Edgar Filing: JPMORGAN CHASE & CO

CORP Q3 2011

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 September 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 October 31, 2011: 3,799,765,675

FORM 10-Q

TABLE OF CONTENTS



		Page
Part I - Financial information
Item 1	Consolidated Financial Statements – JPMorgan Chase & Co.:
	Consolidated Statements of Income (unaudited) for the three and nine months ended September 30, 2011 and 2010	100
	Consolidated Balance Sheets (unaudited) at September 30, 2011, and December 31, 2010	101
	Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income (unaudited) for the nine months ended September 30, 2011 and 2010	102
	Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2011 and 2010	103
	Notes to Consolidated Financial Statements (unaudited)	104
	Report of Independent Registered Public Accounting Firm	193
	Consolidated Average Balance Sheets, Interest and Rates (unaudited) for the three and nine months ended September 30, 2011 and 2010	194
	Glossary of Terms and Line of Business Metrics	196
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations:
	Consolidated Financial Highlights	3
	Introduction	4
	Executive Overview	6
	Consolidated Results of Operations	11
	Explanation and Reconciliation of the Firms Use of Non-GAAP Financial Measures	14
	Business Segment Results	16
	International Operations	48
	Balance Sheet Analysis	49
	Off-Balance Sheet Arrangements	52
	Capital Management	57
	Risk Management	61
	Supervision and Regulation	94
	Critical Accounting Estimates Used by the Firm	95
	Accounting and Reporting Developments	98
	Forward-Looking Statements	99
Item 3	Quantitative and Qualitative Disclosures About Market Risk	201
Item 4	Controls and Procedures	202
Part II - Other information
Item 1	Legal Proceedings	202
Item 1A	Risk Factors	202
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	204
Item 3	Defaults Upon Senior Securities	206
Item 5	Other Information	206
Item 6	Exhibits	206

JPMORGAN CHASE & CO.

CONSOLIDATED FINANCIAL HIGHLIGHTS



(unaudited) (in millions, except per share, headcount and ratio data)																Nine months ended September 30,
As of or for the period ended,	3Q11			2Q11			1Q11			4Q10			3Q10			2011			2010
Selected income statement data
Total net revenue	$	23,763		$	26,779		$	25,221		$	26,098		$	23,824		$	75,763		$	76,596
Total noninterest expense	15,534			16,842			15,995			16,043			14,398			48,371			45,153
Pre-provision profit^(a)	8,229			9,937			9,226			10,055			9,426			27,392			31,443
Provision for credit losses	2,411			1,810			1,169			3,043			3,223			5,390			13,596
Income before income tax expense	5,818			8,127			8,057			7,012			6,203			22,002			17,847
Income tax expense	1,556			2,696			2,502			2,181			1,785			6,754			5,308
Net income	$	4,262		$	5,431		$	5,555		$	4,831		$	4,418		$	15,248		$	12,539
Per common share data
Net income per share: Basic	$	1.02		$	1.28		$	1.29		$	1.13		$	1.02		$	3.60		$	2.86
Diluted	1.02			1.27			1.28			1.12			1.01			3.57			2.84
Cash dividends declared per share^(b)	0.25			0.25			0.25			0.05			0.05			0.75			0.15
Book value per share	45.93			44.77			43.34			43.04			42.29			45.93			42.29
Common shares outstanding
Average: Basic	3,859.6			3,958.4			3,981.6			3,917.0			3,954.3			3,933.2			3,969.4
Diluted	3,872.2			3,983.2			4,014.1			3,935.2			3,971.9			3,956.5			3,990.7
Common shares at period-end	3,798.9			3,910.2			3,986.6			3,910.3			3,925.8			3,798.9			3,925.8
Share price^(c)
High	$	42.55		$	47.80		$	48.36		$	43.12		$	41.70		$	48.36		$	48.20
Low	28.53			39.24			42.65			36.21			35.16			28.53			35.16
Close	30.12			40.94			46.10			42.42			38.06			30.12			38.06
Market capitalization	114,422			160,083			183,783			165,875			149,418			114,422			149,418
Selected ratios
Return on common equity (“ROE”)	9		%	12		%	13		%	11		%	10		%	11		%	10		%
Return on tangible common equity (“ROTCE”)	13			17			18			16			15			16			15
Return on assets (“ROA”)	0.76			0.99			1.07			0.92			0.86			0.94			0.82
Overhead ratio	65			63			63			61			60			64			59
Deposits-to-loans ratio	157			152			145			134			131			157			131
Tier 1 capital ratio	12.1			12.4			12.3			12.1			11.9
Total capital ratio	15.3			15.7			15.6			15.5			15.4
Tier 1 leverage ratio	6.8			7.0			7.2			7.0			7.1
Tier 1 common capital ratio^(d)	9.9			10.1			10.0			9.8			9.5
Selected balance sheet data (period-end)^(e)
Trading assets	$	461,531		$	458,722		$	501,148		$	489,892		$	475,515		$	461,531		$	475,515
Securities	339,349			324,741			334,800			316,336			340,168			339,349			340,168
Loans	696,853			689,736			685,996			692,927			690,531			696,853			690,531
Total assets	2,289,240			2,246,764			2,198,161			2,117,605			2,141,595			2,289,240			2,141,595
Deposits	1,092,708			1,048,685			995,829			930,369			903,138			1,092,708			903,138
Long-term debt^(e)	273,688			279,228			269,616			270,653			271,495			273,688			271,495
Common stockholders’ equity	174,487			175,079			172,798			168,306			166,030			174,487			166,030
Total stockholders’ equity	182,287			182,879			180,598			176,106			173,830			182,287			173,830
Headcount	256,663			250,095			242,929			239,831			236,810			256,663			236,810
Credit quality metrics
Allowance for credit losses	$	29,036		$	29,146		$	30,438		$	32,983		$	35,034		$	29,036		$	35,034
Allowance for loan losses to total retained loans	4.09		%	4.16		%	4.40		%	4.71		%	4.97		%	4.09		%	4.97		%
Allowance for loan losses to retained loans excluding purchased credit-impaired loans^(f)	3.74			3.83			4.10			4.46			5.12			3.74			5.12
Nonperforming assets	$	12,194		$	13,240		$	14,986		$	16,557		$	17,656		$	12,194		$	17,656
Net charge-offs^(g)	2,507			3,103			3,720			5,104			4,945			9,330			18,569
Net charge-off rate^(g)	1.44		%	1.83		%	2.22		%	2.95		%	2.84		%	1.83		%	3.53		%
Wholesale net charge-off/(recovery) rate	(0.24		)	0.14			0.30			0.49			0.49			0.05			0.92
Consumer net charge-off rate^(g)	2.40			2.74			3.18			4.12			3.90			2.78			4.66


(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 capital 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 of Tier 1 common capital ratio, 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 87–89 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.

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 196–199 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 99 and Part II, Item 1A: Risk Factors, on pages 202–204 of this Form 10-Q, Part II, Item 1A, Risk Factors on pages 181 and 192-193 of JPMorgan Chase's Quarterly Reports on Form 10-Q for the quarters ended March 31, 2011, and June 30, 2011, respectively, 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 $2.3 trillion in assets, $182.3 billion in stockholders’ equity and operations in more than 60 countries as of September 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 & Auto 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. Customers can use nearly 5,400 bank branches (third-largest nationally) and more than 16,700 ATMs (second-largest nationally), as well as online and mobile banking around the clock. Nearly 32,100 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.

Card Services & Auto

Card Services & Auto (“Card”) is one of the nation’s largest credit card issuers, with over $127 billion in credit card loans and over 64 million open credit card accounts (excluding the commercial card portfolio). In the nine months ended September 30, 2011, customers used Chase credit cards (excluding the commercial card portfolio) to meet over $250 billion of their spending needs. Through its merchant acquiring business, Chase Paymentech Solutions, Card is a global leader in payment processing and merchant acquiring. Consumers also can obtain loans through more than 16,900 auto dealerships and 1,900 schools and universities nationwide.

Commercial Banking

Commercial Banking (“CB”) delivers extensive industry knowledge, local expertise and dedicated service to more than 24,000 clients nationally, including corporations, municipalities, financial institutions and not-for-profit entities with annual revenue generally ranging from $10 million to $2 billion, and nearly 35,000 real estate investors/owners. CB partners with the Firm’s other businesses to provide comprehensive solutions, including lending, treasury services, investment banking and asset management, to meet its clients’ domestic and international financial needs.

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.

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. economy strengthened in the third quarter, led by a pickup in consumer and business spending. Overall labor market indicators continued to be weak, and the unemployment rate remained elevated. The housing sector remained depressed; however, business investment in equipment and software continued to increase. Also, inflation moderated since earlier in the year as energy prices declined from their peaks.

Concerns about sovereign debt in Greece and other euro-zone countries, as well as the sovereign debt exposures of the European banking system, were a source of stress in the global financial markets during the quarter. The impact of these strains on U.S. economic activity is difficult to judge, but the resulting volatility in the debt and capital markets has likely affected household and business confidence.

The Board of Governors of the Federal Reserve System (the "Federal Reserve") took several actions during the third quarter and in earlier periods to support a stronger economic recovery and to help support conditions in mortgage markets. These actions included extending the average maturity of its holdings of securities, reinvesting principal payments from its holdings of agency debt and U.S. government agency mortgage-backed securities into other agency mortgage-backed securities and maintaining its existing policy of rolling over maturing U.S. Treasury securities at auction. The Federal Reserve maintained the target range for the federal funds rate at zero to one-quarter percent and provided specific guidance regarding its prediction about policy rates, saying that economic conditions were likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

Financial performance of JPMorgan Chase



	Three months ended September 30,								Nine months ended September 30,
(in millions, except per share data and ratios)	2011			2010			Change		2011			2010			Change
Selected income statement data
Total net revenue	$	23,763		$	23,824		—	%	$	75,763		$	76,596		(1	)%
Total noninterest expense	15,534			14,398			8		48,371			45,153			7
Pre-provision profit	8,229			9,426			(13	)	27,392			31,443			(13	)
Provision for credit losses	2,411			3,223			(25	)	5,390			13,596			(60	)
Net income	4,262			4,418			(4	)	15,248			12,539			22
Diluted earnings per share	1.02			1.01			1		3.57			2.84			26
Return on common equity	9		%	10		%			11		%	10		%
Capital ratios
Tier 1 capital	12.1			11.9
Tier 1 common	9.9			9.5

Business overview

JPMorgan Chase reported third-quarter 2011 net income of $4.3 billion, or $1.02 per share, on net revenue of $23.8 billion. Net income was down 4% compared with net income of $4.4 billion, or $1.01 per share, in the third quarter of 2010. ROE for the third quarter of 2011 was 9%, compared with 10% in the prior year. Current-quarter results included several significant items, including a $542 million pretax ($0.09 per share after-tax) loss in Private Equity; $1.0 billion pretax ($0.15 per share after-tax) of additional litigation expense, predominantly for mortgage-related matters, in Corporate; and a $1.9 billion pretax ($0.29 per share after-tax) benefit from debit valuation adjustment (“DVA”) gains in the Investment Bank, resulting from widening of the Firm’s credit spreads. In the Investment Bank, Credit Portfolio also recognized a $691 million pretax ($0.11 per share after-tax) net loss, including hedges, from credit valuation adjustments (“CVA”) on derivative assets, due to the widening of credit spreads for the Firm’s counterparties.

The decrease in net income for the third quarter of 2011 was driven by higher noninterest expense, largely offset by a lower provision for credit losses. Net revenue was flat compared with the prior-year quarter, as lower principal transactions revenue, lower net interest income, and lower investment banking fees were largely offset by higher mortgage fees and related income, and higher securities gains. The increase in mortgage fees and related income was driven by lower repurchase losses compared with the prior year which included a $1.5 billion increase in the mortgage repurchase reserve. The decline in net interest income was driven predominantly by runoff of higher-yielding loans and spread compression. The decrease in the provision for credit losses reflected improved delinquency trends across most consumer portfolios compared with the prior year. The increase in noninterest expense was driven by higher noncompensation expense.

The Firm’s third-quarter results reflected a challenging investment banking and capital markets environment which contributed to lower revenue in the Investment Bank (excluding the DVA gain). However, the Investment Bank maintained its #1 ranking in Global Investment Banking Fees for the first nine months of 2011. Retail Financial Services demonstrated good underlying performance, with solid revenue and increased deposits in Consumer & Business Banking and strong retail mortgage origination volumes in the Mortgage Banking business. In the Card business, credit card sales volume, excluding Commercial Card, was up 10% compared with the prior year. Commercial Banking reported continued loan growth and record liability balances. In Treasury & Securities Services, trade finance loans increased 69% and liability balances increased 41%. Corporate/Private Equity results included private equity losses, compared with gains in the third quarter of 2010, reflecting economic conditions. Corporate/Private Equity results were also negatively affected by the Firm’s decision to take certain positions in its securities portfolio in anticipation of an eventual increase in interest rates, and by additional litigation expense.

Wholesale credit trends in the third quarter remained stable. Delinquency trends in Retail Financial Services improved modestly compared with the prior year and were flat compared with the prior quarter; while losses in the mortgage and home equity portfolios remained high and are expected to stay elevated. Net charge-offs improved in the Chase credit card portfolio, and lower estimated losses resulted in a reduction in the allowance for loan losses for the portfolio in the third quarter of 2011.

JPMorgan Chase ended the third quarter with a Basel I Tier 1 Common ratio of 9.9%. This strong capital position enabled the Firm to repurchase $4.4 billion of common stock and warrants during the third quarter. The Firm estimated that its Basel III Tier 1 Common ratio was approximately 7.7% at September 30, 2011. Total firmwide credit reserves of $29.0 billion were flat compared with the level at June 30, 2011, resulting in a firmwide loan loss coverage ratio of 3.74%, excluding purchased credit-impaired loans. Total deposits increased to $1.1 trillion, up 21% from the prior year. Total stockholders’ equity at September 30, 2011, was $182.3 billion.

Net income for the first nine months of 2011 was $15.2 billion, or $3.57 per share, compared with $12.5 billion, or $2.84 per share, in the first nine months 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 compared with the prior year. The modest decline in net revenue for the first nine months of 2011 was driven by lower net interest income, predominantly offset by higher asset management, administration and commissions revenue, higher credit card income and higher investment banking fees. The increase in noninterest expense compared with the first nine months of 2010 was driven by higher compensation expense.

During the first nine months of 2011, JPMorgan Chase provided credit to and raised capital of over $1.3 trillion for its clients, up 22% compared with the same period last year; this included $12.6 billion lent to small businesses, up 71%. The Firm originated more than 560,000 mortgages; provided credit cards to approximately 6.6 million people; and lent or increased credit to more than 1,100 not-for-profit and government entities, including states, municipalities, hospitals and universities. In addition, the Firm has been very successful in hiring more than 2,200 U.S. military veterans so far this year and has increased its net employee headcount in the U.S. by more than 13,200.

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 14–15 of this Form 10-Q.

Investment Bank net income increased from the prior year as higher net revenue was partially offset by an increased provision for credit losses and higher noninterest expense. Net revenue included a $1.9 billion gain from DVA on certain structured and derivative liabilities, resulting from the widening of the Firm's credit spreads. This was partially offset by a $691 million net loss, including hedges, from CVA on derivative assets within Credit Portfolio, due to the widening of credit spreads for the Firm’s counterparties. Fixed Income and Equity Markets revenue increased compared with the third quarter of 2010 due to the DVA gain. In addition, results in Fixed Income Markets reflected solid revenue from rates and currency-related products, partially offset by lower results in credit-related products. Equity Markets revenue reflected solid client revenue, partially offset by the impact of challenging market conditions. The provision for credit losses was an expense in the third quarter of 2011, compared with a benefit in the third quarter of 2010. The third quarter of 2011 included an increase in the allowance that reflected a more cautious credit outlook. The increase in noninterest expense was driven by higher noncompensation expense.

Retail Financial Services net income increased compared with the prior year driven by higher net revenue and a lower provision for credit losses, partially offset by higher noninterest expense. The increase in net revenue was driven by higher mortgage fees and related income, and higher debit card income and deposit-related fees, partially offset by lower net interest income resulting from lower loan balances due to the runoff of the mortgage loan portfolio. The provision for credit losses decreased, reflecting a reduction in net charge-offs, driven by a modest improvement in delinquency trends. The increase in noninterest expense from the prior year was driven by investments in branch and mortgage production sales and support staff, as well as elevated default-related costs.

Card Services & Auto net income decreased compared with the third quarter of 2010 driven by higher noninterest expense and lower net revenue, predominantly offset by a lower provision for credit losses. The decrease in net revenue was driven by a decline in net interest income, reflecting lower average loan balances, narrower loan spreads and a decreased level of fees. These decreases were predominantly offset by lower revenue reversals associated with lower net charge-offs, and higher net interchange income. Credit card sales volume, excluding the Washington Mutual and Commercial Card portfolios, was up 10% from the prior year. The lower provision for credit losses reflected lower net charge-offs and a reduction of $370 million to the allowance for loan losses due to lower estimated losses. The increase in noninterest expense was due to higher marketing expense and the inclusion of the Commercial Card business.

Commercial Banking net income increased, driven by a lower provision for credit losses and higher net revenue. The increase in net revenue was driven by growth in liability and loan balances, predominantly offset by spread compression on liability products and changes in the valuation of investments held at fair value. Average liability balances reached a record level in the third quarter of 2011, up 31% from the third quarter of 2010. End-of-period loan balances were up 9% from the prior year and have increased for five consecutive quarters. The decrease in the provision for credit losses compared with the prior year reflected lower net charge-offs, mainly related to commercial real estate. Noninterest expense increased from the third quarter of 2010, primarily reflecting higher headcount-related expense.

Treasury & Securities Services net income increased from the prior year, driven by higher net revenue and an increased benefit from the provision for credit losses, largely offset by higher noninterest expense. Worldwide Securities Services net revenue increased, driven by higher net interest income due to higher deposit balances. Assets under custody of $16.3 trillion were up 2% from the prior year. Treasury Services net revenue increased, driven by higher deposit balances, predominantly offset by the effect of the transfer of the Commercial Card business to Card in the first quarter of 2011. The increased benefit in the provision for credit losses reflected a reduction in the allowance for loan losses resulting primarily from repayments. Higher noninterest expense was mainly driven by continued expansion into new markets and higher other noncompensation expense, partially offset by the transfer of the Commercial Card business to Card.

Asset Management net income decreased from the prior year, reflecting higher noninterest expense, partially offset by higher net revenue. The growth in net revenue was due to higher deposit and loan balances, a gain on the sale of an investment, net inflows to products with higher margins, and the effect of higher market levels. This growth was partially offset by lower valuations of seed capital investments and narrower deposit spreads. Assets under supervision of $1.8 trillion increased 2% from the prior year due to deposit and custody inflows. Assets under management decreased slightly from the prior year due to net outflows from liquidity products and the effect of lower markets, offset by net inflows to long-term products. The increase in noninterest expense largely resulted from non-client-related litigation expense and an increase in compensation expense due to increased headcount.

Corporate/Private Equity reported a net loss for the third quarter of 2011, compared with net income in the third quarter of 2010. Both Private Equity and Corporate reported net losses. In Private Equity the net loss was driven by a significant decline in net revenue, driven primarily by net write-downs on privately-held investments and lower valuations of public securities held at fair value in the portfolio. In Corporate, net interest income was lower as a result of portfolio repositioning in anticipation of an eventual increase in market interest rates and a reduced benefit from financing the securities portfolio. Noninterest expense included $1.0 billion of additional litigation expense, predominantly for mortgage-related matters. Noninterest expense in the prior year included $1.3 billion of additional litigation expense, predominantly for mortgage-related matters.

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 99 and Risk Factors on pages 202–204 of this Form 10-Q.

JPMorgan Chase’s outlook for the fourth quarter of 2011 and full-year 2012 should be viewed against the backdrop of the global and U.S. economies, financial markets activity, the geopolitical environment, the competitive environment, client activity levels, and regulatory and legislative developments in the U.S. and other countries where the Firm does business. Each of these linked factors will affect the performance of the Firm and its lines of business.

In the Consumer & Business Banking business within RFS, the Firm estimates that fourth-quarter 2011 revenue will be reduced by approximately $300 million as a result of the effect of the Durbin Amendment. Furthermore, as the full impact of the elimination of certain debit card rewards programs is reflected in the run rate, the Durbin Amendment is expected to reduce revenue by approximately $1.0 billion on an annualized basis. Also, given the current low interest rate environment, spread compression will likely reduce net income for this business in 2012 on an annualized basis by approximately $400 million.

In the Mortgage Production and Servicing business within RFS, revenue will continue to be negatively affected by continued elevated levels of repurchases of mortgages previously sold. Management estimates that realized mortgage repurchase losses could be approximately $350 million, or slightly higher, for the fourth quarter of 2011. Also for Mortgage Production and Servicing, management expects the business to continue to incur elevated default management and foreclosure-related costs including

additional costs associated with the Firm’s mortgage servicing processes, particularly its loan modification and foreclosure procedures, and costs to comply with the Consent Orders entered into with the banking regulators. (See Enhancements to Mortgage Servicing on pages 85–86 and Note 16 on pages 168–172 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.

For the Mortgage Banking Portfolios within RFS, management believes that total quarterly net charge-offs could be approximately $1.2 billion, and it is possible that they could be modestly better. 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. However, over time, the reduction in net interest income is expected to be more than offset by an improvement in credit costs and lower expenses. In addition, as the portfolio continues to run off, management anticipates that approximately $1.0 billion of capital may become available for redeployment each year, subject to the capital requirements associated with the remaining portfolio.

In Card, given current high repayment rates, management expects end-of-period outstandings for the Chase credit card portfolio (excluding the Washington Mutual and Commercial Card portfolios) could be between $115 billion and $120 billion by the end of 2011. The net charge-off rate for the Chase credit card portfolio, excluding Washington Mutual and Commercial Card, could improve over the next quarter or so from the 4.34% reported in the third quarter.

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 Card could be adversely affected.

In IB, TSS, CB and AM, revenue will be affected by market levels, volumes and volatility, which will influence client flows and assets under management, supervision and custody. For AM, management expects revenue to decline from the third-quarter 2011 run-rate as a result of the decline in asset values. CB and TSS will continue to experience lower net interest margins as long as market interest rates remain low. In addition, the wholesale credit environment will influence levels of charge-offs, repayments and provision for credit losses for IB, CB, TSS and AM.

In Private Equity, within the Corporate/Private Equity segment, earnings will likely continue to be volatile and be influenced by capital markets activity, market levels, the performance of the broader economy and investment-specific issues. Corporate’s net interest income levels will generally trend with the size and duration of the investment securities portfolio. Corporate quarterly net income, excluding Private Equity, significant nonrecurring items and litigation expense, is anticipated to be approximately zero in the fourth quarter of 2011 due to spread compression and the Firm’s continued repositioning of the investment securities portfolio. In 2012, Corporate quarterly net income, excluding Private Equity, and excluding significant nonrecurring items and litigation expense, could be approximately $200 million, though these results will depend on the decisions that the Firm makes over the course of the year with respect to repositioning of the investment securities portfolio.

The Firm faces 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 U.S. government- sponsored entities (commonly referred to as 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. In the first nine months of 2011, the Firm repurchased $8.0 billion in common stock and warrants that had been approved by the Federal Reserve for 2011.

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 currently underway.

In September 2011, the Federal Deposit Insurance Corporation (“FDIC”) issued, and in October 2011, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) issued, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), a final rule that will require bank holding companies with assets of $50 billion or more and companies designated as systemically important by the Financial Stability Oversight Council (“FSOC”) to report periodically to the Federal Reserve, the FDIC and the FSOC on a resolution plan under the Bankruptcy Code in the event of material financial distress or failure (a “resolution plan”). In September 2011, the FDIC also issued an interim final rule that will require insured depository institutions with greater than $50 billion in assets to submit periodic contingency plans to the FDIC for resolution under the Federal Deposit Insurance Act in the event of failure. The timing of initial, annual and interim resolution plan submissions under both the rules is the same. The Firm’s initial resolution plan submissions are due on July 1, 2012, with annual updates thereafter, and the Firm is in the process of developing its resolution plans.

On October 1, 2011, the final rules implementing the Durbin Amendment provisions of the Dodd-Frank Act became effective. These rules limit the amount the Firm may charge for each debit card transaction it processes. The Firm currently anticipates that the effect of these rules will reduce fourth quarter 2011 revenue by approximately $300 million. Furthermore, as the full impact of the elimination of certain debit card rewards programs is reflected in the run rate, the Durbin Amendment is expected to reduce revenue by approximately $1.0 billion on an annualized basis.

Under the Dodd-Frank Act, the Firm will be subject to comprehensive regulation of its derivatives business, including strict capital and margin requirements, central clearing of standardized over-the-counter derivatives, and heightened supervision. 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. The proposed margin rules for uncleared swaps may apply extraterritorially to U.S. firms doing business with foreign clients outside of the United States. European and Asian firms doing business outside the United States would not be subject to requiring clients to post margin in similar transactions. If the rules become final as currently drafted, JPMorgan Chase could be at a significant competitive disadvantage, which could have a material adverse effect on its derivatives businesses.

The Firm will also be affected by the requirements of Section 619 of the Dodd-Frank Act, and specifically the provisions prohibiting proprietary trading and restricting the activities involving private equity and hedge funds (the “Volcker Rule”). On October 11, 2011, regulators proposed the remaining rules to implement the Volcker Rule. In order to begin planning for its implementation, the Firm is currently in the process of identifying the activities that it expects to be affected by the Volcker Rule. The Firm believes that proprietary trading activities are separable from client market making and other client driven businesses as well as risk management activities. Under the proposed rules, “proprietary trading” is defined as the trading of securities, derivatives, or futures (or options on any of the foregoing) that is predominantly for the purpose of short-term resale, benefiting from short-term movements in prices or for realizing arbitrage profits for the Firm’s own account. The proposed rule’s definition of proprietary trading does not include client market-making, or certain risk management activities. 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. However, interpretation of the proposed rules will occur over time and it is not clear under the proposed rules whether some portion of the Firm’s market-making and risk mitigation activities, as currently conducted, will be required to be curtailed or otherwise adversely affected.

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 7.7% at the end of the third 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.

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 nine months ended September 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 95–97 of this Form 10-Q and pages 149–154 of JPMorgan Chase’s 2010 Annual Report.



Revenue	Three months ended September 30,						Nine months ended September 30,
(in millions)	2011		2010		Change		2011		2010		Change
Investment banking fees	$	1,052	$	1,476	(29	)%	$	4,778	$	4,358	10	%
Principal transactions	1,370		2,341		(41	)	9,255		8,979		3
Lending- and deposit-related fees	1,643		1,563		5		4,838		4,795		1
Asset management, administration and commissions	3,448		3,188		8		10,757		9,802		10
Securities gains	607		102		495		1,546		1,712		(10	)
Mortgage fees and related income	1,380		707		95		1,996		2,253		(11	)
Credit card income	1,666		1,477		13		4,799		4,333		11
Other income	780		468		67		2,236		1,465		53
Noninterest revenue	11,946		11,322		6		40,205		37,697		7
Net interest income	11,817		12,502		(5	)	35,558		38,899		(9	)
Total net revenue	$	23,763	$	23,824	—	%	$	75,763	$	76,596	(1	)%

Total net revenue for the third quarter of 2011 was $23.8 billion, relatively flat compared with the third quarter of 2010. Lower principal transactions revenue and net interest income were largely offset by higher mortgage fees and related income and securities gains. For the first nine months of 2011, total net revenue was $75.8 billion, down slightly from the first nine months of 2010. Lower net interest income was largely offset by higher asset management, administration and commissions revenue, credit card income and other income.

Investment banking fees for the third quarter of 2011 decreased compared with the prior year, in particular, for debt underwriting and equity underwriting, due to lower industry-wide volumes. For the first nine months of 2011, investment banking fees were higher, driven predominantly by an increase in advisory fees, reflecting higher industry-wide completed M&A volumes relative to the comparable 2010 level. For additional information on investment banking fees, which are primarily recorded in IB, see IB segment results on pages 18–21 of this Form 10-Q.

Principal transactions revenue decreased compared with the third quarter of 2010, driven by private equity losses, partially offset by higher trading revenue. The private equity losses were primarily due to net write-downs on private investments and lower valuations of public securities held at fair value in the Corporate/Private Equity portfolio. Trading revenue included a $1.9 billion gain from DVA on certain structured and derivative liabilities, resulting from the widening of the Firm’s credit spreads, partially offset by a $691 million net loss, including hedges, from CVA on derivative assets within Credit Portfolio in IB, due to the widening of credit spreads for the Firm’s counterparties. Excluding the DVA and CVA results, trading revenue declined as a result of the challenging market conditions. For the first nine months of 2011, principal transactions revenue increased compared with the prior year, driven largely by DVA gains of $2.0 billion compared with $494 million in the prior year, as well as higher private equity gains relative to the comparable period in 2010. These were offset by a $828 million net loss, including hedges, from CVA on derivative assets within Credit Portfolio in IB. For additional information on principal transactions revenue, see IB and Corporate/Private Equity segment results on pages 18–21 and 46-47, respectively, and Note 6 on pages 126–127 of this Form 10-Q.

Lending- and deposit-related fees increased in the third quarter of 2011 compared with the prior year. The increase was primarily driven by the introduction in the first quarter of 2011 of a new checking account product offering in RFS, and the conversion of some existing checking accounts into the new product offering. For the nine months ended September 30, 2011, lending- and deposit-related fees increased slightly compared with the prior year, reflecting the net-positive impact of the items in RFS that drove the quarterly comparison, predominantly offset by the impact of regulatory and policy changes affecting nonsufficient fund/overdraft (“NSF/OD”) fees, and 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 22–31, CB on pages 36–38, TSS on pages 39–41 and IB segment results on pages 18–21 of this Form 10-Q.

Asset management, administration and commissions revenue increased from the third quarter and first nine months of 2010. The increases reflected higher asset management fees in AM and RFS, driven by net inflows to products with higher margins and the effect of higher market levels in both periods, and higher administration fees in TSS, reflecting net inflows of assets under custody. For additional information on these fees and commissions, see the segment discussions for AM on pages 42–45 and TSS on pages 39–41 of this Form 10-Q.

Securities gains increased from the third quarter of 2010 but decreased compared with the first nine months of 2010. Results in both comparable periods were primarily due to the repositioning of the portfolio in response to changes in market 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.

Mortgage fees and related income increased compared with the third quarter of 2010, driven by significantly lower repurchase losses, partially offset by lower mortgage servicing rights ("MSR") risk management income. Mortgage fees and related income decreased compared with the first nine months of 2010, reflecting a MSR risk management loss of $1.2 billion for the first nine months of 2011, compared with income of $850 million for the first nine months of 2010, predominantly offset by lower repurchase losses. The $1.2 billion loss was driven by a $1.1 billion decline in fair value of the MSR related to revised cost to service assumptions incorporated in the MSR valuation in the first quarter of 2011. For additional information on mortgage fees and related income, which is recorded primarily in RFS, see RFS’s Mortgage Production and Servicing discussion on pages 26–29, and Note 16 on pages 168–172 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 176–180 of this Form 10-Q.

Credit card income increased in both the third quarter and first nine months of 2011. The increase for both periods largely reflected higher net interchange income associated with higher customer transaction 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. These increases were partially offset by lower revenue from fee-based products. For additional information on credit card income, see the Card and RFS segment results on pages 32–35, and pages 22–31, respectively, of this Form 10-Q.

Other income increased compared with the third quarter and first nine months of 2010, driven by valuation adjustments on certain assets and incremental income from recent acquisitions in IB, and a gain on the sale of an investment, which was partly offset by lower valuations of seed capital investments in AM. Higher auto operating lease income in Card, resulting from growth in lease volume, also contributed to the increase in the first nine months of 2010.

Net interest income decreased in the third quarter and first nine months of 2011 compared with the prior year. The declines in both periods were driven by lower average loan balances and yields, primarily in Card and RFS, reflecting the expected runoff of credit card balances and residential real estate loans; lower yields on securities, reflecting portfolio repositioning in anticipation of an increasing interest rate environment; lower fees on credit card receivables, reflecting the impact of legislative changes; and higher average deposit balances and yields. The decrease was offset partially by lower revenue reversals associated with lower credit card charge-offs, and higher trading asset balances. The Firm’s average interest-earning assets were $1.8 trillion in the third quarter of 2011, and the net yield on those assets, on a fully taxable-equivalent (“FTE”) basis, was 2.66%, a decrease of 35 basis points from the third quarter of 2010. For the first nine months of 2011, average interest-earning assets were $1.7 trillion, and the net yield on those assets, on an FTE basis, was 2.75%, a decrease of 38 basis points from the first nine months of 2010. For further information on the impact of the legislative changes on the Consolidated Statements of Income, see Card discussion on credit card legislation on page 79 of JPMorgan Chase's 2010 Annual Report.



Provision for credit losses	Three months ended September 30,						Nine months ended September 30,
(in millions)	2011		2010		Change		2011			2010			Change
Wholesale	$	127	$	44	189	%	$	(376	)	$	(764	)	51	%
Consumer, excluding credit card	1,285		1,546		(17	)	3,731			6,994			(47	)
Credit card	999		1,633		(39	)	2,035			7,366			(72	)
Total consumer	2,284		3,179		(28	)	5,766			14,360			(60	)
Total provision for credit losses	$	2,411	$	3,223	(25	)%	$	5,390		$	13,596		(60	)%

The provision for credit losses decreased compared with the third quarter and first nine months of 2010. The credit card provision was down from both prior-year periods, driven primarily by improved delinquency and net credit loss trends. The consumer, excluding credit card, provision was also down from both prior-year periods, reflecting improved delinquency and charge-off trends in 2011 across most portfolios, and the absence of additions to the allowance for loan losses. The wholesale provision increased compared with the third quarter and first nine months in 2010, primarily reflecting loan growth and other portfolio activity. For a more detailed discussion of the loan portfolio and the allowance for credit losses, see the segment discussions for RFS on pages 22–31, Card on pages 32–35, IB on pages 18–21 and CB on pages 36–38, and the Allowance for credit losses section on pages 87–89 of this Form 10-Q.



Noninterest expense	Three months ended September 30,						Nine months ended September 30,
(in millions)	2011		2010		Change		2011		2010		Change
Compensation expense^(a)	$	6,908	$	6,661	4	%	$	22,740	$	21,553	6	%
Noncompensation expense:
Occupancy	935		884		6		2,848		2,636		8
Technology, communications and equipment	1,248		1,184		5		3,665		3,486		5
Professional and outside services	1,860		1,718		8		5,461		4,978		10
Marketing	926		651		42		2,329		1,862		25
Other^(b)(c)	3,445		3,082		12		10,687		9,942		7
Amortization of intangibles	212		218		(3	)	641		696		(8	)
Total noncompensation expense	8,626		7,737		11		25,631		23,600		9
Total noninterest expense	$	15,534	$	14,398	8	%	$	48,371	$	45,153	7	%


(a)	Year-to-date 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 $1.3 billion and $4.3 billion for the three and nine months ended September 30, 2011, respectively, compared with $1.5 billion and $5.2 billion for the three and nine months ended September 30, 2010, respectively.


(c)	Included foreclosed property expense of $151 million and $535 million for the three and nine months ended September 30, 2011, respectively, compared with $251 million and $798 million for the three and nine months ended September 30, 2010, respectively.

Total noninterest expense for the third quarter of 2011 was $15.5 billion, an increase of $1.1 billion, compared with the third quarter of 2010. Total noninterest expense for the first nine months of 2011 was $48.4 billion, up by $3.2 billion, compared with the first nine months of 2010. The increases in both periods compared with the prior year were largely due to higher noncompensation and compensation expense.

Compensation expense increased from the third quarter and first nine months of 2010. The increase in both comparable periods was driven by investments in branch and mortgage production sales and support staff in RFS and increased headcount in AM, partially offset by lower performance-based compensation expense in IB. In addition, the nine-month comparison reflects the absence of the U.K. Bank Payroll Tax that was recorded in IB in the second quarter of 2010.

The increase in noncompensation expense in the third quarter of 2011 was due to higher marketing expense in Card and higher FDIC assessments across businesses. Effective April 1, 2011, the FDIC changed its methodology for calculating the deposit insurance assessment rate for large banks. The new rule changed the assessment base from insured deposits to average consolidated total assets less average tangible equity, and changed the assessment rate calculation. A non-client-related litigation expense in AM, higher professional services expense due to Consent Orders and foreclosure-related matters in RFS, and the impact of continued investments in the businesses, also contributed to the increase.

Noncompensation expense for the first nine months of 2011 was also affected by the aforementioned items, together with a $1.7 billion expense for estimated litigation and other costs of foreclosure-related matters in RFS and higher operating expense related to growth in business activities in IB. These were offset partially by lower litigation expense in the first nine months of 2011 in IB and Corporate, as charges for mortgage-related matters were lower than in 2010. For a further discussion of litigation expense, see Note 23 on pages 181–189 of this Form 10-Q. For a discussion of amortization of intangibles, refer to the Balance Sheet Analysis on pages 49–51, and Note 16 on pages 168–172 of this Form 10-Q.



Income tax expense	Three months ended September 30,						Nine months ended September 30,
(in millions, except rate)	2011			2010			2011			2010
Income before income tax expense	$	5,818		$	6,203		$	22,002		$	17,847
Income tax expense	1,556			1,785			6,754			5,308
Effective tax rate	26.7		%	28.8		%	30.7		%	29.7		%

The decrease in the effective tax rate during the third quarter of 2011 was primarily the result of lower reported pretax income and changes in the proportion of income subject to U.S. federal and state and local taxes, as well as deferred tax benefits associated with state and local income taxes. In addition, the third quarter of 2011 included tax benefits associated with the disposition of certain investments; the prior year period included tax benefits associated with the resolution of tax audits. The increase in the effective tax rate during the nine months ended September 30, 2011, was primarily the result of higher reported pretax income and changes in the proportion of income subject to U.S. federal and state and local taxes. In addition, the prior year period included 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 95–97 of this Form 10-Q.

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 100–103 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. Tier 1 common under Basel III rules, a non-GAAP financial measure, is used by management to assess the Firm's capital position in conjunction with its capital ratios under Basel I requirements. For additional information on Tier 1 common under Basel III, see Basel III on pages 59–60 of this Form 10-Q. 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.

The following summary table provides a reconciliation from the Firm’s reported U.S. GAAP results to managed basis.



	Three months ended September 30, 2011								Three months ended September 30, 2010
(in millions, except per share and ratios)	Reported Results			Fully tax-equivalent adjustments		Managed basis			Reported Results			Fully tax-equivalent adjustments		Managed basis
Revenue
Investment banking fees	$	1,052		$	—	$	1,052		$	1,476		$	—	$	1,476
Principal transactions	1,370			—		1,370			2,341			—		2,341
Lending- and deposit-related fees	1,643			—		1,643			1,563			—		1,563
Asset management, administration and commissions	3,448			—		3,448			3,188			—		3,188
Securities gains	607			—		607			102			—		102
Mortgage fees and related income	1,380			—		1,380			707			—		707
Credit card income	1,666			—		1,666			1,477			—		1,477
Other income	780			472		1,252			468			415		883
Noninterest revenue	11,946			472		12,418			11,322			415		11,737
Net interest income	11,817			133		11,950			12,502			96		12,598
Total net revenue	23,763			605		24,368			23,824			511		24,335
Noninterest expense	15,534			—		15,534			14,398			—		14,398
Pre-provision profit	8,229			605		8,834			9,426			511		9,937
Provision for credit losses	2,411			—		2,411			3,223			—		3,223
Income before income tax expense	5,818			605		6,423			6,203			511		6,714
Income tax expense	1,556			605		2,161			1,785			511		2,296
Net income	$	4,262		$	—	$	4,262		$	4,418		$	—	$	4,418
Diluted earnings per share	$	1.02		$	—	$	1.02		$	1.01		$	—	$	1.01
Return on assets	0.76		%	NM		0.76		%	0.86		%	NM		0.86		%
Overhead ratio	65			NM		64			60			NM		59



	Nine months ended September 30, 2011								Nine months ended September 30, 2010
(in millions, except per share and ratios)	Reported Results			Fully tax-equivalent adjustments		Managed basis			Reported Results			Fully tax-equivalent adjustments		Managed basis
Revenue
Investment banking fees	$	4,778		$	—	$	4,778		$	4,358		$	—	$	4,358
Principal transactions	9,255			—		9,255			8,979			—		8,979
Lending- and deposit-related fees	4,838			—		4,838			4,795			—		4,795
Asset management, administration and commissions	10,757			—		10,757			9,802			—		9,802
Securities gains	1,546			—		1,546			1,712			—		1,712
Mortgage fees and related income	1,996			—		1,996			2,253			—		2,253
Credit card income	4,799			—		4,799			4,333			—		4,333
Other income	2,236			1,433		3,669			1,465			1,242		2,707
Noninterest revenue	40,205			1,433		41,638			37,697			1,242		38,939
Net interest income	35,558			373		35,931			38,899			282		39,181
Total net revenue	75,763			1,806		77,569			76,596			1,524		78,120
Noninterest expense	48,371			—		48,371			45,153			—		45,153
Pre-provision profit	27,392			1,806		29,198			31,443			1,524		32,967
Provision for credit losses	5,390			—		5,390			13,596			—		13,596
Income before income tax expense	22,002			1,806		23,808			17,847			1,524		19,371
Income tax expense	6,754			1,806		8,560			5,308			1,524		6,832
Net income	$	15,248		$	—	$	15,248		$	12,539		$	—	$	12,539
Diluted earnings per share	$	3.57		$	—	$	3.57		$	2.84		$	—	$	2.84
Return on assets	0.94		%	NM		0.94		%	0.82		%	NM		0.82		%
Overhead ratio	64			NM		62			59			NM		58



Average tangible common equity
	Three months ended				Nine months ended
(in millions)	September 30, 2011		September 30, 2010		September 30, 2011		September 30, 2010
Common stockholders’ equity	$	174,454	$	163,962	$	172,667	$	159,737
Less: Goodwill	48,631		48,745		48,770		48,546
Less: Certain identifiable intangible assets	3,545		4,094		3,736		4,221
Add: Deferred tax liabilities^(a)	2,639		2,620		2,617		2,575
Tangible common equity	$	124,917	$	113,743	$	122,778	$	109,545


(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 87–89 of this Form 10-Q.

BUSINESS SEGMENT RESULTS

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

Commencing July 1, 2011, the Firm’s business segments have been reorganized as follows:

Auto and Student Lending transferred from the RFS segment and are reported with Card in a single segment. Retail Financial Services continues as a segment, organized in two components: Consumer & Business Banking (formerly Retail Banking) and Mortgage Banking (including Mortgage Production and Servicing, and Real Estate Portfolios).

The business segment information associated with RFS and Card has been revised to reflect the business reorganization retroactive to January 1, 2010.

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 Card 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 September 30,	Total net revenue							Noninterest expense						Pre-provision profit^(c)
(in millions, except ratios)	2011			2010		Change		2011		2010		Change		2011			2010		Change
Investment Bank^(b)	$	6,369		$	5,353	19	%	$	3,799	$	3,704	3	%	$	2,570		$	1,649	56	%
Retail Financial Services	7,535			6,814		11		4,565		4,170		9		2,970			2,644		12
Card Services & Auto	4,775			5,085		(6	)	2,115		1,792		18		2,660			3,293		(19	)
Commercial Banking	1,588			1,527		4		573		560		2		1,015			967		5
Treasury & Securities Services	1,908			1,831		4		1,470		1,410		4		438			421		4
Asset Management	2,316			2,172		7		1,796		1,488		21		520			684		(24	)
Corporate/Private Equity^(b)	(123		)	1,553		NM		1,216		1,274		(5	)	(1,339		)	279		NM
Total	$	24,368		$	24,335	—	%	$	15,534	$	14,398	8	%	$	8,834		$	9,937	(11	)%



Three months ended September 30,	Provision for credit losses								Net income/(loss)							Return on equity
(in millions, except ratios)	2011			2010			Change		2011			2010		Change		2011		2010
Investment Bank^(b)	$	54		$	(142	)	NM		$	1,636		$	1,286	27	%	16	%	13	%
Retail Financial Services	1,027			1,397			(26	)%	1,161			716		62		18		12
Card Services & Auto	1,264			1,784			(29	)	849			926		(8	)	21		20
Commercial Banking	67			166			(60	)	571			471		21		28		23
Treasury & Securities Services	(20		)	(2		)	NM		305			251		22		17		15
Asset Management	26			23			13		385			420		(8	)	24		26
Corporate/Private Equity^(b)	(7		)	(3		)	(133	)	(645		)	348		NM		NM		NM
Total	$	2,411		$	3,223		(25	)%	$	4,262		$	4,418	(4	)%	9	%	10	%



Nine months ended September 30,	Total net revenue						Noninterest expense						Pre-provision profit^(c)
(in millions, except ratios)	2011		2010		Change		2011		2010		Change		2011		2010		Change
Investment Bank^(b)	$	21,916	$	20,004	10	%	$	13,147	$	13,064	1	%	$	8,769	$	6,940	26	%
Retail Financial Services	20,143		20,748		(3	)	14,736		12,012		23		5,407		8,736		(38	)
Card Services & Auto	14,327		15,400		(7	)	6,020		5,311		13		8,307		10,089		(18	)
Commercial Banking	4,731		4,429		7		1,699		1,641		4		3,032		2,788		9
Treasury & Securities Services	5,680		5,468		4		4,300		4,134		4		1,380		1,334		3
Asset Management	7,259		6,371		14		5,250		4,335		21		2,009		2,036		(1	)
Corporate/Private Equity^(b)	3,513		5,700		(38	)	3,219		4,656		(31	)	294		1,044		(72	)
Total	$	77,569	$	78,120	(1	)%	$	48,371	$	45,153	7	%	$	29,198	$	32,967	(11	)%



Nine months ended September 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)	$	(558	)	$	(929	)	40	%	$	6,063	$	5,138	18	%	20	%	17	%
Retail Financial Services	3,220			6,501			(50	)	1,145		1,269		(10	)	6		7
Card Services & Auto	2,561			7,861			(67	)	3,493		1,324		164		29		10
Commercial Banking	168			145			16		1,724		1,554		11		29		26
Treasury & Securities Services	(18		)	(57		)	68		954		822		16		18		17
Asset Management	43			63			(32	)	1,290		1,203		7		27		25
Corporate/Private Equity^(b)	(26		)	12			NM		579		1,229		(53	)	NM		NM
Total	$	5,390		$	13,596		(60	)%	$	15,248	$	12,539	22	%	11	%	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).


(c)	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.

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 September 30,								Nine months ended September 30,
(in millions, except ratios)	2011			2010			Change		2011			2010			Change
Revenue
Investment banking fees	$	1,039		$	1,502		(31	)%	$	4,740		$	4,353		9	%
Principal transactions	2,253			1,129			100		7,960			7,165			11
Lending- and deposit-related fees	210			205			2		642			610			5
Asset management, administration and commissions	563			565			—		1,730			1,761			(2	)
All other income^(a)	228			61			274		630			196			221
Noninterest revenue	4,293			3,462			24		15,702			14,085			11
Net interest income	2,076			1,891			10		6,214			5,919			5
Total net revenue^(b)	6,369			5,353			19		21,916			20,004			10

Provision for credit losses	54			(142		)	NM		(558		)	(929		)	40

Noninterest expense
Compensation expense	1,850			2,031			(9	)	7,708			7,882			(2	)
Noncompensation expense	1,949			1,673			16		5,439			5,182			5
Total noninterest expense	3,799			3,704			3		13,147			13,064			1
Income before income tax expense	2,516			1,791			40		9,327			7,869			19
Income tax expense	880			505			74		3,264			2,731			20
Net income	$	1,636		$	1,286		27		$	6,063		$	5,138		18
Financial ratios
Return on common equity	16		%	13		%			20		%	17		%
Return on assets	0.81			0.68					0.99			0.97
Overhead ratio	60			69					60			65
Compensation expense as a percentage of total net revenue^(c)	29			38					35			39
Revenue by business
Investment banking fees:
Advisory	$