10-Q 1 y78939e10vq.htm FORM 10-Q e10vq
Table of Contents

 
 
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, 2009           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)
Registrant’s telephone number, including area code (212) 270-6000
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.
þ 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).
þ 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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
    (Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes þ No
Number of shares of common stock outstanding as of October 31, 2009: 3,940,654,134
 
 

 


 

FORM 10-Q
TABLE OF CONTENTS
         
    Page
Part I — Financial information
       
 
Item 1 Consolidated Financial Statements — JPMorgan Chase & Co.:
       
 
       
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 EX-31.1
 EX-31.2
 EX-32
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

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JPMORGAN CHASE & CO.
CONSOLIDATED FINANCIAL HIGHLIGHTS
                                                         
(unaudited)                                           Nine months ended  
(in millions, except per share, headcount and ratios)                                           September 30,  
As of or for the period ended,   3Q09     2Q09     1Q09     4Q08     3Q08     2009     2008  
 
Selected income statement data
                                                       
Noninterest revenue
  $ 13,885     $ 12,953     $ 11,658     $ 3,394     $ 5,743     $ 38,496     $ 25,079  
Net interest income
    12,737       12,670       13,367       13,832       8,994       38,774       24,947  
 
Total net revenue
    26,622       25,623       25,025       17,226       14,737       77,270       50,026  
Noninterest expense
    13,455       13,520       13,373       11,255       11,137       40,348       32,245  
 
Pre-provision profit(a)
    13,167       12,103       11,652       5,971       3,600       36,922       17,781  
Provision for credit losses
    8,104       8,031       8,596       7,755       3,811       24,731       11,690  
Provision for credit losses — accounting conformity(b)
                      (442 )     1,976             1,976  
 
Income/(loss) before income tax expense and extraordinary gain
    5,063       4,072       3,056       (1,342 )     (2,187 )     12,191       4,115  
Income tax expense/(benefit)(c)
    1,551       1,351       915       (719 )     (2,133 )     3,817       (207 )
 
Income/(loss) before extraordinary gain
    3,512       2,721       2,141       (623 )     (54 )     8,374       4,322  
Extraordinary gain(d)
    76                   1,325       581       76       581  
 
Net income
  $ 3,588     $ 2,721     $ 2,141     $ 702     $ 527     $ 8,450     $ 4,903  
 
Per common share data
                                                       
Basic earnings(e)
                                                       
Income/(loss) before extraordinary gain
  $ 0.80     $ 0.28     $ 0.40     $ (0.29 )   $ (0.08 )   $ 1.50     $ 1.14  
Net income
    0.82       0.28       0.40       0.06       0.09       1.52       1.31  
Diluted earnings(e)(f)
                                                       
Income/(loss) before extraordinary gain
  $ 0.80     $ 0.28     $ 0.40     $ (0.29 )   $ (0.08 )   $ 1.50     $ 1.13  
Net income
    0.82       0.28       0.40       0.06       0.09       1.51       1.30  
Cash dividends declared per share
    0.05       0.05       0.05       0.38       0.38       0.15       1.14  
Book value per share
    39.12       37.36       36.78       36.15       36.95                  
Common shares outstanding
                                                       
Weighted average: Basic
    3,937.9       3,811.5       3,755.7       3,737.5       3,444.6       3,835.0       3,422.3  
Diluted(e)
    3,962.0       3,824.1       3,758.7       3,737.5 (m)     3,444.6 (m)     3,848.3       3,446.2  
Common shares at period end(g)
    3,938.7       3,924.1       3,757.7       3,732.8       3,726.9                  
Share price(h)
                                                       
High
  $ 46.50     $ 38.94     $ 31.64     $ 50.63     $ 49.00     $ 46.50     $ 49.95  
Low
    31.59       25.29       14.96       19.69       29.24       14.96       29.24  
Close
    43.82       34.11       26.58       31.53       46.70                  
Market capitalization
    172,596       133,852       99,881       117,695       174,048                  
 
Financial ratios
                                                       
Return on common equity (“ROE”)(i)
                                                       
Income/(loss) before extraordinary gain
    9 %     3 %     5 %     (3 )%     (1 )%     6 %     4 %
Net income
    9       3       5       1       1       6       5  
Return on tangible common equity (“ROTCE”)(i)(j)
                                                       
Income/(loss) before extraordinary gain
    13       5       8       (5 )     (1 )     9       7  
Net income
    14       5       8       1       2       9       8  
Return on assets (“ROA”)
                                                       
Income/(loss) before extraordinary gain
    0.70       0.54       0.42       (0.11 )     (0.01 )     0.55       0.35  
Net income
    0.71       0.54       0.42       0.13       0.12       0.56       0.39  
 
                                                       
Overhead ratio
    51       53       53       65       76       52       64  
Tier 1 capital ratio
    10.2       9.7       11.4       10.9       8.9                  
Total capital ratio
    13.9       13.3       15.2       14.8       12.6                  
Tier 1 leverage ratio
    6.5       6.2       7.1       6.9       7.2                  
Tier 1 common capital ratio(k)
    8.2       7.7       7.3       7.0       6.8                  
 
Selected balance sheet data (period-end)
                                                       
Trading assets
  $ 424,435     $ 395,626     $ 429,700     $ 509,983     $ 520,257                  
Securities
    372,867       345,563       333,861       205,943       150,779                  
Loans
    653,144       680,601       708,243       744,898       761,381                  
Total assets
    2,041,009       2,026,642       2,079,188       2,175,052       2,251,469                  
Deposits
    867,977       866,477       906,969       1,009,277       969,783                  
Long-term debt
    254,413       254,226       243,569       252,094       238,034                  
Common stockholders’ equity
    154,101       146,614       138,201       134,945       137,691                  
Total stockholders’ equity
    162,253       154,766       170,194       166,884       145,843                  
 
Headcount
    220,861       220,255       219,569       224,961       228,452                  
 

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(unaudited)                                           Nine months ended  
(in millions, except ratios)                                           September 30,  
As of or for the period ended,   3Q09     2Q09     1Q09     4Q08     3Q08     2009     2008  
 
Credit quality metrics
                                                       
Allowance for credit losses
  $ 31,454     $ 29,818     $ 28,019     $ 23,823     $ 19,765                  
Allowance for loan losses to total retained loans
    4.74 %     4.33 %     3.95 %     3.18 %     2.56 %                
Allowance for loan losses to retained loans excluding purchased credit- impaired loans(l)
    5.28       5.01       4.53       3.62       2.87                  
Nonperforming assets
  $ 20,362     $ 17,517     $ 14,654     $ 12,714     $ 9,520                  
Net charge-offs
    6,373       6,019       4,396       3,315       2,484     $ 16,788     $ 6,520  
Net charge-off rate
    3.84 %     3.52 %     2.51 %     1.80 %     1.91 %     3.28 %     1.70 %
Wholesale net charge-off rate
    1.93       1.19       0.32       0.33       0.10       1.13       0.12  
Consumer net charge-off rate
    4.79       4.69       3.61       2.59       3.13       4.36       2.78  
 
 
(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)   The third and fourth quarters of 2008 included an accounting conformity loan loss reserve provision related to the acquisition of Washington Mutual’s banking operations.
 
(c)   The income tax benefit in the third quarter of 2008 included the realization of a benefit from the release of deferred tax liabilities associated with the undistributed earnings of certain non-U.S. subsidiaries that were deemed to be reinvested indefinitely.
 
(d)   JPMorgan Chase acquired the banking operations of Washington Mutual Bank for $1.9 billion. The fair value of the net assets acquired exceeded the purchase price, which resulted in negative goodwill. In accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for business combinations, nonfinancial assets that are not held-for-sale were written down against that negative goodwill. The negative goodwill that remained after writing down nonfinancial assets was recognized as an extraordinary gain. As a result of the final refinement of the purchase price allocation during the third quarter of 2009, the Firm recognized a $76 million increase in the extraordinary gain.
 
(e)   Effective January 1, 2009, the Firm implemented new FASB guidance for participating securities. Accordingly, prior-period amounts have been revised as required. For further discussion of the guidance, see Note 21 on pages 166-167 of this Form 10-Q.
 
(f)   The calculation of both the second-quarter and nine months ended 2009 earnings per share includes a one-time, noncash reduction of $1.1 billion, or $0.27 per share, resulting from repayment of U.S. Troubled Asset Relief Program (“TARP”) preferred capital. For further discussion, see “Impact on diluted earnings per share of redemption of TARP preferred stock issued to the U.S. Treasury” on page 19 of this Form 10-Q.
 
(g)   On June 5, 2009, the Firm issued 163 million shares of its common stock at $35.25 per share; and on September 30, 2008, the Firm issued 284 million shares of its common stock at $40.50 per share.
 
(h)   The principal market for JPMorgan Chase’s common stock is 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.
 
(i)   The calculation of second-quarter 2009 net income applicable to common equity includes a one-time, noncash reduction of $1.1 billion resulting from repayment of TARP preferred capital. Excluding this reduction, the adjusted ROE and ROTCE were 6% and 10% for the second quarter of 2009, respectively. For further discussion of adjusted ROE, see “Explanation and reconciliation of the Firm’s use of non-GAAP financial measures” on pages 15-19 of this Form 10-Q.
 
(j)   For further discussion of ROTCE, a non-GAAP financial measure, see “Explanation and reconciliation of the Firm’s use of non-GAAP financial measures” on pages 15-19 of this Form 10-Q.
 
(k)   Tier 1 common is calculated as Tier 1 capital less qualifying perpetual preferred stock, qualifying trust preferred securities and qualifying minority interest in subsidiaries. The Firm uses the Tier 1 common capital ratio, a non-GAAP financial measure, to assess and compare the quality and composition of the Firm’s capital with the capital of other financial services companies. For further discussion, see Regulatory capital on pages 55-57 of this Form 10-Q.
 
(l)   Excludes the impact of home lending purchased credit-impaired loans and loans held by the Washington Mutual Master Trust. For further discussion, see Allowance for credit losses on pages 81-84 of this Form 10-Q.
 
(m)   Common equivalent shares have been excluded from the computation of diluted earnings per share for the third and fourth quarters of 2008, as the effect on income/(loss) before extraordinary gain would be antidilutive.

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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 for JPMorgan Chase. See the Glossary of Terms on pages 178-181 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 JPMorgan Chase’s actual results to differ materially from those set forth in such forward-looking statements. For a discussion of some of these risks and uncertainties, see Forward-looking Statements on pages 184-185 and Part II, Item 1A: Risk Factors on page 187 of this Form 10-Q, and JPMorgan Chase’s Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the U.S. Securities and Exchange Commission (“2008 Annual Report” or “2008 Form 10-K”), including Part I, Item 1A: Risk factors.
INTRODUCTION
JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”), a financial holding company incorporated under Delaware law in 1968, is a leading global financial services firm and one of the largest banking institutions in the United States of America (“U.S.”), with $2.0 trillion in assets, $162.3 billion in stockholders’ equity and operations in more than 60 countries as of September 30, 2009. The Firm is a leader in investment banking, financial services for consumers and businesses, financial transaction processing and asset management. 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 U.S. national banking association with branches in 23 states; and Chase Bank USA, National Association (“Chase Bank USA, N.A.”), a national bank that is the Firm’s credit card-issuing bank. JPMorgan Chase’s principal nonbank subsidiary is J.P. Morgan Securities Inc., the Firm’s U.S. investment banking firm.
JPMorgan Chase’s activities are organized, for management reporting purposes, into six business segments, as well as Corporate/Private Equity. The Firm’s wholesale businesses comprise the Investment Bank, Commercial Banking, Treasury & Securities Services and Asset Management segments. The Firm’s consumer businesses comprise the Retail Financial Services and Card Services segments. A description of the Firm’s business segments, and the products and services they provide to their respective client bases, follows.
Investment Bank
J.P. Morgan is one of the world’s leading investment banks, with deep client relationships and broad product capabilities. The clients of the Investment Bank (“IB”) are corporations, financial institutions, governments and institutional investors. The Firm offers a full range of investment banking products and services in all major capital markets, including advising on corporate strategy and structure, capital-raising in equity and debt markets, sophisticated risk management, market-making in cash securities and derivative instruments, prime brokerage and research. IB also selectively commits the Firm’s own capital to principal investing and trading activities.
Retail Financial Services
Retail Financial Services (“RFS”), which includes the Retail Banking and Consumer Lending reporting segments, 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 5,100 bank branches (third-largest nationally) and 15,000 ATMs (second-largest nationally), as well as online and mobile banking around the clock. More than 22,400 branch salespeople assist customers with checking and savings accounts, mortgages, home equity and business loans, and investments across a 23-state footprint from New York and Florida to California. Consumers also can obtain loans through 15,900 auto dealerships and nearly 2,400 schools and universities nationwide.
Card Services
Chase Card Services (“CS”) is one of the nation’s largest credit card issuers, with more than 146 million cards in circulation and more than $165 billion in managed loans. In the nine months ended September 30, 2009, customers used Chase cards to meet more than $241 billion worth of their spending needs. Chase has a market leadership position in building loyalty and rewards programs with many of the world’s most respected brands and through its proprietary products, including the Chase Freedom program.
Through Chase Paymentech Solutions, its merchant acquiring business, Chase is one of the leading processors of MasterCard and Visa payments.

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Commercial Banking
Commercial Banking (“CB”) serves more than 26,000 clients nationally, including corporations, municipalities, financial institutions and not-for-profit entities with annual revenue generally ranging from $10 million to $2 billion, and approximately 30,000 real estate investors/owners. Delivering extensive industry knowledge, local expertise and dedicated service, 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 the Commercial Banking, Retail Financial Services and Asset Management businesses to serve clients firmwide. As a result, 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 it manages depositary receipt programs globally.
Asset Management
Asset Management (“AM”), with assets under supervision of $1.7 trillion, is a global leader in investment and wealth management. AM clients include institutions, retail investors and high-net-worth individuals in every major market throughout the world. AM offers global investment management in equities, fixed income, real estate, hedge funds, private equity and liquidity products, including money-market instruments and bank deposits. AM also provides trust and estate, banking and brokerage services to high-net-worth clients, and retirement services for corporations and individuals. The majority of AM’s client assets are in actively managed portfolios.

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EXECUTIVE OVERVIEW
This overview of management’s discussion and analysis 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.
Financial performance of JPMorgan Chase
                                                 
    Three months ended September 30,     Nine months ended September 30,  
(in millions, except per share data and ratios)   2009     2008     Change     2009     2008     Change  
 
Selected income statement data
                                               
Total net revenue
  $ 26,622     $ 14,737       81 %   $ 77,270     $ 50,026       54 %
Total noninterest expense
    13,455       11,137       21       40,348       32,245       25  
Pre-provision profit
    13,167       3,600       266       36,922       17,781       108  
Provision for credit losses(a)
    8,104       5,787       40       24,731       13,666       81  
Income/(loss) before extraordinary gain
    3,512       (54 )   NM       8,374       4,322       94  
Extraordinary gain(b)
    76       581       (87 )     76       581       (87 )
Net income
    3,588       527     NM       8,450       4,903       72  
 
                                               
Diluted earnings per share(c)(d)
                                               
Income/(loss) before extraordinary gain
  $ 0.80     $ (0.08 )   NM     $ 1.50     $ 1.13       33  
Net income
    0.82       0.09     NM       1.51       1.30       16  
Return on common equity
                                               
Income/(loss) before extraordinary gain
    9 %     (1 )%             6 %     4 %        
Net income
    9       1               6       5          
 
 
(a)   The third quarter of 2008 included an accounting conformity loan loss reserve provision related to the acquisition of Washington Mutual’s banking operations.
 
(b)   JPMorgan Chase acquired Washington Mutual’s banking operations from the Federal Deposit Insurance Corporation (“FDIC”) for $1.9 billion. The fair value of Washington Mutual net assets acquired exceeded the purchase price, which resulted in negative goodwill. In accordance with U.S. GAAP for business combinations, nonfinancial assets that are not held-for-sale were written down against that negative goodwill. The negative goodwill that remained after writing down nonfinancial assets was recognized as an extraordinary gain. As a result of the final refinement of the purchase price allocation during the third quarter of 2009, the Firm recognized a $76 million increase in the extraordinary gain.
 
(c)   Effective January 1, 2009, the Firm implemented new FASB guidance for participating securities. Accordingly, prior-period amounts have been revised. For further discussion of the guidance, see Note 21 on pages 166-167 of this Form 10-Q.
 
(d)   The calculation of EPS for the nine months ended September 30, 2009, includes a one-time noncash reduction of $1.1 billion, or $0.27 per share, resulting from the redemption of Series K preferred stock issued to the U.S. Treasury.
Business overview
JPMorgan Chase reported third-quarter 2009 net income of $3.6 billion, compared with net income of $527 million in the third quarter of 2008. Earnings per share were $0.82, compared with $0.09 in the prior year. Return on common equity was 9%.
The increase in earnings from the third quarter of 2008 was driven by significantly higher net revenue, partially offset by an increase in the provision for credit losses and higher noninterest expense. Both revenue and expense were higher due to the impact of the acquisition of the banking operations of Washington Mutual Bank (“Washington Mutual”) on September 25, 2008. In addition, the increase in net revenue was driven by strong trading results and gains on legacy leveraged-lending and mortgage-related positions, compared with markdowns in the prior year in IB; gains on trading positions and higher net interest income in Corporate/Private Equity; and wider loan spreads across most businesses. The increase to the provision for credit losses resulted from a significant increase in the consumer provision, reflecting higher net charge-offs and an increase in the allowance for credit losses in the home lending and credit card loan portfolios. In addition to the impact of the Washington Mutual transaction, the increase in noninterest expense was driven by higher performance-based compensation expense, partially offset by lower headcount-related expense.
Net income for the first nine months of 2009 was $8.5 billion, or $1.51 per share, compared with $4.9 billion, or $1.30 per share, in the first nine months of 2008. The following factors that drove the 2009 third-quarter results also generally drove the increase in earnings from the comparable 2008 nine-month period: strong net revenue growth, driven by the Washington Mutual transaction; higher principal transactions revenue; and increased net interest income; partially offset by higher credit costs and higher noninterest expense. The first nine months of 2009 also reflected higher net revenue from mortgage servicing rights (“MSR”) risk management results in RFS and higher noninterest expense resulting from an accrual for an FDIC special assessment in the second quarter of 2009.

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The U.S. and most other economies grew in the third quarter of 2009, with various industry sectors showing signs of stability. Conditions in financial markets also improved, as evidenced by the following: credit spreads have stabilized in the interbank term funding markets and continued to narrow for investment-grade borrowers; credit markets opened for noninvestment-grade borrowers; and the broader equity markets rose significantly. Activity in the housing sector increased, with new home construction picking up for the first time in three and a half years. Consumer spending stabilized, despite losses on household balance sheets and poor job market conditions, as the unemployment rate rose to 9.8% at the end of the third quarter. Business capital spending leveled out, aided by a slowing in the pace of inventory liquidation. Inflation remained low, and the Federal Reserve indicated that the federal funds rate would likely remain low for an “extended period,” reiterating its intent to continue to use a wide range of tools to promote economic recovery and maintain price stability.
JPMorgan Chase’s line-of-business results for the third quarter of 2009 reflected the broad-based nature of the economic improvement. Pre-provision profit remained strong at $13.2 billion, up by $9.6 billion from the prior year. Five of the six lines of business produced revenue growth, and the Investment Bank, Asset Management, Commercial Banking and the Retail Banking segment within Retail Financial Services grew net income. In contrast, Card Services and the Consumer Lending segment within Retail Financial Services reported net losses; in spite of initial signs of improvement, particularly in early-stage delinquencies, credit costs continued to be elevated in these businesses. Accordingly, the Firm increased its consumer allowance for credit losses by $2.0 billion, bringing the total allowance for credit losses to $31.5 billion, or 5.28% of total loans. This addition, combined with capital generation in the quarter, helped the Firm maintain a strong balance sheet, with a Tier 1 Capital ratio of 10.2% and a Tier 1 Common Capital ratio of 8.2%.
The Firm continued to help consumers and communities navigate the challenging economy by announcing a revamp of its overdraft policies to provide customers with more control over the fees they pay; developing new, innovative products in Card Services to enhance the way customers manage their spending and borrowing; and working with struggling mortgage customers to modify their loans. JPMorgan Chase has approved more than 262,000 new trial modifications under the U.S. Making Home Affordable Program and its own modification program, nearly 90% of which include a reduction in payments for the homeowner. Since 2007, the Firm has helped families by initiating approximately 782,000 actions to prevent foreclosure.
The discussion that follows highlights the current-quarter performance of each business segment compared with the prior-year quarter, and presents results on a managed basis unless otherwise noted. For more information about managed basis, see Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures on pages 15-19 of this Form 10-Q .
Investment Bank net income increased, reflecting higher net revenue partially offset by increases in both noninterest expense and the provision for credit losses. Fixed Income Markets drove the revenue growth, with strong results across most products and gains on legacy leveraged-lending and mortgage-related positions, compared with markdowns on these positions in the prior year. The increase in the provision for credit losses reflected deterioration in the credit environment compared with the third quarter of 2008. Noninterest expense increased, driven by higher performance-based compensation, partially offset by lower headcount-related expense.
Retail Financial Services net income declined, as an increase in the provision for credit losses was largely offset by the positive impact of the Washington Mutual transaction. Growth in net revenue was also driven by higher net mortgage servicing revenue, wider loan spreads and higher deposit balances, offset partially by lower mortgage production revenue and lower loan balances. The provision for credit losses rose significantly as weak economic conditions and housing price declines continued to drive higher estimated losses for the home equity and mortgage loan portfolios. Included in the third-quarter 2009 addition to the allowance for loan losses was an increase related to estimated deterioration in the Washington Mutual purchased credit-impaired portfolio. Noninterest expense increased, reflecting the impact of the Washington Mutual transaction and higher servicing expense, partially offset by lower mortgage reinsurance losses.
Card Services reported a net loss, compared with net income in the prior year. The decrease was driven by a higher provision for credit losses, partially offset by higher net revenue. The increase in net revenue was driven by the impact of the Washington Mutual transaction, wider loan spreads and higher merchant servicing revenue related to the dissolution of the Chase Paymentech Solutions joint venture. These benefits were offset partially by higher revenue reversals associated with higher charge-offs, lower average loan balances and a decreased level of fees. The provision for credit losses reflected a higher level of charge-offs and an increase in the allowance for loan losses. Noninterest expense increased due to the dissolution of the Chase Paymentech Solutions joint venture and the impact of the Washington Mutual transaction.

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Commercial Banking net income increased, driven by higher net revenue, reflecting the impact of the Washington Mutual transaction, predominantly offset by a higher provision for credit losses and higher noninterest expense. Net revenue also increased due to wider loan spreads, a shift to higher-spread liability products, overall growth in liability balances and higher lending- and deposit-related fees. These benefits were offset predominantly by spread compression on liability products and lower loan balances. The increase in the provision for credit losses reflected continued deterioration in the credit environment across all business segments, particularly real estate-related segments. Noninterest expense rose due to the impact of the Washington Mutual transaction and higher FDIC insurance premiums.
Treasury & Securities Services net income decreased, driven by lower net revenue offset partially by lower noninterest expense. Worldwide Securities Services revenue declined, driven by lower securities lending balances, primarily as a result of declines in asset valuations and demand; lower spreads and balances on liability products; and the effect of market depreciation on certain custody assets. Treasury Services revenue declined as well, reflecting spread compression on deposit products offset by higher trade revenue driven by wider spreads, and higher card product volumes. Noninterest expense decreased, reflecting lower headcount-related expense, offset partially by higher FDIC insurance premiums.
Asset Management net income increased, due to higher net revenue and lower noninterest expense, offset partially by a higher provision for credit losses. Growth in net revenue was driven by gains on the Firm’s seed capital investments, wider loan spreads, higher deposit balances and net inflows. These benefits were partially offset by the effect of lower market levels, narrower deposit spreads, lower loan balances and decreased placement fees. The increase in the provision for credit losses reflected continued deterioration in the credit environment. Noninterest expense decreased due to lower headcount-related expense, offset by higher performance-based compensation and higher FDIC insurance premiums.
Corporate/Private Equity reported net income, compared with a net loss in the prior year, reflecting continued gains on trading positions, higher net interest income and private equity gains in the third quarter of 2009, compared with losses in the third quarter of 2008.
Firmwide, the managed provision for credit losses was $9.8 billion, up by $3.1 billion, or 47%, from the prior year. The prior-year quarter included a $2.0 billion charge to conform Washington Mutual’s allowance for loan losses, which affected both the consumer and wholesale portfolios. For the purposes of the following analysis, this charge is excluded. The consumer-managed provision for credit losses was $9.0 billion, compared with $4.3 billion in the prior year, reflecting an increase in the allowance for credit losses in the home lending and credit card loan portfolios. Consumer-managed net charge-offs were $7.0 billion, compared with $3.3 billion, resulting in managed net charge-off rates of 6.29% and 3.39%, respectively. The wholesale provision for credit losses was $779 million, compared with $398 million, reflecting continued deterioration in the credit environment. Wholesale net charge-offs were $1.1 billion, compared with $52 million, resulting in net charge-off rates of 1.93% and 0.10%, respectively. The Firm’s nonperforming assets totaled $20.4 billion at September 30, 2009, up from $9.5 billion. The allowance for credit losses increased by $1.6 billion during the quarter; this resulted in a loan loss coverage ratio at September 30, 2009, of 5.28%, compared with 5.01% at June 30, 2009, and 2.87% at September 30, 2008. The above mentioned net charge-off rates and allowance for loan loss ratios exclude loans accounted for at fair value and loans held-for-sale, and the impact of purchased credit-impaired loans. The allowance for loan loss ratios also excluded the impact of loans held by the Washington Mutual Master Trust, which were consolidated on the Firm’s balance sheet at fair value during the second quarter of 2009 and the $1.1 billion of allowance related to the purchased credit-impaired portfolio.
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.
JPMorgan Chase’s outlook for the fourth quarter of 2009 should be viewed against the backdrop of the global and U.S. economies, financial markets activity, the geopolitical environment, the competitive environment and client activity levels. Each of these linked factors will affect the performance of the Firm and its lines of business. The Firm continues to monitor the global and U.S. economic environments. The outlook for the capital markets remains uncertain, and further declines in U.S. housing prices in certain markets and increases in the unemployment rate, either of which could adversely affect the Firm’s financial results, are possible. In addition, as a result of recent market conditions, the U.S. Congress and regulators have increased their focus on the regulation of financial institutions; any legislation or regulations that may be adopted as a result could limit or restrict the Firm’s operations, or impose additional costs on the Firm in order to comply with such new laws or rules.

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Given the potential stress on the consumer from rising unemployment and continued downward pressure on housing prices, management remains cautious with respect to the credit outlook for the consumer loan portfolios. Possible continued deterioration in credit trends could result in higher credit costs and require additions to the consumer allowance for credit losses. Based on management’s current economic outlook, quarterly net charge-offs could reach $1.4 billion for the home equity portfolio, $600 million for the prime mortgage portfolio and $500 million for the subprime mortgage portfolio over the next several quarters. The managed net charge-off rate for Card Services (excluding the Washington Mutual credit card portfolio) could approach 10.5% by the first half of 2010, and thereafter will remain highly dependent on unemployment levels. The managed net charge-off rate for the Washington Mutual credit card portfolio could approach 24% over the next several quarters. These charge-off rates are likely to move even higher if the economic environment deteriorates beyond management’s current expectations. Similarly, wholesale credit costs, and net charge-offs could increase over the next several quarters if the credit environment continues to deteriorate.
The Investment Bank continues to operate in an uncertain environment and, as noted above, results could be adversely affected if the credit environment deteriorates further. Trading results can be volatile and recent market conditions, which include elevated client volumes and spread levels, are not likely to continue. As such, management does not expect recent strong results in both Fixed Income and Equity Markets segments to continue at the same levels. Finally, if the Firm’s own credit spreads tighten, as was the case in the third quarter of 2009, the change in fair value of certain trading liabilities would also negatively affect trading results.
Although management expects underlying growth in Retail Banking, results will be under pressure from the credit environment and ongoing lower consumer spending levels. In addition, there could be further declines over the remainder of the year in average retail deposits due to anticipated downward repricing of certain legacy Washington Mutual deposits. Finally, as a result of recent changes in the Firm’s policies relating to non-sufficient funds and overdraft fees, management expects lower Retail Banking revenue in 2010. Although management estimates are, at this point in time, preliminary and subject to change, the impact of such changes could result in an annualized reduction in net income of approximately $500 million.
Card Services faces rising credit costs, as noted above, as well as continued pressure on both charge volumes and credit card receivables growth, reflecting continued lower levels of consumer spending. In addition, as a result of the recently-enacted credit card legislation, management estimates, which are preliminary and subject to change, are that Card Services’ annual net income may be adversely affected by approximately $500 million to $750 million. As a result of all these factors, management currently expects Card Services to have a net loss for the full year 2010.
Commercial Banking results could be negatively affected by rising credit costs, a decline in loan demand and reduced liability balances.
Earnings in Treasury & Securities Services and Asset Management will be affected by the impact of market levels on assets under management, supervision and custody. Additionally, earnings in Treasury & Securities Services could be affected by liability balance flows.
Private Equity results will likely be volatile and continue to be influenced by capital market activity, market levels, the performance of the broader economy and investment-specific issues. Net interest income levels will generally trend with the size of the investment portfolio in Corporate; however, the high level of trading gains in Corporate in the third quarter of 2009 is not likely to continue. In the near-term, Corporate quarterly net income (excluding Private Equity, merger-related items and any significant nonrecurring items) is expected to decline to approximately $500 million and continue trending lower through the course of 2010.
Lastly, on a Firmwide matter, the decision of the Firm’s Board of Directors regarding any increase in the level of common stock dividends will be subject to their judgment that the likelihood of another severe economic downturn has sufficiently diminished, and that overall business performance has stabilized. When, in the Board’s judgment, it is appropriate to increase the dividend, the likely result might involve an initial increase to a $0.75 to $1.00 per share annual payout level, followed by a subsequent return to the Firm’s historical dividend payout ratio of 30% to 40% of normalized earnings over time.

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CONSOLIDATED RESULTS OF OPERATIONS
This section provides a comparative discussion of JPMorgan Chase’s Consolidated Results of Operations on a reported basis. 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 92-94 of this Form 10-Q and pages 107-111 of JPMorgan Chase’s 2008 Annual Report.
Total net revenue
                                                 
    Three months ended September 30,     Nine months ended September 30,  
(in millions)   2009     2008     Change     2009     2008     Change  
 
Investment banking fees
  $ 1,679     $ 1,316       28 %   $ 5,171     $ 4,144       25 %
Principal transactions
    3,860       (2,763 )   NM       8,958       (2,814 )   NM  
Lending and deposit-related fees
    1,826       1,168       56       5,280       3,312       59  
Asset management, administration and commissions
    3,158       3,485       (9 )     9,179       10,709       (14 )
Securities gains
    184       424       (57 )     729       1,104       (34 )
Mortgage fees and related income
    843       457       84       3,228       1,678       92  
Credit card income
    1,710       1,771       (3 )     5,266       5,370       (2 )
Other income
    625       (115 )   NM       685       1,576       (57 )
                     
Noninterest revenue
    13,885       5,743       142       38,496       25,079       53  
Net interest income
    12,737       8,994       42       38,774       24,947       55  
                     
Total net revenue
  $ 26,622     $ 14,737       81     $ 77,270     $ 50,026       54  
 
Total net revenue for the third quarter of 2009 was $26.6 billion, up by $11.9 billion, or 81%, from the third quarter of 2008. For the first nine months of 2009, total net revenue was $77.3 billion, up by $27.2 billion, or 54%, from the equivalent period of 2008. The increase from both prior-year periods was driven by higher principal transactions revenue, primarily related to the strong results across most fixed income and equity products and the absence of markdowns on legacy leveraged lending and mortgage positions in IB, as well as higher levels of trading gains and investment securities income in Corporate. The results also benefited from the impact of the Washington Mutual transaction, which contributed to the increases in net interest income, lending- and deposit-related fees, mortgage fees and related income. These benefits were offset partially by reduced fees and commissions resulting from lower market levels on assets under management and custody. For the year-to-date comparison, an additional driver of the increase in revenue was higher net revenue from MSR risk management results, offset by the absence of proceeds from the sale of Visa shares in its initial public offering in the first quarter of 2008.
Investment banking fees for the third quarter and first nine months of 2009 increased from the comparable periods in 2008, reflecting higher equity and debt underwriting fees, offset partially by lower advisory fees. For a further discussion of investment banking fees, which are primarily recorded in IB, see IB segment results on pages 21-24 of this Form 10-Q.
Principal transactions revenue, which consists of revenue from the Firm’s trading and private equity investing activities, rose from the third quarter and first nine months of 2008. Trading revenue increased in the third quarter of 2009, driven by strong results across most fixed income and equity products; gains of approximately $400 million on legacy leveraged lending and mortgage-related positions, compared with markdowns of $3.6 billion in the prior year; and gains on trading positions in Corporate, compared with losses in the prior year of $1.0 billion on markdowns of Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) preferred securities. These benefits were offset partially by an aggregate loss of $1.0 billion in the quarter from the tightening of the Firm’s credit spread on certain structured liabilities and derivatives, compared with gains of $956 million in the prior year from the widening of the spread on those liabilities. For the first nine months of 2009, trading revenue rose as a result of the same drivers in the quarter, including significantly lower net markdowns on legacy leveraged lending and mortgage-related positions, compared with markdowns of $7.7 billion in the prior year; these benefits were offset partially by an aggregate loss of $1.9 billion from the tightening of the Firm’s credit spread on certain structured liabilities and derivatives, compared with gains of $2.8 billion in the prior year from the widening of spreads on those liabilities. The Firm’s private equity investments generated net gains in the third quarter of 2009, compared with net losses in the prior year. For the first nine months of 2009, the private equity investments produced net losses, compared with net gains in the prior year. For a further discussion of principal transactions revenue, see IB and Corporate/Private Equity segment results on pages 21-24 and 47-49 respectively, and Note 3 on pages 106-121 of this Form 10-Q.
Lending- and deposit-related fees rose from the third quarter and first nine months of 2008, predominantly reflecting the impact of the Washington Mutual transaction and organic growth in both lending- and deposit-related fees in RFS and IB, as well as in CB. For a further discussion of lending- and deposit-related fees, which are mostly recorded in RFS, CB and TSS, see the RFS segment results on pages 25-32, the CB segment results on pages 37-39, and the TSS segment results on pages 40-43 of this Form 10-Q.

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The decline in asset management, administration and commissions revenue compared with the third quarter of 2008 reflected lower brokerage commissions revenue in IB, predominantly related to lower transaction volume; lower asset management fees in AM, from the impact of lower market levels on assets under management; and lower administration fees in TSS, driven by the effect of market depreciation on certain custody assets and lower securities lending balances. For the first nine months of 2009, the decline was largely due to lower asset management fees in AM from the impact of lower market levels on assets under management. Lower brokerage commissions revenue in IB and lower administrative fees in TSS also contributed to the decrease.
The decrease in securities gains compared with the third quarter of 2008 was due to lower gains from the repositioning of the Corporate investment securities portfolio, in connection with managing the Firm’s structural interest rate risk. For the first nine months of 2009, the decrease reflected lower gains from the sale of MasterCard shares, which totaled $241 million in 2009, compared with $668 million in 2008. For a further discussion of securities gains, which are mostly recorded in the Firm’s Corporate business, see the Corporate/Private Equity segment discussion on pages 47-49 of this Form 10-Q.
Mortgage fees and related income increased during the third quarter and first nine months of 2009, as higher net mortgage servicing revenue was offset partially by a production-related net loss in the third quarter of 2009. The increase in net mortgage servicing revenue was driven by growth in average third-party loans serviced as a result of the Washington Mutual transaction and higher MSR risk management results, reflecting primarily, for the nine-month period, the positive impact of a decrease in estimated future mortgage prepayments and positive hedging results. Mortgage production generated a net loss for the third quarter of 2009, and a decline from the first nine months of 2008, reflecting an increase in reserves for the repurchase of previously-sold loans, offset by wider margins on new originations. For a discussion of mortgage fees and related income, which is recorded primarily in RFS’ Consumer Lending business, see the Consumer Lending discussion on pages 29-32 of this Form 10-Q.
Credit card income, which includes the impact of the Washington Mutual transaction, was flat compared with the third quarter and first nine months of 2008, as lower servicing fees earned in connection with CS securitization activities, largely as a result of higher credit losses, were offset by wider loan margins on securitized credit card loans. Also partially offsetting the decline were higher merchant servicing revenue related to the dissolution of the Chase Paymentech Solutions joint venture and higher interchange income. For a further discussion of credit card income, see the CS segment results on pages 33-36 of this Form 10-Q.
Other income increased in the third quarter of 2009 due to the absence of a $375 million charge recognized in the third quarter of 2008 related to the repurchase of auction-rate securities at par. Also contributing to the increase in other income during the quarter were higher markups on certain investments, including seed capital in AM, and higher gains on the sale of certain assets, including other real estate owned. For the first nine months of 2009, other income decreased, due predominantly to the absence of $1.5 billion in proceeds from the sale of Visa shares in the first quarter of 2008 during its initial public offering, lower net securitization income in CS and the dissolution of the Chase Paymentech Solutions joint venture. These items were partially offset by the absence of a $423 million loss incurred in the second quarter of 2008, reflecting the Firm’s 49.4% share in Bear Stearns’ losses from April 8 to May 30, 2008, and the same items that drove the increase in the third quarter of 2009 results compared with the third quarter of 2008.
Net interest income increased $3.7 billion to $12.7 billion, and $13.8 billion to $38.8 billion, for the third quarter and first nine months of 2009, respectively, compared with the comparable periods in 2008. The increase from the prior year was driven by the Washington Mutual transaction, which contributed to higher average loans and deposits, and the impact of a wider net interest margin. For the quarter, the net yield on the Firm’s interest-earning assets of $1.6 trillion, on a fully taxable-equivalent (FTE) basis, was 3.10%, an increase of 37 basis points from 2008. For the first nine months, the net yield on the Firm’s interest-earning assets of $1.7 trillion, on an FTE basis, was 3.15%, an increase of 47 basis points from 2008. Excluding the impact of the Washington Mutual transaction, the increase in net interest income in the quarter and first nine months of the year was driven by the overall decline in market interest rates during the periods, which benefited the net interest margin as rates paid on the Firm’s interest-bearing liabilities declined faster relative to the decline in rates earned on interest-earning assets. The higher level of the investment securities portfolio also contributed to the increase in net interest income. The increase in net interest income was offset partially by lower loan balances, which included the effect of loan charge-offs.
                                                 
Provision for credit losses   Three months ended September 30,     Nine months ended September 30,  
(in millions)   2009     2008     Change     2009     2008     Change  
 
Wholesale
  $ 779     $ 962       (19 )%   $ 3,553     $ 2,214       60 %
Consumer
    7,325       4,825       52       21,178       11,452       85  
                     
Total provision for credit losses
  $ 8,104     $ 5,787       40     $ 24,731     $ 13,666       81  
 

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Provision for credit losses
The provision for credit losses in the third quarter and first nine months of 2009 rose compared with the equivalent 2008 periods due to increases in the consumer provision. The prior-year quarter included a $2.0 billion charge to conform Washington Mutual’s allowance for loan losses, which affected both the consumer and wholesale portfolios. For the purpose of the following analysis, this charge is excluded. The consumer provision reflected additions to the allowance for loan losses for the home equity, mortgage and credit card portfolios, as weak economic conditions, housing price declines and higher unemployment rates continued to drive higher estimated losses for these portfolios. Included in the third-quarter 2009 addition to the allowance for loan losses was a $1.1 billion increase related to estimated deterioration in the Washington Mutual purchased credit-impaired portfolio. The wholesale provision increased from the comparable 2008 periods, reflecting continued deterioration in the credit environment. For a more detailed discussion of the loan portfolio and the allowance for loan losses, see the segment discussions for RFS on pages 25-32, CS on pages 33-36, IB on pages 21-24 and CB on pages 37-39, and the Allowance for Credit Losses section on pages 81-84 of this Form 10-Q.
Noninterest expense
The following table presents the components of noninterest expense.
                                                 
    Three months ended September 30,     Nine months ended September 30,  
(in millions)   2009     2008     Change     2009     2008     Change  
 
Compensation expense
  $ 7,311     $ 5,858       25 %   $ 21,816     $ 17,722       23 %
Noncompensation expense:
                                               
Occupancy expense
    923       766       20       2,722       2,083       31  
Technology, communications and equipment expense
    1,140       1,112       3       3,442       3,108       11  
Professional & outside services
    1,517       1,451       5       4,550       4,234       7  
Marketing
    440       453       (3 )     1,241       1,412       (12 )
Other expense(a)
    1,767       1,096       61       5,332       2,498       113  
Amortization of intangibles
    254       305       (17 )     794       937       (15 )
                     
Total noncompensation expense
    6,041       5,183       17       18,081       14,272       27  
Merger costs
    103       96       7       451       251       80  
                     
Total noninterest expense
  $ 13,455     $ 11,137       21     $ 40,348     $ 32,245       25  
 
 
(a)   Includes $675 million accrued for an FDIC special assessment in the second quarter of 2009.
Total noninterest expense for the third quarter of 2009 was $13.5 billion, up $2.3 billion, or 21%, from the third quarter of 2008; for the first nine months of 2009, total noninterest expense was $40.3 billion, up by $8.1 billion, or 25%, from the comparable 2008 period. The increase was driven by the impact of the Washington Mutual transaction, higher performance-based compensation expense, the accrual of $0.7 billion for an FDIC special assessment recognized in the second quarter of 2009, higher FDIC insurance premiums and increased mortgage-related servicing expense. These items were offset partially by lower headcount-related expense, which includes salary and benefits (excluding performance-based incentives), and other noncompensation costs related to employees.
Compensation expense increased in the third quarter and first nine months of 2009 compared with the prior-year periods, reflecting higher performance-based incentives, as well as the impact of the Washington Mutual transaction. Excluding these two items, compensation expense decreased as a result of the reduction in headcount, particularly in the wholesale businesses and in Corporate.
Noncompensation expense increased from the third quarter of 2008, due predominantly to the following: the impact of the Washington Mutual transaction; higher litigation costs, partly as a result of benefits recognized in 2008 from certain litigation matters; higher mortgage servicing-related expense due to increased delinquencies and defaults, which included an increase in foreclosed property expense of $0.3 billion; higher FDIC insurance premiums; and the impact of the dissolution of the Chase Paymentech Solutions joint venture. These items were offset partially by lower headcount-related expense, particularly in IB, TSS and AM, and lower mortgage reinsurance losses. Noncompensation expense increased from the first nine months of 2008, primarily due to the drivers discussed for the third quarter and an accrual of $0.7 billion for an FDIC special assessment recognized in the second quarter of 2009. The increase was partially offset by lower credit card marketing expense.
For information on merger costs, refer to Note 10 on page 135 of this Form 10-Q.

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Income tax expense
The following table presents the Firm’s income before income tax expense, income tax expense and effective tax rate.
                                 
    Three months ended September 30,     Nine months ended September 30,  
(in millions, except rate)   2009     2008     2009     2008  
 
Income/(loss) before income tax expense/(benefit)
  $ 5,063     $ (2,187 )   $ 12,191     $ 4,115  
Income tax expense/(benefit)
    1,551       (2,133 )     3,817       (207 )
Effective tax rate
    30.6 %     97.5 %     31.3 %     (5.0 )%
 
The change in the effective tax rate for the third quarter and first nine months of 2009, compared with the same periods of 2008, was primarily the result of higher reported pretax income and changes in the proportion of income subject to federal, state and local taxes. In addition, the third quarter and first nine months of 2008 reflected the realization of benefits of $927 million and $1.1 billion, respectively, from the release of deferred tax liabilities associated with the undistributed earnings of certain non-U.S. subsidiaries that were deemed to be reinvested indefinitely. For a further discussion of income taxes, see Critical Accounting Estimates used by the Firm on pages 92-94 of this Form 10-Q.
Extraordinary gain
The Firm recognized a $76 million increase in the extraordinary gain in the third quarter of 2009 associated with the final purchase accounting adjustments for the September 25, 2008 acquisition of the banking operations of Washington Mutual, compared with a preliminary gain of $581 million in the third quarter of 2008. The transaction was accounted for under the purchase method of accounting in accordance with U.S. GAAP for business combinations. The adjusted net asset value of the banking operations after purchase accounting adjustments was higher than the consideration paid by JPMorgan Chase, resulting in these extraordinary gains. For a further discussion of the Washington Mutual transaction, see Note 2 on pages 102-106 of this Form 10-Q.

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EXPLANATION AND RECONCILIATION OF THE FIRM’S USE OF NON-GAAP FINANCIAL MEASURES
The Firm prepares its consolidated financial statements using 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 that assume credit card loans securitized by CS remain on the balance sheet, and it presents revenue on a FTE basis. These adjustments do not have any impact on net income as reported by the lines of business or by the Firm as a whole.
The presentation of CS results on a managed basis assumes that credit card loans that have been securitized and sold in accordance with U.S. GAAP remain on the Consolidated Balance Sheets, and that the earnings on the securitized loans are classified in the same manner as the earnings on retained loans recorded on the Consolidated Balance Sheets. JPMorgan Chase uses the concept of managed basis to evaluate the credit performance and overall financial performance of the entire managed credit card portfolio. Operations are funded and decisions are made about allocating resources, such as employees and capital, based on managed financial information. In addition, the same underwriting standards and ongoing risk monitoring are used for both loans on the Consolidated Balance Sheets and securitized loans. Although securitizations result in the sale of credit card receivables to a trust, JPMorgan Chase retains the ongoing customer relationships, as the customers may continue to use their credit cards; accordingly, the customer’s credit performance will affect both the securitized loans and the loans retained on the Consolidated Balance Sheets. JPMorgan Chase believes managed basis information is useful to investors, enabling them to understand both the credit risks associated with the loans reported on the Consolidated Balance Sheets and the Firm’s retained interests in securitized loans. For a reconciliation of reported to managed basis results for CS, see CS segment results on pages 33-36 of this Form 10-Q. For information regarding the securitization process, and loans and residual interests sold and securitized, see Note 15 on pages 147-155 of this Form 10-Q.
Total net revenue for each of the business segments and the Firm is presented on a FTE basis. Accordingly, revenue from tax-exempt securities and investments that receive tax credits is presented in the managed results on a basis comparable to taxable securities and investments. This non-GAAP financial measure allows management to assess the comparability of revenue arising from both taxable and tax-exempt sources. The corresponding income tax impact related to these items is recorded within income tax expense.
Tangible common equity (“TCE”) represents common stockholders’ equity (i.e., total stockholders’ equity less preferred stock) less identifiable intangible assets (other than MSRs) and goodwill, net of related deferred tax liabilities. ROTCE, a non-GAAP financial ratio, measures the Firm’s earnings as a percentage of TCE, and is in management’s view a meaningful measure to assess the Firm’s use of equity.
Management also uses certain non-GAAP financial measures at the business-segment level, because it believes these other non-GAAP financial measures provide information to investors about the underlying operational performance and trends of the particular business segment and, therefore, facilitate a comparison of the business segment with the performance of its competitors.

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The following summary table provides a reconciliation from the Firm’s reported U.S. GAAP results to managed basis.
                                 
    Three months ended September 30, 2009
    Reported   Credit   Fully tax-equivalent   Managed
(in millions, except per share and ratios)   results   card(d)   adjustments   basis
 
Revenue
                               
Investment banking fees
  $ 1,679     $     $     $ 1,679  
Principal transactions
    3,860                   3,860  
Lending- and deposit-related fees
    1,826                   1,826  
Asset management, administration and commissions
    3,158                   3,158  
Securities gains
    184                   184  
Mortgage fees and related income
    843                   843  
Credit card income
    1,710       (285 )           1,425  
Other income
    625             371       996  
 
Noninterest revenue
    13,885       (285 )     371       13,971  
Net interest income
    12,737       1,983       89       14,809  
 
Total net revenue
    26,622       1,698       460       28,780  
Noninterest expense
    13,455                   13,455  
 
Pre-provision profit
    13,167       1,698       460       15,325  
Provision for credit losses
    8,104       1,698             9,802  
 
Income before income tax expense and extraordinary gain
    5,063             460       5,523  
Income tax expense
    1,551             460       2,011  
 
Income before extraordinary gain
    3,512                   3,512  
Extraordinary gain
    76                   76  
 
Net income
  $ 3,588     $     $     $ 3,588  
 
Diluted earnings per share(a)(b)
  $ 0.80     $     $     $ 0.80  
Return on assets(b)
    0.70 %   NM     NM       0.67 %
Overhead ratio
    51     NM     NM       47  
 
                                 
    Three months ended September 30, 2008
    Reported   Credit   Fully tax-equivalent   Managed
(in millions, except per share and ratios)   results   card(d)   adjustments   basis
 
Revenue
                               
Investment banking fees
  $ 1,316     $     $     $ 1,316  
Principal transactions
    (2,763 )                 (2,763 )
Lending- and deposit-related fees
    1,168                   1,168  
Asset management, administration and commissions
    3,485                   3,485  
Securities gains
    424                   424  
Mortgage fees and related income
    457                   457  
Credit card income
    1,771       (843 )           928  
Other income
    (115 )           323       208  
 
Noninterest revenue
    5,743       (843 )     323       5,223  
Net interest income
    8,994       1,716       155       10,865  
 
Total net revenue
    14,737       873       478       16,088  
Noninterest expense
    11,137                   11,137  
 
Pre-provision profit
    3,600       873       478       4,951  
Provision for credit losses
    3,811       873             4,684  
Provision for credit losses — accounting conformity(c)
    1,976                   1,976  
 
Income/(loss) before income tax expense/(benefit) and extraordinary gain
    (2,187 )           478       (1,709 )
Income tax expense/(benefit)
    (2,133 )           478       (1,655 )
 
Income/(loss) before extraordinary gain
    (54 )                 (54 )
Extraordinary gain
    581                   581  
 
Net income
  $ 527     $     $     $ 527  
 
Diluted earnings (loss) per share(a)(b)
  $ (0.08 )   $     $     $ (0.08 )
Return on assets(b)
    (0.01 )%   NM     NM       (0.01 )%
Overhead ratio
    76     NM     NM       69  
 

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    Nine months ended September 30, 2009
    Reported   Credit   Fully tax-equivalent   Managed
(in millions, except per share and ratios)   results   card(d)   adjustments   basis
 
Revenue
                               
Investment banking fees
  $ 5,171     $     $     $ 5,171  
Principal transactions
    8,958                   8,958  
Lending- and deposit-related fees
    5,280                   5,280  
Asset management, administration and commissions
    9,179                   9,179  
Securities gains
    729                   729  
Mortgage fees and related income
    3,228                   3,228  
Credit card income
    5,266       (1,119 )           4,147  
Other income
    685             1,043       1,728  
 
Noninterest revenue
    38,496       (1,119 )     1,043       38,420  
Net interest income
    38,774       5,945       272       44,991  
 
Total net revenue
    77,270       4,826       1,315       83,411  
Noninterest expense
    40,348                   40,348  
 
Pre-provision profit
    36,922       4,826       1,315       43,063  
Provision for credit losses
    24,731       4,826             29,557  
 
Income before income tax expense and extraordinary gain
    12,191             1,315       13,506  
Income tax expense
    3,817             1,315       5,132  
 
Income before extraordinary gain
    8,374                   8,374  
Extraordinary gain
    76                   76  
 
Net income
  $ 8,450     $     $     $ 8,450  
 
Diluted earnings per share(a)(b)
  $ 1.50     $     $     $ 1.50  
Return on assets(b)
    0.55 %   NM     NM       0.53 %
Overhead ratio
    52     NM     NM       48  
 
                                 
    Nine months ended September 30, 2008
    Reported   Credit   Fully tax-equivalent   Managed
(in millions, except per share and ratios)   results   card(d)   adjustments   basis
 
Revenue
                               
Investment banking fees
  $ 4,144     $     $     $ 4,144  
Principal transactions
    (2,814 )                 (2,814 )
Lending- and deposit-related fees
    3,312                   3,312  
Asset management, administration and commissions
    10,709                   10,709  
Securities gains
    1,104                   1,104  
Mortgage fees and related income
    1,678                   1,678  
Credit card income
    5,370       (2,623 )           2,747  
Other income
    1,576             773       2,349  
 
Noninterest revenue
    25,079       (2,623 )     773       23,229  
Net interest income
    24,947       5,007       481       30,435  
 
Total net revenue
    50,026       2,384       1,254       53,664  
Noninterest expense
    32,245                   32,245  
 
Pre-provision profit
    17,781       2,384       1,254       21,419  
Provision for credit losses
    11,690       2,384             14,074  
Provision for credit losses — accounting conformity(c)
    1,976                   1,976  
 
Income before income tax expense/(benefit) and extraordinary gain
    4,115             1,254       5,369  
Income tax expense/(benefit)
    (207 )           1,254       1,047  
 
Income before extraordinary gain
    4,322                   4,322  
Extraordinary gain
    581                   581  
 
Net income
  $ 4,903     $     $     $ 4,903  
 
Diluted earnings per share(a)(b)
  $ 1.13     $     $     $ 1.13  
Return on assets(b)
    0.35 %   NM     NM       0.33 %
Overhead ratio
    64     NM     NM       60  
 
 
(a)   Effective January 1, 2009, the Firm implemented new FASB guidance for participating securities. Accordingly, prior-period amounts have been revised. For further discussion of the guidance, see Note 21 on pages 166-167 of this Form 10-Q.
 
(b)   Based on income/(loss) before extraordinary gain.
 
(c)   The third quarter of 2008 included an accounting conformity loan loss reserve provision related to the acquisition of Washington Mutual’s banking operations.
 
(d)   See pages 33-36 of this Form 10-Q for a discussion of the effect of credit card securitizations on CS.

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Three months ended September 30,   2009   2008
(in millions)   Reported   Securitized   Managed   Reported   Securitized   Managed
 
Loans — Period-end
  $ 653,144     $ 87,028     $ 740,172     $ 761,381     $ 93,664     $ 855,045  
Total assets — average
    1,999,176       82,779       2,081,955       1,756,359       75,712       1,832,071  
 
                                                 
Nine months ended September 30,   2009   2008
(in millions)   Reported   Securitized   Managed   Reported   Securitized   Managed
 
Loans — Period-end
  $ 653,144     $ 87,028     $ 740,172     $ 761,381     $ 93,664     $ 855,045  
Total assets — average
    2,034,640       82,383       2,117,023       1,665,285       73,966       1,739,251  
 
Average tangible common equity
                                                         
    Three months ended   Nine months ended September 30,
(in millions)   Sept. 30, 2009   June 30, 2009   March 31, 2009   Dec. 31, 2008   Sept. 30, 2008   2009   2008
 
Common
stockholders’
equity
  $ 149,468     $ 140,865     $ 136,493     $ 138,757     $ 126,640     $ 142,322     $ 125,878  
Less: Goodwill
    48,328       48,273       48,071       46,838       45,947       48,225       45,809  
Less: Certain identifiable intangible assets
    4,984       5,218       5,443       5,586       5,512       5,214       5,845  
Add: Deferred tax liabilities(a)
    2,531       2,518       2,609       2,547       2,378       2,552       2,309  
 
Tangible common equity (TCE)
  $ 98,687     $ 89,892     $ 85,588     $ 88,880     $ 77,559     $ 91,435     $ 76,533  
 
 
(a)   Represents deferred tax liabilities related to tax-deductible goodwill and to identifiable intangibles created in non-taxable transactions, which are netted against goodwill and other intangibles when calculating TCE.
Impact on ROE of redemption of TARP preferred stock issued to the U.S. Treasury
The calculation of second-quarter 2009 net income applicable to common equity includes a one-time, noncash reduction of $1.1 billion resulting from the repayment of TARP preferred capital. Excluding this reduction ROE would have been 6% for the second quarter of 2009 as disclosed in the table below. The Firm views the adjusted ROE, a non-GAAP financial measure, as meaningful because it increases the comparability to prior periods.
                 
    Three months ended June 30, 2009
            Excluding the
(in millions, except ratios)   As reported   TARP redemption
 
Return on equity
               
 
Net income
  $ 2,721     $ 2,721  
Less: Preferred stock dividends
    473       473  
Less: Accelerated amortization from redemption of preferred stock issued to the U.S. Treasury
    1,112        
 
Net income applicable to common equity
  $ 1,136     $ 2,248  
 
Average common stockholders’ equity
  $ 140,865     $ 140,865  
 
ROE
    3 %     6 %
 

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Impact on diluted earnings per share of redemption of TARP preferred stock issued to the U.S. Treasury
Net income applicable to common equity for the second quarter of 2009 included a one-time, noncash reduction of approximately $1.1 billion resulting from the repayment of TARP preferred capital. The following table presents the calculations of the effect on net income applicable to common stockholders for the three months ended June 30, 2009 and the nine months ended September 30, 2009, and the $0.27 reduction to diluted earnings per share which resulted from the repayment. There was no impact on diluted earnings per share from the TARP repayment during the third quarter of 2009.
                                 
    Three months ended June 30, 2009   Nine months ended September 30, 2009
            Effect of           Effect of
(in millions, except per share)   As reported   TARP redemption   As reported   TARP redemption
 
Diluted earnings per share
                               
 
Net income
  $ 2,721     $     $ 8,450     $  
Less: Preferred stock dividends
    473             1,165        
Less: Accelerated amortization from redemption of preferred stock issued to the U.S. Treasury
    1,112       1,112       1,112       1,112  
 
Net income applicable to common equity
  $ 1,136     $ (1,112 )   $ 6,173     $ (1,112 )
Less: Dividends and undistributed earnings allocated to participating securities
    64       (64 )     348       (64 )
 
Net income applicable to common stockholders
  $ 1,072     $ (1,048 )   $ 5,825     $ (1,048 )
 
 
                               
Total weighted average diluted shares outstanding
    3,824.1       3,824.1       3,848.3       3,848.3  
 
Net income per share
  $ 0.28     $ (0.27 )   $ 1.51     $ (0.27 )
 
Other financial measures
The Firm also discloses the allowance for loan losses to total retained loans, excluding home lending purchased credit-impaired loans and loans held by the Washington Mutual Master Trust. For a further discussion of this credit metric, see Allowance for Credit Losses on pages 81–84 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, 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 40-41 of JPMorgan Chase’s 2008 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.

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Segment Results — Managed Basis(a)(b)

The following table summarizes the business segment results for the periods indicated.
                                                                                         
Three months ended                                                                           Return  
September 30,   Total net revenue     Noninterest expense     Net income/(loss)     on equity  
(in millions, except ratios)   2009     2008     Change     2009     2008     Change     2009     2008     Change     2009     2008  
 
Investment Bank(c)
  $ 7,508     $ 4,066       85 %   $ 4,274     $ 3,816       12 %   $ 1,921     $ 882       118 %     23 %     13 %
Retail Financial Services
    8,218       4,963       66       4,196       2,779       51       7       64       (89 )           1  
Card Services
    5,159       3,887       33       1,306       1,194       9       (700 )     292     NM       (19 )     8  
Commercial Banking
    1,459       1,125       30       545       486       12       341       312       9       17       18  
Treasury & Securities Services
    1,788       1,953       (8 )     1,280       1,339       (4 )     302       406       (26 )     24       46  
Asset Management
    2,085       1,961       6       1,351       1,362       (1 )     430       351       23       24       25  
Corporate/Private Equity(c)
    2,563       (1,867 )   NM       503       161       212       1,287       (1,780 )   NM     NM     NM    
                                                 
Total
  $ 28,780     $ 16,088       79 %   $ 13,455     $ 11,137       21 %   $ 3,588     $ 527     NM       9 %     1 %
 
                                                                                         
Nine months ended                                                                           Return  
September 30,   Total net revenue     Noninterest expense     Net income/(loss)     on equity  
(in millions, except ratios)   2009     2008     Change     2009     2008     Change     2009     2008     Change     2009     2008  
 
Investment Bank(c)
  $ 23,180     $ 12,607       84 %   $ 13,115     $ 11,103       18 %   $ 4,998     $ 1,189       320 %     20 %     7 %
Retail Financial Services
    25,023       14,836       69       12,446       8,031       55       496       256       94       3       2  
Card Services
    15,156       11,566       31       3,985       3,651       9       (1,919 )     1,151     NM       (17 )     11  
Commercial Banking
    4,314       3,298       31       1,633       1,447       13       1,047       959       9       17       18  
Treasury & Securities Services
    5,509       5,885       (6 )     3,887       3,884             989       1,234       (20 )     26       47  
Asset Management
    5,770       5,926       (3 )     4,003       4,085       (2 )     1,006       1,102       (9 )     19       28  
Corporate/Private Equity(c)
    4,459       (454 )   NM       1,279       44     NM       1,833       (988 )   NM     NM     NM  
                                                 
Total
  $ 83,411     $ 53,664       55 %   $ 40,348     $ 32,245       25 %   $ 8,450     $ 4,903       72       6 %     5 %
 
 
(a)   Represents reported results on a fully tax-equivalent basis, excluding the impact of credit card securitizations.
 
(b)   On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual Bank. On May 30, 2008, the Bear Stearns merger was consummated. Each of these transactions was accounted for as a purchase, and their respective results of operations are included in the Firm’s results from each respective transaction date. For additional information on these transactions, see Note 2 on pages 123-127 of JPMorgan Chase’s 2008 Annual Report and Note 2 on pages 102-106 of this Form 10-Q.
 
(c)   In the second quarter of 2009, IB began reporting credit reimbursement from TSS as a component of total net revenue, whereas TSS continues to report its credit reimbursement to IB as a separate line item on its income statement (not part of total net revenue). Corporate/Private Equity includes an adjustment to offset IB’s inclusion of the credit reimbursement in total net revenue. Prior periods have been revised for IB and Corporate/Private Equity to reflect this presentation.

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Table of Contents

INVESTMENT BANK
For a discussion of the business profile of IB, see pages 42-44 of JPMorgan Chase’s 2008 Annual Report and page 5 of this Form 10-Q.
                                                 
Selected income statement data   Three months ended September 30,     Nine months ended September 30,  
(in millions, except ratios)   2009     2008     Change     2009     2008     Change  
 
Revenue
                                               
Investment banking fees
  $ 1,658     $ 1,593       4 %   $ 5,277     $ 4,534       16 %
Principal transactions
    2,714       (922 )   NM       8,070       (882 )   NM  
Lending- and deposit-related fees
    185       118       57       490       325       51  
Asset management, administration and commissions
    633       847       (25 )     2,042       2,300       (11 )
All other income(a)
    63       (248 )   NM       (101 )     (480 )     79  
                     
Noninterest revenue
    5,253       1,388       278       15,778       5,797       172  
Net interest income(b)
    2,255       2,678       (16 )     7,402       6,810       9  
                     
Total net revenue(c)
    7,508       4,066       85       23,180       12,607       84  
Provision for credit losses
    379       234       62       2,460       1,250       97  
 
                                               
Noninterest expense
                                               
Compensation expense
    2,778       2,162       28       8,785       6,535       34  
Noncompensation expense
    1,496       1,654       (10 )     4,330       4,568       (5 )
                     
Total noninterest expense
    4,274       3,816       12       13,115       11,103       18  
                     
Income before income tax expense/(benefit)
    2,855       16     NM       7,605       254     NM  
Income tax expense/(benefit)(d)
    934       (866 )   NM       2,607       (935 )   NM  
                     
Net income
  $ 1,921     $ 882       118     $ 4,998     $ 1,189       320  
                     
 
                                               
Financial ratios
                                               
ROE
    23 %     13 %             20 %     7 %        
ROA
    1.12       0.39               0.94       0.19          
Overhead ratio
    57       94               57       88          
Compensation expense as a percentage of total net revenue
    37       53               38       52          
                     
 
                                               
Revenue by business
                                               
Investment banking fees:
                                               
Advisory
  $ 384     $ 576       (33 )   $ 1,256     $ 1,429       (12 )
Equity underwriting
    681       518       31       2,092       1,419       47  
Debt underwriting
    593       499       19       1,929       1,686       14  
                     
Total investment banking fees
    1,658       1,593       4       5,277       4,534       16  
Fixed income markets
    5,011       815     NM       14,829       3,628       309  
Equity markets
    941       1,650       (43 )     3,422       3,705       (8 )
Credit portfolio
    (102 )     8     NM       (348 )     740     NM  
                     
Total net revenue
  $ 7,508     $ 4,066       85     $ 23,180     $ 12,607       84  
                     
 
                                               
Revenue by region
                                               
Americas
  $ 3,913     $ 1,072       265     $ 12,890     $ 4,813       168  
Europe/Middle East/Africa
    2,855       2,517       13       7,685       5,684       35  
Asia/Pacific
    740       477       55       2,605       2,110       23  
                     
Total net revenue
  $ 7,508     $ 4,066       85     $ 23,180     $ 12,607       84  
                     
 
(a)   TSS was charged a credit reimbursement related to certain exposures managed within IB credit portfolio on behalf of clients shared with TSS. IB recognizes this credit reimbursement in its credit portfolio business in All other income. Prior periods have been revised to conform to the current presentation.
 
(b)   The decrease in net interest income in the third quarter was due to a lower amount of interest-earning assets, while the increase in year-to-date 2009 was driven by higher spreads across several fixed income trading businesses, partially offset by lower balances.
 
(c)   Total net revenue included tax-equivalent adjustments, predominantly due to income tax credits related to affordable housing and alternative energy investments, as well as tax-exempt income from municipal bond investments of $371 million and $427 million for the quarters ended September 30, 2009 and 2008, respectively, and $1.1 billion for both year-to-date 2009 and 2008.
 
(d)   The income tax benefit in the third quarter and year-to-date 2008 was predominantly the result of reduced deferred tax liabilities on overseas earnings.

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Quarterly results
Net income was $1.9 billion, an increase of $1.0 billion from the third quarter of 2008. These results included the negative impact of the tightening of the Firm’s credit spread, offset by the positive impact of counterparty spread tightening and gains on legacy leveraged lending and mortgage-related positions.
Net revenue was $7.5 billion, an increase of $3.4 billion, or 85%, from the prior year. Investment banking fees were up 4% to $1.7 billion, consisting of equity underwriting fees of $681 million (up 31%), debt underwriting fees of $593 million (up 19%) and advisory fees of $384 million (down 33%). Fixed Income Markets revenue was $5.0 billion, up by $4.2 billion, reflecting strong results across most products and gains of approximately $400 million on legacy leveraged lending and mortgage-related positions, compared with markdowns of $3.6 billion in the prior year. These results also included losses of $497 million from the tightening of the Firm’s credit spread on certain structured liabilities, compared with gains of $343 million in the prior year from the widening of the spread on those liabilities. Equity Markets revenue was $941 million, down by $709 million, or 43%, which included losses of $343 million from the tightening of the Firm’s credit spread on certain structured liabilities, compared with gains in the prior year of $429 million from the widening of the spread on those liabilities. The current period’s results also included solid client revenue, particularly in prime services, and strong trading results. Credit Portfolio revenue was a loss of $102 million, reflecting mark-to-market losses on hedges of retained loans, largely offset by a combination of the positive net impact of credit spreads on derivative assets and liabilities, and net interest income on loans.
The provision for credit losses increased to $379 million, compared with $234 million in the prior year. The increase in the provision reflected deterioration in the credit environment compared with the third quarter of 2008. Net charge-offs were $750 million compared with $13 million in the prior year. The allowance for loan losses to end-of-period loans retained was 8.44%, compared with 3.62% in the prior year. Nonperforming loans were $4.9 billion, up by $4.5 billion from the prior year.
Noninterest expense was $4.3 billion, up by $458 million, or 12%, from the prior year. The increase was driven by higher performance-based compensation, partially offset by lower headcount-related expense.
Return on equity was 23% on $33.0 billion of average allocated capital, compared with 13% on $26.0 billion of average allocated capital in the prior year.
Year-to-date results
Net income was $5.0 billion, an increase of $3.8 billion from the prior year. The results reflected higher net revenue, partially offset by higher noninterest expense and a higher provision for credit losses.
Net revenue was $23.2 billion, an increase of $10.6 billion, or 84%, from the prior year. Investment banking fees were up 16% to $5.3 billion, consisting of equity underwriting fees of $2.1 billion (up 47%), debt underwriting fees of $1.9 billion (up 14%) and advisory fees of $1.3 billion (down 12%). Fixed Income Markets revenue was $14.8 billion, up by $11.2 billion, reflecting strong results across all products, as well as significantly lower net markdowns on legacy leveraged lending and mortgage-related positions, compared with markdowns of $7.7 billion in the prior year. These results also included losses of $848 million from the tightening of the Firm’s credit spread on certain structured liabilities, compared with gains of $1.2 billion in the prior year from the widening of the spread on those liabilities. Equity Markets revenue was $3.4 billion, down by $283 million, or 8%, which included losses of $453 million from the tightening of the Firm’s credit spread on certain structured liabilities, compared with gains in the prior year of $865 million from the widening of the spread on those liabilities. The current period’s results also included solid client revenue, particularly in prime services, and strong trading results. Credit Portfolio revenue was a loss of $348 million, down by $1.1 billion, reflecting mark-to-market losses on hedges of retained loans, partially offset by a combination of the positive net impact of credit spreads on derivative assets and liabilities, and net interest income on loans.
The provision for credit losses increased to $2.5 billion from $1.3 billion in the prior year, reflecting continued deterioration in the credit environment. Net charge-offs were $1.2 billion in 2009, compared with $18 million in the prior year.
Noninterest expense was $13.1 billion, up by $2.0 billion, or 18%, from the prior year. The increase was driven by higher performance-based compensation, partially offset by lower noncompensation expense.
Return on Equity was 20% on $33.0 billion of average allocated capital, compared with 7% on $23.8 billion of average allocated capital in the prior year.

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Selected metrics   Three months ended September 30,     Nine months ended September 30,  
(in millions, except headcount and ratios)   2009     2008     Change     2009     2008     Change  
 
Selected balance sheet data (period-end)
                                               
Loans:
                                               
Loans retained(a)
  $ 55,703     $ 73,347       (24 )%   $ 55,703     $ 73,347       (24 )%
Loans held-for-sale and loans at fair value
    4,582       16,667       (73 )     4,582       16,667       (73 )
 
Total loans
    60,285       90,014       (33 )     60,285       90,014       (33 )
Equity
    33,000       33,000             33,000       33,000        
Selected balance sheet data (average)
                                               
Total assets
  $ 678,796     $ 890,040       (24 )   $ 707,396     $ 820,497       (14 )
Trading assets — debt and equity instruments
    270,695       360,821       (25 )     269,668       365,802       (26 )
Trading assets — derivative receivables
    86,651       105,462       (18 )     103,929       98,390       6  
Loans:
                                               
Loans retained(a)
    61,269       69,022       (11 )     66,479       73,107       (9 )
Loans held-for-sale and loans at fair value
    4,981       17,612       (72 )     8,745       19,215       (54 )
                     
Total loans
    66,250       86,634       (24 )     75,224       92,322       (19 )
Adjusted assets(b)
    515,718       694,459       (26 )     545,235       677,945       (20 )
Equity
    33,000       26,000       27       33,000       23,781       39  
Headcount
    24,828       30,993       (20 )     24,828       30,993       (20 )
 
Credit data and quality statistics
                                               
Net charge-offs
  $ 750     $ 13     NM     $ 1,219     $ 18     NM  
Nonperforming assets:
                                               
Nonperforming loans:
                                               
Nonperforming loans retained(a)(c)
    4,782       404     NM       4,782       404     NM  
Nonperforming loans held-for-sale and loans at fair value
    128       32       300       128       32       300  
                     
Total nonperforming loans
    4,910       436     NM       4,910       436     NM  
 
Derivative receivables
    624       34     NM       624       34     NM  
Assets acquired in loan satisfactions
    248       113       119       248       113       119  
                     
Total nonperforming assets
    5,782       583     NM       5,782       583     NM  
Allowance for credit losses:
                                               
Allowance for loan losses
    4,703       2,654       77       4,703       2,654       77  
Allowance for lending-related commitments
    401       463       (13 )     401       463       (13 )
                     
Total allowance for credit losses
    5,104       3,117       64       5,104       3,117       64  
 
Net charge-off rate(a)(d)
    4.86 %     0.07 %             2.45 %     0.03 %        
Allowance for loan losses to period-end loans retained(a)(d)
    8.44       3.62               8.44       3.62          
Allowance for loan losses to average loans retained(a)(d)
    7.68       3.85 (i)             7.07       3.63 (i)        
Allowance for loan losses to nonperforming loans retained (c)
    98       657               98       657          
Nonperforming loans to total period-end loans
    8.14       0.48               8.14       0.48          
Nonperforming loans to total average loans
    7.41       0.50               6.53       0.47          
Market risk-average trading and credit portfolio VaR - 99% confidence level(e)
                                               
Trading activities:
                                               
Fixed income
  $ 243     $ 183       33     $ 237     $ 150       58  
Foreign exchange
    30       20       50       32       27       19  
Equities
    28       80       (65 )     88       47       87  
Commodities and other
    38       41       (7 )     34       33       3  
Diversification(f)
    (134 )     (104 )     (29 )     (144 )     (95 )     (52 )
                     
Total trading VaR(g)
    205       220       (7 )     247       162       52  
Credit portfolio VaR(h)
    50       47       6       120       38       216  
Diversification(f)
    (49 )     (49 )           (99 )     (39 )     (154 )
                     
Total trading and credit portfolio VaR
  $ 206     $ 218       (6 )   $ 268     $ 161       66  
 
 
(a)   Loans retained included credit portfolio loans, leveraged leases and other accrual loans, and excluded loans held-for-sale and loans accounted for at fair value.

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(b)   Adjusted assets, a non-GAAP financial measure, equals total assets minus: (1) securities purchased under resale agreements and securities borrowed less securities sold, not yet purchased; (2) assets of consolidated variable interest entities (“VIEs”); (3) cash and securities segregated and on deposit for regulatory and other purposes; (4) goodwill and intangibles; (5) securities received as collateral; and (6) investments purchased under the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (“AML Facility”). The amount of adjusted assets is presented to assist the reader in comparing IB’s asset and capital levels to other investment banks in the securities industry. Asset-to-equity leverage ratios are commonly used as one measure to assess a company’s capital adequacy. IB believes an adjusted asset amount that excludes the assets discussed above, which were considered to have a low risk profile, provides a more meaningful measure of balance sheet leverage in the securities industry.
 
(c)   Allowance for loan losses of $1.8 billion and $72 million were held against these nonperforming loans at September 30, 2009 and 2008, respectively. Nonperforming loans excluded distressed loans held-for-sale that were purchased as part of IB’s proprietary activities.
 
(d)   Loans held-for-sale and loans at fair value were excluded when calculating the allowance coverage ratio and net charge-off rate.
 
(e)   Results for year-to-date 2008 include four months of the combined Firm’s (JPMorgan Chase & Co.’s and Bear Stearns’) results and five months of heritage JPMorgan Chase & Co results. For a more complete description of value-at-risk, see pages 84-89 of this Form 10-Q.
 
(f)   Average VaRs were less than the sum of the VaRs of their market risk components, which was due to risk offsets resulting from portfolio diversification. The diversification effect reflected the fact that the risks were not perfectly correlated. The risk of a portfolio of positions is usually less than the sum of the risks of the positions themselves.
 
(g)   Trading VaR includes predominantly all trading activities in IB. Trading VaR does not include VaR related to held-for-sale funded loans and unfunded commitments, nor the debit valuation adjustments (“DVA”) taken on derivative and structured liabilities to reflect the credit quality of the Firm. See the DVA Sensitivity table on page 89 of this Form 10-Q for further details. Trading VaR also does not include the MSR portfolio or VaR related to other corporate functions, such as Corporate/Private Equity. Beginning in the fourth quarter of 2008, trading VaR includes the estimated credit spread sensitivity of certain mortgage products.
 
(h)   Includes VaR on derivative credit valuation adjustments (“CVA”), hedges of the CVA and mark-to-market hedges of the retained loan portfolio, which were all reported in principal transactions revenue. This VaR does not include the retained loan portfolio.
 
(i)   Excluding the impact of a loan originated in March 2008 to Bear Stearns, the adjusted ratio would be 3.76% for year-to-date 2008. The average balance of the loan extended to Bear Stearns was $2.6 billion for year-to-date 2008.
According to Thomson Reuters, for the first nine months of 2009, the Firm was ranked #1 in Global Debt, Equity and Equity-Related; #1 in Global Equity and Equity-Related; #1 in Global Long-Term Debt; #1 in Global Syndicated Loans and #4 in Global Announced M&A based on volume.
According to Dealogic, the Firm was ranked #1 in Investment Banking fees generated for the first nine months of 2009, based on revenue.
                                 
    Nine months ended September 30, 2009   Full-year 2008
Market shares and rankings(a)   Market Share   Rankings   Market Share   Rankings
 
Global debt, equity and equity-related
    10 %     #1       9 %     #1  
Global syndicated loans
    9       #1       11       #1  
Global long-term debt(b)
    9       #1       9       #3  
Global equity and equity-related(c)
    15       #1       10       #1  
Global announced M&A(d)
    25       #4       28       #2  
U.S. debt, equity and equity-related
    15       #1       15       #2  
U.S. syndicated loans
    23       #1       25       #1  
U.S. long-term debt(b)
    14       #1       15       #2  
U.S. equity and equity-related(c)
    18       #1       11       #1  
U.S. announced M&A(d)
    33       #4       35       #2  
 
 
(a)   Source: Thomson Reuters. Full-year 2008 results are pro forma for the Bear Stearns merger.
 
(b)   Includes asset-backed securities, mortgage-backed securities and municipal securities.
 
(c)   Includes rights offerings, and U.S.-domiciled equity and equity-related transactions.
 
(d)   Global announced M&A is based on rank value; all other rankings are based on proceeds, with full credit to each book manager/equal if joint. Because of joint assignments, market share of all participants will add up to more than 100%. Global and U.S. announced M&A market share and rankings for 2008 include transactions withdrawn since December 31, 2008. U.S. announced M&A represents any U.S. involvement ranking.

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RETAIL FINANCIAL SERVICES
For a discussion of the business profile of RFS, see pages 45-50 of JPMorgan Chase’s 2008 Annual Report and page 5 of this Form 10-Q.
                                                 
Selected income statement data   Three months ended September 30,     Nine months ended September 30,  
(in millions, except ratios)   2009     2008     Change     2009     2008     Change  
 
Revenue
                                               
Lending- and deposit-related fees
  $ 1,046     $ 538       94 %   $ 2,997     $ 1,496       100 %
Asset management, administration and commissions
    408       346       18       1,268       1,098       15  
Mortgage fees and related income
    873       438       99       3,313       1,659       100  
Credit card income
    416       204       104       1,194       572       109  
Other income
    321       206       56       829       556       49  
                     
Noninterest revenue
    3,064       1,732       77       9,601       5,381       78  
Net interest income
    5,154       3,231       60       15,422       9,455       63  
                     
Total net revenue
    8,218       4,963       66       25,023       14,836       69  
 
                                               
Provision for credit losses
    3,988       2,056       94       11,711       6,329       85  
 
                                               
Noninterest expense
                                               
Compensation expense
    1,728       1,120       54       4,990       3,464       44  
Noncompensation expense
    2,385       1,559       53       7,207       4,267       69  
Amortization of intangibles
    83       100       (17 )     249       300       (17 )
                     
Total noninterest expense
    4,196       2,779       51       12,446       8,031       55  
                     
Income before income tax expense
    34       128       (73 )     866       476       82  
Income tax expense
    27       64       (58 )     370       220       68  
                     
Net income
  $ 7     $ 64       (89 )   $ 496     $ 256       94  
                     
 
                                               
Financial ratios
                                               
ROE
    %     1 %             3 %     2 %        
Overhead ratio
    51       56               50       54          
Overhead ratio excluding core deposit intangibles(a)
    50       54               49       52          
 
(a)   Retail Financial Services uses the overhead ratio (excluding the amortization of core deposit intangibles (“CDI”)), a non-GAAP financial measure, to evaluate the underlying expense trends of the business. Including CDI amortization expense in the overhead ratio calculation results in a higher overhead ratio in the earlier years and a lower overhead ratio in later years; this method would result in an improving overhead ratio over time, all things remaining equal. This non-GAAP ratio excludes Retail Banking’s core deposit intangible amortization expense, related to the 2006 Bank of New York transaction and the 2004 Bank One merger, of $83 million and $99 million for the quarters ended September 30, 2009 and 2008, respectively, and $248 million and $297 million for year-to-date September 30, 2009 and 2008, respectively.
Quarterly results
Net income was $7 million, a decrease of $57 million from the third quarter of 2008, as an increase in the provision for credit losses was largely offset by the positive impact of the Washington Mutual transaction.
Net revenue was $8.2 billion, an increase of $3.3 billion, or 66%, from the prior year. Net interest income was $5.2 billion, up by $1.9 billion, or 60%, reflecting the impact of the Washington Mutual transaction, wider loan spreads and higher deposit balances offset partially by lower loan balances. Noninterest revenue was $3.1 billion, up by $1.3 billion, or 77%, driven by the impact of the Washington Mutual transaction, higher net mortgage servicing revenue and higher deposit-related fees, partially offset by lower mortgage production revenue.
The provision for credit losses was $4.0 billion, an increase of $1.9 billion from the prior year. Weak economic conditions and housing price declines continued to drive higher estimated losses for the home equity and mortgage loan portfolios. The provision included an addition of $1.4 billion to the allowance for loan losses, compared with additions of $730 million in the prior year. Included in the third-quarter 2009 addition to the allowance for loan losses was a $1.1 billion increase related to estimated deterioration in the Washington Mutual purchased credit-impaired portfolio. Home equity net charge-offs were $1.1 billion (3.38% net charge-off rate; 4.25% excluding purchased credit-impaired loans), compared with $663 million (2.78% net charge-off rate) in the prior year. Subprime mortgage net charge-offs were $422 million (8.46% net charge-off rate; 12.31% excluding purchased credit-impaired loans), compared with $273 million (7.65% net charge-off rate) in the prior year. Prime mortgage net charge-offs were $525 million (2.58% net charge-off rate; 3.45% excluding purchased credit-impaired loans), compared with $177 million (1.79% net charge-off rate) in the prior year.

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Noninterest expense was $4.2 billion, an increase of $1.4 billion, or 51%. The increase reflected the impact of the Washington Mutual transaction and higher servicing expense, partially offset by lower mortgage reinsurance losses.
Year-to-date results
Net income was $496 million, an increase of $240 million from the prior year, as the positive impact of the Washington Mutual transaction was partially offset by an increase in the provision for credit losses.
Net revenue was $25.0 billion, an increase of $10.2 billion, or 69%, from the prior year. Net interest income was $15.4 billion, up by $6.0 billion, or 63%, reflecting the impact of the Washington Mutual transaction, wider loan and deposit spreads and higher average deposit balances. Noninterest revenue was $9.6 billion, up by $4.2 billion, or 78%, driven by the impact of the Washington Mutual transaction and higher net mortgage servicing revenue.
The provision for credit losses was $11.7 billion, an increase of $5.4 billion from the prior year. Weak economic conditions and housing price declines continued to drive higher estimated losses for the home equity and mortgage loan portfolios. The provision included an addition of $4.3 billion to the allowance for loan losses, compared with additions of $3.2 billion in the prior year. Included in the 2009 addition to the allowance for loan losses was a $1.1 billion increase related to estimated deterioration in the Washington Mutual purchased credit-impaired portfolio. Home equity net charge-offs were $3.5 billion (3.40% net charge-off rate; 4.26% excluding purchased credit-impaired loans), compared with $1.6 billion (2.28% net charge-off rate) in the prior year. Subprime mortgage net charge-offs were $1.2 billion (7.69% net charge-off rate; 11.18% excluding purchased credit-impaired loans), compared with $614 million (5.43% net charge-off rate) in the prior year. Prime mortgage net charge-offs were $1.3 billion (2.10% net charge-off rate; 2.81% excluding purchased credit-impaired loans), compared with $331 million (1.16% net charge-off rate) in the prior year.
Noninterest expense was $12.4 billion, an increase of $4.4 billion, or 55%. The increase reflected the impact of the Washington Mutual transaction and higher servicing expense.
                                                 
Selected metrics   Three months ended September 30,     Nine months ended September 30,  
(in millions, except headcount and ratios)   2009     2008     Change     2009     2008     Change  
 
Selected balance sheet data (period-end)
                                               
Assets
  $ 397,673     $ 426,435       (7 )%   $ 397,673     $ 426,435       (7 )%
Loans:
                                               
Loans retained
    346,765       371,153       (7 )     346,765       371,153       (7 )
Loans held-for-sale and loans at fair value(a)
    14,303       10,223       40       14,303       10,223       40  
                     
Total loans
    361,068       381,376       (5 )     361,068       381,376       (5 )
Deposits
    361,046       353,660       2       361,046       353,660       2  
Equity
    25,000       25,000             25,000       25,000        
 
                                               
Selected balance sheet data (average)
                                               
Assets
  $ 401,620     $ 265,367       51     $ 411,693     $ 264,400       56  
Loans:
                                               
Loans retained
    349,762       222,640       57       358,623       219,464       63  
Loans held-for-sale and loans at fair value(a)
    19,025       16,037       19       18,208       18,116       1  
                     
Total loans
    368,787       238,677       55       376,831       237,580       59  
Deposits
    366,944       222,180       65       371,482       224,731       65  
Equity
    25,000       17,000       47       25,000       17,000       47  
 
                                               
Headcount
    106,951       101,826       5       106,951       101,826       5  
 

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Selected metrics   Three months ended September 30,     Nine months ended September 30,  
(in millions, except ratios)   2009     2008     Change     2009     2008     Change  
 
Credit data and quality statistics
                                               
Net charge-offs
  $ 2,550     $ 1,326       92     $ 7,375     $ 3,176       132  
Nonperforming loans:
                                               
Nonperforming loans retained
    10,091       5,517       83       10,091       5,517       83  
Nonperforming loans held-for-sale and loans at fair value
    242       207       17       242       207       17  
                     
Total nonperforming loans(b)(c)(d)
    10,333       5,724       81       10,333       5,724       81  
Nonperforming assets(b)(c)(d)
    11,883       8,085       47       11,883       8,085       47  
Allowance for loan losses
    13,286       7,517       77       13,286       7,517       77  
 
                                               
Net charge-off rate(e)
    2.89 %     2.37 %             2.75 %     1.93 %        
Net charge-off rate excluding purchased credit-impaired loans(e)(f)
    3.81       2.37               3.62       1.93          
Allowance for loan losses to ending loans retained(e)
    3.83       2.03               3.83       2.03          
Allowance for loan losses to ending loans retained excluding purchased credit-impaired loans(e)(f)
    4.63       2.56               4.63       2.56          
Allowance for loan losses to
nonperforming loans retained(b)(e)(f)
    121       136               121       136          
Nonperforming loans to total loans
    2.86       1.50               2.86       1.50          
Nonperforming loans to total loans excluding purchased credit-impaired loans(b)
    3.72       1.88               3.72       1.88          
 
(a)   Loans at fair value consist of prime mortgages originated with the intent to sell that are accounted for at fair value and classified as trading assets on the Consolidated Balance Sheets. These loans totaled $12.8 billion and $8.6 billion at September 30, 2009 and 2008, respectively. Average balances of these loans totaled $17.7 billion and $14.5 billion for the quarters ended September 30, 2009 and 2008, respectively, and $15.8 billion and $14.9 billion for year-to-date 2009 and 2008, respectively.
 
(b)   Excludes purchased credit-impaired loans that were acquired as part of the Washington Mutual transaction. These loans are accounted for on a pool basis, and the pools are considered to be performing.
 
(c)   Certain of these loans are classified as trading assets on the Consolidated Balance Sheets.
 
(d)   At September 30, 2009 and 2008, nonperforming loans and assets excluded: (1) mortgage loans insured by U.S. government agencies of $7.0 billion and $1.4 billion, respectively; (2) real estate owned insured by U.S. government agencies of $579 million and $370 million, respectively; and (3) student loans that are 90 days past due and still accruing, which are insured by U.S. government agencies under the Federal Family Education Loan Program, of $511 million and $405 million, respectively. These amounts are excluded, as reimbursement is proceeding normally.
 
(e)   Loans held-for-sale and loans accounted for at fair value were excluded when calculating the allowance coverage ratio and the net charge-off rate.
 
(f)   Excludes the impact of purchased credit-impaired loans that were acquired as part of the Washington Mutual transaction. These loans were accounted for at fair value on the acquisition date, which incorporated management’s estimate, as of that date, of credit losses over the remaining life of the portfolio. During the third quarter of 2009, an allowance for loan losses of $1.1 billion was recorded for these loans. To date, no charge-offs have been recorded for these loans.
RETAIL BANKING
                                                 
Selected income statement data   Three months ended September 30,     Nine months ended September 30,  
(in millions, except ratios)   2009     2008     Change     2009     2008     Change  
 
Noninterest revenue
  $ 1,844     $ 1,089       69 %   $ 5,365     $ 3,117       72 %
Net interest income
    2,732       1,756       56       8,065       4,972       62  
                     
Total net revenue
    4,576       2,845       61       13,430       8,089       66  
Provision for credit losses
    208       70       197       894       181       394  
Noninterest expense
    2,646       1,580       67       7,783       4,699       66  
                     
Income before income tax expense
    1,722       1,195       44       4,753       3,209       48  
Net income
  $ 1,043     $ 723       44     $ 2,876     $ 1,942       48  
                     
 
Overhead ratio
    58 %     56 %             58 %     58 %        
Overhead ratio excluding core deposit intangibles(a)
    56       52               56       54          
 
(a)   Retail Banking uses the overhead ratio (excluding the amortization of CDI), a non-GAAP financial measure, to evaluate the underlying expense trends of the business. Including CDI amortization expense in the overhead ratio calculation results in a higher overhead ratio in the earlier years and a lower overhead ratio in later years; this method would result in an improving overhead ratio over time, all things remaining equal. This non-GAAP ratio excludes Retail Banking’s CDI amortization expense, related to the 2006 Bank of New York transaction and the 2004 Bank One merger, of $83 million and $99 million for the quarters ended September 30, 2009 and 2008, respectively, and $248 million and $297 million for year-to-date 2009 and 2008, respectively.

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Quarterly results
Retail Banking reported net income of $1.0 billion, up by $320 million, or 44%, from the prior year.
Net revenue was $4.6 billion, up by $1.7 billion, or 61%, from the prior year. The increase reflected the impact of the Washington Mutual transaction, higher deposit balances, higher deposit-related fees and wider deposit spreads.
The provision for credit losses was $208 million, compared with $70 million in the prior year, reflecting higher estimated losses for Business Banking loans.
Noninterest expense was $2.6 billion, up by $1.1 billion, or 67%. The increase reflected the impact of the Washington Mutual transaction, higher headcount-related expense and higher FDIC insurance premiums.
Year-to-date results
Retail Banking reported net income of $2.9 billion, up by $934 million, or 48%, from the prior year.
Net revenue was $13.4 billion, up by $5.3 billion, or 66%, from the prior year. The increase reflected the impact of the Washington Mutual transaction, wider deposit spreads, higher deposit balances and higher deposit-related fees.
The provision for credit losses was $894 million, compared with $181 million in the prior year, reflecting higher estimated losses for Business Banking loans.
Noninterest expense was $7.8 billion, up by $3.1 billion, or 66%. The increase reflected the impact of the Washington Mutual transaction, higher FDIC insurance premiums and higher headcount-related expense.
                                                 
Selected metrics   Three months ended September 30,     Nine months ended September 30,  
(in billions, except ratios and where otherwise noted)   2009     2008     Change     2009     2008     Change  
 
Business metrics
                                               
Selected ending balances
                                               
 
                                               
Business banking origination volume
  $ 0.5     $ 1.2       (58 )%   $ 1.6     $ 4.7       (66 )%
End-of-period loans owned
    17.4       18.6       (6 )     17.4       18.6       (6 )
End-of-period deposits:
                                               
Checking
  $ 115.5     $ 106.7       8     $ 115.5     $ 106.7       8  
Savings
    151.6       146.4       4       151.6       146.4       4  
Time and other
    66.6       85.8       (22 )     66.6       85.8       (22 )
                     
Total end-of-period deposits
    333.7       338.9       (2 )     333.7       338.9       (2 )
Average loans owned
  $ 17.7     $ 16.6       7     $ 18.0     $ 16.2       11  
Average deposits:
                                               
Checking
  $ 114.0     $ 68.0       68     $ 112.6     $ 67.5       67  
Savings
    151.2       105.4       43       150.1       103.9       44  
Time and other
    74.4       36.7       103       81.8       41.3       98  
                     
Total average deposits
    339.6       210.1       62       344.5       212.7       62  
Deposit margin
    2.99 %     3.06 %             2.92 %     2.86 %        
Average assets
  $ 28.1     $ 25.6       10     $ 29.1     $ 25.6       14  
                     
Credit data and quality statistics (in millions, except ratio)
                                               
Net charge-offs
  $ 208     $ 68       206     $ 594     $ 178       234  
Net charge-off rate
    4.66 %     1.63 %             4.41 %     1.47 %        
Nonperforming assets
  $ 816     $ 380       115     $ 816     $ 380       115  
 
 
                                               
Retail branch business metrics
                                               
 
                                               
Investment sales volume (in millions)
  $ 6,243     $ 4,389       42     $ 15,933     $ 13,684       16  
 
                                               
Number of:
                                               
Branches
    5,126       5,423       (5 )     5,126       5,423       (5 )
ATMs
    15,038       14,389       5       15,038       14,389       5  
Personal bankers
    16,941       15,491       9       16,941       15,491       9  
Sales specialists
    5,530       5,899       (6 )     5,530       5,899       (6 )
Active online customers (in thousands)
    13,852       11,682       19       13,852       11,682       19  
Checking accounts (in thousands)
    25,546       24,490       4       25,546       24,490       4  
 

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CONSUMER LENDING
                                                 
Selected income statement data   Three months ended September 30,     Nine months ended September 30,  
(in millions, except ratio)   2009     2008     Change     2009     2008     Change  
 
Noninterest revenue
  $ 1,220     $ 643       90 %   $ 4,236     $ 2,264       87 %
Net interest income
    2,422       1,475       64       7,357       4,483       64  
                     
Total net revenue
    3,642       2,118       72       11,593       6,747       72  
Provision for credit losses
    3,780       1,986       90       10,817       6,148       76  
Noninterest expense
    1,550       1,199       29       4,663       3,332       40  
                     
Income/(loss) before income tax expense
    (1,688 )     (1,067 )     (58 )     (3,887 )     (2,733 )     (42 )
                     
Net income/(loss)
  $ (1,036 )   $ (659 )     (57 )   $ (2,380 )   $ (1,686 )     (41 )
Overhead ratio
    43 %     57 %             40 %     49 %        
 
Quarterly results
Consumer Lending reported a net loss of $1.0 billion, compared with a net loss of $659 million in the prior year.
Net revenue was $3.6 billion, up by $1.5 billion, or 72%, from the prior year. The increase was driven by the impact of the Washington Mutual transaction, higher mortgage fees and related income and wider loan spreads, partially offset by lower loan balances. Mortgage production revenue was negative $70 million, compared with positive $66 million in the prior year, as an increase in reserves for the repurchase of previously-sold loans was predominantly offset by wider margins on new originations. Operating revenue, which represents loan servicing revenue net of other changes in fair value of the MSR asset, was $508 million, compared with $264 million in the prior year, reflecting growth in average third-party loans serviced as a result of the Washington Mutual transaction. MSR risk management results were $435 million, compared with $108 million in the prior year.
The provision for credit losses was $3.8 billion, compared with $2.0 billion in the prior year, reflecting continued weakness in the home equity and mortgage loan portfolios (see Retail Financial Services discussion of the provision for credit losses, above, for further detail).
Noninterest expense was $1.6 billion, up by $351 million, or 29%, from the prior year, reflecting higher servicing expense due to increased delinquencies and defaults and the impact of the Washington Mutual transaction, partially offset by lower mortgage reinsurance losses.
Year-to-date results
Consumer Lending reported a net loss of $2.4 billion, compared with a net loss of $1.7 billion in the prior year.
Net revenue was $11.6 billion, up by $4.8 billion, or 72%, from the prior year. The increase was driven by the impact of the Washington Mutual transaction, higher mortgage fees and related income and wider loan spreads, partially offset by lower loan balances. Mortgage production revenue was $695 million, down $141 million from the prior year, as an increase in reserves for the repurchase of previously-sold loans was predominantly offset by wider margins on new originations. Operating revenue, which represents loan servicing revenue net of other changes in fair value of the MSR asset, was $1.1 billion, compared with $683 million in the prior year, reflecting growth in average third-party loans serviced as a result of the Washington Mutual transaction. MSR risk management results were $1.5 billion, compared with $140 million in the prior year, reflecting the positive impact of a decrease in estimated future mortgage prepayments and positive hedging results.
The provision for credit losses was $10.8 billion, compared with $6.1 billion in the prior year, reflecting continued weakness in the home equity and mortgage loan portfolios (see Retail Financial Services discussion of the provision for credit losses, above, for further detail).
Noninterest expense was $4.7 billion, up by $1.3 billion, or 40%, from the prior year, reflecting higher servicing expense due to increased delinquencies and defaults and the impact of the Washington Mutual transaction, partially offset by lower mortgage reinsurance losses.

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Table of Contents

                                                 
Selected metrics   Three months ended September 30,     Nine months ended September 30,  
(in billions)   2009     2008     Change     2009     2008     Change  
 
Business metrics
                                               
Selected ending balances
                                               
Loans excluding purchased credit-impaired loans(a)
                                               
End-of-period loans owned:
                                               
Home equity
  $ 104.8     $ 116.8       (10 )%   $ 104.8     $ 116.8       (10 )%
Prime mortgage
    60.1       63.0       (5 )     60.1       63.0       (5 )
Subprime mortgage
    13.3       18.1       (27 )     13.3       18.1       (27 )
Option ARMs
    8.9       19.0       (53 )     8.9       19.0       (53 )
Student loans
    15.5       15.3       1       15.5       15.3       1  
Auto loans
    44.3       43.3       2       44.3       43.3       2  
Other
    0.8       1.0       (20 )     0.8       1.0       (20 )
                     
Total end-of-period loans
  $ 247.7     $ 276.5       (10 )   $ 247.7     $ 276.5       (10 )
                     
Average loans owned:
                                               
Home equity
  $ 106.6     $ 94.8       12     $ 110.0     $ 95.0       16  
Prime mortgage
    60.6       39.7       53       63.1       38.4       64  
Subprime mortgage
    13.6       14.2       (4 )     14.3       15.1       (5 )
Option ARMs
    8.9           NM       8.9           NM  
Student loans
    15.2       14.1       8       16.3       12.9       26  
Auto loans
    43.3       43.9       (1 )     43.0       44.0       (2 )
Other
    0.9       0.9             1.1       1.1        
                     
Total average loans
  $ 249.1     $ 207.6       20     $ 256.7     $ 206.5       24  
                     
Purchased credit-impaired loans(a)
                                               
End-of-period loans owned:
                                               
Home equity
  $ 27.1     $ 26.5       2     $ 27.1     $ 26.5       2  
Prime mortgage
    20.2       24.7       (18 )     20.2       24.7       (18 )
Subprime mortgage
    6.1       3.9       56       6.1       3.9       56  
Option ARMs
    29.8       22.6       32       29.8       22.6       32  
                     
Total end-of-period loans
  $ 83.2     $ 77.7       7     $ 83.2     $ 77.7       7  
                     
Average loans owned:
                                               
Home equity
  $ 27.4     $     NM     $ 27.9     $     NM  
Prime mortgage
    20.5           NM       21.1           NM  
Subprime mortgage
    6.2           NM       6.5           NM  
Option ARMs
    30.2           NM       30.8           NM  
                     
Total average loans
  $ 84.3     $     NM     $ 86.3     $     NM  
                     
Total consumer lending portfolio
                                               
End-of-period loans owned:
                                               
Home equity
  $ 131.9     $ 143.3       (8 )   $ 131.9     $ 143.3       (8 )
Prime mortgage
    80.3       87.7       (8 )     80.3       87.7       (8 )
Subprime mortgage
    19.4       22.0       (12 )     19.4       22.0       (12 )
Option ARMs
    38.7       41.6       (7 )     38.7       41.6       (7 )
Student loans
    15.5       15.3       1       15.5       15.3       1  
Auto loans
    44.3       43.3       2       44.3       43.3       2  
Other
    0.8       1.0       (20 )     0.8       1.0       (20 )
                     
Total end-of-period loans
  $ 330.9     $ 354.2       (7 )   $ 330.9     $ 354.2       (7 )
                     
Average loans owned:
                                               
Home equity
  $ 134.0     $ 94.8       41     $ 137.9     $ 95.0       45  
Prime mortgage
    81.1       39.7       104       84.2       38.4       119  
Subprime mortgage
    19.8       14.2       39       20.8       15.1       38  
Option ARMs
    39.1           NM       39.7           NM  
Student loans
    15.2       14.1       8       16.3       12.9       26  
Auto loans
    43.3       43.9       (1 )     43.0       44.0       (2 )
Other
    0.9       0.9             1.1       1.1        
                     
Total average loans owned(b)
  $ 333.4     $ 207.6       61     $ 343.0     $ 206.5       66  
 
(a)   Purchased credit-impaired loans represent loans acquired in the Washington Mutual transaction for which a deterioration in credit quality occurred between the origination date and JPMorgan Chase’s acquisition date. These loans were initially recorded at fair value and accrete interest income over the estimated life of the loan when cash flows are reasonably estimable, even if the underlying loans are contractually past due.
 
(b)   Total average loans owned includes loans held-for-sale of $1.3 billion and $1.5 billion for the quarters ended September 30, 2009 and 2008, respectively; and $2.4 billion and $3.2 billion for year-to-date 2009 and 2008, respectively.

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Credit data and quality statistics   Three months ended September 30,   Nine months ended September 30,
(in millions, except ratios)   2009   2008   Change   2009   2008   Change
 
Net charge-offs excluding purchased credit-impaired loans(a):
                                               
Home equity
  $ 1,142     $ 663       72 %   $ 3,505     $ 1,621       116 %
Prime mortgage
    525       177       197       1,318       331       298  
Subprime mortgage
    422       273       55       1,196       614       95  
Option ARMs
    15           NM     34           NM
Auto loans
    159       124       28       479       361       33  
Other
    79       21       276       249       71       251  
                     
Total net charge-offs
  $ 2,342     $ 1,258       86     $ 6,781     $ 2,998       126  
                     
Net charge-off rate excluding purchased credit-impaired loans(a):
                                               
Home equity
    4.25 %     2.78 %             4.26 %     2.28 %        
Prime mortgage
    3.45       1.79               2.81       1.16          
Subprime mortgage
    12.31       7.65               11.18       5.43          
Option ARMs
    0.67                     0.51                
Auto loans
    1.46       1.12               1.49       1.10          
Other
    2.08       0.60               2.16       0.84          
Total net charge-off rate excluding
purchased credit-impaired loans
(b)
    3.75       2.43               3.57       1.97          
                     
Net charge-off rate — reported:
                                               
Home equity
    3.38 %     2.78 %             3.40 %     2.28 %        
Prime mortgage
    2.58       1.79               2.10       1.16          
Subprime mortgage
    8.46       7.65               7.69       5.43          
Option ARMs
    0.15                     0.11                
Auto loans
    1.46       1.12               1.49       1.10          
Other
    2.08       0.60               2.16       0.84          
Total net charge-off rate — reported(b)
    2.80       2.43               2.66       1.97          
                     
30+ day delinquency rate excluding
purchased credit-impaired loans(c)(d)(e)
    5.85 %     3.16 %             5.85 %     3.16 %        
Nonperforming assets(f)(g)
  $ 11,068     $ 7,705       44     $ 11,068     $ 7,705       44  
Allowance for loan losses to ending loans retained
    3.74 %     1.95 %             3.74 %     1.95 %        
Allowance for loan losses to ending loans retained excluding purchased credit-impaired loans(a)
    4.56       2.50               4.56       2.50          
 
(a)   Excludes the impact of purchased credit-impaired loans that were acquired as part of the Washington Mutual transaction. These loans were accounted for at fair value on the acquisition date, which incorporated management’s estimate, as of that date, of credit losses over the remaining life of the portfolio. An allowance for loan losses of $1.1 billion has been recorded for these loans as of September 30, 2009. To date, no charge-offs have been recorded for these loans.
 
(b)   Average loans held-for-sale of $1.3 billion and $1.5 billion for the quarters ended September 30, 2009 and 2008, respectively, and $2.4 billion and $3.2 billion for year-to-date 2009 and 2008, respectively, were excluded when calculating the net charge-off rate.
 
(c)   Excluded mortgage loans that are insured by U.S. government agencies of $7.7 billion and $2.2 billion at September 30, 2009 and 2008, respectively. These amounts are excluded, as reimbursement is proceeding normally.
 
(d)   Excluded loans that are 30 days past due and still accruing, which are insured by U.S. government agencies under the Federal Family Education Loan Program, of $903 million and $787 million at September 30, 2009 and 2008, respectively. These amounts are excluded, as reimbursement is proceeding normally.
 
(e)   The delinquency rate for purchased credit-impaired loans was 25.56% and 13.21% at September 30, 2009 and 2008, respectively.
 
(f)   At September 30, 2009 and 2008, nonperforming assets excluded: (1) mortgage loans insured by U.S. government agencies of $7.0 billion and $1.4 billion, respectively; (2) real estate owned insured by U.S. government agencies of $579 million and $370 million, respectively; and (3) student loans that are 90 days past due and still accruing, which are insured by U.S. government agencies under the Federal Family Education Loan Program, of $511 million and $405 million, respectively. These amounts are excluded, as reimbursement is proceeding normally.
 
(g)   Excludes purchased credit-impaired loans that were acquired as part of the Washington Mutual transaction. These loans are accounted for on a pool basis, and the pools are considered to be performing.

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Consumer Lending (continued)   Three months ended September 30,   Nine months ended September 30,
(in billions, except where otherwise noted)   2009   2008   Change   2009   2008   Change
 
Origination volume:
                                               
Mortgage origination volume by channel
                                               
Retail
  $ 13.3     $ 8.4       58 %   $ 41.6     $ 33.5       24 %
Wholesale(a)
    3.4       5.9       (42 )     8.4       25.6       (67 )
Correspondent
    18.4       13.2       39       55.6       42.2       32  
CNT (negotiated transactions)
    2.0       10.2       (80 )     10.3       39.6       (74 )
                     
Total mortgage origination volume
    37.1       37.7       (2 )     115.9       140.9       (18 )
                     
Home equity
    0.5       2.6       (81 )     2.0       14.6       (86 )
Student loans
    1.5       2.6       (42 )     3.6       5.9       (39 )
Auto loans
    6.9       3.8       82       17.8       16.6       7  
 
Application volume:
                                               
Mortgage application volume by channel
                                               
Retail
  $ 17.8     $ 17.1       4     $ 73.5     $ 64.9       13  
Wholesale(a)
    4.7       11.7       (60 )     12.7       54.2       (77 )
Correspondent
    23.0       18.2       26       77.0       61.3       26  
                     
Total mortgage application volume
    45.5       47.0       (3 )     163.2       180.4       (10 )
                     
 
Average mortgage loans held-for-sale and loans at fair value(b)
    18.0       14.9       21       16.2       15.4       5  
Average assets
    373.5       239.8       56       382.6       238.8       60  
Third-party mortgage loans serviced (ending)
    1,098.9       1,114.8       (1 )     1,098.9       1,114.8       (1 )
MSR net carrying value (ending)
    13.6       16.4       (17 )     13.6       16.4       (17 )
                     
 
                                               
Supplemental mortgage fees and related income details (in millions)
                                               
Production revenue
  $ (70 )   $ 66     NM   $ 695     $ 836       (17 )
                     
Net mortgage servicing revenue:
                                               
Operating revenue:
                                               
Loan servicing revenue
    1,220       654       87       3,721       1,892       97  
Other changes in fair value
    (712 )     (390 )     (83 )     (2,622 )     (1,209 )     (117 )
                     
Total operating revenue
    508       264       92       1,099       683       61  
                     
Risk management:
                                               
Due to inputs or assumptions in model
    (1,099 )     (786 )     (40 )     4,042       101     NM
Derivative valuation adjustments and other
    1,534       894       72       (2,523 )     39     NM
                     
Total risk management
    435       108       303       1,519       140     NM
                     
Total net mortgage servicing revenue
    943       372       153       2,618       823       218  
                     
Mortgage fees and related income
    873       438       99       3,313       1,659       100  
 
(a)   Includes rural housing loans sourced through brokers and underwritten under U.S. Department of Agriculture guidelines.
 
(b)   Loans at fair value consist of prime mortgages originated with the intent to sell that are accounted for at fair value and classified as trading assets on the Consolidated Balance Sheets. Average balances of these loans totaled $17.7 billion and $14.5 billion for the quarters ended September 30, 2009 and 2008, respectively, and $15.8 billion and $14.9 billion for year-to-date 2009 and 2008, respectively.

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CARD SERVICES
For a discussion of the business profile of CS, see pages 51-53 of JPMorgan Chase’s 2008 Annual Report and page 5 of this Form 10-Q.
JPMorgan Chase uses the concept of “managed basis” to evaluate the credit performance of its credit card loans, both loans on the balance sheet and loans that have been securitized. For further information, see Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures on pages 15-19 of this Form 10-Q. Managed results exclude the impact of credit card securitizations on total net revenue, the provision for credit losses, net charge-offs and loan receivables. Securitization does not change reported net income; however, it does affect the classification of items on the Consolidated Statements of Income and Consolidated Balance Sheets.
                                                 
Selected income statement data - managed basis   Three months ended September 30,   Nine months ended September 30,
(in millions, except ratios)   2009   2008   Change   2009   2008   Change
 
Revenue
                                               
Credit card income
  $ 916     $ 633       45 %   $ 2,681     $ 1,906       41 %
All other income
    (85 )     13     NM     (646 )     223     NM
                     
Noninterest revenue
    831       646       29       2,035       2,129       (4 )
Net interest income
    4,328       3,241       34       13,121       9,437       39  
                     
Total net revenue
    5,159       3,887       33       15,156       11,566       31  
 
                                               
Provision for credit losses
    4,967       2,229       123       14,223       6,093       133  
 
                                               
Noninterest expense
                                               
Compensation expense
    354       267       33       1,040       792       31  
Noncompensation expense
    829       773       7       2,552       2,377       7  
Amortization of intangibles
    123       154       (20 )     393       482       (18 )
                     
Total noninterest expense
    1,306       1,194       9       3,985       3,651       9  
                     
 
                                               
Income/(loss) before income tax expense
    (1,114 )     464     NM     (3,052 )     1,822     NM
Income tax expense/(benefit)
    (414 )     172     NM     (1,133 )     671     NM
                     
Net income/(loss)
  $ (700 )   $ 292     NM   $ (1,919 )   $ 1,151     NM
                     
 
                                               
Memo: Net securitization income/(loss)
  $ (43 )   $ (28 )     (54 )   $ (491 )   $ 78     NM
 
                                               
Financial ratios
                                               
ROE
    (19 )%     8 %             (17 )%     11 %        
Overhead ratio
    25       31               26       32          
 
Quarterly results
Card Services reported a net loss of $700 million, a decline of $992 million from the third quarter of 2008. The decrease was driven by a higher provision for credit losses, partially offset by higher net revenue.
End-of-period managed loans were $165.2 billion, a decrease of $21.3 billion, or 11%, from the prior year. The decrease was due to lower charge volume and a higher level of charge-offs. Average managed loans were $169.2 billion, an increase of $11.6 billion, or 7%, from the prior year. Excluding the impact of the Washington Mutual transaction, end-of-period and average managed loans were $144.1 billion and $146.9 billion, respectively.
Managed net revenue was $5.2 billion, an increase of $1.3 billion, or 33%, from the prior year. Net interest income was $4.3 billion, up by $1.1 billion, or 34%, driven by the impact of the Washington Mutual transaction and wider loan spreads. These benefits were offset partially by higher revenue reversals associated with higher charge-offs, lower average loan balances and a decreased level of fees. Noninterest revenue was $831 million, up by $185 million, or 29%. The increase was driven by higher merchant servicing revenue related to the dissolution of the Chase Paymentech Solutions joint venture and the impact of the Washington Mutual transaction.
The managed provision for credit losses was $5.0 billion, an increase of $2.7 billion from the prior year. The provision reflected a higher level of charge-offs and an increase of $575 million in the allowance for loan losses in the current period, compared with an increase of $250 million in the prior year. The managed net charge-off rate for the quarter was 10.30%, up from 5.00% in the prior year. The 30-day managed delinquency rate was 5.99%, up from 3.91% in the prior year. Excluding the impact of the Washington Mutual transaction, the managed net charge-off rate for the third quarter was 9.41%, and the 30-day delinquency rate was 5.38%.

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Noninterest expense was $1.3 billion, an increase of $112 million, or 9%, from the prior year, due to the dissolution of the Chase Paymentech Solutions joint venture and the impact of the Washington Mutual transaction.
Year-to-date results
Net loss was $1.9 billion, a decline of $3.1 billion from the prior year. The decrease was driven by a higher provision for credit losses, partially offset by higher net revenue.
Average managed loans were $175.5 billion, an increase of $20.9 billion, or 13%, from the prior year. The increase from the prior year was predominantly due to the impact of the Washington Mutual transaction. Excluding the impact of the Washington Mutual transaction, average managed loans were $150.8 billion.
Managed net revenue was $15.2 billion, an increase of $3.6 billion, or 31%, from the prior year. Net interest income was $13.1 billion, up by $3.7 billion, or 39%, from the prior year, driven by the impact of the Washington Mutual transaction and wider loan spreads. These benefits were offset partially by higher revenue reversals associated with higher charge-offs and a decreased level of fees. Noninterest revenue was $2.0 billion, a decrease of $94 million, or 4%, from the prior year. The decline was driven by lower securitization income combined with an increase in the credit enhancement for securitization trusts, partially offset by higher merchant servicing revenue related to the dissolution of the Chase Paymentech Solutions joint venture and the impact of the Washington Mutual transaction.
The managed provision for credit losses was $14.2 billion, an increase of $8.1 billion from the prior year. The provision reflected a higher level of charge-offs and an increase of $2.0 billion in the allowance for loan losses in the current period, compared with an increase of $550 million in the prior year. The managed net charge-off rate was 9.32%, up from 4.79% in the prior year. Excluding the impact of the Washington Mutual transaction, the managed net charge-off rate was 8.39%.
Noninterest expense was $4.0 billion, an increase of $334 million, or 9%, from the prior year, due to the impact of the Washington Mutual transaction and the dissolution of the Chase Paymentech Solutions joint venture, partially offset by lower marketing expense.
                                                 
Selected metrics        
(in millions, except headcount, ratios and   Three months ended September 30,   Nine months ended September 30,
where otherwise noted)   2009   2008   Change   2009   2008   Change
 
Financial metrics
                                               
Percentage of average managed outstandings:
                                               
Net interest income
    10.15 %     8.18 %             10.00 %     8.15 %        
Provision for credit losses
    11.65       5.63               10.84       5.26          
Noninterest revenue
    1.95       1.63               1.55       1.84          
Risk adjusted margin(a)
    0.45       4.19               0.71       4.73          
Noninterest expense
    3.06       3.01               3.04       3.15          
Pretax income/(loss) (ROO)(b)
    (2.61 )     1.17               (2.32 )     1.57          
Net income/(loss)
    (1.64 )     0.74               (1.46 )     0.99          
 
                                               
Business metrics
                                               
Charge volume (in billions)
  $ 82.6     $ 93.9       (12 )%   $ 241.4     $ 272.9       (12 )%
Net accounts opened (in millions)(c)
    2.4       16.6       (86 )     7.0       23.6       (70 )
Credit cards issued (in millions)
    146.6       171.9       (15 )     146.6       171.9       (15 )
Number of registered internet customers (in millions)
    31.3       34.3       (9 )     31.3       34.3       (9 )
Merchant acquiring business(d)
                                               
Bank card volume (in billions)
  $ 103.5     $ 197.1       (47 )   $ 299.3     $ 578.8       (48 )
Total transactions (in billions)
    4.5       5.7       (21 )     13.1       16.5       (21 )
 
                                               
Selected balance sheet data (period-end)
                                               
Loans:
                                               
Loans on balance sheets
  $ 78,215     $ 92,881       (16 )   $ 78,215     $ 92,881       (16 )
Securitized loans
    87,028       93,664       (7 )     87,028       93,664       (7 )
                     
Managed loans
  $ 165,243     $ 186,545       (11 )   $ 165,243     $ 186,545       (11 )
                     
Equity
  $ 15,000     $ 15,000           $ 15,000     $ 15,000        
 
                                               
Selected balance sheet data (average)
                                               
Managed assets
  $ 192,141     $ 169,413       13     $ 195,517     $ 163,560       20  
Loans:
                                               
Loans on balance sheets
  $ 83,146     $ 79,183       5     $ 90,154     $ 78,090       15  
Securitized loans
    86,017       78,371       10       85,352       76,564       11  
                     
Managed average loans
  $ 169,163     $ 157,554       7     $ 175,506     $ 154,654       13  
                     
Equity
  $ 15,000     $ 14,100       6     $ 15,000     $ 14,100       6  
 
Headcount
    22,850       22,283       3       22,850       22,283       3  
 

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Selected metrics   Three months ended September 30,   Nine months ended September 30,
(in millions, except ratios)   2009   2008   Change   2009   2008   Change
 
Managed credit quality statistics
                                               
Net charge-offs
  $ 4,392     $ 1,979       122 %   $ 12,238     $ 5,543       121 %
Net charge-off rate(e)
    10.30 %     5.00 %             9.32 %     4.79 %        
Managed delinquency rates
                                               
30+ day(e)
    5.99 %     3.91 %             5.99 %     3.91 %        
90+ day(e)
    2.76       1.77               2.76       1.77          
 
                                               
Allowance for loan losses(f)
  $ 9,297     $ 5,946       56     $ 9,297     $ 5,946       56  
Allowance for loan losses to period-end loans(f)(g)
    11.89 %     6.40 %             11.89 %     6.40 %        
 
                                               
Key stats — Washington Mutual only
                                               
Managed loans
  $ 21,163     $ 27,235       (22 )   $ 21,163     $ 27,235       (22 )
Managed average loans
    22,287             NM     24,742             NM
Net interest income(h)
    17.04 %                     17.11 %                
Risk adjusted margin(a)(h)
    (4.45 )                     (1.01 )                
Net charge-off rate(i)
    21.94                       18.32                  
30+ day delinquency rate(i)
    12.44       7.53 %             12.44       7.53 %        
90+ day delinquency rate(i)
    6.21       3.51               6.21       3.51          
 
                                               
Key stats — excluding Washington Mutual
                                               
Managed loans
  $ 144,080     $ 159,310       (10 )   $ 144,080     $ 159,310       (10 )
Managed average loans
    146,876       157,554       (7 )     150,764       154,654       (3 )
Net interest income(h)
    9.10 %     8.18 %             8.83 %     8.15 %        
Risk adjusted margin(a)(h)
    1.19       4.19               0.99       4.73          
Net charge-off rate
    9.41       5.00               8.39       4.79          
30+ day delinquency rate
    5.38       3.69               5.38       3.69          
90+ day delinquency rate
    2.48       1.74               2.48       1.74          
 
(a)   Represents total net revenue less provision for credit losses.
 
(b)   Pretax return on average managed outstandings.
 
(c)   Third quarter of 2008 included approximately 13 million credit card accounts acquired by JPMorgan Chase in the Washington Mutual transaction.
 
(d)   The Chase Paymentech Solutions joint venture was dissolved effective November 1, 2008. JPMorgan Chase retained approximately 51% of the business and operates the business under the name Chase Paymentech Solutions. For the three and nine months ended September 30, 2008, the data presented represents activity for the Chase Paymentech Solutions joint venture, and for the three and nine months ended September 30, 2009, the data presented represents activity for Chase Paymentech Solutions.
 
(e)   Results reflect the impact of purchase accounting adjustments related to the Washington Mutual transaction and the consolidation of the Washington Mutual Master Trust.
 
(f)   Based on loans on balance sheets (“reported basis”).
 
(g)   Includes $3.0 billion of loans at September 30, 2009, held by the Washington Mutual Master Trust, which were consolidated onto the Card Services balance sheet at fair value during the second quarter of 2009. No allowance for loan losses was recorded for these loans as of September 30, 2009. Excluding these loans, the allowance for loan losses to period-end loans was 12.36%.
 
(h)   As a percentage of average managed outstandings.
 
(i)   Excludes the impact of purchase accounting adjustments related to the Washington Mutual transaction and the consolidation of the Washington Mutual Master Trust.

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Reconciliation from reported basis to managed basis
The financial information presented below reconciles reported basis and managed basis to disclose the effect of securitizations.
                                                 
    Three months ended September 30,   Nine months ended September 30,
(in millions)   2009   2008   Change   2009   2008   Change
 
Income statement data(a)
                                               
Credit card income
                                               
Reported
  $ 1,201     $ 1,476       (19 )%   $ 3,800     $ 4,529       (16 )%
Securitization adjustments
    (285 )     (843 )     66       (1,119 )     (2,623 )     57  
                     
Managed credit card income
  $ 916     $ 633       45     $ 2,681     $ 1,906       41  
                     
 
                                               
Net interest income
                                               
Reported
  $ 2,345     $ 1,525       54     $ 7,176     $ 4,430       62  
Securitization adjustments
    1,983       1,716       16       5,945       5,007       19  
                     
Managed net interest income
  $ 4,328     $ 3,241       34     $ 13,121     $ 9,437       39  
                     
 
                                               
Total net revenue
                                               
Reported
  $ 3,461     $ 3,014       15     $ 10,330     $ 9,182       13  
Securitization adjustments
    1,698       873       95       4,826       2,384       102  
                     
Managed total net revenue
  $ 5,159     $ 3,887       33     $ 15,156     $ 11,566       31  
                     
 
                                               
Provision for credit losses
                                               
Reported
  $ 3,269     $ 1,356       141     $ 9,397     $ 3,709       153  
Securitization adjustments
    1,698       873       95       4,826       2,384       102  
                     
Managed provision for credit losses
  $ 4,967     $ 2,229       123     $ 14,223     $ 6,093       133  
                     
 
                                               
Balance sheet — average balances(a)
                                               
Total average assets
                                               
Reported
  $ 109,362     $ 93,701       17     $ 113,134     $ 89,594       26  
Securitization adjustments
    82,779       75,712       9       82,383       73,966       11  
                     
Managed average assets
  $ 192,141     $ 169,413       13     $ 195,517     $ 163,560       20  
                     
 
Credit quality statistics(a)
                                               
Net charge-offs
                                               
Reported
  $ 2,694     $ 1,106       144     $ 7,412     $ 3,159       135  
Securitization adjustments
    1,698       873       95       4,826       2,384       102  
                     
Managed net charge-offs
  $ 4,392     $ 1,979       122     $ 12,238     $ 5,543       121  
                     
 
                                               
Net charge-off rates
                                               
Reported
    12.85 %     5.56 %             10.99 %     5.40 %        
Securitized
    7.83       4.43               7.56       4.16          
Managed net charge-off rate
    10.30       5.00               9.32       4.79          
 
(a)   JPMorgan Chase uses the concept of “managed basis” to evaluate the credit performance and overall performance of the underlying credit card loans, both sold and not sold; as the same borrower is continuing to use the credit card for ongoing charges, a borrower’s credit performance will affect both the receivables sold and those not sold. Thus, in its disclosures regarding managed receivables, JPMorgan Chase treats the sold receivables as if they were still on the balance sheet in order to disclose the credit performance (such as net charge-off rates) of the entire managed credit card portfolio. Managed results exclude the impact of credit card securitizations on total net revenue, the provision for credit losses, net charge-offs and loan receivables. Securitization does not change reported net income versus managed earnings; however, it does affect the classification of items on the Consolidated Statements of Income and Consolidated Balance Sheets. For further information, see Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures on pages 15-19 of this Form 10-Q.

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COMMERCIAL BANKING
For a discussion of the business profile of CB, see pages 54-55 of JPMorgan Chase’s 2008 Annual Report and page 6 of this Form 10-Q.
                                                 
Selected income statement data   Three months ended September 30,   Nine months ended September 30,
(in millions, except ratios)   2009   2008   Change   2009   2008   Change
 
Revenue
                                               
Lending- and deposit-related fees
  $ 269     $ 212       27 %   $ 802     $ 612       31 %
Asset management, administration and commissions
    35       29       21       105       81       30  
All other income(a)
    170       147       16       447       412       8  
                     
Noninterest revenue
    474       388       22       1,354       1,105       23  
Net interest income
    985       737       34       2,960       2,193       35  
                     
Total net revenue
    1,459       1,125       30       4,314       3,298       31  
 
                                               
Provision for credit losses
    355       126       182       960       274       250  
 
                                               
Noninterest expense
                                               
Compensation expense
    196       177       11       593       528       12  
Noncompensation expense
    339       298       14       1,008       882       14  
Amortization of intangibles
    10       11       (9 )     32       37       (14 )
                     
Total noninterest expense
    545       486       12       1,633       1,447       13  
                     
Income before income tax expense
    559       513       9       1,721       1,577       9  
Income tax expense
    218       201       8       674       618       9  
                     
Net income
  $ 341     $ 312       9     $ 1,047     $ 959       9  
                     
 
                                               
Revenue by product:
                                               
Lending
  $ 675     $ 377       79     $ 2,024     $ 1,132       79  
Treasury services
    672       643       5       1,997       1,889       6  
Investment banking
    99       87       14       286       246       16  
Other
    13       18       (28 )     7       31       (77 )
                     
Total Commercial Banking revenue
  $ 1,459     $ 1,125       30     $ 4,314     $ 3,298       31  
 
                                               
IB revenue, gross(b)
  $ 301     $ 252       19     $ 835     $ 725       15  
 
                                               
Revenue by business:
                                               
Middle Market Banking
  $ 771     $ 729       6     $ 2,295     $ 2,143       7  
Commercial Term Lending(c)
    232           NM     684           NM
Mid-Corporate Banking
    278       236       18       825       678       22  
Real Estate Banking(c)
    121       91       33       361       282       28  
Other(c)
    57       69       (17 )     149       195       (24 )
                     
Total Commercial Banking revenue
  $ 1,459     $ 1,125       30     $ 4,314     $ 3,298       31  
                     
 
                                               
Financial ratios
                                               
ROE
    17 %     18 %             17 %     18 %        
Overhead ratio
    37       43               38       44          
 
(a)   Revenue from investment banking products sold to CB clients and commercial card revenue is included in all other income.
 
(b)   Represents the total revenue related to investment banking products sold to CB clients.
 
(c)   Results for 2009 include total net revenue on net assets acquired in the Washington Mutual transaction.

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Quarterly results
Net income was $341 million, an increase of $29 million, or 9%, from the third quarter of 2008. Higher net revenue, reflecting the impact of the Washington Mutual transaction, was predominantly offset by a higher provision for credit losses and higher noninterest expense.
Net revenue was $1.5 billion, an increase of $334 million, or 30%, from the prior year. Net interest income was $985 million, up by $248 million, or 34%, driven by the impact of the Washington Mutual transaction. Excluding Washington Mutual, net interest income was flat compared with the prior year, as spread compression on liability products and lower loan balances were offset by wider loan spreads, a shift to higher-spread liability products and overall growth in liability balances. Noninterest revenue was $474 million, an increase of $86 million, or 22%, reflecting higher lending- and deposit-related fees.
Revenue from Middle Market Banking was $771 million, an increase of $42 million, or 6%, from the prior year. Revenue from Commercial Term Lending (a new business resulting from the Washington Mutual transaction) was $232 million. Revenue from Mid-Corporate Banking was $278 million, an increase of $42 million, or 18%, from the prior year. Revenue from Real Estate Banking was $121 million, an increase of $30 million, or 33%, from the prior year due to the impact of the Washington Mutual transaction.
The provision for credit losses was $355 million, compared with $126 million in the prior year, reflecting continued deterioration in the credit environment across all business segments, particularly real estate-related segments. Net charge-offs were $291 million (1.11% net charge-off rate), compared with $40 million (0.22% net charge-off rate) in the prior year. The allowance for loan losses to end-of-period loans retained was 3.01%, up from 2.30% in the prior year. Nonperforming loans were $2.3 billion, up by $1.5 billion from the prior year.
Noninterest expense was $545 million, an increase of $59 million, or 12%, from the prior year, due to the impact of the Washington Mutual transaction and higher FDIC insurance premiums.
Year-to-date results
Net income was $1.0 billion, an increase of $88 million, or 9%, from the prior year, as higher net revenue reflecting the impact of the Washington Mutual transaction, was predominantly offset by a higher provision for credit losses and higher noninterest expense.
Net revenue was $4.3 billion, an increase of $1.0 billion, or 31%, from the prior year. Net interest income of $3.0 billion increased by $767 million, or 35%, driven by the impact of the Washington Mutual transaction. Noninterest revenue was $1.4 billion, an increase of $249 million, or 23%, from the prior year, reflecting higher lending- and deposit-related fees and higher investment banking fees.
Revenue from Middle Market Banking was $2.3 billion, an increase of $152 million, or 7%, from the prior year. Revenue from Commercial Term Lending (a new business resulting from the Washington Mutual transaction) was $684 million. Mid-Corporate Banking revenue was $825 million, an increase of $147 million, or 22%. Real Estate Banking revenue was $361 million, an increase of $79 million, or 28%, due to the impact of the Washington Mutual transaction.
The provision for credit losses was $960 million, compared with $274 million in the prior year, reflecting continued deterioration in the credit environment across all business segments. Net charge-offs were $606 million (0.75% net charge-off rate), compared with $170 million (0.32% net charge-off rate) in the prior year. The allowance for loan losses to end-of-period loans retained was 3.01%, up from 2.30% in the prior year. Nonperforming loans were $2.3 billion, an increase of $1.5 billion from the prior year.
Noninterest expense was $1.6 billion, an increase of $186 million, or 13%, from the prior year, due to the impact of the Washington Mutual transaction and higher FDIC insurance premiums.

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Selected metrics        
    Three months ended September 30,   Nine months ended September 30,
(in millions, except headcount and ratios)   2009   2008   Change   2009   2008   Change
 
Selected balance sheet data (period-end):
                                               
Loans:
                                               
Loans retained
  $ 101,608     $ 117,316       (13 )%   $ 101,608     $ 117,316       (13 )%
Loans held-for-sale and loans at fair value
    288       313       (8 )     288       313       (8 )
                     
Total loans
    101,896       117,629       (13 )     101,896       117,629       (13 )
Equity
    8,000       8,000             8,000       8,000        
 
                                               
Selected balance sheet data (average):
                                               
Total assets
  $ 130,316     $ 101,681       28     $ 137,248     $ 102,374       34  
Loans:
                                               
Loans retained
    103,752       71,901       44       108,654       70,038       55  
Loans held-for-sale and loans at fair value
    297       397       (25 )     294       432       (32 )
                     
Total loans
    104,049       72,298       44       108,948       70,470       55  
Liability balances(a)
    109,293       99,410       10       110,012       99,430       11  
Equity
    8,000       7,000       14       8,000       7,000       14  
 
                                               
Average loans by business:
                                               
Middle Market Banking
  $ 36,200     $ 43,155       (16 )   $ 38,357     $ 42,052       (9 )
Commercial Term Lending(b)
    36,943           NM     36,907           NM
Mid-Corporate Banking
    14,933       16,491       (9 )     16,774       15,669       7  
Real Estate Banking(b)
    11,547       7,513       54       12,380       7,490       65  
Other(b)
    4,426       5,139       (14 )     4,530       5,259       (14 )
                     
Total Commercial Banking loans
  $ 104,049     $ 72,298       44     $ 108,948     $ 70,470       55  
 
                                               
Headcount
    4,177       5,298       (21 )     4,177       5,298       (21 )
 
                                               
Credit data and quality statistics:
                                               
Net charge-offs
  $ 291     $ 40     NM   $ 606     $ 170       256  
Nonperforming loans:
                                               
Nonperforming loans retained(c)
    2,284       844       171       2,284       844       171  
Nonperforming loans held-for-sale and loans at fair value
    18           NM     18           NM
                     
Total nonperforming loans
    2,302       844       173       2,302       844       173  
Nonperforming assets
    2,461       923       167       2,461       923       167  
Allowance for credit losses:
                                               
Allowance for loan losses
    3,063       2,698       14       3,063       2,698       14  
Allowance for lending-related commitments
    300       191       57       300       191       57  
                     
Total allowance for credit losses
    3,363       2,889       16       3,363       2,889       16  
 
                                               
Net charge-off rate
    1.11 %     0.22 %             0.75 %     0.32 %        
Allowance for loan losses to period-end loans retained
    3.01       2.30               3.01       2.30          
Allowance for loan losses to average loans retained
    2.95       2.32 (d)             2.82       3.18 (d)        
Allowance for loan losses to nonperforming loans retained
    134       320               134       320          
Nonperforming loans to total period-end loans
    2.26       0.72               2.26       0.72          
Nonperforming loans to total average loans
    2.21       0.72 (d)             2.11       0.99 (d)        
 
(a)   Liability balances include deposits and deposits swept to on-balance sheet liabilities, such as commercial paper, federal funds purchased and securities loaned or sold under repurchase agreements.
 
(b)   Results for 2009 include loans acquired in the Washington Mutual transaction.
 
(c)   Allowance for loan losses of $496 million and $135 million were held against nonperforming loans retained at September 30, 2009 and 2008, respectively.
 
(d)   Average loans in the calculation of this ratio were adjusted to include $44.5 billion of loans acquired from Washington Mutual as if the transaction occurred on July 1, 2008. Excluding this adjustment, the unadjusted allowance for loan losses to average loans retained and nonperforming loans to total average loans ratios would have been 3.75% and 1.17%, respectively, for the period ended September 30, 2008, and 3.85% and 1.20%, respectively, for the nine months ended September 30, 2008.

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TREASURY & SECURITIES SERVICES
For a discussion of the business profile of TSS, see pages 56-57 of JPMorgan Chase’s 2008 Annual Report and page 6 of this Form 10-Q.
                                                 
Selected income statement data   Three months ended September 30,   Nine months ended September 30,
(in millions, except headcount and ratios)   2009   2008   Change   2009   2008   Change
 
Revenue
                                               
Lending- and deposit-related fees
  $ 316     $ 290       9 %   $ 955     $ 842       13 %
Asset management, administration and commissions
    620       719       (14 )     1,956       2,385       (18 )
All other income
    201       221       (9 )     619       649       (5 )
                     
Noninterest revenue
    1,137       1,230       (8 )     3,530       3,876       (9 )
Net interest income
    651       723       (10 )     1,979       2,009       (1 )
                     
Total net revenue
    1,788       1,953       (8 )     5,509       5,885       (6 )
 
                                               
Provision for credit losses
    13       18       (28 )     2       37       (95 )
Credit reimbursement to IB(a)
    (31 )     (31 )           (91 )     (91 )      
 
                                               
Noninterest expense
                                               
Compensation expense
    629       664       (5 )     1,876       1,974       (5 )
Noncompensation expense
    633       661       (4 )     1,954       1,864       5  
Amortization of intangibles
    18       14       29       57       46       24  
                     
Total noninterest expense
    1,280       1,339       (4 )     3,887       3,884        
                     
Income before income tax expense
    464       565       (18 )     1,529       1,873       (18 )
Income tax expense
    162       159       2       540       639       (15 )
                     
Net income
  $ 302     $ 406       (26 )   $ 989     $ 1,234       (20 )
                     
 
                                               
Revenue by business
                                               
Treasury Services(b)
  $ 919     $ 946       (3 )   $ 2,784     $ 2,711       3  
Worldwide Securities Services(b)
    869       1,007       (14 )     2,725       3,174       (14 )
                     
Total net revenue
  $ 1,788     $ 1,953       (8 )   $ 5,509     $ 5,885       (6 )
Financial ratios
                                               
ROE
    24 %     46 %             26 %     47 %        
Overhead ratio
    72       69               71       66          
Pretax margin ratio(c)
    26       29               28       32          
 
                                               
Selected balance sheet data (period-end)
                                               
Loans
  $ 19,693     $ 40,675       (52 )   $ 19,693     $ 40,675       (52 )
Equity
    5,000       4,500       11       5,000       4,500       11  
 
                                               
Selected balance sheet data (average)
                                               
Total assets
  $ 33,117     $ 49,386       (33 )   $ 35,753     $ 54,243       (34 )
Loans(d)
    17,062       26,650       (36 )     18,231       24,527       (26 )
Liability balances(e)
    231,502       259,992       (11 )     247,219       260,882       (5 )
Equity
    5,000       3,500       43       5,000       3,500       43  
 
                                               
Headcount
    26,389       27,592       (4 )     26,389       27,592       (4 )
 
(a)   IB credit portfolio group manages certain exposures on behalf of clients shared with TSS. TSS reimburses IB for a portion of the total cost of managing the credit portfolio. IB recognizes this credit reimbursement as a component of noninterest revenue.
 
(b)   Reflects an internal reorganization for escrow products from Worldwide Securities Services to Treasury Services revenue of $38 million and $49 million for the three months ended September 30, 2009 and 2008, respectively, and $129 million and $148 million for the nine months ended September 30, 2009 and 2008, respectively.
 
(c)   Pretax margin represents income before income tax expense divided by total net revenue, which is a measure of pretax performance and another basis by which management evaluates its performance and that of its competitors.
 
(d)   Loan balances include wholesale overdrafts, commercial card and trade finance loans.
 
(e)   Liability balances include deposits and deposits swept to on-balance sheet liabilities, such as commercial paper, federal funds purchased and securities loaned or sold under repurchase agreements.

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Quarterly results
Net income was $302 million, a decrease of $104 million, or 26%, from the third quarter of 2008. The decrease was driven by lower net revenue, offset partially by lower noninterest expense.
Net revenue was $1.8 billion, a decrease of $165 million, or 8%, from the prior year. Worldwide Securities Services net revenue was $869 million, a decrease of $138 million, or 14%. The decrease was driven by lower securities lending balances, primarily as a result of declines in asset valuations and demand, lower spreads and balances on liability products, and the effect of market depreciation on certain custody assets. Treasury Services net revenue was $919 million, a decrease of $27 million, or 3%. The decrease reflected spread compression on deposit products offset by higher trade revenue driven by wider spreads, and higher card product volumes. TSS firmwide net revenue, which includes net revenue recorded in other lines of business, was $2.5 billion, a decrease of $149 million, or 6%, primarily due to declines in Worldwide Securities Services. Treasury Services firmwide net revenue was $1.7 billion, flat compared with the prior year.
The provision for credit losses was $13 million, a decrease of $5 million from the prior year.
Noninterest expense was $1.3 billion, a decrease of $59 million, or 4%. The decrease reflected lower headcount-related expense, partially offset by higher FDIC insurance premiums.
Year-to-date results
Net income was $989 million, a decrease of $245 million, or 20%, from the prior year, driven by lower net revenue.
Net revenue was $5.5 billion, a decrease of $376 million, or 6%, from the prior year. Worldwide Securities Services net revenue was $2.7 billion, a decrease of $449 million, or 14%, from the prior year. The decrease was driven by lower securities lending balances, primarily as a result of declines in asset valuations and demand, as well as the effect of market depreciation on certain custody assets. Treasury Services net revenue was $2.8 billion, an increase of $73 million, or 3%, reflecting higher trade revenue driven by wider spreads and growth across cash management and card product volumes, partially offset by spread compression on deposit products. TSS firmwide net revenue, which includes net revenue recorded in other lines of business, was $7.7 billion, a decrease of $297 million, or 4%, compared with the prior year, primarily due to declines in Worldwide Securities Services. Treasury Services firmwide net revenue grew to $5.0 billion, an increase of $152 million, or 3%, from the prior year.
The provision for credit losses was $2 million, a decrease of $35 million from the prior year.
Noninterest expense was $3.9 billion, flat compared with the prior year, reflecting higher FDIC insurance premiums, offset by lower headcount-related expense.

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Selected metrics        
    Three months ended September 30,   Nine months ended September 30,
(in millions, except ratios and where otherwise noted)   2009   2008   Change   2009   2008   Change
 
TSS firmwide disclosures
                                               
Treasury Services revenue - reported(a)
  $ 919     $ 946       (3 )%   $ 2,784     $ 2,711       3 %
Treasury Services revenue reported in CB
    672       643       5       1,997       1,889       6  
Treasury Services revenue reported in other lines of business
    63       76       (17 )     188       217       (13 )
                     
 
                                               
Treasury Services firmwide revenue(a)(b)
    1,654       1,665       (1 )     4,969       4,817       3  
Worldwide Securities Services revenue(a)
    869       1,007       (14 )     2,725       3,174       (14 )
                     
Treasury & Securities Services firmwide revenue(b)
  $ 2,523     $ 2,672       (6 )   $ 7,694     $ 7,991       (4 )
 
Treasury Services firmwide liability balances (average)(c)(d)
  $ 261,059     $ 248,075       5     $ 269,568     $ 247,956       9  
Treasury & Securities Services firmwide liability balances (average)(c)
    340,795       359,401       (5 )     357,231       360,302       (1 )
 
                                               
TSS firmwide financial ratios
                                               
Treasury Services firmwide overhead ratio(e)
    52 %     52 %             52 %     53 %        
Treasury & Securities Services firmwide overhead ratio(e)
    62       60               61       59          
 
                                               
Firmwide business metrics
                                               
Assets under custody (in billions)
  $ 14,887     $ 14,417       3     $ 14,887     $ 14,417       3  
 
                                               
Number of:
                                               
U.S.$ ACH transactions originated (in millions)
    965       997       (3 )     2,921       2,994       (2 )
Total U.S.$ clearing volume (in thousands)
    28,604       29,277       (2 )     83,983       86,396       (3 )
International electronic funds transfer volume (in thousands)(f)
    48,533       41,831       16       139,994       123,302       14  
Wholesale check volume (in millions)
    530       595       (11 )     1,670       1,836       (9 )
Wholesale cards issued (in thousands)(g)
    26,977       21,858       23       26,977       21,858       23  
                     
 
                                               
Credit data and quality statistics
                                               
Net charge-offs (recoveries)
  $     $           $ 19     $ (2 )   NM
Nonperforming loans
    14           NM     14           NM
Allowance for credit losses:
                                               
Allowance for loan losses
    15       47       (68 )     15       47       (68 )
Allowance for lending-related commitments
    104       45       131       104       45       131  
                     
Total allowance for credit losses
    119       92       29       119       92       29  
 
                                               
Net charge-off (recovery) rate
    %     %             0.14 %     (0.01 )%        
Allowance for loan losses to period-end loans
    0.08       0.12               0.08       0.12          
Allowance for loan losses to average loans
    0.09       0.18               0.08       0.19          
Allowance for loan losses to nonperforming loans
    107           NM             107           NM        
Nonperforming loans to period-end loans
    0.07                     0.07                
Nonperforming loans to average loans
    0.08                     0.08                
 
(a)   Reflects an internal reorganization for escrow products, from Worldwide Securities Services to Treasury Services revenue, of $38 million and $49 million for the three months ended September 30, 2009 and 2008, respectively, and $129 million and $148 million for the nine months ended September 30, 2009 and 2008, respectively.
 
(b)   TSS firmwide revenue includes FX revenue recorded in TSS and FX revenue associated with TSS customers who are FX customers of IB. However, some of the FX revenue associated with TSS customers who are FX customers of IB is not included in TS and TSS firmwide revenue. These amounts were $154 million and $196 million, for the three months ended September 30, 2009 and 2008, respectively, and $499 million and $609 million for the nine months ended September 30, 2009 and 2008, respectively.

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(c)   Firmwide liability balances include liability balances recorded in Commercial Banking.
 
(d)   Reflects an internal reorganization for escrow products, from Worldwide Securities Services to Treasury Services liability balances, of $13.9 billion and $20.3 billion for the three months ended September 30, 2009 and 2008, respectively, and $15.6 billion and $21.2 billion for the nine months ended September 30, 2009 and 2008, respectively.
 
(e)   Overhead ratios have been calculated based on firmwide revenue and TSS and TS expense, respectively, including those allocated to certain other lines of business. FX revenue and expense recorded in IB for TSS-related FX activity are not included in this ratio.
 
(f)   International electronic funds transfer includes non-U.S. dollar ACH and clearing volume.
 
(g)   Wholesale cards issued include domestic commercial, stored value, prepaid and government electronic benefit card products.
ASSET MANAGEMENT
For a discussion of the business profile of AM, see pages 58-60 of JPMorgan Chase’s 2008 Annual Report and on page 6 of this Form 10-Q.
                                                 
Selected income statement data   Three months ended September 30,   Nine months ended September 30,
(in millions, except ratios)   2009   2008   Change   2009   2008   Change
 
Revenue
                                               
Asset management, administration and commissions
  $ 1,443     $ 1,538       (6 )%   $ 3,989     $ 4,642       (14 )%
All other income
    238       43       453       560       232       141  
                     
Noninterest revenue
    1,681       1,581       6       4,549       4,874       (7 )
Net interest income
    404       380       6       1,221       1,052       16  
                     
Total net revenue
    2,085       1,961       6       5,770       5,926       (3 )
 
                                               
Provision for credit losses
    38       20       90       130       53       145  
 
                                               
Noninterest expense
                                               
Compensation expense
    858       816       5       2,468       2,527       (2 )
Noncompensation expense
    474       525       (10 )     1,478       1,496       (1 )
Amortization of intangibles
    19       21       (10 )     57       62       (8 )
                     
Total noninterest expense
    1,351       1,362       (1 )     4,003       4,085       (2 )
                     
Income before income tax expense
    696       579       20       1,637       1,788       (8 )
Income tax expense
    266       228       17       631       686       (8 )
                     
Net income
  $ 430     $ 351       23     $ 1,006     $ 1,102       (9 )
                     
 
                                               
Revenue by client segment
                                               
Private Bank
  $ 639     $ 631       1     $ 1,862     $ 1,935       (4 )
Institutional
    534       486       10       1,481       1,448       2  
Retail
    471       399       18       1,135       1,355       (16 )
Private Wealth Management
    339       352       (4 )     985       1,057       (7 )
Bear Stearns Private Client Services
    102       93       10       307       131       134  
                     
Total net revenue
  $ 2,085     $ 1,961       6     $ 5,770     $ 5,926       (3 )
                     
Financial ratios
                                               
ROE
    24 %     25 %             19 %     28 %        
Overhead ratio
    65       69               69       69          
Pretax margin ratio(a)
    33       30               28       30          
 
(a)   Pretax margin represents income before income tax expense divided by total net revenue, which is a measure of pretax performance and another basis by which management evaluates its performance and that of its competitors.

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Quarterly results
Net income was $430 million, an increase of $79 million, or 23%, from the third quarter of 2008, as higher net revenue and lower noninterest expense were offset partially by a higher provision for credit losses.
Net revenue was $2.1 billion, an increase of $124 million, or 6%, from the prior year. Noninterest revenue was $1.7 billion, an increase of $100 million, or 6%, due to gains on the Firm’s seed capital investments and net inflows, largely offset by the effect of lower market levels and decreased placement fees. Net interest income was $404 million, up by $24 million, or 6%, from the prior year, due to wider loan spreads and higher deposit balances, largely offset by narrower deposit spreads and lower loan balances.
Revenue from the Private Bank was $639 million, up 1%, from the prior year. Revenue from Institutional was $534 million, up 10%. Revenue from Retail was $471 million, up 18%. Revenue from Private Wealth Management was $339 million, down 4%. Revenue from Bear Stearns Private Client Services was $102 million, up 10%.
The provision for credit losses was $38 million, an increase of $18 million from the prior year, reflecting continued deterioration in the credit environment.
Noninterest expense was $1.4 billion, down by $11 million, or 1%, from the prior year. The decrease was due to lower headcount-related expense, offset by higher performance-based compensation and higher FDIC insurance premiums.
Year-to-date results
Net income was $1.0 billion, a decrease of $96 million, or 9%, from the prior year, due to lower net revenue and a higher provision for credit losses offset partially by lower noninterest expense.
Net revenue was $5.8 billion, a decrease of $156 million, or 3%, from the prior year. Noninterest revenue was $4.5 billion, a decrease of $325 million, or 7%, due to the effect of lower market levels, lower placement fees and lower performance fees; these effects were offset predominantly by gains on the Firm’s seed capital investments, the benefit from the Bear Stearns merger and net inflows. Net interest income was $1.2 billion, up by $169 million, or 16%, from the prior year, predominantly due to wider loan spreads and higher deposit balances, partially offset by lower loan balances.
Revenue from the Private Bank was $1.9 billion, down 4%, from the prior year. Revenue from Institutional was $1.5 billion, up 2%. Revenue from Retail was $1.1 billion, down 16%. Revenue from Private Wealth Management was $985 million, down 7%. Bear Stearns Private Client Services contributed $307 million to revenue.
The provision for credit losses was $130 million, an increase of $77 million from the prior year, reflecting continued deterioration in the credit environment.
Noninterest expense was $4.0 billion, a decrease of $82 million, or 2%, from the prior year due to lower headcount-related expense and lower performance-based compensation, offset predominantly by the effect of the Bear Stearns merger and higher FDIC insurance premiums.

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Business metrics
                                                 
(in millions, except headcount, ratios and   Three months ended September 30,   Nine months ended September 30,
ranking data, and where otherwise noted)   2009   2008   Change   2009   2008   Change
 
Number of:
                                               
Client advisors(a)
    1,891       1,814       4 %     1,891       1,814       4 %
Retirement planning services participants
    1,620,000       1,492,000       9       1,620,000       1,492,000       9  
Bear Stearns brokers
    365       323       13       365       323       13  
% of customer assets in 4 & 5 Star Funds(b)
    39 %     39 %           39 %     39 %      
% of AUM in 1st and 2nd quartiles:(c)
                                               
1 year
    60 %     49 %     22       60 %     49 %     22  
3 years
    70 %     67 %     4       70 %     67 %     4  
5 years
    74 %     77 %     (4 )     74 %     77 %     (4 )
 
                                               
Selected balance sheet data (period-end)
                                               
Loans
  $ 35,925     $ 39,720       (10 )   $ 35,925     $ 39,720       (10 )
Equity
    7,000       7,000             7,000       7,000        
 
                                               
Selected balance sheet data (average)
                                               
Total assets
  $ 60,345     $ 71,189       (15 )   $ 59,309     $ 65,518       (9 )
Loans
    34,822       39,750       (12 )     34,567       38,552       (10 )
Deposits
    73,649       65,621       12       76,888       67,918       13  
Equity
    7,000       5,500       27       7,000       5,190       35  
 
                                               
Headcount
    14,919       15,493       (4 )     14,919       15,493       (4 )
 
                                               
Credit data and quality statistics
                                               
Net charge-offs (recoveries)
  $ 17     $ (1 )   NM   $ 82     $ (1 )   NM
Nonperforming loans
    409       121       238       409       121       238  
Allowance for credit losses:
                                               
Allowance for loan losses
    251       170       48       251       170       48  
Allowance for lending-related commitments
    5       5             5       5        
                     
Total allowance for credit losses
    256       175       46       256       175       46  
 
                                               
Net charge-off (recovery) rate
    0.19 %     (0.01 )%             0.32 %     %        
Allowance for loan losses to period-end loans
    0.70       0.43               0.70       0.43          
Allowance for loan losses to average loans
    0.72       0.43               0.73       0.44          
Allowance for loan losses to nonperforming loans
    61       140               61       140          
Nonperforming loans to period-end loans
    1.14       0.30               1.14       0.30          
Nonperforming loans to average loans
    1.17       0.30               1.18       0.31          
 
(a)   Prior periods have been restated to conform to current methodologies.
 
(b)   Derived from the following rating services: Morningstar for the United States; Micropal for the United Kingdom, Luxembourg, Hong Kong and Taiwan; and Nomura for Japan.
 
(c)   Derived from the following rating services: Lipper for the United States and Taiwan; Micropal for the United Kingdom, Luxembourg and Hong Kong; and Nomura for Japan.

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Assets under supervision
Assets under supervision were $1.7 trillion, an increase of $108 billion, or 7%, from the prior year. Assets under management were $1.3 trillion, an increase of $106 billion, or 9%. The increases were due to inflows in liquidity, fixed income and equity products, partially offset by the effect of lower market levels and outflows in alternative products. Custody, brokerage, administration and deposit balances were $411 billion, up by $2 billion, due to brokerage inflows in the Private Bank, partially offset by the effect of lower market levels on custody and brokerage balances.
                 
ASSETS UNDER SUPERVISION(a) (in billions)        
As of September 30,   2009   2008
 
Assets by asset class
               
 
               
Liquidity
  $ 634     $ 524  
Fixed income
    215       189  
Equities & balanced
    316       308  
Alternatives
    94       132  
 
Total assets under management
    1,259       1,153  
Custody/brokerage/administration/deposits
    411       409  
 
Total assets under supervision
  $ 1,670     $ 1,562  
 
 
               
Assets by client segment
               
 
               
Institutional
  $ 737     $ 653  
Private Bank
    180       194  
Retail
    256       223  
Private Wealth Management
    71       75  
Bear Stearns Private Client Services
    15       8  
 
Total assets under management
  $ 1,259     $ 1,153  
 
Institutional
  $ 737     $ 653  
Private Bank
    414       417  
Retail
    339       303  
Private Wealth Management
    131       134  
Bear Stearns Private Client Services
    49       55  
 
Total assets under supervision
  $ 1,670     $ 1,562  
 
 
               
Assets by geographic region
               
 
               
U.S./Canada
  $ 862     $ 785  
International
    397       368  
 
Total assets under management
  $ 1,259     $ 1,153  
 
 
               
U.S./Canada
  $ 1,179     $ 1,100  
International
    491       462  
 
Total assets under supervision
  $ 1,670     $ 1,562  
 
 
               
Mutual fund assets by asset class
               
Liquidity
  $ 576     $ 470  
Fixed income
    57       44  
Equities
    133       127  
Alternatives
    10       7  
 
Total mutual fund assets
  $ 776     $ 648  
 
(a)   Excludes assets under management of American Century Companies, Inc., in which the Firm retained 42% and 43% ownership at September 30, 2009 and 2008, respectively.

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    Three months ended September 30,   Nine months ended September 30,
Assets under management rollforward   2009   2008   2009   2008
 
Beginning balance
  $ 1,171     $ 1,185     $ 1,133     $ 1,193  
Net asset flows:
                               
Liquidity
    9       55       21       124  
Fixed income
    13       (4 )     22       (5 )
Equities, balanced and alternatives
    12       (5 )     9       (29 )
Market/performance/other impacts
    54       (78 )     74       (130 )
 
Total assets under management
  $ 1,259     $ 1,153     $ 1,259     $ 1,153  
 
 
                               
Assets under supervision rollforward
                               
 
Beginning balance
  $ 1,543     $ 1,611     $ 1,496     $ 1,572  
Net asset flows
    45       61       61       108  
Market/performance/other impacts
    82       (110 )     113       (118 )
 
Total assets under supervision
  $ 1,670     $ 1,562     $ 1,670     $ 1,562  
 
CORPORATE / PRIVATE EQUITY
For a discussion of the business profile of Corporate/Private Equity, see pages 61–63 of JPMorgan Chase’s 2008 Annual Report.
                                                 
Selected income statement data   Three months ended September 30,   Nine months ended September 30,
(in millions, except headcount)   2009   2008   Change   2009   2008   Change
 
Revenue
                                               
Principal transactions
  $ 1,109     $ (1,876 )   NM   $ 859     $ (1,968 )   NM
Securities gains
    181       440       (59 )%     761       1,138       (33 )%
All other income(a)
    273       (275 )   NM     45       988       (95 )
                     
Noninterest revenue
    1,563       (1,711 )   NM     1,665       158     NM
Net interest income (expense)
    1,031       (125 )   NM     2,885       (521 )   NM
                     
Total net revenue
    2,594       (1,836 )   NM     4,550       (363 )   NM
 
                                               
Provision for credit losses(b)
    62       1,977       (97 )     71       2,014       (96 )
 
                                               
Noninterest expense
                                               
Compensation expense
    768       652       18       2,064       1,902       9  
Noncompensation expense(c)
    875       563       55       2,539       1,168       117  
Merger costs
    103       96       7       451       251       80  
                     
Subtotal
    1,746       1,311       33       5,054       3,321       52  
Net expense allocated to other businesses
    (1,243 )     (1,150 )     (8 )     (3,775 )     (3,277 )     (15 )
                     
Total noninterest expense
    503       161       212       1,279       44     NM
                     
Income/(loss) before income tax expense and extraordinary gain
    2,029       (3,974 )   NM     3,200       (2,421 )   NM
Income tax expense/(benefit)
    818       (1,613 )   NM     1,443       (852 )   NM
                     
Income/(loss) before extraordinary gain
    1,211       (2,361 )   NM     1,757       (1,569 )   NM
Extraordinary gain(d)
    76       581       (87 )     76       581       (87 )
                     
Net income/(loss)
  $ 1,287     $ (1,780 )   NM   $ 1,833     $ (988 )   NM
                     
 
                                               
Total net revenue
                                               
Private equity
  $ 172     $ (216 )   NM   $ (278 )   $ 144     NM
Corporate
    2,422       (1,620 )   NM     4,828       (507 )   NM
                     
Total net revenue
  $ 2,594     $ (1,836 )   NM   $ 4,550     $ (363 )   NM
                     
 
                                               
Net income/(loss)
                                               
Private equity
  $ 88     $ (164 )   NM   $ (219 )   $ (8 )   NM
Corporate
    1,269       (881 )   NM     2,514       295     NM
Merger-related items(e)
    (70 )     (735 )     90       (462 )     (1,275 )     64  
                     
Total net income/(loss)
  $ 1,287     $ (1,780 )   NM   $ 1,833     $ (988 )   NM
                     
Headcount
    20,747       24,967       (17 )     20,747       24,967       (17 )
 
(a)   Included $423 million representing the Firm’s share of Bear Stearns’ losses from April 8 to May 30, 2008, in the second quarter of 2008, and proceeds of $1.5 billion from the sale of Visa shares in its initial public offering in the first quarter of 2008.
 
(b)   2008 included an accounting conformity loan loss reserve provision related to the acquisition of Washington Mutual’s banking operations. For a further discussion, see Consumer Credit Portfolio on page 103 of JPMorgan Chase’s 2008 Annual Report.
 
(c)   Second quarter of 2009 included an accrual of $675 million for an FDIC special assessment. The first quarter of 2008 included a release of credit card litigation reserves.

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(d)   JPMorgan Chase acquired the banking operations of Washington Mutual Bank for $1.9 billion. The fair value of the net assets acquired exceeded the purchase price, which resulted in negative goodwill. In accordance with U.S. GAAP for business combinations, nonfinancial assets that are not held-for-sale were written down against that negative goodwill. The negative goodwill that remained after writing down nonfinancial assets was recognized as an extraordinary gain. As a result of the final refinement of the purchase price allocation during the third quarter of 2009, the Firm recognized a $76 million increase in the extraordinary gain.
 
(e)   Included costs related to the Washington Mutual transaction, as well as items related to the Bear Stearns merger.
Quarterly results
Net income was $1.3 billion, compared with a net loss of $1.8 billion in the third quarter of 2008.
Private Equity reported net income of $88 million, compared with a net loss of $164 million in the prior year. Net revenue was $172 million, an increase of $388 million, reflecting Private Equity gains of $155 million, compared with losses of $206 million in the prior year. Noninterest expense was $34 million, a decrease of $7 million.
Net income for Corporate was $1.3 billion, compared with a net loss of $881 million in the prior year. Net revenue was $2.4 billion, reflecting continued gains on trading positions and net interest income.
Year-to-date results
Net income was $1.8 billion, compared with a loss of $988 million in the prior year.
Private Equity reported a net loss of $219 million, compared with a net loss of $8 million in the prior year. Net revenue was negative $278 million, a decrease of $422 million, reflecting Private Equity losses of $327 million, compared with gains of $203 million in the prior year. Noninterest expense was $65 million, a decrease of $96 million.
Net income for Corporate was $2.5 billion, compared with $295 million in the prior year. Current-year results reflected continued gains on trading positions, net interest income driven by higher levels of investment securities, and a gain of $150 million (after-tax) from the sale of MasterCard shares, partially offset by a $419 million (after-tax) FDIC special assessment. Prior-year results included $955 million (after-tax) proceeds from the sale of Visa shares in its initial public offering, partially offset by losses of $642 million (after-tax) on preferred securities of Fannie Mae and Freddie Mac and a $248 million (after-tax) charge related to the offer to repurchase auction-rate securities.
Merger-related items were a net loss of $462 million, compared with a loss of $1.3 billion in the prior year. Bear Stearns net merger-related costs were $262 million, compared with $635 million. The prior year included a net loss of $423 million, which represented JPMorgan Chase’s 49.4% ownership in Bear Stearns’ losses from April 8 to May 30, 2008. Washington Mutual net merger-related costs were $200 million, which included an extraordinary gain of $76 million, compared with a loss of $640 million. The prior year included a charge of $1.2 billion (after-tax) to conform loan loss reserves and an extraordinary gain of $581 million.
                                                 
Selected income statement and balance sheet data   Three months ended September 30,   Nine months ended September 30,
(in millions)   2009   2008   Change   2009   2008   Change
 
Treasury
                                               
Securities gains(a)
  $ 181     $ 442       (59 )%   $ 769     $ 1,140       (33 )%
Investment securities portfolio (average)(b)
    339,745       108,728       212       314,202       97,498       222  
Investment securities portfolio (ending)(b)
    351,823       119,085       195       351,823       119,085       195  
Mortgage loans (average)
    7,469       7,221       3       7,303       6,986       5  
Mortgage loans (ending)
    7,665       7,297       5       7,665       7,297       5  
Private equity