Form 10-Q






UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011
 
Commission file 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, New York
10017
(Address of principal executive offices)
(Zip Code)

(212) 270-6000
(Registrant’s telephone number, including area code)

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.
T Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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).
T Yes o No
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer T Accelerated filer o .
Non-accelerated filer (Do not check if a smaller reporting company) o Smaller reporting company o .

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes T No
 
Number of shares of common stock outstanding as of July 31, 2011: 3,899,050,011
 

FORM 10-Q
TABLE OF CONTENTS

 
 
Page
Part I - Financial information
 
Item 1
 
 
98
 
Consolidated Balance Sheets (unaudited) at June 30, 2011, and December 31, 2010
99
 
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income
(unaudited) for the six months ended June 30, 2011 and 2010
100
 
Consolidated Statements of Cash Flows (unaudited) for the six months ended
June 30, 2011 and 2010
101
 
102
 
Report of Independent Registered Public Accounting Firm
183
 
Consolidated Average Balance Sheets, Interest and Rates (unaudited) for the three and six
months ended June 30, 2011 and 2010
184
 
186
Item 2
 
 
3
 
4
 
6
 
11
 
14
 
17
 
48
 
49
 
52
 
57
 
61
 
92
 
92
 
96
 
97
Item 3
191
Item 4
191
Part II - Other information
 
Item 1
192
Item 1A
192
Item 2
193
Item 3
195
Item 5
195
Item 6
195


2


JPMORGAN CHASE & CO.
CONSOLIDATED FINANCIAL HIGHLIGHTS
(unaudited)
(in millions, except per share, headcount and ratio data)
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30,
As of or for the period ended,
 
2Q11
 
1Q11
 
4Q10
 
3Q10
 
2Q10
 
2011
 
2010
Selected income statement data
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total net revenue
 
$
26,779

 
$
25,221

 
$
26,098

 
$
23,824

 
$
25,101

 
$
52,000

 
$
52,772

Total noninterest expense
 
16,842

 
15,995

 
16,043

 
14,398

 
14,631

 
32,837

 
30,755

Pre-provision profit(a)
 
9,937

 
9,226

 
10,055

 
9,426

 
10,470

 
19,163

 
22,017

Provision for credit losses
 
1,810

 
1,169

 
3,043

 
3,223

 
3,363

 
2,979

 
10,373

Income before income tax expense
 
8,127

 
8,057

 
7,012

 
6,203

 
7,107

 
16,184

 
11,644

Income tax expense
 
2,696

 
2,502

 
2,181

 
1,785

 
2,312

 
5,198

 
3,523

Net income
 
$
5,431

 
$
5,555

 
$
4,831

 
$
4,418

 
$
4,795

 
$
10,986

 
$
8,121

Per common share data
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income per share: Basic
 
$
1.28

 
$
1.29

 
$
1.13

 
$
1.02

 
$
1.10

 
$
2.57

 
$
1.84

Diluted
 
1.27

 
1.28

 
1.12

 
1.01

 
1.09

 
2.55

 
1.83

Cash dividends declared per share(b)
 
0.25

 
0.25

 
0.05

 
0.05

 
0.05

 
0.50

 
0.10

Book value per share
 
44.77

 
43.34

 
43.04

 
42.29

 
40.99

 
44.77

 
40.99

Common shares outstanding
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average: Basic
 
3,958.4

 
3,981.6

 
3,917.0

 
3,954.3

 
3,983.5

 
3,970.0

 
3,977.0

Diluted
 
3,983.2

 
4,014.1

 
3,935.2

 
3,971.9

 
4,005.6

 
3,998.6

 
4,000.2

Common shares at period-end
 
3,910.2

 
3,986.6

 
3,910.3

 
3,925.8

 
3,975.8

 
3,910.2

 
3,975.8

Share price(c)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
High
 
$
47.80

 
$
48.36

 
$
43.12

 
$
41.70

 
$
48.20

 
$
48.36

 
$
48.20

Low
 
39.24

 
42.65

 
36.21

 
35.16

 
36.51

 
39.24

 
36.51

Close
 
40.94

 
46.10

 
42.42

 
38.06

 
36.61

 
40.94

 
36.61

Market capitalization
 
160,083

 
183,783

 
165,875

 
149,418

 
145,554

 
160,083

 
145,554

Selected ratios
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Return on common equity (“ROE”)
 
12
%
 
13
%
 
11
%
 
10
%
 
12
%
 
13
%
 
10
%
Return on tangible common equity (“ROTCE”)
 
17

 
18

 
16

 
15

 
17

 
18

 
15

Return on assets (“ROA”)
 
0.99

 
1.07

 
0.92

 
0.86

 
0.94

 
1.03

 
0.80

Overhead ratio
 
63

 
63

 
61

 
60

 
58

 
63

 
58

Deposits-to-loans ratio
 
152

 
145

 
134

 
131

 
127

 
152

 
127

Tier 1 capital ratio
 
12.4

 
12.3

 
12.1

 
11.9

 
12.1

 
 
 
 
Total capital ratio
 
15.7

 
15.6

 
15.5

 
15.4

 
15.8

 
 
 
 
Tier 1 leverage ratio
 
7.0

 
7.2

 
7.0

 
7.1

 
6.9

 
 
 
 
Tier 1 common capital ratio(d)
 
10.1

 
10.0

 
9.8

 
9.5

 
9.6

 
 
 
 
Selected balance sheet data (period-end)(e)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading assets
 
$
458,722

 
$
501,148

 
$
489,892

 
$
475,515

 
$
397,508

 
$
458,722

 
$
397,508

Securities
 
324,741

 
334,800

 
316,336

 
340,168

 
312,013

 
324,741

 
312,013

Loans
 
689,736

 
685,996

 
692,927

 
690,531

 
699,483

 
689,736

 
699,483

Total assets
 
2,246,764

 
2,198,161

 
2,117,605

 
2,141,595

 
2,014,019

 
2,246,764

 
2,014,019

Deposits
 
1,048,685

 
995,829

 
930,369

 
903,138

 
887,805

 
1,048,685

 
887,805

Long-term debt(e)
 
279,228

 
269,616

 
270,653

 
271,495

 
260,442

 
279,228

 
260,442

Common stockholders’ equity
 
175,079

 
172,798

 
168,306

 
166,030

 
162,968

 
175,079

 
162,968

Total stockholders' equity
 
182,879

 
180,598

 
176,106

 
173,830

 
171,120

 
182,879

 
171,120

Headcount
 
250,095

 
242,929

 
239,831

 
236,810

 
232,939

 
250,095

 
232,939

Credit quality metrics
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for credit losses
 
$
29,146

 
$
30,438

 
$
32,983

 
$
35,034

 
$
36,748

 
$
29,146

 
$
36,748

Allowance for loan losses to total retained loans
 
4.16
%
 
4.40
%
 
4.71
%
 
4.97
%
 
5.15
%
 
4.16
%
 
5.15
%
Allowance for loan losses to retained loans excluding purchased credit-impaired loans(f)
 
3.83

 
4.10

 
4.46

 
5.12

 
5.34

 
3.83

 
5.34

Nonperforming assets
 
$
13,240

 
$
14,986

 
$
16,557

 
$
17,656

 
$
18,156

 
$
13,240

 
$
18,156

Net charge-offs(g)
 
3,103

 
3,720

 
5,104

 
4,945

 
5,714

 
6,823

 
13,624

Net charge-off rate(g)
 
1.83
%
 
2.22
%
 
2.95
%
 
2.84
%
 
3.28
%
 
2.02
%
 
3.88
%
Wholesale net charge-off rate
 
0.14

 
0.30

 
0.49

 
0.49

 
0.44

 
0.21

 
1.14

Consumer net charge-off rate(g)
 
2.74

 
3.18

 
4.12

 
3.90

 
4.49

 
2.96

 
5.03

(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)
On March 18, 2011, the Board of Directors increased the Firm's quarterly common stock dividend from $0.05 to $0.25 per share.
(c)
Share prices shown for JPMorgan Chase’s common stock are from the New York Stock Exchange. JPMorgan Chase's common stock is also listed and traded on the London Stock Exchange and the Tokyo Stock Exchange.
(d)
Tier 1 common capital ratio (“Tier 1 common ratio”) is Tier 1 common divided by risk-weighted assets. The Firm uses Tier 1 common capital (“Tier 1 common”) along with the other capital measures to assess and monitor its capital position. For further discussion, see Regulatory capital on pages 57–60 of this Form 10-Q.
(e)
Effective January 1, 2011, the long-term portion of advances from Federal Home Loan Banks (“FHLBs”) was reclassified from other borrowed funds to long-term debt. Prior periods have been revised to conform with the current presentation.
(f)
Excludes the impact of home lending purchased credit-impaired (“PCI”) loans. For further discussion, see Allowance for credit losses on pages 86–88 of this Form 10-Q.
(g)
Net charge-offs and net charge-off rates for the fourth quarter of 2010 include the effect of $632 million of charge-offs related to the estimated net realizable value of the collateral underlying delinquent residential home loans. Because these losses were previously recognized in the provision and allowance for loan losses, this adjustment had no impact on the Firm's net income.

3

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section of the Form 10-Q provides management’s discussion and analysis (“MD&A”) of the financial condition and results of operations of JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”). See the Glossary of terms on pages 186–189 for definitions of terms used throughout this Form 10-Q. The MD&A included in this Form 10-Q 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. For a discussion of such risks and uncertainties, see Forward-looking Statements on page 97 and Part II, Item 1A, Risk Factors on pages 192–193 of this Form 10-Q, and Part I, Item 1A, Risk Factors on pages 5–12 of JPMorgan Chase’s Annual Report on Form 10-K for the year ended December 31, 2010, filed with the U.S. Securities and Exchange Commission (“2010 Annual Report” or “2010 Form 10-K”), to which reference is hereby made.
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 $2.2 trillion in assets, $182.9 billion in stockholders’ equity and operations in more than 60 countries as of June 30, 2011. The Firm is a leader in investment banking, financial services for consumers and small business, commercial banking, financial transaction processing, asset management and private equity. 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”), 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 5,300 bank branches (third-largest nationally) and more than 16,400 ATMs (second-largest nationally), as well as online and mobile banking around the clock. More than 30,900 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 16,500 auto dealerships and can get student loans certified by more than 1,900 schools and universities nationwide.
Card Services
Card Services (“CS”) is one of the nation’s largest credit card issuers, with over $125 billion in loans and over 65 million open accounts. In the six months ended June 30, 2011, customers used Chase cards to meet $163 billion of their spending needs. 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 25,000 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.

4



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


5

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 Form 10-Q. For a complete description of events, trends and uncertainties, as well as the capital, liquidity, credit and market risks, and the critical accounting estimates affecting the Firm and its various lines of business, this Form 10-Q should be read in its entirety.
Economic environment
The U.S. economic recovery continued in the second quarter of 2011, though the pace seemed to have slowed, due, in part, to the major disruptions in the global supply chain for the auto industry as a result of the earthquake and tsunami in Japan and the sharp rise in oil prices during the first half of the year. Labor market indicators were weaker than anticipated in the second quarter and the struggling housing and construction sectors remained depressed. However, household spending and business investment in equipment and software continued to expand.
To promote a faster pace of economic recovery, the Federal Reserve maintained its existing policy of reinvesting principal payments from its securities holdings and completed the purchase of $600 billion of longer-term Treasury securities in the second quarter. The Federal Reserve also held 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.
Financial performance of JPMorgan Chase
 
Three months ended June 30,
 
Six months ended June 30,
(in millions, except per share data and ratios)
2011
 
2010
 
Change
 
2011
 
2010
 
Change
Selected income statement data
 
 
 
 
 
 
 
 
 
 
 
Total net revenue
$
26,779

 
$
25,101

 
7
 %
 
$
52,000

 
$
52,772

 
(1
)%
Total noninterest expense
16,842

 
14,631

 
15

 
32,837

 
30,755

 
7

Pre-provision profit
9,937

 
10,470

 
(5
)
 
19,163

 
22,017

 
(13
)
Provision for credit losses
1,810

 
3,363

 
(46
)
 
2,979

 
10,373

 
(71
)
Net income
5,431

 
4,795

 
13

 
10,986

 
8,121

 
35

Diluted earnings per share
1.27

 
1.09

 
17

 
2.55

 
1.83

 
39

Return on common equity
12
%
 
12
%
 
 
 
13
%
 
10
%
 
 
Capital ratios
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital
12.4

 
12.1

 
 
 
 
 
 
 
 
Tier 1 common
10.1

 
9.6

 
 
 
 
 
 
 
 

Business overview
JPMorgan Chase reported second-quarter 2011 net income of $5.4 billion, or $1.27 per share, on net revenue of $26.8 billion. Net income was up 13% compared with net income of $4.8 billion, or $1.09 per share, in the second quarter of 2010. ROE for the quarter was 12%, unchanged from the prior year. Current-quarter results included a $1.0 billion pretax ($0.15 per share after-tax) benefit from a reduction in the allowance for loan losses in Card Services; an $837 million pretax ($0.12 per share after-tax) benefit from securities gains in Corporate; a $1.0 billion pretax ($0.15 per share after-tax) expense for estimated costs of foreclosure-related matters in Retail Financial Services; and $1.3 billion pretax ($0.19 per share after-tax) of additional litigation reserves, predominantly for mortgage-related matters, in Corporate.
The increase in net income for the second quarter of 2011 was driven by higher net revenue and a significantly lower provision for credit losses, largely offset by higher noninterest expense. Net revenue growth resulted from higher levels of principal transactions revenue, investment banking fees and asset management, administration and commissions revenue, partially offset by lower net interest income and lower securities gains. The decrease in the provision for credit losses reflected improvement in the credit environment. The increase in noninterest expense was driven by higher noncompensation expense due to additional litigation reserves, predominantly for mortgage-related matters, and expense for the estimated costs of foreclosure-related matters.
The Firm’s second-quarter results reflected strong earnings and solid client flows in the Investment Bank, record revenue and continued loan growth in Commercial Banking, and solid performance across most other businesses. Retail Banking within Retail Financial Services continued to demonstrate good underlying performance, but RFS overall continued to be negatively affected by high expenses for mortgage-related issues, including a $1.0 billion expense for estimated litigation and other costs of foreclosure-related matters. Results for the second quarter also reflected continued improvement in credit trends across the consumer and wholesale portfolios. With respect to the credit card portfolio, delinquencies and net charge-offs improved, and the Firm reduced loan loss reserves by $1.0 billion as estimated losses declined. With respect to the mortgage portfolio, delinquency and net charge-off trends improved modestly compared with the prior quarter; however, net charge-offs remained high, and credit losses are expected to remain elevated.


6



JPMorgan Chase’s balance sheet remained strong, ending the second quarter with a Basel I Tier 1 Common ratio of 10.1%. This strong and growing capital base enabled the Firm to repurchase $3.5 billion of common stock during the quarter. Total firmwide credit reserves at quarter-end were $29.1 billion, resulting in a firmwide loan loss coverage ratio of 3.83%, excluding purchased credit-impaired loans. Total stockholders’ equity at June 30, 2011, was $182.9 billion.
Net income for the first six months of 2011 was $11.0 billion, or $2.55 per share, compared with $8.1 billion, or $1.83 per share, in the first half of 2010. The increase was driven by a significantly lower provision for credit losses, partially offset by higher noninterest expense and lower net revenue. The lower provision for credit losses reflected an improved credit environment. The modest decline in net revenue for the first six months of the year was driven by lower net interest income, mortgage fees and related income and securities gains, largely offset by higher levels of principal transactions revenue, investment banking fees and asset management, administration and commissions revenue. The increase in noninterest expense compared with the first six months of 2010 was driven by expenses taken for the estimated costs of foreclosure-related matters in RFS and higher compensation expense.
During the first six months of 2011, JPMorgan Chase provided credit to and raised capital of over $990 billion for its clients. The Firm originated mortgages to more than 360,000 people; provided credit cards to approximately 4.6 million people; lent or increased credit to more than 16,800 small businesses; lent to more than 800 not-for-profit and government entities, including states, municipalities, hospitals and universities; extended or increased loan limits to approximately 3,000 middle-market companies; and lent to or raised capital for more than 5,000 other corporations. JPMorgan Chase is the #1 Small Business Administration lender in the U.S. with more loans made than any other lender. In 2009 and 2010, the Firm lent more than $7 billion and $10 billion, respectively, to small businesses, and has committed to lend at least $12 billion in 2011. The Firm remains committed to helping homeowners and preventing foreclosures; since the beginning of 2009, JPMorgan Chase has offered 1,177,000 trial modifications to struggling homeowners.
The discussion that follows highlights the performance of each business segment compared with the prior-year quarter and presents results on a managed basis. 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 14–16 of this Form 10-Q.
Investment Bank net income increased from the prior year, reflecting higher net revenue and lower noninterest expense, partially offset by a lower benefit from the provision for credit losses. The increase in net revenue was largely driven by higher investment banking fees and solid client revenue in Fixed Income and Equity Markets. Credit Portfolio revenue was a loss, primarily reflecting the negative net impact of credit-related valuation adjustments, largely offset by net interest income and fees on retained loans. The provision for credit losses was a smaller benefit in the second quarter of 2011 compared with the second quarter of 2010 and reflected a reduction in the allowance for loan losses, largely due to net repayments. Noninterest expense decreased, driven by lower compensation expense. The prior-year results included the impact of the U.K. Bank Payroll Tax.
Retail Financial Services net income decreased compared with the prior year as higher noninterest expense was largely offset by a lower provision for credit losses and higher net revenue. The increase in net revenue was driven by higher mortgage fees and related income, deposit balances, debit card income, deposit-related fees and investment sales revenue, partially offset by lower loan balances due to portfolio runoff. The provision for credit losses decreased, as delinquency trends and net charge-offs modestly improved compared with the prior year. However, the current-quarter provision continued to reflect elevated losses in the mortgage and home equity portfolios. Noninterest expense increased, driven by elevated foreclosure and default-related costs, including $1.0 billion for estimated litigation and other costs of foreclosure-related matters.
Card Services net income increased compared with the second quarter of 2010 driven by a lower provision for credit losses, 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 (including the impact of the Kohl’s portfolio sale), the impact of legislative changes and a decreased level of fees. These decreases were largely offset by lower revenue reversals associated with lower net charge-offs. The provision for credit losses decreased from the prior year, reflecting lower net charge-offs and a $1.0 billion reduction in the allowance for loan losses due to lower estimated losses. Noninterest expense increased, due to higher marketing expense and the inclusion of the Commercial Card business. Sales volume, excluding the Washington Mutual and Commercial Card portfolios, was $83.1 billion, an increase of 10% from the prior year.
Commercial Banking net income decreased, driven by an increase in the provision for credit losses, partially offset by record net revenue. Record net revenue was driven by growth in liability balances, wider loan spreads, higher investment banking revenue and growth in loan balances, partially offset by spread compression on liability products. The provision for credit losses was an expense compared with a benefit in the prior-year. Noninterest expense increased, primarily reflecting higher headcount-related expense. End-of-period loans of $102.7 billion, up 7% compared with the second quarter 2010, have increased for four consecutive quarters. Average liability balances of $162.8 billion have increased 19% from the second quarter 2010.
Treasury & Securities Services net income increased from the prior year, driven by higher net revenue and the credit allocation benefit related to the Global Corporate Bank (“GCB”), partially offset by higher noninterest expense. Worldwide Securities Services net revenue increased, driven by higher market levels, higher net interest income and net inflows of assets under custody. Assets

7



under custody were a record $16.9 trillion, an increase of 14% from the prior year. Treasury Services net revenue was relatively flat as higher trade loan volumes and higher deposit balances were largely offset by the effect of the transfer of the Commercial Card business to CS and lower spreads on deposits. Higher noninterest expense was driven by continued investment in new product platforms, primarily related to international expansion, partially offset by the transfer of the Commercial Card business to CS.
Asset Management net income increased from the prior year, reflecting higher net revenue, predominantly 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 valuations of seed capital investments, higher deposit and loan balances, and higher performance fees. The increase in revenue was partially offset by narrower deposit spreads. Assets under supervision of $1.9 trillion increased 17% from the prior year due to the effect of higher market levels and net inflows to long-term products, partially offset by net outflows from liquidity products. Noninterest expense increased, largely resulting from an increase in headcount and higher performance-based compensation.
Corporate/Private Equity net income decreased compared with the second quarter of 2010. Private equity revenue increased, primarily driven by gains on sales and net increases in investment valuations. Net interest income and securities gains decreased from the prior year. Noninterest expense was higher and included $1.3 billion of additional litigation reserves, predominantly for mortgage-related matters. Noninterest expense in the prior year included $694 million of additional litigation reserves.
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. 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 97 and Risk Factors on pages 192–193 of this Form 10-Q.
JPMorgan Chase’s outlook for the second half of 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.
In the Mortgage Banking, Auto & Other Consumer Lending business within RFS, if mortgage interest rates remain at current levels or rise in the future, management anticipates that loan production and margins will be negatively affected, resulting in lower revenue for this business for full-year 2011 when compared with 2010. In addition, revenue in 2011 will 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 be approximately $1.2 billion on an annualized basis for the remainder of 2011.
The Firm expects noninterest expense in Mortgage Banking, Auto & Other Consumer Lending to remain, for the remainder of the year, at elevated levels similar to those incurred in the first half of 2011 (excluding the $1.7 billion expense incurred during the first half of 2011 for various estimated costs related to foreclosure delays and potential settlements with federal and state officials). These higher levels of noninterest expense are expected in light of increased servicing costs to enhance the Firm’s mortgage servicing processes, particularly loan modification and foreclosure procedures, and comply with the Consent Orders entered into with the banking regulators. (See Enhancements to Mortgage Servicing on pages 84–85 and Note 23 on pages 172–179 of this Form 10-Q for further information about the Consent Orders.) It is also possible that the Firm will incur additional fees and assessments related to foreclosure delays as well as other costs in connection with the potential settlement of the governmental investigations related to the Firm’s mortgage servicing procedures.
In the Real Estate Portfolios business within RFS, management believes that, based on the current outlook for delinquencies and loss severity, total quarterly net charge-offs could be approximately $1.2 billion. 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 reduction in the residential real estate portfolio is expected to reduce net interest income in each period, including a reduction of approximately $700 million for full-year 2011 from the 2010 level, assuming no changes in interest rates during the year. 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 redeployment each year, subject to the capital requirements associated with the remaining portfolio.
In CS, given current high repayment rates, management expects end-of-period outstandings for the Chase portfolio (excluding the Washington Mutual and Commercial Card portfolios) could be between $115 billion and $120 billion by the end of 2011. Management estimates that the Washington Mutual portfolio could decline to $10 billion by the end of 2011.
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, management anticipates the net charge-off rate for the Chase portfolio (excluding the Washington Mutual and Commercial Card portfolios) could be approximately 4.5% for the third quarter of 2011. Recent reserve

8



releases from the credit card allowance for loan losses reflect the continued improvement in the credit cycle. Management anticipates that as credit card net charge-offs begin to stabilize towards a normal through-the-cycle level, releases from the allowance will decline and eventually abate.
Economic data for the first half of 2011 seemed to imply that U.S. economic growth has slowed, and high unemployment rates and the difficult housing market have been persistent. Ongoing weak economic conditions, combined with elevated delinquencies and ongoing discussions regarding mortgage foreclosure-related matters with federal and state officials, continue to result in a high level of uncertainty in the residential real estate portfolio. Further declines in U.S. housing prices and increases in the unemployment rate remain possible; were this to occur, currently anticipated 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, the wholesale credit environment will influence levels of charge-offs, repayments and provision for credit losses for IB, CB and TSS.
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 significant litigation expense and significant nonrecurring items, is anticipated to trend toward approximately $300 million per quarter. Furthermore, continued repositioning of the investment securities portfolio in Corporate, changes in the mix of loans within the consumer loan portfolio and other factors, including continued low interest rates, could result in further downward pressure on the Firm’s net interest margin in the third quarter of 2011.
The Firm faces litigation in its various roles as issuer and/or underwriter in mortgage-backed securities (“MBS”) offerings, primarily related to offerings involving third parties other than the GSEs. It is possible that these matters will take a number of years to resolve; their ultimate resolution is inherently uncertain and reserves for such litigation matters may need to be increased in the future.
Management and the 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 and warrants, increasing the common stock dividend and pursuing alternative investment opportunities. The Firm expects to utilize the authorized $15.0 billion, multi-year common equity repurchase program, of which up to $8.0 billion is approved by the Federal Reserve for 2011, to, at a minimum, repurchase the same amount of shares that it issues for employee stock-based incentive awards. Beyond this, the Firm intends to repurchase its common equity only when the Firm is generating capital in excess of that which is needed to fund its organic growth and when, in management’s judgment, such repurchases provide excellent value to the Firm’s existing shareholders. Management and the Board will continue to assess and make decisions regarding alternatives for deploying capital, as appropriate, over the course of the year. Any planned future dividend increases over the current level, or planned use of the repurchase program over the repurchases approved for 2011, will be reviewed by the Firm with its banking regulators before taking action.

9

Regulatory developments
JPMorgan Chase is subject to regulation under state and federal laws in the U.S., as well as the applicable laws of each of the various other jurisdictions outside the U.S. in which the Firm does business. The Firm is currently experiencing a period of unprecedented change in regulation and such changes could have a significant impact on how the Firm conducts business. The Firm continues to work diligently in assessing and understanding the implications of the regulatory changes it is facing, and is devoting substantial resources to implementing all the new rules and regulations while meeting the needs and expectations of its clients. While the Firm has made a preliminary assessment of the likely impact of certain of the anticipated changes, as more fully described below, the Firm cannot, given the current status of the regulatory developments, quantify the possible effects on its business and operations of all of the significant changes that are underway. See Risk Factors on pages 192–193 of this Form 10-Q for additional information.
In February 2011, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the FDIC issued a final rule changing its methodology for calculating the deposit insurance assessment rate for large banks. The new rule changes the assessment base from insured deposits to average consolidated total assets less average tangible equity, and changes the assessment rate calculation. These changes became effective on April 1, 2011, and, based on the Firm’s understanding of the final rule, are expected to result in an aggregate annualized increase of approximately $500 million in the assessments that the Firm’s bank subsidiaries pay to the FDIC.
In June 2011, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) adopted rules implementing the Durbin Amendment provisions of the Dodd-Frank Act, which limits the amount the Firm may charge for each debit card transaction it processes. Based on the Firm’s current understanding of the final rules, which become effective on October 1, 2011, it is anticipated that such rules will result, absent mitigation, in a decline in aggregate annualized gross revenue for Retail Banking of approximately $1.0 billion, beginning in the fourth quarter of 2011. The Firm is considering various actions it may take to mitigate some of the anticipated decline in revenue over time, though any mitigating actions are not expected to wholly offset the loss of revenue. Accordingly, the final effect of this regulation cannot be determined at this time.
The Firm will also be affected by the requirements of Section 619 of the Dodd-Frank Act, and specifically the provisions prohibiting proprietary trading and restricting the activities involving private equity and hedge funds (the “Volcker Rule”). However, the revenue and net earnings generated by the Firm’s proprietary trading activities represent a de minimis portion of the revenue and net earnings of the IB line of business and of the Firm overall. The Firm ceased some proprietary trading activities during 2010, and is planning to cease its remaining proprietary trading activities within the timeframe mandated by the Volcker Rule. In addition, the application of the Volcker Rule to the Firm’s private equity and hedge fund activities in its AM and IB lines of business, as well as in the Corporate/Private Equity sector, is not expected to have a significant effect on the revenue or net earnings of the Firm or those lines of business. The Firm expects that certain private equity and hedge fund activities or investments expected to be within the scope of the Volcker Rule will be redeemed or liquidated within the timeframe mandated by the Volcker Rule and the Firm is currently assessing alternative means by which either to exit any remaining activities and investments or conform them to the requirements of the Volcker Rule within the timeframe mandated.
While regulators have not yet proposed many of the rules to implement the Volcker Rule, in order to begin planning for its implementation, the Firm has attempted to identify the activities it expects to be affected by the Volcker Rule. In this regard, the Firm defines “proprietary trading” as the trading of securities, derivatives, or futures (or options on any of the foregoing) that is predominantly used to realize gains from short-term movements in prices for the Firm’s own account. The Firm’s proprietary trading activities are typically conducted separately from other business activities and segregated organizationally and physically from client market-making and other client-driven businesses as well as from risk management activities. The Firm’s definition of proprietary trading does not include client market-making, long term investment activities or risk management activities. However, until the remainder of the implementing rules are adopted, the Firm will not know the extent to which the Volcker Rule will affect its ability to engage in these activities.
In June 2011, the Basel Committee and the Financial Stability Board (“FSB”) announced that certain global systemically important banks (“GSIBs”) would be required to maintain additional capital, above the Basel III Tier 1 common equity minimum, in amounts ranging from 1% to 2.5%, depending upon the bank’s systemic importance. Furthermore, in order to provide a disincentive for banks facing the highest required level of Tier 1 common equity to “increase materially their global systemic importance in the future,” an additional 1% charge could be applied. JPMorgan Chase estimates that its Basel III Tier 1 common ratio was approximately 7.6% at the end of the second quarter of 2011. This level is well in excess of that which is required today under existing rules and is greater than the level the Firm expects will be required under the proposed rules for up to five years, including the additional buffer for GSIBs. The Firm expects that its strong capital position and significant earnings power will allow it to actively grow its business and rapidly meet any proposed Basel III requirements as they are phased in. The Firm intends to keep its capital ratios approximately at current levels, subject to regulatory approval, as management does not see a need to manage to higher ratios ahead of time.

10

CONSOLIDATED RESULTS OF OPERATIONS
The following section provides a comparative discussion of JPMorgan Chase’s Consolidated Results of Operations on a reported basis for the three and six months ended June 30, 2011 and 2010. Factors that relate primarily to a single business segment are discussed in more detail within that business segment. For a discussion of the Critical Accounting Estimates Used by the Firm that affect the Consolidated Results of Operations, see pages 92–95 of this Form 10-Q and pages 149–154 of JPMorgan Chase’s 2010 Annual Report.
Revenue
Three months ended June 30,
 
Six months ended June 30,
(in millions)
2011

 
2010

 
Change
 
2011

 
2010

 
Change
Investment banking fees
$
1,933

 
$
1,421

 
36
  %
 
$
3,726

 
$
2,882

 
29
  %
Principal transactions
3,140

 
2,090

 
50

 
7,885

 
6,638

 
19

Lending- and deposit-related fees
1,649

 
1,586

 
4

 
3,195

 
3,232

 
(1
)
Asset management, administration and commissions
3,703

 
3,349

 
11

 
7,309

 
6,614

 
11

Securities gains
837

 
1,000

 
(16
)
 
939

 
1,610

 
(42
)
Mortgage fees and related income
1,103

 
888

 
24

 
616

 
1,546

 
(60
)
Credit card income
1,696

 
1,495

 
13

 
3,133

 
2,856

 
10

Other income
882

 
585

 
51

 
1,456

 
997

 
46

Noninterest revenue
14,943

 
12,414

 
20

 
28,259

 
26,375

 
7

Net interest income
11,836

 
12,687

 
(7
)
 
23,741

 
26,397

 
(10
)
Total net revenue
$
26,779

 
$
25,101

 
7
  %
 
$
52,000

 
$
52,772

 
(1
)%

Total net revenue for the second quarter of 2011 was $26.8 billion, an increase of $1.7 billion, or 7%, from the second quarter of 2010. Revenue growth was driven by higher levels of principal transactions revenue, investment banking fees, and asset management, administration and commissions revenue, largely offset by lower net interest income. For the first six months of 2011, total net revenue was $52.0 billion, a modest decline compared with the first six months of 2010, as lower net interest income, mortgage fees and related income, and securities gains more than offset revenue growth from higher levels of principal transactions revenue, investment banking fees, and asset management, administration and commissions revenue.
Investment banking fees increased compared with both the second quarter and first six months of 2010 and were a record for the first six months of 2011. Debt underwriting fees were also a record for the first six months of 2011. Advisory fees, debt underwriting fees and equity underwriting fees were higher in both periods of comparison, as industry-wide M&A and capital-raising volumes increased from their 2010 levels. For additional information on investment banking fees, which are primarily recorded in IB, see IB segment results on pages 19–22 of this Form 10-Q.
Principal transactions revenue increased compared with the second quarter and first six months of 2010, primarily driven by gains on sales and net increases in investment valuations in Corporate/Private Equity, as a result of continued improvement in market conditions related to certain portfolio investments. Trading revenue increased in the second quarter of 2011 compared with the second quarter of 2010 but decreased in the first half of 2011 compared with the first half of 2010. Client revenue in IB remained solid in both periods of comparison, reflecting the strength and depth of the client franchise. For additional information on principal transactions revenue, see IB and Corporate/Private Equity segment results on pages 19–22 and 46–47, respectively, and Note 6 on pages 124–125 of this Form 10-Q.
Lending- and deposit-related fees increased in the second quarter of 2011 compared with the prior year. The increase was primarily driven by the introduction of a new checking account product offering in RFS, and the conversion of some existing checking accounts into the new product offering; partially offset by the impact of nonsufficient fund/overdraft (“NSF/OD”) regulatory and policy changes. For the first six months of 2011, lending- and deposit-related fees declined slightly compared with the prior year, reflecting lower deposit-related fees in RFS associated, in part, with the impact of the aforementioned regulatory and policy changes. These declines were partially offset by higher lending-related fees in IB. For additional information on lending- and deposit-related fees, which are mostly recorded in RFS, CB, TSS and IB, see RFS on pages 23–32, CB on pages 36–38, TSS on pages 39–41 and IB segment results on pages 19–22 of this Form 10-Q.
Asset management, administration and commissions revenue increased from the second quarter and first six months of 2010. The increases reflected higher asset management fees in AM, driven by the effect of higher market levels and net inflows to longer-term products with higher margins. To a lesser extent, higher administration fees in TSS, reflecting the effect of higher market levels and net inflows of assets under custody, also contributed to the increases in revenue. For additional information on these fees and commissions, see the segment discussions for AM on pages 42–45 and TSS on pages 39–41 of this Form 10-Q.
Securities gains decreased from the second quarter and first six months of 2010, resulting primarily from the repositioning of the portfolio in response to changes in the interest rate environment and rebalancing exposures. 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 46–47 of this Form 10-Q.

11



Mortgage fees and related income increased compared with the second quarter of 2010, driven by an increase in production revenue, reflecting wider margins and lower levels of repurchase losses; this increase was largely offset by a decrease in net mortgage servicing revenue due to lower MSR risk management revenue. Mortgage fees and related income decreased compared with the first six months of 2010; the decrease was driven by a $1.1 billion decline in the fair value of the MSR asset that was recognized in the first quarter of 2011 related to a revised cost to service assumption incorporated into the valuation to reflect the estimated impact of higher servicing costs to enhance servicing processes – particularly loan modification and foreclosure procedures, and higher estimated costs to comply with Consent Orders entered into with banking regulators. The decline in the fair value of the MSR asset also resulted from a decrease in interest rates. Partially offsetting the decrease was an increase in production revenue, driven by the impact of higher mortgage origination volumes and wider margins, as well as lower levels of repurchase losses. 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 27-29 of this Form 10-Q. For additional information on repurchase losses, see the Mortgage repurchase liability discussion on pages 53-56 and Note 21 on pages 167-171 of this Form 10-Q.
Credit card income increased in both the second quarter and first half of 2011. The increase in the quarter largely reflected higher net interchange income associated with higher customer charge volume on debit and credit cards, as well as lower partner revenue-sharing (a contra-revenue item) due to the impact of the Kohl's portfolio sale. The increase in the first six months of 2011 was driven by higher net interchange income, partially offset by lower revenue from fee-based products. For additional information on credit card income, see the CS and RFS segment results on pages 33–35, and pages 23–32, respectively, of this Form 10-Q.
Other income increased compared with the second quarter and first six months of 2010, driven by valuation adjustments on certain assets and incremental income from recent acquisitions in IB, as well as higher valuations of seed capital investments in AM. Higher auto operating lease income in RFS, resulting from growth in lease volume, also contributed to the increase.
Net interest income decreased in the second quarter and first six months of 2011 compared with the prior year. The declines in both periods were driven by lower yields on securities; lower average loan balances and yields, primarily in CS and RFS, reflecting the expected runoff of credit card balances and residential real estate loans; lower fees on credit card receivables, reflecting the impact of legislative changes; and lower yields on deposits. The decrease was offset partially by lower revenue reversals associated with lower credit card charge-offs, and higher average deposit balances. The Firm's average interest-earning assets were $1.8 trillion in the second quarter of 2011, and the net yield on those assets, on a fully taxable-equivalent (“FTE”) basis, was 2.72%, a decrease of 34 basis points from the second quarter of 2010. For the first six months of 2011, average interest-earning assets were $1.7 trillion, and the net yield on those assets, on an FTE basis, was 2.80%, a decrease of 39 basis points from the first six months of 2010. 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 JPMorgan Chase's 2010 Annual Report.
Provision for credit losses
Three months ended June 30,
 
Six months ended June 30,
(in millions)
2011

 
2010

 
Change
 
2011

 
2010

 
Change
Wholesale
$
(117
)
 
$
(572
)
 
80
  %
 
$
(503
)
 
$
(808
)
 
38
  %
Consumer, excluding credit card
1,117

 
1,714

 
(35
)
 
2,446

 
5,448

 
(55
)
Credit card
810

 
2,221

 
(64
)
 
1,036

 
5,733

 
(82
)
Total consumer
1,927

 
3,935

 
(51
)
 
3,482

 
11,181

 
(69
)
Total provision for credit losses
$
1,810

 
$
3,363

 
(46
)%
 
$
2,979

 
$
10,373

 
(71
)%

The provision for credit losses decreased significantly compared with the second quarter and first six months of 2010. The credit card provision was down from both prior-year periods, driven primarily by improved delinquency trends and a reduction in the allowance for loan losses as a result of lower estimated losses. The consumer, excluding credit card, provision was also down from both prior-year periods, reflecting improving delinquency and charge-off trends in 2011 across most portfolios and the absence of additions to the allowance for loan losses. The wholesale provision reflected a lower benefit for both the second quarter and first six months of 2011 compared with the prior-year periods. For a more detailed discussion of the loan portfolio and the allowance for credit losses, see the segment discussions for RFS on pages 23–32, CS on pages 33–35, IB on pages 19–22 and CB on pages 36–38, and the Allowance for credit losses section on pages 86–88 of this Form 10-Q.


12



Noninterest expense
Three months ended June 30,
 
Six months ended June 30,
(in millions)
2011
 
2010
 
Change
 
2011
 
2010
 
Change
Compensation expense(a)
$
7,569

 
$
7,616

 
(1
)%
 
$
15,832

 
$
14,892

 
6
  %
Noncompensation expense:
 
 
 
 
 
 
 
 
 
 
 
Occupancy
935

 
883

 
6

 
1,913

 
1,752

 
9

Technology, communications and equipment
1,217

 
1,165

 
4

 
2,417

 
2,302

 
5

Professional and outside services
1,866

 
1,685

 
11

 
3,601

 
3,260

 
10

Marketing
744

 
628

 
18

 
1,403

 
1,211

 
16

Other (b)(c)
4,299

 
2,419

 
78

 
7,242

 
6,860

 
6

Amortization of intangibles
212

 
235

 
(10
)
 
429

 
478

 
(10
)
Total noncompensation expense
9,273

 
7,015

 
32

 
17,005

 
15,863

 
7

Total noninterest expense
$
16,842

 
$
14,631

 
15
 %
 
$
32,837

 
$
30,755

 
7
  %
(a)
The three and six months ended June 30, 2010, included a payroll tax expense related to the United Kingdom (“U.K.”) Bank Payroll Tax on certain compensation awarded from December 9, 2009, to April 5, 2010, to relevant banking employees.
(b)
Included litigation expense of $1.9 billion and $3.0 billion for the three and six months ended June 30, 2011, respectively, compared with $792 million and $3.7 billion for the three and six months ended June 30, 2010, respectively.
(c)
Included foreclosed property expense of $174 million and $384 million for the three and six months ended June 30, 2011, respectively, compared with $244 million and $547 million for the three and six months ended June 30, 2010, respectively.

Total noninterest expense for the second quarter of 2011 was $16.8 billion, an increase of $2.2 billion, or 15%, compared with the second quarter of 2010. Total noninterest expense for the first six months of 2011 was $32.8 billion, up by $2.1 billion, or 7%, compared with the first six months of 2010. The increases in both periods of comparison were due to higher noncompensation expense, which included elevated levels of litigation expense related to mortgage-related matters and an increase in other expense for foreclosure-related matters. Higher compensation expense also contributed to the increase in noninterest expense for the first half of 2011.
Compensation expense decreased slightly from the second quarter of 2010, as the prior-year results included the impact of the U.K. Bank Payroll Tax in IB. Compensation expense increased from the first six months of 2010, due to higher salary and benefits expense in IB, as well as additions to the sales force and employees engaged in default-related matters associated with the serviced portfolio in RFS, and front office staff in AM; these increases were partially offset by the aforementioned payroll tax in IB in 2010.
The increase in noncompensation expense in the second quarter of 2011 was due to higher litigation expense, which included an addition of $1.3 billion to litigation reserves in Corporate predominantly for mortgage-related matters; and a $1.0 billion expense for estimated litigation and other costs of foreclosure-related matters in RFS. Noncompensation expense for the first six months of 2011 was also affected by these items, together with an additional $650 million expense for estimated litigation and other costs of foreclosure-related matters in RFS in the first quarter of 2011. Litigation expense in the first half of 2011 decreased from the prior year, as the aforementioned charges for mortgage-related matters were lower than those incurred in 2010. For a further discussion of litigation expense, see the Litigation reserve discussion in Note 23 on pages 172–179 of this Form 10-Q.
In addition to the items mentioned above, the following items in noncompensation expense were higher in the second quarter and first six months of 2011: professional services expense, due to Consent Orders and foreclosure-related matters in RFS and continued investments in new product platforms in the businesses; marketing expense in CS; and all other expense, reflecting higher FDIC assessments in 2011 and additional operating expense related to business activities in IB. For a discussion of amortization of intangibles, refer to the Balance Sheet Analysis on pages 49–51, and Note 16 on pages 159–163 of this Form 10-Q.
Income tax expense
Three months ended June 30,
 
Six months ended June 30,
(in millions, except rate)
2011
 
2010
 
2011
 
2010
Income before income tax expense
$
8,127

 
$
7,107

 
$
16,184

 
$
11,644

Income tax expense
2,696

 
2,312

 
5,198

 
3,523

Effective tax rate
33.2
%
 
32.5
%
 
32.1
%
 
30.3
%

The increase in the effective tax rate during the three and six months ended June 30, 2011, compared with the prior-year periods was primarily the result of higher reported pretax income and changes in the mix of income subject to U.S. federal, state and local taxes, as well as lower tax benefits recognized upon the resolution of tax audits. These factors were partially offset by deferred tax benefits associated with state and local income taxes. For additional information on income taxes, see Critical Accounting Estimates Used by the Firm on pages 92–95 of this Form 10-Q.


13

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 98–101 of this Form 10-Q. 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 tax-exempt items is recorded within income tax expense. These adjustments have no impact on net income as reported by the Firm as a whole or by the lines of business.
Tangible common equity (“TCE”), a non-GAAP financial measure, represents common stockholders’ equity (i.e., total stockholders’ equity less preferred stock) less goodwill and identifiable intangible assets (other than MSRs), net of related deferred tax liabilities. ROTCE, a non-GAAP financial ratio, measures the Firm’s earnings as a percentage of TCE. In management’s view, these measures are meaningful to the Firm, as well as analysts and investors, in assessing the Firm's use of equity and in facilitating comparisons with competitors.
Management also uses certain non-GAAP financial measures at the business-segment level, because it believes these other non-GAAP financial measures provide information to investors about the underlying operational performance and trends of the particular business segment and, therefore, facilitate a comparison of the business segment with the performance of its competitors. Non-GAAP financial measures used by the Firm may not be comparable to similarly named non-GAAP financial measures used by other companies.

14



The following summary table provides a reconciliation from the Firm’s reported U.S. GAAP results to managed basis.
 
Three months ended June 30, 2011
(in millions, except per share and ratios)
Reported
Results
 
Fully tax-equivalent adjustments
 
Managed
basis
Revenue
 
 
 
 
 
Investment banking fees
$
1,933

 
$
—

 
$
1,933

Principal transactions
3,140

 
—

 
3,140

Lending- and deposit-related fees
1,649

 
—

 
1,649

Asset management, administration and commissions
3,703

 
—

 
3,703

Securities gains
837

 
—

 
837

Mortgage fees and related income
1,103

 
—

 
1,103

Credit card income
1,696

 
—

 
1,696

Other income
882

 
510

 
1,392

Noninterest revenue
14,943

 
510

 
15,453

Net interest income
11,836

 
121

 
11,957

Total net revenue
26,779

 
631

 
27,410

Noninterest expense
16,842

 
—

 
16,842

Pre-provision profit
9,937

 
631

 
10,568

Provision for credit losses
1,810

 
—

 
1,810

Income before income tax expense
8,127

 
631

 
8,758

Income tax expense
2,696

 
631

 
3,327

Net income
$
5,431

 
$
—

 
$
5,431

Diluted earnings per share
$
1.27

 
$
—

 
$
1.27

Return on assets
0.99
%
 
NM

 
0.99
%
Overhead ratio
63

 
NM

 
61

 
Three months ended June 30, 2010
(in millions, except per share and ratios)
Reported
Results
 
Fully tax-equivalent adjustments
 
Managed
basis
Revenue
 
 
 
 
 
Investment banking fees
$
1,421

 
$
—

 
$
1,421

Principal transactions
2,090

 
—

 
2,090

Lending- and deposit-related fees
1,586

 
—

 
1,586

Asset management, administration and commissions
3,349

 
—

 
3,349

Securities gains
1,000

 
—

 
1,000

Mortgage fees and related income
888

 
—

 
888

Credit card income
1,495

 
—

 
1,495

Other income
585

 
416

 
1,001

Noninterest revenue
12,414

 
416

 
12,830

Net interest income
12,687

 
96

 
12,783

Total net revenue
25,101

 
512

 
25,613

Noninterest expense
14,631

 
—

 
14,631

Pre-provision profit
10,470

 
512

 
10,982

Provision for credit losses
3,363

 
—

 
3,363

Income before income tax expense
7,107

 
512

 
7,619

Income tax expense
2,312

 
512

 
2,824

Net income
$
4,795

 
$
—

 
$
4,795

Diluted earnings per share
$
1.09

 
$
—

 
$
1.09

Return on assets
0.94
%
 
NM

 
0.94
%
Overhead ratio
58

 
NM

 
57

















15



 
Six months ended June 30, 2011
(in millions, except per share and ratios)
Reported
Results
 
Fully tax-equivalent adjustments
 
Managed
basis
Revenue
 
 
 
 
 
Investment banking fees
$
3,726

 
$
—

 
$
3,726

Principal transactions
7,885

 
—

 
7,885

Lending- and deposit-related fees
3,195

 
—

 
3,195

Asset management, administration and commissions
7,309

 
—

 
7,309

Securities gains
939

 
—

 
939

Mortgage fees and related income
616

 
—

 
616

Credit card income
3,133

 
—

 
3,133

Other income
1,456

 
961

 
2,417

Noninterest revenue
28,259

 
961

 
29,220

Net interest income
23,741

 
240

 
23,981

Total net revenue
52,000

 
1,201

 
53,201

Noninterest expense
32,837

 
—

 
32,837

Pre-provision profit
19,163

 
1,201

 
20,364

Provision for credit losses
2,979

 
—

 
2,979

Income before income tax expense
16,184

 
1,201

 
17,385

Income tax expense
5,198

 
1,201

 
6,399

Net income
$
10,986

 
$
—

 
$
10,986

Diluted earnings per share
$
2.55

 
$
—

 
$
2.55

Return on assets
1.03
%
 
NM

 
1.03
%
Overhead ratio
63

 
NM

 
62

 
Six months ended June 30, 2010
(in millions, except per share and ratios)
Reported
Results
 
Fully tax-equivalent adjustments
 
Managed
basis
Revenue
 
 
 
 
 
Investment banking fees
$
2,882

 
$
—

 
$
2,882

Principal transactions
6,638

 
—

 
6,638

Lending- and deposit-related fees
3,232

 
—

 
3,232

Asset management, administration and commissions
6,614

 
—

 
6,614

Securities gains
1,610

 
—

 
1,610

Mortgage fees and related income
1,546

 
—

 
1,546

Credit card income
2,856

 
—

 
2,856

Other income
997

 
827

 
1,824

Noninterest revenue
26,375

 
827

 
27,202

Net interest income
26,397

 
186

 
26,583

Total net revenue
52,772

 
1,013

 
53,785

Noninterest expense
30,755

 
—

 
30,755

Pre-provision profit
22,017

 
1,013

 
23,030

Provision for credit losses
10,373

 
—

 
10,373

Income before income tax expense
11,644

 
1,013

 
12,657

Income tax expense
3,523

 
1,013

 
4,536

Net income
$
8,121

 
$
—

 
$
8,121

Diluted earnings per share
$
1.83

 
$
—

 
$
1.83

Return on assets
0.80
%
 
NM

 
0.80
%
Overhead ratio
58

 
NM

 
57

Average tangible common equity
 
 
 
 
 
 
 
Three months ended
 
Six months ended
(in millions)
June 30,
2011
 
June 30,
2010
 
June 30,
2011
 
June 30,
2010
Common stockholders’ equity
$
174,077

 
$
159,069

 
$
171,759

 
$
157,590

Less: Goodwill
48,834

 
48,348

 
48,840

 
48,445

Less: Certain identifiable intangible assets
3,738

 
4,265

 
3,833

 
4,285

Add: Deferred tax liabilities(a)
2,618

 
2,564

 
2,607

 
2,553

Tangible common equity
$
124,123

 
$
109,020

 
$
121,693

 
$
107,413

(a)
Represents deferred tax liabilities related to tax-deductible goodwill and to identifiable intangibles created in nontaxable transactions, which are netted against goodwill and other intangibles when calculating TCE.
Other financial measures
The Firm also discloses the allowance for loan losses to total retained loans, excluding home lending PCI loans. For a further discussion of this credit metric, see Allowance for credit losses on pages 86–88 of this Form 10-Q.

16

BUSINESS SEGMENT RESULTS
The Firm is managed on a line of business basis. The business segment financial results presented reflect the current organization of JPMorgan Chase. There are six major reportable business segments: the Investment Bank, Retail Financial Services, Card Services, 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.
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. For a further discussion of those methodologies, see Business Segment Results – Description of business segment reporting methodology on pages 67–68 of JPMorgan Chase’s 2010 Annual Report. The Firm continues to assess the assumptions, methodologies and reporting classifications used for segment reporting, and further refinements may be implemented in future periods.
Business segment capital allocation changes
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, 2011, capital allocated to CS was reduced and that of TSS was increased. For further information about these capital changes, see Line of business equity on pages 60–61 of this Form 10-Q.
Segment Results – Managed Basis(a) 
The following table summarizes the business segment results for the periods indicated.
Three months ended June 30,
Total net revenue
 
Noninterest expense
 
Pre-provision profit
(in millions, except ratios)
2011

2010

Change

 
2011

2010

Change

 
2011

2010

Change

Investment Bank(b)
$
7,314

$
6,332

16
  %
 
$
4,332

$
4,522

(4
)%
 
$
2,982

$
1,810

65
  %
Retail Financial Services
7,976

7,809

2

 
5,637

4,281

32

 
2,339

3,528

(34
)
Card Services
3,927

4,217

(7
)
 
1,622

1,436

13

 
2,305

2,781

(17
)
Commercial Banking
1,627

1,486

9

 
563

542

4

 
1,064

944

13

Treasury & Securities Services
1,932

1,881

3

 
1,453

1,399

4

 
479

482

(1
)
Asset Management
2,537

2,068

23

 
1,794

1,405

28

 
743

663

12

Corporate/Private Equity(b)
2,097

1,820

15

 
1,441

1,046

38

 
656

774

(15
)
Total
$
27,410

$
25,613

7
 %
 
$
16,842

$
14,631

15
 %
 
$
10,568

$
10,982

(4
)%

Three months ended June 30,
Provision for credit losses
 
Net income
 
Return on equity
(in millions, except ratios)
2011

2010

Change

 
2011

2010

Change

 
2011

2010

Investment Bank(b)
$
(183
)
$
(325
)
44
  %
 
$
2,057

$
1,381

49
  %
 
21
%
14
%
Retail Financial Services
1,128

1,715

(34
)
 
582

1,042

(44
)
 
8

15

Card Services
810

2,221

(64
)
 
911

343

166

 
28

9

Commercial Banking
54

(235
)
NM

 
607

693

(12
)
 
30

35

Treasury & Securities Services
(2
)
(16
)
88

 
333

292

14

 
19

18

Asset Management
12

5

140

 
439

391

12

 
27

24

Corporate/Private Equity(b)
(9
)
(2
)
(350
)
 
502

653

(23
)
 
                NM

NM

Total
$
1,810

$
3,363

(46
)%
 
$
5,431

$
4,795

13
 %
 
12
%
12
%








17



Six months ended June 30,
Total net revenue
 
Noninterest expense
 
Pre-provision profit
(in millions, except ratios)
2011

2010

Change

 
2011

2010

Change

 
2011

2010

Change

Investment Bank(b)
$
15,547

$
14,651

6
  %
 
$
9,348

$
9,360

—
  %
 
$
6,199

$
5,291

17
  %
Retail Financial Services
14,251

15,585

(9
)
 
10,899

8,523

28

 
3,352

7,062

(53
)
Card Services
7,909

8,664

(9
)
 
3,177

2,838

12

 
4,732

5,826

(19
)
Commercial Banking
3,143

2,902

8

 
1,126

1,081

4

 
2,017

1,821

11

Treasury & Securities Services
3,772

3,637

4

 
2,830

2,724

4

 
942

913

3

Asset Management
4,943

4,199

18

 
3,454

2,847

21

 
1,489

1,352

10

Corporate/Private Equity(b)
3,636

4,147

(12
)
 
2,003

3,382

(41
)
 
1,633

765

113

Total
$
53,201

$
53,785

(1
)%
 
$
32,837

$
30,755

7
 %
 
$
20,364

$
23,030

(12
)%

Six months ended June 30,
Provision for credit losses
 
Net income
 
Return on equity
(in millions, except ratios)
2011

2010

Change

 
2011

2010

Change

 
2011

2010

Investment Bank(b)
$
(612
)
$
(787
)
22
  %
 
$
4,427

$
3,852

15
  %
 
22
%
19
%
Retail Financial Services
2,454

5,448

(55
)
 
374

911

(59
)
 
3

7

Card Services
1,036

5,733

(82
)
 
2,254

40

NM

 
35

1

Commercial Banking
101

(21
)
NM

 
1,153

1,083

6

 
29

27

Treasury & Securities Services
2

(55
)
NM

 
649

571

14

 
19

18

Asset Management
17

40

(58
)
 
905

783

16

 
28

24

Corporate/Private Equity(b)
(19
)
15

NM

 
1,224

881

39

 
NM

NM

Total
$
2,979

$
10,373

(71
)%
 
$
10,986

$
8,121

35
 %
 
13
%
10
%
(a)
Represents reported results on a tax-equivalent basis.
(b)
Corporate/Private Equity includes an adjustment to offset IB’s inclusion of a credit allocation income/(expense) to TSS in total net revenue; TSS reports the credit allocation as a separate line on its income statement (not within total net revenue).


18

INVESTMENT BANK
For a discussion of the business profile of IB, see pages 69–71 of JPMorgan Chase’s 2010 Annual Report and Introduction on page 4 of this Form 10-Q.
Selected income statement data
Three months ended June 30,
 
Six months ended June 30,
(in millions, except ratios)
2011
 
2010
 
Change
 
2011
 
2010
 
Change
Revenue
 
 
 
 
 
 
 
 
 
 
 
Investment banking fees
$
1,922

 
$
1,405

 
37
 %
 
$
3,701

 
$
2,851

 
30
 %
Principal transactions
2,309

 
2,105

 
10

 
5,707

 
6,036

 
(5
)
Lending- and deposit-related fees
218

 
203

 
7

 
432

 
405

 
7

Asset management, administration and commissions
548

 
633

 
(13
)
 
1,167

 
1,196

 
(2
)
All other income(a)
236

 
86

 
174

 
402

 
135

 
198

Noninterest revenue
5,233

 
4,432

 
18

 
11,409