10-K 1 y86143e10vk.htm FORM 10-K e10vk
Table of Contents

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 December 31, 2010
     
For the fiscal year ended   Commission file
December 31, 2010   number 1-5805
JPMorgan Chase & Co.
(Exact name of registrant as specified in its charter)
     
Delaware   13-2624428
(State or other jurisdiction of   (I.R.S. employer
incorporation or organization)   identification no.)
 
270 Park Avenue, New York, NY   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
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 XXVI
 
The New York Stock Exchange
Guarantee of Fixed-to-Floating Rate Capital Securities, Series BB, of JPMorgan Chase Capital XXVIII
 
The 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 10 Long Bond Treasury Futures ETNs due September 30, 2025
 
NYSE Arca, Inc.
Euro Floating Rate Global Notes due July 27, 2012
 
The NYSE Alternext U.S. LLC
Principal Protected Notes Linked to the Dow Jones Industrial Average SM due March 23, 2011
 
The 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. x 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 x No
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No
     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 x No
     The aggregate market value of JPMorgan Chase & Co. common stock held by non-affiliates of JPMorgan Chase & Co. on June 30, 2010 was approximately $144,824,681,723.
Number of shares of common stock outstanding on January 31, 2011: 3,983,509,889
Documents incorporated by reference: Portions of the registrant’s Proxy Statement for the annual meeting of stockholders to be held on May 17, 2011, 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
             
 
      Page  
           
 
  Business     1  
 
  Overview     1  
 
  Business segments     1  
 
  Competition     1  
 
  Supervision and regulation     1  
 
      304–308  
 
  Return on equity and assets     52, 295, 297, 304  
 
  Securities portfolio     214–218, 309  
 
  Loan portfolio     118–138, 220–238, 310–314  
 
  Summary of loan and lending-related commitments loss experience     139–141, 239–243, 315–316  
 
  Deposits     263–264, 317  
 
  Short-term and other borrowed funds     264, 299  
  Risk factors     5–12  
  Unresolved SEC Staff comments     12  
  Properties     12  
  Legal proceedings     12–13  
 
           
           
      13–14  
  Selected financial data     14  
      14  
      14  
  Financial statements and supplementary data     14  
      14  
  Controls and procedures     14  
  Other information     14  
 
           
           
  Directors, executive officers and corporate governance     15  
  Executive compensation     15  
      16  
  Certain relationships and related transactions, and director independence     16  
  Principal accounting fees and services     16  
 
           
           
  Exhibits, financial statement schedules     16–19  
 EX-12.1
 EX-12.2
 EX-21.1
 EX-23.1
 EX-31.1
 EX-31.2
 EX-32
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

 


Table of Contents

Part I
ITEM 1: BUSINESS
 
Overview
JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”) is a financial holding company incorporated under Delaware law in 1968. JPMorgan Chase is one of the largest banking institutions in the United States of America (“U.S.”), with $2.1 trillion in assets, $176.1 billion in stockholders’ equity and operations in more than 60 countries.
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.
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’s activities are organized, for management reporting purposes, into six business segments, as well as Corporate/Private Equity. The Firm’s wholesale businesses comprise the Investment Bank, Commercial Banking, Treasury & Securities Services and Asset Management segments. The Firm’s consumer businesses comprise the Retail Financial Services and Card Services segments.
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 67 and in Note 34 on pages 290–291.
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 the Firm’s businesses continue to compete with other financial institutions that are or may become larger or better capitalized, or that may have a stronger local presence in certain geographies.
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.
Recent events affecting the Firm: On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) which will make significant structural reforms to the financial services industry. These changes include the following:
  Volcker Rule. The Dodd-Frank Act’s Volcker Rule prohibits banking entities, such as JPMorgan Chase, from engaging in certain proprietary trading activities and restricts their ownership of, investment in or sponsorship of, hedge funds and private equity funds.
  Derivatives. The Dodd-Frank Act requires comprehensive regulation of the over-the-counter derivatives market, including strict capital and margin requirements, central clearing of standardized over-the-counter derivatives, and heightened supervision of over-the-counter derivatives dealers and major market participants, including JPMorgan Chase. 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.
  Debit Interchange. The Federal Reserve is required to restrict the interchange fees payable on debit card transactions.
  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. For more information, see “Capital requirements” below.
  FDIC Deposit Insurance Fund Assessments. The FDIC is required to amend its regulations to revise the assessment base for the calculation of banking industry assessments,


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Part I
    which support the Deposit Insurance Fund. For more information, see “Deposit Insurance” below.
  Bureau of Consumer Financial Protection. The Dodd-Frank Act establishes a Bureau of Consumer Financial Protection having broad authority to regulate providers of credit, payment and other consumer financial products and services, and may narrow the scope of federal preemption of state consumer laws and expand the authority of state attorneys general to bring actions to enforce federal consumer protection legislation.
  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, including liquidity, risk management, resolution plan, concentration limit, and credit exposure report requirements. Bank holding companies with over $50 billion in assets, including JPMorgan Chase, are considered systemically important. 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.
  Concentration 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.
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 Securities and Exchange Commission (the “SEC”); the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”); the Office of the Comptroller of the Currency (the “OCC”); the Federal Deposit Insurance Corporation (the “FDIC”); the new Bureau of Consumer Financial Protection (the “CFPB”); and the new Financial Stability Oversight Council (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., the Firm’s U.K. broker-dealer subsidiary.
It is not clear at this time what form all of the rulemakings will take, or what new proposals may be made. The description below summarizes the current regulatory structure in which the Firm operates, which could change significantly and, accordingly, the structure of the Firm and the products and services it offers could also change significantly as a result.
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 (“GLBA”). Under regulations implemented by the Federal Reserve Board, if any depository institution controlled by a financial holding company ceases to meet certain capital or management standards, the Federal Reserve Board 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 Board may require divestiture of the holding company’s depository institutions if the deficiencies persist. The 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 Board 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 GLBA.
Financial holding companies and bank holding companies are required to obtain the approval of the Federal Reserve Board 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 Board 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. 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.
Regulation by Federal Reserve Board: The Federal Reserve Board 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” below for a further description of the regulatory supervision to which the Firm’s subsidiaries are subject. In addition, under the Dodd-Frank Act, the Federal Reserve will remain the regulator of JPMorgan Chase, and will be imposing heightened prudential standards in its role as the regulator of systemically important financial institutions.
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 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 28 on page 273 for the amount of dividends that the Firm’s principal


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bank subsidiaries could pay, at January 1, 2011, 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 Board 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.
Moreover, the Federal Reserve Board has issued supervisory guidance requiring bank holding companies, such as JPMorgan Chase, to consult with Federal Reserve Board staff before taking actions, such as increasing dividends, implementing common stock repurchase programs or redeeming or repurchasing capital instruments. Such guidance provides for a supervisory capital assessment program that outlines Federal Reserve Board expectations concerning the processes that such bank holding companies should have in place to ensure they hold adequate capital under adverse conditions to maintain ready access to funding. The procedures require the implementation of a comprehensive capital plan and demonstration that the bank holding company will meet proposed Basel III regulatory capital standards, including the Basel III fully phased-in 7% tier 1 common equity target after giving effect to proposed dividend increases or other capital actions. The Firm is currently undergoing a capital assessment review pursuant to this supervisory program.
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 29 on pages 273–274.
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% for bank holding companies that are considered “strong” under Federal Reserve Board guidelines or which have implemented the Federal Reserve Board’s risk-based capital measure for market risk. Other bank holding companies must have a minimum leverage ratio of 4%. 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 addition, the U.S. federal banking agencies have published for public comment proposed risk-based capital floors pursuant to the requirements of the Dodd-Frank Act to establish a permanent Basel I floor under Basel II/Basel III calculations. For further description of these capital requirements, see pages 102–104.
Effective January 1, 2008, the SEC authorized JPMorgan Securities 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, JPMorgan Securities 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 102–104.
Federal Deposit Insurance Corporation Improvement Act: 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.
The regulations apply only to banks and not to bank holding companies, such as JPMorgan Chase. However, the Federal Reserve Board is authorized to take appropriate action against the bank holding company 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.
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 over the past three years have dramatically increased resolution costs of the FDIC and depleted the deposit insurance fund. 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. 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 are expected to become due over the next three years.


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Part I
The Dodd-Frank Act requires the FDIC to amend its regulations to change the base for calculating assessments from deposits to assets minus tangible equity. In February 2011, the FDIC issued a final rule changing the assessment base and the method for calculating the assessment rate. These changes are expected to result in an increase in the assessments that the Firm’s bank subsidiaries pay to the deposit insurance fund.
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.
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 important financial institution. The FDIC is in the process of proposing rules to implement its orderly liquidation authority. While the FDIC may have powers as receiver similar to those described above, the details of those powers are the subject of the proposed rules.
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 recordkeeping 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.
Other supervision and regulation: Under current Federal Reserve Board policy, JPMorgan Chase is expected to act as a source of financial strength to its bank subsidiaries 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 codify the Federal Reserve Board’s policy, and require a bank holding company to serve as a source of strength for any depository institution subsidiary. However, because GLBA provides for functional regulation of financial holding company activities by various regulators, GLBA prohibits the Federal Reserve Board 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 Board could instead require the divestiture of the depository institution and impose operating restrictions pending the divestiture.
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 28 on page 273. Effective in 2012, the Dodd-Frank Act extends 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.
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 GLBA). 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 Board 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, 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 JPMorgan Securities 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 (“U.K.”), those activities are conducted by J.P. Morgan Securities Ltd., which is regulated by the Financial Services Authority of the U.K. The operations of JPMorgan Chase mutual funds also are subject to regulation by the SEC.
The Firm has subsidiaries that are members of futures exchanges in the United States and abroad and are registered accordingly.


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In the United States, three 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. and other jurisdictions globally.
Under the Dodd-Frank Act, the CFTC and SEC will be the regulators of the Firm’s derivatives businesses. Certain of the Firm’s subsidiaries will likely be required to register with the CFTC and SEC as swaps dealers or security-based swaps 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 Board. 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 and collection practices. Under the Dodd-Frank Act, the new CFPB will be responsible for rulemaking and enforcement pursuant to such statutes.
Under the requirements imposed by GLBA, 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 GLBA, retail customers also must be given the opportunity to “opt out” of information-sharing arrangements with nonaffiliates, subject to certain exceptions set forth in GLBA.
ITEM 1A: RISK FACTORS
The following discussion sets forth some of the more important risk factors that could materially affect JPMorgan Chase’s financial condition and operations. Other factors that could affect the Firm’s financial condition and operations are discussed in the “Forward-looking statements” section on page 157. However, factors besides those discussed below, in MD&A or elsewhere in this or other reports that JPMorgan Chase filed or furnished with the SEC, also could adversely affect the Firm. Readers should not consider any descriptions of such factors to be a complete set of all potential risks that could affect the Firm.
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, 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.
The Firm generally maintains large positions in the fixed income, currency, commodity and equity markets, and from time to time the Firm may have trading 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 trading and private equity businesses will continue to experience volatility, which will affect pricing or the ability to realize returns from such investments, 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. Moreover, even in the absence of a market downturn, sub-par performance by the Firm’s investment management businesses could cause outflows of assets under management and, therefore, reduce the fees that the Firm receives.
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 deterioration in these conditions can 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 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.
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 disrupted, 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


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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.
The credit ratings of JPMorgan Chase & Co., JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A. are important to maintaining the Firm’s liquidity. A reduction in their 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, 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. Such downgrades may come at times of broader market instability, when the Firm’s options for responding to events are more limited and general investor confidence is low.
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 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 country in which they operate, and to maintain independent capital and liquidity for such subsidiaries. If adopted, these requirements could decrease the Firm’s ability to manage and increase the risk of its liquidity positions.
JPMorgan Chase operates within a highly regulated industry and the Firm’s business and results are significantly affected by the laws and regulations to which it is subject, including recently-adopted legislation and regulations.
JPMorgan Chase is subject to regulation under state and federal laws in the United States, as well as the applicable laws of each
of the various other jurisdictions outside the United States in which the Firm does business. These laws and regulations affect the way that the Firm does business, may restrict the scope of its existing businesses, limit its ability to expand its product offerings or pursue acquisitions, or make offering its products to clients more expensive.
Extensive legislation affecting the financial services industry has recently been adopted in the United States and in other jurisdictions, and regulations are in the process of being implemented. In the United States, the Dodd-Frank Wall Street Reform and Consumer Protection Act was adopted in 2010 and will effect significant structural reforms to the financial services industry. This legislation provides for, among other things: the establishment of a Bureau of Consumer Financial Protection which will have broad authority to regulate the credit, savings, payment and other consumer financial products and services that the Firm offers; the creation of a structure to regulate systemically important financial companies, and provide regulators with the power to require such companies to sell or transfer assets and terminate activities 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; more comprehensive regulation of the over-the-counter derivatives market, including providing for higher capital and margin requirements, the central clearing of standardized over-the-counter derivatives, and heightened supervision of all over-the-counter derivatives dealers and major market participants, including the Firm; so-called “push out” provisions that could require the Firm to significantly restructure or restrict its derivatives businesses, change the legal entities through which such businesses are conducted, or limit the Firm’s ability to manage collateral, margin and other risks; prohibitions on the Firm engaging in certain proprietary trading activities and restricting its ownership of, investment in or sponsorship of, hedge funds and private equity funds; restrictions on the interchange fees that the Firm earns on debit card transactions; and a requirement that bank regulators phase out the treatment of trust preferred capital debt securities as Tier 1 capital for regulatory capital purposes.
The European Union (“EU”) has created a European Systemic Risk Board to monitor financial stability and implemented rules that will increase capital requirements for certain trading instruments or exposures and impose compensation limits on certain employees located in affected countries. In addition, the EU Commission is considering a wide array of other initiatives, including new legislation that will affect derivatives trading, impose surcharges on “globally” systemically important firms and possibly impose new levies on bank balance sheets.
The Basel Committee on Banking Supervision announced in December 2010 revisions to its Capital Accord, which will require higher capital ratio requirements for banks, narrow the definition of capital, and introduce short term liquidity and term funding standards, among other things. Also being considered is the imposition of a bank surcharge on institutions that are determined to be “globally significant financial institutions”. These requirements could increase the Firm’s funding and operational costs.


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These and any additional legislative or regulatory actions in the United States or other countries, and any required changes to the Firm’s business operations resulting from such legislation and regulations, could result in significant loss of revenue, 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, the Firm cannot provide assurance that any such new legislation or regulations would not have an adverse effect on its business, results of operations or financial condition in the future.
If the Firm does not comply with current or future legislation and regulations that apply to its operations, the Firm may be subject to fines, penalties or material restrictions on its businesses in the jurisdiction where the violation occurred. In recent years, regulatory oversight and enforcement have increased substantially, imposing additional costs and increasing the potential risks associated with the Firm’s operations. As this regulatory trend continues, it could adversely affect the Firm’s operations and, in turn, its financial results.
The financial condition of JPMorgan Chase’s customers, clients and counterparties, including other financial institutions, could adversely affect the Firm.
If the current economic environment were to deteriorate, 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 provision 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 trading and clearing businesses.
Financial services institutions are interrelated as a result of 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 in the event of a default by the counterparty or client, which can be exacerbated during periods of market illiquidity. During such periods, the Firm’s credit risk also may be further increased when the collateral held by the Firm cannot be realized upon or is liquidated at prices that are not sufficient to recover the full amount of the loan, derivative or other exposure due to the Firm. In addition, disputes with counterparties as to the valuation of collateral significantly 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 upon 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, increased concentration within the Firm’s securities or loan portfolios, or in other positions that the Firm may hold, may occur for reasons outside of the Firm’s control. Disruptions in the liquidity or transparency of the financial markets may result in the Firm’s inability to sell, syndicate or realize upon its positions, thereby leading to increased concentrations. The inability to reduce the Firm’s positions not only increases the market and credit risks associated with such positions, but also increases 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 framework for managing risks 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 risk, interest rate risk, operational risk, legal and fiduciary risk, reputational risk and private equity 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, 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 reserves for probable credit losses


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inherent in its credit exposure (including unfunded lending commitments). The Firm also employs stress testing and other methods 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 trading 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 trading 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 derivatives 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 hedging strategies and other risk management 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.
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 Board 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. The market impact from such policies can also materially decrease the value of financial assets that the Firm holds, such as mortgage servicing rights (“MSRs”). Federal Reserve Board policies also can adversely affect the Firm’s borrowers and counterparties, potentially increasing the risk that they may fail to repay their loans or satisfy their obligations to the Firm. Changes in Federal Reserve Board 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 trading 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. In 2010, concerns were raised about certain European countries, including Greece, Ireland, Italy, Portugal and Spain, regarding perceived weaknesses in their economic and fiscal


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condition, and how such weaknesses might affect other economies as well as financial institutions, including the Firm, which lent funds to or did business with or in those countries. There is always the chance that economic disruptions in other countries, even in countries in which the Firm does not conduct business or have operations, will adversely affect the Firm.
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, including those acquired through the Bear Stearns merger and the Washington Mutual transaction, 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. In 2010, the costs of repurchasing mortgage loans that had been sold to government agencies such as Fannie Mae and Freddie Mac (the “GSEs”) increased substantially, and there is no assurance that such costs could not continue to increase substantially 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 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. 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, the economic environment and other circumstances. Accordingly, such reserves may be increased in the future.
The Firm also faces litigation related to securitizations, primarily related to securitizations not sold to the GSEs. The 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 foreclosures.
In late September 2010, JPMorgan Chase commenced implementation of a temporary suspension of obtaining mortgage foreclosure judgments in the states and territories that require a judicial foreclosure process. Subsequently, the Firm extended this temporary suspension to foreclosure sales in those states and territories that require a judicial foreclosure process, and to foreclosures and foreclosure sales in the majority of remaining
states where a judicial process is not required, but where an affidavit signed by Firm personnel may have been used as part of the foreclosure process. In mid-October, the Firm also temporarily suspended evictions in the states and territories in which the Firm had suspended foreclosures and foreclosure sales, as well as in certain additional states in which an affidavit signed by Firm personnel may have been used in connection with eviction proceedings.
This temporary suspension arose out of questions about affidavits of indebtedness prepared by local foreclosure counsel, signed by Firm employees, and filed or used in mortgage foreclosure proceedings in certain states. Based on the Firm’s work to date, the Firm believes that the information in those affidavits of indebtedness about the fact of default and amount of indebtedness was materially accurate. However, the underlying review and verification of this information was performed by personnel other than the affiants, or the affidavits may not have been properly notarized. The Firm has since resumed filing new foreclosure actions in most of the states in which the Firm had previously halted such actions, using revised procedures in connection with the execution of the affidavits and other documents that may be used in the foreclosure process, and the Firm intends to resume filing new foreclosure actions in all remaining states. The Firm is also in the process of reviewing pending foreclosure matters to determine whether the remediation of previously filed affidavits or other documents is necessary, and the Firm intends to resume pending foreclosure proceedings as the review, and if necessary, remediation, of each pending matter is completed.
The Firm expects to incur additional costs and expenses in connection with its efforts to correct and enhance its mortgage foreclosure procedures. Multiple state and federal officials have announced investigations into the procedures followed by mortgage servicing companies and banks, including JPMorgan Chase and its affiliates, relating to foreclosure and loss mitigation processes. The Firm is cooperating with these investigations, and these investigations could result in material fines, penalties, equitable remedies (including requiring default servicing or other process changes), or other enforcement actions, as well as significant legal costs in responding to governmental investigations and additional litigation. The Firm cannot predict the ultimate outcome of these matters or the impact that they could have on the Firm’s financial results.
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


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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 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.
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. 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.
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 of its employees causes a significant operational break-down 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 relating to breakdowns or failures of such parties’ own systems or employees. 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 by 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, computer viruses, electrical or 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. Such disruptions may 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 could adversely affect the Firm’s business and results of operations by


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requiring the Firm to expend significant resources to correct the defect, as well as by exposing the Firm to litigation, regulatory fines or penalties or losses not covered by insurance.
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, as well as investigations or proceedings brought by regulatory agencies. Actions brought 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 and regulatory scrutiny and investigations related to its businesses and operations.
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.
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 integration efforts in connection with acquisitions already consummated or any new acquisitions 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.
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 credit loss reserves, mortgage repurchase liability and reserves related to litigations, 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


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Part I

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.
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 is currently undergoing a major renovation.
The design seeks to attain the highest sustainability rating for renovations of existing buildings under the Leadership in Energy and Environmental Design (“LEED”) Green Building Rating System. The total renovation is expected to be substantially completed in 2011.
In connection with the Bear Stearns merger in 2008, JPMorgan Chase acquired 383 Madison Avenue in New York City, a 45-story, 1.1 million square-foot office building on land which is subject to a ground lease through 2096. This building serves as the U.S. headquarters of JPMorgan Chase’s Investment Bank. For further discussion, see Building purchase commitments in Note 30, on page 278.
In total, JPMorgan Chase owned or leased approximately 12.4 million square feet of commercial office space and retail space in New York City at December 31, 2010. JPMorgan Chase and its subsidiaries also own or lease significant administrative and operational facilities in Chicago, Illinois (3.8 million square feet); Houston and Dallas, Texas (3.7 million square feet); Columbus, Ohio (2.7 million square feet); Phoenix, Arizona (1.4 million square feet); Jersey City, New Jersey (1.1 million square feet); and 5,268 retail branches in 23 states. At December 31, 2010, the Firm occupied approximately 68.2 million total square feet of space in the United States.
At December 31, 2010, the Firm also managed and occupied approximately 5.6 million total square feet of space in Europe, the Middle East and Africa.
In the United Kingdom, at December 31, 2010, JPMorgan Chase owned or leased approximately 4.7 million square feet of office space and owned a 424,000 square-foot operations center. In December 2010, JPMorgan Chase acquired a 999-year leasehold interest in 25 Bank Street in London’s Canary Wharf. With 1.0 million square feet of space, 25 Bank Street will become the new European headquarters of the Investment Bank in 2012. In addition, JPMorgan Chase agreed to purchase 60 Victoria Embankment in 2011, a 518,000 square-foot office building the Firm has been leasing since 1991. For further discussion, see Building purchase commitments in Note 30, on page 278.
In 2008, JPMorgan Chase acquired a 999-year leasehold interest in land at London’s Canary Wharf and entered into a building agreement to develop the site and construct a European headquarters building. However, acquisition of 25 Bank Street allows the Firm to
accelerate by four years the consolidation of its Investment Bank personnel in one location. In December 2010, JPMorgan Chase signed an amended building agreement to allow 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 Canada under various types of ownership and leasehold agreements, aggregating approximately 5.3 million total square feet of space at December 31, 2010. JPMorgan Chase and its subsidiaries lease significant administrative and operational facilities in India (1.8 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 discussion on pages 59–63.
ITEM 3: LEGAL PROCEEDINGS
As of December 31, 2010, the Firm and its subsidiaries are defendants or putative defendants in more than 10,000 legal proceedings, in the form of regulatory/government investigations as well as private, civil litigations. 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 claims or legal theories. 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.
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 $4.5 billion at December 31, 2010. 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 of them are currently in preliminary stages), the existence of multiple defendants (including the Firm) in many of such proceedings 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


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time to time, and actual losses may be more than the current estimate.
The Firm has established reserves for several hundred of its currently outstanding legal proceedings. The Firm accrues for potential liability arising from such proceedings when it is probable that such liability has been incurred and the amount of the loss can be reasonably estimated. The Firm evaluates its outstanding legal proceedings each quarter to assess its litigation reserves, and makes adjustments in such reserves, upwards or downwards, as appropriate, based on management’s best judgment after consultation with counsel.
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 the eventual outcome of the currently pending matters will be, what the timing of the ultimate resolution of these pending matters will be or what the eventual loss, fines, penalties or impact related to each pending matter may be. 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 currently accrued by the Firm; 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.
For a description of the Firm’s material legal proceedings, see Note 32 on pages 282–289.
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 295–296. For a comparison of the cumulative total return for JPMorgan Chase common stock with the comparable total return of the S&P 500 Index and the S&P Financial Index over the five-year period ended December 31, 2010, see “Five-year stock performance,” on page 53.
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. The action enabled the Firm to retain approximately $5.5 billion in common equity in each of 2010 and 2009, and was taken to ensure the Firm had sufficient capital strength in the event the very weak economic conditions that existed at the beginning of 2009 deteriorated further. JPMorgan Chase declared quarterly cash dividends on its common stock in the amount of $0.05 per share for each quarter of 2010 and 2009.
The common dividend payout ratio, based on reported net income, was 5% for 2010, 9% for 2009, and 114% for 2008. For a discussion of restrictions on dividend payments, see Note 23 on pages 267–268. At January 31, 2011, there were 225,114 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 16.
Stock repurchases under the stock repurchase program
Under the stock repurchase program authorized by the Firm’s Board of Directors, the Firm is authorized to repurchase up to $10.0 billion of the Firm’s common stock plus the 88 million warrants sold by the U.S. Treasury in 2009. During 2009, the Firm did not repurchase any shares of its common stock or warrants. In the second quarter of 2010, the Firm resumed common stock repurchases, and during the year repurchased an aggregate of 78 million shares for $3.0 billion at an average price per share of $38.49. The Firm’s share repurchase activities in 2010 were intended to offset sharecount increases resulting from employee stock-based incentive awards and were consistent with the Firm’s goal of maintaining an appropriate sharecount. The Firm did not repurchase any of the warrants during 2010. As of December 31, 2010, $3.2 billion of authorized repurchase capacity remained with respect to the common stock, and all of the authorized repurchase capacity remained with respect to the warrants.
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 the repurchase of common stock and warrants 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 stock – 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 stock and warrants will be utilized at management’s discretion, and the timing of purchases and the exact number of shares and warrants purchased 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 potential investment opportunities. The repurchase program does not include specific price targets or


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Part II

timetables; may be executed through open market purchases or privately negotiated transactions, including through the use of Rule 10b5-1 programs; and may be suspended at any time.
For a discussion of restrictions on stock repurchases, see Note 23 on pages 267–268.
                         
                    Dollar value  
                    of remaining  
                    authorized  
Year ended   Total shares     Average price     repurchase  
December 31, 2010   repurchased     paid per share(a)     (in millions)(b)  
 
First quarter
        $     $ 6,221  
 
Second quarter
    3,491,900       38.73       6,085  
 
Third quarter
    56,517,833       38.52       3,908  
 
October
    17,300,020       38.40       3,244  
November
    589,800       37.40       3,222  
December
                3,222  
 
Fourth quarter
    17,889,820       38.37       3,222  
 
Total for 2010
    77,899,553     $ 38.49     $ 3,222  
 
 
(a)   Excludes commissions cost.
(b)   The amount authorized by the Board of Directors excludes commissions cost.
Stock repurchases under the stock-based incentive plans
Participants in the Firm’s stock-based incentive plans may have shares 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 share repurchase program. Shares repurchased pursuant to these plans during 2010 were as follows:
                 
Year ended   Total shares     Average price  
December 31, 2010   repurchased     paid per share  
 
First quarter
    2,444     $ 41.88  
 
Second quarter
    393       30.01  
 
Third quarter
    293       37.49  
 
October
           
November
    128,964       37.52  
December
    62       39.31  
 
Fourth quarter
    129,026       37.52  
 
Total for 2010
    132,156     $ 37.58  
 
ITEM 6: SELECTED FINANCIAL DATA
For five-year selected financial data, see “Five-year summary of consolidated financial highlights (unaudited)” on pages 52–53 and “Selected annual financial data (unaudited)” on pages 297–298.
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 53–156. Such information should be read in conjunction with the Consolidated Financial Statements and Notes thereto, which appear on pages 160–294.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information related to market risk, see the “Market Risk Management” section on pages 142–146.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements, together with the Notes thereto and the report of PricewaterhouseCoopers LLP dated February 28, 2011, thereon, appear on pages 159–294.
Supplementary financial data for each full quarter within the two years ended December 31, 2010, are included on pages 295–296 in the table entitled “Selected quarterly financial data (unaudited).” Also included is a “Glossary of terms’’ on pages 300–303.
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. See page 158 for “Management’s report on internal control over financial reporting.” 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 fourth quarter of 2010 that has materially affected, or is reasonably likely to materially affect, the Firm’s internal control over financial reporting.
ITEM 9B: OTHER INFORMATION
None.


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Part III
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Executive officers of the registrant
             
Name   Age   Positions and offices
    (at December 31, 2010)    
 
James Dimon
    54     Chairman of the Board since December 31, 2006, and President and Chief Executive Officer since December 31, 2005.
 
           
Frank J. Bisignano
    51     Chief Administrative Officer.
 
           
Douglas L. Braunstein
    49     Chief Financial Officer since June 2010. He had been 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. Cavanagh
    44     Chief Executive Officer of Treasury & Securities Services since June 2010, prior to which he had been Chief Financial Officer.
 
           
Stephen M. Cutler
    49     General 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 since October 2005. Prior to joining WilmerHale, he had been Director of the Division of Enforcement at the U.S. Securities and Exchange Commission.
 
           
John L. Donnelly
    54     Director 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. Drew
    54     Chief Investment Officer.
 
           
Mary Callahan Erdoes
    43     Chief Executive Officer of Asset Management since September 2009, prior to which she had been Chief Executive Officer of Private Banking.
 
           
Samuel Todd Maclin
    54     Chief Executive Officer of Commercial Banking.
 
           
Jay Mandelbaum
    48     Head of Strategy and Business Development.
 
           
Heidi Miller
    57     President of International since June 2010 prior to which she had been Chief Executive Officer of Treasury & Securities Services.
 
           
Charles W. Scharf
    45     Chief Executive Officer of Retail Financial Services.
 
           
Gordon A. Smith
    52     Chief Executive Officer of Card Services since June 2007. Prior to joining JPMorgan Chase, he was with American Express Company for more than 25 years. From August 2005 until June 2007, he was president of American Express’ global commercial card business.
 
           
James E. Staley
    54     Chief Executive Officer of the Investment Bank since September 2009, prior to which he had been Chief Executive Officer of Asset Management.
 
           
Barry L. Zubrow
    57     Chief Risk Officer since November 2007. Prior to joining JPMorgan Chase, he was a private investor and was Chairman of the New Jersey Schools Development Authority from March 2006 through August 2010.
Unless otherwise noted, during the five fiscal years ended December 31, 2010, 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.

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Parts III and IV
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.
                         
    Number of shares to be   Weighted-average   Number of shares remaining
December 31, 2010   issued upon exercise of   exercise price of   available for future issuance under
(Shares in thousands)   outstanding options/SARs   outstanding options/SARs   stock compensation plans
 
Plan category
                       
Employee stock-based incentive plans approved
by shareholders
    168,678,150     $ 42.67       113,194,301 (a)
Employee stock-based incentive plans not approved
by shareholders
    65,239,147       45.05        
 
Total
    233,917,297     $ 43.33       113,194,301  
 
 
(a)   Represents future shares available under the shareholder-approved 2005 Long-Term Incentive Plan, as amended and restated effective May 20, 2008.
All future shares will be issued under the shareholder-approved 2005 Long-Term Incentive Plan, as amended and restated effective May 20, 2008. For further discussion, see Note 10 on pages 210–212.

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 2011 Annual Meeting of Stockholders to be held on May 17, 2011, which will be filed with the SEC within 120 days of the end of the Firm’s fiscal year ended December 31, 2010.
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 thereon listed in Item 8 are set forth commencing on page 159.
 
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).
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).
 
3.4   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).
 
4.3(a)   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


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    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).
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).*
 
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).*
 
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).*
 
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).*
 
10.5   JPMorgan Chase & Co. 2005 Long-Term Incentive Plan as amended and restated effective May 20, 2008 (incorporated by reference to Appendix B of Schedule 14A of JPMorgan Chase & Co. (File No. 1-5805) filed March 31, 2008).*
10.6   Key Executive Performance Plan of JPMorgan Chase & Co., restated as of January 1, 2005 (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, 2005).*
 
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).*
 
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).*
 
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).*
 
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).*
 
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).*
 
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).*
 
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).*
 
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).*
 
10.15   Banc One Corporation Revised and Restated 1995 Stock Incentive Plan, effective April 17, 1995 (incorporated by


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Part IV

  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).*
 
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).*
 
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).*
 
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).*
 
10.19   Form of JPMorgan Chase & Co. Long-Term Incentive Plan Award Agreement of January 22, 2008 restricted stock units (incorporated by reference to Exhibit 10.26 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2007).*
 
10.20   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).*
 
10.21   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).*
 
10.22   Form of JPMorgan Chase & Co. Long-Term Incentive Plan Terms and Conditions for restricted stock units, dated as of January 20, 2009 (incorporated by reference to Exhibit 10.22 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).*
 
10.23   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).*
10.24   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).*
 
10.25   Form of JPMorgan Chase & Co. Long-Term Incentive Plan Terms and Conditions for Operating Committee member restricted stock units, dated as of January 20, 2009 (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, 2008).*
 
10.26   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).*
 
10.27   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).*
 
10.28   Form 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.***
 
12.2   Computation of ratio of earnings to fixed charges and preferred stock dividend requirements.***
 
21.1   List of Subsidiaries of JPMorgan Chase & Co.***
 
22.1   Annual Report on Form 11-K of The JPMorgan Chase 401(k) Savings Plan for the year ended December 31, 2010 (to be filed pursuant to Rule 15d-21 under the Securities Exchange Act of 1934).
 
23.1   Consent of independent registered public accounting firm.***
 
31.1   Certification.***
 
31.2   Certification.***
 
32   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**


18


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  101.INS   XBRL Instance Document. 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, 2010, formatted in XBRL (eXtensible Business Reporting Language) interactive data files: (i) the Consolidated Statements of Income for the years ended December 31, 2010, 2009 and 2008, (ii) the Consolidated Balance Sheets as of December 31, 2010 and 2009, (iii) the Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income for the years ended December 31, 2010, 2009 and 2008, (iv) the Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008, and (v) the Notes to Consolidated Financial Statements.***
101.SCH   XBRL Taxonomy Extension Schema Document.***
 
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document.***
 
101.LAB   XBRL Taxonomy Extension Label Linkbase Document.***
 
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document.***
 
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document.***
 
 
*   This exhibit is a management contract or compensatory plan or arrangement.
 
**   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.
 
***   Filed herewith.


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Pages 20–50 not used

20


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Table of contents
     
Financial:
 
   
52
  Five-Year Summary of Consolidated Financial Highlights
 
   
53
  Five-Year Stock Performance
 
   
Management’s discussion and analysis:
 
   
54
  Introduction
 
   
55
  Executive Overview
 
   
59
  Consolidated Results of Operations
 
   
64
  Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures
 
   
67
  Business Segment Results
 
   
91
  International Operations
 
   
92
  Balance Sheet Analysis
 
   
95
  Off–Balance Sheet Arrangements and Contractual Cash Obligations
 
   
102
  Capital Management
 
   
107
  Risk Management
 
   
110
  Liquidity Risk Management
 
   
116
  Credit Risk Management
 
   
142
  Market Risk Management
 
   
147
  Private Equity Risk Management
 
   
147
  Operational Risk Management
 
   
148
  Reputation and Fiduciary Risk Management
 
   
149
  Critical Accounting Estimates Used by the Firm
 
   
155
  Accounting and Reporting Developments
 
   
156
  Nonexchange-Traded Commodity Derivative Contracts
at Fair Value
 
   
157
  Forward-Looking Statements
     
Audited financial statements:
 
   
158
  Management’s Report on Internal Control Over
Financial Reporting
 
   
159
  Report of Independent Registered Public Accounting Firm
 
   
160
  Consolidated Financial Statements
 
   
164
  Notes to Consolidated Financial Statements
 
   
Supplementary information:
 
   
295
  Selected Quarterly Financial Data
 
   
297
  Selected Annual Financial Data
 
   
299
  Short-term and other borrowed funds
 
   
300
  Glossary of Terms


     
JPMorgan Chase & Co. / 2010 Annual Report   51

 


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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,   2010     2009     2008(d)     2007     2006  
 
Selected income statement data
                                       
Total net revenue
  $ 102,694     $ 100,434     $ 67,252     $ 71,372     $ 61,999  
Total noninterest expense
    61,196       52,352       43,500       41,703       38,843  
 
Pre-provision profit(a)
    41,498       48,082       23,752       29,669       23,156  
Provision for credit losses
    16,639       32,015       19,445       6,864       3,270  
Provision for credit losses – accounting conformity(b)
                1,534              
 
Income from continuing operations before income tax expense/(benefit) and extraordinary gain
    24,859       16,067       2,773       22,805       19,886  
Income tax expense/(benefit)
    7,489       4,415       (926 )     7,440       6,237  
 
Income from continuing operations
    17,370       11,652       3,699       15,365       13,649  
Income from discontinued operations(c)
                            795  
 
Income before extraordinary gain
    17,370       11,652       3,699       15,365       14,444  
Extraordinary gain(d)
          76       1,906              
 
Net income
  $ 17,370     $ 11,728     $ 5,605     $ 15,365     $ 14,444  
 
Per common share data
                                       
Basic earnings
                                       
Income from continuing operations
  $ 3.98     $ 2.25     $ 0.81     $ 4.38     $ 3.83  
Net income
    3.98       2.27       1.35       4.38       4.05  
Diluted earnings(e)
                                       
Income from continuing operations
  $ 3.96     $ 2.24     $ 0.81     $ 4.33     $ 3.78  
Net income
    3.96       2.26       1.35       4.33       4.00  
Cash dividends declared per share
    0.20       0.20       1.52       1.48       1.36  
Book value per share
    43.04       39.88       36.15       36.59       33.45  
Common shares outstanding
                                       
Average:         Basic
    3,956.3       3,862.8       3,501.1       3,403.6       3,470.1  
  Diluted
    3,976.9       3,879.7       3,521.8       3,445.3       3,516.1  
Common shares at period-end
    3,910.3       3,942.0       3,732.8       3,367.4       3,461.7  
Share price(f)
                                       
High
  $ 48.20     $ 47.47     $ 50.63     $ 53.25     $ 49.00  
Low
    35.16       14.96       19.69       40.15       37.88  
Close
    42.42       41.67       31.53       43.65       48.30  
Market capitalization
    165,875       164,261       117,695       146,986       167,199  
Selected ratios
                                       
Return on common equity (“ROE”)(e)
                                       
Income from continuing operations
    10 %     6 %     2 %     13 %     12 %
Net income
    10       6       4       13       13  
Return on tangible common equity (“ROTCE”)(e)
                                       
Income from continuing operations
    15       10       4       22       24  
Net income
    15       10       6       22       24  
Return on assets (“ROA”)
                                       
Income from continuing operations
    0.85       0.58       0.21       1.06       1.04  
Net income
    0.85       0.58       0.31       1.06       1.10  
Overhead ratio
    60       52       65       58       63  
Deposits-to-loans ratio
    134       148       135       143       132  
Tier 1 capital ratio(g)
    12.1       11.1       10.9       8.4       8.7  
Total capital ratio
    15.5       14.8       14.8       12.6       12.3  
Tier 1 leverage ratio
    7.0       6.9       6.9       6.0       6.2  
Tier 1 common capital ratio(h)
    9.8       8.8       7.0       7.0       7.3  
Selected balance sheet data (period-end)(g)
                                       
Trading assets
  $ 489,892     $ 411,128     $ 509,983     $ 491,409     $ 365,738  
Securities
    316,336       360,390       205,943       85,450       91,975  
Loans
    692,927       633,458       744,898       519,374       483,127  
Total assets
    2,117,605       2,031,989       2,175,052       1,562,147       1,351,520  
Deposits
    930,369       938,367       1,009,277       740,728       638,788  
Long-term debt
    247,669       266,318       270,683       199,010       145,630  
Common stockholders’ equity
    168,306       157,213       134,945       123,221       115,790  
Total stockholders’ equity
    176,106       165,365       166,884       123,221       115,790  
Headcount
    239,831       222,316       224,961       180,667       174,360  
 
(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.
 
(b)   Results for 2008 included an accounting conformity loan loss reserve provision related to the acquisition of Washington Mutual Bank’s (“Washington Mutual “) banking operations.
 
(c)   On October 1, 2006, JPMorgan Chase & Co. completed the exchange of selected corporate trust businesses for the consumer, business banking and middle-market banking businesses of The Bank of New York Company Inc. The results of operations of these corporate trust businesses were reported as discontinued operations.
 
(d)   On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual. On May 30, 2008, a wholly-owned subsidiary of JPMorgan Chase merged with and into The Bear Stearns Companies Inc. (“Bear Stearns”), and Bear Stearns became a wholly-owned subsidiary of JPMorgan Chase. 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. For additional information on these transactions, see Note 2 on pages 166–170 of this Annual Report.
 
(e)   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. For further discussion, see “Explanation and reconciliation of the Firm’s use of non-GAAP financial measures” on pages 64–66 of this Annual Report.
     
52   JPMorgan Chase & Co. / 2010 Annual Report

 


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(f)   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.
 
(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.
 
(h)   The Firm uses Tier 1 common capital (“Tier 1 common”) along with the other capital measures to assess and monitor its capital position. The Tier 1 common capital ratio (“Tier 1 common ratio”) is Tier 1 common divided by risk-weighted assets. For further discussion, see Regulatory capital on pages 102–104 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 Stock 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 S&P Financial Index is an

index of 81 financial companies, all of which are within the S&P 500. The Firm is a component of both industry indices.
The following table and graph assume simultaneous investments of $100 on December 31, 2005, 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)   2005   2006   2007   2008   2009   2010  
 
JPMorgan Chase
  $ 100.00   $ 125.55   $ 116.75   $ 87.19   $ 116.98   $ 119.61  
S&P Financial Index
    100.00     119.19     96.99     43.34     50.80     56.96  
S&P 500 Index
    100.00     115.79     122.16     76.96     97.33     111.99  
 
(PERFORMANCE GRAPH)
     
 
This section of JPMorgan Chase’s Annual Report for the year ended December 31, 2010 (“Annual Report”) provides management’s discussion and analysis (“MD&A”) of the financial condition and results of operations of JPMorgan Chase. See the Glossary of terms on pages 300–303 for definitions of terms used throughout this Annual Report. The MD&A included in this Annual Report contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on the current beliefs and expectations of JPMorgan Chase’s management and are subject
to significant risks and uncertainties. These risks and uncertainties could cause the Firm’s actual results to differ materially from those set forth in such forward-looking statements. Certain of such risks and uncertainties are described herein (see Forward-looking Statements on page 157 of this Annual Report) and in the JPMorgan Chase Annual Report on Form 10-K for the year ended December 31, 2010 (“2010 Form 10-K”), in Part I, Item 1A: Risk factors, to which reference is hereby made.


     
JPMorgan Chase & Co. / 2010 Annual Report   53

 


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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 $2.1 trillion in assets, $176.1 billion in stockholders’ equity and operations in more than 60 countries as of December 31, 2010. The Firm is a leader in investment banking, financial services for consumers, small business and 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 branches in 23 states in the U.S.; 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”; formerly J.P. Morgan Securities Inc.), the Firm’s U.S. investment banking firm.
JPMorgan Chase’s activities are organized, for management reporting purposes, into six business segments, as well as Corporate/Private Equity. The Firm’s wholesale businesses comprise the Investment Bank, Commercial Banking, Treasury & Securities Services and Asset Management segments. The Firm’s consumer businesses comprise the Retail Financial Services and Card Services segments. A description of the Firm’s business segments, and the products and services they provide to their respective client bases, follows.
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 the Investment Bank (“IB”) are corporations, financial institutions, governments and institutional investors. The Firm offers a full range of investment banking products and services in all major capital markets, including advising on corporate strategy and structure, capital-raising in equity and debt markets, sophisticated risk management, market-making in cash securities and derivative instruments, prime brokerage, and research.
Retail Financial Services
Retail Financial Services (“RFS”) serves consumers and businesses through personal service at bank branches and through ATMs, online banking and telephone banking, as well as through auto dealerships and school financial-aid offices. Customers can use more than 5,200 bank branches (third-largest nationally) and 16,100 ATMs (second-largest nationally), as well as online and mobile banking around the clock. More than 28,900 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. Consumers also can obtain loans through more than 16,200 auto dealerships and 2,200 schools and universities nationwide.
Card Services
Card Services (“CS”) is one of the nation’s largest credit card issuers, with over $137 billion in loans and over 90 million open accounts. Customers used Chase cards to meet $313 billion of their spending needs in 2010. Through its merchant acquiring business, Chase Paymentech Solutions, CS is a global leader in payment processing and merchant acquiring.
Commercial Banking
Commercial Banking (“CB”) delivers extensive industry knowledge, local expertise and dedicated service to nearly 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.
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 Services holds, values, clears and services securities, cash and alternative investments for investors and broker-dealers, and manages depositary receipt programs globally.
Asset Management
Asset Management (“AM”), with assets under supervision of $1.8 trillion, is a global leader in investment and wealth management. AM clients include institutions, retail investors and high-net-worth individuals in every major market throughout the world. AM offers global investment management in equities, fixed income, real estate, hedge funds, private equity and liquidity products, including money-market instruments and bank deposits. AM also provides trust and estate, banking and brokerage services to high-net-worth clients, and retirement services for corporations and individuals. The majority of AM’s client assets are in actively managed portfolios.


     
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EXECUTIVE OVERVIEW
 
This executive overview of MD&A highlights selected information and may not contain all of the information that is important to readers of this Annual Report. For a complete description of events, trends and uncertainties, as well as the capital, liquidity, credit, operational and market risks, and the critical accounting estimates, affecting the Firm and its various lines of business, this Annual Report should be read in its entirety.
Economic environment
The business environment in 2010 continued to improve, as signs of growth and stability returned to both the global capital markets and the U.S. economy. The year began with a continuation of the trends seen at the end of 2009: although unemployment had reached 10%, its highest level since 1983, signs were emerging that deterioration in the labor markets was abating and economic activity was beginning to expand. The housing sector also showed some signs of improvement, which was helped by a new round of home-buyer credits. Overall, during 2010, the business environment continued to improve and the U.S. economy grew, though the pace of growth was not sufficient to meaningfully affect unemployment which, at year-end 2010, stood at 9.4%. Consumer spending expanded at a moderate rate early in the year and accelerated as the year progressed, as households continued to reduce debt and increase savings. Businesses began to spend aggressively, with outlays for equipment and software expanding at a double-digit pace over the course of the year. Additionally, businesses cautiously added to payrolls in every month of the year.
Low inflation allowed the Federal Reserve to maintain its accommodative stance throughout 2010, in order to help promote the U.S. economic recovery. The Federal Reserve maintained the target range for the federal funds rate at zero to one-quarter percent and continued to indicate that economic conditions were likely to warrant a low federal funds rate for an extended period.
The U.S. and global economic recovery paused briefly during the second quarter of 2010 as concerns arose that European countries would have to take measures to address their worsening fiscal positions. Equity markets fell sharply, and bond yields tumbled. Concerns about the developed economies, particularly in Europe, persisted throughout 2010 and have continued into 2011. However, fears that the U.S. recovery was faltering proved unfounded, and the U.S. economy continued to grow over the second half of the year. At the same time, growth in the emerging economies remained robust. During the fourth quarter, the Federal Reserve announced a program to purchase longer-term Treasury securities through 2011 in order to restrain interest rates and boost the economy. These developments, combined with record U.S. corporate profit margins and rapid international growth, continued to support stock markets as financial market conditions improved and risk spreads continued to narrow.
Financial performance of JPMorgan Chase
                         
Year ended December 31,                  
(in millions, except per share data and ratios)   2010     2009     Change  
 
Selected income statement data
                       
Total net revenue
  $ 102,694     $ 100,434       2 %
Total noninterest expense
    61,196       52,352       17  
Pre-provision profit
    41,498       48,082       (14 )
Provision for credit losses
    16,639       32,015       (48 )
Income before extraordinary gain
    17,370       11,652       49  
Extraordinary gain
          76     NM  
Net income
    17,370       11,728       48  
 
                       
Diluted earnings per share
                       
Income before extraordinary gain
  $ 3.96     $ 2.24       77  
Net income
    3.96       2.26       75  
Return on common equity
                       
Income before extraordinary gain
    10 %     6 %        
Net income
    10       6          
Capital ratios
                       
Tier 1 capital
    12.1       11.1          
Tier 1 common capital
    9.8       8.8          
 
Business overview
Against the backdrop of the improvement in the business environment during the year, JPMorgan Chase reported full-year 2010 record net income of $17.4 billion, or $3.96 per share, on net revenue of $102.7 billion. Net income was up 48% compared with net income of $11.7 billion, or $2.26 per share, in 2009. Return on common equity was 10% for the year, compared with 6% for the prior year.
The increase in net income for 2010 was driven by a lower provision for credit losses and higher net revenue, partially offset by higher noninterest expense. The lower provision for credit losses reflected improvements in both the consumer and wholesale provisions. The increase in net revenue was due predominantly to higher securities gains in the Corporate/Private Equity segment, increased other income and increased principal transactions revenue, partially offset by lower credit card income. The increase in noninterest expense was largely due to higher litigation expense.
JPMorgan Chase benefited from an improvement in the credit environment during 2010. Compared with 2009, delinquency trends were more favorable and estimated losses were lower in the consumer businesses, although they remained at elevated levels. The credit quality of the commercial and industrial loan portfolio across the Firm’s wholesale businesses improved. In addition, for the year, net charge-offs were lower across all businesses, though the level of net charge-offs in the Firm’s mortgage portfolio remained very high and continued to be a significant drag on returns. These positive credit trends resulted in reductions in the allowance for credit losses in Card Services, the loan portfolio in Retail Financial Services (excluding purchased credit-impaired loans), and in the Investment Bank and Commercial Banking. Nevertheless, the allowance for loan losses associated with the Washington Mutual purchased credit-impaired loan portfolio in


     
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Retail Financial Services increased, reflecting an increase in estimated future credit losses largely related to home equity, and, to a lesser extent, option ARM loans. Total firmwide credit reserves at December 31, 2010, were $33.0 billion, resulting in a firmwide loan loss coverage ratio of 4.5% of total loans.
Strong client relationships and continued investments for growth resulted in good results across most of the Firm’s businesses, including record revenue and net income in Commercial Banking, record revenue in Asset Management and solid results across most other businesses. For the year, the Investment Bank ranked #1 for Global Investment Banking Fees; Retail Financial Services added more than 150 new branches and 5,000 salespeople, and opened more than 1.5 million net new checking accounts; Card Services rolled out new products and opened 11.3 million new accounts; Treasury & Securities Services grew assets under custody to $16.1 trillion; and Asset Management reported record long-term AUM net inflows of $69 billion.
The Firm also continued to strengthen its balance sheet during 2010, ending the year with a Tier 1 Common ratio of 9.8% and a Tier 1 Capital ratio of 12.1%. Total stockholders’ equity at December 31, 2010, was $176.1 billion.
Throughout 2010, JPMorgan Chase continued to support the economic recovery by providing capital, financing and liquidity to its clients in the U.S. and around the world. During the year, the Firm loaned or raised capital of more than $1.4 trillion for its clients, which included more than $10 billion of credit provided to more than 250,000 small businesses in the U.S., an increase of more than 50% over 2009. JPMorgan Chase also made substantial investments in the future of its businesses, including hiring more than 8,000 people in the U.S. alone. The Firm remains committed to helping homeowners and preventing foreclosures. Since the beginning of 2009, the Firm has offered 1,038,000 trial modifications to struggling homeowners. Of the 285,000 modifications that the Firm has completed, more than half were modified under Chase programs, and the remainder were offered under government-sponsored or agency programs.
Although the Firm continues to face challenges, there are signs of stability and growth returning to both the global capital markets and the U.S. economy. The Firm intends to continue to innovate and invest in the products that support and serve its clients and the communities where it does business.
The discussion that follows highlights the performance of each business segment compared with the prior year and presents results on a managed basis. Managed basis starts with the reported U.S. GAAP results 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. Effective January 1, 2010, the Firm adopted accounting guidance that required it to consolidate its Firm-sponsored credit card securitization trusts; as a result, reported and managed basis relating to credit card securitizations are equivalent for periods beginning after January 1, 2010. Prior to the adoption of this accounting guidance, in 2009 and all other
prior periods, U.S. GAAP results for CS and the Firm were also adjusted for certain reclassifications that assumed credit card loans that had been securitized and sold by CS remained on the Consolidated Balance Sheets. These adjustments (“managed basis”) had no impact on net income as reported by the Firm as a whole or by the lines of business. 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 64–66 of this Annual Report.
Investment Bank net income decreased from the prior year, reflecting lower net revenue and higher noninterest expense, partially offset by a benefit from the provision for credit losses and gains of $509 million from the widening of the Firm’s credit spread on certain structured and derivative liabilities (compared with losses of $2.3 billion on the tightening of the spread on those liabilities in the prior year). The decrease in net revenue was driven by a decline in Fixed Income Markets revenue as well as lower investment banking fees. The provision for credit losses was a benefit in 2010, compared with an expense in 2009, and reflected a reduction in the allowance for loan losses, largely related to net repayments and loan sales. Noninterest expense increased, driven by higher noncompensation expense, including increased litigation reserves, as well as higher compensation expense, including the impact of the U.K. Bank Payroll Tax.
Retail Financial Services net income increased significantly from the prior year, driven by a lower provision for credit losses, partially offset by increased noninterest expense and lower net revenue. Net revenue decreased, driven by lower deposit-related fees (including the impact of the legislative changes related to non-sufficient funds and overdraft fees), and lower loan balances. These decreases were partially offset by a shift to wider-spread deposit products, and growth in debit card income and auto operating lease income. The provision for credit losses decreased from the 2009 level, reflecting improved delinquency trends and reduced net charge-offs. The provision also reflected an increase in the allowance for loan losses for the purchased credit-impaired portfolio, partially offset by a reduction in the allowance for loan losses, predominantly for the mortgage loan portfolios. Noninterest expense increased from the prior year, driven by higher default-related expense for mortgage loans serviced, and sales force increases in Business Banking and bank branches.
Card Services reported net income compared with a net loss in the prior year, as a lower provision for credit losses was partially offset by lower net revenue. 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 partially offset by a decrease in revenue reversals associated with lower net charge-offs. The provision for credit losses decreased from the prior year, reflecting lower net charge-offs and a reduction in the allowance for loan losses due to lower estimated losses. The prior-year provision included an increase to the allowance for loan losses. Noninterest expense increased due to higher marketing expense.


     
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Commercial Banking reported record net income, driven by a reduction in the provision for credit losses and record net revenue. The increase in net revenue was driven by growth in liability balances, wider loan spreads, higher net gains from asset sales, higher lending-related fees, an improvement in the market conditions impacting the value of investments held at fair value, and higher investment banking fees; these were largely offset by spread compression on liability products and lower loan balances. Results also included the impact of the purchase of a $3.5 billion loan portfolio during the third quarter of 2010. The provision for credit losses decreased from 2009 and reflected a reduction in the allowance for credit losses, primarily due to stabilization in the credit quality of the loan portfolio and refinements to credit loss estimates. Noninterest expense increased slightly, reflecting higher headcount-related expense.
Treasury and Securities Services net income decreased from the prior year, driven by higher noninterest expense, partially offset by a benefit from the provision for credit losses and higher net revenue. Worldwide Securities Services net revenue was relatively flat, 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. Treasury Services net revenue was relatively flat, as lower spreads on liability products were offset by higher trade loan and card product volumes. Assets under custody grew to $16.1 trillion during 2010, an 8% increase. Noninterest expense for TSS increased, driven by continued investment in new product platforms, primarily related to international expansion, and higher performance-based compensation expense.
Asset Management net income increased from the prior year on record revenue, largely offset by higher noninterest expense. The growth in net revenue was driven by the effect of higher market levels, net inflows to products with higher margins, higher loan originations, higher deposit and loan balances, and higher performance fees, partially offset by narrower deposit spreads. Assets under supervision increased 8% during 2010 driven by the effect of higher market valuations, record net inflows of $69 billion to long-term products, and inflows in custody and brokerage products, offset partially by net outflows from liquidity products. Noninterest expense increased due to higher headcount and performance-based compensation.
Corporate/Private Equity net income decreased from the prior year, driven by higher noninterest expense partially offset by higher net revenue. The increase in net revenue reflected higher securities gains, primarily associated with actions taken to reposition the Corporate investment securities portfolio in connection with managing the Firm’s structural interest rate risk, and higher private equity gains. These gains were partially offset by lower net interest income from the investment portfolio. The increase in noninterest expense was due to an increase in litigation reserves, including those for mortgage-related matters, partially offset by the absence of a $675 million FDIC special assessment in 2009.
2011 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. As noted above, these risks and uncertainties could cause the Firm’s actual results to differ materially from those set forth in such forward-looking statements. See Forward-Looking Statements on page 157 and Risk Factors on pages 5–12 of this Annual Report.
JPMorgan Chase’s outlook for 2011 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. Economic and macroeconomic factors, such as market and credit trends, customer behavior, client business strategies and competition, are all expected to affect the Firm’s businesses. The outlook for RFS and CS, in particular, reflects the expected effect of current economic trends in the U.S relating to high unemployment levels and the continuing stress and uncertainty in the housing markets. The Firm’s wholesale businesses will be affected by market levels and volumes, which are volatile and quickly subject to change.
In the Mortgage Banking, Auto & Other Consumer Lending business within RFS, management expects mortgage fees and related income to be $1 billion or less for the first quarter of 2011, given the levels of mortgage interest rates and production volumes experienced year-to-date. If mortgage interest rates remain at current levels or rise in the future, loan production and margins could continue to be negatively affected resulting in lower revenue for the full year 2011. In addition, revenue could continue to 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 repurchase losses could total approximately $1.2 billion in 2011. In addition, the Firm is dedicating significant resources to address, correct and enhance its mortgage loan foreclosure procedures and is cooperating with various state and federal investigations into its procedures. As a result, the Firm expects to incur additional costs and expenses in resolving these issues.
In the Real Estate Portfolios business within RFS, management believes that, based on the current outlook for delinquencies and loss severity, it is possible that total quarterly net charge-offs could be approximately $1.2 billion during 2011. Given current origination and production levels, combined with management’s current estimate of portfolio runoff levels, the residential real estate portfolio is expected to decline by approximately 10% to 15% annually for the foreseeable future. The annual reductions in the residential real estate portfolio are expected to reduce net interest income in each period, including a reduction of approximately $700 million in 2011 from the 2010 level; however, over time the reduction in net interest income is expected to be more than offset by an improvement in credit costs and lower expenses. As the portfolio continues to run off, management anticipates that approximately $1.0 billion of capital may become available for


     
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redeployment each year, subject to the capital requirements associated with the remaining portfolio.
Also, in RFS, management expects noninterest expense in 2011 to remain modestly above 2010 levels, reflecting investments in new branch builds and sales force hires, as well as continued elevated servicing-, default- and foreclosed asset-related costs.
In CS, management expects end-of-period outstandings for the Chase portfolio (excluding the Washington Mutual portfolio) to continue to decline in 2011. This decline may be as much as $10 billion in the first quarter, reflecting both continued portfolio run-off and seasonal activity. The decline in the Chase portfolio is expected to bottom out in the third quarter of 2011, and by the end of 2011, outstandings in the portfolio are anticipated to be approximately $120 billion and reflect a better mix of customers. The Washington Mutual portfolio declined to approximately $14 billion at the end of 2010, from $20 billion at the end of 2009. Management estimates that the Washington Mutual portfolio could decline to $10 billion by the end of 2011. The effect of such reductions in the Chase and Washington Mutual portfolios is expected to reduce 2011 net interest income in CS by approximately $1.4 billion from the 2010 level.
The net charge-off rates for both the Chase and Washington Mutual credit card portfolios are anticipated to continue to improve. If current delinquency trends continue, the net charge-off rate for the Chase portfolio (excluding the Washington Mutual portfolio) could be below 6.5% in the first quarter of 2011.
Despite these positive economic trends, results for RFS and CS will depend on the economic environment. Although the positive economic data seen in 2010 seemed to imply that the U.S. economy was not falling back into recession, high unemployment rates and the difficult housing market have been persistent. Even as consumer lending net charge-offs and delinquencies have improved, the consumer credit portfolio remains under stress. Further declines in U.S. housing prices and increases in the unemployment rate remain possible; if this were to occur, results for both RFS and CS could be adversely affected.
In IB, TSS and AM, revenue will be affected by market levels, volumes and volatility, which will influence client flows and assets under management, supervision and custody. In addition, IB and CB results will continue to be affected by the credit environment, which will influence levels of charge-offs, repayments and provision for credit losses.
In Private Equity (within the Corporate/Private Equity segment), earnings will likely continue to be volatile and be influenced by capital markets activity, market levels, the performance of the broader economy and investment-specific issues. Corporate’s net interest income levels will generally trend with the size and duration of the investment securities portfolio. Corporate net income (excluding Private Equity, and excluding merger-related items, material litigation expenses and significant nonrecurring items, if any) is anticipated to trend toward a level of approximately $300 million per quarter.
Furthermore, continued repositioning of the investment securities portfolio in Corporate could result in modest downward pressure on the Firm’s net interest margin in the first quarter of 2011.
Regarding regulatory reform, JPMorgan Chase intends to continue to work with the Firm’s regulators as they proceed with the extensive rulemaking required to implement financial reform. The Firm will continue to devote substantial resources to achieving implementation of regulatory reforms in a way that preserves the value the Firm delivers to its clients.
Management and the Firm’s Board of Directors continually evaluate ways to deploy the Firm’s strong capital base in order to enhance shareholder value. Such alternatives could include the repurchase of common stock, increasing the common stock dividend and pursuing alternative investment opportunities. Management and the Board will continue to assess and make decisions regarding these alternatives, as appropriate, over the course of the year.


     
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CONSOLIDATED RESULTS OF OPERATIONS
 
This 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, 2010. Factors that related 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 149–154 of this Annual Report.
Revenue
                         
Year ended December 31, (in millions)   2010     2009     2008  
 
Investment banking fees
  $ 6,190     $ 7,087     $ 5,526  
Principal transactions
    10,894       9,796       (10,699 )
Lending- and deposit-related fees
    6,340       7,045       5,088  
Asset management, administration and commissions
    13,499       12,540       13,943  
Securities gains
    2,965       1,110       1,560  
Mortgage fees and related income
    3,870       3,678       3,467  
Credit card income
    5,891       7,110       7,419  
Other income
    2,044       916       2,169  
 
Noninterest revenue
    51,693       49,282       28,473  
Net interest income
    51,001       51,152       38,779  
 
Total net revenue
  $ 102,694     $ 100,434     $ 67,252  
 
2010 compared with 2009
Total net revenue for 2010 was $102.7 billion, up by $2.3 billion, or 2%, from 2009. Results for 2010 were driven by a higher level of securities gains and private equity gains in Corporate/Private Equity, higher asset management fees in AM and administration fees in TSS, and higher other income in several businesses, partially offset by lower credit card income.
Investment banking fees decreased from 2009 due to lower equity underwriting and advisory fees, partially offset by higher debt underwriting fees. Competitive markets combined with flat industry-wide equity underwriting and completed M&A volumes, resulted in lower equity underwriting and advisory fees; while strong industry-wide 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 69–71 of this Annual Report.
Principal transactions revenue, which consists of revenue from the Firm’s trading and private equity investing activities, 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 gains from the widening of the Firm’s credit spread on certain structured and derivative liabilities. For additional information on principal transactions revenue, see IB and Corporate/Private Equity segment results on pages 69–71 and 89–
90, respectively, and Note 7 on pages 199–200 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 69–71, RFS on pages 72–78, CB on pages 82–83 and TSS on pages 84–85 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 86–88 and TSS on pages 84–85 of this Annual Report.
Securities gains were significantly higher in 2010 compared with 2009, resulting primarily from the repositioning of the portfolio in response to changes in the interest rate environment and to rebalance exposure. For additional information on securities gains, which are mostly recorded in the Firm’s Corporate segment, see the Corporate/Private Equity segment discussion on pages 89–90 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 GSEs. For additional information on mortgage fees and related income, which is recorded primarily in RFS, see RFS’s Mortgage Banking, Auto & Other Consumer Lending discussion on pages 74–77 of this Annual Report. For additional information on repurchase losses, see the repurchase liability discussion on pages 98–101 and Note 30 on pages 275–280 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 the new 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


     
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interest income and the provision for credit losses, and the elimination of securitization income/(losses) in other income). Lower income from other fee-based products also contributed to the decrease in credit card income. Excluding the impact of the adoption of the new accounting guidance, credit card income increased in 2010, reflecting higher customer charge volume on credit and debit cards. For a more detailed discussion of the impact of the adoption of the new accounting guidance on the Consolidated Statements of Income, see Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures on pages 64–66 of this Annual Report. For additional information on credit card income, see the CS and RFS segment results on pages 79–81, and pages 72–78, 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 RFS.
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 CS, 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 64–66 of this Annual Report. For further information on the impact of the legislative changes on the Consolidated Statements of Income, see CS discussion on Credit Card Legislation on page 79 of this Annual Report.
2009 compared with 2008
Total net revenue was $100.4 billion, up by $33.2 billion, or 49%, from the prior year. The increase was driven by higher principal transactions revenue, primarily related to improved performance across most fixed income and equity products, and the absence of net markdowns on legacy leveraged lending and mortgage positions in IB, as well as higher levels of trading gains and investment securities income in Corporate/Private Equity. Results also benefited from the impact of the Washington Mutual transaction, which contributed to increases in net interest income, lending- and deposit-related fees, and mortgage fees and related income. Lastly, higher investment banking fees also contributed to revenue growth. These increases in revenue were offset partially by reduced fees and commissions from the effect of lower market levels on assets under management and custody, and the absence of proceeds from the sale of Visa shares in its initial public offering in the first quarter of 2008.
Investment banking fees increased from the prior year, due to higher equity and debt underwriting fees. For a further discussion of investment banking fees, which are primarily recorded in IB, see IB segment results on pages 69–71 of this Annual Report.
Principal transactions revenue, which consists of revenue from trading and private equity investing activities, was significantly higher compared with the prior year. Trading revenue increased, driven by improved performance across most fixed income and equity products; modest net gains on legacy leveraged lending and mortgage-related positions, compared with net markdowns of $10.6 billion in the prior year; and gains on trading positions in Corporate/Private Equity, compared with losses in the prior year of $1.1 billion on markdowns of Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) preferred securities. These increases in revenue were offset partially by an aggregate loss of $2.3 billion from the tightening of the Firm’s credit spread on certain structured liabilities and derivatives, compared with gains of $2.0 billion in the prior year from widening spreads on these liabilities and derivatives. The Firm’s private equity investments produced a slight net loss in 2009, a significant improvement from a larger net loss in 2008. For a further discussion of principal transactions revenue, see IB and Corporate/Private Equity segment results on pages 69–71 and 89–90, respectively, and Note 7 on pages 199–200 of this Annual Report.


     
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Lending- and deposit-related fees rose from the prior year, predominantly reflecting the impact of the Washington Mutual transaction and organic growth in both lending- and deposit-related fees in RFS, CB, IB and TSS. For a further discussion of lending- and deposit-related fees, which are mostly recorded in RFS, TSS and CB, see the RFS segment results on pages 72–78, the TSS segment results on pages 84–85, and the CB segment results on pages 82–83 of this Annual Report.
The decline in asset management, administration and commissions revenue compared with the prior year was largely due to lower asset management fees in AM from the effect of lower market levels. Also contributing to the decrease were lower administration fees in TSS, driven by the effect of market depreciation on certain custody assets and lower securities lending balances; and lower brokerage commissions revenue in IB, predominantly related to lower transaction volume. For additional information on these fees and commissions, see the segment discussions for TSS and AM on pages 84–85 and pages 86–88, respectively, of this Annual Report.
Securities gains were lower in 2009 and included credit losses related to other-than-temporary impairment and lower gains on the sale of MasterCard shares totaling $241 million in 2009, compared with $668 million in 2008. These decreases were offset partially by higher gains from repositioning the Corporate investment securities portfolio in connection with managing the Firm’s structural interest rate risk. For a further discussion of securities gains, which are mostly recorded in Corporate/Private Equity, see the Corporate/Private Equity segment discussion on pages 89–90 of this Annual Report.
Mortgage fees and related income increased slightly from the prior year, as higher net mortgage servicing revenue was largely offset by lower production revenue. The increase in net mortgage servicing revenue was driven by growth in average third-party loans serviced as a result of the Washington Mutual transaction. Mortgage production revenue declined from the prior year, reflecting an increase in estimated losses from the repurchase of previously-sold loans, offset partially by wider margins on new originations. For a discussion of mortgage fees and related income, which is recorded primarily in RFS, see RFS’s Mortgage Banking, Auto & Other Consumer Lending discussion on pages 74–77 of this Annual Report.
Credit card income, which includes the impact of the Washington Mutual transaction, decreased slightly compared with the prior year, due to lower servicing fees earned in connection with CS securitization activities, largely as a result of higher credit losses. The decrease was partially offset by wider loan margins on securitized credit card loans; higher merchant servicing revenue related to the dissolution of the Chase Paymentech Solutions joint venture; and higher interchange income. For a further discussion of credit card income, see the CS segment results on pages 79–81 of this Annual Report.
Other income decreased from the prior year, due predominantly to the absence of $1.5 billion in proceeds from the sale of Visa shares as part of its initial public offering in the first quarter of 2008; a $1.0 billion gain on the dissolution of the Chase Paymentech Solutions joint venture in the fourth quarter of 2008; and lower net securitization income in CS. These items were partially offset by a $464 million charge recognized in 2008 related to the repurchase of auction-rate securities at par; the absence of a $423 million loss incurred in the second quarter of 2008, reflecting the Firm’s 49.4% share of Bear Stearns’s losses from April 8 to May 30, 2008; and higher valuations on certain investments, including seed capital in AM.
Net interest income increased from the prior year, driven by the Washington Mutual transaction, which contributed to higher average loans and deposits. The Firm’s interest-earning assets were $1.7 trillion, and the net yield on those assets, on a fully taxable-equivalent (“FTE”) basis, was 3.12%, an increase of 25 basis points from 2008. Excluding the impact of the Washington Mutual transaction, the increase in net interest income in 2009 was driven by a higher level of investment securities, as well as a wider net interest margin, which reflected the overall decline in market interest rates during the year. Declining interest rates had a positive effect on the net interest margin, as rates paid on the Firm’s interest-bearing liabilities decreased faster relative to the decline in rates earned on interest-earning assets. These increases in net interest income were offset partially by lower loan balances, which included the effect of lower customer demand, repayments and charge-offs.


     
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Provision for credit losses
                         
Year ended December 31,                  
(in millions)   2010     2009     2008  
 
Wholesale
  $ (850 )   $ 3,974     $ 3,327  
Consumer, excluding credit card(a)
    9,452       16,022       10,610  
Credit card(a)
    8,037       12,019       7,042  
 
Total provision for credit losses
  $ 16,639     $ 32,015     $ 20,979  
 
(a)   Includes adjustments to the provision for credit losses recognized in the Corporate/Private Equity segment related to the Washington Mutual transaction in 2008.
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 purchased credit-impaired loans portfolio, resulting from increased estimated future credit losses. The decrease in the wholesale provision in 2010 reflected a reduction in the allowance for credit losses, predominantly as a result of continued improvement in the credit quality of the commercial and industrial loan portfolio, reduced net charge-offs, and net repayments and loan sales. For a more detailed discussion of the loan portfolio and the allowance for credit losses, see the segment discussions for RFS on pages 72–78, CS on pages 79–81, IB on pages 69–71 and CB on pages 82–83, and the Allowance for Credit Losses section on pages 139–141 of this Annual Report.
2009 compared with 2008
The provision for credit losses in 2009 rose by $11.0 billion compared with the prior year, predominantly due to a significant increase in the consumer provision. The prior year included a $1.5 billion charge to conform Washington Mutual’s allowance for loan losses, which affected both the consumer and wholesale portfolios. For the purpose of the following analysis, this charge is excluded. The consumer provision reflected additions to the allowance for loan losses for the home equity, mortgage and credit card portfolios, as weak economic conditions, housing price declines and higher unemployment rates continued to drive higher estimated losses for these portfolios. Included in the 2009 addition to the allowance for loan losses was a $1.6 billion provision related to estimated deterioration in the Washington Mutual purchased credit-impaired portfolio. The wholesale provision increased from the prior year, reflecting continued weakness in the credit environment in 2009 compared with the prior year. For a more detailed discussion of the loan portfolio and the allowance for loan losses, see the segment discussions for RFS on pages 72–78, CS on pages 79–81, IB on pages 69–71 and CB on pages 82–83, and the Allowance for Credit Losses section on pages 139–141 of this Annual Report.
Noninterest expense
                         
Year ended December 31,                  
(in millions)   2010     2009     2008  
 
Compensation expense(a)
  $ 28,124     $ 26,928     $ 22,746  
Noncompensation expense:
                       
Occupancy expense
    3,681       3,666       3,038  
Technology, communications and equipment
    4,684       4,624       4,315  
Professional and outside services
    6,767       6,232       6,053  
Marketing
    2,446       1,777       1,913  
Other expense(b)(c)(d)
    14,558       7,594       3,740  
Amortization of intangibles
    936       1,050       1,263  
 
Total noncompensation expense
    33,072       24,943       20,322  
Merger costs
          481       432  
 
Total noninterest expense
  $ 61,196     $ 52,352     $ 43,500  
 
(a)   Expense for 2010 included a 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.
 
(b)   In 2010, 2009 and 2008, included litigation expense of $7.4 billion, $161 million and a net benefit of $781 million, respectively.
 
(c)   In 2010, 2009 and 2008, included foreclosed property expense of $1.0 billion, $1.4 billion and $213 million, respectively. For additional information regarding foreclosed property, see Note 11 on page 213 of this Annual Report.
 
(d)   Expense for 2009 included a $675 million FDIC special assessment.
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 CS; 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 the Litigation reserve discussion in Note 32 pages 282–289 of this Annual Report. For a discussion of amortization of intangibles, refer to Note 17 on pages 260–263 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 213 of this Annual Report.


     
62   JPMorgan Chase & Co. / 2010 Annual Report

 


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2009 compared with 2008
Total noninterest expense was $52.4 billion, up by $8.9 billion, or 20%, from the prior year. The increase was driven by the impact of the Washington Mutual transaction, higher performance-based compensation expense, higher FDIC-related costs, and increased mortgage servicing and default-related expense. These items were offset partially by lower headcount-related expense, including salary and benefits but excluding performance-based incentives, and other noncompensation costs related to employees.
Compensation expense increased in 2009 compared with the prior year, reflecting higher performance-based incentives, as well as the impact of the Washington Mutual transaction. Excluding these two items, compensation expense decreased as a result of a reduction in headcount, particularly in the wholesale businesses and in Corporate.
Noncompensation expense increased from the prior year, due predominantly to the following: the impact of the Washington Mutual transaction; higher ongoing FDIC insurance premiums and an FDIC special assessment of $675 million recognized in the second quarter of 2009; higher mortgage servicing and default-related expense, which included an increase in foreclosed property expense of $1.2 billion; higher litigation costs; and the effect of the dissolution of the Chase Paymentech Solutions joint venture. These increases were partially offset by lower headcount-related expense, particularly in IB, TSS and AM; a decrease in amortization of intangibles, predominantly related to purchased credit card relationships; lower mortgage reinsurance losses; and a decrease in credit card marketing expense. For a discussion of amortization of intangibles, refer to Note 17 on pages 260–263 of this Annual Report.
For information on merger costs, refer to Note 11 on page 213 of this Annual Report.
Income tax expense
                         
Year ended December 31,                  
(in millions, except rate)   2010     2009     2008  
 
Income before income tax expense/ (benefit) and extraordinary gain
  $ 24,859     $ 16,067     $ 2,773  
Income tax expense/(benefit)
    7,489       4,415       (926 )
Effective tax rate
    30.1 %     27.5 %     (33.4 )%
 
2010 compared with 2009
The increase in the effective tax rate compared with the prior year was primarily 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 149–154 and Note 27 on pages 271–273 of this Annual Report.
2009 compared with 2008
The change in the effective tax rate compared with the prior year was primarily the result of higher reported pretax income and changes in the proportion of income subject to U.S. federal, state and local taxes. Benefits related to tax-exempt income, business tax credits and tax audit settlements increased in 2009 relative to 2008; however, the impact of these items on the effective tax rate was reduced by the significantly higher level of pretax income in 2009. In addition, 2008 reflected the realization of benefits of $1.1 billion from the release of deferred tax liabilities associated with the undistributed earnings of certain non-U.S. subsidiaries that were deemed to be reinvested indefinitely.
Extraordinary gain
On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual. This transaction was accounted for under the purchase method of accounting for business combinations. The adjusted net asset value of the banking operations after purchase accounting adjustments was higher than the consideration paid by JPMorgan Chase, resulting in an extraordinary gain. The preliminary gain recognized in 2008 was $1.9 billion. In the third quarter of 2009, the Firm recognized an additional $76 million extraordinary gain associated with the final purchase accounting adjustments for the acquisition. For a further discussion of the Washington Mutual transaction, see Note 2 on pages 166–170 of the Firm’s 2009 Annual Report.


     
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Management’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”); these financial statements appear on pages 160–163 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 tax-exempt securities and investments that receive tax credits is presented in the managed results on a basis comparable to taxable securities and investments. 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 these 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 CS remained on the balance sheet. Effective January 1, 2010, the Firm adopted accounting guidance that required the Firm to consolidate its Firm-sponsored credit card securitization trusts. The income, expense and credit costs associated with these securitization activities are now recorded in the 2010 Consolidated Statements of Income in the same classifications that were previously used to report such items on a managed basis. 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 additional information on the accounting guidance, see Note 16 on pages 244–259 of this Annual Report.
The presentation in 2009 and 2008 of CS 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


The following summary table provides a reconciliation from the Firm’s reported U.S. GAAP results to managed basis.
(Table continues on next page)
                                                                 
    2010   2009
                    Fully                             Fully        
Year ended December 31,                   tax-                             tax-        
(in millions, except   Reported             equivalent     Managed     Reported         equivalent     Managed  
per share and ratio data)   results     Credit card(c)     adjustments     basis     results     Credit card(c)     adjustments     basis  
           
Revenue
                                                               
Investment banking fees
  $ 6,190       NA     $     $ 6,190     $ 7,087     $     $     $ 7,087  
Principal transactions
    10,894       NA             10,894       9,796                   9,796  
Lending- and deposit-related fees
    6,340       NA             6,340       7,045                   7,045  
Asset management, administration and commissions
    13,499       NA             13,499       12,540                   12,540  
Securities gains
    2,965       NA             2,965       1,110                   1,110  
Mortgage fees and related income
    3,870       NA             3,870       3,678                   3,678  
Credit card income
    5,891       NA             5,891       7,110       (1,494 )           5,616  
Other income
    2,044       NA       1,745       3,789       916             1,440       2,356  
           
Noninterest revenue
    51,693       NA       1,745       53,438       49,282       (1,494 )     1,440       49,228  
Net interest income
    51,001       NA       403       51,404       51,152       7,937       330       59,419  
           
Total net revenue
    102,694       NA       2,148       104,842       100,434       6,443       1,770       108,647  
Noninterest expense
    61,196       NA             61,196       52,352                   52,352  
           
Pre-provision profit
    41,498       NA       2,148       43,646       48,082       6,443       1,770       56,295  
Provision for credit losses
    16,639       NA             16,639       32,015       6,443             38,458  
Provision for credit losses – accounting conformity(a)
          NA                                      
           
Income before income tax expense/ (benefit) and extraordinary gain
    24,859       NA       2,148       27,007       16,067             1,770       17,837  
Income tax expense/(benefit)
    7,489       NA       2,148       9,637       4,415             1,770       6,185  
           
Income before extraordinary gain
    17,370       NA             17,370       11,652                   11,652  
Extraordinary gain
          NA                   76                   76  
           
Net income
  $ 17,370       NA     $     $ 17,370     $ 11,728     $     $     $ 11,728  
           
 
                                                               
Diluted earnings per share(b)
  $ 3.96       NA     $     $ 3.96     $ 2.24     $     $     $ 2.24  
Return on assets(b)
    0.85 %     NA       NM       0.85 %     0.58 %     NM       NM       0.55 %
Overhead ratio
    60       NA       NM       58       52       NM       NM       48  
           
Loans – period-end
  $ 692,927       NA     $     $ 692,927     $ 633,458     $ 84,626     $     $ 718,084  
Total assets – average
    2,053,251       NA             2,053,251       2,024,201       82,233             2,106,434  
           
(a)   2008 included an accounting conformity loan loss reserve provision related to the acquisition of Washington Mutual’s banking operations.
 
(b)   Based on income before extraordinary gain.
 
(c)   See pages 79–81 of this Annual Report for a discussion of the effect of credit card securitizations on CS results.
 
    NA: Not applicable
     
64   JPMorgan Chase & Co. / 2010 Annual Report

 


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Sheets, and that the earnings on the securitized loans were classified in the same manner as the 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. Operations were funded and decisions were made about allocating resources, such as employees and capital, based on managed financial information. In addition, the same underwriting standards and ongoing risk monitoring are used for both loans on the Consolidated Balance Sheets and securitized loans. Although securitizations result in the sale of credit card receivables to a trust, JPMorgan Chase retains the ongoing customer relationships, as the customers may continue to use their credit cards; accordingly, the customer’s credit performance affects both the securitized loans and the loans retained on the Consolidated Balance Sheets. 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 and 2008 reported to managed basis results for CS, see CS segment results on pages 79–81 of this Annual
(Table continued from previous page)
                             
2008
                       
                Fully        
Reported             tax-equivalent     Managed  
results     Credit card(c)     adjustments     basis  
     
                             
$ 5,526     $     $     $ 5,526  
  (10,699 )                 (10,699 )
                             
  5,088                   5,088  
                             
                             
  13,943                   13,943  
  1,560                   1,560  
                             
  3,467                   3,467  
  7,419       (3,333 )           4,086  
  2,169             1,329       3,498  
     
  28,473       (3,333 )     1,329       26,469  
  38,779       6,945       579       46,303  
     
  67,252       3,612       1,908       72,772  
  43,500                   43,500  
     
  23,752       3,612       1,908       29,272  
  19,445       3,612             23,057  
                             
  1,534                   1,534  
     
                             
                             
  2,773             1,908       4,681  
  (926 )           1,908       982  
     
                             
  3,699                   3,699  
  1,906                   1,906  
     
$ 5,605     $     $     $ 5,605  
     
                             
$ 0.81     $     $     $ 0.81  
  0.21 %     NM       NM       0.20 %
  65       NM       NM       60  
     
$ 744,898     $ 85,571     $     $ 830,469  
  1,791,617       76,904             1,868,521  
     
Report. For information regarding the securitization process, and loans and residual interests sold and securitized, see Note 16 on pages 244–259 of this Annual Report.
Tangible common equity (“TCE”) represents common stockholders’ equity (i.e., total stockholders’ equity less preferred stock) less identifiable intangible assets (other than mortgage servicing rights (“MSRs”)) and goodwill, net of related deferred tax liabilities. ROTCE, a non-GAAP financial ratio, measures the Firm’s earnings as a percentage of TCE and is, in management’s view, a meaningful measure to assess the Firm’s use of equity.
Management also uses certain non-GAAP financial measures at the business-segment level, because it believes these other non-GAAP financial measures provide information to investors about the underlying operational performance and trends of the particular business segment and, therefore, facilitate a comparison of the business segment with the performance of its competitors. Non-GAAP financial measures used by the Firm may not be comparable to similarly named non-GAAP financial measures used by other companies.
 
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(d)
Net income* / Average tangible common equity
Return on assets
Reported net income / Total average assets
Managed net income / Total average managed assets(e)
(including average securitized credit card receivables)
Overhead ratio
Total noninterest expense / Total net revenue
*   Represents net income applicable to common equity
 
(d)   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 page for the calculation of average tangible common equity.
 
(e)   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.


     
JPMorgan Chase & Co. / 2010 Annual Report   65

 


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Management’s discussion and analysis

Average tangible common equity
                         
Year ended December 31, (in millions)   2010     2009     2008  
 
Common stockholders’ equity
  $ 161,520     $ 145,903     $ 129,116  
Less: Goodwill
    48,618       48,254       46,068  
Less: Certain identifiable intangible assets
    4,178       5,095       5,779  
Add: Deferred tax liabilities(a)
    2,587       2,547       2,369  
 
Tangible Common Equity
  $ 111,311     $ 95,101     $ 79,638  
 
(a)   Represents deferred tax liabilities related to tax-deductible goodwill and to identifiable intangibles created in non-taxable transactions, which are netted against goodwill and other intangibles when calculating TCE.
Impact 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 repayment 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 prior periods.
                 
Year ended December 31, 2009           Excluding the  
(in millions, except ratios)   As reported     TARP redemption  
 
Return on equity
               
Net income
  $ 11,728     $ 11,728  
Less: Preferred stock dividends
    1,327       1,327  
Less: Accelerated amortization from redemption of preferred stock issued to the U.S. Treasury
    1,112        
 
Net income applicable to common equity
    9,289       10,401  
 
Average common stockholders’ equity
  $ 145,903     $ 145,903  
 
ROE
    6 %     7 %
 
In addition, the calculated net income applicable to common equity for the year ended December 31, 2009, was also affected by the TARP repayment. The following table presents the effect on net income applicable to common stockholders and the $0.27 reduction to diluted earnings per share (“EPS”) for the year ended December 31, 2009.
                 
Year ended December 31, 2009           Effect of  
(in millions, except per share)   As reported     TARP redemption  
 
Diluted earnings per share
               
Net income
  $ 11,728     $  
Less: Preferred stock dividends
    1,327        
Less: Accelerated amortization from redemption of preferred stock issued to the U.S. Treasury
    1,112       1,112  
 
Net income applicable to common equity
    9,289       (1,112 )
Less: Dividends and undistributed earnings allocated to participating securities
    515       (62 )
 
Net income applicable to common stockholders
    8,774       (1,050 )
 
Total weighted average diluted shares outstanding
    3,879.7       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 home lending purchased credit-impaired loans and loans held by the Washington Mutual Master Trust (“WMMT”). For a further discussion of this credit metric, see Allowance for Credit Losses on pages 139—141 of this Annual Report.


     
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BUSINESS SEGMENT RESULTS
 

The Firm is managed on a line of business basis. The business segment financial results presented reflect the current organization of JPMorgan Chase. There are six major reportable business segments: Investment Bank, Retail Financial Services, Card Services, Commercial Banking, Treasury & Securities Services and Asset Management, as well as a Corporate/Private Equity segment.
The business segments are determined based on the products and services provided, or the type of customer served, and reflect the manner in which financial information is currently evaluated by management. Results of these lines of business are presented on a managed basis.


(FLOW CHART)

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. Business segment reporting methodologies used by the Firm are discussed below. 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. The allocation process is unique to each business segment and considers the interest rate risk, liquidity risk and regulatory requirements of that segment’s 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.


     
JPMorgan Chase & Co. / 2010 Annual Report   67

 


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Management’s discussion and analysis

Capital allocation
Each business segment is allocated capital by taking into consideration stand-alone peer comparisons, economic risk measures and regulatory capital requirements. The amount of capital assigned to each business is referred to as equity. Effective January 1, 2010, the Firm enhanced its line-of-business equity framework to better align equity assigned to each line of business as a result of the changes anticipated to occur in the business, and in 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. For a further discussion of the changes, see Capital Management – Line of business equity on page 105 of this Annual Report.
Expense allocation
Where business segments use services provided by support units within the Firm, the costs of those support units are allocated to the business segments. The expense is allocated based on their actual cost or the lower of actual cost or market, as well as upon usage of the services provided. In contrast, certain other expense related to certain corporate functions, or to certain technology and operations, are not allocated to the business segments and are retained in Corporate. Retained expense includes: parent company costs that would not be incurred if the segments were stand-alone businesses; adjustments to align certain corporate staff, technology and operations allocations with market prices; and other one-time items not aligned with a particular business segment.


Segment results – Managed basis(a)
The following table summarizes the business segment results for the periods indicated.
                                                 
Year ended December 31,   Total net revenue     Noninterest expense  
(in millions)   2010     2009     2008     2010     2009     2008  
 
Investment Bank(b)
  $ 26,217     $ 28,109     $ 12,335     $ 17,265     $ 15,401     $ 13,844  
Retail Financial Services
    31,756       32,692       23,520       17,864       16,748       12,077  
Card Services
    17,163       20,304       16,474       5,797       5,381       5,140  
Commercial Banking
    6,040       5,720       4,777       2,199       2,176       1,946  
Treasury & Securities Services
    7,381       7,344       8,134       5,604       5,278       5,223  
Asset Management
    8,984       7,965       7,584       6,112       5,473       5,298  
Corporate/Private Equity(b)
    7,301       6,513       (52 )     6,355       1,895       (28 )
 
Total
  $ 104,842     $ 108,647     $ 72,772     $ 61,196     $ 52,352     $ 43,500  
 
                                                 
Year ended December 31,   Pre-provision profit(d)     Provision for credit losses  
(in millions)   2010     2009     2008     2010     2009     2008  
 
Investment Bank(b)
  $ 8,952     $ 12,708     $ (1,509 )   $ (1,200 )   $ 2,279     $ 2,015  
Retail Financial Services
    13,892       15,944       11,443       9,452       15,940       9,905  
Card Services
    11,366       14,923       11,334       8,037       18,462       10,059  
Commercial Banking
    3,841       3,544       2,831       297       1,454       464  
Treasury & Securities Services
    1,777       2,066       2,911       (47 )     55       82  
Asset Management
    2,872       2,492       2,286       86       188       85  
Corporate/Private Equity(b)
    946       4,618       (24 )     14       80       1,981  
 
Total
  $ 43,646     $ 56,295     $ 29,272     $ 16,639     $ 38,458     $ 24,591  
 
                                                 
Year ended December 31,   Net income/(loss)     Return on equity  
(in millions)   2010     2009     2008     2010     2009     2008  
 
Investment Bank(b)
  $ 6,639     $ 6,899     $ (1,175 )     17 %     21 %     (5 )%
Retail Financial Services
    2,526       97       880       9             5  
Card Services
    2,074       (2,225 )     780       14       (15 )     5  
Commercial Banking
    2,084       1,271       1,439       26       16       20  
Treasury & Securities Services
    1,079       1,226       1,767       17       25       47  
Asset Management
    1,710       1,430       1,357       26       20       24  
Corporate/Private Equity(b)(c)
    1,258       3,030       557     NM     NM     NM  
 
Total
  $ 17,370     $ 11,728     $ 5,605       10 %     6 %     4 %
 
(a)   Represents reported results on a tax-equivalent basis. The managed basis also assumes that credit card loans in Firm-sponsored credit card securitization trusts remained on the balance sheet for 2009 and 2008. Firm-sponsored credit card securitizations were consolidated at their carrying values on January 1, 2010, under the accounting guidance related to VIEs.
 
(b)   IB reports its credit reimbursement from TSS as a component of its total net revenue, whereas TSS reports its credit reimbursement to IB as a separate line item on its income statement (not part of total net revenue). Corporate/Private Equity includes an adjustment to offset IB’s inclusion of the credit reimbursement in total net revenue.
 
(c)   Net income included an extraordinary gain of $76 million and $1.9 billion related to the Washington Mutual transaction for 2009 and 2008, respectively.
 
(d)   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.
     
68   JPMorgan Chase & Co. / 2010 Annual Report

 


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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 income statement data
                         
Year ended December 31,                  
(in millions, except ratios)   2010     2009     2008(e)  
 
Revenue
                       
Investment banking fees
  $ 6,186     $ 7,169     $ 5,907  
Principal transactions(a)
    8,454       8,154       (7,042 )
Lending- and deposit-related fees
    819       664       463  
Asset management, administration and commissions
    2,413       2,650       3,064  
All other income(b)
    381       (115 )     (341 )
 
Noninterest revenue
    18,253       18,522       2,051  
Net interest income
    7,964       9,587       10,284  
 
Total net revenue(c)
    26,217       28,109       12,335  
Provision for credit losses
    (1,200 )     2,279       2,015  
Noninterest expense
                       
Compensation expense
    9,727       9,334       7,701  
Noncompensation expense
    7,538       6,067       6,143  
 
Total noninterest expense
    17,265       15,401       13,844  
 
Income/(loss) before income tax expense/(benefit)
    10,152       10,429       (3,524 )
Income tax expense/(benefit)(d)
    3,513       3,530       (2,349 )
 
Net income/(loss)
  $ 6,639     $ 6,899     $ (1,175 )
 
Financial ratios
                       
ROE
    17 %     21 %     (5 )%
ROA
    0.91       0.99       (0.14 )
Overhead ratio
    66       55       112  
Compensation expense as % of total net revenue(f)
    37       33       62  
 
(a)   The 2009 results reflect modest net gains on legacy leveraged lending and mortgage-related positions, compared with net markdowns of $10.6 billion in 2008.
 
(b)   TSS was charged a credit reimbursement related to certain exposures managed within IB’s credit portfolio on behalf of clients shared with TSS. IB recognizes this credit reimbursement in its credit portfolio business in all other income.
 
(c)   Total net revenue included tax-equivalent adjustments, predominantly due to income tax credits related to affordable housing and alternative energy investments as well as tax-exempt income from municipal bond investments of $1.7 billion, $1.4 billion and $1.7 billion for 2010, 2009 and 2008, respectively.
 
(d)   The income tax benefit in 2008 includes the result of reduced deferred tax liabilities on overseas earnings.
 
(e)   Results for 2008 include seven months of the combined Firm’s (JPMorgan Chase & Co.’s and Bear Stearns’) results and five months of heritage JPMorgan Chase results.
 
(f)   The compensation expense as a percentage of total net revenue ratio includes the impact of the U.K. Bank Payroll Tax on certain compensation awarded from December 9, 2009 to April 5, 2010 to relevant banking employees. For comparability to prior periods, IB excludes the impact of the U.K. Bank Payroll Tax expense, which results in a compensation expense as a percentage of total net revenue for 2010 of 35%, which is a non-GAAP financial measure.
The following table provides IB’s total net revenue by business segment.
                         
Year ended December 31,                  
(in millions)   2010     2009     2008(e)  
 
Revenue by business
                       
Investment banking fees:
                       
Advisory
  $ 1,469     $ 1,867     $ 2,008  
Equity underwriting
    1,589       2,641       1,749  
Debt underwriting
    3,128       2,661       2,150  
 
Total investment banking fees
    6,186       7,169       5,907  
Fixed income markets(a)
    15,025       17,564       1,957  
Equity markets(b)
    4,763       4,393       3,611  
Credit portfolio(c)(d)
    243       (1,017 )     860  
 
Total net revenue
  $ 26,217     $ 28,109     $ 12,335  
 
Revenue by region(d)
                       
Americas
  $ 15,189     $ 15,156     $ 2,610  
Europe/Middle East/Africa
    7,405       9,790       7,710  
Asia/Pacific
    3,623       3,163       2,015  
 
Total net revenue
  $ 26,217     $ 28,109     $ 12,335  
 
(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.
 
(b)   Equities markets primarily include revenue related to market-making across global equity products, including cash instruments, derivatives, convertibles and prime services.
 
(c)   Credit portfolio revenue includes net interest income, fees and loan sale activity, as well as gains or losses on securities received as part of a loan restructuring, for 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 116–118 of the Credit Risk Management section of this Annual Report for further discussion.
 
(d)   TSS was charged a credit reimbursement related to certain exposures managed within IB’s credit portfolio on behalf of clients shared with TSS. IB recognizes this credit reimbursement in its credit portfolio business in all other income.
 
(e)   Results for 2008 include seven months of the combined Firm’s (JPMorgan Chase & Co.’s and Bear Stearns’) results and five months of heritage JPMorgan Chase & Co. results.
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 gains of $287 million from the widening of the Firm’s credit spread on certain structured liabilities, compared with 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 gains of $181 million from the widening of the Firm’s credit spread on certain structured liabilities, compared with 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 the negative impact of


     
JPMorgan Chase & Co. / 2010 Annual Report   69

 


Table of Contents

Management’s discussion and analysis

credit spreads 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.
2009 compared with 2008
Net income was $6.9 billion, compared with a net loss of $1.2 billion in the prior year. These results reflected significantly higher total net revenue, partially offset by higher noninterest expense and a higher provision for credit losses.
Total net revenue was $28.1 billion, compared with $12.3 billion in the prior year. Investment banking fees were up 21% to $7.2 billion, consisting of debt underwriting fees of $2.7 billion (up 24%), equity underwriting fees of $2.6 billion (up 51%), and advisory fees of $1.9 billion (down 7%). Fixed Income Markets revenue was $17.6 billion, compared with $2.0 billion in the prior year, reflecting improved performance across most products and modest net gains on legacy leveraged lending and mortgage-related positions, compared with net markdowns of $10.6 billion in the prior year. Equity Markets revenue was $4.4 billion, up 22% from the prior year, driven by strong client revenue across products, particularly prime services, and improved trading results. Fixed Income and Equity Markets results also included losses of $1.7 billion from the tightening of the Firm’s credit spread on certain structured liabilities, compared with gains of $1.2 billion in the prior year. Credit Portfolio revenue was a loss of $1.0 billion versus a gain of $860 million in the prior year, driven by mark-to-market losses on hedges of retained loans compared with gains in the prior year, partially offset by the positive net impact of credit spreads on derivative assets and liabilities.
The provision for credit losses was $2.3 billion, compared with $2.0 billion in the prior year, reflecting continued weakness in the credit environment. The allowance for loan losses to end-of-period loans retained was 8.25%, compared with 4.83% in the prior year. Net charge-offs were $1.9 billion, compared with $105 million in the prior year. Total nonperforming assets were $4.2 billion, compared with $2.5 billion in the prior year.
Noninterest expense was $15.4 billion, up $1.6 billion, or 11%, from the prior year, driven by higher performance-based compensation expense, partially offset by lower headcount-related expense.
Return on Equity was 21% on $33.0 billion of average allocated capital, compared with negative 5% on $26.1 billion of average allocated capital in the prior year.
Selected metrics
                         
As of or for the year ended December 31,                  
(in millions, except headcount)   2010     2009     2008  
 
Selected balance sheet data (period-end)
                       
Loans:(a)
                       
Loans retained(b)
  $ 53,145     $ 45,544     $ 71,357  
Loans held-for-sale and loans at fair value
    3,746       3,567       13,660  
 
Total loans
    56,891       49,111       85,017  
Equity
    40,000       33,000       33,000  
 
                       
Selected balance sheet data (average)
                       
Total assets
  $ 731,801     $ 699,039     $ 832,729  
Trading assets – debt and equity instruments
    307,061       273,624       350,812  
Trading assets – derivative receivables
    70,289       96,042       112,337  
Loans: (a)
                       
Loans retained(b)
    54,402       62,722       73,108  
Loans held-for-sale and loans at fair value
    3,215       7,589       18,502  
 
Total loans
    57,617       70,311       91,610  
 
                       
Adjusted assets(c)
    540,449       538,724       679,780  
Equity
    40,000       33,000       26,098  
 
                       
Headcount
    26,314       24,654       27,938  
 
(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. As a result, $15.1 billion of related loans were recorded in loans on the Consolidated Balance Sheets.
 
(b)   Loans retained included credit portfolio loans, leveraged leases and other accrual loans, and excluded loans held-for-sale and loans at fair value.
 
(c)   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 variable interest entities (“VIEs”); (3) cash and securities segregated and on deposit for regulatory and other purposes; (4) goodwill and intangibles; (5) securities received as collateral; and (6) investments purchased under the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (“AML Facility”). 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.


70   JPMorgan Chase & Co. / 2010 Annual Report

 


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Selected metrics
                         
As of or for the year ended December 31,                  
(in millions, except ratios)   2010     2009     2008  
 
Credit data and quality statistics
                       
Net charge-offs
  $ 735     $ 1,904     $ 105  
Nonperforming assets:
                       
Nonaccrual loans:
                       
Nonaccrual loans retained(a)(b)
    3,159       3,196       1,143  
Nonaccrual loans held-for-sale and loans at fair value
    460       308       32  
 
Total nonperforming loans
    3,619       3,504       1,175  
Derivative receivables
    34       529       1,079  
Assets acquired in loan satisfactions
    117       203       247  
 
Total nonperforming assets
    3,770       4,236       2,501  
Allowance for credit losses:
                       
Allowance for loan losses
    1,863       3,756       3,444  
Allowance for lending-related commitments
    447       485       360  
 
Total allowance for credit losses
    2,310       4,241       3,804  
Net charge-off rate(a)(c)
    1.35 %     3.04 %     0.14 %
Allowance for loan losses to period-end loans retained(a)(c)
    3.51       8.25       4.83  
Allowance for loan losses to average loans retained(a)(c)(d)
    3.42       5.99       4.71 (i)
Allowance for loan losses to nonaccrual loans retained(a)(b)(c)
    59       118       301  
Nonaccrual loans to total period-end loans
    6.36       7.13       1.38  
Nonaccrual loans to average loans
    6.28       4.98       1.28  
Market risk–average trading and credit portfolio VaR – 95% confidence level(e)
                       
Trading activities:
                       
Fixed income
  $ 65     $ 160     $ 162  
Foreign exchange
    11       18       23  
Equities
    22       47       47  
Commodities and other
    16       20       23  
Diversification(f)
    (43 )     (91 )     (88 )
 
Total trading VaR(g)
    71       154       167  
Credit portfolio VaR(h)
    26       52       45  
Diversification(f)
    (10 )     (42 )     (36 )
 
Total trading and credit portfolio VaR
  $ 87     $ 164     $ 176  
 
(a)   Loans retained included credit portfolio loans, leveraged leases and other accrual loans, and excluded loans held-for-sale and loans accounted for at fair value.
 
(b)   Allowance for loan losses of $1.1 billion, $1.3 billion and $430 million were held against these nonaccrual loans at December 31, 2010, 2009 and 2008, 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)   Results for 2008 include seven months of the combined Firm’s (JPMorgan Chase & Co.’s and Bear Stearns’) results and five months of heritage JPMorgan Chase & Co.’s results only.
 
(e)   For 2008, 95% VaR reflects data only for the last six months of the year as the Firm began to calculate VaR using a 95% confidence level effective in the third quarter of 2008, rather than the prior 99% confidence level.
 
(f)   Average value-at-risk (“VaR”) was 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.
 
(g)   Trading VaR includes predominantly all trading activities in IB, as well as 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 debit valuation adjustments (“DVA”) taken on derivative and structured liabilities to reflect the credit quality of the Firm. See VaR discussion on pages 142–146 and the DVA Sensitivity table on page 144 of this Annual Report for further details. Trading VaR includes the estimated credit spread sensitivity of certain mortgage products.
 
(h)   Credit portfolio VaR includes the derivative credit valuation adjustments (“CVA”), hedges of the CVA and mark-to-market (“MTM”) hedges of the retained loan portfolio, which were all reported in principal transactions revenue. This VaR does not include the retained loan portfolio.
 
(i)   Excluding the impact of a loan originated in March 2008 to Bear Stearns, the adjusted ratio would be 4.84% for 2008. The average balance of the loan extended to Bear Stearns was $1.9 billion for 2008.

Market shares and rankings (a)
                                                 
    2010   2009   2008
Year ended   Market           Market           Market    
December 31,   share   Rankings   share   Rankings   share   Rankings
 
Global investment banking fees (b)
    8 %     #1       9 %     #1       9 %     #2  
Debt, equity and equity-related
                                               
Global
    7       1       9       1       8       2  
U.S.
    11       2       15       1       14       2  
Syndicated loans
                                               
Global
    9       1       8       1       9       1  
U.S.
    19       2       22       1       22       1  
Long-term debt (c)
                                               
Global
    7       2       8       1       8       3  
U.S.
    11       2       14       1       14       2  
Equity and equity- related
                                               
Global(d)
    7       3       12       1       12       2  
U.S.
    13       2       16       2       16       2  
Announced M&A(e)
                                               
Global
    16       4       24       3       25       1  
U.S.
    23       3       36       2       31       2  
 
(a)   Source: Dealogic. Global Investment Banking fees reflects ranking of fees and market share. Remainder of rankings reflects transaction volume rank and market share. Results for 2008 are pro forma for the Bear Stearns merger.
 
(b)   Global IB fees exclude money market, short-term debt and shelf deals.
 
(c)   Long-term debt tables include investment-grade, high-yield, supranationals, sovereigns, agencies, covered bonds, asset-backed securities and mortgage-backed securities; and exclude money market, short-term debt, and U.S. municipal securities.
 
(d)   Equity and equity-related rankings include rights offerings and Chinese A-Shares.
 
(e)   Global announced M&A is based on transaction value at announcement; all other rankings are based on transaction proceeds, with full credit to each book manager/equal if joint. Because of joint assignments, market share of all participants will add up to more than 100%. M&A for 2010, 2009 and 2008, 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 2010, based on revenue; #1 in Global Debt, Equity and Equity-related; #1 in Global Syndicated Loans; #2 in Global Long-Term Debt; #3 in Global Equity and Equity-related; and #4 in Global Announced M&A, based on volume.


JPMorgan Chase & Co. / 2010 Annual Report   71

 


Table of Contents

Management’s discussion and analysis
RETAIL FINANCIAL SERVICES
 

Retail Financial Services (“RFS”) serves consumers and businesses through personal service at bank branches and through ATMs, online banking and telephone banking, as well as through auto dealerships and school financial-aid offices. Customers can use more than 5,200 bank branches (third-largest nationally) and 16,100 ATMs (second-largest nationally), as well as online and mobile banking around the clock. More than 28,900 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. Consumers also can obtain loans through more than 16,200 auto dealerships and 2,200 schools and universities nationwide.
Prior to January 1, 2010, RFS was reported as: Retail Banking and Consumer Lending. Commencing in 2010, Consumer Lending is presented as: (1) Mortgage Banking, Auto & Other Consumer Lending, and (2) Real Estate Portfolios. Mortgage Banking, Auto & Other Consumer Lending comprises mortgage production and servicing, auto finance, and student and other lending activities. Real Estate Portfolios comprises residential mortgages and home equity loans, including the purchased credit-impaired portfolio acquired in the Washington Mutual transaction. These reporting revisions were intended to provide further clarity around the Real Estate Portfolios. Retail Banking, which includes branch banking and business banking activities, was not affected by these reporting revisions.
Selected income statement data
                         
Year ended December 31,                  
(in millions, except ratios)   2010     2009     2008  
 
Revenue
                       
Lending- and deposit-related fees
  $ 3,117     $ 3,969     $ 2,546  
Asset management, administration and commissions
    1,784       1,674       1,510  
Mortgage fees and related income
    3,855       3,794       3,621  
Credit card income
    1,956       1,635       939  
Other income
    1,516       1,128       739  
 
Noninterest revenue
    12,228       12,200       9,355  
Net interest income
    19,528       20,492       14,165  
 
Total net revenue(a)
    31,756       32,692       23,520  
 
                       
Provision for credit losses
    9,452       15,940       9,905  
 
                       
Noninterest expense
                       
Compensation expense
    7,432       6,712       5,068  
Noncompensation expense
    10,155       9,706       6,612  
Amortization of intangibles
    277       330       397  
 
Total noninterest expense
    17,864       16,748       12,077  
 
Income before income tax expense/(benefit)
    4,440       4       1,538  
Income tax expense/(benefit)
    1,914       (93 )     658  
 
Net income
  $ 2,526     $ 97     $ 880  
 
Financial ratios
                       
ROE
    9 %     %     5 %
Overhead ratio
    56       51       51  
Overhead ratio excluding
core deposit intangibles(b)
    55       50       50  
 
(a)   Total net revenue included tax-equivalent adjustments associated with tax-exempt loans to municipalities and other qualified entities of $15 million, $22 million and $23 million for the years ended December 31, 2010, 2009 and 2008, respectively.
 
(b)   RFS uses the overhead ratio (excluding the amortization of core deposit intangibles (“CDI”)), a non-GAAP financial measure, to evaluate the underlying expense trends of the business. Including CDI amortization expense in the overhead ratio calculation would result in a higher overhead ratio in the earlier years and a lower overhead ratio in later years. This method would therefore result in an improving overhead ratio over time, all things remaining equal. The non-GAAP ratio excludes Retail Banking’s CDI amortization expense related to prior business combination transactions of $276 million, $328 million and $394 million for the years ended December 31, 2010, 2009 and 2008, respectively.
2010 compared with 2009
Net income was $2.5 billion, compared with $97 million in the prior year.
Net revenue was $31.8 billion, a decrease of $936 million, or 3%, compared with the prior year. Net interest income was $19.5 billion, down by $964 million, or 5%, reflecting the impact of lower loan and deposit balances and narrower loan spreads, partially offset by a shift to wider-spread deposit products. Noninterest revenue was $12.2 billion, flat to the prior year, as lower deposit-related fees were largely offset by higher debit card income and auto operating lease income.
The provision for credit losses was $9.5 billion, compared with $15.9 billion in the prior year. The current-year provision reflected an addition to the allowance for loan losses of $3.4 billion for the purchased credit-impaired (“PCI”) portfolio and a reduction in the allowance for loan losses of $1.8 billion, predominantly for the mortgage loan portfolios. In comparison, the prior-year provision reflected an addition to the allowance for loan losses of $5.8 billion, predominantly for the home equity and mortgage portfolios, but which also included an addition of $1.6 billion for the PCI portfolio. While delinquency trends and net charge-offs improved compared with the prior year, the provision continued to reflect elevated losses for the mortgage and home equity portfolios. See page 130 of this Annual Report for the net charge-off amounts and rates. To date, no charge-offs have been recorded on PCI loans.
Noninterest expense was $17.9 billion, an increase of $1.1 billion, or 7%, from the prior year, reflecting higher default-related expense.
2009 compared with 2008
The following discussion of RFS’s financial results reflects the acquisition of Washington Mutual’s retail bank network and mortgage banking activities as a result of the Washington Mutual transaction on September 25, 2008. See Note 2 on pages 166–170 of this Annual Report for more information concerning this transaction.
Net income was $97 million, a decrease of $783 million from the prior year, as the increase in provision for credit losses more than offset the positive impact of the Washington Mutual transaction.
Net revenue was $32.7 billion, an increase of $9.2 billion, or 39%, from the prior year. Net interest income was $20.5 billion, up by $6.3 billion, or 45%, reflecting the impact of the Washington Mutual transaction, and wider loan and deposit spreads.


 
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Noninterest revenue was $12.2 billion, up by $2.8 billion, or 30%, driven by the impact of the Washington Mutual transaction, wider margins on mortgage originations and higher net mortgage servicing revenue, partially offset by $1.6 billion in estimated losses related to the repurchase of previously sold loans.
The provision for credit losses was $15.9 billion, an increase of $6.0 billion from the prior year. Weak economic conditions and housing price declines continued to drive higher estimated losses for the home equity and mortgage loan portfolios. The provision included an addition of $5.8 billion to the allowance for loan losses, compared with an addition of $5.0 billion in the prior year. Included in the 2009 addition to the allowance for loan losses was a $1.6 billion increase related to estimated deterioration in the Washington Mutual PCI portfolio. See page 130 of this Annual Report for the net charge-off amounts and rates. To date, no charge-offs have been recorded on PCI loans.
Noninterest expense was $16.7 billion, an increase of $4.7 billion, or 39%. The increase reflected the impact of the Washington Mutual transaction and higher servicing and default-related expense.
Selected metrics
                         
As of or for the year ended December 31,                  
(in millions, except headcount and                  
ratios)   2010     2009     2008  
 
Selected balance sheet data
(period-end)
                       
Assets
  $ 366,841     $ 387,269     $ 419,831  
Loans:
                       
Loans retained
    316,725       340,332       368,786  
Loans held-for-sale and loans at fair value(a)
    14,863       14,612       9,996  
 
Total loans
    331,588       354,944       378,782  
Deposits
    370,819       357,463       360,451  
Equity
    28,000       25,000       25,000  
 
                       
Selected balance sheet data (average)
                       
Assets
  $ 381,337     $ 407,497     $ 304,442  
Loans:
                       
Loans retained
    331,330       354,789       257,083  
Loans held-for-sale and loans at fair value(a)
    16,515       18,072       17,056  
 
Total loans
    347,845       372,861       274,139  
Deposits
    362,386       367,696       258,362  
Equity
    28,000       25,000       19,011  
 
                       
Headcount
    121,876       108,971       102,007  
 
                         
As of or for the year ended December 31,                  
(in millions, except headcount and                  
ratios)   2010     2009     2008  
 
 
                       
Credit data and quality statistics
                       
Net charge-offs
  $ 7,906     $ 10,113     $ 4,877  
Nonaccrual loans:
                       
Nonaccrual loans retained
    8,768       10,611       6,548  
Nonaccrual loans held-for- sale and loans at fair value
    145       234       236  
 
Total nonaccrual loans(b)(c)(d)
    8,913       10,845       6,784  
Nonperforming assets(b)(c)(d)
    10,266       12,098       9,077  
Allowance for loan losses
    16,453       14,776       8,918  
 
                       
Net charge-off rate(e)
    2.39 %     2.85 %     1.90 %
Net charge-off rate excluding PCI loans(e)(f)
    3.11       3.75       2.08  
Allowance for loan losses to ending loans retained(e)
    5.19       4.34       2.42  
Allowance for loan losses to ending loans excluding PCI loans(e)(f)
    4.72       5.09       3.19  
Allowance for loan losses to nonaccrual loans retained(b)(e)(f)
    131       124       136  
Nonaccrual loans to total loans
    2.69       3.06       1.79  
Nonaccrual loans to total loans excluding PCI loans(b)
    3.44       3.96       2.34  
 
(a)   Loans at fair value consist of prime mortgages originated with the intent to sell that are accounted for at fair value and classified as trading assets on the Consolidated Balance Sheets. These loans totaled $14.7 billion, $12.5 billion and $8.0 billion at December 31, 2010, 2009 and 2008, respectively. Average balances of these loans totaled $15.2 billion, $15.8 billion and $14.2 billion for the years ended December 31, 2010, 2009 and 2008, respectively.
 
(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, 2010, 2009 and 2008, nonperforming assets excluded: (1) mortgage loans insured by U.S. government agencies of $10.5 billion, $9.0 billion and $3.0 billion, respectively, that are 90 days past due and accruing at the guaranteed reimbursement rate; (2) real estate owned insured by U.S. government agencies of $1.9 billion, $579 million and $364 million, respectively; and (3) student loans that are 90 days past due and still accruing, which are insured by U.S. government agencies under the Federal Family Education Loan Program (“FFELP”), of $625 million, $542 million and $437 million, respectively. These amounts are excluded as reimbursement of insured amounts is proceeding normally.
 
(e)   Loans held-for-sale and loans accounted for at fair value were excluded when calculating the allowance coverage ratio and 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 $4.9 billion and $1.6 billion was recorded for these loans at December 31, 2010 and 2009, respectively, which has also been excluded from the applicable ratios. No allowance for loan losses was recorded for these loans at December 31, 2008. To date, no charge-offs have been recorded for these loans.


 
JPMorgan Chase & Co. / 2010 Annual Report   73


Table of Contents

Management’s discussion and analysis

Retail Banking
Selected income statement data
                         
Year ended December 31,                  
(in millions, except ratios)   2010     2009     2008  
 
Noninterest revenue
  $ 6,792     $ 7,169     $ 4,951  
Net interest income
    10,785       10,781       7,659  
 
Total net revenue
    17,577       17,950       12,610  
Provision for credit losses
    607       1,142       449  
Noninterest expense
    10,657       10,357       7,232  
 
Income before income tax expense
    6,313       6,451       4,929  
 
Net income
  $ 3,614     $ 3,903     $ 2,982  
 
Overhead ratio
    61 %     58 %     57 %
Overhead ratio excluding core deposit intangibles(a)
    59       56       54  
 
(a)   Retail 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. The non-GAAP ratio excludes Retail Banking’s CDI amortization expense related to prior business combination transactions of $276 million, $328 million and $394 million for the years ended December 31, 2010, 2009 and 2008, respectively.
Selected metrics
                         
As of or for the year ended December 31,                  
(in billions, except ratios and                  
where otherwise noted)   2010     2009     2008  
 
Business metrics
                       
Business banking origination volume
(in millions)
  $ 4,688     $ 2,299     $ 5,531  
End-of-period loans owned
    16.8       17.0       18.4  
End-of-period deposits:
                       
Checking
  $ 131.7     $ 121.9     $ 109.2  
Savings
    166.6       153.4       144.0  
Time and other
    45.9       58.0       89.1  
 
Total end-of-period deposits
    344.2       333.3       342.3  
Average loans owned
  $ 16.7     $ 17.8     $ 16.7  
Average deposits:
                       
Checking
  $ 123.4     $ 113.5     $ 77.1  
Savings
    162.1       150.9       114.3  
Time and other
    51.0       76.4       53.2  
 
Total average deposits
    336.5       340.8       244.6  
 
Deposit margin
    3.03 %     2.96 %     2.89 %
Average assets
  $ 28.3     $ 28.9     $ 26.3  
 
Credit data and quality statistics
(in millions, except ratios)
                       
Net charge-offs
  $ 707     $ 842     $ 346  
Net charge-off rate
    4.23 %     4.73 %     2.07 %
Nonperforming assets
  $ 846     $ 839     $ 424  
 
Retail branch business metrics
                         
Year ended December 31,   2010     2009     2008  
 
Investment sales volume (in millions)
  $ 23,579     $ 21,784     $ 17,640  
 
                       
Number of:
                       
Branches
    5,268       5,154       5,474  
ATMs
    16,145       15,406       14,568  
Personal bankers
    21,715       17,991       15,825  
Sales specialists
    7,196       5,912       5,661  
Active online customers
(in thousands)
    17,744       15,424       11,710  
Checking accounts
(in thousands)
    27,252       25,712       24,499  
 
2010 compared with 2009
Retail Banking reported net income of $3.6 billion, a decrease of $289 million, or 7%, compared with the prior year. Total net revenue was $17.6 billion, down 2% compared with the prior year. The decrease was driven by lower deposit-related fees, largely offset by higher debit card income and a shift to wider-spread deposit products. The provision for credit losses was $607 million, down $535 million compared with the prior year. The current-year provision reflected lower net charge-offs and a reduction of $100 million to the allowance for loan losses due to lower estimated losses, compared with a $300 million addition to the allowance for loan losses in the prior year. Retail Banking net charge-offs were $707 million, compared with $842 million in the prior year. Noninterest expense was $10.7 billion, up 3% compared with the prior year, resulting from sales force increases in Business Banking and bank branches.
2009 compared with 2008
Retail Banking reported net income of $3.9 billion, up by $921 million, or 31%, from the prior year. Total net revenue was $18.0 billion, up by $5.3 billion, or 42%, from the prior year. The increase reflected the impact of the Washington Mutual transaction, wider deposit spreads, higher average deposit balances and higher debit card income. The provision for credit losses was $1.1 billion, compared with $449 million in the prior year, reflecting higher estimated losses in the Business Banking portfolio. Noninterest expense was $10.4 billion, up by $3.1 billion, or 43%. The increase reflected the impact of the Washington Mutual transaction, higher FDIC insurance premiums and higher headcount-related expense.
Mortgage Banking, Auto & Other Consumer Lending
Selected income statement data
                         
Year ended December 31,                  
(in millions, except ratios)   2010     2009     2008  
 
Noninterest revenue
  $ 5,321     $ 5,057     $ 4,689  
Net interest income
    3,311       3,165       2,279  
 
Total net revenue
    8,632       8,222       6,968  
Provision for credit losses
    614       1,235       895  
Noninterest expense
    5,580       4,544       3,956  
 
Income before income tax expense
    2,438       2,443       2,117  
 
Net income
  $ 1,405     $ 1,643     $ 1,286  
 
Overhead ratio
    65 %     55 %     57 %
 
2010 compared with 2009
Mortgage Banking, Auto & Other Consumer Lending reported net income of $1.4 billion, a decrease of $238 million, or 14%, from the prior year.
Net revenue was $8.6 billion, up by $410 million, or 5%, from the prior year. Mortgage Banking net revenue was $5.2 billion, flat to the prior year. Other Consumer Lending net revenue, comprising Auto and Student Lending, was $3.5 billion, up by $447 million, predominantly as a result of higher auto loan and lease balances.
Mortgage Banking net revenue included $904 million of net interest income, $3.9 billion of mortgage fees and related income,


 
74   JPMorgan Chase & Co. / 2010 Annual Report


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and $413 million of other noninterest revenue. Mortgage fees and related revenue comprised $528 million of net production revenue, $2.2 billion of servicing operating revenue and $1.1 billion of MSR risk management revenue. Production revenue, excluding repurchase losses, was $3.4 billion, an increase of $1.3 billion, reflecting wider mortgage margins and higher origination volumes. Total production revenue was reduced by $2.9 billion of repurchase losses, compared with $1.6 billion in the prior year, and included a $1.6 billion increase in the repurchase reserve during the current year, reflecting higher estimated future repurchase demands. Servicing operating revenue was $2.2 billion, an increase of $528 million, reflecting an improvement in other changes in the MSR asset fair value driven by lower runoff of the MSR asset due to time decay, partially offset by lower loan servicing revenue as a result of lower third-party loans serviced. MSR risk management revenue was $1.1 billion, a decrease of $492 million.
The provision for credit losses, predominantly related to the student and auto loan portfolios, was $614 million, compared with $1.2 billion in the prior year. The current-year provision reflected lower net charge-offs and a reduction of $135 million to the allowance for loan losses due to lower estimated losses, compared with a $307 million addition to the allowance for loan losses in the prior year. See page 130 of this Annual Report for the net charge-off amounts and rates.
Noninterest expense was $5.6 billion, up by $1.0 billion, or 23%, from the prior year, driven by an increase in default-related expense for the serviced portfolio, including costs associated with foreclosure affidavit-related suspensions.
2009 compared with 2008
Mortgage Banking, Auto & Other Consumer Lending reported net income of $1.6 billion, an increase of $357 million, or 28%, from the prior year.
Net revenue was $8.2 billion, up by $1.3 billion, or 18%, from the prior year. Mortgage Banking net revenue was $5.2 billion, up by $701 million. Other Consumer Lending net revenue, comprising Auto and Student Lending, was $3.0 billion, up by $553 million, largely as a result of wider loan spreads.
Mortgage Banking net revenue included $973 million of net interest income, $3.8 billion of mortgage fees and related income, and $442 million of other noninterest revenue. Mortgage fees and related income comprised $503 million of net production revenue, $1.7 billion of servicing operating revenue and $1.6 billion of MSR risk management revenue. Production revenue, excluding repurchase losses, was $2.1 billion, an increase of $965 million, reflecting wider margins on new originations. Total production revenue was reduced by $1.6 billion of repurchase losses, compared with repurchase losses of $252 million in the prior year. Servicing operating revenue was $1.7 billion, an increase of $457 million, reflecting growth in average third-party loans serviced as a result of the Washington Mutual transaction. MSR risk management revenue was $1.6 billion, an increase of $111 million, reflecting the positive impact of a decrease in estimated future prepayments during 2009.
The provision for credit losses, predominantly related to the student and auto loan portfolios, was $1.2 billion, compared with $895 million in the prior year. The current- and prior-year provision reflected an increase in the allowance for loan losses for student and auto loans. See page 130 of this Annual Report for the net charge-off amounts and rates.
Noninterest expense was $4.5 billion, up by $588 million, or 15%, from the prior year, driven by higher servicing and default-related expense and the impact of the Washington Mutual transaction.
Selected metrics
                         
As of or for the year ended December 31,                  
(in billions, except ratios and                  
where otherwise noted)   2010     2009     2008  
 
Business metrics
                       
End-of-period loans owned:
                       
Auto
  $ 48.4     $ 46.0     $ 42.6  
Mortgage(a)
    14.2       11.9       6.5  
Student and other
    14.4       15.8       16.3  
 
Total end-of-period loans owned
  $ 77.0     $ 73.7     $ 65.4  
 
Average loans owned:
                       
Auto
  $ 47.6     $ 43.6     $ 43.8  
Mortgage(a)
    13.4       8.8       4.3  
Student and other
    16.2       16.3       13.8  
 
Total average loans owned(b)
  $ 77.2     $ 68.7     $ 61.9  
 
Credit data and quality statistics
(in millions)
                       
Net charge-offs:
                       
Auto
  $ 298     $ 627     $ 568  
Mortgage
    41       14       5  
Student and other
    410       287       64  
 
Total net charge-offs
  $ 749     $ 928     $ 637  
 
Net charge-off rate:
                       
Auto
    0.63 %     1.44 %     1.30 %
Mortgage
    0.31       0.17       0.13  
Student and other
    2.72       1.98       0.57  
Total net charge-off rate(b)
    0.99       1.40       1.08  
 
30+ day delinquency rate(c)(d)
    1.69       1.75       1.91  
Nonperforming assets (in millions)(e)
  $ 996     $ 912     $ 866  
 
 
                       
Origination volume:
                       
Mortgage origination volume by channel:
                       
Retail
  $ 68.8     $ 53.9     $ 41.1  
Wholesale(f)
    1.3       3.6       26.7  
Correspondent(f)
    75.3       81.0       58.2  
CNT (negotiated transactions)
    10.2       12.2       43.0  
 
Total mortgage origination volume
  $ 155.6     $ 150.7     $ 169.0  
 
Student
    1.9       4.2       6.9  
Auto
    23.0       23.7       19.4  
 


 
JPMorgan Chase & Co. / 2010 Annual Report   75


Table of Contents

Management’s discussion and analysis

Selected metrics
                         
As of or for the year ended                  
December 31,                  
(in billions, except ratios)   2010     2009     2008  
 
Application volume:
                       
Mortgage application volume by channel:
                       
Retail
  $ 115.1     $ 90.9     $ 89.1  
Wholesale(f)
    2.4       4.9       58.6  
Correspondent(f)
    97.3       110.8       86.9  
 
Total mortgage application volume
  $ 214.8     $ 206.6     $ 234.6  
 
 
                       
Average mortgage loans held-for-sale and loans at fair value(g)
  $ 15.4     $ 16.2     $ 14.6  
Average assets
    126.0       115.0       98.8  
Repurchase reserve (ending)
    3.0       1.4       1.0  
Third-party mortgage loans serviced (ending)
    967.5       1,082.1       1,172.6  
Third-party mortgage loans serviced (average)
    1,037.6       1,119.1       774.9  
MSR net carrying value (ending)
    13.6       15.5       9.3  
Ratio of MSR net carrying value (ending) to third-party mortgage loans serviced (ending)
    1.41 %     1.43 %     0.79 %
Ratio of annualized loan servicing revenue to third-party mortgage loans serviced (average)
    0.44       0.44       0.42  
MSR revenue multiple(h)
    3.20 x     3.25 x     1.88 x
 
                         
Supplemental mortgage fees                  
     and related income details                  
As of or for the year ended                  
December 31, (in millions)   2010     2009     2008  
 
Net production revenue:
                       
Production revenue
  $ 3,440     $ 2,115     $ 1,150  
Repurchase losses
    (2,912 )     (1,612 )     (252 )
 
Net production revenue
    528       503       898  
 
Net mortgage servicing revenue:
                       
Operating revenue:
                       
Loan servicing revenue
    4,575       4,942       3,258  
Other changes in MSR asset fair value
    (2,384 )     (3,279 )     (2,052 )
 
Total operating revenue
    2,191       1,663       1,206  
Risk management:
                       
Changes in MSR asset fair value due to inputs or assumptions in model
    (2,268 )     5,804       (6,849 )
Derivative valuation adjustments and other
    3,404       (4,176 )     8,366  
 
Total risk management
    1,136       1,628       1,517  
 
Total net mortgage servicing revenue
    3,327       3,291       2,723  
 
Mortgage fees and related income
  $ 3,855     $ 3,794     $ 3,621  
 
(a)   Predominantly represents prime loans repurchased from Government National Mortgage Association (“Ginnie Mae”) pools, which are insured by U.S. government agencies. See further discussion of loans repurchased from Ginnie Mae pools in Repurchase liability on pages 98—101 of this Annual Report.
 
(b)   Total average loans owned includes loans held-for-sale of $1.3 billion, $2.2 billion and $2.8 billion for the years ended December 31, 2010, 2009 and 2008, respectively. These amounts are excluded when calculating the net charge-off rate.
 
(c)   Excludes mortgage loans that are insured by U.S. government agencies of $11.4 billion, $9.7 billion and $3.5 billion at December 31, 2010, 2009 and 2008, respectively. These amounts are excluded as reimbursement of insured amounts is proceeding normally.
(d)   Excludes loans that are 30 days past due and still accruing, which are insured by U.S. government agencies under the FFELP, of $1.1 billion, $942 million and $824 million at December 31, 2010, 2009 and 2008, respectively. These amounts are excluded as reimbursement of insured amounts is proceeding normally.
 
(e)   At December 31, 2010, 2009 and 2008, nonperforming assets excluded: (1) mortgage loans insured by U.S. government agencies of $10.5 billion, $9.0 billion and $3.0 billion, respectively, that are 90 days past due and accruing at the guaranteed reimbursement rate; (2) real estate owned insured by U.S. government agencies of $1.9 billion, $579 million and $364 million, respectively; and (3) student loans that are 90 days past due and still accruing, which are insured by U.S. government agencies under the FFELP, of $625 million, $542 million and $437 million, respectively. These amounts are excluded as reimbursement of insured amounts is proceeding normally.
 
(f)   Includes rural housing loans sourced through brokers and correspondents, which are underwritten under U.S. Department of Agriculture guidelines. Prior period amounts have been revised to conform with the current period presentation.
 
(g)   Loans at fair value consist of prime mortgages originated with the intent to sell that are accounted for at fair value and classified as trading assets on the Consolidated Balance Sheets. Average balances of these loans totaled $15.2 billion, $15.8 billion and $14.2 billion for the years ended December 31, 2010, 2009 and 2008, respectively.
 
(h)   Represents the ratio of MSR net carrying value (ending) to third-party mortgage loans serviced (ending) divided by the ratio of annualized loan servicing revenue to third-party mortgage loans serviced (average).

Mortgage origination channels comprise the following:
Retail – Borrowers who are buying or refinancing 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 – A third-party mortgage broker refers loan applications to a mortgage banker at the Firm. Brokers are independent loan originators that specialize in finding and counseling borrowers but do not provide funding for loans. The Firm exited the broker channel during 2008.
Correspondent – Banks, thrifts, other mortgage banks and other financial institutions that sell closed loans to the Firm.
Correspondent negotiated transactions (“CNTs”) – These transactions occur when mid- to large-sized mortgage lenders, banks and bank-owned mortgage companies sell servicing to the Firm, on an as-originated basis, and exclude purchased bulk servicing transactions. These transactions supplement traditional production channels and provide growth opportunities in the servicing portfolio in stable and periods of rising interest rates.
Net production revenue – Includes net gains or losses on originations and sales of prime and subprime mortgage loans, other production-related fees and losses related to the repurchase of previously-sold loans.


 
76   JPMorgan Chase & Co. / 2010 Annual Report


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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 servicing portfolio runoff (or time decay).
(b)   Risk management comprises:
  – changes in MSR asset fair value due to market-based inputs such as interest rates and volatility, as well as updates to assumptions used in the MSR valuation model.
  – 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.
Real Estate Portfolios
Selected income statement data
                         
Year ended December 31,                  
(in millions, except ratios)   2010     2009     2008  
 
Noninterest revenue
  $ 115     $ (26 )   $ (285 )
Net interest income
    5,432       6,546       4,227  
 
Total net revenue
    5,547       6,520       3,942  
Provision for credit losses
    8,231       13,563       8,561  
Noninterest expense
    1,627       1,847       889  
 
Income/(loss) before income tax expense/(benefit)
    (4,311 )     (8,890 )     (5,508 )
 
Net income/(loss)
  $ (2,493 )   $ (5,449 )   $ (3,388 )
 
Overhead ratio
    29 %     28 %     23 %
 
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. For additional information, refer to Portfolio analysis on page 131 of this Annual Report. 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. (For further detail, see the RFS discussion of the provision for credit losses on page 72 of this Annual Report.)
Noninterest expense was $1.6 billion, down by $220 million, or 12%, from the prior year, reflecting lower default-related expense.
2009 compared with 2008
Real Estate Portfolios reported a net loss of $5.4 billion, compared with a net loss of $3.4 billion in the prior year.
Net revenue was $6.5 billion, up by $2.6 billion, or 65%, from the prior year. The increase was driven by the impact of the Washington Mutual transaction and wider loan spreads, partially offset by lower heritage Chase loan balances.
The provision for credit losses was $13.6 billion, compared with $8.6 billion in the prior year. The provision reflected weakness in the home equity and mortgage portfolios. (For further detail, see the RFS discussion of the provision for credit losses for further detail) on pages 72–73 of this Annual Report.
Noninterest expense was $1.8 billion, compared with $889 million in the prior year, reflecting higher default-related expense.
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, 2010, the remaining weighted-average life of the PCI loan portfolio is expected to be 7.0 years. For further information, see Note 14, PCI loans, on pages 233–236 of this Annual Report. The loan balances are expected to decline more rapidly in the earlier years as the most troubled loans are liquidated, and more slowly thereafter as the remaining troubled borrowers have limited refinancing opportunities. Similarly, default and servicing expense are expected to be higher in the earlier years and decline over time as liquidations slow down.
To date the impact of the PCI loans on Real Estate Portfolios’ net income has been modestly negative. This is due to the current net spread of the portfolio, the provision for loan losses recognized subsequent to its acquisition, and the higher level of default and servicing expense associated with the portfolio. Over time, the Firm expects that this portfolio will contribute positively to net income.


 
JPMorgan Chase & Co. / 2010 Annual Report   77


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Management’s discussion and analysis

Selected metrics
                         
As of or for the year ended December 31,                  
(in billions)   2010     2009     2008  
 
Loans excluding PCI loans(a)
                       
End-of-period loans owned:
                       
Home equity
  $ 88.4     $ 101.4     $ 114.3  
Prime mortgage
    41.7       47.5       58.7  
Subprime mortgage
    11.3       12.5       15.3  
Option ARMs
    8.1       8.5       9.0  
Other
    0.8       0.7       0.9  
 
Total end-of-period loans owned
  $ 150.3     $ 170.6     $ 198.2  
 
Average loans owned:
                       
Home equity
  $ 94.8     $ 108.3     $ 99.9  
Prime mortgage
    44.9       53.4       40.7  
Subprime mortgage
    12.7       13.9       15.3  
Option ARMs
    8.5       8.9       2.3  
Other
    1.0       0.8       0.9  
 
Total average loans owned
  $ 161.9     $ 185.3     $ 159.1  
 
PCI loans(a)
                       
End-of-period loans owned:
                       
Home equity
  $ 24.5     $ 26.5     $ 28.6  
Prime mortgage
    17.3       19.7       21.8  
Subprime mortgage
    5.4       6.0       6.8  
Option ARMs
    25.6       29.0       31.6  
 
Total end-of-period loans owned
  $ 72.8     $ 81.2     $ 88.8  
 
Average loans owned:
                       
Home equity
  $ 25.5     $ 27.6     $ 7.1  
Prime mortgage
    18.5       20.8       5.4  
Subprime mortgage
    5.7       6.3       1.7  
Option ARMs
    27.2       30.5       8.0  
 
Total average loans owned
  $ 76.9     $ 85.2     $ 22.2  
 
Total Real Estate Portfolios
                       
End-of-period loans owned:
                       
Home equity
  $ 112.9     $ 127.9     $ 142.9  
Prime mortgage
    59.0       67.2       80.5  
Subprime mortgage
    16.7       18.5       22.1  
Option ARMs
    33.7       37.5       40.6  
Other
    0.8       0.7       0.9  
 
Total end-of-period loans owned
  $ 223.1     $ 251.8     $ 287.0  
 
Average loans owned:
                       
Home equity
  $ 120.3     $ 135.9     $ 107.0  
Prime mortgage
    63.4       74.2       46.1  
Subprime mortgage
    18.4       20.2       17.0  
Option ARMs
    35.7       39.4       10.3  
Other
    1.0       0.8       0.9  
 
Total average loans owned
  $ 238.8     $ 270.5     $ 181.3  
 
Average assets
  $ 227.0     $ 263.6     $ 179.3  
Home equity origination volume
    1.2       2.4       16.3  
 
(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)   2010     2009     2008  
 
Net charge-offs excluding PCI loans(a):
                       
Home equity
  $ 3,444     $ 4,682     $ 2,391  
Prime mortgage
    1,475       1,872       521  
Subprime mortgage
    1,374       1,648       933  
Option ARMs
    98       63        
Other
    59       78       49  
 
Total net charge-offs
  $ 6,450     $ 8,343     $ 3,894  
 
Net charge-off rate excluding PCI loans(a):
                       
Home equity
    3.63 %     4.32 %     2.39 %
Prime mortgage
    3.29       3.51       1.28  
Subprime mortgage
    10.82       11.86       6.10  
Option ARMs
    1.15       0.71        
Other
    5.90       9.75       5.44  
Total net charge-off rate excluding PCI loans
    3.98       4.50       2.45  
 
Net charge-off rate – reported:
                       
Home equity
    2.86 %     3.45 %     2.23 %
Prime mortgage
    2.33       2.52       1.13  
Subprime mortgage
    7.47       8.16       5.49  
Option ARMs
    0.27       0.16        
Other
    5.90       9.75       5.44  
Total net charge-off rate – reported
    2.70       3.08       2.15  
 
30+ day delinquency rate excluding PCI
loans(b)
    6.45 %     7.73 %     4.97 %
Allowance for loan losses
  $ 14,659     $ 12,752     $ 7,510  
Nonperforming assets(c)
    8,424       10,347       7,787  
Allowance for loan losses to ending loans retained
    6.57 %     5.06 %     2.62 %
Allowance for loan losses to ending loans retained excluding PCI loans(a)
    6.47       6.55       3.79  
 
(a)   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 $4.9 billion and $1.6 billion was recorded for these loans at December 31, 2010 and 2009, respectively, which has also been excluded from the applicable ratios. No allowance for loan losses was recorded for these loans at December 31, 2008. To date, no charge-offs have been recorded for these loans.
 
(b)   The delinquency rate for PCI loans was 28.20%, 27.62% and 17.89% at December 31, 2010, 2009 and 2008, respectively.
 
(c)   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.


 
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CARD SERVICES
 

Card Services is one of the nation’s largest credit card issuers, with over $137 billion in loans and over 90 million open accounts. Customers used Chase cards to meet $313 billion of their spending needs in 2010.
Chase continues to innovate, despite a very difficult business environment, offering products and services such as Blueprint, Chase Freedom, Ultimate Rewards, Chase Sapphire and Ink from Chase, and earning a market leadership position in building loyalty and rewards programs. Through its merchant acquiring business, Chase Paymentech Solutions, CS is a global leader in payment processing and merchant acquiring.
Selected income statement data – managed basis(a)
                         
Year ended December 31,                  
(in millions, except ratios)   2010     2009     2008  
 
Revenue
                       
Credit card income
  $ 3,513     $ 3,612     $ 2,768  
All other income(b)
    (236 )     (692 )     (49 )
 
Noninterest revenue
    3,277       2,920       2,719  
Net interest income
    13,886       17,384       13,755  
 
Total net revenue
    17,163       20,304       16,474  
 
Provision for credit losses
    8,037       18,462       10,059  
 
Noninterest expense
                       
Compensation expense
    1,291       1,376       1,127  
Noncompensation expense
    4,040       3,490       3,356  
Amortization of intangibles
    466       515       657  
 
Total noninterest expense
    5,797       5,381       5,140  
 
Income/(loss) before income tax expense/(benefit)
    3,329       (3,539 )     1,275  
Income tax expense/(benefit)
    1,255       (1,314 )     495  
 
Net income/(loss)
  $ 2,074     $ (2,225 )   $ 780  
 
Memo: Net securitization income/(loss)
  NA     $ (474 )   $ (183 )
Financial ratios
                       
ROE
    14 %     (15 )%     5 %
Overhead ratio
    34       27       31  
 
(a)   Effective January 1, 2010, the Firm adopted accounting guidance related to VIEs. As a result of the consolidation of the securitization trusts, reported and managed basis are equivalent for periods beginning after January 1, 2010. See Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures on pages 64–66 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 244–259 of this Annual Report.
 
(b)   Includes the impact of revenue sharing agreements with other JPMorgan Chase business segments. For periods prior to January 1, 2010, net securitization income/(loss) is also included.
NA: Not applicable
2010 compared with 2009
Net income was $2.1 billion, compared with a net loss of $2.2 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 $137.7 billion, a decrease of $25.7 billion, or 16%, from the prior year. Average loans were $144.4 billion, a decrease of $28.0 billion, or 16%, from the prior year. The declines in both end-of-period and average loans were due to a decline in lower-yielding promotional balances and the Washington Mutual portfolio runoff.
Net revenue was $17.2 billion, a decrease of $3.1 billion, or 15%, from the prior year. Net interest income was $13.9 billion, down by $3.5 billion, or 20%. 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 $3.3 billion, an increase of $357 million, or 12%, driven by the prior-year write-down of securitization interests, offset partially by lower revenue from fee-based products.
The provision for credit losses was $8.0 billion, compared with $18.5 billion in the prior year. The current-year provision reflected lower net charge-offs and a reduction of $6.0 billion to the allowance for loan losses due to lower estimated losses. The prior-year provision included an addition of $2.4 billion to the allowance for loan losses. Including the Washington Mutual portfolio, the net charge-off rate was 9.72%, including loans held-for-sale, up from 9.33% in the prior year; and the 30-day delinquency rate was 4.07%, down from 6.28% in the prior year. Excluding the Washington Mutual portfolio, the net charge-off rate was 8.72%, including loans held-for-sale, up from 8.45% in the prior year; and the 30-day delinquency rate was 3.66%, down from 5.52% in the prior year.
Noninterest expense was $5.8 billion, an increase of $416 million, or 8%, due to higher marketing expense.
Credit Card Legislation
In May 2009, the CARD Act was enacted. Management estimates that the total reduction in net income resulting from the CARD Act is approximately $750 million annually. The run-rate impact of this reduction in net income is reflected in results as of the end of the fourth quarter of 2010. The full year impact on 2010 net income was approximately $300 million.
The most significant effects of the CARD Act include: (a) the inability to change the pricing of existing balances; (b) the allocation of customer payments above the minimum payment to the existing balance with the highest annual percentage rate (“APR”); (c) the requirement that customers opt-in in order to receive, for a fee, overlimit protection that permits an authorized transaction over their credit limit; (d) the requirement that statements must be mailed or delivered not later than 21 days before the payment due date; (e) the limiting of the amount of penalty fees that can be assessed; and (f) the requirement to review customer accounts for potential interest rate reductions in certain circumstances.
As a result of the CARD Act, CS has implemented certain changes to its business practices to manage its inability to price loans to customers at rates that are commensurate with their risk over time. These changes include: (a) selectively increasing pricing; (b) reducing the volume and duration of low-rate promotional pricing offered to customers; and (c) reducing the amount of credit that is granted to certain new and existing customers.


 
JPMorgan Chase & Co. / 2010 Annual Report   79


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Management’s discussion and analysis

2009 compared with 2008
The following discussion of CS’s financial results reflects the acquisition of Washington Mutual’s credit cards operations as a result of the Washington Mutual transaction on September 25, 2008, and the dissolution of the Chase Paymentech Solutions joint venture on November 1, 2008. See Note 2 on pages 166–170 of this Annual Report for more information concerning these transactions.
Card Services reported a net loss of $2.2 billion, compared with net income of $780 million in the prior year. The decrease was driven by a higher provision for credit losses, partially offset by higher total net revenue.
End-of-period managed loans were $163.4 billion, a decrease of $26.9 billion, or 14%, from the prior year, reflecting lower charge volume and a higher level of charge-offs. Average managed loans were $172.4 billion, an increase of $9.5 billion, or 6%, from the prior year, primarily due to the impact of the Washington Mutual transaction. Excluding the impact of the Washington Mutual transaction, end-of-period and average managed loans for 2009 were $143.8 billion and $148.8 billion, respectively.
Managed total net revenue was $20.3 billion, an increase of $3.8 billion, or 23%, from the prior year. Net interest income was $17.4 billion, up by $3.6 billion, or 26%, from the prior year, driven by wider loan spreads and the impact of the Washington Mutual transaction. These benefits were offset partially by higher revenue reversals associated with higher charge-offs, a decreased level of fees, lower average managed loan balances, and the impact of legislative changes. Noninterest revenue was $2.9 billion, an increase of $201 million, or 7%, from the prior year. The increase was driven by higher merchant servicing revenue related to the dissolution of the Chase Paymentech Solutions joint venture and the impact of the Washington Mutual transaction, partially offset by a larger write-down of securitization interests.
The managed provision for credit losses was $18.5 billion, an increase of $8.4 billion from the prior year, reflecting a higher level of charge-offs and an addition of $2.4 billion to the allowance for loan losses, reflecting continued weakness in the credit environment. The managed net charge-off rate was 9.33%, up from 5.01% in the prior year. The 30-day managed delinquency rate was 6.28%, up from 4.97% in the prior year. Excluding the impact of the Washington Mutual transaction, the managed net charge-off rate was 8.45%, and the 30-day managed delinquency rate was 5.52%.
Noninterest expense was $5.4 billion, an increase of $241 million, or 5%, from the prior year, due to the dissolution of the Chase Paymentech Solutions joint venture and the impact of the Washington Mutual transaction, partially offset by lower marketing expense.
Selected metrics
                         
As of or for the year ended December 31,                  
(in millions, except headcount, ratios                  
and where otherwise noted)   2010     2009     2008  
 
Financial ratios(a)
                       
Percentage of average outstandings:
                       
Net interest income
    9.62 %     10.08 %     8.45 %
Provision for credit losses
    5.57       10.71       6.18  
Noninterest revenue
    2.27       1.69       1.67  
Risk adjusted margin(b)
    6.32       1.07       3.94  
Noninterest expense
    4.02       3.12       3.16  
Pretax income/(loss) (ROO)(c)
    2.31       (2.05 )     0.78  
Net income/(loss)
    1.44       (1.29 )     0.48  
Business metrics
                       
Sales volume (in billions)
  $ 313.0     $ 294.1     $ 298.5  
New accounts opened
    11.3       10.2       14.9  
Open accounts
    90.7       93.3       109.5  
Merchant acquiring business(d)
                       
Bank card volume (in billions)
  $ 469.3     $ 409.7     $ 713.9  
Total transactions (in billions)
    20.5       18.0       21.4  
 
Selected balance sheet data
(period-end)
                       
Loans:
                       
Loans on balance sheets
  $ 137,676     $ 78,786     $ 104,746  
Securitized loans(a)
  NA       84,626       85,571  
 
Total loans
    137,676       163,412       190,317  
Equity
    15,000       15,000       15,000  
 
Selected balance sheet data (average)
                       
Managed assets
  $ 145,750     $ 192,749     $ 173,711  
Loans:
                       
Loans on balance sheets
    144,367       87,029       83,293  
Securitized loans(a)
  NA       85,378       79,566  
 
Total average loans
    144,367       172,407       162,859  
Equity
  $ 15,000     $ 15,000     $ 14,326  
 
Headcount
    20,739       22,676       24,025  
 
Credit quality statistics(a)
                       
Net charge-offs
  $ 14,037     $ 16,077     $ 8,159  
Net charge-off rate(e)(f)
    9.73 %     9.33 %     5.01 %
Delinquency rates(a)(e)
                       
30+ day
    4.07       6.28       4.97  
90+ day
    2.22       3.59       2.34  
Allowance for loan losses(a)(g)
  $ 11,034     $ 9,672     $ 7,692  
Allowance for loan losses to period-end loans(a)(g)(h)(i)
    8.14 %     12.28 %     7.34 %
 
Key stats – Washington Mutual only(j)
                       
Loans
  $ 13,733     $ 19,653     $ 28,250  
Average loans
    16,055       23,642       6,964  
Net interest income(k)
    15.66 %     17.11 %     14.87 %
Risk adjusted margin(b)(k)
    10.42       (0.93 )     4.18  
Net charge-off rate(l)
    18.73       18.79       12.09  
30+ day delinquency rate(l)
    7.74       12.72       9.14  
90+ day delinquency rate(l)
    4.40       7.76       4.39  
 
Key stats – excluding Washington Mutual
                       
Loans
  $ 123,943     $ 143,759     $ 162,067  
Average loans
    128,312       148,765       155,895  
Net interest income(k)
    8.86 %     8.97 %     8.16 %
Risk adjusted margin(b)(k)
    5.81       1.39       3.93  
Net charge-off rate
    8.72       8.45       4.92  
30+ day delinquency rate
    3.66       5.52       4.36  
90+ day delinquency rate
    1.98       3.13       2.09  
 
(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 details regarding the Firm’s application and impact of the guidance, see Note 16 on pages 244–259 of this Annual Report.
 
(b)   Represents total net revenue less provision for credit losses.


 
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(c)   Pretax return on average managed outstandings.
 
(d)   The Chase Paymentech Solutions joint venture was dissolved effective November 1, 2008. JPMorgan Chase retained approximately 51% of the business and operates the business under the name Chase Paymentech Solutions. For the period January 1 through October 31, 2008, the data presented represents activity for the Chase Paymentech Solutions joint venture, and for the period November 1, 2008, through December 31, 2010, the data presented represents activity for Chase Paymentech Solutions.
 
(e)   Results reflect the impact of purchase accounting adjustments related to the Washington Mutual transaction and the consolidation of the WMMT in the second quarter of 2009. The delinquency rates as of December 31, 2010, were not affected.
 
(f)   Total average loans includes loans held-for-sale of $148 million for full year 2010. These amounts are excluded when calculating the net charge-off rate. The net charge-off rate including loans held-for-sale, which is a non-GAAP financial measure, would have been 9.72% for the full year 2010.
 
(g)   Based on loans on the Consolidated Balance Sheets.
 
(h)   Includes $1.0 billion of loans at December 31, 2009, held by the WMMT, which were consolidated onto the Card Services balance sheet at fair value during the second quarter of 2009. No allowance for loan losses was recorded for these loans as of December 31, 2009. Excluding these loans, the allowance for loan losses to period-end loans would have been 12.43% as of December 31, 2009.
 
(i)   Total period-end loans includes loans held-for-sale of $2.2 billion at December 31, 2010. No allowance for loan losses was recorded for these loans as of December 31, 2010. The loans held-for-sale are excluded when calculating the allowance for loan losses to period-end loans.
 
(j)   Statistics are only presented for periods after September 25, 2008, the date of the Washington Mutual transaction.
 
(k)   As a percentage of average managed outstandings.
 
(l)   Excludes the impact of purchase accounting adjustments related to the Washington Mutual transaction and the consolidation of the WMMT in the second quarter of 2009.
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 in 2009 and 2008. 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 244–259 of this Annual Report.
                         
Year ended December 31,                  
(in millions, except ratios)   2010     2009     2008  
 
Income statement data
                       
Credit card income
                       
Reported
  $ 3,513     $ 5,106     $ 6,082  
Securitization adjustments
  NA       (1,494 )     (3,314 )
 
Managed credit card income
  $ 3,513     $ 3,612     $ 2,768  
 
Net interest income
                       
Reported
  $ 13,886     $ 9,447     $ 6,838  
Securitization adjustments
  NA       7,937       6,917  
 
Managed net interest income
  $ 13,886     $ 17,384     $ 13,755  
 
Total net revenue
                       
Reported
  $ 17,163     $ 13,861     $ 12,871  
Securitization adjustments
  NA       6,443       3,603  
 
Managed total net revenue
  $ 17,163     $ 20,304     $ 16,474  
 
Provision for credit losses
                       
Reported
  $ 8,037     $ 12,019     $ 6,456  
Securitization adjustments
  NA       6,443       3,603  
 
Managed provision for credit losses
  $ 8,037     $ 18,462     $ 10,059  
 
Balance sheet – average balances
                       
Total average assets
                       
Reported
  $ 145,750     $ 110,516     $ 96,807  
Securitization adjustments
  NA       82,233       76,904  
 
Managed average assets
  $ 145,750     $ 192,749     $ 173,711  
 
Credit quality statistics
                       
Net charge-offs
                       
Reported
  $ 14,037     $ 9,634     $ 4,556  
Securitization adjustments
  NA       6,443       3,603  
 
Managed net charge-offs
  $ 14,037     $ 16,077     $ 8,159  
 
Net charge-off rates
                       
Reported
    9.73 %     11.07 %     5.47 %
Securitized
  NA       7.55       4.53  
Managed net charge-off rate
    9.73       9.33       5.01  
 
NA: Not applicable


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


 
JPMorgan Chase & Co. / 2010 Annual Report   81


Table of Contents

Management’s discussion and analysis
COMMERCIAL BANKING
 

Commercial Banking delivers extensive industry knowledge, local expertise and dedicated service to nearly 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.
Commercial Banking is divided into four primary client segments: Middle Market Banking, Commercial Term Lending, Mid-Corporate 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. Mid-Corporate Banking covers clients with annual revenue generally ranging between $500 million and $2 billion and focuses on clients that have broader investment banking needs. Commercial Term Lending primarily provides term financing to real estate investors/ owners for multi-family properties as well as financing office, retail and industrial properties. Real Estate Banking provides full-service banking to investors and developers of institutional-grade real estate properties.
Selected income statement data
                         
Year ended December 31,                  
(in millions)   2010     2009     2008  
 
Revenue
                       
Lending- and deposit-related fees
  $ 1,099     $ 1,081     $ 854  
Asset management, administration and commissions
    144       140       113  
All other income(a)
    957       596       514  
 
Noninterest revenue
    2,200       1,817       1,481  
Net interest income
    3,840       3,903       3,296  
 
Total net revenue(b)
    6,040       5,720       4,777  
 
Provision for credit losses
    297       1,454       464  
 
Noninterest expense
                       
Compensation expense
    820       776       692  
Noncompensation expense
    1,344       1,359       1,206  
Amortization of intangibles
    35       41       48  
 
Total noninterest expense
    2,199       2,176       1,946  
 
Income before income tax expense
    3,544       2,090       2,367  
Income tax expense
    1,460       819       928  
 
Net income
  $ 2,084     $ 1,271     $ 1,439  
 
Revenue by product:
                       
Lending
  $ 2,749     $ 2,663     $ 1,743  
Treasury services
    2,632       2,642       2,648  
Investment banking
    466       394       334  
Other(c)
    193       21       52  
 
Total Commercial Banking revenue
  $ 6,040     $ 5,720     $ 4,777  
 
Selected income statement data
                         
Year ended December 31,                  
(in millions, except ratios)   2010     2009     2008  
 
IB revenue, gross(d)
  $ 1,335     $ 1,163     $ 966  
Revenue by client segment:
                       
Middle Market Banking
  $ 3,060     $ 3,055     $ 2,939  
Commercial Term Lending(e)
    1,023       875       243  
Mid-Corporate Banking
    1,154       1,102       921  
Real Estate Banking(e)
    460       461       413  
Other(e)(f)
    343       227       261  
 
Total Commercial Banking revenue
  $ 6,040     $ 5,720     $ 4,777  
 
Financial ratios
                       
ROE
    26 %     16 %     20 %
Overhead ratio
    36       38       41  
 
(a)   CB client revenue from investment banking products and commercial card transactions is included in all other income.
 
(b)   Total net revenue included tax-equivalent adjustments from income tax credits related to equity investments in designated community development entities that provide loans to qualified businesses in low-income communities as well as tax-exempt income from municipal bond activity of $238 million, $170 million and $125 million for the years ended December 31, 2010, 2009 and 2008, respectively.
 
(c)   Other product revenue primarily includes tax-equivalent adjustments generated from Community Development Banking segment activity and certain income derived from principal transactions.
 
(d)   Represents the total revenue related to investment banking products sold to CB clients.
 
(e)   2008 results reflect the partial year impact of the Washington Mutual transaction.
 
(f)   Other primarily includes revenue related to the Community Development Banking and Chase Capital segments.
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-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 includes 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. Mid-Corporate 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-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.


 
82   JPMorgan Chase & Co. / 2010 Annual Report


Table of Contents

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.
2009 compared with 2008
The following discussion of CB’s results reflects the September 25, 2008 acquisition of the commercial banking operations of Washington Mutual from the FDIC. The Washington Mutual transaction added approximately $44.5 billion in loans to the Commercial Term Lending, Real Estate Banking, and Other client segments in Commercial Banking.
Net income was $1.3 billion, a decrease of $168 million, or 12%, from the prior year, as higher provision for credit losses and noninterest expense was partially offset by higher net revenue, reflecting the impact of the Washington Mutual transaction.
Record net revenue of $5.7 billion increased $943 million, or 20%, from the prior year. Net interest income of $3.9 billion increased $607 million, or 18%, driven by the impact of the Washington Mutual transaction. Noninterest revenue was $1.8 billion, an increase of $336 million, or 23%, from the prior year, reflecting higher lending- and deposit-related fees and higher investment banking fees and other income.
On a client segment basis, revenue from Middle Market Banking was $3.1 billion, an increase of $116 million, or 4%, from the prior year due to higher liability balances, a shift to higher-spread liability products, wider loan spreads, higher lending- and deposit-related fees, and higher other income, partially offset by a narrowing of spreads on liability products and reduced loan balances. Revenue from Commercial Term Lending (a new client segment acquired in the Washington Mutual transaction encompassing multi-family and commercial mortgage loans) was $875 million, an increase of $632 million. Mid-Corporate Banking revenue was $1.1 billion, an increase of $181 million, or 20%, driven by higher investment banking fees, increased loan spreads, and higher lending- and deposit-related fees. Real Estate Banking revenue was $461 million, an increase of $48 million, or 12%, due to the impact of the Washington Mutual transaction.
The provision for credit losses was $1.5 billion, compared with $464 million in the prior year, reflecting continued weakness in the credit environment, predominantly in real estate-related segments. Net charge-offs were $1.1 billion (1.02% net charge-off rate), compared with $288 million (0.35% net charge-off rate) in the prior year. The allowance for loan losses to end-of-period loans retained was 3.12%, up from 2.45% in the prior year. Nonperforming loans were $2.8 billion, an increase of $1.8 billion from the prior year.
Noninterest expense was $2.2 billion, an increase of $230 million, or 12%, from the prior year, due to the impact of the Washington Mutual transaction and higher FDIC insurance premiums.
Selected metrics
                         
Year ended December 31, (in millions,                  
except headcount and ratio data)   2010     2009     2008  
 
Selected balance sheet data
(period-end):
                       
Loans:
                       
Loans retained
  $ 97,900     $ 97,108     $ 115,130  
Loans held-for-sale and loans at fair value
    1,018       324       295  
 
Total loans
  $ 98,918     $ 97,432     $ 115,425  
Equity
    8,000       8,000       8,000  
Selected balance sheet data (average):
                       
Total assets
  $ 133,654     $ 135,408     $ 114,299  
Loans:
                       
Loans retained
  $ 96,584     $ 106,421     $ 81,931  
Loans held-for-sale and loans at fair value
    422       317       406  
 
Total loans
  $ 97,006     $ 106,738     $ 82,337  
Liability balances(a)
    138,862       113,152       103,121  
Equity
    8,000       8,000       7,251  
 
Average loans by client segment:
                       
Middle Market Banking
  $ 35,059     $ 37,459     $ 42,193  
Commercial Term Lending(b)
    36,978       36,806       9,310  
Mid-Corporate Banking
    11,926       15,951       16,297  
Real Estate Banking(b)
    9,344       12,066       9,008  
Other(b)(c)
    3,699       4,456       5,529  
 
Total Commercial Banking loans
  $ 97,006     $ 106,738     $ 82,337  
 
Headcount
    4,881       4,151       5,206  
 
Credit data and quality statistics:
                       
Net charge-offs
  $ 909     $ 1,089     $ 288  
Nonaccrual loans:
                       
Nonaccrual loans retained(d)
    1,964       2,764       1,026  
Nonaccrual loans held-for-sale and loans held at fair value
    36       37        
 
Total nonaccrual loans
    2,000       2,801       1,026  
Assets acquired in loan satisfactions
    197       188       116  
 
Total nonperforming assets
    2,197       2,989       1,142  
Allowance for credit losses:
                       
Allowance for loan losses
    2,552       3,025       2,826  
Allowance for lending-related commitments
    209       349       206  
 
Total allowance for credit losses
    2,761       3,374       3,032  
 
Net charge-off rate
    0.94 %     1.02 %     0.35 %
Allowance for loan losses to period-end loans retained
    2.61       3.12       2.45  
Allowance for loan losses to average loans retained
    2.64       2.84       3.04 (e)
Allowance for loan losses to nonaccrual loans retained
    130       109       275  
Nonaccrual loans to total period-end loans
    2.02       2.87       0.89  
Nonaccrual loans to total average loans
    2.06       2.62       1.10 (e)
 
(a)   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.
 
(b)   2008 results reflect the partial year impact of the Washington Mutual transaction.
 
(c)   Other primarily includes lending activity within the Community Development Banking and Chase Capital segments.
 
(d)   Allowance for loan losses of $340 million, $581 million and $208 million were held against nonaccrual loans retained for the periods ended December 31, 2010, 2009, and 2008, respectively.
 
(e)   Average loans in the calculation of this ratio were adjusted to include $44.5 billion of loans acquired in the Washington Mutual transaction as if the transaction occurred on July 1, 2008. Excluding this adjustment, the unadjusted allowance for loan losses to average loans retained and nonaccrual loans to total average loans ratios would have been 3.45% and 1.25%, respectively, for the period ended December 31, 2008.


 
JPMorgan Chase & Co. / 2010 Annual Report   83


Table of Contents

Management’s discussion and analysis
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)   2010     2009     2008  
 
Revenue
                       
Lending- and deposit-related fees
  $ 1,256     $ 1,285     $ 1,146  
Asset management, administration and commissions
    2,697       2,631       3,133  
All other income
    804       831       917  
 
Noninterest revenue
    4,757       4,747       5,196  
Net interest income
    2,624       2,597       2,938  
 
Total net revenue
    7,381       7,344       8,134  
 
Provision for credit losses
    (47 )     55       82  
Credit reimbursement to IB(a)
    (121 )     (121 )     (121 )
 
Noninterest expense
                       
Compensation expense
    2,734       2,544       2,602  
Noncompensation expense
    2,790       2,658       2,556  
Amortization of intangibles
    80       76       65  
 
Total noninterest expense
    5,604       5,278       5,223  
 
Income before income tax expense
    1,703       1,890       2,708  
Income tax expense
    624       664       941  
 
Net income
  $ 1,079     $ 1,226     $ 1,767  
 
Revenue by business
                       
Treasury Services
  $ 3,698     $ 3,702     $ 3,779  
Worldwide Securities Services
    3,683       3,642       4,355  
 
Total net revenue
  $ 7,381     $ 7,344     $ 8,134  
 
Financial ratios
                       
ROE
    17 %     25 %     47 %
Overhead ratio
    76       72       64  
Pretax margin ratio
    23       26       33  
 
                         
As of or for the year ended December 31,                  
(in millions, except headcount)   2010     2009     2008  
 
Selected balance sheet data (period-end)
                       
Loans(b)
  $ 27,168     $ 18,972     $ 24,508  
Equity
    6,500       5,000       4,500  
 
Selected balance sheet data (average)
                       
Total assets
  $ 42,494     $ 35,963     $ 54,563  
Loans(b)
    23,271       18,397       26,226  
Liability balances
    248,451       248,095       279,833  
Equity
    6,500       5,000       3,751  
 
Headcount
    29,073       26,609       27,070  
 
(a)   IB credit portfolio group manages certain exposures on behalf of clients shared with TSS. TSS reimburses IB for a portion of the total cost of managing the credit portfolio. IB recognizes this credit reimbursement as a component of noninterest revenue.
 
(b)   Loan balances include wholesale overdrafts, commercial card and trade finance loans.
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.


 
84   JPMorgan Chase & Co. / 2010 Annual Report


Table of Contents

2009 compared with 2008
Net income was $1.2 billion, a decrease of $541 million, or 31%, from the prior year, driven by lower net revenue.
Net revenue was $7.3 billion, a decrease of $790 million, or 10%, from the prior year. Worldwide Securities Services net revenue was $3.6 billion, a decrease of $713 million, or 16%. The decrease was driven by lower securities lending balances, primarily as a result of declines in asset valuations and demand, lower balances and spreads on liability products, and the effect of market depreciation on certain custody assets. Treasury Services net revenue was $3.7 billion, a decrease of $77 million, or 2%, reflecting spread compression on deposit products, offset by higher trade revenue driven by wider spreads and growth across cash management and card product volumes.
TSS generated firmwide net revenue of $10.2 billion, including $6.6 billion of net revenue in Treasury Services; of that amount, $3.7 billion was recorded in the Treasury Services business, $2.6 billion was recorded in the Commercial Banking business, and $245 million was recorded in other lines of business. The remaining $3.6 billion of net revenue was recorded in Worldwide Securities Services.
The provision for credit losses was $55 million, a decrease of $27 million from the prior year.
Noninterest expense was $5.3 billion, an increase of $55 million from the prior year. The increase was driven by higher FDIC insurance premiums, predominantly offset by lower headcount-related expense.
Selected metrics
                         
Year ended December 31,                  
(in millions, except ratio data)   2010     2009     2008  
 
TSS firmwide disclosures
                       
Treasury Services revenue – reported
  $ 3,698     $ 3,702     $ 3,779  
Treasury Services revenue reported in CB
    2,632       2,642       2,648  
Treasury Services revenue reported in other lines of business
    247       245       299  
 
Treasury Services firmwide
revenue
(a)
    6,577       6,589       6,726  
Worldwide Securities Services revenue
    3,683       3,642       4,355  
 
Treasury & Securities Services firmwide revenue(a)
  $ 10,260     $ 10,231     $ 11,081  
Treasury Services firmwide liability balances (average)(b)
  $ 308,028     $ 274,472     $ 264,195  
Treasury & Securities Services firmwide liability balances (average)(b)
    387,313       361,247       382,947  
TSS firmwide financial ratios
                       
Treasury Services firmwide overhead ratio(c)
    55 %     53 %     50 %
Treasury & Securities Services firmwide overhead ratio(c)
    65       62       57  
 
Selected metrics
                         
As of or for the year ended                  
December 31,                  
(in millions, except ratio data                  
and where otherwise noted)   2010     2009     2008  
 
Firmwide business metrics
                       
Assets under custody (in billions)
  $ 16,120     $ 14,885     $ 13,205  
 
   
Number of:
                       
U.S.$ ACH transactions originated
    3,892       3,896       4,000  
Total U.S.$ clearing volume (in thousands)
    122,123       113,476       115,742  
International electronic funds transfer volume (in thousands)(d)
    232,453       193,348       171,036  
Wholesale check volume
    2,060       2,184       2,408  
Wholesale cards issued (in thousands)(e)
    29,785       27,138       22,784  
 
   
Credit data and quality statistics
                       
Net charge-offs/(recoveries)
  $ 1     $ 19     $ (2 )
Nonaccrual loans
    12       14       30  
Allowance for credit losses:
                       
Allowance for loan losses
    65       88       74  
Allowance for lending-related commitments
    51       84       63  
 
Total allowance for credit losses
    116       172       137  
Net charge-off/(recovery) rate
    %     0.10 %     (0.01 )%
Allowance for loan losses to period-end loans
    0.24       0.46       0.30  
Allowance for loan losses to average loans
    0.28       0.48       0.28  
Allowance for loan losses to nonaccrual loans
    NM       NM       247  
Nonaccrual loans to period-end loans
    0.04       0.07       0.12  
Nonaccrual loans to average loans
    0.05       0.08       0.11  
 
(a)   TSS firmwide revenue includes foreign exchange (“FX”) revenue recorded in TSS and FX revenue associated with TSS customers who are FX customers of IB. However, some of the FX revenue associated with TSS customers who are FX customers of IB is not included in TS and TSS firmwide revenue. The total FX revenue generated was $636 million, $661 million and $880 million, for the years ended December 31, 2010, 2009 and 2008, respectively.
 
(b)   Firmwide liability balances include liability balances recorded in CB.
 
(c)   Overhead ratios have been calculated based on firmwide revenue and TSS and TS expense, respectively, including those allocated to certain other lines of business. FX revenue and expense recorded in IB for TSS-related FX activity are not included in this ratio.
 
(d)   International electronic funds transfer includes non-U.S. dollar Automated Clearing House (“ACH”) and clearing volume.
 
(e)   Wholesale cards issued and outstanding include U.S. domestic commercial, stored value, prepaid and government electronic benefit card products.


 
JPMorgan Chase & Co. / 2010 Annual Report   85


Table of Contents

Management’s discussion and analysis
ASSET MANAGEMENT
 

Asset Management, with assets under supervision of $1.8 trillion, is a global leader in investment and wealth management. AM clients include institutions, retail investors and high-net-worth individuals in every major market throughout the world. AM offers global investment management in equities, fixed income, real estate, hedge funds, private equity and liquidity, including money market instruments and bank deposits. AM also provides trust and estate, banking and brokerage services to high-net-worth clients, and retirement services for corporations and individuals. The majority of AM’s client assets are in actively managed portfolios.
Selected income statement data
                         
Year ended December 31,                  
(in millions, except ratios)   2010     2009     2008  
 
Revenue
                       
Asset management, administration and commissions
  $ 6,374     $ 5,621     $ 6,004  
All other income
    1,111       751       62  
 
Noninterest revenue
    7,485       6,372       6,066  
Net interest income
    1,499       1,593       1,518  
 
Total net revenue
    8,984       7,965       7,584  
 
                       
Provision for credit losses
    86       188       85  
 
                       
Noninterest expense
                       
Compensation expense
    3,763       3,375       3,216  
Noncompensation expense
    2,277       2,021       2,000  
Amortization of intangibles
    72       77       82  
 
Total noninterest expense
    6,112       5,473       5,298  
 
Income before income tax expense
    2,786       2,304       2,201  
Income tax expense
    1,076       874       844  
 
Net income
  $ 1,710     $ 1,430     $ 1,357  
 
 
                       
Revenue by client segment
                       
Private Banking(a)
  $ 4,860     $ 4,320     $ 4,189  
Institutional
    2,180       2,065       1,775  
Retail
    1,944       1,580       1,620  
 
Total net revenue
  $ 8,984     $ 7,965     $ 7,584  
 
 
                       
Financial ratios
                       
ROE
    26 %     20 %     24 %
Overhead ratio
    68       69       70  
Pretax margin ratio
    31       29       29  
 
 
(a)   Private Banking is a combination of the previously disclosed client segments: Private Bank, Private Wealth Management and JPMorgan Securities.
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.
2009 compared with 2008
Net income was $1.4 billion, an increase of $73 million, or 5%, from the prior year, due to higher total net revenue, offset largely by higher noninterest expense and provision for credit losses.
Total net revenue was $8.0 billion, an increase of $381 million, or 5%, from the prior year. Noninterest revenue was $6.4 billion, an increase of $306 million, or 5%, due to higher valuations of seed capital investments and net inflows, offset largely by lower market levels. Net interest income was $1.6 billion, up by $75 million, or 5%, from the prior year, due to wider loan spreads and higher deposit balances, offset partially by narrower deposit spreads.
Revenue from Private Banking was $4.3 billion, up 3% from the prior year due to wider loan spreads and higher deposit balances, offset largely by the effect of lower market levels. Revenue from Institutional was $2.1 billion, up 16% due to higher valuations of seed capital investments and net inflows, offset partially by the effect of lower market levels. Revenue from Retail was $1.6 billion, down 2% due to the effect of lower market levels, offset largely by higher valuations of seed capital investments.
The provision for credit losses was $188 million, an increase of $103 million from the prior year, reflecting continued weakness in the credit environment.
Noninterest expense was $5.5 billion, an increase of $175 million, or 3%, from the prior year due to the effect of the Bear Stearns merger, higher performance-based compensation and higher FDIC insurance premiums, offset largely by lower headcount-related expense.


 
86   JPMorgan Chase & Co. / 2010 Annual Report

 


Table of Contents

Selected metrics
                         
As of or for the year ended December 31,                  
(in millions, except headcount, ranking                  
data, and where                  
otherwise noted)   2010     2009     2008  
 
Business metrics
                       
Number of:
                       
Client advisors
    2,245       1,934       1,840  
Retirement planning services participants (in thousands)
    1,580       1,628       1,531  
JPMorgan Securities brokers(a)
    415       376       324  
 
                       
% of customer assets in 4 & 5 Star Funds(b)
    49 %     42 %     42 %
 
                       
% of AUM in 1st and 2nd quartiles:(c)
                       
1 year
    67 %     57 %     54 %
3 years
    72 %     62 %     65 %
5 years
    80 %     74 %     76 %
 
                       
Selected balance sheet data (period-end)
                       
Loans
  $ 44,084     $ 37,755     $ 36,188  
Equity
    6,500       7,000       7,000  
 
                       
Selected balance sheet data (average)
                       
Total assets
  $ 65,056     $ 60,249     $ 65,550  
Loans
    38,948       34,963       38,124  
Deposits
    86,096       77,005       70,179  
Equity
    6,500       7,000       5,645  
 
Headcount
    16,918       15,136       15,339  
 
                       
Credit data and quality statistics
                       
Net charge-offs
  $ 76     $ 117     $ 11  
Nonaccrual loans
    375       580       147  
Allowance for credit losses:
                       
Allowance for loan losses
    267       269       191  
Allowance for lending- related commitments
    4       9       5  
 
Total allowance for credit losses
  $ 271     $ 278     $ 196  
 
Net charge-off rate
    0.20 %     0.33 %     0.03 %
Allowance for loan losses to period-end loans
    0.61       0.71       0.53  
Allowance for loan losses to average loans
    0.69       0.77       0.50  
Allowance for loan losses to nonaccrual loans
    71       46       130  
Nonaccrual loans to period-end loans
    0.85       1.54       0.41  
Nonaccrual loans to average loans
    0.96       1.66       0.39  
 
 
(a)   JPMorgan Securities was formerly known as Bear Stearns Private Client Services prior to January 1, 2010.
(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.

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-profit organizations and governments worldwide.
Retail provides worldwide investment management services and retirement planning and administration, through third-party and direct distribution of a full range of investment vehicles.

J.P. Morgan Asset Management has two high-level measures of its overall fund performance.
  Percentage of assets under management in funds rated 4 and 5 stars (three year). Mutual fund rating services rank funds based on their risk-adjusted performance over various periods. A 5 star rating is the best and represents the top 10% of industry wide ranked funds. A 4 star rating represents the next 22% of industry wide ranked funds. The worst rating is a 1 star rating.
 
  Percentage of assets under management in first- or second- quartile funds (one, three and five years). Mutual fund rating services rank funds according to a peer-based performance system, which measures returns according to specific time and fund classification (small-, mid-, multi- and large-cap).


 
JPMorgan Chase & Co. / 2010 Annual Report   87

 


Table of Contents

Management’s discussion and analysis
Assets under supervision
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. The Firm also has a 41% interest in American Century Companies, Inc., whose AUM totaled $103 billion and $86 billion at December 31, 2010 and 2009, respectively; these are excluded from the AUM above.
2009 compared with 2008
Assets under supervision were $1.7 trillion at December 31, 2009, an increase of $205 billion, or 14%, from the prior year. Assets under management were $1.2 trillion, an increase of $116 billion, or 10%, from the prior year. The increases were due to the effect of higher market valuations and inflows in fixed income and equity products offset partially by outflows in cash products. Custody, brokerage, administration and deposit balances were $452 billion, up by $89 billion, due to the effect of higher market levels on custody and brokerage balances, and brokerage inflows in Private Banking. The Firm also had a 42% interest in American Century Companies, Inc. at December 31, 2009, whose AUM totaled $86 billion and $70 billion at December 31, 2009 and 2008, respectively; these are excluded from the AUM above.
                         
Assets under supervision(a)                  
As of or for the year ended                  
December 31, (in billions)   2010     2009     2008  
 
Assets by asset class
                       
Liquidity
  $ 497     $ 591     $ 613  
Fixed income
    289       226       180  
Equities and multi-asset
    404       339       240  
Alternatives
    108       93       100  
 
Total assets under management
    1,298       1,249       1,133  
Custody/brokerage/administration/ deposits
    542       452       363  
 
Total assets under supervision
  $ 1,840     $ 1,701     $ 1,496  
 
 
                       
Assets by client segment
                       
Private Banking(b)
  $ 284     $ 270     $ 258  
Institutional
    686       709       681  
Retail
    328       270       194  
 
Total assets under management
  $ 1,298     $ 1,249     $ 1,133  
 
Private Banking(b)
  $ 731     $ 636     $ 552  
Institutional
    687       710       682  
Retail
    422       355       262  
 
Total assets under supervision
  $ 1,840     $ 1,701     $ 1,496  
 
                         
Assets by geographic region                  
December 31, (in billions)   2010     2009     2008  
 
U.S./Canada
  $ 862     $ 837     $ 798  
International
    436       412       335  
 
Total assets under management
  $ 1,298     $ 1,249     $ 1,133  
 
U.S./Canada
  $ 1,271     $ 1,182     $ 1,084  
International
    569       519       412  
 
Total assets under supervision
  $ 1,840     $ 1,701     $ 1,496  
 
 
                       
Mutual fund assets by asset class
                       
Liquidity
  $ 446     $ 539     $ 553  
Fixed income
    92       67       41  
Equities and multi-asset
    169       143       92  
Alternatives
    7       9       7  
 
Total mutual fund assets
  $ 714     $ 758     $ 693  
 
                         
Assets under management rollforward
                 
Year ended December 31, (in billions)   2010     2009     2008  
 
Beginning balance, January 1
  $ 1,249     $ 1,133     $ 1,193  
Net asset flows:
                       
Liquidity
    (89 )     (23 )     210  
Fixed income
    50       34       (12 )
Equities, multi-asset and alternatives
    19       17       (47 )
Market/performance/other impacts(c)
    69       88       (211 )
 
Ending balance, December 31
  $ 1,298     $ 1,249     $ 1,133  
 
 
                       
Assets under supervision rollforward
                       
Beginning balance, January 1
  $ 1,701     $ 1,496     $ 1,572  
Net asset flows
    28       50       181  
Market/performance/other impacts(c)
    111       155       (257 )
 
Ending balance, December 31
  $ 1,840     $ 1,701     $ 1,496  
 
 
(a)   Excludes assets under management of American Century Companies, Inc., in which the Firm had a 41%, 42% and 43% ownership at December 31, 2010, 2009 and 2008, respectively.
(b)   Private Banking is a combination of the previously disclosed client segments: Private Bank, Private Wealth Management and JPMorgan Securities.
(c)   Includes $15 billion for assets under management and $68 billion for assets under supervision, which were acquired in the Bear Stearns merger in the second quarter of 2008.


     
88   JPMorgan Chase & Co. / 2010 Annual Report

 


Table of Contents

 
CORPORATE/PRIVATE EQUITY
 

The Corporate/Private Equity sector comprises Private Equity, Treasury, the Chief Investment Office, corporate staff units and expense that is centrally managed. Treasury and the Chief Investment Office manage capital, liquidity and structural risks of the Firm. The corporate staff units include Central Technology and Operations, Internal Audit, Executive Office, Finance, Human Resources, Marketing & Communications, Legal & Compliance, Corporate Real Estate and General Services, Risk Management, Corporate Responsibility and Strategy & Development. Other centrally managed expense includes the Firm’s occupancy and pension-related expense, net of allocations to the business.
Selected income statement data
                         
Year ended December 31,                  
(in millions, except headcount)   2010     2009     2008  
 
Revenue
                       
Principal transactions(a)
  $ 2,208     $ 1,574     $ (3,588 )
Securities gains(b)
    2,898       1,139       1,637  
All other income(c)
    253       58       1,673  
 
Noninterest revenue
    5,359       2,771       (278 )
Net interest income
    2,063       3,863       347  
 
Total net revenue(d)
    7,422       6,634       69  
 
                       
Provision for credit losses
    14       80       447 (j)
 
                       
Provision for credit losses – accounting conformity(e)
                1,534  
 
                       
Noninterest expense
Compensation expense
    2,357       2,811       2,340  
Noncompensation expense(f)
    8,788       3,597       1,841  
Merger costs
          481       432  
 
Subtotal
    11,145       6,889       4,613  
Net expense allocated to other businesses
    (4,790 )     (4,994 )     (4,641 )
 
Total noninterest expense
    6,355       1,895       (28 )
 
Income/(loss) before income tax expense/(benefit) and extraordinary gain
    1,053       4,659       (1,884 )
Income tax expense/(benefit)(g)
    (205 )     1,705       (535 )
 
Income/(loss) before extraordinary gain
    1,258       2,954       (1,349 )
Extraordinary gain(h)
          76       1,906  
 
Net income
  $ 1,258     $ 3,030     $ 557  
 
 
                       
Total net revenue
                       
Private equity
  $ 1,239     $ 18     $ (963 )
Corporate
    6,183       6,616       1,032  
 
Total net revenue
  $ 7,422     $ 6,634     $ 69  
 
Net income/(loss)
                       
Private equity
  $ 588     $ (78 )   $ (690 )
Corporate(i)
    670       3,108       1,247  
 
Total net income
  $ 1,258     $ 3,030     $ 557  
 
Headcount
    20,030       20,119       23,376  
 
 
(a)   Included losses on preferred equity interests in Fannie Mae and Freddie Mac in 2008.
(b)   Included gain on sale of MasterCard shares in 2008.
(c)   Included a gain from the dissolution of the Chase Paymentech Solutions joint venture and proceeds from the sale of Visa shares in its initial public offering in 2008.
(d)   Total net revenue included tax-equivalent adjustments, predominantly due to tax-exempt income from municipal bond investments of $226 million, $151 million and $57 million for 2010, 2009 and 2008, respectively.
(e)   Represents an accounting conformity credit loss reserve provision related to the acquisition of Washington Mutual Bank’s banking operations.
(f)   Includes litigation expense of $5.7 billion for 2010, compared with net benefits of $0.3 billion and $1.0 billion for 2009 and 2008, respectively. Included in the net benefits were a release of credit card litigation reserves in 2008 and insurance recoveries related to settlement of the Enron and WorldCom class action litigations. Also included a $675 million FDIC special assessment during 2009.
(g)   Includes tax benefits recognized upon the resolution of tax audits.
(h)   On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual Bank. The acquisition resulted in negative goodwill, and accordingly, the Firm recognized 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.
(i)   2009 and 2008 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.
(j)   In November 2008, the Firm transferred $5.8 billion of higher quality credit card loans from the legacy Chase portfolio to a securitization trust previously established by Washington Mutual (“the Trust”). As a result of converting higher credit quality Chase-originated on-book receivables to the Trust’s seller’s interest which had a higher overall loss rate reflective of the total assets within the Trust, approximately $400 million of incremental provision expense was recorded during the fourth quarter of 2008. This incremental provision expense was recorded in the Corporate segment as the action related to the acquisition of Washington Mutual’s banking operations. For further discussion of credit card securitizations, see Note 16 on pages 244–259 of this Annual Report.
2010 compared with 2009
Net income was $1.3 billion compared with $3.0 billion in the prior year. The decrease was driven by higher litigation expense, partially offset by higher net revenue.
Net income for Private Equity was $588 million, compared with a net loss of $78 million in the prior year, reflecting the impact of improved market conditions on certain investments in the portfolio. Net revenue was $1.2 billion compared with $18 million in the prior year, reflecting private equity gains of $1.3 billion compared with losses of $54 million. Noninterest expense was $323 million, an increase of $182 million, driven by higher compensation expense.
Net income for Corporate was $670 million, compared with $3.1 billion in the prior year. Current year results reflect after-tax litigation expense of $3.5 billion, lower net interest income and trading gains, partially offset by a higher level of securities gains, primarily driven by repositioning of the 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.


     
JPMorgan Chase & Co. / 2010 Annual Report   89

 


Table of Contents

Management’s discussion and analysis

2009 compared with 2008
Net income was $3.0 billion compared with $557 million in the prior year. The increase was driven by higher net revenue, partially offset by higher litigation expense.
Net loss for Private Equity was $78 million compared with a net loss of $690 million in the prior year. Net revenue was $18 million, an increase of $981 million, reflecting private equity losses of $54 million compared with losses of $894 million. Noninterest expense was $141 million, an increase of $21 million.
Net income for Corporate, including merger-related items, was $3.1 billion, compared with $1.2 billion in the prior year. Results in 2009 reflected higher levels of trading gains,