Chase’s common stock are from the New York Stock Exchange. JPMorgan Chase’s common stock is also listed and traded on the London Stock Exchange and the Tokyo Stock Exchange.
(f)Return on Basel I risk-weighted assets is the annualized earnings of the Firm divided by its average risk-weighted assets.
(g)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)(h)
Basel I 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 the Tier 1 common capital ratio, see Regulatory capital on pages 119–122117–120 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 155–157159–162 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, the KBW Bank Index and the S&P Financial Index. The S&P 500 Index is a commonly referenced U.S. equity benchmark consisting of leading
companies from different economic sectors. The KBW Bank Index seeks to reflect the performance of banks and thrifts that are publicly-traded in the U.S. and is composed of 24 leading national money center and regional banks and thrifts. The S&P Financial Index is an index of 8180 financial companies, all of which are components of the S&P 500. The Firm is a component of bothall three industry indices.
The following table and graph assume simultaneous investments of $100$100 on December 31, 2006,2007, in JPMorgan Chase common stock and in each of the above S&P indices. The comparison assumes that all dividends are reinvested.

December 31,
(in dollars)
2006 2007 2008 2009 2010 2011200720082009201020112012
JPMorgan Chase$100.00
 $93.07
 $69.58
 $93.39
 $95.50
 $76.29
$100.00
$74.87
$100.59
$102.91
$82.36
$112.15
KBW Bank Index100.00
52.45
51.53
63.56
48.83
64.97
S&P Financial Index100.00
 81.37
 36.36
 42.62
 47.79
 39.64
100.00
44.73
52.44
58.82
48.81
62.92
S&P 500 Index100.00
 105.49
 66.46
 84.05
 96.71
 98.75
100.00
63.00
79.68
91.68
93.61
108.59

 


JPMorgan Chase & Co./2012 Annual Report63
Management’s discussion and analysis

This section of JPMorgan Chase’s Annual Report for the year ended December 31, 20112012 (“Annual Report”), provides management’sManagement’s discussion and analysis (“MD&A”) of the financial condition and results of operations of JPMorgan Chase. See the Glossary of Terms on pages 308–311333–335 for definitions of terms used throughout this Annual Report.Report. The MD&A included in this Annual Report contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on the current beliefs and expectations of
JPMorgan Chase’s management and are subject to significant risks and uncertainties. These risks and uncertainties could cause the Firm’s actual results to differ materially from those set forth in such forward-looking statements. Certain of such risks and uncertainties are described herein (see Forward-looking Statements on page 175185 of this Annual Report)Report) and in JPMorgan Chase’s Annual Report on Form 10-K for the year ended December 31, 20112012 (“20112012 Form 10-K”), in Part I, Item 1A: Risk factors; reference is hereby made to both.


JPMorgan Chase & Co./2011 Annual Report63
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 $2.32.4 trillion in assets and $183.6204.1 billion in stockholders’ equity as of December 31, 20112012. 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 world’s most prominent corporate, institutional and government clients.
JPMorgan Chase’s principal bank subsidiaries are JPMorgan Chase Bank, National Association (“JPMorgan Chase Bank, N.A.”), a national bank with U.S. branches in 23 states, and Chase Bank USA, National Association (“Chase Bank USA, N.A.”), a national bank that is the Firm’s credit card–issuing bank. JPMorgan Chase’s principal nonbank subsidiary is J.P. Morgan Securities LLC (“JPMorgan Securities”), the Firm’s U.S. investment banking firm. The bank and nonbank subsidiaries of JPMorgan Chase operate nationally as well as through overseas branches and subsidiaries, representative offices and subsidiary foreign banks. One of the Firm’s principal operating subsidiaries in the United Kingdom (“U.K.”) is J.P. Morgan Securities plc (formerly J.P. Morgan Securities Ltd.), a wholly-owned subsidiary of JPMorgan Chase Bank, N.A.
JPMorgan Chase’s activities are organized, for management reporting purposes, into sixfour major reportable business segments, as well as a Corporate/Private Equity.Equity segment. The Firm’s wholesale businesses compriseconsumer business is the Consumer & Community Banking segment. The Corporate & Investment Bank, Commercial Banking, Treasury & Securities Services and Asset Management segments. The Firm’s consumer businessessegments comprise the Retail Financial Services and Card Services & Auto segments.Firm’s wholesale businesses. A description of the Firm’s business segments, and the products and services they provide to their respective client bases, follows.
Consumer & Community Banking
Consumer & Community Banking (“CCB”) serves consumers and businesses through personal service at bank branches and through ATMs, online, mobile and telephone banking. CCB is organized into Consumer & Business Banking, Mortgage Banking (including Mortgage Production, Mortgage Servicing and Real Estate Portfolios) and Card, Merchant Services & Auto (“Card”). Consumer & Business Banking offers deposit and investment products and services to consumers, and lending, deposit, and cash management and payment solutions to small businesses. Mortgage Banking includes mortgage origination and servicing activities, as well as portfolios comprised of residential mortgages and home equity loans, including the purchased credit impaired (“PCI”) portfolio acquired in the Washington Mutual transaction. Card issues credit cards to consumers and small businesses, provides payment services to corporate and public sector clients through its commercial card products, offers payment processing services to merchants, and provides auto and student loan services.


64JPMorgan Chase & Co./2012 Annual Report


Corporate & Investment Bank
J.P. Morgan is one of the world’s leading investment banks, with deep client relationships and broad product capabilities. The clients of theCorporate & Investment Bank (“IB”CIB”) areoffers a broad suite of investment banking, market-making, prime brokerage, and treasury and securities products and services to a global client base of corporations, investors, financial institutions, governmentsgovernment and institutional investors. The Firmmunicipal entities. Within Banking, the CIB 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 riskas well as loan origination and syndication. Also included in Banking is Treasury Services, which includes transaction services, comprised primarily of cash management market-makingand liquidity solutions, and trade finance products. The Markets & Investor Services segment of the CIB is a global market-maker in cash securities and derivative instruments, and also offers sophisticated risk management solutions, prime brokerage, and research.
Retail Financial Markets & Investor 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 also includes branch banking and business bankingactivities. 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 nation’s 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 MerchantSecurities 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 Firm’s other businesses to provide comprehensive solutions, including lending, treasury services, investment banking and asset management, to meet its clients’ domestic and international financial needs.


64JPMorgan 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 world’s 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 Servicescustodian which holds, values, clears and services securities, cash and alternative investments for investors and broker-dealers, and manages depositary receipt programs globally.
 
Commercial Banking
Commercial Banking (“CB”) delivers extensive industry knowledge, local expertise and dedicated service to U.S. and U.S. multinational clients, including corporations, municipalities, financial institutions and non-profit entities with annual revenue generally ranging from $20 million to $2 billion. CB provides financing to real estate investors and owners. Partnering with the Firm’s other businesses, CB provides comprehensive financial solutions, including lending, treasury services, investment banking and asset management to meet its clients’ domestic and international financial needs.
Asset Management
Asset Management (“AM”("AM"), with client assets under supervision of $1.9$2.1 trillion,, is a global leader in investment and wealth management. AM clients include institutions, high-net-worth individuals and retail investors and high-net-worth individuals in every major market throughout the world. AM offers global investment management inacross all major asset classes including equities, fixed income, real estate, hedge funds, private equityalternatives and liquidity products, including money-market instruments and bank deposits.money market funds. AM also offers multi-asset investment management, providing solutions to a broad range of clients’ investment needs. For individual investors, AM also provides retirement products and services, brokerage and banking services including trust and estate, bankingloans, mortgages and brokerage services to high-net-worth clients, and retirement services for corporations and individuals.deposits. The majority of AM’s client assets are in actively managed portfolios.



JPMorgan Chase & Co./20112012 Annual Report 65
Management'sManagement’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.Report. For a complete description of events, trends and uncertainties, as well as the capital, liquidity, credit, market, and marketcountry 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 inEurozone crisis was center stage the face of several new threats, some transitory and some more deeply entrenched. In the first halfbeginning of the year, the earthquakewith social stresses 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 wakefears of political unrest in the Middle East slowed consumer demand.
Although many of these shocks eased later in the year, Europe’s 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 viabilitybreakup 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,Euro. However, strong stands by Eurozone states and the European Central Bank (“ECB”) announced measureshelped stabilize the Eurozone later in the year. The ECB’s Outright Monetary Transactions (“OMT”) program showed its commitment 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 replacedprovide a 12-month lending facility establishedsafety net for European nations. Eurozone member states also took crucial steps toward further fiscal integration by handing over power to the ECB in October 2011 and also allowedto regulate the largest banks to use a wider variety of assets as collateral for the loans. The ECB’s 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 consumerEuro area and wholesale delinquencies decreased and lending for a broad range of purposes accelerated. Housing prices continuedby passing more budgetary authority 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.European Union. Despite the turmoil in the summer months associated with the debt ceiling crisis and a worseningeasing of the crisis, the economies of many of the European Union member countries stalled in Europe,2012.
Asia’s developing economies continued to expand in 2012, although growth was significantly slower than the previous year, reducing global inflationary pressures.
In the U.S. job, the economy grew at a modest pace and the unemployment rate declined to a four year low of 7.8% by the end of 2012 as U.S. labor market conditions continued to improve, with layoffs easing, employment expanding steadily,improve. The U.S. housing market turned the corner during 2012 as the sector continued to show signs of improvement: excess inventories were reduced, prices began to rise and unemployment falling.home affordability improved in most areas of the country as household incomes stabilized and mortgage rates declined to historic lows. Homebuilder confidence improved to the highest level in six years and housing starts increased to the highest level in four years during 2012. At the same time, inflation remained below 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 SystemSystem’s (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. 2% long-run goal.
The Federal Reserve maintained the target range for the federal funds rate at zero to one-quarterone quarter percent and tied the interest rate forecasts to the evolution of the economy, 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,particular inflation and unemployment rates. Additionally, the Federal Reserve reactivated currency swap lines withannounced a new asset purchase program that would be open-ended and is intended to speed up the ECBpace of the U.S. economic recovery and produce sustained improvement in responsethe labor market.
Financial markets reacted favorably when the U.S. Congress reached an agreement to pressuresresolve the so-called “fiscal cliff” by passing the American Taxpayer Relief Act of 2012. This Act made permanent most of the tax cuts initiated in interbank term funding markets.2001 and 2003 and allowed the tax rate on the top income bracket, which was increased to $450,000 annually for
joint tax filers, to revert to 39.6% from 35.0%. Spending and debt ceiling issues were postponed into 2013.
Going into 2013, the U.S. economy is likely to be affected by the continuing uncertainty about Europe’s financial crisis, the Federal Reserve’s monetary policy, and the ongoing fiscal debate over the U.S. debt limit, government spending and taxes.
Financial performance of JPMorgan ChaseFinancial performance of JPMorgan Chase  Financial performance of JPMorgan Chase  
Year ended December 31,  
(in millions, except per share data and ratios)2011 2010 Change2012 2011 Change
Selected income statement data          
Total net revenue$97,234
 $102,694
 (5)%$97,031
 $97,234
 — %
Total noninterest expense62,911
 61,196
 3
64,729
 62,911
 3
Pre-provision profit34,323
 41,498
 (17)32,302
 34,323
 (6)
Provision for credit losses7,574
 16,639
 (54)3,385
 7,574
 (55)
Net income18,976
 17,370
 9
21,284
 18,976
 12
Diluted earnings per share4.48
 3.96
 13
5.20
 4.48
 16
Return on common equity11% 10%  11% 11%  
Capital ratios          
Tier 1 capital12.3
 12.1
  12.6
 12.3
  
Tier 1 common10.1
 9.8
  11.0
 10.1
  
Business overview
JPMorgan Chase reported full-year 20112012 record net income of $21.3 billion, or $5.20 per share, on net revenue of $97.0 billion. Net income increased by $2.3 billion, or 12%, compared with 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 2010.2011. ROE for the yearboth 2012 and 2011 was 11%, compared with 10% for the prior year..
The increase in net income in 20112012 was driven by a lower provision for credit losses, predominantlypartially offset by lower net revenue and higher noninterest expense. Net revenue was flat compared with 2011 as lower principal transactions revenue and lower net interest income were offset by higher mortgage fees and related income, higher other income, and higher securities gains. Principal transactions revenue for 2012 included losses from the synthetic credit portfolio. The reductionincrease in noninterest expense was driven by higher compensation expense.
The decline in the provision for credit losses reflected continued improvementa lower consumer provision as net charge-offs decreased and the related allowance for credit losses was reduced by $5.5 billion in 2012. The decline in the consumer allowance reflected improved delinquency trends and reduced estimated losses in the real estate and credit card loan portfolios. The declinewholesale credit environment remained favorable throughout 2012. Firmwide, net charge-offs were $9.1 billion for the year, down $3.2 billion, or 26%, from 2011, and nonperforming assets at year-end were $11.7 billion, up $419 million, or 4%. The current year included the effect of regulatory guidance implemented during 2012, which resulted 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.the Firm reporting an additional $3.0 billion of nonperforming loans at December 31, 2012 (see Consumer, excluding credit card on pages 140–148 of this Annual Report for further information). Before the


66 JPMorgan Chase & Co./20112012 Annual Report


During 2011, the credit qualityimpact of the Firm’s wholesale credit portfolio improved.these reporting changes, nonperforming assets would have been $8.7 billion at December 31, 2012. 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 thetotal firmwide allowance for loancredit 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 $28.3was $22.6 billion, resulting in a loan loss coverage ratio of 3.35%2.43% of total loans, excluding the purchased credit-impaired portfolio.
Net incomeThe Firm’s 2012 results reflected strong underlying performance varied among JPMorgan Chase’s lines of business, but underlying metricsacross virtually all its businesses, with strong lending and deposit growth. Consumer & Business Banking within Consumer & Community Banking added 106 branches and increased deposits by 11% in each business showed positive trends. The second half of 2011 reflected2012. Business Banking loans increased to a challenging investment banking and capital markets environment which contributed to lowerrecord $18.9 billion, up 7% compared with 2011. Mortgage Banking reported strong production revenue driven by strong originations growth. In Card, Merchant Services & Auto, credit card sales volume (excluding Commercial Card) was up 11% for the year in the Investment Bank (excluding debit valuation adjustment (“DVA”) gains). However, theyear. The Corporate & 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.assets under custody of $18.8 trillion at December 31, 2012. Commercial Banking also reported record average liability balances, up 26% for the year,net revenue of $6.8 billion and record revenue and net income for the year. The fourth quarter of 2011 also marked CB’s sixth consecutive quarter of loan growth, including$2.6 billion in 2012. Commercial Banking loans increased to a 17%record $128.2 billion, a 14% increase in middle-market loans overcompared with the prior year end.year. Asset Management reported record revenue for the yearin 2012 and achieved elevenits fifteenth consecutive quartersquarter of positive net long-term client flows into assets under management. Asset Management also increased loan balances to a record $80.2 billion at December 31, 2012.
JPMorgan Chase ended the year with a Basel I Tier 1 common ratio of 10.1%11.0%, compared with 9.8%10.1% 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%8.7% at December 31, 2011.2012, taking into account the impact of final Basel 2.5 rules and the proposals set forth in the Federal Reserve’s Notice of Proposed Rulemaking (“NPR���). Total deposits increased to $1.1$1.2 trillion, up 21%6% from the prior year. Total stockholders’ equity at December 31, 2011,2012, was $183.6$204.1 billion. The(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 119–123117–120 of this Annual Report.)
During 2011,2012, 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;2012; this included $17$20 billion lent to small businesses up 52%, and $68$85 billion to more than 1,200 not-for-profitfor nearly 1,500 non-profit and government entities, including states, municipalities, hospitals and universities. The Firm alsooriginated more than 765,000920,000 mortgages, and provided credit cards to approximately 8.56.7 million people. The Firm remains committed to helping homeowners and preventing foreclosures. Since the beginning of 2009, the Firm has offered more than 1.2nearly 1.4 million mortgage modifications and of whichthese approximately 452,000610,000 have achieved permanent modification asmodifications.
In addition, despite the damage and disruption at many of December 31, 2011.its branches and facilities caused by Superstorm Sandy at
the end of October 2012, the Firm continued to assist customers, clients and borrowers in the affected areas. The Firm continued to dispense cash through ATMs, loan money, provide liquidity to customers, and settle trades, and it waived a number of checking account and loan fees, including late payment fees, for the benefit of its customers.
Consumer & Community Banking net income increased compared to the prior year, reflecting higher net revenue and lower provision for credit losses, partially offset by higher noninterest expense. Net revenue increased, driven by higher noninterest revenue. Net interest income decreased, driven by lower deposit margins and lower loan balances due to net portfolio runoff, largely offset by the impact of higher deposit balances. Noninterest revenue increased, driven by higher mortgage fees and related income, partially offset by lower debit card revenue, reflecting the impact of the Durbin Amendment. The discussion that follows highlightsprovision for credit losses in 2012 was $3.8 billion compared with $7.6 billion in the performance of each business segmentprior year. The current-year provision reflected a $5.5 billion reduction in the allowance for loan losses due to improved delinquency trends and lower estimated losses in the mortgage loan and credit card portfolios. The prior-year provision reflected a $4.2 billion reduction in the allowance for loan losses. Noninterest expense increased in 2012 compared with the prior year, driven by higher production expense reflecting higher volumes, investments in sales force and presents resultspartially offset by lower marketing expense in Card. Return on a managed basis. Managed basis starts withequity for the reported results under the accounting principles generally accepted in the United Statesyear was 25% on $43.0 billion 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 Firm’s 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 76–78 of this Annual Report.average allocated capital.
Corporate & Investment Bank net income increased modestly fromin 2012 compared with the prior year, asreflecting slightly higher net revenue, lower noninterest expense was predominantly offset byand a lowerlarger benefit from the provision for credit losses. Net revenue for 2012 included a $930 million loss from debit valuation adjustments (“DVA”) on structured notes and derivative liabilities resulting from the tightening of the Firm’s credit spreads. The prior year was approximately flat compared with 2010 andnet revenue included a $1.4 billion gain from DVA on certain structured and derivative liabilities, compared withDVA. The provision for credit losses was a DVA gain of $509 millionlarger benefit 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 Firm’s counterparties. In 2010, net revenue was partially offset by a $403 million loss, net of hedges, from CVA. Fixed Income and Equity Markets revenue increased2012 compared with the prior year partially dueyear. The current-year benefit reflected recoveries and a net reduction in the allowance for credit losses both related to the DVA gain. In addition, results in Fixed Incomerestructuring of certain nonperforming loans, current credit trends 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 noninterestother portfolio activity. Noninterest expense from the prior-year level was largelydown slightly driven by lower compensation expenseexpense. Return on equity for the year was 18%, or 19% excluding DVA (a non-GAAP financial measure), on $47.5 billion of average allocated capital.
Commercial Banking reported record net income for 2012, reflecting an increase in net revenue and a decrease in the absence ofprovision for credit losses, partially offset by higher noninterest expense. Net revenue was a record, driven by higher net interest income and higher noninterest revenue. Net interest income increased, driven by growth in loan and liability balances, partially offset by spread compression on loan and liability products. Noninterest revenue increased


JPMorgan Chase & Co./20112012 Annual Report 67
Management'sManagement’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, largely 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. Higherincreased investment sales revenue and deposit-related fees partially offset the decline inbanking 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 foreclosure-related 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%28% on $8.0$9.5 billion of average allocated capital.
Treasury & Securities ServicesAsset Management net income increased from the prior year,in 2012, 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 netrevenue. Net revenue increased, compareddriven by net inflows to 2010, driven byproducts with higher margins and higher net interest income due toresulting from higher loan and 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 noninterestbalances. Noninterest expense was mainly driven by continued expansion into new markets and expenses related to exiting unprofitable business, partially offset byflat compared with the transfer of the Commercial Card business to Card.prior year. Return on equity for the year was 17%24% 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 reported a net loss in 2012, compared with 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, lowerprior year driven by losses in Treasury and Chief Investment Office (“CIO”). Treasury and CIO net revenue included $5.8 billion of principal transactions losses from the synthetic credit portfolio in CIO during the first six months of 2012 and $449 million of losses during the third quarter of 2012 on the retained index credit derivative positions. During the third quarter, CIO effectively closed out the index credit derivative positions that were retained following the transfer of the remainder of the synthetic credit portfolio to CIB on July 2, 2012. Treasury and CIO net revenue also included securities gains of $2.0 billion for the year. The current-year net revenue also included $888 million of extinguishment gains related to the redemption of trust preferred securities. Net interest income was negative in 2012, and significantly lower than the prior year, primarily driven by repositioningreflecting the impact of lower portfolio yields and higher deposit balances across the Firm.
Other Corporate reported a net loss in 2012. Noninterest revenue included a benefit of $1.1 billion as a result of the investment securities portfolioWashington Mutual bankruptcy settlement and lower funding benefits from financing portfolio positions. Lower securities gains also drovea $665 million gain for the decline in net income. In 2011, noninterestrecovery on a Bear Stearns-related subordinated loan. Noninterest expense included $3.2an expense of $3.7 billion offor additional litigation expense,reserves, predominantly for mortgage-related matters, compared with $5.7matters. The prior year included expense of $3.2 billion for additional litigation reserves.
Note: The Firm uses a single U.S.-based, blended marginal tax rate of litigation expense in 2010.38% (“the marginal rate”) to report the estimated after-tax effects of each significant item affecting net income. This rate represents the weighted-average marginal tax rate for the U.S. consolidated tax group. The Firm uses this single marginal rate to reflect the tax effects of all significant items because (a) it simplifies the presentation and analysis for management and investors; (b) it has proved to be a reasonable estimate of the marginal tax effects; and (c) often there is uncertainty at the time a significant item is disclosed regarding its ultimate tax outcome.
20122013 Business outlook
The following forward-looking statements are based on the current beliefs and expectations of JPMorgan Chase’s management and are subject to significant risks and uncertainties. These risks and uncertainties could cause the Firm’s actual results to differ materially from those set forth in such forward-looking statements. See Forward-Looking


68JPMorgan Chase & Co./2011 Annual Report


Statements on page 175185 of this Annual Report and the Risk Factors section on pages 8–21of the 20112012 Form 10-K.
JPMorgan Chase’s outlook for the full-year 2012full year 2013 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,CCB, the Firm estimates that, given the current low interest rate environment, continued deposit spread compression will likelycould negatively affect 2012impact annual net income by approximately $400 million. In addition,million in 2013. This decline may be offset by the effectimpact of deposit balance growth, although the Durbin Amendment will likely reduce annualized net income by approximately $600 million. exact extent of any such deposit growth cannot be determined at this time.
In the Mortgage Production and ServicingBanking business within RFS, revenue in 2012 could be negatively affected by continued elevated levels of repurchases of mortgages previously sold, predominantly to U.S. government-sponsored entities (“GSEs”). Management estimates that realized mortgage repurchase losses could be approximately $350 million per quarter in 2012. Also for Mortgage Production and Servicing,CCB, management expects the business to continue to incur elevated default managementdefault- and foreclosure-related costs, including additional costs associated with the Firm’s mortgage servicing processes, particularly its loan modification and foreclosure procedures. (See EnhancementsIn addition, management believes that the high production margins experienced in recent quarters likely peaked in 2012 and will decline over time. Management also expects there will be continued elevated levels of repurchases of mortgages previously sold, predominantly to Mortgage ServicingU.S. government-sponsored entities (“GSEs”). However, based on pages 152-153current trends and Note 17 on pages 267–271 of this Annual Report.)estimates, management believes that the existing mortgage repurchase liability is sufficient to cover such losses.
For the Real Estate Portfolios within RFS,Mortgage Banking, management believes that total quarterly net charge-offs couldmay be approximately $900 million.$550 million, subject to economic conditions. If the positive credit trends in the residential real estate portfolio continue or accelerate and economic uncertainty declines, the related allowance for loan losses may be reduced over time. Given management’s current estimate of portfolio runoff levels, the existing residential real estate portfolio is expected to decline by approximately 10% to 15% in 20122013 from year-end 20112012 levels. This reductionThe run-off in the residential real estate portfolio iscan be expected to reduce annual net interest income by approximately $500$600 million in 2012. However, over2013. Over time, the reduction in net interest income is expected toshould 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 Services within CCB, the net charge-off rateFirm expects that, if current positive credit trends continue, the card- related allowance for loan losses could be reduced by up to $1 billion over the combined Chase and Washington Mutual credit card portfolios (excluding Commercial Card) could increase in the first quartercourse of 2012 to approximately 4.50% from the 4.33% reported in the fourth quarter, reflecting normal seasonality.2013.
The currently anticipated results of RFS and Cardfor CCB described above could be adversely affected by further declines in
if economic conditions, including 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, managementrate, do not continue to improve. 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


68JPMorgan Chase & Co./2012 Annual Report


influenced by capital markets activity, market levels, the performance of the broader economy and investment-specific issues. Corporate’s net interest income levels will generally trend with
For Treasury and CIO, within the size and duration of the investment securities portfolio. CorporateCorporate/Private Equity segment, management expects a quarterly net income (excluding Private Equity results, significant nonrecurring itemsloss of approximately $300 million with that amount likely to vary driven by the implied yield curve and litigation expense) could be approximately $200 million, though these results will depend onmanagement decisions related to the decisions that the Firm makes over the course of the year with respect to repositioningpositioning of the investment securities portfolio.
For Other Corporate, within the Corporate/Private Equity segment, management expects quarterly net income, excluding material litigation expense and significant items, if any, to be approximately $100 million, but this amount is also likely to vary each quarter.
Management expects the Firm's net interest income to be generally flat during 2013, as modest pressure on the net yield on interest-earning assets is expected to be generally offset by anticipated growth in interest-earning assets.
The Firm faces a variety of litigation, includingcontinues to focus on expense discipline and is targeting expense for 2013 to be approximately $1 billion lower than in its various roles as issuer and/or underwriter2012 (not taking into account, for such purposes, any expenses in mortgage-backed securities (“MBS”) offerings, primarilyeach year related to offerings involving third parties other thancorporate litigation and foreclosure-related matters).
CIO synthetic credit portfolio
On August 9, 2012, the GSEs. It is possible that these matters will take a numberFirm restated its previously-filed interim financial statements for the quarterly period ended March 31, 2012. The restatement related to valuations of years to resolve; their ultimate resolution is inherently uncertain and reserves for such litigation matters may need to be increasedcertain positions in the future.synthetic credit portfolio of the Firm’s CIO. The restatement had the effect of reducing the Firm’s reported net income for the three months ended March 31, 2012, by $459 million. The restatement had no impact on any of the Firm’s Consolidated Financial Statements as of June 30, 2012, and December 31, 2011, or for the three and six months ended June 30, 2012 and 2011. For more information about the restatement and the related valuation matter, see the Firm’s Form 10-Q for the quarter ended June 30, 2012, filed on August 9, 2012.
Management also determined that a material weakness existed in the Firm’s internal control over financial reporting at March 31, 2012. Management has taken steps to remediate the material weakness, including enhancing management supervision of valuation matters. These remedial steps were substantially implemented by June 30, 2012; however, in accordance with the Firm’s internal control compliance program, the material weakness designation could not be closed until the remedial processes were operational for a period of time and successfully tested. The testing was successfully completed during the third quarter of 2012 and the control deficiency was closed at September 30, 2012. For additional information concerning the remedial changes in, and related testing of, the Firm’s internal control over financial reporting, see Part I, Item 4: Controls and Procedures in the Firm’s Form 10-Q for the quarter ended September 30, 2012, filed on November 8, 2012.
On July 2, 2012, the majority of the synthetic credit portfolio was transferred from the CIO to the Firm’s CIB, which has the expertise, trading platforms and market franchise to manage these positions to maximize their economic value. An aggregate position of approximately $12 billion notional was retained in CIO. By the end of the third quarter of 2012, CIO effectively closed out the index credit derivative positions that had been retained by it following the transfer. CIO incurred losses of $5.8 billion from the synthetic credit portfolio for the six months ended June 30, 2012, and losses of $449 million from the retained index credit derivative positions for the three months ended September 30, 2012, which were recorded in the principal transactions revenue line item of the income statement. CIB continues to actively manage and reduce the risks in the remaining synthetic credit portfolio that had been transferred to it on July 2, 2012. This portion of the portfolio experienced modest losses in each of the two quarters of 2012 following the transfer; these losses were included in Fixed Income Markets Revenue for CIB (and also recorded in the principal transactions revenue).
On January 16, 2013, the Firm announced that the Firm’s Management Task Force and the independent Review Committee of the Firm’s Board of Directors continually evaluate ways(the “Board Review Committee”) had each concluded their reviews relating to deploythe 2012 losses by the CIO and had released their respective reports. The Board Review Committee’s Report sets forth recommendations relating to the Board’s oversight of the Firm’s strong capital baserisk management processes, all of which have been approved by the full Board of Directors and have been, or are in orderthe process of being, implemented.
The Management Task Force Report, in addition to enhance shareholder value. Such alternatives could includesummarizing the repurchasekey events and setting forth its observations regarding the losses incurred in CIO’s synthetic credit portfolio, describes the broad range 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 Reserve’s Comprehensive Capital Analysis and Review (“CCAR”) process. The Federal Reserve requiresremedial measures taken by the Firm to submitrespond to the lessons it has learned from the CIO events, including:
revamping the governance, mandate and reporting and control processes of CIO;
implementing numerous risk management changes, including improvements in model governance and market risk; and
effecting a capital planseries of changes to the Risk function’s governance, organizational structure and interaction with the Board.
The Board of Directors formed the Board Review Committee in May 2012 to oversee the scope and work of the Management Task Force review, assess the Firm’s risk management processes related to the issues raised in the Management Task Force review, and to report to the Board of Directors on the Review Committee’s findings and recommendations. In performing these tasks, the Board Review Committee, with the assistance of its own counsel and expert advisor, conducted an annual basis.independent review, including analyzing the voluminous documentary record and conducting interviews of Board members and


JPMorgan Chase & Co./2012 Annual Report69
Management’s discussion and analysis

numerous current and former employees of the Firm. Based on its review, the Board Review Committee concurred in the substance of the Management Task Force Report. The Firm submittedManagement Task Force Report and the Board Review Committee Report set out facts that in their view were the most relevant for their respective purposes. Others (including regulators conducting their own investigations) may have a different view of the facts, or may focus on other facts, and may also draw different conclusions regarding the facts and issues.
The Board Review Committee Report recommends a number of enhancements to the Board’s own practices to strengthen its 2012 capital planoversight of the Firm’s risk management processes. The Board Review Committee noted that some of its recommendations were already being followed by the Board or the Risk Policy Committee or have recently been put into effect.
The Board Review Committee’s recommendations include:
better focused and clearer reporting of presentations to the Board’s Risk Policy Committee, with particular emphasis on January 9, 2012. The Federal Reserve has indicatedthe key risks for each line of business, identification of significant future changes to the business and its risk profile, and adequacy of staffing, technology and other resources;
clarifying to management the Board’s expectations regarding the capabilities, stature, and independence of the Firm’s risk management personnel;
more systematic reporting to the Risk Policy Committee on significant model risk, model approval and model governance, on setting of significant risk limits and responses to significant limit excessions, and with respect to regulatory matters requiring attention;
further clarification of the Risk Policy Committee’s role and responsibilities, and more coordination of matters presented to the Risk Policy Committee and the Audit Committee;
concurrence by the Risk Policy Committee in the hiring or firing of the Chief Risk Officer and that it expectsbe consulted with respect to provide notificationthe setting of either its objection or non-objectionsuch Chief Risk Officer’s compensation; and
staff with appropriate risk expertise be added to the Firm’s capital planInternal Audit function and that Internal Audit more systematically include the risk management function in its audits.
The Board of Directors will continue to oversee the Firm’s remediation efforts to ensure they are fully implemented.
Also, on January 14, 2013, the Firm and JPMorgan Chase Bank, N.A., entered into Consent Orders with, respectively, the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency (“the OCC”) that relate to risk management, model governance and other control functions related to CIO and certain other trading activities at the Firm. Many of the actions required by March 15, 2012.the Consent Orders are consistent with those recommended by the Management Task Force and the Board Review Committee and, as such, a number of them have been, or are in the process of being, implemented. The
Firm is committed to the full remediation of all issues identified in the Consent Orders.
The CIO synthetic credit portfolio losses have resulted in litigation against the Firm, as well as heightened regulatory scrutiny and may lead to additional regulatory or legal proceedings, in addition to the consent orders noted above. Such regulatory and legal proceedings may expose the Firm to fines, penalties, judgments or losses, harm the Firm’s reputation or otherwise cause a decline in investor confidence. For a description of the regulatory and legal developments relating to the CIO matters described above, see Note 31 on pages 316–325 of this Annual Report.
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


JPMorgan Chase & Co./2011 Annual Report69
Management's discussion experiencing an unprecedented increase in regulation and analysis

experiencing a period of unprecedented change in regulationsupervision, and such changes could have a significant impact on how the Firm conducts business. For example, under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), U.S. federal banking and other regulatory agencies are instructed to conduct approximately 285 rulemakings and 130 studies and reports. These agencies include the Federal Reserve, the Office of the Comptroller of the Currency (the “OCC”), the Federal Deposit Insurance Corporation (the “FDIC”), the Commodity Futures Trading Commission, the U.S. Securities and Exchange Commission (the “SEC”) and the Bureau of Consumer Financial Protection (the “CFPB”). 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, at the same time, best meeting the needs and expectations of its clients. While
During 2012, for example, the Firm has madesubmitted to the Federal Reserve and the FDIC its “resolution plan” in the event of a preliminary assessmentmaterial distress or failure, registered several of its subsidiaries with the CFTC as swap dealers, and continued its planning and implementation efforts with respect to new regulations affecting its derivatives, trading and money market mutual funds businesses. The Firm also faces regulatory initiatives relating to its structure, including push-out of certain derivatives activities from its subsidiary banks under Section 716 of the likely impact of certain ofDodd-Frank Act, a proposed requirement from 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 principleU.K. Financial Services Authority (the “global settlement”“FSA”) 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 forrequiring the Firm to either obtain equal treatment for the U.K. depositors of its U.S. bank who makes deposits in the U.K., or “subsidiarize” in the U.K., and various other proposed U.K. and EU initiatives that could affect its ability to allocate capital and liquidity efficiently 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 loansits global operations. Additional efforts 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 costsunderway to comply with portionsthe higher capital requirements of the global settlement,new Basel Accords (both 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 “Subsequent events” in Note 2, and “Mortgage Foreclosure Investigations and Litigation” in Note 31 on pages 183–184 and 295–296, 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”)“Basel 2.5” requirements effective January 1, 2013 as well as significant creditor groups (the “WaMu Global Settlement”the additional capital requirements of “Basel III”). PursuantThe Firm is also preparing to this agreement,comply with Basel III’s new liquidity measures -- the Firm expects to recognize additional assets, including certain pension-related assets, as well as tax refunds, in future periods as“liquidity coverage ratio” (“LCR”) and 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.




“net stable


70 JPMorgan Chase & Co./20112012 Annual Report


funding ratio” (“NSFR”) - which require the Firm to hold specified types of “high quality” liquid assets to meet assumed levels of cash outflows following a stress event. Management’s current objective is for the Firm to reach, by the end of 2013, an estimated Basel III Tier I common ratio of 9.5% (including the impact of the Basel 2.5 rules and the estimated impact of the other applicable requirements set forth in the Federal Reserve’s Advanced NPR issued in June 2012). The Firm is currently targeting reaching a 100% LCR, based on its current understanding of these requirements, by the end of 2013.
Furthermore, the Firm is experiencing heightened scrutiny by its regulators of its compliance with new and existing regulations, including those issued under the Bank Secrecy Act, the Unfair and Deceptive Acts or Practices laws, the Real Estate Settlement Procedures Act (“RESPA”), the Truth in Lending Act, laws governing the Firm’s consumer collections practices and the laws administered by the Office of Foreign Control, among others. The Firm is also under scrutiny by its supervisors with respect to its controls and operational processes, such as those relating to model development, review, governance and approvals. On January 14, 2013, the Firm and three of its subsidiary banks, including JPMorgan Chase Bank, N.A. entered into Consent Orders with the Federal Reserve and the OCC relating principally to the Firm’s and such banks’ BSA/AML policies and procedures. Also on January 14, 2013, the Firm and JPMorgan Chase Bank, N.A. entered into Consent Orders arising out of their reviews of the Firm’s Chief Investment Office. These latter Consent Orders relate to risk management, model governance and other control functions related to CIO and certain other trading activities at the Firm. The Firm expects that its banking supervisors will in the future continue to take more formal enforcement actions against the Firm rather than issuing informal supervisory actions or criticisms.
While the effect of the changes in law and the heightened scrutiny of its regulators is likely to result in additional costs, the Firm cannot, given the current status of regulatory and supervisory developments, quantify the possible effects on its business and operations of all the significant changes that are currently underway. For further discussion of regulatory developments, see Supervision and regulation on pages 1–8 and Risk factors on pages 8–21.
On January 7, 2013, the Firm submitted its capital plan to the Federal Reserve under the Federal Reserve’s 2013 Comprehensive Capital Analysis and Review (“CCAR”) process. The Firm’s plan relates to the last three quarters of 2013 and the first quarter of 2014 (that is, the 2013 CCAR capital plan relates to dividends to be declared commencing in June 2013 and payable in July 2013, and to common equity repurchases and other capital actions commencing April 1, 2013). The Firm expects to receive the Federal Reserve’s final response to its plan no later than March 14, 2013. With respect to the Firm’s 2012 CCAR capital plan, the Firm expects that its Board of Directors will declare the regular quarterly common stock dividend of $0.30 per share for the 2013 first quarter at its Board meeting to be
held on March 19, 2013. In addition, pursuant to a non-objection received from the Federal Reserve on November 5, 2012 with respect to the 2012 capital plan it resubmitted in August 2012, the Firm is authorized to repurchase up to $3.0 billion of common equity in the first quarter of 2013. The timing and exact amount of any common equity to be repurchased under the program will depend on various factors, including market conditions; the Firm’s capital position; organic and other investment opportunities, and legal and regulatory considerations, among other factors. For more information, see Capital management on pages 116–122.
Business events
Superstorm Sandy
On October 29, 2012, the mid-Atlantic and Northeast regions of the U.S. were affected by Superstorm Sandy, which caused major flooding and wind damage and resulted in major disruptions to individuals and businesses and significant damage to homes and communities in the affected regions. Despite the damage and disruption to many of its branches and facilities, the Firm has been assisting its customers, clients and borrowers in the affected areas. The Firm has continued to dispense cash via ATMs and branches, loan money, provide liquidity to customers, and settle trades, and it waived a number of checking account and loan fees, including late payment fees. Superstorm Sandy did not have a material impact on the 2012 financial results of the Firm and the Firm does not anticipate total losses due to the storm will be material.
Subsequent events
Mortgage foreclosure settlement agreement with the Office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System
On January 7, 2013, the Firm announced that it and a number of other financial institutions entered into a settlement agreement with the Office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System providing for the termination of the independent foreclosure review programs (the “Independent Foreclosure Review”). Under this settlement, the Firm will make a cash payment of $753 million into a settlement fund for distribution to qualified borrowers. The Firm has also committed an additional $1.2 billion to foreclosure prevention actions, which will be fulfilled through credits given to the Firm for modifications, short sales and other specified types of borrower relief. Foreclosure prevention actions that earn credit under the Independent Foreclosure Review settlement are in addition to actions taken by the Firm to earn credit under the global settlement entered into by the Firm with state and federal agencies. The estimated impact of the foreclosure prevention actions required under the Independent Foreclosure Review settlement have been considered in the Firm’s allowance for loan losses. The Firm recognized a pretax charge of approximately $700 millionin the fourth quarter of 2012 related to the Independent Foreclosure Review settlement.


JPMorgan Chase & Co./2012 Annual Report71

Management’s discussion and analysis

CONSOLIDATED RESULTS OF OPERATIONS
The following section provides a comparative discussion of JPMorgan Chase’s Consolidated Results of Operations on a reported basis for the three-year period ended December 31, 2011.2012. 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 168–172178–182 of this Annual Report.
Revenue          
Year ended December 31,          
(in millions)2011
 2010
 2009
2012
 2011
 2010
Investment banking fees$5,911
 $6,190
 $7,087
$5,808
 $5,911
 $6,190
Principal transactions10,005
 10,894
 9,796
5,536
 10,005
 10,894
Lending- and deposit-related fees6,458
 6,340
 7,045
6,196
 6,458
 6,340
Asset management, administration and commissions14,094
 13,499
 12,540
13,868
 14,094
 13,499
Securities gains1,593
 2,965
 1,110
2,110
 1,593
 2,965
Mortgage fees and related income2,721
 3,870
 3,678
8,687
 2,721
 3,870
Credit card income6,158
 5,891
 7,110
Card income5,658
 6,158
 5,891
Other income(a)2,605
 2,044
 916
4,258
 2,605
 2,044
Noninterest revenue49,545
 51,693
 49,282
52,121
 49,545
 51,693
Net interest income47,689
 51,001
 51,152
44,910
 47,689
 51,001
Total net revenue$97,234
 $102,694
 $100,434
$97,031
 $97,234
 $102,694
(a)
Included operating lease income of $1.3 billion, $1.2 billion and $971 million for the years ended December 31, 2012, 2011 and 2010, respectively.

2012 compared with 2011
Total net revenue for 2012 was $97.0 billion, down slightly from 2011. Results for 2012 were driven by lower principal transactions revenue from losses incurred by CIO, and lower net interest income. These items were predominantly offset by higher mortgage fees and related income in CCB and higher other income in Corporate/Private Equity.
Investment banking fees decreased slightly from 2011, reflecting lower advisory fees on lower industry-wide volumes, and to a lesser extent, slightly lower equity underwriting fees on industry-wide volumes that were flat from the prior year. These declines were predominantly offset by record debt underwriting fees, driven by favorable market conditions and the impact of continued low interest rates. For additional information on investment banking fees, which are primarily recorded in CIB, see CIB segment results pages 92–95 and Note 7 on pages 228–229 of this Annual Report.
Principal transactions revenue, which consists of revenue primarily from the Firm’s market-making and private equity investing activities, decreased compared with 2011, predominantly due to $5.8 billion of losses incurred by CIO from the synthetic credit portfolio for the six months ended June 30, 2012, and $449 million of losses incurred by CIO from the retained index credit derivative positions for the
three months ended September 30, 2012; and additional modest losses incurred by CIB from the synthetic credit portfolio in each of the third and fourth quarters of 2012.
Principal transaction revenue also included a $930 million loss in 2012, compared with a $1.4 billion gain in 2011, from DVA on structured notes and derivative liabilities, resulting from the tightening of the Firm’s credit spreads. These declines were partially offset by higher market-making revenue in CIB, driven by strong client revenue and higher revenue in rates-related products, as well as a $665 million gain recognized in Other Corporate associated with the recovery on a Bear Stearns-related subordinated loan. Private equity gains decreased in 2012, predominantly due to lower unrealized and realized gains on private investments, partially offset by higher unrealized gains on public securities. For additional information on principal transactions revenue, see CIB and Corporate/Private Equity segment results on pages 92–95 and 102–104, respectively, and Note 7 on pages 228–229 of this Annual Report.
Lending- and deposit-related fees decreased in 2012 compared with the prior year. The decrease predominantly reflected lower lending-related fees in CIB and lower deposit-related fees in CCB. For additional information on lending- and deposit-related fees, which are mostly recorded in CCB, CIB and CB, see the segment results for CCB on pages 80–91, CIB on pages 92–95 and CB on pages 96–98 of this Annual Report.
Asset management, administration and commissions revenue decreased from 2011. The decrease was largely driven by lower brokerage commissions in CIB. This decrease was largely offset by higher asset management fees in AM driven by net client inflows, the effect of higher market levels, and higher performance fees; and higher investment service fees in CCB, as a result of growth in branch sales of investment products. For additional information on these fees and commissions, see the segment discussions for CIB on pages 92–95, CCB on pages 80–91, AM on pages 99–101, and Note 7 on pages 228–229 of this Annual Report.
Securities gains increased, compared with the 2011 level, reflecting the results of repositioning the CIO available-for-sale (“AFS”) securities portfolio. 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 102–104, and Note 12 on pages 244–248 of this Annual Report.
Mortgage fees and related income increased significantly in 2012 compared with 2011. The increase resulted from higher production revenue, reflecting wider margins driven by favorable market conditions; and higher volumes due to historically low interest rates and the Home Affordable Refinance Programs (“HARP”). The increase also resulted from a favorable swing in risk management results related


72JPMorgan Chase & Co./2012 Annual Report


to mortgage servicing rights (“MSR”), which was a gain of $619 million in 2012, compared with a loss of $1.6 billion in 2011. For additional information on mortgage fees and related income, which is recorded predominantly in CCB, see CCB’s Mortgage Production and Mortgage Servicing discussion on pages 85–87, and Note 17 on pages 291–295 of this Annual Report.
Card income decreased during 2012, driven by lower debit card revenue, reflecting the impact of the Durbin Amendment; and to a lesser extent, higher amortization of loan origination costs. The decrease in credit card income was offset partially by higher net interchange income associated with growth in credit card sales volume, and higher merchant servicing revenue. For additional information on credit card income, see the CCB segment results on pages 80–91 of this Annual Report.
Other income increased in 2012 compared with the prior year, largely due to a $1.1 billion benefit from the Washington Mutual bankruptcy settlement, and $888 million of extinguishment gains in Corporate/Private Equity related to the redemption of trust preferred securities (“TruPS”). The extinguishment gains were related to adjustments applied to the cost basis of the TruPS during the period they were in a qualified hedge accounting relationship. These items were offset partially by the absence of a prior-year gain on the sale of an investment in AM.
Net interest income decreased in 2012 compared with the prior year, predominantly reflecting the impact of lower average trading asset balances, the runoff of higher-yielding loans, faster prepayment of mortgage-backed securities, limited reinvestment opportunities, as well as the impact of lower interest rates across the Firm’s interest-earning assets. The decrease in net interest income was partially offset by lower deposit and other borrowing costs. The Firm’s average interest-earning assets were $1.8 trillion for 2012, and the net yield on those assets, on a fully taxable-equivalent (“FTE”) basis, was 2.48%, a decrease of 26 basis points from 2011.
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,CCB, 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'sFirm’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 81–84, and Note 7 on pages 211–212 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'sFirm’s credit spreads,spreads; this was partially
offset by a $769$769 million loss, net of hedges, from CVA on derivative assets within Credit Portfolio in IB,CIB’s credit portfolio, due to the widening of credit spreads ofrelated to the Firm'sFirm’s counterparties. The prior year included a $509$509 million gain from DVA, partially offset by a $403$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.CIB during the second half of 2011. 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 81–84 and 107–108, respectively, and Note 7 on pages 211–212 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 by CCB in RFS,the first quarter of 2011, 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 85–93, CB on pages 98–100, TSS on pages 101–103 and IB on pages 81–84 of this Annual Report.CCB.
Asset management, administration and commissions revenue increased from 2010, reflecting higher asset management fees in AM and RFS,CCB, driven by net inflows to products with higher margins and the effect of higher market levels; and higher administration fees in TSS,CIB, reflecting net inflows of assets under custody. For additional information on these fees and commissions, see the segment discussions for AM on pages 104–106, RFS on pages 85–93 and TSS on pages 101–103, and Note 7 on pages 211–212 of this Annual Report.
Securities gains decreased, compared with the 2010 level, primarily due to the repositioning of the investment securitiesAFS 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 107–108, and Note 12 on pages 225–230 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”MSR”) asset, which was predominantly offset by a $5.6 billion gain on the derivatives used to hedge the MSR asset. For additional information on


JPMorgan Chase & Co./2011 Annual Report71
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 89–91, and Note 17 on pages 267–271 of this Annual Report. For additional information on repurchase losses, see the Mortgage repurchase liability discussion on pages 115–118111–115 and Note 29 on pages 283–289308–315 of this Annual Report.
Credit cardCard 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'sKohl’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 94–97, 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,CIB, and higher auto operating lease income in Card,CCB, resulting from growth in lease volume.


JPMorgan Chase & Co./2012 Annual Report73
Management’s discussion and analysis

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,CCB, 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'sFirm’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”)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 CardCCB discussion on credit card legislation on page 9489 of this Annual Report.
2010
Provision for credit losses    
Year ended December 31,     
(in millions)2012
 2011
 2010
Consumer, excluding credit card$302
 $4,672
 $9,452
Credit card3,444
 2,925
 8,037
Total consumer3,746
 7,597
 17,489
Wholesale(361) (23) (850)
Total provision for credit losses$3,385
 $7,574
 $16,639
2012 compared with 20092011
Total net revenueThe provision for 2010 was $102.7 billion, upcredit losses decreased by $2.34.2 billion, or 2%, from 2009. Results for 2010 were2011. The decrease was driven by a lower provision for consumer, excluding credit card loans, which reflected a reduction in the allowance for loan losses, due primarily to lower estimated losses in the non-PCI residential real estate portfolio as delinquency trends improved, partially offset by the impact of charge-offs of Chapter 7 loans. A higher level of securities gainsrecoveries 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
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 81–84, and Note 7 on pages 211–212 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 81–84 and 107–108, respectively, and Note 7 on pages 211–212 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 81–84, RFS on pages 85–93, CB on pages 98–100 and TSS on pages 101–103 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 104–106 and TSS on pages 101–103, and Note 7 on pages 211–212 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 changescharge-offs 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 107–108, and Note 12 on pages 225–230 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 contra-revenue), which were attributable to higher estimated losses related to repurchase demands, predominantly from


72JPMorgan 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 89–91, and Note 17 on pages 267–271 of this Annual Report. For additional information on repurchase losses, see the mortgage repurchase liability discussion on pages 115–118 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 andwholesale provision for credit losses. Lower income from other fee-based products also contributed to the decrease indecrease. These items were partially offset by a higher provision for credit card income. Excludingloans, largely due to a smaller reduction in the impact ofallowance for loan losses in 2012 compared with the adoption of the accounting guidance, credit card income increased in 2010, reflecting higher customer charge volume on credit and debit cards.prior year. For a more detailed discussion of the impact ofloan portfolio and the adoption ofallowance for credit losses, see the accounting guidance on the Consolidated Statements of Income, see Explanation and Reconciliation of the Firm's Use of Non-GAAP Financial Measuressegment discussions for CCB on pages 76–7880–91, CIB on pages 92–95 and CB on pages 96–98, and Allowance For Credit Losses on pages 159–162 of this Annual Report. For additional information on credit card income, see the Cardand RFS segment results on pages 94–97, and pages 85–93, respectively, of this Annual Report.
Other income increased in 2010, largely due to the write-down 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 $1.7 trillion in 2010, and the net yield on those assets, on a FTE basis, was 3.06%, a decrease of 6 basis points from 2009. For a more detailed discussion of the impact of the adoption of the new accounting guidance related to VIEs on the Consolidated Statements of Income, see Explanation and Reconciliation of the Firm's Use of Non-GAAP Financial Measures on pages 76–78 of this Annual Report. For further information on the impact of the legislative changes on the Consolidated Statements of Income, see Carddiscussion on credit card legislation on page 94 of this Annual Report.
Provision for credit losses    
Year ended December 31,     
(in millions)2011
 2010
 2009
Wholesale$(23) $(850) $3,974
Consumer, excluding credit card4,672
 9,452
 16,022
Credit card2,925
 8,037
 12,019
Total consumer7,597
 17,489
 28,041
Total provision for credit losses$7,574
 $16,639
 $32,015
2011 compared with 2010
The provision for credit losses declined by $9.1 billion compared withfrom 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$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.
Noninterest expense    
Year ended December 31, 
(in millions)2012
 2011
 2010
Compensation expense$30,585
 $29,037
 $28,124
Noncompensation expense:     
Occupancy3,925
 3,895
 3,681
Technology, communications and equipment5,224
 4,947
 4,684
Professional and outside services7,429
 7,482
 6,767
Marketing2,577
 3,143
��2,446
Other(a)(b)
14,032
 13,559
 14,558
Amortization of intangibles957
 848
 936
Total noncompensation expense34,144
 33,874
 33,072
Total noninterest expense$64,729
 $62,911
 $61,196
(a)
Included litigation expense of $5.0 billion, $4.9 billion and $7.4 billion for the years ended December 31, 2012, 2011 and 2010, respectively.
(b)
Included FDIC-related expense of $1.7 billion, $1.5 billion and $899 million for the years ended December 31, 2012, 2011 and 2010, respectively.
2012 compared with 2011
Total noninterest expense for 2012 was $64.7 billion, up by $1.8 billion, or 3%, from 2011. Compensation expense drove the increase from the prior year.
Compensation expense increased from the prior year, predominantly due to investments in the businesses, including the sales force in CCB and bankers in the other businesses, partially offset by lower compensation expense in CIB.
Noncompensation expense for 2012 increased from the prior year, reflecting continued investments in the businesses, including branch builds in CCB; higher expense related to growth in business volume in CIB and CCB; higher regulatory deposit insurance assessments; expenses related to exiting a non-core product and writing-off intangible assets in CCB; and higher litigation expense in Corporate/Private Equity. These increases were partially offset by lower litigation expense in AM and CCB (including the Independent Foreclosure Review settlement) and lower marketing expense in CCB. For a more detailedfurther discussion of the loan portfolio and the allowance for credit losses,litigation expense, see the segment discussions for RFSNote 31 on pages 85–93, Card on pages 94–97, IB on pages 81–84 and CB on pages 98–100, and the Allowance for credit losses section on pages 155–157316–325 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 RFSamortization of intangibles, refer to Note 17 on pages 85–93, Card on pages 94–97, IB on pages 81–84 and CB on pages 98–100, and the Allowance for Credit Losses section on pages 155–157291–295 of this Annual Report.


74JPMorgan Chase & Co./20112012 Annual Report73
Management's discussion and analysis

Noninterest expense    
Year ended December 31, 
(in millions)2011
 2010
 2009
Compensation expense$29,037
 $28,124
 $26,928
Noncompensation expense:     
Occupancy3,895
 3,681
 3,666
Technology, communications and equipment4,947
 4,684
 4,624
Professional and outside services7,482
 6,767
 6,232
Marketing3,143
 2,446
 1,777
Other(a)(b)
13,559
 14,558
 7,594
Amortization of intangibles848
 936
 1,050
Total noncompensation expense33,874
 33,072
 24,943
Merger costs—
 —
 481
Total noninterest expense$62,911
 $61,196
 $52,352
(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 higherBoth compensation expense and noncompensation expense.expense contributed to the increase.
Compensation expense increased from the prior year, due to investments in branch and mortgage production sales and support staff in RFSCCB 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.CIB.
The increase in noncompensation expense in 2011 was due to elevated foreclosure- and default-related costs in RFS,CCB, including $1.7 billion of expense for fees and assessments, as well as other costs of foreclosure-related matters, higher marketing expense in Card,CCB, 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.CCB. These were offset partially by lower litigation expense in 2011 in Corporate and IB.CIB. 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.
Income tax expense     
Year ended December 31,
(in millions, except rate)
     
2012 2011 2010
Income before income tax expense$28,917
 $26,749
 $24,859
Income tax expense7,633
 7,773
 7,489
Effective tax rate26.4% 29.1% 30.1%
2012 compared with 2011
The decrease in the effective tax rate compared with the prior year was largely the result of changes in the proportion of income subject to U.S. federal and state and local taxes, as well as higher tax benefits associated with tax audits and tax-advantaged investments. This was partially offset by higher reported pretax income and lower benefits associated with the disposition of certain investments. The current and prior periods include deferred tax benefits associated with state and local income taxes. For a further discussion of litigation expense,additional information on income taxes, see Note 31Critical Accounting Estimates Used by the Firm on pages 290–299178–182 and Note 26 on pages 303–305 of this Annual Report. For a discussion of amortization of intangibles, refer to the Balance Sheet Analysis on pages 110–112, and Note 17 on pages 267–271 of this Annual Report.
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 290–299 of this Annual Report. For a discussion of amortization of intangibles, refer to Note 17 on pages 267–271 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.


74JPMorgan Chase & Co./2011 Annual Report


Income tax expense     
Year ended December 31,
(in millions, except rate)
     
2011 2010 2009
Income before income tax expense and extraordinary gain$26,749
 $24,859
 $16,067
Income tax expense7,773
 7,489
 4,415
Effective tax rate29.1% 30.1% 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 U.S. 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 168–172 and Note 26 on pages 279–281 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 non-U.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 168–172 and Note 26 on pages 279–281 of this Annual Report.


JPMorgan Chase & Co./20112012 Annual Report 75
Management'sManagement’s discussion and analysis

EXPLANATION AND RECONCILIATION OF THE FIRM’S USE OF NON-GAAP FINANCIAL MEASURES
The Firm prepares its consolidated financial statements using accounting principles generally accepted in the U.S.(“U.S. GAAP;GAAP”); these financial statements appear on pages 178–181188–192 of this Annual Report. That presentation, which is referred to as “reported” basis, provides the reader with an understanding of the Firm’s results that can be tracked consistently from year to year and enables a comparison of the Firm’s performance with other companies’ U.S. GAAP financial statements.
In addition to analyzing the Firm’s results on a reported basis, management reviews the Firm’s results and the results of the lines of business on a “managed” basis, which is a non-GAAP financial measure. The Firm’s definition of managed basis starts with the reported U.S. GAAP results and includes certain reclassifications to present total net revenue for the Firm (and each of the business segments) on a FTE basis. Accordingly, revenue from investments that receive tax credits and tax-exempt securities is presented in
the managed results on a basis comparable to taxable investments and securities. This non-GAAP financial measure allows management to assess the comparability of revenue arising from both taxable and tax-exempt sources. The corresponding income tax impact related to tax-exempt items is recorded within income tax expense. These adjustments have no impact on net income as reported by the Firm as a whole or by the lines of business.
Prior to January 1, 2010, the Firm’s 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 Firm-sponsored 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 256–267 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 managed-basis information to evaluate the credit performance and overall financial performance of the entire managed credit card portfolio. JPMorgan Chase believed that this managed-basis 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 Firm’s retained interests in securitized loans. For a reconciliation of 2009 reported to managed basis results for Card, see Card's segment results on pages 94–97 of this Annual Report. For information regarding the securitization process, and loans and residual interests sold and securitized, see Note 16 on pages 256–267 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 Firm’s 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 119–124 of this Annual Report. In management’s view, these measures are meaningful to the Firm, as well as analysts and investors, in assessing the Firm’s 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. Non-GAAPNon- GAAP financial measures used by the Firm may not be comparable to similarly named non-GAAP financial measures used by other companies.


76JPMorgan Chase & Co./2011 Annual Report


The following summary table provides a reconciliation from the Firm’s reported U.S. GAAP results to managed basis.
 2011 2010 2009
Year ended
December 31,
(in millions, except per share and ratios)
Reported
Results
 Fully tax-equivalent adjustments 
Managed
basis
 
Reported
Results
 Fully tax-equivalent adjustments 
Managed
basis
 
Reported
Results
 
Credit card(b)
 Fully tax-equivalent adjustments 
Managed
basis
Revenue                   
Investment banking fees$5,911
 $—
 $5,911
 $6,190
 $—
 $6,190
 $7,087
 $—
 $—
 $7,087
Principal transactions10,005
 —
 10,005
 10,894
 —
 10,894
 9,796
 —
 —
 9,796
Lending- and deposit-related fees6,458
 —
 6,458
 6,340
 —
 6,340
 7,045
 —
 —
 7,045
Asset management, administration and commissions14,094
 —
 14,094
 13,499
 —
 13,499
 12,540
 —
 —
 12,540
Securities gains1,593
 —
 1,593
 2,965
 —
 2,965
 1,110
 —
 —
 1,110
Mortgage fees and related income2,721
 —
 2,721
 3,870
 —
 3,870
 3,678
 —
 —
 3,678
Credit card income6,158
 —
 6,158
 5,891
 —
 5,891
 7,110
 (1,494) —
 5,616
Other income2,605
 2,003
 4,608
 2,044
 1,745
 3,789
 916
 —
 1,440
 2,356
Noninterest revenue49,545
 2,003
 51,548
 51,693
 1,745
 53,438
 49,282
 (1,494) 1,440
 49,228
Net interest income47,689
 530
 48,219
 51,001
 403
 51,404
 51,152
 7,937
 330
 59,419
Total net revenue97,234
 2,533
 99,767
 102,694
 2,148
 104,842
 100,434
 6,443
 1,770
 108,647
Noninterest expense62,911
 —
 62,911
 61,196
 —
 61,196
 52,352
 —
 —
 52,352
Pre-provision profit34,323
 2,533
 36,856
 41,498
 2,148
 43,646
 48,082
 6,443
 1,770
 56,295
Provision for credit losses7,574
 —
 7,574
 16,639
 —
 16,639
 32,015
 6,443
 —
 38,458
Income before income tax expense and extraordinary gain26,749
 2,533
 29,282
 24,859
 2,148
 27,007
 16,067
 —
 1,770
 17,837
Income tax expense7,773
 2,533
 10,306
 7,489
 2,148
 9,637
 4,415
 —
 1,770
 6,185
Income before extraordinary gain18,976
 —
 18,976
 17,370
 —
 17,370
 11,652
 —
 —
 11,652
Extraordinary gain—
 —
 —
 —
 —
 —
 76
 —
 —
 76
Net income$18,976
 $—
 $18,976
 $17,370
 $—
 $17,370
 $11,728
 $—
 $—
 $11,728
Diluted earnings per share(a)
$4.48
 $—
 $4.48
 $3.96
 $—
 $3.96
 $2.24
 $—
 $—
 $2.24
Return on assets(a)
0.86% NM
 0.86% 0.85% NM
 0.85% 0.58% NM
 NM
 0.55%
Overhead ratio65
 NM
 63
 60
 NM
 58
 52
 NM
 NM
 48
Loans – period-end$723,720
 $—
 $723,720
 $692,927
 $—
 $692,927
 $633,458
 $84,626
 $—
 $718,084
Total assets – average2,198,198
 —
 2,198,198
 2,053,251
 —
 2,053,251
 2,024,201
 82,233
 —
 2,106,434
 2012 2011 2010
Year ended
December 31,
(in millions, except ratios)
Reported
Results
 
Fully tax-equivalent adjustments(a)
 
Managed
basis
 
Reported
Results
 
Fully tax-equivalent adjustments(a)
 
Managed
basis
 
Reported
Results
  
Fully tax-equivalent adjustments(a)
 
Managed
basis
Other income$4,258
 $2,116
 $6,374
 $2,605
 $2,003
 $4,608
 $2,044
  $1,745
 $3,789
Total noninterest revenue52,121
 2,116
 54,237
 49,545
 2,003
 51,548
 51,693
  1,745
 53,438
Net interest income44,910
 743
 45,653
 47,689
 530
 48,219
 51,001
  403
 51,404
Total net revenue97,031
 2,859
 99,890
 97,234
 2,533
 99,767
 102,694
  2,148
 104,842
Pre-provision profit32,302
 2,859
 35,161
 34,323
 2,533
 36,856
 41,498
  2,148
 43,646
Income before income tax expense28,917
 2,859
 31,776
 26,749
 2,533
 29,282
 24,859
  2,148
 27,007
Income tax expense7,633
 2,859
 10,492
 7,773
 2,533
 10,306
 7,489
  2,148
 9,637
Overhead ratio67% NM
 65% 65% NM
 63% 60%  NM
 58%
(a)Based on income before extraordinary gain.
(b)See pages 94–97 of this Annual Report for a discussion of the effect of credit card securitizations on Card's results.
(a)Predominantly recognized in CIB and CB business segments and Corporate/Private Equity.

Tangible common equity (“TCE”), ROTCE, tangible book value per share (“TBVS”), and Tier 1 common under Basel I and III rules are each non-GAAP financial measures. TCE represents the Firm’s common stockholders’ equity (i.e., total stockholders’ equity less preferred stock) less goodwill and identifiable intangible assets (other than MSRs), net of related deferred tax liabilities. ROTCE measures the Firm’s earnings as a percentage of TCE. TBVS represents the Firm’s tangible common equity divided by period-end common shares. Tier 1 common under Basel I and III rules are used by management, along with other capital measures, to assess and monitor the Firm’s capital position. TCE, ROTCE, and TBVS are meaningful to the Firm, as well as analysts and investors, in assessing the Firm’s use of equity. For additional information on Tier 1 common under Basel I and III, see Regulatory capital on pages 117–120 of this Annual Report. All of the aforementioned measures are useful to the Firm, as well as analysts and investors, in facilitating comparison of the Firm with competitors.
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)(a)
Net income* / Average tangible common equity
Return on assets
Reported net income / Total average assets
Managed net income
Return on risk-weighted assets
Annualized earnings / Total average managedAverage risk-weighted assets(d)
Overhead ratio
Total noninterest expense / Total net revenue
* Represents net income applicable to common equity
(c)(a) 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.

76JPMorgan Chase & Co./2012 Annual Report


Average tangible common equityAverage tangible common equity    Average tangible common equity    
Year ended December 31, (in millions) 2011 2010 2009 2012 2011 2010
Common stockholders’ equity $173,266
 $161,520
 $145,903
 $184,352
 $173,266
 $161,520
Less: Goodwill 48,632
 48,618
 48,254
 48,176
 48,632
 48,618
Less: Certain identifiable intangible assets 3,632
 4,178
 5,095
 2,833
 3,632
 4,178
Add: Deferred tax liabilities(a)
 2,635
 2,587
 2,547
 2,754
 2,635
 2,587
Tangible common equity $123,637
 $111,311
 $95,101
 $136,097
 $123,637
 $111,311
(a)Represents deferred tax liabilities related to tax-deductible goodwill and to identifiable intangibles created in nontaxable transactions, which are netted against goodwill and other intangibles when calculating TCE.




JPMorgan Chase & Co./2011 Annual Report77
Management's discussion and analysis

Core net interest income
In addition to reviewing JPMorgan Chase'sChase’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/liabilityasset-liability management) and deposit-raising activities excluding(which excludes the impact of IB'sCIB’s market-based activities.activities). The table below presents an analysis of core net interest income, core average interest-earning 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'sCIB’s market-based net interest income and the related assets. Management believes the exclusion of IB'sCIB’s market-based activities provides investors and analysts a more meaningful measure by which to analyze non-market relatedthe non-market-related business trends of the Firm and can be used asprovides a comparable measure to other financial institutions that are primarily focused on core lending, investing and deposit-raising activities.
Core net interest income data(a)
Core net interest income data(a)
 
Core net interest income data(a)
 
Year ended December 31,
(in millions, except rates)
2011201020092012
2011
2010
Net interest income - managed basis(c)$48,219
$51,404
$59,419
$45,653
$48,219
$51,404
Impact of market-based net interest income7,329
7,112
8,238
Less: Market-based net interest income5,787
7,329
7,112
Core net interest income(b)$40,890
$44,292
$51,181
$39,866
$40,890
$44,292
  
Average interest-earning assets - managed basis$1,761,355
$1,677,521
$1,735,866
Impact of market-based earning assets519,655
470,927
428,471
Average interest-earning assets$1,842,417
$1,761,355
$1,677,521
Less: Average market-based earning assets499,339
519,655
470,927
Core average interest-earning assets$1,241,700
$1,206,594
$1,307,395
$1,343,078
$1,241,700
$1,206,594
  
Net interest yield on interest-earning assets - managed basis2.74%3.06%3.42%2.48%2.74%3.06%
Net interest yield on market-based activity
1.41
1.51
1.92
1.16
1.41
1.51
Core net interest yield on interest-earning assets3.29%3.67%3.91%
Core net interest yield on core average interest-earning assets2.97%3.29%3.67%
(a) Includes core lending, activities, investing and deposit-raising activities on a managed basis across RFS, Card,CCB, CIB, CB, TSS, AM, and Corporate/Private Equity,Equity; excludes the market-based activities within the CIB.
(b) Interest includes the effect of related hedging derivatives. Taxable-equivalent amounts are used where applicable.
(c) For a reconciliation of net interest income on a reported and managed basis, see reconciliation from the Firm’s reported U.S. GAAP results to managed basis on page 76.
2012 compared with 2011
Core net interest income decreased by $1.0 billion to $39.9 billion for 2012 and core average interest-earning assets increased by $101.4 billion in 2012 to $1,343.1 billion. The decline in net interest income in 2012 reflected the impact of the runoff of higher-yielding loans, faster prepayment of mortgage-backed securities, limited reinvestment opportunities, as well as IB credit portfolio loans.the impact of lower interest rates across the Firm’s interest-earning assets. The decrease in net interest income was partially offset by lower deposit and other borrowing costs. The increase in average interest-earning assets was driven by higher deposits with banks and other short-term investments, increased levels of loans, and an increase in investment securities. The core net interest yield decreased by 32 basis points to 2.97% in 2012, primarily driven by the runoff of higher-yielding loans as well as lower customer loan rates, higher financing costs associated with mortgage-backed securities, limited reinvestment opportunities, and was slightly offset by lower customer deposit rates.
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 CardCCB 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
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)
As reported 
Excluding the
TARP redemption
Return on equity   
Net income$11,728
 $11,728
Less: Preferred stock dividends1,327
 1,327
Less: Accelerated amortization from redemption of preferred stock issued to the U.S. Treasury1,112
 —
Net income applicable to common equity$9,289
 $10,401
Average common stockholders’ equity$145,903
 $145,903
ROE6% 7%
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)
As reported 
Effect of
TARP redemption
Diluted earnings per share   
Net income$11,728
 $—
Less: Preferred stock dividends1,327
 —
Less: Accelerated amortization from redemption of preferred stock issued to the U.S. Treasury1,112
 1,112
Net income applicable to common equity9,289
 (1,112)
Less: Dividends and undistributed earnings allocated to participating securities515
 (62)
Net income applicable to common stockholders8,774
 (1,050)
Total weighted average diluted shares outstanding3,879.7
 3,879.7
Net income per share$2.26
 $(0.27)
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 155–157159–162 of this Annual Report.


78JPMorgan Chase & Co./20112012 Annual Report77

Management’s discussion and analysis

BUSINESS SEGMENT RESULTS
The Firm is managed on a line-of-businessline of business basis. The business segment financial results presented reflect the current organization of JPMorgan Chase. There are sixfour major reportable business segments: thesegments – Consumer & Community Banking, Corporate & Investment Bank, Retail Financial Services, Card Services & Auto, Commercial Banking Treasury & Securities Services and Asset Management, as well asManagement. In addition, there is a Corporate/Private Equity segment.
The business segments are determined based on the products and services provided, or the type of customer served, and they reflect the manner in which financial information is currently evaluated by management. Results of thethese lines of business are presented on a managed basis. For a definition of managed basis, see Explanation and Reconciliation of the Firm'sFirm’s use of non-GAAP financial measures, on pages 76–7877 of this Annual Report.
Business segment changes
Commencing July 1, 2011,with the Firm’sfourth quarter of 2012, the Firm's business segments have been reorganized as follows:


Retail Financial Services and Card Services & Auto (“Card”) business segments were reorganized as follows:
Autocombined to form one business segment called Consumer & Community Banking (“CCB”), and Student LendingInvestment Bank and Treasury & Securities Services business segments were combined to form one business segment called Corporate & Investment Bank (“CIB”). Commercial Banking (“CB”) and Asset Management (“AM”) were not affected by the aforementioned changes. A technology function supporting online and mobile banking was transferred from Corporate/Private Equity to the RFSCCB business segment. This transfer did not materially affect the results of either the CCB business 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).or Corporate/Private Equity.
The business segment information associated with RFS and Card havethat follows has been revised to reflect the business reorganization retroactive to January 1, 2009.

2010.


JPMorgan Chase
Investment
Bank
Retail Financial Services
Card Services
& Auto
Commercial
Banking
Treasury & Securities ServicesAsset Management
Businesses:Businesses:Businesses:Businesses:Businesses:Businesses:
ŸInvestment Banking
  – Advisory
– Debt and equity
underwriting


ŸConsumer & Business Banking
ŸCard Services
  – Credit Card
– Merchant Services



ŸMiddle Market Banking
ŸTreasury Services
ŸPrivate Banking

ŸMortgage Production and Servicing

ŸCommercial Term
  Lending
ŸWorldwide Securities
  Services
ŸInvestment
  Management:
  – Institutional
– Retail
ŸMarket-making
   – Fixed income
– Commodities
– Equities



ŸReal Estate Portfolios
   – Residential mortgage
loans
– Home equity loans
and originations






ŸAuto


ŸCorporate Client
  Banking
ŸStudent


ŸReal Estate Banking
ŸHighbridge
ŸPrime Services
ŸResearch
ŸCorporate Lending
ŸCredit Portfolio
Management
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 Firm’s clients, the participating business segments agree to share revenue from those transactions. The segment results reflect these revenue-sharing agreements.

 
Funds transfer pricing
Funds transfer pricing is used to 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.Equity. 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 Firm’s 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


78JPMorgan Chase & Co./20112012 Annual Report79
Management's discussion and analysis

Capital allocation
Each business segment is allocated capital, taking into consideration the capital the business segment would require if it were operating independently, incorporating sufficient capital to address regulatory capital requirements (including Basel III Tier 1 common capital requirements), economic risk measures and capital levels for similarly rated peers.peers. The amount of capital assigned to each business is referred to as equity. Effective January 1, 2012, the Firm revised the capital allocated to certain businesses, reflecting additional refinement of each segment’s estimated Basel III Tier 1 common capital requirements and balance sheet trends. For a further discussion onof capital allocation, including refinements to the capital allocations that became effective on January 1, 2013, see Capital Management – Line of business equity on page 123121 of this Annual Report.


Expense allocation
Where business segments use services provided by support units within the Firm, or another business segment, the costs of those support unitsservices are allocated to the respective business segments. The expense is generally allocated based on their actual cost or the lower of actual
cost or market, as well asand 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,Total net revenue Noninterest expense 
Pre-provision profit(b)
Total net revenue Noninterest expense Pre-provision profit
(in millions)2011
2010
2009
 2011
2010
2009
 2011
2010
2009
2012
2011
2010
 2012
2011
2010
 2012
2011
2010
Investment Bank(a)
$26,274
$26,217
$28,109
 $16,116
$17,265
$15,401
 $10,158
$8,952
$12,708
Retail Financial Services26,538
28,447
29,797
 19,458
16,483
15,512
 7,080
11,964
14,285
Card Services & Auto19,141
20,472
23,199
 8,045
7,178
6,617
 11,096
13,294
16,582
Consumer & Community Banking$49,945
$45,687
$48,927
 $28,790
$27,544
$23,706
 $21,155
$18,143
$25,221
Corporate & Investment Bank34,326
33,984
33,477
 21,850
21,979
22,869
 12,476
12,005
10,608
Commercial Banking6,418
6,040
5,720
 2,278
2,199
2,176
 4,140
3,841
3,544
6,825
6,418
6,040
 2,389
2,278
2,199
 4,436
4,140
3,841
Treasury & Securities Services7,702
7,381
7,344
 5,863
5,604
5,278
 1,839
1,777
2,066
Asset Management9,543
8,984
7,965
 7,002
6,112
5,473
 2,541
2,872
2,492
9,946
9,543
8,984
 7,104
7,002
6,112
 2,842
2,541
2,872
Corporate/Private Equity(a)
4,151
7,301
6,513
 4,149
6,355
1,895
 2
946
4,618
Corporate/Private Equity(1,152)4,135
7,414
 4,596
4,108
6,310
 (5,748)27
1,104
Total$99,767
$104,842
$108,647
 $62,911
$61,196
$52,352
 $36,856
$43,646
$56,295
$99,890
$99,767
$104,842
 $64,729
$62,911
$61,196
 $35,161
$36,856
$43,646

Year ended December 31,Provision for credit losses Net income/(loss) Return on equityProvision for credit losses Net income/(loss) Return on equity
(in millions, except ratios)2011
2010
2009
 2011
2010
2009
 2011
2010
2009
2012
2011
2010
 2012
2011
2010
 2012
2011
2010
Investment Bank(a)
$(286)$(1,200)$2,279
 $6,789
$6,639
$6,899
 17%17%21 %
Retail Financial Services3,999
8,919
14,754
 1,678
1,728
(335) 7
7
(1)
Card Services & Auto3,621
8,570
19,648
 4,544
2,872
(1,793) 28
16
(10)
Consumer & Community Banking$3,774
$7,620
$17,489
 $10,611
$6,202
$4,578
 25%15%11%
Corporate & Investment Bank(479)(285)(1,247) 8,406
7,993
7,718
 18
17
17
Commercial Banking208
297
1,454
 2,367
2,084
1,271
 30
26
16
41
208
297
 2,646
2,367
2,084
 28
30
26
Treasury & Securities Services1
(47)55
 1,204
1,079
1,226
 17
17
25
Asset Management67
86
188
 1,592
1,710
1,430
 25
26
20
86
67
86
 1,703
1,592
1,710
 24
25
26
Corporate/Private Equity(a)
(36)14
80
 802
1,258
3,030
 NM
NM
NM
Corporate/Private Equity(37)(36)14
 (2,082)822
1,280
 NM
NM
NM
Total$7,574
$16,639
$38,458
 $18,976
$17,370
$11,728
 11%10%6 %$3,385
$7,574
$16,639
 $21,284
$18,976
$17,370
 11%11%10%




(a)JPMorgan Chase & Co./2012 Annual ReportCorporate/Private Equity includes an adjustment to offset IB’s 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).79
Management’s discussion and analysis

(b)CONSUMER & COMMUNITY BANKING
Pre-provision profit
Consumer & Community Banking (“CCB”) serves consumers and businesses through personal service at bank branches and through ATMs, online, mobile and telephone banking. CCB is total net revenue less noninterest expense. The Firm believes that this financial measure is usefulorganized into Consumer & Business Banking, Mortgage Banking (including Mortgage Production, Mortgage Servicing and Real Estate Portfolios) and Card, Merchant Services & Auto (“Card”). Consumer & Business Banking offers deposit and investment products and services to consumers, and lending, deposit, and cash management and payment solutions to small businesses. Mortgage Banking includes mortgage origination and servicing activities, as well as portfolios comprised of residential mortgages and home equity loans, including the PCI portfolio acquired in assessing the ability of a lending institutionWashington Mutual transaction. Card issues credit cards to generate income in excess ofconsumers and small businesses, provides payment services to corporate and public sector clients through its provision for credit losses.commercial card products, offers payment processing services to merchants, and provides auto and student loan services.
Selected income statement data    
Year ended December 31, 
(in millions, except ratios)2012 2011 2010
Revenue     
Lending- and deposit-related fees$3,121
 $3,219
 $3,117
Asset management, administration and commissions2,092
 2,044
 1,831
Mortgage fees and related income8,680
 2,714
 3,855
Card income5,446
 6,152
 5,469
All other income1,456
 1,177
 1,241
Noninterest revenue20,795
 15,306
 15,513
Net interest income29,150
 30,381
 33,414
Total net revenue49,945

45,687
 48,927
      
Provision for credit losses3,774
 7,620
 17,489
      
Noninterest expense     
Compensation expense11,231
 9,971
 8,804
Noncompensation expense16,784
 16,934
 14,159
Amortization of intangibles775
 639
 743
Total noninterest expense28,790
 27,544
 23,706
Income before income tax expense17,381
 10,523
 7,732
Income tax expense6,770
 4,321
 3,154
Net income$10,611
 $6,202
 $4,578
      
Financial ratios     
Return on common equity25% 15% 11%
Overhead ratio58
 60
 48
2012 compared with 2011
Consumer & Community Banking net income was $10.6 billion, up 71% when compared with the prior year. The increase was driven by higher net revenue and lower provision for credit losses, partially offset by higher noninterest expense.
Net revenue was $49.9 billion, up $4.3 billion, or 9%, compared with the prior year. Net interest income was $29.2 billion, down $1.2 billion, or 4%, driven by lower deposit margins and lower loan balances due to portfolio runoff, largely offset by higher deposit balances. Noninterest revenue was $20.8 billion, up $5.5 billion, or 36%, driven by higher mortgage fees and related income, partially offset by lower debit card revenue, reflecting the impact of the Durbin Amendment.
The provision for credit losses was $3.8 billion compared with $7.6 billion in the prior year. The current-year provision reflected a $5.5 billion reduction in the allowance for loan losses due to improved delinquency trends and reduced estimated losses in the real estate and credit card loan portfolios. Current-year total net charge-offs were $9.3 billion, including $800 million of charge-offs related to regulatory guidance. Excluding these charge-offs, net charge-offs during the year would have been $8.5 billion compared with $11.8 billion in the prior year. For more information, including net charge-off amounts and rates, see Consumer Credit Portfolio on pages 138–149 of this Annual Report.
Noninterest expense was $28.8 billion, an increase of $1.2 billion, or 5%, compared with the prior year, driven by higher production expense reflecting higher volumes, and investments in sales force, partially offset by lower costs related to mortgage-related matters and lower marketing expense in Card.
2011 compared with 2010
Consumer & Community Banking net income was $6.2 billion, up 35% when compared with the prior year. The increase was driven by lower provision for credit losses, largely offset by higher noninterest expense and lower net revenue.
Net revenue was $45.7 billion, down $3.2 billion, or 7%, compared with the prior year. Net interest income was $30.4 billion, down $3.0 billion, or 9%, reflecting the impact of lower loan balances, the impact of legislative changes in Card and a decreased level of fees in Card, largely offset by lower revenue reversals associated with lower net charge-offs in Card. Noninterest revenue was $15.3 billion, down $207 million, or 1%, driven by lower mortgage fees and related income, largely offset by the transfer of the Commercial Card business to Card from CIB in the first quarter of 2011 and higher net interchange income in Card.


80 JPMorgan Chase & Co./20112012 Annual Report


The provision for credit losses was $7.6 billion, a decrease of $9.9 billion from the prior year. The current year provision included a $4.2 billion net reduction in the allowance for loan losses due to improved delinquency trends and lower estimated losses primarily in Card. The prior year provision reflected a reduction in the allowance for loan losses of $4.3 billion due to lower estimated losses primarily in Card.
Noninterest expense was $27.5 billion, up $3.8 billion, or 16%, 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 in Mortgage Banking, as well as higher marketing expense in Card.
Selected metrics    
As of or for the year ended December 31,     
(in millions, except headcount and ratios)2012 2011 2010
Selected balance sheet data (period-end)     
Total assets$463,608
 $483,307
 $508,775
Loans:     
Loans retained402,963
 425,581
 452,249
Loans held-for-sale and loans at fair value(a)
18,801
 12,796
 17,015
Total loans421,764
 438,377
 469,264
Deposits438,484
 397,825
 371,861
Equity43,000
 41,000
 43,000
Selected balance sheet data (average)     
Total assets$464,197
 $487,923
 $527,101
Loans:     
Loans retained408,559
 429,975
 475,549
Loans held-for-sale and loans at fair value(a)
18,006
 17,187
 16,663
Total loans426,565
 447,162
 492,212
Deposits413,911
 382,678
 363,645
Equity43,000
 41,000
 43,000
      
Headcount159,467
 161,443
 143,226
INVESTMENT BANK
J.P. Morgan is one of the world’s 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 metrics    
As of or for the year ended December 31,     
(in millions, except headcount and ratios)2012 2011 2010
Credit data and quality statistics     
Net charge-offs(b)
$9,280
 $11,815
 $21,943
Nonaccrual loans:     
Nonaccrual loans retained9,114
 7,354
 8,770
Nonaccrual loans held-for-sale and loans at fair value39
 103
 145
Total nonaccrual loans(c)(d)(e)(f)
9,153
 7,457
 8,915
Nonperforming assets(c)(d)(e)(f)
9,830
 8,292
 10,268
Allowance for loan losses17,752
 23,256
 27,487
Net charge-off rate(b)(g)
2.27% 2.75% 4.61%
Net charge-off rate, excluding PCI loans(b)(g)
2.68
 3.27
 5.50
Allowance for loan losses to period-end loans retained4.41
 5.46
 6.08
Allowance for loan losses to period-end loans retained, excluding PCI loans(h)
3.51
 4.87
 5.94
Allowance for loan losses to nonaccrual loans retained, excluding credit card(c)(f)(h)
72
 143
 131
Nonaccrual loans to total period-end loans, excluding credit card(f)
3.12
 2.44
 2.69
Nonaccrual loans to total period-end loans, excluding credit card and PCI loans(c)(f)
3.91
 3.10
 3.44
Business metrics     
Number of:     
Branches5,614
 5,508
 5,268
ATMs18,699
 17,235
 16,145
Active online customers (in thousands)31,114
 29,749
 28,708
Active mobile customers (in thousands)12,359
 8,203
 4,873
Selected income statement data  
Year ended December 31, 
(in millions, except ratios)2011 2010 2009
Revenue     
Investment banking fees$5,859
 $6,186
 $7,169
Principal transactions(a)
8,324
 8,454
 8,154
Lending- and deposit-related fees858
 819
 664
Asset management, administration and commissions2,207
 2,413
 2,650
All other income(b)
723
 381
 (115)
Noninterest revenue17,971
 18,253
 18,522
Net interest income8,303
 7,964
 9,587
Total net revenue(c)
26,274

26,217

28,109
      
Provision for credit losses(286) (1,200) 2,279
      
Noninterest expense     
Compensation expense8,880
 9,727
 9,334
Noncompensation expense7,236
 7,538
 6,067
Total noninterest expense16,116
 17,265
 15,401
Income before income tax expense10,444
 10,152
 10,429
Income tax expense3,655
 3,513
 3,530
Net income$6,789

$6,639

$6,899
Financial ratios     
Return on common equity17%
17%
21%
Return on assets0.84
 0.91
 0.99
Overhead ratio61
 66
 55
Compensation expense as a percentage of total net revenue(d)
34
 37
 33
(a)Principal transactions included DVA relatedPredominantly consists of prime mortgages originated with the intent to derivatives and structured liabilities measuredsell that are accounted for at fair value. DVA gains/(losses) were $1.4 billion, $509 million,value and ($2.3) billion forclassified as trading assets on the years ended December 31, 2011, 2010, and 2009, respectively.Consolidated Balance Sheets.
(b)
IB manages traditional credit exposures related to GCBNet charge-offs and net charge-off rates for the year ended December 31, 2012, included $800 million of charge-offs, recorded in accordance with regulatory guidance. Excluding these charges-offs, net charge-offs for the year ended December 31, 2012, would have been $8.5 billion and excluding these charge-offs and PCI loans, the net charge-off rate for the year ended December 31, 2012, would have been 2.45%. For further information, see Consumer Credit Portfolio on behalfpages 138–149 of IB and TSS. Effective January 1, 2011, IB and TSS share the economics related to the Firm’s 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.Annual Report.
(c)
Total net revenue included tax-equivalent adjustments, predominantly dueExcludes PCI loans. Because the Firm is recognizing interest income on each pool of PCI loans, they are all considered 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.
be performing.
(d)
The compensation expenseCertain mortgages originated with the intent to sell are classified as a percentage of total net revenue ratio fortrading assets on 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.

The following table provides IB's total net revenue by business.
Year ended December 31, 
(in millions)2011 2010 2009
Revenue by business     
Investment banking fees:     
Advisory$1,792
 $1,469
 $1,867
Equity underwriting1,181
 1,589
 2,641
Debt underwriting2,886
 3,128
 2,661
Total investment banking fees5,859
 6,186
 7,169
Fixed income markets(a)
15,337
 15,025
 17,564
Equity markets(b)
4,832
 4,763
 4,393
Credit portfolio(c)(d)
246
 243
 (1,017)
Total net revenue$26,274
 $26,217
 $28,109
(a)Fixed income markets primarily include revenue related to market-making across global fixed income markets, including foreign exchange, interest rate, credit and commodities markets.Consolidated Balance Sheets.
(b)(e)Equity markets primarily include revenue related to market-making across global equity products, including cash instruments, derivatives, convertiblesAt December 31, 2012, 2011 and Prime Services.2010, nonperforming assets excluded: (1) mortgage loans insured by U.S. government agencies of $10.6 billion, $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 $1.6 billion, $954 million, and $1.9 billion, respectively; and (3) student loans insured by U.S. government agencies under the Federal Family Education Loan Program (“FFELP”) of $525 million, $551 million, and $625 million, respectively, that are 90 or more days past due. These amounts were excluded from nonaccrual loans as reimbursement of insured amounts is proceeding normally.
(c)(f)
Nonaccrual loans included $3.0 billion of loans at December 31, 2012, based upon regulatory guidance. For further information, see Consumer Credit portfolio revenue includes net interest income, fees and loan sale activity, as well as gains or lossesPortfolio on securities received as part of a loan restructuring, for IB’s credit portfolio. Credit portfolio revenue also includes the results of risk management related to the Firm's lending and derivative activities. See pages 143–144 of the Credit Risk Management section138–149 of this Annual Report for further discussion.Report.
(d)(g)
IB manages traditional credit exposures related to GCB on behalf of IBLoans held-for-sale and TSS. Effective January 1, 2011, IB and TSS shareloans accounted for at fair value were excluded when calculating the economics related to the Firm’s 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.
net charge-off rate.
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
(h)An allowance for loan losses of $5.7 billion at December 31, 2012 and 2011, and $4.9 billion at December 31, 2010 was recorded for PCI loans; these amounts were also excluded from the applicable ratios.


JPMorgan Chase & Co./20112012 Annual Report 81
Management'sManagement’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 Firm’s 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)2011 2010 2009
Selected balance sheet data (period-end)     
Total assets$776,430
 $825,150
 $706,944
Loans:     
Loans retained(a)
68,208
 53,145
 45,544
Loans held-for-sale and loans at fair value2,915
 3,746
 3,567
Total loans71,123
 56,891
 49,111
Equity40,000
 40,000
 33,000
Selected balance sheet data (average)     
Total assets$812,779
 $731,801
 $699,039
Trading assets-debt and equity instruments346,461
 307,061
 273,624
Trading assets-derivative receivables73,201
 70,289
 96,042
Loans:     
Loans retained(a)
57,007
 54,402
 62,722
Loans held-for-sale and loans at fair value3,119
 3,215
 7,589
Total loans60,126
 57,617
 70,311
Adjusted assets(b)
600,160
 540,449
 538,724
Equity40,000
 40,000
 33,000
      
Headcount25,999
 26,314
 24,654
(a)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.
(b)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 IB’s 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.


82JPMorgan Chase & Co./2011 Annual Report


Selected metrics     
As of or for the year ended December 31, 
(in millions, except ratios)2011 2010 2009
Credit data and quality statistics     
Net charge-offs$161
 $735
 $1,904
Nonperforming assets:     
Nonaccrual loans:     
Nonaccrual loans retained(a)(b)
1,035
 3,159
 3,196
Nonaccrual loans held-for-sale and loans at fair value
166
 460
 308
Total nonaccrual loans1,201
 3,619
 3,504
Derivative receivables14
 34
 529
Assets acquired in loan satisfactions79
 117
 203
Total nonperforming assets1,294
 3,770
 4,236
Allowance for credit losses:     
Allowance for loan losses1,436
 1,863
 3,756
Allowance for lending-related commitments418
 447
 485
Total allowance for credit losses1,854
 2,310
 4,241
Net charge-off rate(a)(c)
0.28% 1.35% 3.04%
Allowance for loan losses to period-end loans retained(a)(c)
2.11
 3.51
 8.25
Allowance for loan losses to nonaccrual loans retained(a)(b)(c)
139
 59
 118
Nonaccrual loans to period-end loans1.69
 6.36
 7.13
Market risk-average trading and credit portfolio VaR – 95% confidence level     
Trading activities:     
Fixed income$50
 $65
 $160
Foreign exchange11
 11
 18
Equities23
 22
 47
Commodities and other16
 16
 20
Diversification(d)
(42) (43) (91)
Total trading VaR(e)
58
 71
 154
Credit portfolio VaR(f)
33
 26
 52
Diversification(d)
(15) (10) (42)
Total trading and credit portfolio VaR$76
 $87
 $164
(a)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.
(b)
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.
(c)Loans held-for-sale and loans at fair value were excluded when calculating the allowance coverage ratio and net charge-off rate.
(d)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.
(e)Trading VaR includes substantially all market-making and client-driven 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
quality of the Firm. See VaR discussion on pages 158–160 and the DVA sensitivity table on page 161 of this Annual Report for further details.
(f)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)
 2011 2010 2009
Year ended
December 31,
Market ShareRankings Market ShareRankings Market ShareRankings
Global investment banking fees(b)
8.1%#1 7.6%#1 9.0%#1
Debt, equity and equity-related        
Global6.81 7.21 8.81
U.S.11.11 11.11 14.81
Syndicated loans        
Global11.01 8.52 8.11
U.S.21.41 19.12 21.81
Long-term
   debt(c)
        
Global6.71 7.22 8.41
U.S.11.21 10.92 14.21
Equity and equity-related        
Global(d)
6.83 7.33 11.61
U.S.12.51 13.12 15.52
Announced M&A(e)
        
Global18.62 15.94 23.73
U.S.27.52 21.93 35.62
         
(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.
         
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 Equity-related; #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.




JPMorgan Chase & Co./2011 Annual Report83
Management's discussion and analysis

International metrics    
Year ended December 31, 
(in millions)2011 2010 2009
Total net revenue(a)
     
Europe/Middle East/Africa$8,418
 $7,380
 $9,164
Asia/Pacific3,334
 3,809
 3,470
Latin America/Caribbean1,079
 897
 1,157
North America13,443
 14,131
 14,318
Total net revenue$26,274
 $26,217
 $28,109
Loans retained (period-end)(b)
     
Europe/Middle East/Africa$15,905
 $13,961
 $13,079
Asia/Pacific7,889
 5,924
 4,542
Latin America/Caribbean3,148
 2,200
 2,523
North America41,266
 31,060
 25,400
Total loans$68,208
 $53,145
 $45,544
(a)Regional revenue is based primarily on the domicile of the client and/or location of the trading desk.
(b)Includes retained loans based on the domicile of the customer. Excludes loans held-for-sale and loans at fair value.


84JPMorgan Chase & Co./2011 Annual Report


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 300–303 of this Annual Report.
Selected income statement data    
Year ended December 31, 
(in millions, except ratios)2011
 2010
 2009
Revenue     
Lending- and deposit-related fees$3,190
 $3,061
 $3,897
Asset management, administration and commissions1,991
 1,776
 1,665
Mortgage fees and related income2,714
 3,855
 3,794
Credit card income2,025
 1,955
 1,634
Other income485
 580
 424
Noninterest revenue10,405
 11,227
 11,414
Net interest income16,133
 17,220
 18,383
Total net revenue(a)
26,538

28,447

29,797
      
Provision for credit losses3,999
 8,919
 14,754
      
Noninterest expense     
Compensation expense8,044
 7,072
 6,349
Noncompensation expense11,176
 9,135
 8,834
Amortization of intangibles238
 276
 329
Total noninterest expense19,458
 16,483
 15,512
Income/(loss) before income tax expense/(benefit)3,081
 3,045
 (469)
Income tax expense/(benefit)1,403
 1,317
 (134)
Net income/(loss)$1,678

$1,728

$(335)
Financial ratios     
Return on common equity7%
7%
(1)%
Overhead ratio73
 58
 52
Overhead ratio excluding core deposit intangibles(b)
72
 57
 51
Selected income statement data    
Year ended December 31, 
(in millions, except ratios)2012 2011 2010
Revenue     
Lending- and deposit-related fees$3,068
 $3,160
 $3,025
Asset management, administration and commissions1,637
 1,559
 1,390
Card income1,353
 2,024
 1,953
All other income481
 467
 484
Noninterest revenue6,539
 7,210
 6,852
Net interest income10,673
 10,808
 10,884
Total net revenue17,212
 18,018
 17,736
      
Provision for credit losses311
 419
 630
      
Noninterest expense11,453
 11,243
 10,762
Income before income tax expense5,448
 6,356
 6,344
Net income$3,263
 $3,796
 $3,630
Overhead ratio67% 62% 61%
Overhead ratio, excluding core deposit intangibles(a)
65
 61
 59
(a)
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.
(b)
RFSConsumer & Business Banking (“CBB”) 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'sCBB’s CDI amortization expense related to prior business combination transactions of $238$200 million,, $276 $238 million, and $328$276 million for the years ended December 31, 2011, 20102012, 2011 and 20092010, respectively.
20112012 compared with 20102011
Retail Financial Services reportedConsumer & Business Banking net income of $1.7 billion, down 3% when compared with the prior year.
Net revenue was $26.53.3 billion, a decrease of $1.9 billion533 million, or 7%14%, compared with the prior year. The decrease was driven by lower net revenue and higher noninterest expense, partially offset by lower provision for credit losses.
Net revenue was $17.2 billion, down 4% from the prior year. Net interest income was $16.110.7 billion, down by $1.1 billion1%, or 6%, reflecting from the prior year, driven by the impact of lower loan balances, due to portfolio runoff, and narrower loan spreads.deposit margins, predominantly offset by higher deposit balances. Noninterest revenue was $10.46.5 billion, down by $822 million9%, or 7%, from the prior year, driven by lower mortgage fees and related income partially offset by higher investment salesdebit card revenue, and higher deposit-related fees.reflecting the impact of the Durbin Amendment.
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 $230311 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-than-expected 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 145–154 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


JPMorgan Chase & Co./2011 Annual Report85
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 billion419 million 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 $100 million reduction in the allowance for loan losses oflosses. Net charge-offs were $1.7 billion411 million, predominantly for the mortgage loan portfolios. In comparison, the prior-year provision reflected an addition to the allowance for loan losses of compared with $5.5 billion, predominantly for the home equity and mortgage portfolios, and also included an addition of $1.6 billion494 million for the PCI portfolio. While delinquency trends and net charge-offs improved compared within the prior year, the provision continued to reflect elevated losses for the mortgage and home equity portfolios. See Consumer Credit Portfolio on page 145–154 of this Annual Report for the net charge-off amounts and rates.year.
Noninterest expense was $16.511.5 billion, an increase ofup $971 million2%, or 6%, from the prior year, reflecting higher default-related expense.resulting from investment in the sales force and new branch builds.
Selected metrics    
As of or for the year ended December 31, 
(in millions, except headcount and ratios)2011 2010 2009
Selected balance sheet data (period-end)     
Total assets$274,795
 $299,950
 $322,185
Loans:     
Loans retained232,555
 253,904
 280,246
Loans held-for-sale and loans at fair value(a)
12,694
 14,863
 12,920
Total loans245,249
 268,767
 293,166
Deposits395,797
 369,925
 356,614
Equity25,000
 24,600
 22,457
Selected balance sheet data (average)     
Total assets$286,716
 $314,046
 $344,727
Loans:     
Loans retained241,621
 268,902
 296,959
Loans held-for-sale and loans at fair value(a)
16,354
 15,395
 16,236
Total loans257,975
 284,297
 313,195
Deposits380,663
 361,525
 366,996
Equity25,000
 24,600
 22,457
      
Headcount133,075
 116,882
 103,733
As of or for the year ended December 31, 
(in millions, except ratios)2011 2010 2009
Credit data and quality statistics     
Net charge-offs$4,304
 $7,221
 $9,233
Nonaccrual loans:     
Nonaccrual loans retained7,170
 8,568
 10,373
Nonaccrual loans held-for-sale and loans at fair value103
 145
 234
Total nonaccrual loans(b)(c)(d)
7,273
 8,713
 10,607
Nonperforming assets(b)(c)(d)
8,064
 9,999
 11,761
Allowance for loan losses15,247
 15,554
 13,734
Net charge-off rate(e)
1.78% 2.69% 3.11%
Net charge-off rate excluding PCI loans(e)(f)
2.49
 3.76
 4.36
Allowance for loan losses to ending loans retained6.56
 6.13
 4.90
Allowance for loan losses to ending loans retained excluding PCI loans(f)
5.71
 5.86
 6.11
Allowance for loan losses to nonaccrual loans retained(b)(f)
133
 124
 117
Nonaccrual loans to total loans2.97
 3.24
 3.62
Nonaccrual loans to total loans excluding PCI loans(b)
4.05
 4.45
 5.01
(a)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.
(b)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 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.
(c)Certain of these loans are classified as trading assets on the Consolidated Balance Sheets.
(d)
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 231–252 of this Annual Report which summarizes loan delinquency information.
(e)Loans held-for-sale and loans accounted for at fair value were excluded when calculating the net charge-off rate.
(f)
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.


86JPMorgan Chase & Co./2011 Annual Report


Consumer & Business Banking
Selected income statement data    
Year ended December 31, 
(in millions, except ratios)2011 2010 2009
Noninterest revenue$7,201
 $6,844
 $7,204
Net interest income10,809
 10,884
 10,864
Total net revenue18,010
 17,728
 18,068
      
Provision for credit losses419
 630
 1,176
      
Noninterest expense11,202
 10,717
 10,421
Income before income tax expense6,389
 6,381
 6,471
Net income$3,816
 $3,652
 $3,915
Overhead ratio62% 60% 58%
Overhead ratio excluding core deposit intangibles(a)
61
 59
 56
(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.
 
2011 compared with 2010
Consumer & Business Banking reported net income ofwas $3.8 billion, an increase of $164166 million, or 4%5%, compared with the prior year. The increase was driven by higher net revenue and lower provision for credit losses, offset by higher noninterest expense.
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 predominantly offset predominantly by the effect of lower deposit spreads.margins. Noninterest revenue was $7.2 billion, an increase ofup 5%, from the prior year, 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%4%, from the prior year, resulting from investment in sales force and new branch builds.
2010
Selected metrics    
As of or for the year ended December 31,     
(in millions, except ratios)2012
 2011
 2010
Business metrics     
Business banking origination volume$6,542
 $5,827
 $4,688
Period-end loans18,883
 17,652
 16,812
Period-end deposits:     
Checking170,322
 147,779
 131,702
Savings216,422
 191,891
 170,604
Time and other31,752
 36,745
 45,967
Total period-end deposits418,496
 376,415
 348,273
Average loans18,104
 17,121
 16,863
Average deposits:     
Checking153,385
 136,579
 123,490
Savings204,449
 182,587
 166,112
Time and other34,224
 41,576
 51,152
Total average deposits392,058
 360,742
 340,754
Deposit margin2.57% 2.82% 3.00%
Average assets$30,987
 $29,774
 $29,321


82JPMorgan Chase & Co./2012 Annual Report


Selected metrics    
As of or for the year ended December 31, 
(in millions, except ratios and where otherwise noted)2012
 2011
 2010
Credit data and quality statistics    
Net charge-offs$411
 $494
 $730
Net charge-off rate2.27% 2.89% 4.32%
Allowance for loan losses$698
 $798
 $875
Nonperforming assets488
 710
 846
Retail branch business metrics    
Investment sales volume$26,036
 $22,716
 $23,579
Client investment assets158,502
 137,853
 133,114
% managed accounts29% 24% 20%
Number of:     
Chase Private Client branch locations1,218
 262
 16
Personal bankers23,674
 24,308
 21,735
Sales specialists6,076
 6,017
 4,876
Client advisors2,963
 3,201
 3,066
Chase Private Clients105,700
 21,723
 4,242
Accounts (in thousands)(a)
28,073
 26,626
 27,252
(a) Includes checking accounts and Chase LiquidSM cards (launched in the second quarter of 2012).
Mortgage Banking
Selected income statement data
Year ended December 31,     
(in millions, except ratios)2012 2011 2010
Revenue     
Mortgage fees and related income$8,680
 $2,714
 $3,855
All other income475
 490
 528
Noninterest revenue9,155
 3,204
 4,383
Net interest income4,808
 5,324
 6,336
Total net revenue13,963
 8,528
 10,719
      
Provision for credit losses(490) 3,580
 8,289
      
Noninterest expense9,121
 8,256
 5,766
Income/(loss) before income tax expense/(benefit)5,332
 (3,308) (3,336)
Net income/(loss)$3,341
 $(2,138) $(1,924)
      
Overhead ratio65% 97% 54%

2012 compared with 20092011
Consumer & BusinessMortgage Banking reported net income was $3.3 billion, compared with a net loss of $2.1 billion in the prior year. The increase was driven by higher net revenue and lower provision for credit losses, partially offset by higher noninterest expense.$3.7
Net revenue was $14.0 billion,, a decrease of $263 million, up $5.4 billion, or 7%64%, compared with the prior year.
Total net Net interest income was $4.8 billion, down $516 million, or 10%, resulting from lower loan balances due to portfolio runoff. Noninterest revenue was $17.7$9.2 billion,, down 2% up $6.0 billion compared with the prior year. The decrease wasyear, driven by lower deposit-relatedhigher mortgage fees largely offset by higher debit card income and a shift to wider-spread deposit products.related income.
The provision for credit losses was $630a benefit of $490 million,, down $546 million compared with a provision expense of $3.6 billion in the prior year. The current-year provisioncurrent year reflected lower net charge-offs and a $3.85 billion reduction of $100 million toin the allowance for loan losses due to improved delinquency trends and lower estimated losses.
Noninterest expense was $9.1 billion, an increase of $865 million, or 10%, compared with the prior year, driven by higher production expense reflecting higher volumes, partially offset by lower costs related to mortgage-related matters.
2011 compared with 2010
Mortgage Banking reported a net loss of $2.1 billion, compared with a net loss of $1.9 billion in the prior year. The increase in net loss was driven by higher noninterest expense and lower net revenue, offset by lower provision for credit losses.
Net revenue was $8.5 billion, down $2.2 billion, or 20%, compared with the prior year. Net interest income was $5.3 billion, down $1.0 billion, or 16%, from the prior year, resulting from lower loan balances due to portfolio runoff. Noninterest revenue was $3.2 billion, down $1.2 billion, or 27%, from the prior year, driven by lower mortgage fees and related income.
The provision for credit losses was $3.6 billion, down $4.7 billion, or 57% compared with the prior year due to lower estimated losses compared withas delinquency trends and charge-offs continued to improve. The current year provision also included a $300$230 million addition to net reduction in the allowance for loan losses which reflects a reduction of $1.0 billion in the prior year. Net charge-offs were $730 million, compared with $876 millionallowance related to the non-credit-impaired portfolio, as estimated losses in the prior year.portfolio have declined, predominantly 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.
Noninterest expense was $10.7$8.3 billion, an increase of $2.5 billion, or 43%, up 3% compared with the prior year, resulting from sales force increasesdriven by elevated foreclosure- and default-related costs in Business Banking and bank branches.Mortgage Servicing.


JPMorgan Chase & Co./20112012 Annual Report 8783
Management'sManagement’s discussion and analysis

Selected metrics    
As of or for the year ended December 31, 
(in millions, except ratios)2011
 2010
 2009
Business metrics     
Business banking origination volume$5,827
 $4,688
 $2,299
End-of-period loans17,652
 16,812
 16,974
End-of-period deposits:     
Checking147,779
 131,702
 123,220
Savings191,891
 170,604
 156,140
Time and other36,743
 45,967
 58,185
Total end-of-period deposits376,413
 348,273
 337,545
Average loans17,121
 16,863
 17,991
Average deposits:     
Checking136,579
 123,490
 116,568
Savings182,587
 166,112
 151,909
Time and other41,574
 51,149
 76,550
Total average deposits360,740
 340,751
 345,027
Deposit margin2.82% 3.00% 2.92%
Average assets$29,729
 $29,307
 $29,791
Selected metrics    
As of or for the year ended December 31, 
(in millions, except ratios and where otherwise noted)2011
 2010
 2009
Credit data and quality statistics    
Net charge-offs$494
 $730
 $876
Net charge-off rate2.89% 4.32% 4.87%
Allowance for loan losses$798
 $875
 $977
Nonperforming assets710
 846
 839
Retail branch business metrics    
Investment sales volume$22,716
 $23,579
 $21,784
Client investment assets137,853
 133,114
 120,507
% managed accounts24% 20% 13%
Number of:     
Branches5,508
 5,268
 5,154
Chase Private Client branch locations262
 16
 16
ATMs17,235
 16,145
 15,406
Personal bankers(a)
24,308
 21,735
 18,009
Sales specialists(a)
6,017
 4,876
 3,915
Client advisors3,201
 3,066
 2,731
Active online customers (in thousands)(a)
17,334
 16,855
 14,627
Active mobile customers (in thousands)(a)
8,391
 5,337
 1,249
Chase Private Clients21,723
 4,242
 2,933
Checking accounts (in thousands)26,626
 27,252
 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.
 


88JPMorgan Chase & Co./2011 Annual Report


Mortgage Production and Servicing
Selected income statement data
Year ended December 31,     
(in millions, except ratios)2011
 2010
 2009
Mortgage fees and related income$2,714
 $3,855
 $3,794
Other noninterest revenue452
 413
 442
Net interest income770
 904
 973
Total net revenue3,936
 5,172
 5,209
      
Provision for credit losses5
 58
 15
      
Noninterest expense6,735
 4,139
 3,244
Income/(loss) before income tax expense/(benefit)(2,804) 975
 1,950
Net income/(loss)$(1,832) $569
 $1,199
Overhead ratio171% 80% 62%
      
Functional results     
Production     
Production revenue$3,395
 $3,440
 $2,115
Production-related net interest & other income840
 869
 1,079
Production-related revenue, excluding repurchase losses4,235
 4,309
 3,194
Production expense1,895
 1,613
 1,575
Income, excluding repurchase losses2,340
 2,696
 1,619
Repurchase losses(1,347) (2,912) (1,612)
Income/(loss) before income tax expense/(benefit)993
 (216) 7
Servicing     
Loan servicing revenue4,134
 4,575
 4,942
Servicing-related net interest & other income390
 433
 240
Servicing-related revenue4,524
 5,008
 5,182
MSR asset modeled amortization(1,904) (2,384) (3,279)
Default servicing expense(a)
3,814
 1,747
 1,002
Core servicing expense1,031
 837
 682
Income/(loss), excluding MSR risk management(2,225) 40
 219
MSR risk management, including related net interest income/(expense)(b)
(1,572) 1,151
 1,724
Income/(loss) before income tax expense/(benefit)(3,797) 1,191
 1,943
Net income/(loss)$(1,832) $569
 $1,199

Selected income statement data
Year ended December 31,     
(in millions)2011
 2010
 2009
Supplemental mortgage fees and related income details     
Net production revenue:     
Production revenue$3,395
 $3,440
 $2,115
Repurchase losses(1,347) (2,912) (1,612)
Net production revenue2,048
 528
 503
Net mortgage servicing revenue: 
    
Operating revenue: 
    
Loan servicing revenue4,134
 4,575
 4,942
Changes in MSR asset fair value due to modeled amortization(1,904) (2,384) (3,279)
Total operating revenue2,230
 2,191
 1,663
Risk management:     
Changes in MSR asset fair value due to inputs or assumptions in model(7,117) (2,268) 5,804
Derivative valuation adjustments and other5,553
 3,404
 (4,176)
Total risk management(b)
(1,564) 1,136
 1,628
Total net mortgage servicing revenue666
 3,327
 3,291
Mortgage fees and related income$2,714
 $3,855
 $3,794
Functional results
Year ended December 31,     
(in millions, except ratios)2012
 2011
 2010
Mortgage Production     
Production revenue$5,783
 $3,395
 $3,440
Production-related net interest & other income787
 840
 869
Production-related revenue, excluding repurchase losses6,570
 4,235
 4,309
Production expense(a)
2,747
 1,895
 1,613
Income, excluding repurchase losses3,823
 2,340
 2,696
Repurchase losses(272) (1,347) (2,912)
Income/(loss) before income tax expense/(benefit)3,551
 993
 (216)
      
Mortgage Servicing     
Loan servicing revenue3,772
 4,134
 4,575
Servicing-related net interest & other income407
 390
 433
Servicing-related revenue4,179
 4,524
 5,008
MSR asset modeled amortization(1,222) (1,904) (2,384)
Default servicing expense3,707
 3,814
 1,747
Core servicing expense1,033
 1,031
 837
Income/(loss), excluding MSR risk management(1,783) (2,225) 40
MSR risk management, including related net interest income/(expense)616
 (1,572) 1,151
Income/(loss) before income tax expense/(benefit)(1,167) (3,797) 1,191
Real Estate Portfolios     
Noninterest revenue43
 38
 115
Net interest income4,049
 4,554
 5,432
Total net revenue4,092
 4,592
 5,547
      
Provision for credit losses(509) 3,575
 8,231
      
Noninterest expense1,653
 1,521
 1,627
Income/(loss) before income tax expense/(benefit)2,948
 (504) (4,311)
Mortgage Banking income/(loss) before income tax expense/(benefit)$5,332
 $(3,308) $(3,336)
Mortgage Banking net income/(loss)$3,341
 $(2,138) $(1,924)
      
Overhead ratios     
Mortgage Production43% 65% 111%
Mortgage Servicing133
 462
 68
Real Estate Portfolios40
 33
 29
(a)
Includes $1.7 billion of fees and assessments, as well as othercredit 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.
associated with Production.
(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 267–271 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 prior-year repurchase losses of $2.9 billion, which included a $1.6 billion increase in the repurchase reserve.


JPMorgan Chase & Co./2011 Annual Report89
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. Servicing-related 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. Servicing-related 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)2011
 2010
 2009
 
Selected balance sheet data      
End-of-period loans:      
Prime mortgage, including option ARMs(a)
$16,891
 $14,186
 $11,964
 
Loans held-for-sale and loans at fair value(b)
12,694
 14,863
 12,920
 
Average loans:      
Prime mortgage, including option ARMs(a)
14,580
 13,422
 8,894
 
Loans held-for-sale and loans at fair value(b)
16,354
 15,395
 16,236
 
Average assets59,891
 57,778
 51,317
 
Repurchase reserve (ending)3,213
 3,000
 1,448
 
Credit data and quality statistics      
Net charge-offs:      
Prime mortgage, including option ARMs5
 41
 14
 
Net charge-off rate:      
Prime mortgage, including option ARMs0.03% 0.31% 0.17% 
30+ day delinquency rate(c)
3.15
 3.44
 2.89
 
Nonperforming assets(d)
$716
 $729
 $575
 
Business metrics (in billions)      
Origination volume by channel      
Retail$87.2
 $68.8
 $53.9
 
Wholesale(e)
0.5
 1.3
 3.6
 
Correspondent(e)
52.1
 75.3
 81.0
 
CNT (negotiated transactions)5.8
 10.2
 12.2
 
Total origination volume$145.6
 $155.6
 $150.7
 
Application volume by channel      
Retail$137.2
 $115.1
 $90.9
 
Wholesale(e)
1.0
 2.4
 4.9
 
Correspondent(e)
66.5
 97.3
 110.8
 
Total application volume$204.7
 $214.8
 $206.6
 
Third-party mortgage loans serviced (ending)$902.2
 $967.5
 $1,082.1
 
Third-party mortgage loans serviced (average)937.6
 1,037.6
 1,119.1
 
MSR net carrying value (ending)7.2
 13.6
 15.5
 
Ratio of MSR net carrying value (ending) to third-party mortgage loans serviced (ending)0.80% 1.41% 1.43% 
Ratio of loan servicing revenue to third-party mortgage loans serviced (average)0.44
 0.44
 0.44
 
MSR revenue multiple(f)
1.82x
 3.20x
 3.25x
 
Selected income statement data
Year ended December 31,     
(in millions)2012 2011 2010
Supplemental mortgage fees and related income details     
Net production revenue:     
Production revenue$5,783
 $3,395
 $3,440
Repurchase losses(272) (1,347) (2,912)
Net production revenue5,511
 2,048
 528
Net mortgage servicing revenue: 
    
Operating revenue: 
    
Loan servicing revenue3,772
 4,134
 4,575
Changes in MSR asset fair value due to modeled amortization(1,222) (1,904) (2,384)
Total operating revenue2,550
 2,230
 2,191
Risk management:     
Changes in MSR asset fair value due to market interest rates(587) (5,390) (2,224)
Other changes in MSR asset fair value due to inputs or assumptions in model(a)
(46) (1,727) (44)
Changes in derivative fair value and other1,252
 5,553
 3,404
Total risk management619
 (1,564) 1,136
Total net mortgage servicing revenue3,169
 666
 3,327
Mortgage fees and related income$8,680
 $2,714
 $3,855
(a)Predominantly represents prime loans repurchased from Government National Mortgage Association (“Ginnie Mae”) pools, which are insured by U.S. government agencies. See further discussionRepresents the aggregate impact of loans repurchased from Ginnie Mae poolschanges in Mortgage repurchase liability on pages 115–118 of this Annual Report.
(b)Loans at fair value consist of prime mortgages originated withmodel 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 intent to sell that are accounted for at fair value and classified as trading assets on the Consolidated Balance Sheets. These loansvaluation models themselves.


9084 JPMorgan Chase & Co./20112012 Annual Report


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.
(c)
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 231–252 of this Annual Report which summarizes loan delinquency information.
(d)
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 231–252 of this Annual Report which summarizes loan delinquency information.
(e)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.
(f)Represents the ratio of MSR net carrying value (ending) to third-party 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 – Includesincludes 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
– changes in derivative valuation adjustmentsfair value 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 who buy or refinance a home through direct contact with a mortgage banker employed by the Firm using a branch office, the Internet or by phone. Borrowers are frequently referred to a mortgage banker by a banker in a Chase branch, real estate brokers, home builders or other third parties.
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 that sell closed loans to the Firm.
Correspondent negotiated transactions (“CNTs”) – Mid-to-large-sized mortgage lenders, banks and bank-owned mortgage companies sell servicing to the Firm on an as-originated basis (excluding sales of bulk servicing)servicing transactions). These transactions supplement traditional production channels and provide growth opportunities in the servicing portfolio in periods of stable and rising interest rates.


2012 compared with 2011

Mortgage Production pretax income was $3.6 billion, an increase of $2.6 billion compared with the prior year. Mortgage production-related revenue, excluding repurchase losses, was $6.6 billion, an increase of $2.3 billion, or 55%, from the prior year. These results reflected wider margins, driven by favorable market conditions, and higher volumes due to historically low interest rates and the Home Affordable Refinance Programs (“HARP”). Production expense, including credit costs, was $2.7 billion, an increase of $852 million, or 45%, reflecting higher volumes and additional litigation costs. Repurchase losses were $272 million, compared with $1.3 billion in the prior year.

The current-year reflected a reduction in the repurchase liability of $683 million compared with a build of $213 million in the prior year, primarily driven by improved cure rates on Agency repurchase demands and lower outstanding repurchase demand pipeline. For further information, see Mortgage repurchase liability on pages 111–115 of this Annual Report.
Mortgage Servicing reported a pretax loss of $1.2 billion, compared with a pretax loss of $3.8 billion in the prior year. Mortgage servicing revenue, including amortization, was $3.0 billion, an increase of $337 million, or 13%, from the prior year, driven by lower mortgage servicing rights (“MSR”) asset amortization expense as a result of lower MSR asset value, partially offset by lower loan servicing revenue due to the decline in the third-party loans serviced. MSR risk management income was $616 million, compared with a loss of $1.6 billion in the prior year. The prior year MSR risk management loss was driven by refinements to the valuation model and related inputs. See Note 17 on pages 291–295 of this Annual Report for further information regarding changes in value of the MSR asset and related hedges. Servicing expense was $4.7 billion, down 2% from the prior year, but elevated in both the current and prior year primarily due to higher default servicing costs.
Real Estate Portfolios pretax income was $2.9 billion, compared with a pretax loss of $504 million in the prior year. The improvement was driven by a benefit from the provision for credit losses, reflecting the continued improvement in credit trends, partially offset by lower net revenue. Net revenue was $4.1 billion, down $500 million, or 11%, 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. The provision for credit losses reflected a benefit of $509 million, compared with a provision expense of $3.6 billion in the prior year. The current-year provision reflected a $3.9 billion reduction in the allowance for loan losses due to improved delinquency trends and lower estimated losses. Current-year net charge-offs totaled $3.3 billion, including $744 million of charge-offs, related to regulatory guidance, compared with $3.8 billion in the prior year. See Consumer Credit Portfolio on pages 138–149 of this Annual Report for the net charge-off amounts and rates. Nonaccrual loans were $7.9 billion, compared with $5.9 billion in the prior year. Excluding the impact of certain regulatory guidance, nonaccrual loans would have been $4.9 billion at December 31, 2012. For more information on the reporting of Chapter 7 loans and performing junior liens that are subordinate to senior liens that are 90 days or more past due as nonaccrual, see Consumer Credit Portfolio on pages 138–149 of this Annual Report. Noninterest expense was $1.7 billion, up $132 million, or 9%, compared with the prior year due to an increase in servicing costs.


JPMorgan Chase & Co./20112012 Annual Report 9185
Management'sManagement’s discussion and analysis

Real Estate Portfolios
Selected income statement data    
Year ended December 31,
(in millions, except ratios)
2011
 2010
 2009
Noninterest revenue$38
 $115
 $(26)
Net interest income4,554
 5,432
 6,546
Total net revenue4,592
 5,547
 6,520
      
Provision for credit losses3,575
 8,231
 13,563
      
Noninterest expense1,521
 1,627
 1,847
Income/(loss) before income tax expense/(benefit)(504) (4,311) (8,890)
Net income/(loss)$(306) $(2,493) $(5,449)
Overhead ratio33% 29% 28%

2011 compared with 2010
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 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 prior-year repurchase losses of $2.9 billion, which included a $1.6 billion increase in the repurchase reserve.
Mortgage Servicing reported a pretax loss of $3.8 billion, compared with pretax income of $1.2 billion in the prior year. Mortgage servicing revenue, including amortization was $2.6 billion, or flat compared with the prior year. 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. 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 foreclosure-related matters, as well as higher core and default servicing costs. See Note 17 on pages 291–295 of this Annual Report for further information regarding changes in value of the MSR asset and related hedges.
Real Estate Portfolios reported a netpretax loss of $306$504 million,, compared with a netpretax loss of $2.5$4.3 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 145–154138–149 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 charge-
 
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 145–154 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, 2011,2012, the remaining weighted-average life of the PCI loan portfolio is expected to be 7.58 years. The loan balances are expected to decline more rapidly inover the earliernext three to four 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 largely 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 248–249266–268 of this Annual Report.



9286 JPMorgan Chase & Co./20112012 Annual Report


Selected metrics     
As of or for the year ended December 31, (in millions)2011
 2010
 2009
Loans excluding PCI(a)
     
End-of-period loans owned:     
Home equity$77,800
 $88,385
 $101,425
Prime mortgage, including option ARMs44,284
 49,768
 55,891
Subprime mortgage9,664
 11,287
 12,526
Other718
 857
 671
Total end-of-period loans owned$132,466
 $150,297
 $170,513
Average loans owned:     
Home equity$82,886
 $94,835
 $108,333
Prime mortgage, including option ARMs46,971
 53,431
 62,155
Subprime mortgage10,471
 12,729
 13,901
Other773
 954
 841
Total average loans owned$141,101
 $161,949
 $185,230
PCI loans(a) 
     
End-of-period loans owned:     
Home equity$22,697
 $24,459
 $26,520
Prime mortgage15,180
 17,322
 19,693
Subprime mortgage4,976
 5,398
 5,993
Option ARMs22,693
 25,584
 29,039
Total end-of-period loans owned$65,546
 $72,763
 $81,245
Average loans owned:     
Home equity$23,514
 $25,455
 $27,627
Prime mortgage16,181
 18,526
 20,791
Subprime mortgage5,170
 5,671
 6,350
Option ARMs24,045
 27,220
 30,464
Total average loans owned$68,910
 $76,872
 $85,232
Total Real Estate Portfolios     
End-of-period loans owned:     
Home equity$100,497
 $112,844
 $127,945
Prime mortgage, including option ARMs82,157
 92,674
 104,623
Subprime mortgage14,640
 16,685
 18,519
Other718
 857
 671
Total end-of-period loans owned$198,012
 $223,060
 $251,758
Average loans owned:     
Home equity$106,400
 $120,290
 $135,960
Prime mortgage, including option ARMs87,197
 99,177
 113,410
Subprime mortgage15,641
 18,400
 20,251
Other773
 954
 841
Total average loans owned$210,011
 $238,821
 $270,462
Average assets$197,096
 $226,961
 $263,619
Home equity origination volume1,127
 1,203
 2,479
Mortgage Production and Servicing  
Selected metrics 
As of or for the year ended December 31,     
(in millions, except ratios)2012 2011 2010
Selected balance sheet data     
Period-end loans:     
Prime mortgage, including option ARMs(a)
$17,290
 $16,891
 $14,186
Loans held-for-sale and loans at fair value(b)
18,801
 12,694
 14,863
Average loans:     
Prime mortgage, including option ARMs(a)
17,335
 14,580
 13,422
Loans held-for-sale and loans at fair value(b)
17,573
 16,354
 15,395
Average assets59,837
 59,891
 57,778
Repurchase liability (period-end)2,530
 3,213
 3,000
Credit data and quality statistics     
Net charge-offs:     
Prime mortgage, including option ARMs19
 5
 41
Net charge-off rate:     
Prime mortgage, including option ARMs0.11% 0.03% 0.31%
30+ day delinquency rate(c)
3.05
 3.15
 3.44
Nonperforming assets(d)
$638
 $716
 $729
(a)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.
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)
2011 2010 2009
Net charge-offs excluding PCI loans:(a)
     
Home equity$2,472
 $3,444
 $4,682
Prime mortgage, including option ARMs682
 1,573
 1,935
Subprime mortgage626
 1,374
 1,648
Other25
 59
 78
Total net charge-offs$3,805
 $6,450
 $8,343
Net charge-off rate excluding PCI loans:(a)
     
Home equity2.98% 3.63% 4.32%
Prime mortgage, including option ARMs1.45
 2.95
 3.11
Subprime mortgage5.98
 10.82
 11.86
Other3.23
 5.90
 9.75
Total net charge-off rate excluding PCI loans2.70
 3.98
 4.50
Net charge-off rate – reported:     
Home equity2.32% 2.86% 3.45%
Prime mortgage, including option ARMs0.78
 1.59
 1.70
Subprime mortgage4.00
 7.47
 8.16
Other3.23
 5.90
 9.75
Total net charge-off rate – reported1.81
 2.70
 3.08
30+ day delinquency rate excluding PCI loans(b)
5.69% 6.45% 7.73%
Allowance for loan losses$14,429
 $14,659
 $12,752
Nonperforming assets(c)
6,638
 8,424
 10,347
Allowance for loan losses to ending loans retained7.29% 6.57% 5.06%
Allowance for loan losses to ending loans retained excluding PCI loans(a)
6.58
 6.47
 6.55
(a)
Excludes the impactPredominantly represents prime loans repurchased from Government National Mortgage Association (“Ginnie Mae”) pools, which are insured by U.S. government agencies. See further discussion of PCI loans that were acquired as part of the Washington Mutual transaction. These loans were accounted for at fair valuerepurchased from Ginnie Mae pools in Mortgage repurchase liability 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 ofpages $5.7 billion, $4.9 billion111–115 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.of this Annual Report.
(b)
The delinquency ratePredominantly consists of prime mortgages originated with the intent to sell that are accounted for PCI loans was 23.30%, 28.20%at fair value and 27.62% at December 31, 2011, 2010 and 2009, respectively.
classified as trading assets on the Consolidated Balance Sheets.
(c)Excludes PCI
At December 31, 2012, 2011 and 2010, excluded mortgage loans insured by U.S. government agencies of $11.8 billion, $12.6 billion, and $10.3 billion, respectively, that are 30 or more days past due. These amounts were acquiredexcluded as partreimbursement of the Washington Mutual transaction,insured amounts is proceeding normally. For further discussion, see Note 14 on pages 250–275 of this Annual Report which summarizes loan delinquency information.
(d)
At December 31, 2012, 2011 and 2010, nonperforming assets excluded: (1) mortgage loans insured by U.S. government agencies of $10.6 billion, $11.5 billion, and $9.4 billion, respectively, that are accounted for90 or more days past due; and (2) real estate owned insured by U.S. government agencies of $1.6 billion, $954 million, and $1.9 billion, respectively. These amounts were excluded from nonaccrual loans as reimbursement of insured amounts is proceeding normally. For further discussion, see Note 14 on a pool basis. Since each pool is accounted for as a single asset with a single composite interest rate and an aggregate expectationpages 250–275 of cash flows, the past-due 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.this Annual Report which summarizes loan delinquency information.



Selected metrics     
As of or for the year ended
December 31,
     
(in millions, except ratios and where otherwise noted)2012 2011 2010
Business metrics (in billions)     
Origination volume by channel     
Retail$101.4
 $87.2
 $68.8
Wholesale(a)
0.3
 0.5
 1.3
Correspondent(a)
73.1
 52.1
 75.3
CNT (negotiated transactions)6.0
 5.8
 10.2
Total origination volume$180.8
 $145.6
 $155.6
Application volume by channel     
Retail$164.5
 $137.2
 $115.1
Wholesale(a)
0.7
 1.0
 2.4
Correspondent(a)
100.5
 66.5
 97.3
Total application volume$265.7
 $204.7
 $214.8
Third-party mortgage loans serviced (period-end)$859.4
 $902.2
 $967.5
Third-party mortgage loans serviced (average)847.0
 937.6
 1,037.6
MSR net carrying value (period-end)7.6
 7.2
 13.6
Ratio of MSR net carrying value (period-end) to third-party mortgage loans serviced (period-end)0.88% 0.80% 1.41%
Ratio of loan servicing-related revenue to third-party mortgage loans serviced (average)0.46
 0.44
 0.44
MSR revenue multiple(b)
1.91x
 1.82x
 3.20x
(a)Includes rural housing loans sourced through brokers and correspondents, which are underwritten and closed with pre-funding loan approval from the U.S. Department of Agriculture Rural Development, which acts as the guarantor in the transaction.
(b)Represents the ratio of MSR net carrying value (period-end) to third-party mortgage loans serviced (period-end) divided by the ratio of loan servicing-related revenue to third-party mortgage loans serviced (average).


JPMorgan Chase & Co./20112012 Annual Report 9387
Management'sManagement’s discussion and analysis

Real Estate Portfolios  
Selected metrics     
As of or for the year ended December 31, (in millions)2012 2011 2010
Loans, excluding PCI     
Period-end loans owned:     
Home equity$67,385
 $77,800
 $88,385
Prime mortgage, including option ARMs41,316
 44,284
 49,768
Subprime mortgage8,255
 9,664
 11,287
Other633
 718
 857
Total period-end loans owned$117,589
 $132,466
 $150,297
Average loans owned:     
Home equity$72,674
 $82,886
 $94,835
Prime mortgage, including option ARMs42,311
 46,971
 53,431
Subprime mortgage8,947
 10,471
 12,729
Other675
 773
 954
Total average loans owned$124,607
 $141,101
 $161,949
PCI loans     
Period-end loans owned:     
Home equity$20,971
 $22,697
 $24,459
Prime mortgage13,674
 15,180
 17,322
Subprime mortgage4,626
 4,976
 5,398
Option ARMs20,466
 22,693
 25,584
Total period-end loans owned$59,737
 $65,546
 $72,763
Average loans owned:     
Home equity$21,840
 $23,514
 $25,455
Prime mortgage14,400
 16,181
 18,526
Subprime mortgage4,777
 5,170
 5,671
Option ARMs21,545
 24,045
 27,220
Total average loans owned$62,562
 $68,910
 $76,872
Total Real Estate Portfolios     
Period-end loans owned:     
Home equity$88,356
 $100,497
 $112,844
Prime mortgage, including option ARMs75,456
 82,157
 92,674
Subprime mortgage12,881
 14,640
 16,685
Other633
 718
 857
Total period-end loans owned$177,326
 $198,012
 $223,060
Average loans owned:     
Home equity$94,514
 $106,400
 $120,290
Prime mortgage, including option ARMs78,256
 87,197
 99,177
Subprime mortgage13,724
 15,641
 18,400
Other675
 773
 954
Total average loans owned$187,169
 $210,011
 $238,821
Average assets$175,712
 $197,096
 $226,961
Home equity origination volume1,420
 1,127
 1,203
CARD SERVICES & AUTO
Card Services & Auto is one of the nation’s 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.
Credit data and quality statistics
As of or for the year ended December 31,
(in millions, except ratios)
2012 2011 2010
Net charge-offs, excluding PCI loans(a)
     
Home equity$2,385
 $2,472
 $3,444
Prime mortgage, including option ARMs454
 682
 1,573
Subprime mortgage486
 626
 1,374
Other16
 25
 59
Total net charge-offs$3,341
 $3,805
 $6,450
Net charge-off rate, excluding PCI loans:(a)
     
Home equity3.28% 2.98% 3.63%
Prime mortgage, including option ARMs1.07
 1.45
 2.95
Subprime mortgage5.43
 5.98
 10.82
Other2.37
 3.23
 5.90
Total net charge-off rate, excluding PCI loans2.68
 2.70
 3.98
Net charge-off rate – reported:(a)
     
Home equity2.52% 2.32% 2.86%
Prime mortgage, including option ARMs0.58
 0.78
 1.59
Subprime mortgage3.54
 4.00
 7.47
Other2.37
 3.23
 5.90
Total net charge-off rate – reported1.79
 1.81
 2.70
30+ day delinquency rate, excluding PCI loans(b)
5.03% 5.69% 6.45%
Allowance for loan losses, excluding PCI loans$4,868
 $8,718
 $9,718
Allowance for PCI loans5,711
 5,711
 4,941
Allowance for loan losses$10,579
 $14,429
 $14,659
Nonperforming assets(c)(d)
8,439
 6,638
 8,424
Allowance for loan losses to period-end loans retained5.97% 7.29% 6.57%
Allowance for loan losses to period-end loans retained, excluding PCI loans4.14
 6.58
 6.47

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 300–303 of this Annual Report.
Selected income statement data – managed basis(a)(b)
Year ended December 31,
(in millions, except ratios)
2011 2010 2009
Revenue     
Credit card income$4,127
 $3,514
 $3,613
All other income765
 764
 93
Noninterest revenue(c)
4,892
 4,278
 3,706
Net interest income14,249
 16,194
 19,493
Total net revenue(d)
19,141

20,472

23,199
      
Provision for credit losses3,621
 8,570
 19,648
      
Noninterest expense     
Compensation expense1,826
 1,651
 1,739
Noncompensation expense5,818
 5,060
 4,362
Amortization of intangibles401
 467
 516
Total noninterest expense(e)
8,045
 7,178
 6,617
Income/(loss) before income tax expense/(benefit)7,475
 4,724
 (3,066)
Income tax expense/(benefit)2,931
 1,852
 (1,273)
Net income/(loss)$4,544

$2,872

$(1,793)
Memo: Net securitization income/(loss)NA
 NA
 (474)
Financial ratios(a)
     
Return on common equity28%
16%
(10)%
Overhead ratio42
 35
 29
(a)
EffectiveNet charge-offs and net charge-off rates for the year ended December 31, 2012, included $744 million of charge-offs related to regulatory guidance. Excluding these charges-offs, net charge-offs for the year ended December 31, 2012, would have been $1.8 billion, $410 million and $416 million for the home equity, prime mortgage, including option ARMs, and subprime mortgage portfolios, respectively. Net charge-off rates for the same period, excluding these charge-offs and PCI loans, would have been 2.41%, 0.97% and 4.65% for the home equity, prime mortgage, including option ARMs, and subprime mortgage portfolios, respectively. For further information, see Consumer Credit Portfolio on pages January 1, 2011138–149, 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. of this Annual Report.
(b)Effective January 1,The delinquency rate for PCI loans was 20.14%, 23.30%, and 28.20% at December 31, 2012, 2011 and 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 Firm’s Use of Non-GAAP Financial Measures on pages 76–78 of this Annual Report for additional information. Also, for further details regarding the Firm’s application and impact of the VIE guidance, see Note 16 on pages 256–267 of this Annual Report.respectively.
(c)
Included Commercial Card noninterest revenueExcludes PCI loans. Because the Firm is recognizing interest income on each pool of $290 million for the year ended December 31, 2011.
PCI loans, they are all considered to be performing.
(d)
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 Nonperforming assets at December 31, 20112012, included loans based upon regulatory guidance. For further information, see Consumer Credit Portfolio on pages ,138–149 of this Annual Report.




2010 and 2009, respectively.
(e)88
Included Commercial Card noninterest expense of $298 million for the year ended December 31, 2011.
JPMorgan Chase & Co./2012 Annual Report
NA: Not applicable


Card, Merchant Services & Auto
Selected income statement data
Year ended December 31,
(in millions, except ratios)
2012 2011 2010
Revenue     
Card income$4,092
 $4,127
 $3,514
All other income1,009
 765
 764
Noninterest revenue5,101
 4,892
 4,278
Net interest income13,669
 14,249
 16,194
Total net revenue18,770

19,141

20,472
      
Provision for credit losses3,953
 3,621
 8,570
      
Noninterest expense8,216
 8,045
 7,178
Income before income tax expense6,601
 7,475
 4,724
Net income$4,007

$4,544

$2,872
      
Overhead ratio44% 42% 35%
2012 compared with 2011
Card, Merchant Services & Auto net income was $4.0 billion, a decrease of $537 million, or 12%, compared with the prior year. The decrease was driven by lower net revenue and higher provision for credit losses.
Net revenue was $18.8 billion, a decrease of $371 million, or 2%, from the prior year. Net interest income was $13.7 billion, down $580 million, or 4%, from the prior year. The decrease was driven by narrower loan spreads and lower average loan balances, partially offset by lower revenue reversals associated with lower net charge-offs. Noninterest revenue was $5.1 billion, an increase of $209 million, or 4%, from the prior year. The increase was driven by higher net interchange income, including lower partner revenue-sharing due to the impact of the Kohl’s portfolio sale on April 1, 2011, and higher merchant servicing revenue, partially offset by higher amortization of loan origination costs.
The provision for credit losses was $4.0 billion, compared with $3.6 billion in the prior year. The current-year provision reflected lower net charge-offs and a $1.6 billion reduction in the allowance for loan losses due to lower estimated losses. The prior-year provision included a $3.9 billion reduction in the allowance for loan losses. The Credit Card net charge-off rate1 was 3.94%, down from 5.40% in the prior year; and the 30+ day delinquency rate1 was 2.10%, down from 2.81% in the prior year. The net charge-off rate would have been 3.87% absent a policy change on restructured loans that do not comply with their modified payment terms. The Auto net charge-off rate was 0.39%, up from 0.32% in the prior year, including $53 million of charge-offs related to regulatory guidance. Excluding these charge-offs, the net charge-off rate would have been 0.28%.
Noninterest expense was $8.2 billion, an increase of $171 million, or 2%, from the prior year, driven by expenses related to a non-core product that is being exited and the write-off of intangible assets associated with a non-strategic relationship, partially offset by lower marketing expense.
2011 compared with 2010
NetCard, Merchant Services & Auto 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 ServicesCIB in the first quarter of 2011, higher net interchange income, and lower partner revenue-sharing due to the impact of the Kohl'sKohl’s portfolio sale. These increases were partially offset by lower revenue from fee-based 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%5.40%, down from 8.72%9.72% in the prior year; and the 30+ day delinquency rate1 was 2.54%2.81%, down from 3.66%4.07% 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.


94JPMorgan 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.

1 For Credit Card, includesThe net charge-off and 30+ day delinquency rates presented for credit card loans, which include loans held-for-sale, which are non-GAAP financial measures,measures. Management uses this as an additional measure to provide more meaningful measures that enable comparability with prior periods.assess the performance of the portfolio.

Selected metrics     
As of or for the year ended December 31,
(in millions, except headcount and ratios)
2011 2010 2009
Selected balance sheet data (period-end)(a)
     
Managed assets$208,467
 $208,793
 $255,029
Loans:     
Credit Card132,277
 137,676
 78,786
Auto47,426
 48,367
 46,031
Student13,425
 14,454
 15,747
Total loans on balance sheets193,128
 200,497
 140,564
Securitized credit card loans(b)
NA
 NA
 84,626
Total loans(c)
$193,128
 $200,497
 $225,190
Equity16,000
 18,400
 17,543
Selected balance sheet data (average)(a)
     
Managed assets$201,162
 $213,041
 $255,519
Loans:     
Credit Card128,167
 144,367
 87,029
Auto47,034
 47,603
 43,558
Student13,986
 15,945
 16,108
Total average loans on balance sheets189,187
 207,915
 146,695
Securitized credit card loans(b)
NA
 NA
 85,378
Total average loans(d)
$189,187
 $207,915
 $232,073
Equity$16,000
 $18,400
 $17,543
Headcount(a)
27,585
 25,733
 27,914
Credit data and quality statistics(a)(b)
     
Net charge-offs:     
Credit Card$6,925
 $14,037
 $16,077
Auto152
 298
 627
Student434
 387
 253
Total net charge-offs$7,511
 $14,722
 $16,957
Net charge-off rate:     
Credit Card(e)
5.44% 9.73% 9.33%
Auto0.32
 0.63
 1.44
Student(f)
3.10
 2.61
 1.77
Total net charge-off rate3.99
 7.12
 7.37


JPMorgan Chase & Co./20112012 Annual Report 9589
Management'sManagement’s discussion and analysis

Selected metrics      
As of or for the year ended December 31,
(in millions, except ratios and where otherwise noted)		 2011 2010 2009
Delinquency rates      
30+ day delinquency rate:      
Credit Card(g)
 2.81% 4.14% 6.28%
Auto 1.13
 1.22
 1.63
Student(h)(i)
 1.78
 1.53
 1.50
Total 30+ day delinquency rate 2.32
 3.23
 5.02
90+ day delinquency rate – Credit Card(g)
 1.44
 2.25
 3.59
Nonperforming assets(j)
 $228
 $269
 $340
Allowance for loan losses:      
Credit Card(k)
 $6,999
 $11,034
 $9,672
Auto and Student 1,010
 899
 1,042
Total allowance for loan losses $8,009
 $11,933
 $10,714
Allowance for loan losses to period-end loans:   

  
Credit Card(g)(k)
 5.30% 8.14% 12.28%
Auto and Student(h)
 1.66
 1.43
 1.73
Total allowance for loan losses to period-end loans 4.15
 6.02
 7.72
Business metrics      
Credit Card, excluding Commercial Card(a)
      
Sales volume (in billions) $343.7
 $313.0
 $294.1
New accounts opened 8.8
 11.3
 10.2
Open accounts(l)
 65.2
 90.7
 93.3
Merchant Services      
Bank card volume
 (in billions)
 $553.7
 $469.3
 $409.7
Total transactions
 (in billions)
 24.4
 20.5
 18.0
Auto and Student      
Origination volume
 (in billions)
      
Auto $21.0
 $23.0
 $23.7
Student 0.3
 1.9
 4.2
Selected metrics
As of or for the year ended December 31,
(in millions, except ratios and where otherwise noted)
2012 2011 2010
Selected balance sheet data (period-end)     
Loans:     
Credit Card$127,993
 $132,277
 $137,676
Auto49,913
 47,426
 48,367
Student11,558
 13,425
 14,454
Total loans$189,464
 $193,128
 $200,497
Selected balance sheet data (average)     
Total assets$197,661
 $201,162
 $213,041
Loans:     
Credit Card125,464
 128,167
 144,367
Auto48,413
 47,034
 47,603
Student12,507
 13,986
 15,945
Total loans$186,384
 $189,187
 $207,915
Business metrics     
Credit Card, excluding Commercial Card     
Sales volume (in billions)$381.1
 $343.7
 $313.0
New accounts opened6.7
 8.8
 11.3
Open accounts64.5
 65.2
 90.7
Accounts with sales activity30.6
 30.7
 39.9
% of accounts acquired online51% 32% 15%
Merchant Services     
Merchant processing volume (in billions)$655.2
 $553.7
 $469.3
Total transactions
 (in billions)
29.5
 24.4
 20.5
Auto & Student     
Origination volume
 (in billions)
     
Auto$23.4
 $21.0
 $23.0
Student0.2
 0.3
 1.9
The following are brief descriptions of selected business metrics within Card, Merchant Services & Auto.
Sales volumeCard Services – Dollar amount of cardmember purchases, net of returns.
Open accounts – Cardmember accounts with charging privileges.includes the Credit Card and Merchant Services businesses.
Merchant Services business – Ais 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.

Sales volume - Dollar amount of cardmember purchases, net of returns.
Open accounts – Cardmember accounts with charging privileges.
Auto origination volume - Dollar amount of auto loans and leases originated.


As of or for the year ended December 31,
(in millions, except ratios)		 2011 2010 2009
Supplemental information(a)(m)
      
Card Services, excluding Washington Mutual portfolio      
Loans (period-end) $121,224
 $123,943
 $143,759
Average loans 116,186
 128,312
 148,765
Net interest income(n)
 8.70% 8.86% 8.97%
Net revenue(n)
 11.74
 11.22
 10.63
Risk adjusted margin(n)(o)
 9.39
 5.81
 1.39
Net charge-offs $5,668
 $11,191
 $12,574
Net charge-off rate(e)
 4.88% 8.72% 8.45%
30+ day delinquency rate(g)
 2.53
 3.66
 5.52
90+ day delinquency rate(g)
 1.29
 1.98
 3.13
Card Services, excluding Washington Mutual and Commercial Card portfolios      
Loans (period-end) $119,966
 $123,943
 $143,759
Average loans 114,828
 128,312
 148,765
Net interest income(n)
 8.87% 8.86% 8.97%
Net revenue(n)
 11.69
 11.22
 10.63
Risk adjusted margin(n)(o)
 9.32
 5.81
 1.39
Net charge-offs $5,666
 $11,191
 $12,574
Net charge-off rate(e)
 4.93% 8.72% 8.45%
30+ day delinquency rate(g)(p)
 2.54
 3.66
 5.52
90+ day delinquency rate(g)(q)
 1.30
 1.98
 3.13
90JPMorgan Chase & Co./2012 Annual Report


Selected metrics
As of or for the year ended December 31,
(in millions, except ratios)		 2012 2011 2010
Credit data and quality statistics      
Net charge-offs:      
Credit Card $4,944
 $6,925
 $14,037
Auto(a)
 188
 152
 298
Student 377
 434
 387
Total net charge-offs $5,509
 $7,511
 $14,722
Net charge-off rate:      
Credit Card(b)
 3.95% 5.44% 9.73%
Auto(a)
 0.39
 0.32
 0.63
Student(c)
 3.01
 3.10
 2.61
Total net charge-off rate 2.96
 3.99
 7.12
Delinquency rates      
30+ day delinquency rate:      
Credit Card(d)
 2.10
 2.81
 4.14
Auto 1.25
 1.13
 1.22
Student(e)
 2.13
 1.78
 1.53
Total 30+ day delinquency rate 1.87
 2.32
 3.23
90+ day delinquency rate – Credit Card(d)
 1.02
 1.44
 2.25
Nonperforming assets(a)(f)
 $265
 $228
 $269
Allowance for loan losses:      
Credit Card $5,501
 $6,999
 $11,034
Auto & Student 954
 1,010
 899
Total allowance for loan losses $6,455
 $8,009
 $11,933
Allowance for loan losses to period-end loans:   

  
Credit Card(d)
 4.30% 5.30% 8.14%
Auto & Student 1.55
 1.66
 1.43
Total allowance for loan losses to period-end loans 3.41
 4.15
 6.02
(a)
EffectiveNet charge-offs and net charge-off rates for the year ended December 31, 2012, included January 1, 2011$53 million of charge-offs related to regulatory guidance. Excluding these charge-offs, net charge-offs for the year ended December 31, 2012, would have been $135 million, and the Commercial Card business that was previously in TSS was transferred tonet charge-off rate would have been Card0.28%. 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. HeadcountNonperforming assets at December 31, 2012, included 1,274 employees related to the transfer$51 million of this business.loans based upon regulatory guidance.
(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 Firm’s application and impact of the guidance, see Note 16 on pages 256–267 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$433 million, $833 million and $148 million for the years ended December 31, 2012, 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)(c)
Average student loans included loans held-for-sale of $1.1 billion for the year ended December 31, 2010. There were no loans held-for-sale for all other periods. This amount is excluded when calculating the net charge-off rate.
(d)
Period-end credit card loans included loans held-for-sale of $102 million and $2.2 billion at December 31, 2011 and 2010, respectively. These amounts are excluded when calculating delinquency rates and the allowance for loan losses to period-end loans. There were no loans held-for-sale at December 31, 2012. 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.


96JPMorgan Chase & Co./2011 Annual Report


(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)(e)
Excluded student loans insured by U.S. government agencies under the Federal Family Education Loan Program (“FFELP”)FFELP of$894 million, $989 million, and $1.1 billion and $942 million at December 31, 20112012, 20102011 and 20092010, respectively, that are 30 or more days past due. These amounts are excluded as reimbursement of insured amounts is proceeding normally.
due. These amounts are excluded as reimbursement of insured amounts is proceeding normally.
(j)(f)
Nonperforming assets excluded student loans insured by U.S. government agencies under the FFELP of $551525 million, $625551 million and $542625 million at December 31, 20112012, 20102011 and 20092010, 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

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 Firm’s application and impact of the guidance, see Note 16 on pages 256–267 of this Annual Report.
Year ended December 31,
(in millions, except ratios)
2011 2010 2009
Income statement data     
Credit card income     
Reported$4,127
 $3,514
 $5,107
Securitization adjustmentsNA
 NA
 (1,494)
Managed credit card income$4,127
 $3,514
 $3,613
Net interest income     
Reported$14,247
 $16,187
 $11,543
Securitization adjustmentsNA
 NA
 7,937
Fully tax-equivalent adjustments2
 7
 13
Managed net interest income$14,249
 $16,194
 $19,493
Total net revenue     
Reported$19,139
 $20,465
 $16,743
Securitization adjustmentsNA
 NA
 6,443
Fully tax-equivalent adjustments2
 7
 13
Managed total net revenue$19,141
 $20,472
 $23,199
Provision for credit losses     
Reported$3,621
 $8,570
 $13,205
Securitization adjustmentsNA
 NA
 6,443
Managed provision for credit losses$3,621
 $8,570
 $19,648
Income tax expense/(benefit)     
Reported$2,929
 $1,845
 $(1,286)
Fully tax-equivalent adjustments2
 7
 13
Managed income tax expense/(benefit)$2,931
 $1,852
 $(1,273)
      
Balance sheet – average balances    
Total average assets     
Reported$201,162
 $213,041
 $173,286
Securitization adjustmentsNA
 NA
 82,233
Managed average assets$201,162
 $213,041
 $255,519
      
Credit data and quality statistics    
Net charge-offs     
Reported$7,511
 $14,722
 $10,514
Securitization adjustmentsNA
 NA
 6,443
Managed net charge-offs$7,511
 $14,722
 $16,957
Net charge-off rates     
Reported3.99% 7.12% 7.26%
SecuritizedNA
 NA
 7.55
Managed net charge-off rate3.99
 7.12
 7.37
NA: Not applicable

Card Services supplemental information
Year ended December 31,
(in millions, except ratios)
2012 2011 2010
Revenue     
Noninterest revenue$3,887
 $3,740
 $3,277
Net interest income11,611
 12,084
 13,886
Total net revenue15,498
 15,824
 17,163
      
Provision for credit losses3,444
 2,925
 8,037
      
Noninterest expense6,566
 6,544
 5,797
Income before income tax expense5,488
 6,355
 3,329
Net income$3,344
 $3,876
 $2,074
      
Percentage of average loans:     
Noninterest revenue3.10% 2.92% 2.27%
Net interest income9.25
 9.43
 9.62
Total net revenue12.35
 12.35
 11.89



JPMorgan Chase & Co./20112012 Annual Report 9791
Management'sManagement’s discussion and analysis

CORPORATE & INVESTMENT BANK

The Corporate & Investment Bank (“CIB”) offers a broad suite of investment banking, market-making, prime brokerage, and treasury and securities products and services to a global client base of corporations, investors, financial institutions, government and municipal entities. Within Banking, the CIB offers a full range of investment banking products and services in all major capital markets, including advising on corporate strategy and structure, capital-raising in equity and debt markets, as well as loan origination and syndication. Also included in Banking is Treasury Services, which includes transaction services, comprised primarily of cash management and liquidity solutions, and trade finance products. The Markets & Investor Services segment of the CIB is a global market-maker in cash securities and derivative instruments, and also offers sophisticated risk management solutions, prime brokerage, and research. Markets & Investor Services also includes the Securities Services business, a leading global custodian which 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)2012 2011 2010
Revenue     
Investment banking fees$5,769
 $5,859
 $6,186
Principal transactions(a)
9,510
 8,347
 8,474
Lending- and deposit-related fees1,948
 2,098
 2,075
Asset management, administration and commissions4,693
 4,955
 5,110
All other income1,184
 1,264
 1,044
Noninterest revenue23,104
 22,523
 22,889
Net interest income11,222
 11,461
 10,588
Total net revenue(b)
34,326
 33,984
 33,477
      
Provision for credit losses(479) (285) (1,247)
      
Noninterest expense     
Compensation expense11,313
 11,654
 12,418
Noncompensation expense10,537
 10,325
 10,451
Total noninterest expense21,850
 21,979
 22,869
Income before income tax expense12,955
 12,290
 11,855
Income tax expense4,549
 4,297
 4,137
Net income$8,406
 $7,993
 $7,718
(a)Included DVA on structured notes and derivative liabilities measured at fair value. DVA gains/(losses) were $(930) million, $1.4 billion and $509 million for the years ended December 31, 2012, 2011 and 2010, respectively.
(b)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 $2.0 billion, $1.9 billion and $1.7 billion for the years ended December 31, 2012, 2011 and 2010, respectively.
Selected income statement data  
Year ended December 31, 
(in millions, except ratios)2012 2011 2010
Financial ratios     
Return on common equity(a)
18% 17% 17%
Overhead ratio64
 65
 68
Compensation expense as a percentage of total net revenue(b)
33
 34
 37
Revenue by business     
Advisory$1,491
 $1,792
 $1,469
Equity underwriting1,026
 1,181
 1,589
Debt underwriting3,252
 2,886
 3,128
Total investment banking fees5,769
 5,859
 6,186
Treasury Services4,249
 3,841
 3,698
Lending1,331
 1,054
 811
Total Banking11,349
 10,754
 10,695
Fixed Income Markets(c)
15,412
 14,784
 14,738
Equity Markets4,406
 4,476
 4,582
Securities Services4,000
 3,861
 3,683
Credit Adjustments & Other(d)(e)
(841) 109
 (221)
Total Markets & Investor Services22,977
 23,230
 22,782
Total net revenue$34,326
 $33,984
 $33,477
(a)Return on equity excluding DVA, a non-GAAP financial measure, was 19%, 15% and 16% for the years ended December 31, 2012, 2011 and 2010, respectively.
(b)Compensation expense as a percentage of total net revenue excluding DVA, a non-GAAP financial measure, was 32%, 36% and 38% for the years ended December 31, 2012, 2011 and 2010, respectively. In addition, compensation expense as a percent of total net revenue for the year ended December 31, 2010, excluding both DVA and 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 36%.
(c)Includes results of the synthetic credit portfolio that was transferred from the CIO effective July 2, 2012.
(d)Primarily includes credit portfolio credit valuation adjustments (“CVA”) net of associated hedging activities; DVA on structured notes and derivative liabilities; and nonperforming derivative receivable results effective in the first quarter of 2012 and thereafter.
(e)Included DVA on structured notes and derivative liabilities measured at fair value. DVA gains/(losses) were $(930) million, $1.4 billion and $509 million for the years ended December 31, 2012, 2011 and 2010, respectively.


92JPMorgan Chase & Co./2012 Annual Report


CIB provides several non-GAAP financial measures which exclude the impact of DVA on: net revenue, net income, compensation ratio, and return on equity. The ratio for the allowance for loan losses to end-of-period loans is calculated excluding the impact of consolidated Firm-administered multi-seller conduits and trade finance, to provide a more meaningful assessment of CIB’s allowance coverage ratio. These measures are used by management to assess the underlying performance of the business and for comparability with peers.
2012 compared with 2011
Net income was $8.4 billion, up 5% compared with the prior year. These results primarily reflected slightly higher net revenue compared with 2011, lower noninterest expense and a larger benefit from the provision for credit losses. Net revenue included a $930 million loss from DVA on structured notes and derivative liabilities resulting from the tightening of the Firm’s credit spreads. Excluding the impact of DVA, net revenue was $35.3 billion and net income was $9.0 billion, compared with $32.5 billion and $7.1 billion in the prior year, respectively.
Net revenue was $34.3 billion, compared with $34.0 billion in the prior year. Banking revenues were $11.3 billion, compared with $10.8 billion in the prior year. Investment banking fees were $5.8 billion, down 2% from the prior year; these consisted of record debt underwriting fees of $3.3 billion (up 13%), advisory fees of $1.5 billion (down 17%) and equity underwriting fees of $1.0 billion (down 13%). Industry-wide debt capital markets volumes were at their second highest annual level since 2006, as the low rate environment continued to fuel issuance and refinancing activity. In contrast there was lower industry-wide announced mergers and acquisitions activity, while industry-wide equity underwriting volumes remained steady. Treasury Services revenue was a record $4.2 billion compared with $3.8 billion in the prior year driven by continued deposit balance growth and higher average trade loans outstanding during the year. Lending revenue was $1.3 billion, compared with $1.1 billion in the prior year due to higher net interest income on increased average retained loans as well as higher fees on lending-related commitments. This was partially offset by higher fair value losses on credit risk-related hedges of the retained loan portfolio.
Markets and Investor Services revenue was $23.0 billion compared to $23.2 billion in the prior year. Combined Fixed Income and Equity Markets revenue was $19.8 billion, up from $19.3 billion the prior year as client revenue remained strong across most products, with particular strength in rates-related products, which improved from the prior year. 2012 generally saw credit spread tightening and lower volatility in both the credit and equity markets compared with the prior year, during which macroeconomic concerns, including those in the Eurozone, caused credit spread widening and generally more volatile market conditions, particularly in the second half of the year. Securities Services revenue was $4.0 billion compared with $3.9
billion the prior year primarily driven by higher deposit balances. Assets under custody grew to a record $18.8 trillion by the end of 2012, driven by both market appreciation as well as net inflows. Credit Adjustments & Other was a loss of $841 million, driven predominantly by DVA, which was a loss of $930 million due to the tightening of the Firm’s credit spreads.
The provision for credit losses was a benefit of $479 million, compared with a benefit of $285 million in the prior year, as credit trends remained stable. The current-year benefit reflected recoveries and a net reduction in the allowance for credit losses, both related to the restructuring of certain nonperforming loans, current credit trends and other portfolio activities. Net recoveries were $284 million, compared with net charge-offs of $161 million in the prior year. Nonperforming loans were down 49% from the prior year.
Noninterest expense was $21.9 billion, down 1%, driven primarily by lower compensation expense.
Return on equity was 18% on $47.5 billion of average allocated capital.
2011 compared with 2010
Net income was $8.0 billion, up 4% compared with the prior year. These results primarily reflected higher net revenue compared with 2010, and lower noninterest expense, largely offset by a reduced benefit from the provision for credit losses. Net revenue included a $1.4 billion gain from DVA on structured notes and derivative liabilities resulting from the widening of the Firm’s credit spreads. Excluding the impact of DVA, net revenue was $32.5 billion and net income was $7.1 billion, compared with $33.0 billion and $7.4 billion in the prior year, respectively.
Net revenue was $34.0 billion, compared with $33.5 billion in the prior year. Banking revenues were $10.8 billion, compared with $10.7 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%). Treasury Services revenue was $3.8 billion compared with $3.7 billion in the prior year 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. Lending revenue was $1.1 billion, compared with $811 million in the prior year, driven by lower fair value losses on hedges of the retained loan portfolio.
Markets and Investor Services revenue was $23.2 billion compared with $22.8 billion the year prior. Fixed Income Markets revenue was $14.8 billion, compared with $14.7 billion in the prior year, with continued solid client revenue. Equity Markets revenue was $4.5 billion compared with $4.6 billion the prior year on slightly lower performance. Securities Services revenue was $3.9 billion compared with $3.7 billion the prior year driven by higher


JPMorgan Chase & Co./2012 Annual Report93
Management’s discussion and analysis

net interest income due to higher deposit balances and net inflows of assets under custody. Credit Adjustments & Other was a gain of $109 million compared with a loss of $221 million in the prior year.
The provision for credit losses was a benefit of $285 million, compared with a benefit of $1.2 billion in the prior year. The benefit in 2011 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 $736 million in the prior year.
Noninterest expense was $22.0 billion, down 4% 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 business growth as well as expenses related to exiting unprofitable business.
Return on equity was 17% on $47.0 billion of average allocated capital.
Selected metrics    
As of or for the year ended December 31, 
(in millions, except headcount)2012 2011 2010
Selected balance sheet data (period-end)     
Assets$876,107
 $845,095
 $870,631
Loans:     
Loans retained(a)
109,501
 111,099
 80,208
Loans held-for-sale and loans at fair value5,749
 3,016
 3,851
Total loans115,250
 114,115
 84,059
Equity47,500
 47,000
 46,500
Selected balance sheet data (average)     
Assets$854,670
 $868,930
 $774,295
Trading assets-debt and equity instruments312,944
 348,234
 309,383
Trading assets-derivative receivables74,874
 73,200
 70,286
Loans:     
Loans retained(a)
110,100
 91,173
 77,620
Loans held-for-sale and loans at fair value3,502
 3,221
 3,268
Total loans113,602
 94,394
 80,888
Equity47,500
 47,000
 46,500
      
Headcount52,151
 53,557
 55,142
(a)Loans retained includes credit portfolio loans, trade finance loans, other held-for-investment loans and overdrafts.


Selected metrics     
As of or for the year ended December 31, 
(in millions, except ratios and where otherwise noted)2012 2011 2010
Credit data and quality statistics     
Net charge-offs/(recoveries)$(284) $161
 $736
Nonperforming assets:     
Nonaccrual loans:     
Nonaccrual loans retained(a)(b)
535
 1,039
 3,171
Nonaccrual loans held-for-sale and loans at fair value
82
 166
 460
Total nonaccrual loans617
 1,205
 3,631
Derivative receivables(c)
239
 293
 159
Assets acquired in loan satisfactions64
 79
 117
Total nonperforming assets920
 1,577
 3,907
Allowance for credit losses:     
Allowance for loan losses1,300
 1,501
 1,928
Allowance for lending-related commitments473
 467
 498
Total allowance for credit losses1,773
 1,968
 2,426
Net charge-off/(recovery) rate(a)
(0.26)% 0.18% 0.95%
Allowance for loan losses to period-end loans retained(a)
1.19
 1.35
 2.40
Allowance for loan losses to period-end loans retained, excluding trade finance and conduits(d)
2.52
 3.06
 4.90
Allowance for loan losses to nonaccrual loans retained(a)(b)
243
 144
 61
Nonaccrual loans to total period-end loans0.54
 1.06
 4.32
Business metrics     
Assets under custody (“AUC”) by asset class (period-end) in billions:     
Fixed Income$11,745
 $10,926
 $10,364
Equity5,637
 4,878
 4,850
Other(e)
1,453
 1,066
 906
Total AUC$18,835
 $16,870
 $16,120
Client deposits and other third party liabilities (average)(f)
$355,766
 $318,802
 $248,451
Trade finance loans (period-end)35,783
 36,696
 21,156
(a)Loans retained includes credit portfolio loans, trade finance loans, other held-for-investment loans and overdrafts.
(b)Allowance for loan losses of $153 million, $263 million and $1.1 billion were held against these nonaccrual loans at December 31, 2012, 2011 and 2010, respectively.
(c)Prior to 2012, reported amounts had only included defaulted derivatives; effective in the first quarter of 2012, reported amounts included both defaulted derivatives as well as derivatives that have been risk rated as nonperforming.
(d)Management uses allowance for loan losses to period-end loans retained, excluding trade finance and conduits, a non-GAAP financial measure, as a more relevant metric to reflect the allowance coverage of the retained lending portfolio.


94JPMorgan Chase & Co./2012 Annual Report


(e)Consists of mutual funds, unit investment trusts, currencies, annuities, insurance contracts, options and nonsecurities contracts.
(f)Client deposits and other third party liabilities pertain to the Treasury Services and Securities Services businesses, and include deposits, as well as deposits that are swept to on-balance sheet liabilities (e.g., commercial paper, federal funds purchased and securities loaned or sold under repurchase agreements) as part of their client cash management program.
Market shares and rankings(a)
 2012 2011 2010
Year ended
December 31,
Market ShareRankings Market ShareRankings Market ShareRankings
Global investment banking fees(b)
7.6% #1 8.1% #1 7.6% #1
Debt, equity and equity-related        
Global7.21 6.71 7.21
U.S.11.51 11.11 11.11
Syndicated loans        
Global9.61 10.81 8.52
U.S.17.61 21.21 19.12
Long-term
   debt(c)
        
Global7.11 6.71 7.22
U.S.11.61 11.21 10.92
Equity and equity-related        
Global(d)
7.84 6.83 7.33
U.S.10.45 12.51 13.12
Announced M&A(e)
        
Global18.52 18.32 15.94
U.S.21.52 26.72 21.93
         
(a) Source: Dealogic. Global Investment Banking fees reflects the ranking of fees and market share. The remaining rankings reflects transaction volume 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.
         
According to Dealogic, the Firm was ranked #1 in Global Investment Banking Fees generated during 2012, based on revenue; #1 in Global Debt, Equity and Equity-related; #1 in Global Syndicated Loans; #1 in Global Long-Term Debt; #4 in Global Equity and Equity-related; and #2 in Global Announced M&A, based on volume.

International metrics    
Year ended December 31, 
(in millions)2012 2011 2010
Total net revenue(a)
     
Europe/Middle East/Africa$10,639
 $11,102
 $9,740
Asia/Pacific4,100
 4,589
 4,775
Latin America/Caribbean1,524
 1,409
 1,154
Total international net revenue16,263
 17,100
 15,669
North America18,063
 16,884
 17,808
Total net revenue$34,326
 $33,984
 $33,477
      
Loans (period-end)(a)
     
Europe/Middle East/Africa$30,266
 $29,484
 $21,072
Asia/Pacific27,193
 27,803
 18,251
Latin America/Caribbean10,220
 9,692
 5,928
Total international loans67,679
 66,979
 45,251
North America41,822
 44,120
 34,957
Total loans$109,501
 $111,099
 $80,208
      
Client deposits and other third-party liabilities (average)(a)(b)
     
Europe/Middle East/Africa$127,326
 $123,920
 $102,014
Asia/Pacific51,180
 43,524
 32,862
Latin America/Caribbean11,052
 12,625
 11,558
Total international$189,558
 $180,069
 $146,434
North America166,208
 138,733
 102,017
Total client deposits and other third-party liabilities$355,766
 $318,802
 $248,451
      
AUC (period-end) (in billions)(a)
     
North America$10,504
 $9,735
 $9,836
All other regions8,331
 7,135
 6,284
Total AUC$18,835
 $16,870
 $16,120
(a)Total net revenue is based primarily on the domicile of the client or location of the trading desk, as applicable. Loans outstanding (excluding loans-held-for-sale and loans carried at fair value), client deposits and AUC are based predominantly on the domicile of the client.
(b)Client deposits and other third-party liabilities pertain to the Treasury Services and Securities Services businesses, and include deposits, as well as deposits that are swept to on-balance sheet liabilities (e.g., commercial paper, federal funds purchased and securities loaned or sold under repurchase agreements) as part of their client cash management program.



JPMorgan Chase & Co./2012 Annual Report95
Management’s discussion and analysis

COMMERCIAL BANKING
Commercial Banking delivers extensive industry knowledge, local expertise and dedicated service to more than 24,000U.S. and U.S. multinational clients, nationally, including corporations, municipalities, financial institutions and not-for-profitnon-profit entities with annual revenue generally ranging from $10$20 million to $2 billion, and nearly 35,000billion. CB provides financing to real estate investors/investors and owners. CB partnersPartnering with the Firm’s other businesses, to provideCB provides comprehensive financial 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 Mid-Corporate 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 dataSelected income statement data    Selected income statement data    
Year ended December 31,
(in millions, except ratios)
2011 2010 20092012 2011 2010
Revenue          
Lending- and deposit-related fees$1,081
 $1,099
 $1,081
$1,072
 $1,081
 $1,099
Asset management, administration and commissions136
 144
 140
130
 136
 144
All other income(a)
978
 957
 596
1,081
 978
 957
Noninterest revenue2,195
 2,200
 1,817
2,283
 2,195
 2,200
Net interest income4,223
 3,840
 3,903
4,542
 4,223
 3,840
Total net revenue(b)
6,418

6,040

5,720
6,825
 6,418
 6,040
Provision for credit losses208
 297
 1,454
41
 208
 297
Noninterest expense          
Compensation expense(c)886
 820
 776
1,014
 936
 863
Noncompensation expense(c)1,361
 1,344
 1,359
1,348
 1,311
 1,301
Amortization of intangibles31
 35
 41
27
 31
 35
Total noninterest expense2,278
 2,199
 2,176
2,389
 2,278
 2,199
Income before income tax expense3,932
 3,544
 2,090
4,395
 3,932
 3,544
Income tax expense1,565
 1,460
 819
1,749
 1,565
 1,460
Net income$2,367
 $2,084
 $1,271
$2,646
 $2,367
 $2,084
Revenue by product          
Lending(c)(d)
$3,455
 $2,749
 $2,663
$3,675
 $3,455
 $2,749
Treasury services(c)(d)
2,270
 2,632
 2,642
2,428
 2,270
 2,632
Investment banking498
 466
 394
545
 498
 466
Other195
 193
 21
177
 195
 193
Total Commercial Banking revenue$6,418
 $6,040
 $5,720
$6,825
 $6,418
 $6,040
          
IB revenue, gross(d)
$1,421
 $1,335
 $1,163
Investment banking revenue, gross$1,597
 $1,421
 $1,335
          
Revenue by client segment          
Middle Market Banking$3,145
 $3,060
 $3,055
$3,334
 $3,145
 $3,060
Commercial Term Lending1,168
 1,023
 875
1,194
 1,168
 1,023
Corporate Client Banking(e)
1,261
 1,154
 1,102
1,456
 1,261
 1,154
Real Estate Banking416
 460
 461
438
 416
 460
Other428
 343
 227
403
 428
 343
Total Commercial Banking revenue$6,418
 $6,040
 $5,720
$6,825
 $6,418
 $6,040
Financial ratios          
Return on common equity30% 26% 16%28% 30% 26%
Overhead ratio35
 36
 38
35
 35
 36
(a)CB client revenue from investment banking products and commercial card transactions is included in all other income.
(b)
Total net revenue includedIncluded tax-equivalent adjustments, frompredominantly due to 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, 2011low-
income communities, as well as tax-exempt income from municipal bond activity, of $381 million, $345 million, and $238 million for the years ended December 31, 2012,2011 and 2010 and 2009, respectively.
(c)Effective July 1, 2012, certain Treasury Services product sales staff supporting CB were transferred from CIB to CB. As a result, compensation expense for these sales staff is now reflected in CB’s compensation expense rather than as an allocation from CIB in noncompensation expense. CB’s and CIB’s previously reported headcount, compensation expense and noncompensation expense have been revised to reflect this transfer.
(c)(d)
Effective January 1, 2011, product revenue from commercial card and standby letters of credit transactions was included in lending. For the yearyears ended December 31, 2012 and 2011,, the impact of the change was $434 million and $438 million. In prior-year periods,million, respectively. For the year ended December 31, 2010, it was reported in treasury services.
(d)CB revenue comprises the following:
Represents the
Lending includes a variety of financing alternatives, which are predominantly provided on a basis secured by receivables, inventory, equipment, real estate or other assets. Products include term loans, revolving lines of credit, bridge financing, asset-based structures, leases, commercial card products and standby letters of credit.
Treasury services includes revenue from a broad range of products and services that enable CB clients to manage payments and receipts, as well as invest and manage funds.
Investment banking includes revenue from a range of products providing CB clients with sophisticated capital-raising alternatives, as well as balance sheet and risk management tools through advisory, equity underwriting, and loan syndications. Revenue from Fixed income and Equity market products available to CB clients is also included. Investment banking revenue, gross, represents total revenue related to investment banking products sold to CB clients.
Other product revenue primarily includes tax-equivalent adjustments generated from Community Development Banking activity and certain income derived from principal transactions.
(e)Commercial Banking is divided into four primary client segments for management reporting purposes: Middle Market Banking, Commercial Term Lending, Corporate Client Banking, and Real Estate Banking.
Middle Market Banking covers corporate, municipal, financial institution and non-profit clients, with annual revenue generally ranging between $20 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 was known as Mid-Corporate 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 priorprovides full-service banking to investors and developers of institutional-grade real estate properties.
OtherJanuary 1, 2011. primarily includes lending and investment activity within the Community Development Banking and Chase Capital businesses.


9896 JPMorgan Chase & Co./20112012 Annual Report


2012 compared with 2011
Record net income was $2.6 billion, an increase of $279 million, or 12%, from the prior year. The improvement was driven by an increase in net revenue and a decrease in the provision for credit losses, partially offset by higher noninterest expense.
Net revenue was a record $6.8 billion, an increase of $407 million, or 6%, from the prior year. Net interest income was $4.5 billion, up by $319 million, or 8%, driven by growth in loans and client deposits, partially offset by spread compression. Loan growth was strong across all client segments and industries. Noninterest revenue was $2.3 billion, up by $88 million, or 4%, compared with the prior year, largely driven by increased investment banking revenue.
Revenue from Middle Market Banking was $3.3 billion, an increase of $189 million, or 6%, from the prior year driven by higher loans and client deposits, partially offset by lower spreads from lending and deposit products. Revenue from Commercial Term Lending was $1.2 billion, an increase of $26 million, or 2%. Revenue from Corporate Client Banking was $1.5 billion, an increase of $195 million, or 15%, driven by growth in loans and client deposits and higher revenue from investment banking products, partially offset by lower lending spreads. Revenue from Real Estate Banking was $438 million, an increase of $22 million, or 5%, partially driven by higher loan balances.
The provision for credit losses was $41 million, compared with $208 million in the prior year. Net charge-offs were $35 million (0.03% net charge-off rate) compared with net charge-offs of $187 million (0.18% net charge-off rate) in 2011. The decrease in the provision and net charge-offs was largely driven by improving trends in the credit quality of the portfolio. Nonaccrual loans were $673 million, down by $380 million or 36%, due to repayments and loan sales. The allowance for loan losses to period-end retained loans was 2.06%, down from 2.34%.
Noninterest expense was $2.4 billion, an increase of $111 million, or 5% from the prior year, reflecting higher compensation expense driven by expansion, portfolio growth and increased regulatory requirements.
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 liabilityclient deposits and loan balances partially offset by spread compression on liability products.client deposits. 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 liabilityclient deposits and loan balances, partially offset by spread compression on liability productsclient deposits 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 liabilityclient deposits and loan balances and higher lending- and deposit-related fees, partially offset by spread compression on liability products.client deposits. 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 lending-and 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.



JPMorgan Chase & Co./20112012 Annual Report 9997
Management'sManagement’s discussion and analysis

Selected metrics          
Year ended December 31,
(in millions, except headcount and ratios)
2011 2010 2009
As of or for the year ended December 31, (in millions, except headcount and ratios)2012 2011 2010
Selected balance sheet data (period-end)          
Total assets$158,040
 $142,646
 $130,280
$181,502
 $158,040
 $142,646
Loans:          
Loans retained111,162
 97,900
 97,108
126,996
 111,162
 97,900
Loans held-for-sale and loans at fair value840
 1,018
 324
1,212
 840
 1,018
Total loans$112,002
 $98,918
 $97,432
$128,208
 $112,002
 $98,918
Equity8,000
 8,000
 8,000
9,500
 8,000
 8,000
          
Period-end loans by client segment          
Middle Market Banking$44,437
 $37,942
 $34,170
$50,701
 $44,437
 $37,942
Commercial Term Lending38,583
 37,928
 36,201
43,512
 38,583
 37,928
Corporate Client Banking(a)
16,747
 11,678
 12,500
Corporate Client Banking21,558
 16,747
 11,678
Real Estate Banking8,211
 7,591
 10,619
8,552
 8,211
 7,591
Other4,024
 3,779
 3,942
3,885
 4,024
 3,779
Total Commercial Banking loans$112,002
 $98,918
 $97,432
$128,208
 $112,002
 $98,918
          
Selected balance sheet data (average)          
Total assets$146,230
 $133,654
 $135,408
$165,111
 $146,230
 $133,654
Loans:          
Loans retained103,462
 96,584
 106,421
119,218
 103,462
 96,584
Loans held-for-sale and loans at fair value745
 422
 317
882
 745
 422
Total loans$104,207
 $97,006
 $106,738
$120,100
 $104,207
 $97,006
Liability balances(b)
174,729
 138,862
 113,152
Client deposits and other third-party liabilities(a)
195,912
 174,729
 138,862
Equity8,000
 8,000
 8,000
9,500
 8,000
 8,000
Average loans by client segment          
Middle Market Banking$40,759
 $35,059
 $37,459
$47,198
 $40,759
 $35,059
Commercial Term Lending38,107
 36,978
 36,806
40,872
 38,107
 36,978
Corporate Client Banking(a)
13,993
 11,926
 15,951
Corporate Client Banking19,383
 13,993
 11,926
Real Estate Banking7,619
 9,344
 12,066
8,562
 7,619
 9,344
Other3,729
 3,699
 4,456
4,085
 3,729
 3,699
Total Commercial Banking loans$104,207
 $97,006
 $106,738
$120,100
 $104,207
 $97,006
          
Headcount(b)5,520
 4,881
 4,151
6,120
 5,787
 5,126








 
Year ended December 31,
(in millions, except headcount and ratios)
2011 2010 2009
As of or for the year ended December 31, (in millions, except headcount and ratios)2012 2011 2010
Credit data and quality statistics          
Net charge-offs$187
 $909
 $1,089
$35
 $187
 $909
Nonperforming assets          
Nonaccrual loans:          
Nonaccrual loans retained(c)
1,036
 1,964
 2,764
644
 1,036
 1,964
Nonaccrual loans held-for-sale and loans held at fair value17
 36
 37
29
 17
 36
Total nonaccrual loans1,053
 2,000
 2,801
673
 1,053
 2,000
Assets acquired in loan satisfactions85
 197
 188
14
 85
 197
Total nonperforming assets1,138
 2,197
 2,989
687
 1,138
 2,197
Allowance for credit losses:          
Allowance for loan losses2,603
 2,552
 3,025
2,610
 2,603
 2,552
Allowance for lending-related commitments189
 209
 349
183
 189
 209
Total allowance for credit losses2,792
 2,761
 3,374
2,793
 2,792
 2,761
Net charge-off rate(d)
0.18% 0.94% 1.02%0.03% 0.18% 0.94%
Allowance for loan losses to period-end loans retained
2.34
 2.61
 3.12
2.06
 2.34
 2.61
Allowance for loan losses to nonaccrual loans retained(c)
251
 130
 109
405
 251
 130
Nonaccrual loans to total period-end loans0.94
 2.02
 2.87
0.52
 0.94
 2.02
(a)
Corporate Client Banking was known as Mid-Corporate Banking prior to January 1, 2011.
(b)Liability balancesdeposits and other third-party liabilities 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 customerclient cash management programs.
(b)Effective July 1, 2012, certain Treasury Services product sales staff supporting CB were transferred from CIB to CB. For further discussion of this transfer, see footnote (c) on page 96 of this Annual Report.
(c)
Allowance for loan losses of $176$107 million $340, $176 million and $581$340 million was held against nonaccrual loans retained at December 31, 20112012, 20102011 and 2009,2010, respectively.
(d)Loans held-for-sale and loans at fair value were excluded when calculating the net charge-off rate.


100JPMorgan 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 world’s 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)		2011 2010 2009
Revenue     
Lending- and deposit-related fees$1,240
 $1,256
 $1,285
Asset management, administration and commissions2,748
 2,697
 2,631
All other income556
 804
 831
Noninterest revenue4,544
 4,757
 4,747
Net interest income3,158
 2,624
 2,597
Total net revenue7,702

7,381

7,344
Provision for credit losses1
 (47) 55
      
Credit allocation income/(expense)(a)
8
 (121) (121)
      
Noninterest expense     
Compensation expense2,824
 2,734
 2,544
Noncompensation expense2,971
 2,790
 2,658
Amortization of intangibles68
 80
 76
Total noninterest expense5,863
 5,604
 5,278
Income before income tax expense1,846
 1,703
 1,890
Income tax expense642
 624
 664
Net income$1,204

$1,079

$1,226
Financial ratios     
Return on common equity17%
17%
25%
Pretax margin ratio24

23

26
Overhead ratio76
 76
 72
Pre-provision profit ratio(b)
24
 24
 28
(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 Firm’s 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.
Year ended December 31,
(in millions)		2011 2010 2009
Revenue by business     
Worldwide Securities Services (“WSS”)     
Investor Services$3,019
 $2,869
 $2,836
Clearance, Collateral Management and Depositary Receipts842
 814
 806
Total WSS revenue$3,861
 $3,683
 $3,642
Treasury Services (“TS”)     
Transaction Services$3,240
 $3,233
 $3,312
Trade Finance601
 465
 390
Total TS revenue$3,841
 $3,698
 $3,702

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.


JPMorgan Chase & Co./2011 Annual Report101
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 performance-based compensation.
Selected metrics     
Year ended December 31,
(in millions, except headcount data)
2011 2010 2009
Selected balance sheet data (period-end)     
Total assets$68,665
 $45,481
 $38,054
Loans(a)
42,992
 27,168
 18,972
Equity7,000
 6,500
 5,000
Selected balance sheet data (average)     
Total assets$56,151
 $42,494
 $35,963
Loans(a)
34,268
 23,271
 18,397
Liability balances318,802
 248,451
 248,095
Equity7,000
 6,500
 5,000
      
Headcount27,825
 29,073
 26,609

Year ended December 31,
(in millions, except ratio data, and where otherwise noted)		2011 2010 2009
Credit data and quality statistics     
Net charge-offs$—
 $1
 $19
Nonaccrual loans4
 12
 14
Allowance for credit losses:     
Allowance for loan losses65
 65
 88
Allowance for lending-related commitments49
 51
 84
Total allowance for credit losses114
 116
 172
Net charge-off rate—% —% 0.10%
Allowance for loan losses to period-end loans0.15
 0.24
 0.46
Allowance for loan losses to nonaccrual loansNM
 NM
 NM
Nonaccrual loans to period-end loans0.01
 0.04
 0.07
WSS business metrics     
Assets under custody (“AUC”)
by assets class (period-end)(in billions)
     
Fixed income$10,926
 $10,364
 $10,073
Equity4,878
 4,850
 4,090
Other(b)
1,066
 906
 722
Total AUC$16,870
 $16,120
 $14,885
Liability balances (average)100,660
 79,457
 86,936
TS business metrics     
TS liability balances (average)218,142
 168,994
 161,159
Trade finance loans (period-end)36,696
 21,156
 10,227
(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.


102JPMorgan Chase & Co./2011 Annual Report


Selected metrics     
Year ended December 31,
(in millions, except where otherwise noted)		2011 2010 2009
International metrics     
Net revenue by geographic region(a)
     
Asia/Pacific$1,235
 $978
 $845
Latin America/Caribbean329
 257
 221
Europe/Middle East/Africa2,658
 2,389
 2,462
North America3,480
 3,757
 3,816
Total net revenue$7,702
 $7,381
 $7,344
Average liability balances(a)
     
Asia/Pacific$43,524
 $32,862
 $28,501
Latin America/Caribbean12,625
 11,558
 8,231
Europe/Middle East/Africa123,920
 102,014
 101,683
North America138,733
 102,017
 109,680
Total average liability balances$318,802
 $248,451
 $248,095
Trade finance loans 
  (period-end)(a)
     
Asia/Pacific$19,280
 $11,834
 $4,519
Latin America/Caribbean6,254
 3,628
 2,458
Europe/Middle East/Africa9,726
 4,874
 2,171
North America1,436
 820
 1,079
Total trade finance loans$36,696
 $21,156
 $10,227
AUC (period-end)(in billions)(a)
     
North America$9,735
 $9,836
 $9,391
All other regions7,135
 6,284
 5,494
Total AUC$16,870
 $16,120
 $14,885
TSS firmwide disclosures(b)
     
TS revenue – reported$3,841
 $3,698
 $3,702
TS revenue reported in CB(c)
2,270
 2,632
 2,642
TS revenue reported in other lines of business265
 247
 245
TS firmwide revenue(d)
6,376
 6,577
 6,589
WSS revenue3,861
 3,683
 3,642
TSS firmwide revenue(d)
$10,237
 $10,260
 $10,231
TSS total foreign exchange (“FX”) revenue(d)
658
 636
 661
TS firmwide liability balances (average)(e)
393,022
 308,028
 274,472
TSS firmwide liability balances (average)(e)
493,531
 387,313
 361,247
Number of:     
U.S.$ ACH transactions originated3,906
 3,892
 3,896
Total U.S.$ clearing volume
  (in thousands)
129,417
 122,123
 113,476
International electronic funds transfer volume (in thousands)(f)
250,537
 232,453
 193,348
Wholesale check volume2,333
 2,060
 2,184
Wholesale cards issued
  (in thousands)(g)
25,187
 29,785
 27,138
(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.
Firmwide metrics are necessary in order to understand the aggregate TSS business.
(c)
Effective January 1, 2011, certain CB revenues were excluded in the TS firmwide metrics; they are instead directly captured within CB’s 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 CB’s treasury services revenue by product.
(d)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.
(e)Firmwide liability balances include liability balances recorded in CB.
(f)International electronic funds transfer includes non-U.S. dollar Automated Clearing House (“ACH”) and clearing volume.
(g)
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 multi-currency 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.






98JPMorgan Chase & Co./20112012 Annual Report103
Management's discussion and analysis

ASSET MANAGEMENT
Asset Management, with client assets under supervision of $1.9$2.1 trillion,is a global leader in investment and wealth management. AM clients include institutions, high-net-worth individuals and retail investors and high-net-worth individuals in every major market throughout the world. AM offers global investment management inacross all major asset classes including equities, fixed income, real estate, hedge funds, private equityalternatives and liquidity products, including money market instruments and bank deposits.funds. AM also offers multi-asset investment management, providing solutions to a broad range of clients’ investment needs. For individual investors, AM also provides retirement products and services, brokerage and banking services including trust and estate, bankingloans, mortgages and brokerage services to high-net-worth clients, and retirement services for corporations and individuals.deposits. The majority of AM’s client assets are in actively managed portfolios.
Selected income statement dataSelected income statement data    Selected income statement data    
Year ended December 31,
(in millions, except ratios)
2011 2010 20092012 2011 2010
Revenue          
Asset management, administration and commissions$6,748
 $6,374
 $5,621
$7,041
 $6,748
 $6,374
All other income1,147
 1,111
 751
806
 1,147
 1,111
Noninterest revenue7,895
 7,485
 6,372
7,847
 7,895
 7,485
Net interest income1,648
 1,499
 1,593
2,099
 1,648
 1,499
Total net revenue9,543

8,984

7,965
9,946

9,543

8,984
          
Provision for credit losses67
 86
 188
86
 67
 86
          
Noninterest expense          
Compensation expense4,152
 3,763
 3,375
4,405
 4,152
 3,763
Noncompensation expense2,752
 2,277
 2,021
2,608
 2,752
 2,277
Amortization of intangibles98
 72
 77
91
 98
 72
Total noninterest expense7,002
 6,112
 5,473
7,104
 7,002
 6,112
Income before income tax expense2,474
 2,786
 2,304
2,756
 2,474
 2,786
Income tax expense882
 1,076
 874
1,053
 882
 1,076
Net income$1,592

$1,710

$1,430
$1,703
 $1,592
 $1,710
Revenue by client segment          
Private Banking$5,116
 $4,860
 $4,320
$5,426
 $5,116
 $4,860
Institutional2,273
 2,180
 2,065
2,386
 2,273
 2,180
Retail2,154
 1,944
 1,580
2,134
 2,154
 1,944
Total net revenue$9,543
 $8,984
 $7,965
$9,946
 $9,543
 $8,984
Financial ratios          
Return on common equity25%
26%
20%24% 25% 26%
Overhead ratio73
 68
 69
71
 73
 68
Pretax margin ratio26

31

29
28
 26
 31
2012 compared with 2011
Net income was $1.7 billion, an increase of $111 million, or 7%, from the prior year. These results reflected higher net revenue, partially offset by higher noninterest expense and a higher provision for credit losses.
Net revenue was $9.9 billion, an increase of $403 million, or 4%, from the prior year. Noninterest revenue was $7.8 billion, down $48 million, or 1%, due to lower loan-related revenue and the absence of a prior-year gain on the sale of
an investment. These decreases were predominantly offset by net client inflows, higher valuations of seed capital investments, the effect of higher market levels, higher brokerage revenue and higher performance fees. Net interest income was $2.1 billion, up $451 million, or 27%, due to higher loan and deposit balances.
Revenue from Private Banking was $5.4 billion, up 6% from the prior year due to higher net interest income from loan and deposit balances and higher brokerage revenue, partially offset by lower loan-related fee revenue. Revenue from Institutional was $2.4 billion, up 5% due to net client inflows and the effect of higher market levels. Revenue from Retail was $2.1 billion, down 1% due to the absence of a prior-year gain on the sale of an investment, predominantly offset by higher valuations of seed capital investments and higher performance fees.
The provision for credit losses was $86 million, compared with $67 million in the prior year.
Noninterest expense was $7.1 billion, an increase of $102 million, or 1%, from the prior year, due to higher performance-based compensation and higher headcount-related expense, partially offset by the absence of non-client-related litigation expense.
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
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.



104JPMorgan Chase & Co./20112012 Annual Report99

Management’s discussion and analysis

Selected metrics          
Business metrics  
As of or for the year ended December 31, (in millions, except headcount, ranking data and where otherwise noted)2011 2010 2009
As of or for the year ended December 31, (in millions, except headcount, ranking data, ratios and where otherwise noted)2012 2011 2010
Number of:          
Client advisors(a)
2,444
 2,281
 1,936
2,821
 2,883 2,696
Retirement planning services participants (in thousands)1,798
 1,580
 1,628
1,961
 1,798 1,580
JPMorgan Securities brokers439
 415
 376
% of customer assets in 4 & 5 Star Funds(b)
43% 49% 42%47% 43% 49%
% of AUM in 1st and 2nd quartiles:(c)
          
1 year48
 67
 57
67
 48
 67
3 years72
 72
 62
74
 72
 72
5 years78
 80
 74
76
 78
 80
Selected balance sheet data (period-end)          
Total assets$86,242
 $68,997
 $64,502
$108,999
 $86,242
 $68,997
Loans57,573
 44,084
 37,755
Loans(d)
80,216
 57,573
 44,084
Equity6,500
 6,500
 7,000
7,000
 6,500
 6,500
Selected balance sheet data (average)          
Total assets$76,141
 $65,056
 $60,249
$97,447
 $76,141
 $65,056
Loans50,315
 38,948
 34,963
68,719
 50,315
 38,948
Deposits106,421
 86,096
 77,005
129,208
 106,421 86,096
Equity6,500
 6,500
 7,000
7,000
 6,500
 6,500
          
Headcount18,036
 16,918
 15,136
18,480
 18,036
 16,918
          
Credit data and quality statistics          
Net charge-offs$92
 $76
 $117
$64
 $92
 $76
Nonaccrual loans317
 375
 580
250
 317
 375
Allowance for credit losses:          
Allowance for loan losses209
 267
 269
248
 209
 267
Allowance for lending-related commitments10
 4
 9
5
 10
 4
Total allowance for credit losses219
 271
 278
253
 219
 271
Net charge-off rate0.18% 0.20% 0.33%0.09% 0.18% 0.20%
Allowance for loan losses to period-end loans0.36
 0.61
 0.71
0.31
 0.36
 0.61
Allowance for loan losses to nonaccrual loans66
 71
 46
99
 66
 71
Nonaccrual loans to period-end loans0.55
 0.85
 1.54
0.31
 0.55
 0.85
(a)
Effective January 1, 2011,2012, the methodology used to determinepreviously disclosed separate metric for client advisors was revised. Prior periods have been revised.
and JPMorgan Securities brokers were combined into one metric that reflects the number of Private Banking client-facing representatives.
(b)Derived from Morningstar for the U.S., the U.K., Luxembourg, France, Hong Kong and Taiwan; and Nomura for Japan.
(c)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.
(d)
Included $10.9 billion of prime mortgage loans reported in the Consumer, excluding credit card, loan portfolio at December 31, 2012.

 
AM’s 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-profitnon-profit organizations and governments worldwide.
Retail provides worldwide investment management services and retirement planning and administration, through third-partyfinancial intermediaries and direct distribution of a full range of investment vehicles.products.
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 wideindustry-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).



100JPMorgan Chase & Co./2012 Annual Report


Assets under supervision
2012 compared with 2011
Assets under supervision were $2.1 trillion at December 31, 2012, an increase of $174 billion, or 9%, from the prior year. Assets under management were $1.4 trillion, an increase of $90 billion, or 7%, due to the effect of higher market levels and net inflows to long-term products, partially offset by net outflows from liquidity products. Custody, brokerage, administration and deposit balances were $669 billion, up $84 billion, or 14%, due to the effect of higher market levels and custody and brokerage inflows.
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.


Assets under supervision    
December 31,
(in billions)
2012
 2011
 2010
Assets by asset class     
Liquidity$475
 $515
 $497
Fixed income386
 336
 289
Equity and multi-asset447
 372
 404
Alternatives118
 113
 108
Total assets under management1,426
 1,336
 1,298
Custody/brokerage/administration/deposits669
 585
 542
Total assets under supervision$2,095
 $1,921
 $1,840
Assets by client segment     
Private Banking$318
 $291
 $284
Institutional741
 722
 703
Retail367
 323
 311
Total assets under management$1,426
 $1,336
 $1,298
Private Banking$877
 $781
 $731
Institutional741
 723
 703
Retail477
 417
 406
Total assets under supervision$2,095
 $1,921
 $1,840
Mutual fund assets by asset class     
Liquidity$410
 $458
 $446
Fixed income136
 107
 92
Equity and multi-asset180
 147
 169
Alternatives5
 8
 7
Total mutual fund assets$731
 $720
 $714
JPMorgan Chase & Co./2011 Annual Report105

Management's discussion and analysis

Assets under supervision(a) 
    
As of or the year ended
December 31,
(in billions)
2011
 2010
 2009
Assets by asset class     
Liquidity$515
 $497
 $591
Fixed income336
 289
 226
Equity and multi-asset372
 404
 339
Alternatives113
 108
 93
Total assets under management1,336
 1,298
 1,249
Custody/brokerage/administration/deposits585
 542
 452
Total assets under supervision$1,921
 $1,840
 $1,701
Assets by client segment     
Private Banking$291
 $284
 $270
Institutional(b)
722
 703
 731
Retail(b)
323
 311
 248
Total assets under management$1,336
 $1,298
 $1,249
Private Banking$781
 $731
 $636
Institutional(b)
723
 703
 731
Retail(b)
417
 406
 334
Total assets under supervision$1,921
 $1,840
 $1,701
Mutual fund assets by asset class     
Liquidity$458
 $446
 $539
Fixed income107
 92
 67
Equity and multi-asset147
 169
 143
Alternatives8
 7
 9
Total mutual fund assets$720
 $714
 $758
(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.
 
Year ended December 31,
(in billions)
 2011 2010 2009 2012 2011 2010
Assets under management rollforward            
Beginning balance $1,298
 $1,249
 $1,133
 $1,336
 $1,298
 $1,249
Net asset flows:            
Liquidity 18
 (89) (23) (43) 18
 (89)
Fixed income 40
 50
 34
 30
 40
 50
Equity, multi-asset and alternatives 13
 19
 17
 30
 13
 19
Market/performance/other impacts (33) 69
 88
 73
 (33) 69
Ending balance, December 31 $1,336
 $1,298
 $1,249
 $1,426
 $1,336
 $1,298
Assets under supervision rollforward            
Beginning balance $1,840
 $1,701
 $1,496
 $1,921
 $1,840
 $1,701
Net asset flows 123
 28
 50
 60
 123
 28
Market/performance/other impacts (42) 111
 155
 114
 (42) 111
Ending balance, December 31 $1,921
 $1,840
 $1,701
 $2,095
 $1,921
 $1,840
International metrics    
Year ended December 31,
(in billions, except where otherwise noted)
 2011 2010 2009 2012 2011 2010
Total net revenue (in millions)(a)
            
Europe/Middle East/Africa $1,704
 $1,642
 $1,380
 $1,641
 $1,704
 $1,642
Asia/Pacific 971
 925
 752
 967
 971
 925
Latin America/Caribbean 808
 541
 426
 772
 808
 541
North America 6,060
 5,876
 5,407
 6,566
 6,060
 5,876
Total net revenue $9,543
 $8,984
 $7,965
 $9,946
 $9,543
 $8,984
Assets under management            
Europe/Middle East/Africa $278
 $282
 $293
 $258
 $278
 $282
Asia/Pacific 105
 111
 99
 114
 105
 111
Latin America/Caribbean 34
 35
 19
 45
 34
 35
North America 919
 870
 838
 1,009
 919
 870
Total assets under management $1,336
 $1,298
 $1,249
 $1,426
 $1,336
 $1,298
Assets under supervision           
Europe/Middle East/Africa $329
 $331
 $338
 $317
 $329
 $331
Asia/Pacific 139
 147
 125
 160
 139
 147
Latin America/Caribbean 89
 84
 55
 110
 89
 84
North America 1,364
 1,278
 1,183
 1,508
 1,364
 1,278
Total assets under supervision $1,921
 $1,840
 $1,701
 $2,095
 $1,921
 $1,840
(a)Regional revenue is based on the domicile of the client.



106JPMorgan Chase & Co./20112012 Annual Report101

Management’s discussion and analysis

CORPORATE/PRIVATE EQUITY
The Corporate/Private Equity sectorsegment comprises Private Equity, Treasury, the Chief Investment Office (“CIO”), and Other Corporate, which includes corporate staff units and expense that is centrally managed. Treasury and CIO manageare predominantly responsible for measuring, monitoring, reporting and managing the Firm’s liquidity, funding, capital liquidity and structural risks of the Firm.interest rate and foreign exchange risks. The corporate staff units include Central Technology and Operations, Internal Audit, Executive, Office, Finance, Human Resources, Marketing & Communications, Legal & Compliance, CorporateGlobal Real Estate, and General Services, Operational Control, Risk Management, and Corporate Responsibility and Strategy & Development.Public Policy. Other centrally managed expense includes the Firm’s occupancy and pension-related expense net of allocationsthat are subject to allocation to the business.

businesses.
Selected income statement dataSelected income statement data    Selected income statement data    
Year ended December 31,
(in millions, except headcount)
2011
 2010
 2009
2012
 2011
 2010
Revenue          
Principal transactions$1,434
 $2,208
 $1,574
$(4,268) $1,434
 $2,208
Securities gains1,600
 2,898
 1,139
2,024
 1,600
 2,898
All other income604
 253
 58
2,452
 595
 245
Noninterest revenue3,638
 5,359
 2,771
208
 3,629
 5,351
Net interest income505
 2,063
 3,863
(1,360) 506
 2,063
Total net revenue(a)
4,143
 7,422
 6,634
(1,152) 4,135
 7,414
          
Provision for credit losses(36) 14
 80
(37) (36) 14
          
Noninterest expense          
Compensation expense2,425
 2,357
 2,811
2,622
 2,324
 2,276
Noncompensation expense(b)
6,884
 8,788
 3,597
7,353
 6,693
 8,641
Merger costs—
 —
 481
Subtotal9,309
 11,145
 6,889
9,975
 9,017
 10,917
Net expense allocated to other businesses(5,160) (4,790) (4,994)(5,379) (4,909) (4,607)
Total noninterest expense4,149
 6,355
 1,895
4,596
 4,108
 6,310
Income before income tax expense/(benefit) and extraordinary gain30
 1,053
 4,659
Income before income tax expense/(benefit)(5,711) 63
 1,090
Income tax expense/(benefit) (c)
(772) (205) 1,705
(3,629) (759) (190)
Income before extraordinary gain802
 1,258
 2,954
Extraordinary gain(d)
—
 —
 76
Net income$802
 $1,258
 $3,030
$(2,082) $822
 $1,280
Total net revenue          
Private equity$836
 $1,239
 $18
$601
 $836
 $1,239
Corporate3,307
 6,183
 6,616
Treasury and CIO(3,064) 3,196
 6,642
Other Corporate1,311
 103
 (467)
Total net revenue$4,143
 $7,422
 $6,634
$(1,152) $4,135
 $7,414
Net income          
Private equity$391
 $588
 $(78)$292
 $391
 $588
Corporate(e)
411
 670
 3,108
Treasury and CIO(2,093) 1,349
 3,576
Other Corporate(281) (918) (2,884)
Total net income$802
 $1,258
 $3,030
$(2,082) $822
 $1,280
Total assets (period-end)$693,153
 $526,588
 $595,877
$728,925
 $693,108
 $526,556
Headcount22,117
 20,030
 20,119
22,747
 21,334
 19,419
(a)
Total net revenue includedIncluded tax-equivalent adjustments, predominantly due to tax-exempt income from municipal bond investments of $298443 million, $226298 million and $151226 million for the years ended December 31, 20112012, 20102011 and 20092010, respectively.
 
(b)
Included litigation expense of $3.7 billion, $3.2 billion and $$5.7 billion for the years ended December 31, 2012, 2011 and 2010,, respectively, compared with net benefits of $0.3 billion for the year ended December 31, 2009. respectively.
(c)Includes tax benefits recognized upon the resolution of tax audits.
2012 compared with 2011
Net loss was $2.1 billion, compared with a net income of $822 million in the prior year.
Private Equity reported net income of $292 million, compared with net income of $391 million in the prior year. Net revenue was $601 million, compared with $836 million in the prior year, due to lower unrealized and realized gains on private investments, partially offset by higher unrealized gains on public securities. Noninterest expense was $145 million, down from $238 million in the prior year.
Treasury and CIO reported a net loss of $2.1 billion, compared with net income of $1.3 billion in the prior year. Net revenue was a loss of $3.1 billion, compared with net revenue of $3.2 billion in the prior year. The current year loss reflected $5.8 billion of losses incurred by CIO from the synthetic credit portfolio for the six months ended June 30, 2012, and $449 million of losses from the retained index credit derivative positions for the three months ended September 30, 2012. These losses were partially offset by securities gains of $2.0 billion. The current year revenue reflected $888 million of extinguishment gains related to the redemption of trust preferred securities, which are included in all other income in the above table. The extinguishment gains were related to adjustments applied to the cost basis of the trust preferred securities during the period they were in a qualified hedge accounting relationship. Net interest income was negative $683 million, compared with $1.4 billion in the prior year, primarily reflecting the impact of lower portfolio yields and higher deposit balances across the Firm.
Other Corporate reported a net loss of $281 million, compared with a net loss of $918 million in the prior year. Noninterest revenue of $1.8 billion was driven by a $1.1 billion benefit for the Washington Mutual bankruptcy settlement, which is included in all other income in the above table, and a $665 million gain from the recovery on a Bear Stearns-related subordinated loan. Noninterest expense of $3.9 billion was up $943 million compared with the prior year. The current year included expense of $3.7 billion for additional litigation reserves, largely for mortgage-related matters. The prior year included expense of $3.2 billion for additional litigation reserves.


(d)102
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.& Co./2012 Annual Report
(e)
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.


2011 compared with 2010
Net income was $802$822 million, compared with $1.3 billion in the prior year.
Private Equity reported net income wasof $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-heldprivate investments and the absence of prior-yearprior year gains fromon sales. Noninterest expense was $238 million, a decrease of $85 million from the prior year.
CorporateTreasury and CIO reported net income of $411 million,$1.3 billion, compared with net income of $670 million$3.6 billion in the prior year. Net revenue was $3.3$3.2 billion, including $1.6$1.4 billion of securitiessecurity 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.
Other Corporate reported a net loss of $918 million, compared with a net loss of $2.9 billion in the prior year. Net revenue was $103 million, compared with a net loss of $467 million in the prior year. Noninterest expense was $4.1$2.9 billion which included $3.2 billion of additional litigation expense,reserves, predominantly for mortgage-related matters. Noninterest expense in the prior year was $6.4$5.5 billion which included $5.7 billion of additional litigation expense.reserves.
2010 compared with 2009Treasury and CIO overview
NetTreasury and CIO are predominantly responsible for measuring, monitoring, reporting and managing the Firm’s liquidity, funding, capital and structural interest rate and foreign exchange risks. The risks managed by Treasury and CIO arise from the activities undertaken by the Firm’s four major reportable business segments to serve their respective client bases, which generate both on- and off-balance sheet assets and liabilities.
Treasury is responsible for, among other functions, funds transfer pricing. Funds transfer pricing is used to transfer structural interest rate risk and foreign exchange risk of the Firm to Treasury and CIO and allocate interest income was $1.3 billion compared with $3.0 billionand expense to each business based on market rates. CIO, through its management of the investment portfolio, generates net interest income to pay the lines of business market rates. Any variance (whether positive or negative) between amounts generated by CIO through its investment portfolio activities and amounts paid to or received by the lines of business are retained by CIO, and are not reflected in line of business segment results. Treasury and CIO activities operate in support of the overall Firm.
CIO achieves the Firm’s asset-liability management objectives generally by investing in high-quality securities that are managed for the longer-term as part of the Firm’s AFS investment portfolio. Unrealized gains and losses on securities held 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 millionAFS portfolio are recorded in other comprehensive income. For further information about securities in the prior year, reflectingAFS portfolio, see Note 3 and Note 12 on
pages 196–214 and 244–248, respectively, of this Annual Report. CIO also uses securities that are not classified within the impact of improved market conditionsAFS portfolio, as well as derivatives, to meet the Firm’s asset-liability management objectives. Securities not classified within the AFS portfolio are recorded in trading assets and liabilities; realized and unrealized gains and losses on certain investmentssuch securities are recorded in the portfolio. Netprincipal transactions revenue was $1.2 billion compared with $18 millionline in the prior year, reflecting private equityConsolidated Statements of Income. For further information about securities included in trading assets and liabilities, see Note 3 on pages 196–214 of this Annual Report. Derivatives used by CIO are also classified as trading assets and liabilities. For further information on derivatives, including the classification of realized and unrealized gains and losses, see Note 6 on pages 218–227of $1.3this Annual Report.
CIO’s AFS portfolio consists of U.S. and non-U.S. government securities, agency and non-agency mortgage-backed securities, other asset-backed securities and corporate and municipal debt securities. Treasury’s AFS portfolio consists of U.S. and non-U.S. government securities and corporate debt securities.At December 31, 2012, the total Treasury and CIO AFS portfolios were $344.1 billion compared with losses and $21.3 billion, respectively; the average credit rating of $54 million in 2009. Noninterest expensethe securities comprising the Treasury and CIO AFS portfolios was $323 million, an increaseAA+ (based upon external ratings where available and where not available, based primarily upon internal ratings that correspond to ratings as defined by S&P and Moody’s). See Note 12 on pages 244–248 of $182 million, driven by higher compensation expense.this Annual Report for further information on the details of the Firm’s AFS portfolio.
Net income for Corporate was $670 million, compared with $3.1 billion inFor further information on liquidity and funding risk, see Liquidity Risk Management on pages 127–133of this Annual Report. For information on interest rate, foreign exchange and other risks, and CIO VaR and the prior year. Results for 2010 reflect after-tax litigation expenseFirm’s nontrading interest rate-sensitive revenue at risk, see Market Risk Management on pages 163–169 of $3.5 billion, lower net interestthis Annual Report.
Selected income statement and balance sheet data
As of or for the year ended December 31, (in millions)2012
 2011
 2010
Securities gains(a)
$2,028
 $1,385
 $2,897
Investment securities portfolio (average)358,029
 330,885
 323,673
Investment securities portfolio (period–end)365,421
 355,605
 310,801
Mortgage loans (average)10,241
 13,006
 9,004
Mortgage loans (period-end)7,037
 13,375
 10,739
(a)Reflects repositioning of the investment securities portfolio.


JPMorgan Chase & Co./20112012 Annual Report 107103
Management'sManagement’s discussion and analysis

income and trading gains, partially offset by a higher level of securities gains, primarily driven by repositioning of the investment securitiesPrivate Equity 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.
Treasury and CIO
Selected income statement and balance sheet data
Year ended December 31,
(in millions)
2011
 2010
 2009
Securities gains(a)
$1,385
 $2,897
 $1,147
Investment securities portfolio (average)330,885
 323,673
 324,037
Investment securities portfolio (ending)355,605
 310,801
 340,163
Mortgage loans (average)13,006
 9,004
 7,427
Mortgage loans (ending)13,375
 10,739
 8,023
(a)Reflects repositioning of the Corporate investment securities portfolio.
For further information on the investment securities portfolio, see Note 3 and Note 12 on pages 184–198 and 225–230, respectively, of this Annual Report. For further information on CIO VaR and the Firm’s nontrading interest rate-sensitive revenue at risk, see the Market Risk Management section on pages 158–163 of this Annual Report.
Private Equity Portfolio
Selected income statement and balance sheet data
Year ended December 31,
(in millions)
2011
 2010
 2009
Private equity gains/(losses)     
Realized gains$1,842
 $1,409
 $109
Unrealized gains/(losses)(a)
(1,305) (302) (81)
Total direct investments537
 1,107
 28
Third-party fund investments417
 241
 (82)
Total private equity gains/(losses)(b)
$954
 $1,348
 $(54)
Private equity portfolio information(c)
  
Direct investments     
December 31, (in millions)2011
 2010
 2009
Publicly held securities     
Carrying value$805
 $875
 $762
Cost573
 732
 743
Quoted public value896
 935
 791
Privately held direct securities     
Carrying value4,597
 5,882
 5,104
Cost6,793
 6,887
 5,959
Third-party fund investments(d)
     
Carrying value2,283
 1,980
 1,459
Cost2,452
 2,404
 2,079
Total private equity portfolio     
Carrying value$7,685
 $8,737
 $7,325
Cost$9,818
 $10,023
 $8,781
Selected income statement and balance sheet data
Year ended December 31,
(in millions)
2012
 2011
 2010
Private equity gains/(losses)     
Realized gains$17
 $1,842
 $1,409
Unrealized gains/(losses)(a)
639
 (1,305) (302)
Total direct investments656
 537
 1,107
Third-party fund investments134
 417
 241
Total private equity gains/(losses)(b)
$790
 $954
 $1,348
(a)Unrealized gains/(losses) contain reversals of unrealized gains and losses that were recognized in prior periods and have now been realized.
(b)Included in principal transactions revenue in the Consolidated Statements of Income.
Private equity portfolio information(a)
  
Direct investments     
December 31, (in millions)2012
 2011
 2010
Publicly held securities     
Carrying value$578
 $805
 $875
Cost350
 573
 732
Quoted public value578
 896
 935
Privately held direct securities     
Carrying value5,379
 4,597
 5,882
Cost6,584
 6,793
 6,887
Third-party fund investments(b)
     
Carrying value2,117
 2,283
 1,980
Cost1,963
 2,452
 2,404
Total private equity portfolio     
Carrying value$8,074
 $7,685
 $8,737
Cost$8,897
 $9,818
 $10,023
(c)(a)
For more information on the Firm'sFirm’s policies regarding the valuation of the private equity portfolio, see Note 3 on pages 184–198196–214 of this Annual Report.
(d)(b)
Unfunded commitments to third-party private equity funds were $789370 million, $1.0 billion789 million and $1.51.0 billion at December 31, 20112012, 20102011 and 20092010, respectively.
2011
2012 compared with 20102011
The carrying value of the private equity portfolio at December 31, 2012, was $8.1 billion, up from $7.7 billion at December 31, 2011. The increase in the portfolio was predominantly driven by new investments and unrealized gains, partially offset by sales of investments. The portfolio represented 5.2% of the Firm’s stockholders’ equity less goodwill at December 31, 2012, down from 5.7% at December 31, 2011.
2011 compared with 2010
The carrying value of the private equity portfolio at December 31, 2011,, was $7.7$7.7 billion,, down from $8.7$8.7 billion at December 31, 2010.2010. The decrease in the portfolio iswas predominantly driven by sales of investments, partially offset by new investments. The portfolio represented 5.7% of the Firm’s 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 Firm’s stockholders’ equity less goodwill at December 31, 2010, up from 6.3% at December 31, 2009.2010.



108104 JPMorgan Chase & Co./20112012 Annual Report


INTERNATIONAL OPERATIONS
During the years ended December 31, 2012, 2011 and 2010, the Firm recorded approximately$18.5 billion, $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 57%, 66% and 64%, respectively, were derived from Europe/Middle East/Africa (“EMEA”); approximately 30%, 25% and 28%, respectively, from Asia/Pacific; and approximately13%, 9% and 8%, respectively, from Latin America/Caribbean. For additional information regarding international operations, see Note 32 on pages 299–300page 326 of this Annual Report.
International Wholesale Activitieswholesale activities
The Firm is committed to further expanding its wholesale business activities outside of the United States, and it
continues to add additional client-serving bankers, as well as product and sales support personnel, to address the needs of the Firm'sFirm’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 Firm’s 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.

As of or for the year ended December 31,EMEA Asia/Pacific Latin America/CaribbeanEMEA Asia/Pacific Latin America/Caribbean
(in millions, except headcount and where otherwise noted)20112010 20112010 20112010201220112010 201220112010 201220112010
Revenue(a)
$16,141
$14,149
 $5,971
$6,082
 $2,232
$1,697
$10,398
$16,141
$14,149
 $5,590
$5,971
$6,082
 $2,327
$2,232
$1,697
Countries of operation33
33
 16
16
 9
8
33
33
33
 17
16
16
 9
9
8
New offices3
6
 2
7
 4
2
—
1
6
 2
2
7
 —
4
2
Total headcount(b)
16,178
16,122
 20,172
19,153
 1,378
1,201
15,533
16,178
16,122
 20,548
20,172
19,153
 1,436
1,378
1,201
Front-office headcount5,993
5,872
 4,253
4,168
 569
486
5,917
5,993
5,872
 4,195
4,253
4,168
 644
569
486
Significant clients(c)
920
881
 480
448
 154
139
992
938
900
 492
479
451
 164
140
126
Deposits (average)(d)
$168,882
$142,859
 $57,684
$53,268
 $5,318
$6,263
$169,693
$168,882
$142,859
 $57,329
$57,684
$53,268
 $4,823
$5,318
$6,263
Loans (period-end)(e)
36,637
27,934
 31,119
20,552
 25,141
16,480
40,760
36,637
27,934
 30,287
31,119
20,552
 30,322
25,141
16,480
Assets under management (in billions)278
282
 105
111
 34
35
258
278
282
 114
105
111
 45
34
35
Assets under supervision (in billions)329
331
 139
147
 89
84
317
329
331
 160
139
147
 110
89
84
Assets under custody (in billions)5,430
4,810
 1,426
1,321
 279
153
6,502
5,430
4,810
 1,577
1,426
1,321
 252
279
153
Note: Wholesale internationalInternational wholesale operations is comprised of IB,CIB, AM, TSS, CB and CIO/Treasury and prior periodCIO, and prior-period amounts have been revised to conform with current allocation methodologies.
(a)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.
(b)Total headcount includes all employees, including those in service centers, located in the region.
(c)
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).
(d)Deposits are based on the location from which the client relationship is managed.
(e)Loans outstanding are based predominantly on the domicile of the borrower and exclude loans held-for-sale and loans carried at fair value.


JPMorgan Chase & Co./20112012 Annual Report 109105
Management'sManagement’s discussion and analysis

BALANCE SHEET ANALYSIS
Selected Consolidated Balance Sheets dataSelected Consolidated Balance Sheets data  Selected Consolidated Balance Sheets data  
December 31, (in millions)2011 20102012 2011
Assets      
Cash and due from banks$59,602
 $27,567
$53,723
 $59,602
Deposits with banks85,279
 21,673
121,814
 85,279
Federal funds sold and securities purchased under resale agreements235,314
 222,554
296,296
 235,314
Securities borrowed142,462
 123,587
119,017
 142,462
Trading assets:      
Debt and equity instruments351,486
 409,411
375,045
 351,486
Derivative receivables92,477
 80,481
74,983
 92,477
Securities364,793
 316,336
371,152
 364,793
Loans723,720
 692,927
733,796
 723,720
Allowance for loan losses(27,609) (32,266)(21,936) (27,609)
Loans, net of allowance for loan losses696,111
 660,661
711,860
 696,111
Accrued interest and accounts receivable61,478
 70,147
60,933
 61,478
Premises and equipment14,041
 13,355
14,519
 14,041
Goodwill48,188
 48,854
48,175
 48,188
Mortgage servicing rights7,223
 13,649
7,614
 7,223
Other intangible assets3,207
 4,039
2,235
 3,207
Other assets104,131
 105,291
101,775
 104,131
Total assets$2,265,792
 $2,117,605
$2,359,141
 $2,265,792
Liabilities      
Deposits$1,127,806
 $930,369
$1,193,593
 $1,127,806
Federal funds purchased and securities loaned or sold under repurchase agreements213,532
 276,644
240,103
 213,532
Commercial paper51,631
 35,363
55,367
 51,631
Other borrowed funds(a)
21,908
 34,325
26,636
 21,908
Trading liabilities:      
Debt and equity instruments66,718
 76,947
61,262
 66,718
Derivative payables74,977
 69,219
70,656
 74,977
Accounts payable and other liabilities202,895
 170,330
195,240
 202,895
Beneficial interests issued by consolidated VIEs65,977
 77,649
63,191
 65,977
Long-term debt(a)
256,775
 270,653
Long-term debt249,024
 256,775
Total liabilities2,082,219
 1,941,499
2,155,072
 2,082,219
Stockholders’ equity183,573
 176,106
204,069
 183,573
Total liabilities and stockholders’ equity$2,265,792
 $2,117,605
$2,359,141
 $2,265,792
(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 184–198 and 273–275, respectively, of this Annual Report.

Consolidated Balance Sheets overview
JPMorgan Chase’s total assets increased 4% and total liabilities increased 3% from December 31, 2010, largely due to a significant level of deposit inflows from wholesale clients and, to a lesser extent, consumer clients.2011. 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 apredominantly due to higher levelsecurities purchased under resale agreements and deposits with banks, reflecting the deployment of securities and loans. These increases were offset partially by lower trading assets, specifically debt and equity instruments.the Firm’s excess cash. The increase in total liabilities was driven by the significant increase inpredominantly due to higher deposits, and, toreflecting a lesser extent, higher accounts payable, partially offset by a lower level of consumer and wholesale balances; and higher securities sold under repurchase agreements.agreements associated with financing the Firm’s assets. The increase in stockholders'stockholders’ equity primarily reflected 2011was predominantly due to net income, net of repurchases of common equity.income.
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, 20102011, 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 cash and liquidity management activities. Cash and due from banks and deposits with banks increased significantly, reflectingThe net increase reflected the placement of the Firm’s excess funds with various central banks, includingprimarily Federal Reserve Banks; the increase in these funds predominantly resulted from the overall growth in wholesale client deposits.Banks. For additional information, seerefer to the depositsLiquidity Risk Management discussion below.on pages 127–133 of this Annual Report.
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. SecuritiesThe increase in securities purchased under resale agreements andwas due primarily to deployment of the Firm’s excess cash by Treasury; the decrease in securities borrowed increased, predominantlyreflects a shift in Corporate due to higherdeployment of excess cash positions at year end.to resale agreements as well as lower client activity in CIB.
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-incomefixed income securities, including government and corporate debt; equity securities, including convertible securities; loans, including prime mortgages and other loans warehoused by RFSCCB and IBCIB for sale or securitization purposes and accounted for at fair value; and


110JPMorgan Chase & Co./2011 Annual Report


physical commodities inventories generally carried at the lower of cost or market (market approximates fair value. Tradingvalue). The increase in trading assets – debt and equity instruments decreased,in 2012 was driven by clientclient-driven market-making activity in IB; thisCIB, which resulted in lowerhigher levels of equity securities, U.S. government and agency mortgage-backed securities, and non-U.S. government securities.debt securities, partially offset by a decrease in physical commodities inventories. For additional information, refer to Note 3 on pages 184–198196–214 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 marketcredit exposure.
Derivative receivables decreased primarily related to the decline in the U.S. dollar, and tightening of credit spreads;


106JPMorgan Chase & Co./2012 Annual Report


these changes resulted in reductions to interest rate, credit derivative, and foreign exchange balances.
Derivative payables decreased primarily related to the decline in the U.S. dollar, and tightening of credit spreads; these changes resulted in reductions to interest rate, 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.balances. For additional information, refer to Derivative contracts on pages 141–144,156–159, and Note 3 and Note 6 on pages 184–198196–214 and 202–210,218–227, respectively, of this Annual Report.
Securities
Substantially all of the securities portfolio is classified as available-for-sale (“AFS”)AFS and used primarily to manage the Firm’s exposure to interest rate movements and to invest cash resulting from excess liquidity. Securities increased largely due to reinvestment and repositioning of the CIO AFS portfolio, in Corporate in response to changes in the market environment. This repositioningwhich increased the levels of non-U.S. government debt and residential mortgage-backed securities (“MBS”) as well as collateralized loan obligations of U.S. states and commercial mortgage-backedmunicipalities; the increase was mainly offset by decreases in corporate debt securities and reduced the levels of U.S. government agency securities.agency-issued MBS. For additional information related to securities, refer to the discussion in the Corporate/Private Equity segment on pages 107–108,102–104, and Note 3 and Note 12 on pages 184–198196–214 and 225–230,244–248, respectively, of this Annual Report.
Loans and allowance for loan losses
The Firm provides loans to a variety of customers, ranging from large corporate and institutional clients, to individual consumerscustomers and small businesses. LoansLoan balances increased reflecting continued growththroughout 2012 due to higher levels of wholesale loans, primarily in clientCB and AM, partially offset by lower balances of consumer loans. The increase in wholesale loans was driven by higher wholesale activity across allmost of the Firm’s wholesale businessesregions and regions. This increase was offset by abusinesses. The decline in consumer, excluding credit card, loan balances,loans was predominantly due to mortgage-related paydowns, portfolio run-off, and charge-offs, andnet charge-offs. The decline in credit card loans was due to higher repayment rates, run-off of the Washington Mutual portfolio and the Firm's sale of the Kohl's portfolio.rates.
The allowance for loan losses decreased predominantly due to lower estimated lossesacross all portfolio segments, but the most significant portion of the reduction occurred in the consumer allowances, predominantly related to the continuing trend of improved delinquencies across most portfolios, notably non-PCI residential real estate and credit card loan portfolio, reflecting improved delinquencycard. The wholesale allowance also decreased,driven by recoveries, the restructuring of certain nonperforming loans, current credit trends and lower levels of credit card outstandings, and the impact of loan sales in the wholesale portfolio. other portfolio activity.
For a more detailed discussion of the loan portfolio and the allowance for loan losses, refer to
Credit Risk Management on pages 132–157,134–162, and Notes 3, 4, 14 and 15 on pages 184–198, 198–200, 231–252196–214, 214–216, 250–275 and 252–255,276–279, 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'sFirm’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 predominantlylargely 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 other 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 AM’s sale of its investment in an asset manager. For additional information on goodwill, see Note 17 on pages 267–271 of this Annual Report.facilities globally.
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,third parties. The increase in the MSR asset was predominantly as a result of a decline indue to originations and purchases, partially offset by dispositions and amortization. These net additions were partially offset by changes due to market interest rates amortization and, to a lesser extent, other changes in valuation due to inputs and assumptions, including increased cost to service assumptions, partially offset by new MSR originations.assumptions. For additional information on MSRs, see Note 17 on pages 267–271291–295 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 267–271 of this Annual Report.
Other assets
Other assets consist of private equity and other
instruments, cash collateral pledged, corporate- and bank-owned life insurance policies, assets acquired in loan
satisfactions (including real estate owned), and all other
assets. Other assets remained relatively flat in 2011.compared to the prior year.


JPMorgan Chase & Co./2011 Annual Report111
Management's discussion and analysis

Deposits
Deposits represent a liability to customers, both retail and wholesale customers related to non-brokerage fundsaccounts held on their behalf. Deposits provide a stable and consistent source of funding for the Firm. Deposits increased significantly, predominantlyThe increase in deposits was due to an overall growth in both consumer and wholesale clientdeposits. Consumer deposit balances increased throughout the year, largely driven by a focus on sales activity, lower attrition due to initiatives to improve customer experience and to a lesser extent, growth in consumer deposit balances.the impact of network expansion. The increase in wholesale client balances particularlywas due to higher client operating balances in TSSCIB; a higher level of seasonal inflows at year-end in both CIB and CB, was primarily driven by lower returns on other available alternative investments and low interest rates during 2011,AM; and in AM, drivenclients realizing capital gains in anticipation of changes in U.S. tax rates; these increases were partially offset by growthlower balances related to changes in the number of clients and level of deposits.FDIC insurance coverage. For more information on deposits, refer to the RFSCCB and AM segment discussions on pages 85–9380–91 and 104–106,99–101, respectively; the Liquidity Risk Management discussion on pages 127–132;133; and Notes 3 and 19 on pages 184–198196–214 and 272,296, respectively, of this Annual Report. For more information on wholesale liability balances, which includesclient deposits, refer to the CB and TSSCIB segment discussions on pages 98–10096–98 and 101–103,92–95, 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 short-term liquidity purposes. Securities sold under repurchase agreements decreased, predominantly in IB, reflecting the lower funding requirementsThe increase was due to higher secured financing of the Firm based on lower trading inventory levels,Firm’s assets. For additional


JPMorgan Chase & Co./2012 Annual Report107
Management’s discussion and change in the mix of funding sources. For additional analysis

information on the Firm’s Liquidity Risk Management, see pages 127–132133 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 TSSCIB liquidity management product, whereby excess client funds are transferredclients choose to sweep their deposits into commercial paper overnight sweep accounts.paper. Commercial paper increased due to growthhigher commercial paper issuance from wholesale funding markets to meet short-term funding needs, partially offset by a decline in the volume of liability balances in sweep accounts related to TSS’s cashCIB’s liquidity management product. Other borrowed funds which includesincreased due to higher secured short-term advances from FHLBs decreased, predominantly driven by maturities ofborrowings and unsecured short-term secured borrowings unsecured bank notes andto meet short-term FHLB advances.funding needs. For additional information on the Firm’s Liquidity Risk Management and other borrowed funds, see pages 127–132133 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; income taxes payable; 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 increaseddecreased predominantly due to higher IB customer balances.lower CIB client balances, partially offset by increases in income taxes payables and litigation reserves related to mortgage foreclosure-related matters. For additional information on the Firm’s accounts payable and other liabilities, see Note 20 on page 272296 of this Annual Report.
Beneficial interests issued by consolidated VIEs
Beneficial interests issued by consolidated VIEs represent interest-bearing beneficial-interest liabilities, which decreased predominantlyprimarily due to maturities of Firm-sponsored credit card securitization transactions.maturities and a reduction in outstanding conduit commercial paper held by third parties, partially offset by new credit card issuances and new consolidated municipal bond vehicles. For additional information on Firm-sponsored VIEs and loan securitization trusts, see Off–Balance Sheet Arrangements, and Note 16 on pages 256���267280–291 of this Annual Report.
Long-term debt
The Firm uses long-term debt (including trust-preferred capital debt securitiesTruPS and long-term FHLB advances) to provide cost-effective and diversified sources of funds and as critical components of the Firm'sFirm’s liquidity and capital management activities. Long-term debt decreased, predominantlyprimarily due to net redemptions and maturitiesthe redemption of long-term borrowings.TruPS. For additional information on the Firm’s long-term debt activities, see the Liquidity Risk Management discussion on pages 127–132133 of this Annual Report.
Stockholders’ equity
Total stockholders’ equity increased, predominantly due to net income, as well asincome; a net increase in AOCI driven by net unrealized market value increases on AFS securities, predominantly non-U.S. residential MBS and corporate debt securities, and obligations of U.S. states and municipalities, partially offset by realized gains; issuances and commitments to issue under the Firm’s employee stock-based compensation plans.plans; and the issuance of preferred stock. The increase was partially offset by the repurchases of common equity;equity, and the declaration of cash dividends on common and preferred stock.



112108 JPMorgan Chase & Co./20112012 Annual Report


OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS

JPMorgan Chase is involved with several types of off–balance sheet arrangements, including through unconsolidatednonconsolidated special-purpose entities (“SPEs”), which are a type of VIE, and through lending-related financial instruments (e.g., commitments and guarantees).
Special-purpose entities
The most common type of VIE is a special purpose entity (“SPE”).an SPE. SPEs are commonly used in securitization transactions in order to isolate certain assets and distribute the cash flows from those assets to investors. SPEs are an important part of the financial markets, including the mortgage- and asset-backed securities and commercial paper markets, as they provide market liquidity by facilitating investors’ access to specific portfolios of assets and risks. 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 Firm’s 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, seeSee Note 16 on pages 256–267280–291 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 arm’s length and reflect market pricing. Consistent with this policy, no JPMorgan Chase employee is permitted to invest in SPEs with which the Firm is involved where such investment would violate the Firm’s Code of Conduct. 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 short-term credit rating were downgraded below specific levels, primarily “P-1,”“P-1”, “A-1” and “F1” for Moody’s, Standard & Poor’s and Fitch, respectively. These liquidity commitments support the issuance of asset-backed commercial paper by
both Firm-administered consolidated and third partythird-party sponsored nonconsolidated SPEs. In the event of such a short-term credit rating downgrade, JPMorgan Chase Bank, N.A., absent other solutions, would be required to provide funding to the SPE, if the commercial paper could not be
reissued as it matured. The aggregate amounts of commercial paper outstanding, issued by both Firm-administered and third-party-sponsoredthird-party sponsored SPEs, that are held by third parties as of December 31, 20112012 and 2010,2011, was $19.718.1 billion and $23.119.7 billion, respectively. In addition, theThe aggregate amounts of commercial paper outstanding could increase in future periods should clients of the Firm-administered consolidated or third partythird-party sponsored nonconsolidated SPEs draw down on certain unfunded lending-related commitments. JPMorgan Chase Bank, N.A. hadThese unfunded lending-related commitments to clients to fund an incrementalwere $10.9 billion and $11.0 billion and $10.5 billionat December 31, 20112012 and 2010,2011, respectively. The Firm could facilitate the refinancing of some of the clients'clients’ assets in order to reduce the funding obligation. For further information, see the discussion of Firm-administered multi-seller conduits in Note 16 on page 260pages 284–285 of this Annual Report.
The Firm also acts as liquidity provider for certain municipal bond vehicles. The liquidity provider'sFirm’s obligation to perform as liquidity provider 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 260–261280–291 of this Annual Report for additional information.
Off–balance sheet lending-related financial
instruments, guarantees, and other commitments
JPMorgan Chase provides lending-related financial instruments (e.g., commitments and guarantees) to meet the financing needs of its customers. The contractual amount of these financial instruments represents the maximum possible credit risk to the Firm should the counterparty draw upon the commitment or the Firm be required to fulfill its obligation under the guarantee, and should the counterparty subsequently fail to perform according to the terms of the contract. Most of these commitments and guarantees expire without being drawn or a default occurring. As a result, the total contractual amount of these instruments is not, in the Firm’s view, representative of its actual future credit exposure or funding requirements. For further discussion of lending-related commitments and guarantees and the Firm’s accounting for them, see Lending-related commitments on page 144,156, and Note 29 (including a table that presents, as of December 31, 20112012, the amounts, by contractual maturity, of off–balance sheet lending-related financial instruments, guarantees and other commitments) on pages 283–289,308–315, of this Annual Report.Report. For a discussion of loan repurchase liabilities, see Mortgage repurchase liability on pages 115–118111–115 and Note 29 on pages 283–289,308–315, respectively, of this Annual Report.Report




.


JPMorgan Chase & Co./20112012 Annual Report 113109
Management'sManagement’s discussion and analysis

Contractual cash obligations
In the normal course of business, the Firm enters into various contractual obligations that may require future cash payments. Certain obligations are recognized on-balance sheet, while others are off-balance sheet under U.S. GAAP. The accompanying table summarizes, by remaining maturity, JPMorgan Chase’sChase’s significant contractual cash obligations at December 31, 20112012. The contractual cash obligations included in the table below reflect the minimum contractual obligation under legally enforceable contracts
 
with terms that are both fixed and determinable. 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 115–118111–115 of this Annual Report.Report. For further discussion of other obligations, see the Notes to Consolidated Financial Statements in this Annual Report.

Report.

Contractual cash obligationsContractual cash obligations          Contractual cash obligations 
2011 2010
By remaining maturity at December 31,
(in millions)
20122011
2012 2013-2014 2015-2016 After 2016 Total Total20132014-20152016-2017After 2017TotalTotal
On-balance sheet obligations            
Deposits(a)
$1,108,154
 $9,681
 $5,570
 $2,065
 $1,125,470
 $927,682
$1,175,886
$7,440
$5,434
$3,016
$1,191,776
$1,125,470
Federal funds purchased and securities loaned or sold under repurchase agreements200,049
 11,271
 875
 1,337
 213,532
 276,644
236,875
1,464
500
1,264
240,103
213,532
Commercial paper51,631
 —
 —
 —
 51,631
 35,363
55,367
—
—
—
55,367
51,631
Other borrowed funds(a)
12,450
 —
 —
 —
 12,450
 24,611
15,357


—
—
15,357
12,450
Beneficial interests issued by consolidated VIEs(a)39,729
 14,317
 3,464
 8,467
 65,977
 77,649
40,071
11,310
4,710
5,930
62,021
65,977
Long-term debt(a)
50,077
 59,749
 43,464
 83,615
 236,905
 249,434
26,256
63,515
57,998
83,454
231,223
236,905
Other(b)
1,355
 1,136
 924
 2,617
 6,032
 7,329
1,120
1,025
915
2,647
5,707
6,032
Total on-balance sheet obligations1,463,445
 96,154
 54,297
 98,101
 1,711,997
 1,598,712
1,550,932
84,754
69,557
96,311
1,801,554
1,711,997
Off-balance sheet obligations            
Unsettled reverse repurchase and securities borrowing agreements(c)
39,939
 —
 —
 —
 39,939
 39,927
34,871
—
—
—
34,871
39,939
Contractual interest payments(d)
9,551
 13,006
 9,669
 44,192
 76,418
 78,454
7,703
11,137
8,195
29,245
56,280
76,418
Operating leases(e)
1,753
 3,335
 2,738
 7,188
 15,014
 16,000
1,788
3,282
2,749
6,536
14,355
15,014
Equity investment commitments(f)
933
 4
 7
 1,346
 2,290
 2,468
449
6
2
1,452
1,909
2,290
Contractual purchases and capital expenditures1,244
 713
 288
 415
 2,660
 2,822
1,232
634
382
497
2,745
2,660
Obligations under affinity and co-brand programs1,197
 1,996
 1,875
 325
 5,393
 5,801
980
1,924
1,336
66
4,306
5,393
Other115
 108
 48
 13
 284
 567
32
2
—
—
34
284
Total off-balance sheet obligations54,732
 19,162
 14,625
 53,479
 141,998
 146,039
47,055
16,985
12,664
37,796
114,500
141,998
Total contractual cash obligations$1,518,177
 $115,316
 $68,922
 $151,580
 $1,853,995
 $1,744,751
$1,597,987
$101,739
$82,221
$134,107
$1,916,054
$1,853,995
(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 286312 of this Annual Report.Report.
(d)Includes accrued interest and future contractual interest obligations. Excludes interest related to structured notes where the Firm’s payment obligation is based on the performance of certain benchmarks.
(e)
Includes noncancelable operating leases for premises and equipment used primarily for banking purposes and for energy-related tolling service agreements. Excludes the benefit of noncancelable sublease rentals of $1.51.7 billion and $1.81.5 billion at December 31, 20112012 and 20102011, respectively.
(f)
At December 31, 20112012 and 20102011, included unfunded commitments of $789370 million and $1.0 billion789 million, respectively, to third-party private equity funds that are generally valued as discussed in Note 3 on pages 184–198196–214 of this Annual Report;Report; and $1.5 billion and $1.41.5 billion of unfunded commitments, respectively, to other equity investments.

114110 JPMorgan Chase & Co./20112012 Annual Report


Mortgage repurchase liability
In connection with the Firm’s 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 loan-to-value (“LTV”) ratio greater than 80% at the loan'sloan’s origination date, and the use of the GSEs'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. DemandsRepurchases resulting from 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 (this amount has not been adjusted for subsequent activity, such as borrower repayments of principal or repurchases completed to date.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 Firm’s 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 Firm’s 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 Firm’s 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 byAs of December 31, 2012, 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 theit has no remaining GSE repurchase exposure related to loans sold by Washington Mutual presents minimal future risk to the Firm’s financial results.GSEs.

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 typically not required, to repurchase delinquent loans securitized by Ginnie Mae, including those that have been sold back to Ginnie Mae
subsequent to modification. PrincipalBecause principal amounts due under the terms of these repurchased loans continue to be insured and the reimbursement of insured amounts is proceeding normally. Accordingly,continues to proceed normally, the Firm has not recorded any mortgage repurchase liability related to these loans. However, the Civil Division of the United States Attorney’s Office for the Southern District of New York is conducting an investigation concerning the Firm’s compliance with the requirements of the Federal Housing Administration’s Direct Endorsement Program. The Firm is cooperating in that investigation.
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 private-label 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 $191197 billion of principal has been repaid (including $7172 billion related to Washington Mutual). In addition, approximately $97118 billion of the principal amount of such loans has been liquidated (including $3543 billion related to Washington Mutual), with an average loss severity of 58%60%. Accordingly, the remaining outstanding principal balance of these loans (including Washington Mutual) was, as of December 31, 20112012, approximately $162135 billion, of which $5539 billion was 60 days or more past due. The remaining outstanding principal balance of loans related to Washington Mutual was approximately $5950 billion, of which $2014 billion were 60 days or more past due.
Although thereThere 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). Although the Firm encourages parties to use the contractual repurchase process established in the governing agreements, these private-label repurchase claims have thus far, generally manifested themselves through threatened or pending litigation. Accordingly, the Firm does not consider these claims in estimating its mortgageliability related to repurchase liability; rather,demands associated with all of the Firmprivate-label securitizations described above is separately evaluates such exposuresevaluated by the Firm in establishing its litigation reserves. For additional information regarding litigation, see Note 31 on pages 290–299316–325 of this Annual Report.Report.


JPMorgan Chase & Co./20112012 Annual Report 115111
Management'sManagement’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 Firm’s mortgage repurchase liability primarily relates to loan sales to the GSEs and is calculated predominantly based on the Firm’s repurchase activity experience with the GSEs.
Repurchase demand process - GSEs
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, mostthe majority of repurchase demands from the GSEs have historically have related to loans that became delinquent in the first 24 months following origination. More recently, the Firm has observed an increase in repurchase demands from the GSEs with respect to loans to borrowers who have made more than 24 months of payments before defaulting.
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 Firm’s mortgage repurchase liability arising from breaches of representations and warranties, the Firm considers the following factors, which are predominantly based on the Firm'sFirm’s historical repurchase activityexperience 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 Firm’s 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 Firm’s 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 $3.62.8 billion and $3.33.6 billion as of December 31, 20112012 and 20102011, respectively. The Firm’s mortgage repurchase liability is intended to cover repurchase losses associated with all loans previously sold in connection with loan sale and securitization transactions with the GSEs, regardless of when those losses occur or how they are ultimately resolved (e.g., repurchase, make-whole payment). While uncertainties continue to exist with respect to both GSE behavior and the economic environment, the Firm believes that the model inputs and assumptions that it uses to estimate its mortgage repurchase liability are becoming increasingly seasoned and stable. Based on these model inputs, which take into account all available information, and also considering projections regarding future uncertainty, including the GSEs’ current behavior, the Firm has become increasingly confident in its ability to estimate reliably its mortgage repurchase liability. For these reasons, the Firm believes that its mortgage repurchase liability at December 31, 2012, is sufficient to cover probable future repurchase losses arising from loan sale and securitization transactions with the GSEs.


112JPMorgan Chase & Co./2012 Annual Report


The following table provides information about outstanding repurchase demands and unresolved mortgage insurance rescission notices, excluding those related to Washington Mutual, by counterparty type, at each of the past five quarter-end dates.
The table includes repurchase demands received from the GSEs as well as repurchase demands that have been presented to the Firm by trustees who assert authority to present such claims under the terms of the underlying sale or securitization agreement (but excludes repurchase demands asserted in or in connection with pending repurchase litigation). However, all mortgage repurchase demands associated with private-label securitizations (however asserted) are evaluated by the Firm in establishing its litigation reserves and are not considered in the Firm’s mortgage repurchase liability.
Outstanding repurchase demands and unresolved mortgage insurance rescission notices by counterparty type(a)
(in millions)December 31, 2011 September 30, 2011 June 30, 2011 March 31, 2011 December 31, 2010Dec 31,
2012		Sep 30,
2012		Jun 30,
2012		Mar 31,
2012		Dec 31,
2011
GSEs and other(b)
$2,345
 $2,133
 $1,826
 $1,321
 $1,251
GSEs$1,166
$1,533
$1,646
$1,868
$1,682
Mortgage insurers1,034
 1,112
 1,093
 1,240
 1,121
1,014
1,036
1,004
1,000
1,034
Overlapping population(c)
(113) (155) (145) (127) (104)
Other(a)
887
1,697
981
756
663
Overlapping population(b)
(86)(150)(125)(116)(113)
Total$3,266
 $3,090
 $2,774
 $2,434
 $2,268
$2,981
$4,116
$3,506
$3,508
$3,266
(a)MortgageThe decrease from September 30, 2012 predominantly relates to repurchase demands associated with pending or threatened litigation are not reportedfrom private-label securitizations that had been presented in this table becauseas of September 30, 2012 but that subsequently became subject to repurchase litigation in the Firm separately evaluates its exposure tofourth quarter of 2012; such repurchase demands in establishing its litigation reserves.are excluded from this table.
(b)The Firm’s outstanding repurchase demands are predominantly from the GSEs. Other represents repurchase demands received from parties other thanBecause the GSEs that have been presented in accordance with the terms of the underlying sale or securitization agreement.
(c)Because the GSEsand others 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.

116JPMorgan Chase & Co./2011 Annual Report


The following tables show the trend inprovide information about 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 labelprivate-label repurchase demands outside of pending repurchase litigation. Additionally, repurchase demands from the GSEs may continue to fluctuate from period to period. The Firm considers future repurchase demands, including this potential volatility, in estimating its mortgage repurchase liability.
Quarterly mortgage repurchase demands received by loan origination vintage(a) 
(in millions)December 31,
2011		 September 30,
2011		 June 30,
2011		 March 31,
2011		 December 31,
2010		Dec 31,
2012		Sep 30,
2012		Jun 30,
2012		Mar 31,
2012		Dec 31,
2011
Pre-2005$39
 $34
 $32
 $15
 $39
$42
$33
$28
$41
$39
200555
 200
 57
 45
 73
42
103
65
95
55
2006315
 232
 363
 158
 198
292
963
506
375
315
2007804
 602
 510
 381
 539
241
371
420
645
804
2008291
 323
 301
 249
 254
114
196
311
361
291
Post-200881
 153
 89
 94
 65
87
124
191
124
81
Total repurchase demands received$1,585
 $1,544
 $1,352
 $942
 $1,168
$818
$1,790
$1,521
$1,641
$1,585
(a) MortgageAll mortgage repurchase demands associated with pending or threatened litigationprivate-label securitizations are not reported in this table becauseseparately evaluated by the Firm separately evaluates its exposure to such repurchase demands in establishing its litigation reserves. This table excludes repurchase demands asserted in or in connection with pending repurchase litigation.

Quarterly mortgage insurance rescission notices received by loan origination vintage(a) 
(in millions)December 31,
2011		 September 30,
2011		 June 30,
2011		 March 31,
2011		 December 31,
2010		Dec 31,
2012		Sep 30,
2012		Jun 30,
2012		Mar 31,
2012		Dec 31,
2011
Pre-2005$4
 $3
 $3
 $5
 $3
$6
$6
$9
$13
$4
200512
 15
 24
 32
 9
18
14
13
19
12
200619
 31
 39
 65
 53
35
46
26
36
19
200748
 63
 72
 144
 142
83
139
121
78
48
200826
 30
 31
 49
 50
26
37
51
32
26
Post-20082
 1
 1
 1
 1
7
8
6
4
2
Total mortgage insurance rescissions received(a)
$111
 $143
 $170
 $296
 $258
$175
$250
$226
$182
$111
(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.

JPMorgan Chase & Co./2012 Annual Report113
Management’s discussion and analysis

Since the beginning of 2010,2011, the Firm’s overallcumulative cure rate excluding(excluding loans originated by Washington Mutual,Mutual) has been approximately 50%60%. A significant portion of repurchase demands now relate to loans with a longer pay history, which historically have had higher cure rates. Repurchases that have resulted from mortgage insurance rescissions are reflected in the Firm’s overall cure rate. While the actual cure rate may vary from quarter to quarter, the Firm expects that the overallcumulative cure rate will remain in the 40-50%55-65% range for the foreseeable future.
The Firm has not observed a direct relationship between the type of defect that allegedly causes the breach of representations and warranties and the severity of the realized loss. Therefore, the loss severity assumption is estimated using the Firm’s historical experience and projections regarding changes in home prices. Actual principal loss severities on finalized repurchases and “make-whole” settlements to date excluding(excluding loans originated by Washington Mutual,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 correspondentsthird-party originators (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 Firm’s 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, 20112012, disclosed above.on the prior page. The Firm has considered its remaining unresolved mortgage insurance rescission risk exposure in estimating the mortgage repurchase liability as of December 31, 20112012.
Substantially all of the estimates and assumptions underlying the Firm’s 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 basedthe GSEs (based on both historical experience)experience and the Firm’s expectations about the GSEs’ future behavior), 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


JPMorgan Chase & Co./2011 Annual Report117
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 processthis estimate is inherently uncertain imprecise and potentially volatile as additional information is obtained and external factors continue to evolve.imprecise.


114JPMorgan Chase & Co./2012 Annual Report


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)
2011
 2010
 2009
 2012 2011 2010 
Repurchase liability at beginning of period$3,285
 $1,705
 $1,093
 $3,557
 $3,285
 $1,705
 
Realized losses(b)
(1,263) (1,423) (1,253)
(d) 
(1,158) (1,263) (1,423) 
Provision for repurchase losses(c)1,535
 3,003
 1,865
 412
 1,535
 3,003
 
Repurchase liability at end of period$3,557
(c) 
$3,285
 1,705
 $2,811
 $3,557
 3,285
 
(a)MortgageAll mortgage repurchase liabilitiesdemands associated with pending or threatened litigationprivate-label securitizations are not reported in this table becauseseparately evaluated by 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. ForMake-whole settlements were $524 million, $640 million and $632 million, for the years ended 2011December 31, 2012, 20102011 and 2009, make-whole settlements were $640 million, $632 million and $277 million2010, respectively.
(c)
Includes $173112 million at, $52 million and $47 million of provision related to new loan sales for the years ended December 31, 20112012, related to future demands on loans sold by Washington Mutual to the GSEs.2011 and 2010, respectively.
(d)Includes the Firm’s 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.
The following table summarizes the total unpaid principal balance of certain repurchases during the periods indicated.
Unpaid principal balance of mortgage loan repurchases(a)  
Year ended December 31,
(in millions)
2011
 2010
 2009
2012 2011 2010
Ginnie Mae(b)
$5,981
 $8,717
 $6,966
$5,539
 $5,981
 $8,717
GSEs and other(c)(d)
1,334
 1,773
 1,019
GSEs(c)
1,204
 1,208
 1,498
Other(c)(d)
209
 126
 275
Total$7,315
 $10,490
 $7,985
$6,952
 $7,315
 $10,490
(a)This table includesincludes: (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 repurchase demands asserted in or in connection with pending or threatened litigation because the Firm separately evaluates its exposure to such repurchases in establishing its litigation reserves.litigation.
(b)In substantially all cases, these repurchases represent the Firm’s 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 $477465 million, $354477 million and $218354 million at December 31, 20112012, 20102011 and 20092010, respectively, of loans repurchased as a result of breaches of representations and warranties.
(d)Represents loans repurchased from parties other than the GSEs, excluding those repurchased in connection with pending repurchase litigation.
For additional information regarding the mortgage repurchase liability, see Note 29 on pages 283-289308–315 of this Annual Report.Report.

The Firm also faces a variety of exposures resulting from repurchase demands and litigation arising out of its various roles as issuer and/or sponsor of mortgage-backed securities (“MBS”) offerings in private-label securitizations. For further information, see Note 31 on pages 316–325 of this Annual Report.















118JPMorgan Chase & Co./20112012 Annual Report115

Management’s discussion and analysis



CAPITAL MANAGEMENT
A strong capital position is essential to the Firm’s business strategy and competitive position. The Firm’s 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. SeniorPrior to making any decisions on future business activities, senior management considers the implications on the Firm’s 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.strength. In addition to considering the Firm’s earnings outlook, senior management evaluates all sources and uses of capital and makes decisionswith a view to vary sources or uses to preservepreserving the Firm’s capital strength. Maintaining a strong balance sheet to manage through economic volatility is considered a strategic imperative by the Firm’s Board of Directors, CEO and Operating Committee. The Firm’s balance sheet philosophy focuses on risk-adjusted returns, strong capital and reserves, and robust liquidity.
The Firm’s capital management objectives are to hold capital sufficient to:
Cover all material risks underlying the Firm’s business activities;
Maintain “well-capitalized” status under regulatory requirements;
Maintain debt ratings which willthat 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 theseThese objectives are achieved through ongoing monitoring of the Firm’s capital position, regular stress testing, and a capital governance framework. Capital management is intended to be flexible in order to react to a range of potential events. JPMorgan Chase has frequent firmwide and LOB processes for ongoing monitoring and active management of its capital position.
Capital governance
The Firm’s senior management recognizes the importance of a capital management function that supports strategic decision-making. The Firm maintains a robusthas established the Regulatory Capital Management Office (“RCMO”) which is responsible for measuring, monitoring and disciplinedreporting the Firm’s capital and related risks. The RCMO is an integral component of the Firm’s overall capital governance framework and is responsible for reviewing, approving and monitoring the implementation of the Firm’s capital policies and strategies, as well as its capital adequacy assessment process. The Board’s Risk Policy Committee assesses the capital adequacy assessment process which is performed regularly, and is intended to enableits components. This review encompasses evaluating the effectiveness of the capital adequacy process, the appropriateness of the risk tolerance levels, and the strength of the control infrastructure. For additional discussion on the Board’s Risk Policy Committee, see Risk Management on pages 123–126 of this Annual Report.
Internal Capital Adequacy Assessment Process
Semiannually, the Firm to remain well-capitalizedcompletes the Internal Capital Adequacy Assessment Process (“ICAAP”), which provides management with a view of the impact of severe and fund ongoing operations under adverse conditions. unexpected events on earnings, balance sheet positions, reserves and capital. The Firm’s ICAAP integrates stress testing protocols with capital planning.
The process assesses the potential impact of alternative economic and business scenarios on the Firm’s earnings and capital for the Firm’s businesses individually and in the aggregate over a rolling three-year period.capital. Economic scenarios, and the parameters underlying those scenarios, are defined centrally and applied uniformly across the businesses. These scenarios are articulated in terms of macroeconomic factors, which are key drivers of business results; global market shocks, which generate short-term but severe trading losses; and idiosyncratic operational risk events, which generate significant losses.events. The scenarios are intended to capture and stress key vulnerabilities and idiosyncratic risks facing the Firm. However, when defining a broad range of scenarios, realized events can always be worse. Accordingly, management considers additional stresses outside these scenarios, as necessary. ICAAP results are reviewed by management and the Board of Directors.
The Firm utilized this capital adequacy process in completing the Federal Reserve Comprehensive Capital Analysis and Review (“CCAR”).
The Federal Reserve requires large bank holding companies, including the Firm, to submit a capital plan on an annual basis. The Federal Reserve uses the CCAR and Dodd-Frank Act Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) stress test processes to ensure that large bank holding companies have sufficient capital during periods of economic and financial stress, and have robust, forward-looking capital assessment and planning processes in place that address each bank holding company’s unique risks to enable them to have the ability to absorb losses under certain stress scenarios. Through the CCAR, the Federal Reserve evaluates each bank holding company’s capital adequacy and internal capital adequacy assessment processes, as well as its plans to make capital distributions, such as dividend payments or stock repurchases.
The Firm’s CCAR process is integrated into and employs the same methodologies utilized in the Firm’s ICAAP process described above. The Firm submitted its 2012 capital plan on January 9, 2012, and received notice of the Federal Reserve’s non-objection on March 13, 2012. The Firm increased the quarterly dividend on its common equity to $0.30 per share commencing in the first quarter of 2012, and during 2012 repurchased (on a trade-date basis) 31 million shares of common stock and 18 million warrants for $1.3 billion and $238 million, respectively. Following the voluntary cessation of its common equity repurchase program in May 2012, the Firm resubmitted its capital plan to the Federal Reserve has indicated that itunder the 2012 CCAR process in August 2012. Pursuant to a non-objection received from the Federal Reserve on November 5, 2012, with respect to the resubmitted capital plan, the Firm is authorized to


116JPMorgan Chase & Co./2012 Annual Report


repurchase up to $3.0 billion of common equity in the first quarter of 2013. The timing and exact amount of any common equity to be repurchased under the program will depend on various factors, including market conditions; the Firm’s capital position; organic and other investment opportunities; and legal and regulatory considerations, among other factors.
On January 7, 2013, the Firm submitted its capital plan to the Federal Reserve under the Federal Reserve’s 2013 CCAR process. The Firm’s plan relates to the last three quarters of 2013 and the first quarter of 2014 (that is, the 2013 CCAR capital plan relates to dividends to be declared commencing in June 2013, and to common equity repurchases and other capital actions commencing April 1, 2013). The Firm expects to provide notificationreceive the Federal Reserve’s response to its plan no later than March 14, 2013. The Firm expects that its Board of eitherDirectors will declare the regular quarterly common stock dividend of $0.30 per share for the 2013 first quarter at its objection or non-objectionBoard meeting to the Firm's capital plan bybe held on March 15, 2012.
Capital adequacy is also evaluated with the Firm’s liquidity
risk management processes.19, 2013. For furtheradditional information on the Firm’s Liquidity Risk Management,capital actions, see Capital actions on page 122, and Notes 22 and 23 on pages 127–132300 and 300–301, respectively, of this Annual Report.
Capital Disciplines
The quality and compositionFirm assesses capital based on:
Regulatory capital requirements
Economic risk capital assessment
Line of business equity attribution
Regulatory capital are key factors in senior management’s evaluation ofis the Firm’s capital adequacy. Accordingly,required to be held by the Firm holds a significant amount of its capital inpursuant to 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.
Regulatory capital is the primary measure used to assess capital adequacy at JPMorgan Chase, as regulatory capital measures are the basis upon which the Federal Reserve objects or does not object to the Firm’s planned capital actions as set forth in the Firm’s CCAR submission.
Economic risk capital – The capital required as a result of a bottom-up assessment of is assessed by evaluating the underlying risks of the Firm’sJPMorgan Chase’s business activities utilizingusing internal risk-assessment methodologies.
risk evaluation methods. These methods result in capital allocations for both individual and aggregated LOB transactions and can be grouped into four main categories:
Credit risk
LineMarket risk
Operational risk
Private equity risk
These internal calculations result in the capital needed to cover JPMorgan Chase’s business activities in the event of unexpected losses.
In determining line of business equity – The amount of equity the Firm believes eachevaluates the amount of capital the line of business segment would require if it were operating independently, which incorporatesincorporating sufficient capital to address regulatory capital requirements (including Basel III Tier 1 common capital requirements as
discussed below), 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 Firm’s 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. Government’s 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 Firm’s 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 Firm’s 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 281–283 of this Annual Report.


JPMorgan Chase & Co./2011 Annual Report119
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 31,2011 2010
Capital ratios   
Tier 1 capital12.3% 12.1%
Total capital15.4
 15.5
Tier 1 leverage6.8
 7.0
Tier 1 common(a)
10.1
 9.8
(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)2011
 2010
Total stockholders’ equity$183,573
 $176,106
Less: Preferred stock7,800
 7,800
Common stockholders’ equity175,773
 168,306
Effect of certain items in accumulated other comprehensive income/(loss) excluded from Tier 1 common(970) (748)
Less: Goodwill(a)
45,873
 46,915
Fair value DVA on derivative and structured note liabilities related to the Firm’s credit quality2,150
 1,261
Investments in certain subsidiaries and other993
 1,032
Other intangible assets(a)
2,871
 3,587
Tier 1 common122,916
 114,763
Preferred stock7,800
 7,800
Qualifying hybrid securities and noncontrolling interests(b)
19,668
 19,887
 Total Tier 1 capital150,384
 142,450
Long-term debt and other instruments qualifying as Tier 222,275
 25,018
Qualifying allowance for credit losses15,504
 14,959
Adjustment for investments in certain subsidiaries and other(75) (211)
Total Tier 2 capital37,704
 39,766
Total qualifying capital$188,088
 $182,216
Risk-weighted assets$1,221,198
 $1,174,978
Total adjusted average assets$2,202,087
 $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 Firm’s 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 Firm’s employee stock-based
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 Firm’s 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 Firm’s 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 1–7 and 7–17, respectively, of the 2011 Form 10-K, and Note 28 on pages 281–283 of this Annual Report.
Basel II
The minimum risk-based capital requirements adopted by the U.S. federal banking agencies follow the Capital Accord (“Basel I”) of the Basel Committee on Banking Supervision (“Basel I”Committee”). In 2004, the Basel Committee published a revision to the Capital Accord (“Basel II”). The goal of the Basel II Frameworkframework 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, framework, JPMorgan Chase is required to complete a qualification period of at least 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.
In connection with the U.S. Government’s Supervisory Capital Assessment Program in 2009 (“SCAP”), U.S. banking regulators developed an additional 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 securities. The Federal Reserve employs a minimum 5% Tier 1 common ratio standard for CCAR purposes, in addition to the other minimum capital requirements under Basel I.
The following table presents the regulatory capital, assets and risk-based capital ratios for JPMorgan Chase at December 31, 2012 and 2011, under Basel I. As of December 31, 2012 and 2011, JPMorgan Chase and all of its banking subsidiaries were well-capitalized and each met all capital requirements to which it was subject.


JPMorgan Chase & Co./2012 Annual Report117
Management’s discussion and analysis

Risk-based capital ratios   
December 31,2012 2011
Capital ratios   
Tier 1 capital12.6% 12.3%
Total capital15.3
 15.4
Tier 1 leverage7.1
 6.8
Tier 1 common(a)
11.0
 10.1
(a) The Tier 1 common ratio is Tier 1 common capital divided by RWA.
At December 31, 2012 and 2011, 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 above tables. In addition, at December 31, 2012 and 2011, the Firm’s Tier 1 common ratio was significantly above the 5% CCAR standard. For more information, see Note 28 on pages 306–308 of this Annual Report.
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)2012
 2011
Total stockholders’ equity$204,069
 $183,573
Less: Preferred stock9,058
 7,800
Common stockholders’ equity195,011
 175,773
Effect of certain items in accumulated other comprehensive income/(loss) excluded from Tier 1 common(4,198) (970)
Less: Goodwill(a)
45,663
 45,873
Fair value DVA on structured notes and derivative liabilities related to the Firm’s credit quality1,577
 2,150
Investments in certain subsidiaries and other920
 993
Other intangible assets(a)
2,311
 2,871
Tier 1 common140,342
 122,916
Preferred stock9,058
 7,800
Qualifying hybrid securities and noncontrolling interests(b)
10,608
 19,668
Adjustment for investments in certain subsidiaries and other(6) —
Total Tier 1 capital160,002
 150,384
Long-term debt and other instruments qualifying as Tier 218,061
 22,275
Qualifying allowance for credit losses15,995
 15,504
Adjustment for investments in certain subsidiaries and other(22) (75)
Total Tier 2 capital34,034
 37,704
Total qualifying capital$194,036
 $188,088
Risk-weighted assets$1,270,378
 $1,221,198
Total adjusted average assets$2,243,242
 $2,202,087
(a)Goodwill and other intangible assets are net of any associated deferred tax liabilities.
(b)Primarily includes trust preferred securities of certain business trusts.
The following table presents the changes in Tier 1 common, Tier 1 capital and Tier 2 capital for the year ended December 31, 2012.
Capital rollforward
Year ended December 31, (in millions)2012
Tier 1 common at December 31, 2011$122,916
Net income21,284
Dividends declared(5,376)
Net issuance of treasury stock1,153
Changes in capital surplus(998)
Effect of certain items in accumulated other comprehensive income/(loss) excluded from Tier 1 common(69)
Qualifying non-controlling minority interests in consolidated subsidiaries309
DVA on structured notes and derivative liabilities573
Goodwill and other nonqualifying intangibles (net of deferred tax liabilities)770
Other(220)
Increase in Tier 1 common17,426
Tier 1 common at December 31, 2012$140,342
  
Tier 1 capital at December 31, 2011$150,384
Change in Tier 1 common17,426
Issuance of noncumulative perpetual preferred stock1,258
Net redemption of qualifying trust preferred securities(9,369)
Other303
Increase in Tier 1 capital9,618
Tier 1 capital at December 31, 2012$160,002
  
Tier 2 capital at December 31, 2011$37,704
Change in long-term debt and other instruments qualifying as Tier 2(4,214)
Change in allowance for credit losses491
Other53
Decrease in Tier 2 capital(3,670)
Tier 2 capital at December 31, 2012$34,034
Total capital at December 31, 2012$194,036
“Basel 2.5”Risk-weighted assets were $1,270 billion at December 31, 2012, an increase of $49 billion from December 31, 2011. In addition to the growth in the Firm’s assets, the increase in risk-weighted assets also reflected an adjustment to reflect regulatory guidance regarding a limited number of market risk models used for certain positions held by the Firm during the first half of 2012, including the synthetic credit portfolio. In the fourth quarter of 2012, the adjustment to RWA decreased substantially as a result of regulatory approval of certain market risk models and a reduction in related positions.
During 2011, theIn June 2012, U.S. federal banking agencies issued proposalspublished final rules that went into effect on January 1, 2013, that provide 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.securitizations (“Basel 2.5”). It is currently estimated that implementation of these rules could result in approximately a 100 basis point decrease infrom the Firm’s Basel I Tier 1 common ratio but the actual impact upon implementation on the Firm’s capital ratios could differ depending on the outcome of the finalat December 31, 2012 (all other factors being constant).
In June 2012, U.S. rules and regulatory approval of the Firm’s internal models.federal banking agencies also published a Notice for Proposed Rulemaking (“NPR”) for


120118 JPMorgan Chase & Co./20112012 Annual Report


Basel III
In additionimplementing further revisions to the Basel II Framework, on December 16, 2010,Capital Accord in the Basel Committee issued the final version of the Capital Accord,U.S. (such further revisions are commonly referred to as “Basel III”). Basel III” which revised Basel II by, among other things, narrowing the definition of capital, and 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 (on- and off-balance sheet) that cannot be monetized over a one-year period of extended stress. Theexposures. Basel CommitteeIII also announcedincludes higher capital ratio requirements under Basel III, which provideand provides that the Tier 1 common equitycapital requirement will be increased to 7%, comprised of a minimum ratio of 4.5% plus a 2.5% capital conservation buffer. Implementation of the 7% Tier 1 common capital requirement is required by January 1, 2019.
On June 25, 2011, the Basel Committee announced an agreement to requireIn addition, global systemically important banks (“GSIBs”) will be required to maintain Tier 1 common requirements above the 7% minimum in amounts ranging from an additional 1% to an additional 2.5%. In November 2012, the Financial Stability Board (“FSB”) indicated that it would require the Firm, as well as three other banks, to hold the additional 2.5% of Tier 1 common; the requirement will be phased in beginning in 2016. The Basel Committee also stated it intended to require certain GSIBs to maintain a furtherhold an additional 1% of 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,Currently, no GSIB (including the Basel Committee published a proposal on the GSIB assessment methodology, which reflects an approach based on five broad categories: size; interconnectedness; lackFirm) is required to hold this additional 1% of substitutability; cross-jurisdictional activity; and complexity. In late September, the Basel Committee finalized the GSIB assessment methodology and Tier 1 common requirements.common.
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 aU.S. federal banking agencies have proposed certain permanent Basel I floorfloors 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'sFirm’s Tier 1 common under Basel I rules to its estimated Tier 1 common under Basel III rules, along with the Firm'sFirm’s estimated risk-weighted assets and the Tier 1 common ratio under Basel III rules, all of which are non-GAAP financial measures.assets. 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”)AOCI related to AFS securities and defined benefit pension and other postretirement employee benefit plans, and the deduction of the Firm's
defined benefit pension fund assets.(“OPEB”) plans.
The Firm estimates that its Tier 1 common ratio under Basel III rules would be 7.9%8.7% as of December 31, 20112012. Management considers this estimateThe Tier 1 common ratio under both Basel I and Basel III are non-GAAP financial measures. However, such measures are used by bank regulators, investors and analysts as a key measure to assess the Firm’s capital position in conjunction with its capital ratios under Basel I requirements, in order to enable management, investors and analysts to compare the Firm’s capital under the Basel III capital standards with similar estimates provided byto that of other financial services companies.
December 31, 2011
(in millions, except ratios)
 
December 31, 2012
(in millions, except ratios)
 
Tier 1 common under Basel I rules$122,916
$140,342
Adjustments related to AOCI for AFS securities and defined benefit pension and other postretirement employee benefit plans919
Deduction for net defined benefit pension asset(1,430)
Adjustments related to AOCI for AFS securities and defined benefit pension and OPEB plans4,077
All other adjustments(534)(453)
Estimated Tier 1 common under Basel III rules$121,871
$143,966
Estimated risk-weighted assets under Basel III rules(a)
$1,545,801
$1,647,903
Estimated Tier 1 common ratio under Basel III rules(b)
7.9%8.7%
(a)Key differences in the calculation of risk-weighted assets between Basel I and Basel III include: (a)(1) Basel III credit risk risk-weighted assets (“RWA”)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.
credit models and parameters, whereas Basel I RWA is based on fixed supervisory risk weightings which vary only by counterparty type and asset class; (2) 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 (3) Basel III includes RWA for operational risk, whereas Basel I does not. The actual impact on the Firm’s capital ratios upon implementation could differ depending on final implementation guidance from the regulators, as well as regulatory approval of certain of the Firm’s internal risk models.
(b)The Tier 1 common ratio is Tier 1 common divided by RWA.
The Firm’s estimate of its Tier 1 common ratio under Basel III reflects its current understanding of the Basel III rules based on information currently published by the Basel Committee and U.S. federal banking agencies and on the application of such rules to its businesses as currently conducted, and thereforeconducted; it 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 ofrules, possible enhancements to certain market risk models, and any further implementation guidance from 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.regulators.
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 willunder Basel III was originally scheduled to begin in 2013, with full implementation on January 1, 2019. The Firm fully expects to beIn November 2012, the U.S. federal banking agencies announced a delay in compliance with the higherimplementation dates for the Basel III capital


JPMorgan Chase & Co./2011 Annual Report121
Management's discussion and analysis

standards, as well as any additional Dodd-Frank Act capital requirements, as they become effective. requirements. The additional capital requirements for GSIBs will be phased-inphased in starting January 1, 2016, with full implementation on January 1, 2019. Management’s current objective is for the Firm to reach, by the end of 2013, an estimated Basel III Tier I common ratio of 9.5%.
The Firm will continue to monitorAdditional information regarding the ongoing rule-making process to assess both the timingFirm’s capital ratios and the impactfederal regulatory capital standards to which it is subject is presented in Supervision and regulation on pages 1–8 of Basel IIIthe 2012 Form 10-K, and Note 28 on its businesses and financial condition.pages 306–308 of this Annual Report.
Broker-dealer regulatory capital
JPMorgan Chase’s 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, 20112012, JPMorgan Securities’ net capital, as defined by the Net Capital Rule, was $11.113.5 billion, exceeding the minimum requirement by


JPMorgan Chase & Co./2012 Annual Report119
Management’s discussion and analysis

$9.512.0 billion, and JPMorgan Clearing’s net capital was $7.46.6 billion, exceeding the minimum requirement by $5.55.0 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, 20112012, JPMorgan Securities had tentative net capital in excess of the minimum and notification requirements.
J.P. Morgan Securities plc (formerly J.P. Morgan Securities Ltd.) is a wholly-owned subsidiary of JPMorgan Chase Bank, N.A. and is the Firm’s principal operating subsidiary in the U.K. It has authority to engage in banking, investment banking and broker-dealer activities. J.P. Morgan Securities plc is regulated by the U.K. Financial Services Authority (“FSA”). At December 31, 2012, it had total capital of $20.8 billion, or a Total capital ratio of 15.5% which exceeded the 8% well-capitalized standard applicable to it under Basel 2.5.
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 Yearly Average
Year ended December 31,
(in billions)
 2011
 2010
 2009
 2012
 2011
 2010
Credit risk $48.2
 $49.7
 $51.3
 $46.6
 $48.2
 $49.7
Market risk 14.5
 15.1
 15.4
 17.5
 14.5
 15.1
Operational risk 8.5
 7.4
 8.5
 15.9
 8.5
 7.4
Private equity risk 6.9
 6.2
 4.7
 6.0
 6.9
 6.2
Economic risk capital 78.1
 78.4
 79.9
 86.0
 78.1
 78.4
Goodwill 48.6
 48.6
 48.3
 48.2
 48.6
 48.6
Other(a)
 46.6
 34.5
 17.7
 50.2
 46.6
 34.5
Total common stockholders’ equity $173.3
 $161.5
 $145.9
 $184.4
 $173.3
 $161.5
(a)Reflects additional capital required, in the Firm’s view, to meet its regulatory and debt rating objectives.
Credit risk capital
Credit risk capital is estimated separately for the wholesale businesses (IB,(CIB, CB TSS and AM) and consumer businesses (RFS and Card)business (CCB).
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 value of 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 allowancesthe allowance for credit losses areis 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. The decrease in credit risk capital in 2012 was driven by consumer portfolio runoff and continued model enhancements to better estimate future stress credit losses in the consumer portfolio. See Credit Risk Management on pages 132–157134–135 of this Annual Report for more information about these credit risk measures.
Market risk capitalcapital
The Firm calculates market risk capital guided by the principle that capital should reflect the risk of loss in the value of the 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,weekly 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. The increase in market risk capital in 2012 was driven by increased risk in the synthetic credit portfolio. See Market Risk Management on pages 158–163163–169 of this Annual Report for more information about these market risk measures.


122JPMorgan Chase & Co./2011 Annual Report


Operational risk capitalcapital
CapitalOperational risk is allocated to the linesrisk of business for operational risk using a risk-based capital allocation methodology which estimates operational risk on a bottom-up basis.loss resulting from inadequate or failed processes or systems, human factors or external events. 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.environment. The Firm believes itsincrease in operational risk capital in 2012 was primarily due to continued model is consistent with the Basel II Framework.enhancements to better capture large historical loss events, including mortgage-related litigation costs. The increases that occurred during 2012 will be fully reflected in average operational risk capital in 2013. See Operational Risk Management on pages 166–167175–176 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, within the Corporate/Private Equity segment, 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.



120JPMorgan Chase & Co./2012 Annual Report


Line of business equity
The Firm’s framework for allocating capital to its business segments 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 aIn determining line of business representsequity the Firm evaluates the amount of capital the Firm believes theline of business would require if it were operating independently, incorporating sufficient capital to address regulatory capital requirements (including Basel III Tier 1 common capital requirements)requirements as discussed below), 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 segment’s performance.
Line of business equity  
December 31, (in billions) 2011 2010
Investment Bank $40.0
 $40.0
Retail Financial Services 25.0
 24.6
Card Services & Auto 16.0
 18.4
Commercial Banking 8.0
 8.0
Treasury & Securities Services 7.0
 6.5
Asset Management 6.5
 6.5
Corporate/Private Equity 73.3
 64.3
Total common stockholders’ equity $175.8
 $168.3
Line of business equity Yearly Average Yearly Average
Year ended December 31,
(in billions)
 2011
 2010
 2009 2012
 2011
 2010
Investment Bank $40.0
 $40.0
 $33.0
Retail Financial Services 25.0
 24.6
 22.5
Card Services & Auto 16.0
 18.4
 17.5
Consumer & Community Banking $43.0
 $41.0
 $43.0
Corporate & Investment Bank 47.5
 47.0
 46.5
Commercial Banking 8.0
 8.0
 8.0
 9.5
 8.0
 8.0
Treasury & Securities Services 7.0
 6.5
 5.0
Asset Management 6.5
 6.5
 7.0
 7.0
 6.5
 6.5
Corporate/Private Equity 70.8
 57.5
 52.9
 77.4
 70.8
 57.5
Total common stockholders’ equity $173.3
 $161.5
 $145.9
 $184.4
 $173.3
 $161.5
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 certaineach of its businesses, reflecting additional refinement of each segment’s Basel III Tier 1 common capital requirements.
In addition, effective January 1, 2013, the Firm further refined the capital allocation framework to align it with the revised line of business structure that became effective in the fourth quarter of 2012. The increase in equity levels for the lines of businesses is largely driven by the most current regulatory guidance on Basel 2.5 and Basel III requirements (including the NPR), principally for CIB and CIO, and by anticipated business growth.
Line of business equityJanuary 1,
 December 31,
(in billions)
2013(a)
 2012 2011
Consumer & Community Banking$46.0
 $43.0
 $41.0
Corporate & Investment Bank56.5
 47.5
 47.0
Commercial Banking13.5
 9.5
 8.0
Asset Management9.0
 7.0
 6.5
Corporate/Private Equity70.0
 88.0
 73.3
Total common stockholders’ equity$195.0
 $195.0
 $175.8
(a)Reflects refined capital allocations effective January 1, 2013 as discussed above.
The Firm continueswill continue 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.



JPMorgan Chase & Co./20112012 Annual Report 123121
Management'sManagement’s discussion and analysis

Capital actions
DividendsIssuance of preferred stock
On February 23, 2009,August 27, 2012, the BoardFirm issued $1.3 billion of Directors reducedfixed–rate noncumulative perpetual preferred stock. For additional information on the Firm’s quarterly commonpreferred stock, dividend from $0.38 tosee Note 22 on page $0.05300 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 this Annual Report.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.
Dividends
JPMorgan Chase declared quarterly cash dividends on its common stock in the amount of $0.05 per share for each quarter of 2010 and 2009.2010.
On March 18, 2011, the Board of Directors increased the Firm’s 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. On March 13, 2012, the Board of Directors increased the Firm’s quarterly common stock dividend from $0.25 to $0.30 per share, effective with the dividend paid on April 30, 2012, to shareholders of record on April 5, 2012. The Firm’s common stock dividend policy reflects JPMorgan Chase’sChase’s earnings outlook;outlook, desired dividend payout ratio;ratio, capital objectives;objectives, and alternative investment opportunities. The Firm’s 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 276pages 300 and 281,306, respectively, of this Annual Report.
The following table shows the common dividend payout ratio based on reported net income.
Year ended December 31,2011
 2010
 2009
2012
 2011
 2010
Common dividend payout ratio22% 5% 9%23% 22% 5%
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. TheOn March 13, 2012, the Board of Directors authorized a new $15.0 billion common equity repurchase program, superseded aof which up to $10.012.0 billion was approved for repurchase in 2012 and up to an additional $3.0 billion was approved through the end of the first quarter of 2013. Following the voluntary cessation of its common equity repurchase program approved in 2007. May 2012, the Firm resubmitted its capital plan to the Federal Reserve under the 2012 CCAR process in August 2012. Pursuant to a non-objection received from the Federal Reserve on November 5, 2012, with respect to the resubmitted capital plan, the Firm is authorized to repurchase up to $3.0 billion of common equity in the first quarter of 2013. The timing and exact amount of any common equity to be repurchased under the program will depend on various factors, including market conditions; the Firm’s capital position; organic and other investment opportunities; and legal and regulatory considerations, among other factors.
During 2012, 2011 and 2010, the Firm repurchased (on a trade-date basis) an aggregate of 24031 million, 229 million, and 78 million shares of common stock, and warrants, for $8.951.3 billion, $8.8 billion and $3.0 billion, at an average price per unit ofrespectively. During 2012 and 2011, the Firm repurchased 18 million and 10 million warrants (originally issued to the U.S. Treasury in 2008 pursuant to its Capital Purchase Program), for $37.35238 million and $38.49122 million, 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.
The authorization to repurchase common equity will be utilized at management’s discretion, and the timing of purchases and the exact amount of common equity that may be repurchased is subject to various factors, including market conditions; legal considerations affecting the amount and timing of repurchase activity; the Firm’s capital position (taking into account goodwill and intangibles); internal capital generation; and alternative investment opportunities. The repurchase program does not include specific price targets or timetables; may be executed through open market purchases or privately negotiated transactions, or utilizing Rule 10b5-1 programs; and may be suspended at any time.
For additional information regarding repurchases of the Firm’s equity securities, see Part II, Item 5: Market for registrant’s common equity, related stockholder matters and issuer purchases of equity securities, on pages 18–2022–23 of JPMorgan Chase’s 20112012 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 2310-K and 2013 Business Outlook, on pages 276-27768–69 of this Annual Report.
Capital Purchase Program
Pursuant to the U.S. Treasury’s 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 Firm’s 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 Firm’s 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.



124122 JPMorgan Chase & Co./20112012 Annual Report


RISK MANAGEMENT
RiskRisk is an inherent part of JPMorgan Chase’s business activities. The Firm’s 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 intended to ensure the broad spectrum of risk types are considered in managing its business activities. The Firm’s 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 isare encouraged.
The Firm’s overall risk appetite is established in the context of the Firm’s capital, earnings power, and diversified business model. The Firm employs a formalized risk appetite framework to clearly link risk appetite andintegrate the Firm’s objectives with return targets, risk controls and capital management. The Firm’s CEOChief Executive Officer (“CEO”) is responsible for setting the overall firmwide risk appetiteappetite. The lines of the Firmbusiness CEOs, Chief Risk Officers (“CROs”) and the LOB CEOsCorporate/Private Equity senior management are responsible for setting the risk appetite for their respective lines of business.business or risk limits, within the Firm’s limits,and these risk limits are subject to approval by the CEO and firmwide Chief Risk Officer (“CRO”) or the Deputy CRO. The Risk Policy Committee of the Firm’s Board of Directors approves the risk appetite policy on behalf of the entire Board of Directors.
Risk governance
The Firm’s risk governance structure is based on the principle that each line of business is responsible for managing the riskrisks inherent in its business, albeit with appropriate Corporatecorporate oversight. Each line of business risk committee is responsible for decisions regarding the business’ risk strategy, policies as appropriate and controls. There are nine major risk types identified inarising out of the business activities of the Firm: liquidity risk, credit risk, market risk, interest rate risk, country risk, private equityprincipal risk, operational risk, legal andrisk, fiduciary risk and reputation risk.
Overlaying line of business risk management are four corporate functions with risk management–relatedmanagement-related responsibilities: Risk Management, the Chief Investment Office, Corporate Treasury and CIO, the Regulatory Capital Management Office (“RCMO”) the Firmwide Oversight and Control Group, Legal and Compliance.Compliance and the Firmwide Valuation Governance Forum.
Risk Management operatesreports independently of the lines of businessesbusiness to provide oversight of firmwide risk management and controls, and is viewed as a partner in achieving appropriate business risk and reward objectives. Risk Management coordinates and communicates with each line of business through the line of business risk committees and chief risk officersCROs to manage risk. The Risk Management function is headed by the Firm’s Chief Risk Officer, who is a member of
the Firm’s Operating Committee and who reports to the Chief Executive Officer and is accountable to the Board of Directors, primarily through the Board’s Risk Policy Committee. The Chief Risk Officer is also a member of the line of business risk committees. Within the Firm’s Risk Management function are units responsible for credit risk, market risk, country risk, private equityprincipal risk, model risk and development, reputational risk and operational risk framework, as well as risk reporting and risk policy andpolicy. Risk Management is supported by risk technology and operations. Risk technology and operations isfunctions that are responsible for building the information technology infrastructure used to monitor and manage risk.
The Chief Investment OfficeRisk Management organization maintains a Risk Operating Committee and the Risk Management Business Control Committees. The Risk Operating Committee focuses on risk management, including setting risk management priorities, escalation of risk issues, talent and resourcing, and other issues brought to its attention by line of business CEOs, CROs and cross-line of business risk officers (e.g., Country Risk, Market Risk and Model Risk). This committee meets bi-weekly and is led by the CRO or deputy-CRO. There are three business control committees within the Risk Management function (Wholesale Risk Business Control Committee, Consumer Risk Business Control Committee and the Corporate Risk Business Control Committee) which meet at least quarterly and focus on the control environment, including outstanding action plans, audit status, operational risk statistics (such as losses, risk indicators, etc.), compliance with critical control programs, and risk technology.
The Model Risk and Development unit, within the Risk Management function, provides oversight of the firmwide Model Risk policy, guidance with respect to a model’s appropriate usage and conducts independent reviews of models.
Treasury and CIO are predominantly responsible for measuring, monitoring, reporting and managing the Firm’s liquidity, funding, capital and structural interest rate and foreign exchange risk,risks. RCMO is responsible for measuring, monitoring, and other structuralreporting the Firm’s capital and related risks.
Legal and Compliance has oversight for legal risk. In January 2013, the Compliance function was moved to report to the Firm’s co-COOs in order to better align the function, which is a critical component of how the Firm manages its risk, with the Firm’s Oversight and Control function. Compliance will continue to work closely with Legal, given their complementary missions. The Firm’s Oversight and Control group is dedicated to enhancing the Firm’s control framework, and to looking within and across the lines of business and the Corporate functions (including CIO) to identify and remediate control issues.


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Management’s discussion and analysis

In addition, the Firm has a firm-wide Valuation Governance Forum (“VGF”) comprising senior finance and risk executives to oversee the management of risks arising from valuation activities conducted across the Firm. The VGF is chaired by the firm-wide head of the valuation control function, and also includes sub-forums for the CIB, MB, and certain corporate functions including Treasury and CIO.
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 Committeenumerous management level committees focused on measuring, monitoring and three other risk-related committees – the Risk Working Group, the Global Counterparty Committee and the Markets Committee. managing risk. All of these committees are accountable to the CEO and Operating
Committee. The membership of these committees areis composed of senior management of the Firm, includingFirm; membership varies across the committees and is based on the objectives of the individual committee. Typically membershipincludes representatives of the lines of business, CIO, Treasury, Risk Management, Finance, Legal and Compliance and other senior executives. The committees meet frequentlyregularly 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 impacteffects of risk factorsissues are considered broadly across the Firm’s businesses.

The Board of Directors exercises its oversight of the Firm’s risk management principally through the Board’s Risk Policy Committee and Audit Committee.
The Board’s Risk Policy Committee oversees senior management risk-related responsibilities, including reviewing management policies and performance against these policies and related benchmarks. The Board’s Risk Policy Committee also reviews firm level market risk limits at least annually. The CROs for each line of business and the heads of Country Risk, Market Risk, Model Risk and the Wholesale Chief Credit Officer meet with the Board’s Risk Policy Committee on a regular basis. In addition, in
conjunction with the Firm’s capital assessment process, the CEO or Chief Risk Officer is responsible for notifying the Risk Policy Committee of any results which are projected to exceed line of business or firmwide risk appetite tolerances. The CEO or CRO is required to notify the Chairman of the Board’s Risk Policy Committee if certain firmwide limits are modified or exceeded.
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


124JPMorgan Chase & Co./20112012 Annual Report125
Management's discussion and analysis


reasonable assurance of compliance with the Firm’s operational risk management processes. In addition, Internal Audit, an independent function within the Firm that provides independent and objective assessments of the control environment, reports directly to the Audit Committee of the Board of Directors and administratively to the CEO. Internal Audit conducts regular independent reviews to evaluate the Firm’s internal control structure and compliance with applicable regulatory requirements and is responsible for providing the Audit Committee, senior management and regulators with an independent assessment of the Firm’s ability to manage and control risk.
Among the Firm’s management level committees that are primarily responsible for certain risk-related functions are:
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 Firm’s overall interest rate risk and liquidity risk. ALCO is responsible for reviewing and approving the Firm’s liquidity policy and contingency funding plan. ALCO also reviews the Firm’s 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)Treasury), nontrading interest rate-sensitive revenue-at-risk, overall interest rate position, funding requirements and strategy, and the Firm’s securitization programs (and any required liquidity support by the Firm of such programs).
The Firmwide Risk Committee is co-chaired by the Firm’s CEO and CRO or Deputy CRO. The Risk Governance Committee is chaired by the Firm’s CRO and Deputy CRO. These committees meet monthly to review cross-line of business issues such as risk appetite, certain business activity and aggregate risk measures, risk policy, risk methodology regulatory capital and other regulatory issues, as referred by line of business risk committees. The Risk Governance Committee is also responsible for ensuring that line of business and firmwide risk reporting and compliance with risk appetite levels are monitored, in conjunction with the Firm’s capital assessment process. Each line of business risk committee meets at least on a monthly basis and is co-chaired by the line of business CRO and CEO or equivalent. Each line of business risk committee is also attended by individuals from outside the line of business. It is the responsibility of committee members of the line of business risk committees to escalate line of business risk topics to the Firmwide Risk Committee as appropriate.
In addition to the above, there is the Investment Committee, chaired by the Firm’s Chief Financial Officer that meets on an as needed basis and oversees global merger and acquisition activities undertaken by JPMorgan Chase for its own account that fall outside the scope of the Firm’s private equity and other principal finance activities.
The Risk Working Group, chaired by the Firm’s 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 Firm’s 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 Firm’s 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 Board’s 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 Firm’s operational risk management processes.
Risk monitoring and control
The Firm’s ability to properly identify, measure, monitor and report risk is critical to both its soundness and profitability.
Risk identification: The Firm’s exposure to risk through its daily business dealings, including lending and capital markets activities and operational services, is identified and aggregated through the Firm’s risk management infrastructure. In addition, individuals who manageThere are nine major risk positions, particularly those that are complex, are responsible for identifyingtypes 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 estimating potential losses that could arise from specific or unusual events that may not be captured in other models,fiduciary risk, and for communicating those risks to senior management.reputation risk.
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


126JPMorgan Chase & Co./2011 Annual Report


review, empirical validation and benchmarking with the goal of ensuring that the Firm’s risk estimates are reasonable and reflective of the risk of the underlying positions.
Risk monitoring/control: The Firm’s 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
Model risk
The Firm uses risk management models, including Value-at-Risk (“VaR”) and stress models, for the measurement, monitoring and management of risk positions. Valuation models are nine majoremployed by the Firm to value certain financial instruments which cannot otherwise be valued using quoted prices. These valuation models may also be employed as inputs to risk types identifiedmanagement models, for example in VaR and economic stress models. The Firm also makes use of models for a number of other purposes, including the calculation of regulatory capital requirements and estimating the allowance for credit losses.
Models are owned by various functions within the Firm based on the specific purposes of such models. For example, VaR models and certain regulatory capital models are owned by the line-of-business aligned risk management functions. Owners of the models are responsible for the development, implementation and testing of models, as well as referral of models to the Model Risk function (within the Model Risk and Development unit) for review and approval. Once models have been approved, the model owners maintain a robust operating environment and monitor and evaluate the performance of models on an ongoing basis. Model owners enhance models in response to changes in


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Management’s discussion and analysis

the portfolios and for changes in product and market developments, as well as improvements in available modeling techniques and systems capabilities, and submit such enhancements to the Model Risk function for review.
The Model Risk function comprises the Model Review Group and the Model Governance Group and reports to the Model Risk and Development unit, which in turn reports to the Chief Risk Officer. The Model Risk function is independent of the model owners and reviews and approves a wide range of models, including risk management, valuation and certain regulatory capital models used by the Firm.
Models are tiered based on an internal standard according to their complexity, the exposure associated with the model and the Firm’s reliance on the model. This tiering is subject to the approval of the Model Risk function. The model reviews conducted by the Model Risk function consider a number of factors about the model’s suitability for valuation or risk management of a particular product, or other purposes. The factors considered include the assigned model tier, whether the model accurately reflects the characteristics of the instruments and its significant risks, the selection and reliability of model inputs, consistency with models for similar products, the appropriateness of any model-related adjustments, and sensitivity to input parameters and assumptions that cannot be observed from the market. When reviewing a model, the Model Risk function analyzes and challenges the model methodology and the reasonableness of model assumptions and may perform or require additional testing, including back-testing of model outcomes. Model reviews are approved by the appropriate level of management within the Model Risk function based on the relevant tier of the model.
Under the Firm’s model risk policy, new significant models, as well as material changes to existing models, are reviewed and approved by the Model Risk function prior to implementation into the operating environment. The Model Risk function performs an annual Firmwide model risk assessment where developments in the business activitiesproduct or market are considered in determining whether models need to be reviewed and approved again.
In the event that the Model Risk function does not approve a significant model, escalation to senior management is required and the model owner is required to remediate the model within a time period as agreed upon with the Model Risk function. The model owner is also required to resubmit the model for review to the Model Risk function and to take appropriate actions to mitigate the model risk in the interim. The actions taken will depend on the model that is disapproved and may include, for example, limitation of trading activity. The Firm may also implement other appropriate risk measurement tools in place to augment the Firm: liquiditymodel that is subject to remediation.
Exceptions to the Firm’s model risk credit risk, market risk, interest rate risk, country risk, private equity risk, operational risk, legalpolicy may be granted by the Model Risk function to allow a significant model to be used prior to review or approval. Such exceptions have been applied in limited circumstances, and fiduciary risk,where this is the case, compensating controls similar to those described above have been put in place.
For a summary of valuations based on models, see Critical Accounting Estimates Used by the Firm on pages 180–181 and reputation risk.Note 3 on pages 196–214 of this Annual Report.


126JPMorgan Chase & Co./2012 Annual Report


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 Firm’s funding strategyrisk management is intended to ensure that it will have sufficientthe Firm has the appropriate amount, composition and tenor of funding and liquidity in support of its assets. The primary objectives of effective liquidity management are to ensure that the Firm’s core businesses are able to operate in support of client needs and meet contractual and contingent obligations through normal economic cycles as well as during market stress and maintain debt ratings that enable the Firm to optimize its funding mix and liquidity sources while minimizing costs.
The Firm manages liquidity and funding using a diversity of funding sources necessarycentralized, global approach in order to enable it to meet actualactively manage liquidity for the Firm as a whole, monitor exposures and contingent liabilities during both normal and stress periods.
JPMorgan Chase’s primary sourcesidentify constraints on the transfer of liquidity include a diversified deposit base, which was $1,127.8 billion at December 31, 2011,within the Firm, and access tomaintain the equity capital marketsappropriate amount of surplus liquidity as part of the Firm’s overall balance sheet management strategy.
In the context of the Firm’s liquidity management, Treasury is responsible for:
Measuring, managing, monitoring and to long-term unsecuredreporting the Firm’s current and securedprojected liquidity sources and uses;
Understanding the liquidity characteristics of the Firm’s assets and liabilities;
Defining and monitoring Firmwide and legal entity liquidity strategies, policies, guidelines, and contingency 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 Firm’s ability to generate funding from a broad range of sources inplans;
Liquidity stress testing under a variety of geographic locationsadverse scenarios
Managing funding mix and indeployment of excess short-term cash;
Defining and implementing funds transfer pricing (“FTP”) across all lines of business and regions; and
Defining and addressing the impact of regulatory changes on funding and liquidity.
The Firm has a rangeliquidity risk governance framework to review, approve and monitor the implementation of tenors is intended to enhance financial flexibilityliquidity risk policies and limit funding concentration risk.and capital strategies at the Firmwide, regional and line of business levels.
Specific risk committees responsible for liquidity risk governance include ALCO as well as lines of business and regional asset and liability management committees. For further discussion of the risk committees, see Risk Management on pages 123–126 of this Annual Report.
Management considers the Firm’s liquidity position to be strong based on its liquidity metrics as of December 31, 2011,2012, and believes that the Firm’s unsecured and secured funding capacity is sufficient to meet its on- and off-balance sheet obligations.
LCR and NSFR
In December 2010, the Basel Committee introduced two new measures of liquidity risk: the liquidity coverage ratio (“LCR”) which is intended to measure the amount of “high-quality liquid assets” held by the Firm during an acute stress, in relation to the estimated net cash outflows within the 30-day period; and the net stable funding ratio
(“NSFR”) which is intended to measure the “available” amount of stable funding relative to the “required” amount of stable funding over a 1-year horizon. The standards require that the LCR be no lower than 100% and the NSFR be greater than 100%.
In January 2013, the Basel Committee introduced certain amendments to the formulation of the LCR, and a revised timetable to phase-in the standard. The LCR will continue to become effective on January 1, 2015, but the minimum requirement will begin at 60%, increasing in equal annual stages to reach 100% on January 1, 2019. The Firm was ableis currently targeting to accessattain a 100% LCR, based on its current understanding of the funding markets as needed duringrequirements, by the year ended December 31, 2011, despite increased market volatility.end of 2013. The NSFR is scheduled to become effective in 2018.
GovernanceFunding
The Firm’s liquidity risk governance process is designed to ensure thatFirm funds its liquidity position remains strong. The Asset-Liability Committee reviews and approves the Firm’s liquidity policy and contingencyglobal balance sheet through diverse sources of funding, plan. Corporate Treasury is responsible for executing the Firm’s liquidity policy and contingency funding planincluding a stable deposit franchise as well as measuring, monitoring, reportingsecured and managingunsecured funding in the Firm’s liquidity risk profile. JPMorgan Chase centralizescapital markets. Access to funding markets is executed regionally through hubs in New York, London, Hong Kong and other locations which enables the management of global fundingFirm to observe and liquidity risk within Corporate Treasury. This centralized approach maximizes liquidity access, minimizes funding costsrespond effectively to local market dynamics 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 Firm’s liquidity position.
Liquidity monitoring
client needs. The Firm employs a varietymanages and monitors its use of wholesale funding markets to maximize market access, optimize funding cost and ensure diversification of its funding profile across geographic regions, tenors, currencies, product types and counterparties, using key 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 Firm’s reliance onincluding short-term unsecured funding as a percentage of total liabilities, as well asand in relation to high-quality assets, and counterparty concentration.
Sources of funds
A key strength of the relationshipFirm is its diversified deposit franchise, through each of short-term unsecuredits lines of business, which provides a stable source of funding to highly-liquid assets,and limits reliance on the wholesale funding markets. As of December 31, 2012, the Firm’s deposits-to-loans ratio was 163%, compared with 156% at December 31, 2011.
As of December 31, 2012, total deposits for the Firm were $1,193.6 billion, compared with $1,127.8 billion at December 31, 2011 (55%and other balance sheet measures.54% of total liabilities at December 31, 2012 and 2011, respectively). The increase in deposits was predominantly due to growth in retail and wholesale deposits. For further information, see Balance Sheet Analysis on pages 106–108 of this Annual Report.
The Firm performs regular liquidity stress tests as parttypically experiences higher customer deposit inflows at period-ends. Therefore, average deposit balances are more representative of its liquidity monitoring activities.deposit trends. The purposetable below summarizes, by line of the liquidity stress tests is intended to ensure sufficient liquiditybusiness, average deposits for the Firm under both idiosyncraticyear ended December 31, 2012 and systemic market stress conditions. These scenarios measure the Firm’s liquidity position across a full-year horizon by analyzing the net funding gaps resulting from contractual and contingent cash and collateral outflows versus the Firm’s 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 Firm’s principal U.S. broker-dealer subsidiary.
The Firm currently has liquidity in excess of its projected full-year liquidity needs under both its idiosyncratic stress scenario (which evaluates the Firm’s 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 Firm’s 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 takes2011, respectively.


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Management'sManagement’s discussion and analysis

Deposits  Year ended December 31,
 December 31, Average
(in millions)20122011 20122011
Consumer & Community Banking$438,484
$397,825
 $413,911
$382,678
Corporate & Investment Bank385,560
362,384
 353,048
317,213
Commercial Banking198,383
196,366
 181,805
157,899
Asset Management144,579
127,464
 129,208
106,421
Corporate/Private Equity26,587
43,767
 27,911
47,779
Total Firm$1,193,593
$1,127,806
 $1,105,883
$1,011,990
A significant portion of the Firm’s deposits are retail deposits (37% and 35% at December 31, 2012 and 2011, respectively), which are considered particularly stable as they are less sensitive to interest rate changes or market volatility. Additionally, the majority of the Firm’s institutional deposits are also considered to be stable sources of funding since they are generated from customers that maintain operating service relationships with the Firm. For further discussions of deposit balance trends, see the discussion of the results for the Firm’s business segments and the Balance Sheet Analysis on pages 80–104 and 106–108, respectively, of this Annual Report.
Short-term funding
Short-term unsecured funding sources include federal funds and Eurodollars purchased; certificates of deposit; time deposits; commercial paper; and other borrowed funds that generally have maturities of one year or less.
The Firm’s reliance on short-term unsecured funding sources is limited. A significant portion of the total commercial paper liabilities, approximately 72% as of December 31, 2012, as shown in the table below, were originated from deposits that customers choose to sweep into consideration regulatory restrictionscommercial paper liabilities as a cash management
program offered by CIB and are not sourced from wholesale funding markets.
The Firm’s sources of short-term secured funding primarily consist of securities loaned or sold under agreements to repurchase. Securities loaned or sold under agreements to repurchase 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, and constitute a significant portion of the federal funds purchased and securities loaned or sold under purchase agreements. The increase in the balance at December 31, 2012, compared with the balance at December 31, 2011 was predominantly because of higher secured financing of the Firm’s assets. The balances associated with securities loaned or sold under agreements to repurchase fluctuate over time due to customers’ investment and financing activities; the Firm’s demand for financing; the ongoing management of the mix of the Firm’s liabilities, including its secured and unsecured financing (for both the investment and market-making portfolios); and other market and portfolio factors.
At December 31, 2012, the balance of total unsecured and secured other borrowed funds increased, compared with the balance at December 31, 2011. The increase was primarily driven by an increase in term federal funds purchased and in CIB structured notes. The average balance for the year ended December 31, 2012, decreased from the prior year, predominantly driven by maturities of short-term unsecured bank notes and other unsecured borrowings, and other secured short-term borrowings.
For additional information, see the Balance Sheet Analysis on pages 106–108 and Note 13 on page 249 of this Annual Report. The following table summarizes by source select short-term unsecured and secured funding as of December 31, 2012 and 2011, and average balances for the year ended December 31, 2012 and 2011, respectively.

 December 31, 2012December 31, 2011 Year ended December 31,
Select Short-term funding Average
(in millions) 20122011
Commercial paper:     
Wholesale funding$15,589
$4,245
 $14,302
$6,119
Client cash management39,778
47,386
 36,478
36,534
Total commercial paper$55,367
$51,631
 $50,780
$42,653
      
Other borrowed funds$26,636
$21,908
 $24,174
$30,943
      
Securities loaned or sold under agreements to repurchase:     
Securities sold under agreements to repurchase$212,278
$191,649
 $219,625
$228,514
Securities loaned23,125
14,214
 20,763
19,438
Total securities loaned or sold under agreements to repurchase(a)(b)(c)
$235,403
$205,863
 $240,388
$247,952
(a)Excludes federal funds purchased.
(b)Excludes long-term structured repurchase agreements of $3.3 billion and $6.1 billion as of December 31, 2012 and 2011, respectively, and average balance of $7.0 billion and $4.6 billion for the years ended December 31, 2012 and 2011, respectively.
(c)Excludes long-term securities loaned of $457 million as of December 31, 2012, and average balance of $113 million for the year ended December 31, 2012. There were no long-term securities loaned as of December 31, 2011.

128JPMorgan Chase & Co./2012 Annual Report


Long-term funding and issuance
Long-term funding provides additional sources of stable funding and liquidity for the Firm. The majority of the Firm’s long-term unsecured funding is issued by the parent holding company to provide maximum flexibility in support of both bank and nonbank subsidiary funding.
The following table summarizes long-term unsecured issuance and maturities or redemption for the years ended December 31, 2012 and 2011, respectively. For additional information, see Note 21 on pages 297–299 of this Annual Report.
Long-term unsecured funding
Year ended December 31,
(in millions)
2012 2011
Issuance   
Senior notes issued in the U.S. market$15,695
 $29,043
Senior notes issued in non-U.S. markets8,341
 5,173
Total senior notes24,036
 34,216
Trust preferred securities—
 —
Subordinated debt—
 —
Structured notes15,525
 14,761
Total long-term unsecured funding – issuance$39,561
 $48,977
    
Maturities/redemptions   
Total senior notes$40,484
 $36,773
Trust preferred securities9,482
 101
Subordinated debt1,045
 2,912
Structured notes20,183
 18,692
Total long-term unsecured funding – maturities/redemptions$71,194
 $58,478
Following the Federal Reserve’s announcement on June 7, 2012, of proposed rules which will implement the phase-out of Tier 1 capital treatment for trust preferred securities, the Firm announced on June 11, 2012, that limitit would redeem approximately $9.0 billion of trust preferred securities pursuant to redemption provisions relating to the extentoccurrence of a “Capital Treatment Event” (as defined in the documents governing those securities). The redemption was completed on July 12, 2012.
The Firm raises secured long-term funding through securitization of consumer credit card loans, residential mortgages, auto loans and student loans, as well as through advances from the FHLBs, all of which increase funding and investor diversity.
The following table summarizes the securitization issuance and FHLB advances and their respective maturities or redemption for the years ended December 31, 2012 and 2011.
Long-term secured funding    
Year ended
December 31,
Issuance Maturities/Redemptions
(in millions)20122011 20122011
Credit card securitization$10,800
$1,775
 $13,187
$13,556
Other securitizations(a)
—
—
 487
478
FHLB advances35,350
4,000
 11,124
9,155
Total long-term secured funding$46,150
$5,775
 $24,798
$23,189
(a)Other securitizations includes securitizations of residential mortgages, auto loans and student loans.
The Firm’s wholesale businesses also securitize loans for client-driven transactions; those client-driven loan securitizations are not considered to which bank subsidiaries may extend creditbe a source of funding for the Firm and are not included in the table above. For further description of the client-driven loan securitizations, see Note 16 on pages 280–291 of this Annual Report.
Parent holding company and subsidiary funding
The parent holding company acts as an important source of funding to its subsidiaries. The Firm’s liquidity management is therefore intended to ensure that liquidity at the parent holding company is maintained at levels sufficient to fund the operations of the parent holding company and other nonbank subsidiaries.its subsidiaries and affiliates for an extended period of time in a stress environment where access to normal funding sources is disrupted.
To effectively monitor the adequacy of liquidity and funding at the parent holding company, the Firm uses three primary measures:
Number of months of pre-funding: The Firm targets pre-funding of the parent holding company to ensure that both contractual and non-contractual obligations can be met for at least 18 months assuming no access to wholesale funding markets. However, due to conservative liquidity management actions taken by the Firm, the current pre-funding of such obligations is greater than target.
Excess cash: Excess cash is managed to ensure that daily cash requirements can be met in both normal and stressed environments. Excess cash generated by parent holding company issuance activity is usedplaced on deposit with or as advances to purchase liquid collateral through reverse repurchase agreements or is placed with both bank and nonbank subsidiaries or held as liquid collateral purchased through reverse repurchase agreements.
Stress testing: The Firm conducts regular stress testing for the parent holding company and major bank subsidiaries as well as the Firm’s principal U.S. and U.K. broker-dealer subsidiaries to ensure sufficient liquidity for the Firm in the form of deposits and advances to satisfy a portion of subsidiary funding requirements.stressed environment. The Firm’s


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Management’s discussion and analysis

liquidity management takes into consideration its subsidiaries'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 For further information, see 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.Stress testing discussion below.
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, includingincludes cash on deposit at central banks, and cash proceeds reasonably expected to be received in secured financings of highly liquid, unencumbered high-quality securities such(such as government-issuedsovereign debt, government- and FDIC-guaranteedgovernment-guaranteed corporate debt, U.S. government agency debt, and agency MBS.MBS) that are available to the Firm on a consolidated basis. The liquidity amount estimated to be realized from secured financings is based on management’s current judgment and assessment of the Firm’s ability to quickly raise funds from secured financings.
The Global Liquidity Reserve also includes the Firm’s 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, 2011,2012, the Global Liquidity Reserve was estimated to be approximately $379$491 billion,, compared with approximately $262$379 billion at December 31, 2010.2011. 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 increasefluctuates due to changes in deposits, during the second half of 2011. For further discussion see Sources of funds below.Firm’s purchase and investment activities and general market conditions.
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.securities available to raise liquidity, if required.
Stress testing
Liquidity stress tests are intended to ensure sufficient liquidity for the Firm under a variety of adverse scenarios. Results of stress tests are therefore considered in the formulation of the Firm’s funding plan and assessment of its liquidity position. Liquidity outflow assumptions are
 
Basel III
On December 16, 2010, the Basel Committee published the final Basel III rules pertaining to capitalmodeled across a range of time horizons and liquidity requirements, including minimum standards for short-term liquidity coverage – the liquidity coverage ratio (the “LCR”) –varying degrees of market and term funding – the net stable funding ratio (the “NSFR”). For more information, see the discussionidiosyncratic stress. Standard stress tests are performed on Basel III on pages 121–122 of this Annual Report.
Funding
Sources of funds
A key strength of the Firm is its diversified deposit franchise, through the RFS, CB, TSSa regular basis 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 depositsad hoc stress tests are performed as required. Stress scenarios are produced 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 balancesparent holding company and to a lesser extent, consumer deposit balances. The increase in wholesale client balances, particularly in TSSthe Firm’s major bank subsidiaries as well as the Firm’s principal U.S. 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.U.K. broker-dealer subsidiaries. In addition, separate regional liquidity stress testing is performed.
The Firm typically experiences higher customer deposit inflows at period-ends. A significant portionLiquidity stress tests assume all of the Firm’s depositscontractual obligations are retail deposits (35%met and 40% at December 31, 2011 and 2010, respectively), which are considered particularly stable as they are less sensitivealso take into consideration varying levels of access to interest rate changes or market volatility. A significant portion of the Firm’s 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 Firm’s 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 Firm’s business segments and the Balance Sheet Analysis on pages 79–80 and 110–112, respectively, of this Annual Report.
Additional sources of funding include a variety of unsecured and secured short-termfunding markets. Additionally, assumptions with respect to potential non-contractual and long-term instruments. Short-term unsecuredcontingent outflows include, but are not limited to, the following:
Deposits
◦For bank deposits that have no contractual maturity, the range of potential outflows reflect the type and size of deposit account, and the nature and extent of the Firm’s relationship with the depositor.
Secured funding sources include federal funds and Eurodollars purchased, certificates of deposit, time deposits, commercial paper and other borrowed funds. Long-term unsecured
◦Range of haircuts on collateral based on security type and counterparty.
Derivatives
◦Margin calls by exchanges or clearing houses;
◦Collateral calls associated with ratings downgrade triggers and variation margin;
◦Outflows of excess client collateral;
◦Novation of derivative trades.
Unfunded commitments
◦Potential facility drawdowns reflecting the type of commitment and counterparty.
Contingency funding sources include long-term debt, preferred stock and common stock.plan
The Firm’s short-term secured sourcescontingency funding plan (“CFP”), which is reviewed and approved by ALCO, provides a documented framework for managing both temporary and longer-term unexpected adverse liquidity situations. It sets out a list of funding consistindicators and metrics that are reviewed on a daily basis to identify the emergence of securities loanedincreased risks or soldvulnerabilities in the Firm’s liquidity position. The CFP identifies alternative contingent liquidity resources that can be accessed under agreements to repurchase and other short-term secured other borrowed funds. Secured long-term funding sources include asset-backedadverse liquidity circumstances.



128130 JPMorgan Chase & Co./20112012 Annual Report


Credit ratings
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 cost and availability of financing are influenced by credit ratings. Reductions in these ratings could have an adverse effect on the Firm’s reliance on short-term unsecuredaccess to liquidity sources, increase the cost of funds, trigger additional collateral or funding sources is limited. Short-term unsecuredrequirements and decrease the number of investors and counterparties willing to lend to the Firm. Additionally, the Firm’s 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;requirements for VIEs 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 asthird-party commitments may be adversely affected by 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 credit ratings. For additional information on the balance, compared withimpact of a credit ratings downgrade on the balance at December 31, 2010, and the average balancefunding requirements for the year ended December 31, 2011, was driven largely by lower financing of the Firm’s 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 Firm’s demand for financing; the Firm’s matched book activity; the ongoing management of the mix of the Firm’s 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 wasVIEs, and on derivatives and collateral agreements, see Special-purpose entities on page $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, 2010109, 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,Credit risk, liquidity risk and other secured short-term borrowings.
For additional information, see the Balance Sheet Analysiscredit-related contingent features in Note 5 on pages 110–112, Note 13 on page 231 and the table of Short-term and other borrowed funds on page 307224–225, of this Annual Report.
Long-termCritical 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 issuancedisciplined liquidity monitoring procedures.


DuringThe credit ratings of the year ended parent holding company and certain of the Firm’s significant operating subsidiaries as of December 31, 2011,2012, were as follows.
JPMorgan Chase & Co.
JPMorgan Chase Bank, N.A.
Chase Bank USA, N.A.
J.P. Morgan Securities LLC
December 31, 2012Long-term issuerShort-term issuerOutlookLong-term issuerShort-term issuerOutlookLong-term issuerShort-term issuerOutlook
Moody’s Investor ServicesA2P-1NegativeAa3P-1StableA1P-1Stable
Standard & Poor’sAA-1NegativeA+A-1NegativeA+A-1Negative
Fitch RatingsA+F1StableA+F1StableA+F1Stable
On June 21, 2012, Moody’s downgraded the long-term ratings of the Firm issued $49.0 billionand affirmed all its short-term ratings. The outlook for the parent holding company was left on negative reflecting Moody’s view that government support for U.S. bank holding company creditors is becoming less certain and less predictable. Such ratings actions concluded Moody’s review of 17 banks and securities firms with global capital markets operations, including the Firm, as a result of which all of these institutions were downgraded by various degrees.
Following the disclosure by the Firm, on May 10, 2012, of losses from the synthetic credit portfolio held by CIO, Fitch downgraded the Firm and placed all parent and subsidiary long-term debt, including $29.0 billionratings on Ratings Watch Negative. At that time, S&P also revised its outlook on the ratings of senior notes issuedthe Firm from Stable to Negative. Subsequently, on October 10, 2012, Fitch revised the outlook to Stable and affirmed the Firm’s ratings.
The above-mentioned rating actions did not have a material adverse impact on the Firm’s cost of funds and its ability to fund itself. Further downgrades of the Firm’s long-term ratings by one notch or two notches could result in a downgrade of the Firm’s short-term ratings. If this were to occur, the Firm believes its cost of funds could increase and access to certain funding markets could be reduced. The nature and magnitude of the impact of further ratings downgrades depends on numerous contractual and behavioral factors (which the Firm believes are incorporated in the U.S. market, $5.2 billionFirm’s liquidity risk and stress testing metrics). The Firm believes it maintains sufficient liquidity to withstand any potential decrease in funding capacity due to further ratings downgrades.
JPMorgan Chase’s unsecured debt does not contain requirements that would call for an acceleration of senior notes issuedpayments, maturities or changes in non-U.S. markets,the structure of the existing debt, provide any limitations on future borrowings or require additional collateral, based on unfavorable changes in the Firm’s credit ratings, financial ratios, earnings, or stock price.
Rating agencies continue to evaluate various ratings factors, such as regulatory reforms, rating uplift assumptions surrounding government support, and $14.8 billioneconomic uncertainty and sovereign creditworthiness, and their potential impact on ratings of IB structured notes. In addition, in January 2012,financial institutions. Although the Firm issued $3.3 billion of senior notesclosely monitors and endeavors to manage factors influencing its credit ratings, there is no assurance that its credit ratings will not be changed 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.future.
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 Firm’s 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.


JPMorgan Chase & Co./20112012 Annual Report 129131
Management'sManagement’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, 20112012, 20102011 and 20092010, cash and due from banks decreased $5.9 billion, and increased by $32.0 billion and $1.4$1.4 billion,, and decreased $689 million, respectively. The following discussion highlights the major activities and transactions that affected JPMorgan Chase'sChase’s cash flows during 20112012, 20102011 and 20092010, respectively.
Cash flows from operating activities
JPMorgan Chase’s operating assets and liabilities support the Firm’s 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 Firm’s ability to generate cash through short- and long-term borrowings are sufficient to fund the Firm’s operating liquidity needs.
For the year ended December 31, 20112012, net cash provided by operating activities was $95.925.1 billion. This resulted from a decrease in securities borrowed reflecting a shift in the deployment of excess cash to resale agreements, as well as lower client activity in CIB, and lower trading assets - derivative receivables, primarily related to the decline in the U.S. dollar and tightening of credit spreads. Partially offsetting these cash inflows was a decrease in accounts payable and other liabilities predominantly due to lower CIB client balances, and an increase in trading assets - debt and equity instruments driven by client-driven market-making activity in CIB. Net cash generated from operating activities was higher than net income largely as a result of adjustments for noncash items such as depreciation and amortization, provision for credit losses, and stock-based compensation. Cash used to acquire loans was higher than cash proceeds received from sales and paydowns of such loans originated and purchased with an initial intent to sell, and also reflected a lower level of activity over the prior-year period.
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 liabilities–liabilities – debt and equity instruments, driven by clientclient-driven market-making activity in IB;CIB; an increase in accounts payable and other liabilities predominantly due to higher IB customer balances;CIB client balances, and a decrease in accrued interest and accounts receivables, primarily in IB,CIB, 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 assets–assets – debt 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 non-cash 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 Firm’s 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, 20112012, net cash of $170.8119.8 billion was used in investing activities. This resulted from an increase in securities purchased under resale agreements due to deployment of the Firm’s excess cash by Treasury; higher deposits with banks reflecting placements of the Firm’s excess cash with various central banks, primarily Federal Reserve Banks; and higher levels of wholesale loans, primarily in CB and AM, driven by higher wholesale activity across most of the Firm’s regions and businesses. Partially offsetting these cash outflows were a decline in consumer, excluding credit card, loans predominantly due to mortgage-related paydowns and portfolio run-off, and a decline in credit card loans due to higher repayment rates; and proceeds from maturities and sales of AFS securities, which were higher than the cash used to acquire new AFS securities.
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'sFirm’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'sFirm’s sale of the Kohl'sKohl’s portfolio.


132JPMorgan Chase & Co./2012 Annual Report


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 Firm’s 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 IBCIB 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,


130JPMorgan Chase & Co./2011 Annual Report


predominantly due to higher financing volume in IB;CIB; 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 asset-backed commercial paper issued by money market mutual funds in connection with the Federal Reserve Bank of Boston’s 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 Firm’s management of interest rate risk and investment of cash resulting from an excess funding position.
Cash flows from financing activities
The Firm’s financing activities primarily reflect cash flows related topredominantly include taking customer deposits, and issuing long-term debt as well as preferred and common stock. For the year ended December 31, 20112012, net cash provided by financing activities was $107.787.7 billion. This was driven by proceeds from long-term borrowings and a higher level of securitized credit cards; an increase in deposits due to growth in both consumer and wholesale deposits (for additional information, see Balance Sheet Analysis on pages 106–108 of this Annual Report); an increase in federal funds purchased and securities loaned or sold under repurchase agreements due to higher secured financings of the Firm’s assets; an increase in commercial paper issuance in the wholesale funding markets to meet short-term funding needs, partially offset by a decline in the volume of client deposits and other third-party liability balances related to CIB’s liquidity management product; an increase in other borrowed funds due to higher secured and unsecured short-term borrowings to meet short-term funding needs; and proceeds from the issuance of preferred stock. Partially offsetting these cash inflows were redemptions and maturities of long-term borrowings, including TruPS, and securitized credit cards; and payments of cash dividends on common and preferred stock and repurchases of common stock and warrants.
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 TSSCIB 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'sCIB’s cash management product.program. Cash was used to reduce securities sold under repurchase agreements, predominantly in IB,CIB, 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 long-term 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;
a decline in deposits associated with wholesale funding activities due to the Firm’s lower funding needs; lower deposit levels in TSS,CIB, offset partially by net inflows from existing customers and new business in AM, CB and RFS;CCB; 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 IBCIB partially offset by a decrease in CIOCorporate 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 short-term 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 Firm’s 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 Firm’s access to liquidity sources, increase the cost of funds, trigger additional collateral or funding requirements and decrease the number of investors and counterparties willing to lend to the Firm. Additionally, the Firm’s funding requirements for VIEs and other third-party commitments may be adversely affected by a decline in credit ratings. For additional information on the impact of a credit ratings downgrade on the funding requirements for VIEs, and on derivatives and collateral agreements, see Special-purpose entities on page 113, and Note 6 on pages 202–210, 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.


JPMorgan Chase & Co./20112012 Annual Report 131133
Management'sManagement’s discussion and analysis

The credit ratings of the parent holding company and each of the Firm’s significant banking subsidiaries as of December 31, 2011, were as follows.
Short-term debtSenior long-term debt
Moody’sS&PFitchMoody’sS&PFitch
JPMorgan Chase & Co.P-1A-1F1+Aa3AAA-
JPMorgan Chase Bank, N.A.P-1A-1F1+Aa1A+AA-
Chase Bank USA, N.A.P-1A-1F1+Aa1A+AA-
On July 18, 2011, Moody’s placed the long-term debt ratings of the Firm and its subsidiaries under review for possible downgrade. The Firm’s current long-term debt ratings by Moody’s reflect “support uplift” above the Firm’s stand-alone financial strength due to Moody’s assessment of the likelihood of U.S. government support. Moody’s action was directly related to Moody’s placing the U.S. government’s Aaa rating on review for possible downgrade on July 13, 2011. Moody’s indicated that the action did not reflect a change to Moody’s opinion of the Firm’s stand-alone 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, Moody’s 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 Moody’s 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 Moody’s and Fitch on JPMorgan Chase and its principal bank subsidiaries remained unchanged at December 31, 2011, from
December 31, 2010. At December 31, 2011, Moody’s outlook was negative, while S&P’s and Fitch’s 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 Firm’s senior long-term debt ratings were downgraded by one notch or two notches, the Firm believes its cost of funds would increase; however, the Firm’s ability to fund itself would not be materially adversely impacted. JPMorgan Chase’s unsecured debt does not contain requirements that would call for an acceleration of payments, maturities or changes in the structure of the existing debt, provide any limitations on future borrowings or require additional collateral, based on unfavorable changes in the Firm’s credit ratings, financial ratios, earnings, or stock price.
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, ranging from large corporate and institutional clients to the individual consumers and small businesses. In its consumer businesses, the Firm is exposed to credit risk through its real estate, credit card, auto, business banking and student lending businesses, with a primary focus of serving the prime segment of the consumer market. Originated mortgage loans are retained in the mortgage portfolio, or securitized or sold to U.S. government agencies and U.S. government-sponsored enterprises; other types of consumer loans are typically retained on balance sheet. In its wholesale businesses, the Firm is exposed to credit risk through its underwriting, lending and derivatives activities with and for clients and counterparties, as well as through its operating services activities, such as cash management and clearing activities. Loans originated or acquired by the Firm’s 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 theThe Firm’s syndicated loan business, distributingdistributes a significant percentage of originations into the market place and
targeting exposure held in the retained wholesale is an important component of 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.management.


132JPMorgan 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 Firm’s 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
Risk identification and measurement
The Firm is exposed to credit risk through its lending, and capital markets activities.activities and operating services businesses. 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 borrower’s credit score versus wholesale risk-rating) and risk management and collection processes (e.g., retail collection center versus centrally managed workout groups). Credit risk measurement is based on the 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 credit losses for the consumer and wholesale and consumer portfolios as follows:
portfolios. Probable credit losses inherent in the Firm’s loan portfolio and related commitments are based primarily uponreflected in the allowance for credit losses. These losses are estimated using statistical estimatesanalyses and other factors as described in Note 15 on pages 276–279 of credit losses as a result of obligor or counterparty default.this Annual Report. However, probable losses are not the sole indicators of risk.
Unexpected losses are reflected in the allocation of credit risk capital and represent the potential volatility of actual losses relative to the amount of probable level of incurred losses.
Risk measurement forlosses inherent in 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 assignedportfolio. The methodologies used 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,measure probable and unexpected loss calculations are basedcredit losses depends on estimatesthe characteristics of probability of default and loss severity given a default. These risk-rated portfolios arethe credit exposure, as described below.
Scored exposure
The scored portfolio is generally held in IB, CB, TSSCCB and AM; they also include approximately $20.0
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. For the scored portfolio, probable and unexpected credit losses are based on statistical analysis of credit losses over discrete periods of time. Probable credit losses inherent in the portfolio are estimated using sophisticated portfolio modeling, credit scoring, and decision-support tools, which take into accountconsider loan-level factors such as delinquency LTV ratios,status, credit scores, collateral values, and geography. These analyses are appliedother risk factors. Estimated probable and unexpected credit losses also consider uncertainties and other factors, including those related to current macroeconomic and political conditions, the Firm’s current portfolios in order to estimate the severityquality 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 behaviorunderwriting standards, and the macroeconomic environment. Theseother internal and external factors. The factors and analysesanalysis are updated on a quarterly basis or more frequently as market conditions dictate.
Risk-rated exposure
Risk-rated portfolios are generally held in CIB, CB and AM, but also include certain business banking and auto dealer loans held in CCB that are risk-rated because they have characteristics similar to commercial loans. For the risk-rated portfolio, probable and unexpected credit losses are based on estimates of the probability of default and loss severity given a default. The estimation process begins with risk-ratings that are assigned to each loan facility to differentiate risk within the portfolio. These risk-ratings are reviewed on an ongoing basis by Credit Risk management and revised as needed to reflect the borrower’s current financial position, risk profile and related collateral. The probability of default is the likelihood that a loan will default and not be fully repaid by the borrower. The probability of default is estimated for each borrower, and a loss given default is estimated considering the collateral and structural support for each credit facility. The calculations and assumptions are based on management


134JPMorgan Chase & Co./2012 Annual Report


information systems and methodologies that are under continual review.
Stress testing
Stress testing is important in measuring and managing credit risk in the Firm’s credit portfolio. The process assesses the potential impact of alternative economic and business scenarios on estimated credit losses for the Firm. Economic scenarios, and the parameters underlying those scenarios, are defined centrally and applied consistently across the businesses. These scenarios are articulated in terms of macroeconomic factors, which may lead to credit migration, changes in delinquency trends and potential losses in the credit portfolio. In addition to the periodic stress testing processes, management also considers additional stresses outside these scenarios, as necessary.
Risk monitoring and controlmanagement
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 amelioratedimproved 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. 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. 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. InUnder the Firm’s consumer credit portfolio,model risk policy, new significant risk management models, as well as major changes to such models, are required to be reviewed and approved by the Model Review Group prior to implementation into the operating environment. Internal Audit


JPMorgan Chase & Co./2011 Annual Report133
Management's discussion and analysis

department also 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 231–252250–275 of this Annual Report.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 Firm’s wholesale credit risk exposure is accomplished through a number of means including:
Loan underwriting and credit approval process
Loan syndications and participations
Loan sales and securitizations
Credit derivatives
Use of master netting agreements
Collateral and other risk-reduction techniques
In addition to Risk Management, the Firm’s Internal Audit department performs periodic exams, as well as continuous review, where appropriate, of the Firm’s consumer and wholesale portfolios.
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,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

Risk reporting
To enable monitoring of credit risk and effective decision-making, aggregate credit exposure, credit quality forecasts, concentration levels and risk profile changes are reported regularly to senior 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.management and the Board of Directors. For further discussion of Risk monitoring and control, see pages 126–127page 125 of this Annual Report.Report.





JPMorgan Chase & Co./2012 Annual Report135
Management’s discussion and analysis

CREDIT PORTFOLIO
20112012 Credit Risk Overview
In the first half of 2011, theThe credit environment showed signs of improvement compared within 20102012. During the second half of the year, macroeconomic conditions became more challenging, with increased market volatility and heightened continued to improve, but concerns persisted around the European financial crisis.crisis and the U.S. fiscal situation. 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. The Firm did see a minimal increase in delinquencies in the fourth quarter as a result of Superstorm Sandy but currently does not anticipate losses to be material. 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 20102011 and contributed to the Firm’s reduction in the allowance for credit losses, particularly in Card.
losses. The credit qualitycurrent year included the effect of the Firm's wholesale portfolio improved in 2011. The rise in commercial client activityregulatory guidance implemented during 2012 which resulted in the Firm reporting 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 Firm’s 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
decreased from higher levels experienced in 2010, including a reduction in nonaccrual loans by over one half. As a result, the ratioadditional $3.0 billion 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 231–252 ofat December 31, 2012 (see page 146 in this Annual Report.Report for further information).Excluding the impact of the reporting changes noted above, nonperforming loans would have decreased from 2011.
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 145–154138–149 and Note 14 on pages 231–252250–275 of this Annual Report.Report.
The wholesale credit environment remained favorable throughout 2012. The rise in commercial client activity resulted in an increase in credit exposure across most businesses, regions and products. Underwriting guidelines across all areas of lending continue to remain a key point of focus, consistent with evolving market conditions and the Firm’s 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, wholesalecriticized assets, nonperforming assets and charge-offs decreased from the higher levels experienced in 2011, including a reduction in nonaccrual loans by 40%. 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 250–275 of this Annual Report.


136JPMorgan Chase & Co./2012 Annual Report


The following table presents JPMorgan Chase’s credit portfolio as of December 31, 20112012 and 20102011. Total credit exposure was $1.81.9 trillion at December 31, 20112012, an


134JPMorgan Chase & Co./2011 Annual Report


increase of $44.451.1 billion from December 31, 20102011, primarily 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 $88.670.9 billion, partially offset by a decrease in the consumer portfolio of $44.219.8 billion. For further information on the changes in the credit portfolio, see Consumer Credit Portfolio on pages 138–149, and Wholesale Credit Portfolio on pages 150–159, of this Annual Report.
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 following 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 valuation changes in value recorded in noninterest revenue); and certain loans accounted for at fair value. The Firm also records certain loans accounted for at fair value in trading assets. For further information regarding these loans see Note 3 on pages 196–214 of this Annual Report. For additional information on the Firm’s loans and derivative receivables, including the Firm’s accounting policies, see Note 14 and Note 6 on pages 231–252250–275 and 202–210,218–227, respectively, of this Annual Report. Average retained loan balances are used for net charge-off rate calculations.Report.
Total credit portfolio    
December 31, 2012Credit exposure 
Nonperforming(b)(c)(d)(e)(f)
(in millions)20122011 20122011
Loans retained$726,835
$718,997
 $10,609
$9,810
Loans held-for-sale4,406
2,626
 18
110
Loans at fair value2,555
2,097
 93
73
Total loans – reported733,796
723,720
 10,720
9,993
Derivative receivables74,983
92,477
 239
297
Receivables from customers and other23,761
17,561
 —
—
Total credit-related assets832,540
833,758
 10,959
10,290
Assets acquired in loan satisfactions     
Real estate ownedNA
NA
 738
975
OtherNA
NA
 37
50
Total assets acquired in loan satisfactions
NA
NA
 775
1,025
Total assets832,540
833,758
 11,734
11,315
Lending-related commitments1,027,988
975,662
 355
865
Total credit portfolio$1,860,528
$1,809,420
 $12,089
$12,180
Credit Portfolio Management derivatives notional, net(a)
$(27,447)$(26,240) $(25)$(38)
Liquid securities and other cash collateral held against derivatives(13,658)(21,807) NA
NA
Total credit portfolio             
As of or for the year ended December 31, Credit exposure 
Nonperforming(c)(d)(e)
 Net charge-offs 
Average annual net charge-off rate(f)
 
(in millions, except ratios) 20112010 20112010 20112010 20112010 
Loans retained $718,997
$685,498
 $9,810
$14,345
 $12,237
$23,673
 1.78%3.39% 
Loans held-for-sale 2,626
5,453
 110
341
 —
—
 —
—
 
Loans at fair value 2,097
1,976
 73
155
 —
—
 —
—
 
Total loans – reported 723,720
692,927
 9,993
14,841
 12,237
23,673
 1.78
3.39
 
Derivative receivables 92,477
80,481
 18
34
 NA
NA
 NA
NA
 
Receivables from customers and interests in purchased receivables 17,561
32,932
 —
—
 —
—
 —
—
 
Total credit-related assets 833,758
806,340
 10,011
14,875
 12,237
23,673
 1.78
3.39
 
Lending-related commitments(a)
 975,662
958,709
 865
1,005
 NA
NA
 NA
NA
 
Assets acquired in loan satisfactions             
Real estate owned NA
NA
 975
1,610
 NA
NA
 NA
NA
 
Other NA
NA
 50
72
 NA
NA
 NA
NA
 
Total assets acquired in loan satisfactions
 NA
NA
 1,025
1,682
 NA
NA
 NA
NA
 
Total credit portfolio $1,809,420
$1,765,049
 $11,901
$17,562
 $12,237
$23,673
 1.78%3.39% 
Net credit derivative hedges notional(b)
 $(26,240)$(23,108) $(38)$(55) NA
NA
 NA
NA
 
Liquid securities and other cash collateral held against derivatives (21,807)(16,486) NA
NA
 NA
NA
 NA
NA
 
Year ended December 31,
(in millions, except ratios)
 20122011
Net charge-offs(g)
 $9,063
$12,237
Average retained loans   
Loans – reported 717,035
688,181
Loans – reported, excluding
  residential real estate PCI loans
 654,454
619,227
Net charge-off rates(g)
   
Loans – reported 1.26%1.78%
Loans – reported, excluding PCI 1.38
1.98
(a)The amounts in nonperforming represent commitments that are risk rated as nonaccrual.
(b)
Represents the net notional amount of protection purchased and sold of single-name and portfoliothrough credit derivatives used to manage both performing and nonperforming wholesale credit exposures; these derivatives do not qualify for hedge accounting under U.S. GAAP. Excludes the synthetic credit portfolio. For additional information, see Credit derivatives on pages 143–144158–159 and Note 6 on pages 202–210218–227 of this Annual Report.Report.
(b)Nonperforming includes nonaccrual loans, nonperforming derivatives, commitments that are risk rated as nonaccrual, real estate owned and other commercial and personal property.
(c)
At December 31, 20112012 and 20102011, nonperforming assets excluded: (1) mortgage loans insured by U.S. government agencies of $11.510.6 billion and $9.411.5 billion, respectively, that are 90 or more days past due; (2) real estate owned insured by U.S. government agencies of $954 million1.6 billion and $1.9 billion954 million, respectively; and (3) student loans insured by U.S. government agencies under the FFELP of $551525 million and $625551 million, respectively, that are 90 or more days past due. These amounts were excluded from nonaccrual loans as reimbursement of insured amounts is proceeding normally. In addition, the Firm’s policy is generally to exempt credit card loans from being placed on nonaccrual status as permitted by regulatory guidance issued by the Federal Financial Institutions Examination Council (“FFIEC”). 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.
(d)Excludes PCI loans. Because the Firm is recognizing interest income on each pool of PCI loans, they are all considered to be performing.
(e)
At December 31, 2012 and 2011, total nonaccrual loans represented 1.46% and 1.38%, respectively, of total loans. At December 31, 2012, included $1.8 billion of Chapter 7 loans and $1.2 billion of performing junior liens that are subordinate to senior liens that are 90 days or more past due. For more information, see Consumer Credit Portfolio on pages 138–149 of this Annual Report.
(f)Prior to the first quarter of 2012, reported amounts had only included defaulted derivatives; effective in the first quarter of 2012, reported amounts in all periods include both defaulted derivatives as well as derivatives that have been risk rated as nonperforming.
(g)
Net charge-offs and net charge-off rates for the year ended December 31, 2012, included $800 million of charge-offs of Chapter 7 loans. See Consumer Credit Portfolio on pages 138–149 of this Annual Report for further details.



JPMorgan Chase & Co./2012 Annual Report137
Management’s discussion and analysis

CONSUMER CREDIT PORTFOLIO
JPMorgan Chase’s consumer portfolio consists primarily of residential real estate loans, credit card loans, auto loans, business banking loans, and student loans. The Firm’s primary focus is on serving the prime segment of the consumer credit market. For further information on consumer loans, see Note 14 on pages 250–275 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, loan-to-value (“LTV”) ratios, FICO risk 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 250–275 of this Annual Report.
The credit performance of the consumer portfolio improved as the economy continued to slowly expand during 2012, resulting in a reduction in estimated credit losses, particularly in the residential real estate and credit card portfolios. However, high unemployment relative to the historical norm and weak housing prices continue to negatively impact the number of residential real estate loans being charged off and the severity of loss recognized on these loans. Early-stage residential real estate delinquencies (30–89 days delinquent), excluding government guaranteed loans, declined during the first half of the year, but increased during the second half of the year primarily due to seasonal impacts and the effect of Superstorm Sandy. Late-stage delinquencies (150+ days delinquent) continued to decline, but remain 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 continue to be recognized in accordance with the Firm’s 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, high unemployment and weak housing prices, 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 that are subordinate to a delinquent or modified senior lien) continue to contribute to uncertainty regarding overall residential real estate portfolio performance and have been considered in estimating the allowance for loan losses.


138JPMorgan Chase & Co./2012 Annual Report


The following table presents consumer credit-related information held by CCB as well as residential real estate loans reported in the Asset Management and the Corporate/Private Equity segments for the dates indicated. For further information about the Firm’s nonaccrual and charge-off accounting policies, see Note 14 on pages 250–275 of this Annual Report.
Consumer credit portfolio
As of or for the year ended December 31,
(in millions, except ratios)
Credit exposure 
Nonaccrual loans(f)(g)(h)
 
Net charge-offs(i)
 
Average annual net charge-off rate(i)(j)
20122011 20122011 20122011 20122011
Consumer, excluding credit card           
Loans, excluding PCI loans and loans held-for-sale           
Home equity – senior lien$19,385
$21,765
 $931
$495
 $279
$284
 1.33%1.20%
Home equity – junior lien48,000
56,035
 2,277
792
 2,106
2,188
 4.07
3.69
Prime mortgage, including option ARMs76,256
76,196
 3,445
3,462
 487
708
 0.64
0.95
Subprime mortgage8,255
9,664
 1,807
1,781
 486
626
 5.43
5.98
Auto(a)
49,913
47,426
 163
118
 188
152
 0.39
0.32
Business banking18,883
17,652
 481
694
 411
494
 2.27
2.89
Student and other12,191
14,143
 70
69
 340
420
 2.58
2.85
Total loans, excluding PCI loans and loans held-for-sale232,883
242,881
 9,174
7,411
 4,297
4,872
 1.81
1.97
Loans – PCI(b)
           
Home equity20,971
22,697
 NA
NA
 NA
NA
 NA
NA
Prime mortgage13,674
15,180
 NA
NA
 NA
NA
 NA
NA
Subprime mortgage4,626
4,976
 NA
NA
 NA
NA
 NA
NA
Option ARMs20,466
22,693
 NA
NA
 NA
NA
 NA
NA
Total loans – PCI59,737
65,546
 NA
NA
 NA
NA
 NA
NA
Total loans – retained292,620
308,427
 9,174
7,411
 4,297
4,872
 1.43
1.54
Loans held-for-sale—
—
 —
—
 —
—
 —
—
Total consumer, excluding credit card loans292,620
308,427
 9,174
7,411
 4,297
4,872
 1.43
1.54
Lending-related commitments           
Home equity – senior lien(c)
15,180
16,542
         
Home equity – junior lien(c)
21,796
26,408
         
Prime mortgage4,107
1,500
         
Subprime mortgage—
—
         
Auto7,185
6,694
         
Business banking11,092
10,299
         
Student and other796
864
         
Total lending-related commitments60,156
62,307
         
Receivables from customers(d)
113
100
         
Total consumer exposure, excluding credit card352,889
370,834
         
Credit Card           
Loans retained(e)
127,993
132,175
 1
1
 4,944
6,925
 3.95
5.44
Loans held-for-sale—
102
 —
—
 —
—
 —
—
Total credit card loans127,993
132,277
 1
1
 4,944
6,925
 3.95
5.44
Lending-related commitments(c)
533,018
530,616
         
Total credit card exposure661,011
662,893
         
Total consumer credit portfolio$1,013,900
$1,033,727
 $9,175
$7,412
 $9,241
$11,797
 2.17%2.66%
Memo: Total consumer credit portfolio, excluding PCI$954,163
$968,181
 $9,175
$7,412
 $9,241
$11,797
 2.55%3.15%
(a)
At December 31, 2012 and 2011, excluded operating lease-related assets of $4.7 billion and $4.4 billion, respectively.
(b)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.
(c)Credit card and home equity lending-related commitments represent the total available lines of credit for these products. The Firm has not experienced, and does not anticipate, that all available lines of credit would be used at the same time. For credit card and home equity commitments (if certain conditions are met), the Firm can reduce or cancel these lines of credit by providing the borrower notice or, in some cases, without notice as permitted by law.
(d)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.
(e)Includes accrued interest and fees net of an allowance for the uncollectible portion of accrued interest and fee income.
(f)
At December 31, 2012 and 2011, nonaccrual loans excluded: (1) mortgage loans insured by U.S. government agencies of $10.6 billion and $11.5 billion, respectively, that are 90 or more days past due; and (2) student loans insured by U.S. government agencies under the FFELP of $525 million and $551 million, respectively, that are 90 or more days past due. These amounts were excluded from nonaccrual loans as reimbursement of insured amounts is proceeding normally. In addition, the Firm’s policy is generally to exempt credit card loans from being placed on nonaccrual status as permitted by regulatory guidance.

JPMorgan Chase & Co./2012 Annual Report139
Management’s discussion and analysis

(g)Excludes PCI loans. Because the Firm is recognizing interest income on each pool of PCI loans, they are all considered to be performing.
(h)
At December 31, 2012, included $1.8 billion of Chapter 7 loans as well as $1.2 billion of performing junior liens that are subordinate to senior liens that are 90 days or more past due. See Consumer Credit Portfolio on pages 138–149 of this Annual Report for further details.
(i)
Charge-offs and net charge-off rates for the year ended December 31, 2012, included net charge-offs of Chapter 7 loans of $91 million for senior lien home equity, $539 million for junior lien home equity, $47 million for prime mortgage, including option ARMs, $70 million for subprime mortgage and $53 million for auto loans. Net charge-off rates for the for the year ended December 31, 2012, excluding these net charge-offs would have been 0.90%, 3.03%, 0.58%, 4.65% and 0.28% for the senior lien home equity, junior lien home equity, prime mortgage, including option ARMs, subprime mortgages and auto loans, respectively. See Consumer Credit Portfolio on pages 138–149 of this Annual Report for further details.
(j)
Average consumer loans held-for-sale were $433 million and $924 million, respectively, for the years ended December 31, 2012 and 2011. These amounts were excluded when calculating net charge-off rates.

Consumer, excluding credit card
At December 31, 2012, the Firm reported, in accordance with regulatory guidance, $1.7 billion of residential real estate and auto loans that have been discharged under Chapter 7 bankruptcy and not reaffirmed by the borrower (“Chapter 7 loans”) as collateral-dependent nonaccrual troubled debt restructurings (“TDRs”), regardless of their delinquency status. Pursuant to that guidance, these Chapter 7 loans were charged off to the net realizable value of the collateral, resulting in $800 million of charge-offs for the year ended December 31, 2012. The Firm expects to recover a significant amount of these losses over time as principal payments are received. Prior to September 30, 2012, the Firm’s policy was to charge down to net realizable value loans to borrowers who had filed for bankruptcy when such loans became 60 days past due, and report such loans as nonaccrual at that time. However, the Firm did not previously report loans discharged under Chapter 7 bankruptcy as TDRs unless otherwise modified under one of the Firm’s loss mitigation programs. Prior periods have not been restated for this policy change.
Based upon regulatory guidance, the Firm also began reporting performing junior liens that are subordinate to senior liens that are 90 days or more past due as nonaccrual loans in the first quarter of 2012. The prior year was also not restated for this policy change. The classification of certain of these higher-risk junior lien loans as nonaccrual did not have an impact on the allowance for loan losses as the Firm had previously considered the risk characteristics of this portfolio in estimating its allowance for loan losses. This regulatory policy change had a minimal impact on the Firm’s net interest income during the year ended December 31, 2012, because predominantly all of the reclassified junior lien loans are currently making payments, and it is the Firm’s policy to recognize these cash interest payments received as interest income.
For more information regarding the impact of these changes to nonaccrual loans and net charge-offs, see the Nonaccrual loans section on page 146 of this Annual Report and the Consumer Credit Portfolio table on page 139 of this Annual Report.
Portfolio analysis
Consumer loan balances declined during the year ended December 31, 2012, due to paydowns and charge-offs. Credit performance has improved across most portfolios but residential real estate charge-offs and delinquent loans remain above normal levels.
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 Firm’s consumer portfolio, including information about delinquencies, loan modifications and other credit quality indicators, see Note 14 on pages 250–275 of this Annual Report.
Home equity: Home equity loans at December 31, 2012, were $67.4 billion, compared with $77.8 billion at December 31, 2011. The decrease in this portfolio primarily reflected loan paydowns and charge-offs. Early-stage delinquencies showed improvement from December 31, 2011, for both senior and junior lien home equity loans, while net charge-offs for the year ended December 31, 2012, which include Chapter 7 loan charge-offs, decreased from the prior year. Senior lien and junior lien nonaccrual loans increased $890 million in 2012 due to the inclusion of Chapter 7 loans. Junior lien nonaccrual loans also increased from December 31, 2011, due to the addition of $1.2 billion of performing junior liens that are subordinate to senior liens that are 90 days or more past due based upon regulatory guidance issued during the first quarter of 2012.
Approximately 20% of the Firm’s 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 3–30 years. Approximately half of the HELOANs are senior liens and the remainder are junior liens. In general, HELOCs originated by the Firm are revolving loans for a 10-year period, after which time the HELOC recasts into a loan with a 20-year amortization period. 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). HELOCs originated by Washington Mutual were generally revolving loans for a 10-year period, after which time the HELOC converts to an interest-only loan with a balloon payment at the end of the loan’s term. Predominantly all HELOCs in the PCI portfolio beyond the revolving period have been modified into fixed-rate amortizing loans.
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


140JPMorgan Chase & Co./2012 Annual Report


difficulty or when the collateral does not support the loan amount. The majority of the HELOCs contain terms that do not require a fully-amortizing payment until 2015 or later. Certain factors, such as future developments in both unemployment and home prices, could have a significant impact on the performance of these loans. The Firm will continue to evaluate both the near-term and longer-term repricing and recast risks inherent in its HELOC portfolio to ensure that changes in the Firm’s estimate of incurred losses are appropriately considered in the allowance for credit losses and the Firm’s account management practices are appropriate given the portfolio’s risk profile.
At December 31, 2012, the Firm estimated that its home equity portfolio contained approximately $3.1 billion of current junior lien loans where the borrower has a first mortgage loan that is either delinquent or has been modified (“high-risk seconds”), compared with $3.7 billion at December 31, 2011. 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. The Firm estimates the balance of its total exposure to high-risk seconds on a quarterly basis using internal data, loan level credit bureau data, which typically provides the delinquency status of the senior lien, as well as information from a database maintained by one of the bank regulatory agencies. The estimated balance of these high-risk seconds may vary from quarter to quarter for reasons such as the movement of related senior liens into and out of the 30+ day delinquency bucket.
Current high risk junior liens   
(in billions) December 31, 2012
Junior liens subordinate to:    
Modified current senior lien  $1.1
 
Senior lien 30 – 89 days delinquent  0.9
 
Senior lien 90 days or more delinquent  1.1
 (a) 
Total current high risk junior liens  $3.1
 
(a)
Junior liens subordinate to senior liens that are 90 days or more past due are classified as nonaccrual loans. Excludes approximately $100 million of junior liens that are performing but not current, which were placed on nonaccrual in accordance with the regulatory guidance.
Of the estimated $3.1 billion of high-risk junior liens at December 31, 2012, the Firm owns approximately 5% and services approximately 30% of the related senior lien loans to the same borrowers. The performance of the Firm’s 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, 2012, including prime, subprime and loans held-for-sale, were $84.5 billion, compared with $85.9 billion at December 31, 2011. Balances declined due to paydowns and the charge-off or liquidation of delinquent loans, partially offset by new prime mortgage originations. Net charge-offs decreased
from the prior year as a result of improvement in delinquencies, but remained elevated.
Prime mortgages, including option adjustable-rate mortgages (“ARMs”), were $76.3 billion at December 31, 2012, compared with $76.2 billion at December 31, 2011. These loans were largely unchanged as increases related to prime mortgage originations and government insured loans that the Firm repurchased were largely offset by charge-off or liquidation of delinquent loans and paydowns of option ARM loans. Excluding loans insured by U.S. government agencies, both early-stage and late-stage delinquencies showed improvement during the year ended December 31, 2012, but early-stage delinquent loans increased during the second half of the year due primarily to seasonal factors and the impact of Superstorm Sandy. Nonaccrual loans decreased from the prior year (notwithstanding the inclusion of Chapter 7 loans), but remained elevated as a result of ongoing foreclosure processing delays. Net charge-offs declined year-over-year but remained elevated.
Option ARM loans, which are included in the prime mortgage portfolio, were $6.5 billion and $7.4 billion and represented 9% and 10% of the prime mortgage portfolio at December 31, 2012 and 2011, respectively. The decrease in option ARM loans resulted from portfolio run-off. As of December 31, 2012, approximately 6% of option ARM borrowers were delinquent, 2% were making interest-only or negatively amortizing payments, and 92% were making amortizing payments (such payments are not necessarily fully amortizing). Approximately 84% 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, 2012, or 2011. The Firm estimates the following balances of option ARM loans will undergo a payment recast that results in a payment increase: $523 million in 2013, $709 million in 2014 and $724 million in 2015. Default rates generally increase when payment recast results in a payment increase. However, as the Firm’s option ARM loans, other than those held in the PCI portfolio, are primarily loans with lower LTV ratios and higher borrower FICO scores, it is possible that many of these borrowers will be able to refinance into a lower rate product, which would reduce this payment recast risk. Accordingly, the Firm expects substantially lower losses on this portfolio when compared with the PCI option ARM portfolio. To date, losses realized on option ARM loans that have undergone payment recast have been immaterial and consistent with the Firm’s expectations. The option ARM portfolio was acquired by the Firm as part of the Washington Mutual transaction.
Subprime mortgages at December 31, 2012, were $8.3 billion, compared with $9.7 billion at December 31, 2011. The decrease was due to portfolio run-off and the charge-off or liquidation of delinquent loans. Both early-stage and late-stage delinquencies have improved from December 31,


JPMorgan Chase & Co./2012 Annual Report141
Management’s discussion and analysis

2011, but remain at elevated levels. Early-stage delinquencies increased during the second half of the year due primarily to seasonal factors and the impact of Superstorm Sandy. Nonaccrual loans increased due to the inclusion of Chapter 7 loans, while net charge-offs declined.
Auto: Auto loans at December 31, 2012, were $49.9 billion, compared with $47.4 billion at December 31, 2011. Loan balances increased due to new originations, partially offset by paydowns and payoffs. Delinquent loans increased compared with December 31, 2011; nonaccrual loans increased due to the inclusion of Chapter 7 loans. Net charge-offs also increased for the year ended December 31, 2012, compared with the prior year as a result of charge-offs of the Chapter 7 loans. Excluding the net charge-offs of the Chapter 7 loans, net charge-offs remained low as a result of favorable trends in both loss frequency and loss severity, mainly due to enhanced underwriting standards and a strong used car market. The auto loan portfolio reflected a high concentration of prime-quality credits.
Business banking: Business banking loans at December 31, 2012, were $18.9 billion, compared with $17.7 billion at December 31, 2011. 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 improvement from December 31, 2011. Net charge-offs declined for the year ended December 31, 2012, compared with the same period in the prior year.
Student and other: Student and other loans at December 31, 2012, were $12.2 billion, compared with $14.1 billion at December 31, 2011. The decrease was primarily due to paydowns and charge-offs of student loans. Other loans primarily include other secured and unsecured consumer loans. Nonaccrual loans were flat compared with December 31, 2011 while charge-offs decreased for the year ended December 31, 2012, compared with the prior year.
Purchased credit-impaired loans: PCI loans at December 31, 2012, were $59.7 billion, compared with $65.5 billion at December 31, 2011. This portfolio represents loans acquired in the Washington Mutual transaction, which were recorded at fair value at the time of acquisition.
During the year ended December 31, 2012, no additional impairment or reserve release was recognized in connection with the Firm’s review of the PCI portfolios’ expected cash flows. At both December 31, 2012 and 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.
As of December 31, 2012, approximately 27% of the option ARM PCI loans were delinquent and 48% had 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. Default rates generally increase on option ARM loans when payment recast results in a payment increase. The expected increase in default rates is considered in the Firm’s quarterly estimates of expected cash flows for the PCI portfolio. The cumulative amount of unpaid interest added to the unpaid principal balance of the option ARM PCI pool was $879 million and $1.1 billion at December 31, 2012, and December 31, 2011, respectively. The Firm estimates the following balances of option ARM PCI loans will undergo a payment recast that results in a payment increase: $283 million in 2013, $449 million in 2014 and $778 million in 2015.
The following table provides a summary of lifetime principal loss estimates included in both the nonaccretable difference and the allowance for loan losses. Lifetime principalloss estimates were relatively unchanged from December 31, 2011, to December 31, 2012. 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)
Lifetime loss estimates(a)
 
LTD liquidation losses(b)
2012 2011 2012 2011
Home equity$14.9
 $14.9
 $11.5
 $10.4
Prime mortgage4.2
 4.6
 2.9
 2.3
Subprime mortgage3.6
 3.8
 2.2
 1.7
Option ARMs11.3
 11.5
 8.0
 6.6
Total$34.0
 $34.8
 $24.6
 $21.0
(a)
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 $5.8 billion and $9.4 billion at December 31, 2012 and 2011, respectively.
(b)Life-to-date (“LTD”) liquidation losses represent realization of loss upon loan resolution.


142JPMorgan Chase & Co./2012 Annual Report


Geographic composition of residential real estate loans
At both December 31, 2012 and 2011, 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, $74.1 billion, or 54%, were concentrated in California, New York, Arizona, Florida and Michigan at December 31, 2012, compared with $79.5 billion, or 54%, at December 31, 2011. The unpaid principal balance of PCI loans concentrated in these five states represented 72% of total PCI loans at both December 31, 2012 and 2011.


Current estimated LTVs of residential real estate loans
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 81% at December 31, 2012, compared with 83% at December 31, 2011. Excluding mortgage loans insured by U.S. government agencies and PCI loans, 20% of the retained portfolio had a current estimated LTV ratio greater than 100%, and 8% of the retained portfolio had a current estimated LTV ratio greater than 125% at December 31, 2012, compared with 24% and 10%, respectively, at December 31, 2011. The decline in home prices since 2007 has had a significant impact on the collateral values underlying the Firm’s 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 a risk.


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Management’s discussion and analysis

The following table for PCI loans presents the current estimated LTV ratios, as well as the ratios of the carrying value of the underlying loans to the current estimated collateral value. Because such loans were initially measured at fair value, the ratios of the carrying value to the current estimated collateral value will be lower than the current estimated LTV ratios, which are based on the unpaid principal balances. 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    
  2012 2011
December 31,
(in millions,
except ratios)
 Unpaid principal balance
Current estimated
LTV ratio(a)
Net carrying value(c)
Ratio of net
carrying value
to current estimated
collateral value(c)
 
Unpaid principal
balance
Current estimated
LTV ratio(a)
Net carrying value(c)
Ratio of net
carrying value
to current estimated
collateral value(c)
Home equity $22,343
111%
(b) 
$19,063
95% $25,064
117%
(b) 
$20,789
97%
Prime mortgage 13,884
104
 11,745
88
 16,060
110
 13,251
91
Subprime mortgage 6,326
107
 4,246
72
 7,229
115
 4,596
73
Option ARMs 22,591
101
 18,972
85
 26,139
109
 21,199
89
(a)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.
(b)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.
(c)
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 of $1.9 billion for home equity, $1.9 billion for prime mortgage, $1.5 billion for option ARMs, and $380 million for subprime mortgage at both December 31, 2012 and 2011.
The current estimated average LTV ratios were 110% and 125% for California and Florida PCI loans, respectively, at December 31, 2012, compared with 117% and 140%, respectively, at December 31, 2011. 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, 55% had a current estimated LTV ratio greater than 100%, and 24% had a current LTV ratio of greater than 125% at December 31, 2012, compared with 62% and 31%, respectively, at December 31, 2011.
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 250–275 of this Annual Report.
Loan modification activities – residential real estate loans
For both the Firm’s on–balance sheet loans and loans serviced for others, more than 1.4 million mortgage modifications have been offered to borrowers and approximately 622,000 have been approved since the beginning of 2009. Of these, approximately 610,000 have achieved permanent modification as of December 31, 2012. Of the remaining modifications offered, 16% are in a trial period or still being reviewed for a modification, while 84% have dropped out of the modification program or otherwise were deemed not eligible for final modification.
The Firm is participating in the U.S. Treasury’s Making Home Affordable (“MHA”) programs and is continuing to offer its other loss-mitigation programs to financially distressed borrowers who do not qualify for the U.S. Treasury’s programs. The MHA programs include the Home Affordable Modification Program (“HAMP”) and the Second Lien Modification Program (“2MP”). The Firm’s other loss-mitigation programs for troubled borrowers who do not qualify for HAMP include the traditional modification programs offered by the GSEs and other governmental agencies, as well as the Firm’s 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. For further information about how loans are modified, see Note 14, Loan modifications, on pages 260–262 of this Annual Report.
Loan modifications under HAMP and under one of the Firm’s proprietary modification programs, which are 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, unless the targeted loan is delinquent at the time of modification. When the Firm modifies home equity lines of credit, future lending commitments related to the modified loans are canceled as part of the terms of the modification.


144JPMorgan Chase & Co./2012 Annual Report


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 borrower’s 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 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 25% for senior lien home equity, 20% for junior lien home equity, 14% for prime mortgages including option ARMs, and 24% 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 22% for home equity, 16% for prime mortgages, 13% for option ARMs and 28% for subprime mortgages. The favorable performance of the option ARM modifications is the result of a targeted proactive program which fixes the borrower’s payment at the current level. The cumulative redefault rates reflect the performance of modifications completed under both HAMP and the Firm’s proprietary modification programs from October 1, 2009, through December 31, 2012.
The following table presents information as of December 31, 2012 and 2011, relating to modified on–balance 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 Firm’s quarterly assessment of estimated future cash flows. Modifications of consumer loans other than PCI loans are generally accounted for and reported as TDRs. For further information on TDRs for the years ended December 31, 2012 and 2011, see Note 14 on pages 250–275 of this Annual Report.
Modified residential real estate loans
 2012 2011
December 31,
(in millions)
On–balance
sheet loans
Nonaccrual on–balance sheet
 loans(e)
 
On–balance
sheet loans
Nonaccrual on–balance sheet
 loans(e)
Modified residential real estate loans, excluding PCI loans(a)(b)(c)
     
Home equity – senior lien$1,092
$607
 $335
$77
Home equity –
  junior lien
1,223
599
 657
159
Prime mortgage, including option ARMs7,118
1,888
 4,877
922
Subprime mortgage3,812
1,308
 3,219
832
Total modified residential real estate loans, excluding PCI loans$13,245
$4,402
 $9,088
$1,990
Modified PCI loans(d)
     
Home equity$2,302
NA
 $1,044
NA
Prime mortgage7,228
NA
 5,418
NA
Subprime mortgage4,430
NA
 3,982
NA
Option ARMs14,031
NA
 13,568
NA
Total modified PCI loans$27,991
NA
 $24,012
NA
(a)Amounts represent the carrying value of modified residential real estate loans.
(b)
At December 31, 2012 and 2011, $7.5 billion and $4.3 billion, respectively, of loans permanently modified subsequent to repurchase from Ginnie Mae in accordance with the standards of the appropriate government agency (i.e., FHA, VA, RHS) are not included in the table above. When such loans perform subsequent to modification in accordance with Ginnie Mae guidelines, they are generally sold back into Ginnie Mae loan pools. Modified loans that do not re-perform become subject to foreclosure. For additional information about sales of loans in securitization transactions with Ginnie Mae, see Note 16 on pages 280–291 of this Annual Report.
(c)
At December 31, 2012, included $1.6 billion of Chapter 7 loans, consisting of $450 million of senior lien home equity loans, $448 million of junior lien home equity loans, $465 million of prime, including option ARMs, and $245 million of subprime mortgages. Certain of these loans were previously reported as nonaccrual loans (e.g. based upon the delinquency status of the loan). See Consumer Credit Portfolio on pages 138–149 of this Annual Report for further details.
(d)Amounts represent the unpaid principal balance of modified PCI loans.
(e)
As of December 31, 2012 and 2011, nonaccrual loans included $2.9 billion and $886 million, respectively, of TDRs for which the borrowers were less than 90 days past due. For additional information about loans modified in a TDR that are on nonaccrual status, see Note 14 on pages 250–275 of this Annual Report.


JPMorgan Chase & Co./2012 Annual Report145
Management’s discussion and analysis

Nonperforming assets
The following table presents information as of December 31, 2012 and 2011, about consumer, excluding credit card, nonperforming assets.
Nonperforming assets(a)
   
December 31, (in millions)2012 2011
Nonaccrual loans(b)
   
Home equity – senior lien$931
 $495
Home equity – junior lien2,277
 792
Prime mortgage, including option ARMs3,445
 3,462
Subprime mortgage1,807
 1,781
Auto163
 118
Business banking481
 694
Student and other70
 69
Total nonaccrual loans9,174
 7,411
Assets acquired in loan satisfactions   
Real estate owned647
 802
Other37
 44
Total assets acquired in loan satisfactions684
 846
Total nonperforming assets$9,858
 $8,257
(a)
At December 31, 2012 and 2011, nonperforming assets excluded: (1) mortgage loans insured by U.S. government agencies of $10.6 billion and $11.5 billion, respectively, that are 90 or more days past due; (2) real estate owned insured by U.S. government agencies of $1.6 billion and $954 million, respectively; and (3) student loans insured by U.S. government agencies under the FFELP of $525 million and $551 million, respectively, that are 90 or more days past due. These amounts were excluded as reimbursement of insured amounts is proceeding normally.
(b)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 duepast-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.
Nonaccrual loans: Total consumer, excluding credit card, nonaccrual loans were $9.2 billion at December 31, 2012, compared with $7.4 billion at December 31, 2011.
Excluding the combined impacts of the Chapter 7 loans and the performing junior lien home equity loans discussed below, total consumer, excluding credit card, nonaccrual loans would have been $6.2 billion at December 31, 2012, compared with $7.4 billion at December 31, 2011. In addition to the combined impacts of the Chapter 7 loans and the performing junior lien home equity loans, elongated foreclosure processing timelines continue to result in elevated levels of nonaccrual loans in the residential real estate portfolios.
Nonaccrual loans in the residential real estate portfolio totaled $8.5 billion at December 31, 2012, of which 42% were greater than 150 days past due, compared with nonaccrual residential real estate loans of $6.5 billion at December 31, 2011, of which 69% were greater than 150 days past due. In the aggregate, the unpaid principal balance of residential real estate loans greater than 150 days past due was charged down by approximately 52% and 50% to estimated net realizable value of the collateral at December 31, 2012 and 2011, respectively.
At December 31, 2012, consumer, excluding credit card, nonaccrual loans included $1.8 billion of Chapter 7 loans, consisting of $450 million of senior lien home equity, $440 million of junior lien home equity, $500 million of prime mortgage, including option ARMs, $357 million of subprime mortgages and $51 million of auto loans. Because the Chapter 7 loans are accounted for as collateral-dependent loans and reported at the net realizable value of the collateral, these loans did not require an additional allowance for loan losses. Certain of these individual loans had previously been reported as performing TDRs (e.g., those loans that had been previously modified under one of the Firm’s loss mitigation programs and that subsequently made at least six payments under the modified payment terms).
At December 31, 2012, nonaccrual loans in the residential real estate portfolio also included $1.2 billion of performing junior lien home equity loans that are subordinate to senior liens that are 90 days or more past due. For more information on the change in reporting of these junior liens, see the home equity portfolio analysis discussion on pages 140–141 of this Annual Report.
Modified loans have contributed to an elevated level of nonaccrual loans, since the Firm’s policy requires modified loans that are on nonaccrual status to remain on nonaccrual status until payment is reasonably assured and the borrower has made a minimum of six payments under the modified terms. At December 31, 2012 and 2011, modified residential real estate loans of $4.4 billion and $2.0 billion, respectively, were classified as nonaccrual loans.
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 receives the property in satisfaction of a debt (e.g., by taking legal title or physical possession). The Firm generally recognizes REO assets at the completion of the foreclosure process or upon execution of a deed in lieu of foreclosure transaction with the borrower. REO assets, excluding those insured by U.S. government agencies, decreased by $155 million from $802 million at December 31, 2011, to $647 million at December 31, 2012.
Mortgage servicing-related matters
The financial crisis resulted in unprecedented levels of delinquencies and defaults of 1-4 family residential real estate loans. Such loans required varying degrees of loss mitigation activities. It is the Firm’s goal that foreclosure in these situations be a last resort, and accordingly, the Firm has made, and continues to make, significant efforts to help borrowers stay in their homes. Since the third quarter of 2010, the Firm has prevented two foreclosures for every foreclosure completed; foreclosure-prevention methods include loan modification, short sales and other means.
The Firm has a well-defined foreclosure prevention process when a borrower fails to pay on his or her loan. The Firm attempts to contact the borrower multiple times and in various ways in an effort to pursue home retention or other


(e)146
At December 31, 2011 and 2010, total nonaccrual loans represented 1.38% and 2.14% of total loans .
JPMorgan Chase & Co./2012 Annual Report
(f)
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 Firm’s total charge-off rates would have been 1.98% and 3.81%, respectively.


options other than foreclosure. In addition, if the Firm is unable to contact a borrower, the Firm completes various reviews of the borrower’s facts and circumstances before a foreclosure sale is completed. The delinquency period for the average borrower at the time of foreclosure over the last year has been approximately 25 months.
The high volume of delinquent and defaulted mortgages experienced by the Firm has placed a significant amount of stress on the Firm’s servicing operations. The Firm has entered into a global settlement with certain federal and state agencies and Consent Orders with its banking regulators with respect to various mortgage servicing, loss mitigation and foreclosure process-related matters as further discussed below. The GSEs also impose compensatory fees on its mortgage servicers, including the Firm, if such servicers are unable to comply with the foreclosure timetables mandated by the GSEs. The Firm has incurred, and is continuing to incur, compensatory fees, which are reported in default servicing expense. To address its underlying mortgage servicing, loss mitigation and foreclosure process issues, the Firm has made, and is continuing to make, significant changes to its mortgage operations, which will enable it to comply with the Consent Orders and the global settlement and enhance its ability to comply with the foreclosure timetables mandated by the GSEs.
Global settlement with federal and state agencies: On February 9, 2012, the Firm announced that it had 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 became effective on April 5, 2012, required 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 (“Cash Settlement Payment”); (ii) provide approximately $500 million of refinancing relief to certain “underwater” borrowers whose loans are owned and serviced by the Firm (“Refi Program”); 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 (“Consumer Relief Program”). The Cash Settlement Payment was made on April 13, 2012.
The purpose of the Refi Program was to allow eligible borrowers who were current on their Firm-owned mortgage loans to refinance those loans and take advantage of the current low interest rate environment. Borrowers who were eligible for the Refi Program were those who were unable to refinance their mortgage loans under standard refinancing programs because they had no equity or, in many cases, negative equity in their homes. Initial interest rates on loans
refinanced under the Refi Program were lower than the borrowers’ interest rates prior to the refinancings and were capped at the greater of 100 basis points over Freddie Mac’s then-current Primary Mortgage Market Survey Rate or 5.25%. Under the Refi Program, the interest rate on each refinanced loan could have been reduced either for the remaining life of the loan or for five years. The Firm reduced the interest rates on loans that it refinanced under the Refi Program for the remaining lives of those loans. In substance, these refinancings were more similar to loan modifications than traditional refinancings. All refinancings required under the Refi Program were completed as of December 31, 2012.
The first and second lien loan modifications provided for in the Consumer Relief Program will typically involve principal reductions for borrowers who have negative equity in their homes and who are experiencing financial difficulty. These loan modifications are primarily expected to be executed under the terms of either MHA (e.g., HAMP, 2MP) or one of the Firm’s proprietary modification programs. The Firm began to provide relief to borrowers under the Consumer Relief Program in the first quarter of 2012.
If the Firm does not meet certain targets set forth in the global settlement agreement for providing either refinancings under the Refi Program or other borrower relief under the Consumer Relief Program within certain prescribed time periods, the Firm must instead make additional cash payments. In general, 75% of the targets must be met within two years of the date of the global settlement and 100% must be achieved within three years of that date. The Firm filed its first quarterly report concerning its compliance with the global settlement with the Office of Mortgage Settlement Oversight in November 2012. The report included information regarding the refinancings completed under the Refi Program and relief provided to borrowers under the Consumer Relief Program, as well as credits earned by the Firm under the global settlement as a result of such actions. The Firm expects to substantially complete its obligations under the Consumer Relief Program in the first half of 2013.
The global settlement also requires the Firm to adhere to certain enhanced mortgage servicing standards. 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 the “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. The Firm has made significant progress in implementing the prescribed servicing standards.


JPMorgan Chase & Co./20112012 Annual Report 135147
Management’s discussion and analysis

The global settlement releases the Firm from certain further claims by the participating government entities 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 with respect to mortgage-backed securities; criminal claims; and repurchase demands from the GSEs, among other items.
The Firm has accounted for all refinancings performed under the Refi Program and expects to account for all first and second lien loans modified under the Consumer Relief Program as TDRs. The expected impact of the Consumer Relief Program has been considered in the Firm’s allowance for loan losses. For additional information, see Allowance for Credit Losses on pages 159–162 of this Annual Report.
On February 9, 2012, the Firm also entered into agreements 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, as discussed further below. 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.
For further information on the global settlement, see Critical Accounting Estimates Used by the Firm on pages 178–182, Note 2 on pages 195–196 and Note 14 on pages 250–275 of this Annual Report.
Consent Orders: During the second quarter of 2011, the Firm entered into Consent Orders (“Orders”) with banking regulators relating to its residential mortgage servicing, foreclosure and loss-mitigation activities. In the Orders, the regulators have mandated significant changes to the Firm’s servicing and default business and outlined requirements to implement these changes. The Firm submitted comprehensive action plans to the regulators, which set forth the steps necessary to ensure the Firm’s residential mortgage servicing, foreclosure and loss-mitigation activities are conducted in accordance with the requirements of the Orders. The plans were approved and the Firm has implemented a number of corrective actions and made significant progress with respect to the following:
Established an independent Compliance Committee which meets regularly and monitors progress against the 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 Firm’s activities with respect to the Mortgage Electronic Registration system (“MERS”)
and compliance with MERSCORP’s 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 Firm’s 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 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 Orders, the Firm had 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.
On January 7, 2013, the Firm announced that it and a number of other financial institutions entered into a settlement agreement with the OCC and the Federal Reserve providing for the termination of such Independent Foreclosure Review programs. As a result of this settlement, the independent consultant will no longer be conducting a look-back review of residential foreclosure actions. The Firm will make a cash payment of $753 million into a settlement fund for distribution to qualified borrowers. The Firm has also committed an additional $1.2 billion to foreclosure prevention actions, which will be fulfilled through credits given to the Firm for modifications, short sales and other specified types of borrower relief. Foreclosure prevention actions that earn credit under the Independent Foreclosure Review settlement are in addition to actions taken by the Firm to earn credit under the Consumer Relief Program of the global settlement. The estimated impact of the foreclosure prevention actions required under the Independent Foreclosure Review settlement have been considered in the Firm’s allowance for loan losses. The Firm recognized a pretax charge of approximately $700 million in the fourth quarter of 2012 related to the Independent Foreclosure Review settlement.


148JPMorgan Chase & Co./2012 Annual Report
Management's

Credit Card
Total credit card loans were $128.0 billion at December 31, 2012, a decrease of $4.3 billion from December 31, 2011. The decrease in outstanding loans was primarily due to higher repayment rates.
For the retained credit card portfolio, the 30+ day delinquency rate decreased to 2.10% at December 31, 2012, from 2.81% at December 31, 2011. For the years ended December 31, 2012 and 2011, the net charge-off rates were 3.95% and 5.44% respectively. Charge-offs have improved as a result of lower delinquent loans. The
credit card portfolio continues to reflect a well-seasoned, 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, 2012 and 2011. Loan concentration for the top five states of California, New York, Texas, Florida and Illinois consisted of $52.3 billion in receivables, or 41% of the retained loan portfolio, at December 31, 2012, compared with $53.6 billion, or 40%, at December 31, 2011.

Geographic composition of Credit Card loans
Modifications of credit card loans
At December 31, 2012 and 2011, the Firm had $4.8 billion and $7.2 billion, respectively, of credit card loans outstanding that have been modified in TDRs. These balances included both credit card loans with modified payment terms and credit card loans that reverted back to their pre-modification payment terms because the cardholder did not comply with the modified payment terms. The decrease in modified credit card loans outstanding from December 31, 2011, was attributable to a reduction in new modifications as well as ongoing payments and charge-offs on previously modified credit card loans. In the second quarter of 2012, the Firm revised its policy for recognizing charge-offs on restructured loans that do not comply with their modified payment terms. Commencing June 30, 2012 these loans are now charged-off when they are 120 days past due rather than 180 days past due.
Consistent with the Firm’s policy, all credit card loans typically remain on accrual status until charged-off. However, the Firm establishes an allowance, which is offset against loans and charged to interest income, for the estimated uncollectible portion of accrued interest and fee income.
For additional information about loan modification programs to borrowers, see Note 14 on pages 250–275 of this Annual Report.



JPMorgan Chase & Co./2012 Annual Report149
Management’s discussion and analysis

WHOLESALE CREDIT PORTFOLIO
As of December 31, 20112012, wholesale exposure (IB,(CIB, CB TSS and AM) increased by $88.670.9 billion from December 31, 20102011. The overall increase was, primarily driven by increases of $55.4 billion in loans, $36.752.1 billion in lending-related commitments and $12.030.2 billion in derivative receivables.loans due to increased client activity across most regions and most businesses. The increase in loans was due to growth in CB and AM. These increases were partially offset by a decrease in receivables from customers and interests in purchased receivables of $15.517.5 billion. The growth in wholesale loans and lending related commitments represented increased client activity across all businesses and all regions. The increase decrease in derivative receivables, wasprimarily related to the decline in the U.S. dollar, and tightening of credit spreads; these changes resulted in reductions to interest rate, credit derivative, and foreign exchange balances.
 
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.
Wholesale credit portfolio
December 31,Credit exposure 
Nonperforming(c)(d)
(in millions)20122011 20122011
Loans retained$306,222
$278,395
 $1,434
$2,398
Loans held-for-sale4,406
2,524
 18
110
Loans at fair value2,555
2,097
 93
73
Loans – reported313,183
283,016
 1,545
2,581
Derivative receivables74,983
92,477
 239
297
Receivables from customers and other(a)
23,648
17,461
 —
—
Total wholesale credit-related assets411,814
392,954
 1,784
2,878
Lending-related commitments434,814
382,739
 355
865
Total wholesale credit exposure$846,628
$775,693
 $2,139
$3,743
Credit Portfolio Management derivatives notional, net(b)
$(27,447)$(26,240) $(25)$(38)
Liquid securities and other cash collateral held against derivatives(13,658)(21,807) NA
NA

Wholesale credit portfolio   
December 31,Credit exposure 
Nonperforming(d)
(in millions)20112010 20112010
Loans retained$278,395
$222,510
 $2,398
$5,510
Loans held-for-sale2,524
3,147
 110
341
Loans at fair value2,097
1,976
 73
155
Loans – reported283,016
227,633
 2,581
6,006
Derivative receivables92,477
80,481
 18
34
Receivables from customers and interests in purchased receivables(a)
17,461
32,932
 —
—
Total wholesale credit-related assets392,954
341,046
 2,599
6,040
Lending-related commitments(b)
382,739
346,079
 865
1,005
Total wholesale credit exposure$775,693
$687,125
 $3,464
$7,045
Net credit derivative hedges notional(c)
$(26,240)$(23,108) $(38)$(55)
Liquid securities and other cash collateral held against derivatives(21,807)(16,486) NA
NA
(a)Receivables from customers and other primarily representincludes margin loans to prime and retail brokerage customers, whichcustomers; these are includedclassified 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.
(b)The amounts in nonperforming represent commitments that are risk-rated as nonaccrual.
(c)
Represents the net notional amount of protection purchased and sold of single-name and portfoliothrough credit derivatives used to manage both performing and nonperforming wholesale credit exposures; these derivatives do not qualify for hedge accounting under U.S. GAAP. Excludes the synthetic credit portfolio. For additional information, see Credit derivatives on pages 143–144,158–159, and Note 6 on pages 202–210218–227 of this Annual Report.Report.
(d)(c)Excludes assets acquired in loan satisfactions.
(d)Prior to the first quarter of 2012, reported amounts had only included defaulted derivatives; effective in the first quarter of 2012, reported amounts in all periods include both defaulted derivatives as well as derivatives that have been risk rated as nonperforming.


136150 JPMorgan Chase & Co./20112012 Annual Report


The following table presents summaries of the maturity and ratings profiles of the wholesale credit portfolio as of December 31, 20112012 and 20102011. 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 Firm’s internal risk ratings, which generally correspond to the ratings as defined by S&P and Moody’s. 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 profileWholesale credit exposure – maturity and ratings profile     Wholesale credit exposure – maturity and ratings profile     
Maturity profile(c)
 Ratings profile
Maturity profile(e)
 Ratings profile
December 31, 2011
Due in
1 year
or less
Due after
1 year through
5 years
Due after
5 years
Total Investment-grade Noninvestment-gradeTotal
Total %
of IG
December 31, 2012Due in 1 year or lessDue after 1 year through 5 yearsDue after 5 yearsTotal Investment-grade Noninvestment-gradeTotal
Total %
of IG
(in millions, except ratios)
Due in
1 year
or less
Due after
1 year through
5 years
Due after
5 years
Total AAA/Aaa to BBB-/Baa3 BB+/Ba1 & belowTotal
Total %
of IG
 AAA/Aaa to BBB-/Baa3 BB+/Ba1 & below
Loans retained $197,070
 $81,325
$115,227
$117,673
$73,322
$306,222
 $214,446
 $91,776
$306,222
70%
Derivative receivables 92,477
    92,477
  74,983
    74,983
 
Less: Liquid securities and other cash collateral held against derivatives (21,807)    (21,807)  (13,658)    (13,658) 
Total derivative receivables, net of all collateral8,243
29,910
32,517
70,670
 57,637
 13,033
70,670
82
13,336
25,055
22,934
61,325
 50,406
 10,919
61,325
82
Lending-related commitments139,978
233,396
9,365
382,739
 310,107
 72,632
382,739
81
164,327
261,261
9,226
434,814
 347,316
 87,498
434,814
80
Subtotal261,443
365,265
105,096
731,804
 564,814
 166,990
731,804
77
292,890
403,989
105,482
802,361
 612,168
 190,193
802,361
76
Loans held-for-sale and loans at fair value(a)
 4,621
    4,621
  6,961
    6,961
 
Receivables from customers and interests in purchased receivables 17,461
    17,461
 
Receivables from customers and other 23,648
    23,648
 
Total exposure – net of liquid securities and other cash collateral held against derivatives $753,886
    $753,886
  $832,970
    $832,970
 
Net credit derivative hedges notional(b)
$(2,034)$(16,450)$(7,756)$(26,240) $(26,300) $60
$(26,240)100%
Credit Portfolio Management derivatives net notional by counterparty ratings profile(b)(c)
$(1,579)$(16,475)$(9,393)$(27,447) $(27,507) $60
$(27,447)100%
Credit Portfolio Management derivatives net notional by reference entity ratings profile(b)(d)
  $(24,622) $(2,825)$(27,447)90%
Maturity profile(c)
 Ratings profile
Maturity profile(e)
 Ratings profile
December 31, 2010
Due in
1 year
or less
Due after
1 year through
5 years
Due after
5 years
Total Investment-grade Noninvestment-gradeTotal
Total %
of IG
December 31, 2011Due in 1 year or lessDue after 1 year through 5 yearsDue after 5 yearsTotal Investment-grade Noninvestment-gradeTotal
Total %
of IG
(in millions, except ratios)
Due in
1 year
or less
Due after
1 year through
5 years
Due after
5 years
Total AAA/Aaa to BBB-/Baa3 BB+/Ba1 & belowTotal
Total %
of IG
 AAA/Aaa to BBB-/Baa3 BB+/Ba1 & below
Loans retained $146,047
 $76,463
$113,222
$101,959
$63,214
$278,395
 $196,998
 $81,397
$278,395
71%
Derivative receivables 80,481
    80,481
  92,477
    92,477
 
Less: Liquid securities and other cash collateral held against derivatives (16,486)    (16,486)  (21,807)    (21,807) 
Total derivative receivables, net of all collateral11,499
24,415
28,081
63,995
 47,557
 16,438
63,995
74
8,243
29,910
32,517
70,670
 57,637
 13,033
70,670
82
Lending-related commitments126,389
209,299
10,391
346,079
 276,298
 69,781
346,079
80
139,978
233,396
9,365
382,739
 310,107
 72,632
382,739
81
Subtotal215,905
319,701
96,978
632,584
 469,902
 162,682
632,584
74
261,443
365,265
105,096
731,804
 564,742
 167,062
731,804
77
Loans held-for-sale and loans at fair value(a)
 5,123
    5,123
  4,621
    4,621
 
Receivables from customers and interests in purchased receivables 32,932
    32,932
 
Receivables from customers and other 17,461
    17,461
 
Total exposure – net of liquid securities and other cash collateral held against derivatives $670,639
    $670,639
  $753,886
    $753,886
 
Net credit derivative hedges notional(b)
$(1,228)$(16,415)$(5,465)$(23,108) $(23,159) $51
$(23,108)100%
Credit Portfolio Management derivatives net notional by counterparty ratings profile(b)(c)
$(2,034)$(16,450)$(7,756)$(26,240) $(26,300) $60
$(26,240)100%
Credit Portfolio Management derivatives net notional by reference entity ratings profile(b)(d)
  $(22,159) $(4,081)$(26,240)84%
(a)Represents loans held-for-sale primarily related to syndicated loans and loans transferred from the retained portfolio, and loans at fair value.
(b)Represents the net notional amounts of protection purchased and sold of single-name and portfolio credit derivatives used to manage the credit exposures; theseThese derivatives do not qualifyquality for hedge accounting under U.S. GAAP. Excludes the synthetic credit portfolio.
(c)The notional amounts are presented on a net basis by each derivative counterparty and the ratings profile shown is based on the ratings of those counterparties. The counterparties to these positions are predominately investment-grade banks and finance companies.
(d)The notional amounts are presented on a net basis by underlying reference entity and the ratings profile shown is based on the ratings of the reference entity on which protection has been purchased.
(e)
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 141–144156–159 of this Annual Report.Report.
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. As of September 30, 2012, the Firm revised its definition of the criticized component of the wholesale portfolio to align with the banking regulators’ definition of criticized exposures, which consist of the special mention, substandard and doubtful categories. Prior periods have been reclassified to conform with the current presentation. The reclassification resulted in an increase in the level of reported criticized exposure by $4.5 billion as of December 31, 2011, which
did not result in material changes to the Firm’s underlying risk ratings or the amount of nonaccrual loans. Accordingly, this reclassification did not result in material changes to the Firm’s allowance for credit losses or additional provision for credit losses. Furthermore, this change had no effect on reported net interest income with respect to the affected loans. The total criticized component of the portfolio, excluding loans held-for-sale and loans at fair value, decreased by 23% to $15.6 billion at December 31, 2012, from $20.3 billion at December 31, 2011, primarily due to repayments.


JPMorgan Chase & Co./2012 Annual Report151
Management’s discussion and analysis

Below are summaries of the top 25 industry exposures as of December 31, 2012 and 2011. For additional information on industry concentrations, see Note 5 on page 217 of this Annual Report.
      Selected metrics
      30 days or more past due and accruing
loans
Net charge-offs/
(recoveries)
Credit derivative hedges(e)
Liquid securities
and other cash collateral held against derivative
receivables
   
Noninvestment-grade(d)(f)
 
Credit
exposure(c)
Investment-
grade
NoncriticizedCriticized performing
Criticized
nonperforming
As of or for the year ended December 31, 2012
(in millions)
Top 25 industries(a)
         
Real Estate$76,198
$50,103
$21,503
$4,067
$525
$391
$54
$(41)$(507)
Banks & Finance Cos73,318
55,805
16,928
578
7
20
(34)(3,524)(5,983)
Healthcare48,487
41,146
6,761
569
11
38
9
(238)(450)
Oil & Gas42,563
31,258
11,012
270
23
9
—
(155)(101)
State & Municipal Govt(b)
41,821
40,562
1,093
52
114
28
2
(186)(218)
Consumer Products32,778
21,428
10,473
868
9
2
(16)(275)(12)
Asset Managers31,474
26,283
4,987
204
—
46
—
—
(2,667)
Utilities29,533
24,917
4,257
175
184
2
15
(315)(368)
Retail & Consumer Services25,597
16,100
8,763
700
34
20
(11)(37)(1)
Central Govt21,223
20,678
484
61
—
—
—
(11,620)(1,154)
Metals/Mining20,958
12,912
7,608
406
32
8
(1)(409)(124)
Transportation19,827
15,128
4,353
283
63
5
2
(82)(1)
Machinery & Equipment Mfg18,504
10,228
7,827
444
5
—
2
(23)—
Technology18,488
12,089
5,683
696
20
—
1
(226)—
Media16,007
7,473
7,754
517
263
2
(218)(93)—
Insurance14,446
12,156
2,119
171
—
2
(2)(143)(1,654)
Business Services13,577
7,172
6,132
232
41
9
23
(10)—
Building Materials/Construction12,377
5,690
5,892
791
4
8
1
(114)—
Telecom Services12,239
7,792
3,244
1,200
3
5
1
(229)—
Chemicals/Plastics11,591
7,234
4,172
169
16
18
2
(55)(74)
Automotive11,511
6,447
4,963
101
—
—
—
(530)—
Leisure7,748
3,160
3,724
551
313
—
(13)(63)(24)
Agriculture/Paper Mfg7,729
5,029
2,657
42
1
5
—
—
—
Aerospace/Defense6,702
5,518
1,150
33
1
—
—
(141)—
Securities Firms & Exchanges5,756
4,096
1,612
46
2
—
—
(171)(179)
All other195,567
174,264
20,562
384
357
1,478
5
(8,767)(141)
Subtotal$816,019
$624,668
$175,713
$13,610
$2,028
$2,096
$(178)$(27,447)$(13,658)
Loans held-for-sale and loans at fair value6,961
        
Receivables from customers and other23,648
        
Total$846,628
        

152JPMorgan Chase & Co./2012 Annual Report




      Selected metrics
      30 days or more past due and accruing
loans
Net charge-offs/
(recoveries)
Credit derivative hedges(e)
Liquid securities
and other cash collateral held against derivative
receivables
   
Noninvestment-grade(d)(f)
 
Credit
exposure(c)
Investment-
grade
NoncriticizedCriticized performing
Criticized
nonperforming
As of or for the year ended December 31, 2011
(in millions)
Top 25 industries(a)
         
Real Estate$67,594
$40,921
$19,947
$5,732
$994
$411
$256
$(97)$(359)
Banks & Finance Cos71,440
59,115
11,744
555
26
20
(211)(3,053)(9,585)
Healthcare42,247
35,146
6,816
228
57
166
—
(304)(320)
Oil & Gas35,437
24,957
10,178
274
28
3
—
(119)(88)
State & Municipal Govt(b)
41,930
40,565
1,122
113
130
23
—
(185)(147)
Consumer Products29,637
19,728
9,040
832
37
3
13
(272)(50)
Asset Managers33,465
28,834
4,201
429
1
24
—
—
(4,807)
Utilities28,650
23,557
4,412
174
507
—
76
(105)(359)
Retail & Consumer Services22,891
14,567
7,446
778
100
15
1
(96)(1)
Central Govt17,138
16,524
488
126
—
—
—
(9,796)(813)
Metals/Mining15,254
8,716
6,339
198
1
6
(19)(423)—
Transportation16,305
12,061
3,930
256
58
6
17
(178)—
Machinery & Equipment Mfg16,498
9,014
7,236
238
10
1
(1)(19)—
Technology17,898
12,494
4,985
417
2
—
4
(191)—
Media11,909
6,853
3,729
866
461
1
18
(188)—
Insurance13,092
9,425
2,852
802
13
—
—
(552)(454)
Business Services12,408
7,093
5,012
264
39
17
22
(20)(2)
Building Materials/Construction11,770
5,175
5,335
1,256
4
6
(4)(213)—
Telecom Services11,552
8,502
2,493
546
11
2
5
(390)—
Chemicals/Plastics11,728
7,867
3,700
146
15
—
—
(95)(20)
Automotive9,910
5,699
4,123
88
—
9
(11)(819)—
Leisure5,650
3,051
1,680
530
389
1
1
(81)(26)
Agriculture/Paper Mfg7,594
4,888
2,540
166
—
9
—
—
—
Aerospace/Defense8,560
7,646
845
69
—
7
—
(208)—
Securities Firms & Exchanges12,394
10,799
1,571
23
1
10
73
(395)(3,738)
All other180,660
161,546
16,785
1,653
676
1,099
200
(8,441)(1,038)
Subtotal$753,611
$584,743
$148,549
$16,759
$3,560
$1,839
$440
$(26,240)$(21,807)
Loans held-for-sale and loans at fair value4,621
        
Receivables from customers and other17,461
        
Total$775,693
        
(a)
The industry rankings presented in the table as of December 31, 2011, are based on the industry rankings of the corresponding exposures at December 31, 2012, not actual rankings of such exposures at December 31, 2011.
(b)
In addition to the credit risk exposure to states and municipal governments (both U.S. and non-U.S.) at December 31, 2012 and 2011, noted above, the Firm held $18.2 billion and $16.7 billion, respectively, of trading securities and $21.7 billion and $16.5 billion, respectively, of AFS securities issued by U.S. state and municipal governments. For further information, see Note 3 and Note 12 on pages 196–214 and 244–248, respectively, of this Annual Report.
(c)Credit exposure is net of risk participations and excludes the benefit of “Credit Portfolio Management derivatives net notional” held against derivative receivables or loans and “Liquid securities and other cash collateral held against derivative receivables”.
(d)
As of December 31, 2012, exposures deemed criticized correspond to special mention, substandard and doubtful categories as defined by bank regulatory agencies. Prior periods have been reclassified to conform with the current presentation.
(e)Represents the net notional amounts of protection purchased and sold through credit derivatives used to manage the credit exposures; these derivatives do not qualify for hedge accounting under U.S. GAAP. The all other category includes purchased credit protection on certain credit indices. Credit Portfolio Management derivatives excludes the synthetic credit portfolio.
(f)Prior to the first quarter of 2012, reported amounts had only included defaulted derivatives; effective in the first quarter of 2012, reported amounts in all periods include both defaulted derivatives as well as derivatives that have been risk rated as nonperforming.

JPMorgan Chase & Co./2012 Annual Report153
Management’s discussion and analysis

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 on the previous pages.
Real estate: Exposure to this industry increased by $8.6 billion or 13%, in 2012 to $76.2 billion. The increase was primarily driven by CB. The credit quality of this industry improved as the investment-grade portion of the exposures to this industry increased by 22% from 2011, while the criticized portion declined by 32% from 2011, primarily as a result of repayments and loan sales. The ratio of nonaccrual retained loans to total retained loans decreased to 0.86% at December 31, 2012 from 1.62% at December 31, 2011 in line with the decrease in real estate criticized exposure. For further information on commercial real estate loans, see Note 14 on pages 250–275 of this Annual Report.
Banks and finance companies: Exposure to this industry increased by $1.9 billion or 3%, and criticized exposure decreased by 0.7%, compared with 2011. At December 31, 2012, 76% of the portfolio is rated investment-grade.
State and municipal governments: Exposure to this industry decreased by $109 million in 2012 to $41.8 billion. Lending-related commitments comprise approximately 69% of the exposure to this sector, generally in the form of bond and commercial paper
liquidity and standby letter of credit commitments. The credit quality of the portfolio remains high as 97% of the portfolio was rated investment-grade, which was unchanged from 2011. Criticized exposure was less than 0.40% of this industry’s exposure. The non-U.S. portion of this industry was less than 4% 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 308–315 of this Annual Report.
All other: All other at December 31, 2012 (excluding loans held-for-sale and loans at fair value), included $195.6 billion of credit exposure. Concentrations of exposures include: (1) Individuals, Private Education & Civic Organizations, which were 57% of this category and (2) SPEs which were 28% of this category. Each of these categories has high credit quality, and approximately 90% of each of these categories were rated investment-grade. 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 193–194 and Note 16 on pages 280–291 of this Annual Report. The remaining exposure within this category is well-diversified, with no category being more than 7% of its total.




154JPMorgan Chase & Co./2012 Annual Report


The following tables present the geographic distribution of wholesale credit exposure including nonperforming assets and past due loans as of December 31, 2012 and 2011. The geographic distribution of the wholesale portfolio is determined based predominantly on the domicile (legal residence) of the borrower. For further information on Country Risk Management, see pages 170–173 of this Annual Report.
 Credit exposure NonperformingAssets acquired in loan satisfactions30 days or more past due and accruing loans
December 31, 2012
(in millions)
LoansLending-related commitmentsDerivative receivablesTotal credit exposure 
Nonaccrual loans(a)
DerivativesLending-related commitmentsTotal non- performing credit exposure
Europe/Middle East/Africa$40,760
$75,706
$35,561
$152,027
 $13
$8
$15
$36
$9
$131
Asia/Pacific30,287
22,919
10,557
63,763
 13
—
—
13
—
18
Latin America/Caribbean30,322
26,438
4,889
61,649
 67
—
4
71
—
640
Other North America2,987
7,653
1,418
12,058
 —
—
—
—
—
14
Total non-U.S.104,356
132,716
52,425
289,497
 93
8
19
120
9
803
Total U.S.201,866
302,098
22,558
526,522
 1,341
231
336
1,908
82
1,293
Loans held-for-sale and loans at fair value6,961
—
—
6,961
 111
NA
—
111
NA
—
Receivables from customers and other—
—
—
23,648
 —
NA
NA
—
NA
—
Total$313,183
$434,814
$74,983
$846,628
 $1,545
$239
$355
$2,139
$91
$2,096
 Credit exposure NonperformingAssets acquired in loan satisfactions30 days or more past due and Accruing loans
December 31, 2011
(in millions)
LoansLending-related commitmentsDerivative receivablesTotal credit exposure 
Nonaccrual loans(a)
Derivatives(b)
Lending-related commitmentsTotal non- performing credit exposure
Europe/Middle East/Africa$36,637
$60,681
$43,204
$140,522
 $44
$14
$25
$83
$—
$68
Asia/Pacific31,119
17,194
10,943
59,256
 1
42
—
43
—
6
Latin America/Caribbean25,141
20,859
5,316
51,316
 386
—
15
401
3
222
Other North America2,267
6,680
1,488
10,435
 3
—
1
4
—
—
Total non-U.S.95,164
105,414
60,951
261,529
 434
56
41
531
3
296
Total U.S.183,231
277,325
31,526
492,082
 1,964
241
824
3,029
176
1,543
Loans held-for-sale and loans at fair value4,621
—
—
4,621
 183
NA
—
183
NA
—
Receivables from customers and other—
—
—
17,461
 —
NA
NA
—
NA
—
Total$283,016
$382,739
$92,477
$775,693
 $2,581
$297
$865
$3,743
$179
$1,839
(a)
At December 31, 2012 and 2011, the Firm held an allowance for loan losses of $310 million and $496 million, respectively, related to nonaccrual retained loans resulting in allowance coverage ratios of 22% and 21%, respectively. Wholesale nonaccrual loans represented 0.49% and 0.91% of total wholesale loans at December 31, 2012 and 2011, respectively.
(b)Prior to the first quarter of 2012, reported amounts had only included defaulted derivatives; effective in the first quarter of 2012, reported amounts in all periods include both defaulted derivatives as well as derivatives that have been risk rated as nonperforming.

Loans
In the normal course of its wholesale business, the Firm provides loans to a variety of customers, ranging 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 250–275 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 2012 and 2011, the Firm sold $8.4 billion and $5.2 billion, respectively, of loans and commitments. These sale activities are not related to the Firm’s securitization activities. For further discussion of securitization activity, see Liquidity Risk Management and Note 16 on pages 127–133 and 280–291 respectively, of this Annual Report.
The following table presents the change in the nonaccrual loan portfolio for the years ended December 31, 2012 and 2011. Nonaccrual wholesale loans decreased by $1.0 billion from December 31, 2011, primarily reflecting paydowns.
Wholesale nonaccrual loan activity  
Year ended December 31, (in millions) 20122011
Beginning balance $2,581
$6,006
Additions 1,748
2,519
Reductions:   
Paydowns and other 1,784
2,841
Gross charge-offs 335
907
Returned to performing status 240
807
Sales 425
1,389
Total reductions 2,784
5,944
Net additions/(reductions) (1,036)(3,425)
Ending balance $1,545
$2,581


JPMorgan Chase & Co./2012 Annual Report155
Management’s discussion and analysis

The following table presents net charge-offs/recoveries, which are defined as gross charge-offs less recoveries, for the years ended December 31, 2012 and 2011. The amounts in the table below do not include gains or losses from sales of nonaccrual loans.
Wholesale net charge-offs/recoveries
Year ended December 31,
(in millions, except ratios)
20122011
Loans – reported  
Average loans retained$291,980
$245,111
Gross charge-Offs346
916
Gross recoveries(524)(476)
Net charge-offs/(recoveries)(178)440
Net charge-off/(recovery) rate(0.06)%0.18%

Receivables from customers
Receivables from customers primarily represent margin loans to prime and retail brokerage clients andthat 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 client’s position may be liquidated by the Firm to meet the minimum collateral requirements.

Wholesale credit exposure – selected industry exposuresLending-related commitments
The Firm focuses onJPMorgan Chase uses lending-related financial instruments, such as commitments and guarantees, to meet the management and diversificationfinancing needs of its industry exposures, with particular attention paidcustomers. 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 industries with actual or potential credit concerns. Exposures deemed criticized generally represent a ratings profile similarperform according to a ratingthe terms of “CCC+”/“Caa1” and lower, as defined by S&P and Moody’s, respectively. Thethese contracts.
In the Firm’s view, the total criticized componentcontractual amount of these wholesale lending-related commitments is not representative of the Firm’s 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 excluding loans held-for-sale and loans at fair value, decreased 29%historical experience, to become drawn upon in an event of a default by an obligor. The loan-equivalent amount of the Firm’s lending-related commitments was $15.9223.7 billion atand December 31, 2011, from $22.4206.5 billion at December 31, 2010. The decrease was primarily related to net repayments and loan sales.


JPMorgan Chase & Co./2011 Annual Report137
Management's discussion and analysis

Below are summaries of the top 25 industry exposures as of December 31, 20112012 and 2010. For additional information on industry concentrations, see Note 5 on page 201 of this Annual Report.
   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
As of or for the year ended Noninvestment-grade
December 31, 2011
Credit
exposure(d)
Investment-
grade
NoncriticizedCriticized performing
Criticized
nonperforming
(in millions)
Top 25 industries(a)
         
Banks and finance companies$71,440
$59,115
$11,742
$560
$23
$20
$(211)$(3,053)$(9,585)
Real estate67,594
40,921
21,541
4,246
886
411
256
(97)(359)
Healthcare42,247
35,147
6,817
247
36
166
—
(304)(320)
State and municipal governments(b)
41,930
40,565
1,124
225
16
23
—
(185)(147)
Oil and gas35,437
25,004
10,337
96
—
3
—
(119)(88)
Asset managers33,465
28,835
4,530
99
1
24
—
—
(4,807)
Consumer products29,637
19,728
9,439
447
23
3
13
(272)(50)
Utilities28,650
23,557
4,423
614
56
—
76
(105)(359)
Retail and consumer services22,891
14,568
7,796
464
63
15
1
(96)(1)
Technology17,898
12,494
5,085
319
—
—
4
(191)—
Central government17,138
16,524
488
126
—
—
—
(9,796)(813)
Machinery and equipment manufacturing16,498
9,014
7,375
103
6
1
(1)(19)—
Transportation16,305
12,061
4,070
149
25
6
17
(178)—
Metals/mining15,254
8,716
6,388
150
—
6
(19)(423)—
Insurance13,092
9,425
3,064
591
12
—
—
(552)(454)
Business services12,408
7,093
5,168
113
34
17
22
(20)(2)
Securities firms and exchanges12,394
10,799
1,564
30
1
10
73
(395)(3,738)
Media11,909
6,853
3,921
720
415
1
18
(188)—
Building materials/construction11,770
5,175
5,674
917
4
6
(4)(213)—
Chemicals/plastics11,728
7,867
3,720
140
1
—
—
(95)(20)
Telecom services11,552
8,502
2,235
814
1
2
5
(390)—
Automotive9,910
5,699
4,188
23
—
9
(11)(819)—
Aerospace8,560
7,646
848
66
—
7
—
(208)—
Agriculture/paper manufacturing7,594
4,888
2,586
120
—
9
—
-
—
Leisure5,650
3,051
1,752
629
218
1
1
(81)(26)
All other(c)
180,660
161,568
17,011
1,486
595
1,099
200
(8,441)(1,038)
Subtotal$753,611
$584,815
$152,886
$13,494
$2,416
$1,839
$440
$(26,240)$(21,807)
Loans held-for-sale and loans at fair value4,621
        
Receivables from customers and interests in purchased receivables17,461
        
Total$775,693
        
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 231–252 of this Annual Report.




138JPMorgan Chase & Co./2011 Annual Report






   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
As of or for the year ended Noninvestment-grade
December 31, 2010
Credit
exposure(d)
Investment-
grade
NoncriticizedCriticized performing
Criticized
nonperforming
(in millions)
Top 25 industries(a)
         
Banks and finance companies$65,867
$54,839
$10,428
$467
$133
$26
$69
$(3,456)$(9,216)
Real estate64,351
34,440
20,569
6,404
2,938
399
862
(76)(57)
Healthcare41,093
33,752
7,019
291
31
85
4
(768)(161)
State and municipal governments(b)
35,808
34,641
912
231
24
34
3
(186)(233)
Oil and gas26,459
18,465
7,850
143
1
24
—
(87)(50)
Asset managers29,364
25,533
3,401
427
3
7
—
—
(2,948)
Consumer products27,508
16,747
10,379
371
11
217
1
(752)(2)
Utilities25,911
20,951
4,101
498
361
3
49
(355)(230)
Retail and consumer services20,882
12,021
8,316
338
207
8
23
(623)(3)
Technology14,348
9,355
4,534
399
60
47
50
(158)—
Central government11,173
10,677
496
—
—
—
—
(6,897)(42)
Machinery and equipment manufacturing13,311
7,690
5,372
244
5
8
2
(74)(2)
Transportation9,652
6,630
2,739
245
38
—
(16)(132)—
Metals/mining11,426
5,260
5,748
362
56
7
35
(296)—
Insurance10,918
7,908
2,690
320
—
—
(1)(805)(567)
Business services11,247
6,351
4,735
115
46
11
15
(5)—
Securities firms and exchanges9,415
7,678
1,700
37
—
—
5
(38)(2,358)
Media10,967
5,808
3,945
672
542
2
92
(212)(3)
Building materials/construction12,808
6,557
5,065
1,129
57
9
6
(308)—
Chemicals/plastics12,312
8,375
3,656
274
7
—
2
(70)—
Telecom services10,709
7,582
2,295
821
11
3
(8)(820)—
Automotive9,011
3,915
4,822
269
5
—
52
(758)—
Aerospace5,732
4,903
732
97
—
—
—
(321)—
Agriculture/paper manufacturing7,368
4,510
2,614
242
2
8
7
(44)(2)
Leisure5,405
2,895
1,367
941
202
—
90
(253)(21)
All other(c)
146,025
128,074
15,648
1,499
804
954
385
(5,614)(591)
Subtotal$649,070
$485,557
$141,133
$16,836
$5,544
$1,852
$1,727
$(23,108)$(16,486)
Loans held-for-sale and loans at fair value5,123
        
Receivables from customers and interests in purchased receivables32,932
        
Total$687,125
        
(a)
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.
(b)
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 184–198 and 225–230, respectively, of this Annual Report.
(c)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.
(d)Credit exposure is net of risk participations and excludes the benefit of credit derivative hedges and collateral held against derivative receivables or loans.
(e)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.



JPMorgan Chase & Co./2011 Annual Report139
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 industry’s 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 283–289 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 investment-grade. 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 182–183 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 NonperformingAssets acquired in loan satisfactions30 days or more past due and accruing loans
December 31, 2011
(in millions)
LoansLending-related commitmentsDerivative receivablesTotal credit exposure 
Nonaccrual loans(a)
DerivativesLending-related commitmentsTotal non- performing credit exposure
Europe/Middle East/Africa$36,637
$60,681
$43,204
$140,522
 $44
$—
$25
$69
$—
$68
Asia/Pacific31,119
17,194
10,943
59,256
 1
13
—
14
—
6
Latin America/Caribbean25,141
20,859
5,316
51,316
 386
—
15
401
3
222
Other North America2,267
6,680
1,488
10,435
 3
—
1
4
—
—
Total non-U.S.95,164
105,414
60,951
261,529
 434
13
41
488
3
296
Total U.S.183,231
277,325
31,526
492,082
 1,964
5
824
2,793
176
1,543
Loans held-for-sale and loans at fair value4,621
—
—
4,621
 183
NA
—
183
NA
—
Receivables from customers and interests in purchased receivables—
—
—
17,461
 —
NA
NA
—
NA
—
Total$283,016
$382,739
$92,477
$775,693
 $2,581
$18
$865
$3,464
$179
$1,839
 Credit exposure NonperformingAssets acquired in loan satisfactions30 days or more past due and Accruing loans
December 31, 2010
(in millions)
LoansLending-related commitmentsDerivative receivablesTotal credit exposure 
Nonaccrual loans(a)
DerivativesLending-related commitmentsTotal non- performing credit exposure
Europe/Middle East/Africa$27,934
$58,418
$35,196
$121,548
 $153
$1
$23
$177
$—
$127
Asia/Pacific20,552
15,002
10,991
46,545
 579
21
—
600
—
74
Latin America/Caribbean16,480
12,170
5,634
34,284
 649
—
13
662
1
131
Other North America1,185
6,149
2,039
9,373
 6
—
5
11
—
—
Total non-U.S.66,151
91,739
53,860
211,750
 1,387
22
41
1,450
1
332
Total U.S.156,359
254,340
26,621
437,320
 4,123
12
964
5,099
320
1,520
Loans held-for-sale and loans at fair value5,123
—
—
5,123
 496
NA
—
496
NA
—
Receivables from customers and interests in purchased receivables—
—
—
32,932
 —
NA
NA
—
NA
—
Total$227,633
$346,079
$80,481
$687,125
 $6,006
$34
$1,005
$7,045
$321
$1,852
(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.

140JPMorgan Chase & Co./2011 Annual Report


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 231–252 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 Firm’s securitization activities. For further discussion of securitization activity, see Liquidity Risk Management and Note 16 on pages 127–132 and 256–267 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) 20112010
Beginning balance $6,006
$6,904
Additions 2,519
9,249
Reductions:   
Paydowns and other 2,841
5,540
Gross charge-offs 907
1,854
Returned to performing status 807
364
Sales 1,389
2,389
Total reductions 5,944
10,147
Net additions/(reductions) (3,425)(898)
Ending balance $2,581
$6,006
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)
20112010
Loans – reported  
Average loans retained$245,111
$213,609
Net charge-offs/(recoveries)440
1,727
Net charge-off/(recovery) rate0.18%0.81%
 
Derivative contracts
In the normal course of business, the Firm uses derivative instruments predominantly for market-making activity.activities. 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 own credit exposure. For further discussion of derivative contracts, see Note 5 and Note 6 on page 201217 and 202–210,pages 218–227, respectively, of this Annual Report.Report.
The following tables summarizetable summarizes the net derivative receivables for the periods presentedpresented.
Derivative receivables  
December 31, (in millions)Derivative receivablesDerivative receivables
2011201020122011
Interest rate$46,369
$32,555
$39,205
$46,369
Credit derivatives6,684
7,725
1,735
6,684
Foreign exchange17,890
25,858
14,142
17,890
Equity6,793
4,204
9,266
6,793
Commodity14,741
10,139
10,635
14,741
Total, net of cash collateral92,477
80,481
74,983
92,477
Liquid securities and other cash collateral held against derivative receivables(21,807)(16,486)(13,658)(21,807)
Total, net of all collateral$70,670
$63,995
$61,325
$70,670
Derivative receivables reported on the Consolidated Balance Sheets were $92.575.0 billion and $80.592.5 billion at December 31, 20112012 and 20102011, respectively. These amounts 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 management’s view, the appropriate measure of current credit risk should also take into consideration additional liquid securities (primarily U.S. government and agency securities and other G7 government bonds) and other cash collateral held by the Firm of $21.813.7 billion and $16.521.8 billion at December 31, 20112012 and 20102011, respectively, that may be used as security when the fair value of the client’s exposure is in the Firm’s favor, as shown in the table above.


156JPMorgan Chase & Co./2012 Annual Report


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 client’s derivative transactions move in the Firm’s favor. As of December 31, 20112012 and 20102011, the Firm held $17.622.6 billion and $18.017.6 billion, respectively, of this additional collateral. The derivative receivables, fair value, net of all collateral, also dodoes not include other credit enhancements, such as letters of credit. For additional information on the Firm’s use of


JPMorgan Chase & Co./2011 Annual Report141
Management's discussion and analysis

collateral agreements, see Note 6 on pages 202–210218–227 of this Annual Report.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 Firm’s derivative receivables at future time periods, including the benefit of collateral. AVG exposure over the total life of the derivative contract is used as the primary metric for pricing purposes and is used to calculate credit capital and the CVA, as further described below. The three year AVG exposure was $53.642.3 billion and $45.353.6 billion at December 31, 20112012 and 20102011, respectively, compared with derivative receivables, net of all collateral, of $70.761.3 billion and $64.070.7 billion at December 31, 20112012 and 20102011, respectively.
The fair value of the Firm’s derivative receivables incorporates an adjustment, the CVA, to reflect the credit
quality of counterparties. The CVA is based on the Firm’s AVG to a counterparty and the counterparty’s 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 Firm’s 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 Firm’s exposure to a counterparty (AVG) and the counterparty’s credit quality. Many factors may influence the nature and magnitude of these correlations over time. To the extent that these correlations are identified, the Firm may adjust the CVA associated with that counterparty’s AVG. The Firm risk manages exposure to changes in CVA by entering into credit derivative transactions, as well as interest rate, foreign exchange, equity and commodity derivative transactions.
The accompanying graph shows exposure profiles to derivatives over the next 10 years as calculated by the DRE and AVG metrics. The two measures generally show decliningthat exposure will decline after the first year, if no new trades wereare added to the portfolio.


JPMorgan Chase & Co./2012 Annual Report157
Management’s discussion and analysis

The following table summarizes the ratings profile by derivative counterparty of the Firm’s derivative receivables, including credit derivatives, net of other liquid securities collateral, for the dates indicated.
Ratings profile of derivative receivables           
Rating equivalent2011 20102012 2011
December 31,
(in millions, except ratios)
Exposure net of all collateral% of exposure net of all collateral Exposure net of all collateral% of exposure net of all collateralExposure net of all collateral% of exposure net of all collateral Exposure net of all collateral% of exposure net of all collateral
AAA/Aaa to AA-/Aa3$25,100
35% $23,342
36%$20,040
33% $25,100
35%
A+/A1 to A-/A322,942
32
 15,812
25
12,169
20
 22,942
32
BBB+/Baa1 to BBB-/Baa39,595
14
 8,403
13
18,197
29
 9,595
14
BB+/Ba1 to B-/B310,545
15
 13,716
22
9,636
16
 10,545
15
CCC+/Caa1 and below2,488
4
 2,722
4
1,283
2
 2,488
4
Total$70,670
100% $63,995
100%$61,325
100% $70,670
100%
As noted above, the Firm uses collateral agreements to mitigate counterparty credit risk. The percentage of the
Firm’s derivatives transactions subject to collateral agreements – excluding foreign exchange spot trades, which


142JPMorgan Chase & Co./2011 Annual Report


are not typically covered by collateral agreements due to their short maturity – was 88% as of December 31, 20112012, unchanged compared with December 31, 20102011. 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 Firm’s 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 202–210218–227 of this Annual Report.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;market-maker; and second, in orderas an end-user, to mitigatemanage the Firm’s own credit risk associated with its overall derivative receivables andvarious exposures.
Included in end-user activities are credit derivatives used to mitigate the credit risk associated with traditional commercial credit lending exposuresactivities (loans and unfunded commitments) and derivatives counterparty exposure in the Firm’s wholesale businesses (“Credit Portfolio Management” activities). ForInformation on Credit Portfolio Management activities is provided in the table below.
In addition, the Firm uses credit derivatives as an end-user to manage other exposures, including credit risk arising from certain AFS securities and from certain securities held in the Firm’s market making businesses. These credit derivatives, as well as the synthetic credit portfolio, are not included in Credit Portfolio Management activities; for further information on these credit derivatives as well as credit derivatives used in the Firm’s dealer/client business,capacity as a market maker in credit derivatives, see Credit derivatives in Note 6 on pages 202–210226–227 of this Annual Report.


The following table presents the Firm’s notional amounts of credit derivatives protection purchased and sold as of ReportDecember 31, 2011 and 2010, distinguishing between dealer/client activity and credit portfolio activity.

Credit derivative notional amounts           
 2011 2010
 Dealer/client Credit portfolio  Dealer/client Credit portfolio 
December 31,
(in millions)
Protection purchased(b)
Protection sold Protection purchasedProtection soldTotal 
Protection purchased(b)
Protection sold Protection purchasedProtection sold Total
Credit default swaps$2,800,975
$2,839,361
 $26,371
$131
$5,666,838
 $2,661,657
$2,658,825
 $23,523
$415
$5,344,420
Other credit derivatives(a)
27,246
79,711
 —
—
106,957
 34,250
93,776
 —
—
128,026
Total$2,828,221
$2,919,072
 $26,371
$131
$5,773,795
 $2,695,907
$2,752,601
 $23,523
$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 202–210 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 Firm’s 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
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 off–balance sheet commitments, although it does provide the Firm with credit risk protection..


158JPMorgan Chase & Co./20112012 Annual Report143
Management's discussion and analysis

Credit Portfolio Management activities
Use of single-name and portfolio credit derivatives
 
Notional amount of protection
purchased and sold
December 31, (in millions)2011 2010
Credit derivatives used to manage:   
Loans and lending-related commitments$3,488
 $6,698
Derivative receivables22,883
 16,825
Total protection purchased26,371
 23,523
Total protection sold131
 415
Credit derivatives hedges notional, net$26,240
 $23,108

Credit Portfolio Management derivatives
 
Notional amount of protection
purchased and sold (a)
December 31, (in millions)2012 2011
Credit derivatives used to manage:   
Loans and lending-related commitments$2,166
 $3,488
Derivative receivables25,347
 22,883
Total net protection purchased27,513
 26,371
Total net protection sold66
 131
Credit Portfolio Management derivatives net notional$27,447
 $26,240
(a)Amounts are presented net, considering the Firm’s net protection purchased or sold with respect to each underlying reference entity or index.
The credit derivatives used by JPMorgan Chase for credit portfolio managementin Credit Portfolio Management activities do not qualify for hedge accounting under U.S. GAAP; these derivatives are reported at fair value, with gains and losses recognized in principal transactions revenue. In contrast, the loans and lending-related commitments being risk-managed are accounted for on an accrual basis. This asymmetry in accounting treatment, between loans and lending-related commitments and the credit derivatives used in credit portfolio management
activities, causes earnings volatility that is not
representative, in the Firm’s view, of the true changes in value of the Firm’s overall credit exposure. In addition, the effectiveness of the Firm’s CDScredit default swap (“CDS”) protection as a hedge of the Firm’s exposures may vary depending uponon a number of factors, including the maturity of the Firm’s CDS protection (which in some cases may be shorter than the Firm’s exposures), the named reference entity (i.e., the Firm may experience losses on specific exposures that are different than the named reference entities in the purchased CDS), and the contractual terms of the CDS. CDS (which may have a defined credit event that does not align with an actual loss realized by the Firm).
The fair value related to the Firm’s 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 163–165 of this Annual Report.
Net gains and losses on credit portfolio hedges
Year ended December 31,
(in millions)
2011 2010 20092012 2011 2010
Hedges of loans and lending-related commitments$(32) $(279) $(3,258)$(163) $(32) $(279)
CVA and hedges of CVA(769) (403) 1,920
127
 (769) (403)
Net gains/(losses)$(801) $(682) $(1,338)$(36) $(801) $(682)

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 Firm’s view, the total contractual amount of these wholesale lending-related commitments is not representative of the Firm’s 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 Firm’s lending-related commitments was $206.5 billion and $178.9 billion as of December 31, 2011 and 2010, respectively.


144JPMorgan Chase & Co./2011 Annual Report


CONSUMER CREDIT PORTFOLIO
JPMorgan Chase’s consumer portfolio consists primarily of residential real estate loans, credit cards, auto loans, business banking loans, and student loans. The Firm’s primary focus is on serving the prime segment of the consumer credit market. For further information on consumer loans, see Note 14 on pages 231–252 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 231–252 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 (30–89 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 Firm’s 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 extended-term 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.




JPMorgan Chase & Co./2011 Annual Report145
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 Firm’s nonaccrual and charge-off accounting policies, see Note 14 on pages 231–252 of this Annual Report.
Consumer credit portfolio       
As of or for the year ended December 31,
(in millions, except ratios)
Credit exposure 
Nonaccrual loans(g)(h)
 Net charge-offs 
Average annual net charge-off rate(i)(j)
20112010 20112010 20112010 20112010
Consumer, excluding credit card           
Loans, excluding PCI loans and loans held-for-sale           
Home equity – senior lien$21,765
$24,376
 $495
$479
 $284
$262
 1.20%1.00%
Home equity – junior lien56,035
64,009
 792
784
 2,188
3,182
 3.69
4.63
Prime mortgage, including option ARMs76,196
74,539
 3,462
4,320
 708
1,627
 0.95
2.15
Subprime mortgage9,664
11,287
 1,781
2,210
 626
1,374
 5.98
10.82
Auto(a)
47,426
48,367
 118
141
 152
298
 0.32
0.63
Business banking17,652
16,812
 694
832
 494
707
 2.89
4.23
Student and other14,143
15,311
 69
67
 420
459
 2.85
2.85
Total loans, excluding PCI loans and loans held-for-sale242,881
254,701
 7,411
8,833
 4,872
7,909
 1.97
3.00
Loans – PCI(b)
      

 

Home equity22,697
24,459
 NA
NA
 NA
NA
 NA
NA
Prime mortgage15,180
17,322
 NA
NA
 NA
NA
 NA
NA
Subprime mortgage4,976
5,398
 NA
NA
 NA
NA
 NA
NA
Option ARMs22,693
25,584
 NA
NA
 NA
NA
 NA
NA
Total loans – PCI65,546
72,763
 NA
NA
 NA
NA
 NA
NA
Total loans – retained308,427
327,464
 7,411
8,833
 4,872
7,909
 1.54
2.32
Loans held-for-sale(c)
—
154
 —
—
 —
—
 —
—
Total consumer, excluding credit card loans308,427
327,618
 7,411
8,833
 4,872
7,909
 1.54
2.32
Lending-related commitments           
Home equity – senior lien(d)
16,542
17,662
         
Home equity – junior lien(d)
26,408
30,948
         
Prime mortgage1,500
1,266
         
Subprime mortgage—
—
         
Auto6,694
5,246
         
Business banking10,299
9,702
         
Student and other864
579
         
Total lending-related commitments62,307
65,403
         
Receivables from customers(e)
100
—
         
Total consumer exposure, excluding credit card370,834
393,021
         
Credit Card           
Loans retained(f)
132,175
135,524
 1
2
 6,925
14,037
 5.44
9.73
Loans held-for-sale102
2,152
 —
—
 —
—
 —
—
Total credit card loans132,277
137,676
 1
2
 6,925
14,037
 5.44
9.73
Lending-related commitments(d)
530,616
547,227
    

 

Total credit card exposure662,893
684,903
    

 

Total consumer credit portfolio$1,033,727
$1,077,924
 $7,412
$8,835
 $11,797
$21,946
 2.66%4.53%
Memo: Total consumer credit portfolio, excluding PCI$968,181
$1,005,161
 $7,412
$8,835
 $11,797
$21,946
 3.15%5.38%
(a)
At December 31, 2011 and 2010, excluded operating lease–related assets of $4.4 billion and $3.7 billion, respectively.
(b)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.
(c)Represents prime mortgage loans held-for-sale.
(d)Credit card and home equity lending–related commitments represent the total available lines of credit for these products. The Firm has not experienced, and does not anticipate, that all available lines of credit would be used at the same time. For credit card and home equity commitments (if certain conditions are met), the Firm can reduce or cancel these lines of credit by providing the borrower notice or, in some cases, without notice as permitted by law.
(e)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.
(f)Includes billed finance charges and fees net of an allowance for uncollectible amounts.
(g)
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,

146JPMorgan Chase & Co./2011 Annual Report


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 Firm’s 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.
(h)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.
(i)
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.
(j)
Net charge-off rates for 2010 reflect the impact of an aggregate $632 million adjustment related to the Firm’s 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 Firm’s consumer portfolio, including information about delinquencies, loan modifications and other credit quality indicators, see Note 14 on pages 231–252 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 Firm’s 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 3–30 years. Approximately half of the HELOANs are senior liens and the remainder are junior liens. 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. 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 (“high-risk 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 loan-level data provided by a number of servicers across the industry (including JPMorgan Chase). The performance of the Firm’s 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 charge-off 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


JPMorgan Chase & Co./2011 Annual Report147
Management's discussion and analysis

prime mortgage originations and Ginnie Mae loans that the Firm elected to repurchase, partially offset by the charge-off 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 charge-offs 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 run-off partially offset by the purchase of loans previously securitized as the securitization entities were terminated. The Firm’s 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 Chase’s 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 charge-off 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
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 Firm’s 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.


148JPMorgan 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 principalloss 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
Lifetime loss estimates(a)
 
LTD liquidation losses(b)
December 31, (in billions)20112010 20112010
Home equity$14.9
 $14.7
  $10.4
 $8.8
 
Prime mortgage4.6
 4.9
  2.3
 1.5
 
Subprime mortgage3.8
 3.7
  1.7
 1.2
 
Option ARMs11.5
 11.6
  6.6
 4.9
 
Total$34.8
 $34.9
  $21.0
 $16.4
 
(a)
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.
(b)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 Firm’s 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.


JPMorgan Chase & Co./2011 Annual Report149
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 2010
 
December 31,
(in millions, except ratios)
Unpaid principal balance
Current estimated
LTV ratio(a)
Net carrying value(c)
Ratio of net
carrying value
to current estimated
collateral value(c)
 
Unpaid principal
balance
Current estimated
LTV ratio(c)
Net carrying value(c)
Ratio of net
carrying value
to current estimated
collateral value(c)
 
 Home equity$25,064
117%
(b) 
$20,789
97% $28,312
117%
(b) 
$22,876
95%
 Prime mortgage16,060
110
 13,251
91 18,928
109
 15,556
90
 Subprime mortgage7,229
115
 4,596
73 8,042
113
 5,300
74
 Option ARMs26,139
109
 21,199
89 30,791
111
 24,090
87
(a)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.
(b)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.
(c)
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 231–252 of this Annual Report.
Loan modification activities - residential real estate loans
For both the Firm’s on–balance 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. Treasury’s 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. Treasury’s programs. The MHA programs include the Home Affordable Modification Program (“HAMP”) and the Second Lien Modification Program (“2MP”). The Firm’s other loss-mitigation 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 Firm’s 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 Firm’s 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


150JPMorgan Chase & Co./2011 Annual Report


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 borrower’s 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 borrower’s payment at the current level. The cumulative redefault rates reflect the performance of modifications completed under both HAMP and the Firm’s 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 on–balance 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 Firm’s 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 231–252 on this Annual Report.
Modified residential real estate loans2011 2010
December 31, (in millions)
On–balance
sheet loans
Nonaccrual on–balance sheet loans(d)
 
On–balance
sheet loans
Nonaccrual on–balance sheet loans(d)
Modified residential real estate loans – excluding PCI loans(a)(b)
     
Home equity – senior lien$335
$77
 $226
$38
Home equity – junior lien657
159
 283
63
Prime mortgage, including option ARMs4,877
922
 2,084
534
Subprime mortgage3,219
832
 2,751
632
Total modified residential real estate loans – excluding PCI loans$9,088
$1,990
 $5,344
$1,267
Modified PCI loans(c)
     
Home equity$1,044
NA
 $492
NA
Prime mortgage5,418
NA
 3,018
NA
Subprime mortgage3,982
NA
 3,329
NA
Option ARMs13,568
NA
 9,396
NA
Total modified PCI loans$24,012
NA
 $16,235
NA
(a)Amounts represent the carrying value of modified residential real estate loans.
(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., 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 256–267 of this Annual Report.
(c)Amounts represent the unpaid principal balance of modified PCI loans.
(d)
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.

JPMorgan Chase & Co./2011 Annual Report151
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 borrower’s 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)2011 2010
Nonaccrual loans(b)(c)
   
Home equity – senior lien$495
 $479
Home equity – junior lien792
 784
Prime mortgage, including option ARMs3,462
 4,320
Subprime mortgage1,781
 2,210
Auto118
 141
Business banking694
 832
Student and other69
 67
Total nonaccrual loans7,411
 8,833
Assets acquired in loan satisfactions   
Real estate owned802
 1,294
Other44
 67
Total assets acquired in loan satisfactions846
 1,361
Total nonperforming assets$8,257
 $10,194
(a)
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.
(b)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.
(c)
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.
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 loss-mitigation activities. In their Orders, the regulators have mandated significant changes to the Firm’s 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 Firm’s residential mortgage servicing, foreclosure and loss-mitigation activities are conducted in accordance with the requirements of the Orders.


152JPMorgan Chase & Co./2011 Annual Report


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 Firm’s activities with respect to the Mortgage Electronic Registration system (“MERS”) and compliance with MERSCORP’s 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 Firm’s 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 290–299 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.



JPMorgan Chase & Co./2011 Annual Report153
Management's discussion and analysis

Credit Card
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 Firm’s sale of the $3.7 billion Kohl’s 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 well-seasoned, 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
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 portfolio’s 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.

Modifications of credit card loans
At December 31, 2011 and 2010, the Firm had $7.2 billion and $10.0 billion, respectively, of on–balance 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 Firm’s 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 231–252 of this Annual Report.





154JPMorgan Chase & Co./2011 Annual Report


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 ChaseThe Firm is a national leader in community development by providing loans, investments and community development services in communities across the United States.
At December 31, 20112012 and 20102011, the Firm’s CRA loan portfolio was approximately $1516 billion and $1615 billion,
respectively. At December 31, 20112012 and 20102011, 63%62% and
65%63%, respectively, of the CRA portfolio were residential mortgage loans; 17%18% and 15%17%, respectively, were business banking loans; 13% and 14%, for both periods,respectively, were commercial real estate loans; and 7% and 6%, for both periods,respectively, were other loans. CRA nonaccrual loans were 4% and 6%, respectively, of the Firm’s total nonaccrual loans at both December 31, 2011 and 2010, respectively.loans. For the years ended December 31, 20112012 and 20102011, net charge-offs in the CRA portfolio were 3% for both periods, of the Firm’s net charge-offs.charge-offs in both years.




ALLOWANCE FOR CREDIT LOSSES
JPMorgan Chase’s allowance for loan losses covers the wholesale (risk-rated), and consumer, excludingincluding credit card, and credit card portfoliosportfolio segments (primarily scored).; and wholesale (risk-rated) portfolio. The allowance represents management’s estimate of probable credit losses inherent in the Firm’s loan portfolio. Management also determines an allowance for wholesale and certain consumer, excluding credit card, lending-related commitments.
The allowance for loan losses includes an asset-specific component, a formula-based component, and a component related to PCI loans. The asset-specific component and the PCI loan component are generally based on an estimate of
cash flows expected to be collected from specifically identified impaired or PCI loans. The formula-based component is based on a statistical calculation to provide for probable principal losses inherent in the remaining loan portfolios. Within the formula-based component, management applies judgment within an established framework to adjust the results of applying its statistical loss calculation. The determination of the appropriate adjustment is based on management’s view of uncertainties that have occurred but are not yet reflected in the statistical calculation and that relate to current macroeconomic and political conditions, the quality of underwriting standards, and other relevant internal and external factors affecting


JPMorgan Chase & Co./2012 Annual Report159
Management’s discussion and analysis

the credit quality of the portfolio. For a further discussion of the components of the allowance for credit losses, see Critical Accounting Estimates Used by the Firm on pages 168–169178–182 and Note 15 on pages 252–255276–279 of this Annual Report.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, 20112012, 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 $22.6 billion at December 31, 2012, a decrease of $5.7 billion from $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 million4.0 billion largelyfrom December 31, 2011, predominantly due to a reduction of $1.0 billionin the allowance related tofor the non-credit-impairednon-PCI residential real estate portfolio, asreflecting the continuing trend of improving delinquencies and nonaccrual loans (excluding the impact of Chapter 7 loans and junior liens that are subordinate to senior liens that are 90 days or more past due, which have been included in nonaccrual loans beginning in 2012), which resulted in a lower level of estimated losses in that portfolio declined, predominantly offset bybased on the Firm’s base statistical loss calculation. The allowance also included a $770488 million increase relatedreduction attributable to a refinement of the loss estimates associated with the Firm’s compliance with its obligations under the global settlement, which reflected changes in implementation strategies adopted in the second quarter of 2012. The adjustment to the base statistical loss calculation that underlies the formula-based component of the allowance for credit losses for the consumer, excluding credit card, portfolio segment has declined over the past two years, predominantly because specific risks covered by this adjustment were subsequently incorporated into either the base statistical loss calculation or asset-specific reserves during that same time period.
The credit card allowance for loan losses decreased by $1.5 billion since December 31, 2011, due to reductions in both the asset-specific allowance and the formula-based allowance. The reduction in the asset-specific allowance, which relates to loans restructured in TDRs, largely reflects the changing profile of the TDR portfolio. The volume of new TDRs, which have higher loss rates due to expected redefaults, continues to decrease, and the loss rate on existing TDRs is also decreasing over time as previously restructured loans season and continue to perform. In addition, effective June 30, 2012, the Firm changed its policy for recognizing charge-offs on restructured loans that do not comply with their modified payment terms based upon guidance received from the banking regulators; this policy change resulted in an acceleration of charge-offs against the asset-specific allowance. For the year ended December 31, 2012, the reduction in the formula-based
allowance was primarily driven by the continuing trend of improving delinquencies and bankruptcies (which resulted in a lower level of estimated losses based on the Firm’s statistical loss calculation) and by lower levels of credit card outstandings. The adjustment to the base statistical loss calculation that underlies the formula-based component of the allowance for credit losses for the credit card portfolio segment has increased somewhat over the past two years, primarily to consider current macroeconomic conditions (including relatively high unemployment rates).
The wholesale allowance for loan losses decreased by $173 million since December 31, 2011. The decrease was driven by recoveries, the restructuring of certain nonperforming loans and other portfolio activity, as well as continued improvements in the wholesale credit environment as evidenced by lower charge-offs, non-accrual assets and downgrade activity. The resulting decrease has been partially offset by an increase in estimated lifetimethe adjustment to the base statistical loss calculation in order to reflect inherent credit losses that have not been captured by current credit metrics and greater levels of uncertainty, due to the low level of criticized assets and limited downgrade activity in the PCI portfolio.
For additional information about the credit quality of the Firm’s loan portfolios, see Consumer Credit Portfolio on pages 138–149, Wholesale Credit Portfolio on pages 150–159, and Note 14 on pages 250–275 of this Annual Report.
The allowance for lending-related commitments for both the wholesale and consumer, excluding credit card, and wholesale portfolios, which is reported in other liabilities, totaledwas $673668 million and $717673 million at December 31, 20112012 and 20102011, respectively.
The credit ratios in the following table below are based on retained loan balances, which exclude loans held-for-sale and loans accounted for at fair value.


JPMorgan Chase & Co./2011 Annual Report155
Management's discussion and analysis

Summary of changes in the allowance for credit losses
 2011 2010
Year ended December 31,Wholesale
Consumer, excluding
credit card
Credit cardTotal Wholesale
Consumer, excluding
credit card
Credit card Total
(in millions, except ratios) 
Allowance for loan losses         
Beginning balance at January 1,$4,761
$16,471
$11,034
$32,266
 $7,145
$14,785
$9,672
$31,602
Cumulative effect of change in accounting principles(a)
—
—
—
—
 14
127
7,353
7,494
Gross charge-offs916
5,419
8,168
14,503
 1,989
8,383
15,410
25,782
Gross recoveries(476)(547)(1,243)(2,266) (262)(474)(1,373)(2,109)
Net charge-offs440
4,872
6,925
12,237
 1,727
7,909
14,037
23,673
Provision for loan losses17
4,670
2,925
7,612
 (673)9,458
8,037
16,822
Other(22)25
(35)(32) 2
10
9
21
Ending balance at December 31,$4,316
$16,294
$6,999
$27,609
 $4,761
$16,471
$11,034
$32,266
Impairment methodology         
Asset-specific(b)
$516
$828
$2,727
$4,071
 $1,574
$1,075
$4,069
$6,718
Formula-based3,800
9,755
4,272
17,827
 3,187
10,455
6,965
20,607
PCI—
5,711
—
5,711
 —
4,941
—
4,941
Total allowance for loan losses$4,316
$16,294
$6,999
$27,609
 $4,761
$16,471
$11,034
$32,266
Allowance for lending-related commitments         
Beginning balance at January 1,$711
$6
$—
$717
 $927
$12
$—
$939
Cumulative effect of change in accounting principles(a)
—
—
—
—
 (18)—
—
(18)
Provision for lending-related commitments(40)2
—
(38) (177)(6)—
(183)
Other(5)(1)—
(6) (21)—
—
(21)
Ending balance at December 31,$666
$7
$—
$673
 $711
$6
$—
$717
Impairment methodology         
Asset-specific$150
$—
$—
$150
 $180
$—
$—
$180
Formula-based516
7
—
523
 531
6
—
537
Total allowance for lending-related commitments$666
$7
$—
$673
 $711
$6
$—
$717
Total allowance for credit losses$4,982
$16,301
$6,999
$28,282
 $5,472
$16,477
$11,034
$32,983
Memo:         
Retained loans, end of period$278,395
$308,427
$132,175
$718,997
 $222,510
$327,464
$135,524
$685,498
Retained loans, average245,111
315,736
127,334
688,181
 213,609
340,334
144,219
698,162
PCI loans, end of period21
65,546
—
65,567
 44
72,763
—
72,807
Credit ratios         
Allowance for loan losses to retained loans1.55%5.28%5.30%3.84% 2.14%5.03%8.14%4.71%
Allowance for loan losses to retained nonaccrual loans(c)
180
220
NM
281
 86
186
NM
225
Allowance for loan losses to retained nonaccrual loans excluding credit card180
220
NM
210
 86
186
NM
148
Net charge-off rates(d)
0.18
1.54
5.44
1.78
 0.81
2.32
9.73
3.39
Credit ratios, excluding residential real estate PCI loans         
Allowance for loan losses to
  retained loans (e)
1.55
4.36
5.30
3.35
 2.14
4.53
8.14
4.46
Allowance for loan losses to
  retained nonaccrual loans(c)(e)
180
143
NM
223
 86
131
NM
190
Allowance for loan losses to
  retained nonaccrual loans excluding credit card(c)(e)
180
143
NM
152
 86
131
NM
114
Net charge-off rates(d)
0.18%1.97%5.44%1.98% 0.81%3.00%9.73%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,

156160 JPMorgan Chase & Co./20112012 Annual Report


$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 256–267 of this Annual Report.
Summary of changes in the allowance for credit losses      
 2012 2011
Year ended December 31,
Consumer, excluding
credit card
 Credit cardWholesaleTotal 
Consumer, excluding
credit card
Credit cardWholesaleTotal
(in millions, except ratios)
Allowance for loan losses          
Beginning balance at January 1,$16,294
 $6,999
$4,316
$27,609
 $16,471
$11,034
$4,761
$32,266
Gross charge-offs4,805
(d) 
5,755
346
10,906
 5,419
8,168
916
14,503
Gross recoveries(508) (811)(524)(1,843) (547)(1,243)(476)(2,266)
Net charge-offs/(recoveries)4,297
(d) 
4,944
(178)9,063
 4,872
6,925
440
12,237
Provision for loan losses302
 3,444
(359)3,387
 4,670
2,925
17
7,612
Other(7) 2
8
3
 25
(35)(22)(32)
Ending balance at December 31,$12,292
 $5,501
$4,143
$21,936
 $16,294
$6,999
$4,316
$27,609
Impairment methodology          
Asset-specific(a)
$729
 $1,681
$319
$2,729
 $828
$2,727
$516
$4,071
Formula-based5,852
 3,820
3,824
13,496
 9,755
4,272
3,800
17,827
PCI5,711
 —
—
5,711
 5,711
—
—
5,711
Total allowance for loan losses$12,292
 $5,501
$4,143
$21,936
 $16,294
$6,999
$4,316
$27,609
Allowance for lending-related commitments          
Beginning balance at January 1,$7
 $—
$666
$673
 $6
$—
$711
$717
Provision for lending-related commitments—
 —
(2)(2) 2
—
(40)(38)
Other—
 —
(3)(3) (1)—
(5)(6)
Ending balance at December 31,$7
 $—
$661
$668
 $7
$—
$666
$673
Impairment methodology          
Asset-specific$—
 $—
$97
$97
 $—
$—
$150
$150
Formula-based7
 —
564
571
 7
—
516
523
Total allowance for lending-related commitments$7
 $—
$661
$668
 $7
$—
$666
$673
Total allowance for credit losses$12,299
 $5,501
$4,804
$22,604
 $16,301
$6,999
$4,982
$28,282
Memo:          
Retained loans, end of period$292,620
 $127,993
$306,222
$726,835
 $308,427
$132,175
$278,395
$718,997
Retained loans, average300,024
 125,031
291,980
717,035
 315,736
127,334
245,111
688,181
PCI loans, end of period59,737
 —
19
59,756
 65,546
—
21
65,567
Credit ratios          
Allowance for loan losses to retained loans4.20% 4.30%1.35 %3.02% 5.28%5.30%1.55%3.84%
Allowance for loan losses to retained nonaccrual loans(b)
134
 NM
289
207
 220
NM
180
281
Allowance for loan losses to retained nonaccrual loans excluding credit card134
 NM
289
155
 220
NM
180
210
Net charge-off/(recovery) rates(c)
1.43
(d) 
3.95
(0.06)1.26
 1.54
5.44
0.18
1.78
Credit ratios, excluding residential real estate PCI loans          
Allowance for loan losses to
retained loans		2.83
 4.30
1.35
2.43
 4.36
5.30
1.55
3.35
Allowance for loan losses to
retained nonaccrual loans(b)
72
 NM
289
153
 143
NM
180
223
Allowance for loan losses to
retained nonaccrual loans excluding credit card(b)
72
 NM
289
101
 143
NM
180
152
Net charge-off/(recovery) rates(c)
1.81%
(d) 
3.95%(0.06)%1.38% 1.97%5.44%0.18%1.98%

(b)(a)
(a)Includes risk-rated loans that have been placed on nonaccrual status and loans that have been modified in a TDR.
(c)(b)The Firm’s 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.
(d)(c)Charge-offs are not recorded on PCI loans until actual losses exceed estimated losses recorded as purchase accounting adjustments at the time of acquisition.
(e)(d)Excludes
Net charge-offs and net charge-off rates for the impactyear ended December 31, 2012, included $800 million of PCI loans acquired as partcharge-offs 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
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.

Year ended December 31,Provision for loan losses Provision for lending-related commitments Total provision for credit losses 
(in millions)2011
2010
2009
 2011
2010
2009
 2011
2010
2009
 
Wholesale$17
$(673)$3,684
 $(40)$(177)$290
 $(23)$(850)$3,974
 
Consumer, excluding credit card4,670
9,458
16,032
 2
(6)(10) 4,672
9,452
16,022
 
Credit card – reported(a)
2,925
8,037
12,019
 —
—
—
 2,925
8,037
12,019
 
Total provision for credit losses – reported7,612
16,822
31,735
 (38)(183)280
 7,574
16,639
32,015
 
Credit card – securitized(a)(b)
NA
NA
6,443
 NA
NA
—
 NA
NA
6,443
 
Total provision for credit losses – managed$7,612
$16,822
$38,178
 $(38)$(183)$280
 $7,574
$16,639
$38,458
 
(a)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 Firm’s application and the impact of the new guidance, see Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial MeasuresChapter 7 loans. See Consumer Credit Portfolio on pages 76–78138–149 of this Annual Report.
(b)Loans securitized are defined as loans that were sold to unconsolidated securitization trusts and were not included in reported loans. ForReport for further discussion of credit card securitizations, see Note 16 on pages 256–267 of this Annual Report.details.

JPMorgan Chase & Co./20112012 Annual Report 157161
Management’s discussion and analysis

Provision for credit losses
For the year ended December 31, 2012, the provision for credit losses was $3.4 billion, down by 55% from 2011.
The consumer, excluding credit card, provision for credit losses was $302 million in 2012, compared with $4.7 billion in 2011, reflecting reductions in the allowance for loan losses due primarily to lower estimated losses in the non-PCI residential real estate portfolio as delinquency trends improved. These reductions were partially offset by the impact of charge-offs of Chapter 7 loans.
The credit card provision for credit losses was $3.4 billion in 2012, compared with $2.9 billion in 2011, reflecting a smaller current year reduction in the allowance for loan losses compared with the prior year, partially offset by lower net charge-offs in 2012.
In 2012 the wholesale provision for credit losses was a benefit of $361 million, compared with a benefit of $23 million in 2011. The current year period provision reflected recoveries, the restructuring of certain nonperforming loans, current credit trends and other portfolio activity. For further information on the provision for credit losses, see the Consolidated Results of Operations on pages 72–75 of this Annual Report.

Year ended December 31, Provision for loan losses 
Provision for
lending-related commitments
 Total provision for credit losses
(in millions) 2012
2011
2010 2012
2011
2010
 2012
2011
2010
Consumer, excluding credit card $302
$4,670
$9,458
 $—
$2
$(6) $302
$4,672
$9,452
Credit card 3,444
2,925
8,037
 —
—
—
 3,444
2,925
8,037
Wholesale (359)17
(673) (2)(40)(177) (361)(23)(850)
Total provision for credit losses $3,387
$7,612
$16,822
 $(2)$(38)$(183) $3,385
$7,574
$16,639


162JPMorgan Chase & Co./2012 Annual Report
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 their market prices or rates.prices.
Market risk management
Market Risk is an independent risk management function that works in close partnership with the lines of business, segmentsincluding Corporate/Private Equity, to identify and monitor market risks throughout the Firm and to define market risk policies and procedures. The market risk management function is headed byreports to the Firm’s Chief Risk Officer.
Market Risk seeks to control risk, facilitate efficient risk/return decisions, reduce volatility in operating performance and provide transparency into the Firm’s market risk profile for senior management, the Board of Directors and regulators. Market Risk is responsible for the following functions:
EstablishingEstablishment of a market risk policy framework
Independent measurement, monitoring and control of line-of-businessline of business and firmwide 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 verificationmanagement of the market risks within its units. The independent risk management group responsible for overseeing each line of business ensures that all material market risks are appropriately identified, measured, monitored and managed in accordance with the risk policy framework set out by Market Risk. The Firm’s market risks arise primarily from the activities in IB,CIB, Mortgage Production and Mortgage Servicing in CCB, and CIO in Corporate/Private Equity.
IBCIB makes markets in products across the fixed income, foreign exchange, equities and commodities markets. This trading activity gives rise to market risk and may lead to a potential decline in net income due to adverseas a result of changes in market prices and rates. In addition, to these risks, there are risks in IB’sCIB’s credit portfolio from retained loans and commitments, derivativeexposes the Firm to market risks related to credit valuation adjustments (“CVA”), hedges of the credit valuation adjustmentsCVA and the fair value of hedges of the retained loan portfolio. Additional market risk positions result from the debit valuation adjustments (“DVA”) taken on certain structured liabilitiesnotes and derivativesderivative liabilities to reflect the credit quality of the Firm.Firm; DVA is not included in VaR.
The Firm’s Mortgage Production and Mortgage Servicing businessbusinesses includes the Firm’s mortgage pipeline and warehouse loans, MSRs and all related hedges. These activities give rise to complex, non-linear interest rate risks, as well as option and basis risk. OptionNon-linear risk arises primarily from prepayment options embedded in mortgages and changes in the probability of newly originated mortgage
commitments actually closing. Basis risk results from differences in the relative movements of the rate indices underlying mortgage exposure and other interest rates.
Corporate/Private Equity comprises Private Equity, Treasury and CIO. Treasury and CIO is primarily concerned withare predominantly responsible for measuring, monitoring, reporting and managing the Firm’s liquidity, funding, capital and structural interest rate and foreign exchange risks. The risks managed by Treasury and CIO arise from the activities undertaken by the Firm’s four major reportable business segments to serve their respective client bases, which arise out of the various business activities of the Firm. Market Risk measuresgenerate both on- and monitors the gross structural exposures as well as the net exposures related to these activities.off-balance sheet assets and liabilities.
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 (“VaR”)
Economic-value stress testing
Nonstatistical risk measures
Loss advisories
RevenueProfit and loss 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 undertakesmoves in a comprehensive VaR calculation that includes the majority of its materialnormal 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.environment.
The Firm calculateshas one overarching VaR to estimate possible economic outcomesmodel framework used for its current positions usingrisk management purposes across the Firm, which utilizes 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. ThisThe framework’s approach assumes that historical changes in market values are representative of the distribution of potential outcomes in the immediate future. VaR is calculated usingassuming a one day time horizonone-day holding period and an expected tail-loss methodology, andwhich 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, days.
Underlying the overall VaR model framework are individual VaR models that simulate historical market returns for individual products and/or about 12risk factors. To capture material market risks as part of the Firm’s risk management framework, comprehensive VaR model calculations are performed daily for businesses whose activities give rise to 13 timesmarket risk. These VaR models are granular and incorporate numerous risk factors and inputs to simulate daily changes


JPMorgan Chase & Co./2012 Annual Report163
Management’s discussion and analysis

in market values over the historical period; inputs are selected based on the risk profile of each portfolio as sensitivities and historical time series used to generate daily market values may be different for different products or risk management systems. The VaR model results across all portfolios are aggregated at the Firm level.
Data sources used in VaR models may be the same as those used for financial statement valuations. However in cases where market prices are not observable, or where proxies are used in VaR historical time series, the sources may differ. In addition, the daily market data used in VaR models may be different than the independent third party data collected for VCG price testing in their monthly valuation process (see pages 196–200 of this Annual Report for further information on the Firm’s valuation process.) VaR model calculations require a year. However,more timely (i.e., daily) data and consistent source for valuation and therefore it is not practical to use the monthly valuation process.
VaR provides a consistent framework to measure risk profiles and levels of diversification across product types and is used for aggregating risks across businesses and monitoring limits. These VaR results are reported to senior management, the Board of Directors and regulators.
The Firm uses VaR as a statistical risk management tool for assessing risk under normal market conditions consistent with the day-to-day risk decisions made by the lines of business. VaR is not used to estimate the impact of stressed market conditions or to manage any impact from potential stress events. The Firm uses economic-value stress testing and other techniques to capture and manage market risk arising under stressed scenarios, as described further below.
Because VaR is based on historical data, it is an imperfect measure of market risk exposure and potential losses. For example, 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 VaR measurement also does not provide an estimate of the extent to which losses may exceed VaR results. In addition, based on their reliance on available historical data, limited time horizons, and other factors, VaR measures are inherently limited in their ability to measure certain risks and to predict losses, particularly those associated with market illiquidity and sudden or severe shifts in market conditions. As VaR cannot be used to determine future losses in the Firm’s market risk positions, the Firm considers other metrics in addition to VaR calculationto monitor and manage its market risk positions.
Separately, the Firm calculates a daily aggregated VaR in accordance with regulatory rules, which is highly granularused to derive the Firm’s regulatory VaR based capital requirements. This regulatory VaR model framework currently assumes a ten business day holding period and incorporates numerous risk factors,an expected tail loss methodology, which approximates a 99% confidence level. Regulatory VaR is applied to positions as defined by the banking regulators’ Basel I “Market Risk Rule”, which are selected baseddifferent than positions included in the Firm’s internal risk management VaR. Certain positions are not included in the Firm’s internal risk management VaR, while the Firm’s internal risk management VaR includes some positions, such as CVA and its related credit hedges that are not included in Regulatory VaR. For further information, see Capital Management on pages 116–122 of this Annual Report. Effective in the risk profilefirst quarter of each portfolio.2013, the Firm will implement regulatory VaR for positions as defined by the U.S. banking regulators’ Basel 2.5 “Market Risk Rule”.



158164 JPMorgan Chase & Co./20112012 Annual Report


The table below shows the results of the Firm’s VaR measure using a 95% confidence level.
Total IB trading VaR by risk type, Credit portfolio VaR and other VaR           
Total VaRTotal VaR        
As of or for the year ended December 31,2011 2010 At December 31,2012 2011 At December 31,
(in millions) Avg.MinMax  Avg.MinMax 20112010 Avg.MinMax  Avg.MinMax 20122011
IB VaR by risk type                  
CIB trading VaR by risk type                  
Fixed income$50
 $31
 $68
 $65
 $33
 $95
 $49
 $52
 $83
(a) 
$47
 $131
 $50
 $31
 $68
 $69
 $49
 
Foreign exchange11
 6
 19
 11
 6
 20
 19
 16
 10
 6
 22
 11
 6
 19
 8
 19
 
Equities23
 15
 42
 22
 10
 52
 19
 30
 21
 12
 35
 23
 15
 42
 22
 19
 
Commodities and other16
 8
 24
 16
 11
 32
 22
 13
 15
 11
 27
 16
 8
 24
 15
 22
 
Diversification benefit to IB trading VaR(42)
(a) 
NM
(b) 
NM
(b) 
 (43)
(a) 
  NM
(b) 
  NM
(b) 
 (55)
(a) 
(34)
(a) 
IB trading VaR58
 34
 80
 71
 40
 107
 54
 77
 
Diversification benefit to CIB trading VaR(45)
(b) 
NM
(c) 
NM
(c) 
 (42)
(b) 
NM
(c) 
NM
(c) 
 (39)
(b) 
(55)
(b) 
CIB trading VaR84
 50
 128
 58
 34
 80
 75
 54
 
Credit portfolio VaR33
 19
 55
 26
 15
 40
 42
 27
 25
 16
 42
 33
 19
 55
 18
 42
 
Diversification benefit to IB trading and credit portfolio VaR(15)
(a) 
NM
(b) 
NM
(b) 
 (10)
(a) 
  NM
(b) 
  NM
(b) 
 (20)
(a) 
(5)
(a) 
Total IB trading and credit portfolio VaR76
 42
 102
 87
 50
 128
 76
 99
 
Diversification benefit to CIB trading and credit portfolio VaR(13)
(b) 
NM
(c) 
NM
(c) 
 (15)
(b) 
NM
(c) 
NM
(c) 
 (9)
(b) 
(20)
(b) 
Total CIB trading and credit portfolio VaR96
(a)(e) 
58
 142
 76
 42
 102
 84
(a)(e) 
76
 
Other VaR                                
Mortgage Production and Servicing VaR30
 6
 98
 23
 8
 47
 16
 9
 
Mortgage Production and Mortgage Servicing VaR17
 8
 43
 30
 6
 98
 24
 16
 
Chief Investment Office (“CIO”) VaR57
 30
 80
 61
 44
 80
 77
 56
 92
(a)(d) 
5
 196
 57
 30
 80
 6
 77
 
Diversification benefit to total other VaR(17)
(a) 
NM
(b) 
NM
(b) 
 (13)
(a) 
  NM
(b) 
  NM
(b) 
 (10)
(a) 
(10)
(a) 
(8)
(b) 
NM
(c) 
NM
(c) 
 (17)
(b) 
NM
(c) 
NM
(c) 
 (5)
(b) 
(10)
(b) 
Total other VaR70
 46
 110
 71
 48
 100
 83
 55
 101
 18
 204
 70
 46
 110
 25
 83
 
Diversification benefit to total IB and other VaR(45)
(a) 
NM
(b) 
NM
(b) 
 (59)
(a) 
  NM
(b) 
  NM
(b) 
 (46)
(a) 
(65)
(a) 
Total IB and other VaR$101
 $67
 $147
 $99
 $66
 $142
 $113
 $89
 
Diversification benefit to total CIB and other VaR(45)
(b) 
NM
(c) 
NM
(c) 
 (45)
(b) 
NM
(c) 
NM
(c) 
 (11)
(b) 
(46)
(b) 
Total VaR$152
 $93
 $254
 $101
 $67
 $147
 $98
 $113
 
(a)On July 2, 2012, CIO transferred its synthetic credit portfolio, other than a portion aggregating approximately $12 billion notional, to CIB; CIO’s retained portfolio was effectively closed out during the three months ended September 30, 2012. During the third quarter of 2012, the Firm applied a new VaR model to calculate VaR for both the portion of the synthetic credit portfolio held by CIB, as well as the portion that was retained by CIO, and which was effectively closed out at September 30, 2012. For the three months ended December 31, 2012, this new VaR model resulted in a reduction to average fixed income VaR of $11 million, average CIB trading and credit portfolio VaR of $8 million, and average total VaR of $7 million.
(b)Average portfolio VaR and period-end portfolio 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.
(b)(c)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.
(d)
Reference is made to CIO synthetic credit portfolio on pages 69–70 of this Annual Report regarding the Firm’s restatement of its 2012 first quarter financial statements. The CIO VaR amount has not been recalculated for the first quarter to reflect the restatement. The 2012 full-year VaR does not include recalculated amounts for the first quarter of 2012.
(e)Effective in the fourth quarter of 2012, CIB’s VaR includes the VaR of former reportable business segments, Investment Bank and Treasury & Securities Services (“TSS”), which were combined to form the CIB business segment as a result of the reorganization of the Firm’s business segments. TSS VaR was not material and was previously classified within Other VaR. Prior period VaR disclosures were not revised as a result of the business segment reorganization.
VaR Measurementmeasurement
IBCIB trading VaR includes substantially all market-making and client-driven activities as well as certain risk management activities in IB.CIB. This includes the credit spread sensitivities of certain mortgage productsto CVA and syndicated lending facilities that the Firm intends to distribute. For certain products, specific risk parameters are not captured in VaR. Reasons include the lack of inherent illiquidity and availability of appropriate historical data or suitable proxies. 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 tradingWhile the overall impact to VaR is not material, the Firm uses alternative methods to capture and credit portfolio VaR, certainmeasure these risk parameters that do not have daily observable values are nototherwise captured suchin VaR, including economic-value stress testing, nonstatistical measures and risk identification for large exposures as correlation risk.described further below.
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 loan portfolio, which is not reported at fair value.
Other VaR includes certain positions employed as part of the Firm’s risk management function within the Chief Investment Office (“CIO”)CIO and in the Mortgage Production and Mortgage Servicing business. businesses. 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 Firm’s ongoing business activities. derivatives, which are measured at fair value through earnings. Mortgage Production and Mortgage Servicing VaR includes the Firm’s mortgage pipeline and warehouse loans, MSRs and all related hedges.
As noted above, IB,CIB, Credit portfolio and other VaR does not include the retained Creditloan portfolio, which is not marked to market;reported at fair value; however, it does include hedges of those positions.positions, which are reported at fair value. It also does not include DVA on derivativestructured notes and structuredderivative liabilities to reflect the credit quality of the Firm; principal investments (mezzanine financing, tax-oriented investments, etc.);investments; certain foreign exchange positions used for net investment hedging of foreign currency operations; and certainlonger-term 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.CIO that are primarily classified as available for sale. These longer-term positions are managed through the Firm’s nontrading interest rate-sensitive revenue-at-risk and other cash flow-monitoring processes, rather than by using a VaR measure. Principal investing activities (including mezzanine financing, tax oriented investments, etc.) and Private Equityprivate equity positions are managed using stress and scenario analyses.analyses and are not included in VaR. See the DVA sensitivity table on page 161167 of this Annual Report for further details. For a discussion of Corporate/Private Equity, see pages 107–108 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


JPMorgan Chase & Co./20112012 Annual Report 159165
Management'sManagement’s discussion and analysis

Annual Report for further details. For a discussion of Corporate/Private Equity, see pages 102–104 of this Annual Report.
The Firm’s VaR model calculations are continuously evaluated and enhanced in response to changes in the composition of the Firm’s portfolios, changes in market conditions, improvements in the Firm’s modeling techniques and other factors. Such changes will also affect historical comparisons of VaR results. Model changes go through a review and approval process by the Model Review Group prior to implementation into the operating environment. For further information, see Model risk on pages 125–126 of this Annual Report.
During the third quarter of 2012, the Firm applied a new VaR model to calculate VaR for the synthetic credit portfolio. (This model change went through the Firm’s review and approval process by the Model Review Group prior to implementation of this model into the operating environment. For further information, see the Model risk on pages 125–126 of this Annual Report.)
For the six months ended December 31, 2012, this new VaR model resulted in a reduction to average fixed income risk component.
VaR of $19 million, average total CIB trading and credit portfolio VaR of $18 million, average CIO VaR averaged $57of $9 million, and average total VaR of $22 million. Prior period VaR results have not been recalculated using the new model. The new model uses data that references actual underlying indices, rather than being constructed through single name and index basis, which the Firm believes is a more direct representation of the risks that were in the portfolio. As a result, the Firm believes the new model, which was applied to both the portion of the synthetic credit portfolio held by CIB, as well as the portion that was retained by CIO, during the last six months of 2012 more appropriately captured the risks of the portfolio.
2012 and 2011 VaR results
As presented in the table above, average Total VaR was $152 million for 2012, compared with $61$101 million for 2010.2011. The decreaseincrease was alsoprimarily driven by the synthetic credit portfolio, partially offset by a declinedecrease in market volatility in the first halffourth quarter of 2011, as well as position changes.2012.
Mortgage ProductionAverage total CIB trading and ServicingCredit portfolio VaR averaged $30for the 2012 was $96 million compared with $76 million for 2011, compared with $23 million for 2010. 2011.
The increase was driven primarily by positionthe addition of the synthetic credit portfolio in CIB on July 2, 2012.
Average CIO VaR for 2012 was $92 million compared with $57 million in 2011, predominantly reflecting the increased risk in the synthetic credit portfolio, during the first quarter of 2012. On July 2, 2012, CIO transferred its synthetic credit portfolio, other than a portion aggregating approximately $12 billion notional, to CIB; CIO’s retained portfolio was effectively closed out during the three months ended September 30, 2012.
Average Mortgage Production and Mortgage Servicing VaR was $17 million for 2012 compared with $30 million for 2011. These decreases were primarily driven by changes in the risk profile of the MSR Portfolio.
The Firm’s average IBCIB and other VaR diversification benefit
was $45 million or 23% of the sum for 2012, compared with $45 million or 31% of the sum for 2011, compared with $59 million or 37% of the sum for 2010.2011. 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 relatedrisk-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 relatedrisk-related gains and losses for IB,CIB, CIO and Mortgage Production and Mortgage Servicing positions in CCB for 2011.the year ended December 31, 2012. This market risk relatedrisk-related revenue is defined as the change in value of: principal transactions revenue for IBCIB and CIO (less(excludes Private Equity gains/losses(losses) and revenueunrealized and realized gains/(losses) from longer-term CIO investments)AFS securities and other investments held for the longer term); trading-relatedtrading related net interest income for IB,CIB, CIO and Mortgage Production and Mortgage Servicing; IB in CCB; CIB 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 Firm’s mortgage pipeline and warehouse loans, MSRs, and all related hedges. Daily firmwide market risk relatedrisk-related revenue excludes gains and losses from DVA.



166JPMorgan Chase & Co./2012 Annual Report


The chart shows that for year ended December 31, 2012, the Firm posted market risk related gains on 233220 of the 260261 days in this period, with sevengains on eight days exceeding $200 million. The chart includes year to date losses incurred in the synthetic credit portfolio. CIB and Credit Portfolio posted market risk-related gains on 254 days in the period.
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.

Of the
160JPMorgan Chase & Co./2011 Annual Report

losses that were sustained on the 41 days of the 261 days in the trading period, the Firm sustained losses that exceeded the VaR measure on three of those days. These losses in excess of the VaR all occurred in the second quarter of 2012 and were due to the adverse effect of market movements on risk positions in the synthetic credit portfolio held by CIO. During the year ended December 31, 2012, CIB and Credit Portfolio experienced seven loss days; none of the losses on those days exceeded their respective VaR measures.

Other risk measures
Debit valuation adjustment sensitivity
The following table provides information about the gross sensitivity of DVA to a one-basis-point increase in JPMorgan Chase’s credit spreads. This sensitivity represents the impact from a one-basis-point parallel shift in JPMorgan Chase’s entire credit curve. As credit curves do not typically moveHowever, the sensitivity at a single point in a parallel fashion, the sensitivitytime multiplied by the change in spreadscredit spread at a single maturity point may not be representative of the actual revenue recognized.DVA gain or loss realized within a period. The actual results reflect the movement in credit spreads across various maturities, which typically do not move in a parallel fashion, and is the product of a constantly changing exposure profile, among other factors.
Debit valuation adjustment sensitivity   
(in millions)
One basis-point increase in
JPMorgan Chase’s credit spread
December 31, 2012   $34
   
December 31, 2011   35
   
Debit valuation adjustment sensitivity   
December 31, (in millions)One basis-point increase
in JPMorgan Chase’s credit spread
2011   $35
   
2010   35
   
Economic-value stress testing
Along with VaR, stress testing is important in measuring and controlling risk. While VaR reflects the risk of loss due to adverse changes in markets using recent historical market behavior as an indicator of losses, stress testing captures the Firm’s exposure to unlikely but plausible events in abnormal marketsmarkets. The Firm runs weekly stress tests on market-related risks across the lines of business using multiple scenarios that assume significant changes in risk factors such as credit spreads, equity prices, interest rates, currency rates or commodity prices. Scenarios are updated dynamicallyThe framework uses a grid-based approach, which calculates multiple magnitudes of stress for both market rallies and may be redefined on an ongoing basis to reflect current market conditions. Along with VaR, stress testing is important in measuringsell-offs for


JPMorgan Chase & Co./2012 Annual Report167
Management’s discussion and controlling risk; it enhances understanding of the Firm’sanalysis

each risk profile and loss potential, as stress losses are monitored against limits. Stress testing is also employed in cross-business risk management.factor. Stress-test results, trends and explanations based on current market risk positions are reported to the Firm’s senior management and to the lines of business to allow them to better understand event risk-sensitivethe sensitivity of positions to certain defined events and manage their risks with more transparency.
Stress scenarios are defined and reviewed by Market Risk, and significant changes are reviewed by the relevant Risk Committees, (For further details see Risk Governance, on pages 123–125 of this Annual Report). While most of these scenarios estimate losses based on significant market moves, such as an equity market collapse or credit crisis, the Firm also develops scenarios to quantify risk coming from specific portfolios or concentrations of risks, which attempt to capture certain idiosyncratic market movements. Scenarios may be redefined on an ongoing basis to reflect current market conditions. Ad hoc scenarios are run in response to specific market events or concerns. Furthermore, the Firm’s stress testing framework is utilized in calculating results under scenarios mandated by the Federal Reserve’s Comprehensive Capital Analysis and Review (“CCAR”) and ICAAP (“Internal Capital Adequacy Assessment Process”) processes.
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 Firm’s 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 revenueprofit and loss drawdowns
Loss advisories and net revenueprofit and loss drawdowns are tools used to highlight trading losses above certain levels of risk tolerance. Net revenue drawdown isProfit and loss drawdowns are defined as the decline in net revenueprofit and loss 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 Firm’s 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 Firm’s significant market risk exposures. This risk arises not only from trading activities but also from the Firm’s traditional
banking activities which include extension of loans and credit facilities, taking deposits and issuing debt (i.e., asset/liability management positions, including accrual loans within IBCIB and CIO, and off—balanceoff-balance sheet positions). ALCO establishes the Firm’s interest rate risk policies and sets risk guidelines and limits and reviews the risk profile of the Firm.guidelines. Treasury, working in partnership with the lines of business, calculates the Firm’s 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 off—balanceoff-balance sheet instruments. For example, if liabilities reprice more quickly than assets and funding interest rates are declining, earningsnet interest income will increase initially.
Differences in the amounts of assets, liabilities and off-balance 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, earningsnet interest income 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 Firm’s earningsnet interest income 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,net interest income, 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, earningsnet interest income 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


JPMorgan Chase & Co./2011 Annual Report161
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


168JPMorgan Chase & Co./2012 Annual Report


exposure through the stress testing of earnings-at-risk, which measures the extent to which changes in interest rates will affect the Firm’s Corecore net interest income (see page 7877 of this Annual Report for further discussion on Coreof core net interest income) and interest rate-sensitive fees (“nontrading interest rate-sensitive revenue”). Earnings-at-risk 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 Firm’s pretax earnings,net interest income, 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 Chase’s earnings-at-risk over a wide range of outcomes.
JPMorgan Chase’s 12-month pretax earnings sensitivity profiles.
(Excludes the impact of trading activities and MSRs)

JPMorgan Chase’s 12-month pretax net interest income sensitivity profiles.
(Excludes the impact of trading activities and MSRs)

JPMorgan Chase’s 12-month pretax net interest income sensitivity profiles.
(Excludes the impact of trading activities and MSRs)

Immediate change in rates Immediate change in rates 
December 31,
(in millions)
+200bp+100bp-100bp-200bp+200bp+100bp-100bp-200bp
2012$3,886
 $2,145
 NM
(a) 
NM
(a) 
2011$4,046
 $2,326
 NM
(a) 
NM
(a) 
4,046
 2,326
 NM
(a) 
NM
(a) 
20102,465
 1,483
 NM
(a) 
NM
(a) 
(a)Downward 100- and 200-basis-point parallel shocks result in a Federal Fundsfederal 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 riskearnings-at-risk from December 31, 2010,2011, resulted from investment portfolio repositioning, and an
assumedpartially offset by higher level ofexpected deposit balances. The Firm’s risk to rising rates was largely the result of widening deposit margins, which are currently compressed due to very low short-term interest rates.rates, and ALM investment portfolio positioning.
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 earningsnet interest income benefit of $669$778 million. The increase in earningsnet interest income 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 Firm’s risk appetitelimits set 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 and accommodation of client business and management experience.
Market risk management regularly reviews and updates risk limits. Senior management, including the Firm’s 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-levelCorporate level limits include VaR and stress limits. Similarly, line-of-businessline of business limits include VaR and stress limits and may be supplemented by loss advisories, nonstatistical measurements and profit and loss drawdowns. BusinessesLimits may also be allocated within the lines of business, as well at the portfolio level.
Limits are established by Market Risk in agreement with the lines of business. Limits are reviewed regularly by Market Risk and updated as appropriate, with any changes approved by lines of business management and Market Risk. Senior management, including the Firm’s Chief Executive Officer and Chief Risk Officer, are responsible for reviewing and approving certain of these risk limits on an ongoing basis. All limits that have not been reviewed within specified time periods by Market Risk are escalated to senior management. The lines of business are responsible for adhering to established limits against which exposures are monitored and reported.
Limit breaches are required to be reported in a timely manner by Risk Management to limit approvers, Market Risk and senior management. Market Risk consults with Firm senior management and lines of business senior management to determine the appropriate course of action required to return to compliance, which may include a reduction in risk in order to remedy the excess. Any Firm or line of business-level limits that are in excess for three business days or longer, or that are over limit by more than 30%, are escalated 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 Firm’s 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 ModelFirmwide 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 model’s 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 wellCommittee.



162JPMorgan Chase & Co./20112012 Annual Report169

Management’s discussion and analysis

as previously accepted models, to assess whether there have been any changes in the product or market that may affect the model’s validity and whether there are theoretical or competitive developments that may require reassessment of the model’s adequacy. For a summary of valuations based on models, see Critical Accounting Estimates Used by the Firm on pages 168–172 and Note 3 on pages 184–198 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 obligors, 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 Firm’s 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, including CIO, to ensure the Firm’s country risk exposures are diversified and that exposure levels are appropriate given the Firm’s 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 the 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 Firm’s internal country risk management approach, country exposure is reported based on the country where the majority of the assets of the obligor, counterparty, issuer or guarantor are located or where the majority of its revenue is derived, which may be different than the domicile (legal residence) of the obligor, counterparty, issuer or guarantor. ExposuresCountry exposures are generally measured by considering the Firm’s risk to an immediate
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, including both long and short positions
Counterparty exposure on derivative receivables, including credit derivative receivables, is measured at the derivative’s 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'sFirm’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 Firm’s credit, market, and operational risk governance, rather than through the country risk governance.
The Firm’s internal country risk management approachreporting 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 FFIEC’s reporting methodology, see Cross-border outstandings on page 322347 of the2012 2011Form 10-K Form 10-K..


170JPMorgan Chase & Co./20112012 Annual Report163
Management's discussion and analysis

Country risk monitoring and control
The Country Risk PolicyManagement 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 161–162163–169 of this Annual Report.Report. For further information on credit loss estimates, see Critical Accounting Estimates – Allowance for credit losses on pages 168–169178–180 of this Annual Report.Report.
Country risk reporting
The following table presents the Firm’s top 20 exposures by country exposures (excluding the U.S.) based on its internal measurements of exposure.. The selection of countries is based solely on the Firm’s largest total exposures by country, based on the Firm’s internal country risk management approach, 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
Switzerland41.4
1.1
0.5
43.0
Netherlands4.7
34.5
2.9
42.1
France16.8
13.9
—
30.7
Germany13.6
16.0
—
29.6
Australia7.6
20.4
—
28.0
Brazil5.3
14.1
—
19.4
Canada9.1
5.9
0.2
15.2
India7.8
7.1
—
14.9
Korea7.7
5.7
—
13.4
China7.0
4.4
0.2
11.6
Japan3.5
5.4
—
8.9
Hong Kong3.5
4.2
—
7.7
Mexico3.2
4.5
—
7.7
Belgium2.1
5.2
0.1
7.4
Spain3.3
3.8
0.1
7.2
Italy3.1
3.4
0.1
6.6
Singapore3.0
2.2
1.0
6.2
Sweden1.6
3.6
0.5
5.7
Taiwan2.8
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.
Top 20 country exposures   
  
December 31, 2012
(in billions)
 
Lending(a)
Trading and investing(b)(c)
Other(d)
Total exposure
United Kingdom $23.3
$52.6
$2.6
$78.5
Germany 24.4
36.3
—
60.7
France 14.7
30.3
—
45.0
Netherlands 5.0
29.8
3.0
37.8
Switzerland 24.4
1.5
2.1
28.0
Australia 7.1
16.2
—
23.3
Canada 12.8
5.8
0.6
19.2
Brazil 5.9
13.0
—
18.9
India 7.3
7.9
0.7
15.9
Korea 6.5
7.8
0.6
14.9
China 8.0
3.9
1.3
13.2
Japan 3.7
7.7
—
11.4
Mexico 2.8
6.8
—
9.6
Italy 2.8
4.7
—
7.5
Singapore 3.8
1.8
1.2
6.8
Russia 4.6
1.9
—
6.5
Hong Kong 3.4
2.8
—
6.2
Sweden 3.5
1.9
0.5
5.9
Malaysia 1.5
3.6
0.7
5.8
Spain 3.1
1.6
—
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. Excludes intra-day and operating exposures, such as from settlement and clearing activities.
(b)Includes market-making inventory, securities held in AFS accounts and hedging.
(c)Includes single-name and index and tranched credit derivatives for which one or more of the underlying reference entities is in a country listed in the above table.
(d)Includes capital invested in local entities and physical commodity inventory.


JPMorgan Chase & Co./2012 Annual Report171
Management’s discussion and analysis

Selected European exposure
Several European countries, including Spain, Italy, Ireland, Portugal and Greece, have been subject to continued credit deterioration due to weaknesses in their economic and fiscal situations. The Firm is closely monitoring its exposures in these countries and believes its exposure to these five countries is modest relative to the Firm’s 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.exposures. The Firm continues to conduct business and support client activity in these countries and, therefore, the Firm’s 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 Firm’s direct exposure to thesethe five countries listed below at December 31, 20112012, as measured under the Firm’s internal country risk management approach. For individual exposures, corporate clients represent approximately 78% of the Firm’s non-sovereign exposure in these five countries, and substantially all of the remaining 22% of the non-sovereign exposure is to the banking sector.



164JPMorgan Chase & Co./2011 Annual Report


December 31, 2011
(in billions)
Lending(a)
AFS securities(b)
Trading(c)
Derivative collateral(d)
Portfolio hedging(e)
Total exposure
December 31, 2012
Lending net of Allowance(a)
AFS securities(b)
Trading(c)
Derivative collateral(d)
Portfolio
hedging(e)
Total exposure
(in billions)
Spain   
Sovereign$—
$2.0
$—
$—
$(0.1)$1.9
$—
$0.5
$(0.4)$—
$(0.1)$—
Non-sovereign3.3
0.2
4.4
(2.3)(0.3)5.3
3.1
—
5.2
(3.3)(0.3)4.7
Total Spain exposure$3.3
$2.2
$4.4
$(2.3)$(0.4)$7.2
$3.1
$0.5
$4.8
$(3.3)$(0.4)$4.7
  
Italy  
Sovereign$—
$—
$6.4
$(1.1)$(2.8)$2.5
$—
$—
$11.6
$(1.4)$(4.9)$5.3
Non-sovereign3.1
0.1
2.9
(1.5)(0.5)4.1
2.8
—
1.0
(1.2)(0.4)2.2
Total Italy exposure$3.1
$0.1
$9.3
$(2.6)$(3.3)$6.6
$2.8
$—
$12.6
$(2.6)$(5.3)$7.5
  
Other (Ireland, Portugal and Greece) 
Ireland 
Sovereign$—
$1.0
$0.1
$—
$(0.9)$0.2
$—
$0.3
$—
$—
$(0.3)$—
Non-sovereign1.4
—
2.1
(1.4)(0.1)2.0
0.5
—
1.7
(0.3)—
1.9
Total other exposure$1.4
$1.0
$2.2
$(1.4)$(1.0)$2.2
Total Ireland exposure$0.5
$0.3
$1.7
$(0.3)$(0.3)$1.9
 
Portugal 
Sovereign$—
$—
$0.4
$—
$(0.3)$0.1
Non-sovereign0.5
—
(0.4)(0.4)(0.1)(0.4)
Total Portugal exposure$0.5
$—
$—
$(0.4)$(0.4)$(0.3)
 
Greece 
Sovereign$—
$—
$0.1
$—
$—
$0.1
Non-sovereign0.1
—
0.7
(0.9)—
(0.1)
Total Greece exposure$0.1
$—
$0.8
$(0.9)$—
$—
    
Total exposure$7.8
$3.3
$15.9
$(6.3)$(4.7)$16.0
$7.0
$0.8
$19.9
$(7.5)$(6.4)$13.8
(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. Excludes intra-day and operating exposures, such as from settlement and clearing activities. Amounts are presented net of the allowance for credit losses of $116 million (Spain), $79 million (Italy), $9 million (Ireland), $15 million (Portugal), and $12 million (Greece) specifically attributable to these countries. Includes $2.22.4 billion of unfunded lending exposure at December 31, 20112012. 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 approximately $3.10.7 billion at December 31, 20112012. The table above reflects AFS securities measured at par value.
(c)
Includes: (1)Primarily includes: $1.219.9 billion of counterparty exposure on derivative and securities financings, $3.7 billion of issuer exposure on debt and equity securities held in trading, as well as market-making CDS exposure and (2) $14.5(3.6) billion of derivative and securities financing counterparty exposure. Asnet protection from credit derivatives, including $(4.1) billion related to the synthetic credit portfolio managed by CIB. Securities financings ofDecember 31, 2011, there were approximately $18.417.9 billion of securities financing receivables, which were collateralized with approximately $21.520.2 billion of cash and marketable securities.securities as of December 31, 2012.
(d)
Includes cash and marketable securities pledged to the Firm, of which approximately 98%97% of the collateral was cash as ofat December 31, 20112012,.
(e)Reflects net CDS protection purchased through the Firm’s credit portfolio management activities, which are managed separately from its market-making activities. Predominantly includes single-name CDS and also includes index credit derivatives and short bond positions. It does not include the synthetic credit portfolio.

Corporate clients represent approximately 77%
172JPMorgan Chase & Co./2012 Annual Report


Effect of credit derivatives on selected European exposures
Country exposures in the Selected European exposure table above have been reduced by purchasing protection through single name, index, and tranched credit derivatives. The following table presents the effect of purchased and sold credit derivatives on the trading and portfolio hedging activities in the Selected European exposure table.
December 31, 2012 Trading Portfolio hedging
(in billions) Purchased Sold Net Purchased Sold Net
Spain $(121.2) $120.2
 $(1.0) $(1.2) $0.9
 $(0.3)
Italy (157.9) 156.5
 (1.4) (11.0) 5.9
 (5.1)
Ireland (7.1) 7.2
 0.1
 (1.0) 0.7
 (0.3)
Portugal (43.2) 42.2
 (1.0) (0.5) 0.1
 (0.4)
Greece (11.7) 11.4
 (0.3) —
 —
 —
Total $(341.1) $337.5
 $(3.6) $(13.7) $7.6
 $(6.1)
Under the Firm’s internal country risk management approach, generally credit derivatives are reported based on the country where the majority of the Firm’s non-sovereign net exposure in these five countries, and substantiallyassets of the reference entity are located. Exposures are measured assuming that all of the remaining 23% of the non-sovereign 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,a particular country default simultaneously with zero recovery. For example, single-name and index credit derivatives are measured at 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 eachnet of the five countries, the aggregate gross notional amount of single-name 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 CDSderivative receivable or payable. Exposures for index credit derivatives, which may include several underlying reference entities, are determined by evaluating the relevant country for each of the reference entities underlying the named index, and allocating the applicable amount of the notional and fair value of the index credit derivative to each of the relevant countries. Tranched credit derivatives are measured at the modeled change in value of the derivative assuming the simultaneous default of all underlying reference entities in a specific country; this approach considers the tranched nature of the derivative (i.e., that some tranches are subordinate to others) and the Firm’s own position in the structure.
The total line in the table above represents the simple sum of the individual countries. Changes in the Firm’s methodology or assumptions would produce different results.
The credit derivatives reflected in the “Trading” column include those from the Firm’s market-making activities as well as $(4.1) billion of net purchased protection soldin the synthetic credit portfolio managed by CIB beginning in July 2012. Based on scheduled maturities and purchasedrisk reduction actions being taken in the synthetic credit portfolio, the amount of protection provided by the synthetic credit portfolio relative to the five named European countries as of December 31, 2011 was $22.9 billion and $24.1 billion, respectively, prioris likely to consideration of collateral and master netting agreements, and was be substantially reduced over time.$2.7 billion and $3.9 billion, respectively, after consideration of counterparty master netting agreements for single-name
The credit derivatives withinreflected in the selected European countries.“Portfolio hedging” column are used in the Firm’s Credit Portfolio Management activities, which are intended to mitigate the credit risk associated with traditional lending activities and derivative counterparty exposure. These credit derivatives include both purchased and sold protection, where the sold
 
The Firm’s credit derivative activityprotection is presented on a net basis, as market-making activities often result in selling and purchasinggenerally used to close out purchased protection related to the same underlying reference entity. This presentation reflects the manner in which this exposure is managed, and reflects, inwhen appropriate under the Firm’s view,risk mitigation strategies. In its Credit Portfolio Management activities, 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 a maturity date that is the same or similar to the maturity date on itsof the exposures for which the protection was purchased. However, there are instances where the purchased protection has a shorter maturity date than the maturity date onof the exposure for which the protection was purchased. These exposures are actively monitored and managed by the Firm.
The effectiveness of the Firm’s CDS protection as a hedge of the Firm’s 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 143–144158–159, and Note 6 on pages 218–227 of this Annual report.Report.
The Firm’s net presentation of purchased and sold credit derivatives reflects the manner in which this exposure is managed, and reflects, in the Firm’s view, the substantial mitigation of market and counterparty credit risk in its credit derivative activities. Market risk is substantially mitigated because market-making activities, and to a lesser extent, hedging activities, often result in selling and purchasing protection related to the same underlying reference entity. For example, in each of the five countries as of December 31, 2012, the protection sold by the Firm was more than 92% offset by protection purchased on the identical reference entity.
In addition, counterparty credit risk has been substantially mitigated by the master netting and collateral agreements in place for these credit derivatives. As of December 31, 2012, 99% of the purchased protection presented in the table above is purchased under contracts that require posting of cash collateral; 92% is purchased from investment-grade counterparties domiciled outside of the selected European countries; and 69% of the protection purchased offsets protection sold on the identical reference entity, with the identical counterparty subject to a master netting agreement.



JPMorgan Chase & Co./20112012 Annual Report 165173
Management'sManagement’s discussion and analysis

PRIVATE EQUITYPRINCIPAL RISK MANAGEMENT
ThePrincipal investments are predominantly privately-held assets and instruments typically representing an ownership or junior capital position, that have unique risks due to their illiquidity and junior capital status, as well as lack of observable valuation data. Such investing activities, including mezzanine financing, tax-oriented investments and private equity positions, are typically intended to be held over extended investment periods and, accordingly, the Firm makeshas no expectation for short-term gain with respect to these investments. 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 principal investments, in private equity. The illiquid nature and long-term holding periods associated with these investments differentiatesincluding private equity, in accordance with relevant accounting, valuation and risk from the risk of positions held in the trading portfolios. policies.
The Firm’s approach to managing private equityprincipal risk is consistent with the Firm’s 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
The Firm also conducts stress testing on these portfolios using specific scenarios that estimate losses based on significant market moves.
committees that include executives who are not part of the investing businesses. An independent valuation functionThe Firm’s merchant banking business is responsible for reviewing the appropriateness of the carrying values of private equity investmentsmanaged in accordance with relevant accounting policies. At December 31, 2011 and 2010, the carrying value of theCorporate/Private Equity (for detailed information, see Private Equity portfolio wason page $7.7 billion104 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.Report); other lines of business may also conduct some principal investing activities, including private equity positions, which are captured within their respective financial results.





174JPMorgan Chase & Co./2012 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 Firm’s 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, including litigation and regulatory fines, as well as other damage to the Firm, including reputational harm.
To monitor and control operational risk, the Firm maintains a system ofan overall framework that includes strong oversight and governance, comprehensive policies, consistent practices across the lines of business, and a control framework designedenterprise risk management tools intended to provide a sound and well-controlled operational environment.
The framework clarifies:
Ownership of the risk by the businesses and functional areas
Monitoring and validation by business control officers
Oversight by independent risk management
Governance through business risk & control committees
Independent review by Internal Audit
The goal is to keep operational risk at appropriate levels, in light of the Firm’s 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
In order to strengthen focus on the Firm’s control measures,environment and drive consistent practices across businesses and functional areas, the Firm incursestablished a new Firmwide Oversight and Control Group during 2012. This group is dedicated to enhancing the Firm’s control framework, and to looking within and across the lines of business and the Corporate functions (including CIO) to identify and remediate control issues. The Firmwide Oversight and Control Group will work closely with all control disciplines - partnering with compliance, risk, audit and other functions - in order to provide a cohesive and centralized view of control functions and control issues. Among other things, Oversight and Control will enable the Firm to detect problems and escalate issues quickly, get the right people involved to understand the common themes and interdependencies among various business and control issues, and effectively remediate these issues across all affected areas of the Firm. As a result, the group will facilitate an effective control framework and operational losses.risk management across the Firm.
The Operational risk management framework
The Firm’s approach to operational risk management is
intended to identify potential issues and mitigate such losses by supplementing traditional control-based approaches to
operational risk with risk measures, tools and disciplines that are risk-specific, consistently applied and utilized firmwide. Key themes are transparency of information, escalation of key issues and accountability for issue resolution.
One ofIn addition to 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 whomstandard Basel risk event categories, the Firm does business. The insurance purchased is reviewed and approved by senior management.
The Firm’s operational risk framework is supported by Phoenix, an internally designed operational risk software tool. Phoenix integrates the individual components ofhas developed 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 Firm’s monitoring and management of its operational risk.
Forcategorization taxonomy below for purposes of identification, monitoring, reporting and analysis, the Firm categorizes operational risk events as follows:
Client service and selection
Business practicesanalysis:
Fraud theft and malicerisk
Execution, delivery and processImproper market practices
Improper client management
Employee disputesProcessing error
Disasters and public safetyFinancial reporting error
Information risk
Technology and infrastructure failures, includingrisk (including cybersecurity breachesrisk)
Third-party risk
Disruption & safety risk
Employee risk
Risk management error (including model risk)
Key components of the Operational Risk Management Framework include:
Control assessment
In order to evaluate the effectiveness of the control environment in mitigating operational risk, the businesses utilize the Firm’s 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 loss-distribution 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 risk-eventrisk event data, permittingwhich permits analysis of errors and losses as well


166JPMorgan Chase & Co./2011 Annual Report


as trends. Such analysis, performed both at a line-of-businessline of business 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 Firm’s businesses and support areas.
Risk measurement
Operational risk is measured using a statistical model based on the loss distribution approach. The operational risk


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Management’s discussion and analysis

capital model uses actual losses, a comprehensive inventory of forward looking potential loss scenarios with adjustments to reflect changes in the quality of the control environment in determining Firmwide operational risk capital. This methodology is designed to comply with the advanced measurement rules under the Basel II Framework.
Operational risk management system
The Firm’s operational risk framework is supported by Phoenix, an internally designed operational risk system, which 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 across the Firm.
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 Firm’s 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.
Insurance
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. Insurance may also be required by third parties with whom the Firm does business. The insurance purchased is reviewed and approved by senior management.
Cybersecurity
The Firm devotes significant resources to maintain and regularly update its systems and processes that are designed to protect the security of the Firm’s computer systems, software, networks and other technology assets against attempts by third parties to obtain unauthorized access to confidential information, destroy data, disrupt or degrade service, sabotage systems or cause other damage. The Firm and several other U.S. financial institutions continue to experience significant distributed denial-of-service attacks from technically sophisticated and well-resourced third parties which are intended to disrupt consumer online banking services. The Firm has also experienced other attempts to breach the security of the Firm’s systems and data. These cyberattacks have not, to date, resulted in any material disruption of the Firm’s operations, material harm to the Firm’s customers, and have not had a material adverse effect on the Firm’s results of operations.
Business resiliency
JPMorgan Chase’s global resiliency and crisis management program is intended to ensure that the Firm has the ability to recover its critical business functions and supporting assets (i.e., staff, technology and facilities) in the event of a business interruption, and to remain in compliance with global laws and regulations as they relate to resiliency risk. The program includes corporate governance, awareness and training, as well as strategic and tactical initiatives to ensure that risks are properly identified, assessed, and managed.
The Firm’s Global Resiliency team has established comprehensive and qualitative tracking and reporting of resiliency plans in order to proactively anticipate and manage various potential disruptive circumstances such as severe weather, technology and communications outages, flooding, mass transit shutdowns and terrorist threats, among others. The resiliency measures utilized by the Firm include backup infrastructure for data centers, a geographically distributed workforce, dedicated recovery facilities, ensuring technological capabilities to support remote work capacity for displaced staff and accommodation of employees at alternate locations. JPMorgan Chase continues to coordinate its global resiliency program across the Firm and mitigate business continuity risks by reviewing and testing recovery procedures. The strength and proficiency of the Firm’s global resiliency program has played an integral role in maintaining the Firm’s business operations during and quickly after various events that have resulted in business interruptions, such as Superstorm Sandy and Hurricane Isaac in the U.S., monsoon rains in the Philippines, tsunamis in Asia, and earthquakes in Latin America.



176JPMorgan Chase & Co./2012 Annual Report


REPUTATIONLEGAL, FIDUCIARY AND FIDUCIARYREPUTATION RISK MANAGEMENT
The Firm’s success depends not only on its prudent management of the liquidity, credit, market, principal, and operational risks that are part of its business risk, but equally on the maintenance among its many constituents–customersconstituents —customers and clients, investors, regulators, as well as the general public–public — of a reputation for business practices of the highest quality. Attention to reputation has always been a key aspect of the Firm’s practices, and maintenance of the Firm’s reputation is the responsibility of each individual employee at the Firm. JPMorgan Chase bolsters this individual responsibility in many ways, including through the Firm’s Code of Conduct (the “Code”), which is based on the Firm’s 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 Firm’s 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 Firm’s business. It also requires the reporting of any illegal conduct, or conduct that violates the underlying principles of the Code, by any of the Firm’s 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 Firm’s 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 and a Reputation Risk Office that reviews transactions or activities that may give rise to reputation risk for the Firm. In addition, eachEach line of business also has a risk committee which includes in its mandate the oversight of the reputational risks in its business that may produce
significant losses or reputational damage; some lines of business, includingdamage to 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 Firm’s 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.Firm.
Fiduciary Risk Management
Fiduciary Risk Management is part of the relevant line of businessline-of-business risk committees. Senior business, legal and compliance management, who have particular responsibility for fiduciary issues, work with the relevant businesses'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 businessline-of-business risk committees provide oversight of the Firm’s 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 Firm’s fiduciary responsibilities under the Firm’s various employee benefit plans.





JPMorgan Chase & Co./20112012 Annual Report 167177
Management'sManagement’s discussion and analysis

CRITICAL ACCOUNTING ESTIMATES USED BY THE FIRM
JPMorgan Chase’s accounting policies and use of estimates are integral to understanding its reported results. The Firm’s most complex accounting estimates require management’s judgment to ascertain the 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 Firm’s critical accounting estimates involving significant valuation judgments.
Allowance for credit losses
JPMorgan Chase’s allowance for credit losses covers the retained wholesaleconsumer and consumerwholesale loan portfolios, as well as the Firm’s wholesaleconsumer and consumerwholesale lending-related commitments. The allowance for loan losses is intended to adjust the value of the Firm’s loan assets to reflect probable credit losses inherent in the loan portfolio as of the balance sheet date. Similarly, the allowance for lending-related commitments is established to cover probable credit losses inherent in the lending-related commitments portfolio as of the balance sheet date.
The allowance for loan losses includes an asset-specific component, a formula-based component and a component related to PCI loans. The asset-specific allowance for loan losses for each of the Firm’s portfolio segments is generally measured as the difference between the recorded investment in the impaired loan and the present value of the cash flows expected to be collected, discounted at the loan’s original effective interest rate. Estimating the timing and amounts of future cash flows is highly judgmental as these cash flow projections further rely upon estimates such as redefault 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, in turn, dependent on factors such as the level of future home prices, the duration of current weak overall economic conditions, and other macroeconomic and portfolio-specific factors. All of these estimates and assumptions require significant management judgment and certain assumptions are highly subjective.
For further discussion of the methodologies used in establishing the Firm’s allowance for credit losses, see Allowance for Credit Losses on pages 155–157159–162 and Note 15 on pages 252–255276–279 of this Annual Report.Report.
The determination of the formula-based allowance for credit losses also involves significant judgment on a number of matters, as discussed below.
Wholesale loans and lending-related commitments
The Firm’s 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 obligor’s ability to fulfill its obligations. In assessing the risk rating of a particular loan, among the factors considered are the obligor’s debt capacity and financial flexibility, the level of the obligor’s earnings, the amount and sources for repayment, the level and nature of contingencies, management strength, and the industry and geography in which the obligor operates. These factors are based on an evaluation of historical and current information and involve subjective assessment and interpretation. 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 Firm’s own
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 Firm’s 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 management’s 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 formula-based 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


168JPMorgan Chase & Co./2011 Annual Report


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, the potential impact of payment recasts within the HELOC portfolio, and other relevant internal and external factors affecting the credit quality of the portfolio. In certain instances, the interrelationships between these factors create further uncertainties. For example, the performance of a HELOC that experiences a payment recast may be affected by both the quality of underwriting standards applied in originating the loan and the general economic conditions in effect at the time of the payment recast. 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


178JPMorgan Chase & Co./2012 Annual Report


inputs or assumptions, could affect the estimate of the allowance for loan losses for the consumer credit portfolio.
TheOverall, 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 231–252250–275 of this Annual Report.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.
Wholesale loans and lending-related commitments
The Firm’s 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 obligor’s ability to fulfill its obligations. In assessing the risk rating of a particular loan, among the factors considered are the obligor’s debt capacity and financial flexibility, the level of the obligor’s earnings, the amount and sources for repayment, the level and nature of contingencies, management strength, and the industry and geography in which the obligor operates. These factors are based on an
evaluation of historical and current information and involve subjective assessment and interpretation. 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 Firm’s own 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 the particular source of external data used as well as the time period to which loss data relates (for example, point-in-time loss estimates and estimates that reflect longer views of the credit cycle). Finally, differences in loan characteristics between the Firm’s specific loan portfolio and those reflected in the external data 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 management’s 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.
Allowance for credit losses sensitivity
As noted above, the Firm’s allowance for credit losses is sensitive to numerous factors, depending on the portfolio. Changes in economic conditions or in the Firm’s assumptions could affect the Firm’s 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 Firm’s modeled loss estimates as of December 31, 20112012, without consideration of any offsetting or correlated effects of other inputs in the Firm’s allowance for loan losses:
A one-notch downgrade in the Firm’s internal risk ratings for its entire wholesale loan portfolio could imply an increase in the Firm’s modeled loss estimates of approximately $1.9 billion5%.
An adverse national home price scenario (reflecting an additional 8% decline in housing prices when geographically weighted forfrom current levels, accompanied by an assumed corresponding change in the PCI portfolio), could result in an increase in credit loss estimates for PCI loans of approximately $1.5 billion.
The same adverse scenario, weightedunemployment rate, for the residential real estate portfolio, excluding PCI loans, could result in an increase to modeled annual loss estimates of approximately $200 million.
A 5% decline in housing prices from current levels, accompanied by an assumed corresponding change in the unemployment rate, could result in an increase in credit loss estimates for PCI loans of approximately $600 million.


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Management’s discussion and analysis

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.
A one-notch downgrade in the Firm’s internal risk ratings for its entire wholesale loan portfolio could imply an increase in the Firm’s modeled loss estimates of approximately $2.1 billion.
The purpose of these sensitivity analyses is to provide an indication of the isolated impacts of hypothetical alternative assumptions on creditmodeled loss estimates. The changes in the inputs presented above are not intended to imply management’s expectation of future deterioration of those risk factors.
These analyses are not intended to estimate changes in the overall allowance for loan losses, which would also be influenced by the judgment management applies to the modeled loss estimates to reflect the uncertainty and imprecision of these modeled loss estimates based on then current circumstances and conditions.
It is difficult to estimate how potential changes in specific factors might affect the 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.



JPMorgan Chase & Co./2011 Annual Report169
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 certain mortgage, home equity and other loans, accounted for atwhere the lower of cost or faircarrying 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 instrument’s 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.underlying collateral.
Assets measured at fair value
The following table includes the Firm’s assets measured at fair value and the portion of such assets that are classified within level 3 of the valuation hierarchy. For further information, see Note 3 on pages 184–198196–214 of this
Annual Report.
 2011
December 31,
(in billions, except ratio data)
Total assets at fair valueTotal level 3 assets
Trading debt and equity instruments$351.5
 $33.0
 
Derivative receivables – gross1,884.5
 35.0
 
Netting adjustment(1,792.0) —
 
Derivative receivables – net92.5
 35.0
 
AFS securities364.8
 25.5
 
Loans2.1
 1.6
 
MSRs7.2
 7.2
 
Private equity investments7.6
 6.8
 
Other49.1
 4.4
 
Total assets measured at fair value on a recurring basis
874.8
 113.5
 
Total assets measured at fair value on a nonrecurring basis5.3
 4.9
 
Total assets measured at fair value
$880.1
 $118.4
(a) 
Total Firm assets$2,265.8
   
Level 3 assets as a percentage of total Firm assets  5.2%
 
Level 3 assets as a percentage of total Firm assets at fair value  13.5%
 
(a) At December 31, 2011, included $63.0 billion of level 3 assets, consisting of recurring and nonrecurring assets carried by IB.
December 31, 2012
(in billions, except ratio data)
Total assets at fair valueTotal level 3 assets
Trading debt and equity instruments$375.0
 $25.6
 
Derivative receivables75.0
 23.3
 
Trading assets450.0
 48.9
 
AFS securities371.1
 28.9
 
Loans2.6
 2.3
 
MSRs7.6
 7.6
 
Private equity investments7.8
 7.2
 
Other43.1
 4.2
 
Total assets measured at fair value on a recurring basis
882.2
 99.1
 
Total assets measured at fair value on a nonrecurring basis5.1
 4.4
 
Total assets measured at fair value
$887.3
 $103.5
(a) 
Total Firm assets$2,359.1
   
Level 3 assets as a percentage of total Firm assets  4.4% 
Level 3 assets as a percentage of total Firm assets at fair value  11.7% 
Valuation
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. The Firm has an established and well-documented process for determining fair value.value, for further details see Note 3 on pages 196–214 of this Annual Report. Fair value is based on quoted market prices, where available. If listed prices or quotes are not available for an instrument or a similar instrument, fair value is generally based on internally developed models that consider relevant transaction data suchcharacteristics (such as maturitymaturity) and use as inputs market-based or independently
sourced parameters.
sourced market parameters. For further informationEstimating fair value requires the application of judgment. The type and level of judgment required is largely dependent on the Firm's valuation process, see Note 3 on pages 184–198amount of this Annual Report.
observable market information available to the Firm. For instruments valued using internally developed models that use significant unobservable inputs and are therefore classified within level 3 of the valuation hierarchy, judgments used to estimate fair value may be significant. are more significant than those required when estimating the fair value of instruments classified within levels 1 and 2.
In arriving at an estimate of fair value for an instrument within level 3, management must first determine the appropriate 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,for example, transaction details, yield curves, interest rates, prepayment rates, default rates, volatilities, correlations, equity or debt prices, valuations of comparable instruments, foreign exchange rates and credit


180JPMorgan Chase & Co./2012 Annual Report


curves. Finally, management judgment must be applied to assess the appropriate level of valuation adjustments to reflect counterparty credit quality, the Firm’s creditworthiness, constraints oncredit-worthiness, liquidity andconsiderations, unobservable parameters, where relevant.and for certain portfolios that meet specified criteria, the size of the net open risk position. The judgments made are typically affected by the type of product and its specific contractual terms, and the level of liquidity for the product or within the market as a whole.
The Firm has numerous controls in place to ensure that its valuations are appropriate. An independent model review group reviews the Firm’s valuation models and approves them for use for specific products. All valuation models For further discussion of the Firm are subject tovaluation of level 3 instruments, including unobservable inputs used, see Note 3 on pages 196–214 of this review process. A price verification group, independent from the risk-taking functions, ensures observable market prices and market-based 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.Annual Report.
Imprecision in estimating unobservable market inputs or other factors can affect the amount of revenuegain or loss recorded for a particular position. Furthermore, while the Firm believes its valuation methods are appropriate and consistent with those of other market participants, the methods and assumptions used reflect management judgment and may vary across the Firm’s businesses and portfolios.
The Firm uses various methodologies and assumptions in the determination of fair value. The use of different methodologies or assumptions to determinethose used by the fair value of certain financial instrumentsFirm could result in a different estimate of fair value at the reporting date. For a detailed discussion of the Firm’s valuation process and hierarchy, and its determination of fair value for individual financial instruments, see Note 3 on pages 184–198196–214 of this Annual Report.


170JPMorgan Chase & Co./2011 Annual Report


Goodwill impairment
Under U.S. GAAP, goodwill must be allocated to reporting units and tested for impairment at least annually. The Firm’s process and methodology used to conduct goodwill impairment testing is described in Note 17 on pages 267–271291–295 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'sFirm’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, 20112012, nor was any goodwill written off during 2011.2012. The fair values of a significant majorityalmost all of the Firm'sFirm’s reporting units exceeded their carrying values by substantial amounts (excess fair value as a percent of carrying value ranged from approximately 20%30% to 200%180%) and did not indicate a significant risk of goodwill impairment based on current projections and valuations.
However, the fair value of the Firm's consumerFirm’s mortgage lending businesses in RFS and Card eachbusiness exceeded theirits carrying valuesvalue by less than 15%10% and the associated goodwill remains at an elevated risk for goodwill impairment due to theirits exposure to U.S. consumer credit risk and the effects of regulatory and legislative changes. The assumptions used in the valuation of these businessesthis business 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 management’s best estimate and most current projections, derived from the Firm’s business forecasting process reviewed with senior management. These
The projections for all of the Firm’s reporting units are consistent with the short-term assumptions discussed in the Business Outlook on pages 68–69 of this Annual Report, and, in the longer term, incorporate a set of macroeconomic assumptions and the Firm’s 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 management’s current expectations. For example, in RFS,the Firm’s mortgage lending business, 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 management’s 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'sFirm’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 Firm’s 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 267–271291–295 of this Annual Report.



JPMorgan Chase & Co./2012 Annual Report181
Management’s discussion and analysis

Income taxes
JPMorgan Chase is subject to the income tax laws of the various jurisdictions in which it operates, including U.S. federal, state and local and non-U.S. jurisdictions. These laws are often complex and may be subject to different interpretations. To determine the financial statement impact of accounting for income taxes, including the provision for income tax expense and unrecognized tax benefits, JPMorgan Chase must make assumptions and judgments about how to interpret and apply these complex tax laws to numerous transactions and business events, as well as make judgments regarding the timing of when certain items may affect taxable income in the U.S. and non-U.S. tax jurisdictions.
JPMorgan Chase’s interpretations of tax laws around the world are subject to review and examination by the various taxing authorities in the jurisdictions where the Firm operates, and disputes may occur regarding its view on a tax position. These disputes over interpretations with the various taxing authorities may be settled by audit, administrative appeals or adjudication in the court systems of the tax jurisdictions in which the Firm operates. JPMorgan Chase regularly reviews whether it may be assessed additional income taxes as a result of the resolution of these matters, and the Firm records additional reserves as appropriate. In addition, the Firm may revise its estimate of income taxes due to changes in income tax laws, legal interpretations and tax planning strategies. It is possible that revisions in the Firm’s estimate of income taxes may materially affect the Firm’s results of operations in any reporting period.
The Firm’s provision for income taxes is composed of current and deferred taxes. Deferred taxes arise from differences between assets and liabilities measured for financial reporting versus income tax return purposes. Deferred tax assets are recognized if, in management’s judgment, their realizability is determined to be more likely


JPMorgan Chase & Co./2011 Annual Report171
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 management’s 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, 20112012, 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 Chase’s 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 279–281303–305 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 290–299316–325 of this Annual Report.





172182 JPMorgan Chase & Co./20112012 Annual Report


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 184–198 of this Annual Report.
In May 2011, the FASBFinancial Accounting Standards Board (“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 iswas effective in the first quarter of 2012. The application of this2012, and the Firm adopted the new 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 231–252 of this Annual Report.2012. The application of this guidance did not have a material effect on the Firm’s 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 iswas effective for new transactions or existing transactions that arewere 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 willdid not have an impact on the Firm’s 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 companiesThe guidance was effective in the first quarter of 2012, and the Firm adopted the new guidance isby electing the two-statement approach, effective for interimJanuary 1, 2012. The application of this guidance only affected the presentation of the Consolidated Financial Statements and annual reporting periods beginning after December 15, 2011. However, in December 2011,had no impact on the Firm’s Consolidated Balance Sheets or results of operations.
In February 2013, the FASB issued guidance that deferred the presentation requirements relating torequires enhanced disclosures of any reclassifications of items out of accumulated other comprehensive income and intoincome. The guidance is effective in the income statement.first quarter of 2013. The application of this guidance will only affect the presentation of the Consolidated Financial Statementsimpact disclosures and will have no impact on the Firm’s Consolidated Balance Sheets or results of operations.
Balance sheet netting
In December 2011, the FASB issued guidance that requires enhanced disclosures about derivativescertain financial assets and securities financing agreementsliabilities that are subject to legally enforceable master netting agreements or similar agreements, or that have otherwise been offset on the balance sheet under certain specific conditions that permit net presentation. In January 2013, the FASB clarified that the scope of this guidance is limited to derivatives, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions. The guidance iswill become 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 Firm’s Consolidated Balance Sheets or results of operations.




JPMorgan Chase & Co./20112012 Annual Report 173183
Management'sManagement’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 Firm’s 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, 20112012.
Year ended December 31, 2011
(in millions)		Asset position Liability position
Net fair value of contracts outstanding at January 1, 2011$8,166
 $7,184
Year ended December 31, 2012
(in millions)
Asset position Liability position
Net fair value of contracts outstanding at January 1, 2012$13,122
 $13,517
Effect of legally enforceable master netting agreements41,284
 41,919
33,495
 35,695
Gross fair value of contracts outstanding at January 1, 201149,450
 49,103
Gross fair value of contracts outstanding at January 1, 201246,617
 49,212
Contracts realized or otherwise settled(22,855) (20,826)(23,889) (26,321)
Fair value of new contracts21,517
 23,195
19,357
 21,502
Changes in fair values attributable to changes in valuation techniques and assumptions—
 —
—
 —
Other changes in fair value(1,495) (2,260)(4,934) (3,072)
Gross fair value of contracts outstanding at December 31, 201146,617
 49,212
Gross fair value of contracts outstanding at December 31, 201237,151
 41,321
Effect of legally enforceable master netting agreements(33,495) (35,695)(28,856) (30,505)
Net fair value of contracts outstanding at December 31, 2011$13,122
 $13,517
Net fair value of contracts outstanding at December 31, 2012$8,295
 $10,816
 
The following table indicates the maturities of nonexchange-traded commodity derivative contracts at December 31, 20112012.
December 31, 2011 (in millions)Asset position Liability position
December 31, 2012 (in millions)Asset position Liability position
Maturity less than 1 year$20,876
 $18,993
$21,878
 $23,129
Maturity 1–3 years16,564
 16,949
12,029
 12,424
Maturity 4–5 years7,745
 7,593
1,947
 2,155
Maturity in excess of 5 years1,432
 5,677
1,297
 3,613
Gross fair value of contracts outstanding at December 31, 201146,617
 49,212
Gross fair value of contracts outstanding at December 31, 201237,151
 41,321
Effect of legally enforceable master netting agreements(33,495) (35,695)(28,856) (30,505)
Net fair value of contracts outstanding at December 31, 2011$13,122
 $13,517
Net fair value of contracts outstanding at December 31, 2012$8,295
 $10,816



174184 JPMorgan Chase & Co./20112012 Annual Report


FORWARD-LOOKING STATEMENTS
From time to time, the Firm has made and will make forward-looking statements. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often use words such as “anticipate,” “target,” “expect,” “estimate,” “intend,” “plan,” “goal,” “believe,” or other words of similar meaning. Forward-looking statements provide JPMorgan Chase’s current expectations or forecasts of future events, circumstances, results or aspirations. JPMorgan Chase’s disclosures in this Annual Report contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Firm also may make forward-looking statements in its other documents filed or furnished with the Securities and Exchange Commission. In addition, the Firm’s 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 Firm’s control. JPMorgan Chase’s actual future results may differ materially from those set forth in its forward-looking statements. While there is no assurance that any list of risks and uncertainties or risk factors is complete, below are certain factors which could cause actual results to differ from those in the forward-looking statements:
Local, regional and 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;capital and liquidity, including approval of its capital plans by banking regulators;
Changes in credit ratings assigned to the Firm or its subsidiaries;
Damage to the Firm’s reputation;
Ability of the Firm to deal effectively with an economic slowdown or other economic or market disruption;
Technology changes instituted by the Firm, its counterparties or competitors;
Mergers and acquisitions, including the Firm’s 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 bank regulatory and other governmental agency requirements affecting its mortgage business;
Ability of the Firm to implement successfully the actions required under the various Consent Orders entered into with its banking regulators;
Acceptance of the Firm’s 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 Firm’s customers and counterparties;
Adequacy of the Firm’s risk management framework;framework, disclosure controls and procedures and internal control over financial reporting, and the effectiveness of such controls and procedures in preventing control lapses or deficiencies;
Efficacy of the models used by the Firm in valuing, measuring, monitoring and managing positions and risk;
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 Firm’s power generation facilities and the Firm’s other commodity-related 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 Firm’s Annual Report on Form 10-K for the year ended December 31, 20112012.
Any forward-looking statements made by or on behalf of the Firm speak only as of the date they are made, and JPMorgan Chase does not undertake to update forward-looking statements 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.



JPMorgan Chase & Co./20112012 Annual Report 175185
Management’s report on internal control over financial reporting



Management of JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”) is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the Firm’sFirm's principal executive and principal financial officers, or persons performing similar functions, and effected by JPMorgan Chase’sChase's Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
JPMorgan Chase’sChase's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records, that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Firm’sFirm's assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Firm are being made only in accordance with authorizations of JPMorgan Chase’sChase's management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Firm’sFirm's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has completed an assessment of the effectiveness of the Firm’sFirm's internal control over financial reporting as of December 31, 2011.2012. 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, 2011,2012, JPMorgan Chase’sChase's internal control over financial reporting was effective based upon the COSO criteria. Additionally, based upon management’smanagement's assessment, the Firm determined that there were no material weaknesses in its internal control over financial reporting as of December 31, 2011.2012.
The effectiveness of the Firm’sFirm's internal control over financial reporting as of December 31, 2011,2012, 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. BraunsteinMarianne Lake
Executive Vice President and Chief Financial Officer


February 29, 201228, 2013




176186 JPMorgan Chase & Co./20112012 Annual Report
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, comprehensive income, changes in stockholders'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, 20112012 and 2010,2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20112012, 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, 20112012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Firm'sFirm’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“Management’s report on internal control over financial reporting.”reporting”. Our responsibility is to express opinions on these financial statements and on the Firm'sFirm’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
 
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'scompany’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'scompany’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'scompany’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, 201228, 2013












PricewaterhouseCoopers LLP Ÿ 300 Madison Avenue Ÿ New York, NY 10017

JPMorgan Chase & Co./20112012 Annual Report 177187
Consolidated statements of income




Year ended December 31, (in millions, except per share data) 2011
 2010
 2009
 2012
 2011
 2010
Revenue            
Investment banking fees $5,911
 $6,190
 $7,087
 $5,808
 $5,911
 $6,190
Principal transactions 10,005
 10,894
 9,796
 5,536
 10,005
 10,894
Lending- and deposit-related fees 6,458
 6,340
 7,045
 6,196
 6,458
 6,340
Asset management, administration and commissions 14,094
 13,499
 12,540
 13,868
 14,094
 13,499
Securities gains(a)
 1,593
 2,965
 1,110
 2,110
 1,593
 2,965
Mortgage fees and related income 2,721
 3,870
 3,678
 8,687
 2,721
 3,870
Credit card income 6,158
 5,891
 7,110
Card income 5,658
 6,158
 5,891
Other income 2,605
 2,044
 916
 4,258
 2,605
 2,044
Noninterest revenue 49,545
 51,693
 49,282
 52,121
 49,545
 51,693
Interest income 61,293
 63,782
 66,350
 56,063
 61,293
 63,782
Interest expense 13,604
 12,781
 15,198
 11,153
 13,604
 12,781
Net interest income 47,689
 51,001
 51,152
 44,910
 47,689
 51,001
Total net revenue 97,234
 102,694
 100,434
 97,031
 97,234
 102,694
            
Provision for credit losses 7,574
 16,639
 32,015
 3,385
 7,574
 16,639
            
Noninterest expense            
Compensation expense 29,037
 28,124
 26,928
 30,585
 29,037
 28,124
Occupancy expense 3,895
 3,681
 3,666
 3,925
 3,895
 3,681
Technology, communications and equipment expense 4,947
 4,684
 4,624
 5,224
 4,947
 4,684
Professional and outside services 7,482
 6,767
 6,232
 7,429
 7,482
 6,767
Marketing 3,143
 2,446
 1,777
 2,577
 3,143
 2,446
Other expense 13,559
 14,558
 7,594
 14,032
 13,559
 14,558
Amortization of intangibles 848
 936
 1,050
 957
 848
 936
Merger costs —
 —
 481
Total noninterest expense 62,911
 61,196
 52,352
 64,729
 62,911
 61,196
Income before income tax expense and extraordinary gain 26,749
 24,859
 16,067
Income before income tax expense 28,917
 26,749
 24,859
Income tax expense 7,773
 7,489
 4,415
 7,633
 7,773
 7,489
Income before extraordinary gain 18,976
 17,370
 11,652
Extraordinary gain —
 —
 76
Net income $18,976
 $17,370
 $11,728
 $21,284
 $18,976
 $17,370
Net income applicable to common stockholders $17,568
 $15,764
 $8,774
 $19,877
 $17,568
 $15,764
Per common share data      
Net income per common share data      
Basic earnings per share       $5.22
 $4.50
 $3.98
Income before extraordinary gain $4.50
 $3.98
 $2.25
Net income 4.50
 3.98
 2.27
      
Diluted earnings per share       5.20
 4.48
 3.96
Income before extraordinary gain 4.48
 3.96
 2.24
Net income 4.48
 3.96
 2.26
            
Weighted-average basic shares 3,900.4
 3,956.3
 3,862.8
 3,809.4
 3,900.4
 3,956.3
Weighted-average diluted shares 3,920.3
 3,976.9
 3,879.7
 3,822.2
 3,920.3
 3,976.9
Cash dividends declared per common share $1.00
 $0.20
 $0.20
 $1.20
 $1.00
 $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) 2011
 2010
 2009
 2012
 2011
 2010
Debt securities the Firm does not intend to sell that have credit losses      
Total other-than-temporary impairment losses $(27) $(94) $(946) $(113) $(27) $(94)
Losses recorded in/(reclassified from) other comprehensive income (49) (6) 368
 85
 (49) (6)
Total credit losses recognized in income $(76) $(100) $(578) (28) (76) (100)
Securities the Firm intends to sell (15) —
 —
Total other-than-temporary impairment losses recognized in income $(43) $(76) $(100)
The Notes to Consolidated Financial Statements are an integral part of these statements.

178188 JPMorgan Chase & Co./20112012 Annual Report
Consolidated statements of comprehensive income

Year ended December 31, (in millions) 2012
 2011
 2010
Net income $21,284
 $18,976
 $17,370
Other comprehensive income, after–tax 

 

 

Unrealized gains on AFS securities 3,303
 1,067
 610
Translation adjustments, net of hedges (69) (279) 269
Cash flow hedges 69
 (155) 25
Defined benefit pension and OPEB plans (145) (690) 332
Total other comprehensive income, after–tax 3,158
 (57) 1,236
Comprehensive income $24,442
 $18,919
 $18,606
The Notes to Consolidated Financial Statements are an integral part of these statements.

JPMorgan Chase & Co./2012 Annual Report189
Consolidated balance sheets


December 31, (in millions, except share data)2011 20102012 2011
Assets      
Cash and due from banks$59,602
 $27,567
$53,723
 $59,602
Deposits with banks85,279
 21,673
121,814
 85,279
Federal funds sold and securities purchased under resale agreements (included $24,891 and $20,299 at fair value)
235,314
 222,554
Securities borrowed (included $15,308 and $13,961 at fair value)
142,462
 123,587
Trading assets (included assets pledged of $89,856 and $73,056)
443,963
 489,892
Securities (included $364,781 and $316,318 at fair value and assets pledged of $94,691 and $86,891)
364,793
 316,336
Loans (included $2,097 and $1,976 at fair value)
723,720
 692,927
Federal funds sold and securities purchased under resale agreements (included $24,258 and $22,191 at fair value)
296,296
 235,314
Securities borrowed (included $10,177 and $15,308 at fair value)
119,017
 142,462
Trading assets (included assets pledged of $108,784 and $89,856)
450,028
 443,963
Securities (included $371,145 and $364,781 at fair value and assets pledged of $71,167 and $94,691)
371,152
 364,793
Loans (included $2,555 and $2,097 at fair value)
733,796
 723,720
Allowance for loan losses(27,609) (32,266)(21,936) (27,609)
Loans, net of allowance for loan losses696,111
 660,661
711,860
 696,111
Accrued interest and accounts receivable61,478
 70,147
60,933
 61,478
Premises and equipment14,041
 13,355
14,519
 14,041
Goodwill48,188
 48,854
48,175
 48,188
Mortgage servicing rights7,223
 13,649
7,614
 7,223
Other intangible assets3,207
 4,039
2,235
 3,207
Other assets (included $16,499 and $18,201 at fair value and assets pledged of $1,316 and $1,485)
104,131
 105,291
Other assets (included $16,458 and $16,499 at fair value and assets pledged of $1,127 and $1,316)
101,775
 104,131
Total assets(a)
$2,265,792
 $2,117,605
$2,359,141
 $2,265,792
Liabilities      
Deposits (included $4,933 and $4,369 at fair value)
$1,127,806
 $930,369
Federal funds purchased and securities loaned or sold under repurchase agreements (included $9,517 and $4,060 at fair value)
213,532
 276,644
Deposits (included $5,733 and $4,933 at fair value)
$1,193,593
 $1,127,806
Federal funds purchased and securities loaned or sold under repurchase agreements (included $4,388 and $6,817 at fair value)
240,103
 213,532
Commercial paper51,631
 35,363
55,367
 51,631
Other borrowed funds (included $9,576 and $9,931 at fair value)
21,908
 34,325
Other borrowed funds (included $11,591 and $9,576 at fair value)
26,636
 21,908
Trading liabilities141,695
 146,166
131,918
 141,695
Accounts payable and other liabilities (included $51 and $236 at fair value)
202,895
 170,330
Beneficial interests issued by consolidated variable interest entities (included $1,250 and $1,495 at fair value)
65,977
 77,649
Long-term debt (included $34,720 and $38,839 at fair value)
256,775
 270,653
Accounts payable and other liabilities (included $36 and $51 at fair value)
195,240
 202,895
Beneficial interests issued by consolidated variable interest entities (included $1,170 and $1,250 at fair value)
63,191
 65,977
Long-term debt (included $30,788 and $34,720 at fair value)
249,024
 256,775
Total liabilities(a)
2,082,219
 1,941,499
2,155,072
 2,082,219
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)
7,800
 7,800
Preferred stock ($1 par value; authorized 200,000,000 shares: issued 905,750 and 780,000 shares)
9,058
 7,800
Common stock ($1 par value; authorized 9,000,000,000 shares; issued 4,104,933,895 shares)
4,105
 4,105
4,105
 4,105
Capital surplus95,602
 97,415
94,604
 95,602
Retained earnings88,315
 73,998
104,223
 88,315
Accumulated other comprehensive income/(loss)944
 1,001
4,102
 944
Shares held in RSU Trust, at cost (852,906 and 1,192,712 shares)
(38) (53)
Treasury stock, at cost (332,243,180 and 194,639,785 shares)
(13,155) (8,160)
Shares held in RSU Trust, at cost (479,126 and 852,906 shares)
(21) (38)
Treasury stock, at cost (300,981,690 and 332,243,180 shares)
(12,002) (13,155)
Total stockholders’ equity183,573
 176,106
204,069
 183,573
Total liabilities and stockholders’ equity$2,265,792
 $2,117,605
$2,359,141
 $2,265,792
(a)
The following table presents information on assets and liabilities related to VIEs that are consolidated by the Firm at December 31, 20112012 and 20102011. The difference between total VIE assets and liabilities represents the Firm’s interests in those entities, which were eliminated in consolidation.
December 31, (in millions)2011 20102012 2011
Assets      
Trading assets$12,079
 $9,837
$11,966
 $12,079
Loans86,754
 95,587
82,723
 86,754
All other assets2,638
 3,494
2,090
 2,638
Total assets$101,471
 $108,918
$96,779
 $101,471
Liabilities      
Beneficial interests issued by consolidated variable interest entities$65,977
 $77,649
$63,191
 $65,977
All other liabilities1,487
 1,922
1,244
 1,487
Total liabilities$67,464
 $79,571
$64,435
 $67,464
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 both December 31, 20112012 and 2010,2011, 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 256–267280–291 of this Annual Report.
The Notes to Consolidated Financial Statements are an integral part of these statements.

190JPMorgan Chase & Co./20112012 Annual Report179
Consolidated statements of changes in stockholders'stockholders’ equity and comprehensive income


Year ended December 31, (in millions, except per share data) 2011 2010 2009 2012 2011 2010
Preferred stock            
Balance at January 1 $7,800
 $8,152
 $31,939
 $7,800
 $7,800
 $8,152
Accretion of preferred stock discount on issuance to the U.S. Treasury —
 —
 1,213
Redemption of preferred stock issued to the U.S. Treasury —
 —
 (25,000)
Redemption of other preferred stock —
 (352) —
Issuance of preferred stock 1,258
 —
 —
Redemption of preferred stock —
 —
 (352)
Balance at December 31 7,800
 7,800
 8,152
 9,058
 7,800
 7,800
Common stock            
Balance at January 1 4,105
 4,105
 3,942
Issuance of common stock —
 —
 163
Balance at December 31 4,105
 4,105
 4,105
Balance at January 1 and December 31 4,105
 4,105
 4,105
Capital surplus            
Balance at January 1 97,415
 97,982
 92,143
 95,602
 97,415
 97,982
Issuance of common stock —
 —
 5,593
Shares issued and commitments to issue common stock for employee stock-based compensation awards, and related tax effects (1,688) 706
 474
 (736) (1,688) 706
Other (125) (1,273) (228) (262) (125) (1,273)
Balance at December 31 95,602
 97,415
 97,982
 94,604
 95,602
 97,415
Retained earnings            
Balance at January 1 73,998
 62,481
 54,013
 88,315
 73,998
 62,481
Cumulative effect of changes in accounting principles —
 (4,376) —
 —
 —
 (4,376)
Net income 18,976
 17,370
 11,728
 21,284
 18,976
 17,370
Dividends declared:            
Preferred stock (629) (642) (1,328) (647) (629) (642)
Accelerated amortization from redemption of preferred stock issued to the U.S. Treasury —
 —
 (1,112)
Common stock ($1.00, $0.20 and $0.20 per share for 2011, 2010 and 2009, respectively)
 (4,030) (835) (820)
Common stock ($1.20, $1.00 and $0.20 per share for 2012, 2011 and 2010, respectively)
 (4,729) (4,030) (835)
Balance at December 31 88,315
 73,998
 62,481
 104,223
 88,315
 73,998
Accumulated other comprehensive income/(loss)            
Balance at January 1 1,001
 (91) (5,687) 944
 1,001
 (91)
Cumulative effect of changes in accounting principles —
 (144) —
 —
 —
 (144)
Other comprehensive (loss)/income (57) 1,236
 5,596
 3,158
 (57) 1,236
Balance at December 31 944
 1,001
 (91) 4,102
 944
 1,001
Shares held in RSU Trust, at cost            
Balance at January 1 (53) (68) (217) (38) (53) (68)
Reissuance from RSU Trust 15
 15
 149
 17
 15
 15
Balance at December 31 (38) (53) (68) (21) (38) (53)
Treasury stock, at cost            
Balance at January 1 (8,160) (7,196) (9,249) (13,155) (8,160) (7,196)
Purchase of treasury stock (8,741) (2,999) —
 (1,415) (8,741) (2,999)
Reissuance from treasury stock 3,750
 2,040
 2,079
 2,574
 3,750
 2,040
Share repurchases related to employee stock-based compensation awards (4) (5) (26) (6) (4) (5)
Balance at December 31 (13,155) (8,160) (7,196) (12,002) (13,155) (8,160)
Total stockholders’ equity $183,573
 $176,106
 $165,365
 $204,069
 $183,573
 $176,106
Comprehensive income      
Net income $18,976
 $17,370
 $11,728
Other comprehensive (loss)/income (57) 1,236
 5,596
Comprehensive income $18,919
 $18,606
 $17,324
The Notes to Consolidated Financial Statements are an integral part of these statements.



180JPMorgan Chase & Co./20112012 Annual Report191
Consolidated statements of cash flows


Year ended December 31, (in millions)2011 2010 20092012 2011 2010
Operating activities          
Net income$18,976
 $17,370
 $11,728
$21,284
 $18,976
 $17,370
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:          
Provision for credit losses7,574
 16,639
 32,015
3,385
 7,574
 16,639
Depreciation and amortization4,257
 4,029
 3,308
4,190
 4,257
 4,029
Amortization of intangibles848
 936
 1,050
957
 848
 936
Deferred tax expense/(benefit)1,693
 (968) (3,622)1,130
 1,693
 (968)
Investment securities gains(1,593) (2,965) (1,110)(2,110) (1,593) (2,965)
Stock-based compensation2,675
 3,251
 3,355
2,545
 2,675
 3,251
Originations and purchases of loans held-for-sale(52,561) (37,085) (22,417)(34,026) (52,561) (37,085)
Proceeds from sales, securitizations and paydowns of loans held-for-sale54,092
 40,155
 33,902
33,202
 54,092
 40,155
Net change in:          
Trading assets36,443
 (72,082) 133,488
(5,379) 36,443
 (72,082)
Securities borrowed(18,936) (3,926) 4,452
23,455
 (18,936) (3,926)
Accrued interest and accounts receivable8,655
 443
 (6,312)1,732
 8,655
 443
Other assets(15,456) (12,452) 32,557
(4,683) (15,456) (12,452)
Trading liabilities7,905
 19,344
 (79,314)(3,921) 7,905
 19,344
Accounts payable and other liabilities35,203
 17,325
 (26,450)(13,069) 35,203
 17,325
Other operating adjustments6,157
 6,234
 6,167
(3,613) 6,157
 6,234
Net cash provided by/(used in) operating activities95,932
 (3,752) 122,797
25,079
 95,932
 (3,752)
Investing activities          
Net change in:          
Deposits with banks(63,592) 41,625
 74,829
(36,595) (63,592) 41,625
Federal funds sold and securities purchased under resale agreements(12,490) (26,957) 7,082
(60,821) (12,490) (26,957)
Held-to-maturity securities:          
Proceeds6
 7
 9
4
 6
 7
Available-for-sale securities:          
Proceeds from maturities86,850
 92,740
 87,712
112,633
 86,850
 92,740
Proceeds from sales68,631
 118,600
 114,041
81,957
 68,631
 118,600
Purchases(202,309) (179,487) (346,372)(189,630) (202,309) (179,487)
Proceeds from sales and securitizations of loans held-for-investment10,478
 9,476
 31,034
6,430
 10,478
 9,476
Other changes in loans, net(58,365) 3,022
 50,651
(30,491) (58,365) 3,022
Net cash received from/(used in) business acquisitions or dispositions102
 (4,910) (97)88
 102
 (4,910)
Net maturities of asset-backed commercial paper guaranteed by the FRBB—
 —
 11,228
All other investing activities, net(63) (114) (762)(3,400) (63) (114)
Net cash (used in)/provided by investing activities(170,752) 54,002
 29,355
(119,825) (170,752) 54,002
Financing activities          
Net change in:          
Deposits203,420
 (9,637) (107,700)67,250
 203,420
 (9,637)
Federal funds purchased and securities loaned or sold under repurchase agreements(63,116) 15,202
 67,785
26,546
 (63,116) 15,202
Commercial paper and other borrowed funds7,230
 (6,869) (67,198)9,315
 7,230
 (6,869)
Beneficial interests issued by consolidated variable interest entities1,165
 2,426
 (4,076)345
 1,165
 2,426
Proceeds from long-term borrowings and trust preferred capital debt securities54,844
 55,181
 51,324
86,271
 54,844
 55,181
Payments of long-term borrowings and trust preferred capital debt securities(82,078) (99,043) (68,441)(96,473) (82,078) (99,043)
Excess tax benefits related to stock-based compensation867
 26
 17
255
 867
 26
Redemption of preferred stock issued to the U.S. Treasury—
 —
 (25,000)
Redemption of other preferred stock—
 (352) —
Proceeds from issuance of common stock—
 —
 5,756
Redemption of preferred stock—
 —
 (352)
Proceeds from issuance of preferred stock1,234
 —
 —
Treasury stock and warrants repurchased(8,863) (2,999) —
(1,653) (8,863) (2,999)
Dividends paid(3,895) (1,486) (3,422)(5,194) (3,895) (1,486)
All other financing activities, net(1,868) (1,666) (2,124)(189) (1,868) (1,666)
Net cash provided by/(used in) financing activities107,706
 (49,217) (153,079)87,707
 107,706
 (49,217)
Effect of exchange rate changes on cash and due from banks(851) 328
 238
1,160
 (851) 328
Net increase/(decrease) in cash and due from banks32,035
 1,361
 (689)
Net (decrease)/increase in cash and due from banks(5,879) 32,035
 1,361
Cash and due from banks at the beginning of the period27,567
 26,206
 26,895
59,602
 27,567
 26,206
Cash and due from banks at the end of the period$59,602
 $27,567
 $26,206
$53,723
 $59,602
 $27,567
Cash interest paid$13,725
 $12,404
 $16,875
$11,161
 $13,725
 $12,404
Cash income taxes paid, net8,153
 9,747
 5,434
2,050
 8,153
 9,747
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.

192JPMorgan Chase & Co./20112012 Annual Report181
Notes to consolidated financial statements


Note 1 – Basis of presentation
JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”), a financial holding company incorporated under Delaware law in 1968, is a leading global financial services firm and one of the largest banking institutions in the 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 Firm’s business segments, see Note 33 on pages 300–303326–329 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 towith 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 entity’s operations. For these types of entities, the Firm’s determination of whether it has a controlling interest is primarily based on the amount of voting equity interests held. Entities in which the Firm has a controlling financial interest, through ownership of the majority of the entities’ voting equity interests, or through other contractual rights that give the Firm control, are consolidated by the Firm.
Investments in companies in which the Firm has significant influence over operating and financing decisions (but does not own a majority of the voting equity interests) are accounted for (i) in accordance with the equity method of accounting (which requires the Firm to recognize its proportionate share of the entity’s net earnings), or (ii) at fair value if the fair value option was elected at the inception of the Firm’s 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
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-affiliatednonaffiliated partners or members do not have substantive kick-out or participating rights, the Firm consolidates the funds.
The Firm’s 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 entity’s operations through voting rights, or do not have the obligation to absorb the expected losses, or do not have the right to receive the residual returns of the entity.
The most common type of VIE is 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 SPE’s investors and other parties that have rights to those cash flows. SPEs are generally structured to insulate investors from claims on the SPE’s assets by creditors of other entities, including the creditors of the seller of the assets.
The primary beneficiary of a VIE (i.e., the party that has a controlling financial interest) is required to consolidate the assets and liabilities of the VIE. The primary beneficiary is the party that has both (1) the power to direct the activities of an entitythe VIE that most significantly impact the VIE'sVIE’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.


182JPMorgan Chase & Co./20112012 Annual Report193

Notes to consolidated financial statements

To assess whether the Firm has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, the Firm considers all the facts and circumstances, including its role in establishing the VIE and its ongoing rights and responsibilities. This assessment includes, first, identifying the activities that most significantly impact the VIE’s economic performance; and second, identifying which party, if any, has power over those activities. In general, the parties that make the most significant decisions affecting the VIE (such as asset managers, collateral managers, servicers, or owners of call options or liquidation rights over the VIE’s assets) or have the right to unilaterally remove those decision-makers are deemed to have the power to direct the activities of a VIE.
To assess whether the Firm has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, the Firm considers all of its economic interests, including debt and equity investments, servicing fees, and 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 VIE’s capital structure; and the reasons why the interests are held by the Firm.
The Firm performs on-going reassessments of: (1) whether entities previously evaluated under the majority voting-interest framework have become VIEs, based on certain events, and therefore subject to the VIE consolidation framework; and (2) whether changes in the facts and circumstances regarding the Firm’s involvement with a VIE cause the Firm’s consolidation conclusion to change.
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 inon 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 Chase’s 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 Chase’s other significant accounting policies and the Note and page where a detailed description of each policy can be found.
Business changes and developmentsNote 2 Page 183195
Fair value measurementNote 3 Page 184196
Fair value optionNote 4 Page 198214
Derivative instrumentsNote 6 Page 202218
Noninterest revenueNote 7 Page 211228
Interest income and interest expenseNote 8 Page 212230
Pension and other postretirement employee benefit plansNote 9 Page 213231
Employee stock-based incentivesNote 10 Page 222241
SecuritiesNote 12 Page 225244
Securities financing activitiesNote 13 Page 231249
LoansNote 14 Page 231250
Allowance for credit lossesNote 15 Page 252276
Variable interest entitiesNote 16 Page 256280
Goodwill and other intangible assetsNote 17 Page 267291
Premises and equipmentNote 18 Page 272296
Long-term debtNote 21 Page 273297
Income taxesNote 26 Page 279303
Off–balance sheet lending-related financial instruments, guarantees and other commitmentsNote 29 Page 283308
LitigationNote 31 Page 290316



194JPMorgan Chase & Co./2012 Annual Report


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 Firm’s 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. On March 13, 2012, the Board of Directors increased the Firm’s quarterly common stock dividend from $0.25 to $0.30 per share, effective with the dividend paid on April 30, 2012, to shareholders of record on April 5, 2012.


JPMorgan Chase & Co./2011 Annual Report183
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 Firm’s 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 Firm’s 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.
Subsequent events
Global settlement on servicing and origination of mortgages
On February 9, 2012, the Firm announced that it had 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 (“DOJ”), 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 forbecame effective on April 5, 2012, required the Firm to, among other things: (i) make cash payments of approximately $1.1 billion (a, a portion of which will be set aside for payments to borrowers)borrowers (“Cash Settlement Payment”); (ii) provide approximately $500 million of refinancing relief to certain “underwater” borrowers whose loans are owned and serviced by the Firm;Firm (“Refi Program”); 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. (Ifhomeowners (“Consumer Relief Program”). The Cash Settlement Payment was made on April 13, 2012.
As the Firm provides relief to borrowers under the Refi and Consumer Relief Programs, the Firm receives credits that reduce its remaining obligation under these programs. If the Firm does not meet certain targets set forth in the global settlement agreement for provision ofproviding either refinancings under the refinancingRefi Program or other borrower relief under the
Consumer Relief Program within certain prescribed time periods, the Firm willmust instead make additional cash payments.) In addition,general, 75% of the targets must be met within two years of the date of the global settlement and 100% must be achieved within three years of that date. The Firm filed its first quarterly report concerning its compliance with the global settlement with the Office of Mortgage Settlement Oversight in November 2012. The report included information regarding refinancings completed under the Refi Program and relief provided to borrowers under the Consumer Relief Program, as well as credits earned by the Firm under the global settlement the Firm will be required to adhere to certain enhanced mortgage servicing standards.as a result of such actions.
The global settlement releases the Firm from certain further claims by the participating government entities related to servicing activities, including foreclosures and loss mitigationmitigation 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 respectingwith respect to mortgage-backed securities; criminal
claims; and repurchase demands from the GSEs,U.S. government-sponsored entities (“GSEs”), among other items.
Also on February 9, 2012, the Firm entered into agreements in principle with the Board of Governors of the Federal Reserve System (“Federal Reserve”) and the Office of the Comptroller of the Currency (“OCC”) for the payment of civil money penalties related to conduct that was the subject of consent orders entered into with the bankingbanking regulators in April 2011. The Firm'sFirm’s payment obligations under those agreements will be deemed satisfied by the Firm'sFirm’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 global settlement, see “Mortgage Foreclosure Investigations and Litigation”Loans in Note 3114 on pages 290–299250–275 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”). PursuantThe WaMu Global Settlement was finalized on March 19, 2012, pursuant to thisthe execution of a definitive agreement and court approval, and the Firm expects to recognizerecognized additional assets, including certain pension-related assets, as well as tax refunds, resulting in future periods asa pretax gain of $1.1 billion for the settlement is executed and various state and federal tax matters are resolved.three months ended March 31, 2012. For additional information related to the WaMu Global Settlement see “WashingtonWashington Mutual Litigations”Litigations in Note 31 on pages 290–299page 324 of this Annual Report.


JPMorgan Chase & Co./2012 Annual Report195
Notes to consolidated financial statements

Superstorm Sandy
On October 29, 2012, the mid-Atlantic and Northeast regions of the U.S. were affected by Superstorm Sandy, which caused major flooding and wind damage and resulted in major disruptions to individuals and businesses and significant damage to homes and communities in the affected regions. Superstorm Sandy did not have a material impact on the 2012 financial results of the Firm.
Subsequent events
Mortgage foreclosure settlement agreement with the Office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System
On January 7, 2013, the Firm announced that it and a number of other financial institutions entered into a settlement agreement with the Office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System providing for the termination of the independent foreclosure review programs (the “Independent Foreclosure Review”). Under this settlement, the Firm will make a cash payment of $753 million into a settlement fund for distribution to qualified borrowers. The Firm has also committed an additional $1.2 billion to foreclosure prevention actions, which will be fulfilled through credits given to the Firm for modifications, short sales and other specified types of borrower relief. Foreclosure prevention actions that earn credit under the Independent Foreclosure Review settlement are in addition to actions taken by the Firm to earn credit under the global settlement entered into by the Firm with state and federal agencies. The estimated impact of the foreclosure prevention actions required under the Independent Foreclosure Review settlement have been considered in the Firm’s allowance for loan losses. The Firm recognized a pretax charge of approximately $700 millionin the fourth quarter of 2012 related to the Independent Foreclosure Review settlement.
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. Certainbasis (i.e., assets and liabilities that are carriedmeasured and reported at fair value on a nonrecurring basis, includingthe Firm’s Consolidated Balance Sheets). Certain assets (e.g. certain mortgage, home equity and other loans, where the carrying value is based on the fair value of the underlying collateral.collateral), 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).
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 suchcharacteristics (such as maturitymaturity) and use as inputs market-basedobservable or independently sourcedunobservable market parameters, including but


184JPMorgan 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 tovalue, as described below.
Imprecision in estimating unobservable market inputs or other factors can affect the amount of gain or loss recorded for a particular position. Furthermore, while the Firm believes its valuation methods are appropriate and consistent with those of other market participants, the methods and assumptions used reflect counterparty credit quality,management judgment and may vary across the Firm’s creditworthiness, constraintsbusinesses and portfolios.
The Firm uses various methodologies and assumptions in the determination of fair value. The use of different methodologies or assumptions to those used by the Firm could result in a different estimate of fair value at the reporting date.
Valuation process
Risk-taking functions are responsible for providing fair value estimates for assets and liabilities carried on 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 arriveConsolidated Balance Sheets at fair value. The adjustment also takes into account contractual factors designed to reduceFirm’s valuation control function, which is part of the Firm’s credit exposure to each counterparty, such as collateralFinance function and legal rights of offset.
Debit valuation adjustments (“DVA”) are taken to reflect the credit qualityindependent of the risk-taking functions, is responsible for verifying these estimates and determining any fair value adjustments that may be required to ensure that the Firm’s positions are recorded at fair value. In addition, the Firm inhas a firm-wide Valuation Governance Forum (“VGF”) comprising senior finance and risk executives to oversee the management of risks arising from valuation activities conducted across the Firm. The VGF is chaired by the firm-wide head of the valuation control function, and also includes sub-forums for the CIB, MB, and certain corporate functions including Treasury and CIO.
The valuation control function verifies fair value estimates leveraging independently derived prices, valuation inputs and other market data, where available. Where independent prices or inputs are not available, additional review is performed by the valuation control function to ensure the reasonableness of estimates that cannot be verified to external independent data, and may include: evaluating the limited market activity including client unwinds; benchmarking of valuation inputs to those for similar instruments; decomposing the valuation of liabilities measured atstructured instruments into individual components; comparing expected to actual cash flows; reviewing profit and loss trends; and reviewing trends in collateral valuation. In addition there are additional levels of management review for more significant or complex positions.
The valuation control function determines any valuation adjustments that may be required to the estimates provided by the risk-taking functions. No adjustments are applied to the quoted market price for instruments classified within


196JPMorgan Chase & Co./2012 Annual Report


level 1 of the fair value.value hierarchy (see below for further information on the fair value hierarchy). For other positions, judgment is required to assess the need for valuation adjustments to appropriately reflect liquidity considerations, unobservable parameters, and, for certain portfolios that meet specified criteria, the size of the net open risk position. The methodology to determinedetermination of such adjustments follows a consistent framework across the adjustment is consistent with CVA and incorporates JPMorgan Chase’s credit spread as observed through the credit default swap market.Firm:
Liquidity valuation adjustments are necessaryconsidered when the Firm may not be able to observe a recent market price for a financial instrument that trades in an inactive (or less active) markets or to reflect the cost of exiting larger-than-normal market-size risk positions (liquidity adjustments are not taken for positions classified within level 1 of the fair value hierarchy; see below).market. The Firm estimates the amount of uncertainty in the initial valuationfair value estimate based on the degree of liquidity in the marketmarket. Factors considered in which the financial instrument trades and makes liquidity adjustments to the carrying value of the financial instrument. The Firm measuresdetermining the liquidity adjustment based on the following factors:include: (1) the amount of time since the last relevant pricing point; (2) whether there was an actual trade or relevant external quote;quote or alternatively pricing points for similar instruments in active markets; and (3) the volatility of the principal risk component of the financial instrument. CostsFor certain portfolios of financial instruments that the Firm manages on the basis of net open risk exposure, valuation adjustments are necessary to exitreflect the cost of exiting a larger-than-normal market-size net open risk positionsposition. Where applied, such adjustments are determined based on factors including the size of the adverse market move that is likely to occur during the period required to bring areduce the net open risk position down to a nonconcentrated level.normal market-size.
Unobservable parameter valuation adjustments are necessarymay be made when positions are valued using internally developed models that use as their basisincorporate unobservable parameters – that is, parameters that must be estimated and are, therefore, subject to management judgment. Unobservable parameter valuation adjustments are applied to mitigatereflect the possibility of error and revisionuncertainty inherent in the valuation estimate of the market price provided by the model.
Where appropriate, the Firm also applies adjustments to its estimates of fair value in order to appropriately reflect counterparty credit quality and the Firm’s own creditworthiness, applying a consistent framework across the Firm. For more information on such adjustments see Credit adjustments on page 212 of this Note
Valuation model review and approval
If prices or quotes are not available for an instrument or a similar instrument, fair value is generally determined using valuation models that consider relevant transaction data such as maturity and use as inputs market-based or independently sourced parameters. Where this is the case
 
the price verification process described above is applied to the inputs to those models.
The Firm has numerous controls in place intended to ensure that its fair values are appropriate. An independent model review group reviewsFirm’s Model Risk function within the Firm’s Model Risk and Development Group, which in turn reports to the Chief Risk Officer, reviews and approves valuation models used by the Firm. Model reviews consider a number of factors about the model’s suitability for valuation of a particular product including whether it accurately reflects the characteristics and approves themsignificant risks of a particular instrument; the selection and reliability of model inputs; consistency with models for use for specific products. Allsimilar products; the appropriateness of any model-related adjustments; and sensitivity to input parameters and assumptions that cannot be observed from the market. When reviewing a model, the Model Risk function analyzes and challenges the model methodology and the reasonableness of model assumptions and may perform or require additional testing, including back-testing of model outcomes.
New significant 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 market-based parameters are used for valuation wherever possible. For those products withas well as 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 methodologyexisting models, are reviewed by managementand approved prior to confirm thatimplementation except where specified conditions are met. The Model Risk function performs an annual Firmwide model risk assessment where developments in the changesproduct or market are justified. As marketsconsidered in determining whether valuation models which have already been reviewed need to be reviewed and products develop and the pricing for certain products becomes more or less transparent, the Firm continues to refine its valuation methodologies.approved again.
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 instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.



JPMorgan Chase & Co./20112012 Annual Report 185197
Notes to consolidated financial statements

The following table is a description ofdescribes the valuation methodologies used by the Firm to measure it'sits more significant products/instruments at fair value, including the general classification of such instruments pursuant to the valuation hierarchy.
 Product/instrumentValuation methodology, inputs and assumptionsClassifications in the valuation hierarchy
 Securities financing agreementsValuations are based on discounted cash flows, which consider:Instruments carried at fair value are generally classified in levelLevel 2
  • Derivative featuresfeatures. For further information refer to discussion on derivatives below.
  • Market rates for the respective maturity
  • Collateral
 Loans and lending-related commitments - wholesale 
 Trading portfolioWhere observable market data is available, valuations are based on:Level 2 or 3
   • 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 rateYield 
  • ExpectedLifetime credit losses 
  • Loss severity rates 
  • Prepayment ratesspeed 
  • Servicing costs 
 Loans held for investment and associated lending related commitmentsValuations are based on discounted cash flows, which consider:
Loans held for investment and associated lending-related commitments that are not carried at fair value are not classified within the fair value hierarchy


Predominantly level 3
 
• Credit spreads, derived from the cost of credit default swaps (“CDS”);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 ratesspeed 
  Lending related commitments are valued similar to loans and reflect the portion of an unused commitment expected, based on the Firm'sFirm’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 on pages 250-275 of this Annual Report.

 
   
 Loans - consumer  
 Held for investment consumer loans, excluding credit cardValuations are based on discounted cash flows, which consider:
Consumer loans in this category are not carried at fair value and are not classified within the fair value hierarchy


Predominantly level 3
 
• 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 on pages 250-275 of this Annual Report.

 
   
 Credit card receivablesValuations are based on discounted cash flows, which consider:
Credit card loans are not carried at fair value and are not classified within the fair value hierarchy


Level 3
  
• 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 
 Conforming residential mortgage loans expected to be sold
Fair value is based upon observable pricing ofprices for mortgage-backed securities with similar collateral and incorporates adjustments to these prices to account for differences between the securitysecurities and the value of the underlying loans, which include credit characteristics, portfolio composition, and liquidity.

Predominantly classified within level 2


 
  
   

186198 JPMorgan Chase & Co./20112012 Annual Report



Product/instrumentValuation methodology, inputs and assumptionsClassifications in the valuation hierarchy
SecuritiesQuoted market prices are used where available.Level 1
 In the absence of quoted market prices, securities are valued based on:Level 2 or 3
 • ObservedObservable market prices for similar securities 
 
• Relevant broker quotes


 
 
• Discounted cash flows


 
 (see specific product discussion below)In addition, the following inputs to discounted cash flows are used for the following products: 
 Mortgage- and asset-backed securities specific inputs: 
 
• Collateral characteristics


 
 
• Deal-specific payment and loss allocations

 
 
• Current market assumptions related to discount rate, prepayments, defaultsyield, prepayment speed, conditional default rates and recoveriesloss severity

 
 Collateralized debt obligations (“CDOs”), including collateralized loan obligations (“CLOs”), specific inputs: 
 • Collateral characteristics 
 
• Deal-specific payment and loss allocations


 
 
• Expected prepayment speed, conditional default recovery, default correlation and liquidity spread assumptionsrates, loss severity


 
 
• Credit spreads

 
 
• Credit rating data

 
Physical commoditiesValued using observable market prices or data
Level 1 or 2


Derivatives
Exchange-traded derivatives that are actively traded and valued using market observable prices.the exchange price, and over-the-counter contracts where quoted prices are available in an active market.

Level 1
 Derivatives that are not exchange-traded, which include plain vanilla 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.that use observable or unobservable valuation inputs (e.g. plain vanilla options and interest rate and credit default swaps). Inputs include:Level 2 or 3
  
 
  
 
• Contractual terms including the period to maturity

 
 
• Readily observable parameters including interest rates and volatility


 
 
• Credit quality of the counterparty and of the Firm

 
 
• Correlation levels

 
 DerivativesIn addition, the following specific inputs are used for the following derivatives that are valued based on models with significant unobservable inputs include:inputs: 
 Structured credit derivatives specific inputs:inputs include: 
 
• CDS spreads and recovery rates

 
 
• CorrelationCredit 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:inputs include: 
 
• Long-dated equity volatilities


 
 CallableCertain interest rate and FX exotic options specific inputs:inputs include: 
 
• Correlation between interest rates and FX ratesInterest rate correlation


 
 
• Interest rate spread volatility

• Foreign exchange correlation
• Correlation between interest rates and foreign exchange rates
• Parameters describing the evolution of underlying interest rates


 
Mortgage servicing rights (“MSRs”)
See Mortgage servicing rights on pages 268–270 of Note 17Certain commodity derivatives specific inputs include:
• Commodity volatility
Adjustments to reflect counterparty credit quality (credit valuation adjustments or “CVA”), and the Firms own creditworthiness (debit valuation adjustments or “DVA”), see page 212 of this Annual Report.

Note.
Level 3

 

JPMorgan Chase & Co./20112012 Annual Report 187199
Notes to consolidated financial statements

Product/instrumentValuation methodology, inputs and assumptionsClassification in the valuation hierarchy
Mortgage servicing rights (“MSRs”)
See Mortgage servicing rights in Note 17 on pages 292-294 of this Annual Report.

Level 3

Private equity direct investmentsPrivate equity direct investments held in the Private Equity portfolioLevel 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 areas required, since comparable public companies are not identical to the company being valued, and for company-specific issues and lack of liquidity 
 Public investments held in the Private Equity portfolioLevel 1 or 2
 
• Valued using observable market prices less adjustments for relevant restrictions, where applicable

 
  
Fund investments (i.e., mutual/collective investment funds, private equity funds, hedge funds, and real estate funds)Net Asset Valueasset value (“NAV”) 
• NAV is validated by sufficient level of observable activity (i.e., purchases and sales)


Level 1
 
• Adjustments to the NAV areas required, for restrictions on redemption (e.g., lock up periods or withdrawal limitations) or where observable activity is limited


Level 2 or 3


  
Beneficial interests issued by consolidated VIEValued using observable market information, where available
Level 2 or 3



In the absence of observable market information, valuations are based on the fair value of the underlying assets held by the VIE 
Long-term debt, not carried at fair valueValuations are based on discounted cash flows, which consider:
Long-term debt, excluding structured notes, is not carried at fair value and is not classified within the fair value hierarchy


Predominantly level 2
• Market rates for respective maturity

 
• Credit qualityThe Firm’s own creditworthiness (DVA), see page 212 of the Firm (DVA)

this Note
Structured notes (included in Deposits, Otherdeposits, other borrowed funds and Long-termlong-term debt)Valuations are based on discounted cash flows, which consider:Level 2 or 3
• Credit qualityThe Firm’s own creditworthiness (DVA), see page 212 of the Firm (DVA)this Note

• Consideration of derivative featuresfeatures. For further information refer to discussion on derivatives above





188200 JPMorgan Chase & Co./20112012 Annual Report


The following table presents the asset and liabilities measured at fair value as of December 31, 20112012 and 20102011 by major product category and fair value hierarchy.
Assets and liabilities measured at fair value on a recurring basis
Fair value hierarchy Fair value hierarchy  
December 31, 2011 (in millions)
Level 1(h)
Level 2(h)
Level 3(h)
Netting adjustmentsTotal fair value
December 31, 2012 (in millions)Level 1Level 2 Level 3 Netting adjustmentsTotal fair value
Federal funds sold and securities purchased under resale agreements$—
$24,891
$—
$—
$24,891
$—
$24,258
 $—
 $—
$24,258
Securities borrowed—
15,308
—
—
15,308
—
10,177
 —
 —
10,177
Trading assets:      
Debt instruments:      
Mortgage-backed securities:      
U.S. government agencies(a)
27,082
7,801
86
—
34,969
—
36,240
 498
 —
36,738
Residential – nonagency—
2,956
796
—
3,752
—
1,509
 663
 —
2,172
Commercial – nonagency—
870
1,758
—
2,628
—
1,565
 1,207
 —
2,772
Total mortgage-backed securities27,082
11,627
2,640
—
41,349
—
39,314
 2,368
 —
41,682
U.S. Treasury and government agencies(a)
11,508
8,391
—
—
19,899
12,240
10,185
 —
 —
22,425
Obligations of U.S. states and municipalities—
15,117
1,619
—
16,736
—
16,726
 1,436
 —
18,162
Certificates of deposit, bankers’ acceptances and commercial paper—
2,615
—
—
2,615
—
4,759
 —
 —
4,759
Non-U.S. government debt securities18,618
40,080
104
—
58,802
23,500
45,121
 67
 —
68,688
Corporate debt securities—
33,938
6,373
—
40,311
—
33,384
 5,308
 —
38,692
Loans(b)
—
21,589
12,209
—
33,798
—
30,754
 10,787
 —
41,541
Asset-backed securities—
2,406
7,965
—
10,371
—
4,182
 3,696
 —
7,878
Total debt instruments57,208
135,763
30,910
—
223,881
35,740
184,425
 23,662
 —
243,827
Equity securities93,799
3,502
1,177
—
98,478
106,898
2,687
 1,114
 —
110,699
Physical commodities(c)
21,066
4,898
—
—
25,964
10,107
6,066
 —
 —
16,173
Other—
2,283
880
—
3,163
—
3,483
 863
 —
4,346
Total debt and equity instruments(d)
172,073
146,446
32,967
—
351,486
152,745
196,661
 25,639
 —
375,045
Derivative receivables:      
Interest rate1,324
1,433,469
6,728
(1,395,152)46,369
476
1,322,155
 6,617
 (1,290,043)39,205
Credit—
152,569
17,081
(162,966)6,684
—
93,821
 6,489
 (98,575)1,735
Foreign exchange833
162,689
4,641
(150,273)17,890
450
144,758
 3,051
 (134,117)14,142
Equity—
43,604
4,132
(40,943)6,793
—
36,017
 4,921
 (31,672)9,266
Commodity4,561
50,409
2,459
(42,688)14,741
316
41,129
 2,180
 (32,990)10,635
Total derivative receivables(e)
6,718
1,842,740
35,041
(1,792,022)92,477
1,242
1,637,880
 23,258
 (1,587,397)74,983
Total trading assets178,791
1,989,186
68,008
(1,792,022)443,963
153,987
1,834,541
 48,897
 (1,587,397)450,028
Available-for-sale securities:      
Mortgage-backed securities:      
U.S. government agencies(a)
92,426
14,681
—
—
107,107
—
98,388
 —
 —
98,388
Residential – nonagency—
67,554
3
—
67,557
—
74,189
 450
 —
74,639
Commercial – nonagency—
10,962
267
—
11,229
—
12,948
 255
 —
13,203
Total mortgage-backed securities92,426
93,197
270
—
185,893
—
185,525
 705
 —
186,230
U.S. Treasury and government agencies(a)
3,837
4,514
—
—
8,351
8,907
3,223
 —
 —
12,130
Obligations of U.S. states and municipalities36
16,246
258
—
16,540
35
21,489
 187
 —
21,711
Certificates of deposit—
3,017
—
—
3,017
—
2,783
 —
 —
2,783
Non-U.S. government debt securities25,381
19,884
—
—
45,265
41,218
24,826
 —
 —
66,044
Corporate debt securities—
62,176
—
—
62,176
—
38,609
 —
 —
38,609
Asset-backed securities:      
Credit card receivables—
4,655
—
—
4,655
Collateralized loan obligations—
116
24,745
—
24,861
—
—
 27,896
 —
27,896
Other—
11,105
213
—
11,318
—
12,843
 128
 —
12,971
Equity securities2,667
38
—
—
2,705
2,733
38
 —
 —
2,771
Total available-for-sale securities124,347
214,948
25,486
—
364,781
52,893
289,336
 28,916
 —
371,145
Loans—
450
1,647
—
2,097
—
273
 2,282
 —
2,555
Mortgage servicing rights—
—
7,223
—
7,223
—
—
 7,614
 —
7,614
Other assets:      
Private equity investments(f)
99
706
6,751
—
7,556
578
—
 7,181
 —
7,759
All other4,336
233
4,374
—
8,943
4,188
253
 4,258
 —
8,699
Total other assets4,435
939
11,125
—
16,499
4,766
253
 11,439
 —
16,458
Total assets measured at fair value on a recurring basis(g)
$307,573
$2,245,722
$113,489
$(1,792,022)$874,762
Total assets measured at fair value on a recurring basis$211,646
$2,158,838
(g) 
$99,148
(g) 
$(1,587,397)$882,235
Deposits$—
$3,515
$1,418
$—
$4,933
$—
$3,750
 $1,983
 $—
$5,733
Federal funds purchased and securities loaned or sold under repurchase agreements—
9,517
—
—
9,517
—
4,388
 —
 —
4,388
Other borrowed funds—
8,069
1,507
—
9,576
—
9,972
 1,619
 —
11,591
Trading liabilities: 

     

Debt and equity instruments(d)
50,830
15,677
211
—
66,718
46,580
14,477
 205
 —
61,262
Derivative payables: 

     

Interest rate1,537
1,395,113
3,167
(1,371,807)28,010
490
1,283,829
 3,295
 (1,262,708)24,906
Credit—
155,772
9,349
(159,511)5,610
—
95,411
 4,616
 (97,523)2,504
Foreign exchange846
159,258
5,904
(148,573)17,435
428
156,413
 4,801
 (143,041)18,601
Equity—
39,129
7,237
(36,711)9,655
—
36,083
 6,727
 (30,991)11,819
Commodity3,114
53,684
3,146
(45,677)14,267
176
45,363
 1,926
 (34,639)12,826
Total derivative payables(e)
5,497
1,802,956
28,803
(1,762,279)74,977
1,094
1,617,099
 21,365
 (1,568,902)70,656
Total trading liabilities56,327
1,818,633
29,014
(1,762,279)141,695
47,674
1,631,576
 21,570
 (1,568,902)131,918
Accounts payable and other liabilities—
—
51
—
51
—
—
 36
 —
36
Beneficial interests issued by consolidated VIEs—
459
791
—
1,250
—
245
 925
 —
1,170
Long-term debt—
24,410
10,310
—
34,720
—
22,312
 8,476
 —
30,788
Total liabilities measured at fair value on a recurring basis$56,327
$1,864,603
$43,091
$(1,762,279)$201,742
$47,674
$1,672,243
 $34,609
 $(1,568,902)$185,624

JPMorgan Chase & Co./20112012 Annual Report 189201
Notes to consolidated financial statements

Fair value hierarchy Fair value hierarchy  
December 31, 2010 (in millions)
Level 1(h)
Level 2(h)
Level 3(h)
Netting adjustmentsTotal fair value
December 31, 2011 (in millions)Level 1Level 2 Level 3 Netting adjustmentsTotal fair value
Federal funds sold and securities purchased under resale agreements$—
$20,299
$—
$—
$20,299
$—
$22,191
 $—
 $—
$22,191
Securities borrowed—
13,961
—
—
13,961
—
15,308
 —
 —
15,308
Trading assets:      
Debt instruments:      
Mortgage-backed securities:      
U.S. government agencies(a)
36,813
10,738
174
—
47,725
27,082
7,801
 86
 —
34,969
Residential – nonagency—
2,807
687
—
3,494
—
2,956
 796
 —
3,752
Commercial – nonagency—
1,093
2,069
—
3,162
—
870
 1,758
 —
2,628
Total mortgage-backed securities36,813
14,638
2,930
—
54,381
27,082
11,627
 2,640
 —
41,349
U.S. Treasury and government agencies(a)
12,863
9,026
—
—
21,889
11,508
8,391
 —
 —
19,899
Obligations of U.S. states and municipalities—
11,715
2,257
—
13,972
—
15,117
 1,619
 —
16,736
Certificates of deposit, bankers’ acceptances and commercial paper—
3,248
—
—
3,248
—
2,615
 —
 —
2,615
Non-U.S. government debt securities31,127
38,482
202
—
69,811
18,618
40,080
 104
 —
58,802
Corporate debt securities—
42,280
4,946
—
47,226
—
33,938
 6,373
 —
40,311
Loans(b)
—
21,736
13,144
—
34,880
—
21,589
 12,209
 —
33,798
Asset-backed securities—
2,743
8,460
—
11,203
—
2,406
 7,965
 —
10,371
Total debt instruments80,803
143,868
31,939
—
256,610
57,208
135,763
 30,910
 —
223,881
Equity securities124,400
3,153
1,685
—
129,238
93,799
3,502
 1,177
 —
98,478
Physical commodities(c)
18,327
2,708
—
—
21,035
21,066
4,898
 —
 —
25,964
Other—
1,598
930
—
2,528
—
2,283
 880
 —
3,163
Total debt and equity instruments(d)
223,530
151,327
34,554
—
409,411
172,073
146,446
 32,967
 —
351,486
Derivative receivables:      
Interest rate2,278
1,120,282
5,422
(1,095,427)32,555
1,324
1,433,469
 6,728
 (1,395,152)46,369
Credit—
111,827
17,902
(122,004)7,725
—
152,569
 17,081
 (162,966)6,684
Foreign exchange1,121
163,114
4,236
(142,613)25,858
833
162,689
 4,641
 (150,273)17,890
Equity30
38,718
4,885
(39,429)4,204
—
43,604
 4,132
 (40,943)6,793
Commodity1,324
56,076
2,197
(49,458)10,139
4,561
50,409
 2,459
 (42,688)14,741
Total derivative receivables(e)
4,753
1,490,017
34,642
(1,448,931)80,481
6,718
1,842,740
 35,041
 (1,792,022)92,477
Total trading assets228,283
1,641,344
69,196
(1,448,931)489,892
178,791
1,989,186
 68,008
 (1,792,022)443,963
Available-for-sale securities:      
Mortgage-backed securities:      
U.S. government agencies(a)
104,736
15,490
—
—
120,226
92,426
14,681
 —
 —
107,107
Residential – nonagency1
48,969
5
—
48,975
—
67,554
 3
 —
67,557
Commercial – nonagency—
5,403
251
—
5,654
—
10,962
 267
 —
11,229
Total mortgage-backed securities104,737
69,862
256
—
174,855
92,426
93,197
 270
 —
185,893
U.S. Treasury and government agencies(a)
522
10,826
—
—
11,348
3,837
4,514
 —
 —
8,351
Obligations of U.S. states and municipalities31
11,272
256
—
11,559
36
16,246
 258
 —
16,540
Certificates of deposit6
3,641
—
—
3,647
—
3,017
 —
 —
3,017
Non-U.S. government debt securities13,107
7,670
—
—
20,777
25,381
19,884
 —
 —
45,265
Corporate debt securities—
61,793
—
—
61,793
—
62,176
 —
 —
62,176
Asset-backed securities:      
Credit card receivables—
7,608
—
—
7,608
Collateralized loan obligations—
128
13,470
—
13,598
—
116
 24,745
 —
24,861
Other—
8,777
305
—
9,082
—
15,760
 213
 —
15,973
Equity securities1,998
53
—
—
2,051
2,667
38
 —
 —
2,705
Total available-for-sale securities120,401
181,630
14,287
—
316,318
124,347
214,948
 25,486
 —
364,781
Loans—
510
1,466
—
1,976
—
450
 1,647
 —
2,097
Mortgage servicing rights—
—
13,649
—
13,649
—
—
 7,223
 —
7,223
Other assets:      
Private equity investments(f)
49
826
7,862
—
8,737
99
706
 6,751
 —
7,556
All other5,093
192
4,179
—
9,464
4,336
233
 4,374
 —
8,943
Total other assets5,142
1,018
12,041
—
18,201
4,435
939
 11,125
 —
16,499
Total assets measured at fair value on a recurring basis(g)
$353,826
$1,858,762
$110,639
$(1,448,931)$874,296
Total assets measured at fair value on a recurring basis$307,573
$2,243,022
(g) 
$113,489
(g) 
$(1,792,022)$872,062
Deposits$—
$3,596
$773
$—
$4,369
$—
$3,515
 $1,418
 $—
$4,933
Federal funds purchased and securities loaned or sold under repurchase agreements—
4,060
—
—
4,060
—
6,817
 —
 —
6,817
Other borrowed funds—
8,547
1,384
—
9,931
—
8,069
 1,507
 —
9,576
Trading liabilities:      
Debt and equity instruments(d)
58,468
18,425
54
—
76,947
50,830
15,677
 211
 —
66,718
Derivative payables:      
Interest rate2,625
1,085,233
2,586
(1,070,057)20,387
1,537
1,395,113
 3,167
 (1,371,807)28,010
Credit—
112,545
12,516
(119,923)5,138
—
155,772
 9,349
 (159,511)5,610
Foreign exchange972
158,908
4,850
(139,715)25,015
846
159,258
 5,904
 (148,573)17,435
Equity22
39,046
7,331
(35,949)10,450
—
39,129
 7,237
 (36,711)9,655
Commodity862
54,611
3,002
(50,246)8,229
3,114
53,684
 3,146
 (45,677)14,267
Total derivative payables(e)
4,481
1,450,343
30,285
(1,415,890)69,219
5,497
1,802,956
 28,803
 (1,762,279)74,977
Total trading liabilities62,949
1,468,768
30,339
(1,415,890)146,166
56,327
1,818,633
 29,014
 (1,762,279)141,695
Accounts payable and other liabilities—
—
236
—
236
—
—
 51
 —
51
Beneficial interests issued by consolidated VIEs—
622
873
—
1,495
—
459
 791
 —
1,250
Long-term debt—
25,795
13,044
—
38,839
—
24,410
 10,310
 —
34,720
Total liabilities measured at fair value on a recurring basis$62,949
$1,511,388
$46,649
$(1,415,890)$205,096
$56,327
$1,861,903
 $43,091
 $(1,762,279)$199,042
(a)
At December 31, 20112012 and 20102011, included total U.S. government-sponsored enterprise obligations of $122.4119.4 billion and $137.3122.4 billion respectively, which were predominantly mortgage-related.
(b)
At December 31, 20112012 and 20102011, included within trading loans were $20.126.4 billion and $22.720.1 billion, respectively, of residential first-lien mortgages, and $2.02.2 billion and $2.62.0 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 $11.017.4 billion and $13.111.0 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 market. “Market” is a term defined in U.S. GAAP as an amount not exceeding fair value.value less costs to sell (“transaction costs”). Transaction costs for the Firm’s physical commodities inventories are either not applicable or immaterial to the value of the inventory.

190202 JPMorgan Chase & Co./20112012 Annual Report


Therefore, market approximates fair value for the Firm’s physical commodities inventories. When fair value hedging has been applied (or when market is below cost), the carrying value of physical commodities approximates fair value, because under fair value hedge accounting, the cost basis is adjusted for changes in fair value. For a further discussion of the Firm’s hedge accounting relationships, see Note 6 on pages 218–227 of this Annual Report. To provide consistent fair value disclosure information, all physical commodities inventories have been included in each period presented.
(d)Balances reflect the reduction of securities owned (long positions) by the amount of 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 $11.78.4 billion and $12.711.7 billion at December 31, 20112012 and 20102011, 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.segment. The cost basis of the private equity investment portfolio totaled $9.58.4 billion and $10.09.5 billion at December 31, 20112012 and 20102011, respectively.
(g)
Includes investments in hedge funds, private equity funds, real estate and other funds that do not have readily determinable fair values. The Firm uses net asset value per share when measuring the fair value of these investments. At December 31, 20112012 and 20102011, balances includedthe fair value of these investments valued at net asset values ofwere $10.84.9 billion and $12.15.5 billion, respectively, of which $5.31.1 billion and $5.9 billion, respectively, were classified in level 1, $1.2 billion and $2.0 billion, respectively, in level 2, and $4.33.8 billion and $4.24.3 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 between levels for instruments carried at fair value on a recurring basis
For the year ended December 31, 2012, $113.9 billion of settled U.S. government agency mortgage-backed securities were transferred from level 1 to level 2. While the U.S. government agency mortgage-backed securities market remains highly liquid and transparent, the transfer reflects greater market price differentiation between settled securities based on certain underlying loan specific factors. There were no significant transfers from level 2 to level 1 for the year ended December 31, 2012, and no significant transfers between level 1 and level 2 for the year ended December 31, 2011.
For the years ended December 31, 2012 and 2011, there were no significant transfers from level 2 into level 3. For the year ended December 31, 2012, transfers from level 3 into level 2 included$1.2 billion of derivative payables based on increased observability of certain structured equity derivatives; and $1.8 billion of long-term debt due to a decrease in valuation uncertainty of certain equity structured notes. 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.
All transfers are assumed to occur at the beginning of the reporting period.
During 2012 the liquidity for certain collateralized loan obligations increased and price transparency improved. Accordingly, the Firm incorporated a revised valuation model into its valuation process for CLOs to better calibrate to market data where available. The Firm began to verify fair value estimates from this model to independent sources during the fourth quarter of 2012. Although market liquidity and price transparency have improved, CLO market prices were not yet considered materially observable and therefore CLOs remained in level 3 as of December 31, 2012. The change in the valuation process did not have a significant impact on the fair value of the Firm’s CLO positions.



JPMorgan Chase & Co./2012 Annual Report203
Notes to consolidated financial statements

Level 3 valuations
The Firm has established well-documented processes for determining fair value, including for instruments where fair value is estimated using significant unobservable inputs (level 3). For further information on the Firm’s valuation process and a detailed discussion of the determination of fair value for individual financial instruments, see pages 196–200 of this Note.
Estimating fair value requires the application of judgment. The type and level of judgment required is largely dependent on the amount of observable market information available to the Firm. For instruments valued using internally developed models that use significant unobservable inputs and are therefore classified within level 3 of the fair value hierarchy, judgments used to estimate fair value are more significant than those required when estimating the fair value of instruments classified within levels 1 and 2.
In arriving at an estimate of fair value for an instrument within level 3, management must first determine the appropriate 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, prepayment speed, default rates, volatilities, correlations, 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 Firm’s 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 following table presents the Firm’s primary level 3 financial instruments, the valuation techniques used to measure the fair value of those financial instruments, the significant unobservable inputs, the range of values for
those inputs and the weighted averages of such inputs. While the determination to classify an instrument within level 3 is based on the significance of the unobservable inputs to the overall fair value measurement, level 3 financial instruments typically include observable components (that is, components that are actively quoted and can be validated to external sources) in addition to the unobservable components. The level 1 and/or level 2 inputs are not included in the table. In addition, the Firm manages the risk of the observable components of level 3 financial instruments using securities and derivative positions that are classified within levels 1 or 2 of the fair value hierarchy.
The range of values presented in the table is representative of the highest and lowest level input used to value the significant groups of instruments within a product/instrument classification. The input range does not reflect the level of input uncertainty, instead it is driven by the different underlying characteristics of the various instruments within the classification. For example, two option contracts may have similar levels of market risk exposure and valuation uncertainty, but may have significantly different implied volatility levels because the option contracts have different underlyings, tenors , or strike prices.
Where provided, the weighted averages of the input values presented in the table are calculated based on the fair value of the instruments that the input is being used to value. In the Firm’s view, the input range and the weighted average value do not reflect the degree of input uncertainty or an assessment of the reasonableness of the Firm’s estimates and assumptions. Rather, they reflect the characteristics of the various instruments held by the Firm and the relative distribution of instruments within the range of characteristics. The input range and weighted average values will therefore vary from period to period and parameter to parameter based on the characteristics of the instruments held by the Firm at each balance sheet date.


204JPMorgan Chase & Co./2012 Annual Report


Level 3 inputs(a)
 
December 31, 2012 (in millions, except for ratios and basis points)     
Product/InstrumentFair valuePrincipal valuation techniqueUnobservable inputsRange of input valuesWeighted average
Residential mortgage-backed securities and loans$9,836
Discounted cash flowsYield4 %-20%7%
  Prepayment speed0 %-40%6%
   Conditional default rate0 %-100%10%
   Loss severity0 %-95%15%
Commercial mortgage-backed securities and loans(b)
1,724
Discounted cash flowsYield2 %-32%6%
  Conditional default rate0 %-8%0%
   Loss severity0 %-40%35%
Corporate debt securities, obligations of U.S. states and municipalities, and other(c)
19,563
Discounted cash flowsCredit spread130 bps
-250 bps153 bps
  Yield0 %-30%9%
 Market comparablesPrice25
-12587
Net interest rate derivatives3,322
Option pricingInterest rate correlation(75)%-100% 
   Interest rate spread volatility0 %-60% 
Net credit derivatives(b)
1,873
Discounted cash flowsCredit correlation27 %-90% 
Net foreign exchange derivatives(1,750)Option pricingForeign exchange correlation(75)%-45% 
Net equity derivatives(1,806)Option pricingEquity volatility5 %-45% 
Net commodity derivatives254
Option pricingCommodity volatility24 %-47% 
Collateralized loan obligations(d)
29,972
Discounted cash flowsCredit spread130 bps
-600 bps163 bps
   Prepayment speed15 %-20%19%
   Conditional default rate2%2%
   Loss severity40%40%
Mortgage servicing rights (“MSRs”)7,614
Discounted cash flowsRefer to Note 17 on pages 291–295 of this Annual Report. 
Private equity direct investments5,231
Market comparablesEBITDA multiple2.7x
-14.6x8.3x
  Liquidity adjustment0 %-30%10%
Private equity fund investments1,950
Net asset value
Net asset value(f)
  
Long-term debt, other borrowed funds, and deposits(e)
12,078
Option pricingInterest rate correlation(75)%-100% 
  Foreign exchange correlation(75)%-45% 
  Equity correlation(40)%-85% 
  Discounted cash flowsCredit correlation27 %-84% 
(a)The categories presented in the table have been aggregated based upon the product type, which may differ from their classification on the Consolidated Balance Sheet.
(b)
The unobservable inputs and associated input ranges for approximately $1.3 billion of credit derivative receivables and $1.2 billion of trading loans due to increased price transparency. There were no significant transfers into level 3credit derivative payables with underlying mortgage risk have been included in the inputs and ranges provided for the years ended December 31, 2011commercial mortgage-backed securities and 2010. All transfers are assumed to occur at the beginning of the reporting period.loans.
(c)
Approximately 16% of instruments in this category include price as an unobservable input. This balance includes certain securities and illiquid trading loans, which are generally valued using comparable prices and/or yields for similar instruments.
(d)
CLOs are securities backed by corporate loans. At December 31, 2012, $27.9 billion of CLOs were held in the available–for–sale (“AFS”) securities portfolio and $2.1 billion were included in asset-backed securities held in the trading portfolio. Substantially all of the securities are rated “AAA”, “AA” and “A”. The reported range of credit spreads increased from the third quarter to the fourth quarter of 2012, while the reported ranges of other unobservable parameters decreased. This was primarily due to the Firm incorporating a revised valuation model for CLOs, which uses a different combination of valuation parameters as compared with the old model. The change did not have a significant impact on the fair value of the Firm’s CLO positions.
(e)Long-term debt, other borrowed funds, and deposits include structured notes issued by the Firm that are financial instruments containing embedded derivatives. The estimation of the fair value of structured notes is predominantly based on the derivative features embedded within the instruments. The significant unobservable inputs are broadly consistent with those presented for derivative receivables.
(f)The range has not been disclosed due to the wide range of possible values given the diverse nature of the underlying investments.

JPMorgan Chase & Co./2012 Annual Report205
Notes to consolidated financial statements

Changes in and ranges of unobservable inputs
The following discussion provides a description of the impact on a fair value measurement of a change in each unobservable input in isolation, and the interrelationship between unobservable inputs, where relevant and significant. The impact of changes in inputs may not be independent as a change in one unobservable input may give rise to a change in another unobservable input, and where relationships exist between two unobservable inputs, those relationships are discussed below. Relationships may also exist between observable and unobservable inputs (for example, as observable interest rates rise, unobservable prepayment rates decline). Such relationships have not been included in the discussion below. In addition, for each of the individual relationships described below, the inverse relationship would also generally apply.
In addition, the following discussion provides a description of attributes of the underlying instruments and external market factors that affect the range of inputs used in the valuation of the Firm’s positions.
Discount rates and spreads
Yield – The yield of an asset is the interest rate used to discount future cash flows in a discounted cash flow calculation. An increase in the yield, in isolation, would result in a decrease in a fair value measurement.
Credit spread – The credit spread is the amount of additional annualized return over the market interest rate that a market participant would demand for taking exposure to the credit risk of an instrument. The credit spread for an instrument forms part of the discount rate used in a discounted cash flow calculation. Generally, an increase in the credit spread would result in a decrease in a fair value measurement.
The yield and the credit spread of a particular mortgage-backed security or CLO primarily reflect the risk inherent in the instrument. The yield is also impacted by the absolute level of the coupon paid by the instrument (which may not correspond directly to the level of inherent risk). Therefore, the range of yield and credit spreads reflects the range of risk inherent in various instruments owned by the Firm. The risk inherent in mortgage-backed securities is driven by the subordination of the security being valued and the characteristics of the underlying mortgages within the collateralized pool, including borrower FICO scores, loan to value ratios for residential mortgages and the nature of the property and/or any tenants for commercial mortgages. For CLOs, credit spread reflects the market’s implied risk premium based on several factors including the subordination of the investment, the credit quality of underlying borrowers, the specific terms of the loans within the CLO structure, as well as the supply and demand of the instrument. For corporate debt securities, obligations of U.S. states and municipalities and other similar instruments, credit spreads reflect the credit quality of the obligor and the tenor of the obligation.
Performance rates of underlying collateral in collateralized obligations (e.g., MBS, CLOs, etc.)
Prepayment speed – The prepayment speed is a measure of the voluntary unscheduled principal repayments of a prepayable obligation in a collateralized pool. Prepayment speeds generally decline as borrower delinquencies rise. An increase in prepayment speeds, in isolation, would result in a decrease in a fair value measurement of assets valued at a premium to par and an increase in a fair value measurement of assets valued at a discount to par.
Prepayment speeds may vary from collateral pool-to-collateral pool, and are driven by the type and location of the underlying borrower, the remaining tenor of the obligation as well as the level and type (e.g., fixed or floating) of interest rate being paid by the borrower. Typically collateral pools with higher borrower credit quality have a higher prepayment rate than those with lower borrower credit quality, all other factors being equal.
Conditional default rate – The conditional default rate is a measure of the reduction in the outstanding collateral balance underlying a collateralized obligation as a result of defaults. While there is typically no direct relationship between conditional default rates and prepayment speeds, collateralized obligations for which the underlying collateral have high prepayment speeds will tend to have lower conditional default rates. An increase in conditional default rates would generally be accompanied by an increase in loss severity and an increase in credit spreads. An increase in the conditional default rate, in isolation, would result in a decrease in a fair value measurement. Conditional default rates reflect the quality of the collateral underlying a securitization and the structure of the securitization itself. Based on the types of securities owned in the Firm’s market-making portfolios, conditional default rates are most typically at the lower end of the range presented.
Loss severity – The loss severity (the inverse concept is the recovery rate) is the expected amount of future realized losses resulting from the ultimate liquidation of a particular loan, expressed as the net amount of loss relative to the outstanding loan balance. An increase in loss severity is generally accompanied by an increase in conditional default rates. An increase in the loss severity, in isolation, would result in a decrease in a fair value measurement.
The loss severity applied in valuing a mortgage-backed security or a CLO investment depends on a host of factors relating to the underlying obligations (i.e., mortgages or loans). For mortgages, this includes the loan-to-value ratio, the nature of the lender’s charge over the property and various other instrument-specific factors. For CLO investments, loss severity is driven by the characteristics of the underlying loans including the seniority of the loans and the type and amount of any security provided by the obligor.


206JPMorgan Chase & Co./2012 Annual Report


Correlation – Correlation is a measure of the relationship between the movements of two variables (e.g., how the change in one variable influences the change in the other). Correlation is a pricing input for a derivative product where the payoff is driven by one or more underlying risks. Correlation inputs are related to the type of derivative (e.g., interest rate, credit, equity and foreign exchange) due to the nature of the underlying risks. When parameters are positively correlated, an increase in one parameter will result in an increase in the other parameter. When parameters are negatively correlated, an increase in one parameter will result in a decrease in the other parameter. An increase in correlation can result in an increase or a decrease in a fair value measurement. Given a short correlation position, an increase in correlation, in isolation, would generally result in a decrease in a fair value measurement. Correlation inputs between risks within the same asset class are generally narrower than those between underlying risks across asset classes. In addition the ranges of credit correlation inputs tend to be narrower than those affecting other asset classes.
The level of correlation used in the valuation of derivatives with multiple underlying risks depends on a number of factors including the nature of those risks. For example, the correlation between two credit risk exposures would be different than that between two interest rate risk exposures. Similarly, the tenor of the transaction may also impact the correlation input as the relationship between the underlying risks may be different over different time periods. Furthermore, correlation levels are very much dependent on market conditions and could have a relatively wide range of levels within or across asset classes over time, particularly in volatile market conditions.
For the Firm’s derivatives and structured notes positions classified within level 3, the equity, foreign exchange and interest rate correlation inputs used in estimating fair value were concentrated at the upper end of the range presented, while the credit correlation inputs were distributed across the range presented.
Volatility – Volatility is a measure of the variability in possible returns for an instrument, parameter or market index given how much the particular instrument, parameter or index changes in value over time. Volatility is a pricing input for options, including equity options, commodity options, and interest rate options. Generally, the higher the volatility of the underlying, the riskier the instrument. Given a long position in an option, an increase in volatility, in isolation, would generally result in an increase in a fair value measurement.
The level of volatility used in the valuation of a particular option-based derivative depends on a number of factors, including the nature of the risk underlying the option (e.g., the volatility of a particular equity security may be significantly different from that of a particular commodity index), the tenor of the derivative as well as the strike price of the option.
For the Firm’s derivatives and structured notes positions classified within level 3, the equity and interest rate volatility inputs used in estimating fair value were concentrated at the upper end of the range presented, while commodities volatilities were concentrated at the lower end of the range.
EBITDA multiple – EBITDA multiples refer to the input (often derived from the value of a comparable company) that is multiplied by the historic and/or expected earnings before interest, taxes, depreciation and amortization (“EBITDA”) of a company in order to estimate the company’s value. An increase in the EBITDA multiple, in isolation, net of adjustments, would result in an increase in a fair value measurement.
Net asset value – Net asset value is the total value of a fund’s assets less liabilities. An increase in net asset value would result in an increase in a fair value measurement.
Changes in level 3 recurring fair value measurements
The following tables include a rollforward of the Consolidated Balance 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, 20112012, 20102011 and 20092010. When a determination is made to classify a financial instrument within level 3, the determination is based on the significance of the unobservable parameters to the overall fair value measurement. However, level 3 financial instruments typically include, in addition to the unobservable or level 3 components, observable
components (that is, components that are actively quoted and can be validated to external sources); accordingly, the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology. Also, the Firm risk-manages the observable components of level 3 financial instruments using securities and derivative positions that are classified within level 1 or 2 of the fair value hierarchy; as these level 1 and level 2 risk management instruments are not included below, the gains or losses in the following tables do not reflect the effect of the Firm’s risk management activities related to such level 3 instruments.


JPMorgan Chase & Co./20112012 Annual Report 191207
Notes to consolidated financial statements

Fair value measurements using significant unobservable inputs  Fair value measurements using significant unobservable inputs  
Year ended
December 31, 2011
(in millions)
Fair value at January 1, 2011Total realized/unrealized gains/(losses) 
Transfers into and/or out of level 3(g)
Fair value at
Dec. 31, 2011
Change in unrealized gains/(losses) related to financial instruments held at Dec. 31, 2011
Purchases(f)(g)
SalesIssuancesSettlements
Year ended
December 31, 2012
(in millions)
Fair value at January 1, 2012Total realized/unrealized gains/(losses) 
Transfers into and/or out of level 3(h)
Fair value at Dec. 31, 2012 Change in unrealized gains/(losses) related to financial instruments held at Dec. 31, 2012
Purchases(f)(g)
Sales Settlements
Assets:              
Trading assets:              
Debt instruments:              
Mortgage-backed securities:              
U.S. government agencies$174
$24
 $28
$(39)$—
$(43)$(58) $86
 $(51) $86
$(44) $575
$(103) $(16)$—
$498
 $(21) 
Residential – nonagency687
109
 708
(432)—
(221)(55) 796
 (9) 796
151
 417
(533) (145)(23)663
 74
 
Commercial – nonagency2,069
37
 796
(973)—
(171)—
 1,758
 33
 1,758
(159) 287
(475) (104)(100)1,207
 (145) 
Total mortgage-backed securities2,930
170
 1,532
(1,444)—
(435)(113) 2,640
 (27) 2,640
(52) 1,279
(1,111) (265)(123)2,368
 (92) 
Obligations of U.S. states and municipalities2,257
9
 807
(1,465)—
(1)12
 1,619
 (11) 1,619
37
 336
(552) (4)—
1,436
 (15) 
Non-U.S. government debt securities202
35
 552
(531)—
(80)(74) 104
 38
 104
(6) 661
(668) (24)—
67
 (5) 
Corporate debt securities4,946
32
 8,080
(5,939)—
(1,005)259
 6,373
 26
 6,373
187
 8,391
(6,186) (3,045)(412)5,308
 689
 
Loans13,144
329
 5,532
(3,873)—
(2,691)(232) 12,209
 142
 12,209
836
 5,342
(3,269) (3,801)(530)10,787
 411
 
Asset-backed securities8,460
90
 4,185
(4,368)—
(424)22
 7,965
 (217) 7,965
272
 2,550
(6,468) (614)(9)3,696
 184
 
Total debt instruments31,939
665
 20,688
(17,620)—
(4,636)(126) 30,910
 (49) 30,910
1,274
 18,559
(18,254) (7,753)(1,074)23,662
 1,172
 
Equity securities1,685
267
 180
(541)—
(352)(62) 1,177
 278
 1,177
(209) 460
(379) (12)77
1,114
 (112) 
Other930
48
 36
(39)—
(95)—
 880
 79
 880
186
 68
(108) (163)—
863
 180
 
Total trading assets – debt and equity instruments34,554
980
(b) 
20,904
(18,200)—
(5,083)(188) 32,967
 308
(b) 
32,967
1,251
(c) 
19,087
(18,741) (7,928)(997)25,639
 1,240
(c) 
Net derivative receivables:(a)              
Interest rate2,836
5,205
 511
(219)—
(4,534)(238) 3,561
 1,497
 3,561
6,930
 406
(194) (7,071)(310)3,322
 905
 
Credit5,386
2,240
 22
(13)—
116
(19) 7,732
 2,744
 7,732
(4,487) 124
(84) (1,416)4
1,873
 (3,271) 
Foreign exchange(614)(1,913) 191
(20)—
886
207
 (1,263) (1,878) (1,263)(800) 112
(184) 436
(51)(1,750) (957) 
Equity(2,446)(60) 715
(1,449)—
37
98
 (3,105) (132) (3,105)168
 1,676
(2,579) 899
1,135
(1,806) 580
 
Commodity(805)596
 328
(350)—
(294)(162) (687) 208
 (687)(673) 74
64
 1,278
198
254
 (160) 
Total net derivative receivables4,357
6,068
(b) 
1,767
(2,051)—
(3,789)(114) 6,238
 2,439
(b) 
6,238
1,138
(c) 
2,392
(2,977) (5,874)976
1,893
 (2,903)
(c) 
Available-for-sale securities:              
Asset-backed securities13,775
(95) 15,268
(1,461)—
(2,529)—
 24,958
 (106) 24,958
135
 9,280
(3,361) (3,104)116
28,024
 118
 
Other512
—
 57
(15)—
(26)—
 528
 8
 528
55
 667
(113) (245)—
892
 59
 
Total available-for-sale securities14,287
(95)
(c) 
15,325
(1,476)—
(2,555)—
 25,486
 (98)
(c) 
25,486
190
(d) 
9,947
(3,474) (3,349)116
28,916
 177
(d) 
Loans1,466
504
(b) 
326
(9)—
(639)(1) 1,647
 484
(b) 
1,647
695
(c) 
1,536
(22) (1,718)144
2,282
 12
(c) 
Mortgage servicing rights13,649
(7,119)
(d) 
2,603
—
—
(1,910)—
 7,223
 (7,119)
(d) 
7,223
(635)
(e) 
2,833
(579) (1,228)—
7,614
 (635)
(e) 
Other assets:              
Private equity investments7,862
943
(b) 
1,452
(2,746)—
(594)(166) 6,751
 (242)
(b) 
6,751
420
(c) 
1,545
(512) (977)(46)7,181
 333
(c) 
All other4,179
(54)
(e) 
938
(139)—
(521)(29) 4,374
 (83)
(e) 
4,374
(195)
(f) 
818
(238) (501)—
4,258
 (200)
(f) 
              
Fair value measurements using significant unobservable inputs  Fair value measurements using significant unobservable inputs  
Year ended
December 31, 2011
(in millions)
Fair value at January 1, 2011Total realized/unrealized (gains)/losses 
Transfers into and/or out of level 3(g)
Fair value at
Dec. 31, 2011
Change in unrealized (gains)/losses related to financial instruments held at Dec. 31, 2011
Purchases(f)(g)
SalesIssuancesSettlements
Year ended
December 31, 2012
(in millions)
Fair value at January 1, 2012Total realized/unrealized (gains)/losses 
Transfers into and/or out of level 3(h)
Fair value at Dec. 31, 2012 Change in unrealized (gains)/losses related to financial instruments held at Dec. 31, 2012
Purchases(f)(g)
SalesIssuancesSettlements
Liabilities:(a)(b)
              
Deposits$773
$15
(b) 
$—
$—
$433
$(386)$583
 $1,418
 $4
(b) 
$1,418
$212
(c) 
$—
$—
$1,236
$(380)$(503)$1,983
 $185
(c) 
Other borrowed funds1,384
(244)
(b) 
—
—
1,597
(834)(396) 1,507
 (85)
(b) 
1,507
148
(c) 
—
—
1,646
(1,774)92
1,619
 72
(c) 
Trading liabilities – debt and equity instruments54
17
(b) 
(533)778
—
(109)4
 211
 (7)
(b) 
211
(16)
(c) 
(2,875)2,940
—
(50)(5)205
 (12)
(c) 
Accounts payable and other liabilities236
(61)
(e) 
—
—
—
(124)—
 51
 5
(e) 
51
1
(f) 
—
—
—
(16)—
36
 1
(f) 
Beneficial interests issued by consolidated VIEs873
17
(b) 
—
—
580
(679)—
 791
 (15)
(b) 
791
181
(c) 
—
—
221
(268)—
925
 143
(c) 
Long-term debt13,044
60
(b) 
—
—
2,564
(3,218)(2,140) 10,310
 288
(b) 
10,310
328
(c) 
—
—
3,662
(4,511)(1,313)8,476
 (101)
(c) 

192208 JPMorgan Chase & Co./20112012 Annual Report


  Fair value measurements using significant unobservable inputs 
 
Year ended
December 31, 2010
(in millions)
Fair value at January 1, 2010Total realized/ unrealized gains/(losses)Purchases, issuances, settlements, net
Transfers into and/or out of level 3(g)
Fair value at Dec. 31, 2010Change in unrealized gains/(losses) related to financial instruments held at Dec. 31, 2010
 
 Assets:        
 Trading assets:        
 Debt instruments:        
 Mortgage-backed securities:        
 U.S. government agencies$260
$24
 $(107)$(3)$174
$(31) 
 Residential – nonagency1,115
178
 (564)(42)687
110
 
 Commercial – nonagency1,770
230
 (33)102
2,069
130
 
 Total mortgage-backed securities3,145
432
 (704)57
2,930
209
 
 Obligations of U.S. states and municipalities1,971
2
 142
142
2,257
(30) 
 Non-U.S. government debt securities89
(36) 194
(45)202
(8) 
 Corporate debt securities5,241
(325) 115
(85)4,946
28
 
 Loans13,218
(40) 1,296
(1,330)13,144
(385) 
 Asset-backed securities8,620
237
 (408)11
8,460
195
 
 Total debt instruments32,284
270
 635
(1,250)31,939
9
 
 Equity securities1,956
133
 (351)(53)1,685
199
 
 Other1,441
211
 (801)79
930
299
 
 Total trading assets – debt and equity instruments35,681
614
(b) 
(517)(1,224)34,554
507
(b) 
 Net derivative receivables:        
 Interest rate2,040
3,057
 (2,520)259
2,836
487
 
 Credit10,350
(1,757) (3,102)(105)5,386
(1,048) 
 Foreign exchange1,082
(913) (434)(349)(614)(464) 
 Equity(2,306)(194) (82)136
(2,446)(212) 
 Commodity(329)(700) 134
90
(805)(76) 
 Total net derivative receivables10,837
(507)
(b) 
(6,004)31
4,357
(1,313)
(b) 
 Available-for-sale securities:        
 Asset-backed securities12,732
(146) 1,189
—
13,775
(129) 
 Other461
(49) 37
63
512
18
 
 Total available-for-sale securities13,193
(195)
(c) 
1,226
63
14,287
(111)
(c) 
 Loans990
145
(b) 
323
8
1,466
37
(b) 
 Mortgage servicing rights15,531
(2,268)
(d) 
386
—
13,649
(2,268)
(d) 
 Other assets:       
 
 Private equity investments6,563
1,038
(b) 
715
(454)7,862
688
(b) 
 All other9,521
(113)
(e) 
(5,132)(97)4,179
37
(e) 
          
  Fair value measurements using significant unobservable inputs 
 
Year ended
December 31, 2010
(in millions)
Fair value at January 1, 2010Total realized/ unrealized (gains)/lossesPurchases, issuances, settlements, net
Transfers into and/or out of level 3(g)
Fair value at Dec. 31, 2010Change in unrealized (gains)/losses related to financial instruments held at Dec. 31, 2010
 
 
Liabilities:(a)
        
 Deposits$476
$54
(b) 
$(86)$329
$773
$(77)
(b) 
 Other borrowed funds542
(242)
(b) 
1,326
(242)1,384
445
(b) 
 Trading liabilities – debt and equity instruments10
2
(b) 
19
23
54
—
 
 Accounts payable and other liabilities355
(138)
(e) 
19
—
236
37
(e) 
 Beneficial interests issued by consolidated VIEs625
(7)
(b) 
87
168
873
(76)
(b) 
 Long-term debt18,287
(532)
(b) 
(4,796)85
13,044
662
(b) 
 Fair value measurements using significant unobservable inputs  
Year ended
December 31, 2011
(in millions)
Fair value at January 1, 2011Total realized/unrealized gains/(losses)    
Transfers into and/or out of level 3(h)
Fair value at
Dec. 31, 2011
Change in unrealized gains/(losses) related to financial instruments held at Dec. 31, 2011
Purchases(g)
Sales Settlements
Assets:            
Trading assets:            
Debt instruments:            
Mortgage-backed securities:            
U.S. government agencies$174
$24
 $28
$(39) $(43)$(58)$86
 $(51) 
Residential – nonagency687
109
 708
(432) (221)(55)796
 (9) 
Commercial – nonagency2,069
37
 796
(973) (171)—
1,758
 33
 
Total mortgage-backed securities2,930
170
 1,532
(1,444) (435)(113)2,640
 (27) 
Obligations of U.S. states and municipalities2,257
9
 807
(1,465) (1)12
1,619
 (11) 
Non-U.S. government debt securities202
35
 552
(531) (80)(74)104
 38
 
Corporate debt securities4,946
32
 8,080
(5,939) (1,005)259
6,373
 26
 
Loans13,144
329
 5,532
(3,873) (2,691)(232)12,209
 142
 
Asset-backed securities8,460
90
 4,185
(4,368) (424)22
7,965
 (217) 
Total debt instruments31,939
665
 20,688
(17,620) (4,636)(126)30,910
 (49) 
Equity securities1,685
267
 180
(541) (352)(62)1,177
 278
 
Other930
48
 36
(39) (95)—
880
 79
 
Total trading assets – debt and equity instruments34,554
980
(c) 
20,904
(18,200) (5,083)(188)32,967
 308
(c) 
Net derivative receivables:(a)
            
Interest rate2,836
5,205
 511
(219) (4,534)(238)3,561
 1,497
 
Credit5,386
2,240
 22
(13) 116
(19)7,732
 2,744
 
Foreign exchange(614)(1,913) 191
(20) 886
207
(1,263) (1,878) 
Equity(2,446)(60) 715
(1,449) 37
98
(3,105) (132) 
Commodity(805)596
 328
(350) (294)(162)(687) 208
 
Total net derivative receivables4,357
6,068
(c) 
1,767
(2,051) (3,789)(114)6,238
 2,439
(c) 
Available-for-sale securities:            
Asset-backed securities13,775
(95) 15,268
(1,461) (2,529)—
24,958
 (106) 
Other512
—
 57
(15) (26)—
528
 8
 
Total available-for-sale securities14,287
(95)
(d) 
15,325
(1,476) (2,555)—
25,486
 (98)
(d) 
Loans1,466
504
(c) 
326
(9) (639)(1)1,647
 484
(c) 
Mortgage servicing rights13,649
(7,119)
(e) 
2,603
—
 (1,910)—
7,223
 (7,119)
(e) 
Other assets:            
Private equity investments7,862
943
(c) 
1,452
(2,746) (594)(166)6,751
 (242)
(c) 
All other4,179
(54)
(f) 
938
(139) (521)(29)4,374
 (83)
(f) 
             
 Fair value measurements using significant unobservable inputs  
Year ended
December 31, 2011
(in millions)
Fair value at January 1, 2011Total realized/unrealized (gains)/losses    
Transfers into and/or out of level 3(h)
Fair value at Dec. 31, 2011Change in unrealized (gains)/losses related to financial instruments held at Dec. 31, 2011
Purchases(g)
SalesIssuancesSettlements
Liabilities:(b)
            
Deposits$773
$15
(c) 
$—
$—
$433
$(386)$583
$1,418
 $4
(c) 
Other borrowed funds1,384
(244)
(c) 
—
—
1,597
(834)(396)1,507
 (85)
(c) 
Trading liabilities – debt and equity instruments54
17
(c) 
(533)778
—
(109)4
211
 (7)
(c) 
Accounts payable and other liabilities236
(61)
(f) 
—
—
—
(124)—
51
 5
(f) 
Beneficial interests issued by consolidated VIEs873
17
(c) 
—
—
580
(679)—
791
 (15)
(c) 
Long-term debt13,044
60
(c) 
—
—
2,564
(3,218)(2,140)10,310
 288
(c) 


JPMorgan Chase & Co./20112012 Annual Report 193209
Notes to consolidated financial statements

  Fair value measurements using significant unobservable inputs  
 
Year ended
December 31, 2009
(in millions)
Fair Value at January 1, 2009Total realized/unrealized gains/(losses)Purchases, issuances settlements, net
Transfers into and/or out of level 3(g)
Fair value at Dec. 31,2009Change in unrealized gains/(losses) related to financial instruments held at Dec. 31, 2009
 
 Assets:        
 Trading assets:        
 Debt instruments:        
 Mortgage-backed securities:        
 U.S. government agencies$163
$(38) $62
$73
$260
$(38) 
 Residential – nonagency3,339
(782) (245)(1,197)1,115
(871) 
 Commercial – nonagency2,487
(242) (325)(150)1,770
(313) 
 Total mortgage-backed securities5,989
(1,062) (508)(1,274)3,145
(1,222) 
 Obligations of U.S. states and municipalities2,641
(22) (648)—
1,971
(123) 
 Non-U.S. government debt securities11
36
 (22)64
89
32
 
 Corporate debt securities5,280
38
 (3,416)3,339
5,241
(72) 
 Loans17,091
(871) (3,497)495
13,218
(1,167) 
 Asset-backed securities7,802
1,438
 (431)(189)8,620
736
 
 Total debt instruments38,814
(443) (8,522)2,435
32,284
(1,816) 
 Equity securities1,380
(149) (512)1,237
1,956
(51) 
 Other1,694
(12) (273)32
1,441
(52) 
 Total trading assets – debt and equity instruments41,888
(604)
(b) 
(9,307)3,704
35,681
(1,919)
(b) 
 Total net derivative receivables9,039
(11,473)
(b) 
(3,428)16,699
10,837
(10,902)
(b) 
 Available-for-sale securities:        
 Asset-backed securities11,447
(2) 1,112
175
12,732
(48) 
 Other944
(269) 302
(516)461
43
 
 Total available-for-sale securities12,391
(271)
(c) 
1,414
(341)13,193
(5)
(c) 
 Loans2,667
(448)
(b) 
(1,906)677
990
(488)
(b) 
 Mortgage servicing rights9,403
5,807
(d) 
321
—
15,531
5,807
(d) 
 Other assets:        
 Private equity investments6,369
(407)
(b) 
582
19
6,563
(369)
(b) 
 All other8,114
(676)
(e) 
2,439
(356)9,521
(612)
(e) 
  Fair value measurements using significant unobservable inputs  
 
Year ended
December 31, 2009
(in millions)
Fair value at January 1, 2009Total realized/unrealized (gains)/lossesPurchases, issuances settlements, net
Transfers into and/or out of level 3(e)
Fair value at Dec.31, 2009Change in unrealized (gains)/losses related to financial instruments held at Dec. 31, 2009
 
 
Liabilities:(a)
        
 Deposits$1,235
$47
(b) 
$(870)$64
$476
$(36)
(b) 
 Other borrowed funds101
(73)
(b) 
621
(107)542
9
(b) 
 Trading liabilities:        
 Debt and equity instruments288
64
(b) 
(339)(3)10
12
(b) 
 Accounts payable and other liabilities—
(55)
(b) 
410
—
355
(29)
(b) 
 Beneficial interests issued by consolidated VIEs—
344
(b) 
(598)879
625
327
(b) 
 Long-term debt16,548
1,367
(b) 
(2,738)3,110
18,287
1,728
(b) 
  Fair value measurements using significant unobservable inputs 
 
Year ended
December 31, 2010
(in millions)
Fair value at January 1, 2010Total realized/ unrealized gains/(losses)Purchases, issuances, settlements, net
Transfers into and/or out of level 3(h)
Fair value at Dec. 31, 2010Change in unrealized gains/(losses) related to financial instruments held at Dec. 31, 2010
 
 Assets:        
 Trading assets:        
 Debt instruments:        
 Mortgage-backed securities:        
 U.S. government agencies$260
$24
 $(107)$(3)$174
$(31) 
 Residential – nonagency1,115
178
 (564)(42)687
110
 
 Commercial – nonagency1,770
230
 (33)102
2,069
130
 
 Total mortgage-backed securities3,145
432
 (704)57
2,930
209
 
 Obligations of U.S. states and municipalities1,971
2
 142
142
2,257
(30) 
 Non-U.S. government debt securities89
(36) 194
(45)202
(8) 
 Corporate debt securities5,241
(325) 115
(85)4,946
28
 
 Loans13,218
(40) 1,296
(1,330)13,144
(385) 
 Asset-backed securities8,620
237
 (408)11
8,460
195
 
 Total debt instruments32,284
270
 635
(1,250)31,939
9
 
 Equity securities1,956
133
 (351)(53)1,685
199
 
 Other1,441
211
 (801)79
930
299
 
 Total trading assets – debt and equity instruments35,681
614
(c) 
(517)(1,224)34,554
507
(c) 
 
Net derivative receivables:(a)
  
  
 
 
 
 
 Interest rate2,040
3,057
 (2,520)259
2,836
487
 
 Credit10,350
(1,757) (3,102)(105)5,386
(1,048) 
 Foreign exchange1,082
(913) (434)(349)(614)(464) 
 Equity(2,306)(194) (82)136
(2,446)(212) 
 Commodity(329)(700) 134
90
(805)(76) 
 Total net derivative receivables10,837
(507)
(c) 
(6,004)31
4,357
(1,313)
(c) 
 Available-for-sale securities:  
  
 
 
 
 
 Asset-backed securities12,732
(146) 1,189
—
13,775
(129) 
 Other461
(49) 37
63
512
18
 
 Total available-for-sale securities13,193
(195)
(d) 
1,226
63
14,287
(111)
(d) 
 Loans990
145
(c) 
323
8
1,466
37
(c) 
 Mortgage servicing rights15,531
(2,268)
(e) 
386
—
13,649
(2,268)
(e) 
 Other assets:  
  
 
 
 
 
 Private equity investments6,563
1,038
(c) 
715
(454)7,862
688
(c) 
 All other9,521
(113)
(f) 
(5,132)(97)4,179
37
(f) 
          
  Fair value measurements using significant unobservable inputs 
 
Year ended
December 31, 2010
(in millions)
Fair value at January 1, 2010Total realized/ unrealized (gains)/lossesPurchases, issuances, settlements, net
Transfers into and/or out of level 3(h)
Fair value at Dec. 31, 2010Change in unrealized (gains)/losses related to financial instruments held at Dec. 31, 2010
 
 
Liabilities:(b)
        
 Deposits$476
$54
(c) 
$(86)$329
$773
$(77)
(c) 
 Other borrowed funds542
(242)
(c) 
1,326
(242)1,384
445
(c) 
 Trading liabilities – debt and equity instruments10
2
(c) 
19
23
54
—
 
 Accounts payable and other liabilities355
(138)
(f) 
19
—
236
37
(f) 
 Beneficial interests issued by consolidated VIEs625
(7)
(c) 
87
168
873
(76)
(c) 
 Long-term debt18,287
(532)
(c) 
(4,796)85
13,044
662
(c) 
(a)All level 3 derivatives are presented on a net basis, irrespective of underlying counterparty.
(b)
Level 3 liabilities as a percentage of total Firm liabilities accounted for at fair value (including liabilities measured at fair value on a nonrecurring basis) were 21%19%, 23%22% and 29%23% at December 31, 20112012, 20102011 and 20092010, respectively.
(b)(c)Predominantly reported in principal transactions revenue, except for changes in fair value for Retail Financial ServicesConsumer & Community Banking (“RFS”CCB”) mortgage loans and lending-related commitments originated with the intent to sell, which are reported in mortgage fees and related income.
(c)(d)
Realized gains/(losses) on available-for-sale (“AFS”)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)145 million, $(66)(240) million, and $(345)(66) million for the years ended December 31, 20112012, 20102011 and 20092010, respectively. Unrealized gains/(losses) recorded on AFS securities in OCI were $14545 million, $(129)145 million and $74(129) million for the years ended December 31, 20112012, 20102011 and 20092010, respectively.
(d)(e)Changes in fair value for RFSCCB mortgage servicing rights are reported in mortgage fees and related income.
(e)(f)Largely reported in other income.
(f)(g)Loan originations are included in purchases.
(g)(h)All transfers into and/or out of level 3 are assumed to occur at the beginning of the reporting period.

210JPMorgan Chase & Co./2012 Annual Report


Level 3 analysis
Consolidated Balance Sheets changes
Level 3 assets (including assets measured at fair value on a nonrecurring basis) were 4.4% of total Firm assets at December 31, 2012. The following describes significant changes to level 3 assets since December 31, 2011, for those items measured at fair value on a recurring basis. For further information on changes impacting items measured at fair value on a nonrecurring basis, see Assets and liabilities measured at fair value on a nonrecurring basis on page 212 of this Annual Report.
For the year ended December 31, 2012
Level 3 assets were $99.1 billion at December 31, 2012, reflecting a decrease of $14.3 billion from December 31, 2011, due to the following:
$11.8 billion decrease in gross derivative receivables, predominantly driven by a $10.6 billion decrease from the impact of tightening reference entity credit spreads and risk reductions of credit derivatives and $1.6 billion decrease due to fluctuation in foreign exchange rates;
$7.3 billion decrease in trading assets – debt and equity instruments, predominantly driven by sales and settlements of ABS, trading loans, and corporate debt securities.
The decreases above are partially offset by:
$3.1 billion increase in asset-backed AFS securities, predominantly driven by purchases of CLOs.

Gains and Losses
The following describes significant components of total realized/unrealized gains/(losses) for instruments measured at fair value on a recurring basis for the years ended 2012, 2011 and 2010. For further information on these instruments, see Changes in level 3 recurring fair value measurements rollforward tables on pages 207–210 of this Annual Report.
2012
$1.3 billion of net gains on trading assets - debt and equity instruments, largely driven by tightening of credit spreads and fluctuation in foreign exchange rates; and
$1.1 billion of net gains on derivatives, driven by $6.9 billion of net gains predominantly on interest rate lock commitments due to increased volumes and lower interest rates, partially offset by $4.5 billion of net losses on credit derivatives largely as a result of tightening of reference entity credit spreads.
2011
$7.1 billion of losses on MSRs. For further discussion of the change, refer to Note 17 on pages 291–295 of this Annual Report; and
$6.1 billion of net gains on derivatives, related to declining interest rates and widening of reference entity credit spreads, partially offset by losses due to fluctuation in foreign exchange rates.
2010
$2.3 billion of losses on MSRs; For further discussion of the change, refer to Note 17 on pages 291–295 of this Annual Report; and
$1.0 billion gain in private equity largely driven by gains on investments in the portfolio.



194JPMorgan Chase & Co./20112012 Annual Report211

Notes to consolidated financial statements

Credit adjustments
When determining the fair value of an instrument, it may be necessary to record adjustments to the Firm’s estimates of fair value in order to reflect the counterparty credit quality and Firm’s own creditworthiness:
Credit valuation adjustments (“CVA”) are taken to reflect the credit quality of a counterparty in the valuation of derivatives. CVA adjustments 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 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 Firm’s 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 generally consistent with CVA and incorporates JPMorgan Chase’s credit spread as observed through the credit default swap (“CDS”) market.
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)20122011
Derivative receivables balance (net of derivatives CVA)$74,983
$92,477
Derivatives CVA(a)
(4,238)(6,936)
Derivative payables balance (net of derivatives DVA)70,656
74,977
Derivatives DVA(830)(1,420)
Structured notes balance (net of structured notes DVA)(b)(c)
48,112
49,229
Structured notes DVA(1,712)(2,052)
(a)Derivatives CVA, gross of hedges, includes results managed by the credit portfolio and other lines of business within the Corporate & Investment Bank (“CIB”).
(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 Firm’s election under the fair value option. For further information on these elections, see Note 4 on pages 214–216 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)
2012 2011 2010
Credit adjustments:     
Derivative CVA(a) 
$2,698
 $(2,574) $(665)
Derivative DVA(590) 538
 41
Structured notes DVA(b) 
(340) 899
 468
(a)Derivatives CVA, gross of hedges, includes results managed by the credit portfolio and other lines of business within the CIB.
(b)
Structured notes are measured at fair value based on the Firm’s election under the fair value option. For further information on these elections, see Note 4 on pages 214–216 of this 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, 20112012 and 2010,2011, assets measured at fair value on a nonrecurring basis were $5.35.1 billion and $9.95.3 billion, respectively, comprised predominantly of loans. At December 31, 2011,2012, $369667 million and $4.94.4 billion of these assets were classified in levels 2 and 3 of the fair value hierarchy, respectively. At December 31, 2010,2011, $312369 million and $9.64.9 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, 20112012 and 2010.2011. For the years ended December 31, 20112012 and 2010,2011, there were no significant transfers between levels 1, 2, and 3.
Of the $5.1 billion of assets measured at fair value on a nonrecurring basis, $4.0 billion related to residential real estate loans at the net realizable value of the underlying collateral (i.e., collateral dependent loans). These amounts are classified as level 3, as they are valued using a broker’s price opinion and discounted based upon the Firm’s experience with actual liquidation values. These discounts to the broker price opinions ranged from 22% to 66%, with a weighted average of 29%.
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, 2012, 2011 2010 and 2009,2010, related to financial instruments held at those dates were losses of $2.21.6 billion, $3.62.2 billion and $4.73.6 billion, respectively; these losses were predominantly associated with loans. The changes reported for the year ended December 31, 2012, included the impact of charge-offs recognized on residential real estate loans discharged under Chapter 7 bankruptcy, as described in Note 14 on page 259 of this Annual Report.
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 231–252 of this Annual Report.
Level 3 analysis
Level 3 assets at December 31, 2011250–275, 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 225–230 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 borrower-specific 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 267–271 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



212JPMorgan Chase & Co./20112012 Annual Report195
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 267–271 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 Firm’s own creditworthiness. The market’s view of the Firm’s 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)20112010
Derivative receivables balance (net of derivatives CVA)$92,477
$80,481
Derivatives CVA(a)
(6,936)(4,362)
Derivative payables balance (net of derivatives DVA)74,977
69,219
Derivatives DVA(1,420)(882)
Structured notes balance (net of structured notes DVA)(b)(c)
49,229
53,139
Structured notes DVA(2,052)(1,153)
(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 Firm’s election under the fair value option. For further information on these elections, see Note 4 on pages 198–200 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)
 2011 2010 2009
Credit adjustments:      
Derivative CVA(a) 
 $(2,574) $(665) $5,869
Derivative DVA 538
 41
 (548)
Structured note DVA(b) 
 899
 468
 (1,748)
(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 Firm’s election under the fair value option. For further information on these elections, see Note 4 on pages 198–200 of this Annual Report.

Additional disclosures about the fair value of financial instruments (including financial instrumentsthat are not carried on the Consolidated Balance Sheets at fair value)value
U.S. GAAP requires disclosure of the estimated fair value of certain financial instruments, and the methods and significant assumptions used to estimate their fair value. Financial instruments within the scope of these disclosure requirements are included in the following table. However, certain financial instruments and all nonfinancial instruments are excluded from the scope of these disclosure requirements. Accordingly, the fair value disclosures provided in the following table include only a partial estimate of the fair value of JPMorgan Chase’s assets and liabilities. For example, the Firm has developed long-term relationships with its customers through its deposit base and credit card accounts, commonly referred to as core deposit intangibles and credit card relationships. In the opinion of management, these items, in the aggregate, add significant value to JPMorgan Chase, but their fair value is not disclosed in this Note.



196JPMorgan 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 short-term nature and generally negligible credit risk. These instruments include cash and due from banks; deposits with banks; federal funds sold; securities purchased under resale agreements and securities borrowed 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”));funds; 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 at December 31, 2012 and 2011, of financial assets and liabilities.liabilities that are not carried on the Firm’s Consolidated Balance Sheets at fair value (i.e. excluding financial instruments which are carried at fair value on a recurring basis. At December 31, 2012, information is provided on their classification within the fair value hierarchy. For additional information regarding the financial instruments within the scope of this disclosure, and the methods and significant assumptions used to estimate their fair value, see pages 196–200 of this Note.
 2011 2010
December 31, (in billions)Carrying valueEstimated fair value Carrying valueEstimated fair value
Financial assets     
Assets for which fair value approximates carrying value$144.9
$144.9
 $49.2
$49.2
Accrued interest and accounts receivable61.5
61.5
 70.1
70.1
Federal funds sold and securities purchased under resale agreements (included $24.9 and $20.3 at fair value)
235.3
235.3
 222.6
222.6
Securities borrowed (included $15.3 and $14.0 at fair value)
142.5
142.5
 123.6
123.6
Trading assets444.0
444.0
 489.9
489.9
Securities (included $364.8 and $316.3 at fair value)
364.8
364.8
 316.3
316.3
Loans (included $2.1 and $2.0 at fair value)(a)
696.1
695.8
 660.7
663.5
Mortgage servicing rights at fair value7.2
7.2
 13.6
13.6
Other (included $16.5 and $18.2 at fair value)
66.3
66.8
 64.9
65.0
Financial liabilities     
Deposits (included $4.9 and $4.4 at fair value)
$1,127.8
$1,128.3
 $930.4
$931.5
Federal funds purchased and securities loaned or sold under repurchase agreements (included $9.5 and $4.1 at fair value)
213.5
213.5
 276.6
276.6
Commercial paper51.6
51.6
 35.4
35.4
Other borrowed funds (included $9.6 and $9.9 at fair value)(b)
21.9
21.9
 34.3
34.3
Trading liabilities141.7
141.7
 146.2
146.2
Accounts payable and other liabilities (included $0.1 and $0.2 at fair value)
167.0
166.9
 138.2
138.2
Beneficial interests issued by consolidated VIEs (included $1.3 and $1.5 at fair value)
66.0
66.2
 77.6
77.9
Long-term debt and junior subordinated deferrable interest debentures (included $34.7 and $38.8 at fair value)(b)
256.8
254.2
 270.7
271.9
 2012 2011
  Estimated fair value hierarchy    
December 31,
(in billions)
Carrying
value
Level 1Level 2Level 3
Total estimated
fair value
 
Carrying
value
Estimated
fair value
Financial assets        
Cash and due from banks$53.7
$53.7
$—
$—
$53.7
 $59.6
$59.6
Deposits with banks121.8
114.1
7.7
—
121.8
 85.3
85.3
Accrued interest and accounts receivable60.9
—
60.3
0.6
60.9
 61.5
61.5
Federal funds sold and securities purchased under resale agreements272.0
—
272.0
—
272.0
 213.1
213.1
Securities borrowed108.8
—
108.8
—
108.8
 127.2
127.2
Loans, net of allowance for loan losses(a)
709.3
—
26.4
685.4
711.8
 694.0
693.7
Other49.7
—
42.7
7.4
50.1
 49.8
50.3
Financial liabilities        
Deposits$1,187.9
$—
$1,187.2
$1.2
$1,188.4
 $1,122.9
$1,123.4
Federal funds purchased and securities loaned or sold under repurchase agreements235.7
—
235.7
—
235.7
 206.7
206.7
Commercial paper55.4
—
55.4
—
55.4
 51.6
51.6
Other borrowed funds15.0
—
15.0
—
15.0
 12.3
12.3
Accounts payable and other liabilities156.5
—
153.8
2.5
156.3
 166.9
166.8
Beneficial interests issued by consolidated VIEs62.0
—
57.7
4.4
62.1
 64.7
64.9
Long-term debt and junior subordinated deferrable interest debentures218.2
—
220.0
5.4
225.4
 222.1
219.5
(a)
Fair value is typically estimated using a discounted cash flow model that incorporates the characteristics of the underlying loans (including principal, contractual interest rate and contractual fees) and other key inputs, including expected lifetime credit losses, interest rates, prepayment rates, and primary origination or secondary market spreads. For certain loans, the fair value is measured based on the value of the underlying collateral. The difference between the estimated fair value and carrying value of a financial asset or liability is the result of the different methodologies used to determine fair value as compared with carrying value. For example, credit losses are estimated for a financial asset’s remaining life in a fair value calculation but are estimated for a loss emergence period in athe allowance for loan loss reserve calculation; future loan income (interest and fees) is incorporated in a fair value calculation but is generally not considered in athe allowance for loan loss reserve calculation.losses. For a further discussion of the Firm’s methodologies for estimating the fair value of loans and lending-related commitments, see pages 186–188page 198 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./20112012 Annual Report 197213
Notes to consolidated financial statements

The majority of the Firm’s 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 Firm’s wholesale lending-related commitments were as follows for the periods indicated.
2012 2011
2011 2010 Estimated fair value hierarchy   
December 31, (in billions)
Carrying value(a)
Estimated fair value 
Carrying value(a)
Estimated fair value
Carrying value(a)
Level 1Level 2Level 3Total estimated fair value 
Carrying value(a)
Estimated fair value
Wholesale lending-related commitments$0.7
$3.4
 $0.7
$0.9
$0.7
$—
$—
$1.9
$1.9
 $0.7
$3.4
(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 283–289 of this Annual Report; for further information on the valuation of lending-related commitments, see pages 186–188page 198 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 market (market approximates fair value.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) 2011 2010 2009 2012 2011 2010
Trading assets – debt and equity instruments(a)
 $393,890
 $354,441
 $318,063
 $349,337
 $393,890
 $354,441
Trading assets – derivative receivables 90,003
 84,676
 110,457
 85,744
 90,003
 84,676
Trading liabilities – debt and equity instruments(a)(b)
 81,916
 78,159
 60,224
 69,001
 81,916
 78,159
Trading liabilities – derivative payables 71,539
 65,714
 77,901
 76,162
 71,539
 65,714
(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.
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.


214JPMorgan Chase & Co./2012 Annual Report


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 IB’sCIB’s client-driven activities. (Structured notes are financial instruments that contain embedded derivatives.)
Long-term beneficial interests issued by IB’sCIB’s consolidated securitization trusts where the underlying assets are carried at fair value.


198JPMorgan 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, 20112012, 20102011 and 20092010, 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 2010 20092012 2011 2010
December 31, (in millions)Principal transactionsOther incomeTotal changes in fair value recorded Principal transactionsOther incomeTotal changes in fair value recorded Principal transactionsOther incomeTotal changes in fair value recordedPrincipal transactionsOther incomeTotal changes in fair value recorded Principal transactionsOther incomeTotal changes in fair value recorded Principal transactionsOther incomeTotal changes in fair value recorded
Federal funds sold and securities purchased under resale agreements$270
$—
 $270
 $173
$—
 $173
 $(553)$—
 $(553)$161
$—
 $161
 $270
$—
 $270
 $173
$—
 $173
Securities borrowed(61)—
 (61) 31
—
 31
 82
—
 82
10
—
 10
 (61)—
 (61) 31
—
 31
Trading assets:         
 
           
 
  
Debt and equity instruments, excluding loans53
(6)
(c) 
47
 556
(2)
(c) 
554
 619
25
(c) 
644
513
7
(c) 
520
 53
(6)
(c) 
47
 556
(2)
(c) 
554
Loans reported as trading assets:         
 
           
 
  
Changes in instrument-specific credit risk934
(174)
(c) 
760
 1,279
(6)
(c) 
1,273
 (300)(177)
(c) 
(477)1,489
81
(c) 
1,570
 934
(174)
(c) 
760
 1,279
(6)
(c) 
1,273
Other changes in fair value127
5,263
(c) 
5,390
 (312)4,449
(c) 
4,137
 1,132
3,119
(c) 
4,251
(183)7,670
(c) 
7,487
 127
5,263
(c) 
5,390
 (312)4,449
(c) 
4,137
Loans:         
 
           
 
  
Changes in instrument-specific credit risk2
—
 2
 95
—
 95
 (78)—
 (78)(14)—
 (14) 2
—
 2
 95
—
 95
Other changes in fair value535
—
 535
 90
—
 90
 (343)—
 (343)676
—
 676
 535
—
 535
 90
—
 90
Other assets(49)(19)
(d) 
(68) —
(263)
(d) 
(263) —
(731)
(d) 
(731)—
(339)
(d) 
(339) (49)(19)
(d) 
(68) —
(263)
(d) 
(263)
Deposits(a)
(237)—
 (237) (564)—
 (564) (770)—
 (770)(188)—
 (188) (237)—
 (237) (564)—
 (564)
Federal funds purchased and securities loaned or sold under repurchase agreements(4)—
 (4) (29)—
 (29) 116
—
 116
(25)—
 (25) (4)—
 (4) (29)—
 (29)
Other borrowed funds(a)
2,986
—
 2,986
 123
—
 123
 (1,287)—
 (1,287)494
—
 494
 2,986
—
 2,986
 123
—
 123
Trading liabilities(57)—
 (57) (23)—
 (23) (3)—
 (3)(41)—
 (41) (57)—
 (57) (23)—
 (23)
Beneficial interests issued by consolidated VIEs(83)—
 (83) (12)—
 (12) (351)—
 (351)(166)—
 (166) (83)—
 (83) (12)—
 (12)
Other liabilities(3)(5)
(d) 
(8) (9)8
(d) 
(1) 64
—
 64
—
—
 —
 (3)(5)
(d) 
(8) (9)8
(d) 
(1)
Long-term debt:         
 
           
 
  
Changes in instrument-specific credit risk(a)
927
—
 927
 400
—
 400
 (1,704)—
 (1,704)(835)—
 (835) 927
—
 927
 400
—
 400
Other changes in fair value(b)
322
—
 322
 1,297
—
 1,297
 (2,393)—
 (2,393)(1,025)—
 (1,025) 322
—
 322
 1,297
—
 1,297
(a)
Total changes in instrument-specific credit risk related to structured notes were $899(340) million, $468899 million, and $(1.7) billion468 million for the years ended December 31, 20112012, 20102011 and 20092010, 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 client’s need. The embedded derivative is the primary driver of risk. Although the risk associated with the structured notes is actively managed, the gainsgains/(losses) 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./20112012 Annual Report 199215
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 20112012, 20102011 and 20092010, which were attributable to changes in instrument-specific credit risk, were determined.
Loans and lending-related commitments: For floating-rate instruments, all changes in value are attributed to instrument-specific credit risk. For fixed-rate instruments, an allocation of the changes in value for the period is made between those changes in value that are interest rate-related and changes in value that are credit-related. Allocations are generally based on an analysis of borrower-specific credit spread and
 
recovery information, where available, or benchmarking to similar entities or industries.
Long-term debt: Changes in value attributable to instrument-specific credit risk were derived principally from observable changes in the Firm’s credit spread.
Resale and repurchase agreements, securities borrowed agreements and securities lending agreements: Generally, for these types of agreements, there is a requirement that collateral be maintained with a market value equal to or in excess of the principal amount loaned; as a result, there would be no adjustment or an immaterial adjustment for instrument-specific credit risk related to these agreements.



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, 20112012 and 20102011, for loans, long-term debt and long-term beneficial interests for which the fair value option has been elected.
2011 20102012 2011
December 31, (in millions)Contractual principal outstanding Fair valueFair value over/(under) contractual principal outstanding Contractual principal outstanding Fair valueFair value over/(under) contractual principal outstandingContractual principal outstanding Fair valueFair value over/(under) contractual principal outstanding Contractual principal outstanding Fair valueFair value over/(under) contractual principal outstanding
Loans(a)
              
Nonaccrual loans              
Loans reported as trading assets$4,875
 $1,141
$(3,734) $5,246
 $1,239
$(4,007)$4,217
 $960
$(3,257) $4,875
 $1,141
$(3,734)
Loans820
 56
(764) 927
 132
(795)116
 64
(52) 820
 56
(764)
Subtotal5,695
 1,197
(4,498) 6,173
 1,371
(4,802)4,333
 1,024
(3,309) 5,695
 1,197
(4,498)
All other performing loans              
Loans reported as trading assets37,481
 32,657
(4,824) 39,490
 33,641
(5,849)44,084
 40,581
(3,503) 37,481
 32,657
(4,824)
Loans2,136
 1,601
(535) 2,496
 1,434
(1,062)2,211
 2,099
(112) 2,136
 1,601
(535)
Total loans$45,312
 $35,455
$(9,857) $48,159
 $36,446
$(11,713)$50,628
 $43,704
$(6,924) $45,312
 $35,455
$(9,857)
Long-term debt              
Principal-protected debt$19,417
(c) 
$19,890
$473
 $20,761
(c) 
$21,315
$554
$16,541
(c) 
$16,391
$(150) $19,417
(c) 
$19,890
$473
Nonprincipal-protected debt(b)
NA
 14,830
NA
 NA
 17,524
NA
NA
 14,397
NA
 NA
 14,830
NA
Total long-term debtNA
 $34,720
NA
 NA
 $38,839
NA
NA
 $30,788
NA
 NA
 $34,720
NA
Long-term beneficial interests              
Principal-protected debt$—
 $—
$—
 $49
 $49
$—
Nonprincipal-protected debt(b)
NA
 1,250
NA
 NA
 1,446
NA
NA
 $1,170
NA
 NA
 $1,250
NA
Total long-term beneficial interestsNA
 $1,250
NA
 NA
 $1,495
NA
NA
 $1,170
NA
 NA
 $1,250
NA
(a)
There were no performing loans which were ninety days or more past due as of December 31, 20112012 and 20102011, 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, 20112012 and 20102011, the contractual amount of letters of credit for which the fair value option was elected was $3.94.5 billion and $3.83.9 billion, respectively, with a corresponding fair value of $(5)(75) million and $(6)(5) million, respectively. For further information regarding off-balance sheet lending-related financial instruments, see Note 29 on pages 283–289308–315 of this Annual Report.



200216 JPMorgan Chase & Co./20112012 Annual Report


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 Firm’s risk appetite.
In the Firm’s 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 Firm’s 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. In the 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 Firm’s wholesale exposure is accomplished through loan syndications and participations, loan sales, securitizations, credit derivatives, use of master netting agreements, and collateral and other risk-reduction techniques.
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 Firm’s assessment when extending credit and establishing its allowance for loan losses.
For further information regarding on–balance sheet credit concentrations by major product and/or geography, see Notes 6, 14 and 15 on pages 202–210, 231–252 and 252–255, respectively, of this Annual Report. For information regarding concentrations of off–balance sheet lending-related financial instruments by major product, see Note 29 on pages 283–289 of this Annual Report.
Customer receivables representing primarily margin loans to prime and retail brokerage clients of $17.623.8 billion and $32.517.6 billion at December 31, 20112012 and 20102011, 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 client’s positions may be liquidated by the Firm to meet the minimum collateral requirements. As a result of the Firm’s credit risk mitigation practices, the Firm does not hold any reserves for credit impairment on these agreementsreceivables as of December 31, 20112012 and 20102011.


The table below presents both on—on–balance sheet and off—off–balance sheet wholesale-consumer and consumer-relatedwholesale-related credit exposure by the Firm’s three credit portfolio segments as of December 31, 20112012 and 20102011.
 2011 20102012 2011
 Credit On-balance sheet Off-balance Credit On-balance sheet Off-balanceCredit exposureOn-balance sheet
Off-balance sheet(c)
 Credit exposureOn-balance sheet
Off-balance sheet(c)
December 31, (in millions) exposure Loans Derivatives 
sheet(c)
 exposure Loans Derivatives 
sheet(c)
LoansDerivatives LoansDerivatives
Wholesale                
Total consumer, excluding credit card(a)
$352,889
$292,620
$—
$60,156
 $370,834
$308,427
$—
$62,307
Total credit card661,011
127,993
—
533,018
 662,893
132,277
—
530,616
Total consumer1,013,900
420,613
—
593,174
 1,033,727
440,704
—
592,923
Wholesale-related   
Real estate76,198
60,740
1,084
14,374
 67,594
54,684
1,155
11,755
Banks and finance companies $71,440
 $29,392
 $20,372
 $21,676
 $65,867
 $21,562
 $20,935
 $23,370
73,318
26,651
19,846
26,821
 71,440
29,392
20,372
21,676
Real estate 67,594
 54,684
 1,155
 11,755
 64,351
 53,635
 868
 9,848
Healthcare 42,247
 8,908
 3,021
 30,318
 41,093
 6,047
 2,121
 32,925
48,487
11,638
3,359
33,490
 42,247
8,908
3,021
30,318
Oil and gas42,563
14,704
2,345
25,514
 35,437
10,780
3,521
21,136
State and municipal governments 41,930
 7,144
 6,575
 28,211
 35,808
 6,095
 5,148
 24,565
41,821
7,998
5,138
28,685
 41,930
7,144
6,575
28,211
Oil and gas 35,437
 10,780
 3,521
 21,136
 26,459
 5,701
 3,866
 16,892
Consumer products32,778
9,151
826
22,801
 29,637
9,187
1,079
19,371
Asset managers 33,465
 6,182
 9,458
 17,825
 29,364
 7,070
 7,124
 15,170
31,474
6,220
8,390
16,864
 33,465
6,182
9,458
17,825
Consumer products 29,637
 9,187
 1,079
 19,371
 27,508
 7,921
 1,039
 18,548
Utilities 28,650
 5,191
 3,602
 19,857
 25,911
 4,220
 3,104
 18,587
29,533
6,814
2,649
20,070
 28,650
5,191
3,602
19,857
Retail and consumer services 22,891
 6,353
 565
 15,973
 20,882
 5,876
 796
 14,210
25,597
7,901
429
17,267
 22,891
6,353
565
15,973
Central government21,223
1,333
11,232
8,658
 17,138
623
10,813
5,702
Metals/mining20,958
6,059
624
14,275
 15,254
6,073
690
8,491
Transportation19,827
12,763
673
6,391
 16,305
10,000
947
5,358
Machinery and equipment manufacturing18,504
6,304
592
11,608
 16,498
5,111
417
10,970
Technology 17,898
 4,394
 1,310
 12,194
 14,348
 2,752
 1,554
 10,042
18,488
3,806
1,192
13,490
 17,898
4,394
1,310
12,194
Central government 17,138
 623
 10,813
 5,702
 11,173
 1,146
 6,052
 3,975
Machinery and equipment manufacturing 16,498
 5,111
 417
 10,970
 13,311
 3,601
 445
 9,265
Transportation 16,305
 10,000
 947
 5,358
 9,652
 3,754
 822
 5,076
Metals/mining 15,254
 6,073
 690
 8,491
 11,426
 3,301
 1,018
 7,107
Insurance 13,092
 1,109
 2,061
 9,922
 10,918
 1,103
 1,660
 8,155
All other(a)
 284,135
 113,264
 26,891
 143,980
 240,999
 88,726
 23,929
 128,344
Media16,007
3,967
973
11,067
 11,909
3,655
202
8,052
All other(b)
299,243
120,173
15,631
163,439
 285,318
110,718
28,750
145,850
Subtotal 753,611
 278,395
 92,477
 382,739
 649,070
 222,510
 80,481
 346,079
816,019
306,222
74,983
434,814
 753,611
278,395
92,477
382,739
Loans held-for-sale and loans at fair value 4,621
 4,621
 —
 —
 5,123
 5,123
 —
 —
6,961
6,961
—
—
 4,621
4,621
—
—
Receivables from customers and interests in purchased receivables 17,461
 —
 —
 —
 32,932
 —
 —
 —
Total wholesale 775,693
 283,016
 92,477
 382,739
 687,125
 227,633
 80,481
 346,079
Total consumer, excluding credit card(b)
 370,834
 308,427
 —
 62,307
 393,021
 327,618
 —
 65,403
Total credit card 662,893
 132,277
 —
 530,616
 684,903
 137,676
 —
 547,227
Total exposure $1,809,420
 $723,720
 $92,477
 $975,662
 $1,765,049
 $692,927
 $80,481
 $958,709
Receivables from customers and other23,648
—
—
—
 17,461
—
—
—
Total wholesale-related846,628
313,183
74,983
434,814
 $775,693
$283,016
92,477
382,739
Total exposure(d)
$1,860,528
$733,796
$74,983
$1,027,988
 $1,809,420
$723,720
$92,477
$975,662
(a)
As of December 31, 2012 and 2011, credit exposure for total consumer, excluding credit card, includes receivables from customers of $113 million and $100 million, respectively.
(b)
For more information on exposures to SPEs included within All other see Note 16 on pages 256–267280–291 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.
(d)
For further information regarding on–balance sheet credit concentrations by major product and/or geography, see Notes 6, 14 and 15 on pages 218–227, 250–275 and 276–279, respectively, of this Annual Report. For information regarding concentrations of off–balance sheet lending-related financial instruments by major product, see Note 29 on pages 308–315 of this Annual Report.

JPMorgan Chase & Co./20112012 Annual Report 201217
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. Predominantly all of the Firm’s derivatives are entered into for market-making or risk management purposes.
Market-making derivatives
The majority of the Firm’s derivatives are entered into for market-making purposes.
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. Fixed-rate assets and liabilities appreciate or depreciate in market value as interest rates change. Similarly, interest income and expense increaseincreases or decreasedecreases as a result of variable-rate assets and liabilities resetting to current market rates, and as a result of the repayment and subsequent origination or issuance of fixed-rate assets and liabilities at current market rates. Gains or losses on the derivative instruments that are related to such assets and liabilities are expected to substantially offset this variability in earnings. The Firm generally uses interest rate swaps, forwards and futures to manage the impact of interest rate fluctuations on earnings.
Foreign currency forward contracts are used to manage the foreign exchange risk associated with certain foreign currency–denominated (i.e., non-U.S. dollar) assets and liabilities and forecasted transactions, as well as the Firm’s net investments in certain non-U.S. subsidiaries or branches whose functional currencies are not the U.S. dollar. As a result of fluctuations in foreign currencies, the U.S. dollar–equivalent values of the foreign currency–denominated assets and liabilities or forecasted revenue or expense increase or decrease. Gains or losses on the derivative instruments related to these foreign currency–denominated assets or liabilities, or forecasted transactions, are expected to substantially offset this variability.
Commodities contracts are used to manage the price risk of certain commodities inventories. Gains or losses on these
derivative instruments are expected to substantially offset the depreciation or appreciation of the related inventory.
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 load-serving contracts and investments.
The Firm uses credit derivatives to manage the counterparty credit risk associated with loans and lending-related commitments. Credit derivatives compensate the purchaser when the entity referenced in the contract experiences a credit event, such as bankruptcy or a failure to pay an obligation when due. Credit derivatives primarily consist of credit default swaps. For a further discussion of credit derivatives, see the discussion in the Credit derivatives section on pages 209–210226–227 of this Note.
For more information about risk management derivatives, see the risk management derivatives gains and losses table on page 207224 of this Note, and the hedge accounting gains and losses tables on pages 205–207222–224 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 receivedreceivables and paid,payables, 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 marketreported and measured at fair value through earnings. The tabular disclosures on pages 203–210220–227 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 184–198196–214 and 198–200,214–216, 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 Firm’s 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 lending-related commitments, because of the difficulties in qualifying such contracts as hedges. For the same reason, the Firm does not apply hedge accounting to certain interest rate 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


202218 JPMorgan Chase & Co./20112012 Annual Report


prospectively and retrospectively. To assess effectiveness, the Firm uses statistical methods such as regression analysis, as well as nonstatistical methods including dollar-value comparisons of the change in the fair value of the derivative to the change in the fair value or cash flows of the hedged item. The extent to which a derivative has been, and is expected to continue to be, effective at offsetting changes in the fair value or cash flows of the hedged item must be assessed and documented at least quarterly. Any hedge ineffectiveness (i.e., the amount by which the gain or loss on the designated derivative instrument does not exactly offset the change in the hedged item attributable to the hedged risk) must be reported in current-period earnings. If it is determined that a derivative is not highly effective at hedging the designated exposure, hedge accounting is discontinued.
There are three types of hedge accounting designations: fair value hedges, cash flow hedges and net investment hedges. JPMorgan Chase uses fair value hedges primarily to hedge fixed-rate long-term debt, AFS securities and certain commodities inventories. For qualifying fair value hedges, the changes in the fair value of the derivative, and in the value of the hedged item for the risk being hedged, are recognized in earnings. If the hedge relationship is terminated, then the 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 primarily to hedge the exposure to variability in forecasted cash flows from floating-rate financial instruments and forecasted transactions, primarily the rollover of short-term assets and liabilities and foreign currency–denominated revenue and expense. For qualifying cash flow hedges, the effective portion of the change in the fair value of the derivative is recorded in OCI and recognized in the Consolidated Statements of Income when the hedged cash flows affect earnings. Derivative amounts affecting earnings are recognized consistent with the classification of the hedged item – primarily interest income, interest expense, noninterest revenue and compensation expense. The ineffective portions of cash flow hedges are immediately recognized in earnings. If the hedge relationship is terminated, then the value of the derivative recorded in 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 Firm’s net investments in certain non-U.S. subsidiaries or branches whose functional currencies are not the U.S. dollar. For foreign currency qualifying net investment hedges, changes in the fair value of the derivatives are recorded in the translation adjustments account within AOCI.

The following table outlines the Firm’s primary uses of derivatives and the related hedge accounting designation or disclosure category.
Type of DerivativeUse of DerivativeDesignation and disclosureAffected segment or unitPage reference
Manage specifically identified risk exposures in qualifying hedge accounting relationships:
◦ Interest rateHedge fixed rate assets and liabilitiesFair value hedgeCorporate/PE222
◦ Interest rateHedge floating rate assets and liabilitiesCash flow hedgeCorporate/PE223
◦ Foreign exchangeHedge foreign currency-denominated assets and liabilitiesFair value hedgeCorporate/PE222
◦ Foreign exchangeHedge forecasted revenue and expenseCash flow hedgeCorporate/PE223
◦ Foreign exchangeHedge the value of the Firm’s investments in non-U.S. subsidiariesNet investment hedgeCorporate/PE224
◦ CommodityHedge commodity inventoryFair value hedgeCIB222
Manage specifically identified risk exposures not designated in qualifying hedge accounting relationships:
◦ Interest rateManage the risk of the mortgage pipeline, warehouse loans and MSRsSpecified risk managementCCB224
◦ CreditManage the credit risk of wholesale lending exposuresSpecified risk managementCIB224
◦ Credit(a)
Manage the credit risk of certain AFS securitiesSpecified risk managementCorporate/PE224
◦ CommodityManage the risk of certain commodities-related contracts and investmentsSpecified risk managementCIB224
◦Interest rate and foreign exchangeManage the risk of certain other specified assets and liabilitiesSpecified risk managementCorporate/PE224
Market-making derivatives and other activities:
• VariousMarket-making and related risk managementMarket-making and otherCIB224
• VariousOther derivatives, including the synthetic credit portfolioMarket-making and otherCIB, Corporate/PE224
(a)Includes a limited number of single-name credit derivatives used to mitigate the credit risk arising from specified AFS securities.

JPMorgan Chase & Co./2012 Annual Report219
Notes to consolidated financial statements

Notional amount of derivative contracts
The following table summarizes the notional amount of derivative contracts outstanding as of December 31, 20112012 and 20102011.
Notional amounts(a)
Notional amounts(b)
December 31, (in billions)2011
2010
2012
2011
Interest rate contracts  
Swaps$38,704
$46,299
$33,183
$38,704
Futures and forwards7,888
9,298
11,824
7,888
Written options3,842
4,075
3,866
3,842
Purchased options4,026
3,968
3,911
4,026
Total interest rate contracts54,460
63,640
52,784
54,460
Credit derivatives(a)5,774
5,472
5,981
5,774
Foreign exchange contracts  
  
Cross-currency swaps2,931
2,568
3,355
2,931
Spot, futures and forwards4,512
3,893
4,033
4,512
Written options674
674
651
674
Purchased options670
649
661
670
Total foreign exchange contracts8,787
7,784
8,700
8,787
Equity contracts  
Swaps119
116
163
119
Futures and forwards38
49
49
38
Written options460
430
442
460
Purchased options405
377
403
405
Total equity contracts1,022
972
1,057
1,022
Commodity contracts  
  
Swaps341
349
313
341
Spot, futures and forwards188
170
190
188
Written options310
264
265
310
Purchased options274
254
260
274
Total commodity contracts1,113
1,037
1,028
1,113
Total derivative notional amounts$71,156
$78,905
$69,550
$71,156
(a)
Primarily consists of credit default swaps. For more information on volumes and types of credit derivative contracts, see the Credit derivatives discussion on pages 226–227 of this Note.
(b)Represents the sum of gross long and gross short third-party notional derivative contracts.

While the notional amounts disclosed above give an indication of the volume of the Firm’s derivatives activity, the notional amounts significantly exceed, in the Firm’s view, the possible losses that could arise from such transactions. For most derivative transactions, the notional amount is not exchanged; it is used simply as a reference to calculate payments.
Synthetic credit portfolio
The synthetic credit portfolio is a portfolio of index credit derivatives, including short and long positions, that was held by CIO. On July 2, 2012, CIO transferred the synthetic credit portfolio, other than a portion that aggregated to a notional amount of approximately $12 billion, to CIB. The positions making up the portion of the synthetic credit portfolio retained by CIO on July 2, 2012, were effectively closed out during the third quarter of 2012. The results of the synthetic credit portfolio, including the portion transferred to CIB, have been included in the gains and losses on derivatives related to market-making activities and other derivatives category discussed on page 224 of this Note.



220JPMorgan Chase & Co./20112012 Annual Report203
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 Firm’s Consolidated Balance Sheets as of December 31, 20112012 and 20102011, by accounting designation (e.g., whether the derivatives were designated as hedgesin qualifying hedge accounting relationships or not) and contract type.
Free-standing derivative receivables and payables(a)
Free-standing derivative receivables and payables(a)
        
Free-standing derivative receivables and payables(a)
      
Gross derivative receivables   Gross derivative payables  
December 31, 2012
(in millions)
Not designated as hedgesDesignated as hedgesTotal derivative receivables 
Net derivative receivables(c)
 Not designated as hedgesDesignated as hedgesTotal derivative payables 
Net derivative payables(c)
Trading assets and liabilities         
Interest rate$1,323,184
$6,064
 $1,329,248
 $39,205
 $1,284,494
$3,120
$1,287,614
 $24,906
Credit100,310
—
 100,310
 1,735
 100,027
—
100,027
 2,504
Foreign exchange(b)
146,682
1,577
 148,259
 14,142
 159,509
2,133
161,642
 18,601
Equity40,938
—
 40,938
 9,266
 42,810
—
42,810
 11,819
Commodity43,039
586
 43,625
 10,635
 46,821
644
47,465
 12,826
Total fair value of trading assets and liabilities$1,654,153
$8,227
 $1,662,380
 $74,983
 $1,633,661
$5,897
$1,639,558
 $70,656
         
Gross derivative receivables   Gross derivative payables  Gross derivative receivables   Gross derivative payables  
December 31, 2011
(in millions)
Not designated as hedgesDesignated as hedgesTotal derivative receivables Net derivative receivables Not designated as hedgesDesignated as hedgesTotal derivative payables Net derivative payablesNot designated as hedgesDesignated as hedgesTotal derivative receivables 
Net derivative receivables(c)
 Not designated as hedgesDesignated as hedgesTotal derivative payables 
Net derivative payables(c)
Trading assets and liabilities                    
Interest rate$1,433,900
$7,621
 $1,441,521
 $46,369
 $1,397,625
$2,192
 $1,399,817
 $28,010
$1,433,900
$7,621
 $1,441,521
 $46,369
 $1,397,625
$2,192
$1,399,817
 $28,010
Credit169,650
—
 169,650
 6,684
 165,121
—
 165,121
 5,610
169,650
—
 169,650
 6,684
 165,121
—
165,121
 5,610
Foreign exchange(b)
163,497
4,666
 168,163
 17,890
 165,353
655
 166,008
 17,435
163,497
4,666
 168,163
 17,890
 165,353
655
166,008
 17,435
Equity47,736
—
 47,736
 6,793
 46,366
—
 46,366
 9,655
47,736
—
 47,736
 6,793
 46,366
—
46,366
 9,655
Commodity53,894
3,535
 57,429
 14,741
 58,836
1,108
 59,944
 14,267
53,894
3,535
 57,429
 14,741
 58,836
1,108
59,944
 14,267
Total fair value of trading assets and liabilities$1,868,677
$15,822
 $1,884,499
 $92,477
 $1,833,301
$3,955
 $1,837,256
 $74,977
$1,868,677
$15,822
 $1,884,499
 $92,477
 $1,833,301
$3,955
$1,837,256
 $74,977
           
Gross derivative receivables   Gross derivative payables  
December 31, 2010
(in millions)
Not designated as hedgesDesignated as hedgesTotal derivative receivables Net derivative receivables Not designated as hedgesDesignated as hedgesTotal derivative payables Net derivative payables
Trading assets and liabilities           
Interest rate$1,121,703
$6,279
 $1,127,982
 $32,555
 $1,089,604
$840
 $1,090,444
 $20,387
Credit129,729
—
 129,729
 7,725
 125,061
—
 125,061
 5,138
Foreign exchange(b)
165,240
3,231
 168,471
 25,858
 163,671
1,059
 164,730
 25,015
Equity43,633
—
 43,633
 4,204
 46,399
—
 46,399
 10,450
Commodity59,573
24
 59,597
 10,139
 56,397
2,078
(c) 
58,475
 8,229
Total fair value of trading assets and liabilities$1,519,878
$9,534
 $1,529,412
 $80,481
 $1,481,132
$3,977
 $1,485,109
 $69,219
(a)
ExcludesBalances exclude structured notes for which the fair value option has been elected. See Note 4 on pages 198–200214–216 of this Annual Report for further information.
(b)
Excludes $11 million and $21 millionof foreign currency-denominated debt designated as a net investment hedge at December 31, 2011 and. Foreign currency-denominated debt was not designated as a hedging instrument at 2010December 31, 2012, respectively..
(c)
Excludes $1.0 billionAs permitted under U.S. GAAP, the Firm has elected to net derivative receivables and derivative payables and the related to commodity derivatives that were embedded incash collateral receivables and payables when 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.
legally enforceable master netting agreement exists.


204JPMorgan Chase & Co./20112012 Annual Report221

Notes to consolidated financial statements

Impact of derivatives on the Consolidated Statements of Income
The following tables provide information related to gains and losses recorded on derivatives based on their hedge accounting
designation or purpose.

Fair value hedge gains and losses
The following tables present derivative instruments, by contract type, used in fair value hedge accounting relationships, as well as pretax gains/(losses) recorded on such derivatives and the related hedged items for the years ended December 31, 20112012, 20102011 and 20092010, 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 Income statement impact due to:
Year ended December 31, 2012 (in millions)DerivativesHedged itemsTotal income statement impact 
Hedge ineffectiveness(e)
Excluded components(f)
Contract type     
Interest rate(a)
$(1,238) $1,879
$641
 $(28)$669
Foreign exchange(b)
(3,027)
(d) 
2,925
(102) —
(102)
Commodity(c)
(2,530) 1,131
(1,399) 107
(1,506)
Total$(6,795) $5,935
$(860) $79
$(939)
     
Gains/(losses) recorded in income Income statement impact due to:Gains/(losses) recorded in income Income statement impact due to:
Year ended December 31, 2011
(in millions)
DerivativesHedged itemsTotal income statement impact 
Hedge ineffectiveness(e)
Excluded components(f)
DerivativesHedged items
Total income statement impact 
Hedge ineffectiveness(e)

Excluded components(f)

Contract type          
Interest rate(a)
$558
 $6
$564
 $104
$460
$532
 $33
$565
 $104
$461
Foreign exchange(b)
5,684
(d) 
(3,761)1,923
 —
1,923
5,684
(d) 
(3,761)1,923
 —
1,923
Commodity(c)
1,784
 (2,880)(1,096) (10)(1,086)1,784
 (2,880)(1,096) (10)(1,086)
Total$8,026
 $(6,635)$1,391
 $94
$1,297
$8,000
 $(6,608)$1,392
 $94
$1,298
          
Gains/(losses) recorded in income Income statement impact due to:Gains/(losses) recorded in income Income statement impact due to:
Year ended December 31, 2010
(in millions)
DerivativesHedged items
Total income statement impact 
Hedge ineffectiveness(e)

Excluded components(f)

DerivativesHedged items
Total income statement impact 
Hedge ineffectiveness(e)

Excluded components(f)

Contract type          
Interest rate(a)
$1,066
 $(454)$612
 $172
$440
$1,102
 $(376)$726
 $175
$551
Foreign exchange(b)
1,357
(d) 
(1,812)(455) —
(455)1,357
(d) 
(1,812)(455) —
(455)
Commodity(c)
(1,354) 1,882
528
 —
528
(1,354) 1,882
528
 —
528
Total$1,069
 $(384)$685
 $172
$513
$1,105
 $(306)$799
 $175
$624
     
Gains/(losses) recorded in income Income statement impact due to:
Year ended December 31, 2009
(in millions)		DerivativesHedged items
Total income statement impact 
Hedge ineffectiveness(e)

Excluded components(f)

Contract type     
Interest rate(a)
$(3,830) $4,638
$808
 $(466)$1,274
Foreign exchange(b)
(1,421)
(d) 
1,445
24
 —
24
Commodity(c)
(430) 399
(31) —
(31)
Total$(5,681) $6,482
$801
 $(466)$1,267
(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. The current presentation excludes accrued interest. Prior period amounts have been revised to conform with the current presentation.
(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.revenue and net interest income.
(c)Consists of overall fair value hedges of certainphysical commodities inventories.inventories that are generally carried at the lower of cost or market (market approximates fair value). Gains and losses were recorded in principal transactions revenue.
(d)
Included $4.9(3.1) billion, $278 million4.9 billion and $(1.6) billion278 million for the years ended December 31, 20112012, 20102011 and 20092010, 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 theThe assessment of hedge effectiveness excludes certain components of the changes in fair values of the derivatives and hedged items such as forward points on foreign exchange forward contracts. Amounts related to excluded components are recorded in current-period income.contracts and time values.


222JPMorgan Chase & Co./20112012 Annual Report205
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, 20112012, 20102011 and 20092010, respectively. The Firm includes the gain/(loss) on the hedging derivative inand the same line item as the offsetting change in cash flows on the hedged item in the same line item in the Consolidated Statements of Income.
Gains/(losses) recorded in income and other comprehensive income/(loss)(c)
Gains/(losses) recorded in income and other comprehensive income/(loss)(c)
Year ended December 31, 2011
(in millions)
Derivatives – effective portion reclassified from AOCI to income
Hedge ineffectiveness recorded directly in income(d)
Total income statement impactDerivatives – effective portion recorded in OCI
Total change
in OCI
for period
Year ended December 31, 2012
(in millions)
Derivatives – effective portion reclassified from AOCI to income
Hedge ineffectiveness recorded directly in income(d)
Total income statement impactDerivatives – effective portion recorded in OCI
Total change
in OCI
for period
Contract type  
Interest rate(a)
$310
$19
$329
$107
$(203)$(3)$5
$2
$13
$16
Foreign exchange(b)
(9)—
(9)(57)(48)31
—
31
128
97
Total$301
$19
$320
$50
$(251)$28
$5
$33
$141
$113

Gains/(losses) recorded in income and other comprehensive income/(loss)(c)
Year ended December 31, 2011
(in millions)
Derivatives – effective portion reclassified from AOCI to income
Hedge ineffectiveness recorded directly in income(d)
Total income statement impactDerivatives – effective portion recorded in OCITotal change
in OCI
for period
Contract type 
Interest rate(a)
$310
$19
$329
$107
$(203)
Foreign exchange(b)
(9)—
(9)(57)(48)
Total$301
$19
$320
$50
$(251)
 
Gains/(losses) recorded in income and other comprehensive income/(loss)(c)
Gains/(losses) recorded in income and other comprehensive income/(loss)(c)
Year ended December 31, 2010
(in millions)
Derivatives – effective portion reclassified from AOCI to income
Hedge ineffectiveness recorded directly in income(d)
Total income statement impactDerivatives – effective portion recorded in OCITotal change
in OCI
for period		Derivatives – effective portion reclassified from AOCI to income
Hedge ineffectiveness recorded directly in income(d)
Total income statement impactDerivatives – effective portion recorded in OCITotal change
in OCI
for period
Contract type  
Interest rate(a)
$288
$20
$308
$388
$100
$288
$20
$308
$388
$100
Foreign exchange(b)
(82)(3)(85)(141)(59)(82)(3)(85)(141)(59)
Total$206
$17
$223
$247
$41
$206
$17
$223
$247
$41
 
Gains/(losses) recorded in income and other comprehensive income/(loss)(c)
Year ended December 31, 2009
(in millions)
Derivatives – effective portion reclassified from AOCI to income
Hedge ineffectiveness recorded directly in income(d)
Total income statement impactDerivatives – effective portion recorded in OCITotal change
in OCI
for period
Contract type 
Interest rate(a)
$(158)$(62)$(220)$61
$219
Foreign exchange(b)
282
—
282
706
424
Total$124
$(62)$62
$767
$643
(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, 20112012 and 2009.2011. 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 $2632 million (after-tax) of net gainslosses recorded in AOCI at December 31, 20112012, related to cash flow hedges will be recognized in income. The maximum length of time over which forecasted transactions are hedged is 108 years years,, and such transactions primarily relate to core lending and borrowing activities.

206JPMorgan Chase & Co./20112012 Annual Report223

Notes to consolidated financial statements

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, 20112012, 20102011 and 20092010.
Gains/(losses) recorded in income and other comprehensive income/(loss)Gains/(losses) recorded in income and other comprehensive income/(loss)
2011 2010 20092012 2011 2010
Year ended December 31,
(in millions)
Excluded components recorded directly in income(a)
Effective portion recorded in OCI 
Excluded components recorded directly in income(a)
Effective portion recorded in OCI 
Excluded components recorded directly in income(a)
Effective portion recorded in OCI
Excluded components recorded directly in income(a)
Effective portion recorded in OCI 
Excluded components recorded directly in income(a)
Effective portion recorded in OCI 
Excluded components recorded directly in income(a)
Effective portion recorded in OCI
Contract type          
Foreign exchange derivatives$(251)$225
 $(139)$(30) $(112)$(259)$(306)$(82) $(251)$225
 $(139)$(30)
Foreign currency denominated debt—
1
 —
41
 NA
NA
—
—
 —
1
 —
41
Total$(251)$226
 $(139)$11
 $(112)$(259)$(306)$(82) $(251)$226
 $(139)$11
(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 20112012, 20102011 and 20092010.
Risk management derivatives gainsGains and losses (not designated as hedging instruments)on derivatives used for specified risk management purposes
The following table presents nontrading derivatives, by contract type, that were not designated in hedge relationships, and the pretax gains/(losses) recorded on sucha limited number of derivatives, for the years ended December 31, 2011, 2010 and 2009. These derivativesnot designated in hedge accounting relationships, that are risk management instruments used to mitigate or transform market risk exposuresmanage risks associated with certain specified assets and liabilities, including certain risks arising from banking activities other than trading activities, which are discussed separately below.the mortgage pipeline, warehouse loans, MSRs, wholesale lending exposures, AFS securities, foreign currency-denominated liabilities, and commodities related contracts and investments.
Derivatives gains/(losses)
recorded in income
Derivatives gains/(losses)
recorded in income
Year ended December 31,
(in millions)
2011
2010
2009
2012
2011
2010
Contract type  
Interest rate(a)
$8,084
$4,987
$(3,113)$5,353
$8,084
$4,987
Credit(b)
(52)(237)(3,222)(175)(52)(237)
Foreign exchange(c)
(157)(64)(197)47
(157)(64)
Equity(b)
—
—
(8)
Commodity(b)
41
(48)(50)
Commodity(d)
94
41
(48)
Total$7,916
$4,638
$(6,590)$5,319
$7,916
$4,638
(a)Primarily relates to interest rate derivatives used to hedge the interest rate risks associated with the mortgage pipeline, warehouse loans and MSRs. Gains and losses were recorded predominantly in principal transactions revenue, mortgage fees and related income, and net interest income.
(b)Relates to credit derivatives used to mitigate credit risk associated with lending exposures in the Firm’s wholesale businesses, and single-name credit derivatives used to mitigate credit risk arising from certain AFS securities. These derivatives do not include the synthetic credit portfolio or credit derivatives used to mitigate counterparty credit risk arising from derivative receivables, both of which are included in gains and losses on derivatives related to market-making activities and other derivatives. Gains and losses were recorded in principal transactions revenue.
(c)Primarily relates to hedges of the foreign exchange risk of specified foreign currency-denominated liabilities. Gains and losses were recorded in principal transactions revenue and net interest income.
(d)Primarily relates to commodity derivatives used to mitigate energy price risk associated with energy-related contracts and investments. Gains and losses were recorded in principal transactions revenue.

Trading derivative gainsGains and losses on derivatives related to market-making activities and other derivatives
The Firm has electedmakes markets in derivatives in order to presentmeet the needs of customers and uses derivatives to manage certain risks associated with net open risk positions from the Firm’s market-making activities, including the counterparty credit risk arising from derivative gainsreceivables. These derivatives, as well as all other derivatives (including the synthetic credit portfolio) that are not included in the hedge accounting or specified risk management categories above, are included in this category. Gains and losses related to its trading activities together with the nonderivative instruments with which they are risk managed. All amountson these derivatives are recorded in principal transactions revenue in the Consolidated Statementsrevenue. See Note 7 on pages 228–229 of Incomethis Annual Report for the years ended December 31, 2011, 2010 and 2009. The amounts below do not represent a comprehensive view of the Firm’s trading activities because they do not include certain revenue associated with those activities, including net interest income earnedinformation on cash instruments used in trading activities and gains and losses on cash instruments that are risk managed without derivative instruments.principal transactions revenue.
 Gains/(losses) recorded in principal transactions revenue
Year ended December 31,
(in millions)
2011
2010
2009
Type of instrument   
Interest rate$(1,531)$(683)$4,375
Credit3,346
4,636
5,022
Foreign exchange1,216
1,854
2,583
Equity1,956
1,827
1,475
Commodity3,697
243
1,329
Total$8,684
$7,877
$14,784

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.


224JPMorgan Chase & Co./20112012 Annual Report207
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-to-market (“MTM”)fair value of the contracts moves in the counterparties’ favor or upon specified downgrades in the Firm’s and its subsidiaries’ respective credit ratings. Certain derivative contracts also provide for termination of the contract, generally upon a downgrade of either the Firm or
the counterparty, at the fair value of the derivative contracts. The following table shows the aggregate fair value of net derivative payables 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, 20112012 and 20102011.

Derivative payables containing downgrade triggers
December 31, (in millions)2012
2011
Aggregate fair value of net derivative payables(a)
$40,844
$39,316
Collateral posted(a)
34,414
31,473
(a)The current period presentation excludes contracts with downgrade triggers that were in a net receivable position. Prior period amounts have been revised to conform with the current presentation.


Derivative payables containing downgrade triggers
December 31, (in millions)2011
2010
Aggregate fair value of net derivative payables$16,937
$19,777
Collateral posted11,429
14,629

The following table shows the impact of a single-notch and two-notch ratings downgrade to JPMorgan Chase & Co. and its subsidiaries, primarilypredominantly JPMorgan Chase Bank, National Association (“JPMorgan Chase Bank, N.A.”), at December 31, 20112012 and 2010,2011, related to derivative contracts with contingent collateral or termination features that may be triggered upon a ratings downgrade. Derivatives contracts generally require additional collateral to be posted or terminations to be triggered when the predefined threshold rating is breached. A downgrade by a single rating agency that does not result in a rating lower than a preexisting corresponding rating provided by another major rating agency will generally not result in additional collateral or termination payment requirements. The liquidity impact in the table is calculated based upon a downgrade below the lowest current rating provided by major rating agencies.
Liquidity impact
Liquidity impact of derivative downgrade triggers     
 2012 2011
December 31, (in millions)Single-notch downgradeTwo-notch downgrade Single-notch downgradeTwo-notch downgrade
Additional portion of net derivative payable to be posted as collateral upon downgrade$1,012
$1,664
 $1,460
$2,054
Amount required to settle contracts with termination triggers upon downgrade(a)
857
1,270
 1,054
1,923
(a) Amounts represent fair value of derivative downgrade triggerspayables, and do not reflect collateral posted.
 2011 2010
December 31, (in millions)Single-notch downgradeTwo-notch downgrade Single-notch downgradeTwo-notch downgrade
Amount of additional collateral to be posted$1,460
$2,054
 $1,904
$3,462
Amount required to settle contracts with termination triggers

1,054
1,923
 430
994
The following tables show the carrying value of derivative receivables and payables after netting adjustments, and adjustments
for collateral held (including cash, U.S. government and agency securities and other G7 government bonds) and transferred as
of December 31, 20112012 and 2010.
Impact of netting adjustments on derivative receivables and payables2011.
 Derivative receivables Derivative payables
December 31, (in millions)2011
2010
 2011
2010
Gross derivative fair value$1,884,499
$1,529,412
 $1,837,256
$1,485,109
Netting adjustment – offsetting receivables/payables(a)
(1,710,525)(1,376,969) (1,710,523)(1,376,969)
Netting adjustment – cash collateral received/paid(a)
(81,497)(71,962) (51,756)(38,921)
Carrying value on Consolidated Balance Sheets$92,477
$80,481
 $74,977
$69,219
Total derivative collateral
Impact of netting adjustments on derivative receivables and payables   
 Derivative receivables Derivative payables
December 31, (in millions)2012
2011
 2012
2011
Gross derivative fair value$1,662,380
$1,884,499
 $1,639,558
$1,837,256
Netting adjustment – offsetting receivables/payables(a)
(1,508,244)(1,710,523) (1,508,244)(1,710,523)
Netting adjustment – cash collateral received/paid(a)
(79,153)(81,499) (60,658)(51,756)
Carrying value on Consolidated Balance Sheets$74,983
$92,477
 $70,656
$74,977
Total derivative collateral   
Collateral held Collateral transferredCollateral held Collateral transferred
December 31, (in millions)2011
2010
 2011
2010
2012
2011
 2012
2011
Netting adjustment for cash collateral(a)
$81,497
$71,962
 $51,756
$38,921
$79,153
$81,499
 $60,658
$51,756
Liquid securities and other cash collateral(b)
21,807
16,486
 19,439
10,899
13,658
21,807
 21,767
19,439
Additional liquid securities and cash collateral(c)
17,615
18,048
 10,824
8,435
22,562
17,613
 9,635
10,824
Total collateral for derivative transactions$120,919
$106,496
 $82,019
$58,255
$115,373
$120,919
 $92,060
$82,019
(a)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 together with the related derivative receivables and derivative payables when a legally enforceable master netting agreement exists.
(b)Represents cash collateral received and paid that is not subject to a legally enforceable master netting agreement, and liquid securities collateral held and transferred.
(c)
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, 20112012 and 20102011.




208JPMorgan Chase & Co./20112012 Annual Report225

Notes to consolidated financial statements

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 Firm’s 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, as an end-user, the Firm uses credit derivatives to mitigatemanage credit risk associated with its overall derivative receivables and traditional commercial credit lending exposures (loans and unfunded commitments) as well asand derivatives counterparty exposures in the Firm’s wholesale businesses, and to manage its exposure to residentialthe credit risk arising from certain AFS securities and commercial mortgages. In accomplishingfrom certain financial instruments in the above,Firm’s market-making businesses. For more information on the Firm uses different typessynthetic credit portfolio, see the discussion on page 220 of credit derivatives.this Note. Following is a summary of various types of credit derivatives.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 single- name 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 256–267280–291 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, 20112012 and 20102011. 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.


226JPMorgan Chase & Co./20112012 Annual Report209
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 Firm’s view, the risks associated with such derivatives.
Total credit derivatives and credit-related notes
Maximum payout/Notional amount
Protection sold
Protection purchased with identical underlyings(b)
Net protection (sold)/purchased(c)
Other protection purchased(d)
December 31, 2012 (in millions)
Credit derivatives 
Credit default swaps$(2,954,705)$2,879,105
$(75,600)$42,460
Other credit derivatives(a)
(66,244)5,649
(60,595)33,174
Total credit derivatives(3,020,949)2,884,754
(136,195)75,634
Credit-related notes(233)—
(233)3,255
Total$(3,021,182)$2,884,754
$(136,428)$78,889
 
Maximum payout/Notional amountMaximum payout/Notional amount
Protection sold
Protection purchased with identical underlyings(b)
Net protection (sold)/purchased(c)
Other protection purchased(d)
Protection sold
Protection purchased with identical underlyings(b)
Net protection (sold)/purchased(c)
Other protection purchased(d)
December 31, 2011 (in millions)
Credit derivatives  
Credit default swaps$(2,839,492)$2,798,207
$(41,285)$29,139
$(2,839,492)$2,798,207
$(41,285)$29,139
Other credit derivatives(a)
(79,711)4,954
(74,757)22,292
(79,711)4,954
(74,757)22,292
Total credit derivatives(2,919,203)2,803,161
(116,042)51,431
(2,919,203)2,803,161
(116,042)51,431
Credit-related notes(742)—
(742)3,944
(742)—
(742)3,944
Total$(2,919,945)$2,803,161
$(116,784)$55,375
$(2,919,945)$2,803,161
$(116,784)$55,375
 
Maximum payout/Notional amount
Protection sold
Protection purchased with identical underlyings(b)
Net protection (sold)/purchased(c)
Other protection purchased(d)
December 31, 2010 (in millions)
Credit derivatives 
Credit default swaps$(2,659,240)$2,652,313
$(6,927)$32,867
Other credit derivatives(a)
(93,776)10,016
(83,760)24,234
Total credit derivatives(2,753,016)2,662,329
(90,687)57,101
Credit-related notes(2,008)—
(2,008)3,327
Total$(2,755,024)$2,662,329
$(92,695)$60,428
(a)Primarily consists of total return swaps and credit default swapCDS 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 swapson referenced instruments (single-name, portfolio or credit-related notes.index) where the Firm has not sold any protection on the identical reference instrument.
The following tables summarize the notional and fair value amounts of credit derivatives and credit-related notes as of December 31, 20112012 and 20102011, 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

Protection sold – credit derivatives and credit-related notes ratings(a)/maturity profile

  
Protection sold – credit derivatives and credit-related notes ratings(a)/maturity profile

  
December 31, 2011 (in millions)<1 year1–5 years>5 years
Total
notional amount
Fair value(b)
December 31, 2012 (in millions)<1 year1–5 years>5 years
Total
notional amount
Fair value of receivables(b)
Fair value of payables(b)
Net fair value
Risk rating of reference entity  
Investment-grade$(352,215)$(1,262,143)$(345,996)$(1,960,354)$(57,697)$(409,748)$(1,383,644)$(224,001)$(2,017,393)$16,690
$(22,393)$(5,703)
Noninvestment-grade(241,823)(589,954)(127,814)(959,591)(85,304)(214,949)(722,115)(66,725)(1,003,789)22,355
(36,815)(14,460)
Total$(594,038)$(1,852,097)$(473,810)$(2,919,945)$(143,001)$(624,697)$(2,105,759)$(290,726)$(3,021,182)$39,045
$(59,208)$(20,163)
December 31, 2010 (in millions)<1 year1–5 years>5 years
Total
notional amount
Fair value(b)
December 31, 2011 (in millions)<1 year1–5 years>5 years
Total
notional amount
Fair value of receivables(b)
Fair value of payables(b)
Net fair value
Risk rating of reference entity  
Investment-grade$(175,618)$(1,194,695)$(336,309)$(1,706,622)$(17,261)$(352,215)$(1,262,143)$(345,996)$(1,960,354)$7,809
$(57,697)$(49,888)
Noninvestment-grade(148,434)(702,638)(197,330)(1,048,402)(59,939)(241,823)(589,954)(127,814)(959,591)13,212
(85,304)(72,092)
Total$(324,052)$(1,897,333)$(533,639)$(2,755,024)$(77,200)$(594,038)$(1,852,097)$(473,810)$(2,919,945)$21,021
$(143,001)$(121,980)
(a)The ratings scale is based on the Firm’s internal ratings, which generally correspond to ratings as defined by S&P and Moody’s.
(b)Amounts are shown on a gross basis, before the benefit of legally enforceable master netting agreements and cash collateral received by the Firm.

210JPMorgan Chase & Co./20112012 Annual Report227

Notes to consolidated financial statements

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)
2011 2010 20092012 2011 2010
Underwriting          
Equity$1,181
 $1,589
 $2,487
$1,026
 $1,181
 $1,589
Debt2,934
 3,172
 2,739
3,290
 2,934
 3,172
Total underwriting4,115
 4,761
 5,226
4,316
 4,115
 4,761
Advisory(a)
1,796
 1,429
 1,861
1,492
 1,796
 1,429
Total investment banking fees$5,911
 $6,190
 $7,087
$5,808
 $5,911
 $6,190
(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 Firm’s 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.
Principal transactions
Principal transactions revenue consists of trading revenue as well asincludes realized and unrealized gains and losses recorded on derivatives, other financial instruments, private equity investments. Trading revenue is driven by the Firm’s 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 instrumentsinvestments, and physical commodities inventories toused in market-making and from its clients and other market-makers is recognized as trading revenue. Tradingclient-driven activities.
In addition, principal transactions revenue also includes certain realized and unrealized gains and losses on financial instruments (including those for which therelated to hedge accounting and specified risk management activities disclosed separately in Note 6, including: (a) certain derivatives designated in qualifying hedge accounting relationships (primarily fair value option was elected)hedges of commodity and unrealizedforeign exchange risk), (b) certain derivatives used for specific risk management purposes, primarily to mitigate credit risk, foreign exchange risk and commodity risk but as to which qualifying hedge accounting is not applied, and (c) certain derivatives related to market-making activities and other. See Note 6 on pages 218–227 of this Annual Report for information on the income statement classification of gains and 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.derivatives.
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 Firm’s client-driven tradingmarket-making activities.
Year ended December 31,
(in millions)
2011 2010 20092012 2011 2010
Trading revenue by risk exposure          
Interest rate(a)$(873) $(199) $3,681
$3,922
 $(873) $(199)
Credit(b)3,393
 4,543
 546
(5,460) 3,393
 4,543
Foreign exchange1,154
 1,896
 2,317
1,436
 1,154
 1,896
Equity2,401
 2,275
 2,056
2,504
 2,401
 2,275
Commodity(a)(c)
2,823
 889
 1,270
2,363
 2,823
 889
Total trading revenue8,898
 9,404
 9,870
4,765
 8,898
 9,404
Private equity gains/(losses)(b)(d)
1,107
 1,490
 (74)771
 1,107
 1,490
Principal transactions(c)(e)
$10,005
 $10,894
 $9,796
$5,536
 $10,005
 $10,894
(a)
Includes a pretax gain of $665 million for the year ended December 31, 2012, reflecting the recovery on a Bear Stearns-related subordinated loan.
(b)
Includes $5.8 billion of losses incurred by CIO from the synthetic credit portfolio for the six months ended June 30, 2012, and $449 million of losses incurred by CIO from the retained index credit derivative positions for the three months ended September 30, 2012; and losses incurred by CIB from the synthetic credit portfolio.
(c)
Includes realized gains and losses and unrealized losses on physical commodities inventories that are generally carried at the lower of cost or market (market approximates fair value), subject to any applicable fair value hedge accounting adjustments, 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'sFirm’s risk exposure to its physical commodities inventories. Gains/(losses) related to commodity fair value hedges were $(1.4) billion, $(1.1) billion and $528 million for the years ended December 31, 2012, 2011 and 2010, respectively.
(b)(d)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)(e)
Principal transactions revenue included DVA related to derivativesstructured notes and structuredderivative liabilities measured at fair value in IB.CIB. DVA gains/(losses) were $1.4 billion(930) million, $509 million1.4 billion, and $(2.3) billion509 million for the years ended December 31, 20112012, 20102011 and 20092010, respectively.
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.


228JPMorgan Chase & Co./2012 Annual Report


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)
2011 2010 20092012 2011 2010
Asset management          
Investment management fees$6,085
 $5,632
 $4,997
$6,309
 $6,085
 $5,632
All other asset management fees605
 496
 356
792
 605
 496
Total asset management fees6,690
 6,128
 5,353
7,101
 6,690
 6,128
          
Total administration fees(a)
2,171
 2,023
 1,927
2,135
 2,171
 2,023
          
Commission and other fees     
     
Brokerage commissions2,753
 2,804
 2,904
2,331
 2,753
 2,804
All other commissions and fees2,480
 2,544
 2,356
2,301
 2,480
 2,544
Total commissions and fees5,233
 5,348
 5,260
4,632
 5,233
 5,348
Total asset management, administration and commissions$14,094
 $13,499
 $12,540
$13,868
 $14,094
 $13,499
(a)Includes fees for custody, securities lending, funds services and securities clearance.


JPMorgan Chase & Co./2011 Annual Report211
Notes to consolidated financial statements

Mortgage fees and related income
This revenue category primarily reflects RFS’s mortgage productionCCB’s Mortgage Production and servicingMortgage 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 RFSCCB 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 267–271291–295 of this Annual Report.
Credit card
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 256–267 of this Annual Report). Credit cardCard 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:on new account originations;originations, charge volumes;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.
Other income
Included in other income is operating lease income of $1.3 billion, $1.2 billion and $971 million for the years ended December 31, 2012, 2011 and 2010, respectively.




JPMorgan Chase & Co./2012 Annual Report229
Notes to consolidated financial statements

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)
2011
2010
2009
2012
 2011
2010
Interest income    
Loans$37,098
$40,388
$38,704
$35,832
 $37,098
$40,388
Securities9,215
9,540
12,377
7,939
 9,215
9,540
Trading assets11,142
11,007
12,098
9,039
 11,142
11,007
Federal funds sold and securities purchased under resale agreements2,523
1,786
1,750
2,442
 2,523
1,786
Securities borrowed110
175
4
(3)
(c) 
110
175
Deposits with banks599
345
938
555
 599
345
Other assets(a)
606
541
479
259
 606
541
Total interest income(b)
61,293
63,782
66,350
56,063
 61,293
63,782
Interest expense    
Interest-bearing deposits3,855
3,424
4,826
2,655
 3,855
3,424
Short-term and other liabilities(d)(b)
2,873
2,364
2,786
1,788
 2,873
2,364
Long-term debt(d)
6,109
5,848
7,368
6,062
 6,109
5,848
Beneficial interests issued by consolidated VIEs767
1,145
218
648
 767
1,145
Total interest expense(b)
13,604
12,781
15,198
11,153
 13,604
12,781
Net interest income47,689
51,001
51,152
44,910
 47,689
51,001
Provision for credit losses7,574
16,639
32,015
3,385
 7,574
16,639
Net interest income after provision for credit losses$40,115
$34,362
$19,137
$41,525
 $40,115
$34,362
(a)PredominantlyLargely 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 Firm’s total net income. However, it did affect the classification of items on the Firm’s 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)(c)Effective January 1, 2011,Negative interest income for the long-term portionyear ended December 31, 2012, is a result of advances from FHLBs was reclassified from other borrowed funds to long-term debt. The relatedincreased client-driven demand for certain securities combined with the impact of low interest rates; the offset of this matched book activity is reflected as lower net interest expense for the prior-year period has also been reclassified to conform with the current presentation.reported within short-term and other liabilities.


212230 JPMorgan Chase & Co./20112012 Annual Report


Note 9 – Pension and other postretirement employee benefit plans
The Firm’s 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 Firm’s 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 at this time any contribution to the U.S. defined benefit pension plan in 20122013 at this time.. The 20122013 contributions to the non-U.S. defined benefit pension plans are expected to be $4940 million of which $3736 million are contractually required.
JPMorgan Chase also has a number of defined benefit pension plans that are 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 earnpreviously earned 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,plan; no further pay credits would no longer be provided on compensation amounts above the maximum stipulated by law.are allocated under this plan. The Excess Retirement Plan had an unfunded projected benefit obligation in the amount of $272276 million and $266272 million, at December 31, 20112012 and 20102011, respectively.




Effective March 19, 2012, pursuant to the WaMu Global Settlement, JPMorgan Chase Bank, N.A. became the sponsor of the WaMu Pension Plan. This plan’s assets were merged with and into the JPMorgan Chase Retirement Plan effective as of December 31, 2012.
 
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 matchedmatches 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.an annual basis. 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 profit-sharing 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 plan’s 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 the length of service and the date of hire and provide for limits on the Firm’s 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 Chase’s 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.



JPMorgan Chase & Co./20112012 Annual Report 213231
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 Firm’s U.S. and non-U.S. defined benefit pension and OPEB plans.
Defined benefit pension plans   Defined benefit pension plans  
As of or for the year ended December 31,U.S. Non-U.S.  
OPEB plans(f)
U.S. Non-U.S.  
OPEB plans(e)
(in millions)2011 2010 2011 2010  2011 20102012 2011 2012 2011  2012 2011
Change in benefit obligation                       
Benefit obligation, beginning of year$(8,320) $(7,977) $(2,600) $(2,536) $(980) $(1,025)$(9,043) $(8,320) $(2,829) $(2,600) $(999) $(980)
Benefits earned during the year(249) (230) (36) (30) (1) (2)(272) (249) (41) (36) (1) (1)
Interest cost on benefit obligations(451) (468) (133) (128) (51) (55)(466) (451) (126) (133) (44) (51)
Plan amendments—
 —
 —
 10
 —
 —
—
 —
 6
 —
 —
 —
Business combinations—
 —
 —
 (12)
(b) 
 —
 —
WaMu Global Settlement(1,425) —
 —
 —
 —
 —
Employee contributionsNA
 NA
 (5) (4) (84)
(70)NA
 NA
 (5) (5) (74) (84)
Net gain/(loss)(563) (249) (160) (71) (39) 13
(864) (563) (244) (160) (9) (39)
Benefits paid540
 604
 93
 96
 166
 168
592
 540
 108
 93
 149
 166
Expected Medicare Part D subsidy receiptsNA
 NA
 NA
 NA
  (10) (10)NA
 NA
 NA
 NA
 (10) (10)
Curtailments—
 —
 —
 —
  —
 —
Settlements—
 —
 —
 5
  —
 —
Special termination benefits—
 —
 —
 (1) —
 —
Foreign exchange impact and other—
 —
 12
 71
 —
 1
—
 —
 (112) 12
 (2) —
Benefit obligation, end of year$(9,043) $(8,320) $(2,829) $(2,600) $(999) $(980)$(11,478) $(9,043) $(3,243) $(2,829) $(990) $(999)
Change in plan assets                       
Fair value of plan assets, beginning of year$10,828
 $10,218
 $2,647
 $2,432
  $1,381
 $1,269
$10,472
 $10,828
 $2,989
 $2,647
 $1,435
 $1,381
Actual return on plan assets147
 1,179
 277
 228
  78
 137
1,292
 147
 237
 277
 142
 78
Firm contributions37
 35
 169
 157
  2
 3
31
 37
 86
 169
 2
 2
WaMu Global Settlement1,809
 —
 —
 —
 —
 —
Employee contributions—
 —
 5
 4
  —
 —
—
 —
 5
 5
 —
 —
Benefits paid(540) (604) (93) (96) (26) (28)(592) (540) (108) (93) (16) (26)
Settlements—
 —
 —
 (5) —
 —
Foreign exchange impact and other—
 —
 (16) (73)  —
 —
—
 —
 121
 (16) —
 —
Fair value of plan assets, end of year$10,472
(c)(d) 
$10,828
(c)(d) 
$2,989
(d) 
$2,647
(d) 
 $1,435
 $1,381
$13,012
(b)(c) 
$10,472
(b)(c) 
$3,330
(c) 
$2,989
(c) 
 $1,563
 $1,435
Funded/(unfunded) status(a)
$1,429
(e) 
$2,508
(e) 
$160
 $47
 $436
 $401
$1,534

$1,429
(d) 
$87
 $160
 $573
 $436
Accumulated benefit obligation, end of year$(9,008) $(8,271) $(2,800) $(2,576) NA
 NA
$(11,447) $(9,008) $(3,221) $(2,800) NA
 NA
(a)
Represents overfunded plans with an aggregate balance of $2.62.8 billion and $3.52.6 billion at December 31, 20112012 and 20102011, respectively, and underfunded plans with an aggregate balance of $621612 million and $561621 million at December 31, 20112012 and 20102011, respectively.
(b)
Represents change resulting from acquisition of RBS Sempra Commodities business in 2010.
(c)
At December 31, 20112012 and 20102011, approximately $426418 million and $385426 million, respectively, of U.S. plan assets included participation rights under participating annuity contracts.
(d)(c)
At December 31, 20112012 and 20102011, defined benefit pension plan amounts not measured at fair value included $50137 million and $5250 million, respectively, of accrued receivables, and $245310 million and $187245 million, respectively, of accrued liabilities, for U.S. plans; and $5647 million and $956 million, respectively, of accrued receivables, , and at December 31, 2011,$46 million and $69 million of accrued liabilities, respectively, for non-U.S. plans.
(e)(d)Does not include any amounts attributable to the Washington Mutual QualifiedWaMu Pension plan. The disposition of this plan remained subject to litigation and was not determinable at December 31, 2011 and 2010.Plan.
(f)(e)
Includes an unfunded accumulated postretirement benefit obligation of $3331 million and $3633 million at December 31, 20112012 and 20102011, respectively, for the U.K. plan.



Gains and losses
For the Firm’s defined benefit pension plans, fair value is used to determine the expected return on plan assets. Amortization of net gains and losses is included in annual net periodic benefit cost if, as of the beginning of the year, the net gain or loss exceeds 10% of the greater of the 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.years. In addition, prior service costs are amortized over the average remaining service period of active employees expected to receive benefits under the plan when the prior service cost is first recognized. The average remaining amortization period for current prior service costs is six years.
 
For the Firm’s OPEB plans, a calculated value that recognizes changes in fair value over a five-yearfive-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 future service period, which is currently four years; however, prior service costs are amortized over the average years of service remaining to full eligibility age, which is currently three years.



214232 JPMorgan Chase & Co./20112012 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  Defined benefit pension plans  
December 31,U.S. Non-U.S. OPEB plansU.S. Non-U.S. OPEB plans
(in millions)2011 2010 2011 2010 2011 20102012 2011 2012 2011 2012 2011
Net gain/(loss)$(3,669) $(2,627) $(544) $(566) $(176) $(119)$(3,814) $(3,669) $(676) $(544) $(133) $(176)
Prior service credit/(cost)278
 321
 12
 13
 1
 9
237
 278
 18
 12
 1
 1
Accumulated other comprehensive income/(loss), pretax, end of year$(3,391) $(2,306) $(532) $(553) $(175) $(110)$(3,577) $(3,391) $(658) $(532) $(132) $(175)
The following table presents the components of net periodic benefit costs reported in the Consolidated Statements of Income and other comprehensive income for the Firm’s U.S. and non-U.S. defined benefit pension, defined contribution and OPEB plans.
Pension plans  Pension plans  
U.S. Non-U.S. OPEB plansU.S. Non-U.S. OPEB plans
Year ended December 31, (in millions)2011
2010
2009
 2011
2010
2009
 2011
2010
2009
2012
2011
2010
 2012
2011
2010
 2012
2011
2010
Components of net periodic benefit cost          
Benefits earned during the year$249
$230
$313
 $36
$31
$28
 $1
$2
$3
$272
$249
$230
 $41
$36
$31
 $1
$1
$2
Interest cost on benefit obligations451
468
514
 133
128
122
 51
55
65
466
451
468
 126
133
128
 44
51
55
Expected return on plan assets(791)(742)(585) (141)(126)(115) (88)(96)(97)(861)(791)(742) (137)(141)(126) (90)(88)(96)
Amortization:  
   
   
  
   
   
Net (gain)/loss165
225
304
 48
56
44
 1
(1)—
289
165
225
 36
48
56
 (1)1
(1)
Prior service cost/(credit)(43)(43)4
 (1)(1)—
 (8)(13)(14)(41)(43)(43) —
(1)(1) —
(8)(13)
Curtailment (gain)/loss—
—
1
 —
—
—
 —
—
5
Settlement (gain)/loss—
—
—
 —
1
1
 —
—
—
—
—
—
 —
—
1
 —
—
—
Special termination benefits—
—
—
 —
1
1
 —
—
—
—
—
—
 —
—
1
 —
—
—
Net periodic defined benefit cost31
138
551
 75
90
81
 (43)(53)(38)125
31
138
 66
75
90
 (46)(43)(53)
Other defined benefit pension plans(a)
19
14
15
 12
11
12
 NA
NA
NA
15
19
14
 8
12
11
 NA
NA
NA
Total defined benefit plans50
152
566
 87
101
93
 (43)(53)(38)140
50
152
 74
87
101
 (46)(43)(53)
Total defined contribution plans370
332
359
 285
251
226
 NA
NA
NA
409
370
332
 302
285
251
 NA
NA
NA
Total pension and OPEB cost included in compensation expense$420
$484
$925
 $372
$352
$319
 $(43)$(53)$(38)$549
$420
$484
 $376
$372
$352
 $(46)$(43)$(53)
Changes in plan assets and benefit obligations recognized in other comprehensive income          
Net (gain)/loss arising during the year1,207
(187)(168) 25
(21)183
 58
(54)(176)$434
$1,207
$(187) $146
$25
$(21) $(43)$58
$(54)
Prior service credit arising during the year—
—
(384) —
(10)(1) —
—
—
—
—
—
 (6)—
(10) —
—
—
Amortization of net loss(165)(225)(304) (48)(56)(44) (1)1
—
(289)(165)(225) (36)(48)(56) 1
(1)1
Amortization of prior service (cost)/credit43
43
(6) 1
1
—
 8
13
15
41
43
43
 —
1
1
 —
8
13
Curtailment (gain)/loss—
—
—
 —
—
—
 —
—
2
Settlement loss/(gain)—
—
—
 —
(1)(1) —
—
—
—
—
—
 —
—
(1) —
—
—
Foreign exchange impact and other—
—
18
 1
(23)36
 —
1
(1)—
—
—
 22
1
(23) (1)—
1
Total recognized in other comprehensive income1,085
(369)(844) (21)(110)173
 65
(39)(160)$186
$1,085
$(369) $126
$(21)$(110) $(43)$65
$(39)
Total recognized in net periodic benefit cost and other comprehensive income$1,116
$(231)$(293) $54
$(20)$254
 $22
$(92)$(198)$311
$1,116
$(231) $192
$54
$(20) $(89)$22
$(92)
(a)Includes various defined benefit pension plans which are individually immaterial.

JPMorgan Chase & Co./20112012 Annual Report 215233
Notes to consolidated financial statements

The estimated pretax amounts that will be amortized from AOCI into net periodic benefit cost in 20122013 are as follows.
 Defined benefit pension plans OPEB plans Defined benefit pension plans OPEB plans
(in millions) U.S. Non-U.S. U.S. Non-U.S. U.S. Non-U.S. U.S. Non-U.S.
Net loss $287
 $36
 $7
 $—
Net loss/(gain) $276
 $50
 $5
 $(1)
Prior service cost/(credit) (41) (1) (1) —
 (41) (2) —
 —
Total $246
 $35
 $6
 $—
 $235
 $48
 $5
 $(1)
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.
U.S. Non-U.S.U.S. Non-U.S.
Year ended December 31,2011
 2010
 2009
 2011 2010 20092012
 2011
 2010
 2012 2011 2010
Actual rate of return:                      
Defined benefit pension plans0.72% 12.23% 13.78% (4.29)-13.12% 0.77-10.65% 3.17-22.43%12.66% 0.72% 12.23% 7.21 - 11.72% (4.29)-13.12% 0.77-10.65%
OPEB plans5.22% 11.23% 15.93% NA NA NA10.10
 5.22
 11.23
 NA NA NA

Plan assumptions
JPMorgan Chase’s expected long-term rate of return for U.S. defined benefit pension and OPEB plan assets is a blended average of the investment advisor’s 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 short-term portfolio mix of each plan; as a result, in 20112012 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 plan’s 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 plansplan represents a rate implied from the yield curve of the year-end iBoxx £ corporate “AA” 15-year-plus15-year-plus bond index.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 Firm’s significant U.S. and non-U.S. defined benefit pension and OPEB plans, as of and for the periods indicated.
Weighted-average assumptions used to determine benefit obligationsWeighted-average assumptions used to determine benefit obligations      Weighted-average assumptions used to determine benefit obligations      
U.S. Non-U.S.U.S. Non-U.S.
December 31,2011
 2010
 2011
 2010
2012
 2011
 2012
 2011
Discount rate:              
Defined benefit pension plans4.60% 5.50% 1.50-4.80%
 1.60–5.50%
3.90% 4.60% 1.40 - 4.40%
 1.50-4.80%
OPEB plans4.70
 5.50
 —
 —
3.90
 4.70
 —
 —
Rate of compensation increase4.00
 4.00
 2.75-4.20
 3.00–4.50
4.00
 4.00
 2.75 - 4.10
 2.75-4.20
Health care cost trend rate:              
Assumed for next year7.00
 7.00
 —
 —
7.00
 7.00
 —
 —
Ultimate5.00
 5.00
 —
 —
5.00
 5.00
 —
 —
Year when rate will reach ultimate2017
 2017
 —
 —
2017
 2017
 —
 —

216234 JPMorgan Chase & Co./20112012 Annual Report


Weighted-average assumptions used to determine net periodic benefit costsWeighted-average assumptions used to determine net periodic benefit costs      Weighted-average assumptions used to determine net periodic benefit costs      
U.S. Non-U.S.U.S. Non-U.S.
Year ended December 31,2011
 2010
 2009
 2011
 2010
 2009
2012
 2011
 2010
 2012
 2011
 2010
Discount rate:                      
Defined benefit pension plans5.50% 6.00% 6.65% 1.60-5.50%
 2.00–5.70%
 2.00–6.20%
4.60% 5.50% 6.00% 1.50 - 4.80%
 1.60-5.50%
 2.00–5.70%
OPEB plans5.50
 6.00
 6.70
 —
 —
 —
4.70
 5.50
 6.00
 —
 —
 —
Expected long-term rate of return on plan assets:       
           
    
Defined benefit pension plans7.50
 7.50
 7.50
 2.40-5.40
 2.40–6.20
 2.50–6.90
7.50
 7.50
 7.50
 2.50 - 4.60
 2.40-5.40
 2.40–6.20
OPEB plans6.25
 7.00
 7.00
 NA
 NA
 NA
6.25
 6.25
 7.00
 NA
 NA
 NA
Rate of compensation increase4.00
 4.00
 4.00
 3.00-4.50
 3.00–4.50
 3.00–4.00
4.00
 4.00
 4.00
 2.75 - 4.20
 3.00-4.50
 3.00–4.50
Health care cost trend rate:       
           
    
Assumed for next year7.00
 7.75
 8.50
 —
 —
 —
7.00
 7.00
 7.75
 —
 —
 —
Ultimate5.00
 5.00
 5.00
 —
 —
 —
5.00
 5.00
 5.00
 —
 —
 —
Year when rate will reach ultimate2017
 2014
 2014
 —
 —
 —
2017
 2017
 2014
 —
 —
 —
The following table presents the effect of a one-percentage-point change in the assumed health care cost trend rate on JPMorgan Chase’s total service and interest cost and accumulated postretirement benefit obligation.
Year ended December 31, 2011(in millions)1-Percentage point increase 1-Percentage point decrease
Year ended December 31, 2012 (in millions)1-Percentage point increase 1-Percentage point decrease
Effect on total service and interest cost$1
 $(1)$1
 $(1)
Effect on accumulated postretirement benefit obligation27
 (24)28
 (25)
At December 31, 20112012, 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 $4748 million for 20122013. The 20122013 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 20112012. For 2012,2013, the initial health care benefit obligation trend assumption will behas been set at 7.00%, and the ultimate health care trend assumption and the year to reach the ultimate rate will remainremains at 5.00% and 2017, respectively, unchanged from 2011.2012. As of December 31, 20112012, the interest crediting rate assumption and the assumed rate of compensation increase remained at 4.00%5.00%. The 2012 interest crediting rate assumption will be set at and 5.00%4.00%, as compared to 5.25% in 2011.respectively.
JPMorgan Chase’s 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 $2935 million in 20122013 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 20122013 U.S. defined benefit pension and OPEB plan expense of approximately an aggregate $1719 million and an increase in the related benefit obligations of approximately an aggregate $192272 million. A 25-basis point increasedecrease in the interest crediting rate for the U.S. defined benefit pension plan would result in an increasea decrease in 20122013 U.S. defined
benefit pension expense of approximately $1925 million and an increasea
decrease in the related projected benefit obligations of approximately $82116 million. A 25-basis point decline in the discount rates for the non-U.S. plans would result in an increase in the 20122013 non-U.S. defined benefit pension plan expense of approximately $1114 million.
Investment strategy and asset allocation
The Firm’s 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 Firm’s 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 Firm’s 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-andshort- 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 and the anticipated implications of the macroeconomic environment on the various asset classes/managers, andclasses while maintaining an appropriate level of liquidity for the plan. The Firm regularly reviews the asset allocations and


JPMorgan Chase & Co./20112012 Annual Report 217235
Notes to consolidated financial statements

The Firm regularly reviews the asset allocations and allmanagers, as well as other 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 plan’splans’ 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 and asset managers for the U.K. plans are reviewed regularly and the portfolio is rebalanced on a regular basis.

when deemed necessary.
 
Investments held by the Plans include financial instruments which are exposed to various risks such as interest rate, market and credit risks. Exposure to a concentration of credit risk is mitigated by the broad diversification of both U.S. and non-U.S. investment instruments. Additionally, the investments in each of the common/collective trust funds and registered investment companies are further diversified into various financial instruments. As of December 31, 20112012, assets held by the Firm’s 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 $1.61.8 billion and $1.71.6 billion for U.S. plans and $194220 million and $155194 million for non-U.S. plans, as of December 31, 20112012 and 20102011, 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 Firm’s U.S. and non-U.S. defined benefit pension and OPEB plans.
Defined benefit pension plans  Defined benefit pension plans  
U.S. Non-U.S. 
OPEB plans(c)
U.S. Non-U.S. 
OPEB plans(c)
Target % of plan assets Target % of plan assets Target % of plan assetsTarget % of plan assets Target % of plan assets Target % of plan assets
December 31,Allocation 2011
 2010
 Allocation 2011
 2010
 Allocation 2011
 2010
Allocation 2012
 2011
 Allocation 2012
 2011
 Allocation 2012
 2011
Asset category                                  
Debt securities(a)
10–30% 20% 29% 72% 74% 71% 50% 50% 50%10-30% 20% 20% 70% 72% 74% 50% 50% 50%
Equity securities25–60 39
 40
 27
 25
 28
 50
 50
 50
25-60 41
 39
 29
 27
 25
 50
 50
 50
Real estate5–20 5
 4
 —
 —
 —
 —
 —
 —
5-20 5
 5
 —
 —
 —
 —
 —
 —
Alternatives(b)
15–50 36
 27
 1
 1
 1
 —
 —
 —
15-50 34
 36
 1
 1
 1
 —
 —
 —
Total100% 100% 100% 100% 100% 100% 100% 100% 100%100% 100% 100% 100% 100% 100% 100% 100% 100%
(a)Debt securities primarily include corporate debt, U.S. federal, state, local and non-U.S. government, and mortgage-backed securities.
(b)Alternatives primarily include limited partnerships.
(c)Represents the U.S. OPEB plan only, as the U.K. OPEB plan is unfunded.



218236 JPMorgan Chase & Co./20112012 Annual Report


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 184–198196–214 of this Annual Report.
Pension and OPEB plan assets and liabilities measured at fair value

Pension and OPEB plan assets and liabilities measured at fair value

        
Pension and OPEB plan assets and liabilities measured at fair value

        
U.S. defined benefit pension plans Non-U.S. defined benefit pension plansU.S. defined benefit pension plans Non-U.S. defined benefit pension plans
December 31, 2011
(in millions)
Level 1 Level 2 Level 3 Total fair value Level 1 Level 2 Level 3 Total fair value
December 31, 2012
(in millions)
Level 1 Level 2 Level 3 Total fair value Level 1 Level 2 Level 3 Total fair value
Cash and cash equivalents$117
 $—
 $—
 $117
 $72
 $—
 $—
 $72
$162
 $—
 $—
 $162
 $142
 $—
 $—
 $142
Equity securities:                              
Capital equipment607
 7
 —
 614
 69
 12
 —
 81
702
 6
 —
 708
 115
 15
 —
 130
Consumer goods657
 —
 —
 657
 64
 30
 —
 94
744
 4
 —
 748
 136
 32
 —
 168
Banks and finance companies301
 2
 —
 303
 83
 13
 —
 96
425
 54
 —
 479
 94
 23
 —
 117
Business services332
 —
 —
 332
 48
 10
 —
 58
424
 —
 —
 424
 125
 8
 —
 133
Energy173
 —
 —
 173
 52
 10
 —
 62
192
 —
 —
 192
 54
 12
 —
 66
Materials161
 —
 1
 162
 35
 6
 —
 41
211
 —
 —
 211
 30
 6
 —
 36
Real Estate11
 —
 —
 11
 1
 —
 —
 1
18
 —
 —
 18
 10
 —
 —
 10
Other766
 274
 —
 1,040
 160
 5
 —
 165
1,107
 42
 4
 1,153
 19
 71
 —
 90
Total equity securities3,008
 283
 1
 3,292
 512
 86
 —
 598
3,823
 106
 4
 3,933
 583
 167
 —
 750
Common/collective trust funds(a)
401
 1,125
 202
 1,728
 138
 170
 —
 308
412
 1,660
 199
 2,271
 62
 192
 —
 254
Limited partnerships:(c)(b)
                              
Hedge funds—
 933
 1,039
 1,972
 —
 —
 —
 —
—
 878
 1,166
 2,044
 —
 —
 —
 —
Private equity—
 —
 1,367
 1,367
 —
 —
 —
 —
—
 —
 1,743
 1,743
 —
 —
 —
 —
Real estate—
 —
 306
 306
 —
 —
 —
 —
—
 —
 467
 467
 —
 —
 —
 —
Real assets(d)(c)
—
 —
 264
 264
 —
 —
 —
 —
—
 —
 311
 311
 —
 —
 —
 —
Total limited partnerships—
 933
 2,976
 3,909
 —
 —
 —
 —
—
 878
 3,687
 4,565
 —
 —
 —
 —
Corporate debt securities(e)(d)
—
 544
 2
 546
 —
 958
 —
 958
—
 1,114
 1
 1,115
 —
 765
 —
 765
U.S. federal, state, local and non-U.S. government debt securities—
 328
 —
 328
 —
 904
 —
 904
—
 537
 —
 537
 —
 1,237
 —
 1,237
Mortgage-backed securities122
 36
 —
 158
 17
 —
 —
 17
107
 30
 —
 137
 100
 —
 —
 100
Derivative receivables1
 2
 —
 3
 —
 7
 —
 7
3
 5
 —
 8
 109
 —
 —
 109
Other(f)(e)
102
 60
 427
 589
 74
 65
 —
 139
7
 34
 420
 461
 21
 67
 —
 88
Total assets measured at fair value(h)(g)
$3,751
 $3,311
 $3,608
 $10,670
 $813
 $2,190
 $—
 $3,003
$4,514
 $4,364
 $4,311
 $13,189
 $1,017
 $2,428
 $—
 $3,445
Derivative payables—
 (3) —
 (3) —
 (1) —
 (1)$—
 $(4) $—
 $(4) $(116) $—
 $—
 $(116)
Total liabilities measured at fair value(h)$—
 $(3) $—
 $(3)
(i) 
$—
 $(1) $—
 $(1)$—
 $(4) $—
 $(4)
$(116) $—
 $—
 $(116)

JPMorgan Chase & Co./20112012 Annual Report 219237
Notes to consolidated financial statements




U.S. defined benefit pension plans Non-U.S. defined benefit pension plansU.S. defined benefit pension plans Non-U.S. defined benefit pension plans
December 31, 2010
(in millions)
Level 1 Level 2 Level 3 Total fair value Level 1 Level 2 Level 3 Total fair value
December 31, 2011
(in millions)
Level 1 Level 2 Level 3 Total fair value Level 1 Level 2 Level 3 Total fair value
Cash and cash equivalents$—
 $—
 $—
 $—
 $81
 $—
 $—
 $81
$117
 $—
 $—
 $117
 $72
 $—
 $—
 $72
Equity securities: 
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
Capital equipment748
 9
 —
 757
 68
 13
 —
 81
607
 7
 —
 614
 69
 12
 —
 81
Consumer goods712
 —
 —
 712
 75
 21
 —
 96
657
 —
 —
 657
 64
 30
 —
 94
Banks and finance companies414
 1
 —
 415
 113
 9
 —
 122
301
 2
 —
 303
 83
 13
 —
 96
Business services444
 —
 —
 444
 53
 10
 —
 63
332
 —
 —
 332
 48
 10
 —
 58
Energy195
 —
 —
 195
 59
 6
 —
 65
173
 —
 —
 173
 52
 10
 —
 62
Materials205
 —
 —
 205
 50
 13
 —
 63
161
 —
 1
 162
 35
 6
 —
 41
Real estate21
 —
 —
 21
 1
 —
 —
 1
11
 —
 —
 11
 1
 —
 —
 1
Other857
 6
 —
 863
 194
 16
 —
 210
766
 274
 —
 1,040
 160
 5
 —
 165
Total equity securities3,596
 16
 —
 3,612
 613
 88
 —
 701
3,008
 283
 1
 3,292
 512
 86
 —
 598
Common/collective trust funds(b)(a)
436
 1,263
 194
 1,893
 46
 180
 —
 226
401
 1,125
 202
 1,728
 138
 170
 —
 308
Limited partnerships:(c)(b)
 
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
Hedge funds—
 959
 1,160
 2,119
 —
 —
 —
 —
—
 933
 1,039
 1,972
 —
 —
 —
 —
Private equity—
 —
 1,232
 1,232
 —
 —
 —
 —
—
 —
 1,367
 1,367
 —
 —
 —
 —
Real estate—
 —
 304
 304
 —
 —
 —
 —
—
 —
 306
 306
 —
 —
 —
 —
Real assets(d)(c)
—
 —
 —
 —
 —
 —
 —
 —
—
 —
 264
 264
 —
 —
 —
 —
Total limited partnerships—
 959
 2,696
 3,655
 —
 —
 —
 —
—
 933
 2,976
 3,909
 —
 —
 —
 —
Corporate debt securities(e)(d)
—
 424
 1
 425
 —
 718
 —
 718
—
 544
 2
 546
 —
 958
 —
 958
U.S. federal, state, local and non-U.S. government debt securities—
 453
 —
 453
 —
 864
 —
 864
—
 328
 —
 328
 —
 904
 —
 904
Mortgage-backed securities188
 55
 —
 243
 1
 —
 —
 1
122
 36
 —
 158
 17
 —
 —
 17
Derivative receivables2
 194
 —
 196
 —
 3
 —
 3
1
 2
 —
 3
 —
 7
 —
 7
Other(f)(e)
218
 58
 387
 663
 18
 51
 —
 69
102
 60
 427
 589
 74
 65
 —
 139
Total assets measured at fair value(h)(g)
$4,440
 $3,422
 $3,278
 $11,140
 $759
 $1,904
 $—
 $2,663
$3,751
 $3,311
 $3,608
 $10,670
 $813
 $2,190
 $—
 $3,003
Derivative payables—
 (177) —
 (177) —
 (25) —
 (25)$—
 $(3) $—
 $(3) $—
 $(1) $—
 $(1)
Total liabilities measured at fair value(h)$—
 $(177) $—
 $(177)
(i) 
$—
 $(25) $—
 $(25)$—
 $(3) $—
 $(3)
$—
 $(1) $—
 $(1)
(a)
At December 31, 20112012 and 20102011, common/collective trust funds generally include commingled funds that primarily included 23% and 22%, respectively,a mix of short-term investment funds; 19%funds, domestic and 21%, respectively, ofinternational equity (index) investments;investments (including index) and 19% and 16%, respectively, of international investments.real estate funds.
(b)The prior period has been revised to consider redemption notification periods, in determining the classification of investments within the fair value hierarchy.
(c)
Unfunded commitments to purchase limited partnership investments for the Plansplans were$1.4 billion and $1.2 billion for 2012 and $1.1 billion for 2011, and 2010, respectively.
(d)(c)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.
(e)(d)Corporate debt securities include debt securities of U.S. and non-U.S. corporations.
(f)(e)Other consists of exchange tradedexchange-traded funds and participating and non-participating annuity contracts. Exchange tradedExchange-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.
(g)(f)
At December 31, 20112012 and 20102011, the fair value of investments valued at NAV were $3.94.4 billion and $4.13.9 billion, respectively, which were classified within the valuation hierarchy as follows: $0.4 billion and $0.50.4 billion in level 1, $2.12.5 billion and $2.22.1 billion in level 2 and $1.41.5 billion and $1.4 billion in level 3.
(h)(g)
At December 31, 20112012 and 20102011, excluded U.S. defined benefit pension plan receivables for investments sold and dividends and interest receivables of $50137 million and $5250 million, respectively; and excluded non-U.S. defined benefit pension plan receivables for investments sold and dividends and interest receivables of $5647 million and $956 million, respectively.
(i)(h)
At December 31, 20112012 and 20102011, excluded $241306 million and $149241 million, respectively, of U.S. defined benefit pension plan payables for investments purchased; and $4 million and $384 million, respectively, of other liabilities; and excluded non-U.S. defined benefit pension plan payables for investments purchased of $69$46 million at December 31, 2011. and $69 million, respectively.
The Firm’s OPEB plan was partially funded with COLI policies of $1.6 billion and $1.4 billion, at December 31, 20112012 and 2010,2011, respectively, which were classified in level 3 of the valuation hierarchy.





220238 JPMorgan Chase & Co./20112012 Annual Report


Changes in level 3 fair value measurements using significant unobservable inputs

Changes in level 3 fair value measurements using significant unobservable inputs

    
Changes in level 3 fair value measurements using significant unobservable inputs

    
Year ended December 31, 2011
(in millions)
 Fair value, January 1, 2011 Actual return on plan assets Purchases, sales and settlements, net Transfers in and/or out of level 3 Fair value, December 31, 2011
Realized gains/(losses) Unrealized gains/(losses)
Year ended December 31, 2012
(in millions)
 Fair value, January 1, 2012 Actual return on plan assets Purchases, sales and settlements, net Transfers in and/or out of level 3 Fair value, December 31, 2012
Realized gains/(losses) Unrealized gains/(losses)
U.S. defined benefit pension plans                        
Equities $—
 $—
 $—
 $—
 $1
 $1
 $1
 $—
 $(1) $—
 $4
 $4
Common/collective trust funds 194
 35
 1
 (28) —
 202
 202
 2
 22
 (27) —
 199
Limited partnerships:                        
Hedge funds 1,160
 (16) 27
 (76) (56) 1,039
 1,039
 1
 71
 55
 —
 1,166
Private equity 1,232
 56
 2
 77
 —
 1,367
 1,367
 59
 54
 263
 —
 1,743
Real estate 304
 8
 40
 14
 (60) 306
 306
 16
 1
 144
 —
 467
Real assets —
 5
 (7) 150
 116
 264
 264
 —
 10
 37
 —
 311
Total limited partnerships 2,696
 53
 62
 165
 —
 2,976
 2,976
 76
 136
 499
 —
 3,687
Corporate debt securities 1
 —
 —
 1
 —
 2
 2
 —
 —
 (1) —
 1
Other 387
 —
 41
 (1) —
 427
 427
 —
 (7) —
 —
 420
Total U.S. plans $3,278
 $88
 $104
 $137
 $1
 $3,608
 $3,608
 $78
 $150
 $471
 $4
 $4,311
Non-U.S. defined benefit pension plans                        
Other $—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
Total non-U.S. plans $—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
OPEB plans                        
COLI $1,381
 $—
 $70
 $(24) $—
 $1,427
 $1,427
 $—
 $127
 $—
 $—
 $1,554
Total OPEB plans $1,381
 $—
 $70
 $(24) $—
 $1,427
 $1,427
 $—
 $127
 $—
 $—
 $1,554
Year ended December 31, 2010
(in millions)
 Fair value, January 1, 2010 Actual return on plan assets Purchases, sales and settlements, net Transfers in and/or out of level 3 Fair value, December 31, 2010
Realized gains/(losses) Unrealized gains/(losses)
Year ended December 31, 2011
(in millions)
 Fair value, January 1, 2011 Actual return on plan assets Purchases, sales and settlements, net Transfers in and/or out of level 3 Fair value, December 31, 2011
Realized gains/(losses) Unrealized gains/(losses)
U.S. defined benefit pension plans                        
Equities $—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
 $1
 $1
Common/collective trust funds(a)
 284
 —
 (90) —
 —
 194
 194
 35
 1
 (28) —
 202
Limited partnerships:                        
Hedge funds 680
 (1) 14
 388
 79
 1,160
 1,160
 (16) 27
 (76) (56) 1,039
Private equity 874
 3
 108
 235
 12
 1,232
 1,232
 56
 2
 77
 —
 1,367
Real estate 196
 3
 16
 89
 —
 304
 304
 8
 40
 14
 (60) 306
Real assets —
 —
 —
 —
 —
 —
 —
 5
 (7) 150
 116
 264
Total limited partnerships 1,750
 5
 138
 712
 91
 2,696
 2,696
 53
 62
 165
 —
 2,976
Corporate debt securities —
 —
 —
 —
 1
 1
 1
 —
 —
 1
 —
 2
Other 334
 —
 53
 —
 —
 387
 387
 —
 41
 (1) —
 427
Total U.S. plans $2,368
 $5
 $101
 $712
 $92
 $3,278
 $3,278
 $88
 $104
 $137
 $1
 $3,608
Non-U.S. defined benefit pension plans                        
Other $13
 $—
 $(1) $(12) $—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
Total non-U.S. plans $13
 $—
 $(1) $(12) $—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
OPEB plans                        
COLI $1,269
 $—
 $137
 $(25) $—
 $1,381
 $1,381
 $—
 $70
 $(24) $—
 $1,427
Total OPEB plans $1,269
 $—
 $137
 $(25) $—
 $1,381
 $1,381
 $—
 $70
 $(24) $—
 $1,427


JPMorgan Chase & Co./20112012 Annual Report 221239
Notes to consolidated financial statements

Year ended December 31, 2009
(in millions)
 Fair value, January 1, 2009 Actual return on plan assets Purchases, sales and settlements, net Transfers in and/or out of level 3 Fair value, December 31, 2009
Realized gains/(losses) Unrealized gains/(losses)
Year ended December 31, 2010
(in millions)
 Fair value, January 1, 2010 Actual return on plan assets Purchases, sales and settlements, net Transfers in and/or out of level 3 Fair value, December 31, 2010
Realized gains/(losses) Unrealized gains/(losses)
U.S. defined benefit pension plans                        
Equities $—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
 $—
Common/collective trust funds(a)
 340
 —
 (56) —
 —
 284
 284
 —
 (90) —
 —
 194
Limited partnerships:                        
Hedge funds 553
 —
 136
 (9) —
 680
 680
 (1) 14
 388
 79
 1,160
Private equity 810
 —
 (1) 80
 (15) 874
 874
 3
 108
 235
 12
 1,232
Real estate 203
 —
 (107) 100
 —
 196
 196
 3
 16
 89
 —
 304
Real assets —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
Total limited partnerships 1,566
 —
 28
 171
 (15) 1,750
 1,750
 5
 138
 712
 91
 2,696
Corporate debt securities —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 1
 1
Other 315
 —
 19
 —
 —
 334
 334
 —
 53
 —
 —
 387
Total U.S. plans $2,221
 $—
 $(9) $171
 $(15) $2,368
 $2,368
 $5
 $101
 $712
 $92
 $3,278
Non-U.S. defined benefit pension plans                        
Other $14
 $—
 $(1) $—
 $—
 $13
 $13
 $—
 $(1) $(12) $—
 $—
Total non-U.S. plans $14
 $—
 $(1) $—
 $—
 $13
 $13
 $—
 $(1) $(12) $—
 $—
OPEB plans                        
COLI $1,126
 $—
 $172
 $(29) $—
 $1,269
 $1,269
 $—
 $137
 $(25) $—
 $1,381
Total OPEB plans $1,126
 $—
 $172
 $(29) $—
 $1,269
 $1,269
 $—
 $137
 $(25) $—
 $1,381
(a)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)
 U.S. defined benefit pension plans Non-U.S. defined benefit pension plans  OPEB before Medicare Part D subsidy Medicare Part D subsidy U.S. defined benefit pension plans Non-U.S. defined benefit pension plans  OPEB before Medicare Part D subsidy Medicare Part D subsidy
2012 $1,038
 $95
 $96
 $11
2013 1,035
 99
 95
 12
 $1,159
 $102
 $92
 $11
2014 610
 101
 94
 13
 1,162
 101
 91
 12
2015 610
 110
 92
 14
 705
 108
 89
 13
2016 613
 116
 90
 14
 709
 110
 87
 14
Years 2017–2021 3,084
 658
 404
 80
2017 711
 112
 84
 14
Years 2018–2022 3,555
 626
 376
 65

240JPMorgan Chase & Co./2012 Annual Report


Note 10 – Employee stock-based incentives
Employee stock-based awards
In 20112012, 20102011 and 20092010, JPMorgan Chase granted long-term 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, andwhich was last amended in May 2011.2011 (“LTIP”). Under the terms of the amended 2005 plan,LTIP, as of December 31, 20112012, 318283 million shares of common stock are available for issuance through May 2015. The amended 2005 PlanLTIP is the only active plan under which the Firm is currently granting stock-based incentive awards. In the following discussion, the 2005 Plan,LTIP, plus prior Firm plans and plans assumed as the result of acquisitions, are referred to collectively as the “LTI Plans,” and such plans constitute the Firm’s 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 years
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 277301 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 Chase’s common stock on the grant date. The Firm typically awards SARs to certain key employees once per year; the Firm also


222JPMorgan Chase & Co./2011 Annual Report


periodically grants employee stock options and SARs to individual employees. The 2012, 2011 2010 and 20092010 grants of SARs to key employees vest ratably over five years (i.e., 20% per year) and contain clawback provisions similar to RSUs. The2012, 2011 and 2010 grants of SARs contain full-career eligibility provisions; the 2009 grants of SARs do not include any full-career eligibility provisions. SARs generally expire 10ten 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 straight-line basis from the grant date until the vesting date of the respective tranche, provided that the employees will not become full-career eligible during the vesting period. For awards with full-career eligibility provisions and awards granted with no future substantive service requirement, the Firm accrues the estimated value of awards expected to be awarded to employees as of the grant date without giving consideration to the impact of post-employment restrictions. For each tranche granted to employees who will become full-career eligible during the vesting period, compensation expense is recognized on a straight-line basis from the grant date until the earlier of the employee’s full-career eligibility date or the vesting date of the respective tranche.
The Firm’s policy for issuing shares upon settlement of employee stock-based incentive awards is to issue either new shares of common stock or treasury shares. During 20112012, 20102011 and 20092010, 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. Effective January 2013, the Compensation Committee and Board of Directors determined that, while all the requirements for vesting of these awards have been met, vesting should be deferred for a period of up to 18 months (i.e., up to July 22, 2014), to enable the Firm to make progress against the Firm’s strategic priorities and performance goals, including remediation relating to the CIO matter. The SARs, which have a 10-year term, will become exercisable no earlier than JanuaryJuly 22, 2013,2014, and have an exercise price of $39.83 (the price of JPMorgan Chase common stock on the date of grant). The number of SARs thatVesting 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 five-year service period, subject to a requirementBoard determination taking into consideration the extent of such progress and such other factors as it deems relevant. The expense related to recognizethis award is dependent on changes in the fair value of the awardSARs through the grant date.date at which the award is finalized, and the cumulative expense is recognized ratably over the service period, which was initially assumed to be five years but, effective in the first quarter of 2013, has been extended to six and one-half years. The Firm recognized $(4)5 million, $4(4) million and $94 million in compensation expense in 20112012, 20102011 and 20092010, respectively, for this award.



JPMorgan Chase & Co./2012 Annual Report241
Notes to consolidated financial statements

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 Chase’s RSUs, employee stock options and SARs activity for 20112012.
 RSUs Options/SARs RSUs Options/SARs
Year ended December 31, 2011 
Number of
shares
Weighted-average grant
date fair value
 Number of awardsWeighted-average exercise price Weighted-average remaining contractual life (in years)Aggregate intrinsic value
Year ended December 31, 2012 
Number of
shares
Weighted-average grant
date fair value
 Number of awardsWeighted-average exercise price Weighted-average remaining contractual life (in years)Aggregate intrinsic value
(in thousands, except weighted-average data, and where otherwise stated) 
Number of
shares
Weighted-average grant
date fair value
 Number of awardsWeighted-average exercise price Weighted-average remaining contractual life (in years)Aggregate intrinsic value 
Outstanding, January 1   166,631
$37.65
 155,761
$40.58
   
Granted 59,697
44.05
 15,300
44.27
   59,646
35.73
 14,738
35.70
  
Exercised or vested (121,699)26.95
 (15,409)32.27
   (79,062)30.91
 (18,675)26.45
  
Forfeited (5,488)37.05
 (4,168)39.56
   (5,209)40.22
 (3,888)38.07
  
Canceled NA
NA
 (74,489)51.77
   NA
NA
 (32,030)40.10
  
Outstanding, December 31 166,631
$37.65
 155,761
$40.58
 4.6$419,887
 142,006
$40.49
 115,906
$42.44
 5.5$721,059
Exercisable, December 31 NA
NA
 106,335
41.89
 3.1260,309
 NA
NA
 70,576
45.87
 4.2420,713
The total fair value of RSUs that vested during the years ended December 31, 2012, 2011 and 2010, and 2009, was$2.8 billion, $5.4 billion, and $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, 20112012, 20102011 and 20092010, was $13.048.89, $12.2713.04 and $8.2412.27, respectively. The total intrinsic value of options exercised during the years ended December 31, 20112012, 20102011 and 20092010, was $191283 million, $154191 million and $154 million, respectively.

JPMorgan Chase & Co./2011 Annual Report223
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) 2011
 2010
 2009
 2012
 2011
 2010
Cost of prior grants of RSUs and SARs that are amortized over their applicable vesting periods $1,986
 $2,479
 $2,510
 $1,810
 $1,986
 $2,479
Accrual of estimated costs of RSUs and SARs to be granted in future periods including those to full-career eligible employees 689
 772
 845
 735
 689
 772
Total noncash compensation expense related to employee stock-based incentive plans $2,675
 $3,251
 $3,355
 $2,545
 $2,675
 $3,251
At December 31, 20112012, approximately $1.3 billion909 million (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 1.00.9 years 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 Firm’s Consolidated Statements of Income for the years ended December 31, 20112012, 20102011 and 20092010, were $1.0 billion, $1.31.0 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) 2011
 2010
 2009
 2012
 2011
 2010
Cash received for options exercised $354
 $205
 $437
 $333
 $354
 $205
Tax benefit realized(a)
 31
 14
 11
 53
 31
 14
(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.



242JPMorgan Chase & Co./2012 Annual Report


Valuation assumptions
The following table presents the assumptions used to value employee stock options and SARs granted during the years ended December 31, 20112012, 20102011 and 20092010, under the Black-Scholes valuation model.
Year ended December 31, 2011
 2010
 2009
 2012
 2011
 2010
Weighted-average annualized valuation assumptions            
Risk-free interest rate 2.58% 3.89% 2.33% 1.19% 2.58% 3.89%
Expected dividend yield(a)
 2.20
 3.13
 3.40
 3.15
 2.20
 3.13
Expected common stock price volatility 34
 37
 56
 35
 34
 37
Expected life (in years) 6.5
 6.4
 6.6
 6.6 6.5 6.4
(a)
In2012 and 2011, the expected dividend yield was determined using forward-looking assumptions. In 2010 and 2009the expected dividend yield was determined using historical dividend yields.
The expected volatility assumption is derived from the implied volatility of JPMorgan Chase’s 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 Firm’s historical experience.

Note 11 – Noninterest expense
The following table presents the components of noninterest expense.
Year ended December 31, (in millions)2011
 2010
 2009
 2012
 2011
 2010
Compensation expense(a)
$29,037
 $28,124
 $26,928
 $30,585
 $29,037
 $28,124
Noncompensation expense:     
      
Occupancy expense3,895
 3,681
 3,666
 3,925
 3,895
 3,681
Technology, communications and equipment expense4,947
 4,684
 4,624
 5,224
 4,947
 4,684
Professional and outside services7,482
 6,767
 6,232
 7,429
 7,482
 6,767
Marketing3,143
 2,446
 1,777
 2,577
 3,143
 2,446
Other expense(b)(c)
13,559
 14,558
 7,594
 14,032
 13,559
 14,558
Amortization of intangibles848
 936
 1,050
 957
 848
 936
Total noncompensation expense33,874
 33,072
 24,943
 34,144
 33,874
 33,072
Merger costs—
 —
 481
(d) 
Total noninterest expense$62,911
 $61,196
 $52,352
 $64,729
 $62,911
 $61,196
(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 $4.95.0 billion, $7.44.9 billion and $161 million7.4 billion for the years ended December 31, 20112012, 20102011 and 20092010, respectively.
(c)
Included foreclosed propertyFDIC-related expense of $718 million1.7 billion, $1.01.5 billion and $1.4 billion899 million for the years ended December 31, 20112012, 20102011 and 20092010, 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.




224JPMorgan Chase & Co./20112012 Annual Report243

Notes to consolidated financial statements

Note 12 – Securities
Securities are primarily classified as AFS or trading. Trading securitiesSecurities classified as trading assets are discussed in Note 3 on pages 184–198196–214 of this Annual Report. Securities are classifiedPredominantly all of the AFS securities portfolio is held by CIO in connection with its asset-liability management objectives. At December 31, 2012, the average credit rating of the debt securities comprising the AFS portfolio was AA+ (based upon external ratings where available, and where not available, based primarily upon internal ratings which correspond to ratings as AFS when used to manage the Firm’s exposure to interest rate movements or used for longer-term strategic purposes.defined by S&P and Moody’s). AFS securities are carried at fair value on the Consolidated Balance Sheets. Unrealized gains and losses, after any applicable hedge accounting adjustments, are reported as net increases or decreases to accumulated other comprehensive income/(loss). The specific identification method is used to determine realized gains and losses on AFS securities, which are included in securities gains/(losses) on the Consolidated Statements of Income.
Other-than-temporary impairment
AFS debt and equity securities in unrealized loss positions are analyzed as part of the Firm’s ongoing assessment of other-than-temporary impairment (“OTTI”). For most types of debt securities, the Firm considers a decline in fair value to be other-than-temporary when the Firm does not expect to recover the entire amortized cost basis of the security. For beneficial interests in securitizations that are rated below “AA” at their acquisition, or that can be contractually prepaid or otherwise settled in such a way that the Firm would not recover substantially all of its recorded investment, the Firm considers an OTTI to have occurred when there is an adverse change in expected cash flows. For AFS equity securities, the Firm considers a decline in fair value to be other-than-temporary if it is probable that the Firm will not recover its 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'sFirm’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'sFirm’s cash flow evaluations take into account the factors noted above and expectations of relevant market and economic data as of the end of the reporting period. For securities issued in a securitization, the Firm estimates cash flows considering underlying loan-level data and structural features of the securitization, such as subordination, excess spread, overcollateralization or other forms of credit enhancement, and compares the losses projected for the underlying collateral (“pool losses”) against the level of credit enhancement in the securitization structure to determine whether these features are sufficient to absorb the pool losses, or whether a credit loss exists. The Firm also performs other analyses to support its cash flow projections, such as first-loss analyses or stress scenarios.
For equity securities, OTTI losses are recognized in earnings if the Firm intends to sell the security. In other cases the Firm considers the relevant factors noted above, as well as the Firm’s intent and ability to retain its investment for a period of time sufficient to allow for any anticipated recovery in market value, and whether evidence exists to support a realizable value equal to or greater than the 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)
2011
2010
2009
2012
 2011
2010
Realized gains$1,811
$3,382
$2,268
$2,610
 $1,811
$3,382
Realized losses(142)(317)(580)(457) (142)(317)
Net realized gains(a)
1,669
3,065
1,688
2,153
 1,669
3,065
Credit losses included in securities gains(b)
(76)(100)(578)
OTTI losses

 



Credit-related(b)
(28) (76)(100)
Securities the Firm intends to sell(c)
(15)
(d) 
—
—
Total OTTI losses recognized in income(43) (76)(100)
Net securities gains$1,593
$2,965
$1,110
$2,110
 $1,593
$2,965
(a)
Proceeds from securities sold were within approximately 4% of amortized cost in 2012 and 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 and obligations of U.S. states and municipalities for the year ended December 31, 2012; certain prime mortgage-backed securities for the year ended December 31, 2011; and certain prime mortgage-backed securities and obligations of U.S. states and municipalities for the year ended December 31, 2010;.
(c)Represents the excess of the amortized cost over the fair value of certain non-U.S. corporate debt, and non-U.S. government debt securities the Firm intends to sell.
(d)
Excludes realized losses of $24 million on sales of non-U.S. corporate debt, non-U.S. government debt and certain prime and subprime mortgage-backedasset-backed securities and obligations of U.S. states and municipalities forthat had been previously reported as an OTTI loss due to the intention to sell the securities during the year ended December 31, 2009.2012.


244JPMorgan Chase & Co./20112012 Annual Report225
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 20102012 2011
December 31, (in millions)Amortized costGross unrealized gainsGross unrealized losses
Fair
value
 Amortized costGross unrealized gainsGross unrealized losses
Fair
value
Amortized costGross unrealized gainsGross unrealized losses
Fair
value
 Amortized costGross unrealized gainsGross unrealized losses
Fair
value
Available-for-sale debt securities              
Mortgage-backed securities:              
U.S. government agencies(a)
$101,968
$5,141
$2
 $107,107
 $117,364
$3,159
$297
 $120,226
$93,693
$4,708
$13
 $98,388
 $101,968
$5,141
$2
 $107,107
Residential:              
Prime and Alt-A2,170
54
218
(c) 
2,006
 2,173
81
250
(c) 
2,004
1,853
83
3
(c) 
1,933
 2,170
54
218
(c) 
2,006
Subprime1
—
—
 1
 1
—
—
 1
825
28
—
 853
 1
—
—
 1
Non-U.S.66,067
170
687
 65,550
 47,089
290
409
 46,970
70,358
1,524
29
 71,853
 66,067
170
687
 65,550
Commercial10,632
650
53
 11,229
 5,169
502
17
 5,654
12,268
948
13
 13,203
 10,632
650
53
 11,229
Total mortgage-backed securities180,838
6,015
960
 185,893
 171,796
4,032
973
 174,855
178,997
7,291
58
 186,230
 180,838
6,015
960
 185,893
U.S. Treasury and government agencies(a)
8,184
169
2
 8,351
 11,258
118
28
 11,348
12,022
116
8
 12,130
 8,184
169
2
 8,351
Obligations of U.S. states and municipalities15,404
1,184
48
 16,540
 11,732
165
338
 11,559
19,876
1,845
10
 21,711
 15,404
1,184
48
 16,540
Certificates of deposit3,017
—
—
 3,017
 3,648
1
2
 3,647
2,781
4
2
 2,783
 3,017
—
—
 3,017
Non-U.S. government debt securities44,944
402
81
 45,265
 20,614
191
28
 20,777
65,168
901
25
 66,044
 44,944
402
81
 45,265
Corporate debt securities(b)
63,607
216
1,647
 62,176
 61,717
495
419
 61,793
37,999
694
84
 38,609
 63,607
216
1,647
 62,176
Asset-backed securities:              
Credit card receivables4,506
149
—
 4,655
 7,278
335
5
 7,608
Collateralized loan obligations24,474
553
166
 24,861
 13,336
472
210
 13,598
27,483
465
52
 27,896
 24,474
553
166
 24,861
Other11,273
102
57
 11,318
 8,968
130
16
 9,082
12,816
166
11
 12,971
 15,779
251
57
 15,973
Total available-for-sale debt securities356,247
8,790
2,961
(c) 
362,076
 310,347
5,939
2,019
(c) 
314,267
357,142
11,482
250
(c) 
368,374
 356,247
8,790
2,961
(c) 
362,076
Available-for-sale equity securities2,693
14
2
 2,705
 1,894
163
6
 2,051
2,750
21
—
 2,771
 2,693
14
2
 2,705
Total available-for-sale securities$358,940
$8,804
$2,963
(c) 
$364,781
 $312,241
$6,102
$2,025
(c) 
$316,318
$359,892
$11,503
$250
(c) 
$371,145
 $358,940
$8,804
$2,963
(c) 
$364,781
Total held-to-maturity securities$12
$1
$—
 $13
 $18
$2
$—
 $20
$7
$1
$—
 $8
 $12
$1
$—
 $13
(a)
Includes total U.S. government-sponsored enterprise obligations with fair values of $89.384.0 billion and $94.289.3 billion at December 31, 20112012 and 20102011, 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.2011. These unrealized losses are not credit-related and remain reported in AOCI. There were no such losses at December 31, 2012.


226JPMorgan Chase & Co./20112012 Annual Report245

Notes to consolidated financial statements

Securities impairment
The following tables present the fair value and gross unrealized losses for AFS securities by aging category at December 31, 20112012 and 20102011.
Securities with gross unrealized lossesSecurities with gross unrealized losses
Less than 12 months 12 months or more Less than 12 months 12 months or more 
December 31, 2011 (in millions)Fair valueGross unrealized losses Fair valueGross unrealized lossesTotal fair valueTotal gross unrealized losses
December 31, 2012 (in millions)Fair valueGross unrealized losses Fair valueGross unrealized lossesTotal fair valueTotal gross unrealized losses
Available-for-sale debt securities      
Mortgage-backed securities:      
U.S. government agencies$2,724
$2
 $—
$—
$2,724
$2
$2,440
$13
 $—
$—
$2,440
$13
Residential:      
Prime and Alt-A649
12
 970
206
1,619
218
218
2
 76
1
294
3
Subprime—
—
 —
—
—
—
—
—
 —
—
—
—
Non-U.S.30,500
266
 25,176
421
55,676
687
2,442
6
 734
23
3,176
29
Commercial837
53
 —
—
837
53
1,159
8
 312
5
1,471
13
Total mortgage-backed securities34,710
333
 26,146
627
60,856
960
6,259
29
 1,122
29
7,381
58
U.S. Treasury and government agencies3,369
2
 —
—
3,369
2
4,198
8
 —
—
4,198
8
Obligations of U.S. states and municipalities147
42
 40
6
187
48
907
10
 —
—
907
10
Certificates of deposit—
—
 —
—
—
—
741
2
 —
—
741
2
Non-U.S. government debt securities11,901
66
 1,286
15
13,187
81
14,527
21
 1,927
4
16,454
25
Corporate debt securities22,230
901
 9,585
746
31,815
1,647
2,651
10
 5,641
74
8,292
84
Asset-backed securities:      
Credit card receivables—
—
 —
—
—
—
Collateralized loan obligations5,610
49
 3,913
117
9,523
166
6,328
17
 2,063
35
8,391
52
Other4,735
40
 1,185
17
5,920
57
2,076
7
 275
4
2,351
11
Total available-for-sale debt securities82,702
1,433
 42,155
1,528
124,857
2,961
37,687
104
 11,028
146
48,715
250
Available-for-sale equity securities338
2
 —
—
338
2
—
—
 —
—
—
—
Total securities with gross unrealized losses$83,040
$1,435
 $42,155
$1,528
$125,195
$2,963
$37,687
$104
 $11,028
$146
$48,715
$250

Securities with gross unrealized lossesSecurities with gross unrealized losses
Less than 12 months 12 months or more Less than 12 months 12 months or more 
December 31, 2010 (in millions)Fair valueGross unrealized losses Fair valueGross unrealized lossesTotal fair valueTotal gross unrealized losses
December 31, 2011 (in millions)Fair valueGross unrealized losses Fair valueGross unrealized lossesTotal fair valueTotal gross unrealized losses
Available-for-sale debt securities      
Mortgage-backed securities:      
U.S. government agencies$14,039
$297
 $—
$—
$14,039
$297
$2,724
$2
 $—
$—
$2,724
$2
Residential:      
Prime and Alt-A—
—
 1,193
250
1,193
250
649
12
 970
206
1,619
218
Subprime—
—
 —
—
—
—
—
—
 —
—
—
—
Non-U.S.35,166
379
 1,080
30
36,246
409
30,500
266
 25,176
421
55,676
687
Commercial548
14
 11
3
559
17
837
53
 —
—
837
53
Total mortgage-backed securities49,753
690
 2,284
283
52,037
973
34,710
333
 26,146
627
60,856
960
U.S. Treasury and government agencies921
28
 —
—
921
28
3,369
2
 —
—
3,369
2
Obligations of U.S. states and municipalities6,890
330
 20
8
6,910
338
147
42
 40
6
187
48
Certificates of deposit1,771
2
 —
—
1,771
2
—
—
 —
—
—
—
Non-U.S. government debt securities6,960
28
 —
—
6,960
28
11,901
66
 1,286
15
13,187
81
Corporate debt securities18,783
418
 90
1
18,873
419
22,230
901
 9,585
746
31,815
1,647
Asset-backed securities:      
Credit card receivables—
—
 345
5
345
5
Collateralized loan obligations460
10
 6,321
200
6,781
210
5,610
49
 3,913
117
9,523
166
Other2,615
9
 32
7
2,647
16
4,735
40
 1,185
17
5,920
57
Total available-for-sale debt securities88,153
1,515
 9,092
504
97,245
2,019
82,702
1,433
 42,155
1,528
124,857
2,961
Available-for-sale equity securities—
—
 2
6
2
6
338
2
 —
—
338
2
Total securities with gross unrealized losses$88,153
$1,515
 $9,094
$510
$97,247
$2,025
$83,040
$1,435
 $42,155
$1,528
$125,195
$2,963

246JPMorgan Chase & Co./20112012 Annual Report227
Notes to consolidated financial statements

Other-than-temporary impairment
The following table presents creditOTTI losses that are included in the securities gains and losses table above.
Year ended December 31,
(in millions)
 2011
 2010
 2009
 2012
 2011
 2010
 
Debt securities the Firm does not intend to sell that have credit losses             
Total other-than-temporary impairment losses(a)
 $(27) $(94) $(946)
Losses recorded in/(reclassified from) other comprehensive income (49) (6) 368
Total OTTI(a)
 $(113) $(27) $(94) 
Losses recorded in/(reclassified from) AOCI 85
 (49) (6) 
Total credit losses recognized in income(c)(b)
 $(76) $(100) $(578) (28)
(d) 
(76)
(f) 
(100)
(g) 
Securities the Firm intends to sell(c)
 (15)
(e) 
—
 —
 
Total OTTI losses recognized in income $(43) $(76) $(100) 
(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 mortgage-backed 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)Represents the excess of the amortized cost over the fair value of certain non-U.S. corporate debt, and non-U.S. government debt securities the Firm intends to sell.
(d)Represents the credit loss component on certain prime mortgage-backed securities and obligations of U.S. states and municipalities for the year ended December 31, 2012, that the Firm does not intend to sell. At December 31, 2012, there were no unrealized losses remaining in AOCI on securities for which credit losses were recognized in income during 2012.
(e)
Excluded from this table are OTTIExcludes realized losses of $724 million on sales of non-U.S. corporate debt, non-U.S. government debt and certain asset-backed securities that were recognized in income in 2009, relatedhad been previously reported as an OTTI loss due to subprimethe intention to sell the securities during the year ended December 31, 2012.
(f)Represents the credit loss component on certain prime mortgage-backed debt securities for the year ended December 31, 2011, that the Firm intendeddid not intend to sell. These
(g)Represents the credit loss component on certain prime mortgage-backed securities were sold in 2009, resulting inand obligations of U.S. states and municipalities for the recognition of a recovery of $1 million.year ended December 31, 2010 that the Firm did not intend to sell.
Changes in the credit loss component of credit-impaired debt securities
The following table presents a rollforward for the years ended December 31, 20112012, 20102011 and 20092010, 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)2011
2010
2009
2012
2011
2010
Balance, beginning of period$632
$578
$—
$708
$632
$578
Additions:  
Newly credit-impaired securities4
—
578
21
4
—
Increase in losses on previously credit-impaired securities—
94
—
—
—
94
Losses reclassified from other comprehensive income on previously credit-impaired securities72
6
—
7
72
6
Reductions:  
Sales of credit-impaired securities—
(31)—
(214)—
(31)
Impact of new accounting guidance related to VIEs—
(15)—
—
—
(15)
Balance, end of period$708
$632
$578
$522
$708
$632
Gross unrealized losses
Gross unrealized losses have generally increaseddecreased since December 31, 2010,2011, including those that have been in an unrealized loss position for 12 months or more. AsExcept for certain securities that the Firm intends to sell for which the unrealized losses have been recognized in income, as of December 31, 2011,2012, 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
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 Firm’s 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 Firm’s 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 Firm’s 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


228JPMorgan Chase & Co./2011 Annual Report


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 management’s assessment that the estimated future cash flows together with the credit enhancement levels for those securities remain sufficient to support the Firm’s 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 security’s 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 management’s 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 management’s assessment that the estimated future cash flows together with the credit enhancement levels for those securities remain sufficient to support the Firm's investment.2012.


JPMorgan Chase & Co./20112012 Annual Report 229247
Notes to consolidated financial statements

Contractual maturities and yields
The following table presents the amortized cost and estimated fair value at December 31, 20112012, of JPMorgan Chase’s AFS and HTM securities by contractual maturity.
By remaining maturity
December 31, 2011
(in millions)
Due in one
year or less
Due after one year through five yearsDue after five years through 10 years
Due after
10 years(c)
Total
By remaining maturity
December 31, 2012
(in millions)
Due in one
year or less
Due after one year through five yearsDue after five years through 10 years
Due after
10 years(c)
Total
Available-for-sale debt securities  
Mortgage-backed securities(a)
  
Amortized cost$15
$3,666
$3,932
$173,225
$180,838
$102
$11,915
$10,568
$156,412
$178,997
Fair value15
3,653
4,073
178,152
185,893
103
12,268
11,008
162,851
186,230
Average yield(b)
5.04%3.20%3.08%3.64%3.62%1.91%1.94%2.81%3.15%3.05%
U.S. Treasury and government agencies(a)
  
Amortized cost$4,949
$2,984
$—
$251
$8,184
$7,779
$1,502
$1,651
$1,090
$12,022
Fair value4,952
3,099
—
300
8,351
7,805
1,558
1,653
1,114
12,130
Average yield(b)
0.58%2.20%—%3.89%1.27%0.51%2.29%1.17%0.78%0.85%
Obligations of U.S. states and municipalities  
Amortized cost$61
$306
$1,132
$13,905
$15,404
$23
$436
$972
$18,445
$19,876
Fair value62
326
1,206
14,946
16,540
23
471
1,033
20,184
21,711
Average yield(b)
3.10%3.66%3.59%4.84%4.72%3.45%5.52%4.08%6.02%5.91%
Certificates of deposit  
Amortized cost$3,017
$—
$—
$—
$3,017
$2,730
$51
$—
$—
$2,781
Fair value3,017
—
—
—
3,017
2,729
54
—
—
2,783
Average yield(b)
4.33%—%—%—%4.33%5.78%3.28%—%—%5.73%
Non-U.S. government debt securities  
Amortized cost$20,863
$15,967
$7,524
$590
$44,944
$18,248
$21,937
$22,870
$2,113
$65,168
Fair value20,861
16,106
7,700
598
45,265
18,254
22,172
23,386
2,232
66,044
Average yield(b)
1.27%2.06%2.86%4.94%1.87%1.23%2.03%1.40%1.65%1.57%
Corporate debt securities  
Amortized cost$22,019
$30,171
$11,398
$19
$63,607
$5,605
$23,342
$8,899
$153
$37,999
Fair value22,091
29,291
10,776
18
62,176
5,618
23,732
9,098
161
38,609
Average yield(b)
2.05%3.09%4.45%5.42%2.97%2.09%2.37%2.57%3.99%2.38%
Asset-backed securities  
Amortized cost$2
$5,965
$17,951
$16,335
$40,253
$500
$3,104
$17,129
$19,566
$40,299
Fair value2
6,102
18,287
16,443
40,834
501
3,145
17,468
19,753
40,867
Average yield(b)
2.28%2.88%2.02%2.51%2.35%1.08%2.10%1.75%2.09%1.93%
Total available-for-sale debt securities  
Amortized cost$50,926
$59,059
$41,937
$204,325
$356,247
$34,987
$62,287
$62,089
$197,779
$357,142
Fair value51,000
58,577
42,042
210,457
362,076
35,033
63,400
63,646
206,295
368,374
Average yield(b)
1.73%2.75%2.97%3.64%3.14%1.57%2.17%1.94%3.29%2.69%
Available-for-sale equity securities  
Amortized cost$—
$—
$—
$2,693
$2,693
$—
$—
$—
$2,750
$2,750
Fair value—
—
—
2,705
2,705
—
—
—
2,771
2,771
Average yield(b)
—%—%—%0.38%0.38%—%—%—%0.36%0.36%
Total available-for-sale securities  
Amortized cost$50,926
$59,059
$41,937
$207,018
$358,940
$34,987
$62,287
$62,089
$200,529
$359,892
Fair value51,000
58,577
42,042
213,162
364,781
35,033
63,400
63,646
209,066
371,145
Average yield(b)
1.73%2.75%2.97%3.60%3.12%1.57%2.17%1.94%3.25%2.67%
Total held-to-maturity securities  
Amortized cost$—
$8
$3
$1
$12
$—
$6
$1
$—
$7
Fair value—
9
3
1
13
—
7
1
—
8
Average yield(b)
—%6.90%6.76%6.48%6.84%—%6.85%6.64%—%6.83%
(a)
U.S. government agencies and U.S. government-sponsored enterprises were the only issuers whose securities exceeded 10% of JPMorgan Chase’s total stockholders’ equity at December 31, 20112012.
(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. The effective yield excludes unscheduled principal prepayments; and accordingly, actual maturities of securities may differ from their contractual or expected maturities as certain securities may be prepaid.
(c)
Includes securities with no stated maturity. Substantially all of the Firm’s residential mortgage-backed securities and collateralized mortgage obligations are due in 10 years 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 years for agency residential mortgage-backed securities, two years years for agency residential collateralized mortgage obligations and four years years for nonagency residential collateralized mortgage obligations.

230248 JPMorgan Chase & Co./20112012 Annual Report


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 Firm’s inventory positions, acquire securities to cover short positions, accommodate customers’ financing needs, and settle other securities obligations.
Securities financing agreements are treated as collateralized financings on the Firm’s Consolidated Balance Sheets. Resale and repurchase agreements are generally carried at the amounts at which the securities will be subsequently sold or repurchased, 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 198–200214–216 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 Firm’s securities financing agreements, all of which are accounted for as collateralized financings during the periods presented.
December 31,
(in millions)
2011 20102012 2011
Securities purchased under resale agreements(a)
 $235,000
 $222,302
  $295,413
 $235,000
 
Securities borrowed(b)
 142,462
 123,587
  119,017
 142,462
 
Securities sold under repurchase agreements(c)
 $197,789
 $262,722
  $215,560
 $197,789
 
Securities loaned(d) 14,214
 10,592
  23,582
 14,214
 
(a)
At December 31, 20112012 and 20102011, included resale agreements of $24.924.3 billion and $20.322.2 billion, respectively, accounted for at fair value.
(b)
At December 31, 20112012 and 20102011, included securities borrowed of $15.310.2 billion and $14.015.3 billion, respectively, accounted for at fair value.
(c)
At December 31, 20112012 and 20102011, included repurchase agreements of $9.53.9 billion and $4.16.8 billion, respectively, accounted for at fair value.

(d)
At December 31, 2012, included securities loaned of $457 million accounted for at fair value. There were no securities loaned accounted for at fair value at December 31, 2011.
The amounts reported in the table above were reduced by $115.796.9 billion and $112.7115.7 billion at December 31, 20112012 and 20102011, respectively, as a result of agreements in effect that meet the specified conditions for net presentation under applicable accounting guidance.
JPMorgan Chase’s 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 Firm’s credit risk mitigation practices described above onwith respect to resale and securities borrowed agreements as described above, the Firm did not hold any reserves for credit impairment onwith respect to these agreements as of December 31, 20112012 and 20102011.
For further information regarding assets pledged and collateral received in securities financing agreements, see Note 30 on page 289pages 315–316 of this Annual Report.



JPMorgan Chase & Co./2012 Annual Report249
Notes to consolidated financial statements

Note 14 – Loans
Loan accounting framework
The accounting for a loan depends on management’s strategy for the loan, and on whether the loan was credit-impaired at the date of acquisition. The Firm accounts for loans based on the following categories:
Originated or purchased loans held-for-investment (i.e., “retained”), other than 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


JPMorgan Chase & Co./2011 Annual Report231
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. AllConsumer, excluding credit card, loans that are less than 90 days past due may be placed on nonaccrual status when there is evidence that full payment of principal and interest is in doubt (e.g., performing junior liens that are subordinate to nonperforming senior liens). Finally, collateral-dependent loans are typically maintained on nonaccrual status.
On the date a loan is placed on nonaccrual status, all interest accrued but not collected is reversed against interest income at the date a loan is placed on nonaccrual status.income. In addition, the amortization of deferred amounts is suspended. In certain cases, interestInterest income on nonaccrual loans may be recognized to the extentas cash isinterest payments are received (i.e., on a cash basis) whenif the recorded loan balance is deemed fully collectible; however, if there is doubt regarding the ultimate collectibility of the recorded loan balance, all interest cash receipts are applied to reduce the carrying value of the loan (the cost recovery method). For consumer loans, application of this policy typically results in the Firm recognizing interest income on nonaccrual consumer loans on a cash basis.
A loan may be returned to accrual status when repayment is reasonably assured and there has been demonstrated performance under the terms of the loan or, if applicable, the terms of the restructured loan.
As permitted by regulatory guidance, credit card loans are generally exempt from being placed on nonaccrual status; accordingly, interest and fees related to credit card loans continue to accrue until the loan is charged off or paid in full. However, the Firm separately establishes an allowance for the estimated uncollectible portion of billed and accrued interest and fee income on credit card loans. The allowance is established with a charge to interest income and is reported as an offset to loans.
Allowance for loan losses
The allowance for loan losses represents the estimated probable losses on held-for-investment loans. Changes in the allowance for loan losses are recorded in the provision for credit losses on the Firm’s Consolidated Statements of Income. See Note 15 on pages 252–255276–279 of this Annual Report for further information on the Firm’s 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 Firm’s claim in bankruptcy, expectations of the workout/restructuring of the loan and valuation of the borrower’s 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, andrisk-rated auto loans and PCI loans, are generally charged off or charged down to the net realizable value of the underlying collateral (i.e., fair value less costs to sell), with an offset to the allowance for loan losses, upon reaching specified stages of delinquency in accordance with standards established by the Federal Financial Institutions Examination Council (“FFIEC”) policy.. Residential mortgagereal estate loans, non-modified credit card loans and scored business banking loans are generally charged downoff at 180 days past due. In the second quarter of 2012, the Firm revised its policy to estimated net realizable value (the fair value of collateral less costs to sell)charge-off modified credit card loans that do not comply with their modified payment terms at at120 days past due rather than 180 days past due. Auto and student loans are charged off no later than 180120 days past due.


Collateral-dependent
250JPMorgan Chase & Co./2012 Annual Report


Certain consumer loans arewill be charged down to estimated net realizable valueoff earlier than the FFIEC charge-off standards in certain circumstances as follows:
A charge-off is recognized when deemed impaired (for example, upon modificationa loan is modified in a troubled debt restructuring).TDR if the loan is determined to be collateral-dependent. A loan is considered to be collateral-dependent when repayment of the loan is expected to be provided solely by the underlying collateral, rather than by cash flows from the borrower’s operations, income or other resources.
Loans to borrowers who have experienced an event (e.g., bankruptcy) that suggests a loss is either known or highly certain are subject to accelerated charge-off standards. Residential real estate and auto loans are charged off when the loan becomes 60 days past due, or sooner if the loan is determined to be collateral-dependent. Credit card and scored business banking loans are charged off within 60 days of receiving notification of the bankruptcy filing or other event. Student loans are generally charged off when the loan becomes 60 days past due after receiving notification of a bankruptcy.
Auto loans are written down to net realizable value upon repossession of the automobile and after a redemption period (i.e., the period during which a borrower may cure the loan) has passed.
Other than in certain limited circumstances, the Firm typically does not recognize charge-offs on government-guaranteed loans.
Wholesale loans, risk-rated business banking loans and risk-rated auto loans are charged off when it is highly certain that a loss has been realized, including situations where a loan is determined to be both impaired and collateral-dependent. The determination of whether to recognize a charge-off includes many factors, including the prioritization of the Firm’s claim in bankruptcy, expectations of the workout/restructuring of the loan and valuation of the borrower’s equity or the loan collateral.
When a loan is charged down to the estimated net realizable value, the determination of the fair value of the collateral depends on the type of collateral (e.g., securities, real estate). In cases where the collateral is in the form of liquid securities, the fair value is based on quoted market prices or broker quotes. For illiquid securities or other financial assets, the fair value of the collateral is estimated using a discounted cash flow model.
For residential real estate loans, collateral values are based upon external valuation sources. When it becomes likely that a borrower is either unable or unwilling to pay, the Firm obtains a broker’s price opinion of the home based on an exterior-only valuation (“exterior opinions”), which is then updated at least every six months thereafter. As soon as practicable after taking physical possession ofthe Firm receives the property in satisfaction of a debt (e.g., by taking legal title or physical possession), generally, either through foreclosure or upon the execution of a deed in lieu of foreclosure transaction with the borrower, 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 Firm’s 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 Firm’s policies. The Firm also considers both borrower- and market-specific factors, which may result in obtaining appraisal updates or broker price opinions at more frequent intervals.
Loans held-for-sale
Held-for-sale loans are measured at the lower of cost or fair value, with valuation changes recorded in noninterest revenue. For consumer loans, the valuation is performed on a portfolio basis. For wholesale loans, the valuation is performed on an individual loan basis. For consumer loans, the valuation is performed on a portfolio basis.


232JPMorgan Chase & Co./2011 Annual Report


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 Firm’s allowance for loan losses and charge-off policies do not apply to these loans.


JPMorgan Chase & Co./2012 Annual Report251
Notes to consolidated financial statements

Loans at fair value
Loans used in a tradingmarket-making 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 Firm’s nonaccrual, allowance for loan losses, and charge-off policies do not apply to these loans.
See Note 4 on pages 198–200214–216 of this Annual Report for further information on the Firm’s elections of fair value accounting under the fair value option. See Note 3 and Note 4 on pages 184–198196–214 and 198–200214–216 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 loan’s origination date and therefore it is probable, at acquisition, that all contractually required payments will not be collected. Because PCI loans are initially measured at fair value, which includes an estimate of future credit losses, no allowance for loan losses related to PCI loans is recorded at the acquisition date. See page 247266 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-for-sale portfolio at the lower of cost or fair value on the date of transfer. Credit-related losses are charged against the allowance for loan losses; 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 Firm’s allowance methodology. For a further discussion of the methodologies used in establishing the Firm’s allowance for loan losses, see Note 15 on pages 252–255276–279 of this Annual Report.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 Firm’s 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 borrower-specific characteristics, and may include interest rate reductions, term extensions, payment deferrals, principal forgiveness, or the acceptance of equity or other assets in lieu of payments. 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(the accrual of interest)interest is resumed) if the following criteria are met: (a) the borrower has performed under the modified terms for a minimum of six months and/orsix payments, and (b) the Firm has an expectation that repayment of the modified loan is reasonably assured based on, for example, the borrower’s debt capacity and level of future earnings, collateral values, LTV ratios, and other current market considerations. In certain limited and well-defined circumstances in which the loan is current at the modification date, such loans are not placed on nonaccrual status at the time of modification.
Because loans modified in TDRs are considered to be impaired, these loans are evaluatedmeasured for animpairment using the Firm’s established asset-specific allowance methodology, which considers the expected re-default rates for the modified loans and is determined based on the same methodology used to estimate the Firm’s asset-specific allowance component.loans. A loan modified in a TDR remains subject to the asset-specific allowance methodology


JPMorgan Chase & Co./2011 Annual Report233
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 Firm’s asset-specific allowance, see Note 15 on pages 252–255276–279 of this Annual Report.Report.


252JPMorgan Chase & Co./2012 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).
AtThe Firm recognizes foreclosed property upon receiving assets in satisfaction of a debt (e.g., by taking legal title or physical possession). For loans collateralized by real property, the time JPMorgan Chase takes physical possession,Firm generally recognizes the property is recordedasset received at foreclosure sale or upon the execution of a deed in lieu of
foreclosure transaction with the borrower. Foreclosed assets are reported in other assets on the Consolidated Balance Sheets and initially recognized at fair value less estimated costs to sell. Each quarter the fair value of the acquired property is reviewed and adjusted, if necessary.necessary, to the lower of cost or fair value. Subsequent changesadjustments 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 Firm’s loan portfolio is divided into three portfolio segments, which are the same segments used by the Firm to determine the allowance for loan losses: Wholesale; Consumer, excluding credit card; Credit card; and Credit card.Wholesale. Within each portfolio segment, the Firm monitors and assesses the credit risk in the following classes of loans, based on the risk characteristics of each loan class:
Consumer, excluding
Wholesalecredit card(a)
 
Consumer, excluding
creditCredit card(b)
 Credit card
Wholesale(c)
• Commercial and industrial
• Real estate
• Financial institutions
• Government agencies
• Other
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)(b)
• Business banking(c)(b)
• Student and other
Residential real estate – PCI
• Home equity
• Prime mortgage
• Subprime mortgage
• Option ARMs
 • Credit card loans
• Chase, excluding accounts
     originated by Washington
     MutualCommercial and industrial
• Accounts originated byReal estate
     Washington Mutual• Financial institutions
• Government agencies
• Other
(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”),CCB and residential real estate loans reported in the AM business segment and in Corporate/Private Equity and AM segment.
Equity.
(c)(b)Includes auto andcertain business banking and auto dealer risk-rated loans that apply the wholesale methodology for determining the allowance for loan losses; these loans are managed by Card and RFS, respectively,CCB, and therefore, for consistency in presentation, are included with the other consumer loan classes.
(c)Includes loans reported in CIB, CB and AM business segments and in Corporate/Private Equity.

JPMorgan Chase & Co./2012 Annual Report253
Notes to consolidated financial statements

The following table summarizestables summarize the Firm’s loan balances by portfolio segment.
December 31, 2012
(in millions)
Consumer, excluding credit card
Credit card(a)
WholesaleTotal 
Retained$292,620
$127,993
$306,222
$726,835
(b) 
Held-for-sale—
—
4,406
4,406
 
At fair value—
—
2,555
2,555
 
Total$292,620
$127,993
$313,183
$733,796
 
  
December 31, 2011
(in millions)
Wholesale
Consumer, excluding
credit card
Credit cardTotal Consumer, excluding credit card
Credit card(a)
WholesaleTotal 
Retained$278,395
$308,427
$132,175
$718,997
(a) 
$308,427
$132,175
$278,395
$718,997
(b) 
Held-for-sale2,524
—
102
2,626
 —
102
2,524
2,626
 
At fair value2,097
—
—
2,097
 —
—
2,097
2,097
 
Total$283,016
$308,427
$132,277
$723,720
 $308,427
$132,277
$283,016
$723,720
 
  
December 31, 2010
(in millions)
Wholesale
Consumer, excluding
credit card
Credit cardTotal 
Retained$222,510
$327,464
$135,524
$685,498
(a) 
Held-for-sale3,147
154
2,152
5,453
 
At fair value1,976
—
—
1,976
 
Total$227,633
$327,618
$137,676
$692,927
 
(a)Includes billed finance charges and fees net of an allowance for uncollectible amounts.
(b)
Loans (other than PCI loans and those for which the fair value option has been selected)elected) are presented net of unearned income, unamortized discounts and premiums, and net deferred loan costs of $2.72.5 billion and $1.92.7 billion at December 31, 20112012 and 20102011, respectively.

234JPMorgan 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)		 WholesaleConsumer, excluding credit cardCredit cardTotal
 2012 2011
Years ended December 31,
(in millions)		 Consumer, excluding credit cardCredit cardWholesaleTotal Consumer, excluding credit cardCredit cardWholesaleTotal 
Purchases $906
$7,525
$—
$8,431
 $6,601
$—
$827
$7,428
 $7,525
$—
$906
$8,431
 
Sales 3,289
1,384
—
4,673
 1,852
—
3,423
5,275
 1,384
—
3,289
4,673
 
Retained loans reclassified to held-for-sale 538
—
2,006
2,544
 —
1,043
504
1,547
 —
2,006
538
2,544
 

The following table provides information about gains/(losses) on loan sales by portfolio segment.
Year ended December 31, (in millions)201120102009201220112010
Net gains/(losses) on sales of loans (including lower of cost or fair value adjustments)(a)
  
Wholesale$121
$215
$291
Consumer, excluding credit card131
265
127
$122
$131
$265
Credit card(24)(16)21
(9)(24)(16)
Wholesale180
121
215
Total net gains/(losses) on sales of loans (including lower of cost or fair value adjustments)(a)
$228
$464
$439
$293
$228
$464
(a)Excludes sales related to loans accounted for at fair value.


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 obligor’s debt capacity and financial flexibility, the level of the obligor’s earnings, the amount and sources for repayment, the level and nature of contingencies, management strength, and the industry and geography in which the obligor operates. Risk ratings generally represent ratings profiles similar to those defined


by S&P and Moody’s. Investment grade ratings range from “AAA/Aaa” to “BBB-/Baa3.” Noninvestment grade ratings are classified as noncriticized (“BB+/Ba1 and B-/B3”) and criticized (“CCC+”/“Caa1 and below”), and the criticized portion is further subdivided into performing and nonaccrual loans, representing management’s assessment of the collectibility of principal and interest. Criticized loans have a higher probability of default than noncriticized loans.
Risk ratings are reviewed on a regular and ongoing basis by Credit Risk Management and are adjusted as necessary for updated information affecting the obligor’s ability to fulfill its obligations.
As noted above, the risk rating of a loan considers the industry in which the obligor conducts its operations. As part of the overall credit risk management framework, the Firm focuses on the management and diversification of its industry and client exposures, with particular attention paid to industries with actual or potential credit concern. See Note 5 on page 201 in this Annual Report for further detail on industry concentrations.



JPMorgan Chase & Co./2011 Annual Report235
Notes to consolidated financial statements

The table below provides information by class of receivable for the retained loans in the Wholesale portfolio segment.
As of or for the year ended December 31,
(in millions, except ratios)
Commercial
and industrial
 Real estate
20112010 20112010
Loans by risk ratings     
Investment grade$52,428
$31,697
 $33,920
$28,504
Noninvestment grade:     
Noncriticized38,644
30,874
 15,972
16,425
Criticized performing2,254
2,371
 3,906
5,769
Criticized nonaccrual889
1,634
 886
2,937
Total noninvestment grade41,787
34,879
 20,764
25,131
Total retained loans$94,215
$66,576
 $54,684
$53,635
% of total criticized to total retained loans3.34%6.02% 8.76%16.23%
% of nonaccrual loans to total retained loans0.94
2.45
 1.62
5.48
Loans by geographic distribution(a)
     
Total non-U.S.$30,813
$17,731
 $1,497
$1,963
Total U.S.63,402
48,845
 53,187
51,672
Total retained loans$94,215
$66,576
 $54,684
$53,635
      
Net charge-offs$124
$403
 $256
$862
% of net charge-offs to end-of-period retained loans0.13%0.61% 0.47%1.61%
      
Loan delinquency(b)
     
Current and less than 30 days past due and still accruing$93,060
$64,501
 $53,387
$50,299
30–89 days past due and still accruing266
434
 327
290
90 or more days past due and still accruing(c)
—
7
 84
109
Criticized nonaccrual889
1,634
 886
2,937
Total retained loans$94,215
$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 obligor’s 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 182–183 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 multi-family 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)
Multifamily Commercial lessors
20112010 20112010
Real estate retained loans$32,524
$30,604
 $14,444
$15,796
Criticized exposure2,451
3,798
 1,662
3,593
% of criticized exposure to total real estate retained loans7.54%12.41% 11.51%22.75%
Criticized nonaccrual$412
$1,016
 $284
$1,549
% of criticized nonaccrual to total real estate retained loans1.27%3.32% 1.97%9.81%


236254 JPMorgan Chase & Co./20112012 Annual Report


(table continued from previous page)
Financial
 institutions
 Government agencies 
Other(d)
 
Total
retained loans
20112010 20112010 20112010 20112010
           
$28,804
$22,525
 $7,421
$6,871
 $74,497
$56,450
 $197,070
$146,047
           
9,132
8,480
 378
382
 7,583
6,012
 71,709
62,173
246
317
 4
3
 808
320
 7,218
8,780
37
136
 16
22
 570
781
 2,398
5,510
9,415
8,933
 398
407
 8,961
7,113
 81,325
76,463
$38,219
$31,458
 $7,819
$7,278
 $83,458
$63,563
 $278,395
$222,510
0.74 %1.44% 0.26%0.34% 1.65%1.73% 3.45%6.42%
0.10
0.43
 0.20
0.30
 0.68
1.23
 0.86
2.48
           
$29,996
$19,756
 $583
$870
 $32,275
$25,831
 $95,164
$66,151
8,223
11,702
 7,236
6,408
 51,183
37,732
 183,231
156,359
$38,219
$31,458
 $7,819
$7,278
 $83,458
$63,563
 $278,395
$222,510
           
$(137)$72
 $—
$2
 $197
$388
 $440
$1,727
(0.36)%0.23% —%0.03% 0.24%0.61% 0.16%0.78%
           
           
$38,129
$31,289
 $7,780
$7,222
 $81,802
$61,837
 $274,158
$215,148
51
31
 23
34
 1,072
704
 1,739
1,493
2
2
 —
—
 14
241
 100
359
37
136
 16
22
 570
781
 2,398
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 Other Total real estate loans
20112010 20112010 20112010
$3,148
$3,395
 $4,568
$3,840
 $54,684
$53,635
297
619
 382
696
 4,792
8,706
9.43%18.23% 8.36%18.13% 8.76%16.23%
$69
$174
 $121
$198
 $886
$2,937
2.19%5.13% 2.65%5.16% 1.62%5.48%





JPMorgan Chase & Co./2011 Annual Report237
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 in Note 15 on pages 252–255 of this Note.
The table below set forth information about the Firm’s wholesale impaired loans.
December 31,
(in millions)
Commercial
and industrial
 Real estate 
Financial
institutions
 
Government
 agencies
 Other 
Total
retained loans
20112010 20112010 20112010 20112010 20112010 20112010
Impaired loans                 
With an allowance$828
$1,512
 $621
$2,510
 $21
$127
 $16
$22
 $473
$697
 $1,959
$4,868
Without an allowance(a)
177
157
 292
445
 18
8
 —
—
 103
8
 590
618
Total impaired loans
$1,005
$1,669
 $913
$2,955
 $39
$135
 $16
$22
 $576
$705
 $2,549
$5,486
Allowance for loan losses related to impaired loans$276
$435
 $148
$825
 $5
$61
 $10
$14
 $77
$239
 $516
$1,574
Unpaid principal balance of impaired loans(b)
1,705
2,453
 1,124
3,487
 63
244
 17
30
 1,008
1,046
 3,917
7,260
(a)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.
(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 carrying value; net deferred loan fees or costs; and unamortized discount or premiums on purchased loans.
The following table presents the Firm’s average impaired loans for the years ended 2011, 2010 and 2009.
Year ended December 31, (in millions)201120102009
Commercial and industrial$1,309
$1,655
$1,767
Real estate1,813
3,101
2,420
Financial institutions84
304
685
Government agencies20
5
4
Other634
884
468
Total(a)
$3,860
$5,949
$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 Firm’s wholesale loans that have been modified in TDRs as of the dates presented.
December 31,
(in millions)
Commercial
and industrial
 Real estate 
Financial
institutions
 
Government
 agencies
 Other 
Total
retained loans
20112010 20112010 20112010 20112010 20112010 20112010
Loans modified in troubled debt restructurings$531
$212
 $176
$907
 $2
$1
 $16
$22
 $25
$1
 $750
$1,143
TDRs on nonaccrual status415
163
 128
831
 —
1
 16
22
 19
1
 578
1,018
Additional commitments to lend to borrowers whose loans have been modified in TDRs147
1
 —
—
 —
—
 —
—
 —
—
 147
1
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)
 Commercial and industrial Real estate 
Other (b)
 Total
Beginning balance of TDRs $212
 $907
 $24
 $1,143
New TDRs 665
 113
 32
 810
Increases to existing TDRs 96
 16
 —
 112
Charge-offs post-modification (30) (146) —
 (176)
Sales and other(a)
 (412) (714) (13) (1,139)
Ending balance of TDRs $531
 $176
 $43
 $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.





238JPMorgan 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.
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 retained consumer retained loans, excluding credit card, by class, excluding the Credit card loan portfolio segment.
class.
December 31, (in millions)2011201020122011
Residential real estate – excluding PCI  
Home equity:  
Senior lien$21,765
$24,376
$19,385
$21,765
Junior lien56,035
64,009
48,000
56,035
Mortgages:  
Prime, including option ARMs76,196
74,539
76,256
76,196
Subprime9,664
11,287
8,255
9,664
Other consumer loans  
Auto47,426
48,367
49,913
47,426
Business banking17,652
16,812
18,883
17,652
Student and other14,143
15,311
12,191
14,143
Residential real estate – PCI  
Home equity22,697
24,459
20,971
22,697
Prime mortgage15,180
17,322
13,674
15,180
Subprime mortgage4,976
5,398
4,626
4,976
Option ARMs22,693
25,584
20,466
22,693
Total retained loans$308,427
$327,464
$292,620
$308,427
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 thatwho 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
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 saleforeclosure or foreclosure.similar liquidation transaction. In addition to delinquency rates, other credit quality indicators for consumer loans vary based on the class of loan, as follows:
For residential real estate loans, including both non-PCI and PCI portfolios, the current estimated LTV ratio, or the combined LTV ratio in the case of loans with a junior lien loans, is an indicator of the potential loss severity in the event of default. Additionally, LTV or combined LTV can provide
insight into a borrower’s continued willingness to pay, as the delinquency rate of high-LTV loans tends to be greater than that for loans where the borrower has equity in the collateral. The geographic distribution of the loan collateral also provides insight as to the credit quality of the portfolio, as factors such as the regional economy, home price changes and specific events such as hurricanes, earthquakes, etc.,natural disasters, will affect credit quality. The borrower’s current or “refreshed” FICO score is a secondary credit-quality indicator for certain loans, as FICO scores are an indication of the borrower’s credit payment history. Thus, a loan to a borrower with a low FICO score (660(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.
For scored 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 and Risk Management and are adjusted as necessary for updated information affectingabout borrowers’ ability to fulfill their obligations. Consistent with other classesFor further information about risk-rated wholesale loan credit quality indicators, see page 271 of consumer loans, the geographic distribution of the portfolio provides insights into portfolio performance based on regional economic activity and events.this Note.
Residential real estate – excluding PCI loans
The following tables providetable provides information by class for residential real estate – excluding retained PCI retained loans in the Consumer,consumer, excluding credit card, portfolio segment.
The following factors should be considered in analyzing certain credit statistics applicable to the Firm’s 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


JPMorgan Chase & Co./2011 Annual Report239
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
may result in higher delinquency rates for loans carried at estimatedthe net realizable value of the collateral value that remain on the Firm’s Consolidated Balance Sheets.


JPMorgan Chase & Co./2012 Annual Report255
Notes to consolidated financial statements

Residential real estate – excluding PCI loans        
Home equityHome equity
December 31,
(in millions, except ratios)
Senior lien Junior lienSenior lien Junior lien
20112010 2011201020122011 2012 2011
Loan delinquency(a)
        
Current and less than 30 days past due$20,992
$23,615
 $54,533
$62,315
Current$18,688
$20,992
 $46,805
 $54,533
30–149 days past due405
414
 1,272
1,508
330
405
 960
 1,272
150 or more days past due368
347
 230
186
367
368
 235
 230
Total retained loans$21,765
$24,376
 $56,035
$64,009
$19,385
$21,765
 $48,000
 $56,035
% of 30+ days past due to total retained loans3.55%3.12% 2.68%2.65%3.60%3.55% 2.49% 2.68%
90 or more days past due and still accruing$—
$—
 $—
$—
$—
$—
 $—
 $—
90 or more days past due and government guaranteed(b)
—
—
 —
—
—
—
 —
 —
Nonaccrual loans(c)495
479
 792
784
931
495
 2,277
(h) 
792
Current estimated LTV ratios(c)(d)(e)(f)
   
Current estimated LTV ratios(d)(e)(f)
     
Greater than 125% and refreshed FICO scores:        
Equal to or greater than 660$341
$363
 $6,463
$6,928
$197
$341
 $4,561
 $6,463
Less than 660160
196
 2,037
2,495
93
160
 1,338
 2,037
101% to 125% and refreshed FICO scores:        
Equal to or greater than 660663
619
 8,775
9,403
491
663
 7,089
 8,775
Less than 660241
249
 2,510
2,873
191
241
 1,971
 2,510
80% to 100% and refreshed FICO scores:        
Equal to or greater than 6601,850
1,900
 11,433
13,333
1,502
1,850
 9,604
 11,433
Less than 660601
657
 2,616
3,155
485
601
 2,279
 2,616
Less than 80% and refreshed FICO scores:        
Equal to or greater than 66015,350
17,474
 19,326
22,527
13,988
15,350
 18,252
 19,326
Less than 6602,559
2,918
 2,875
3,295
2,438
2,559
 2,906
 2,875
U.S. government-guaranteed—
—
 —
—
—
—
 —
 —
Total retained loans$21,765
$24,376
 $56,035
$64,009
$19,385
$21,765
 $48,000
 $56,035
Geographic region        
California$3,066
$3,348
 $12,851
$14,656
$2,786
$3,066
 $10,969
 $12,851
New York3,023
3,272
 10,979
12,278
2,847
3,023
 9,753
 10,979
Illinois1,358
1,495
 3,265
 3,785
Florida992
1,088
 3,006
3,470
892
992
 2,572
 3,006
Illinois1,495
1,635
 3,785
4,248
Texas3,027
3,594
 1,859
2,239
2,508
3,027
 1,503
 1,859
New Jersey687
732
 3,238
3,617
652
687
 2,838
 3,238
Arizona1,339
1,481
 2,552
2,979
1,183
1,339
 2,151
 2,552
Washington714
776
 1,895
2,142
651
714
 1,629
 1,895
Ohio1,747
2,010
 1,328
1,568
1,514
1,747
 1,091
 1,328
Michigan1,044
1,176
 1,400
1,618
910
1,044
 1,169
 1,400
All other(g)
4,631
5,264
 13,142
15,194
4,084
4,631
 11,060
 13,142
Total retained loans$21,765
$24,376
 $56,035
$64,009
$19,385
$21,765
 $48,000
 $56,035
(a)
Individual delinquency classifications included mortgage loans insured by U.S. government agencies as follows: current includes $3.8 billionand less than 30 days past due includes $3.0 billion and; $2.5 billion30; 30––149 days past due includes $2.3 billion and $2.52.3 billion; and 150 or more days past due includes $10.39.5 billion and $7.910.3 billion at December 31, 20112012 and 20102011, 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 agreedagreed-upon servicing guidelines. These amounts are excluded from nonaccrual loans because reimbursement of insured and guaranteed amounts is proceeding normally. At December 31, 20112012 and 20102011, these balances included $7.06.8 billion and $2.87.0 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)
At December 31, 2012, included $1.7 billion of loans recorded in accordance with regulatory guidance requiring loans discharged under Chapter 7 bankruptcy and not reaffirmed by the borrower to be reported as nonaccrual loans, regardless of their delinquency status. This $1.7 billion consisted of $450 million, $440 million, $500 million, and $357 million for home equity - senior lien, home equity - junior lien, prime mortgage, including option ARMs, and subprime mortgages, respectively. Certain of these loans have previously been reported as performing TDRs (e.g., loans that were previously modified under one of the Firm’s loss mitigation programs and that have made at least six payments under the modified payment terms).
(d)Represents the aggregate unpaid principal balance of loans divided by the estimated current property value. Current property values are estimated, at a minimum, quarterly, based on home valuation models using nationally recognized home price index valuation estimates incorporating actual data to the extent available and forecasted data where actual data is not available. These property values do not represent actual appraised loan level collateral values; as such, the resulting ratios are necessarily imprecise and should be viewed as estimates.
(d)(e)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)(f)Refreshed FICO scores represent each borrower’s most recent credit score, which is obtained by the Firm on 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 both December 31, 20112012 and 20102011, included mortgage loans insured by U.S. government agencies of $15.6 billion and $12.9 billion, respectively..
(h)
Includes $1.2 billion of performing junior liens at December 31, 2012, that are subordinate to senior liens that are 90 days or more past due; such junior liens are now being reported as nonaccrual loans based upon regulatory guidance issued in the first quarter of 2012. Of the total, $1.1 billion were current at December 31, 2012. Prior periods have not been restated.
(i)
At December 31, 20112012 and 20102011, excluded mortgage loans insured by U.S. government agencies of $12.611.8 billion and $10.312.6 billion, respectively. These amounts were excluded as reimbursement of insured amounts is proceeding normally.

240256 JPMorgan Chase & Co./20112012 Annual Report







(table continued from previous page)
Mortgages   
Prime, including option ARMs  Subprime Total residential real estate – excluding PCI 
2011 2010  20112010 2011 2010 
            
$59,855
 $59,223
  $7,585
$8,477
 $142,965
 $153,630
 
3,475
 4,052
  820
1,184
 5,972
 7,158
 
12,866
 11,264
  1,259
1,626
 14,723
 13,423
 
$76,196
 $74,539
  $9,664
$11,287
 $163,660
 $174,211
 
4.96%
(h) 
6.68%
(h) 
 21.51%24.90% 4.97%
(h) 
5.88%
(h) 
$—
 $—
  $—
$—
 $—
 $—
 
11,516
 9,417
  —
—
 11,516
 9,417
 
3,462
 4,320
  1,781
2,210
 6,530
 7,793
 
            
            
$3,168
 $3,039
  $367
$338
 $10,339
 $10,668
 
1,416
 1,595
  1,061
1,153
 4,674
 5,439
 
            
4,626
 4,733
  506
506
 14,570
 15,261
 
1,636
 1,775
  1,284
1,486
 5,671
 6,383
 
            
9,343
 10,720
  817
925
 23,443
 26,878
 
2,349
 2,786
  1,556
1,955
 7,122
 8,553
 
            
33,849
 32,385
  1,906
2,252
 70,431
 74,638
 
4,225
 4,557
  2,167
2,672
 11,826
 13,442
 
15,584
 12,949
  —
—
 15,584
 12,949
 
$76,196
 $74,539
  $9,664
$11,287
 $163,660
 $174,211
 
            
$18,029
 $19,278
  $1,463
$1,730
 $35,409
 $39,012
 
10,200
 9,587
  1,217
1,381
 25,419
 26,518
 
4,565
 4,840
  1,206
1,422
 9,769
 10,820
 
3,922
 3,765
  391
468
 9,593
 10,116
 
2,851
 2,569
  300
345
 8,037
 8,747
 
2,042
 2,026
  461
534
 6,428
 6,909
 
1,194
 1,320
  199
244
 5,284
 6,024
 
1,878
 2,056
  209
247
 4,696
 5,221
 
441
 462
  234
275
 3,750
 4,315
 
909
 963
  246
294
 3,599
 4,051
 
30,165
 27,673
  3,738
4,347
 51,676
 52,478
 
$76,196
 $74,539
  $9,664
$11,287
 $163,660
 $174,211
 
(table continued from previous page)       
Mortgages   
Prime, including option ARMs  Subprime Total residential real estate – excluding PCI 
2012 2011  20122011 2012 2011 
            
$61,439
 $59,855
  $6,673
$7,585
 $133,605
 $142,965
 
3,237
 3,475
  727
820
 5,254
 5,972
 
11,580
 12,866
  855
1,259
 13,037
 14,723
 
$76,256
 $76,196
  $8,255
$9,664
 $151,896
 $163,660
 
3.97%
(i) 
4.96%
(i) 
 19.16%21.51% 4.28%
(i) 
4.97%
(i) 
$—
 $—
  $—
$—
 $—
 $—
 
10,625
 11,516
  —
—
 10,625
 11,516
 
3,445
 3,462
  1,807
1,781
 8,460
 6,530
 
            
            
$2,573
 $3,168
  $236
$367
 $7,567
 $10,339
 
991
 1,416
  653
1,061
 3,075
 4,674
 
            
3,697
 4,626
  457
506
 11,734
 14,570
 
1,376
 1,636
  985
1,284
 4,523
 5,671
 
            
7,070
 9,343
  726
817
 18,902
 23,443
 
2,117
 2,349
  1,346
1,556
 6,227
 7,122
 
            
38,281
 33,849
  1,793
1,906
 72,314
 70,431
 
4,549
 4,225
  2,059
2,167
 11,952
 11,826
 
15,602
 15,584
  —
—
 15,602
 15,584
 
$76,256
 $76,196
  $8,255
$9,664
 $151,896
 $163,660
 
            
$17,539
 $18,029
  $1,240
$1,463
 $32,534
 $35,409
 
11,190
 10,200
  1,081
1,217
 24,871
 25,419
 
3,999
 3,922
  323
391
 8,945
 9,593
 
4,372
 4,565
  1,031
1,206
 8,867
 9,769
 
2,927
 2,851
  257
300
 7,195
 8,037
 
2,131
 2,042
  399
461
 6,020
 6,428
 
1,162
 1,194
  165
199
 4,661
 5,284
 
1,741
 1,878
  177
209
 4,198
 4,696
 
405
 441
  191
234
 3,201
 3,750
 
866
 909
  203
246
 3,148
 3,599
 
29,924
 30,165
  3,188
3,738
 48,256
 51,676
 
$76,256
 $76,196
  $8,255
$9,664
 $151,896
 $163,660
 


JPMorgan Chase & Co./20112012 Annual Report 241257
Notes to consolidated financial statements

The following table representstables represent the Firm’s delinquency statistics for junior lien home equity loans as of December 31, 20112012 and 20102011.
 Delinquencies     Delinquencies    
December 31, 2011
(in millions, except ratios)
 30–89 days past due 90–149 days past due 150+ days past due Total loans Total 30+ day delinquency rate
December 31, 2012
(in millions, except ratios)
 30–89 days past due 90–149 days past due 150+ days past due Total loans Total 30+ day delinquency rate
HELOCs:(a)
                    
Within the revolving period(b)
 $606
 $314
 $173
 $47,760
 2.29% $514
 $196
 $185
 $40,794
 2.19%
Within the required amortization period 45
 19
 15
 1,636
 4.83
Beyond the revolving period 48
 19
 27
 2,127
 4.42
HELOANs 188
 100
 42
 6,639
 4.97
 125
 58
 23
 5,079
 4.06
Total $839
 $433
 $230
 $56,035
 2.68% $687
 $273
 $235
 $48,000
 2.49%
 Delinquencies     Delinquencies    
December 31, 2010
(in millions, except ratios)
 30–89 days past due 90–149 days past due 150+ days past due Total loans Total 30+ day delinquency rate
December 31, 2011
(in millions, except ratios)
 30–89 days past due 90–149 days past due 150+ days past due Total loans Total 30+ day delinquency rate
HELOCs:(a)
                    
Within the revolving period(b)
 $665
 $384
 $145
 $54,434
 2.19% $606
 $314
 $173
 $47,760
 2.29%
Within the required amortization period 41
 19
 10
 1,177
 5.95
Beyond the revolving period 45
 19
 15
 1,636
 4.83
HELOANs 250
 149
 31
 8,398
 5.12
 188
 100
 42
 6,639
 4.97
Total $956
 $552
 $186
 $64,009
 2.65% $839
 $433
 $230
 $56,035
 2.68%
(a) In general, These HELOCs are open-ended,predominantly revolving loans for a 10-year10-year period,after which time the HELOC converts to a loan with a 20-year20-year amortization period, but also include HELOCs originated by Washington Mutual that require interest-only payments beyond the revolving period.
(b) The Firm manages the risk of HELOCs during their revolving period by closing or reducing the undrawn line to the extent permitted by law when borrowers are experiencing financial difficulty 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 Firm’s delinquency roll-rate methodology, which estimates defaults based on the current delinquency status of a portfolio.


258JPMorgan Chase & Co./2012 Annual Report


Impaired loans
At December 31, 2012, the Firm reported, in accordance with regulatory guidance, $1.6 billion of residential real estate loans that have been discharged under Chapter 7 bankruptcy and not reaffirmed by the borrower (“Chapter 7 loans”) as collateral-dependent nonaccrual TDRs, regardless of their delinquency status. Pursuant to that guidance, these Chapter 7 loans were charged off to the net realizable value of the collateral, resulting in $747 million
of charge-offs for the year ended December 31, 2012. Prior periods were not restated for this policy change. Prior to September 30, 2012, the Firm’s policy was to charge down to net realizable value, and also to place on nonaccrual status, loans to borrowers who had filed for bankruptcy when such loans became 60 days past due; however, the Firm did not previously report Chapter 7 loans as TDRs unless otherwise modified under one of the Firm’s loss mitigation programs.

The table below sets forth information about the Firm’s residential real estate impaired loans, excluding PCI.PCI loans. These loans are considered to be impaired as they have been modified in a TDR. All impaired loans are evaluated for an asset-specific allowance as described in Note 15 on pages 252–255276–279 of this Annual Report.Report.
Home equity Mortgages 
Total residential
 real estate
– excluding PCI
Home equity Mortgages 
Total residential
 real estate
– excluding PCI
December 31,
(in millions)
Senior lien Junior lien 
Prime, including
option ARMs
 Subprime Senior lien Junior lien 
Prime, including
option ARMs
 Subprime 
20112010 20112010 20112010 20112010 2011201020122011 20122011 20122011 20122011 20122011
Impaired loans                  
With an allowance$319
$211
 $622
$258
 $4,332
$1,525
 $3,047
$2,563
 $8,320
$4,557
$542
$319
 $677
$622
 $5,810
$4,332
 $3,071
$3,047
 $10,100
$8,320
Without an allowance(a)
16
15
 35
25
 545
559
 172
188
 768
787
550
16
 546
35
 1,308
545
 741
172
 3,145
768
Total impaired loans(b)(c)
$335
$226
 $657
$283
 $4,877
$2,084
 $3,219
$2,751
 $9,088
$5,344
$1,092
$335
 $1,223
$657
 $7,118
$4,877
 $3,812
$3,219
 $13,245
$9,088
Allowance for loan losses related to impaired loans$80
$77
 $141
$82
 $4
$97
 $366
$555
 $591
$811
$159
$80
 $188
$141
 $70
$4
 $174
$366
 $591
$591
Unpaid principal balance of impaired loans(c)(e)
433
265
 994
402
 6,190
2,751
 4,827
3,777
 12,444
7,195
1,408
433
 2,352
994
 9,095
6,190
 5,700
4,827
 18,555
12,444
Impaired loans on nonaccrual status(f)77
38
 159
63
 922
534
 832
632
 1,990
1,267
607
77
 599
159
 1,888
922
 1,308
832
 4,402
1,990
(a)When discounted cash flows orRepresents collateral-dependent residential mortgage loans, including Chapter 7 loans, that are charged off to the fair value of the underlying 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.less cost to sell.
(b)
At December 31, 20112012 and 20102011, $4.37.5 billion and $3.04.3 billion, respectively, of loans permanently modified subsequent to repurchase from Government National Mortgage Association (“Ginnie MaeMae”) 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.are not included in the table above. When such loans perform subsequent to modification in accordance with Ginnie Mae guidelines, they are generally sold back into Ginnie Mae loan pools. Modified loans that do not re-perform become subject to foreclosure.
(c)
At December 31, 2012, included $1.6 billion of Chapter 7 loans, consisting of $450 million of senior lien home equity loans, $448 million of junior lien home equity loans, $465 million of prime including option ARMs, and $245 million of subprime mortgages. Certain of these loans were previously reported as nonaccrual loans (e.g., based upon the delinquency status of the loan).
(d)
Represents the contractual amount of principal owed at December 31, 20112012 and 20102011. The unpaid principal balance differs from the impaired loan balances due to various factors, including charge-offs, net deferred loan fees or costs;costs, and unamortized discounts or premiums on purchased loans.


242(e)JPMorgan Chase & Co./2011 Annual Report
At December 31, 2012, included $2.7 billion of Chapter 7 loans, consisting of $596 million of senior lien home equity loans, $990 million of junior lien home equity loans, $713 million of prime, including option ARMs, and $379 million of subprime mortgages.
(f)
As of December 31, 2012 and 2011, nonaccrual loans included $2.9 billion and $886 million, respectively, of TDRs for which the borrowers were less than 90 days past due. For additional information about loans modified in a TDR that are on nonaccrual status refer to the Loan accounting framework on pages 250–252 of this Note.


The following table presents average impaired loans and the related interest income reported by the Firm.
Year ended December 31,Average impaired loans 
Interest income on
impaired loans(a)
 
Interest income on impaired
loans on a cash basis(a)
Average impaired loans 
Interest income on
impaired loans(a)
 
Interest income on impaired
loans on a cash basis(a)
(in millions)2011
2010
2009
 2011
2010
2009
 2011
2010
2009
201220112010 201220112010 201220112010
Home equity          
Senior lien$287
$207
$142
 $10
$15
$7
 $1
$1
$1
$610
$287
$207
 $27
$10
$15
 $12
$1
$1
Junior lien521
266
187
 18
10
9
 2
1
1
848
521
266
 42
18
10
 16
2
1
Mortgages                
Prime, including option ARMs3,859
1,530
496
 147
70
34
 14
14
8
5,989
3,859
1,530
 238
147
70
 28
14
14
Subprime3,083
2,539
1,948
 148
121
98
 16
19
6
3,494
3,083
2,539
 183
148
121
 31
16
19
Total residential real estate – excluding PCI$7,750
$4,542
$2,773
 $323
$216
$148
 $33
$35
$16
$10,941
$7,750
$4,542
 $490
$323
$216
 $87
$33
$35
(a)
Generally, interest income on loans modified in a TDRTDRs 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.

JPMorgan Chase & Co./2012 Annual Report259
Notes to consolidated financial statements

Loan modifications
The global settlement, which became effective on April 5, 2012, required the Firm to, among other things, provide approximately $500 million of refinancing relief to certain “underwater” borrowers under the Refi Program and approximately $3.7 billion of additional relief to certain borrowers under the Consumer Relief Program, including reductions of principal on first and second liens.
The purpose of the Refi Program was to allow eligible borrowers who were current on their mortgage loans to refinance their existing loans; such borrowers were otherwise unable to do so because they had no equity or, in many cases, negative equity in their homes. Under the Refi Program, the interest rate on each refinanced loan could have been reduced either for the remaining life of the loan or for five years. The Firm is participatingreduced the interest rates on loans that it refinanced under the Refi Program for the remaining lives of those loans. The refinancings generally did not result in term extensions and accordingly, in that
regard, were more similar to loan modifications than to traditional refinancings.
The Firm continues to modify first and second lien loans under the Consumer Relief Program. These loan modifications are primarily expected to be executed under the terms of either the U.S. Treasury’s 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. Treasury’s programs. The MHA programs include(e.g., the Home Affordable Modification Program (“HAMP”) and, the Second Lien Modification Program (“2MP”). The Firm’s other loss-mitigation 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) or one of the Firm’s proprietary modification programs, which include concessions similar to those offered under HAMPprograms. For further information on the global settlement, see Global settlement on servicing and 2MP but with expanded eligibility criteria. In addition, the Firm has offered specific targeted modification programs to higher risk borrowers, manyorigination of whom were currentmortgages in Note 2 on their mortgages prior to modification.page 195 of this Annual Report.
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 modificationsModifications 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 Firm’s 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 reconciletable reconciles the beginning and ending balances of residential real estate loans, excluding PCI loans, modified in TDRs for the periods presented.
Home equity Mortgages Total residential real estate – (excluding PCI)
Year ended December 31, 2011
(in millions)
Senior lien Junior lien Prime, including option ARMs Subprime 
Year ended December 31,
(in millions)
Home equity Mortgages 
Total residential
real estate – excluding PCI
Senior lien Junior lien Prime, including option ARMs Subprime 
20122011 20122011 20122011 20122011 20122011
Beginning balance of TDRs$226
 $283
 $2,084
 $2,751
 $5,344
$335
$226
 $657
$283
 $4,877
$2,084
 $3,219
$2,751
 $9,088
$5,344
New TDRs(a)
138
 518
 3,268
 883
 4,807
835
138
 711
518
 2,918
3,268
 1,043
883
 5,507
4,807
Charge-offs post-modification(b)
(15) (78) (119) (234) (446)(31)(15) (2)(78) (135)(119) (208)(234) (376)(446)
Foreclosures and other liquidations (e.g., short sales)—
 (11) (108) (82) (201)(5)—
 (21)(11) (138)(108) (113)(82) (277)(201)
Principal payments and other(14) (55) (248) (99) (416)(42)(14) (122)(55) (404)(248) (129)(99) (697)(416)
Ending balance of TDRs$335
 $657
 $4,877
 $3,219
 $9,088
$1,092
$335
 $1,223
$657
 $7,118
$4,877
 $3,812
$3,219
 $13,245
$9,088
Permanent modifications$285
 $634
 $4,601
 $3,029
 $8,549
Permanent modifications(a)
$1,058
$285
 $1,218
$634
 $6,834
$4,601
 $3,661
$3,029
 $12,771
$8,549
Trial modifications$50
 $23
 $276
 $190
 $539
$34
$50
 $5
$23
 $284
$276
 $151
$190
 $474
$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 duringFor the year ended December 31, 20112012. In the event that a trial modification is, included $1.6 billion of Chapter 7 loans consisting of $450 million of senior lien home equity loans, $448 million of junior lien home equity loans, $465 million of prime, including option ARMs, and $245 million of subprime mortgages. Certain of these loans were previously reported as a new TDR, any subsequent permanent modificationnonaccrual loans (e.g., based upon the delinquency status of that same loan is not reported as a new TDR.the loan).
(b)Includes charge-offs on unsuccessful trial modifications.


260JPMorgan Chase & Co./20112012 Annual Report243
Notes to consolidated financial statements

Nature and extent of modifications
MHA, as well as the Firm’s proprietary modification programs, generally provide various concessions to financially troubled borrowers including, but not limited to, interest rate reductions, term or payment extensions and
deferral of principal and/or interest payments that would otherwise have been required under the terms of the original agreement.

The following table provides information about how residential real estate loans, excluding PCI loans, were permanently modified under the Firm’s loss mitigation programs during the periodperiods presented. This table excludes Chapter 7 loans where the sole concession granted is the discharge of debt. At December 31, 2012, there were approximately 37,300 of such Chapter 7 loans, consisting of approximately 9,000 senior lien home equity loans, 20,700 junior lien home equity loans, 3,800 prime mortgage, including option ARMs, and 3,800 subprime mortgages.
Home equity Mortgages  
Year ended December 31, 2011Senior lien Junior lien Prime, including option ARMs Subprime Total residential real estate – (excluding PCI)
Year ended December 31,Home equity Mortgages 
Total residential
real estate -
excluding PCI
Senior lien Junior lien Prime, including option ARMs Subprime 
20122011 20122011 20122011 20122011 20122011
Number of loans approved for a trial modification, but not permanently modified654
 778
 898
 1,730
 4,060
410
654
 528
778
 1,101
898
 1,168
1,730
 3,207
4,060
Number of loans permanently modified1,006
 9,142
 9,579
 4,972
 24,699
4,385
1,006
 7,430
9,142
 9,043
9,579
 9,964
4,972
 30,822
24,699
Permanent concession granted:(a)(b)
         
Concession granted:(a)
         
Interest rate reduction80% 95% 53% 80% 75%81%76% 89%95% 75%54% 70%79% 77%75%
Term or payment extension88
 81
 71
 72
 75
49
86
 76
81
 61
71
 45
74
 57
76
Principal and/or interest deferred10
 21
 17
 19
 19
8
12
 19
22
 21
18
 12
19
 16
19
Principal forgiveness7
 20
 2
 13
 11
12
8
 22
20
 30
3
 43
14
 30
12
Other(c)
29
 7
 68
 26
 35
Other(b)
3
27
 5
7
 31
68
 8
26
 13
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.

JPMorgan Chase & Co./2012 Annual Report261
Notes to consolidated financial statements

Financial effects of modifications and redefaults
The following table provides information about the financial effects of the various concessions granted in permanent modifications of residential real estate loans, excluding PCI, under the Firm’s loss mitigation programs and also about redefaults of certain loans modified in TDRs for the periodperiods presented. This table excludes Chapter 7 loans where the sole concession granted is the discharge of debt.
Year ended December 31, 2011
(in millions, except weighted-average data and number of loans)		Home equity Mortgages Total residential real estate – (excluding PCI)
Senior lien Junior lien Prime, including option ARMs Subprime 
Weighted-average interest rate of loans with interest rate reductions – before TDR(a)
7.25% 5.46% 5.98% 8.25% 6.44%
Weighted-average interest rate of loans with interest rate reductions – after TDR(a)
3.51
 1.49
 3.34
 3.46
 3.09
Weighted-average remaining contractual term (in years) of loans with term or payment extensions – before TDR(a)
18
 21
 25
 23
 24
Weighted-average remaining contractual term (in years) of loans with term or payment extensions – after TDR(a)
30
 34
 35
 34
 35
Charge-offs recognized upon permanent modification$1
 $117
 $61
 $19
 $198
Principal deferred(b)
4
 35
 167
 61
 267
Principal forgiven(b)
1
 62
 20
 46
 129
Number of loans that redefaulted within one year of permanent modification(c)
222
 1,310
 1,142
 1,989
 4,663
Balance of loans that redefaulted within one year of permanent modification(c)
$18
 $52
 $340
 $281
 $691
Cumulative permanent modification redefault rates(d)
21% 14% 13% 28% 18%
Year ended December 31,
(in millions, except weighted-average
data and number of loans)		Home equity Mortgages Total residential real estate – excluding PCI
Senior lien Junior lien Prime, including option ARMs Subprime 
20122011 20122011 20122011 20122011 20122011
Weighted-average interest rate of loans with interest rate reductions – before TDR7.14%7.25% 5.40%5.44% 6.12%5.99% 7.78%8.27% 6.56%6.47%
Weighted-average interest rate of loans with interest rate reductions – after TDR4.56
3.54
 1.89
1.48
 3.57
3.32
 4.09
3.50
 3.62
3.09
Weighted-average remaining contractual term (in years) of loans with term or payment extensions – before TDR19
18
 20
21
 25
25
 23
23
 23
24
Weighted-average remaining contractual term (in years) of loans with term or payment extensions – after TDR28
30
 32
34
 36
35
 32
34
 34
35
Charge-offs recognized upon permanent modification$8
$1
 $65
$117
 $35
$61
 $29
$19
 $137
$198
Principal deferred5
4
 26
36
 164
176
 50
68
 245
284
Principal forgiven23
1
 58
62
 318
24
 371
55
 770
142
Number of loans that redefaulted within one year of permanent modification(a)
374
201
 1,436
1,170
 920
1,041
 1,426
1,742
 4,156
4,154
Balance of loans that redefaulted within one year of permanent modification(a)
$30
$17
 $46
$47
 $255
$319
 $156
$245
 $487
$628
(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 theysuch loans defaulted. For residential real estate loans modified in TDRs, payment default is deemed to occur when the loan becomes two contractual payments past due. In the event that a modified loan redefaults, it is probable that the loan will ultimately be liquidated through foreclosure or another similar type of liquidation transaction. Redefaults of loans modified within the last 12 months may not be representative of ultimate redefault levels.
(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.


The primary performance indicator for TDRs is the rate at which permanently modified loans redefault. At December 31, 2012, the cumulative redefault rates of residential real estate loans that have been modified under the Firm’s loss mitigation programs, excluding PCI loans, based upon permanent modifications that were completed after October 1, 2009, and that are seasoned more than six months, are 25% for senior lien home equity, 20% for junior lien home equity, 14% for prime mortgages including option ARMs, and 24% for subprime mortgages.
244JPMorgan Chase & Co./2011 Annual Report

Default rates of Chapter 7 loans vary significantly based on the delinquency status of the loan and overall economic conditions at the time of discharge. Default rates for Chapter 7 residential real estate loans that were less than 60 days past due at the time of discharge have ranged between approximately 10% and 40% in recent years based on the economic conditions at the time of discharge. At December 31, 2012, Chapter 7 residential real estate loans included approximately 19% of senior lien home equity, 12% of junior lien home equity, 45% of prime mortgages, including option ARMs, and 32% of subprime mortgages that were 30 days or more past due.

At December 31, 20112012, 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 6.76 years for senior lien home equity, 7 years for junior lien home equity,10 years for prime mortgage, including option ARMs and 8 years for subprime mortgage, respectively.mortgage. The estimated remaining lives of these loans reflect estimated prepayments, both voluntary and involuntary (i.e., foreclosures and other forced liquidations).


262JPMorgan Chase & Co./2012 Annual Report


Other consumer loans
The tablestable below provideprovides information for other consumer retained loan classes, including auto, business banking and student loans.
December 31,
(in millions, except ratios)
Auto Business banking Student and other Total other consumer Auto Business banking Student and other Total other consumer 
20112010 20112010 2011 2010 2011 2010 2012 2011 20122011 2012 2011 2012 2011 
Loan delinquency(a)
                          
Current and less than 30 days past due$46,891
$47,778
 $17,173
$16,240
 $12,905
 $13,998
 $76,969
 $78,016
 
Current$49,290
 $46,891
 $18,482
$17,173
 $11,038
 $12,905
 $78,810
 $76,969
 
30–119 days past due528
579
 326
351
 777
 795
 1,631
 1,725
 616
 528
 263
326
 709
 777
 1,588
 1,631
 
120 or more days past due7
10
 153
221
 461
 518
 621
 749
 7
 7
 138
153
 444
 461
 589
 621
 
Total retained loans$47,426
$48,367
 $17,652
$16,812
 $14,143
 $15,311
 $79,221
 $80,490
 $49,913
 $47,426
 $18,883
$17,652
 $12,191
 $14,143
 $80,987
 $79,221
 
% of 30+ days past due to total retained loans1.13%1.22% 2.71%3.40% 1.76%
(d) 
1.61%
(d) 
1.59%
(d) 
1.75%
(d) 
1.25% 1.13% 2.12%2.71% 2.12%
(e) 
1.76%
(e) 
1.58%
(e) 
1.59%
(e) 
90 or more days past due and still accruing (b)
$—
$—
 $—
$—
 $551
 $625
 $551
 $625
 $—
 $—
 $—
$—
 $525
 $551
 $525
 $551
 
Nonaccrual loans118
141
 694
832
 69
 67
 881
 1,040
 163
(d) 
118
 481
694
 70
 69
 714
 881
 
Geographic region                          
California$4,413
$4,307
 $1,342
$851
 $1,261
 $1,330
 $7,016
 $6,488
 $4,962
 $4,413
 $1,983
$1,342
 $1,108
 $1,261
 $8,053
 $7,016
 
New York3,616
3,875
 2,792
2,877
 1,401
 1,305
 7,809
 8,057
 3,742
 3,616
 2,981
2,792
 1,202
 1,401
 7,925
 7,809
 
Illinois2,738
 2,496
 1,404
1,364
 556
 851
 4,698
 4,711
 
Florida1,881
1,923
 313
220
 658
 722
 2,852
 2,865
 1,922
 1,881
 527
313
 748
 658
 3,197
 2,852
 
Illinois2,496
2,608
 1,364
1,320
 851
 940
 4,711
 4,868
 
Texas4,467
4,505
 2,680
2,550
 1,053
 1,273
 8,200
 8,328
 4,739
 4,467
 2,749
2,680
 891
 1,053
 8,379
 8,200
 
New Jersey1,829
1,842
 376
422
 460
 502
 2,665
 2,766
 1,921
 1,829
 379
376
 409
 460
 2,709
 2,665
 
Arizona1,495
1,499
 1,165
1,218
 316
 387
 2,976
 3,104
 1,719
 1,495
 1,139
1,165
 265
 316
 3,123
 2,976
 
Washington735
716
 160
115
 249
 279
 1,144
 1,110
 824
 735
 202
160
 287
 249
 1,313
 1,144
 
Ohio2,633
2,961
 1,541
1,647
 880
 1,010
 5,054
 5,618
 2,462
 2,633
 1,443
1,541
 770
 880
 4,675
 5,054
 
Michigan2,282
2,434
 1,389
1,401
 637
 729
 4,308
 4,564
 2,091
 2,282
 1,368
1,389
 548
 637
 4,007
 4,308
 
All other21,579
21,697
 4,530
4,191
 6,377
 6,834
 32,486
 32,722
 22,793
 21,579
 4,708
4,530
 5,407
 6,377
 32,908
 32,486
 
Total retained loans$47,426
$48,367
 $17,652
$16,812
 $14,143
 $15,311
 $79,221
 $80,490
 $49,913
 $47,426
 $18,883
$17,652
 $12,191
 $14,143
 $80,987
 $79,221
 
Loans by risk ratings(c)
                          
Noncriticized$6,775
$5,803
 $11,749
$10,351
 NA
 NA
 $18,524
 $16,154
 $8,882
 $6,775
 $13,336
$11,749
 NA
 NA
 $22,218
 $18,524
 
Criticized performing166
265
 817
982
 NA
 NA
 983
 1,247
 130
 166
 713
817
 NA
 NA
 843
 983
 
Criticized nonaccrual3
12
 524
574
 NA
 NA
 527
 586
 4
 3
 386
524
 NA
 NA
 390
 527
 
(a)Loans
Individual delinquency classifications included 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.as follows: current includes $5.4 billion and $7.0 billion; 30-119 days past due includes $466 million and $542 million; and 120 or more days past due includes $428 million and $447 million at December 31, 2012 and 2011, respectively.
(b)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.
(c)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.
(d)
At December 31, 20112012, included $51 million of Chapter 7 auto loans.
(e)
December 31, 2012 and 20102011, excluded loans 30 days or more past due and still accruing, which are insured by U.S. government agencies under the FFELP, of $989894 million and $1.1 billion989 million, respectively. These amounts were excluded as reimbursement of insured amounts is proceeding normally.

JPMorgan Chase & Co./20112012 Annual Report 245263
Notes to consolidated financial statements

Other consumer impaired loans and loan modifications
The tablestable below setsets forth information about the Firm’s other consumer impaired loans, including risk-rated business banking and auto loans that have been placed on nonaccrual status, and loans that have been modified in TDRs.
December 31,
(in millions)
Auto Business banking 
Total other consumer(c)
Auto Business banking 
Total other consumer(e)
20112010 20112010 2011201020122011 20122011 20122011
Impaired loans          
With an allowance$88
$102
 $713
$774
 $801
$876
$78
$88
 $543
$713
 $621
$801
Without an allowance(a)
3
—
 —
—
 3
—
72
3
 —
—
 72
3
Total impaired loans(b)$91
$102
 $713
$774
 $804
$876
$150
$91
 $543
$713
 $693
$804
Allowance for loan losses related to impaired loans$12
$16
 $225
$248
 $237
$264
$12
$12
 $126
$225
 $138
$237
Unpaid principal balance of impaired loans(b)(d)
126
132
 822
899
 948
1,031
259
126
 624
822
 883
948
Impaired loans on nonaccrual status(b)41
50
 551
647
 592
697
109
41
 394
551
 503
592
(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)
At December 31, 2012, included $72 million of Chapter 7 auto loans. Certain of these loans were previously reported as nonaccrual loans (e.g., based upon the delinquency status of the loan).
(c)
At December 31, 2012, included $146 million of Chapter 7 auto loans.
(d)
Represents the contractual amount of principal owed at December 31, 20112012 and 20102011. 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)(e)
There were no impaired student and other loans at December 31, 20112012 and 20102011.
The following table presents average impaired loans for the periods presented.
Year ended December 31,
(in millions)
Average impaired loans(b)
Average impaired loans(b)
201120102009201220112010
Auto$92
$120
$100
$111
$92
$120
Business banking760
682
396
622
760
682
Total other consumer(a)
$852
$802
$496
$733
$852
$802
(a)
There were no impaired student and other loans for the years ended 20112012, 20102011 and 20092010.
(b)
The related interest income on impaired loans, including those on a cash basis, was not material for the years ended 20112012, 20102011 and 20092010.
Loan modifications
The following table provides information about the Firm’s other consumer loans modified in TDRs. All of these TDRs are reported as impaired loans in the tables above.
December 31,
(in millions)
Auto Business banking 
Total other consumer(c)
Auto Business banking 
Total other consumer(d)
20112010 20112010 2011201020122011 20122011 20122011
Loans modified in troubled debt restructurings(b)(c)
$88
$91
 $415
$395
 $503
$486
$150
$88
 $352
$415
 $502
$503
TDRs on nonaccrual status38
39
 253
268
 291
307
109
38
 203
253
 312
291
(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, 20112012 and 20102011, were immaterial.
(c)
At December 31, 2012, included $72 million of Chapter 7 auto loans. Certain of these loans were previously reported as nonaccrual loans (e.g., based upon the delinquency status of the loan).
(d)
There were no student and other loans modified in TDRs at December 31, 20112012 and 20102011.

264JPMorgan Chase & Co./2012 Annual Report


TDR activity rollforward
The following table reconciles the beginning and ending balances of other consumer loans modified in TDRs for the periodperiods presented.

Year ended December 31, 2011  
(in millions)Auto Business banking Total other consumer 
Year ended December 31,
(in millions)		Auto Business banking Total other consumer
20122011 20122011 20122011
Beginning balance of TDRs$91
 $395
 $486
 $88
$91
 $415
$395
 $503
$486
New TDRs(a)54
 195
 249
 145
54
 104
195
 249
249
Charge-offs(5) (11) (16) 
Charge-offs post-modification(9)(5) (9)(11) (18)(16)
Foreclosures and other liquidations—
 (3) (3) —
—
 (1)(3) (1)(3)
Principal payments and other(52) (161) (213) (74)(52) (157)(161) (231)(213)
Ending balance of TDRs$88
 $415
 $503
 $150
$88
 $352
$415
 $502
$503
(a)
At December 31, 2012, included $72 million of Chapter 7 auto loans. Certain of these loans were previously reported as nonaccrual loans (e.g., based upon the delinquency status of the loan).

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. Beginning September 30, 2012, Chapter 7 auto loans are also considered TDRs.


246JPMorgan Chase & Co./2011 Annual Report


For business banking loans, concessions are dependent on individual borrower circumstances and can be of a short-term 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, and for which the payment default occurred within one year of the modification, was $42 million and $80 million, during the years ended December 31, 2012 and 2011, respectively. The balance of auto loans modified in TDRs that experienced a payment default, and for which the payment default occurred within one year of the modification, was $46 million during the year ended December 31, 2012. The corresponding amount for 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.

The following table provides information about the financial effects of the various concessions granted in modifications of other consumer loans for the periods presented.
Year ended December 31, Auto Business banking
 20122011 20122011
Weighted-average interest rate of loans with interest rate reductions – before TDR 12.64%12.45% 7.33%7.55%
Weighted-average interest rate of loans with interest rate reductions – after TDR 4.83
5.70
 5.49
5.52
Weighted-average remaining contractual term (in years) of loans with term or payment extensions – before TDR NM
NM
 1.4
1.4
Weighted-average remaining contractual term (in years) of loans with term or payment extensions – after TDR NM
NM
 2.4
2.6

JPMorgan Chase & Co./2012 Annual Report265
Notes to consolidated financial statements

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 pool’s effective interest rate. Impairments are recognized through the provision for credit losses and an increase in the allowance for loan losses. Probable and significant increases in expected cash flows (e.g., decreased credit losses, the net benefit of modifications) would first reverse any previously recorded allowance for loan losses with any remaining increases recognized prospectively as a yield adjustment over the remaining estimated lives of the underlying loans. The impacts of (i) pre-payments,prepayments, (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 Firm’s quarterly assessment of whether a probable and significant change in expected cash flows has occurred, and the loans continue to be accounted for and reported as PCI loans. In evaluating the effect of modifications on expected cash flows, the Firm incorporates the effect of any 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 Firm’s Consolidated Balance Sheets but is accreted into interest income at a level rate of return over the remaining estimated lives of the underlying pools of loans.
If the timing and/or amounts of expected cash flows on PCI 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 Firm’s 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. Actual losses in excess of the purchase accounting adjustment are charged off against the PCI allowance for credit losses. To date, no charge-offs have been recorded for these consumer loans.
The PCI portfolio affects the Firm’s results of operations primarily through: (i) contribution to net interest margin; (ii) expense related to defaults and servicing resulting from the liquidation of the loans; and (iii) any provision for loan losses. The PCI loans acquired in the Washington Mutual transaction were funded based on the interest rate characteristics of the loans. For example, variable-rate loans were funded with variable-rate liabilities and fixed-rate loans were funded with fixed-rate liabilities with a similar maturity profile. A net spread will be earned on the declining balance of the portfolio, which is estimated as of December 31, 20112012, to have a remaining weighted-average life of 7.58 years.



266JPMorgan Chase & Co./20112012 Annual Report247
Notes to consolidated financial statements

Residential real estate – PCI loans

The table below sets forth information about the Firm’s consumer, excluding credit card, PCI loans.
December 31,
(in millions, except ratios)
Home equity Prime mortgage Subprime mortgage Option ARMs Total PCIHome equity Prime mortgage Subprime mortgage Option ARMs Total PCI
20112010 20112010 20112010 20112010 2011201020122011 20122011 20122011 20122011 20122011
Carrying value(a)
$22,697
$24,459
 $15,180
$17,322
 $4,976
$5,398
 $22,693
$25,584
 $65,546
$72,763
$20,971
$22,697
 $13,674
$15,180
 $4,626
$4,976
 $20,466
$22,693
 $59,737
$65,546
Related allowance for loan losses(b)
1,908
1,583
 1,929
1,766
 380
98
 1,494
1,494
 5,711
4,941
1,908
1,908
 1,929
1,929
 380
380
 1,494
1,494
 5,711
5,711
Loan delinquency (based on unpaid principal balance)                  
Current and less than 30 days past due$22,682
$25,783
 $12,148
$13,035
 $4,388
$4,312
 $17,919
$18,672
 $57,137
$61,802
Current$20,331
$22,682
 $11,078
$12,148
 $4,198
$4,388
 $16,415
$17,919
 $52,022
$57,137
30–149 days past due1,130
1,348
 912
1,468
 782
1,020
 1,467
2,215
 4,291
6,051
803
1,130
 740
912
 698
782
 1,314
1,467
 3,555
4,291
150 or more days past due1,252
1,181
 3,000
4,425
 2,059
2,710
 6,753
9,904
 13,064
18,220
1,209
1,252
 2,066
3,000
 1,430
2,059
 4,862
6,753
 9,567
13,064
Total loans$25,064
$28,312
 $16,060
$18,928
 $7,229
$8,042
 $26,139
$30,791
 $74,492
$86,073
$22,343
$25,064
 $13,884
$16,060
 $6,326
$7,229
 $22,591
$26,139
 $65,144
$74,492
% of 30+ days past due to total loans9.50%8.93% 24.36%31.13% 39.30%46.38% 31.45%39.36% 23.30%28.20%9.01%9.50% 20.21%24.36% 33.64%39.30% 27.34%31.45% 20.14%23.30%
Current estimated LTV ratios (based on unpaid principal balance)(e)(d)
                  
Greater than 125% and refreshed FICO scores:                  
Equal to or greater than 660$5,915
$6,289
 $2,313
$2,400
 $473
$432
 $2,509
$2,681
 $11,210
$11,802
$4,508
$5,915
 $1,478
$2,313
 $375
$473
 $1,597
$2,509
 $7,958
$11,210
Less than 6603,299
4,043
 2,319
2,744
 1,939
2,129
 4,608
6,330
 12,165
15,246
2,344
3,299
 1,449
2,319
 1,300
1,939
 2,729
4,608
 7,822
12,165
101% to 125% and refreshed FICO scores:                  
Equal to or greater than 6605,393
6,053
 3,328
3,815
 434
424
 3,959
4,292
 13,114
14,584
4,966
5,393
 2,968
3,328
 434
434
 3,281
3,959
 11,649
13,114
Less than 6602,304
2,696
 2,314
3,011
 1,510
1,663
 3,884
5,005
 10,012
12,375
2,098
2,304
 1,983
2,314
 1,256
1,510
 3,200
3,884
 8,537
10,012
80% to 100% and refreshed FICO scores:                  
Equal to or greater than 6603,482
3,995
 1,629
1,970
 372
374
 3,740
4,152
 9,223
10,491
3,531
3,482
 1,872
1,629
 416
372
 3,794
3,740
 9,613
9,223
Less than 6601,264
1,482
 1,457
1,857
 1,197
1,477
 3,035
3,551
 6,953
8,367
1,305
1,264
 1,378
1,457
 1,182
1,197
 2,974
3,035
 6,839
6,953
Lower than 80% and refreshed FICO scores:                  
Equal to or greater than 6602,409
2,641
 1,276
1,443
 198
186
 2,189
2,281
 6,072
6,551
2,524
2,409
 1,356
1,276
 255
198
 2,624
2,189
 6,759
6,072
Less than 660998
1,113
 1,424
1,688
 1,106
1,357
 2,215
2,499
 5,743
6,657
1,067
998
 1,400
1,424
 1,108
1,106
 2,392
2,215
 5,967
5,743
Total unpaid principal balance$25,064
$28,312
 $16,060
$18,928
 $7,229
$8,042
 $26,139
$30,791
 $74,492
$86,073
$22,343
$25,064
 $13,884
$16,060
 $6,326
$7,229
 $22,591
$26,139
 $65,144
$74,492
Geographic region (based on unpaid principal balance)                  
California$15,091
$17,012
 $9,121
$10,891
 $1,661
$1,971
 $13,565
$16,130
 $39,438
$46,004
$13,493
$15,091
 $7,877
$9,121
 $1,444
$1,661
 $11,889
$13,565
 $34,703
$39,438
New York1,179
1,316
 1,018
1,111
 709
736
 1,548
1,703
 4,454
4,866
1,067
1,179
 927
1,018
 649
709
 1,404
1,548
 4,047
4,454
Illinois502
558
 433
511
 338
411
 587
702
 1,860
2,182
Florida2,307
2,595
 1,265
1,519
 812
906
 3,201
3,916
 7,585
8,936
2,054
2,307
 1,023
1,265
 651
812
 2,480
3,201
 6,208
7,585
Illinois558
627
 511
562
 411
438
 702
760
 2,182
2,387
Texas455
525
 168
194
 405
435
 140
155
 1,168
1,309
385
455
 148
168
 368
405
 118
140
 1,019
1,168
New Jersey471
540
 445
486
 297
316
 969
1,064
 2,182
2,406
423
471
 401
445
 260
297
 854
969
 1,938
2,182
Arizona468
539
 254
359
 126
165
 362
528
 1,210
1,591
408
468
 215
254
 105
126
 305
362
 1,033
1,210
Washington1,368
1,535
 388
451
 160
178
 649
745
 2,565
2,909
1,215
1,368
 328
388
 142
160
 563
649
 2,248
2,565
Ohio32
38
 79
91
 114
122
 111
131
 336
382
27
32
 71
79
 100
114
 89
111
 287
336
Michigan81
95
 239
279
 187
214
 268
345
 775
933
70
81
 211
239
 163
187
 235
268
 679
775
All other3,054
3,490
 2,572
2,985
 2,347
2,561
 4,624
5,314
 12,597
14,350
2,699
3,054
 2,250
2,572
 2,106
2,347
 4,067
4,624
 11,122
12,597
Total unpaid principal balance$25,064
$28,312
 $16,060
$18,928
 $7,229
$8,042
 $26,139
$30,791
 $74,492
$86,073
$22,343
$25,064
 $13,884
$16,060
 $6,326
$7,229
 $22,591
$26,139
 $65,144
$74,492
(a)Carrying value includes the effect of fair value adjustments that were applied to the consumer PCI portfolio at the date of acquisition.
(b)Management concluded as part of the Firm’s regular assessment of the PCI loan pools that it was probable that higher expected credit losses would result in a decrease in expected cash flows. As a result, an allowance for loan losses for impairment of these pools has been recognized.
(c)Represents the aggregate unpaid principal balance of loans divided by the estimated current property value. Current property values are estimated, at a minimum, quarterly, based on home valuation models using nationally recognized home price index valuation estimates incorporating actual data to the extent available and forecasted data where actual data is not available. These property values do not represent actual appraised loan level collateral values; as such, the resulting ratios are necessarily imprecise and should be viewed as estimates. Current estimated combined LTV for junior lien home equity loans considers all available lien positions related to the property.
(d)Refreshed FICO scores, which the Firm obtains at least quarterly, represent each borrower’s most recent credit score obtained by the Firm. The Firm obtains refreshed FICO scores at least quarterly.
(e)For home equity loans, prior-period amounts have been revised to conform with the current-period presentation.score.

248JPMorgan Chase & Co./20112012 Annual Report267

Notes to consolidated financial statements

Approximately 20%21% of the PCI home equity portfolio are senior lien loans; the remaining balance are junior lien HELOANs or HELOCs. The following table representstables set forth delinquency statistics for PCI junior lien home equity loans based on unpaid principal balance as of December 31, 20112012 and 20102011.
 Delinquencies     Delinquencies   Total 30+ day delinquency rate
December 31, 2011
(in millions, except ratios)
 30–89 days past due 90–149 days past due 150+ days past due Total loans Total 30+ day delinquency rate
December 31, 2012
(in millions, except ratios)
 30–89 days past due 90–149 days past due 150+ days past due Total loans Total 30+ day delinquency rate
HELOCs:(a)
                   
Within the revolving period(b)
 $500
 $296
 $543
 $18,246
 7.34% $361
 $175
 $591
 $15,915
 7.08%
Within the required amortization period(c)
 16
 11
 5
 400
 8.00
Beyond the revolving period(c)
 30
 13
 20
 666
 9.46
HELOANs 53
 29
 44
 1,327
 9.50
 37
 18
 44
 1,085
 9.12
Total $569
 $336
 $592
 $19,973
 7.50% $428
 $206
 $655
 $17,666
 7.30%
 Delinquencies     Delinquencies   Total 30+ day delinquency rate
December 31, 2010
(in millions, except ratios)
 30–89 days past due 90–149 days past due 150+ days past due Total loans Total 30+ day delinquency rate
December 31, 2011
(in millions, except ratios)
 30–89 days past due 90–149 days past due 150+ days past due Total loans Total 30+ day delinquency rate
HELOCs:(a)
                   
Within the revolving period(b)
 $601
 $404
 $428
 $21,172
 6.77% $500
 $296
 $543
 $18,246
 7.34%
Within the required amortization period(c)
 1
 —
 1
 37
 5.41
Beyond the revolving period(c)
 16
 11
 5
 400
 8.00
HELOANs 79
 49
 46
 1,573
 11.06
 53
 29
 44
 1,327
 9.50
Total $681
 $453
 $475
 $22,782
 7.06% $569
 $336
 $592
 $19,973
 7.50%
(a)
In general, these HELOCs are open-ended, revolving loans for a 10-year10-year period,after which time the HELOC converts to aan interest-only loan with a 20-year amortization period.balloon payment at the end of the loan’s term.
(b)Substantially all undrawn HELOCs within the revolving period have been closed.
(c)Predominantly all of these loans have been modified to provide a more affordable payment to the borrower.into fixed-rate amortizing loans.
The table below sets forth the accretable yield activity for the Firm’s PCI consumer loans for the years ended December 31, 20112012, 20102011 and 20092010, and represents the Firm’s estimate of gross interest income expected to be earned over the remaining life of the PCI loan portfolios. ThisThe table excludes the cost to fund the PCI portfolios, and therefore the accretable yield does not represent net interest income expected to be earned on these portfolios.
Year ended December 31,
(in millions, except ratios)		Total PCITotal PCI
2011201020092012 2011 2010
Beginning balance$19,097
$25,544
$32,619
$19,072
 $19,097
 $25,544
Accretion into interest income(2,767)(3,232)(4,363)(2,491) (2,767) (3,232)
Changes in interest rates on variable-rate loans(573)(819)(4,849)(449) (573) (819)
Other changes in expected cash flows(a)
3,315
(2,396)2,137
2,325
 3,315
 (2,396)
Balance at December 31$19,072
$19,097
$25,544
$18,457
 $19,072
 $19,097
Accretable yield percentage4.33%4.35%5.14%4.38% 4.33% 4.35%
(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 yearyears ended December 31, 2012 and 2011, other changes in expected cash flows were largelyprincipally driven by the impact of modifications, but also related to changes in prepayment assumptions. For the yearsyear 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.
SinceFrom the date of acquisition through 2011, 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. More recently, however, the Firm has observed loan liquidation periods start to shorten, thus increasing the accretable yield percentage. Certain events, such as extended or shortened loan liquidation periods, affect the timing of
expected cash flows and the accretable yield percentage, but not the amount of cash expected to
be received (i.e., the accretable yield balance). ExtendedWhile extended loan liquidation periods reduce the accretable yield percentage because(because the same accretable yield balance is recognized against a higher-than-expected loan balance over a longer-than-expected period of time.time), shortened loan liquidation periods would have the opposite effect.




268JPMorgan Chase & Co./20112012 Annual Report249
Notes to consolidated financial statements

Credit card loan portfolio
The Credit card portfolio segment includes credit card loans originated and purchased by the Firm, including those acquired in the Washington Mutual transaction.
Firm. Delinquency rates are the primary credit quality indicator for credit card loans as they provide an early warning that borrowers may be experiencing difficulties (30-days(30 days past due), as well as information on those borrowers that have been delinquent for a longer period of time (90-days(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.
TheWhile the borrower’s credit score is another general indicator of credit quality. Becausequality, because the borrower’s credit score tends to
be a lagging indicator, of credit quality, the Firm does not useview 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, asbelow; 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 changedecrease over time, depending on the performance of the cardholder and changes in credit score technology.


The table below sets forth information about the Firm’s credit card loans.
As of or for the year ended December 31,
(in millions, except ratios)
20122011
Net charge-offs$4,944
$6,925
% of net charge-offs to retained loans3.95%5.44%
Loan delinquency  
Current and less than 30 days past due
and still accruing		$125,309
$128,464
30–89 days past due and still accruing1,381
1,808
90 or more days past due and still accruing1,302
1,902
Nonaccrual loans1
1
Total retained credit card loans$127,993
$132,175
Loan delinquency ratios  
% of 30+ days past due to total retained loans2.10%2.81%
% of 90+ days past due to total retained loans1.02
1.44
Credit card loans by geographic region  
California$17,115
$17,598
New York10,379
10,594
Texas10,209
10,239
Illinois7,399
7,548
Florida7,231
7,583
New Jersey5,503
5,604
Ohio4,956
5,202
Pennsylvania4,549
4,779
Michigan3,745
3,994
Virginia3,193
3,298
All other53,714
55,736
Total retained credit card loans$127,993
$132,175
Percentage of portfolio based on carrying value with estimated refreshed FICO scores(a)
  
Equal to or greater than 66084.1%81.4%
Less than 66015.9
18.6
As of or for the year ended December 31,
(in millions, except ratios)
Chase, excluding
Washington Mutual portfolio(b)
 
Washington Mutual
portfolio(b)
 
Total credit card(b)
20112010 20112010 20112010
Net charge-offs$5,668
$11,191
 $1,257
$2,846
 $6,925
$14,037
% of net charge-offs to retained loans4.91%8.73% 10.49%17.73% 5.44%9.73%
Loan delinquency        
Current and less than 30 days past due and still accruing$118,054
$117,248
 $10,410
$12,670
 $128,464
$129,918
30–89 days past due and still accruing1,509
2,092
 299
459
 1,808
2,551
90 or more days past due and still accruing1,558
2,449
 344
604
 1,902
3,053
Nonaccrual loans1
2
 —
—
 1
2
Total retained loans$121,122
$121,791
 $11,053
$13,733
 $132,175
$135,524
Loan delinquency ratios        
% of 30+ days past due to total retained loans2.53%3.73% 5.82%7.74% 2.81%4.14%
% of 90+ days past due to total retained loans1.29
2.01
 3.11
4.40
 1.44
2.25
Credit card loans by geographic region        
California$15,479
$15,454
 $2,119
$2,650
 $17,598
$18,104
New York9,755
9,540
 839
1,032
 10,594
10,572
Texas9,418
9,217
 821
1,006
 10,239
10,223
Florida6,658
6,724
 925
1,165
 7,583
7,889
Illinois7,108
7,077
 440
542
 7,548
7,619
New Jersey5,208
5,070
 396
494
 5,604
5,564
Ohio4,882
5,035
 320
401
 5,202
5,436
Pennsylvania4,434
4,521
 345
424
 4,779
4,945
Michigan3,777
3,956
 217
273
 3,994
4,229
Virginia3,061
3,020
 237
295
 3,298
3,315
Georgia2,737
2,834
 315
398
 3,052
3,232
Washington2,081
2,053
 359
438
 2,440
2,491
All other46,524
47,290
 3,720
4,615
 50,244
51,905
Total retained loans$121,122
$121,791
 $11,053
$13,733
 $132,175
$135,524
Percentage of portfolio based on carrying value with estimated refreshed FICO scores(a)
        
Equal to or greater than 66083.3%80.6% 62.6%56.4% 81.4%77.9%
Less than 66016.7
19.4
 37.4
43.6
 18.6
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 periodperiods shown. The Firm obtains refreshed FICO scores at least quarterly.
(b)Includes billed finance charges and fees net of an allowance for uncollectible amounts.




250JPMorgan Chase & Co./20112012 Annual Report269

Notes to consolidated financial statements

Credit card impaired loans and loan modifications
The table below sets forth information about the Firm’s impaired credit card loans. All of these loans are considered to be impaired as they have been modified in TDRs.
Chase, excluding
Washington Mutual
portfolio
 
Washington Mutual
portfolio
 Total credit card
December 31, (in millions)20112010 20112010 2011201020122011
Impaired loans with an allowance(a)(b)
     
Impaired credit card loans with an
allowance(a)(b)
 
Credit card loans with modified payment terms(c)
$4,959
$6,685
 $1,116
$1,570
 $6,075
$8,255
$4,189
$6,075
Modified credit card loans that have reverted to pre-modification payment terms(d)
930
1,439
 209
311
 1,139
1,750
573
1,139
Total impaired loans$5,889
$8,124
 $1,325
$1,881
 $7,214
$10,005
Allowance for loan losses related to impaired loans$2,195
$3,175
 $532
$894
 $2,727
$4,069
Total impaired credit card loans$4,762
$7,214
Allowance for loan losses related to impaired credit card loans$1,681
$2,727
(a)The carrying value and the unpaid principal balance are the same for credit card impaired loans.
(b)There were no impaired loans without an allowance.
(c)Represents credit card loans outstanding to borrowers enrolled in a credit card modification program as of the date presented.
(d)
Represents credit card loans that were modified in TDRs but that have subsequently reverted back to the loans’ pre-modification payment terms. At December 31, 20112012 and 20102011, $762341 million and $1.2 billion762 million, respectively, of loans have reverted back to the pre-modification payment terms of the loans due to noncompliance with the terms of the modified loans. Based on the Firm’s historical experience a substantial portion of these loans is expected to be charged-off in accordance with the Firm’s standard charge-off policy. The remaining $377232 million and $590377 million at December 31, 20112012 and 20102011, 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,Average impaired loans Interest income on impaired loans
(in millions)201120102009 201120102009
Chase, excluding Washington Mutual portfolio$6,914
$8,747
$3,059
 $360
$479
$181
Washington Mutual portfolio1,585
1,983
991
 103
126
70
Total credit card$8,499
$10,730
$4,050
 $463
$605
$251

Year ended December 31,
(in millions)
 201220112010
Average impaired credit card loans $5,893
$8,499
$10,730
Interest income on
  impaired credit card loans
 308
463
605
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.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 Firm’s 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 borrower’s line of credit.


JPMorgan Chase & Co./2011 Annual Report251
Notes to consolidated financial statements

The following tables providetable provides information regarding the nature and extent of modifications of credit card loans for the periodperiods presented.
 Chase, excluding Washington Mutual portfolio Washington Mutual portfolio Total credit card
Year ended December 31, 2011
(in millions)
Short-term programs Long-term programs Short-term programs Long-term programs Short-term programs Long-term programs
New enrollments$141
 $2,075
 $26
 $448
 $167
 $2,523

Year ended December 31, New enrollments
(in millions) 20122011
Short-term programs $47
$167
Long-term programs 1,607
2,523
Total new enrollments $1,654
$2,690
Financial effects of modifications and redefaults
The following tables providetable provides 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)
Chase, excluding Washington Mutual portfolio Washington Mutual portfolio Total credit card
Year ended December 31,
(in millions, except
weighted-average data)
 20122011
Weighted-average interest rate of loans – before TDR14.91% 21.38% 16.05% 15.67%16.05%
Weighted-average interest rate of loans – after TDR5.04
 6.39
 5.28
 5.19
5.28
Loans that redefaulted within one year of modification(a)
$559
 $128
 $687
 $309
$687
(a)
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, aA substantial portion of these loans areis expected to be charged-off in accordance with the Firm’s standard charge-off policy. Also basedBased on historical experience, the estimated weighted-average ultimateexpected default rate for modified credit card loans was 38.23% at December 31, 2012, and 35.47% at December 31, 2011.



270JPMorgan Chase & Co./2012 Annual Report


Wholesale loan portfolio
Wholesale loans include loans made to a variety of customers, ranging from large corporate and institutional clients to high-net-worth individuals.
The primary credit quality indicator for wholesale loans is the risk rating assigned 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 obligor’s debt capacity and financial flexibility, the level of the obligor’s earnings, the amount and sources for repayment, the level and nature of contingencies, management strength, and the industry and geography in which the obligor operates. As of September 30, 2012, the Firm revised its definition of the criticized component of the wholesale portfolio to align with the banking regulators’ definition of criticized exposures, which consists of the special mention, substandard and doubtful categories. Prior periods have been reclassified to conform with the current presentation. Risk ratings generally represent ratings profiles similar to those defined by S&P and Moody’s. Investment grade ratings range from “AAA/Aaa” to “BBB-/Baa3.” Noninvestment grade ratings are classified as noncriticized (“BB+/Ba1 and B-/B3”) and criticized (“CCC+”/“Caa1 and below”), and the criticized portion is further subdivided into performing and nonaccrual loans, representing management’s assessment of the collectibility of principal and interest. Criticized loans have a higher probability of default than noncriticized loans.
Risk ratings are reviewed on a regular and ongoing basis by Credit Risk Management and are adjusted as necessary for updated information affecting the obligor’s ability to fulfill its obligations.
As noted above, the risk rating of a loan considers the industry in which the obligor conducts its operations. As part of the overall credit risk management framework, the Firm focuses on the management and diversification of its industry and client exposures, with particular attention paid to industries with actual or potential credit concern. See Note 5 on page 36.45%217 in this Annual Report for further detail on industry concentrations.


JPMorgan Chase & Co./2012 Annual Report271
Notes to consolidated financial statements

The table below provides information by class of receivable for the retained loans in the Wholesale portfolio segment.
As of or for the year ended December 31,
(in millions, except ratios)
Commercial
and industrial
 Real estate
20122011 20122011
Loans by risk ratings     
Investment grade$61,870
$52,379
 $41,796
$33,920
Noninvestment grade:     
Noncriticized44,651
37,870
 14,567
14,394
Criticized performing2,636
3,077
 3,857
5,484
Criticized nonaccrual708
889
 520
886
Total noninvestment grade47,995
41,836
 18,944
20,764
Total retained loans$109,865
$94,215
 $60,740
$54,684
% of total criticized to total retained loans3.04 %4.21% 7.21%11.65%
% of nonaccrual loans to total retained loans0.64
0.94
 0.86
1.62
Loans by geographic distribution(a)
     
Total non-U.S.$35,494
$30,813
 $1,533
$1,497
Total U.S.74,371
63,402
 59,207
53,187
Total retained loans$109,865
$94,215
 $60,740
$54,684
      
Net charge-offs/(recoveries)$(212)$124
 $54
$256
% of net charge-offs/(recoveries) to end-of-period retained loans(0.19)%0.13% 0.09%0.47%
      
Loan delinquency(b)
     
Current and less than 30 days past due and still accruing$109,019
$93,060
 $59,829
$53,387
30–89 days past due and still accruing119
266
 322
327
90 or more days past due and still accruing(c)
19
—
 69
84
Criticized nonaccrual708
889
 520
886
Total retained loans$109,865
$94,215
 $60,740
$54,684
(a)The U.S. and non-U.S. distribution is determined based predominantly on the domicile of the borrower.
(b)
The credit quality of wholesale loans is assessed primarily through ongoing review and monitoring of an obligor’s ability to meet contractual obligations rather than relying on the past due status, which is generally a lagging indicator of credit quality. For a discussion of more significant risk factors, see page 271 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 193–194 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 multi-family 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)
Multifamily Commercial lessors
20122011 20122011
Real estate retained loans$38,030
$32,524
 $14,668
$14,444
Criticized exposure2,118
3,452
 1,951
2,192
% of criticized exposure to total real estate retained loans5.57%10.61% 13.30%15.18%
Criticized nonaccrual$249
$412
 $207
$284
% of criticized nonaccrual to total real estate retained loans0.65%1.27% 1.41%1.97%

272JPMorgan Chase & Co./2012 Annual Report


(table continued from previous page)
Financial
 institutions
 Government agencies 
Other(d)
 
Total
retained loans
20122011 20122011 20122011 20122011
           
$22,064
$28,803
 $9,183
$7,421
 $79,533
$74,475
 $214,446
$196,998
           
13,760
8,849
 356
377
 9,914
7,450
 83,248
68,940
395
530
 5
5
 201
963
 7,094
10,059
8
37
 —
16
 198
570
 1,434
2,398
14,163
9,416
 361
398
 10,313
8,983
 91,776
81,397
$36,227
$38,219
 $9,544
$7,819
 $89,846
$83,458
 $306,222
$278,395
1.11 %1.48 % 0.05%0.27% 0.44%1.84% 2.78 %4.47%
0.02
0.10
 —
0.20
 0.22
0.68
 0.47
0.86
           
$26,326
$29,996
 $1,582
$583
 $39,421
$32,275
 $104,356
$95,164
9,901
8,223
 7,962
7,236
 50,425
51,183
 201,866
183,231
$36,227
$38,219
 $9,544
$7,819
 $89,846
$83,458
 $306,222
$278,395
           
$(36)$(137) $2
$—
 $14
$197
 $(178)$440
(0.10)%(0.36)% 0.02%—% 0.02%0.24% (0.06)%0.16%
           
           
$36,151
$38,129
 $9,516
$7,780
 $88,177
$81,802
 $302,692
$274,158
62
51
 28
23
 1,427
1,072
 1,958
1,739
6
2
 —
—
 44
14
 138
100
8
37
 —
16
 198
570
 1,434
2,398
$36,227
$38,219
 $9,544
$7,819
 $89,846
$83,458
 $306,222
$278,395












(table continued from previous page)
Commercial construction and development Other Total real estate loans
20122011 20122011 20122011
$2,989
$3,148
 $5,053
$4,568
 $60,740
$54,684
119
304
 189
422
 4,377
6,370
3.98%9.66% 3.74%9.24% 7.21%11.65%
$21
$69
 $43
$121
 $520
$886
0.70%2.19% 0.85%2.65% 0.86%1.62%




JPMorgan Chase & Co./2012 Annual Report273
Notes to consolidated financial statements

Wholesale impaired loans and loan modifications
Wholesale impaired loans are comprised of loans that have been placed on nonaccrual status and/or that have been modified in a TDR. All impaired loans are evaluated for an asset-specific allowance as described in Note 15 on pages 276–279 of this Annual Report.
The table below sets forth information about the Firm’s wholesale impaired loans.
December 31,
(in millions)
Commercial
and industrial
 Real estate 
Financial
institutions
 
Government
 agencies
 Other 
Total
retained loans
20122011 20122011 20122011 20122011 20122011 20122011
Impaired loans                 
With an allowance$588
$828
 $375
$621
 $6
$21
 $—
$16
 $122
$473
 $1,091
$1,959
Without an allowance(a)
173
177
 133
292
 2
18
 —
—
 76
103
 384
590
Total impaired loans
$761
$1,005
 $508
$913
 $8
$39
 $—
$16
 $198
$576
 $1,475
$2,549
Allowance for loan losses related to impaired loans$205
$276
 $82
$148
 $2
$5
 $—
$10
 $30
$77
 $319
$516
Unpaid principal balance of impaired loans(b)
957
1,705
 626
1,124
 22
63
 —
17
 318
1,008
 1,923
3,917
(a)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.
(b)
Represents the contractual amount of principal owed atDecember 31, 2012 and 2011. 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 Firm’s average impaired loans for the years ended 2012, 2011 and 2010.
Year ended December 31, (in millions)201220112010
Commercial and industrial$873
$1,309
$1,655
Real estate784
1,813
3,101
Financial institutions17
84
304
Government agencies9
20
5
Other277
634
884
Total(a)
$1,960
$3,860
$5,949
(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, 2012, 2011 and 2010.

274JPMorgan Chase & Co./2012 Annual Report


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 Firm’s wholesale loans that have been modified in TDRs, including a reconciliation of the beginning and ending balances of such loans and information regarding the nature and extent of modifications during the periods presented.
Years ended December 31,
(in millions)
 Commercial and industrial Real estate 
Other(b)
 Total
2012 20112012 20112012 20112012 2011
Beginning balance of TDRs $531
 $212
 $176
 $907
 $43
 $24
 $750
 $1,143
New TDRs 162
 $665
 43
 113
 73
 32
 278
 810
Increases to existing TDRs 183
 96
 —
 16
 —
 —
 183
 112
Charge-offs post-modification (27) (30) (2) (146) (7) —
 (36) (176)
Sales and other(a)
 (274) (412) (118) (714) (87) (13) (479) (1,139)
Ending balance of TDRs $575
 $531
 $99
 $176
 $22
 $43
 $696
 $750
TDRs on nonaccrual status $522
 $415
 $92
 $128
 $22
 $35
 $636
 $578
Additional commitments to lend to borrowers whose loans have been modified in TDRs 44
 147
 —
 —
 2
 —
 46
 147
(a)
Sales and other are largely sales and paydowns, but also includes performing loans restructured at market rates that were removed from the reported TDR balance of $44 million and $152 million during the years ended December 31, 2012 and 2011, respectively.
(b)Includes loans to Financial institutions, Government agencies and Other.

Financial effects of modifications and redefaults
Loans modified as TDRs are typically term or payment extensions and, to a lesser extent, deferrals of principal and/or interest on commercial and industrial and real estate loans. For the years ended December 31, 20102012. and 2011, the average term extension granted on loans with term or payment extensions was 1.1 years and 3.3 years, respectively. The weighted-average remaining term for all loans modified during these periods was 3.6 years and 4.5 years, respectively. Wholesale TDR loans that redefaulted within one year of the modification were $56 million and $96 million during the years ended December 31, 2012 and 2011, respectively. 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.



JPMorgan Chase & Co./2012 Annual Report275
Notes to consolidated financial statements

Note 15 – Allowance for credit losses
JPMorgan Chase’s allowance for loan losses covers the wholesale and consumer, including credit card, loan portfolios,portfolio segments (primarily scored); and wholesale (risk-rated) portfolio, and represents management’s estimate of probable credit losses inherent in the Firm’s 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 20112012, 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-ratedScored loans (i.e., consumer loans) are pooled by product type, while risk-rated loans (primarily wholesale loans) are segmented by risk rating, while scored loans (i.e.,
rating.
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 loan’s 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 loan’s 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 asset-specific reserve as for other impaired loans. See Note 14 on pages 231–252250–275 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 loan’s expected cash flows, which considers the potential for redefault. For wholesale loans modified in TDRs, expected losses incorporate redefaults based on management’s expectation of the borrower’s 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 Firm’s


252JPMorgan Chase & Co./2011 Annual Report


historical experience by type of modification program. For wholesale loans modified in TDRs, expected losses incorporate redefaults based on management’s expectation of the borrower’s ability to repay under the modified terms.
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 231–252250–275 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 obligor’s debt capacity and financial flexibility, the level of the obligor’s earnings, the amount and sources for repayment, the level and nature of contingencies, management strength, and the industry and geography in which the obligor operates. These factors are based on an evaluation of historical and current information, and involve subjective assessment and interpretation. 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 credit-rating agency default statistics. LGD estimates are based on the Firm’s 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.


276JPMorgan Chase & Co./2012 Annual Report


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.
For risk-rated loans, the statistical calculation is the product of an estimated PD and an estimated 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 obligor’s debt capacity and financial flexibility, the level of the obligor’s earnings, the amount and sources for repayment, the level and nature of contingencies, management strength, and the industry and geography in which the obligor operates. These factors are based on an evaluation of historical and current information, and involve subjective assessment and interpretation. 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 credit-rating agency default statistics. LGD estimates are based on the Firm’s history of actual credit losses over more than one credit cycle.
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 management’s 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 foreclosure-related 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. In addition, for the risk-rated portfolios, any adjustments made to the statistical calculation also consider concentrated and deteriorating industries.
Management establishes an asset-specific allowance for lending-related commitments that are considered impaired and computes a formula-based allowance for performing wholesaleconsumer and consumerwholesale 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, 20112012, 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./20112012 Annual Report 253277
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.
20112012
Year ended December 31,
(in millions)
Wholesale
Consumer,
excluding
credit card
 Credit cardTotal
Consumer,
excluding
credit card
 Credit card WholesaleTotal
Allowance for loan losses        
Beginning balance at January 1,$4,761
$16,471
 $11,034
$32,266
$16,294
 $6,999
 $4,316
$27,609
Cumulative effect of change in accounting principles(a)
—
—
 —
—
—
 —
 —
—
Gross charge-offs916
5,419
 8,168
14,503
4,805
(c) 
5,755
 346
10,906
Gross recoveries(476)(547) (1,243)(2,266)(508) (811) (524)(1,843)
Net charge-offs440
4,872
 6,925
12,237
4,297
(c) 
4,944
 (178)9,063
Provision for loan losses17
4,670
 2,925
7,612
302
 3,444
 (359)3,387
Other(22)25
 (35)(32)(7) 2
 8
3
Ending balance at December 31,$4,316
$16,294
 $6,999
$27,609
$12,292
 $5,501
 $4,143
$21,936
        
Allowance for loan losses by impairment methodology        
Asset-specific(b)
$516
$828
 $2,727
$4,071
$729
 $1,681
(d) 
$319
$2,729
Formula-based3,800
9,755
 4,272
17,827
5,852
 3,820
 3,824
13,496
PCI—
5,711
 —
5,711
5,711
 —
 —
5,711
Total allowance for loan losses$4,316
$16,294
 $6,999
$27,609
$12,292
 $5,501
 $4,143
$21,936
        
Loans by impairment methodology        
Asset-specific$2,549
$9,892
 $7,214
$19,655
$13,938
 $4,762
 $1,475
$20,175
Formula-based275,825
232,989
 124,961
633,775
218,945
 123,231
 304,728
646,904
PCI21
65,546
 —
65,567
59,737
 —
 19
59,756
Total retained loans$278,395
$308,427
 $132,175
$718,997
$292,620
 $127,993
 $306,222
$726,835
        
Impaired collateral-dependent loans        
Net charge-offs(c)
$128
$110
 $—
$238
$973
(c) 
$—
 $77
$1,050
Loans measured at fair value of collateral less cost to sell(c)
833
830
(d) 
—
1,663
3,272
 —
 445
3,717
        
Allowance for lending-related commitments        
Beginning balance at January 1,$711
$6
 $—
$717
$7
 $—
 $666
$673
Cumulative effect of change in accounting principles(a)
—
—
 —
—
—
 —
 —
—
Provision for lending-related commitments(40)2
 —
(38)—
 —
 (2)(2)
Other(5)(1) —
(6)—
 —
 (3)(3)
Ending balance at December 31,$666
$7
 $—
$673
$7
 $—
 $661
$668
        
Allowance for lending-related commitments by impairment methodology        
Asset-specific$150
$—
 $—
$150
$—
 $—
 $97
$97
Formula-based516
7
 —
523
7
 —
 564
571
Total allowance for lending-related commitments$666
$7
 $—
$673
$7
 $—
 $661
$668
        
Lending-related commitments by impairment methodology        
Asset-specific$865
$—
 $—
$865
$—
 $—
 $355
$355
Formula-based381,874
62,307
 530,616
974,797
60,156
 533,018
 434,459
1,027,633
Total lending-related commitments$382,739
$62,307
 $530,616
$975,662
$60,156
 $533,018
 $434,814
$1,027,988
(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, $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 256–267280–291 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
Consumer, excluding credit card, charge-offs for the current presentation.year ended December 31, 2012, included $747 million of charge-offs for Chapter 7 residential real estate loans and $53 million of charge-offs for Chapter 7 auto loans.
(d)Includes collateral-dependent residential mortgageThe asset-specific credit card allowance for loan losses is related to loans that are charged off tohave been modified in a TDR; such allowance is calculated based on 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.loans’ original contractual interest rates and does not consider any incremental penalty rates.



254278 JPMorgan Chase & Co./20112012 Annual Report




(table continued from previous page)(table continued from previous page)      (table continued from previous page)       
2010 2009
Wholesale
Consumer,
excluding
credit card
 Credit cardTotal Wholesale
Consumer,
excluding
credit card
 Credit cardTotal
20112011 2010
Consumer,
excluding
credit card
Consumer,
excluding
credit card
 Credit card WholesaleTotal 
Consumer,
excluding
credit card
 Credit card WholesaleTotal
                  
$7,145
$14,785
 $9,672
$31,602
 $6,545
$8,927
 $7,692
$23,164
16,471
 $11,034
 $4,761
$32,266
 $14,785
 $9,672
 $7,145
$31,602
14
127
 7,353
7,494
 —
—
 —
—
1,989
8,383
 15,410
25,782
 3,226
10,421
 10,371
24,018
(262)(474) (1,373)(2,109) (94)(222) (737)(1,053)
1,727
7,909
 14,037
23,673
 3,132
10,199
 9,634
22,965
(673)9,458
 8,037
16,822
 3,684
16,032
 12,019
31,735
2
10
 9
21
 48
25
 (405)(332)
——
 —
 —
—
 127
 7,353
 14
7,494
5,4195,419
 8,168
 916
14,503
 8,383
 15,410
 1,989
25,782
(547(547) (1,243) (476)(2,266) (474) (1,373) (262)(2,109)
4,8724,872
 6,925
 440
12,237
 7,909
 14,037
 1,727
23,673
4,6704,670
 2,925
 17
7,612
 9,458
 8,037
 (673)16,822
2525
 (35) (22)(32) 10
 9
 2
21
$4,761
$16,471
 $11,034
$32,266
 $7,145
$14,785
 $9,672
$31,602
16,294
 $6,999
 $4,316
$27,609
 $16,471
 $11,034
 $4,761
$32,266
                  
                  
$1,574
$1,075
 $4,069
$6,718
 $2,046
$896
 $3,117
$6,059
828
 $2,727
(d) 
$516
$4,071
 $1,075
 $4,069
(d) 
$1,574
$6,718
3,187
10,455
 6,965
20,607
 5,099
12,308
 6,555
23,962
—
4,941
 —
4,941
 —
1,581
 —
1,581
9,7559,755
 4,272
 3,800
17,827
 10,455
 6,965
 3,187
20,607
5,7115,711
 —
 —
5,711
 4,941
 —
 —
4,941
$4,761
$16,471
 $11,034
$32,266
 $7,145
$14,785
 $9,672
$31,602
16,294
 $6,999
 $4,316
$27,609
 $16,471
 $11,034
 $4,761
$32,266
                  
                  
$5,486
$6,220
 $10,005
$21,711
 $6,960
$3,648
 $6,245
$16,853
9,892
 $7,214
 $2,549
$19,655
 $6,220
 $10,005
 $5,486
$21,711
216,980
248,481
 125,519
590,980
 192,982
263,462
 72,541
528,985
44
72,763
 —
72,807
 135
81,245
 —
81,380
232,989232,989
 124,961
 275,825
633,775
 248,481
 125,519
��216,980
590,980
65,54665,546
 —
 21
65,567
 72,763
 —
 44
72,807
$222,510
$327,464
 $135,524
$685,498
 $200,077
$348,355
 $78,786
$627,218
308,427
 $132,175
 $278,395
$718,997
 $327,464
 $135,524
 $222,510
$685,498
                  
                  
$636
$304
 $—
$940
 $1,394
$166
 $—
$1,560
110
 $—
 $128
$238
 $304
 $—
 $636
$940
1,269
890
(d) 
—
2,159
 1,744
210
(d) 
—
1,954
830830
 —
 833
1,663
 890
 —
 1,269
2,159
                  
                  
$927
$12
 $—
$939
 $634
$25
 $—
$659
6
 $—
 $711
$717
 $12
 $—
 $927
$939
(18)—
 —
(18) —
—
 —
—
(177)(6) —
(183) 290
(10) —
280
(21)—
 —
(21) 3
(3) —
—
——
 —
 —
—
 —
 —
 (18)(18)
22
 —
 (40)(38) (6) —
 (177)(183)
(1(1) —
 (5)(6) —
 —
 (21)(21)
$711
$6
 $—
$717
 $927
$12
 $—
$939
7
 $—
 $666
$673
 $6
 $—
 $711
$717
                  
                  
$180
$—
 $—
$180
 $297
$—
 $—
$297
—
 $—
 $150
$150
 $—
 $—
 $180
$180
531
6
 —
537
 630
12
 —
642
77
 —
 516
523
 6
 —
 531
537
$711
$6
 $—
$717
 $927
$12
 $—
$939
7
 $—
 $666
$673
 $6
 $—
 $711
$717
                  
                  
$1,005
$—
 $—
$1,005
 $1,577
$—
 $—
$1,577
—
 $—
 $865
$865
 $—
 $—
 $1,005
$1,005
345,074
65,403
 547,227
957,704
 345,578
74,827
 569,113
989,518
62,30762,307
 530,616
 381,874
974,797
 65,403
 547,227
 345,074
957,704
$346,079
$65,403
 $547,227
$958,709
 $347,155
$74,827
 $569,113
$991,095
62,307
 $530,616
 $382,739
$975,662
 $65,403
 $547,227
 $346,079
$958,709



JPMorgan Chase & Co./20112012 Annual Report 255279
Notes to consolidated financial statements

Note 16 – Variable interest entities
For a further description of JPMorgan Chase’s accounting policies regarding consolidation of VIEs, see Note 1 on pages 182–183193–194 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 Chase–administered asset-backed commercial paper conduit.
Line-of-BusinessTransaction TypeActivity
Annual Report
page reference
CardCCBCredit card securitization trustsSecuritization of both originated and purchased credit card receivables257281
 Other securitization trustsSecuritization of originated automobile and student loans257–260281–283
RFSMortgage securitization trustsSecuritization of originated and purchased residential mortgages257–260281–283
IBCIBMortgage and other securitization trustsSecuritization of both originated and purchased residential and commercial mortgages, automobile and student loans257–260281–283
 
Multi-seller conduits
Investor intermediation activities:
Assist clients in accessing the financial markets in a cost-efficient manner and structures transactions to meet investor needs260284–285
 Municipal bond vehicles 260–261285–286
 Credit-related note and asset swap vehicles 261–263286–288
The Firm’s 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 fund’s investment objective and is competitively priced. For fund entities that qualify as VIEs, AM’s 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. TSS’s 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 debttrust preferred securities. See Note 21 on pages 273–275297–299 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 Firm’s 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 263288 of this Note.

256280 JPMorgan Chase & Co./20112012 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 Firm’s continuing involvement in credit card securitizations includes servicing the receivables, retaining an undivided seller’s interest in the receivables, retaining certain senior and subordinated securities and maintaining escrow accounts.
The Firm is considered to be the primary beneficiary of these Firm-sponsored credit card securitization trusts based on the Firm'sFirm’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'sFirm’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 of the securitization trusts are available only for payment of the beneficial interests issued by the securitization trusts; they are not available to pay the Firm’s other obligations or the claims of the Firm’s 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, 20112012 and 20102011, the Firm held undivided interests in Firm-sponsored credit card securitization trusts of $13.715.8 billion and $17.213.7 billion, respectively. The Firm maintained an average undivided interest in principal receivables owned by those trusts of approximately 22%28% and 19%22% for the years ended December 31, 20112012 and 2010,2011, respectively. The Firm also retained $541362 million and $1.1 billion541 million of senior securities and $3.04.6 billion and $3.23.0 billion of subordinated securities in certain of its credit card securitization trusts as of December 31, 20112012 and 20102011, respectively. The Firm’s undivided interests in the credit card trusts and securities retained are eliminated in consolidation.
Firm-sponsored mortgage and other securitization trusts
The Firm securitizes (or has securitized) originated and purchased residential mortgages, commercial mortgages and other consumer loans (including automobile and student loans) primarily in its IBCIB and RFSCCB 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./20112012 Annual Report 257281
Notes to consolidated financial statements

The following table presents the total unpaid principal amount of assets held in Firm-sponsored private-label securitization entities, including those in which the Firm has continuing involvement, includingand those that are consolidated or not consolidated by the Firm. Continuing involvement includes servicing the loans;loans, holding senior interests or subordinated interests;interests, recourse or guarantee arrangements;arrangements, and derivative transactions. In certain instances, the Firm’s only continuing involvement is servicing the loans. See Securitization activity on pages 264–265page 289 of this Note for further information regarding the Firm’s cash flows with and interests retained in nonconsolidated VIEs.VIEs, and pages 289–290 of this Note for information on the Firm’s loan sales to U.S. government agencies.
Principal amount outstanding 
JPMorgan Chase interest in securitized assets in nonconsolidated VIEs(d)(e)(f)
Principal amount outstanding 
JPMorgan Chase interest in securitized assets in nonconsolidated VIEs(d)(e)(f)
December 31, 2011(a) (in billions)
Total assets held by securitization VIEsAssets held in consolidated securitization VIEsAssets held in nonconsolidated securitization VIEs with continuing involvement Trading assetsAFS securitiesTotal interests held by JPMorgan Chase
December 31, 2012 (a) (in billions)
Total assets held by securitization VIEsAssets held in consolidated securitization VIEsAssets held in nonconsolidated securitization VIEs with continuing involvement Trading assetsAFS securitiesTotal interests held by JPMorgan Chase
Securitization-related      
Residential mortgage:      
Prime(b)
$129.5
$2.4
$101.0
 $0.6
$—
$0.6
Prime and Alt-A$107.2
$2.5
$80.6
 $0.3
$—
$0.3
Subprime38.3
0.2
35.8
 —
—
—
34.5
1.3
31.3
 0.1
—
0.1
Option ARMs31.1
—
31.1
 —
—
—
26.3
0.2
26.1
 —
—
—
Commercial and other(c)(b)
139.3
—
93.3
 1.7
2.0
3.7
127.8
—
81.8
 1.5
2.8
4.3
Student4.1
4.1
—
 —
—
—
Total$342.3
$6.7
$261.2
 $2.3
$2.0
$4.3
$295.8
$4.0
$219.8
 $1.9
$2.8
$4.7

Principal amount outstanding 
JPMorgan Chase interest in securitized assets in nonconsolidated VIEs(d)(e)(f)
Principal amount outstanding 
JPMorgan Chase interest in securitized assets in nonconsolidated VIEs(d)(e)(f)
December 31, 2010(a) (in billions)
Total assets held by securitization VIEsAssets held in consolidated securitization VIEsAssets held in nonconsolidated securitization VIEs with continuing involvement Trading assetsAFS securitiesTotal interests held by JPMorgan Chase
December 31, 2011(a) (in billions)
Total assets held by securitization VIEsAssets held in consolidated securitization VIEsAssets held in nonconsolidated securitization VIEs with continuing involvement Trading assetsAFS securitiesTotal interests held by JPMorgan Chase
Securitization-related      
Residential mortgage:      
Prime(b)
$153.1
$2.2
$143.8
 $0.7
$—
$0.7
Prime and Alt-A$129.9
$2.7
$101.0
 $0.6
$—
$0.6
Subprime44.0
1.6
40.7
 —
—
—
39.4
1.4
35.8
 —
—
—
Option ARMs36.1
0.3
35.8
 —
—
—
31.4
0.3
31.1
 —
—
—
Commercial and other(c)(b)
153.4
—
106.2
 2.0
0.9
2.9
139.3
—
93.3
 1.7
2.0
3.7
Student4.5
4.5
—
 —
—
—
Total$391.1
$8.6
$326.5
 $2.7
$0.9
$3.6
Total(c)
$340.0
$4.4
$261.2
 $2.3
$2.0
$4.3
(a)Excludes U.S. government agency securitizations. See page 265pages 289–290 of this Note for information on the Firm’s 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.
(c)Prior period amounts have been revised to conform with the current presentation methodology.
(d)
The table above excludes the following: retained servicing (see Note 17 on pages 267–271291–295 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 202–210218–227 of this Annual Report for further information on derivatives); senior and subordinated securities of$131 million and $45 million, respectively, at December 31, 2012, and $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 IB’sCIB’s secondary market-making activities.
(e)Includes interests held in re-securitization transactions.
(f)
As of December 31, 20112012 and 20102011, 68%74% and 66%68%, respectively, of the Firm’s retained securitization interests, which are carried at fair value, were risk-rated “A” or better, on an S&P-equivalent basis. The retained interests in prime residential mortgages consisted of $136170 million and $157136 million of investment-grade and $427171 million and $552427 million of noninvestment-grade retained interests at December 31, 20112012 and 2010,2011, respectively. The retained interests in commercial and other securitizations trusts consisted of $3.44.1 billion and $2.63.4 billion of investment-grade and $283164 million and $250283 million of noninvestment-grade retained interests at December 31, 20112012 and 20102011, respectively.

258282 JPMorgan Chase & Co./20112012 Annual Report


Residential mortgage
The Firm securitizes residential mortgage loans originated by RFS,CCB, as well as residential mortgage loans purchased from third parties by either RFSCCB or IB. RFSCIB. CCB generally retains servicing for all residential mortgage loans originated or purchased by RFS,CCB, and for certain mortgage loans purchased by IB.CIB. For securitizations serviced by RFS,CCB, the Firm has the power to direct the significant activities of the VIE because it is responsible for decisions related to loan modifications and workouts. RFSCCB may also retain an interest upon securitization.
In addition, IBCIB engages in underwriting and trading activities involving securities issued by Firm-sponsored securitization trusts. As a result, IBCIB 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 IBCIB or held by RFS,CCB, when considered together with the servicing arrangements entered into by RFS,CCB, the Firm is deemed to be the primary beneficiary of certain securitization trusts. See the table on page 264288 of this Note for more information on the consolidated residential mortgage securitizations.
The Firm does not consolidate a residential mortgage securitization (Firm-sponsored or third-party-sponsored) when it is not the servicer (and therefore does not have the power to direct the most significant activities of the trust) or does not hold a beneficial interest in the trust that could potentially be significant to the trust. At December 31, 20112012 and 2010,2011, 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 258288 of this Note for more information on the consolidated residential mortgage securitizations, and the table on the previous page of this Note for further information on interests held in nonconsolidated residential mortgage securitizations.
Commercial mortgages and other consumer securitizations
IBCIB originates and securitizes commercial mortgage loans, and engages in underwriting and trading activities involving the securities issued by securitization trusts. IBCIB 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 264288 of this Note for more information on the consolidated commercial mortgage securitizations, and the table on the previous 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
288 of this Note for more information on the consolidated student loan securitizations, and the table on the previous 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 Firm’s consolidation analysis is largely dependent on the Firm’s role and interest in the re-securitization trusts. During the years ended December 31, 20112012, 20102011 and 20092010, the Firm transferred $24.910.0 billion, $33.924.9 billion and $19.133.9 billion, respectively, of securities to agency VIEs, and $381286 million, $1.3 billion381 million and $4.01.3 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.


JPMorgan Chase & Co./2012 Annual Report283
Notes to consolidated financial statements

In more limited circumstances, the Firm creates a re-securitization trust independently and not in conjunction with specific clients. In these circumstances, the Firm is deemed to have the unilateral ability to direct the most significant activities of the re-securitization trust because of the decisions made during the establishment and design of the trust; therefore, the Firm consolidates the re-securitization VIE if the Firm holds an interest that could potentially be significant.
Additionally, the Firm may invest in beneficial interests of third-party 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 wasn’t 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, 20112012 and 20102011, the Firm did not consolidate any agency re-securitizations. As of December 31, 20112012 and 20102011, the Firm consolidated $34876 million and $477348 million, respectively, of assets, and $1395 million and $230139 million, respectively, of liabilities of private-label re-securitizations. See the table on page 264288 of this Note for more information on the consolidated re-securitization transactions.



JPMorgan Chase & Co./2011 Annual Report259
Notes to consolidated financial statements

As of December 31, 20112012 and 20102011, total assets (including the notional amount of interest-only securities) of nonconsolidated Firm-sponsored private-label re-securitization entities in which the Firm has continuing involvement were $3.34.6 billion and $3.63.3 billion, respectively. At December 31, 20112012 and 20102011, the Firm held approximately $3.62.0 billion and $3.53.6 billion, respectively, of interests in nonconsolidated agency re-securitization entities, and $1461 million and $4614 million, respectively, of senior and subordinated interests in nonconsolidated private-label re-securitization entities. See the table on page 258282 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 deal-specific credit enhancements mitigate the Firm’s 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 program-wide credit enhancement in the form of standby letters of credit. The amount of program-wide credit enhancement required varies by conduitis based upon commercial paper issuance and ranges between 5% andapproximates 10% of the commercial paper that is outstanding.outstanding balance.
The Firm consolidates its Firm-administered multi-seller conduits, as the Firm has both the power to direct the significant activities of the conduits and a potentially significant economic interest in the conduits. As administrative agent and in its role in structuring transactions, the Firm makes decisions regarding asset types and credit quality, and manages the commercial paper funding needs of the conduits. The Firm’s interests that could potentially be significant to the VIEs include the fees received as administrative agent and liquidity and program-wide credit enhancement provider, as well as the potential exposure tocreated by the liquidity and credit enhancement facilities provided to the conduits. See page 264288 of this Note for further information on consolidated VIE assets and liabilities.


284JPMorgan Chase & Co./2012 Annual Report


In the normal course of business, JPMorgan Chase tradesmakes markets in and invests in commercial paper, including commercial paper issued by the Firm-administered multi-seller conduits. The Firm held $8.3 billion and $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, 20102012. and 2011, respectively. The Firm'sFirm’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 lending-related commitments to certain clients of the Firm-administered multi-seller conduits. The unfunded portion of these commitments was $10.8 billion and $10.0 billionat both December 31, 20112012 and 20102011 respectively, which, and are reported as off-balance sheet lending-related commitments. For more information on off-balance sheet lending-related commitments, see Note 29 on pages 283–308–315289 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 short-term 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


260JPMorgan Chase & Co./2011 Annual Report


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 serves as remarketing agent, of the puttable floating-rate certificates. 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. In addition, the Firm'sFirm’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’s short-term rating does not affect the Firm'sFirm’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'sFirm’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 floating-rate certificates of the municipal bond vehicles. At December 31, 20112012 and 20102011, respectively, the Firm held $637893 million and $248637 million, respectively, of these certificates on its Consolidated Balance Sheets. The largest amount held by the Firm at any time during 20112012 was $1.11.8 billion, or 7.6%8%, 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.


JPMorgan Chase & Co./2012 Annual Report285
Notes to consolidated financial statements

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. See page 288 of this Note for further information on consolidated municipal bond vehicles.


The Firm’s exposure to nonconsolidated municipal bond VIEs at December 31, 20112012 and 20102011, including the ratings profile of the VIEs’ assets, was as follows.
December 31,
(in billions)
Fair value of assets held by VIEs
Liquidity facilities(a)
Excess/(deficit)(b)
Maximum exposureFair value of assets held by VIEsLiquidity facilities
Excess/(deficit)(a)
Maximum exposure
Nonconsolidated municipal bond vehicles  
2012$14.2
$8.0
$6.2
$8.0
2011$13.5
$7.9
$5.6
$7.9
13.5
7.9
5.6
7.9
201013.7
8.8
4.9
8.8
  
Ratings profile of VIE assets(c)
Fair value of assets held by VIEsWt. avg. expected life of assets (years)
Ratings profile of VIE assets(b)
Fair value of assets held by VIEsWt. avg. expected life of assets (years)
Investment-grade Noninvestment- gradeInvestment-grade Noninvestment- grade
December 31,
(in billions, except where otherwise noted)
AAA to AAA-AA+ to AA-A+ to A-BBB+ to BBB- BB+ and belowAAA to AAA-AA+ to AA-A+ to A-BBB+ to BBB- BB+ and below
2012$1.6
$11.8
$0.8
$—
 $—
$14.2
5.9
2011$1.5
$11.2
$0.7
$—
 $0.1
$13.5
6.6
1.5
11.2
0.7
—
 0.1
13.5
6.6
20101.9
11.2
0.6
—
 —
13.7
15.5
(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)(b)The ratings scale is based on the Firm’s 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 10ten years in order to transfer the risk of the referenced credit to the
VIE’s 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.


JPMorgan Chase & Co./2011 Annual Report261
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 credit-related 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. Furthermore, the Firm does not generally have a variable interest that could potentially be significant. 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.


286JPMorgan Chase & Co./2012 Annual Report


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 Firm’s 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.


262JPMorgan Chase & Co./2011 Annual Report


Exposure to nonconsolidated credit-related note and asset swap VIEs at December 31, 20112012 and 20102011, was as follows.
December 31, 2012
(in billions)
Net derivative receivablesTotal exposure
Par value of collateral held by VIEs(a)
Credit-related notes 
Static structure$0.5
$0.5
$7.3
Managed structure0.6
0.6
5.6
Total credit-related notes1.1
1.1
12.9
Asset swaps0.4
0.4
7.9
Total$1.5
$1.5
$20.8
 
December 31, 2011 (in billions)Net derivative receivables
Total exposure(a)
Par value of collateral held by VIEs(b)
Net derivative receivablesTotal exposure
Par value of collateral held by VIEs(a)
Credit-related notes  
Static structure$1.0
$1.0
$9.1
$1.0
$1.0
$9.1
Managed structure2.7
2.7
7.7
2.7
2.7
7.7
Total credit-related notes3.7
3.7
16.8
3.7
3.7
16.8
Asset swaps0.6
0.6
8.6
0.6
0.6
8.6
Total$4.3
$4.3
$25.4
$4.3
$4.3
$25.4
December 31, 2010 (in billions)Net derivative receivables
Total exposure(a)
Par value of collateral held by VIEs(b)
Credit-related notes 
Static structure$1.0
$1.0
$9.5
Managed structure2.8
2.8
10.7
Total credit-related notes3.8
3.8
20.2
Asset swaps0.3
0.3
7.6
Total$4.1
$4.1
$27.8
(a)On–balance 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 Firm’s 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.


JPMorgan Chase & Co./2012 Annual Report287
Notes to consolidated financial statements

The Firm consolidated Firm-sponsored and third-party credit-related note vehicles with collateral fair values of $231483 million and $394231 million, at December 31, 20112012 and 20102011, 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, 20112012 and 20102011.
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 VIE’s economic performance. The Firm’s 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 225–230 and 231–252, 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$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$28.85 billion term loan from the FRBNY and a $1.15$1.15 billion subordinated loan from JPMorgan Chase. The JPMorgan Chase loan iswas subordinated to the
FRBNY loan and will bearbore 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 bewas for the account of the FRBNY. The extent to which the FRBNY and JPMorgan Chase loans will bewere repaid will dependdepended on the value of the assets in the portfolio and the liquidation strategy directed by the FRBNY. The Firm doesdid not consolidate the LLC, as it doesdid not have the power to direct the activities of the VIE that most significantly impact the VIE’s 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 In June 2012, the FRBNY loan was repaid in full and in November 2012, the JPMorgan Chase loan was repaid in full. During the year ended December 31, 2012, JPMorgan Chase recognized a derivative counterparty, liquidity provider, investor, underwriter, placement agent, trustee or custodian. These transactions are conducted at arm’s-length, and individual credit decisions are basedpretax gain of $665 million reflecting the recovery on the analysis of the specific VIE, taking into consideration the quality of the underlying assets. Where the Firm does not have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, or a variable interest that could potentially be significant, the Firm 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.$1.15 billion subordinated loan plus contractual interest.




JPMorgan Chase & Co./2011 Annual Report263
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, 20112012 and 20102011.
Assets LiabilitiesAssets Liabilities
December 31, 2011 (in billions)Trading assets –
debt and equity instruments		Loans
Other(c) 
Total
assets(d)
 
Beneficial interests in
VIE assets(e)
Other(f)
Total
liabilities
December 31, 2012 (in billions)(a)
Trading assets –
debt and equity instruments		Loans
Other(d) 
Total
assets(e)
 
Beneficial interests in
VIE assets(f)
Other(g)
Total
liabilities
VIE program type      
Firm-sponsored credit card trusts$—
$50.7
$0.8
$51.5
 $32.5
$—
$32.5
$—
$51.9
$0.8
$52.7
 $30.1
$—
$30.1
Firm-administered multi-seller conduits—
29.7
0.2
29.9
 18.7
—
18.7
—
25.4
0.1
25.5
 17.2
—
17.2
Mortgage securitization entities(a)
1.4
2.3
—
3.7
 2.3
1.3
3.6
Other(b)
10.7
4.1
1.6
16.4
 12.5
0.2
12.7
Municipal bond vehicles9.8
—
0.1
9.9
 11.0
—
11.0
Mortgage securitization entities(b)
1.4
2.0
—
3.4
 2.3
1.1
3.4
Other(c)
0.8
3.4
1.1
5.3
 2.6
0.1
2.7
Total$12.1
$86.8
$2.6
$101.5
 $66.0
$1.5
$67.5
$12.0
$82.7
$2.1
$96.8
 $63.2
$1.2
$64.4
      
Assets LiabilitiesAssets Liabilities
December 31, 2010 (in billions)Trading assets –
debt and equity instruments		Loans
Other(c) 
Total
assets(d)
 
Beneficial interests in
VIE assets(e)
Other(f)
Total
liabilities
December 31, 2011 (in billions)(a)
Trading assets –
debt and equity instruments		Loans
Other(d) 
Total
assets(e)
 
Beneficial interests in
VIE assets(f)
Other(g)
Total
liabilities
VIE program type      
Firm-sponsored credit card trusts$—
$67.2
$1.3
$68.5
 $44.3
$—
$44.3
$—
$50.7
$0.8
$51.5
 $32.5
$—
$32.5
Firm-administered multi-seller conduits—
21.1
0.6
21.7
 21.6
0.1
21.7
—
29.7
0.2
29.9
 18.7
—
18.7
Mortgage securitization entities(a)
1.8
2.9
—
4.7
 2.4
1.6
4.0
Other(b)
8.0
4.4
1.6
14.0
 9.3
0.3
9.6
Municipal bond vehicles9.2
—
0.1
9.3
 9.2
—
9.2
Mortgage securitization entities(b)
1.4
2.3
—
3.7
 2.3
1.3
3.6
Other(c)
1.5
4.1
1.5
7.1
 3.3
0.2
3.5
Total$9.8
$95.6
$3.5
$108.9
 $77.6
$2.0
$79.6
$12.1
$86.8
$2.6
$101.5
 $66.0
$1.5
$67.5
(a)Excludes intercompany transactions which were eliminated in consolidation.
(b)Includes residential and commercial mortgage securitizations as well as re-securitizations.
(b)(c)
Primarily comprises student loan securitization entities and municipal bond entities. The Firm consolidated $4.13.3 billion and $4.54.1 billion of student loan securitization entities as of December 31, 20112012 and 2010, respectively, and $9.3 billion and $4.6 billion of municipal bond vehicles as of December 31, 2011, and 2010, respectively.
(c)(d)Includes assets classified as cash, derivative receivables, AFS securities, and other assets within the Consolidated Balance Sheets.
(d)(e)The assets of the consolidated VIEs included in the program types above are used to settle the liabilities of those entities. The difference between total assets and total liabilities recognized for consolidated VIEs represents the Firm’s interest in the consolidated VIEs for each program type.
(e)(f)
The interest-bearing beneficial interest liabilities issued by consolidated VIEs are classified in the line item on the Consolidated Balance Sheets titled, “Beneficial interests issued by consolidated variable interest entities.” The holders of these beneficial interests do not have recourse to the general credit of JPMorgan Chase. Included in beneficial interests in VIE assets are long-term beneficial interests of $39.735.0 billion and $52.639.7 billion at December 31, 20112012 and 20102011, respectively. The maturities of the long-term beneficial interests as of December 31, 20112012, were as follows: $13.511.9 billion under one year, $17.816.0 billion between one and five years, and $8.47.1 billion over five years, all respectively.
(f)(g)Includes liabilities classified as accounts payable and other liabilities in the Consolidated Balance Sheets.



288JPMorgan Chase & Co./2012 Annual Report


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 Firm’s creditors; (2) the transferee or beneficial interest
holder can pledge or exchange the transferred financial assets; and (3) the Firm does not maintain effective control over the transferred financial assets (e.g., the Firm cannot repurchase the transferred assets before their maturity and it does not have the ability to unilaterally cause the holder to return the transferred assets).

For loan securitizations accounted for as a sale, the Firm recognizes a gain or loss based on the difference between the value of proceeds received (including cash, beneficial interests, or servicing assets received) and the carrying value of the assets sold. Gains and losses on securitizations are reported in noninterest revenue.


Securitization activity
The following tables provide information related to the Firm’s securitization activities for the years ended December 31, 20112012, 20102011 and 20092010, related to assets held in JPMorgan Chase-sponsored securitization entities that were not consolidated by the Firm, and where 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.



264JPMorgan Chase & Co./2011 Annual Report


Effective January 1, 2010, all of the Firm-sponsored credit card securitization trusts and predominantly all of the Firm-sponsored 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.
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.

 2011 2010 2009
Year ended December 31,
(in millions, except rates)
Residential mortgage(d)(e)
Commercial and other(f)
 
Residential mortgage(d)(e)
Commercial and other(f)
 
Residential mortgage(d)(e)
Commercial and other(f)
 Credit card
Principal securitized$—
$5,961
 $35
$2,237
 $—
$500
 $26,538
Pretax gains—
—
(g) 
—
—
(g) 
—
—
(g) 
22
All cash flows during the period:          
Proceeds from new securitizations(a)
$—
$6,142
 $36
$2,369
 $—
$542
 $26,538
Servicing fees collected755
4
 968
4
 1,111
18
 1,251
Other cash flows received—
—
 —
—
 11
—
 5,000
Proceeds from collections reinvested in revolving securitizations—
—
 —
—
 —
—
 161,428
Purchases of previously transferred financial assets (or the underlying collateral)(b)
772
—
 321
—
 165
249
 —
Cash flows received on the interests that continue to be held by the Firm235
178
 319
143
 538
120
 261
Key assumptions used to measure retained interests originated during the year (rates per annum)          
Prepayment rate(c)
 —%  100%  100% 16.7%
  CPY
  CPY
  CPY
 PPR
Weighted-average life (in years) 1.7
  7.1
  9.0
 0.5
Expected credit losses —%  —%  —% 8.9%
Discount rate 3.5
  7.7
  10.7
 16.0
 2012 2011 2010
Year ended December 31,
(in millions, except rates)(a)
Residential mortgage(d)(e)
Commercial and other(f)(g)
 
Residential mortgage(d)(e)
Commercial and other(f)(g)
 
Residential mortgage(d)(e)
Commercial and other(f)(g)
 
Principal securitized$—
$5,421
 $—
$5,961
 $35
$2,237
 
All cash flows during the period:         
Proceeds from new securitizations(b)
$—
$5,705
 $—
$6,142
 $36
$2,369
 
Servicing fees collected662
4
 755
4
 968
4
 
Purchases of previously transferred financial assets (or the underlying collateral)(c)
222
—
 772
—
 321
—
 
Cash flows received on interests185
163
 235
178
 319
143
 
(a)Excludes re-securitization transactions.
(b)
Proceeds fromresidential and commercial mortgage securitizations arewere received in the form of securities. During 2012, $5.7 billion of commercial mortgage securitizations were classified in level 2 of the fair value hierarchy. 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)(c)Includes cash paid by the Firm to reacquire assets from off–balance sheet, nonconsolidated entities – for example, loan repurchases due to representation and warranties and servicer clean-up calls.
(c)CPY: constant prepayment yield; PPR: principal payment rate.calls
(d)Includes prime, Alt-A, subprime, and option ARMS, and re-securitizations.ARMs. 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 2011during 2012 and 2009.
2011.
(f)
Includes commercial and student loan and automobile loan securitizations.securitizations.
(g)The Firm elected
Key assumptions used to measure retained interests originated during the fair value optionyear included weighted-average life (in years) of 8.8, 1.7 and 7.1 for loans pending securitization. The carrying valuethe years ended December 31, 2012, 2011, and 2010, respectively, and weighted-average discount rate of these loans accounted3.6%, 3.5% and 7.7% for at fair value approximated the proceeds received from securitization.years ended December 31, 2012, 2011, and 2010, respectively.

Loans and excess mortgage servicing rights 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 and certain originated excess mortgage servicing rights on a nonrecourse basis, predominantly to Ginnie Mae, Fannie Mae and Freddie Mac (the “Agencies”). These loans and excess mortgage servicing rights are sold primarily for the purpose of securitization by the Agencies, which also provide credit enhancement of the loans and excess mortgage servicing rights 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 283–289308–315 of this Annual Report for additional
information about the Firm’s loansloan sales- and securitization-securitization-related indemnifications. See Note 17 on pages 291–295 of this Annual Report for additional information about the impact of the Firm’s sale of certain excess mortgage servicing rights.


related indemnifications.
JPMorgan Chase & Co./2012 Annual Report289
Notes to consolidated financial statements

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)
201120102009201220112010
Carrying value of loans sold(b)(a)
$150,632
$156,615
$154,571
$180,097
$150,632
$156,615
Proceeds received from loan sales as cash2,864
3,887
1,702
$1,270
$2,864
$3,887
Proceeds from loans sales as securities(c)
145,340
149,786
149,343
Proceeds from loan sales as securities(b)
176,592
145,340
149,786
Total proceeds received from loan sales(c)$148,204
$153,673
$151,045
$177,862
$148,204
$153,673
Gains on loan sales(d)133
212
89
141
133
212
(a)Predominantly to U.S. government agencies.


JPMorgan Chase & Co./2011 Annual Report265
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.
(c)Excludes the value of MSRs retained upon the sale of loans. Gains on loan sales include the value of MSRs.
(d)The carrying value of the loans accounted for at fair value approximated the proceeds received upon loan sale.

Options to repurchase delinquent loans
In addition to the Firm’s obligation to repurchase certain loans due to material breaches of representations and warranties as discussed in Note 29 on pages 283–289308–315 of this Annual Report, the Firm also has the option to repurchase delinquent loans that it services for Ginnie Mae loan pools, as well as for other U.S. government agencies inunder certain arrangements. The Firm typically elects to repurchase delinquent loans from Ginnie Mae loan pools as it continues to service them and/or manage the foreclosure process in accordance with the applicable requirements, and such loans continue
to be insured or guaranteed. When the Firm’s repurchase option becomes exercisable, such loans must be reported on the Consolidated Balance Sheets as a loan with a corresponding liability. As of December 31, 20112012 and 20102011, the Firm had recorded on its Consolidated Balance Sheets $15.715.6 billion and $13.015.7 billion, respectively, of loans that either had been repurchased or for which the Firm had an option to repurchase. Predominately all of thethese amounts presented above relate to loans that have been repurchased from Ginnie Mae.Mae loan pools. Additionally, real estate owned resulting from voluntary repurchases of loans was $1.01.6 billion and $1.91.0 billion as of December 31, 20112012 and 20102011, 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 231–252250–275 of this Annual Report.



JPMorgan Chase’s 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, 20112012 and 20102011, of certain of the Firm’s 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 267–271291–295 of this Annual Report.
Commercial and otherCommercial and other
December 31, (in millions, except rates and where otherwise noted)(a)201120102012
2011(d)
JPMorgan Chase interests in securitized assets(a)(b)
$3,663
$2,906
JPMorgan Chase interests in securitized assets(b)
$1,488
$1,585
Weighted-average life (in years)3.0
3.3
6.1
1.0
Weighted-average constant prepayment rate(c)
—%—%
  CPR
  CPR
Weighted-average discount rate(c)
4.1%59.1%
Impact of 10% adverse change$—
$—
$(34)$(45)
Impact of 20% adverse change—
—
(65)(76)
Weighted-average loss assumption0.2%2.1%
Impact of 10% adverse change$(61)$(76)
Impact of 20% adverse change(119)(151)
Weighted-average discount rate28.2%16.4%
Impact of 10% adverse change$(75)$(69)
Impact of 20% adverse change(136)(134)
(a)
The Firm’s interests in prime mortgage securitizations were $555341 million and $708555 million, as of December 31, 20112012 and 20102011, respectively. These include retained interests in Alt-A loans and re-securitization transactions. The Firm'sFirm’s interests in subprime mortgage securitizations were $3168 million and $1431 million, as of December 31, 20112012 and 20102011, respectively. Additionally, the Firm had interests in option ARM mortgage securitizations of $23 million and $29 millionat 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. Incorporates the Firm’s weighted-average loss assumption.
(d)The prior period has been reclassified to conform with the current presentation.
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.


266290 JPMorgan Chase & Co./20112012 Annual Report


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, and delinquencies as of December 31, 20112012 and 20102011.
Securitized assets 90 days past due Liquidation lossesSecuritized assets 90 days past due Liquidation losses
As of or for the year ended December 31, (in millions)20112010 20112010 2011201020122011 20122011 20122011
Securitized loans(a)
          
Residential mortgage:          
Prime mortgage(b)
$101,004
$143,764
 $24,285
$33,093
 $5,650
$6,257
$80,572
$101,004
 $16,270
$24,285
 $6,850
$5,650
Subprime mortgage35,755
40,721
 14,293
15,456
 3,086
3,598
31,264
35,755
 10,570
14,293
 3,013
3,086
Option ARMs31,075
35,786
 9,999
10,788
 1,907
2,305
26,095
31,075
 6,595
9,999
 2,268
1,907
Commercial and other93,336
106,245
 4,836
5,791
 1,101
618
81,834
93,336
 4,077
4,836
 1,265
1,101
Total loans securitized(c)
$261,170
$326,516
 $53,413
$65,128
 $11,744
$12,778
$219,765
$261,170
 $37,512
$53,413
 $13,396
$11,744
(a)
Total assets held in securitization-related SPEs were $342.3295.8 billion and $391.1340.0 billion, respectively, at December 31, 20112012 and 20102011. The $261.2219.8 billion and $326.5261.2 billion, respectively, of loans securitized at December 31, 20112012 and 20102011, excludes: $74.472.0 billion and $56.074.4 billion, respectively, of securitized loans in which the Firm has no continuing involvement, and $6.74.0 billion and $8.64.4 billion, respectively, of loan securitizations consolidated on the Firm’s Consolidated Balance Sheets at December 31, 20112012 and 20102011.
(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)U.S. GAAP assetsU.S. GAAP liabilitiesStockholders' equityTier 1 capital
As of December 31, 2009$2,031,989
$1,866,624
$165,365
11.10 %
Impact of new accounting guidance for consolidation of VIEs

    
Credit card

60,901
65,353
(4,452)(0.30)
Multi-seller conduits

17,724
17,744
(20)—
Mortgage & other

9,059
9,107
(48)(0.04)
Total impact of new guidance

87,684
92,204
(4,520)(0.34)
Beginning balance as of January 1, 2010

$2,119,673
$1,958,828
$160,845
10.76 %

Note 17 – Goodwill and other intangible assets
Goodwill and other intangible assets consist of the following.
December 31, (in millions)201120102009201220112010
Goodwill$48,188
$48,854
$48,357
$48,175
$48,188
$48,854
Mortgage servicing rights7,223
13,649
15,531
7,614
7,223
13,649
Other intangible assets:  
Purchased credit card relationships$602
$897
$1,246
$295
$602
$897
Other credit card-related intangibles488
593
691
229
488
593
Core deposit intangibles594
879
1,207
355
594
879
Other intangibles1,523
1,670
1,477
1,356
1,523
1,670
Total other intangible assets$3,207
$4,039
$4,621
$2,235
$3,207
$4,039
Goodwill
Goodwill is recorded upon completion of a business combination as the difference between the purchase price and the fair value of the net assets acquired. Subsequent to initial recognition, goodwill is not amortized but is tested for impairment during the fourth quarter of each fiscal year, or more often if events or circumstances, such as adverse changes in the business climate, indicate there may be impairment.
The goodwill associated with each business combination is allocated to the related reporting units, which are
determined based on how the Firm’s businesses are managed and how they are reviewed by the Firm’s Operating Committee. The following table presents goodwill attributed to the business segments.
December 31, (in millions)201220112010
Consumer & Community Banking$31,048
$30,996
$31,018
Corporate & Investment Bank6,895
6,944
6,958
Commercial Banking2,863
2,864
2,866
Asset Management6,992
7,007
7,635
Corporate/Private Equity377
377
377
Total goodwill$48,175
$48,188
$48,854
December 31, (in millions)201120102009
Investment Bank$5,276
$5,278
$4,959
Retail Financial Services16,489
16,496
16,514
Card Services & Auto14,507
14,522
14,451
Commercial Banking2,864
2,866
2,868
Treasury & Securities Services1,668
1,680
1,667
Asset Management7,007
7,635
7,521
Corporate/Private Equity377
377
377
Total goodwill$48,188
$48,854
$48,357
The following table presents changes in the carrying amount of goodwill.
Year ended December 31,
(in millions)
2011 2010 2009
Balance at beginning of period(a)
$48,854
 $48,357
 $48,027
Changes during the period from:     
Business combinations97
 556
 271
Dispositions(685) (19) —
Other(b)
(78) (40) 59
Balance at December 31,(a)
$48,188
 $48,854
 $48,357


JPMorgan Chase & Co./2011 Annual Report267
Year ended December 31,
(in millions)
2012 2011 2010
Balance at beginning of period(a)
$48,188
 $48,854
 $48,357
Changes during the period from:     
Business combinations43
 97
 556
Dispositions(4) (685) (19)
Other(b)
(52) (78) (40)
Balance at December 31,(a)
$48,175
 $48,188
 $48,854
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 tax-related adjustments.
The net reduction in goodwill from 2010 to 2011 was predominantly due to AM’s sale of its investment in an asset manager.
Impairment testing
Goodwill was not impaired at December 31, 20112012 or 20102011, nor was any goodwill written off due to impairment during 20112012, 20102011 or 20092010.
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 unit’s 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 unit’s goodwill is determined by comparing the fair value of the reporting unit (as determined in step one) to the fair value of the net assets of the reporting unit, as if the reporting unit were being acquired in a business combination. The resulting implied current fair value of goodwill is then compared with the carrying value of the reporting unit’s goodwill. If the carrying value of the goodwill exceeds its implied current fair value, then an impairment charge is recognized for the excess. If the


JPMorgan Chase & Co./2012 Annual Report291
Notes to consolidated financial statements

carrying value of goodwill is less than its implied current fair value, then no goodwill impairment is recognized.
The Firm uses the reporting units’ allocated equity plus goodwill capital as a proxy for the carrying amounts of equity for the reporting units in the goodwill impairment testing. Reporting unit equity is determined on a similar basis as the allocation of equity to the Firm’s lines of business, which takes into consideration the capital the business segment would require if it were operating independently, incorporating sufficient capital to address regulatory capital requirements (including Basel III), economic risk measures and capital levels for similarly rated peers. Proposed line of business equity levels are incorporated into the Firm’s annual budget process, which is reviewed by the Firm’s Board of Directors. Allocated equity is further reviewed on a periodic basis and updated as needed.
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 Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the CARD Act, and limitations on non-sufficient 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 Firm’s overall estimated cost of equity (estimated using the Capital Asset Pricing Model), as adjusted for the risk characteristics specific to each reporting unit (for example, for higher levels of risk or uncertainty associated with the business or management’s forecasts and assumptions). To assess the reasonableness of the discount rates used for each reporting unit management compares the discount rate to the estimated cost of equity for publicly traded institutions with similar businesses and risk characteristics. In addition, the weighted average cost of equity (aggregating the various reporting units) is compared with the Firms’ overall estimated cost of equity to ensure reasonableness.
The valuations derived from the discounted cash flow 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'sFirm’s businesses and competitor institutions. Management also takes into consideration a comparison between the aggregate fair value of the Firm’s reporting units and JPMorgan Chase’s 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 Firm’s consumermortgage lending businessesbusiness in RFS and CardCCB remain at an elevated risk of goodwill impairment due to theirits exposure to U.S. consumer credit risk and the effects of economic, regulatory and legislative changes. The valuation of these businessesthis business 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)activities), and the amount of equity capital required. In addition, the earnings or estimated cost of equity of the Firm'sFirm’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 management’s 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


268JPMorgan Chase & Co./2011 Annual Report


management purposes. The Firm estimates the fair value of MSRs using an option-adjusted spread (“OAS”) model, which projects MSR cash flows over multiple interest rate scenarios in conjunction with the Firm’s prepayment model, and then discounts these cash flows at risk-adjusted rates. The model considers portfolio characteristics, contractually specified servicing fees, prepayment assumptions, delinquency rates, costs to service, late charges and other ancillary revenue, and 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.


292JPMorgan Chase & Co./2012 Annual Report


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, 20112012, 20102011 and 20092010.
Year ended December 31,
(in millions, except where otherwise noted)
2011
 2010
 2009
As of or for the year ended December 31, (in millions, except where otherwise noted)2012
 2011
 2010
Fair value at beginning of period$13,649
 $15,531
 $9,403
$7,223
 $13,649
 $15,531
MSR activity     
     
Originations of MSRs2,570
 3,153
 3,615
2,376
 2,570
 3,153
Purchase of MSRs33
 26
 2
457
 33
 26
Disposition of MSRs—
 (407) (10)(579)
(e) 
—
 (407)
Changes due to modeled amortization(1,910) (2,386) (3,286)(1,228) (1,910) (2,386)
Net additions and amortization693
 386
 321
1,026
 693
 386
Changes due to market interest rates(5,392) (2,224) 5,844
(589) (5,392) (2,224)
Other changes in valuation due to inputs and assumptions(a)
(1,727) (44) (37)(46) (1,727) (44)
Total change in fair value of MSRs(b)
(7,119) (2,268) 5,807
(635) (7,119) (2,268)
Fair value at December 31(c)
$7,223
 $13,649
 $15,531
$7,614
 $7,223
 $13,649
Change in unrealized gains/(losses) included in income related to MSRs held at December 31$(7,119) $(2,268) $5,807
$(635) $(7,119) $(2,268)
Contractual service fees, late fees and other ancillary fees included in income$3,977
 $4,484
 $4,818
$3,783
 $3,977
 $4,484
Third-party mortgage loans serviced at December 31 (in billions)$910
 $976
 $1,091
$867
 $910
 $976
Servicer advances at December 31 (in billions)(d)
$11.1
 $9.9
 $7.7
$10.9
 $11.1
 $9.9
(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 $(8) million, $(9) million and $(1) million for the years ended December 31, 2012,2011 and 2010, respectively.
$(1) million and $(4) million for the years ended December 31, 2011, 2010 and 2009, respectively.
(c)
Includes $3123 million, $4031 million and $4140 million related to commercial real estate at December 31, 20112012, 20102011 and 2009,2010, 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 Firm’s 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 to investors if the collateral is insufficient to cover the advance.
(e)Includes excess mortgage servicing rights transferred to an agency-sponsored trust in exchange for stripped mortgage backed securities (“SMBS”). A portion of the SMBS was acquired by third parties at the transaction date; the Firm acquired and has retained the remaining balance of those SMBS as trading assets.
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 in fair value 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'sFirm’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'sFirm’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),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.


JPMorgan Chase & Co./2011 Annual Report269
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


JPMorgan Chase & Co./2012 Annual Report293
Notes to consolidated financial statements

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, 20112012, 20102011 and 20092010.
Year ended December 31,
(in millions)
2011 2010 20092012 2011 2010
RFS mortgage fees and related income     
Mortgage fees and related income     
Net production revenue:          
Production revenue$3,395
 $3,440
 $2,115
$5,783
 $3,395
 $3,440
Repurchase losses(1,347) (2,912) (1,612)(272) (1,347) (2,912)
Net production revenue2,048
 528
 503
5,511
 2,048
 528
Net mortgage servicing revenue     
     
Operating revenue:     
     
Loan servicing revenue4,134
 4,575
 4,942
3,772
 4,134
 4,575
Changes in MSR asset fair value due to modeled amortization(1,904) (2,384) (3,279)(1,222) (1,904) (2,384)
Total operating revenue2,230
 2,191
 1,663
2,550
 2,230
 2,191
Risk management:     
     
Changes in MSR asset fair value due to market interest rates(5,390) (2,224) 5,804
(587) (5,390) (2,224)
Other changes in MSR asset fair value due to inputs or assumptions in model(a)
(1,727) (44) —
(46) (1,727) (44)
Derivative valuation adjustments and other5,553
 3,404
 (4,176)
Change in derivative fair value and other1,252
 5,553
 3,404
Total risk management(1,564) 1,136
 1,628
619
 (1,564) 1,136
Total RFS net mortgage servicing revenue666
 3,327
 3,291
Net mortgage servicing revenue3,169
 666
 3,327
All other7
 15
 (116)7
 7
 15
Mortgage fees and related income$2,721
 $3,870
 $3,678
$8,687
 $2,721
 $3,870
(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.
 
The table below outlines the key economic assumptions used to determine the fair value of the Firm’s MSRs at December 31, 20112012 and 20102011;, 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)
2011 2010
December 31,
(in millions, except rates)
2012 2011
Weighted-average prepayment speed assumption (“CPR”)18.07% 11.29%13.04% 18.07%
Impact on fair value of 10% adverse change$(585) $(809)$(517) $(585)
Impact on fair value of 20% adverse change(1,118) (1,568)(1,009) (1,118)
Weighted-average option adjusted spread7.83% 3.94%7.61% 7.83%
Impact on fair value of 100 basis points adverse change$(269) $(578)$(306) $(269)
Impact on fair value of 200 basis points adverse change(518) (1,109)(591) (518)
CPR: Constant prepayment rate.
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.


270294 JPMorgan Chase & Co./20112012 Annual Report


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 Firm’s 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 $832972 million decrease in other intangible assets during 20112012, was due to $848957 million in amortization.amortization, which included a $214 million impairment write-off of purchased credit card relationships and other credit card-related intangibles, as projected cash flows associated with a non-strategic credit card relationship within CCB had deteriorated.
The components of credit card relationships, core deposits and other intangible assets were as follows.
December 31, 2011 December 31, 20102012 2011
Gross amount(a)
Accumulated amortization(a)
Net
carrying value
 Gross amountAccumulated amortization
Net
carrying value
Gross amount(a)
Accumulated amortization(a)
Net
carrying value
 Gross amountAccumulated amortization
Net
carrying value
December 31, (in millions)  
Purchased credit card relationships$3,826
$3,224
$602
 $5,789
$4,892
$897
$3,775
$3,480
$295
 $3,826
$3,224
$602
Other credit card-related intangibles844
356
488
 907
314
593
850
621
229
 844
356
488
Core deposit intangibles4,133
3,539
594
 4,280
3,401
879
4,133
3,778
355
 4,133
3,539
594
Other intangibles(b)2,467
944
1,523
 2,515
845
1,670
2,390
1,034
1,356
 2,467
944
1,523
(a)
The decrease in the gross amount and accumulated amortization from December 31, 20102011, was due to the removal of fully amortized assets.
In addition to the finite lived intangible assets in the previous table, the Firm has
(b)
Includes 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)2011 2010 20092012 2011 2010
Purchased credit card relationships$295
 $355
 $421
$309
 $295
 $355
Other credit card-related intangibles106
 111
 94
265
 106
 111
Core deposit intangibles285
 328
 390
239
 285
 328
Other intangibles162
 142
 145
144
 162
 142
Total amortization expense$848
 $936
 $1,050
$957
 $848
 $936
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, 2011.2012.
For the year ended December 31,
(in millions)
Purchased credit card relationships
Other credit
card-related intangibles
Core deposit intangibles
Other
intangibles
Total
2012$253
$106
$240
$147
$746
Year ended December 31,
(in millions)
Purchased credit card relationships
Other credit
card-related intangibles
Core deposit intangibles
Other
intangibles
Total
2013212
103
195
140
650
$192
$57
$196
$132
$577
2014109
102
103
122
436
91
49
102
116
358
201523
94
26
105
248
7
39
26
96
168
20164
34
14
98
150
4
34
14
89
141
20171
29
13
88
131


Impairment testing
The Firm’s 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 in amortization expense 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 in amortization expense for the difference.


JPMorgan Chase & Co./20112012 Annual Report 271295
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 software’s expected useful life and reviewed for impairment on an ongoing basis.

Note 19 – Deposits
At December 31, 20112012 and 20102011, noninterest-bearing and interest-bearing deposits were as follows.
December 31, (in millions)2011 20102012 2011
U.S. offices      
Noninterest-bearing$346,670
 $228,555
$380,320
 $346,670
Interest-bearing      
Demand(a)
47,075
 33,368
53,980
 47,075
Savings(b)
375,051
 334,632
407,710
 375,051
Time (included $3,861 and $2,733 at fair value)(c)
82,738
 87,237
Time (included $5,140 and $3,861 at fair value)(c)
90,416
 82,738
Total interest-bearing deposits504,864
 455,237
552,106
 504,864
Total deposits in U.S. offices851,534
 683,792
932,426
 851,534
Non-U.S. offices      
Noninterest-bearing18,790
 10,917
17,845
 18,790
Interest-bearing      
Demand188,202
 174,417
195,395
 188,202
Savings687
 607
1,004
 687
Time (included $1,072 and $1,636 at fair value)(c)
68,593
 60,636
Time (included $593 and $1,072 at fair value)(c)
46,923
 68,593
Total interest-bearing deposits257,482
 235,660
243,322
 257,482
Total deposits in non-U.S. offices276,272
 246,577
261,167
 276,272
Total deposits$1,127,806
 $930,369
$1,193,593
 $1,127,806
(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 198–200214–216 of this Annual Report.
 
At December 31, 20112012 and 20102011, time deposits in denominations of $100,000 or more were as follows.
December 31, (in millions) 2012 2011 
U.S. offices $70,008
 $57,802
 
Non-U.S. offices 46,890
 60,066
(a) 
Total $116,898
 $117,868
 
December 31, (in millions) 2011 2010
U.S. offices $57,802
 $59,653
Non-U.S. offices 50,614
 44,544
Total $108,416
 $104,197
(a)The prior period balance has been revised.
At December 31, 20112012, the maturities of interest-bearing time deposits were as follows.
December 31, 2011  
  
�� 
December 31, 2012  
  
  
(in millions) U.S. Non-U.S. Total U.S. Non-U.S. Total
2012 $68,345
 $67,107
 $135,452
2013 7,222
 1,086
 8,308
 $74,469
 $45,731
 $120,200
2014 1,947
 219
 2,166
 3,792
 795
 4,587
2015 2,051
 22
 2,073
 3,374
 34
 3,408
2016 2,532
 102
 2,634
 4,566
 188
 4,754
2017 1,195
 110
 1,305
After 5 years 641
 57
 698
 3,020
 65
 3,085
Total $82,738
 $68,593
 $151,331
 $90,416
 $46,923
 $137,339
Note 20 – Accounts payable and other liabilities
The following table details the components of accounts payable and other liabilities.
December 31, (in millions) 2011
 2010
 2012
 2011
Brokerage payables(a)
 $121,353
 $95,359
 $108,398
 $121,353
Accounts payable and other liabilities(b)
 81,542
 74,971
 86,842
 81,542
Total $202,895
 $170,330
 $195,240
 $202,895
(a)Includes payables to customers, brokers, dealers and clearing organizations, and securities fails.
(b)
Includes $5136 million and $23651 million accounted for at fair value at December 31, 20112012 and 20102011, respectively.



272296 JPMorgan Chase & Co./20112012 Annual Report


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, 20112012.
By remaining maturity at   2011  
December 31,   Under
   After
   2010
By remaining maturity at
December 31,
   2012 2011
(in millions, except rates)   1 year
 1-5 years
 5 years
 Total
 Total
   Under 1 year
 1-5 years
 After 5 years
 Total
 Total
Parent company    
        
    
        
Senior debt: 
Fixed rate(a)
 $17,142
 $40,060
 $39,276
 $96,478
 $98,787
 
Fixed rate(a)
 $6,876
 $47,101
 $45,739
 $99,716
 $96,478
 
Variable rate(b)
 24,186
 25,684
 5,909
 55,779
 59,027
 
Variable rate(b)
 10,049
 22,706
 6,010
 38,765
 55,779
 
Interest rates(c)
 0.32-7.00%
 0.60-7.00%
 0.41-7.25%
 0.32-7.25%
 0.24-7.25%
 
Interest rates(c)
 0.43-5.38%
 0.35-7.00%
 0.26-7.25%
 0.26-7.25%
 0.32-7.25%
Subordinated debt: Fixed rate $1,005
 $8,919
 $9,243
 $19,167
 $22,000
 Fixed rate $2,421
 $8,259
 $5,632
 $16,312
 $19,167
 Variable rate 118
 1,827
 9
 1,954
 1,996
 Variable rate —
 3,431
 9
 3,440
 1,954
 
Interest rates(c)
 6.63-6.63%
 1.09-5.75%
 2.16-8.53%
 1.09-8.53%
 1.37-8.53%
 
Interest rates(c)
 5.25-5.75%
 0.61-6.13%
 3.88-8.53%
 0.61-8.53%
 1.09-8.53%
 Subtotal $42,451
 $76,490
 $54,437
 $173,378
 $181,810
 Subtotal $19,346
 $81,497
 $57,390
 $158,233
 $173,378
Subsidiaries    
  
  
  
  
    
  
  
  
  
FHLB advances:(d)
 Fixed rate $18
 $4,548
 $172
 $4,738
 $7,324
FHLB advances: Fixed rate $1,510
 $3,040
 $162
 $4,712
 $4,738
 Variable rate 5,500
 6,822
 763
 13,085
 15,660
 Variable rate 2,321
 23,012
 12,000
 37,333
 13,085
 
Interest rates(c)
 0.32-0.44%
 0.32-2.04%
 0.41-0.44%
 0.32-2.04%
 0.21-4.05%
 
Interest rates(c)
 0.30-1.15%
 0.30-2.04%
 0.39-0.47%
 0.30-2.04%
 0.32-2.04%
Senior debt: Fixed rate $699
 $2,963
 $2,884
 $6,546
 $5,228
 Fixed rate $582
 $2,397
 $3,782
 $6,761
 $6,546
 Variable rate 6,465
 17,327
 4,465
 28,257
 30,545
 Variable rate 7,577
 11,390
 2,640
 21,607
 28,257
 
Interest rates(c)
 0.33-0.57%
 0.13-4.28%
 4.00-14.21%
 0.13-14.21%
 0.21-14.21%
 
Interest rates(c)
 0.33-2.10%
 0.16-3.75%
 1.00-7.28%
 0.16-7.28%
 0.13-14.21%
Subordinated debt: Fixed rate $—
 $1,672
 $7,083
 $8,755
 $8,605
 Fixed rate $—
 $5,651
 $1,862
 $7,513
 $8,755
 Variable rate —
 1,150
 —
 1,150
 1,150
 Variable rate —
 2,466
 —
 2,466
 1,150
 
Interest rates(c)
 —% 0.87-5.88%
 4.38-8.25%
 0.87-8.25%
 0.63-8.25%
 
Interest rates(c)
 —% 0.64-6.00%
 4.38-8.25%
 0.64-8.25%
 0.87-8.25%
 Subtotal $12,682
 $34,482
 $15,367
 $62,531
 $68,512
 Subtotal $11,990
 $47,956
 $20,446
 $80,392
 $62,531
Junior subordinated debt: Fixed rate $—
 $—
 $15,784
 $15,784
 $15,249
 Fixed rate $—
 $—
 $7,131
 $7,131
 $15,784
 Variable rate —
 —
 5,082
 5,082
 5,082
 Variable rate —
 —
 3,268
 3,268
 5,082
 
Interest rates(c)
 —% —% 0.93-8.75%
 0.93-8.75%
 0.79-8.75%
 
Interest rates(c)
 —% —% 0.81-8.75%
 0.81-8.75%
 0.93-8.75%
 Subtotal $—
 $—
 $20,866
 $20,866
 $20,331
 Subtotal $—
 $—
 $10,399
 $10,399
 $20,866
Total long-term debt(e)(f)(g)
   $55,133
 $110,972
 $90,670
 $256,775
(i)(j) 
$270,653
Total long-term debt(d)(e)(f)
   $31,336
 $129,453
 $88,235
 $249,024
(h)(i) 
$256,775
Long-term beneficial interests:    
  
  
  
  
    
  
  
  
  
 Fixed rate $2,012
 $2,474
 $1,775
 $6,261
 $9,795
 Fixed rate $1,629
 $5,502
 $3,262
 $10,393
 $6,261
 Variable rate 11,474
 15,306
 6,693
 33,473
 42,759
 Variable rate 10,226
 10,551
 3,802
 24,579
 33,473
 Interest rates 0.06-11.00%
 0.06-5.63%
 0.02-9.19%
 0.02-11.00%
 0.05-11.00%
 Interest rates 0.27-5.40%
 0.23-5.63%
 0.32-13.91%
 0.23-13.91%
 0.02-11.00%
Total long-term beneficial interests(h)
   $13,486
 $17,780
 $8,468
 $39,734
 $52,554
Total long-term beneficial interests(g)
   $11,855
 $16,053
 $7,064
 $34,972
 $39,734
(a)
Included $8.4 billion and $18.5 billionas of December 31, 2011 and 2010, respectively,that was guaranteed by the FDIC under the Temporary Liquidity Guarantee (“TLG”) Program. All long-term debt guaranteed under the TLG Program matured prior to December 31, 2012.
(b)
Included $11.9 billion and $17.9 billionas of December 31, 2011 and 2010, respectively,that was guaranteed by the FDIC under the TLG Program. All long-term debt guaranteed under the TLG Program matured prior to December 31, 2012.
(c)
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 Firm’s exposure to the contractual interest rates disclosed in the table above. Including the effects of the hedge accounting derivatives, the range of modified rates in effect at December 31, 20112012, for total long-term debt was (0.37)(0.76)% to 14.21%7.86%, versus the contractual range of 0.13%0.16% to 14.21%8.75% presented in the table above. The interest rate ranges shown exclude structured notes accounted for at fair value.
(d)
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.
(e)
Included long-term debt of $23.848.0 billion and $31.323.8 billion secured by assets totaling $89.4112.8 billion and $92.089.4 billion at December 31, 20112012 and 20102011, respectively. The amount of long-term debt secured by assets does not include amounts related to hybrid instruments.
(f)(e)
Included $34.730.8 billion and $38.834.7 billion of outstanding structured notes accounted for at fair value at December 31, 20112012 and 20102011, respectively.
(g)(f)
Included $2.11.6 billion and $879 million2.1 billion of outstanding zero-coupon notes at December 31, 20112012 and 20102011, respectively. The aggregate principal amount of these notes at their respective maturities was $5.03.0 billion and $2.75.0 billion, respectively.
(h)(g)
Included on the Consolidated Balance Sheets in beneficial interests issued by consolidated VIEs. Also included $1.31.2 billion and $1.51.3 billion of outstanding structured notes accounted for at fair value at December 31, 20112012 and 20102011, respectively. Excluded short-term commercial paper and other short-term beneficial interests of $26.228.2 billion and $25.126.2 billion at December 31, 20112012 and 20102011, respectively.

JPMorgan Chase & Co./2011 Annual Report273
Notes to consolidated financial statements

(i)(h)
At December 31, 20112012, long-term debt in the aggregate of $28.622.1 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.
(j)(i)
The aggregate carrying values of debt that matures in each of the five years subsequent to 20112012 is $55.1 billion in 2012, $34.931.3 billion in 2013, $30.435.8 billion in 2014, $21.632.0 billion in 2015, and $24.128.0 billion in 2016.2016 and $33.6 billion in 2017.

JPMorgan Chase & Co./2012 Annual Report297
Notes to consolidated financial statements

The weighted-average contractual interest rates for total long-term debt excluding structured notes accounted for at fair value were 3.57%3.09% and 3.50%3.57% as of December 31, 20112012 and 20102011, 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 Firm’s interest expense on the associated debt. The modified weighted-average interest rates for total long-term debt, including the effects of related derivative instruments, were 2.67%2.33% and 2.36%2.67% as of December 31, 20112012 and 20102011, 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'sFirm’s market-making
activities. These guarantees rank on parity with all of the Firm'sFirm’s other unsecured and unsubordinated indebtedness. Guaranteed liabilities were $3.01.7 billion and $3.73.0 billion at December 31, 20112012 and 20102011, respectively.
The Firm’s unsecured debt does not contain requirements that would call for an acceleration of payments, maturities or changes in the structure of the existing debt, provide any limitations on future borrowings or require additional collateral, based on unfavorable changes in the Firm’s credit ratings, financial ratios, earnings or stock price.

Junior subordinated deferrable interest debentures held by trusts that issued guaranteed capital debt securities
On July 12, 2012, JPMorgan Chase redeemed $9.0 billion, or 100% of the liquidation amount, of the following guaranteed capital debt securities (“trust preferred securities”): JPMorgan Chase Capital XV, JPMorgan Chase Capital XVII, JPMorgan Chase Capital XVIII, JPMorgan Chase Capital XX, JPMorgan Chase Capital XXII, JPMorgan Chase Capital XXV, JPMorgan Chase Capital XXVI, JPMorgan Chase Capital XXVII, and JPMorgan Chase Capital XXVIII. Other income for the year ended December 31, 2012, reflected $888 million of pretax extinguishment gains related to adjustments applied to the cost basis of the redeemed trust preferred securities during the period they were in a qualified hedge accounting relationship.
At December 31, 20112012, the Firm had establishedoutstanding 2617 wholly-owned 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 $20.910.4 billion and $20.320.9 billion at December 31, 20112012 and 20102011, respectively, were reflected in the Firm’s 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, 20112012 and 20102011. 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, 20112012.



274298 JPMorgan Chase & Co./20112012 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, 20112012.
December 31, 2011
(in millions)
 
Amount of trust preferred capital debt securities issued by trust(a)
 
Principal amount of debenture issued to trust(b)
 Issue date Stated maturity of trust preferred capital securities and debentures Earliest redemption date Interest rate of trust preferred capital securities and debentures Interest payment/distribution dates
December 31, 2012
(in millions)
 
Amount of trust preferred securities issued by trust(a)
 
Principal amount of debenture issued to trust(b)
 Issue date Stated maturity of trust preferred securities and debentures Earliest redemption date Interest rate of trust preferred securities and debentures Interest payment/distribution dates
Bank One Capital III $474 $765 2000 2030 Any time 8.75% Semiannually $474 $757 2000 2030 Any time 8.75% Semiannually
Bank One Capital VI 525 552 2001 2031 Any time 7.20% Quarterly 100 105 2001 2031 Any time 7.20% Quarterly
Chase Capital II 482 497 1997 2027 Any time LIBOR + 0.50% Quarterly 482 498 1997 2027 Any time LIBOR + 0.50% Quarterly
Chase Capital III 295 305 1997 2027 Any time LIBOR + 0.55% Quarterly 296 305 1997 2027 Any time LIBOR + 0.55% Quarterly
Chase Capital VI 241 249 1998 2028 Any time LIBOR + 0.625% Quarterly 241 249 1998 2028 Any time LIBOR + 0.625% Quarterly
First Chicago NBD Capital I 249 256 1997 2027 Any time LIBOR + 0.55% Quarterly 249 256 1997 2027 Any time LIBOR + 0.55% Quarterly
J.P. Morgan Chase Capital X 1,000 1,016 2002 2032 Any time 7.00% Quarterly 1,000 1,018 2002 2032 Any time 7.00% Quarterly
J.P. Morgan Chase Capital XI 1,075 1,009 2003 2033 Any time 5.88% Quarterly 1,075 1,013 2003 2033 Any time 5.88% Quarterly
J.P. Morgan Chase Capital XII 400 391 2003 2033 Any time 6.25% Quarterly 400 392 2003 2033 Any time 6.25% Quarterly
JPMorgan Chase Capital XIII 465 480 2004 2034 2014 LIBOR + 0.95% Quarterly 465 480 2004 2034 2014 LIBOR + 0.95% Quarterly
JPMorgan Chase Capital XIV 600 587 2004 2034 Any time 6.20% Quarterly 600 588 2004 2034 Any time 6.20% Quarterly
JPMorgan Chase Capital XV 93 132 2005 2035 Any time 5.88% Semiannually
JPMorgan Chase Capital XVI 500 493 2005 2035 Any time 6.35% Quarterly 500 494 2005 2035 Any time 6.35% Quarterly
JPMorgan Chase Capital XVII 496 720 2005 2035 Any time 5.85% Semiannually
JPMorgan Chase Capital XVIII 748 749 2006 2036 Any time 6.95% Semiannually
JPMorgan Chase Capital XIX 563 564 2006 2036 Any time 6.63% Quarterly 563 564 2006 2036 Any time 6.63% Quarterly
JPMorgan Chase Capital XX 905 907 2006 2036 Any time 6.55% Semiannually
JPMorgan Chase Capital XXI 836 837 2007 2037 2012 LIBOR + 0.95% Quarterly 836 837 2007 2037 Any time LIBOR + 0.95% Quarterly
JPMorgan Chase Capital XXII 911 912 2007 2037 Any time 6.45% Semiannually
JPMorgan Chase Capital XXIII 643 643 2007 2047 2012 LIBOR + 1.00% Quarterly 643 643 2007 2047 Any time LIBOR + 1.00% Quarterly
JPMorgan Chase Capital XXIV 700 700 2007 2047 2012 6.88% Quarterly 700 700 2007 2047 Any time 6.88% Quarterly
JPMorgan Chase Capital XXV 1,493 2,292 2007 2037 2037 6.80% Semiannually
JPMorgan Chase Capital XXVI 1,815 1,815 2008 2048 2013 8.00% Quarterly
JPMorgan Chase Capital XXVII 995 995 2009 2039 2039 7.00% Semiannually
JPMorgan Chase Capital XXVIII 1,500 1,500 2009 2039 2014 7.20% Quarterly
JPMorgan Chase Capital XXIX 1,500 1,500 2010 2040 2015 6.70% Quarterly 1,500 1,500 2010 2040 2015 6.70% Quarterly
Total $19,504 $20,866           $10,124 $10,399          
(a)Represents the amount of trust preferred capital debt securities issued to the public by each trust, including unamortized original issue discount.
(b)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 Firm’s Consolidated Financial Statements.

JPMorgan Chase & Co./20112012 Annual Report 275299
Notes to consolidated financial statements

Note 22 – Preferred stock
At December 31, 20112012 and 20102011, JPMorgan Chase was authorized to issue 200 million shares of preferred stock, in one or more series, with a par value of $1 per share.
In the event of a liquidation or dissolution of the Firm, JPMorgan Chase’s preferred stock then outstanding takes precedence over the Firm’s common stock for the payment of dividends and the distribution of assets.


The following is a summary of JPMorgan Chase’s preferred stock outstanding as of December 31, 2012 and 2011.
  
Contractual rate in effect at
December 31, 2012
 
Shares at December 31,(a)
 Carrying value (in millions) at December 31, Earliest redemption date 
Share value and redemption
price per share(b)
   20122011 20122011 
Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series I 7.900% 600,000
600,000
 $6,000
$6,000
 4/30/2018 $10,000
8.625% Non-Cumulative Perpetual Preferred Stock, Series J 8.625% 180,000
180,000
 1,800
1,800
 9/1/2013 10,000
5.50% Non-Cumulative Perpetual Preferred Stock, Series O 5.500% 125,750
—
 1,258
—
 9/1/2017 10,000
Total preferred stock   905,750
780,000
 $9,058
$7,800
    
(a)Represented by depositary shares.
(b)The redemption price includes the amount shown in the table plus any accrued but unpaid dividends.
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 and on the 5.50% Non-Cumulative Preferred Stock, Series O are payable quarterly. The 5.50% Non-Cumulative was issued in August 2012.
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
Redemption rights
Each series 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 Chase’sFirm’s preferred stock outstandingmay be redeemed on any dividend payment date on or after the earliest redemption date for that series. The Series O preferred stock may also be redeemed following a capital treatment event, as described in the terms of December 31, 2011 and 2010.
December 31,  Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series I 8.625% Non-Cumulative Perpetual Preferred Stock, Series J Total preferred stock
Contractual rate in effect at December 31, 2011 7.900% 8.625%  
       

Shares(a)
2011 600,000
 180,000
 780,000
 2010 600,000
 180,000
 780,000
        
Carrying value
(in millions)
2011 $6,000
 $1,800
 $7,800
2010 6,000
 1,800
 7,800
        
Earliest redemption date 4/30/2018
 9/1/2013
  
Share value and redemption price per share(b)
 $10,000
 $10,000
  
(a)Represented by depositary shares.
(b)The redemption price includes the amount shown in the table plus any accrued but unpaid dividends.
Dividend and stock repurchase restrictions
Prior to thethat series. Any redemption of the Series K Preferred Stock on June 17, 2009, the Firm wasFirm’s preferred stock is subject to certain restrictions regardingnon-objection from 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.Federal Reserve.

 
Note 23 – Common stock
At December 31, 20112012 and 20102011, 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, 20112012, 20102011 and 20092010 were as follows.
Year ended December 31,
(in millions)
 2011
 2010
 2009
2012
2011
2010
Issued – balance at January 1 4,104.9
 4,104.9
 3,941.6
4,104.9
4,104.9
4,104.9
New open market issuances —
 —
 163.3
—
—
—
Total issued – balance at December 31 4,104.9
 4,104.9
 4,104.9
4,104.9
4,104.9
4,104.9
Treasury – balance at January 1 (194.6) (162.9) (208.8)(332.2)(194.6)(162.9)
Purchase of treasury stock (226.9) (77.9) —
(33.5)(226.9)(77.9)
Share repurchases related to employee stock-based awards(a)
 (0.1) (0.1) (1.1)(0.2)(0.1)(0.1)
Issued from treasury:       
Employee benefits and compensation plans 88.3
 45.3
 45.7
63.7
88.3
45.3
Employee stock purchase plans 1.1
 1.0
 1.3
1.3
1.1
1.0
Total issued from treasury 89.4
 46.3
 47.0
65.0
89.4
46.3
Total treasury – balance at December 31 (332.2) (194.6) (162.9)(300.9)(332.2)(194.6)
Outstanding 3,772.7
 3,910.3
 3,942.0
3,804.0
3,772.7
3,910.3
(a)Participants in the Firm’s stock-based incentive plans may have shares withheld to cover income taxes.


300JPMorgan Chase & Co./2012 Annual Report


Pursuant to the U.S. Treasury’s Capital Purchase Program, the Firm issued to the U.S. Treasury a Warrant to purchase up to 88,401,697 shares of the Firm’s 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 Firm’s 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, 2018.2018. As part of its common equity repurchase program discussed below, during 2012 and 2011, the Firm repurchased 18,471,300 and 10,167,698 warrants, for $238 million and $122 million, respectively, which resulted in adjustments to capital surplus. The Firm did not repurchase any of the warrants during2010. At December 31, 2012 and 2011, withrespectively, 59,762,699 and 78,233,999 warrants remaining outstanding at December 31, 2011. The repurchase of the warrants resulted in a $122 million adjustment to capital surplus.remained outstanding.
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. The2011. On March 13, 2012, the Board of Directors authorized a $15.0 billion common equity repurchase program, superseded aof which up to $10.012.0 billion was approved for repurchase in 2012 and up to an additional $3.0 billion is approved for repurchases through the end of the first quarter of 2013. Following the voluntary cessation of its common equity repurchase program approved in 2007. May 2012, the Firm resubmitted its capital plan to the Federal Reserve under the 2012 CCAR process in August 2012. Pursuant to a non-objection received from the Federal Reserve on November 5, 2012, with respect to the resubmitted capital plan, the Firm is authorized to repurchase up to $3.0 billion of common equity in the first quarter of 2013.
During 2012, 2011 and 2010, the Firm repurchased (on a trade-date basis) an aggregate of 24031 million, 229 million, and 78 million shares of common stock, and warrants, for $8.951.3 billion, $8.8 billion and $3.0 billion, at an average price per unit of $37.35 and $38.49, respectively. The Firm


276JPMorgan Chase & Co./2011 Annual Report


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 Firm’s equity securities, see Part II, Item 5: Market for registrant’s common equity, related stockholder matters and issuer purchases of equity securities, on pages 18–2022–23 of JPMorgan Chase’s 2011Chase’s 2012 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, 20112012, approximately 408325 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.
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.
The following table presents the calculation of basic and diluted EPS for the years ended December 31, 20112012, 20102011 and 20092010.
Year ended December 31,
(in millions, except per share amounts)
 2011 2010 2009 201220112010
Basic earnings per share        
Income before extraordinary gain $18,976
 $17,370
 $11,652
 
Extraordinary gain —
 —
 76
 
Net income $18,976
 $17,370
 $11,728
 $21,284
$18,976
$17,370
Less: Preferred stock dividends 629
 642
 1,327
 653
629
642
Less: Accelerated amortization from redemption of preferred stock issued to the U.S. Treasury —
 —
 1,112
(c) 
Net income applicable to common equity 18,347
 16,728
 9,289
(c) 
20,631
18,347
16,728
Less: Dividends and undistributed earnings allocated to participating securities 779
 964
 515
 754
779
964
Net income applicable to common stockholders $17,568
 $15,764
 $8,774
 $19,877
$17,568
$15,764
Total weighted-average basic shares outstanding 3,900.4
 3,956.3
 3,862.8
 3,809.4
3,900.4
3,956.3
Per share       
Income before extraordinary gain $4.50
 $3.98
 $2.25
(c) 
Extraordinary gain —
 —
 0.02
 
Net income $4.50
 $3.98
 $2.27
(c) 
Net income per share$5.22
$4.50
$3.98
        
Year ended December 31,
(in millions, except per share amounts)		 2011 2010 2009 
Diluted earnings per share        
Net income applicable to common stockholders $17,568
 $15,764
 $8,774
 $19,877
$17,568
$15,764
Total weighted-average basic shares outstanding 3,900.4
 3,956.3
 3,862.8
 3,809.4
3,900.4
3,956.3
Add: Employee stock options, SARs and warrants(a)
 19.9
 20.6
 16.9
 12.8
19.9
20.6
Total weighted-average diluted shares outstanding(b)
 3,920.3
 3,976.9
 3,879.7
 3,822.2
3,920.3
3,976.9
Per share       
Income before extraordinary gain $4.48
 $3.96
 $2.24
(c) 
Extraordinary gain —
 —
 0.02
 
Net income per share $4.48
 $3.96
 $2.26
(c) 
$5.20
$4.48
$3.96
(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. Treasury’s Capital Purchase Program to purchase shares of the Firm’s common stock. The aggregate number of shares issuable upon the exercise of such options and warrants was 133148 million, 233133 million and 266233 million for the full years ended December 31, 20112012, 20102011 and 20092010 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.


JPMorgan Chase & Co./20112012 Annual Report 277301
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 Firm’s defined benefit pension and OPEB plans.
As of or for the year ended
December 31,
Unrealized gains/(losses) on AFS securities(b)
 Translation adjustments, net of hedges Cash flow hedges Net loss and prior service costs/(credit) of defined benefit pension and OPEB plans Accumulated other comprehensive income/(loss) 
Year ended December 31,
Unrealized gains/(losses) on AFS securities(b)
 Translation adjustments, net of hedges Cash flow hedges Defined benefit pension and OPEB plans Accumulated other comprehensive income/(loss) 
(in millions)
Unrealized gains/(losses) on AFS securities(b)
 Translation adjustments, net of hedges Cash flow hedges Net loss and prior service costs/(credit) of defined benefit pension and OPEB plans Accumulated other comprehensive income/(loss) 
Balance at December 31, 2008
Net change 4,133
(c) 
 582
 383
 498
 5,596
 
Balance at December 31, 2009 $2,032
(d) 
 $(16) $181
 $(2,288) $(91)  $2,032
  $(16) $181
 $(2,288) $(91) 
Cumulative effect of changes in accounting principles(a)
 (144) —
 —
 —
 (144)  (144) —
 —
 —
 (144) 
Net change 610
(e) 
 269
 25
 332
 1,236
  610
(c) 
 269
 25
 332
 1,236
 
Balance at December 31, 2010 $2,498
(d) 
 $253
 $206
 $(1,956) $1,001
  $2,498
(d) 
 $253
 $206
 $(1,956) $1,001
 
Net change 1,067
(f) 
 (279)  (155)  (690)  (57)  1,067
(e) 
 (279) (155) (690) (57) 
Balance at December 31, 2011 $3,565
(d) 
 $(26) $51
 $(2,646) $944
  $3,565
(d) 
 $(26) $51
 $(2,646) $944
 
Net change 3,303
(f) 
 (69)  69
  (145)  3,158
 
Balance at December 31, 2012 $6,868
(d) 
 $(95) $120
 $(2,791) $4,102
 
(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 256–267280–291 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 Firm’s AFS securities; for further discussion see Note 6 on pages 202–210218–227 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)(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 and $(81) million at December 31, 2011 and 2010, respectively. There were no such losses at December 31, 2012.
(e)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.
(f)The net change for 2012 was predominantly driven by increased market value on non-U.S. residential MBS, corporate debt securities and obligations of U.S. states and municipalities, partially offset by realized gains.
The following table presents the before- and after-tax changes in the components of other comprehensive income/(loss).
2011 2010 20092012 2011 2010
Year ended December 31, (in millions)Before tax Tax effect After tax Before tax Tax effect After tax Before tax Tax effect After taxPretax Tax effect After-tax Pretax Tax effect After-tax Pretax Tax effect After-tax
Unrealized gains/(losses) on AFS securities:                                  
Net unrealized gains/(losses) arising during the period$3,361
 $(1,322) $2,039
 $3,982
 $(1,540) $2,442
 $7,870
 $(3,029) $4,841
$7,521
 $(2,930) $4,591
 $3,361
 $(1,322) $2,039
 $3,982
 $(1,540) $2,442
Reclassification adjustment for realized (gains)/losses included in net income(1,593) 621
 (972) (2,982) 1,150
 (1,832) (1,152) 444
 (708)(2,110) 822
 (1,288) (1,593) 621
 (972) (2,982) 1,150
 (1,832)
Net change1,768
 (701) 1,067
 1,000
 (390) 610
 6,718
 (2,585) 4,133
5,411
 (2,108) 3,303
 1,768
 (701) 1,067
 1,000
 (390) 610
Translation adjustments:                                  
Translation(672) 255
 (417) 402
 (139) 263
 1,139
 (398) 741
(26) 8
 (18) (672) 255
 (417) 402
 (139) 263
Hedges226
 (88) 138
 11
 (5) 6
 (259) 100
 (159)(82) 31
 (51) 226
 (88) 138
 11
 (5) 6
Net change(446) 167
 (279) 413
 (144) 269
 880
 (298) 582
(108) 39
 (69) (446) 167
 (279) 413
 (144) 269
Cash flow hedges:                                  
Net unrealized gains/(losses) arising during the period50
 (19) 31
 247
 (96) 151
 767
 (308) 459
141
 (55) 86
 50
 (19) 31
 247
 (96) 151
Reclassification adjustment for realized (gains)/losses included in net income(301) 115
 (186) (206) 80
 (126) (124) 48
 (76)(28) 11
 (17) (301) 115
 (186) (206) 80
 (126)
Net change(251) 96
 (155) 41
 (16) 25
 643
 (260) 383
113
 (44) 69
 (251) 96
 (155) 41
 (16) 25
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(1,291) 502
 (789) 294
 (96) 198
 494
 (200) 294
Reclassification adjustment for net loss and prior service credits included in net income162
 (63) 99
 224
 (90) 134
 337
 (133) 204
Defined benefit pension and OPEB plans:                 
Prior service credits arising during the period6
 (2) 4
 —
 —
 —
 10
 (4) 6
Net gains/(losses) arising during the period(537) 228
 (309) (1,290) 502
 (788) 262
 (84) 178
Reclassification adjustments included in net income:

 

 

 

 

 

 

 

 —
Amortization of net loss324
 (126) 198
 214
 (83) 131
 280
 (112) 168
Prior service costs/(credits)(41) 16
 (25) (52) 20
 (32) (57) 22
 (35)
Settlement gain/(loss)—
 —
 —
 —
 —
 —
 1
 —
 1
Foreign exchange and other(21) 8
 (13) (1) —
 (1) 22
 (8) 14
Net change(1,129) 439
 (690) 518
 (186) 332
 831
 (333) 498
(269) 124
 (145) (1,129) 439
 (690) 518
 (186) 332
Total other comprehensive income/(loss)$(58) $1
 $(57) $1,972
 $(736) $1,236
 $9,072
 $(3,476) $5,596
$5,147
 $(1,989) $3,158
 $(58) $1
 $(57) $1,972
 $(736) $1,236

278302 JPMorgan Chase & Co./20112012 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 Chase’s expense for income taxes includes the current and deferred portions of that expense. A valuation allowance is established to reduce deferred tax assets to the amount the Firm expects to realize.
Due to the inherent complexities arising from the nature of the Firm’s businesses, and from conducting business and being taxed in a substantial number of jurisdictions, significant judgments and estimates are required to be made. Agreement of tax liabilities between JPMorgan Chase and the many tax jurisdictions in which the Firm files tax returns may not be finalized for several years. Thus, the Firm’s final tax-related assets and liabilities may ultimately be different from those currently reported.
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, 20112012, 20102011, and 20092010.
Income tax expense/(benefit)Income tax expense/(benefit)
Year ended December 31,
(in millions)
 2011
 2010
 2009
 2012
 2011
 2010
Current income tax expense            
U.S. federal $3,719
 $4,001
 $4,698
 $3,225
 $3,719
 $4,001
Non-U.S. 1,183
 2,712
 2,368
 1,782
 1,183
 2,712
U.S. state and local 1,178
 1,744
 971
 1,496
 1,178
 1,744
Total current income tax expense 6,080
 8,457
 8,037
 6,503
 6,080
 8,457
Deferred income tax expense/(benefit)            
U.S. federal 2,109
 (753) (2,867) 2,238
 2,109
 (753)
Non-U.S. 102
 169
 (454) (327) 102
 169
U.S. state and local (518) (384) (301) (781) (518) (384)
Total deferred income tax expense/(benefit) 1,693
 (968) (3,622) 1,130
 1,693
 (968)
Total income tax expense $7,773
 $7,489
 $4,415
 $7,633
 $7,773
 $7,489
Total income tax expense includes $76200 million, $48576 million and $280485 million of tax benefits recorded in 20112012, 20102011, and 20092010, 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 Firm’s employee stock-based compensation plans. The tax effect of all items recorded directly to stockholders’ equity resulted in an increasea decrease of $1.9 billion in 2012, and increases of $927 million in 2011, an
increase ofand $1.8 billion in 2011 and 2010, and a decrease of $3.7 billion in 2009.respectively.
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. During 2012, as part of JPMorgan Chase’s ongoing review of the business requirements and capital needs of certain of its non-U.S. subsidiaries and their associated U.S. parent, the Firm determined that the undistributed earnings of certain of its subsidiaries would no longer be indefinitely reinvested. This determination resulted in the establishment of deferred tax liabilities and the recognition of an income tax expense of $80 million associated with prior years’ undistributed earnings. Based on JPMorgan Chase'sChase’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 20112012, pretax earnings of approximately $2.63.1 billion were generated and will be indefinitely reinvested in these subsidiaries. At December 31, 20112012, the cumulative amount of undistributed pretax earnings in these subsidiaries approximated $21.825.1 billion. If the Firm were to record a deferred tax liability associated with these undistributed earnings, the amount would be approximately $4.95.7 billion at December 31, 20112012.
Tax expense applicable to securities gains and losses for the years 20112012, 20102011 and 20092010 was$822 million, $617 million, and $1.1 billion, and $427 million, respectively.



JPMorgan Chase & Co./2012 Annual Report303
Notes to consolidated financial statements

A reconciliation of the applicable statutory U.S. income tax rate to the effective tax rate for each of the years ended December 31, 20112012, 20102011 and 20092010, is presented in the following table.
Effective tax rateEffective tax rate
Year ended December 31, 2011
 2010
 2009
 2012
 2011
 2010
Statutory U.S. federal tax rate 35.0 % 35.0 % 35.0 % 35.0 % 35.0 % 35.0 %
Increase/(decrease) in tax rate resulting from:            
U.S. state and local income taxes, net of U.S. federal income tax benefit 1.6
 3.6
 2.7
 1.6
 1.6
 3.6
Tax-exempt income (2.1) (2.4) (3.9) (2.9) (2.1) (2.4)
Non-U.S. subsidiary earnings(a)
 (2.3) (2.2) (1.7) (2.4) (2.3) (2.2)
Business tax credits (4.0) (3.7) (5.5) (4.2) (4.0) (3.7)
Other, net 0.9
 (0.2) 0.9
 (0.7) 0.9
 (0.2)
Effective tax rate 29.1 % 30.1 % 27.5 % 26.4 % 29.1 % 30.1 %
(a)Includes earnings deemed to be reinvested indefinitely in non-U.S. subsidiaries.
Deferred income tax expense/(benefit) results from differences between assets and liabilities measured for financial reporting purposes versus income tax return purposes. Deferred tax assets are recognized if, in management’s judgment, their realizability is determined to be more likely than not. If a deferred tax asset is determined to be unrealizable, a valuation allowance is established. The significant components of deferred tax assets and liabilities are reflected in the following table as of December 31, 20112012 and 20102011.


JPMorgan Chase & Co./2011 Annual Report279
Notes to consolidated financial statements

Deferred taxes    
December 31, (in millions) 2011
 2010
 2012
 2011
Deferred tax assets        
Allowance for loan losses $10,689
 $12,287
 $8,712
 $10,689
Employee benefits 4,570
 4,279
 4,308
 4,570
Accrued expenses and other(a)
 9,186
 7,850
 12,393
 11,183
Non-U.S. operations 2,943
 956
 3,537
 2,943
Tax attribute carryforwards(a)
 1,547
 2,348
Gross deferred tax assets $28,935
 $27,720
Tax attribute carryforwards 1,062
 1,547
Gross deferred tax assets(a)
 30,012
 30,932
Valuation allowance (1,303) (1,784) (689) (1,303)
Deferred tax assets, net of valuation allowance $27,632
 $25,936
Deferred tax assets, net of valuation allowance(a)
 $29,323
 $29,629
Deferred tax liabilities        
Depreciation and amortization(a)
 $6,358
 $4,823
 $2,563
 $2,799
Leasing transactions 2,569
 2,160
Mortgage servicing rights, net of hedges (a)
 5,336
 4,396
Leasing transactions(a)
 2,242
 2,348
Non-U.S. operations 2,790
 1,136
 3,582
 2,790
Other, net(a)
 1,139
 1,497
 4,340
 2,520
Gross deferred tax liabilities $12,856
 $9,616
Gross deferred tax liabilities(a)
 18,063
 14,853
Net deferred tax assets $14,776
 $16,320
 $11,260
 $14,776
(a)The prior-yearprior period has been revised to conform with the current presentation.

JPMorgan Chase has recorded deferred tax assets of $1.51.1 billion at December 31, 20112012, in connection with U.S. federal and state and local and non-U.S. subsidiary net operating loss carryforwards and foreign tax credit carryforwards. At December 31, 20112012, the U.S. federal net operating loss carryforwards were approximately $4.11.5 billion; the state and local net operating loss carryforward was approximately $642269 million; and the non-U.S. subsidiary net operating lossU.S. foreign tax credit carryforward was approximately $116525 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 2030.2030; and the U.S. foreign tax credit carryforward will expire in 2022. The non-U.S. subsidiary net operating loss carryforward has an unlimited carryforward period.
AThe valuation allowance has been recorded forat December 31, 2012, was due to losses associated with non-U.S. subsidiaries and certain portfolio investments, and certain state and local tax benefits.subsidiaries. During 2011,2012, the valuation allowance decreased by $481614 million predominantlylargely related to the realization of state and local tax benefits.

At December 31, 20112012, 20102011 and 20092010, JPMorgan Chase’s unrecognized tax benefits, excluding related interest expense and penalties, were $7.2 billion, $7.87.2 billion and $6.67.8 billion, respectively, of which $4.04.2 billion, $3.84.0 billion and $3.53.8 billion, respectively, if recognized, would reduce the annual effective tax rate. Included in the amount of unrecognized tax benefits are certain items that would not affect the effective tax rate if they were recognized in the Consolidated Statements of Income. These unrecognized items include the tax effect of certain temporary differences, the portion of gross state and local unrecognized tax benefits that would be offset by the benefit from associated U.S. federal income tax deductions, and the portion of gross non-U.S. unrecognized tax benefits that would have offsets in other jurisdictions. 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 twelve12 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, 20112012, 20102011 and 20092010.


Unrecognized tax benefits    
Year ended December 31,
(in millions)
 2011
 2010
 2009
Balance at January 1, $7,767
 $6,608
 $5,894
Increases based on tax positions related to the current period 516
 813
 584
Decreases based on tax positions related to the current period (110) (24) (6)
Increases based on tax positions related to prior periods 496
 1,681
 703
Decreases based on tax positions related to prior periods (1,433) (1,198) (322)
Decreases related to settlements with taxing authorities (16) (74) (203)
Decreases related to a lapse of applicable statute of limitations (31) (39) (42)
Balance at December 31, $7,189
 $7,767
 $6,608
304JPMorgan Chase & Co./2012 Annual Report


Unrecognized tax benefits
Year ended December 31,
(in millions)
 2012
 2011
 2010
Balance at January 1, $7,189
 $7,767
 $6,608
Increases based on tax positions related to the current period 680
 516
 813
Decreases based on tax positions related to the current period —
 (110) (24)
Increases based on tax positions related to prior periods 234
 496
 1,681
Decreases based on tax positions related to prior periods (853) (1,433) (1,198)
Decreases related to settlements with taxing authorities (50) (16) (74)
Decreases related to a lapse of applicable statute of limitations (42) (31) (39)
Balance at December 31, $7,158
 $7,189
 $7,767
After-tax interest expense/(benefit) and penalties related to income tax liabilities recognized in income tax expense were $184147 million, $(54)184 million and $101(54) million in 20112012, 20102011 and 20092010, respectively.
At December 31, 20112012 and 20102011, in addition to the liability for unrecognized tax benefits, the Firm had accrued $1.71.9 billion and $1.61.7 billion, respectively, for income tax-related 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, 20112012.


280JPMorgan Chase & Co./2011 Annual Report


December 31, 20112012 Periods under examination Status
JPMorgan Chase – U.S. 1993 – 2002Refund claims under review
JPMorgan Chase – U.S.
2003 –- 2005(a)
 Field examination completed, JPMorgan Chase intends to file refund claims
Bank OneJPMorgan Chase – U.S. 2000 – 20042006 - 2010 Refund claims under review
Bear Stearns – U.S.2003 – 2005In appeals processField examination
Bear Stearns – U.S. 2006 – 2008 Field examination
JPMorgan Chase – United Kingdom 2006 – 2010 Field examination
JPMorgan Chase – New York State and City 2005 – 2007 Field examination
JPMorgan Chase – California 2006 – 2008 Field examination
(a)
JPMorgan Chase anticipates that the IRS will commence in 2012 anexamination 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, 20112012, 20102011 and 20092010.
Income before income tax expense - U.S. and non-U.S.Income before income tax expense - U.S. and non-U.S.
Year ended December 31,
(in millions)
 2011
 2010
 2009
 2012
 2011
 2010
U.S. $16,336
 $16,568
 $6,263
 $24,895
 $16,336
 $16,568
Non-U.S.(a)
 10,413
 8,291
 9,804
 4,022
 10,413
 8,291
Income before income tax and extraordinary gain $26,749
 $24,859
 $16,067
Income before income tax expense $28,917
 $26,749
 $24,859
(a)For purposes of this table, non-U.S. income is defined as income generated from operations located outside the U.S.



JPMorgan Chase & Co./2012 Annual Report305
Notes to consolidated financial statements

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 Firm’s bank subsidiaries with various Federal Reserve Banks was approximately $4.45.6 billion and $803 million4.4 billion in 20112012 and 20102011, 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 subsidiary’s total capital, as determined by the risk-based capital guidelines; the aggregate amount of all such loans is limited to 20% of the banking subsidiary’s total capital.
The principal sources of JPMorgan Chase’s 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
dividend restrictions set forth in statutes and regulations, the Federal Reserve, the OCC and the FDIC have authority under the Financial Institutions Supervisory Act to prohibit or to limit the payment of dividends by the banking organizations they supervise, including JPMorgan Chase and its subsidiaries that are banks or bank holding companies, if, in the banking regulator’s opinion, payment of a dividend would constitute an unsafe or unsound practice in light of the financial condition of the banking organization.
At January 1, 2012,2013, JPMorgan Chase’s banking subsidiaries could pay, in the aggregate, $7.418.4 billion in dividends to their respective bank holding companies without the prior approval of their relevant banking regulators. The capacity to pay dividends in 20122013 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, 20112012 and 20102011, cash in the amount of $25.425.1 billion and $25.025.4 billion, respectively, and securities with a fair value of $23.40.7 billion and $9.716.1 billion, respectively, were segregated in special bank accounts for the benefit of securities and futures brokerage customers. In addition, as of December 31, 20112012 and 20102011, the Firm had other restricted cash of $4.23.4 billion and $2.74.2 billion, respectively, primarily representing cash reserves held at non-U.S. central banks and held for other general purposes.
Note 28 – Regulatory capital
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 Firm’s 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. Risk-weighted assets (“RWA”) consist of on– and off–balance sheet assets that are assigned to one of several broad risk categories and weighted by factors representing their risk and potential for default. On–balance 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, and derivatives, 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. Risk-weighted assets 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 risk-weighted assets.
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, 20112012 and 20102011, JPMorgan Chase and all of its banking subsidiaries were well-capitalized and met all capital requirements to which each was subject.


306JPMorgan Chase & Co./20112012 Annual Report281
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, 20112012 and 20102011. These amounts are determined in accordance with regulations issued by the Federal Reserve and/or OCC. The following table reflects an adjustment to RWA to reflect regulatory guidance regarding a limited number of market risk models used for certain positions held by the Firm and JPMorgan Chase Bank, N.A. during the first half of 2012, including the synthetic credit portfolio. In the fourth quarter of 2012, the adjustment to RWA decreased substantially as a result of regulatory approval of certain market risk models and a reduction in related positions.
December 31,
JPMorgan Chase & Co.(e)
 
JPMorgan Chase Bank, N.A.(e)
 
Chase Bank USA, N.A.(e)
 
Well-capitalized ratios(f)
 
Minimum capital ratios(f)
 
JPMorgan Chase & Co.(d)
 
JPMorgan Chase Bank, N.A.(d)
 
Chase Bank USA, N.A.(d)
 
Well-capitalized ratios(e)
 
Minimum capital ratios(e)
 
(in millions, except ratios)2011 2010 2011 2010 2011 2010  2012 2011 2012 2011 2012 2011  
Regulatory capital                                
Tier 1(a)
$150,384
 $142,450
 $98,426
 $91,764
 $11,903
 $12,966
     $160,002
 $150,384
 $111,827
 $98,426
 $9,648
 $11,903
     
Total188,088
 182,216
 136,017
 130,444
 15,448
 16,659
     194,036
 188,088
 146,870
 136,017
 13,131
 15,448
     
                                
Assets                                
Risk-weighted(c)(b)
$1,221,198
 $1,174,978
 $1,042,898
 $965,897
 $107,421
 $116,992
     $1,270,378
 $1,221,198
 $1,094,155
 $1,042,898
 $103,593
 $107,421
     
Adjusted average(d)(c)
2,202,087
 2,024,515
 1,789,194
 1,611,486
 106,312
 117,368
     2,243,242
 2,202,087
 1,815,816
 1,789,194
 103,688
 106,312
     
                                
Capital ratios                                
Tier 1(a)
12.3% 12.1% 9.4% 9.5% 11.1% 11.1% 6.0% 4.0% 12.6% 12.3% 10.2% 9.4% 9.3% 11.1% 6.0% 4.0% 
Total15.4
 15.5
 13.0
 13.5
 14.4
 14.2
 10.0
 8.0
 15.3
 15.4
 13.4
 13.0
 12.7
 14.4
 10.0
 8.0
 
Tier 1 leverage6.8
 7.0
 5.5
 5.7
 11.2
 11.0
 5.0
(g) 
3.0
(h) 
7.1
 6.8
 6.2
 5.5
 9.3
 11.2
 5.0
(f) 
3.0
(g) 
(a)
JPMorgan Chase redeemed $9.0 billion of trust preferred securities effective July 12, 2012. At December 31, 20112012, for JPMorgan Chase and JPMorgan Chase Bank, N.A., trust preferred capital debt securities were $19.610.2 billion and $600 million, respectively. If these securities were excluded from the calculation at December 31, 20112012, Tier 1 capital would be $130.8149.8 billion and $97.8111.2 billion, respectively, and the Tier 1 capital ratio would be 10.7%11.8% and 9.4%10.2%, respectively. At December 31, 20112012, Chase Bank USA, N.A. had no trust preferred capital debt securities.
(b)Risk-weighted assets consist of on– and off–balance sheet assets that are assigned to one of several broad risk categories and weighted by factors representing their risk and potential for default. On–balance 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 off–balance 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. Risk-weighted assets 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 risk-weighted assets.
(c)
Includes off–balance sheet risk-weighted assets at December 31, 2012, of $304.5 billion, $297.1 billion and $16 million, and 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)(c)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)(d)
Asset and capital amounts for JPMorgan Chase’s banking subsidiaries reflect intercompany transactions; whereas the respective amounts for JPMorgan Chase reflect the elimination of intercompany transactions.
(f)(e)As defined by the regulations issued by the Federal Reserve, OCC and FDIC.
(g)(f)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)(g)
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 $414291 million and $647414 million at December 31, 20112012 and 20102011, respectively; and deferred tax liabilities resulting from tax-deductible goodwill of $2.32.5 billion and $1.92.3 billion at December 31, 20112012 and 20102011, respectively.




282JPMorgan Chase & Co./20112012 Annual Report307

Notes to consolidated financial statements

A reconciliation of the Firm’s Total stockholders’ equity to Tier 1 capital and Total qualifying capital is presented in the table below.
December 31, (in millions) 2011
 2010
 2012
 2011
Tier 1 capital        
Total stockholders’ equity $183,573
 $176,106
 $204,069
 $183,573
Effect of certain items in accumulated other comprehensive income/(loss) excluded from Tier 1 capital (970) (748) (4,198) (970)
Qualifying hybrid securities and noncontrolling interests(a)
 19,668
 19,887
 10,608
 19,668
Less: Goodwill(b)
 45,873
 46,915
 45,663
 45,873
Fair value DVA on derivative and structured note liabilities related to the Firm’s credit quality 2,150
 1,261
Investments in certain subsidiaries and other 993
 1,032
Fair value DVA on structured notes and derivative liabilities related to the Firm’s credit quality 1,577
 2,150
Investments in certain subsidiaries 926
 993
Other intangible assets(b)
 2,871
 3,587
 2,311
 2,871
Total Tier 1 capital 150,384
 142,450
 160,002
 150,384
Tier 2 capital        
Long-term debt and other instruments qualifying as Tier 2 22,275
 25,018
 18,061
 22,275
Qualifying allowance for credit losses 15,504
 14,959
 15,995
 15,504
Adjustment for investments in certain subsidiaries and other (75) (211) (22) (75)
Total Tier 2 capital 37,704
 39,766
 34,034
 37,704
Total qualifying capital $188,088
 $182,216
 $194,036
 $188,088
(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.

 
Note 29 – Off–balance sheet lending-related financial instruments, guarantees, and other commitments
JPMorgan Chase provides lending-related financial instruments (e.g., commitments and guarantees) to meet the financing needs of its customers. The contractual amount of these financial instruments represents the maximum possible credit risk to the Firm should the counterparty draw upon the commitment or the Firm be required to fulfill its obligation under the guarantee, and should the counterparty subsequently fail to perform according to the terms of the contract. Most of these commitments and guarantees expire without being drawn or a default occurring. As a result, the total contractual amount of these instruments is not, in the Firm’s view, representative of its actual future credit exposure or funding requirements.
To provide for the risk of loss inherent in wholesale and consumer (excluding credit card) and wholesale contracts, an allowance for credit losses on lending-related commitments is maintained. See Note 15 on pages 252–255276–279 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, 20112012 and 20102011. 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.


308JPMorgan Chase & Co./20112012 Annual Report283
Notes to consolidated financial statements

Off–balance sheet lending-related financial instruments, guarantees and other commitments

Off–balance sheet lending-related financial instruments, guarantees and other commitments

 
Off–balance sheet lending-related financial instruments, guarantees and other commitments

 
Contractual amount 
Carrying value(i)
Contractual amount 
Carrying value(h)
2011 2010 201120102012 2011 20122011
By remaining maturity at December 31,
(in millions)
Expires in 1 year or lessExpires after
1 year through
3 years		Expires after
3 years through
5 years		Expires after 5 yearsTotal Total  Expires in 1 year or lessExpires after
1 year through
3 years		Expires after
3 years through
5 years		Expires after 5 yearsTotal Total  
Lending-related          
Consumer, excluding credit card:          
Home equity – senior lien$933
$4,780
$4,870
$5,959
$16,542
 $17,662
 $—
$—
$2,039
$5,208
$4,848
$3,085
$15,180
 $16,542
 $—
$—
Home equity – junior lien2,096
8,964
8,075
7,273
26,408
 30,948
 —
—
3,739
8,343
6,361
3,353
21,796
 26,408
 —
—
Prime mortgage1,500
—
—
—
1,500
 1,266
 —
—
4,107
—
—
—
4,107
 1,500
 —
—
Subprime mortgage—
—
—
—
—
 —
 —
—
—
—
—
—
—
 —
 —
—
Auto6,431
97
149
17
6,694
 5,246
 1
2
6,916
111
127
31
7,185
 6,694
 1
1
Business banking9,480
430
63
326
10,299
 9,702
 6
4
10,160
476
94
362
11,092
 10,299
 6
6
Student and other82
169
127
486
864
 579
 —
—
128
189
8
471
796
 864
 —
—
Total consumer, excluding credit card20,522
14,440
13,284
14,061
62,307
 65,403
 7
6
27,089
14,327
11,438
7,302
60,156
 62,307
 7
7
Credit card530,616
—
—
—
530,616
 547,227
 —
—
533,018
—
—
—
533,018
 530,616
 —
—
Total consumer551,138
14,440
13,284
14,061
592,923
 612,630
 7
6
560,107
14,327
11,438
7,302
593,174
 592,923
 7
7
Wholesale:







     







     
Other unfunded commitments to extend credit(a)(b)
61,083
61,628
87,830
4,710
215,251
 199,859
 347
364
57,443
81,575
97,394
6,813
243,225
 215,251
 377
347
Standby letters of credit and other financial guarantees(a)(b)(c)(d)
27,982
34,671
36,448
2,798
101,899
 94,837
 696
705
28,641
31,270
39,076
1,942
100,929
 101,899
 647
696
Unused advised lines of credit46,695
11,324
327
1,857
60,203
 44,720
 —
—
73,967
10,328
375
417
85,087
 60,203
 —
—
Other letters of credit(a)(d)
4,218
1,020
148
—
5,386
 6,663
 2
2
4,276
1,169
74
54
5,573
 5,386
 2
2
Total wholesale139,978
108,643
124,753
9,365
382,739
 346,079
 1,045
1,071
164,327
124,342
136,919
9,226
434,814
 382,739
 1,026
1,045
Total lending-related$691,116
$123,083
$138,037
$23,426
$975,662
 $958,709
 $1,052
$1,077
$724,434
$138,669
$148,357
$16,528
$1,027,988
 $975,662
 $1,033
$1,052
Other guarantees and commitments          
Securities lending indemnifications(e)
$186,077
$—
$—
$—
$186,077
 $181,717
 NA
NA
Securities lending indemnification agreements and guarantees(e)
$166,493
$—
$—
$—
$166,493
 $186,077
 NA
NA
Derivatives qualifying as guarantees(f)
2,998
5,117
31,097
36,381
75,593
 87,768
 $457
$294
2,336
2,441
19,946
37,015
61,738
 75,593
 $42
$457
Unsettled reverse repurchase and securities borrowing agreements(f)39,939
—
—
—
39,939
 39,927
 —
—
34,871
—
—
—
34,871
 39,939
 —
—
Loan sale and securitization-related indemnifications:          
Mortgage repurchase liability(g)
 NA
 NA
 NA
 NA
NA
 NA
 3,557
3,285
 NA
 NA
 NA
 NA
NA
 NA
 2,811
3,557
Loans sold with recourse NA
 NA
 NA
 NA
10,397
 10,982
 148
153
 NA
 NA
 NA
 NA
9,305
 10,397
 141
148
Other guarantees and commitments(h)(g)
1,030
279
299
4,713
6,321
 6,492
 (5)(6)609
319
1,400
4,452
6,780
 6,321
 (75)(5)
(a)
At December 31, 20112012 and 20102011, reflects the contractual amount net of risk participations totaling $1.1 billion473 million and $542 million1.1 billion, respectively, for other unfunded commitments to extend credit; $19.816.6 billion and $22.419.8 billion, respectively, for standby letters of credit and other financial guarantees; and $974690 million and $1.1 billion974 million, 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, 20112012 and 20102011, included credit enhancements and bond and commercial paper liquidity commitments to U.S. states and municipalities, hospitals and other not-for-profitnon-profit entities of $48.644.5 billion and $43.448.6 billion, respectively. These commitments also include liquidity facilities to nonconsolidated municipal bond VIEs; for further information, see Note 16 on pages 256–267280–291 of this Annual Report.
(c)
At December 31, 20112012 and 20102011, included unissued standby letters of credit commitments of $44.144.4 billion and $41.644.1 billion, respectively.
(d)
At December 31, 20112012 and 20102011, JPMorgan Chase held collateral relating to $41.542.7 billion and $37.841.5 billion, respectively, of standby letters of credit; and $1.31.1 billion and $2.11.3 billion, respectively, of other letters of credit.
(e)
At December 31, 20112012 and 20102011, collateral held by the Firm in support of securities lending indemnification agreements was $186.3165.1 billion and $185.0186.3 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
At December 31, 2012 and 2011, the amount of derivatives qualifying as guarantees.commitments related to forward-starting reverse repurchase agreements and securities borrowing agreements were $13.2 billion and $14.4 billion, respectively. Commitments related to unsettled reverse repurchase agreements and securities borrowing agreements with regular-way settlement periods were $21.7 billion and $25.5 billion, at December 31, 2012 and 2011, respectively.
(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 286–287 of this Note.
(h)
At December 31, 20112012 and 20102011, included unfunded commitments of $789370 million and $1.0 billion789 million, respectively, to third-party private equity funds; and $1.5 billion and $1.41.5 billion, respectively, to other equity investments. These commitments included $820333 million and $1.0 billion820 million, respectively, related to investments that are generally fair valued at net asset value as discussed in Note 3 on pages 184–198196–214 of this Annual Report. In addition, at December 31, 20112012 and 20102011, included letters of credit hedged by derivative transactions and managed on a market risk basis of $3.94.5 billion and $3.83.9 billion, respectively.
(i)(h)For lending-related products, the carrying value represents the allowance for lending-related commitments and the guarantee liability; for derivative-related products, the carrying value represents the fair value. For all other products the carrying value represents the valuation reserve.

284JPMorgan Chase & Co./20112012 Annual Report309

Notes to consolidated financial statements

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.investors as well as committed liquidity facilities to clearing organizations.
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 $6.18.8 billion and $5.96.1 billion at December 31, 20112012 and 20102011, respectively. For further information, see Note 3 and Note 4 on pages 184–198196–214 and 198–200214–216 respectively, of this Annual Report.
In addition, the Firm acts as a clearing and custody bank in the U.S. tri-party repurchase transaction market. In its role as clearing and custody bank, the Firm is exposed to intra-day credit risk of the cash borrowers, usually broker-dealers; however, this exposure is secured by collateral and typically extinguished through the settlement process by the end of the day. For the three months endedDecember 31, 2012, the tri-party repurchase daily balances averaged $409 billion.
Guarantees
U.S. GAAP requires that a guarantor recognize, at the inception of a guarantee, a liability in an amount equal to the fair value of the obligation undertaken in issuing the guarantee. U.S. GAAP defines a guarantee as a contract that contingently requires the guarantor to pay a guaranteed party based upon: (a) changes in an underlying asset, liability or equity security of the guaranteed party; or (b) a third party’s failure to perform under a specified agreement. The Firm considers the following off–balance sheet lending-related arrangements to be guarantees under U.S. GAAP: standby letters of credit and financial guarantees, securities lending indemnifications, certain indemnification agreements included within third-party contractual arrangements and certain derivative contracts.
As required by U.S. GAAP, the Firm initially records guarantees at the inception date fair value of the obligation assumed (e.g., the amount of consideration received or the net present value of the premium receivable). For certain types of guarantees, the Firm records this fair value amount in other liabilities with an offsetting entry recorded in cash (for premiums received), or other assets (for premiums
receivable). Any premium receivable recorded in other assets is reduced as cash is received under the contract, and the fair value of the liability recorded at inception is amortized into income as lending and deposit-related fees over the life of the guarantee contract. For indemnifications provided in sales agreements, a portion of the sale proceeds is allocated to the guarantee, which adjusts the gain or loss that would otherwise result from the transaction. For these indemnifications, the initial liability is amortized to income as the Firm’s risk is reduced (i.e., over time or when the indemnification expires). Any contingent liability that exists as a result of issuing the guarantee or indemnification is recognized when it becomes probable and reasonably estimable. The contingent portion of the liability is not recognized if the estimated amount is less than the carrying amount of the liability recognized at inception (adjusted for any amortization). The recorded amounts of the liabilities related to guarantees and indemnifications at December 31, 20112012 and 20102011, excluding the allowance for credit losses on lending-related commitments, are discussed below.


310JPMorgan Chase & Co./2012 Annual Report


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
$698649 million and $707698 million at December 31, 20112012 and 20102011, respectively, which were classified in accounts payable and other liabilities on the Consolidated Balance Sheets; these carrying values included $319284 million and $347319 million, respectively, for the allowance for lending-related commitments, and $379365 million and $360379 million, respectively, for the guarantee liability and corresponding asset.


The following table summarizes the types of facilities under which standby letters of credit and other letters of credit arrangements are outstanding by the ratings profiles of the Firm’s customers, as of December 31, 20112012 and 20102011.
Standby letters of credit, other financial guarantees and other letters of credit
2011 20102012 2011
December 31,
(in millions)
Standby letters of
credit and other financial guarantees
Other letters
of credit
 
Standby letters of
credit and other financial guarantees
Other letters
of credit
Standby letters of
credit and other financial guarantees
Other letters
of credit
 
Standby letters of
credit and other financial guarantees
Other letters
of credit
Investment-grade(a)
 $78,884
 $4,105
 $70,236
 $5,289
 $77,081
 $3,998
 $78,884
 $4,105
Noninvestment-grade(a)
 23,015
 1,281
 24,601
 1,374
 23,848
 1,575
 23,015
 1,281
Total contractual amount(b)
 $101,899
(c) 
$5,386
 $94,837
(c) 
$6,663
 $100,929
(b) 
$5,573
 $101,899
(b) 
$5,386
Allowance for lending-related commitments $317
 $2
 $345
 $2
 $282
 $2
 $317
 $2
Commitments with collateral 41,529
 1,264
 37,815
 2,127
 42,654
 1,145
 41,529
 1,264
(a)The ratings scale is based on the Firm’s internal ratings which generally correspond to ratings as defined by S&P and Moody’s.
(b)
At December 31, 20112012 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.
(c)
At December 31, 2011 and 2010, included unissued standby letters of credit commitments of $44.144.4 billion and $41.644.1 billion, respectively.






JPMorgan Chase & Co./2011 Annual Report285
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 Firm’s 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 third-party borrower to return the lent securities in the event the Firm did not obtain sufficient collateral.securities. To minimize its liability under these indemnification agreements, the Firm obtains cash or other highly liquid collateral with a market value exceeding 100% of the value of the securities on loan from the borrower. Collateral is marked to market daily to help assure that collateralization is adequate. Additional collateral is called from the borrower if a shortfall exists, or collateral may be released to the borrower in the event of overcollateralization. If a borrower defaults, the Firm would use the collateral held to purchase replacement securities in the market or to credit the lending 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 counterparty’s reference portfolio of assets in the event that market value is less than book value and certain other conditions have been met. Stable value 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.


JPMorgan Chase & Co./2012 Annual Report311
Notes to consolidated financial statements

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 $75.661.7 billion and $87.875.6 billion at December 31, 20112012 and 20102011, respectively. The notional amount generally represents the Firm’s 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
these stable value contracts was $26.126.5 billion and $25.926.1 billion and the maximum exposure to loss was $2.8 billion and $2.72.8 billion, at December 31, 20112012 and 20102011, 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 $555122 million and $390555 million and derivative receivables of $9880 million and $9698 million at December 31, 20112012 and 20102011, 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 202–210218–227 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, 20112012 and 20102011, the amount of commitments related to forward starting reverse repurchase agreements and securities borrowing agreements were $14.413.2 billion and $14.4 billion, respectively. Commitments related to unsettled reverse repurchase agreements and securities borrowing agreements with regular way settlement periods were $25.521.7 billion and $25.5 billion at December 31, 20112012 and 20102011, respectively.
Loan sales- and securitization-related indemnifications
Mortgage repurchase liability
In connection with the Firm’s loan sale and securitization activities with the GSEs and other loan sale and private-label securitization transactions, as described in Note 16 on pages 256–267280–291 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


286JPMorgan 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 Firm’s 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 Firm’s position that such obligations remain with the FDIC receivership. TheAs of December 31, 2012, the Firm will continuebelieves that it has no remaining exposure related to evaluate and may pay (subjectloans sold by Washington Mutual to reserving its rights for indemnificationthe GSEs.
There have been generalized allegations, as well as specific demands, that the Firm repurchase loans sold or deposited into private-label securitizations (including claims from insurers that have guaranteed certain obligations of the securitization trusts). Although the Firm encourages parties to use the contractual repurchase process established in the governing agreements, these private-label repurchase claims have generally manifested themselves through threatened or pending litigation. Accordingly, the liability related to repurchase demands associated with all of the private-label securitizations is separately evaluated by the FDIC) certain future repurchase demands related to individual loans, subject to certain limitations, and has considered such potential repurchase demandsFirm in establishing its repurchase liability.litigation reserves. For additional information regarding litigation, see Note 31 on pages 316–325 of this Annual Report.


312JPMorgan Chase & Co./2012 Annual Report


To estimate the Firm’s 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 Firm’s 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 Firm’s 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 $3.62.8 billion and $3.33.6 billion, as of December 31, 20112012 and 20102011, respectively, which is reported in accounts payable and other liabilities net of probable recoveries from third-party correspondentsoriginators of $577441 million and $517577 million at December 31, 20112012 and 20102011, respectively. The Firm’s mortgage repurchase liability is intended to cover losses associated with all loans previously sold in connection with loan sale and securitization transactions with the GSEs, regardless of when those losses occur or how they are ultimately resolved (e.g., repurchase, make-whole payment). The liability related to all repurchase demands associated with private-label securitizations is separately evaluated by the Firm in establishing its litigation reserves.
Substantially all of the estimates and assumptions underlying the Firm’s 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 GSEs (based on both historical experience and the Firm’s expectations about the GSEs future behavior), 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, 20112012, 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 $20.9 billion at December 31, 20112012. This estimated range of reasonably possible loss considers the Firm'sFirm’s GSE-related exposure based on an assumed peak to trough decline in home prices of 44%40%, which is an additional 910 percentage point decline in home prices beyond the Firm’s current assumptions which(which were derived from a nationally recognized home price index.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 levellevels of loan delinquencies, thereby potentially increasingwhich may, in turn, increase the level of repurchase demand ratedemands from the GSEs and increasingpotentially result in additional repurchases of loans at greater loss severity on repurchased loans,severities; each of whichthese factors could affect the Firm’s 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 Firm’s 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)
2011 2010 2009 2012 2011 2010 
Repurchase liability at beginning of period$3,285
 $1,705
 $1,093
 $3,557
 $3,285
 $1,705
 
Realized losses(b)
(1,263) (1,423) (1,253)
(d) 
(1,158) (1,263) (1,423) 
Provision for repurchase losses(c)1,535
 3,003
 1,865
 412
 1,535
 3,003
 
Repurchase liability at end of period$3,557
(c) 
$3,285
 $1,705
 $2,811
 $3,557
 $3,285
 
(a)MortgageAll mortgage repurchase liabilitiesdemands associated with pending or threatened litigationprivate-label securitizations are not reported in this table becauseseparately evaluated by 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. ForMake-whole settlements were $524 million, $640 million and $632 million, for the years ended December 31, 20112012, 20102011 and 2009, make-whole settlements were and $640 million, $632 million and $277 million2010, respectively.
(c)
Includes $173112 million at, $52 million and $47 million of provision related to new loan sales for the years ended December 31, 20112012, related to future demands on loans sold by Washington Mutual to the GSEs.2011 and 2010, respectively.


(d)JPMorgan Chase & Co./2012 Annual ReportIncludes the Firm’s resolution of certain current and future repurchase demands for certain loans sold by Washington Mutual.313
Notes to consolidated financial statements

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


JPMorgan Chase & Co./2011 Annual Report287
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 Firm’s securitizations are predominantly nonrecourse, thereby effectively transferring the risk of future credit losses to the purchaser of the mortgage-backed securities issued by the trust. At December 31, 20112012 and 20102011, the unpaid principal balance of loans sold with recourse totaled $10.49.3 billion and $11.010.4 billion, respectively. The carrying value of the related liability that the Firm has recorded, which is representative of the Firm’s view of the likelihood it will have to perform under its recourse obligations, was $148141 million and $153148 million at December 31, 20112012 and 20102011, 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 Firm’s maximum exposure under these indemnification arrangements, since this would require an assessment of future changes in tax law and future claims that may be made against the Firm that have not yet occurred. However, based on historical experience, management expects the risk of loss to be remote.
Credit card charge-backs
Chase Paymentech Solutions, Card’s 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 cardmember’s favor, Chase Paymentech will (through the cardmember’s issuing bank) credit or refund the amount to the cardmember and will charge back the transaction to the
merchant. If 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, 2012, Chase Paymentech incurred aggregate credit losses of $16 million on $655.2 billion of aggregate volume processed, and at December 31, 2012, it held $203 million of collateral. 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 Firm’s 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 Firm’s contribution to a member’s guarantee fund, or, in a few cases, the obligation may be unlimited. It is difficult to estimate the Firm’s 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


314JPMorgan Chase & Co./2012 Annual Report


if clients do not adhere to their obligations under the clearing agreement. It is difficult to estimate the Firm'sFirm’s maximum exposure under such transactions, as this would


288JPMorgan Chase & Co./2011 Annual Report


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 Firm’s counterparties. The obligations of the subsidiaries are included on the Firm’s Consolidated Balance Sheets, or are reflected as off-balance sheet commitments; therefore, the Parent Company has not recognized a separate liability for these guarantees. The Firm believes that the occurrence of any event that would trigger payments by the Parent Company under these guarantees is remote.
The Parent Company has guaranteed certain debt of its subsidiaries, including both long-term debt and structured notes sold as part of the Firm’s market-making activities. These guarantees are not included in the table on page 284309 of this Note. For additional information, see Note 21 on pages 273–275297–299 of this Annual Report.
Note 30 – Commitments, pledged assets and collateral
Lease commitments
At December 31, 20112012, 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 Firm’s ability to pay dividends, engage in debt or equity financing transactions or enter into further lease agreements.
The following table presents required future minimum rental payments under operating leases with noncancelable lease terms that expire after December 31, 20112012.
Year ended December 31, (in millions)  
2012$1,753
20131,758
$1,788
20141,577
1,711
20151,438
1,571
20161,300
1,431
After 20167,188
20171,318
After 20176,536
Total minimum payments required(a)
15,014
14,355
Less: Sublease rentals under noncancelable subleases(1,542)(1,732)
Net minimum payment required$13,472
$12,623
(a)Lease restoration obligations are accrued in accordance with U.S. GAAP, and are not reported as a required minimum lease payment.
Total rental expense was as follows.
Year ended December 31,            
(in millions) 2011 2010 2009 2012 2011 2010
Gross rental expense $2,228
 $2,212
 $1,884
 $2,212
 $2,228
 $2,212
Sublease rental income (403) (545) (172) (288) (403) (545)
Net rental expense $1,825
 $1,667
 $1,712
 $1,924
 $1,825
 $1,667
Pledged assets
At December 31, 20112012, assets were pledged to collateralize repurchase agreements,and other securities financing agreements, derivative transactionsmaintain potential borrowing capacity with central banks 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, 20112012 and 20102011, the Firm had pledged $270.3291.7 billion and $288.7270.3 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. See Note 16 on pages 280–291 of this Annual Report for additional information on assets and liabilities of consolidated VIEs. For additional information on the Firm’s securities financing activities and long-term debt, see Note 13 on page 249, and Note 21 on pages 297–299, respectively, of this Annual report. The significant components of the Firm’s pledged assets were as follows.
December 31, (in billions) 2011 2010 2012 2011
Securities $134.8
 $112.1
 $110.1
 $134.8
Loans 198.6
 214.8
 207.2
 198.6
Trading assets and other 122.8
 123.2
 155.5
 122.8
Total assets pledged(a)
 $456.2
 $450.1
 $472.8
 $456.2



(a)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 thisJPMorgan Chase & Co./2012 Annual Report for additional information on assets and liabilities of consolidated VIEs.315
Notes to consolidated financial statements

Collateral
At December 31, 20112012 and 20102011, the Firm had accepted assets as collateral that it could sell or repledge, deliver or otherwise use with a fair value of approximately $742.1825.7 billion and $655.0742.1 billion, respectively. This collateral was generally obtained under resale agreements, securities borrowing agreements, customer margin loans and derivative agreements. Of the collateral received, approximately $515.8546.8 billion and $521.3515.8 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.


JPMorgan Chase & Co./2011 Annual Report289
Notes to consolidated financial statements

Note 31 – Litigation
Contingencies
As of December 31, 2011,2012, 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 self-regulatory organizations. These legal proceedings are at varying stages of adjudication, arbitration or investigation, and involve each of the Firm’s lines of business and geographies and a wide variety of claims (including common law tort and contract claims and statutory antitrust, securities and consumer protection claims), some of which present novel legal theories.
The Firm believes the estimate of the aggregate range of reasonably possible losses, in excess of reserves established, for its legal proceedings is from $0 to approximately $5.16.1 billion at December 31, 2011.2012. 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 Firm’s 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 Firm’s 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 Firm’s estimate will change from time to time, and actual losses may be more or less than the current estimate.
Set forth below are descriptions of the Firm’s 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.securities (“ARS”). 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 General’s Office which provided, among other things, that the Firm would offer to purchase at par certain auction-rate securitiesARS 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
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 General’s 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 NASAA’s member states; more than 45 of thesestates and territories. To date, final consent agreements have been finalized to date.reached with all but three of NASAA’s members.
The Firm also faces a number of civil actions relating to the Firm’s 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 securitiesARS market and then to withdraw their support for the auction-rate securitiesARS 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.
Bank Secrecy Act/Anti-Money Laundering. In January 2013, JPMorgan Chase & Co. entered into a Consent Order with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and JPMorgan Chase Bank, N.A., JPMorgan Bank and Trust Company, N.A. and Chase Bank USA, N.A. entered into a Consent Order with the Office of the Comptroller of the Currency (the “OCC”) relating principally to JPMorgan Chase & Co.’s and such banks’ policies, procedures and controls relating to compliance with Bank Secrecy Act and Anti-Money Laundering requirements. The Firm neither admitted nor denied the regulatory agencies’ findings in the orders.
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


316JPMorgan Chase & Co./2012 Annual Report


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


290JPMorgan Chase & Co./2011 Annual Report


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 reservedIn April 2012, the right not to proceed withDistrict Court granted final approval of 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 partnershipsettlement. In May 2012, objectors representing certain interests in the U.S. feeder fund filed a notice of appeal to the High Grade Fund, and was dismissed following a Court-approved settlement with similar terms, pursuant to which BSAM paid approximately United States Court of Appeals for the Second Circuit from the District Court’s final approval of the settlement. That appeal is currently pending.
$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,funds. This action alleges net losses of approximately $700 million and seeks compensatory and punitive damages. The parties presently are engagedrecently reached an agreement in discovery.
principle to resolve the litigation contingent on the execution of a written settlement agreement. The third action was brought by Bank of America and Banc of America Securities LLC (together “BofA”) alleging breach of contract, fraud and fraudbreach of fiduciary duty 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 ofcurrently seeks damages up to approximately $3 billion540 million 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.. Motions for summary judgment are pending.
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, allegealleged 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 theirNovember 2012, the United
 
own arbitration proceedings and lawsuits asserting claims similar to those inStates District Court for the putative class actions. CertainSouthern District of these matters have been dismissed or settled.
Separately, an agreement in principle has been reached to resolveNew York granted final approval of 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 $10275 million. settlement.
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 in January 2011, and plaintiffs have appealed. The appeal has been withdrawn pursuant to a stipulation that gives plaintiffs until March 1, 2013 to reinstate.
CIO Investigations and Litigation. The Firm is responding to a consolidated shareholder class action, a consolidated class action brought under the Employee Retirement Income Security Act (“ERISA”), shareholder derivative actions, shareholder demands and government investigations relating to losses in the synthetic credit portfolio managed by the Firm’s Chief Investment Office (“CIO”). The Firm has received requests for documents and information in connection with governmental inquiries and investigations by Congress, the OCC, the Federal Reserve, the U.S. Department of Justice (the “DOJ”), the Securities and Exchange Commission (the “SEC”), the Commodity Futures Trading Commission (the “CFTC”), the UK Financial Services Authority, the State of Massachusetts and other government agencies. The Firm is cooperating with these investigations.
Four putative class actions alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder were filed on behalf of purchasers of the Firm’s common stock. The cases were consolidated, lead plaintiffs were appointed pursuant to the Private Securities Litigation Reform Act, and a consolidated amended complaint was filed in November 2012 that defines the putative class as purchasers of the Firm’s common stock between February 24, 2010 and May 21, 2012. The consolidated amended complaint alleges that the Firm and certain current and former officers made false or misleading statements concerning CIO’s role, the Firm’s risk management practices and the Firm’s financial results, as well as in connection with the disclosure of losses in the synthetic credit portfolio in 2012.
Separately, two putative class actions were filed on behalf of participants who held the Firm’s common stock in the Firm’s retirement plans. These actions assert claims under ERISA for alleged breaches of fiduciary duties by the Firm, certain affiliates and certain current and former directors


JPMorgan Chase & Co./2012 Annual Report317
Notes to consolidated financial statements

and officers in connection with the management of those plans. The complaints generally allege that defendants breached the duty of prudence by allowing investment in the Firm’s common stock when they knew or should have known that such stock was unsuitable for the plans and that the Firm and certain current and former officers made false or misleading statements concerning the Firm’s financial condition. These actions have been consolidated, and a consolidated amended complaint was filed in December 2012 which alleges a class period of December 20, 2011 to July 12, 2012. The consolidated amended complaint contains allegations similar to those in the original complaints, but now asserts claims only on behalf of participants in the Firm’s 401(k) Savings Plan.
Four shareholder derivative actions have also been filed, purportedly on behalf of the Firm, against certain of the Firm’s current and former directors and officers for alleged breaches of their fiduciary duties. These actions generally allege that defendants failed to exercise adequate oversight over CIO and to manage the risk of CIO’s trading activities, which allegedly led to CIO’s losses. Two of these four actions have been consolidated, and a consolidated amended complaint was filed in December 2012. An amended complaint in one of the other derivative actions was filed in January 2013.
The consolidated securities action, consolidated ERISA action and the consolidated shareholder derivative action are pending in the United States District Court for the Southern District of New York, while the two other derivative actions are pending in New York State court. In October 2012, defendants moved to dismiss one of the two shareholder derivative actions pending in New York State court on the ground that plaintiff failed to make a demand on the Firm’s Board of Directors or adequately allege demand futility, as required by applicable Delaware law. Defendants have not yet responded to the complaints in any of the other actions.
In January 2013, JPMorgan Chase & Co. entered into a Consent Order with the Federal Reserve and JPMorgan Chase Bank, N.A. entered into a Consent Order with the OCC arising out of the Federal Reserve’s and the OCC’s reviews of the CIO, including the synthetic credit portfolio previously held by the CIO. The Consent Orders relate to risk management, model governance and other control functions related to CIO and certain other trading activities at the Firm. Many of the actions required by the Consent Orders have already been, or are in the process of being, implemented by the Firm.
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.plc (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 Firm has entered into a settlement agreement with the City to resolve the City’s 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.proceedings.
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. AlthoughThe verdict, rendered in December 2012, acquitted two of the Firm is not chargedJPMorgan Chase personnel and found the other two guilty of aggravated fraud with any crimesanctions of prison sentences (that were automatically suspended under applicable law), fines and does not face criminal liability, if a ban from dealing with Italian public bodies for one or moreyear. In addition, JPMorgan Chase (along with other banks involved) was found liable for breaches of Italian administrative law, fined €1 million and was ordered to forfeit its employees were found guilty,profit from the Firm could be subjecttransaction, which totaled €24.7 million. JPMorgan Chase and the individuals plan to administrativeappeal the verdict, and none of the sanctions including restrictions on its ability


JPMorgan Chase & Co./2011 Annual Report291
Notes to consolidated financial statements

to conduct business in Italy and monetary penalties. Hearingswill take effect until all appeal avenues have continued on a weekly basis since May 2010.been exhausted.
Enron Litigation. JPMorgan Chase and certain of its officers and directors are involved in severaltwo lawsuits seeking damages arising out of the Firm’s banking relationships with Enron Corp. and its subsidiaries (“Enron”). Motions to dismiss are pending in both of these lawsuits: an individual action by Enron investors and an action by an Enron counterparty. 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 Enron’s bankruptcy estate.
FERC Matters. The remaining Enron-related actions includeFederal Energy Regulatory Commission (the “FERC”) is investigating the Firm’s bidding practices in certain organized power markets. Additionally, in November 2012, the FERC issued an individual action by an Enron investor, an action by an Enron counterparty andOrder suspending a purported class action filed on behalf of JPMorgan Chase employees who participatedenergy subsidiary’s market-based rate authority for six months commencing on April 1, 2013, based on its finding that statements concerning discovery obligations made in the Firm’s 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 appealsubmissions related to the United States Court of Appeals for the Second Circuit. Motions to dismiss are pending in the other two actions.FERC investigation violated FERC rules regarding misleading information.
Interchange Litigation. A group of merchants hasand retail associations filed a series of putative class action complaints relating to interchange in several federal courts. The complaints allege, among other claims, 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 beenwere consolidated in the United States District Court for the Eastern District of New York for pretrial proceedings. The
In October 2012, Visa, Inc., its wholly-owned subsidiaries Visa U.S.A. Inc. and Visa International Service Association, MasterCard Incorporated, MasterCard International Incorporated and various United States financial institution defendants, including JPMorgan Chase & Co., JPMorgan


318JPMorgan Chase & Co./2012 Annual Report


Chase Bank, N.A., Chase Bank USA, N.A., Chase Paymentech Solutions, LLC and certain predecessor institutions, entered into a settlement agreement (the “Settlement Agreement”) to resolve the claims of the U.S. merchant and retail association plaintiffs (the “Class Plaintiffs”) in the multi-district litigation. In November 2012, the Court has dismissed all claims relating to periods prior to January 2004. The Court has not yet ruled on motions relatingentered an order preliminarily approving the Settlement Agreement, which provides for, among other things, a cash payment of $6.05 billion to the remainderClass Plaintiffs (of which the Firm’s share is approximately 20%), and an amount equal to ten basis points of credit card interchange for a period of eight months to be measured from a date within 60 days 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 7end of the Clayton Act and Section 1 ofopt-out period. The Settlement Agreement also provides for modifications to each credit card network’s rules, including those that prohibit surcharging credit card transactions. The rule modifications became effective in January 2013. The Settlement Agreement is subject to final approval by 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.Court.
Investment Management Litigation.FourThe Firm is defending three pending cases have been filed claimingthat allege that investment portfolios managed by J.P. Morgan Investment Management Inc. (“JPMorgan
Investment Management”) were inappropriately invested in securities backed by subprime residential real estate collateral. Plaintiffs claim that JPMorgan Investment Management and related defendants areis 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, plaintiff’s 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.) and the case filed by Ambac Assurance UK Limited in New York state court, discovery is proceeding on plaintiff’s claims for breach of contract, breach of fiduciary duty and gross negligence. In theThe third case, filed by Ambac Assurance UK Limited in New York state court, the lower court granted JPMorgan Investment Management’s motion to dismiss. The New York State Appellate Division reversed the lower court’s 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 deniedTrial of the CMMF action was completed in part defendants’ motion to dismissFebruary 2013, and discoverythe Court’s decision is proceeding.pending.
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 LBHI’s bankruptcy. The amended complaint also seeks unspecified damages on the grounds that JPMorgan Chase Bank, N.A.’s collateral requests hastened LBHI’s demise.bankruptcy. 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 onIn April 2012, the Bankruptcy Court issued a decision granting in part and denying in part the Firm’s motion to transferdismiss. The Court dismissed the litigation,counts of the amended complaint seeking avoidance of the allegedly constructively fraudulent and preferential transfers made to the Firm during the months of August and September 2008. The Court denied the Firm’s motion to dismiss as to the other claims, including claims that allege intentional
misconduct. In September 2012, the District Court directeddenied the Bankruptcy Courttransfer motion without prejudice to decideits renewal in the motionfuture, but stated that any trial would likely have to dismiss whilebe conducted before the District Court is considering the transfer motion. Court.
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”), LBHI’s 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, ongoing.
LBHI and the Committee have 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 responded to LBHI’s objection in November 2011. Discovery is ongoing.
LBHI and several of its subsidiaries that had been Chapter 11 debtors have filed a separate complaint and objection to derivatives claims asserted by the Firm alleging that the amount of the derivatives claims had been overstated and challenging certain set-offs taken by JPMorgan Chase entities to recover on the claims. The Firm has receivednot yet responded to the amended derivatives complaint and is in various


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stages of responding to regulatory investigations regarding Lehman.objection, and discovery has not begun.
LIBOR Investigations and Litigation. JPMorgan Chase has received various subpoenas and requests for documents and, in some cases, interviews, from federal and state agencies and entities, including the United States Department of Justice, United States Commodity Futures Trading Commission, United States SecuritiesDOJ, CFTC, SEC, and Exchange Commission,various state attorneys general, as well as the European Commission, United KingdomUK Financial Services Authority, Canadian Competition Bureau, and Swiss Competition Commission.Commission and other regulatory authorities and banking associations around the world. The documents and information sought all relate primarily to the process by which interest rates were submitted to the British Bankers Association (“BBA”) in connection with the setting of the BBA’s London Interbank Offered Rate (“LIBOR”), for various currencies, principally in 2007 and 2008. The inquiries from someSome of the regulatorsinquiries also relate to similar processes by which EURIBORinformation on rates areis submitted to the European Banking Federation (“EBF”) in connection with the setting of the EBF’s Euro Interbank Offered Rates (“EURIBOR”) and TIBOR rates are submitted to the Japanese Bankers’ Association for the setting of Tokyo Interbank Offered Rates (“TIBOR”) as well as to other processes for the setting of other reference rates in various parts of the world 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 allegingUnited States District Courts in which plaintiffs make varying allegations that since 2006 thein various periods, starting in 2000 or later, defendants either individually suppressedor collectively manipulated the U.S. dollar LIBOR, rate artificially or colluded inYen LIBOR and Euroyen TIBOR rates by submitting rates for LIBOR that were artificially low.low or high. Plaintiffs allege that they transacted


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in U.S. dollar LIBOR-basedloans, derivatives or other financial instruments whose values are impacted by changes in U.S. dollar LIBOR, Yen LIBOR, or Euroyen TIBOR and assert a variety of claims including antitrust claims seeking treble damages. All cases have been
In 2011, a number of class actions were filed against LIBOR panel banks, including the Firm, asserting various federal and state law claims relating to the alleged manipulation of U.S. dollar LIBOR. These purported class actions were consolidated for pre-trial purposes in the United States District Court for the Southern District of New York. In November 2011, theYork before District Court entered an Order appointingJudge Buchwald, who appointed interim lead counsel for the twothree proposed classes: (i) plaintiffs who allegedly purchaseddirect purchasers of U.S. dollar LIBOR-based financial instruments directly from the defendants in the over-the-counter market, andmarket; (ii) plaintiffs who allegedly purchasedpurchasers of U.S. dollar LIBOR-based financial instruments on an exchange.exchange; and (iii) purchasers of debt securities that pay an interest rate linked to U.S. dollar LIBOR. The defendants moved to dismiss all claims in these three putative class actions and three related individual actions pending before the Court. The Court has not yet ruled on the defendants’ motions to dismiss.
Since April 2012, a number of additional U.S. dollar LIBOR putative class actions and individual actions have been filed in various courts. Defendants have moved to transfer each of these cases to the consolidated action pending in the Southern District of New York. To date, all but three of these actions have been transferred. The actions that have been transferred are stayed until the Court rules on the defendants’ pending motions to dismiss.
The Firm also has been named as a defendant in a purported class action filed in the United States District Court for the Southern District of New York which seeks to bring claims on behalf of plaintiffs who purchased or sold exchange-traded Euroyen futures and options contracts. The plaintiff has been granted leave to file a Second Amended Complaint, and defendants will have 60 days after the filing of that amended pleading to respond.
Madoff Litigation. JPMorgan Chase & Co., JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC, and J.P. Morgan Securities Ltd.plc 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 Madoff’s long-time bank, facilitated the maintenance ofenrichment in connection with Madoff’s Ponzi scheme and overlooked signs of wrongdoing in order to obtain profits and fees.scheme. The complaint asserts common law claims that purport to seek
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
Madoff’s brokerage firm. By order datedIn October 31, 2011, the United States District Court for the Southern District of New York granted JPMorgan Chase’s 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 and oral argument on the appeal was held in November 2012. The Firm is awaiting the Court’s decision.
Separately, J.P. Morgan Trust Company (Cayman) Limited, JPMorgan (Suisse) SA, J.P. Morgan Securities Ltd.,plc, Bear Stearns Alternative Assets International Ltd., J.P. Morgan Clearing Corp., J.P. Morgan Bank Luxembourg SA, and J.P. Morgan Clearing Corp.Markets Limited (formerly Bear Stearns International Limited) 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, among other theories, and seek to recover payments made to defendants by the funds totaling approximately $150155 million. Pursuant to an agreement with the Trustee, the liquidators of Fairfield have voluntarily dismissed their action against J.P. Morgan Securities Ltd.plc without prejudice to refiling. The other actions remain outstanding. The Bankruptcy Court has stayed these actions. In addition, a purported class action was brought by investors in certain feeder funds against JPMorgan Chase in the United States District Court for the Southern District of New York, as iswas a motion by separate potential class plaintiffs to add claims against JPMorgan Chase & Co., JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC and J.P. Morgan Securities Ltd.plc to an already-pending 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 ChaseThe Firm is a defendant in five other Madoff-related actions pending in New York state court and twoone purported class actionsaction in federal courtDistrict 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,among other things, aiding and abetting breach of fiduciary duty, conversion and unjust enrichment. In the state court actions, the Firm’s motion to dismiss is pending. The Firm has moved to dismiss both 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 beenwas named as one of several defendants in sixa number of putative class action lawsuits brought by former customers of MF Global in federal district courtsDistrict Courts in MontanaNew York, Illinois and Montana. The lawsuits have been consolidated before the United States District Court for the Southern District of New York. The actions allege,alleged, among other things, that the Firm aided and abetted MF Global’s alleged misuse of customer money and breaches of fiduciary duty and was unjustly enriched by the transfer of $200 million incertain customer segregated funds by MF Global.
In addition, J.P. Morgan Securities LLC The Firm has been named as one of several defendants inentered into a putativetolling agreement with counsel for the customer class action filed inplaintiffs


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federal district courtand an individual plaintiff, pursuant to which the plaintiffs have agreed not to pursue any such claims against the Firm in New York on behalfthese actions for so long as the tolling agreement remains in effect.
J.P. Morgan Securities LLC has been named as one of several defendants in a number of purported class actions filed by purchasers of MF Global’s publicly traded securities, including the securities issued pursuant to MF Global’s June 2010 secondary offering of common stock and February 2011 and August 2011 convertible note offerings. The actions have been consolidated before the United States District Court for the Southern District of New York. In August 2012, the lead plaintiffs filed an amended complaint which asserts violations of the Securities Act of 1933 against the underwriter defendants and alleges that the offering documents contained materially false and misleading statements and omissions regarding MF Global’s financial position, includinginternal controls and risk management, as such topics relate to its exposure to European sovereign debt. Defendants moved to dismiss in October 2012. Those motions remain pending.
In June 2012, the Securities Investor Protection Act (“SIPA”) Trustee issued a Report of the Trustee’s Investigation and Recommendations, and stated that he is considering potential claims against the Firm with respect to certain transfers identified in the Report. Discussions regarding possible resolution of potential SIPA Trustee claims and customer claims against the Firm are ongoing.
The Firm is also respondinghas responded to various governmentaland continues to respond to inquiries from the CFTC, SEC, SIPA Trustee and Bankruptcy Trustee concerning MF Global.
Mortgage-Backed Securities and Repurchase Litigation and Mortgage-Related 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, originator 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, an action by the New York State Attorney General 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 ofnumerous 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 $120170 billion of such securities, a numbersecurities. In addition, and as described below, there are pending and threatened claims by monoline insurers and by and on behalf of
trustees that decreased significantly in the fourth quarterinvolve some of 2011 largely due to favorable rulings on standing in the class actions discussed below.these and other securitizations.
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 movedMotions to dismiss have been largely denied in these actions. In the first of these three actions, the court dismissed claims relatingcases, although in certain cases defendants have sought to all but oneappeal aspects of the offerings. In the second action, the court dismissed claims as to certain offeringsdecision, and tranches for lackthey are in various stages 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 Firm’s motion to dismiss remains pending. Inlitigation. A settlement of a fourth purported class action that is pending in the United States District Court for the Western District of Washington against Washington Mutual affiliates, WaMu Asset Acceptance Corp. and WaMu Capital Corp., along with and certain former officers or directors of WaMu Asset Acceptance Corp., have been named as defendants. Thehas received final 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
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.approval.
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). of MBS. 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.governmental agencies. These actions are pending in federal and state courts across the countryUnited States and are atin various stages of litigation.
In actions against the Firm solely as an underwriter of other issuers’ MBS offerings, the Firm has contractual rights to indemnification from the issuers. However, those indemnity rights may prove effectively unenforceable where the issuers are now defunct, such as in pending cases where the Firm has been named involving affiliates of IndyMac Bancorp. A settlement of a purported class action involving Thornburg Mortgage MBS offerings that was pending against the Firm has received preliminary court approval. The Firm may also be contractually obligated to indemnify underwriters in certain deals it issued.
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 fournine pending actions commenced by bond insurers that guaranteed payments of principal and interest on approximately $3.5 billion of certain classes of six19 different MBS offerings sponsored by EMC. One of thoseofferings. These actions commenced by Syncora Guarantee, Inc., isare pending in the United States District Court for the Southern District of New York against EMC only. Syncora has also filed two actionsfederal and state courts in New York state court: the first, against J.P. Morgan Securities LLC, asserts tort claims arising outand are in various stages 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,litigation. Certain JPMorgan Chase Bank, N.A. andentities, in their capacities as alleged successors in interest to Bear Stearns Asset-Backed Securities I LLC. Ambac hasand EMC, have been named as defendants in a civil suit filed a similar complaintby the New York State Attorney General in New York state court in connection with Bear Stearns’ due diligence and quality control practices relating to fourMBS.
The Firm or its affiliates are defendants in actions brought by trustees or master servicers of various MBS offerings, which allegestrusts and others on behalf of the purchasers of securities issued by those trusts. The first action was commenced by Deutsche Bank National Trust Company, acting as trustee for 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


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(“IndyMac Trusts”)MBS trusts, against the Firm 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 underwritersFDIC based on MBS issued by Washington Mutual Bank and individuals,its affiliates; that case is named as a defendant, both in its own capacity and as successor to Bear Stearns, in a purported class action pendingdescribed in the United States District Court forWashington Mutual Litigations section below. The other actions are at various initial stages of litigation in 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,and Delaware state courts, 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 MBS trustees, ofeach specific to one or more MBS on behalf of the purchasers of securities. In the first, Wells Fargo, as trustee for a single MBS trust, has filed an actiontransactions, against EMC Mortgage in Delaware state court alleging that EMC breachedand/or JPMorgan Chase. These cases generally allege breaches of various representations and warranties regarding securitized loans and seeking theseek repurchase of more than 800 mortgagethose loans, by EMC andas well as indemnification for the trusteeof 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.costs 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.other remedies.
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 whichthat toll the statutes ofapplicable limitations and reposeperiods 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 whopurchasers of MBS that purport to have 25% or more of the voting rights in as many as 191 different trusts sponsored by the Firm or its affiliates 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. Further, there have been repurchase and servicing claims made in litigation against trustees not affiliated with the Firm, but involving trusts that the Firm sponsored.
A shareholder complaint has been filed inIn April 2012, the New York state court granted the Firm’s motion to dismiss a shareholder complaint 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 accountingplaintiff has appealed the order. A second shareholder complaint has been filed in New York state court against current and damages. The defendants have movedformer members of the Firm’s Board of Directors and the Firm, as nominal defendant, alleging that the Board allowed the Firm to dismissengage in wrongful conduct regarding the action.sale of residential MBS and failed to implement adequate internal controls to prevent such wrongdoing.
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 Firm’sFirm and its affiliates’ origination and purchase of whole loans, underwriting and issuance of MBS, treatment of early payment defaults, and potential breaches of securitization representations and warranties, reserves and
due diligence in connection with securitizations. In JanuaryNovember 2012, the Firm was advised bysettled with the SEC staff that they are considering recommendingover its investigations of J.P. Morgan Securities LLC and J.P. Morgan Acceptance Corporation I relating to the Commission that civil or administrative actions be pursued arising outdelinquency disclosures, and of two separate investigations they have been conducting. The first involves potential claims againstBear Stearns entities and J.P. Morgan Securities LLC relating to due diligence conducted for two mortgage-backed securitizations and corresponding disclosures. The second involves potential claims against Bear Stearns entities, JPMorgan Chase & Co. and J.P. Morgan Securities LLC relating todisclosures concerning 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 responsesPursuant to the proposed actions.settlement, the named entities, without admitting or denying the SEC’s allegations, consented to the entry of a final judgment ordering certain relief, including an injunction and the payment of approximately $296.9 million in disgorgement, penalties and interest. The United States District Court for the District of Columbia approved the settlement and entered the judgment in January 2013. The Firm continues to respond to other MBS-related regulatory inquiries.
Mortgage ForeclosureForeclosure-Related 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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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 Firm’s payment obligations under those agreements will be deemed satisfied by the Firm’s 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'sindustry’s electronic mortgage registry. The court granted in part and denied in part the defendants’ motion to dismiss the Massachusetts action and the Firm has moved to dismiss the Massachusetts action, and has yet to respond to the New York action.
FiveSix purported class action lawsuits were filed against the Firm relating to its mortgage foreclosure procedures. Two of those suits werethe class actions have been dismissed with prejudice. A third suit has been resolved,prejudice and its dismissal will be obtained shortly.one settled on an individual basis. Of the remaining active actions, two are in the discovery phase and a motion to dismiss is pending in the remaining action. Additionally, the Firm is defending a purported class action brought against Bank of America involving an EMC loan.loan has been dismissed.
ATwo shareholder derivative action hasactions have been filed in New York state courtSupreme Court against the Firm’s boardBoard of directorsDirectors alleging that the boardBoard failed to exercise adequate oversight as to wrongful conduct by the Firm regarding mortgage servicing. The action seeks aThese actions seek declaratory judgmentrelief and damages. In July 2012, the Court granted defendants’ motion to dismiss the complaint in the first-filed action and gave plaintiff 45 days in which to file an amended complaint. In October 2012, the Court entered a stipulated order consolidating the actions and staying all proceedings pending the plaintiffs’ decision whether to file a consolidated complaint after the Firm completes its response to a demand submitted by one of the plaintiffs under Section 220 of the Delaware General Corporation Law.
The Civil Division of the United States Attorney’s Office for the Southern District of New York is conducting an investigation concerning the Firm’s compliance with the requirements of the Federal Housing Administration’s Direct Endorsement Program. The Firm is cooperating in that investigation.
On January 7, 2013, the Firm announced that it and a number of other financial institutions entered into a


322JPMorgan Chase & Co./2012 Annual Report


settlement agreement with the OCC and the Federal Reserve providing for the termination of the Independent Foreclosure Review programs that had been required under the Consent Orders with such banking regulators relating to each bank’s residential mortgage servicing, foreclosure and loss-mitigation activities. Under this settlement, the Firm will make a cash payment of $753 million into a settlement fund for distribution to qualified borrowers. The Firm has also committed an additional $1.2 billion to foreclosure prevention actions under the settlement, which will be fulfilled through credits given to the Firm for modifications, short sales and other types of borrower relief.
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 beenmunicipal derivatives actions were consolidated and/or coordinated in the United States District Court for the Southern District of New York. The court deniedIn December 2012, the District Court granted final approval of a settlement calling for payment of approximately $43 million. Certain class members opted out of the settlement, including 27 plaintiffs named in part and granted in part defendants’ motions to dismiss the purported class and individual actions permitting certain claims to proceedalready pending 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.JPMorgan.
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 complaintsan action against the Firm and several other defendants in Alabama state court. An action on behalf of a purported class of sewer rate payers has also been filed 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 third-party payments and that, but for this concealment, the County would not have entered into the transactions. The Court denied the Firm’s 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 County’s 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.Alabama. 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 District’s Bankruptcy Court, where the action remains pending. Limited discovery has taken


place in the County’s action and additional discovery may take place in 2013.
296JPMorgan Chase & Co./2011 Annual Report
In September 2012, a group of purported creditors of the County initiated an adversary proceeding and filed a purported class action complaint alleging that certain warrants were issued unlawfully and were thus null and void and seeking $1.6 billion in damages from the Firm and other defendants involved in the Jefferson County financing transactions. The Firm, along with a number of other defendants, moved to dismiss the complaint in November 2012. Plaintiffs subsequently agreed to dismiss their tort claims seeking damages and are solely pursuing their claims relating to the validity of the warrants. The motion to dismiss these claims remains pending.


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 Firm’s motions to dismiss each of the complaints. The Firm has filed a cross-claim 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. In February 2012, one of the insurers filed a motion for a declaration that its action is not stayed as against the Firm or, in the alternative, for an order lifting the stay as against the Firm. The Firm and the County opposed the motion, which remains pending.
Option Adjustable Rate Mortgage Litigation.The Firm is defending one purported and three certified class actions, all pending in federal courts in California, which assert that several JPMorgan Chase entities violated the federal Truth in Lending Act and state unfair business practice statutes in failing to provide adequate disclosures in Option Adjustable Rate Mortgage (“ARM”) loans regarding the resetting of introductory interest rates and that negative amortization was certain to occur if a borrower made the minimum monthly payment. With respect to the former Washington Mutual and Bear Stearns defendants who purchased Option ARM loans from third-party originators, plaintiffs allege that those entities aided and abetted the original lenders’ alleged violations. Classes have been certified in three of the actions. In one of the certified class actions, the Firm has moved for decertification of the class and for summary


JPMorgan Chase & Co./2012 Annual Report323
Notes to consolidated financial statements

judgment. The Firm was unsuccessful in seeking permission to appeal the remaining class certification decisions.
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 in which 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 re-ordering 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 Firm’s 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 Court’s 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.In December 2012, the Court granted final approval of the settlement.
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
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.trustees and the parties have agreed to stay the action brought by the Receiver until after the Bankruptcy Court rules on the pending motions.
Securities Lending Litigation. JPMorgan Chase Bank, N.A. has beenwas named as a defendant in foura putative class actionsaction asserting ERISA and other claims pending in the United States District Court for the Southern District of New York brought by participants in the Firm’s 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 Chase’s 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 medium-term notes. The Firm has movedCourt granted the Firm’s motion to dismiss theall claims in April 2012. The plaintiff filed a third 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 plaintiff’s 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 Firm’s procedures relatedmotion to the Service Members Civil Relief Act (“SCRA”) and the Housing and Economic Recovery Act of 2008 (“HERA”). These inquiries were prompted bydismiss this complaint is
pending. Discovery has been stayed until the Firm’s public statements about its SCRA and HERA


JPMorgan Chase & Co./2011 Annual Report297
Notesmotion 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.dismiss is decided.
Washington Mutual Litigations. Subsequent to JPMorgan Chase’s 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 Bank’s 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
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 Mutual’s 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 Court’s 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 proceedingsProceedings related to Washington Mutual’s 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 WMIWashington Mutual, Inc. (“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 Bank’s 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 Chase’s and the FDIC’s motions to dismiss the complaint, but the United States Court of Appeals for the District of Columbia Circuit reversed the trial court’sDistrict Court’s dismissal and remanded the case for further proceedings. Plaintiffs, whichwho sue now include only as 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


298JPMorgan Chase & Co./2011 Annual Report


the closure of Washington Mutual Bank and damaged them by causing their bonds issued by Washington Mutual Bank, which had a total face value of $38 million, to lose substantially all of their value. JPMorgan Chase and the FDIC have again moved to dismiss this action.action and the District Court dismissed the case except as to the plaintiffs’ claim that the Firm tortiously interfered with the plaintiffs’ bond contracts with Washington Mutual Bank prior to its closure.
* * *
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


324JPMorgan Chase & Co./2012 Annual Report


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 management’s best judgment after consultation with counsel. During the years ended December 31, 20112012, 20102011 and 20092010, the Firm incurred $4.95.0 billion, $7.44.9 billion
and $161 million7.4 billion, respectively, of litigation expense. There is no assurance that the Firm’s litigation reserves will not need to be adjusted in the future.
In view of the inherent difficulty of predicting the outcome of legal proceedings, particularly where the claimants seek very large or indeterminate damages, or where the matters present novel legal theories, involve a large number of parties or are in early stages of discovery, the Firm cannot state with confidence what will be the eventual outcomes of
the currently pending matters, the timing of their ultimate resolution or the eventual losses, fines, penalties or 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 Firm’s 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 Chase’s operating results for a particular period, depending on, among other factors, the size of the loss or liability imposed and the level of JPMorgan Chase’s income for that period.



JPMorgan Chase & Co./2012 Annual Report325
Notes to consolidated financial statements

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 Firm’s U.S. operations serve international businesses.

 
As the Firm’s operations are highly integrated, estimates and subjective assumptions have been made to apportion revenue and expense between U.S. and international operations. These estimates and assumptions are consistent with the allocations used for the Firm’s segment reporting as set forth in Note 33 on pages 300–303326–329 of this Annual Report.
The Firm’s long-lived assets for the periods presented are not considered by management to be significant in relation to total assets. The majority of the Firm’s long-lived assets are located in the United States.


JPMorgan Chase & Co./2011 Annual Report299
Notes to consolidated financial statements

As of or for the year ended December 31, (in millions) 
Revenue(c)
 
Expense(d)
 
Income before income tax
expense and extraordinary gain
 Net income Total assets 
Revenue(c)
 
Expense(d)
 
Income before income tax
expense
 Net income Total assets 
2012           
Europe/Middle East and Africa $10,522
 $9,326
 $1,196
 $1,508
 $553,147
(e) 
Asia and Pacific 5,605
 3,952
 1,653
 1,048
 167,955
 
Latin America and the Caribbean 2,328
 1,580
 748
 454
 53,984
 
Total international 18,455
 14,858
 3,597
 3,010
 775,086
 
North America(a)
 78,576
 53,256
 25,320
 18,274
 1,584,055
 
Total $97,031
 $68,114
 $28,917
 $21,284
 $2,359,141
 
2011                     
Europe/Middle East and Africa $16,212
 $9,157
 $7,055
 $4,844
 $566,866
 $16,212
 $9,157
 $7,055
 $4,844
 $566,866
(e) 
Asia and Pacific 5,992
 3,802
 2,190
 1,380
 156,411
 5,992
 3,802
 2,190
 1,380
 156,411
 
Latin America and the Caribbean 2,273
 1,711
 562
 340
 51,481
 2,273
 1,711
 562
 340
 51,481
 
Total international 24,477
 14,670
 9,807
 6,564
 774,758
 24,477
 14,670
 9,807
 6,564
 774,758
 
North America(a)
 72,757
 55,815
 16,942
 12,412
 1,491,034
 72,757
 55,815
 16,942
 12,412
 1,491,034
 
Total $97,234
 $70,485
 $26,749
 $18,976
 $2,265,792
 $97,234
 $70,485
 $26,749
 $18,976
 $2,265,792
 
2010(b)
                     
Europe/Middle East and Africa $14,135
 $8,777
 $5,358
 $3,635
 $446,547
 $14,135
 $8,777
 $5,358
 $3,635
 $446,547
(e) 
Asia and Pacific 6,073
 3,677
 2,396
 1,614
 151,379
 6,073
 3,677
 2,396
 1,614
 151,379
 
Latin America and the Caribbean 1,750
 1,181
 569
 362
 33,192
 1,750
 1,181
 569
 362
 33,192
 
Total international 21,958
 13,635
 8,323
 5,611
 631,118
 21,958
 13,635
 8,323
 5,611
 631,118
 
North America(a)
 80,736
 64,200
 16,536
 11,759
 1,486,487
 80,736
 64,200
 16,536
 11,759
 1,486,487
 
Total $102,694
 $77,835
 $24,859
 $17,370
 $2,117,605
 $102,694
 $77,835
 $24,859
 $17,370
 $2,117,605
 
2009(b)
          
Europe/Middle East and Africa $16,294
 $8,620
 $7,674
 $5,212
 $375,406
Asia and Pacific 5,429
 3,528
 1,901
 1,286
 112,798
Latin America and the Caribbean 1,867
 1,083
 784
 463
 23,692
Total international 23,590
 13,231
 10,359
 6,961
 511,896
North America(a)
 76,844
 71,136
 5,708
 4,767
 1,520,093
Total $100,434
 $84,367
 $16,067
 $11,728
 $2,031,989
(a)Substantially reflects the U.S.
(b)The regional allocation of revenue, expense and net income for 2010 and 2009 has been modified to conform with current allocation methodologies.
(c)Revenue is composed of net interest income and noninterest revenue.
(d)Expense is composed of noninterest expense and the provision for credit losses.
(e)
Total assets for the U.K. were approximately $498 billion, $510 billion, and $419 billion at December 31, 2012, 2011 and 2010, respectively.
Note 33 – Business segments
The Firm is managed on a line of business basis. There are sixfour major reportable business segments – Consumer & Community Banking, Corporate & Investment Bank, Retail Financial Services, Card Services & Auto, Commercial Banking Treasury & Securities Services and Asset Management, as well asManagement. In addition, there is a Corporate/Private Equity segment. The business segments are determined based on the products and services provided, or the type of customer served, and they reflect the manner in which financial information is currently evaluated by management. Results of these lines of business are presented on a managed basis. For a definition of managed basis, see Explanation and
Reconciliation of the Firm’s use of non-GAAP financial measures, on pages 76–7877 of this Annual Report.Report. For a further discussion concerning JPMorgan Chase’s business segments, see Business Segment Results on pages 79–8078–79 of this Annual Report.
Business segment changes
Commencing with the fourth quarter of 2012, the Firm’s business segments have been reorganized as follows:
Retail Financial Services and Card Services & Auto (“Card”) business segments were combined to form one business segment called Consumer & Community Banking (“CCB”), and Investment Bank and Treasury & Securities Services


326JPMorgan Chase & Co./2012 Annual Report


business segments were combined to form one business segment called Corporate & Investment Bank (“CIB”). Commercial Banking (“CB”) and Asset Management (“AM”) were not affected by the aforementioned changes. A technology function supporting online and mobile banking was transferred from Corporate/Private Equity to the CCB business segment. This transfer did not materially affect the results of either the CCB business segment or Corporate/Private Equity.
The business segment information that follows has been revised to reflect the business reorganization retroactive to January 1, 2010.
The following is a description of each of the Firm’s business segments:segments, and the products and services they provide to their respective client bases.
Consumer & Community Banking
CCB serves consumers and businesses through personal service at bank branches and through ATMs, online, mobile and telephone banking. CCB is organized into Consumer & Business Banking, Mortgage Banking (including Mortgage Production, Mortgage Servicing and Real Estate Portfolios) and Card. Consumer & Business Banking offers deposit and investment products and services to consumers, and lending, deposit, and cash management and payment solutions to small businesses. Mortgage Banking includes mortgage origination and servicing activities, as well as portfolios comprised of residential mortgages and home equity loans, including the PCI portfolio acquired in the Washington Mutual transaction. Card issues credit cards to consumers and small businesses, provides payment services to corporate and public sector clients through its commercial card products, offers payment processing services to merchants, and provides auto and student loan services.
Corporate & Investment Bank
J.P. Morgan is oneCIB offers a broad suite of the world’s leading investment banks, with deepbanking, market-making, prime brokerage, and treasury and securities products and services to a global client relationships and broad product capabilities. The clientsbase of IB are corporations, investors, financial institutions, governmentsgovernment and institutional investors. The Firmmunicipal entities. Within Banking, the CIB 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 riskas well as loan origination and syndication. Also included in Banking is Treasury Services, which includes transaction services, comprised primarily of cash management market-makingand liquidity solutions, and trade finance products. The Markets & Investor Services segment of the CIB is a global market-maker in cash securities and derivative instruments, and also offers sophisticated risk management solutions, prime brokerage, and research.
Retail Financial Markets & Investor 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 also includes branch banking and business bankingactivities. 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


300JPMorgan 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 nation’s 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 MerchantSecurities Services business, Chase Paymentech Solutions, Card is a leading global leader in payment processingcustodian which holds, values, clears and merchant acquiring. Consumers also can obtain loans through more than 17,200 auto dealershipsservices securities, cash and 2,000 schoolsalternative investments for investors and universities nationwide.broker-dealers, and manages depositary receipt programs globally.
Commercial Banking
CB delivers extensive industry knowledge, local expertise and dedicated service to more than 24,000U.S. and U.S. multinational clients, nationally, including corporations, municipalities, financial institutions and not-for-profitnon-profit entities with annual revenue generally ranging from $1020 million to $2 billion, and nearly 35,000. CB provides financing to real estate investors/investors and owners. CB partnersPartnering with the Firm’s other businesses, to provideCB provides comprehensive financial 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 world’s 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
AM, with client assets under supervision of $1.92.1 trillion, is a global leader in investment and wealth management. AM clients include institutions, high-net-worth individuals and retail investors and high-net-worth individuals in every major market throughout the world. AM offers global investment management inacross all major asset classes including equities, fixed income, real estate, hedge funds, private equityalternatives and
liquidity products, including money-market instruments and bank deposits. money market funds. AM also offers multi-asset investment management, providing solutions to a broad range of clients’ investment needs. For individual investors, AM also provides retirement products and services, brokerage and banking services including trust and estate, bankingloans, mortgages and brokerage services to high-net-worth clients, and retirement services for corporations and individuals.deposits. The majority of AM’s client assets are in actively managed portfolios.
Corporate/Private Equity
The Corporate/Private Equity sectorsegment comprises Private Equity, Treasury, the Chief Investment Office (“CIO”), and Other Corporate, which includes corporate staff units and expense that is centrally managed. Treasury and CIO are predominantly responsible for measuring, monitoring, reporting and managing the Chief Investment Office manageFirm’s liquidity, funding, capital liquidity, and structural risks of the Firm.interest rate and foreign exchange risks. The corporate staff units include Central Technology and Operations, Internal Audit, Executive, Office, Finance, Human Resources, Marketing & Communications, Legal & Compliance, CorporateGlobal Real Estate, and General Services, Operational Control, Risk Management, and Corporate Responsibility and Strategy & Development.Public Policy. Other centrally managed expense includes the Firm’s occupancy and pension-related expense net of allocationsthat are subject to allocation to the business.
Business segment changes
Commencing July 1, 2011, the Firm’s 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.businesses.


JPMorgan Chase & Co./2012 Annual Report327
Notes to consolidated financial statements

Segment results
The following tables provide a summary of the Firm’s segment results for 20112012, 20102011 and 20092010 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, totalTotal net revenue (noninterest revenue and net interest income) for each of the segments is presented on a tax-equivalentfully taxable-equivalent (“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. Thissecurities; 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 Report301
NotesEffective January 1, 2012, the Firm revised the capital allocated to consolidated financial statementseach of its businesses, reflecting additional refinement of each segment’s Basel III Tier 1 common capital requirements.

Segment results and reconciliation(a)
As of or the year ended
December 31,
(in millions, except ratios)
Investment Bank Retail Financial Services 
Card Services & Auto(f)
 Commercial BankingConsumer & Community Banking Corporate & Investment Bank Commercial Banking Asset Management
201120102009 201120102009 201120102009 2011201020092012
2011
2010
 201220112010 201220112010 201220112010
Noninterest revenue$17,971
$18,253
$18,522
 $10,405
$11,227
$11,414
 $4,892
$4,278
$3,706
 $2,195
$2,200
$1,817
$20,795
$15,306
$15,513
 $23,104
$22,523
$22,889
 $2,283
$2,195
$2,200
 $7,847
$7,895
$7,485
Net interest income8,303
7,964
9,587
 16,133
17,220
18,383
 14,249
16,194
19,493
 4,223
3,840
3,903
29,150
30,381
33,414
 11,222
11,461
10,588
 4,542
4,223
3,840
 2,099
1,648
1,499
Total net revenue26,274
26,217
28,109
 26,538
28,447
29,797
 19,141
20,472
23,199
 6,418
6,040
5,720
49,945
45,687
48,927
 34,326
33,984
33,477
 6,825
6,418
6,040
 9,946
9,543
8,984
Provision for credit losses(286)(1,200)2,279
 3,999
8,919
14,754
 3,621
8,570
19,648
 208
297
1,454
3,774
7,620
17,489
 (479)(285)(1,247) 41
208
297
 86
67
86
Credit allocation income/(expense)(b)
—
—
—
 —
—
—
 —
—
—
 —
—
—
Noninterest expense(c)
16,116
17,265
15,401
 19,458
16,483
15,512
 8,045
7,178
6,617
 2,278
2,199
2,176
Income/(loss) before income tax expense/(benefit) and extraordinary gain10,444
10,152
10,429
 3,081
3,045
(469) 7,475
4,724
(3,066) 3,932
3,544
2,090
Noninterest expense28,790
27,544
23,706
 21,850
21,979
22,869
 2,389
2,278
2,199
 7,104
7,002
6,112
Income/(loss) before income tax expense/(benefit)17,381
10,523
7,732
 12,955
12,290
11,855
 4,395
3,932
3,544
 2,756
2,474
2,786
Income tax expense/(benefit)3,655
3,513
3,530
 1,403
1,317
(134) 2,931
1,852
(1,273) 1,565
1,460
819
6,770
4,321
3,154
 4,549
4,297
4,137
 1,749
1,565
1,460
 1,053
882
1,076
Income/(loss) before extraordinary gain6,789
6,639
6,899
 1,678
1,728
(335) 4,544
2,872
(1,793) 2,367
2,084
1,271
Extraordinary gain(d)
—
—
—
 —
—
—
 —
—
—
 —
—
—
Net income/(loss)$6,789
$6,639
$6,899
 $1,678
$1,728
$(335) $4,544
$2,872
$(1,793) $2,367
$2,084
$1,271
$10,611
$6,202
$4,578
 $8,406
$7,993
$7,718
 $2,646
$2,367
$2,084
 $1,703
$1,592
$1,710
Average common equity$40,000
$40,000
$33,000
 $25,000
$24,600
$22,457
 $16,000
$18,400
$17,543
 $8,000
$8,000
$8,000
$43,000
$41,000
$43,000
 $47,500
$47,000
$46,500
 $9,500
$8,000
$8,000
 $7,000
$6,500
$6,500
Total assets776,430
825,150
706,944
 274,795
299,950
322,185
 208,467
208,793
255,029
 158,040
142,646
130,280
463,608
483,307
508,775
 876,107
845,095
870,631
 181,502
158,040
142,646
 108,999
86,242
68,997
Return on average common equity(e)
17%17%21% 7%7%(1)% 28%16%(10)% 30%26%16%
Return on average common equity25%15%11% 18%17%17% 28%30%26% 24%25%26%
Overhead ratio61
66
55
 73
58
52
 42
35
29
 35
36
38
58
60
48
 64
65
68
 35
35
36
 71
73
68
(a)In addition to analyzing the Firm’s results on a reported basis, management reviews the Firm’s lines of business results on a “managed basis,” which is a non-GAAP financial measure. The Firm’s definition of managedManaged 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.
(b)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 Firm’s 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.
(c)
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) 2009
Investment Bank $27
Retail Financial Services 228
Card Services & Auto 40
Commercial Banking 6
Treasury & Securities Services 11
Asset Management 6
Corporate/Private Equity 163
(d)
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 $2.0 billion.
(e)
Ratio is based on income/(loss) before extraordinary gain for 2009.
(f)Effective January 1, 2010, the Firm adopted accounting guidance related to VIEs. Prior to the adoption of the new guidance, managed results for credit Card excluded the impact of credit card securitizations on total net revenue, provision for credit losses and average assets, as JPMorgan Chase treated the sold receivables as if they were still on the balance sheet in evaluating the credit performance of the entire managed credit card portfolio, as operations are funded, and decisions are made about allocating resources, such as employees and capital, based on managed information. These adjustments are eliminated in reconciling items to arrive at the Firm’s reported U.S. GAAP results. The related securitization adjustments were as follows.
Year ended December 31, (in millions)2009
Noninterest revenue$(1,494)
Net interest income7,937
Provision for credit losses6,443
Total assets80,882

302JPMorgan Chase & Co./2011 Annual Report


(table continued from previous page)
Treasury & Securities Services Asset Management 
Corporate/Private Equity 
 
Reconciling Items(f)(g)
 Total
201120102009 201120102009 201120102009 201120102009 201120102009
$4,544
$4,757
$4,747
 $7,895
$7,485
$6,372
 $3,638
$5,359
$2,771
 $(1,995)$(1,866)$(67) $49,545
$51,693
$49,282
3,158
2,624
2,597
 1,648
1,499
1,593
 505
2,063
3,863
 (530)(403)(8,267) 47,689
51,001
51,152
7,702
7,381
7,344
 9,543
8,984
7,965
 4,143
7,422
6,634
 (2,525)(2,269)(8,334) 97,234
102,694
100,434
1
(47)55
 67
86
188
 (36)14
80
 —
—
(6,443) 7,574
16,639
32,015
8
(121)(121) —
—
—
 —
—
—
 (8)121
121
 —
—
—
5,863
5,604
5,278
 7,002
6,112
5,473
 4,149
6,355
1,895
 —
—
—
 62,911
61,196
52,352
1,846
1,703
1,890
 2,474
2,786
2,304
 30
1,053
4,659
 (2,533)(2,148)(1,770) 26,749
24,859
16,067
642
624
664
 882
1,076
874
 (772)(205)1,705
 (2,533)(2,148)(1,770) 7,773
7,489
4,415
1,204
1,079
1,226
 1,592
1,710
1,430
 802
1,258
2,954
 —
—
—
 18,976
17,370
11,652
—
—
—
 —
—
—
 —
—
76
 —
—
—
 —
—
76
$1,204
$1,079
$1,226
 $1,592
$1,710
$1,430
 $802
$1,258
$3,030
 $—
$—
$—
 $18,976
$17,370
$11,728
$7,000
$6,500
$5,000
 $6,500
$6,500
$7,000
 $70,766
$57,520
$52,903
 $—
$—
$—
 $173,266
$161,520
$145,903
68,665
45,481
38,054
 86,242
68,997
64,502
 693,153
526,588
595,877
 NA
NA
(80,882) 2,265,792
2,117,605
2,031,989
17%17%25% 25%26%20% NM
NM
NM
 NM
NM
NM
 11%10%6%
76
76
72
 73
68
69
 NM
NM
NM
 NM
NM
NM
 65
60
52
(g)
Segment managed results reflect revenue on a tax-equivalentFTE basis with the corresponding income tax impact recorded within income tax expense/(benefit). These adjustments are eliminated in reconciling items to arrive at the Firm’s reported U.S. GAAP results. Tax-equivalentFTE adjustments for the years ended December 31, 2012, 2011,, 2010 and 20092010, were as follows.
Year ended December 31, (in millions)2011
2010
2009
2012
2011
2010
Noninterest revenue$2,003
$1,745
$1,440
$2,116
$2,003
$1,745
Net interest income530
403
330
743
530
403
Income tax expense2,533
2,148
1,770
2,859
2,533
2,148


328JPMorgan Chase & Co./2012 Annual Report


(table continued from previous page)









Corporate/Private Equity 
 
Reconciling Items(b)
 Total
201220112010 201220112010 201220112010
$208
$3,629
$5,351
 $(2,116)$(2,003)$(1,745) $52,121
$49,545
$51,693
(1,360)506
2,063
 (743)(530)(403) 44,910
47,689
51,001
(1,152)4,135
7,414
 (2,859)(2,533)(2,148) 97,031
97,234
102,694
(37)(36)14
 —
—
—
 3,385
7,574
16,639
4,596
4,108
6,310
 —
—
—
 64,729
62,911
61,196
(5,711)63
1,090
 (2,859)(2,533)(2,148) 28,917
26,749
24,859
(3,629)(759)(190) (2,859)(2,533)(2,148) 7,633
7,773
7,489
$(2,082)$822
$1,280
 $—
$—
$—
 $21,284
$18,976
$17,370
$77,352
$70,766
$57,520
 $—
$—
$—
 $184,352
$173,266
$161,520
728,925
693,108
526,556
 NA
NA
NA
 2,359,141
2,265,792
2,117,605
NM
NM
NM
 NM
NM
NM
 11%11%10%
NM
NM
NM
 NM
NM
NM
 67
65
60


JPMorgan Chase & Co./20112012 Annual Report 303329
Notes to consolidated financial statements

Note 34 – Parent company
Parent company – Statements of incomeParent company – Statements of income    Parent company – Statements of income    
Year ended December 31,
(in millions)
 2011
 2010
 2009
 2012
 2011
 2010
Income            
Dividends from subsidiaries:      
Dividends from subsidiaries and affiliates:      
Bank and bank holding company $10,852
 $16,554
 $15,235
 $4,828
 $10,852
 $16,554
Nonbank(a)
 2,651
 932
 1,036
 1,972
 2,651
 932
Interest income from subsidiaries 1,099
 985
 1,501
 1,041
 1,099
 985
Other interest income 384
 294
 266
 293
 384
 294
Other income from subsidiaries,
primarily fees:
            
Bank and bank holding company 809
 680
 233
 939
 809
 680
Nonbank 92
 312
 742
 1,207
 92
 312
Other income/(loss) (85) 157
 844
 579
 (85) 157
Total income 15,802
 19,914
 19,857
 10,859
 15,802
 19,914
Expense            
Interest expense to subsidiaries(a)
 1,121
 1,263
 1,118
Interest expense to subsidiaries and affiliates(a)
 836
 1,121
 1,263
Other interest expense 4,447
 3,782
 4,696
 4,679
 4,447
 3,782
Other noninterest expense 649
 540
 988
 2,399
 649
 540
Total expense 6,217
 5,585
 6,802
 7,914
 6,217
 5,585
Income before income tax benefit and undistributed net income of subsidiaries 9,585
 14,329
 13,055
 2,945
 9,585
 14,329
Income tax benefit 1,089
 511
 1,269
 1,665
 1,089
 511
Equity in undistributed net income of subsidiaries 8,302
 2,530
 (2,596) 16,674
 8,302
 2,530
Net income $18,976
 $17,370
 $11,728
 $21,284
 $18,976
 $17,370
Parent company – Balance sheets  
  
    
December 31, (in millions) 2011
 2010
 2012
 2011
Assets        
Cash and due from banks $132
 $96
 $216
 $132
Deposits with banking subsidiaries 91,622
 80,201
 75,521
 91,622
Trading assets 18,485
 16,038
 8,128
 18,485
Available-for-sale securities 3,657
 3,176
 3,541
 3,657
Loans 1,880
 1,849
 2,101
 1,880
Advances to, and receivables from, subsidiaries:        
Bank and bank holding company 39,888
 54,887
 39,773
 39,888
Nonbank 83,138
 72,080
 86,904
 83,138
Investments (at equity) in subsidiaries:    
Investments (at equity) in subsidiaries and affiliates:    
Bank and bank holding company 157,160
 150,876
 170,276
 157,160
Nonbank(a)
 42,231
 38,000
 45,305
 42,231
Goodwill and other intangibles 1,027
 1,050
 1,018
 1,027
Other assets 15,506
 17,171
 16,481
 15,506
Total assets $454,726
 $435,424
 $449,264
 $454,726
Liabilities and stockholders’ equity        
Borrowings from, and payables to, subsidiaries(a)
 $30,231
 $28,332
Borrowings from, and payables to, subsidiaries and affiliates(a)
 $16,744
 $30,231
Other borrowed funds, primarily commercial paper 59,891
 41,874
 62,010
 59,891
Other liabilities 7,653
 7,302
 8,208
 7,653
Long-term debt(b)(c)
 173,378
 181,810
 158,233
 173,378
Total liabilities(c)
 271,153
 259,318
 245,195
 271,153
Total stockholders’ equity 183,573
 176,106
 204,069
 183,573
Total liabilities and stockholders’ equity $454,726
 $435,424
 $449,264
 $454,726
 
Parent company – Statements of cash flowsParent company – Statements of cash flows  Parent company – Statements of cash flows  
Year ended December 31,
(in millions)
 2011
 2010
 2009
 2012
 2011
 2010
Operating activities            
Net income $18,976
 $17,370
 $11,728
 $21,284
 $18,976
 $17,370
Less: Net income of subsidiaries(a)
 21,805
 20,016
 13,675
Less: Net income of subsidiaries and affiliates(a)
 23,474
 21,805
 20,016
Parent company net loss (2,829) (2,646) (1,947) (2,190) (2,829) (2,646)
Cash dividends from subsidiaries(a)
 13,414
 17,432
 16,054
Cash dividends from subsidiaries and affiliates(a)
 6,798
 13,414
 17,432
Other, net 889
 1,685
 1,852
 2,401
 889
 1,685
Net cash provided by operating activities 11,474
 16,471
 15,959
 7,009
 11,474
 16,471
Investing activities            
Net change in:            
Deposits with banking subsidiaries 20,866
 7,692
 (27,342) 16,100
 20,866
 7,692
Available-for-sale securities:            
Purchases (1,109) (1,387) (1,454) (364) (1,109) (1,387)
Proceeds from sales and maturities 886
 745
 522
 621
 886
 745
Loans, net 153
 (90) 209
 (350) 153
 (90)
Advances to subsidiaries, net (28,105) 8,051
 28,808
 5,951
 (28,105) 8,051
Investments (at equity) in subsidiaries, net(a)
 (1,530) (871) (6,582)
Net cash (used in)/provided by investing activities (8,839) 14,140
 (5,839)
Investments (at equity) in subsidiaries and affiliates, net(a)
 3,546
 (1,530) (871)
Net cash provided by/(used in) investing activities 25,504
 (8,839) 14,140
Financing activities            
Net change in borrowings from subsidiaries(a)
 2,827
 (2,039) (4,935)
Net change in borrowings from subsidiaries and affiliates(a)
 (14,038) 2,827
 (2,039)
Net change in other borrowed funds 16,268
 (11,843) 1,894
 3,736
 16,268
 (11,843)
Proceeds from the issuance of long-term debt 33,566
 21,610
 32,304
 28,172
 33,566
 21,610
Proceeds from the assumption of subsidiaries long-term debt(d)
 —
 —
 15,264
Repayments of long-term debt (41,747) (32,893) (31,964) (44,240) (41,747) (32,893)
Excess tax benefits related to stock-based compensation 867
 26
 17
 255
 867
 26
Redemption of preferred stock issued to the U.S. Treasury —
 —
 (25,000)
Redemption of other preferred stock —
 (352) —
Proceeds from issuance of common stock —
 —
 5,756
Redemption of preferred stock —
 —
 (352)
Proceeds from issuance of preferred stock 1,234
 —
 —
Treasury stock and warrants repurchased (8,863) (2,999) —
 (1,653) (8,863) (2,999)
Dividends paid (3,895) (1,486) (3,422) (5,194) (3,895) (1,486)
All other financing activities, net (1,622) (641) 33
 (701) (1,622) (641)
Net cash used in financing activities (2,599) (30,617) (10,053) (32,429) (2,599) (30,617)
Net increase/(decrease) in cash and due from banks 36
 (6) 67
 84
 36
 (6)
Cash and due from banks at the beginning of the year, primarily with bank subsidiaries 96
 102
 35
 132
 96
 102
Cash and due from banks at the end of the year, primarily with bank subsidiaries $132
 $96
 $102
 $216
 $132
 $96
Cash interest paid $5,800
 $5,090
 $5,629
 $5,690
 $5,800
 $5,090
Cash income taxes paid, net 5,885
 7,001
 3,124
 3,080
 5,885
 7,001





(a)
SubsidiariesAffiliates include trusts that issued guaranteed capital debt securities (“issuer trusts”). The Parent received dividends of $1312 million, $13 million and $1413 million from the issuer trusts in 2012, 2011 2010 and 2009,2010, respectively. For further discussion on these issuer trusts, see Note 21 on pages 273–275297–299 of this Annual Report.
(b)
At December 31, 2011,2012, long-term debt that contractually matures in 20122013 through 20162017 totaled $42.519.3 billion, $17.425.1 billion, $24.921.6 billion, $16.717.5 billion and $17.517.3 billion, respectively.
(c)
For information regarding the Firm'sFirm’s guarantees of its subsidiaries'subsidiaries’ obligations, see Note 21 and Note 29 on pages 273–275297–299 and 283–289,308–315, respectively, of this Annual Report.
(d)Represents the assumption of Bear Stearns long-term debt by JPMorgan Chase & Co.


304330 JPMorgan Chase & Co./20112012 Annual Report
Supplementary information


Selected quarterly financial data (unaudited)
(Table continued on next page)      
As of or for the period ended2011 20102012 2011
(in millions, except per share, ratio and headcount data)4th quarter3rd quarter2nd quarter1st quarter 4th quarter3rd quarter2nd quarter1st quarter4th quarter3rd quarter2nd quarter1st quarter 4th quarter3rd quarter2nd quarter1st quarter
Selected income statement data      
Noninterest revenue$9,340
$11,946
$14,943
$13,316
 $13,996
$11,322
$12,414
$13,961
Net interest income12,131
11,817
11,836
11,905
 12,102
12,502
12,687
13,710
Total net revenue21,471
23,763
26,779
25,221
 26,098
23,824
25,101
27,671
$23,653
$25,146
$22,180
$26,052
 $21,471
$23,763
$26,779
$25,221
Total noninterest expense14,540
15,534
16,842
15,995
 16,043
14,398
14,631
16,124
16,047
15,371
14,966
18,345
 14,540
15,534
16,842
15,995
Pre-provision profit(a)
6,931
8,229
9,937
9,226
 10,055
9,426
10,470
11,547
Pre-provision profit7,606
9,775
7,214
7,707
 6,931
8,229
9,937
9,226
Provision for credit losses2,184
2,411
1,810
1,169
 3,043
3,223
3,363
7,010
656
1,789
214
726
 2,184
2,411
1,810
1,169
Income before income tax expense4,747
5,818
8,127
8,057
 7,012
6,203
7,107
4,537
6,950
7,986
7,000
6,981
 4,747
5,818
8,127
8,057
Income tax expense1,019
1,556
2,696
2,502
 2,181
1,785
2,312
1,211
1,258
2,278
2,040
2,057
 1,019
1,556
2,696
2,502
Net income$3,728
$4,262
$5,431
$5,555
 $4,831
$4,418
$4,795
$3,326
$5,692
$5,708
$4,960
$4,924
 $3,728
$4,262
$5,431
$5,555
Per common share data      
Average: Basic$0.90
$1.02
$1.28
$1.29
 $1.13
$1.02
$1.10
$0.75
Net income per share: Basic$1.40
$1.41
$1.22
$1.20
 $0.90
$1.02
$1.28
$1.29
Diluted0.90
1.02
1.27
1.28
 1.12
1.01
1.09
0.74
1.39
1.40
1.21
1.19
 0.90
1.02
1.27
1.28
Cash dividends declared per share(b)
0.25
0.25
0.25
0.25
 0.05
0.05
0.05
0.05
Cash dividends declared per share(a)
0.30
0.30
0.30
0.30
 0.25
0.25
0.25
0.25
Book value per share46.59
45.93
44.77
43.34
 43.04
42.29
40.99
39.38
51.27
50.17
48.40
47.48
 46.59
45.93
44.77
43.34
Tangible book value per share(b)
38.75
37.53
35.71
34.79
 33.69
33.05
32.01
30.77
Common shares outstanding      
Average: Basic3,801.9
3,859.6
3,958.4
3,981.6
 3,917.0
3,954.3
3,983.5
3,970.5
3,806.7
3,803.3
3,808.9
3,818.8
 3,801.9
3,859.6
3,958.4
3,981.6
Diluted3,811.7
3,872.2
3,983.2
4,014.1
 3,935.2
3,971.9
4,005.6
3,994.7
3,820.9
3,813.9
3,820.5
3,833.4
 3,811.7
3,872.2
3,983.2
4,014.1
Common shares at period-end3,772.7
3,798.9
3,910.2
3,986.6
 3,910.3
3,925.8
3,975.8
3,975.4
3,804.0
3,799.6
3,796.8
3,822.0
 3,772.7
3,798.9
3,910.2
3,986.6
Share price(c)
      
High$37.54
$42.55
$47.80
$48.36
 $43.12
$41.70
$48.20
$46.05
$44.54
$42.09
$46.35
$46.49
 $37.54
$42.55
$47.80
$48.36
Low27.85
28.53
39.24
42.65
 36.21
35.16
36.51
37.03
38.83
33.10
30.83
34.01
 27.85
28.53
39.24
42.65
Close33.25
30.12
40.94
46.10
 42.42
38.06
36.61
44.75
43.97
40.48
35.73
45.98
 33.25
30.12
40.94
46.10
Market capitalization125,442
114,422
160,083
183,783
 165,875
149,418
145,554
177,897
167,260
153,806
135,661
175,737
 125,442
114,422
160,083
183,783
Financial ratios   
Selected ratios   
Return on common equity8%9%12%13% 11%10%12%8%11%12%11%11% 8%9%12%13%
Return on tangible common equity11
13
17
18
 16
15
17
12
Return on tangible common equity(b)
15
16
15
15
 11
13
17
18
Return on assets0.65
0.76
0.99
1.07
 0.92
0.86
0.94
0.66
0.98
1.01
0.88
0.88
 0.65
0.76
0.99
1.07
Return on risk-weighted assets(d)
1.76
1.74
1.52
1.57
 1.21
1.40
1.82
1.90
Overhead ratio68
65
63
63
 61
60
58
58
68
61
67
70
 68
65
63
63
Deposits-to-loans ratio156
157
152
145
 134
131
127
130
163
158
153
157
 156
157
152
145
Tier 1 capital ratio12.3
12.1
12.4
12.3
 12.1
11.9
12.1
11.5
12.6
11.9
11.3
11.9
 12.3
12.1
12.4
12.3
Total capital ratio15.4
15.3
15.7
15.6
 15.5
15.4
15.8
15.1
15.3
14.7
14.0
14.9
 15.4
15.3
15.7
15.6
Tier 1 leverage ratio6.8
6.8
7.0
7.2
 7.0
7.1
6.9
6.6
7.1
7.1
6.7
7.1
 6.8
6.8
7.0
7.2
Tier 1 common capital ratio(d)(e)
10.1
9.9
10.1
10.0
 9.8
9.5
9.6
9.1
11.0
10.4
9.9
9.8
 10.1
9.9
10.1
10.0
Selected balance sheet data (period-end)      
Trading assets$443,963
$461,531
$458,722
$501,148
 $489,892
$475,515
$397,508
$426,128
$450,028
$447,053
$417,324
$455,633
 $443,963
$461,531
$458,722
$501,148
Securities364,793
339,349
324,741
334,800
 316,336
340,168
312,013
344,376
371,152
365,901
354,595
381,742
 364,793
339,349
324,741
334,800
Loans723,720
696,853
689,736
685,996
 692,927
690,531
699,483
713,799
733,796
721,947
727,571
720,967
 723,720
696,853
689,736
685,996
Total assets2,265,792
2,289,240
2,246,764
2,198,161
 2,117,605
2,141,595
2,014,019
2,135,796
2,359,141
2,321,284
2,290,146
2,320,164
 2,265,792
2,289,240
2,246,764
2,198,161
Deposits1,127,806
1,092,708
1,048,685
995,829
 930,369
903,138
887,805
925,303
1,193,593
1,139,611
1,115,886
1,128,512
 1,127,806
1,092,708
1,048,685
995,829
Long-term debt(f)
256,775
273,688
279,228
269,616
 270,653
271,495
260,442
278,685
249,024
241,140
239,539
255,831
 256,775
273,688
279,228
269,616
Common stockholders’ equity175,773
174,487
175,079
172,798
 168,306
166,030
162,968
156,569
195,011
190,635
183,772
181,469
 175,773
174,487
175,079
172,798
Total stockholders’ equity183,573
182,287
182,879
180,598
 176,106
173,830
171,120
164,721
204,069
199,639
191,572
189,269
 183,573
182,287
182,879
180,598
Headcount260,157
256,663
250,095
242,929
 239,831
236,810
232,939
226,623
258,965
259,547
262,882
261,453
 260,157
256,663
250,095
242,929


JPMorgan Chase & Co./20112012 Annual Report 305331
Supplementary information

(Table continued from previous page)      
As of or for the period ended2011 20102012 2011
(in millions, except ratio data)4th quarter3rd quarter2nd quarter1st quarter 4th quarter3rd quarter2nd quarter1st quarter4th quarter3rd quarter2nd quarter1st quarter 4th quarter3rd quarter2nd quarter1st quarter
Credit quality metrics      
Allowance for credit losses$28,282
$29,036
$29,146
$30,438
 $32,983
$35,034
$36,748
$39,126
$22,604
$23,576
$24,555
$26,621
 $28,282
$29,036
$29,146
$30,438
Allowance for loan losses to total retained loans3.84%4.09%4.16%4.40% 4.71%4.97%5.15%5.40%3.02%3.18%3.29%3.63% 3.84%4.09%4.16%4.40%
Allowance for loan losses to retained loans excluding purchased credit-impaired loans(g)(f)
3.35
3.74
3.83
4.10
 4.46
5.12
5.34
5.64
2.43
2.61
2.74
3.11
 3.35
3.74
3.83
4.10
Nonperforming assets$11,036
$12,194
$13,240
$14,986
 $16,557
$17,656
$18,156
$19,019
$11,734
$12,481
$11,397
$11,953
 $11,315
$12,468
$13,435
$15,149
Net charge-offs(h)
2,907
2,507
3,103
3,720
 5,104
4,945
5,714
7,910
1,628
2,770
2,278
2,387
 2,907
2,507
3,103
3,720
Net charge-off rate(h)
1.64%1.44%1.83%2.22% 2.95%2.84%3.28%4.46%0.90%1.53%1.27%1.35% 1.64%1.44%1.83%2.22%
(a)Pre-provision profit is total net revenue less noninterest expense. The Firm believes that this financial measure is useful in assessingOn March 13, 2012, the ability of a lending institutionFirm’s quarterly stock dividend was increased from $0.25 to generate income in excess of its provision for credit losses.$0.30 per share.
(b)On March 18, 2011,
Tangible book value per share and ROTCE are non-GAAP financial measures. Tangible book value per share represents the BoardFirm’s tangible common equity divided by period-end common shares. ROTCE measures the Firm’s annualized earnings as a percentage of Directors increasedtangible common equity. For further discussion of these measures, see Explanation and Reconciliation of the Firm's quarterly stock dividend from $0.05 to $0.25 per share.Firm’s Use of Non-GAAP Financial Measures on pages 76–77 of this Annual Report.
(c)Share prices shown for JPMorgan Chase’s common stock are from the New York Stock Exchange. JPMorgan Chase’s common stock is also listed and traded on the London Stock Exchange and the Tokyo Stock Exchange.
(d)Return on Basel I risk-weighted assets is the annualized earnings of the Firm divided by its average risk-weighted assets.
(e)
Basel I 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 the Tier 1 common ratio, see Regulatory capital on pages 119–122117–120 of this Annual Report.
(f)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.
(g)
Excludes the impact of residential real estate PCI loans. For further discussion, see Allowance for credit losses on pages 155–157159–162 of this Annual Report.
(h)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.


306332 JPMorgan Chase & Co./20112012 Annual Report


Short-term and other borrowed funds
The following table provides a summary of JPMorgan Chase’s short-term and other borrowed funds for the years indicated.
As of or for the year ended December 31, (in millions, except rates)2011 2010 2009
Federal funds purchased and securities loaned or sold under repurchase agreements:     
Balance at year-end$213,532
 $276,644
 $261,413
Average daily balance during the year256,283
 278,603
 275,862
Maximum month-end balance289,835
 314,161
 310,802
Weighted-average rate at December 310.16% 0.18 % 0.04%
Weighted-average rate during the year0.21
 (0.07)
(d) 
0.21
      
Commercial paper:     
Balance at year-end$51,631
 $35,363
 $41,794
Average daily balance during the year42,653
 36,000
 39,055
Maximum month-end balance51,631
 50,554
 53,920
Weighted-average rate at December 310.12% 0.21 % 0.18%
Weighted-average rate during the year0.17
 0.20
 0.28
      
Other borrowed funds:(a)(b)
     
Balance at year-end$88,626
 $111,272
 $97,838
Average daily balance during the year107,543
 104,951
 99,785
Maximum month-end balance127,517
 120,437
 155,693
Weighted-average rate at December 311.60% 5.71 % 3.92%
Weighted-average rate during the year2.50
 2.89
 2.83
      
Short-term beneficial interests:(c)
     
Commercial paper and other borrowed funds:     
Balance at year-end$26,243
 $25,095
 $4,787
Average daily balance during the year25,125
 21,853
 3,275
Maximum month-end balance26,780
 25,095
 7,751
Weighted-average rate at December 310.18% 0.25 % 0.17%
Weighted-average rate during the year0.23
 0.27
 0.24
(a)Includes securities sold but not yet purchased.
(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 periods have been revised to conform with the current presentation.
(c)Included on the Consolidated Balance Sheets in beneficial interests issued by consolidated variable interest entities.
(d)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.



JPMorgan Chase & Co./2011 Annual Report307
Glossary of Terms

ACH: Automated Clearing House.
Active mobile customerscustomers: - 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 its 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 Firm’s Consolidated Balance Sheets plus credit card receivables that have been securitized and removed from the Firm’s 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 interest of third-party interestsholders of debt, equity securities, or other obligations, 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.consolidates.
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 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 byat the earlier of: (i) the end of the month in which the account becomes 180 days past due or (ii) 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, Card’s 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 swapCDS 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 generally made by the relevant ISDA DeterminationInternational Swaps and Derivatives Association (“ISDA”) Determinations 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.again (or vice versa). 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 & Poor’s – 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.security and is assigned by the American Bankers Association and operated by Standard & Poor’s. This system facilitates the clearing and settlement process of securities. 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


308JPMorgan Chase & Co./2011 Annual Report


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 governmentGroup of one of countries in the “Group of Seven”Seven (“G7”) nations. nations: Countries in the G7 are Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.
Global Corporate Bank:G7 government bonds: TSS and IB formed a joint venture to createBonds issued by the Firm’s Global Corporate Bank. With a teamgovernment of bankers,one of countries in 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.G7 nations.
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:Investment-grade: 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 Chase’s internal risk assessment system. “Investment grade” generally represents a risk profile similar to a rating of a “BBB-”/“Baa3” or better, as defined by independent rating agencies.
ISDA: International Swaps and Derivatives Association.
LLC: Limited Liability Company.
Loan-to-value (“LTV”) ratio: Forresidential real estate loans, the relationship, expressed as a percentage, between the principal amount of a loan and the appraised value of the collateral (i.e., residential real estate) securing the loan.
Origination date LTV ratio
The LTV ratio at the origination date of the loan. Origination date LTV ratios are calculated based on the actual appraised values of collateral (i.e., loan-level data) at the origination date.
Current estimated LTV ratio
An estimate of the LTV as of a certain date. The current estimated LTV ratios are calculated using estimated
collateral values derived from a nationally recognized home price index measured at the metropolitan statistical area (“MSA”) level. These MSA-level home price indices 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


333
Glossary of Terms

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 Firm’s 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-GAAPnon- 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 Firm’s Consolidated Balance Sheets plus credit card receivables that have been securitized and removed from the Firm’s 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 combined-loan-to-valuecombined loan-to-value (“CLTV”) ratio; (iii) loans secured by non-


JPMorgan Chase & Co./2011 Annual Report309
Glossary of Terms

ownernon-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 traditionalthe Firm’s Alt-A loans are those where a borrower does not provide complete documentation of his or her assets or the amount or source of his or her income.
Option ARMs
The option ARM real estate loan product is an adjustable-rate mortgage loan that provides the borrower with the option each month to make a fully amortizing, interest-only or minimum payment. The minimum payment on an option ARM loan is based on the interest rate charged during the introductory period. This introductory rate is usually significantly below the fully indexed rate. The fully indexed rate is calculated using an index rate plus a margin. Once the introductory period ends, the contractual interest rate charged on the loan increases to the fully indexed rate and adjusts monthly to reflect movements in the index. The minimum payment is typically insufficient to cover interest accrued in the prior month, and any unpaid interest is deferred and added to the principal balance of the loan. Option ARM loans are subject to payment recast, which converts the loan to a variable-rate fully amortizing loan upon meeting specified loan balance and anniversary date triggers.
Prime
Prime mortgage loans 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 forloans to customers with one or more high risk characteristics, including but not limited to: (i) unreliable or poor payment histories; (ii) a high LTV ratio of greater than 80% (without borrower-paid mortgage insurance); (iii) a high debt-to-income ratio; (iv) an occupancy type for the loan is other than the borrower’s primary residence; or (v) a history of delinquencies or late payments on the loan.
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., long-term fixed income, equity, cash, real assets, private equity or hedge funds).class.
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-shareearnings per share calculation using the two-class method. JPMorgan Chase grants restricted stock and RSUs to certain employees under its stock-based compensation programs, which entitle the recipients to receive nonforfeitable dividends during the vesting period on a basis equivalent to the dividends paid to holders of common stock. These unvested awards meet the definition of participating securities. Under the two-class method, all earnings (distributed and undistributed) are allocated to each class of common stock and participating securities, based on their respective rights to receive dividends.
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: TotalRepresents total net revenue less noninterest expense. The Firm believes that this financial measure is useful in assessing the ability of a lending institution to generate income in excess of its provision for credit losses.
Pretax margin:Represents income before income tax expense divided by total net revenue, which is, in management’s view, a comprehensive measure of pretax performance derived by


334
Glossary of Terms

measuring earnings after all costs are taken into consideration. It is therefore, anotherone basis thatupon which management uses to evaluateevaluates the performance of TSS and AM against the performance of their respective competitors.
Principal transactions revenue: Principal transactions revenue includes realized and unrealized gains and losses recorded on derivatives, other financial instruments, private equity investments, and physical commodities used in market making and client-driven activities. In addition, Principal transactions revenue also includes certain realized and unrealized gains and losses related to hedge accounting and specified risk management activities including: (a) certain derivatives designated in qualifying hedge accounting relationships (primarily fair value hedges of commodity and foreign exchange risk), (b) certain derivatives used for specified risk management purposes, primarily to mitigate credit risk, foreign exchange risk and commodity risk, and (c) other derivatives, including the synthetic credit portfolio.
Purchased credit-impaired (“PCI”) loans: AcquiredRepresents loans that were acquired in the Washington Mutual transaction and deemed to be credit-impaired underon the acquisition date in accordance with FASB guidance for PCI loans.guidance. The guidance allows purchasers to aggregate credit-impaired loans acquired in the same fiscal quarter into one or more pools, provided that the loans have common risk characteristics (e.g., product type, LTV ratios, FICO score,scores, past due status, geographic location). A pool is then accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Wholesale loans are determined
Real assets: Real assets include investments in productive assets such as agriculture, energy rights, mining and timber properties and exclude raw land 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.developed for real estate purposes.
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 real-estate related assets by pooling their capital to purchase and manage income property (i.e., equity REIT) and/or


310JPMorgan Chase & Co./2011 Annual Report


mortgage loans (i.e., mortgage REIT). REITs can be publicly- orpublicly-or privately-held and they also qualify for certain favorable tax considerations.
Receivables from customers: Primarily represents margin loans to prime and retail brokerage customers which are included in accrued interest and accounts receivable on the Consolidated Balance Sheets for the wholesale lines of business.
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(i.e. excludes loans held-for-sale and loans at fair value.value).
Risk-weighted assets (“RWA”):Risk-weighted assets consist of on–on- and off–balanceoff-balance sheet assets that are assigned to one of several broad risk categories and weighted by factors representing their risk and potential for default. On–balanceOn-balance sheet assets are risk-weighted based on the perceivedestimated credit risk associated with the obligor or counterparty, the nature of any collateral, and the guarantor, if any. Off–balanceOff-balance sheet assets such as lending-related commitments, guarantees, derivatives and other applicable off–balanceoff-balance 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. RWARisk-weighted assets 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.risk-weighted assets.
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 Firm’s capital from the investment.
Stress testing:Short sale: A scenario that measures market riskshort sale is a sale of real estate in which proceeds from selling the underlying property are less than the amount owed the Firm under unlikely but plausible events in abnormal markets.the terms of the related mortgage and the related lien is released upon receipt of such proceeds.
TARP: Troubled Asset Relief Program.
Taxable-equivalent basis: ForIn presenting managed results, the total net revenue for each of the business segments and the Firm is presented on a tax-equivalent basis. Accordingly, revenue from investments that receive tax credits and tax-exempt securities is presented in the managed results on a basis comparable to taxable investments and securities. This non-GAAP financial measure allows management to assesssecurities; 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.
Troubled debt restructuring (“TDR”): OccursA TDR is deemed to occur when the Firm modifies the original terms of a loan agreement by granting a concession to a borrower that is experiencing financial difficulty.
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 certain of the assets of 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.




JPMorgan Chase & Co./2011 Annual Report 311335
Distribution of assets, liabilities and stockholders’ equity; interest rates and interest differentials


Consolidated average balance sheet, interest and rates
Provided below is a summary of JPMorgan Chase & Co.’s (“JPMorgan Chase” or the “Firm”) consolidated average balances, interest rates and interest differentials on a taxable-equivalent basis for the years 20092010 through 2011.2012. Income computed on a taxable-equivalent basis is the
 
income reported in the Consolidated Statements of Income, adjusted to make income and earnings yields on assets exempt from income taxes (primarily federal taxes) comparable with other taxable


(Table continued on next page)20112012
Year ended December 31,
(Taxable-equivalent interest and rates; in millions, except rates)
Average
balance
 Interest 
Average
rate
Average
balance
 
Interest(e)
 
Average
rate
Assets            
Deposits with banks$79,783
 $599
 0.75% $118,463
 $555
 0.47% 
Federal funds sold and securities purchased under resale agreements211,800
 2,523
 1.19
 239,703
 2,442
 1.02
 
Securities borrowed128,777
 110
 0.09
 131,446
 (3)
(a) 
—
 
Trading assets – debt instruments264,941
 11,309
 4.27
 234,224
 9,285
 3.96
 
Securities337,894
 9,462
 2.80
(f) 
363,230
 8,322
 2.29
(g) 
Loans693,523
 37,214
(e) 
5.37
 722,384
 35,946
(f) 
4.98
 
Other assets(a)(b)
44,637
 606
 1.36
 32,967
 259
 0.79
 
Total interest-earning assets1,761,355
 61,823
 3.51
 1,842,417
 56,806
 3.08
 
Allowance for loan losses(29,483)     (24,906)     
Cash and due from banks40,725
     51,410
     
Trading assets – equity instruments128,949
     115,113
     
Trading assets – derivative receivables90,003
     85,744
     
Goodwill48,632
     48,176
     
Other intangible assets:            
Mortgage servicing rights11,249
     7,133
     
Purchased credit card relationships744
     470
     
Other intangibles2,889
     2,363
     
Other assets143,135
     144,061
     
Total assets2,198,198
     $2,271,981
     
Liabilities            
Interest-bearing deposits$733,683
 $3,855
 0.53% $751,098
 $2,655
 0.35% 
Federal funds purchased and securities loaned or sold under repurchase agreements256,283
 534
 0.21
 248,561
 535
 0.22
 
Commercial paper42,653
 73
 0.17
 50,780
 91
 0.18
 
Trading liabilities – debt, short-term and other liabilities(b)(c)
206,531
 2,266
 1.10
 
Trading liabilities - debt, short-term and other liabilities(c)
193,459
 1,162
 0.60
 
Beneficial interests issued by consolidated VIEs68,523
 767
 1.12
 60,234
 648
 1.08
 
Long-term debt(c)
272,985
 6,109
 2.24
 245,662
 6,062
 2.47
 
Total interest-bearing liabilities1,580,658
 13,604
 0.86
 1,549,794
 11,153
 0.72
 
Noninterest-bearing deposits278,307
     354,785
     
Trading liabilities – equity instruments5,316
     14,172
     
Trading liabilities – derivative payables71,539
     76,162
     
All other liabilities, including the allowance for lending-related commitments81,312
     84,480
     
Total liabilities2,017,132
     2,079,393
     
Stockholders’ equity            
Preferred stock7,800
     8,236
     
Common stockholders’ equity173,266
     184,352
     
Total stockholders’ equity181,066
(d) 
    192,588
(d) 
    
Total liabilities and stockholders’ equity$2,198,198
     $2,271,981
     
Interest rate spread    2.65%     2.36% 
Net interest income and net yield on interest-earning assets  $48,219
 2.74
   $45,653
 2.48
 
(a)Includes margin loansNegative interest income for the year ended December 31, 2012, is a result of increased client-driven demand for certain securities combined with the impact of low interest rates; the offset of this matched book activity is reflected as lower net interest expense reported within trading liabilities - debt, short-term and in 2009, the Firm’s investment in asset-backed commercial paper under the Federal Reserve Bank of Boston’s Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (“AML facility”).other liabilities.
(b)Includes brokerage customer payables.margin loans.
(c)
Effective January 1, 2011, long-term advances from Federal Home Loan Banks (“FHLBs”) were reclassified from other borrowed funds to long-term debt. Prior-year periods have been revised to conform with the current presentation; average long-term FHLBs advances for the years ended December 31, 2010 and 2009, were $17.0 billion and $31.0 billion, respectively.
Includes brokerage customer payables.
(d)
The ratio of average stockholders’ equity to average assets was 8.2%8.5% for 20112012,8.2% for 2011, and 8.3% for 2010, and 8.1% for 20092010. The return on average stockholders’ equity, based on net income, was 11.1% for 2012, 10.5% for 2011, and 10.2% for 2010, and 7.1% for 2009.
(e)Interest includes the effect of related hedging derivatives. Taxable-equivalent amounts are used where applicable.
(f)
Fees and commissions on loans included in loan interest amounted to $1.3 billion in 2012, $1.2 billion in 2011, and $1.5 billion in 2010, and $2.0 billion in 2009.
(f)(g)
The annualized rate for available-for-sale securities based on amortized cost was 2.35% in 2012, 2.84% in 2011, and 3.00% in 2010, and 3.66% in 2009, and does not give effect to changes in fair value that are reflected in accumulated other comprehensive income/(loss).
(g)(h)Reflects a benefit from the favorable market environments for dollar-roll financings.

312336  


income. The incremental tax rate used for calculating the taxable-equivalent adjustment was approximately 38% in both 2012 and 2011, and 39% in both 2010 and 2009.2010. A substantial portion of JPMorgan Chase’s securities are taxable.
Within the Consolidated average balance sheets, interest
and rates summary, the principal amounts of nonaccrual
loans have been included in the average loan balances used to determine the average interest rate earned on loans. For additional information on nonaccrual loans, including interest accrued, see Note 14 on pages 231–252.250–275.

(Table continued from previous page)          
2010 2009
Average
balance
 Interest 
Average
rate
 
Average
balance
 Interest 
Average
rate
             
$47,611
 $345
 0.72%  $67,015
 $938
 1.40% 
188,394
 1,786
 0.95
  152,926
 1,750
 1.14
 
117,416
 175
 0.15
  124,462
 4
 —
 
254,898
 11,128
 4.37
  251,035
 12,283
 4.89
 
330,166
 9,729
 2.95
(f) 
 342,655
 12,506
 3.65
(f) 
703,540
 40,481
(e) 
5.75
  682,885
 38,720
(e) 
5.67
 
35,496
 541
 1.52
  29,510
 479
 1.62
 
1,677,521
 64,185
 3.83
  1,650,488
 66,680
 4.04
 
(36,588)      (27,635)     
30,318
      24,873
     
99,543
      67,028
     
84,676
      110,457
     
48,618
      48,254
     
             
12,896
      12,898
     
1,061
      1,436
     
3,117
      3,659
     
132,089
      132,743
     
$2,053,251
      $2,024,201
     
             
$668,640
 $3,424
 0.51%  $684,016
 $4,826
 0.71% 
278,603
 (192)
(g) 
(0.07)
(g) 
 275,862
 573
 0.21
 
36,000
 72
 0.20
  39,055
 108
 0.28
 
186,059
 2,484
 1.34
  170,200
 2,105
 1.24
 
87,493
 1,145
 1.31
  14,930
 218
 1.46
 
273,074
 5,848
 2.14
  299,220
 7,368
 2.46
 
1,529,869
 12,781
 0.84
  1,483,283
 15,198
 1.02
 
212,414
      197,989
     
6,172
      11,694
     
65,714
      77,901
     
69,539
      88,377
     
1,883,708
      1,859,244
     
             
8,023
      19,054
     
161,520
      145,903
     
169,543
(d) 
     164,957
(d) 
    
$2,053,251
      $2,024,201
     
    2.99%      3.02% 
  $51,404
 3.06
    $51,482
 3.12
 


(Table continued from previous page)          
2011 2010
Average
balance
 
Interest(e)
 
Average
rate
 
Average
balance
 
Interest(e)
 
Average
rate
             
$79,783
 $599
 0.75%  $47,611
 $345
 0.72% 
211,800
 2,523
 1.19
  188,394
 1,786
 0.95
 
128,777
 110
 0.09
  117,416
 175
 0.15
 
264,941
 11,309
 4.27
  254,898
 11,128
 4.37
 
337,894
 9,462
 2.80
(g) 
 330,166
 9,729
 2.95
(g) 
693,523
 37,214
(f) 
5.37
  703,540
 40,481
(f) 
5.75
 
44,637
 606
 1.36
  35,496
 541
 1.52
 
1,761,355
 61,823
 3.51
  1,677,521
 64,185
 3.83
 
(29,483)      (36,588)     
40,725
      30,318
     
128,949
      99,543
     
90,003
      84,676
     
48,632
      48,618
     
             
11,249
      12,896
     
744
      1,061
     
2,889
      3,117
     
143,135
      132,089
     
$2,198,198
      $2,053,251
     
             
$733,683
 $3,855
 0.53%  $668,640
 $3,424
 0.51% 
256,283
 534
 0.21
  278,603
 (192)
(h) 
(0.07)
(h) 
42,653
 73
 0.17
  36,000
 72
 0.20
 
206,531
 2,266
 1.10
  186,059
 2,484
 1.34
 
68,523
 767
 1.12
  87,493
 1,145
 1.31
 
272,985
 6,109
 2.24
  273,074
 5,848
 2.14
 
1,580,658
 13,604
 0.86
  1,529,869
 12,781
 0.84
 
278,307
      212,414
     
5,316
      6,172
     
71,539
      65,714
     
81,312
      69,539
     
2,017,132
      1,883,708
     
             
7,800
      8,023
     
173,266
      161,520
     
181,066
(d) 
     169,543
(d) 
    
$2,198,198
      $2,053,251
     
    2.65%      2.99% 
  $48,219
 2.74
    $51,404
 3.06
 

  313337
Interest rates and interest differential analysis of net interest income – U.S. and non-U.S.


Presented below is a summary of interest rates and interest differentials segregated between U.S. and non-U.S. operations for the years 20092010 through 20112012. The segregation of U.S. and non-U.S. components is based on
 
the location of the office recording the transaction. Intracompany funding generally comprises dollar-denominated deposits originated in various locations that are centrally managed by JPMorgan Chase’s Treasury unit.

(Table continued on next page)        
20112012
Year ended December 31,
(Taxable-equivalent interest and rates; in millions, except rates)
Average balanceInterest Average rateAverage balanceInterest Average rate
Interest-earning assets        
Deposits with banks, primarily U.S.$79,783
$599
 0.75% 
Deposits with banks:    
U.S.$79,992
$168
 0.21% 
Non-U.S.38,471
387
 1.01
 
Federal funds sold and securities purchased under resale agreements:        
U.S.106,927
690
 0.65
 137,874
872
 0.63
 
Non-U.S.104,873
1,833
 1.75
 101,829
1,570
 1.54
 
Securities borrowed:        
U.S.65,702
(358) (0.54) 70,084
(407)
(c) 
(0.58) 
Non-U.S.63,075
468
 0.74
 61,362
404
 0.66
 
Trading assets – debt instruments:        
U.S.123,078
5,071
 4.12
 119,854
4,592
 3.83
 
Non-U.S.141,863
6,238
 4.40
 114,370
4,693
 4.10
 
Securities:        
U.S.183,692
5,761
 3.14
 161,727
3,991
 2.47
 
Non-U.S.154,202
3,701
 2.40
 201,503
4,331
 2.15
 
Loans:    
Loans(a):
    
U.S.611,057
34,625
 5.67
 620,615
33,167
 5.34
 
Non-U.S.82,466
2,589
 3.14
 101,769
2,779
 2.73
 
Other assets, primarily U.S.44,637
606
 1.36
 
Other assets, predominantly U.S.32,967
259
 0.79
 
Total interest-earning assets1,761,355
61,823
 3.51
 1,842,417
56,806
 3.08
 
Interest-bearing liabilities        
Interest-bearing deposits:        
U.S.472,645
1,680
 0.36
 512,589
1,345
 0.26
 
Non-U.S.261,038
2,175
 0.83
 238,509
1,310
 0.55
 
Federal funds purchased and securities loaned or sold under repurchase agreements:        
U.S.203,899
(92)
(b) 
(0.05)
(b) 
181,460
4
(d) 
—
(d) 
Non-U.S.52,384
626
 1.20
 67,101
531
 0.79
 
Trading liabilities – debt, short-term and other liabilities:    
Trading liabilities - debt, short-term and other liabilities(a):
    
U.S.171,667
352
 0.21
 176,755
(82)
(c) 
(0.05) 
Non-U.S.77,517
1,987
 2.56
 67,484
1,335
 1.98
 
Beneficial interests issued by consolidated VIEs, primarily U.S.68,523
767
 1.12
 
Beneficial interests issued by consolidated VIEs, predominantly U.S.60,234
648
 1.08
 
Long-term debt:        
U.S.252,506
6,041
 2.39
 230,101
5,998
 2.61
 
Non-U.S.20,479
68
 0.33
 15,561
64
 0.41
 
Intracompany funding:        
U.S.(190,282)(600) —
 (253,906)(551) —
 
Non-U.S.190,282
600
 —
 253,906
551
 —
 
Total interest-bearing liabilities1,580,658
13,604
 0.86
 1,549,794
11,153
 0.72
 
Noninterest-bearing liabilities(a)
180,697
    
Noninterest-bearing liabilities(b)
292,623
    
Total investable funds$1,761,355
$13,604
 0.77% $1,842,417
$11,153
 0.60% 
Net interest income and net yield: $48,219
 2.74%  $45,653
 2.48% 
U.S. 38,399
 3.25
  35,315
 2.91
 
Non-U.S. 9,820
 1.69
  10,338
 1.65
 
Percentage of total assets and liabilities attributable to non-U.S. operations:        
Assets  36.3
   36.2
 
Liabilities  24.9
   23.4
 
(a)2011 has been reclassified to conform with the current presentation.
(b)Represents the amount of noninterest-bearing liabilities funding interest-earning assets.
(b)(c)Negative interest income is a result of increased client-driven demand for certain securities combined with the impact of low interest rates; the offset of this matched book activity is reflected as lower net interest expense reported within trading liabilities - debt, short-term and other liabilities.
(d)Reflects a benefit from the favorable market environments for dollar-roll financings.






314338  


U.S. net interest income was $38.435.3 billion in 20112012, a decrease of $5.73.1 billion from the prior year. Net interest income from non-U.S. operations was $9.810.3 billion for 20112012,
an increase of $2.5 billion518 million from $7.39.8 billion in2010. For
 
2011. For further information, see the “Net interest income” discussion in Consolidated Results of Operations on pages 71–75.72–75.


(Table continued from previous page)

       
2010 2009
Average balanceInterest Average rate  Average balanceInterestAverage rate
         
$47,611
$345
 0.72%  $67,015
$938
1.40%
         
89,619
830
 0.93
  72,619
997
1.37
98,775
956
 0.97
  80,307
753
0.94
         
67,031
(237) (0.35)  75,301
(354)(0.47)
50,385
412
 0.82
  49,161
358
0.73
         
119,660
5,513
 4.61
  130,558
6,742
5.16
135,238
5,615
 4.15
  120,477
5,541
4.60
         
226,345
7,210
 3.19
  275,601
11,015
4.00
103,821
2,519
 2.43
  67,054
1,491
2.22
         
644,504
38,800
 6.02
  620,716
36,476
5.88
59,036
1,681
 2.85
  62,169
2,244
3.61
35,496
541
 1.52
  29,510
479
1.62
1,677,521
64,185
 3.83
  1,650,488
66,680
4.04
         
         
433,227
2,156
 0.50
  440,326
3,781
0.86
235,413
1,268
 0.54
  243,690
1,045
0.43
         
231,710
(635)
(b) 
(0.27)
(b) 
 238,691
296
0.12
46,893
443
 0.95
  37,171
277
0.75
         
145,422
682
 0.47
  170,043
446
0.26
76,637
1,874
 2.45
  39,212
1,767
4.51
87,493
1,145
 1.31
  14,930
218
1.46
         
247,813
5,752
 2.32
  259,738
7,210
2.78
25,261
96
 0.38
  39,482
158
0.40
         
(88,286)(359) —
  (42,711)(510)—
88,286
359
 —
  42,711
510
—
1,529,869
12,781
 0.84
  1,483,283
15,198
1.02
147,652
     167,205
  
$1,677,521
$12,781
 0.76%  $1,650,488
$15,198
0.92%
 $51,404
 3.06%   $51,482
3.12%
 44,059
 3.65
   44,098
3.61
 7,345
 1.56
   7,384
1.72
         
   31.9
    28.9
   25.2
    25.1
(Table continued from previous page)

        
2011 2010 
Average balanceInterest Average rate  Average balanceInterest Average rate 
           
           
$51,123
$127
 0.25%  $26,148
$88
 0.34% 
28,660
472
 1.65
  21,463
257
 1.20
 
           
106,927
690
 0.65
  89,619
830
 0.93
 
104,873
1,833
 1.75
  98,775
956
 0.97
 
           
65,702
(358)
(c) 
(0.54)  67,031
(237)
(c) 
(0.35) 
63,075
468
 0.74
  50,385
412
 0.82
 
           
123,078
5,071
 4.12
  119,660
5,513
 4.61
 
141,863
6,238
 4.40
  135,238
5,615
 4.15
 
           
183,692
5,761
 3.14
  226,345
7,210
 3.19
 
154,202
3,701
 2.40
  103,821
2,519
 2.43
 
           
611,057
34,846
 5.70
  644,504
38,800
 6.02
 
82,466
2,368
 2.87
  59,036
1,681
 2.85
 
44,637
606
 1.36
  35,496
541
 1.52
 
1,761,355
61,823
 3.51
  1,677,521
64,185
 3.83
 
           
           
472,645
1,680
 0.36
  433,227
2,156
 0.50
 
261,038
2,175
 0.83
  235,413
1,268
 0.54
 
           
203,899
(92)
(d) 
(0.05)
(d) 
 231,710
(635)
(d) 
(0.27)
(d) 
52,384
626
 1.20
  46,893
443
 0.95
 
           
171,731
573
 0.34
  145,422
682
 0.47
 
77,453
1,766
 2.27
  76,637
1,874
 2.45
 
68,523
767
 1.12
  87,493
1,145
 1.31
 
           
252,506
6,041
 2.39
  247,813
5,752
 2.32
 
20,479
68
 0.33
  25,261
96
 0.38
 
           
(190,282)(600) —
  (88,286)(359) —
 
190,282
600
 —
  88,286
359
 —
 
1,580,658
13,604
 0.86
  1,529,869
12,781
 0.84
 
180,697
     147,652
    
$1,761,355
$13,604
 0.77%  $1,677,521
$12,781
 0.76% 
 $48,219
 2.74%   $51,404
 3.06% 
 38,399
 3.25
   44,059
 3.65
 
 9,820
 1.69
   7,345
 1.56
 
           
   36.3
     31.9
 
   24.9
     25.2
 


  315339
Changes in net interest income, volume and rate analysis


The table below presents an analysis of the effect on net interest income of volume and rate changes for the periods 2012 versus 2011 and 2011 versus 2010 and 2010 versus 2009. In this analysis, when the change duecannot be isolated to the volume/either volume or rate, it has been allocated to volume.
2011 versus 2010 2010 versus 20092012 versus 2011 2011 versus 2010
Increase/(decrease) due to change in:   Increase/(decrease) due to change in:  Increase/(decrease) due to change in:   Increase/(decrease) due to change in:  
Year ended December 31,
(On a taxable-equivalent basis: in millions)
Volume Rate 
Net
change
 Volume Rate 
Net
change
Volume Rate 
Net
change
 Volume Rate 
Net
change
Interest-earning assets                      
Deposits with banks, primarily U.S.$240
 $14
 $254
 $(137) $(456) $(593)
Deposits with banks:           
U.S.$61
 $(20) $41
 $63
 $(24) $39
Non-U.S.98
 (183) (85) 118
 97
 215
Federal funds sold and securities purchased under resale agreements:                      
U.S.111
 (251) (140) 153
 (320) (167)203
 (21) 182
 111
 (251) (140)
Non-U.S.107
 770
 877
 179
 24
 203
(43) (220) (263) 107
 770
 877
Securities borrowed:                      
U.S.6
 (127) (121) 27
 90
 117
(23) (26) (49) 6
 (127) (121)
Non-U.S.96
 (40) 56
 10
 44
 54
(14) (50) (64) 96
 (40) 56
Trading assets – debt instruments:                      
U.S.144
 (586) (442) (511) (718) (1,229)(122) (357) (479) 144
 (586) (442)
Non-U.S.285
 338
 623
 616
 (542) 74
(1,119) (426) (1,545) 285
 338
 623
Securities:                      
U.S.(1,336) (113) (1,449) (1,573) (2,232) (3,805)(539) (1,231) (1,770) (1,336) (113) (1,449)
Non-U.S.1,213
 (31) 1,182
 887
 141
 1,028
1,016
 (386) 630
 1,213
 (31) 1,182
Loans:                      
U.S.(1,919) (2,256) (4,175) 1,455
 869
 2,324
521
 (2,200) (1,679) (1,892) (2,062) (3,954)
Non-U.S.737
 171
 908
 (91) (472) (563)526
 (115) 411
 675
 12
 687
Other assets, primarily U.S.122
 (57) 65
 92
 (30) 62
Other assets, predominantly U.S.(93) (254) (347) 122
 (57) 65
Change in interest income(194) (2,168) (2,362) 1,107
 (3,602) (2,495)472
 (5,489) (5,017) (288) (2,074) (2,362)
Interest-bearing liabilities                      
Interest-bearing deposits:                      
U.S.131
 (607) (476) (40) (1,585) (1,625)138
 (473) (335) 131
 (607) (476)
Non-U.S.224
 683
 907
 (45) 268
 223
(134) (731) (865) 224
 683
 907
Federal funds purchased and securities loaned or sold under repurchase agreements:                      
U.S.33
 510
 543
 —
 (931) (931)(6) 102
 96
 33
 510
 543
Non-U.S.66
 117
 183
 92
 74
 166
120
 (215) (95) 66
 117
 183
Trading liabilities - debt, short-term and other liabilities                      
U.S.48
 (378) (330) (121) 357
 236
15
 (670) (655) 80
 (189) (109)
Non-U.S.29
 84
 113
 915
 (808) 107
(206) (225) (431) 30
 (138) (108)
Beneficial interests issued by consolidated VIEs, primarily U.S.(212) (166) (378) 949
 (22) 927
Beneficial interests issued by consolidated VIEs, predominantly U.S.(92) (27) (119) (212) (166) (378)
Long-term debt:                      
U.S.116
 173
 289
 (263) (1,195) (1,458)(599) 556
 (43) 116
 173
 289
Non-U.S.(15) (13) (28) (54) (8) (62)(20) 16
 (4) (15) (13) (28)
Intracompany funding:                      
U.S.(320) 79
 (241) (182) 333
 151
(141) 190
 49
 (320) 79
 (241)
Non-U.S.320
 (79) 241
 182
 (333) (151)141
 (190) (49) 320
 (79) 241
Change in interest expense420
 403
 823
 1,433
 (3,850) (2,417)(784) (1,667) (2,451) 453
 370
 823
Change in net interest income$(614) $(2,571) $(3,185) $(326) $248
 $(78)$1,256
 $(3,822) $(2,566) $(741) $(2,444) $(3,185)

316340  
Securities portfolio


For information regarding the securities portfolio as of December 31, 20112012 and 20102011, and for the years ended December 31, 20112012 and 20102011, see Note 12 on pages 225–230.244–248. For the available–for–sale securities portfolio, at December 31, 20092010, the fair value and amortized cost of U.S. Department of the Treasury (“U.S. Treasury”) and government agency obligations was $197.9131.6 billion and $196.1128.6 billion, respectively; the fair value and amortized cost of all other available–for–sale securities was $162.5184.7 billion and $161.0183.6 billion, respectively; and the total fair value and amortized cost of the total available–for–sale securities portfolio was $360.4316.3 billion and $357.1312.2 billion respectively.
At December 31, 20092010, the fair value and amortized cost of U.S. Treasury and government agency obligations in held-to-maturity securities portfolio was $2720 million and $2518 million, respectively. There were no other held-to-maturity securities at December 31, 20092010.



  317341
Loan portfolio



The table below presents loans on the line-of-business basis that is presented in Credit Risk Management on pages 135, 136137, 150 and 146,138–149, and in Note 14 on pages 231–252,250–275, at the periods indicated.
December 31, (in millions)2011 2010 2009 2008 200720122011201020092008
U.S. Consumer, excluding credit card loans 
Home equity$88,356
$100,497
$112,844
$127,945
$142,890
Mortgage123,277
128,709
134,284
143,129
157,078
Auto49,913
47,426
48,367
46,031
42,603
Other31,074
31,795
32,123
33,392
35,537
Total U.S. Consumer, excluding credit card loans292,620
308,427
327,618
350,497
378,108
Credit Card Loans 
U.S. Credit Card loans125,277
129,587
134,781
76,490
102,607
Non-U.S. Credit Card loans2,716
2,690
2,895
2,296
2,139
Total Credit Card loans127,993
132,277
137,676
78,786
104,746
Total Consumer loans420,613
440,704
465,294
429,283
482,854
U.S. wholesale loans          
Commercial and industrial$65,958
 $50,912
 $51,113
 $74,153
 $70,081
77,900
65,958
50,912
51,113
74,153
Real estate53,230
 51,734
 54,970
 61,890
 15,977
59,369
53,230
51,734
54,970
61,890
Financial institutions8,489
 12,120
 13,557
 20,953
 15,113
10,708
8,489
12,120
13,557
20,953
Government agencies7,236
 6,408
 5,634
 5,919
 5,770
7,962
7,236
6,408
5,634
5,919
Other52,126
 38,298
 23,811
 23,861
 26,312
50,948
52,126
38,298
23,811
23,861
Total U.S. wholesale loans187,039
 159,472
 149,085
 186,776
 133,253
206,887
187,039
159,472
149,085
186,776
Non-U.S. wholesale loans          
Commercial and industrial31,108
 19,053
 20,188
 35,291
 33,829
36,674
31,108
19,053
20,188
35,291
Real estate1,748
 1,973
 2,270
 2,811
 3,632
1,757
1,748
1,973
2,270
2,811
Financial institutions30,262
 20,043
 11,848
 17,552
 17,245
26,564
30,262
20,043
11,848
17,552
Government agencies583
 870
 1,707
 602
 720
1,586
583
870
1,707
602
Other32,276
 26,222
 19,077
 19,012
 24,397
39,715
32,276
26,222
19,077
19,012
Total non-U.S. wholesale loans95,977
 68,161
 55,090
 75,268
 79,823
106,296
95,977
68,161
55,090
75,268
Total wholesale loans          
Commercial and industrial97,066
 69,965
 71,301
 109,444
 103,910
114,574
97,066
69,965
71,301
109,444
Real estate54,978
 53,707
 57,240
 64,701
 19,609
61,126
54,978
53,707
57,240
64,701
Financial institutions38,751
 32,163
 25,405
 38,505
 32,358
37,272
38,751
32,163
25,405
38,505
Government agencies7,819
 7,278
 7,341
 6,521
 6,490
9,548
7,819
7,278
7,341
6,521
Other84,402
 64,520
 42,888
 42,873
 50,709
90,663
84,402
64,520
42,888
42,873
Total wholesale loans283,016
 227,633
 204,175
 262,044
 213,076
313,183
283,016
227,633
204,175
262,044
Total consumer loans         
Home equity100,497
 112,844
 127,945
 142,890
 94,832
Mortgage128,709
 134,284
 143,129
 157,078
 56,031
Auto47,426
 48,367
 46,031
 42,603
 42,350
Credit card132,277
 137,676
 78,786
 104,746
 84,352
Other31,795
 32,123
 33,392
 35,537
 28,733
Total consumer loans440,704
 465,294
 429,283
 482,854
 306,298
Total loans(a)
$723,720
 $692,927
 $633,458
 $744,898
 $519,374
$733,796
$723,720
$692,927
$633,458
$744,898
Memo:          
Loans held-for-sale$2,626
 $5,453
 $4,876
 $8,287
 $18,899
$4,406
$2,626
$5,453
$4,876
$8,287
Loans at fair value2,097
 1,976
 1,364
 7,696
 8,739
2,555
2,097
1,976
1,364
7,696
Total loans held-for-sale and loans at fair value$4,723
 $7,429
 $6,240
 $15,983
 $27,638
$6,961
$4,723
$7,429
$6,240
$15,983
(a)
Loans (other than purchased credit-impaired loans and those for which the fair value option have been elected) are presented net of unearned income, unamortized discounts and premiums, and net deferred loan costs of $2.5 billion, $2.7 billion, $1.9 billion, $1.4 billion, and $2.0 billion and $1.3 billion at December 31, 2012, 2011, 2010, 2009, and 2008 and 2007, respectively.


318342  


Maturities and sensitivity to changes in interest rates
The table below shows,sets forth, at December 31, 20112012, wholesale loan maturity and distribution between fixed and floating interest rates based on the stated terms of the wholesale loan agreements. The table below also reflects the line-of-business basis that is presented in Credit Risk Management on pages 135, 136137, 150 and 146,138–149, and in Note 14 on pages 231–252.250–275. The table does not include the impact of derivative instruments.
December 31, 2011 (in millions)
Within
1 year (a)
 
1-5
years
 
After 5
years
 Total
December 31, 2012 (in millions)
Within
1 year (a)
1-5
years
After 5
years
Total
U.S.        
Commercial and industrial$14,527
 $38,967
 $12,464
 $65,958
$14,543
$47,236
$16,121
$77,900
Real estate5,216
 10,822
 37,192
 53,230
4,656
13,559
41,154
59,369
Financial institutions3,427
 4,021
 1,041
 8,489
4,887
4,277
1,544
10,708
Government agencies1,882
 1,810
 3,544
 7,236
1,765
1,604
4,593
7,962
Other25,167
 23,092
 3,867
 52,126
22,283
25,663
3,002
50,948
Total U.S.50,219
 78,712
 58,108
 187,039
48,134
92,339
66,414
206,887
Non-U.S.        
Commercial and industrial13,264
 11,806
 6,038
 31,108
13,523
15,083
8,068
36,674
Real estate771
 882
 95
 1,748
479
1,126
152
1,757
Financial institutions27,179
 2,971
 112
 30,262
22,237
3,641
686
26,564
Government agencies461
 57
 65
 583
1,025
8
553
1,586
Other22,218
 9,049
 1,009
 32,276
30,832
7,970
913
39,715
Total non-U.S.63,893
 24,765
 7,319
 95,977
68,096
27,828
10,372
106,296
Total wholesale loans$114,112
 $103,477
 $65,427
 $283,016
$116,230
$120,167
$76,786
$313,183
Loans at fixed interest rates  $10,211
 $41,127
   $11,446
$49,185
 
Loans at variable interest rates  93,266
 24,300
   108,721
27,601
 
Total wholesale loans  $103,477
 $65,427
   $120,167
$76,786
 
(a)Includes demand loans and overdrafts.


319


Risk elements
The following table setstables set forth nonperforming assets, contractually past-due assets, and accruing restructured loans with the line-of-business basis that is presented in Credit Risk Management on pages 135, 136,137, 139 and 146,150, at the periods indicated.

December 31, (in millions)2011 2010 2009 2008 200720122011201020092008
Nonperforming assets          
U.S. nonaccrual loans:          
Consumer, excluding credit card loans$9,174
$7,411
$8,833
$10,657
$6,567
Credit Card loans1
1
2
3
4
Total U.S. nonaccrual consumer loans9,175
7,412
8,835
10,660
6,571
Wholesale:          
Commercial and industrial$936
 $1,745
 $2,182
 $1,052
 $63
702
936
1,745
2,182
1,052
Real estate886
 2,390
 2,647
 806
 216
520
886
2,390
2,647
806
Financial institutions76
 111
 663
 60
 10
60
76
111
663
60
Government agencies—
 —
 4
 —
 1
—
—
—
4
—
Other234
 267
 348
 205
 200
153
234
267
348
205
Consumer7,412
 8,835
 10,660
 6,571
 2,768
Total U.S. wholesale nonaccrual loans1,435
2,132
4,513
5,844
2,123
Total U.S. nonaccrual loans9,544
 13,348
 16,504
 8,694
 3,258
10,610
9,544
13,348
16,504
8,694
Non-U.S. nonaccrual loans:          
Consumer, excluding credit card loans—
—
—
—
—
Credit Card loans—
—
—
—
—
Total Non-U.S. nonaccrual consumer loans—
—
—
—
—
Wholesale:          
Commercial and industrial79
 234
 281
 45
 14
48
79
234
281
45
Real estate—
 585
 241
 —
 —
—
—
585
241
—
Financial institutions—
 30
 118
 115
 8
—
—
30
118
115
Government agencies16
 22
 —
 —
 —
5
16
22
—
—
Other354
 622
 420
 99
 2
57
354
622
420
99
Consumer—
 —
 —
 —
 —
Total non-U.S. nonaccrual loans449
 1,493
 1,060
 259
 24
Total non-U.S. Wholesale nonaccrual loans110
449
1,493
1,060
259
Total Non-U.S. nonaccrual loans110
449
1,493
1,060
259
Total nonaccrual loans9,993
 14,841
 17,564
 8,953
 3,282
10,720
9,993
14,841
17,564
8,953
Derivative receivables18
 34
 529
 1,079
 29
239
297
159
736
1,145
Assets acquired in loan satisfactions1,025
 1,682
 1,648
 2,682
 622
775
1,025
1,682
1,648
2,682
Nonperforming assets$11,036
 $16,557
 $19,741
 $12,714
 $3,933
$11,734
$11,315
$16,682
$19,948
$12,780
Memo:          
Loans held-for-sale$110
 $341
 $234
 $12
 $45
$18
$110
$341
$234
$12
Loans at fair value73
 155
 111
 20
 5
93
73
155
111
20
Total loans held-for-sale and loans at fair value$183
 $496
 $345
 $32
 $50
$111
$183
$496
$345
$32
Contractually past-due assets(a)
         
U.S. loans:         
Wholesale:         
Commercial and industrial$—
 $7
 $23
 $30
 $7
Real estate84
 109
 114
 76
 34
Financial institutions2
 2
 6
 —
 —
Government agencies—
 —
 —
 —
 —
Other6
 171
 75
 54
 28
Consumer2,418
 3,640
 3,985
 3,084
 1,945
Total U.S. loans2,510
 3,929
 4,203
 3,244
 2,014
Non-U.S. loans:         
Wholesale:         
Commercial and industrial—
 —
 5
 —
 —
Real estate—
 —
 —
 —
 —
Financial institutions—
 —
 —
 —
 —
Government agencies—
 —
 —
 —
 —
Other8
 70
 109
 3
 6
Consumer36
 38
 38
 28
 23
Total non-U.S. loans44
 108
 152
 31
 29
Total$2,554
 $4,037
 $4,355
 $3,275
 $2,043
Accruing restructured loans(b)
         
U.S.:         
Commercial and industrial$68
 $—
 $—
 $—
 $8
Real estate48
 76
 5
 —
 —
Financial institutions2
 —
 —
 —
 —
Other6
 —
 —
 —
 —
Consumer(c)
14,524
 14,261
 8,405
 4,029
 1,867
Total U.S.14,648
 14,337
 8,410
 4,029
 1,875
Non-U.S.:         
Commercial and industrial48
 49
 31
 5
 —
Real estate—
 —
 582
 —
 —
Other—
 —
 —
 —
 —
Consumer—
 —
 —
 —
 —
Total non-U.S.48
 49
 613
 5
 —
Total$14,696
 $14,386
 $9,023
 $4,034
 $1,875

343


December 31, (in millions)20122011201020092008
Contractually past-due loans(a)
     
U.S. loans:     
Consumer, excluding credit card loans$525
$551
$625
$542
$463
Credit Card loans1,268
1,867
3,015
3,443
2,621
Total U.S. Consumer loans1,793
2,418
3,640
3,985
3,084
Wholesale:     
Commercial and industrial19
—
7
23
30
Real estate69
84
109
114
76
Financial institutions6
2
2
6
—
Government agencies—
—
—
—
—
Other30
6
171
75
54
Total U.S. Wholesale loans124
92
289
218
160
Total U.S. loans1,917
2,510
3,929
4,203
3,244
Non-U.S. loans:     
Consumer, excluding credit card loans—
—
—
—
—
Credit Card loans34
36
38
38
28
Total Non-U.S. Consumer loans34
36
38
38
28
Wholesale:     
Commercial and industrial—
—
—
5
—
Real estate—
—
—
—
—
Financial institutions—
—
—
—
—
Government agencies—
—
—
—
—
Other14
8
70
109
3
Total non-U.S. Wholesale loans14
8
70
114
3
Total non-U.S. loans48
44
108
152
31
Total contractually past due loans$1,965
$2,554
$4,037
$4,355
$3,275
(a)Represents accruing loans past-due 90 days or more as to principal and interest, which are not characterized as nonaccrual loans.


December 31, (in millions)20122011201020092008
Accruing restructured loans(a)
     
U.S.:     
Consumer, excluding credit card loans$9,033
$7,310
$4,256
$2,160
$981
Credit Card loans(b)
4,762
7,214
10,005
6,245
3,048
Total U.S. Consumer loans13,795
14,524
14,261
8,405
4,029
Wholesale:     
Commercial and industrial29
68
—
—
—
Real estate7
48
76
5
—
Financial institutions—
2
—
—
—
Other—
6
—
—
—
Total U.S. Wholesale loans36
124
76
5
—
Total U.S.13,831
14,648
14,337
8,410
4,029
Non-U.S.:     
Consumer, excluding credit card loans—
—
—
—
—
Credit Card loans(b)
—
—
—
—
—
Total Non-U.S. Consumer loans—
—
—
—
—
Wholesale:     
Commercial and industrial24
48
49
31
5
Real estate—
—
—
582
—
Other—
—
—
—
—
Total non-U.S. Wholesale loans24
48
49
613
5
Total non-U.S.24
48
49
613
5
Total accruing restructured notes$13,855
$14,696
$14,386
$9,023
$4,034
(b)(a)Represents performing loans modified in troubled debt restructurings in which an economic concession was granted by the Firm and the borrower has demonstrated its ability to repay the loans according to the terms of the restructuring. As defined in accounting principles generally accepted in the United States of America (“U.S. GAAP”), concessions include the reduction of interest rates or the deferral of interest or principal payments, resulting from deterioration in the borrowers’ financial condition. Excludes nonaccrual assets and contractually past-due assets, which are included in the sections above.
(c)(b)Includes credit card loans that have been modified in a troubled debt restructuring.

For a discussion of nonaccrual loans, past-due loan accounting policies, and accruing restructured loans see Credit Risk Management on pages 132–157,134–135, and Note 14 on pages 231–252.250–275.

320344  


Impact of nonaccrual loans and accruing restructured loans on interest income
The negative impact on interest income from nonaccrual loans represents the difference between the amount of interest income that would have been recorded on such nonaccrual loans according to their original contractual terms had they been performing and the amount of interest that actually was recognized on a cash basis. The negative impact on interest income from accruing restructured loans represents the difference between the amount of interest income that would have been recorded on such loans according to their original contractual terms and the amount of interest that actually was recognized under the modified terms. The following table sets forth this data for the years specified. The change in foregone interest income from 20092010 through 20112012 was primarily driven by the change in the levels of nonaccrual loans.
Year ended December 31, (in millions)2011 2010 2009201220112010
Nonaccrual loans      
U.S.:      
Consumer, excluding credit card: 
Gross amount of interest that would have been recorded at the original terms$804
$669
$860
Interest that was recognized in income(302)(128)(139)
Total U.S. Consumer, excluding credit card502
541
721
Credit Card: 
Gross amount of interest that would have been recorded at the original terms—
—
—
Interest that was recognized in income—
—
—
Total U.S. credit card—
—
—
Total U.S. Consumer502
541
721
Wholesale:      
Gross amount of interest that would have been recorded at the original terms$80
 $110
 $88
54
80
110
Interest that was recognized in income(4) (21) (13)(4)(4)(21)
Total U.S. wholesale76
 89
 75
Consumer:     
Total U.S. Wholesale50
76
89
Negative impact - U.S.552
617
810
Non-U.S.: 
Consumer, excluding credit card: 
Gross amount of interest that would have been recorded at the original terms669
 860
 932
—
—
—
Interest that was recognized in income(128) (139) (208)—
—
—
Total U.S. consumer541
 721
 724
Negative impact — U.S.617
 810
 799
Non-U.S.:     
Total Non-U.S. Consumer, excluding credit card—
—
—
Credit Card: 
Gross amount of interest that would have been recorded at the original terms—
—
—
Interest that was recognized in income—
—
—
Total Non U.S. credit card—
—
—
Total Non U.S. Consumer—
—
—
Wholesale:      
Gross amount of interest that would have been recorded at the original terms10
 26
 58
3
10
26
Interest that was recognized in income(2) (17) (7)—
(2)(17)
Total non-U.S. wholesale8
 9
 51
3
8
9
Consumer:     
Gross amount of interest that would have been recorded at the original terms—
 —
 —
Interest that was recognized in income—
 —
 —
Total non-U.S. consumer—
 —
 —
Negative impact — non-U.S.8
 9
 51
3
8
9
Total negative impact on interest income$625
 $819
 $850
$555
$625
$819

345


Year ended December 31, (in millions)2011 2010 2009201220112010
Accruing restructured loans      
U.S.:      
Consumer, excluding credit card: 
Gross amount of interest that would have been recorded at the original terms$729
$537
$295
Interest that was recognized in income(417)(304)(192)
Total U.S. Consumer, excluding credit card312
233
103
Credit Card: 
Gross amount of interest that would have been recorded at the original terms805
1,150
1,727
Interest that was recognized in income(308)(463)(605)
Total U.S. Credit Card497
687
1,122
Total U.S. Consumer809
920
1,225
Wholesale:(a)
      
Gross amount of interest that would have been recorded at the original terms$2
 $5
 $—
1
2
5
Interest that was recognized in income(2) (2) —
(2)(2)(2)
Total U.S. wholesale—
 3
 —
(1)—
3
Consumer:     
Negative impact — U.S.808
920
1,228
Non-U.S.: 
Consumer, excluding credit card: 
Gross amount of interest that would have been recorded at the original terms1,687
 2,022
 819
—
—
—
Interest that was recognized in income(767) (797) (386)—
—
—
Total U.S. consumer920
 1,225
 433
Negative impact — U.S.920
 1,228
 433
Non-U.S.:     
Total Non-U.S. Consumer, excluding credit card—
—
—
Credit Card: 
Gross amount of interest that would have been recorded at the original terms—
—
—
Interest that was recognized in income—
—
—
Total Non U.S. Credit Card—
—
—
Total Non U.S. Consumer—
—
—
Wholesale:(a)
      
Gross amount of interest that would have been recorded at the original terms4
 3
 38
1
4
3
Interest that was recognized in income(3) (2) (15)(1)(3)(2)
Total non-U.S. wholesale1
 1
 23
—
1
1
Consumer:     
Gross amount of interest that would have been recorded at the original terms—
 —
 —
Interest that was recognized in income—
 —
 —
Total non-U.S. consumer—
 —
 —
Negative impact — non-U.S.1
 1
 23
—
1
1
Total negative impact on interest income$921
 $1,229
 $456
$808
$921
$1,229
(a)Predominantly real estate-related.

346 321


Cross-border outstandings
Cross-border disclosure is based on the Federal Financial Institutions Examination Council’s (“FFIEC”) guidelines governing the determination of cross-border risk.
The reporting of country exposure under the FFIEC bank regulatory requirements significantly differs from the Firm’s internal risk management approach as described in Country Risk Management on pages 163–165.170–173. One significant difference is the FFIEC amounts are based on the domicile (legal residence) of the obligor, counterparty, issuer, or guarantor, while the Firm’s internalCredit Risk Management approach is based on where the assets of the obligor, counterparty, issuer or guarantor are located or where the majority of the revenue is derived. Other significant differences between the FFIEC and the Firm’s internal approachCredit Risk Management include the fact that the FFIEC amounts do not consider the following:
the benefit of collateral received for securities financing exposures;
the netting of cash and marketable securities received for lending exposures. The FFIEC guidelines require risk
 
shifting of lending exposure collateralized by marketable securities to the country of domicile of the issuer of the securities, and risk shifting to the U.S. for cash collateral;
the netting of long and short positions across issuers in the same country; and
the netting of credit derivative protection purchased and sold. The FFIEC guidelines require the reporting of the gross notional of credit derivative protection sold and does not permit netting for credit derivatives protection on the same underlying reference entity.
In addition to the above differences, the FFIEC requires that net local country assets be reduced by local country liabilities (regardless of currency denomination).
JPMorgan Chase’sChase’s total cross-border exposure tends to fluctuate greatly, and the amount of exposure at year-end tends to be a function of timing rather than representing a consistent trend. For a further discussion of JPMorgan Chase’sChase’s country risk exposure, see Country Risk Management on pages 163–165.170–173.

The following table lists all countries in which JPMorgan Chase’sChase’s cross-border outstandings exceed 0.75% of consolidated assets as of the dates specified.
Cross-border outstandings exceeding 0.75% of total assetsCross-border outstandings exceeding 0.75% of total assets        Cross-border outstandings exceeding 0.75% of total assets 
(in millions)December 31, Governments Banks 
Other(b)
 Net local country assets 
Total cross-border outstandings(c)
 
Commitments(d)
 Total exposureDecember 31,GovernmentsBanks
Other(b)
Net local
country
assets
Total cross-border outstandings(c)
Commitments(d)
Total exposure
United Kingdom(a)
2011 $984
 $12,023
 $14,003
 $—
 $27,010
 $156,747
 $183,757
Cayman Islands2012$315
$35
$67,700
$—
$68,050
$2,517
$70,567
2011266
64
52,760
—
53,090
6,836
59,926
201073
136
38,278
—
38,487
7,926
46,413
Japan2012$2,016
$30,616
$7,706
$23,679
$64,017
$57,041
$121,058
2010 787
 12,133
 10,903
 —
 23,823
 165,282
 189,105
20113,135
32,334
3,572
35,936
74,977
57,158
132,135
2009 347
 15,822
 11,565
 —
 27,734
 92,984
 120,718
2010233
24,386
4,231
25,050
53,900
63,980
117,880
France2011 $2,960
 $20,167
 $29,043
 $1,333
 $53,503
 $100,898
 $154,401
2012$10,706
$19,044
$26,902
$1,581
$58,233
$91,603
$149,836
2010 4,699
 16,541
 26,374
 1,473
 49,087
 101,141
 150,228
20112,960
20,167
29,043
1,333
53,503
100,898
154,401
2009 9,505
 16,428
 19,642
 1,377
 46,952
 160,536
 207,488
20104,699
16,541
26,374
1,473
49,087
101,141
150,228
Germany2011 $8,900
 $21,565
 $8,386
 $—
 $38,851
 $104,125
 $142,976
2012$9,363
$23,957
$11,557
$310
$45,187
$92,388
$137,575
2010 15,339
 9,900
 17,759
 —
 42,998
 108,141
 151,139
20118,900
21,565
8,386
—
38,851
104,125
142,976
2009 13,291
 10,704
 10,718
 —
 34,713
 175,323
 210,036
201015,339
9,900
17,759
—
42,998
108,141
151,139
Japan2011 $3,135
 $32,334
 $3,572
 $35,936
 $74,977
 $57,158
 $132,135
2010 233
 24,386
 4,231
 25,050
 53,900
 63,980
 117,880
2009 404
 22,022
 8,984
 4,622
 36,032
 66,487
 102,519
Netherlands2011 $130
 $9,433
 $38,879
 $—
 $48,442
 $44,832
 $93,274
2012$54
$5,947
$36,754
$—
$42,755
$41,836
$84,591
2010 506
 8,093
 36,060
 —
 44,659
 47,015
 91,674
2011130
9,433
38,879
—
48,442
44,832
93,274
2009 690
 9,037
 22,770
 —
 32,497
 74,789
 107,286
2010506
8,093
36,060
—
44,659
47,015
91,674
Italy2011 $8,155
 $4,407
 $2,731
 $1,318
 $16,611
 $70,884
 $87,495
Brazil2012$4,951
$4,373
$6,367
$9,452
$25,143
$8,939
$34,082
2010 5,292
 3,490
 2,543
 832
 12,157
 70,522
 82,679
20112,928
3,746
5,635
11,685
23,994
10,025
34,019
2009 12,912
 2,065
 3,643
 128
 18,748
 86,790
 105,538
20102,611
5,302
4,252
4,750
16,915
11,139
28,054
Switzerland2011 $119
 $5,596
 $1,757
 $30,324
 $37,796
 $35,559
 $73,355
2012$103
$4,193
$3,657
$14,121
$22,074
$32,531
$54,605
2010 146
 4,781
 2,167
 —
 7,094
 37,208
 44,302
2011119
5,596
1,757
30,324
37,796
35,559
73,355
2009 113
 3,769
 1,293
 —
 5,175
 56,457
 61,632
2010146
4,781
2,167
—
7,094
37,208
44,302
Cayman Islands2011 $266
 $64
 $52,760
 $—
 $53,090
 $6,836
 $59,926
Ireland2012$97
$2,818
$12,845
$—
$15,760
$8,951
$24,711
2010 73
 136
 38,278
 —
 38,487
 7,926
 46,413
201185
2,530
11,604
—
14,219
9,825
24,044
2009 243
 216
 30,830
 —
 31,289
 8,218
 39,507
2010189
6,300
12,307
—
18,796
11,453
30,249
Spain2011 $597
 $10,047
 $3,487
 $844
 $14,975
 $42,483
 $57,458
2010 936
 5,877
 4,390
 785
 11,988
 40,147
 52,135
2009 2,705
 8,724
 4,884
 1,189
 17,502
 52,363
 69,865
Brazil2011 $2,928
 $3,746
 $5,635
 $11,685
 $23,994
 $10,025
 $34,019
United Kingdom(a)
2012$712
$5,782
$8,757
$—
$15,251
$125,234
$140,485
2010 2,611
 5,302
 4,252
 4,750
 16,915
 11,139
 28,054
2011984
12,023
14,003
—
27,010
156,747
183,757
2009 2,082
 2,165
 3,681
 1,793
 9,721
 11,727
 21,448
2010787
12,133
10,903
—
23,823
165,282
189,105
Canada2011 $2,635
 $5,037
 $3,766
 $—
 $11,438
 $21,442
 $32,880
2012$1,536
$5,746
$3,718
$—
$11,000
$19,763
$30,763
2010 4,995
 4,482
 6,599
 —
 16,076
 23,434
 39,510
20112,635
5,037
3,766
—
11,438
21,442
32,880
2009 5,119
 2,057
 4,836
 —
 12,012
 24,719
 36,731
20104,995
4,482
6,599
—
16,076
23,434
39,510
Ireland2011 $85
 $2,530
 $11,604
 $—
 $14,219
 $9,825
 $24,044
2010 189
 6,300
 12,307
 —
 18,796
 11,453
 30,249
2009 700
 5,584
 8,413
 —
 14,697
 13,075
 27,772
(a)
Excluded from the table are $657.2$905.6 billion $503.5, $657.2 billion and $532.0$503.5 billion, at December 31, 2012, 2011 2010 and 2009,2010, respectively, substantially all of which represent notional amounts related to credit protection sold on indices representing baskets of exposures from multiple European countries, which had previously been reported within the United Kingdom. Based on regulatory guidance, credit protection sold on indices representing baskets of exposures from multiple countries shouldare to be disclosed in the aggregate as “other” rather than as a single country. Prior periods have been revised to conform with the current presentation.
(b)Consists primarily of commercial and industrial.
(c)Outstandings includes loans and accrued interest receivable, interest-bearing deposits with banks, acceptances, resale agreements, other monetary assets, cross-border trading debt and equity instruments, mark-to-market exposurefair value of foreign exchange and derivative contracts, and local country assets, net of local country liabilities. The amounts associated with foreign exchange and derivative contracts are presented after taking into account the impact of legally enforceable master netting agreements.
(d)
Commitments include outstanding letters of credit, undrawn commitments to extend credit, and the notional value of credit derivatives where JPMorgan Chase is a protection seller.

322 347
Summary of loan and lending-related commitments loss experience


The tables below summarize the changes in the allowance for loan losses and the allowance for lending-related commitments during the periods indicated. For a further discussion, see Allowance for credit losses on pages 155–157,159–162, and Note 15 on pages 252–255.
276–279.
Allowance for loan losses

            
Year ended December 31, (in millions)2011
 2010
 2009
 2008
 2007
2012201120102009 2008
Balance at beginning of year$32,266
 $31,602
 $23,164
 $9,234
 $7,279
$27,609
$32,266
$31,602
$23,164
 $9,234
Addition resulting from mergers and acquisitions(a)
—
 —
 —
 2,535
 —
—
—
—
—
 2,535
Provision for loan losses7,612
 16,822
 31,735
 21,237
 6,538
3,387
7,612
16,822
31,735
 21,237
U.S. charge-offs            
U.S. Consumer, excluding credit card:4,805
5,419
8,383
10,421
 5,086
U.S. Credit Card:5,624
8,017
15,247
10,217
 5,054
Total U.S. Consumer charge-offs10,429
13,436
23,630
20,638
 10,140
U.S. Wholesale:   
Commercial and industrial197
 467
 1,233
 183
 34
131
197
467
1,233
 183
Real estate221
 698
 700
 217
 46
114
221
698
700
 217
Financial institutions102
 146
 671
 17
 9
8
102
146
671
 17
Government agencies—
 3
 —
 —
 10
—
—
3
—
 —
Other149
 102
 151
 35
 81
56
149
102
151
 35
Consumer13,436
 23,630
 20,638
 10,140
 5,181
Total U.S. Wholesale charge-offs309
669
1,416
2,755
 452
Total U.S. charge-offs14,105
 25,046
 23,393
 10,592
 5,361
10,738
14,105
25,046
23,393
 10,592
Non-U.S. charge-offs            
Non-U.S. Consumer, excluding credit card:—
—
—
—
 —
Non-U.S. Credit Card:131
151
163
154
 103
Total Non-U.S. Consumer charge-offs131
151
163
154
 103
Non-U.S. Wholesale:   
Commercial and industrial1
 23
 64
 40
 2
8
1
23
64
 40
Real estate142
 239
 —
 —
 —
6
142
239
—
 —
Financial institutions6
 —
 66
 29
 —
—
6
—
66
 29
Government agencies—
 —
 —
 —
 —
4
—
—
—
 —
Other98
 311
 341
 —
 3
19
98
311
341
 —
Consumer151
 163
 154
 103
 1
Total non-U.S. charge-offs398
 736
 625
 172
 6
Total Non-U.S. Wholesale charge-offs37
247
573
471
 69
Total Non-U.S. charge-offs168
398
736
625
 172
Total charge-offs14,503
 25,782
 24,018
 10,764
 5,367
10,906
14,503
25,782
24,018
 10,764
U.S. recoveries            
U.S. Consumer, excluding credit card:(508)(547)(474)(222) (209)
U.S. Credit Card loans:(782)(1,211)(1,345)(719) (584)
Total U.S. Consumer recoveries:(1,290)(1,758)(1,819)(941) (793)
U.S. Wholesale:   
Commercial and industrial(60) (86) (53) (60) (48)(335)(60)(86)(53) (60)
Real estate(93) (75) (12) (5) (1)(64)(93)(75)(12) (5)
Financial institutions(207) (74) (3) (2) (3)(37)(207)(74)(3) (2)
Government agencies—
 (1) —
 —
 —
(2)—
(1)—
 —
Other(36) (25) (25) (29) (40)(21)(36)(25)(25) (29)
Consumer(1,758) (1,819) (941) (793) (716)
Total U.S. Wholesale recoveries(459)(396)(261)(93) (96)
Total U.S. recoveries(2,154) (2,080) (1,034) (889) (808)(1,749)(2,154)(2,080)(1,034) (889)
Non-U.S. recoveries            
Non-U.S. Consumer, excluding credit card:—
—
—
—
 —
Non-U.S. Credit Card:(29)(32)(28)(18) (17)
Total Non-U.S. Consumer recoveries(29)(32)(28)(18) (17)
Non-U.S. Wholesale:   
Commercial and industrial(14) (1) (1) (16) (8)(16)(14)(1)(1) (16)
Real estate(14) —
 —
 —
 —
(2)(14)—
—
 —
Financial institutions(38) —
 —
 —
 (1)(7)(38)—
—
 —
Government agencies—
 —
 —
 —
 —
—
—
—
—
 —
Other(14) —
 —
 (7) (12)(40)(14)—
—
 (7)
Consumer(32) (28) (18) (17) —
Total Non-U.S. Wholesale recoveries(65)(80)(1)(1) (23)
Total non-U.S. recoveries(112) (29) (19) (40) (21)(94)(112)(29)(19) (40)
Total recoveries(2,266) (2,109) (1,053) (929) (829)(1,843)(2,266)(2,109)(1,053) (929)
Net charge-offs12,237
 23,673
 22,965
 9,835
 4,538
9,063
12,237
23,673
22,965
 9,835
Allowance related to purchased portfolios—
 —
 —
 6
 —
—
—
—
—
 6
Change in accounting principles(b)
—
 7,494
 —
 —
 (56)—
—
7,494
—
 —
Other(32) 21
 (332)
(c) 
(13) 11
3
(32)21
(332)
(c) 
(13)
Balance at year-end$27,609
 $32,266
 $31,602
 $23,164
 $9,234
$21,936
$27,609
$32,266
$31,602
 $23,164
(a)The 2008 amount relates to the Washington Mutual transaction.
(b)
Effective January 1, 2010, the Firm adopted accounting guidance related to variable interest entities (“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, $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 256—267.280–291.
(c)Predominantly includes a reclassification in 2009 related to the issuance and retention of securities from the Chase Issuance Trust.

348 323


Allowance for lending-related commitments
Year ended December 31, (in millions)2011 2010 2009 2008 200720122011201020092008
Balance at beginning of year$717
 $939
 $659
 $850
 $524
$673
$717
$939
$659
$850
Addition resulting from mergers and acquisitions(a)
—
 —
 —
 66
 —
—
—
—
—
66
Provision for lending-related commitments(38) (183) 280
 (258) 326
(2)(38)(183)280
(258)
Net charge-offs—
 —
 —
 —
 —
—
—
—
—
—
Change in accounting principles(b)
—
 (18) —
 —
 —
—
—
(18)—
—
Other(6) (21) —
 1
 —
(3)(6)(21)—
1
Balance at year-end$673
 $717
 $939
 $659
 $850
$668
$673
$717
$939
$659
(a)The 2008 amount relates to the Washington Mutual transaction.
(b)Relates to the adoption of the new accounting guidance related to VIEs.

Loan loss analysis

          
As of or for the year ended December 31,
(in millions, except ratios)
2011 2010 2009 
2008(c)
 20072012201120102009
2008(c)
Balances          
Loans – average$693,523
 $703,540
 $682,885
 $588,801
 $479,679
$722,384
$693,523
$703,540
$682,885
$588,801
Loans – year-end723,720
 692,927
 633,458
 744,898
 519,374
733,796
723,720
692,927
633,458
744,898
Net charge-offs(a)
12,237
 23,673
 22,965
 9,835
 4,538
9,063
12,237
23,673
22,965
9,835
Allowance for loan losses:          
U.S.26,621
 31,111
 29,802
 21,830
 8,454
$20,946
$26,621
$31,111
$29,802
$21,830
Non-U.S.988
 1,155
 1,800
 1,334
 780
990
988
1,155
1,800
1,334
Total allowance for loan losses27,609
 32,266
 31,602
 23,164
 9,234
$21,936
$27,609
$32,266
$31,602
$23,164
Nonaccrual loans9,993
 14,841
 17,564
 8,953
 3,282
10,720
9,993
14,841
17,564
8,953
Ratios          
Net charge-offs to:          
Loans retained – average1.78% 3.39% 3.42% 1.73% 1.00%1.26%1.78%3.39%3.42%1.73%
Allowance for loan losses44.32
 73.37
 72.67
 42.46
 49.14
41.32
44.32
73.37
72.67
42.46
Allowance for loan losses to:          
Loans retained – year-end(b)
3.84
 4.71
 5.04
 3.18
 1.88
3.02
3.84
4.71
5.04
3.18
Nonaccrual loans retained281
 225
 184
 260
 286
207
281
225
184
260
(a)
There were no net charge-offs/(recoveries) on lending-related commitments in 2012, 2011, 2010, 2009, or 2008 or 2007.
(b)
The allowance for loan losses as a percentage of retained loans declined from 2009 to 20112012, due to an improvement in credit quality of the wholesaleconsumer and consumerwholesale credit portfolios. Deteriorating credit conditions fromduring 20072008 to 2009, primarily within consumer lending, resulted in increasing losses and correspondingly higher loan loss provisions for those periods. For a more detailed discussion of the 20092010 through 20112012 provision for credit losses, see Provision for credit losses on page 157.162.
(c)
On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual Bank. On May 30, 2008, the Bear Stearns merger was consummated. Each of these transactions was accounted for as a purchase, and their respective results of operations are included in the Firm’s results from each respective transaction.



324 349


Deposits
The following table provides a summary of the average balances and average interest rates of JPMorgan Chase’s various deposits for the years indicated.
Year ended December 31,Average balances Average interest ratesAverage balances Average interest rates
(in millions, except interest rates)2011 2010 2009 2011 2010 20092012
 2011
 2010
 2012
 2011
 2010
U.S.           
U.S. offices           
Noninterest-bearing$265,522
 $202,459
 $190,195
 —% —% —%$338,652
 $265,522
 $202,459
 —% —% —%
Interest-bearing

 

 

 

 

 



 

 

 

 

 

Demand39,177
 18,881
 14,873
 0.08
 0.04
 0.44
43,124
 39,177
 18,881
 0.08
 0.08
 0.04
Savings349,425
 312,118
 276,296
 0.23
 0.27
 0.33
383,777
 349,425
 312,118
 0.18
 0.23
 0.27
Time84,043
 102,228
 149,157
 1.00
 1.27
 1.88
85,688
 84,043
 102,228
 0.74
 1.00
 1.27
Total interest-bearing deposits472,645
 433,227
 440,326
 0.36
 0.50
 0.86
512,589
 472,645
 433,227
 0.26
 0.36
 0.50
Total U.S. deposits738,167
 635,686
 630,521
 0.23
 0.34
 0.60
Non-U.S.           
Total deposits in U.S. offices851,241
 738,167
 635,686
 0.16
 0.23
 0.34
Non-U.S. offices           
Noninterest-bearing12,785
 9,955
 7,794
 —
 —
 —
16,133
 12,785
 9,955
 —
 —
 —
Interest-bearing

 

 

 

 

 



 

 

 

 

 

Demand190,092
 163,550
 163,512
 0.66
 0.35
 0.25
184,366
 190,092
 163,550
 0.35
 0.66
 0.35
Savings637
 605
 559
 0.14
 0.28
 0.18
846
 637
 605
 0.23
 0.14
 0.28
Time70,309
 71,258
 79,619
 1.32
 0.97
 0.80
53,297
 70,309
 71,258
 1.23
 1.32
 0.97
Total interest-bearing deposits261,038
 235,413
 243,690
 0.83
 0.54
 0.43
238,509
 261,038
 235,413
 0.55
 0.83
 0.54
Total non-U.S. deposits273,823
 245,368
 251,484
 0.79
 0.52
 0.42
Total deposits in non-U.S. offices254,642
 273,823
 245,368
 0.51
 0.79
 0.52
Total deposits$1,011,990
 $881,054
 $882,005
 0.38% 0.39% 0.55%$1,105,883
 $1,011,990
 $881,054
 0.24% 0.38% 0.39%
At December 31, 2011,2012, other U.S. time deposits in denominations of $100,000 or more totaled $40.748.4 billion, substantially all of which mature in three months or less. In addition, the table below presents the maturities for U.S. time certificates of deposit in denominations of $100,000 or more.
By remaining maturity at
December 31, 2011 (in millions)
Three months
or less
 
Over three months
but within six months
 
Over six months
 but within 12 months
 Over 12 months Total
By remaining maturity at
December 31, 2012 (in millions)
Three months
or less
 
Over three months
but within six months
 
Over six months
 but within 12 months
 Over 12 months Total
U.S. time certificates of deposit ($100,000 or more)$4,801
 $3,016
 $3,930
 $5,372
 $17,119
$11,638
 $2,148
 $4,197
 $3,652
 $21,635


350


Short-term and other borrowed funds
The following table provides a summary of JPMorgan Chase’s short-term and other borrowed funds for the years indicated.
As of or for the year ended December 31, (in millions, except rates)2012 2011 2010 
Federal funds purchased and securities loaned or sold under repurchase agreements:      
Balance at year-end$240,103
 $213,532
 $276,644
 
Average daily balance during the year248,561
 256,283
 278,603
 
Maximum month-end balance268,931
 289,835
 314,161
 
Weighted-average rate at December 310.23% 0.16% 0.18 % 
Weighted-average rate during the year0.22
 0.21
 (0.07)
(c) 
       
Commercial paper:      
Balance at year-end$55,367
 $51,631
 $35,363
 
Average daily balance during the year50,780
 42,653
 36,000
 
Maximum month-end balance62,875
 51,631
 50,554
 
Weighted-average rate at December 310.21% 0.12% 0.21 % 
Weighted-average rate during the year0.18
 0.17
 0.20
 
       
Other borrowed funds:(a)
      
Balance at year-end$79,258
 $75,181
 $100,375
 
Average daily balance during the year79,003
 107,543
 104,951
 
Maximum month-end balance87,815
 124,138
 116,473
 
Weighted-average rate at December 311.83% 1.60% 5.71 % 
Weighted-average rate during the year2.49
 2.50
 2.89
 
       
Short-term beneficial interests:(b)
      
Commercial paper and other borrowed funds:      
Balance at year-end$28,219
 $26,243
 $25,095
 
Average daily balance during the year25,653
 25,125
 21,853
 
Maximum month-end balance30,043
 26,780
 25,095
 
Weighted-average rate at December 310.18% 0.18% 0.25 % 
Weighted-average rate during the year0.16
 0.23
 0.27
 
(a)Includes interest-bearing securities sold but not yet purchased.
(b)Included on the Consolidated Balance Sheets in beneficial interests issued by consolidated variable interest entities.
(c)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.



  325351


Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on behalf of the undersigned, thereunto duly authorized.
 
JPMorgan Chase & Co.
        (Registrant)
 
By: /s/ JAMES DIMON
 
 
(James Dimon
Chairman and Chief Executive Officer)
 February 29, 201228, 2013
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacity and on the date indicated. JPMorgan Chase & Co. does not exercise the power of attorney to sign on behalf of any Director.
  Capacity Date
/s/ JAMES DIMON 
Director, Chairman and Chief Executive Officer
 (Principal Executive Officer)
  
(James Dimon)   
     
/s/ JAMES A. BELL Director   
(James A. Bell)    
     
/s/ CRANDALL C. BOWLES Director   
(Crandall C. Bowles)    
     
/s/ STEPHEN B. BURKE Director   
(Stephen B. Burke)    
     
/s/ DAVID M. COTE Director   
(David M. Cote)    
     
/s/ JAMES S. CROWN Director  February 29, 201228, 2013
(James S. Crown)
/s/ TIMOTHY P. FLYNNDirector 
(Timothy P. Flynn)    
     
/s/ ELLEN V. FUTTER Director   
(Ellen V. Futter)    
     
/s/ WILLIAM H. GRAY, IIIDirector 
(William H. Gray, III)
/s/ LABAN P. JACKSON, JR. Director   
(Laban P. Jackson, Jr.)
/s/ DAVID C. NOVAKDirector 
(David C. Novak)    
     
/s/ LEE R. RAYMOND Director   
(Lee R. Raymond)    
     
/s/ WILLIAM C. WELDON Director   
 (William C. Weldon)    
     
/s/ DOUGLAS L. BRAUNSTEINMARIANNE LAKE 
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
  
(Douglas L. Braunstein)Marianne Lake)   
     
/s/ SHANNON S. WARRENMARK W. O’DONOVAN 
Managing Director and Corporate Controller
(Principal Accounting Officer)
  
(Shannon S. Warren)Mark W. O’Donovan)   


326352