10-Q 1 y72204e10vq.htm FORM 10-Q 10-Q
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, 2008   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 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 (Do not check if a smaller reporting company) o   Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes þ No
 
Number of shares of common stock outstanding as of October 31, 2008: 3,732,357,534
 

 


 

FORM 10-Q
TABLE OF CONTENTS
             
        Page
Part I — Financial information        
Item 1  
Consolidated Financial Statements — JPMorgan Chase & Co.:
       
        89
        90
        91
        92
        93
        154
        156
Item 2  
Management’s Discussion and Analysis of Financial Condition and Results of Operations:
       
        3
        5
        6
        7
        9
        13
        17
        20
        51
        54
        58
        60
        84
        85
        87
        162
Item 3       163
Item 4       163
Part II — Other information
       
Item 1       163
Item 1A       165
Item 2       167
Item 3       168
Item 4       168
Item 5       168
Item 6       168
   
 
       
 
 EX-10.1: PURCHASE AND ASSUMPTION AGREEMENT
 EX-31.1: CERTIFICATION
 EX-31.2: CERTIFICATION
 EX-32: CERTIFICATION

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JPMORGAN CHASE & CO.
CONSOLIDATED FINANCIAL HIGHLIGHTS
                                                         
(unaudited)                                           Nine months ended
(in millions, except per share, headcount and ratio data)                                           September 30,
As of or for the period ended,   3Q08     2Q08     1Q08     4Q07     3Q07     2008     2007  
                                                         
Selected income statement data
                                                       
Noninterest revenue
  $ 5,743     $ 10,105     $ 9,231     $ 10,161     $ 9,199     $ 25,079     $ 34,805  
Net interest income
    8,994       8,294       7,659       7,223       6,913       24,947       19,183  
                                                         
Total net revenue
    14,737       18,399       16,890       17,384       16,112       50,026       53,988  
Provision for credit losses
    3,811       3,455       4,424       2,542       1,785       11,690       4,322  
Provision for credit losses — accounting conformity(a)
    1,976                               1,976        
Noninterest expense
    11,137       12,177       8,931       10,720       9,327       32,245       30,983  
                                                         
Income (loss) before income tax expense and extraordinary gain
    (2,187 )     2,767       3,535       4,122       5,000       4,115       18,683  
Income tax expense (benefit)(b)
    (2,133 )     764       1,162       1,151       1,627       (207 )     6,289  
Income (loss) before extraordinary gain
    (54 )     2,003       2,373       2,971       3,373       4,322       12,394  
Extraordinary gain(c)
    581                               581        
                                                         
Net income
  $ 527     $ 2,003     $ 2,373     $ 2,971     $ 3,373     $ 4,903     $ 12,394  
                                                         
Per common share
                                                       
Basic earnings
                                                       
Income (loss) before extraordinary gain
  $ (0.06 )   $ 0.56     $ 0.70     $ 0.88     $ 1.00     $ 1.19     $ 3.63  
Net income
    0.11       0.56       0.70       0.88       1.00       1.36       3.63  
Diluted earnings
                                                       
Income (loss) before extraordinary gain
  $ (0.06 )   $ 0.54     $ 0.68     $ 0.86     $ 0.97     $ 1.15     $ 3.52  
Net income
    0.11       0.54       0.68       0.86       0.97       1.32       3.52  
Cash dividends declared per share
    0.38       0.38       0.38       0.38       0.38       1.14       1.10  
Book value per share
    36.95       37.02       36.94       36.59       35.72                  
Common shares outstanding
                                                       
Average: Basic
    3,445       3,426       3,396       3,367       3,376       3,422       3,416  
Diluted
    3,445 (h)   3,531       3,495       3,472       3,478       3,525       3,520  
Common shares at period end
    3,727       3,436       3,401       3,367       3,359                  
Share price(d)
                                                       
High
  $ 49.00     $ 49.95     $ 49.29     $ 48.02     $ 50.48     $ 49.95     $ 53.25  
Low
    29.24       33.96       36.01       40.15       42.16       29.24       42.16  
Close
    46.70       34.31       42.95       43.65       45.82                  
Market capitalization
    174,048       117,881       146,066       146,986       153,901                  
                                                         
Financial ratios
                                                       
Return on common equity (“ROE”)
                                                       
Income (loss) before extraordinary gain
    (1 )%     6 %     8 %     10 %     11 %     4 %     14 %
Net income
    1       6       8       10       11       5       14  
Return on assets (“ROA”)
                                                       
Income (loss) before extraordinary gain
    (0.01 )     0.48       0.61       0.77       0.91       0.35       1.16  
Net income
    0.12       0.48       0.61       0.77       0.91       0.39       1.16  
Overhead ratio
    76       66       53       62       58       64       57  
Tier 1 capital ratio
    8.9       9.2       8.3       8.4       8.4                  
Total capital ratio
    12.7       13.4       12.5       12.6       12.5                  
Tier 1 leverage ratio
    7.2       6.4       5.9       6.0       6.0                  
                                                         
Selected balance sheet data (period-end)
                                                       
Trading assets
  $ 520,257       $531,997     $ 485,280     $ 491,409     $ 453,711                
Securities
    150,779       119,173       101,647       85,450       97,706                
Loans
    761,381       538,029       537,056       519,374       486,320                
Total assets
    2,251,469       1,775,670       1,642,862       1,562,147       1,479,575                
Deposits
    969,783       722,905       761,626       740,728       678,091                
Long-term debt
    238,034       260,192       189,995       183,862       173,696                
Common stockholders’ equity
    137,691       127,176       125,627       123,221       119,978                
Total stockholders’ equity
    145,843       133,176       125,627       123,221       119,978                
                                                         
Headcount
    228,452       195,594       182,166       180,667       179,847                
                                                         

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(unaudited)                                           Nine months ended
(in millions, except per share, headcount and ratio data)                                           September 30,
As of or for the period ended,   3Q08     2Q08     1Q08     4Q07     3Q07     2008     2007  
                                                         
Credit quality metrics
                                                       
Allowance for credit losses
  $ 19,765     $ 13,932     $ 12,601     $ 10,084     $ 8,971                  
Nonperforming assets(e)
    9,520       6,233       5,143       3,933       3,009                  
Allowance for loan losses to loans(f)
    2.86 %     2.57 %     2.29 %     1.88 %     1.76 %                
Net charge-offs
  $ 2,484     $ 2,130     $ 1,906     $ 1,429     $ 1,221     $ 6,520     $ 3,109  
Net charge-off rate(g)
    1.91 %     1.67 %     1.53 %     1.19 %     1.07 %     1.70 %     0.94 %
Wholesale net charge-off rate(g)
    0.10       0.08       0.18       0.05       0.19       0.12       0.04  
Consumer net charge-off rate(g)
    3.13       2.77       2.43       1.93       1.62       2.78       1.50  
Managed Card net charge-off rate
    5.00       4.98       4.37       3.89       3.64       4.79       3.61  
                                                         
 
(a)  
The third quarter of 2008 included an accounting conformity loan loss reserve provision related to the acquisition of Washington Mutual Bank’s banking operations.
(b)  
The income tax benefit in the third quarter and year-to-date 2008 is predominantly the result of reduced deferred tax liabilities on overseas earnings, as well as the tax benefit associated with the conforming loan loss reserve provision related to the acquisition of Washington Mutual Bank’s banking operations.
(c)  
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 SFAS 141, 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.
(d)  
JPMorgan Chase’s common stock is listed and traded on the New York Stock Exchange, the London Stock Exchange and the Tokyo Stock Exchange. The high, low and closing prices of JPMorgan Chase’s common stock are from the New York Stock Exchange Composite Transaction Tape.
(e)  
Excludes purchased held-for-sale loans and approximately $6.4 billion of consumer loans acquired as part of the Washington Mutual Bank transaction that were nonperforming prior to the transaction closing. The loans acquired from Washington Mutual Bank are considered to be credit impaired and, therefore, are accounted for under SOP 03-3. For additional information, see Note 13 on pages 120—122 of this Form 10-Q.
(f)  
Loans accounted for at fair value, purchased credit impaired loans accounted for under SOP 03-3 and loans held-for-sale were excluded when calculating this metric.
(g)  
Loans accounted for at fair value and loans held-for-sale were excluded when calculating these metrics.
(h)  
Common equivalent shares have been excluded from the computation of diluted earnings per share for the third quarter 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 156—159 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 upon 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. Certain of such risks and uncertainties are described herein (see Forward-looking Statements on page 162 and Item 1A: Risk Factors on page 165 of this Form 10-Q), as well as in the JPMorgan Chase Annual Report on Form 10-K for the year ended December 31, 2007 (“2007 Annual Report” or “2007 Form 10-K”), including Part I, Item 1A: Risk factors, and the JPMorgan Chase quarterly reports, on Forms 10-Q for the quarters ended June 30, 2008, and March 31, 2008, including Part II, Item 1A thereof, to which reference is hereby made.
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 $2.3 trillion in assets, $145.8 billion in total stockholders’ equity and operations in more than 60 countries as of September 30, 2008. The Firm is a leader in investment banking, financial services for consumers and businesses, financial transaction processing and asset management. Under the JPMorgan and Chase brands, the Firm serves millions of customers in the U.S. and many of the world’s most prominent corporate, institutional and government clients.
JPMorgan Chase’s principal bank subsidiaries are JPMorgan Chase Bank, National Association (“JPMorgan Chase Bank, N.A.”), a national banking association with branches in 24 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 subsidiaries are J.P. Morgan Securities Inc. and Bear, Stearns & Co., Inc. (“Bear Stearns & Co.”), the Firm’s U.S. investment banking firms. The Firm merged J.P. Morgan Securities Inc. with and into Bear Stearns & Co. and changed the name of the surviving corporation to J.P. Morgan Securities Inc.
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. The description of the Firm’s business segments below does not give effect to the acquisition of the banking operations of Washington Mutual Bank (“Washington Mutual”), which was consummated on September 25, 2008. For a discussion of the Washington Mutual transaction, see pages 6 and 49–50 of this Form 10-Q.
Investment Bank
JPMorgan is one of the world’s leading investment banks, with deep client relationships and broad product capabilities. The Investment Bank’s clients 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. The Investment Bank (“IB”) also commits the Firm’s own capital to proprietary investing and trading activities.
Retail Financial Services
Retail Financial Services (“RFS”), which includes the Regional Banking, Mortgage Banking and Auto Finance reporting segments serves consumers and businesses through bank branches, ATMs, online banking and telephone banking. Customers can use more than 3,100 bank branches, 9,300 ATMs and 300 mortgage offices. More than 14,100 branch salespeople assist customers with checking and savings accounts, mortgages, home equity and business loans and investments across the 17-state footprint from New York to Arizona. Consumers also can obtain loans through more than 14,200 auto dealerships and 3,500 schools and universities nationwide.
Card Services
With more than 156 million cards in circulation and more than $159 billion in managed loans, Card Services (“CS”) is one of the nation’s largest credit card issuers. Customers used Chase cards to meet more than $272 billion worth of their spending needs in the nine months ended September 30, 2008.

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With hundreds of partnerships, Chase has a market leadership position in building loyalty programs with many of the world’s most respected brands.
Chase Paymentech Solutions, LLC, a joint venture between JPMorgan Chase and First Data Corporation, is a processor of MasterCard and Visa payments and handled more than 16 billion transactions in the nine months ended September 30, 2008. On May 27, 2008, the Firm announced the termination of Chase Paymentech Solutions. For further information, see Other Business Events on page 7 of this Form 10-Q.
Commercial Banking
Commercial Banking (“CB”) serves more than 30,000 clients nationally, including corporations, municipalities, financial institutions and not-for-profit entities with annual revenue generally ranging from approximately $10 million to approximately $2 billion. Commercial Banking delivers extensive industry knowledge, local expertise and a dedicated service model. In partnership with the Firm’s other businesses, it provides 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 (“WSS”) holds, values, clears and services securities, cash and alternative investments for investors and broker-dealers, and manages depositary receipt programs globally.
Asset Management
With assets under supervision of $1.6 trillion as of September 30, 2008, Asset Management (“AM”) is a global leader in investment and wealth management. AM clients include institutions, retail investors and high-net-worth individuals in every major market throughout the world. AM offers global investment management in equities, fixed income, real estate, hedge funds, private equity and liquidity, including both 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.
OTHER BUSINESS EVENTS
Acquisition of the banking operations of Washington Mutual Bank
On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual from the Federal Deposit Insurance Corporation (“FDIC”) for $1.9 billion through a purchase of substantially all of the assets and assumption of specified liabilities of Washington Mutual. Washington Mutual’s banking operations consisted of a retail bank network of 2,244 branches, a nationwide credit card lending business, a multi-family and commercial real estate lending business, and nationwide mortgage banking activities. The transaction expands the Firm’s consumer branch network into California, Florida, Washington, Georgia, Idaho, Nevada and Oregon. The transaction created the nation’s second-largest branch network. The transaction also extends the reach of the Firm’s business banking, commercial banking, credit card, consumer lending and wealth management businesses. The transaction was accounted for under the purchase method of accounting in accordance with SFAS 141. The results of operations of Washington Mutual’s banking operations for the period September 26, 2008, through September 30, 2008, did not have a material effect on the results of the quarter ended September 30, 2008, except with respect to the charge to conform Washington Mutual’s loan loss reserves and the extraordinary gain related to the transaction, both of which are reflected for JPMorgan Chase in the Corporate/Private Equity segment. Beginning October 1, 2008, the results of operations of Washington Mutual’s banking operations will be included in the Firm’s business segments. For further discussion of the transaction, see Note 2 on pages 93—98 of this Form 10-Q.
Merger with The Bear Stearns Companies Inc.
Effective May 30, 2008, BSC Merger Corporation, a wholly-owned subsidiary of JPMorgan Chase, merged with The Bear Stearns Companies Inc. (“Bear Stearns”) pursuant to the Agreement and Plan of Merger, dated as of March 16, 2008, as amended March 24, 2008, with Bear Stearns becoming a wholly-owned subsidiary of JPMorgan Chase (the “Merger”). The Merger provides the Firm with a leading global prime brokerage platform; strengthens the Firm’s equities and asset management businesses; enhances capabilities in mortgage origination, securitization and servicing; and expands the platform of the Firm’s energy business. The Merger was accounted for under the purchase method of accounting, which requires that the assets and liabilities of Bear Stearns be fair valued. The total purchase price to complete the Merger was $1.5 billion.

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The Merger was accomplished through a series of transactions that were reflected as step acquisitions in accordance with SFAS 141. On April 8, 2008, pursuant to the share exchange agreement, JPMorgan Chase acquired 95 million newly issued shares of Bear Stearns common stock (or 39.5% of Bear Stearns common stock after giving effect to the issuance) for 21 million shares of JPMorgan Chase common stock. Further, between March 24, 2008, and May 12, 2008, JPMorgan Chase acquired approximately 24 million shares of Bear Stearns common stock in the open market at an average purchase price of $12.37 per share. The share exchange and cash purchase transactions resulted in JPMorgan Chase owning approximately 49.4% of Bear Stearns common stock immediately prior to consummation of the Merger. Finally, on May 30, 2008, JPMorgan Chase completed the Merger, and as a result of the Merger, each outstanding share of Bear Stearns common stock (other than shares then held by JPMorgan Chase) was converted into the right to receive 0.21753 shares of common stock of JPMorgan Chase. On May 30, 2008, the shares of common stock that JPMorgan Chase and Bear Stearns acquired from each other in the share exchange transaction were cancelled. From April 8, 2008, through May 30, 2008, JPMorgan Chase accounted for its investment in Bear Stearns under the equity method of accounting in accordance with APB 18. During this period, JPMorgan Chase recorded reductions to its investment in Bear Stearns representing its share of Bear Stearns net losses, which were recorded in other income and accumulated other comprehensive income. Commencing May 31, 2008, Bear Stearns was reflected in JPMorgan Chase’s consolidated results of operations.
In conjunction with the Merger, in June 2008, the Federal Reserve Bank of New York (the “FRBNY”) took control, through a limited liability company (“LLC”) formed for this purpose, of a portfolio of $30 billion in assets acquired from Bear Stearns, based upon the value of the portfolio as of March 14, 2008. The assets of the LLC were funded by a $28.85 billion term loan from the FRBNY, and a $1.15 billion subordinated loan from JPMorgan Chase. The JPMorgan Chase loan is subordinated to the FRBNY loan and will bear the first $1.15 billion of any losses of the portfolio. Any remaining assets in the portfolio after repayment of the FRBNY loan, the JPMorgan Chase loan and the expense of the LLC, will be for the account of the FRBNY.
For further discussion of the Merger, see Note 2 on pages 93—98 of this Form 10-Q.
Termination of Chase Paymentech Solutions joint venture
The dissolution of Chase Paymentech Solutions, a global payments and merchant acquiring joint venture between JPMorgan Chase and First Data Corporation, was completed on November 1, 2008 and JPMorgan Chase retained approximately 51% of the business under the Chase Paymentech name.
The dissolution of Chase Paymentech Solutions is being accounted for as a step acquisition in accordance with SFAS 141, and the Firm anticipates recognizing an after-tax gain of approximately $600 million in the fourth quarter of 2008 as a result of the dissolution. The gain will represent the amount by which the fair value of the net assets acquired (predominantly intangible assets and goodwill) exceeded JPMorgan Chase’s book basis in the net assets transferred to First Data Corporation.
Purchase of additional interest in Highbridge Capital Management
In January 2008, JPMorgan Chase purchased an additional equity interest in Highbridge Capital Management, LLC (“Highbridge”). As a result, the Firm currently owns 77.5% of Highbridge. The Firm acquired a majority interest in Highbridge in 2004.
RECENT MARKET DEVELOPMENTS
The liquidity crisis has evolved into a global credit and liquidity issue involving a number of financial institutions, including the failures of some, in the U.S. and Europe. In response to these circumstances, the United States government, particularly the U.S. Department of the Treasury (the “U.S. Treasury”), the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and the FDIC, working in cooperation with foreign governments and other central banks, including the Bank of England, the European Central Bank and the Swiss National Bank, have taken a variety of extraordinary measures designed to restore confidence in the financial markets and to strengthen financial institutions, including capital injections, guarantees of bank liabilities and the acquisition of illiquid assets from banks.
In particular, on October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the “EESA”) was signed into law. Pursuant to the EESA, the U.S. Treasury has the authority to take a range of actions for the purpose of stabilizing and providing liquidity to the U.S. financial markets and has proposed several programs, including the purchase by the U.S. Treasury of certain troubled assets from financial institutions (the “Troubled Asset Relief Program”) and the direct purchase by the U.S. Treasury of equity of financial institutions (the “Capital Purchase Program”).
Other programs and actions taken by U.S. regulatory agencies include (i) the U.S. Treasury’s Temporary Guarantee Program for Money Market Funds, (ii) the FRBNY’s Money Market Investor Funding Facility (the “MMIF Facility”), which is designed to provide liquidity to U.S. money market investors, (iii) the Federal Reserve’s Commercial Paper

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Funding Facility, which is designed to provide liquidity to term funding markets by providing a liquidity backstop to U.S. issuers of commercial paper, (iv) the Federal Reserve’s Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (the “AML Facility”), which is designed to provide liquidity to money market mutual funds under certain conditions by providing funding to U.S. depository institutions and bank holding companies secured by high-quality asset-backed commercial paper they purchased from those money market mutual funds, (v) the FDIC’s Temporary Liquidity Guarantee Program, which enables the FDIC to temporarily provide a 100% guarantee of the senior debt of all FDIC-insured institutions and their holding companies, as well as deposits in noninterest-bearing transaction deposit accounts, (vi) the Federal Reserve’s Primary Dealer Credit Facility, which is designed to foster the financial markets generally, was modified to expand the eligible collateral to include any collateral eligible for tri-party repurchase agreements, (vii) the Federal Reserve’s Term Securities Lending Facility, which is designed to promote liquidity in the financial markets for treasuries and other collateral, was expanded to (a) include all investment-grade debt securities as eligible collateral for schedule 2 auctions and (b) increase the frequency of schedule 2 auctions, (viii) the Federal Reserve’s adoption of an interim rule that provides an exemption, until January 30, 2009, to the Federal Reserve Act to allow insured depository institutions to provide liquidity to their affiliates for assets typically funded in the tri-party repurchase agreement market, and (ix) the Federal Reserve’s Term Auction Facility, which is designed to allow financial institutions to borrow funds at a rate that is below the discount rate.
Capital Purchase Program
Under the Capital Purchase Program, the U.S. Treasury will make $250 billion of capital available to U.S. financial institutions in the form of preferred stock and a warrant to acquire common stock. Pursuant to the Capital Purchase Program, on October 28, 2008, the Firm issued to the U.S. Treasury, in exchange for aggregate consideration of $25.0 billion, (i) 2.5 million shares of the Firm’s Fixed Rate Cumulative Perpetual Preferred Stock, Series K, par value $1 and liquidation preference $10,000 per share (and $25.0 billion liquidation preference in the aggregate) (the “Series K Preferred Stock”), and (ii) a warrant (the “Warrant”) to purchase up to 88,401,697 shares of the Firm’s common stock, at an exercise price of $42.42 per share. The number of shares of common stock to be issued pursuant to the Warrant and the exercise price of the Warrant is subject to adjustment from time to time following, among other things, stock splits, subdivisions or combinations, certain issuances of common stock or convertible securities and certain repurchases of common stock. The Series K Preferred Stock is nonvoting, qualifies as Tier 1 capital and ranks on parity with the Firm’s other series of preferred stock. For a discussion of the Firm’s preferred stock, see page 56 of this Form 10-Q and Note 22 on pages 141—142 of this Form 10-Q.
The letter agreement between the U.S. Treasury and the Firm, dated October 26, 2008, including the securities purchase agreement (the “Purchase Agreement”) concerning the issuance and sale of the Series K Preferred Stock to the U.S. Treasury grants the holders of the Series K Preferred Stock, the Warrant and JPMorgan Chase common stock to be issued under the Warrant certain registration rights and imposes restrictions on dividend and stock repurchases. For a discussion of the dividend and stock repurchase restrictions, see Capital Purchase Program on page 55 and Note 22 on pages 141-142 of this Form 10-Q. In addition, the Purchase Agreement subjects the Firm to the executive compensation limitations as set forth in Section 111(b) of the EESA.
MMIF Facility
The MMIF, authorized by the FRBNY, will support a private-sector initiative designed to provide liquidity to U.S. money market investors. Under the MMIF Facility, the FRBNY will provide senior secured funding to a series of special purpose vehicles to finance the purchase of eligible assets such as commercial paper, bank note and certificates of deposit from eligible investors. The Firm has been selected by the FRBNY to advise the U.S. Treasury regarding the MMIF Facility.
AML Facility
On September 19, 2008, the Federal Reserve established a special lending facility, the AML Facility, to provide liquidity to eligible U.S. money market mutual funds (“MMMFs”). Under the AML Facility, participating banking organizations purchase eligible high-quality asset-backed commercial paper (“ABCP”) investments from MMMFs, which are then pledged to secure nonrecourse advances from the Federal Reserve Bank of Boston (“FRBB”); participating banking organizations do not bear any credit or market risk related to the ABCP investments they hold under this facility and, therefore, the ABCP investments held are not assessed any regulatory risk-based capital. The AML Facility will be in effect until January 30, 2009. The Firm is currently participating in the AML Facility.

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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 and ratio data)   2008     2007     Change   2008     2007     Change
 
Selected income statement data
                                               
Total net revenue
  $ 14,737     $ 16,112       (9 )%   $ 50,026     $ 53,988       (7 )%
Provision for credit losses
    3,811       1,785       114       11,690       4,322       170  
Provision for credit losses — accounting conformity(a)
    1,976             NM       1,976             NM  
Total noninterest expense
    11,137       9,327       19       32,245       30,983       4  
Income (loss) before extraordinary gain
    (54 )     3,373       NM       4,322       12,394       (65 )
Extraordinary gain(b)
    581             NM       581             NM  
Net income
    527       3,373       (84 )     4,903       12,394       (60 )
Diluted earnings per share
                                               
Income (loss) before extraordinary gain
  $ (0.06 )   $ 0.97     NM%   $ 1.15     $ 3.52       (67 )%
Net income
    0.11       0.97       (89 )     1.32       3.52       (63 )
Return on common equity
                                               
Income (loss) before extraordinary gain
    (1 )%     11 %             4 %     14 %        
Net income
    1       11               5       14          
 
 
(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 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 SFAS 141, 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.
Business overview
JPMorgan Chase reported 2008 third-quarter net income of $527 million, or $0.11 per share, compared with net income of $3.4 billion, or $0.97 per share, for the third quarter of 2007. Return on common equity for the quarter was 1%, compared with 11% in the prior year. On September 25, 2008, JPMorgan Chase acquired Washington Mutual’s banking operations, significantly strengthening its consumer franchise, with the addition of more than 2,200 branches. Results in the third quarter included an after-tax charge of $1.2 billion to conform loan loss reserves and an extraordinary gain of $581 million related to this transaction. Excluding the conforming adjustment for the Washington Mutual transaction, the decline in net income from the third quarter of 2007 was driven by a significant increase in the provision for credit losses, higher noninterest expense and lower net revenue. Lower net revenue reflected markdowns related to mortgage-related positions and leveraged lending exposures in the Investment Bank, partially offset by increased net interest income. The provision for credit losses rose predominantly due to increases in the allowance for loan losses related to home equity, subprime and prime mortgage and credit card loans, as well as higher net charge-offs. The increase in noninterest expense was driven by higher compensation expense and additional operating costs relating to the Bear Stearns merger.
Net income for the first nine months of 2008 was $4.9 billion, or $1.32 per share, compared with net income of $12.4 billion, or $3.52 per share, for the first nine months of 2007. Return on common equity for the period was 5%, compared with 14% in the prior year. The lower results in the first nine months of 2008 were due to the same drivers highlighted for the third quarter — a significantly higher provision for credit losses, markdowns related to mortgage-related positions and leveraged lending exposures, and higher total noninterest expense, partially offset by increased net interest income.
The financial crisis that has plagued the U.S. markets and economy for over a year intensified in the third quarter of 2008, as did the global economic slowdown, resulting in sharp declines across most equity markets that are expected to continue into the fourth quarter of 2008. Credit volatility and the stress in financial markets resulted in the occurrence of significant events during the quarter: the U.S. federal government placed the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and Federal National Mortgage Association (“Fannie Mae”) under its direct control; Lehman Brothers Holdings Inc. declared bankruptcy; the Bank of America Corporation agreed to acquire Merrill Lynch & Co., Inc.; the government provided a loan to American International Group, Inc. (“AIG”) in exchange for an equity interest in AIG to prevent the insurer’s failure; and Morgan Stanley and The Goldman Sachs Group, Inc. received approval from the Federal Reserve to become federal bank holding companies. The crisis of confidence was most

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visible in the liquidity pressures affecting the short-term funding markets, as evidenced by the LIBOR-Fed Funds rate disparity (i.e., 3-month LIBOR rates surged over the expected Fed Funds rate). The rate disparity placed additional stress on global banking systems and economies, as LIBOR represents a key benchmark that is used to set other borrowing costs, including short-term business funding costs and rates on many types of mortgage contracts. The Federal Reserve and other global central banking authorities have responded with a series of initiatives to deal with the financial crisis and to make liquidity available to the markets, as discussed on pages 7-8 of this Form 10-Q. Labor markets continued to struggle, with the unemployment rate rising to 6.1% in September, reaching the highest level in the last five years. Economic growth contracted in the third quarter due to a decline in real consumer spending, as economic uncertainty weighed on the minds of consumers, as did high energy bills which continued to squeeze budgets, and the benefits from the tax rebates provided by the Economic Stimulus Act of 2008 came to an end.
During the third quarter of 2008, the Firm’s performance was negatively affected by the weak economic conditions and volatile financial markets. Markdowns on mortgage-related positions and leveraged lending exposures reduced net revenue in the Investment Bank. Unprecedented challenges facing the housing market resulted in a higher provision for credit losses and lower income in Retail Financial Services. A higher provision for credit losses also lowered income in Card Services. Asset Management’s net income decreased due to lower performance fees and the effect of lower markets. However, the Firm continued to show underlying business momentum, with four of its six principal lines of business delivering double-digit revenue growth. The IB maintained its #1 rankings for Global Investment Banking Fees and Global Debt, Equity and Equity-related volumes for the third quarter and first nine months of 2008; RFS increased branch production; and Commercial Banking and Treasury & Securities Services delivered double-digit net income growth.
The discussion that follows highlights the current-quarter performance of each business segment, compared with the prior-year quarter, and discusses results on a managed basis unless otherwise noted. For more information about the Washington Mutual transaction, and its effects on current quarter performance, see pages 93—98 of this Form 10-Q. For more information about managed basis, see Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures on pages 17—20 of this Form 10-Q .
Investment Bank net income increased compared with the third quarter of 2007, reflecting an increase in net revenue and the benefit of reduced deferred tax liabilities offset largely by increased noninterest expense. Higher net revenue was driven by record Equity Markets revenue, higher investment banking fees and increased Fixed Income Markets revenue. Fixed Income Markets revenue reflected record results in rates and currencies, and strong performance in credit trading, emerging markets, and commodities, largely offset by markdowns on mortgage-related positions and leveraged lending funded and unfunded commitments. The provision for credit losses increased slightly compared with the prior year, reflecting a weakening credit environment. The increase in noninterest expense was largely driven by higher compensation expense and additional operating costs relating to the Bear Stearns merger.
Retail Financial Services net income declined, reflecting a significant increase in the provision for credit losses in Regional Banking and higher noninterest expense in Mortgage Banking, offset partially by revenue growth in all businesses. Net revenue benefited from increased net interest income as a result of increased loan and deposit balances combined with wider deposit spreads, as well as higher net mortgage servicing revenue and higher deposit-related fees. The provision for credit losses increased as housing price declines have continued to result in significant increases in estimated losses, particularly for high loan-to-value home equity and mortgage loans, and loans in specific geographic areas that have been most heavily impacted by housing price declines. Noninterest expense rose from the prior year, reflecting higher mortgage reinsurance losses and increased servicing expense.
Card Services net income declined, driven by a higher provision for credit losses partially offset by lower noninterest expense. Managed net revenue increased slightly, as higher average managed loan balances, wider loan spreads and increased interchange income were offset predominantly by the effect of higher revenue reversals associated with higher charge-offs, increased rewards expense and higher volume-driven payments to partners. The managed provision for credit losses increased from the prior year due to a higher level of charge-offs and an increase in the allowance for loan losses. Noninterest expense declined due to lower marketing expense.
Commercial Banking net income increased, driven by record net revenue, partially offset by an increase in the provision for credit losses and higher noninterest expense. The increase in revenue resulted from double-digit growth in loan and liability balances and higher deposit-related and investment banking fees, predominantly offset by spread compression in the liability and loan portfolios. The increase in the provision for credit losses reflected a weakening credit environment and growth in loan balances. Noninterest expense increased due to higher performance-based compensation expense.

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Treasury & Securities Services net income rose, driven by higher net revenue and the benefit of reduced deferred tax liabilities, predominantly offset by higher noninterest expense. Worldwide Securities Services revenue increased, driven by wider spreads on liability products and in securities lending and foreign exchange, combined with increased product usage by new and existing clients. Market depreciation partially offset these benefits. Treasury Services posted record revenue, reflecting higher liability balances as well as volume growth in electronic funds transfer products and trade loans. Noninterest expense increased, reflecting higher expense related to business and volume growth as well as continued investment in new product platforms.
Asset Management net income decreased, driven largely by lower net revenue. The decline in net revenue was due to lower performance fees and the effect of lower markets, including the impact of lower market valuations of seed capital investments. Partially offsetting these net revenue declines were the benefit of the Bear Stearns merger, higher loan and deposit balances, and wider deposit spreads. The provision for credit losses rose from the prior year, reflecting an increase in loan balances and a lower level of recoveries. Noninterest expense was flat compared with the prior year due to the effect of the Bear Stearns merger and increased headcount, offset by lower performance-based compensation.
Corporate/Private Equity reported a net loss for the quarter. The net loss included a conforming loan loss reserve provision and an extraordinary gain related to the acquisition of Washington Mutual’s banking operations. Excluding these items, the balance of the net loss resulted from significantly lower net revenue and an increase in the provision for credit losses, offset partially by a decrease in noninterest expense. The decline in net revenue was driven by a higher level of trading losses, predominantly on preferred securities of Fannie Mae and Freddie Mac; private equity losses in the current quarter compared with gains in the prior-year quarter; and a charge related to the offer to repurchase auction-rate securities from certain customers. These declines were partially offset by higher securities gains. The increase in the provision for credit losses was predominantly related to an increase in the allowance for loan losses for prime mortgage. The decrease in noninterest expense was driven by lower litigation expense.
The Firm’s managed provision for credit losses was $6.7 billion in the third quarter, including the $2.0 billion charge to conform Washington Mutual’s loan loss allowance. For the purposes of the following analysis, this charge is excluded. The managed provision for credit losses was $4.7 billion, up $2.3 billion, or 98%, from the prior year. The total consumer-managed provision for credit losses was $4.3 billion, compared with $2.0 billion in the prior year, reflecting increases in the allowance for credit losses related to home equity, subprime and prime mortgage and credit card loans, as well as higher net charge-offs. Consumer-managed net charge-offs were $3.3 billion, compared with $1.7 billion in the prior year, resulting in managed net charge-off rates of 3.39% and 1.96%, respectively. The wholesale provision for credit losses was $398 million, compared with $351 million in the prior year, due to an increase in the allowance for credit losses reflecting the effect of a weakening credit environment and loan growth. Wholesale net charge-offs were $52 million, compared with net charge-offs of $82 million, resulting in net charge-off rates of 0.10% and 0.19%, respectively. The Firm had total nonperforming assets of $9.5 billion at September 30, 2008, up from the prior-year level of $3.0 billion. Substantially all of the loans acquired from Washington Mutual that were nonperforming prior to the transaction closing are now considered to be performing based upon the provisions of SOP 03-3. For additional information, see Note 13 on pages 120—122 of this Form 10-Q.
Total stockholders’ equity at September 30, 2008, was $145.8 billion, and the Tier 1 capital ratio was 8.9%, compared with 8.4% at September 30, 2007. During the quarter, the Firm raised $11.5 billion of common equity and $1.8 billion of preferred equity.
Business outlook
The following forward-looking statements are based upon 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.
JPMorgan Chase’s outlook for the fourth quarter of 2008 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’s current expectations are for the global and U.S. economic environments to weaken further and potentially faster, for capital markets to remain under stress and for a continued decline in U.S. housing prices. These factors have affected, and are likely to continue to adversely impact, the Firm’s credit costs, overall business volumes and earnings.

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The consumer provision for credit losses could increase substantially as a result of a higher level of losses. Given the potential stress on the consumer from rising unemployment, the continued downward pressure on housing prices and the elevated national inventory of unsold homes, management remains extremely cautious with respect to the credit outlook for home equity, mortgage and credit card portfolios. As described below, management expects continued deterioration in credit trends for the consumer portfolios, which will likely require additions to the consumer loan loss allowance in the fourth quarter of 2008. Housing price declines in specific geographic regions and slowing economic growth could continue to drive higher estimated losses and nonperforming assets for the home equity and subprime mortgage portfolios and to increasingly affect the prime mortgage segment, due in part to the high concentration of more recent (2006 and later) originations in this portfolio. Based on management’s current economic outlook, quarterly net charge-offs in the home lending portfolio, including home equity, prime, and subprime mortgages, are expected to increase in the fourth quarter of 2008 and into 2009. Management expects the managed net charge-off rate for Card Services to be 5% or above in the fourth quarter of 2008, and to increase further in 2009; potentially, the Card Services net charge-off rate could be 6% in the early part of 2009 and possibly reach 7% by the end of the year (excluding the impact resulting from the acquisition of Washington Mutual’s banking operations). These charge-off rates could increase even further if the economic environment continues to deteriorate more than current management expectations. The wholesale provision for credit losses, nonperforming assets, and charge-offs are expected to increase over time as a result of the deterioration in underlying credit conditions. The wholesale provision may also increase due to loan growth.
The Investment Bank continues to be negatively affected by the disruption in the credit and mortgage markets, as well as by overall lower levels of liquidity and wider credit spreads. The continuation of these factors could potentially lead to reduced levels of client activity, lower investment banking fees and lower trading revenue. In addition, if the Firm’s own credit spreads tighten, the change in the fair value of certain trading liabilities would also negatively affect trading results. The Firm held $12.9 billion (gross notional) of legacy leveraged loans and unfunded commitments as held-for-sale as of September 30, 2008. Markdowns averaging 29% of the gross notional value have been taken on these legacy positions as of September 30, 2008. Leveraged loans and unfunded commitments are difficult to hedge effectively, and if market conditions further deteriorate, additional markdowns may be necessary on this asset class. The Investment Bank also held, at September 30, 2008, an aggregate $8.1 billion of prime and Alt-A mortgage exposure, which is also difficult to hedge effectively, and $1.2 billion of subprime mortgage exposure. In addition, the Investment Bank had $9.3 billion of commercial mortgage-backed securities (“CMBS”) exposure. During the quarter, mortgage exposure of $4.3 billion, primarily consisting of prime loans and securities, was transferred to the Firm’s corporate investment portfolio. Even with respect to mortgage exposure that is being actively hedged, such mortgage exposures could be adversely affected by worsening market conditions, further deterioration in the housing market and market activity.
Funding markets have remained challenging, with a wide differential between prime and LIBOR rates. Management expects that if there is a continuation of this rate dislocation, Card Services net income could be significantly reduced in the fourth quarter of 2008. Earnings in Treasury & Securities Services and Asset Management will likely deteriorate if business volumes or assets under custody, management or supervision decline, volatility in certain products decreases, or spreads narrow. Given recent equity market declines, management expects that fourth quarter earnings for these market-sensitive businesses will be lower. Management also continues to believe that the net quarterly loss in Corporate could average approximately $50 million to $100 million, excluding trading results related to the Firm’s investment portfolio (which could be volatile) and credit costs related to prime mortgage exposures (which are expected to increase from third quarter levels, as discussed within the consumer outlook section above). Private Equity results, which are dependent upon the capital markets, are likely to remain depressed and continue to be negative in the fourth quarter.
Management believes the net income impact of the acquisition of Washington Mutual’s banking operations could be approximately $0.50 per share in 2009, with a pro rata portion expected in the fourth quarter of 2008. Management also believes the Firm will incur merger costs related to this transaction of approximately $500 million (after tax), with approximately $100 million (after tax) of expense recognized in the fourth quarter and the remainder incurred through 2011. Also, the Firm anticipates recognizing an after-tax gain of approximately $600 million in the fourth quarter of 2008, related to the dissolution of the Chase Paymentech Solutions, LLC joint venture on November 1, 2008.

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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 related primarily to a single business segment are discussed in more detail within that business segment. For a discussion of the Critical Accounting Estimates Used by the Firm that affect the Consolidated Results of Operations, see pages 85—87 of this Form 10-Q and pages 96—98 of JPMorgan Chase’s 2007 Annual Report.
Total net revenue
The following table presents the components of total net revenue.
                                                 
    Three months ended September 30,   Nine months ended September 30,
(in millions)   2008     2007     Change     2008     2007     Change  
                                                 
Investment banking fees
  $ 1,316     $ 1,336       (1 )%   $ 4,144     $ 4,973       (17 )%
Principal transactions
    (2,763 )     650       NM       (2,814 )     8,850       NM  
Lending & deposit-related fees
    1,168       1,026       14       3,312       2,872       15  
Asset management, administration and commissions
    3,485       3,663       (5 )     10,709       10,460       2  
Securities gains
    424       237       79       1,104       16       NM  
Mortgage fees and related income
    457       221       107       1,678       1,220       38  
Credit card income
    1,771       1,777             5,370       5,054       6  
Other income
    (115 )     289       NM       1,576       1,360       16  
       
Noninterest revenue
    5,743       9,199       (38 )     25,079       34,805       (28 )
Net interest income
    8,994       6,913       30       24,947       19,183       30  
       
Total net revenue
  $ 14,737     $ 16,112       (9 )   $ 50,026     $ 53,988       (7 )
                                                 
Total net revenue for the third quarter of 2008 was $14.7 billion, down $1.4 billion, or 9%, from the prior year. The decrease was due to a significant decline in principal transactions revenue, which included net markdowns on mortgage-related positions and leveraged lending funded and unfunded commitments, losses on preferred securities of Fannie Mae and Freddie Mac, and losses on private equity investments; higher net interest income predominantly offset the decline. For the first nine months of 2008, total net revenue was $50.0 billion, down $4.0 billion, or 7%, from the prior year, largely reflecting the same drivers as the quarter, although the Firm had private equity gains in the first nine months of 2008 versus losses in the third quarter of 2008. However, these gains were lower than the gains in the first nine months of 2007. Also contributing to the decline in total net revenue were lower investment banking fees and the Firm’s share of Bear Stearns’ losses from April 8 to May 30, 2008. These were largely offset by the proceeds from the sale of Visa shares in its initial public offering and higher securities gains from the sale of MasterCard shares.
Investment banking fees were down slightly in the third quarter of 2008 compared with the third quarter of 2007. For the first nine months of 2008, fees declined from the record level of the comparable period last year due to lower debt underwriting fees and advisory fees, which were both at record levels in the first nine months of 2007. For a further discussion of investment banking fees, which are primarily recorded in IB, see the IB segment results on pages 22—25 of this Form 10-Q.
Principal transactions revenue consists of trading revenue and private equity gains. The Firm’s trading activities in the third quarter and first nine months of 2008 decreased significantly from the comparable periods of 2007. The decrease in the third quarter was largely driven by mortgage-related net markdowns of $2.6 billion and net markdowns on leveraged lending funded and unfunded commitments of $1.0 billion, as well as losses of $1.0 billion on preferred securities of Fannie Mae and Freddie Mac. Partially offsetting the decline in trading revenue were record results in rates and currencies, strong performance in credit trading, emerging markets and commodities, strong equity trading and client revenue, and total gains of $956 million from the widening of the Firm’s credit spread on certain structured liabilities and derivatives compared with $582 million for the third quarter of 2007. The decline in trading revenue for the first nine months of 2008 was due to the aforementioned significant markdowns, including $4.7 billion on mortgage-related positions as well as $2.8 billion on leveraged lending funded and unfunded commitments. These markdowns were offset partially by strong performances in the aforementioned trading products, as well as total gains of $2.8 billion from the widening of the Firm’s credit spread on certain structured liabilities and derivatives compared with $955 million for the first nine months of 2007. Private equity gains also declined compared with the third quarter and first nine months of 2007, driven by a net loss in the third quarter of 2008, and lower net gains for the first nine months. In addition, the first quarter of 2007 included a fair value adjustment related to the adoption of SFAS 157. For a further discussion of principal transactions revenue, see the IB and Corporate/Private Equity segment results on pages 22—25 and 47—49, respectively, and Note 5 on pages 111—113 of this Form 10-Q.

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Lending & deposit-related fees rose from the third quarter and first nine months of 2007, predominantly resulting from higher deposit-related fees. For a further discussion of lending & deposit-related fees, which are mostly recorded in RFS, TSS and CB, see the RFS segment results on pages 26—32 the TSS segment results on pages 40—42, and the CB segment results on pages 37—39 of this Form 10-Q.
The decrease in asset management, administration and commissions revenue compared with the third quarter of 2007 was largely due to lower asset management fees in AM as a result of lower performance fees and the effect of lower markets. This decline was partially offset by higher commissions revenue driven by higher brokerage transaction volume (primarily included within equity markets revenue of IB). For the first nine months of 2008, asset management, administration and commissions revenue increased due predominantly to higher commissions revenue and the absence of a charge in RFS in the first quarter of 2007 associated with the accelerated surrenders of customer annuity contracts. TSS also contributed to the increase in asset management, administration and commissions, driven by the benefit of short-term interest rates in securities lending and increased product usage by new and existing clients (largely in custody, funds services and depositary receipts). These results were partially offset by lower asset management fees in AM as a result of lower performance fees and the effect of lower markets. For additional information on these fees and commissions, see the segment discussions for IB on pages 22—25, RFS on pages 26—32, TSS on pages 40—42, and AM on pages 43—46, of this Form 10-Q.
The increase in securities gains for the third quarter of 2008, compared with the same period in 2007, was due to the repositioning of the Corporate investment securities portfolio, partially offset by gains of $115 million recognized in 2007 from the sale of MasterCard shares and marketable securities received from loan workouts in IB. In the first nine months of 2008, securities gains increased due to the repositioning of the Corporate investment securities portfolio and higher gains from the sale of MasterCard shares. 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 from the third quarter and first nine months of 2007, driven by higher net mortgage servicing revenue, which benefited from increased loan servicing revenue and an improvement in mortgage servicing rights (“MSR”) risk management results, and higher production revenue, which reflected lower markdowns on the mortgage warehouse and pipeline. These increases were offset partially by increased reserves related to the repurchase of previously sold loans. For the first nine months of 2008, production revenue was also positively impacted by higher loan originations. For a discussion of mortgage fees and related income, which is recorded primarily in RFS’ Mortgage Banking business, see the Mortgage Banking discussion on pages 30—31 of this Form 10-Q.
Credit card income decreased slightly from the third quarter of 2007, driven primarily by lower servicing fees earned in connection with CS securitization activities, which were negatively affected by higher credit losses on securitized credit card loans. Also contributing to the decrease in credit card income were increased expense related to rewards programs and higher volume-driven payments to partners. Partially offsetting the declines was higher interchange income as a result of an increase in customer charge volume. Credit card income rose in the first nine months of 2008 due to increased servicing fees, which reflected the impact of a higher level of securitized receivables, and an increase in interchange income. Higher customer charge volume in CS and higher debit card transaction volume in RFS drove the increase in interchange income. These results were partially offset by the increases in volume-driven payments to partners and expense related to rewards programs. For a further discussion of credit card income, see CS’ segment results on pages 33—36 of this Form 10-Q.
The decline in other income from the third quarter of 2007 was predominantly due to a $375 million charge related to the offer to repurchase auction-rate securities at par, markdowns on certain investments, including seed capital in AM, lower gains on education loan sales and higher losses on other real estate owned, partially offset by higher gains on sales of certain assets. For the first nine months of 2008, other income increased due predominantly to the proceeds from the sale of Visa shares in its initial public offering ($1.5 billion pretax), higher automobile operating lease revenue and credit card net securitization gains. The increase in other income was partially offset by losses of $423 million (after-tax) reflecting the Firm’s 49.4% ownership in Bear Stearns’ losses from April 8 to May 30, 2008, and the net negative impact of the aforementioned drivers of the decline in other income in the third quarter of 2008.
Net interest income rose from the third quarter and first nine months of 2007, due predominantly to the following: higher trading-related net interest income, higher wholesale and consumer loan balances, growth in liability and deposit balances in the wholesale and consumer businesses, wider spreads on credit card balances and deposit balances in RFS and AM, and a wider net interest spread in the Corporate business. These benefits were offset partially by spread compression on deposit and liability products in CB. The Firm’s total average interest-earning assets for the third quarter of 2008 were $1.3 trillion, up 16% from the third quarter of 2007. The increase was predominantly driven by higher loans, securities borrowed, other assets, federal funds sold and securities purchased under resale agreements and available-for-sale (“AFS”) securities,

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predominantly offset by lower trading assets — debt instruments. The net interest yield on these assets, on a fully taxable equivalent basis, was 2.73%, an increase of 30 basis points from the third quarter of 2007. The Firm’s total average interest earning assets for the first nine months of 2008 were $1.3 trillion, up 15% from the first nine months of 2007, driven by the same factors as drove the 2008 third quarter results, as well as by higher trading assets — debt instruments and higher deposits with banks. The net interest yield on these assets, on a fully taxable equivalent basis, was 2.68%, an increase of 31 basis points from the first nine months of 2007.
                                                 
Provision for credit losses   Three months ended September 30,   Nine months ended September 30,
(in millions)   2008     2007     Change   2008     2007     Change
 
Wholesale:
                                               
Provision for credit losses
  $ 398     $ 351       13 %   $ 1,650     $ 626       164 %
Provision for credit losses — accounting conformity(a)
    564             NM       564             NM  
       
Total wholesale provision for credit losses
    962       351       174       2,214       626       254  
       
Consumer:
                                               
Provision for credit losses
    3,413       1,434       138       10,040       3,696       172  
Provision for credit losses — accounting conformity(a)
    1,412             NM       1,412             NM  
       
Total consumer provision for credit losses
    4,825       1,434       236       11,452       3,696       210  
       
Total provision for credit losses
  $ 5,787     $ 1,785       224     $ 13,666     $ 4,322       216  
 
 
(a)  
The third quarter of 2008 included an accounting conformity loan loss reserve provision related to the acquisition of Washington Mutual’s banking operations.
Provision for credit losses
The provision for credit losses in the third quarter and first nine months of 2008 rose significantly when compared with the prior-year periods due to increases in both the consumer and wholesale provisions. Affecting both the consumer and wholesale provisions was a $2.0 billion charge to conform Washington Mutual’s loan loss allowance. In addition, the consumer provision reflected higher estimated losses for the home equity, subprime mortgage, prime mortgage and credit card loan portfolios. The additional increase in the wholesale provision was driven by the effect of a weakening credit environment and loan growth. The wholesale provision for the first nine months of 2008 also included the effect of the transfer of funded and unfunded leverage lending commitments to retained loans from held-for-sale. For a more detailed discussion of the loan portfolio and the allowance for loan losses, see the segment discussions for RFS on pages 26—32, CS on pages 33—36, IB on pages 22—25, CB on pages 37—39 and Credit Risk Management on pages 64—80 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)   2008     2007     Change   2008     2007     Change
 
Compensation expense
  $ 5,858     $ 4,677       25 %   $ 17,722     $ 17,220       3 %
Occupancy expense
    766       657       17       2,083       1,949       7  
Technology, communications and equipment expense
    1,112       950       17       3,108       2,793       11  
Professional & outside services
    1,451       1,260       15       4,234       3,719       14  
Marketing
    453       561       (19 )     1,412       1,500       (6 )
Other expense
    1,096       812       35       2,498       2,560       (2 )
Amortization of intangibles
    305       349       (13 )     937       1,055       (11 )
Merger costs
    96       61       57       251       187       34  
       
Total noninterest expense
  $ 11,137     $ 9,327       19     $ 32,245     $ 30,983       4  
 

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Total noninterest expense for the third quarter of 2008 was $11.1 billion, up $1.8 billion, or 19%, from the third quarter of 2007. For the first nine months of 2008, total noninterest expense was $32.2 billion, up $1.3 billion, or 4%, from the prior year. The increase in both periods was driven by higher compensation expense and additional operating costs relating to the Bear Stearns’ merger, partially offset in the first nine months of 2008 by lower performance-based incentives.
The increase in Compensation expense for the third quarter and first nine months of 2008 was predominantly driven by the merger with Bear Stearns and additional headcount due to investments in the businesses. The increase in compensation expense for the first nine months of 2008 was partially offset by lower performance-based incentives.
The increase in occupancy expense from the third quarter and first nine months of 2007 was driven by the merger with Bear Stearns.
Technology, communications and equipment expense increased compared with the third quarter and first nine months of 2007, due to additional operating costs related to the Bear Stearns merger, the impact of business and volume growth and increased depreciation expense on owned automobiles subject to operating leases in the Auto Finance business.
Professional & outside services rose from the third quarter and first nine months of 2007, reflecting higher expense related to business and volume growth, including higher brokerage expense in IB, partly from the Bear Stearns merger, and continued investment in new product platforms in TSS.
Marketing expense declined compared with the third quarter and first nine months of 2007, reflecting lower credit card and retail marketing expense.
The increase in other expense from the third quarter of 2007 was due to higher mortgage reinsurance losses, increased mortgage servicing expense and the effect of the Bear Stearns merger, partially offset by a net reduction in litigation expense. For the first nine months of 2008, other expense declined due largely to a net reduction of litigation expense, offset partially by the aforementioned items.
For a discussion of amortization of intangibles and merger costs, refer to Note 18 and Note 10 on pages 135—137 and 117, respectively, of this Form 10-Q.
Income tax expense
The Firm’s income (loss) before income tax expense and extraordinary gain, income tax expense (benefit) and effective tax rate were as follows for each of the periods indicated.
                                 
    Three months ended September 30,   Nine months ended September 30,
(in millions, except rate)   2008     2007     2008     2007  
                                 
Income (loss) before income tax expense and extraordinary gain
  $ (2,187 )   $ 5,000     $ 4,115     $ 18,683  
Income tax expense (benefit)
    (2,133 )     1,627       (207 )     6,289  
Effective tax rate
    97.5 %     32.5 %     (5.0 )     33.7 %
                                 
The change in the effective tax rate for the third quarter and first nine months of 2008, compared with the same periods for 2007, was the result of lower reported pretax income combined with an increased proportion of income that was not subject to U.S. federal income taxes, increased tax credits, and the realization of a $927 million 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, which is discussed further in Note 26 on page 144 of this Form 10-Q.
Extraordinary gain
The Firm recorded an extraordinary gain of $581 million in the third quarter of 2008 associated with the acquisition of the banking operations of Washington Mutual. The transaction is being accounted for under the purchase method of accounting in accordance with SFAS 141. The adjusted net asset value of the banking operations after purchase accounting adjustments was higher than the consideration paid by JPMorgan Chase, resulting in an extraordinary gain. There were no extraordinary gains recorded in any other period in 2007 or 2008.

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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 accounting principles generally accepted in the United States of America (“U.S. GAAP”); these financial statements appear on pages 89—92 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 and the lines’ of business results 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 presents revenue on a fully taxable-equivalent (“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 SFAS 140 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 upon 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 16 on pages 124—130 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.
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, 2008
                    Fully    
    Reported   Credit   tax-equivalent   Managed
(in millions, except per share and ratio data)   results   card(c)   adjustments   basis
                                 
Revenue
                               
Investment banking fees
  $ 1,316     $     $     $ 1,316  
Principal transactions
    (2,763 )                 (2,763 )
Lending & 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  
Provision for credit losses
    3,811       873             4,684  
Provision for credit losses — accounting conformity(a)
    1,976                   1,976  
Noninterest expense
    11,137                   11,137  
                                 
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(b)
  $ (0.06 )   $     $     $ (0.06 )
                                 
Return on common equity(b)
    (1 )%     %     %     (1 )%
Return on equity less goodwill(b)
    (1 )                 (1 )
Return on assets(b)
    (0.01 )     NM       NM       (0.01 )
Overhead ratio
    76       NM       NM       69  
                                 
                                 
    Three months ended September 30, 2007
                    Fully    
    Reported   Credit   tax-equivalent   Managed
(in millions, except per share and ratio data)   results   card(c)   adjustments   basis
                                 
Revenue
                               
Investment banking fees
  $ 1,336     $     $     $ 1,336  
Principal transactions
    650                   650  
Lending & deposit-related fees
    1,026                   1,026  
Asset management, administration and commissions
    3,663                   3,663  
Securities gains
    237                   237  
Mortgage fees and related income
    221                   221  
Credit card income
    1,777       (836 )           941  
Other income
    289             192       481  
                                 
Noninterest revenue
    9,199       (836 )     192       8,555  
Net interest income
    6,913       1,414       95       8,422  
                                 
Total net revenue
    16,112       578       287       16,977  
Provision for credit losses
    1,785       578             2,363  
Noninterest expense
    9,327                   9,327  
                                 
Income before income tax expense and extraordinary gain
    5,000             287       5,287  
Income tax expense
    1,627             287       1,914  
                                 
Income before extraordinary gain
    3,373                   3,373  
Extraordinary gain
                       
                                 
Net income
  $ 3,373     $     $     $ 3,373  
                                 
Diluted earnings per share(b)
  $ 0.97     $     $     $ 0.97  
                                 
Return on common equity(b)
    11 %     %     %     11 %
Return on equity less goodwill(b)
    18                   18  
Return on assets(b)
    0.91       NM       NM       0.87  
Overhead ratio
    58       NM       NM       55  
                                 

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    Nine months ended September 30, 2008
                    Fully    
    Reported   Credit   tax-equivalent   Managed
(in millions, except per share and ratio data)   results   card(c)   adjustments   basis
                                 
Revenue
                               
Investment banking fees
  $ 4,144     $     $     $ 4,144  
Principal transactions
    (2,814 )                 (2,814 )
Lending & 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  
Provision for credit losses
    11,690       2,384             14,074  
Provision for credit losses — accounting conformity(a)
    1,976                   1,976  
Noninterest expense
    32,245                   32,245  
                                 
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(b)
  $ 1.15     $     $     $ 1.15  
                                 
Return on common equity(b)
    4 %     %     %     4 %
Return on equity less goodwill(b)
    7                   7  
Return on assets(b)
    0.35       NM       NM       0.33  
Overhead ratio
    64       NM       NM       60  
                                 
                                 
    Nine months ended September 30, 2007
                    Fully      
    Reported   Credit   tax-equivalent   Managed
(in millions, except per share and ratio data)   results   card(c)   adjustments   basis
                                 
Revenue
                               
Investment banking fees
  $ 4,973     $     $     $ 4,973  
Principal transactions
    8,850                   8,850  
Lending & deposit-related fees
    2,872                   2,872  
Asset management, administration and commissions
    10,460                   10,460  
Securities gains
    16                   16  
Mortgage fees and related income
    1,220                   1,220  
Credit card income
    5,054       (2,370 )           2,684  
Other income
    1,360             501       1,861  
                                 
Noninterest revenue
    34,805       (2,370 )     501       32,936  
Net interest income
    19,183       4,131       287       23,601  
                                 
Total net revenue
    53,988       1,761       788       56,537  
Provision for credit losses
    4,322       1,761             6,083  
Noninterest expense
    30,983                   30,983  
                                 
Income before income tax expense and extraordinary gain
    18,683             788       19,471  
Income tax expense
    6,289             788       7,077  
                                 
Income before extraordinary gain
    12,394                   12,394  
Extraordinary gain
                       
                                 
Net income
  $ 12,394     $     $     $ 12,394  
                                 
Diluted earnings per share(b)
  $ 3.52     $     $     $ 3.52  
                                 
Return on common equity(b)
    14 %     %     %     14 %
Return on equity less goodwill(b)
    23                   23  
Return on assets(b)
    1.16       NM       NM       1.11  
Overhead ratio
    57       NM       NM       55  
                                 

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Three months ended September 30,   2008   2007
(in millions)   Reported     Securitized     Managed     Reported     Securitized     Managed  
                                                 
Loans — Period-end
  $ 761,381     $ 93,664 (d)   $ 855,045     $ 486,320     $ 69,643     $ 555,963  
Total assets — average
    1,756,359       75,712       1,832,071       1,477,334       66,100       1,543,434  
                                                 
                                                 
Nine months ended September 30,   2008   2007
(in millions)   Reported     Securitized     Managed     Reported     Securitized     Managed  
                                                 
Loans — Period-end
  $ 761,381     $ 93,664 (d)   $ 855,045     $ 486,320     $ 69,643     $ 555,963  
Total assets — average
    1,665,285       73,966       1,739,251       1,429,772       65,715       1,495,487  
                                                 
 
(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)  
Based upon income (loss) before extraordinary gain.
(c)  
Credit card securitizations affect CS. See pages 33—36 of this Form 10-Q for further information.
(d)  
Included securitized loans acquired in the Washington Mutual transaction of $11.9 billion at September 30, 2008.
 
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 upon the products and services provided, or the type of customer served, and they reflect the manner in which financial information is currently evaluated by management. Results of these lines of business are presented on a managed basis. For further discussion of Business Segment Results, see pages 38—39 of JPMorgan Chase’s 2007 Annual Report.
As part of the Bear Stearns merger integration, the businesses of Bear Stearns were reviewed and aligned with the business segments of JPMorgan Chase. The Merger predominantly affected the IB and AM lines of business. The impact of the Merger on the JPMorgan Chase business segments is discussed in the segment results of the applicable line of business.
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 page 38 of JPMorgan Chase’s 2007 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.
Capital allocation
Line of business equity increased during the second quarter of 2008 in IB and AM due to the Bear Stearns merger, and for AM, the purchase of the additional equity interest in Highbridge. At the end of the third quarter of 2008, equity was increased for each line of business with a view toward the future implementation of the new Basel II capital rules. For further details on these rules, see Basel II on page 57 of this Form 10-Q. In addition, capital allocated to RFS, CS, and CB was increased as a result of the acquisition of Washington Mutual’s banking operations.

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Effect of Washington Mutual on business segment presentation
The effects of Washington Mutual’s banking operations are not included in the following business segment results as such operations did not have a material effect on the results of the quarter ended September 30, 2008, except with respect to the charge to conform Washington Mutual’s loan loss reserves and the extraordinary gain related to the transaction, both of which are reflected for JPMorgan Chase in the Corporate/Private Equity segment. Information regarding Washington Mutual’s banking operations is presented in this section on pages 49—50 of this Form 10-Q.
Segment Results — Managed Basis(a)
The following table summarizes the business segment results for the periods indicated.
                                                                                         
Three months ended                                                                           Return
September 30,   Total net revenue   Noninterest expense   Net income (loss)   on equity
(in millions, except ratios)   2008     2007     Change     2008     2007     Change     2008     2007     Change     2008     2007  
                                                                                         
Investment Bank
  $ 4,035     $ 2,946       37 %   $ 3,816     $ 2,378       60 %   $ 882     $ 296       198 %     13 %     6 %
Retail Financial Services
    4,875       4,201       16       2,772       2,469       12       247       639       (61 )     6       16  
Card Services
    3,887       3,867       1       1,194       1,262       (5 )     292       786       (63 )     8       22  
Commercial Banking
    1,125       1,009       11       486       473       3       312       258       21       18       15  
Treasury & Securities Services
    1,953       1,748       12       1,339       1,134       18       406       360       13       46       48  
Asset Management
    1,961       2,205       (11 )     1,362       1,366             351       521       (33 )     25       52  
Corporate/Private Equity(b)
    (1,748 )     1,001       NM       168       245       (31 )     (1,963 )     513       NM       NM       NM  
 
                                               
Total
  $ 16,088     $ 16,977       (5 )%   $ 11,137     $ 9,327       19 %   $ 527     $ 3,373       (84 )%     1 %     11 %
                                                                                         
                                                                                         
Nine months ended                                                                           Return
September 30,   Total net revenue   Noninterest expense   Net income (loss)   on equity
(in millions, except ratios)   2008     2007     Change     2008     2007     Change     2008     2007     Change     2008     2007  
                                                                                         
Investment Bank
  $ 12,516     $ 14,998       (17 )%   $ 11,103     $ 10,063       10 %   $ 1,189     $ 3,015       (61 )%     7 %     19 %
Retail Financial Services
    14,592       12,664       15       8,012       7,360       9       626       2,283       (73 )     5       19  
Card Services
    11,566       11,264       3       3,651       3,691       (1 )     1,151       2,310       (50 )     11       22  
Commercial Banking
    3,298       3,019       9       1,447       1,454             959       846       13       18       18  
Treasury & Securities Services
    5,885       5,015       17       3,884       3,358       16       1,234       975       27       47       43  
Asset Management
    5,926       6,246       (5 )     4,085       3,956       3       1,102       1,439       (23 )     28       50  
Corporate/Private Equity(b)
    (119 )     3,331       NM       63       1,101       (94 )     (1,358 )     1,526       NM       NM       NM  
 
                                               
Total
  $ 53,664     $ 56,537       (5 )%   $ 32,245     $ 30,983       4 %   $ 4,903     $ 12,394       (60 )%     5 %     14 %
                                                                                         
 
(a)  
Represents reported results on a tax-equivalent basis and excludes the impact of credit card securitizations.
(b)  
The third quarter of 2008 included an accounting conformity loan loss reserve provision of $1.2 billion (after-tax) and an extraordinary gain of $581 million related to the Washington Mutual transaction, as well as losses on preferred equity interests in Fannie Mae and Freddie Mac.

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INVESTMENT BANK
 
For a discussion of the business profile of the IB, see pages 40—42 of JPMorgan Chase’s 2007 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)   2008     2007     Change   2008     2007     Change
 
Revenue
                                               
Investment banking fees
  $ 1,593     $ 1,330       20 %   $ 4,534     $ 4,959       (9 )%
Principal transactions
    (922 )     (435 )     (112 )     (882 )     5,032       NM  
Lending & deposit-related fees
    118       118             325       304       7  
Asset management, administration and commissions
    847       712       19       2,300       1,996       15  
All other income
    (279 )     (76 )     (267 )     (571 )     88       NM  
       
Noninterest revenue
    1,357       1,649       (18 )     5,706       12,379       (54 )
Net interest income
    2,678       1,297       106       6,810       2,619       160  
       
Total net revenue(a)
    4,035       2,946       37       12,516       14,998       (17 )
Provision for credit losses
    234       227       3       1,250       454       175  
Credit reimbursement from TSS(b)
    31       31             91       91        
Noninterest expense
                                               
Compensation expense
    2,162       1,178       84       6,535       6,404       2  
Noncompensation expense
    1,654       1,200       38       4,568       3,659       25  
       
Total noninterest expense
    3,816       2,378       60       11,103       10,063       10  
       
Income (loss) before income tax expense
    16       372       (96 )     254       4,572       (94 )
Income tax expense (benefit)(c)
    (866 )     76       NM       (935 )     1,557       NM  
       
Net income (loss)
  $ 882     $ 296       198     $ 1,189     $ 3,015       (61 )
       
 
                                               
Financial ratios
                                               
ROE
    13 %     6 %             7 %     19 %        
ROA
    0.39       0.17               0.19       0.59          
Overhead ratio
    95       81               89       67          
Compensation expense as a % of total net revenue
    54       40               52       43          
       
 
                                               
Revenue by business
                                               
Investment banking fees:
                                               
Advisory
  $ 576     $ 595       (3 )   $ 1,429     $ 1,627       (12 )
Equity underwriting
    518       267       94       1,419       1,169       21  
Debt underwriting
    499       468       7       1,686       2,163       (22 )
       
Total investment banking fees
    1,593       1,330       20       4,534       4,959       (9 )
Fixed income markets
    815       687       19       3,628       5,724       (37 )
Equity markets
    1,650       537       207       3,705       3,325       11  
Credit portfolio
    (23 )     392       NM       649       990       (34 )
       
Total net revenue
  $ 4,035     $ 2,946       37     $ 12,516     $ 14,998       (17 )
       
 
                                               
Revenue by region
                                               
Americas
  $ 1,052     $ 1,016       4     $ 4,753     $ 7,037       (32 )
Europe/Middle East/Africa
    2,509       1,389       81       5,662       5,967       (5 )
Asia/Pacific
    474       541       (12 )     2,101       1,994       5  
       
Total net revenue
  $ 4,035     $ 2,946       37     $ 12,516     $ 14,998       (17 )
 
 
(a)  
Total net revenue included tax-equivalent adjustments, predominantly due to income tax credits related to affordable housing investments and tax-exempt income from municipal bond investments of $427 million and $255 million for the quarters ended September 30, 2008 and 2007, respectively, and $1.1 billion and $697 million for year-to-date 2008 and 2007, respectively.
(b)  
TSS is charged a credit reimbursement related to certain exposures managed within the IB credit portfolio on behalf of clients shared with TSS.
(c)  
The income tax benefit in the third quarter and year-to-date 2008 is predominantly the result of reduced deferred tax liabilities on overseas earnings.

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Quarterly results
Net income was $882 million, an increase of $586 million from the prior year. The improved results reflected an increase in net revenue and the benefit of reduced deferred tax liabilities offset largely by increased noninterest expense.
Net revenue was $4.0 billion, an increase of $1.1 billion, or 37%, from the prior year. Investment banking fees were $1.6 billion, up 20% from the prior year. Advisory fees were $576 million, down 3% from the prior year, reflecting decreased levels of activity. Debt underwriting fees were $499 million, up 7%. Equity underwriting fees were $518 million, up 94% from the prior year. Fixed Income Markets revenue was $815 million, up 19% from the prior year. The increase was driven by record results in rates and currencies, and strong performance in credit trading, emerging markets, and commodities, as well as gains of $343 million from the widening of the Firm’s credit spread on certain structured liabilities. Largely offsetting these results were mortgage-related net markdowns of $2.6 billion, as well as $1.0 billion of net markdowns on leveraged lending funded and unfunded commitments. Equity Markets revenue was a record $1.7 billion, up $1.1 billion from the prior year, driven by strong trading results and client revenue, as well as a gain of $429 million from the widening of the Firm’s credit spread on certain structured liabilities. Credit Portfolio revenue was a loss of $23 million, down $415 million from the prior year, reflecting net markdowns due to wider counterparty credit spreads and fewer gains from loan workouts, largely offset by higher net interest income and increased revenue from risk management activities.
The provision for credit losses was $234 million, compared with $227 million in the prior year, reflecting a weakening credit environment. Net charge-offs were $13 million, compared with $67 million in the prior year. The allowance for loan losses to total average loans retained was 3.85% for the current quarter, an increase from 1.80% in the prior year.
Average loans retained were $69.0 billion, an increase of $7.1 billion, or 11%, from the prior year, largely driven by growth in acquisition finance activity, including leveraged lending. Average fair value and held-for-sale loans were $17.6 billion, up $297 million, or 2%, from the prior year.
Noninterest expense was $3.8 billion, an increase of $1.4 billion, or 60%, from the prior year, largely driven by higher compensation expense and additional operating costs relating to the Bear Stearns merger.
Year-to-date results
Net income was $1.2 billion, down 61%, or $1.8 billion, from the prior year. The lower results reflected a decline in total net revenue and higher noninterest expense and provision for credit losses, partially offset by the benefit of reduced deferred tax liabilities.
Total net revenue was $12.5 billion, a decrease of $2.5 billion, or 17%, from the prior year. Investment banking fees were $4.5 billion, down 9% from the prior year, predominantly reflecting lower debt underwriting and advisory fees. Debt underwriting fees of $1.7 billion were down 22%, driven by lower loan syndication and bond underwriting fees, reflecting market conditions. Advisory fees of $1.4 billion were down 12% from the prior year reflecting decreased levels of activity. Equity underwriting fees were $1.4 billion, an increase of 21% from the prior year. Fixed Income Markets revenue was $3.6 billion, down $2.1 billion, or 37%, from the prior year driven largely by mortgage-related net markdowns of approximately $4.7 billion and net markdowns of $2.8 billion on leveraged lending funded and unfunded commitments. These markdowns were partially offset by strong performance in credit trading, commodities, rates, and emerging markets as well as gains of $1.2 billion from the widening of the Firm’s credit spread on certain structured liabilities. Equity Markets revenue was $3.7 billion, up $380 million, or 11% from the prior year, driven by strong trading results and client revenue, as well as a gain of $865 million from the widening of the Firm’s credit spread on certain structured liabilities. Credit Portfolio revenue was $649 million, down $341 million, or 34% from the prior year, reflecting net markdowns due to wider counterparty credit spreads and fewer gains from loan workouts, largely offset by higher net interest income and increased revenue from risk management activities.
The provision for credit losses was $1.3 billion, compared with $454 million in the prior year, primarily reflecting an increase in the allowance for credit losses due to the effect of a weakening credit environment as well as the effect of the transfer of funded and unfunded leverage lending commitments to retained loans from held-for-sale. The allowance for loan losses to total average loans retained was 3.63% compared with 1.85% in the prior year.
Total average loans retained were $73.1 billion, an increase of $13.1 billion, or 22%, from the prior year, principally driven by growth in acquisition finance activity, including leveraged lending, as well as liquidity financing. Average fair value and held-for-sale loans were $19.2 billion, up $3.9 billion, or 26%, from the prior year.
Noninterest expense was $11.1 billion, an increase of $1.0 billion, or 10%, from the prior year, driven by higher noncompensation expense and the Bear Stearns merger.

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Selected metrics   Three months ended September 30,   Nine months ended September 30,
(in millions, except headcount and ratio data)   2008     2007     Change   2008     2007     Change
 
Selected ending balances
                                               
Equity
  $ 33,000     $ 21,000       57 %   $ 33,000     $ 21,000       57 %
Selected average balances
                                               
Total assets
  $ 890,040     $ 710,665       25     $ 820,497     $ 688,730       19  
Trading assets—debt and equity instruments
    360,821       372,212       (3 )     365,802       355,708       3  
Trading assets—derivatives receivables
    105,462       63,017       67       98,390       59,336       66  
Loans:
                                               
Loans retained(a)
    69,022       61,919       11       73,107       59,996       22  
Loans held-for-sale and loans at fair value
    17,612       17,315       2       19,215       15,278       26  
       
Total loans
    86,634       79,234       9       92,322       75,274       23  
Adjusted assets(b)
    694,459       625,619       11       677,945       600,688       13  
Equity
    26,000       21,000       24       23,781       21,000       13  
 
                                               
Headcount
    30,989       25,691       21       30,989       25,691       21  
 
                                               
Credit data and quality statistics
                                               
Net charge-offs (recoveries)
  $ 13     $ 67       (81 )   $ 18     $ 45       (60 )
Nonperforming assets:
                                               
Nonperforming loans(c)
    436       265       65       436       265       65  
Other nonperforming assets
    147       60       145       147       60       145  
Allowance for credit losses:
                                               
Allowance for loan losses
    2,654       1,112       139       2,654       1,112       139  
Allowance for lending-related commitments
    463       568       (18 )     463       568       (18 )
       
Total allowance for credit losses
    3,117       1,680       86       3,117       1,680       86  
 
                                               
Net charge-off (recovery) rate(c)(d)
    0.07 %     0.43 %             0.03 %     0.10 %        
Allowance for loan losses to average loans(c)(d)
    3.85       1.80               3.63 (i)     1.85          
Allowance for loan losses to nonperforming loans(c)
    657       585               657       585          
Nonperforming loans to average loans
    0.50       0.33               0.47       0.35          
Market risk—average trading and credit
portfolio VaR
(e)
                                               
By risk type:
                                               
Fixed income
  $ 183     $ 98       87     $ 150     $ 72       108  
Foreign exchange
    20       23       (13 )     27       21       29  
Equities
    80       35       129       47       43       9  
Commodities and other
    41       28       46       33       34       (3 )
Diversification(f)
    (104 )     (72 )     (44 )     (95 )     (68 )     (40 )
       
Total trading VaR(g)
    220       112       96       162       102       59  
Credit portfolio VaR(h)
    47       17       176       38       14       171  
Diversification(f)
    (49 )     (22 )     (123 )     (39 )     (16 )     (144 )
       
Total trading and credit portfolio VaR
  $ 218     $ 107       104     $ 161     $ 100       61  
 
 
(a)  
Loans retained included credit portfolio loans, leveraged leases and other accrual loans, and excluded loans at fair value.
(b)  
Adjusted assets, a non-GAAP financial measure, equals total assets minus (1) securities purchased under resale agreements and securities borrowed less securities sold, not yet purchased; (2) assets of variable interest entities (“VIEs”) consolidated under FIN 46R; (3) cash and securities segregated and on deposit for regulatory and other purposes; and (4) goodwill and intangibles. 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. The 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)  
Nonperforming loans included loans held-for-sale and loans at fair value of $32 million and $75 million at September 30, 2008 and 2007, respectively, which were excluded from the allowance coverage ratios. 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 (recovery) rate.
(e)  
Results for year-to-date 2008 include four months of the combined Firm’s (JPMorgan Chase’s and Bear Stearns’) results and five months of heritage JPMorgan Chase results. All prior periods reflect heritage JPMorgan Chase results. For a more complete description of value-at-risk (“VaR”), see pages 80—84 of this Form 10-Q.

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(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; however, particular risk parameters of certain products are not fully captured, for example, correlation risk or the credit spread sensitivity of certain mortgage products. 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 83 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.
(h)  
Included VaR on derivative credit valuation adjustments, hedges of the credit valuation adjustment 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. The allowance for loan losses to period-end loans was 3.70% at September 30, 2008.
According to Thomson Reuters, for the first nine months of 2008, the Firm was ranked #1 in Global Debt, Equity and Equity-Related; #1 in Global Equity and Equity-Related; #1 in Global Syndicated Loans; #1 in Global Long-Term Debt and #3 in Global Announced M&A based upon volume.
                                 
    Nine months ended September 30, 2008   Full Year 2007
Market shares and rankings(a)   Market Share   Rankings   Market Share   Rankings
                                 
Global debt, equity and equity-related
    10 %     #1       8 %     #2  
Global syndicated loans
    12       #1       13       #1  
Global long-term debt(b)
    9       #1       7       #3  
Global equity and equity-related(c)
    12       #1       9       #2  
Global announced M&A(d)
    24       #3       27       #4  
U.S. debt, equity and equity-related
    15       #1       10       #2  
U.S. syndicated loans
    27       #1       24       #1  
U.S. long-term debt(b)
    15       #1       10       #2  
U.S. equity and equity-related(c)
    17       #1       11       #5  
U.S. announced M&A(d)
    33       #3       28       #3  
                                 
 
(a)  
Source: Thomson Reuters. The results for the nine months ended September 30, 2008, are pro forma for the merger with Bear Stearns. Full-year 2007 results represent heritage JPMorgan Chase only.
(b)  
Includes asset-backed securities, mortgage-backed securities and municipal securities.
(c)  
Includes rights offerings; U.S. domiciled equity and equity-related transactions.
(d)  
Global announced M&A is based upon rank value; all other rankings are based upon 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 2007 included transactions withdrawn since December 31, 2007. 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 43—48 of JPMorgan Chase’s 2007 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)   2008     2007     Change   2008     2007     Change
 
Revenue
                                               
Lending & deposit-related fees
  $ 538     $ 492       9 %   $ 1,496     $ 1,385       8 %
Asset management, administration and commissions
    346       336       3       1,098       943       16  
Mortgage fees and related income
    437       229       91       1,658       1,206       37  
Credit card income
    204       167       22       572       472       21  
Other income
    206       296       (30 )     558       687       (19 )
       
Noninterest revenue
    1,731       1,520       14       5,382       4,693       15  
Net interest income
    3,144       2,681       17       9,210       7,971       16  
       
Total net revenue
    4,875       4,201       16       14,592       12,664       15  
 
                                               
Provision for credit losses
    1,678       680       147       5,502       1,559       253  
 
                                               
Noninterest expense
                                               
Compensation expense
    1,120       1,087       3       3,464       3,256       6  
Noncompensation expense
    1,552       1,265       23       4,248       3,753       13  
Amortization of intangibles
    100       117       (15 )     300       351       (15 )
       
Total noninterest expense
    2,772       2,469       12       8,012       7,360       9  
       
Income before income tax expense
    425       1,052       (60 )     1,078       3,745       (71 )
Income tax expense
    178       413       (57 )     452       1,462       (69 )
       
Net income
  $ 247     $ 639       (61 )   $ 626     $ 2,283       (73 )
       
 
                                               
Financial ratios
                                               
ROE
    6 %     16 %             5 %     19 %        
Overhead ratio
    57       59               55       58          
Overhead ratio excluding core deposit intangibles(a)
    55       56               53       55          
 
 
(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 ratio excludes Regional Banking’s core deposit intangible amortization expense related to The Bank of New York transaction and the Bank One merger of $99 million and $116 million for the quarters ended September 30, 2008 and 2007, respectively, and $297 million and $347 million for year-to-date September 30, 2008 and 2007, respectively.
Quarterly results
Net income was $247 million, a decrease of $392 million, or 61%, reflecting a significant increase in the provision for credit losses in Regional Banking and higher noninterest expense in Mortgage Banking. These factors were offset partially by revenue growth in all businesses.
Net revenue was $4.9 billion, an increase of $674 million, or 16%, from the prior year. Net interest income was $3.1 billion, up $463 million, or 17%, due to higher loan and deposit balances and wider deposit spreads. Noninterest revenue was $1.7 billion, up $211 million, or 14%, as higher net mortgage servicing revenue and increased deposit-related fees were offset partially by declines in education loan sales.
The provision for credit losses was $1.7 billion, as housing price declines have continued to result in significant increases in estimated losses, particularly for high loan-to-value home equity and mortgage loans. Home equity net charge-offs were $663 million (2.78% net charge-off rate), compared with $150 million (0.65% net charge-off rate) in the prior year. Subprime mortgage net charge-offs were $273 million (7.65% net charge-off rate), compared with $40 million (1.62% net charge-off rate) in the prior year. Prime mortgage net charge-offs (including net charge-offs reflected in the Corporate segment) were $177 million (1.51% net charge-off rate), compared with $9 million (0.11% net charge-off rate) in the prior year. The current-quarter provision includes an increase in the allowance for loan losses of $450 million due to increases in estimated losses in the subprime and home equity mortgage portfolios. An additional $250 million increase in the allowance for loan losses for prime mortgage loans has been reflected in the Corporate segment.

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Noninterest expense was $2.8 billion, an increase of $303 million, or 12%, from the prior year, reflecting higher mortgage reinsurance losses and increased servicing expense.
Year-to-date results
Net income was $626 million, a decrease of $1.7 billion, or 73%, reflecting a significant increase in the provision for credit losses in Regional Banking and higher noninterest expense in Mortgage Banking. These factors were offset partially by revenue growth in all businesses.
Net revenue was $14.6 billion, an increase of $1.9 billion, or 15%, from the prior year. Net interest income was $9.2 billion, up $1.2 billion, or 16%, due to higher loan and deposit balances and wider loan and deposit spreads. Noninterest revenue was $5.4 billion, up $689 million, or 15%, as higher mortgage banking revenue and increased deposit-related fees were offset partially by declines in education loan sales.
The provision for credit losses was $5.5 billion, as housing price declines have continued to result in significant increases in estimated losses, particularly for high loan-to-value home equity and mortgage loans. Home equity net charge-offs were $1.6 billion (2.28% net charge-off rate), compared with $316 million (0.47% net charge-off rate) in the prior year. Subprime mortgage net charge-offs were $614 million (5.43% net charge-off rate), compared with $86 million (1.28% net charge-off rate) in the prior year. Prime mortgage net charge-offs (including net charge-offs reflected in the Corporate segment) were $331 million (0.98% net charge-off rate), compared with $16 million (0.07% net charge-off rate) in the prior year. The year-to-date provision includes increases in the allowance for loan losses of $1.2 billion for home equity loans and $1.3 billion for prime and subprime mortgage loans due to increases in estimated losses for these portfolios. An additional $580 million increase in the allowance for loan losses for prime mortgage loans has been reflected in the Corporate segment.
Noninterest expense was $8.0 billion, an increase of $652 million, or 9%, from the prior year, reflecting higher mortgage reinsurance losses, increased servicing expense and investment in the retail distribution network.
                                                 
Selected metrics   Three months ended September 30,   Nine months ended September 30,
(in millions, except headcount and ratios)   2008     2007     Change   2008     2007     Change
 
Selected ending balances
                                               
Assets
  $ 228,982     $ 216,754       6 %   $ 228,982     $ 216,754       6 %
Loans:
                                               
Loans retained
    187,548       172,498       9       187,548       172,498       9  
Loans held-for-sale and loans at fair value(a)
    9,655       18,274       (47 )     9,655       18,274       (47 )
       
Total loans
    197,203       190,772       3       197,203       190,772       3  
Deposits
    222,574       216,135       3       222,574       216,135       3  
Equity
    25,000       16,000       56       25,000       16,000       56  
 
                                               
Selected average balances
                                               
Assets
  $ 230,428     $ 214,852       7     $ 230,239     $ 216,218       6  
Loans:
                                               
Loans retained
    187,429       168,495       11       185,222       165,479       12  
Loans held-for-sale and loans at fair value(a)
    16,037       19,560       (18 )     18,116       24,289       (25 )
       
Total loans
    203,466       188,055       8       203,338       189,768       7  
Deposits
    222,180       216,904       2       224,731       217,669       3  
Equity
    17,000       16,000       6       17,000       16,000       6  
 
                                               
Headcount
    67,265       68,528       (2 )     67,265       68,528       (2 )
 
                                               
Credit data and quality statistics
                                               
Net charge-offs
  $ 1,196     $ 350       242     $ 2,926     $ 805       263  
Nonperforming loans(b)(c)(d)
    4,443       1,820       144       4,443       1,820       144  
Nonperforming assets(b)(c)(d)
    5,131       2,232       130       5,131       2,232       130  
Allowance for loan losses
    4,957       2,105       135       4,957       2,105       135  
 
                                               
Net charge-off rate(e)(f)
    2.44 %     0.82 %             2.05 %     0.65 %        
Allowance for loan losses to ending loans(e)
    2.64       1.22               2.64       1.22          
Allowance for loan losses to nonperforming loans(e)
    117       117               117       117          
Nonperforming loans to total loans
    2.25       0.95               2.25       0.95          
 

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(a)  
Loans held-for-sale and loans at fair value included prime mortgage loans originated with the intent to sell, which were accounted for at fair value. These loans, classified as trading assets on the Consolidated Balance Sheets, totaled $8.1 billion and $14.4 billion at September 30, 2008 and 2007, respectively. Average loans included prime mortgage loans, classified as trading assets on the Consolidated Balance Sheets, of $14.5 billion and $14.1 billion for the three months ended September 30, 2008 and 2007, respectively, and $14.9 billion and $11.4 billion for the nine months ended September 30, 2008 and 2007, respectively.
(b)  
Nonperforming loans and assets included loans held-for-sale and loans accounted for at fair value of $207 million and $17 million at September 30, 2008 and 2007, respectively. Certain of these loans are classified as trading assets on the Consolidated Balance Sheets.
(c)  
Nonperforming loans and assets excluded (1) loans eligible for repurchase as well as loans repurchased from Government National Mortgage Association (“GNMA”) pools that are insured by U.S. government agencies of $1.8 billion and $1.3 billion at September 30, 2008 and 2007, respectively, and (2) education 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 $405 million and $241 million at September 30, 2008 and 2007, respectively. These amounts were excluded, as reimbursement is proceeding normally.
(d)  
During the second quarter of 2008, the policy for classifying subprime mortgage and home equity loans as nonperforming was changed to conform to all other home lending products. Prior period nonperforming assets have been revised to conform to this change.
(e)  
Loans held-for-sale and loans accounted for at fair value were excluded when calculating the allowance coverage ratio and net charge-off rate.
(f)  
The net charge-off rate for the three and nine months ended September 30, 2008, excluded $45 million and $78 million, respectively, of charge-offs related to prime mortgage loans held by the Corporate/Private Equity segment.
REGIONAL BANKING
                                                 
Selected income statement data   Three months ended September 30,   Nine months ended September 30,
(in millions, except ratios)   2008     2007     Change   2008     2007     Change
 
 
                                               
Noninterest revenue
  $ 1,049     $ 1,013       4 %   $ 2,949     $ 2,783       6 %
Net interest income
    2,652       2,325       14       7,766       6,920       12  
       
Total net revenue
    3,701       3,338       11       10,715       9,703       10  
Provision for credit losses
    1,552       574       170       5,089       1,301       291  
Noninterest expense
    1,773       1,760       1       5,345       5,238       2  
       
Income before income tax expense
    376       1,004       (63 )     281       3,164       (91 )
Net income
  $ 218     $ 611       (64 )   $ 139     $ 1,930       (93 )
       
 
                                               
ROE
    7 %     21 %             1 %     22 %        
Overhead ratio
    48       53               50       54          
Overhead ratio excluding core deposit intangibles(a)
    45       49               47       50          
 
 
(a)  
Regional Banking 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 inclusion would result in an improving overhead ratio over time, all things remaining equal. This ratio excludes Regional Banking’s core deposit intangible amortization expense related to The Bank of New York transaction and the Bank One merger of $99 million and $116 million for the quarters ended September 30, 2008 and 2007, respectively, and $297 million and $347 million for year-to-date 2008 and 2007, respectively.
Quarterly results
Regional Banking net income was $218 million, down $393 million, or 64%, from the prior year. Net revenue was $3.7 billion, up $363 million, or 11%, as the benefits of higher loan and deposit balances, wider deposit spreads and higher deposit-related fees were offset partially by declines in education loan sales. The provision for credit losses was $1.6 billion, compared with $574 million in the prior year. The provision reflected weakness in the home equity and mortgage portfolios (see Retail Financial Services discussion of the provision for credit losses for further detail). Noninterest expense was $1.8 billion, up $13 million, or 1%, from the prior year.
Year-to-date results
Regional Banking net income was $139 million, down $1.8 billion, or 93%, from the prior year. Net revenue was $10.7 billion, up $1.0 billion, or 10%, as the benefits of higher loan and deposit balances, wider loan and deposit spreads and higher deposit-related fees were offset partially by declines in education loan sales. The provision for credit losses was $5.1 billion, compared with $1.3 billion in the prior year. The provision reflected weakness in the home equity and mortgage portfolios (see Retail Financial Services discussion of the provision for credit losses for further detail). Noninterest expense was $5.3 billion, up $107 million, or 2%, from the prior year, due to investment in the retail distribution network.

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Selected metrics   Three months ended September 30,   Nine months ended September 30,
(in billions, except ratios and where otherwise noted)   2008     2007     Change   2008     2007     Change
 
Business metrics
                                               
Home equity origination volume
  $ 2.6     $ 11.2       (77 )%   $ 14.6     $ 38.5       (62 )%
End-of-period loans owned
                                               
Home equity
  $ 94.6     $ 93.0       2     $ 94.6     $ 93.0       2  
Mortgage(a)
    13.6       12.3       11       13.6       12.3       11  
Business banking
    16.5       14.9       11       16.5       14.9       11  
Education
    15.3       10.2       50       15.3       10.2       50  
Other loans(b)
    1.0       2.4       (58 )     1.0       2.4       (58 )
       
Total end of period loans
    141.0       132.8       6       141.0       132.8       6  
End-of-period deposits
                                               
Checking
  $ 69.0     $ 64.5       7     $ 69.0     $ 64.5       7  
Savings
    105.0       95.7       10       105.0       95.7       10  
Time and other
    37.5       46.5       (19 )     37.5       46.5       (19 )
       
Total end of period deposits
    211.5       206.7       2       211.5       206.7       2  
Average loans owned
                                               
Home equity
  $ 94.8     $ 91.8       3     $ 95.0     $ 89.1       7  
Mortgage(a)
    14.3       9.9       44       15.2       9.2       65  
Business banking
    16.4       14.8       11       16.1       14.5       11  
Education
    14.1       9.8       44       12.9       10.4       24  
Other loans(b)
    1.0       2.4       (58 )     1.2       2.6       (54 )
       
Total average loans(c)
    140.6       128.7       9       140.4       125.8       12  
Average deposits
                                               
Checking
  $ 68.0     $ 64.9       5     $ 63.4     $ 66.5       (5 )
Savings
    105.5       97.1       9       103.9       97.4       7  
Time and other
    36.7       43.3       (15 )     45.5       42.5       7  
       
Total average deposits
    210.2       205.3       2       212.8       206.4       3  
Average assets
    148.7       140.6       6       149.3       138.1       8  
Average equity
    12.4       11.8       5       12.4       11.8       5  
       
 
                                               
Credit data and quality statistics
(in millions, except ratios)
                                               
30+ day delinquency rate(d)(e)
    4.18 %     2.39 %             4.18 %     2.39 %        
Net charge-offs
                                               
Home equity
  $ 663     $ 150       342     $ 1,621     $ 316       413  
Mortgage
    318       40       NM       692       86       NM  
Business banking
    55       33       67       146       88       66  
Other loans
    34       23       48       103       88       17  
       
Total net charge-offs
    1,070       246       335       2,562       578       343  
Net charge-off rate
                                               
Home equity
    2.78 %     0.65 %             2.28 %     0.47 %        
Mortgage(f)
    7.59       1.60               5.40       1.25          
Business banking
    1.33       0.88               1.21       0.81          
Other loans
    0.97       1.01               1.21       1.28          
Total net charge-off rate(c)(f)
    2.92       0.78               2.41       0.63          
 
                                               
Nonperforming assets(g)(h)
  $ 4,310     $ 2,034       112     $ 4,310     $ 2,034       112  
 
 
(a)  
Balance reported predominantly reflected subprime mortgage loans owned.
(b)  
Included commercial loans derived from community development activities prior to March 31, 2008.
(c)  
Average loans include loans held-for-sale of $1.2 billion and $3.2 billion for the quarters ended September 30, 2008 and 2007, respectively, and $2.8 billion and $3.8 billion for the nine months ended September 30, 2008 and 2007, respectively. These amounts were excluded when calculating the net charge-off rate.
(d)  
Excluded loans eligible for repurchase as well as loans repurchased from GNMA pools that are insured by U.S. government agencies of $2.0 billion and $979 million at September 30, 2008 and 2007, respectively. These amounts are excluded as reimbursement is proceeding normally.
(e)  
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 $787 million and $590 million at September 30, 2008 and 2007, respectively. These amounts are excluded as reimbursement is proceeding normally.
(f)  
The mortgage and total net charge-off rate for the three and nine months ended September 30, 2008, excluded $45 million and $78 million, respectively, of charge-offs related to prime mortgage loans held by the Corporate/Private Equity segment.

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(g)  
Excluded (1) loans eligible for repurchase as well as loans repurchased from GNMA pools that are insured by U.S. government agencies of $1.8 billion and $1.3 billion at September 30, 2008 and 2007, respectively, and (2) education 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 $405 million and $241 million at September 30, 2008 and 2007, respectively. These amounts for GNMA and education loans are excluded, as reimbursement is proceeding normally.
(h)  
During the second quarter of 2008, the policy for classifying subprime mortgage and home equity loans as nonperforming was changed to conform to all other home lending products. Prior period nonperforming assets have been revised to conform to this change.
                                                 
Retail branch business metrics   Three months ended September 30,   Nine months ended September 30,
(in millions, except where otherwise noted)   2008     2007     Change   2008     2007     Change
 
Investment sales volume
  $ 4,389     $ 4,346       1 %   $ 13,684     $ 14,246       (4 )%
                                                 
Number of:
                                               
Branches
    3,179       3,096       3       3,179       3,096       3  
ATMs
    9,308       8,943       4       9,308       8,943       4  
Personal bankers
    10,201       9,503       7       10,201       9,503       7  
Sales specialists
    3,959       4,025       (2 )     3,959       4,025       (2 )
Active online customers (in thousands)
    7,315       5,706       28       7,315       5,706       28  
Checking accounts (in thousands)
    11,672       10,644       10       11,672       10,644       10  
 
MORTGAGE BANKING
                                                 
Selected income statement data                          
(in millions, except ratios and where   Three months ended September 30,   Nine months ended September 30,
otherwise noted)   2008     2007     Change   2008     2007     Change
 
Production revenue
  $ 254     $ 176       44 %   $ 1,427     $ 1,039       37 %
Net mortgage servicing revenue:
                                               
Servicing revenue
    695       629       10       2,007       1,845       9  
Changes in MSR asset fair value:
                                               
Due to inputs or assumptions in model
    (786 )     (810 )     3       101       250       (60 )
Other changes in fair value
    (390 )     (377 )     (3 )     (1,209 )     (1,138 )     (6 )
       
Total changes in MSR asset fair value
    (1,176 )     (1,187 )     1       (1,108 )     (888 )     (25 )
Derivative valuation adjustments and other
    893       788       13       13       (353 )     NM  
       
Total net mortgage servicing revenue
    412       230       79       912       604       51  
       
Total net revenue
    666       406       64       2,339       1,643       42  
Noninterest expense
    747       485       54       1,932       1,469       32  
       
Income (loss) before income tax expense
    (81 )     (79 )     (3 )     407       174       134  
Net income (loss)
  $ (50 )   $ (48 )     (4 )   $ 251     $ 107       135  
       
 
                                               
ROE
    (8 )%     (10 )%             14 %     7 %        
 
                                               
Business metrics (in billions)
                                               
Third-party mortgage loans serviced (ending)
  $ 681.8     $ 600.0       14     $ 681.8     $ 600.0       14  
MSR net carrying value (ending)
    10.6       9.1       16       10.6       9.1       16  
Average mortgage loans held-for-sale(a)
    14.9       16.4       (9 )     15.4       20.4       (25 )
Average assets
    35.4       31.4       13       34.6       35.0       (1 )
Average equity
    2.4       2.0       20       2.4       2.0       20  
 
                                               
Mortgage origination volume by channel (in billions)
                                               
Retail
  $ 8.4     $ 11.1       (24 )   $ 33.5     $ 35.6       (6 )
Wholesale
    5.9       9.8       (40 )     25.6       32.5       (21 )
Correspondent
    13.2       7.2       83       42.2       18.4       129  
CNT (Negotiated transactions)
    10.2       11.1       (8 )     39.6       32.9       20  
       
Total
  $ 37.7     $ 39.2       (4 )   $ 140.9     $ 119.4       18  
 
 
(a)  
Included $14.5 billion and $14.1 billion of prime mortgage loans at fair value for the three months ended September 30, 2008 and 2007, respectively, and $14.9 billion and $11.4 billion for the nine months ended September 30, 2008 and 2007. These loans are classified as trading assets on the Consolidated Balance Sheets.

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Quarterly results
Mortgage Banking reported a net loss of $50 million, compared with a net loss of $48 million in the prior year. Net revenue was $666 million, up $260 million, or 64%. Net revenue comprises production revenue and net mortgage servicing revenue. Production revenue was $254 million, up $78 million, reflecting lower markdowns of $91 million on the mortgage warehouse and pipeline as compared with markdowns of $186 million in the prior year. The current-year result was also affected by an increase in reserves related to the repurchase of previously sold loans. Net mortgage servicing revenue — which includes loan servicing revenue, MSR risk management results and other changes in fair value — was $412 million, an increase of $182 million, or 79%, from the prior year. Loan servicing revenue was $695 million, an increase of $66 million on growth of 14% in third-party loans serviced. MSR risk management results were $107 million, compared with negative $22 million in the prior year. Other changes in fair value of the MSR asset were negative $390 million compared with negative $377 million in the prior year. Noninterest expense was $747 million, an increase of $262 million, or 54%. The increase reflected higher mortgage reinsurance losses and higher servicing costs due to increased delinquencies and defaults.
Year-to-date results
Mortgage Banking net income was $251 million, compared with $107 million in the prior year. Net revenue was $2.3 billion, up $696 million, or 42%. Net revenue comprises production revenue and net mortgage servicing revenue. Production revenue was $1.4 billion, up $388 million, benefiting from higher loan originations and lower markdowns on the mortgage warehouse and pipeline as compared with the prior year. The current-year result was also affected by an increase in reserves related to the repurchase of previously sold loans. Net mortgage servicing revenue — which includes loan servicing revenue, MSR risk management results and other changes in fair value — was $912 million, an increase of $308 million, or 51%, from the prior year. Loan servicing revenue was $2.0 billion, an increase of $162 million on growth of 14% in third-party loans serviced. MSR risk management results were $114 million, compared with negative $103 million in the prior year. Other changes in fair value of the MSR asset were negative $1.2 billion compared with negative $1.1 billion in the prior year. Noninterest expense was $1.9 billion, an increase of $463 million, or 32%. The increase reflected higher mortgage reinsurance losses and higher servicing costs due to increased delinquencies and defaults.

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AUTO FINANCE
                                                 
Selected income statement data                          
(in millions, except ratios and where   Three months ended September 30,   Nine months ended September 30,
otherwise noted)   2008     2007     Change   2008     2007     Change
 
Noninterest revenue
  $ 157     $ 140       12 %   $ 463     $ 409       13 %
Net interest income
    349       307       14       1,071       898       19  
       
Total net revenue
    506       447       13       1,534       1,307       17  
Provision for credit losses
    124       96       29       409       247       66  
Noninterest expense
    252       224       13       735       653       13  
       
Income before income tax expense
    130       127       2       390       407       (4 )
Net income
  $ 79     $ 76       4     $ 236     $ 246       (4 )
       
       
ROE
    14 %     14 %             14 %     15 %        
ROA
    0.68       0.70               0.68       0.76          
       
Business metrics (in billions)
                                               
Auto origination volume
  $ 3.8     $ 5.2       (27 )   $ 16.6     $ 15.7       6  
End-of-period loans and lease-related assets
                                               
Loans outstanding
  $ 43.2     $ 40.3       7     $ 43.2     $ 40.3       7  
Lease financing receivables
    0.1       0.6       (83 )     0.1       0.6       (83 )
Operating lease assets
    2.2       1.8       22       2.2       1.8       22  
       
Total end-of-period loans and lease-related assets
    45.5       42.7       7       45.5       42.7       7  
Average loans and lease-related assets
                                               
Loans outstanding
  $ 43.8     $ 39.9       10     $ 43.8     $ 39.8       10  
Lease financing receivables
    0.1       0.7       (86 )     0.2       1.1       (82 )
Operating lease assets
    2.2       1.8       22       2.1       1.7       24  
       
Total average loans and lease-related assets
    46.1       42.4       9       46.1       42.6       8  
Average assets
    46.4       42.9       8       46.4       43.1       8  
Average equity
    2.3       2.2       5       2.3       2.2       5  
       
       
Credit quality statistics
                                               
30+ day delinquency rate
    1.82 %     1.65 %             1.82 %     1.65 %        
Net charge-offs
                                               
Loans
  $ 123     $ 98       26     $ 358     $ 218       64  
Lease receivables
    1       1             3       3        
       
Total net charge-offs
    124       99       25       361       221       63  
Net charge-off rate
                                               
Loans
    1.12 %     0.97 %             1.09 %     0.73 %        
Lease receivables
    3.98       0.57               2.00       0.36          
Total net charge-off rate
    1.12       0.97               1.10       0.72          
Nonperforming assets
  $ 239     $ 156       53     $ 239     $ 156       53  
 
Quarterly results
Auto Finance net income was $79 million, an increase of $3 million, or 4%, from the prior year. Net revenue was $506 million, up $59 million, or 13%, driven by higher loan balances and increased automobile operating lease revenue. The provision for credit losses was $124 million, up $28 million, reflecting higher estimated losses. The net charge-off rate was 1.12%, compared with 0.97% in the prior year. Noninterest expense was $252 million, an increase of $28 million, or 13%, driven by increased depreciation expense on owned automobiles subject to operating leases.
Year-to-date results
Auto Finance net income was $236 million, a decrease of $10 million, or 4%, from the prior year. Net revenue was $1.5 billion, up $227 million, or 17%, driven by increased automobile operating lease revenue, higher loan balances, and a reduction in residual value reserves for direct finance leases. The provision for credit losses was $409 million, up $162 million, reflecting higher estimated losses. The net charge-off rate was 1.10%, compared with 0.72% in the prior year. Noninterest expense was $735 million, an increase of $82 million, or 13%, driven by increased depreciation expense on owned automobiles subject to operating leases.

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CARD SERVICES
 
For a discussion of the business profile of CS, see pages 49—51 of JPMorgan Chase’s 2007 Annual Report and pages 5—6 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 17—20 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)   2008     2007     Change   2008     2007     Change
 
Revenue
                                               
Credit card income
  $ 633     $ 692       (9 )%   $ 1,906     $ 1,973       (3 )%
All other income
    13       67       (81 )     223       239       (7 )
       
Noninterest revenue
    646       759       (15 )     2,129       2,212       (4 )
Net interest income
    3,241       3,108       4       9,437       9,052       4  
       
Total net revenue
    3,887       3,867       1       11,566       11,264       3  
       
Provision for credit losses
    2,229       1,363       64       6,093       3,923       55  
       
Noninterest expense
                                               
Compensation expense
    267       256       4       792       761       4  
Noncompensation expense
    773       827       (7 )     2,377       2,383        
Amortization of intangibles
    154       179       (14 )     482       547       (12 )
       
Total noninterest expense
    1,194       1,262       (5 )     3,651       3,691       (1 )
       
       
Income before income tax expense
    464       1,242       (63 )     1,822       3,650       (50 )
Income tax expense
    172       456       (62 )     671       1,340       (50 )
       
Net income
  $ 292     $ 786       (63 )   $ 1,151     $ 2,310       (50 )
       
       
Memo: Net securitization gains (amortization)
  $ (28 )   $       NM     $ 78     $ 39       100  
       
Financial ratios
                                               
ROE
    8 %     22 %             11 %     22 %        
Overhead ratio
    31       33               32       33          
 
Quarterly results
Net income was $292 million, a decline of $494 million, or 63%, from the prior year. The decrease was driven by a higher provision for credit losses, partially offset by lower noninterest expense.
End-of-period managed loans were $159.3 billion, an increase of $10.3 billion, or 7%, from the prior year. Average managed loans were $157.6 billion, an increase of $8.9 billion, or 6%, from the prior year. The increase in both end-of-period and average managed loans reflects organic portfolio growth.
Managed total net revenue was $3.9 billion, an increase of $20 million, or 1%, from the prior year. Net interest income was $3.2 billion, up $133 million, or 4%, from the prior year, driven by higher average managed loan balances and wider loan spreads. These benefits were offset partially by the effect of higher revenue reversals associated with higher charge-offs. Noninterest revenue was $646 million, a decrease of $113 million, or 15%, from the prior year. Interchange income increased, benefiting from a 5% increase in charge volume, but was more than offset by increased rewards expense and higher volume-driven payments to partners (both of which are netted against interchange income), as well as a decrease in securitization income.
The managed provision for credit losses was $2.2 billion, an increase of $866 million, or 64%, from the prior year, due to a higher level of charge-offs and an increase of $250 million in the allowance for loan losses, reflecting higher estimated losses. The managed net charge-off rate for the quarter was 5.00%, up from 3.64% in the prior year. The 30-day managed delinquency rate was 3.69%, up from 3.25% in the prior year.
Noninterest expense was $1.2 billion, a decrease of $68 million, or 5%, from the prior year due to lower marketing expense.

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Year-to-date results
Net income was $1.2 billion, a decline of $1.2 billion, or 50%, 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 $154.7 billion, an increase of $6.2 billion, or 4%, from the prior year, reflecting organic portfolio growth.
Managed total net revenue was $11.6 billion, an increase of $302 million, or 3%, from the prior year. Net interest income was $9.4 billion, up $385 million, or 4%, from the prior year, driven by higher average managed loan balances, wider loan spreads and an increased level of fees. These benefits were offset partially by the effect of higher revenue reversals associated with higher charge-offs. Noninterest revenue was $2.1 billion, a decrease of $83 million, or 4%, from the prior year. Interchange income increased, benefiting from a 5% increase in charge volume, but was more than offset by increased rewards expense and higher volume-driven payments to partners (both of which are netted against interchange income).
The managed provision for credit losses was $6.1 billion, an increase of $2.2 billion, or 55%, from the prior year, due to a higher level of charge-offs and an increase in the allowance for loan losses (an increase of $550 million compared with a prior year release of $85 million), reflecting higher estimated losses. The managed net charge-off rate increased to 4.79%, up from 3.61% in the prior year.
Noninterest expense was $3.7 billion, a decrease of $40 million, or 1%, from the prior year.

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Selected metrics                    
(in millions, except headcount, ratios   Three months ended September 30,   Nine months ended September 30,
and where otherwise noted)   2008     2007     Change   2008     2007     Change
 
Financial metrics
                                               
% of average managed outstandings:
                                               
Net interest income
    8.18 %     8.29 %             8.15 %     8.15 %        
Provision for credit losses
    5.63       3.64               5.26       3.53          
Noninterest revenue
    1.63       2.03               1.84       1.99          
Risk adjusted margin(a)
    4.19       6.68               4.73       6.61          
Noninterest expense
    3.01       3.37               3.15       3.32          
Pretax income (ROO)(b)
    1.17       3.31               1.57       3.29          
Net income
    0.74       2.10               0.99       2.08          
       
Business metrics
                                               
Charge volume (in billions)
  $ 93.9     $ 89.8       5 %   $ 272.9     $ 259.1       5 %
Net accounts opened (in millions)
    3.6       4.0       (10 )     10.6       11.1       (5 )
Credit cards issued (in millions)
    156.9       153.6       2       156.9       153.6       2  
Number of registered internet customers (in millions)
    27.5       26.4       4       27.5       26.4       4  
Merchant acquiring business(c)
                                               
Bank card volume (in billions)
  $ 197.1     $ 181.4       9     $ 578.8     $ 524.7       10  
Total transactions (in billions)
    5.7       5.0       14       16.5       14.3       15  
       
Selected ending balances
                                               
Loans:
                                               
Loans on balance sheets
  $ 77,565     $ 79,409       (2 )   $ 77,565     $ 79,409       (2 )
Securitized loans
    81,745       69,643       17       81,745       69,643       17  
       
Managed loans
  $ 159,310     $ 149,052       7     $ 159,310     $ 149,052       7  
       
Equity
  $ 15,000     $ 14,100       6     $ 15,000     $ 14,100       6  
       
Selected average balances
                                               
Managed assets
  $ 169,413     $ 154,956       9     $ 163,560     $ 155,206       5  
Loans:
                                               
Loans on balance sheets
  $ 79,183     $ 79,993       (1 )   $ 78,090     $ 80,301       (3 )
Securitized loans
    78,371       68,673       14       76,564       68,200       12  
       
Managed average loans
  $ 157,554     $ 148,666       6     $ 154,654     $ 148,501       4  
       
Equity
  $ 14,100     $ 14,100           $ 14,100     $ 14,100        
       
Headcount
    19,722       18,887       4       19,722       18,887       4  
       
Managed credit quality statistics
                                               
Net charge-offs
  $ 1,979     $ 1,363       45     $ 5,543     $ 4,008       38  
Net charge-off rate
    5.00 %     3.64 %             4.79 %     3.61 %        
Managed delinquency ratios
                                               
30+ days
    3.69 %     3.25 %             3.69 %     3.25 %        
90+ days
    1.74       1.50               1.74       1.50          
       
Allowance for loan losses(d)
  $ 3,951     $ 3,107       27     $ 3,951     $ 3,107       27  
Allowance for loan losses to period-end loans(d)
    5.09 %     3.91 %             5.09 %     3.91 %        
 
 
(a)  
Represents total net revenue less provision for credit losses.
(b)  
Pretax return on average managed outstandings.
(c)  
Represents 100% of the merchant acquiring business.
(d)  
Loans on a reported basis.

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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)   2008     2007     Change   2008     2007     Change
 
Income statement data(a)
                                               
Credit card income
                                               
Reported
  $ 1,476     $ 1,528       (3 )%   $ 4,529     $ 4,343       4 %
Securitization adjustments
    (843 )     (836 )     (1 )     (2,623 )     (2,370 )     (11 )
       
Managed credit card income
  $ 633     $ 692       (9 )   $ 1,906     $ 1,973       (3 )
       
Net interest income
                                               
Reported
  $ 1,525     $ 1,694       (10 )   $ 4,430     $ 4,921       (10 )
Securitization adjustments
    1,716       1,414       21       5,007       4,131       21  
       
Managed net interest income
  $ 3,241     $ 3,108       4     $ 9,437     $ 9,052       4  
       
Total net revenue
                                               
Reported
  $ 3,014     $ 3,289       (8 )   $ 9,182     $ 9,503       (3 )
Securitization adjustments
    873       578       51       2,384       1,761       35  
       
Managed total net revenue
  $ 3,887     $ 3,867       1     $ 11,566     $ 11,264       3  
       
Provision for credit losses
                                               
Reported
  $ 1,356     $ 785       73     $ 3,709     $ 2,162       72  
Securitization adjustments
    873       578       51       2,384       1,761       35  
       
Managed provision for credit losses
  $ 2,229     $ 1,363       64     $ 6,093     $ 3,923       55  
       
Balance sheet — average balances(a)
                                               
Total average assets
                                               
Reported
  $ 93,701     $ 88,856       5     $ 89,594     $ 89,491        
Securitization adjustments
    75,712       66,100       15       73,966       65,715       13  
       
Managed average assets
  $ 169,413     $ 154,956       9     $ 163,560     $ 155,206       5  
       
Credit quality statistics(a)
                                               
Net charge-offs
                                               
Reported
  $ 1,106     $ 785       41     $ 3,159     $ 2,247       41  
Securitization adjustments
    873       578       51       2,384       1,761       35  
       
Managed net charge-offs
  $ 1,979     $ 1,363       45     $ 5,543     $ 4,008       38  
 
 
(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 under SFAS 140 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 17—20 of this Form 10-Q.

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COMMERCIAL BANKING
 
For a discussion of the business profile of CB, see pages 52—53 of JPMorgan Chase’s 2007 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)   2008     2007     Change   2008     2007     Change
 
Revenue
                                               
Lending & deposit-related fees
  $ 212     $ 159       33 %   $ 612     $ 475       29 %
Asset management, administration and commissions
    29       24       21       81       68       19  
All other income(a)
    147       107       37       412       394       5  
       
Noninterest revenue
    388       290       34       1,105       937       18  
Net interest income
    737       719       3       2,193       2,082       5  
       
Total net revenue
    1,125       1,009       11       3,298       3,019       9  
       
Provision for credit losses
    126       112       13       274       174       57  
       
Noninterest expense
                                               
Compensation expense
    177       160       11       528       522       1  
Noncompensation expense
    298       300       (1 )     882       890       (1 )
Amortization of intangibles
    11       13       (15 )     37       42       (12 )
       
Total noninterest expense
    486       473       3       1,447       1,454        
       
Income before income tax expense
    513       424       21       1,577       1,391       13  
Income tax expense
    201       166       21       618       545       13  
       
Net income
  $ 312     $ 258       21     $ 959     $ 846       13  
       
       
Revenue by product:
                                               
Lending
  $ 377     $ 343       10     $ 1,132     $ 1,039       9  
Treasury services
    643       594       8       1,889       1,719       10  
Investment banking
    87       64       36       246       222       11  
Other
    18       8       125       31       39       (21 )
       
Total Commercial Banking revenue
  $ 1,125     $ 1,009       11     $ 3,298     $ 3,019       9  
       
IB revenue, gross(b)
  $ 252     $ 194       30     $ 725     $ 661       10  
       
Revenue by business:
                                               
Middle Market Banking
  $ 729     $ 680       7     $ 2,143     $ 1,994       7  
Mid-Corporate Banking
    236       167       41       678       576       18  
Real Estate Banking
    91       108       (16 )     282       319       (12 )
Other
    69       54       28       195       130       50  
       
Total Commercial Banking revenue
  $ 1,125     $ 1,009       11     $ 3,298     $ 3,019       9  
       
       
Financial ratios
                                               
ROE
    18 %     15 %             18 %     18 %        
Overhead ratio
    43       47               44       48          
 
 
(a)  
IB-related and commercial card revenue is included in all other income.
(b)  
Represents the total revenue related to investment banking products sold to CB clients.

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Quarterly results
Net income was $312 million, an increase of $54 million, or 21%, from the prior year, driven by record net revenue, partially offset by an increase in the provision for credit losses and higher noninterest expense.
Net revenue was $1.1 billion, an increase of $116 million, or 11%, from the prior year. Net interest income was $737 million, up $18 million, or 3%, driven by double-digit growth in loan and liability balances, predominantly offset by spread compression in the liability and loan portfolios. Noninterest revenue was $388 million, an increase of $98 million, or 34%, from the prior year, reflecting higher deposit-related fees, investment banking fees, and other income.
Middle Market Banking revenue was $729 million, an increase of $49 million, or 7%, from the prior year. Mid-Corporate Banking revenue was $236 million, an increase of $69 million, or 41%. Real Estate Banking revenue was $91 million, a decline of $17 million, or 16%.
The provision for credit losses was $126 million, an increase of $14 million, or 13%, compared with the prior year. The current-quarter provision reflects a weakening credit environment and growth in loan balances. The allowance for loan losses to average loans retained was 2.65% for the current quarter, in line with the prior year. Nonperforming loans were $572 million, up $438 million from the prior year, reflecting increases across all businesses and the effect of a weakening credit environment. Net charge-offs were $40 million (0.22% net charge-off rate), compared with $20 million (0.13% net charge-off rate) in the prior year.
Noninterest expense was $486 million, an increase of $13 million, or 3%, from the prior year, due to higher performance-based compensation expense.
Year-to-date results
Net income was $959 million, an increase of $113 million, or 13%, from the prior year driven by growth in total net revenue partially offset by a higher provision for credit losses.
Total net revenue was $3.3 billion, an increase of $279 million, or 9%, from the prior year. Net interest income was $2.2 billion, an increase of $111 million, or 5%, driven by double-digit growth in liability balances and loans, largely offset by spread compression in the liability and loan portfolios and a shift to narrower-spread liability products. Noninterest revenue was $1.1 billion, up $168 million, or 18%, due to higher deposit-related fees as well as increases in other fee income, partially offset by lower gains related to the sale of securities acquired in the satisfaction of debt.
Middle Market Banking revenue was $2.1 billion, an increase of $149 million, or 7%. Mid-Corporate Banking revenue was $678 million, an increase of $102 million, or 18%. Real Estate Banking revenue was $282 million, a decline of $37 million, or 12%.
The provision for credit losses was $274 million, compared with $174 million in the prior year, reflecting growth in loan balances and a weakening credit environment. The allowance for loan losses to average loans retained was 2.72%, down from 2.75% in the prior year. Net charge-offs were $170 million (0.32% net charge-off rate), compared with net charge-offs of $11 million (0.02% net charge-off rate) in the prior year.
Noninterest expense was $1.4 billion, in line with the prior year.

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Selected metrics   Three months ended September 30,   Nine months ended September 30,
(in millions, except ratio and headcount data)   2008     2007     Change   2008     2007     Change
 
Selected balance sheet data (period-end)
                                               
Equity
  $ 8,000     $ 6,700       19 %   $ 8,000     $ 6,700       19 %
Selected balance sheet data (average)
                                               
Total assets
  $ 101,681     $ 86,652       17     $ 102,374     $ 84,643       21  
Loans:
                                               
Loans retained
    71,901       60,839       18       70,038       59,045       19  
Loans held-for-sale and loans at fair value
    397       433       (8 )     432       550       (21 )
       
Total loans
    72,298       61,272       18       70,470       59,595       18  
Liability balances(a)
    99,410       88,081       13       99,430       84,697       17  
Equity
    7,000       6,700       4       7,000       6,435       9  
                                                 
Average loans by business:
                                               
Middle Market Banking
  $ 43,155     $ 37,617       15     $ 42,052     $ 37,016       14  
Mid-Corporate Banking
    16,491       12,076       37       15,669       11,484       36  
Real Estate Banking
    7,513       7,144       5       7,490       7,038       6  
Other
    5,139       4,435       16       5,259       4,057       30  
       
Total Commercial Banking loans
  $ 72,298     $ 61,272       18     $ 70,470     $ 59,595       18  
                                                 
Headcount
    3,965       4,158       (5 )     3,965       4,158       (5 )
                                                 
Credit data and quality statistics:
                                               
Net charge-offs
  $ 40     $ 20       100     $ 170     $ 11       NM  
                                                 
Nonperforming loans
    572       134       327       572       134       327  
Allowance for credit losses:
                                               
Allowance for loan losses
    1,905       1,623       17       1,905       1,623       17  
Allowance for lending-related commitments
    191       236       (19 )     191       236       (19 )
       
Total allowance for credit losses
    2,096       1,859       13       2,096       1,859       13  
                                                 
Net charge-off rate(b)
    0.22 %     0.13 %             0.32 %     0.02 %        
Allowance for loan losses to average loans(b)
    2.65       2.67               2.72       2.75          
Allowance for loan losses to nonperforming loans
    333       1,211               333       1,211          
Nonperforming loans to average loans
    0.79       0.22               0.81       0.22          
 
 
(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)  
Loans held-for-sale and loans accounted for at fair value were excluded when calculating the allowance coverage ratio and net charge-off rate.

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TREASURY & SECURITIES SERVICES
 
For a discussion of the business profile of TSS, see pages 54—55 of JPMorgan Chase’s 2007 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 ratio data)   2008     2007     Change   2008     2007     Change
 
Revenue
                                               
Lending & deposit-related fees
  $ 290     $ 244       19 %   $ 842     $ 676       25 %
Asset management, administration and commissions
    719       730       (2 )     2,385       2,244       6  
All other income
    221       171       29       649       480       35  
       
Noninterest revenue
    1,230       1,145       7       3,876       3,400       14  
Net interest income
    723       603       20       2,009       1,615       24  
       
Total net revenue
    1,953       1,748       12       5,885       5,015       17  
       
Provision for credit losses
    18       9       100       37       15       147  
Credit reimbursement to IB(a)
    (31 )     (31 )           (91 )     (91 )      
       
Noninterest expense
                                               
Compensation expense
    664       579       15       1,974       1,746       13  
Noncompensation expense
    661       538       23       1,864       1,563       19  
Amortization of intangibles
    14       17       (18 )     46       49       (6 )
       
Total noninterest expense
    1,339       1,134       18       3,884       3,358       16  
       
Income before income tax expense
    565       574       (2 )     1,873       1,551       21  
Income tax expense
    159       214       (26 )     639       576       11  
       
Net income
  $ 406     $ 360       13     $ 1,234     $ 975       27  
       
       
Revenue by business
                                               
Treasury Services
  $ 897     $ 780       15     $ 2,562     $ 2,189       17  
Worldwide Securities Services
    1,056       968       9       3,323       2,826       18  
       
Total net revenue
  $ 1,953     $ 1,748       12     $ 5,885     $ 5,015       17  
Financial ratios
                                               
ROE
    46 %     48 %             47 %     43 %        
Overhead ratio
    69       65               66       67          
Pretax margin ratio(b)
    29       33               32       31          
       
Selected balance sheet data (period-end)
                                               
       
Equity
  $ 4,500     $ 3,000       50     $ 4,500     $ 3,000       50  
       
Selected balance sheet data (average)
                                               
Total assets
  $ 49,386     $ 55,688       (11 )   $ 54,243     $ 50,829       7  
Loans(c)
    26,650       20,602       29       24,527       19,921       23  
Liability balances(d)
    259,992       236,381       10       260,882       221,606       18  
Equity
    3,500       3,000       17       3,500       3,000       17  
       
Headcount
    27,592       25,209       9       27,592       25,209       9  
 
 
(a)  
TSS is charged a credit reimbursement related to certain exposures managed within the IB credit portfolio on behalf of clients shared with TSS.
(b)  
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.
(c)  
Loan balances include wholesale overdrafts, commercial card and trade finance loans.
(d)  
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 $406 million, an increase of $46 million, or 13%, from the prior year, driven by higher net revenue and the benefit of reduced deferred tax liabilities. This increase was predominantly offset by higher noninterest expense.
Net revenue was $2.0 billion, an increase of $205 million, or 12%, from the prior year. Worldwide Securities Services net revenue was $1.1 billion, an increase of $88 million, or 9%, from the prior year. The growth was driven by wider spreads on liability products and in securities lending and foreign exchange, combined with increased product usage by new and existing clients (largely in custody, fund services and alternative investment services). These benefits were offset partially by market depreciation. Treasury Services net revenue was a record $897 million, an increase of $117 million, or 15%, reflecting higher liability balances as well as volume growth in electronic funds transfer products and trade loans. TSS firmwide net revenue, which includes Treasury Services net revenue recorded in other lines of business, grew to $2.7 billion, an increase of $260 million, or 11%. Treasury Services firmwide net revenue grew to $1.6 billion, an increase of $172 million, or 12%.
Noninterest expense was $1.3 billion, an increase of $205 million, or 18%, from the prior year, reflecting higher expense related to business and volume growth as well as continued investment in new product platforms.
Year-to-date results
Net income was $1.2 billion, an increase of $259 million, or 27%, from the prior year, driven by higher net revenue. This increase was predominantly offset by higher noninterest expense.
Net revenue was $5.9 billion, an increase of $870 million, or 17%, from the prior year. Worldwide Securities Services net revenue was $3.3 billion, an increase of $497 million, or 18%, from the prior year. The growth was driven by wider spreads in securities lending, foreign exchange and liability products, combined with increased product usage by new and existing clients (largely in custody, fund services, alternative investment services and depositary receipts). These benefits were offset partially by market depreciation. Treasury Services net revenue was $2.6 billion, an increase of $373 million, or 17%, reflecting higher liability balances and volume growth in electronic funds transfer products and trade loans as well as market-driven spreads. TSS firmwide net revenue, which includes Treasury Services net revenue recorded in other lines of business, grew to $8.0 billion, an increase of $1.1 billion, or 15%. Treasury Services firmwide net revenue grew to $4.7 billion, an increase of $565 million, or 14%.
Noninterest expense was $3.9 billion, an increase of $526 million, or 16%, from the prior year, reflecting higher expense related to business and volume growth as well as continued investment in new product platforms.

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TSS firmwide metrics
TSS firmwide metrics include revenue recorded in the CB, Regional Banking and AM lines of business and excludes foreign exchange (“FX”) revenue recorded in the IB for TSS-related FX activity. In order to capture the firmwide impact of TS and TSS products and revenue, management reviews firmwide metrics such as liability balances, revenue and overhead ratios in assessing financial performance for TSS. Firmwide metrics are necessary in order to understand the aggregate TSS business.
                                                 
Selected metrics                          
(in millions, except ratio data and   Three months ended September 30,   Nine months ended September 30,
where otherwise noted)   2008     2007     Change   2008     2007     Change
 
TSS firmwide disclosures
                                               
Treasury Services revenue — reported
  $ 897     $ 780       15 %   $ 2,562     $ 2,189       17 %
Treasury Services revenue reported in Commercial Banking
    643       594       8       1,889       1,719       10  
Treasury Services revenue reported in other lines of business
    76       70       9       217       195       11  
       
       
Treasury Services firmwide revenue(a)
    1,616       1,444       12       4,668       4,103       14  
Worldwide Securities Services revenue
    1,056       968       9       3,323       2,826       18  
       
Treasury & Securities Services firmwide revenue(a)
  $ 2,672     $ 2,412       11     $ 7,991     $ 6,929       15  
       
Treasury Services firmwide liability balances (average)(b)
  $ 227,760     $ 201,671       13     $ 226,725     $ 192,560       18  
Treasury & Securities Services firmwide liability balances (average)(b)
    359,401       324,462       11       360,302       306,302       18  
       
TSS firmwide financial ratios
                                               
Treasury Services firmwide overhead ratio(c)
    52 %     54 %             54 %     57 %        
Treasury & Securities Services overhead ratio(c)
    60       59               59       60          
       
Firmwide business metrics
                                               
Assets under custody (in billions)
  $ 14,417     $ 15,614       (8 )   $ 14,417     $ 15,614       (8 )
       
Number of:
                                               
U.S.$ ACH transactions originated (in millions)
    997       943       6       2,994       2,886       4  
Total U.S.$ clearing volume (in thousands)
    29,277       28,031       4       86,396       82,650       5  
International electronic funds transfer volume (in thousands)(d)
    41,831       41,415       1       123,302       125,882       (2 )
Wholesale check volume (in millions)
    595       731       (19 )     1,836       2,269       (19 )
Wholesale cards issued (in thousands)(e)
    21,858       18,108       21       21,858       18,108       21  
 
 
(a)  
TSS firmwide FX revenue, which includes FX revenue recorded in TSS and FX revenue associated with TSS customers who are FX customers of the IB, was $196 million and $144 million for the quarters ended September 30, 2008 and 2007, respectively, and $609 million and $395 million for year-to-date 2008 and 2007, respectively. This is not included in the TS and TSS firmwide revenue.
(b)  
Firmwide liability balances include TS’s liability balances recorded in the CB line of business.
(c)  
Overhead ratios have been calculated based upon firmwide revenue and TSS and TS expense, respectively, including those allocated to certain other lines of business. FX revenue and expense recorded in the IB for TSS-related FX activity are not included in this ratio.
(d)  
International electronic funds transfer includes non-U.S. dollar ACH and clearing volume.
(e)  
Wholesale cards issued include domestic commercial card, stored value card, prepaid card and government electronic benefit card products.

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ASSET MANAGEMENT
 
For a discussion of the business profile of AM, see pages 56—58 of JPMorgan Chase’s 2007 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)   2008     2007     Change   2008     2007     Change
 
Revenue
                                               
Asset management, administration and commissions
  $ 1,538     $ 1,760       (13 )%   $ 4,642     $ 4,920       (6 )%
All other income
    43       152       (72 )     232       495       (53 )
       
Noninterest revenue
    1,581       1,912       (17 )     4,874       5,415       (10 )
Net interest income
    380       293       30       1,052       831       27  
       
Total net revenue
    1,961       2,205       (11 )     5,926       6,246       (5 )
 
                                               
Provision for credit losses
    20       3       NM       53       (17 )     NM  
 
                                               
Noninterest expense
                                               
Compensation expense
    816       848       (4 )     2,527       2,491       1  
Noncompensation expense
    525       498       5       1,496       1,405       6  
Amortization of intangibles
    21       20       5       62       60       3  
       
Total noninterest expense
    1,362       1,366             4,085       3,956       3  
       
Income before income tax expense
    579       836       (31 )     1,788       2,307       (22 )
Income tax expense
    228       315       (28 )     686       868       (21 )
       
Net income
  $ 351     $ 521       (33 )   $ 1,102     $ 1,439       (23 )
       
 
                                               
Revenue by client segment
                                               
Private Bank(a)
  $ 631     $ 624       1     $ 1,935     $ 1,712       13  
Institutional
    486       603       (19 )     1,448       1,771       (18 )
Retail
    399       639       (38 )     1,355       1,768       (23 )
Private Wealth Management(a)
    352       339       4       1,057       995       6  
Bear Stearns Brokerage
    93             NM       131             NM  
       
Total net revenue
  $ 1,961     $ 2,205       (11 )   $ 5,926     $ 6,246       (5 )
       
Financial ratios
                                               
ROE
    25 %     52 %             28 %     50 %        
Overhead ratio
    69       62               69       63          
Pretax margin ratio(b)
    30       38               30       37          
 
 
(a)  
In the third quarter of 2008, certain clients were transferred from Private Bank to Private Wealth Management. Prior periods have been revised to conform to this change.
(b)  
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.
Quarterly results
Net income was $351 million, a decline of $170 million, or 33%, from the prior year, driven largely by lower net revenue.
Net revenue was $2.0 billion, a decrease of $244 million, or 11%, from the prior year. Noninterest revenue was $1.6 billion, a decline of $331 million, or 17%, due to lower performance fees and the effect of lower markets, including the impact of lower market valuations of seed capital investments; these effects were offset partially by the benefit of the Bear Stearns merger and increased revenue from net asset inflows. Net interest income was $380 million, up $87 million, or 30%, from the prior year, predominantly due to higher loan and deposit balances and wider deposit spreads.
Private Bank revenue was $631 million, relatively flat compared with the prior year, as increased loan and deposit balances and higher assets under management largely offset the effect of lower markets and lower performance fees. Institutional revenue declined 19% to $486 million due to lower performance fees, partially offset by growth in assets under management. Retail revenue decreased 38% to $399 million due to the effect of lower markets, including the impact of lower market valuations of seed capital investments and net equity outflows. Private Wealth Management revenue grew 4% to $352 million due to higher loan and deposit balances and growth in assets under management from net asset inflows. Bear Stearns Brokerage contributed $93 million to revenue.
The provision for credit losses was $20 million, compared with $3 million in the prior year, reflecting an increase in loan balances and a lower level of recoveries.

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Noninterest expense of $1.4 billion was flat compared with the prior year as the effect of the Bear Stearns merger and increased headcount were offset by lower performance-based compensation.
Year-to-date results
Net income was $1.1 billion, a decline of $337 million, or 23%, from the prior year, driven by lower net revenue and higher noninterest expense.
Net revenue was $5.9 billion, a decrease of $320 million, or 5%, from the prior year. Noninterest revenue was $4.9 billion, a decline of $541 million, or 10%, from the prior year due to lower performance fees and the effect of lower markets, including the impact of lower market valuations of seed capital investments. The lower results were offset partially by the benefit of the Bear Stearns merger and increased revenue from net asset inflows. Net interest income was $1.1 billion, up $221 million, or 27%, from the prior year, predominantly due to higher deposit and loan balances and wider deposit spreads.
Private Bank revenue grew 13% to $1.9 billion, due to higher assets under management and increased loan and deposit balances, partially offset by the effect of lower markets and lower performance fees. Institutional revenue declined 18% to $1.4 billion due to lower performance fees, partially offset by growth in assets under management. Retail revenue declined 23% to $1.4 billion due to the effect of lower markets, including the impact of lower market valuations of seed capital investments and net equity outflows. Private Wealth Management revenue grew 6% to $1.1 billion due to higher deposit and loan balances and growth in assets under management from net asset inflows. Bear Stearns Brokerage contributed $131 million to revenue.
The provision for credit losses was $53 million, compared with a benefit of $17 million in the prior year, reflecting an increase in loan balances and a lower level of recoveries.
Noninterest expense was $4.1 billion, up $129 million, or 3%, compared with the prior year as the effect of the Bear Stearns merger and increased headcount were offset by lower performance-based compensation.

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Business metrics                          
(in millions, except headcount, ratios and ranking data,   Three months ended September 30,   Nine months ended September 30,
and where otherwise noted)   2008     2007     Change   2008     2007     Change
 
Number of:
                                               
Client advisors
    1,684       1,680       %     1,684       1,680       %
Retirement planning services participants
    1,492,000       1,495,000             1,492,000       1,495,000        
Bear Stearns brokers
    323             NM       323             NM  
 
                                               
% of customer assets in 4 & 5 Star Funds(a)
    39 %     55 %     (29 )     39 %     55 %     (29 )
 
                                               
% of AUM in 1st and 2nd quartiles:(b)
                                               
1 year
    49 %     47 %     4       49 %     47 %     4  
3 years
    67 %     73 %     (8 )     67 %     73 %     (8 )
5 years
    77 %     76 %     1       77 %     76 %     1  
 
                                               
Selected balance sheet data (period-end)
                                               
Equity
  $ 7,000     $ 4,000       75     $ 7,000     $ 4,000       75  
 
                                               
Selected balance sheet data (average)
                                               
Total assets
  $ 71,189     $ 53,879       32     $ 65,518     $ 50,498       30  
Loans(c)
    39,750       30,928       29       38,552       28,440       36  
Deposits
    65,621       59,907       10       67,918       56,920       19  
Equity
    5,500       4,000       38       5,190       3,834       35  
 
                                               
Headcount
    15,493       14,510       7       15,493       14,510       7  
 
                                               
Credit data and quality statistics
                                               
Net charge-offs (recoveries)
  $ (1 )   $ (5 )     80     $ (1 )   $ (10 )     90  
Nonperforming loans
    121       28       332       121       28       332  
Allowance for loan losses
    170       115       48       170       115       48  
Allowance for lending-related commitments
    5       6       (17 )     5       6       (17 )
 
                                               
Net charge-off (recovery) rate
    (0.01 )%     (0.06 )%             %     (0.05 )%        
Allowance for loan losses to average loans
    0.43       0.37               0.44       0.40          
Allowance for loan losses to nonperforming loans
    140       411               140       411          
Nonperforming loans to average loans
    0.30       0.09               0.31       0.10          
 
 
(a)  
Derived from following rating services: Morningstar for the United States; Micropal for the United Kingdom, Luxembourg, Hong Kong and Taiwan; and Nomura for Japan.
(b)  
Derived from following rating services: Lipper for the United States and Taiwan; Micropal for the United Kingdom, Luxembourg and Hong Kong; and Nomura for Japan.
(c)  
Reflects the transfer in 2007 of held-for-investment prime mortgage loans transferred from AM to Corporate within the Corporate/Private Equity segment.
Assets under supervision
Assets under supervision were $1.6 trillion, an increase of $23 billion, or 1%, from the prior year. Assets under management were $1.2 trillion, down $10 billion, or 1%, from the prior year. The decrease in assets under management was predominantly due to lower equity markets and equity product outflows, partially offset by liquidity product inflows across all segments and the addition of Bear Stearns assets under management. Custody, brokerage, administration and deposit balances were $409 billion, up $33 billion, driven by the addition of Bear Stearns Brokerage.

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ASSETS UNDER SUPERVISION(a) (in billions)            
As of September 30,   2008     2007  
                 
Assets by asset class
               
Liquidity
  $ 524     $ 368  
Fixed income
    189       195  
Equities & balanced
    308       481  
Alternatives
    132       119  
                 
Total assets under management
    1,153       1,163  
Custody/brokerage/administration/deposits
    409       376  
                 
Total assets under supervision
  $ 1,562     $ 1,539  
                 
                 
Assets by client segment
               
Institutional
  $ 653     $ 603  
Private Bank(b)
    194       179  
Retail
    223       304  
Private Wealth Management(b)
    75       77  
Bear Stearns Brokerage
    8        
                 
Total assets under management
  $ 1,153     $ 1,163  
                 
Institutional
  $ 653     $ 604  
Private Bank(b)
    417       395  
Retail
    303       399  
Private Wealth Management(b)
    134       141  
Bear Stearns Brokerage
    55        
                 
Total assets under supervision
  $ 1,562     $ 1,539  
                 
                 
Assets by geographic region
               
U.S./Canada
  $ 785     $ 745  
International
    368       418  
                 
Total assets under management
  $ 1,153     $ 1,163  
                 
U.S./Canada
  $ 1,100     $ 1,022  
International
    462       517  
                 
Total assets under supervision
  $ 1,562     $ 1,539  
                 
                 
Mutual fund assets by asset class
               
Liquidity
  $ 470     $ 308  
Fixed income
    44       46  
Equity
    134       235  
                 
Total mutual fund assets
  $ 648     $ 589  
                 
 
(a)  
Excludes assets under management of American Century Companies, Inc., in which the Firm has 43% ownership.
(b)  
In the third quarter of 2008, certain clients were transferred from Private Bank to Private Wealth Management. Prior periods have been revised to conform to this change.
                                 
    Three months ended September 30,   Nine months ended September 30,
Assets under management rollforward   2008     2007     2008     2007  
                                 
Beginning balance
  $ 1,185     $ 1,109     $ 1,193     $ 1,013  
Net asset flows:
                               
Liquidity
    55       33       124       52  
Fixed income
    (4 )     (2 )     (5 )     6  
Equities, balanced and alternative
    (5 )     2       (29 )     24  
Market/performance/other impacts(a)
    (78 )     21       (130 )     68  
                                 
Total assets under management
  $ 1,153     $ 1,163     $ 1,153     $ 1,163  
                                 
                 
Assets under supervision rollforward
                               
Beginning balance
  $ 1,611     $ 1,472     $ 1,572     $ 1,347  
Net asset flows
    61       41       108       106  
Market/performance/other impacts(a)
    (110 )     26       (118 )     86  
                                 
Total assets under supervision
  $ 1,562     $ 1,539     $ 1,562     $ 1,539  
                                 
 
(a)  
Includes $15 billion for assets under management and $68 billion for assets under supervision from the Bear Stearns merger in the second quarter of 2008.

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CORPORATE / PRIVATE EQUITY
 
For a discussion of the business profile of Corporate/Private Equity, see pages 59—60 of JPMorgan Chase’s 2007 Annual Report.
                                                 
Selected income statement data   Three months ended September 30,   Nine months ended September 30,
(in millions, except headcount)   2008     2007     Change   2008     2007     Change
 
Revenue
                                               
Principal transactions(a)
  $ (1,876 )   $ 1,082     NM%   $ (1,968 )   $ 3,779     NM%
Securities gains (losses)(b)
    440       128       244       1,138       (107 )     NM  
All other income(c)
    (274 )     70       NM       987       228       333  
       
Noninterest revenue
    (1,710 )     1,280       NM       157       3,900       (96 )
Net interest income (expense)
    (38 )     (279 )     86       (276 )     (569 )     51  
       
Total net revenue
    (1,748 )     1,001       NM       (119 )     3,331       NM  
 
                                               
Provision for credit losses(d)
    2,355       (31 )     NM       2,841       (25 )     NM  
 
                                               
Noninterest expense
                                               
Compensation expense
    652       569       15       1,902       2,040       (7 )
Noncompensation expense(e)
    570       674       (15 )     1,187       2,048       (42 )
Merger costs
    96       61       57       251       187       34  
       
Subtotal
    1,318       1,304       1       3,340       4,275       (22 )
Net expense allocated to other businesses
    (1,150 )     (1,059 )     (9 )     (3,277 )     (3,174 )     (3 )
       
Total noninterest expense
    168       245       (31 )     63       1,101       (94 )
       
Income (loss) before income tax expense and extraordinary gain
    (4,271 )     787       NM       (3,023 )     2,255       NM  
Income tax expense (benefit)
    (1,727 )     274       NM       (1,084 )     729       NM  
       
Income (loss) before extraordinary gain
    (2,544 )     513       NM       (1,939 )     1,526       NM  
Extraordinary gain(f)
    581             NM       581             NM  
       
Net income (loss)
  $ (1,963 )   $ 513       NM     $ (1,358 )   $ 1,526       NM  
       
Total net revenue
                                               
Private equity
  $ (216 )   $ 733       NM     $ 144     $ 3,279       (96 )
Corporate
    (1,532 )     268       NM       (263 )     52       NM  
       
Total net revenue
  $ (1,748 )   $ 1,001       NM     $ (119 )   $ 3,331       NM  
       
 
                                               
Net income (loss)
                                               
Private equity
  $ (164 )   $ 409       NM     $ (8 )   $ 1,809       NM  
Corporate
    (1,064 )     142       NM       (75 )     (167 )     55  
Merger-related items(g)
    (735 )     (38 )     NM       (1,275 )     (116 )     NM  
       
Total net income (loss)
  $ (1,963 )   $ 513       NM     $ (1,358 )   $ 1,526       NM  
       
Headcount
    21,641       22,864       (5 )     21,641       22,864       (5 )
 
 
(a)  
Included losses on preferred equity interest in Fannie Mae and Freddie Mac in the third quarter of 2008.
(b)  
Included gains on the sale of MasterCard shares in the second quarter of 2008.
(c)  
Included proceeds from the sale of Visa shares in its initial public offering in the first quarter of 2008.
(d)  
Included a $2.0 billion charge to conform Washington Mutual’s loan loss reserves to JPMorgan Chase’s accounting policy in the third quarter of 2008.
(e)  
Included a release of credit card litigation reserves in the first quarter of 2008.
(f)  
Effective September 25, 2008, JPMorgan Chase acquired Washington Mutual’s banking operations from the FDIC for $1.9 billion. The fair value of the Washington Mutual net assets acquired exceeded the purchase price, which resulted in negative goodwill. In accordance with SFAS 141, 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.
(g)  
Included an accounting conformity loan loss reserve provision and an extraordinary gain related to the Washington Mutual transaction in the third quarter of 2008. The three and nine month periods of 2008 reflect items related to the Bear Stearns merger, which included Bear Stearn’s equity earnings, merger costs, Bear Stearns asset management liquidation costs and Bear Stearns private client services broker retention expense. Prior periods represent costs related to the 2004 Bank One and 2006 Bank of New York transactions.

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Quarterly results
Net loss for Corporate/Private Equity was $2.0 billion, compared with net income of $513 million in the prior year.
Net loss included a charge of $1.2 billion (after-tax) to conform loan loss reserves and an extraordinary gain of $581 million related to the acquisition of Washington Mutual’s banking operations, which closed on September 25, 2008. Net loss also included $95 million (after-tax) of continuing Bear Stearns merger-related items.
Net loss for Private Equity was $164 million, compared with net income of $409 million in the prior year. Net revenue was negative $216 million, a decrease of $949 million, reflecting Private Equity losses of $206 million, compared with gains of $766 million in the prior year. Noninterest expense was $41 million, a decline of $54 million from the prior year, reflecting lower compensation expense.
Excluding the above merger-related items, the net loss for Corporate was $1.1 billion, compared with net income of $142 million in the prior year. Net revenue was negative $1.5 billion, compared with revenue of $268 million in the prior year. This decrease reflects a higher level of trading losses, including losses of $1.0 billion on preferred securities of Fannie Mae and Freddie Mac, a $375 million charge related to the offer to repurchase the Firm and its affiliates auction-rate securities at par for certain customers, and the absence of a $115 million gain from the sale of MasterCard shares in the prior year. These losses were offset partially by securities gains of $440 million. Excluding the provision related to Washington Mutual, the current-quarter provision for credit losses of $378 million includes an increase in the allowance for loan losses of $250 million for prime mortgage (see Retail Financial Services’ discussion of the provision for loan losses for further detail). Noninterest expense was $127 million, a decrease of $23 million from the prior year, driven by lower litigation expense.
Year-to-date results
Net loss for Corporate/Private Equity was $1.4 billion, compared with net income of $1.5 billion in the prior year.
Results included a $1.2 billion (after-tax) conforming loan loss reserve provision and an extraordinary gain of $581 million related to the acquisition of Washington Mutual’s banking operations, the after-tax effect from the sale of Visa shares in its initial public offering ($1.5 billion pretax and $955 million after-tax) and the impact of Bear Stearns merger-related items, netting to a loss of $635 million.
Net loss for Private Equity was $8 million, compared with net income of $1.8 billion in the prior year. Net revenue was $144 million, a decrease of $3.1 billion, reflecting Private Equity gains of $203 million, compared with gains of $3.4 billion in the prior year. Noninterest expense was $161 million, a decline of $296 million from the prior year, reflecting lower compensation expense.
Excluding the above merger-related items and the impact of the Visa initial public offering, the net loss for Corporate was $1.0 billion, compared with a net loss of $167 million in the prior year. Net revenue was negative $1.4 billion, compared with revenue of $52 million in the prior year. This decrease was due to a higher level of trading losses, including losses of $1.0 billion on preferred securities of Fannie Mae and Freddie Mac, a $375 million charge related to the offer to repurchase auction-rate securities at par, and the absence of a $115 million gain from the sale of MasterCard shares in the prior year. Trading losses were offset partially by securities gains of $1.1 billion, which included a pretax gain of $668 million from the sale of MasterCard shares. Excluding the provision related to the Washington Mutual transaction, there were credit losses of $865 million compared with a benefit of $25 million in the prior year, predominantly reflecting an increase in the allowance for loan losses and higher net charge-offs for prime mortgages. Excluding the above merger-related items, noninterest expense was negative $435 million compared with $645 million in the prior year, reflecting a reduction of credit card-related litigation expense and the absence of prior-year Bank One merger expense.

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Selected income statement and balance sheet data   Three months ended September 30,   Nine months ended September 30,
(in millions)   2008     2007     Change   2008     2007     Change
 
Treasury
                                               
Securities gains (losses)(a)
  $ 442     $ 126       251 %   $ 1,140     $ (109 )     NM %
Investment securities portfolio (average)
    105,984       85,470       24       94,592       86,552       9  
Investment securities portfolio (ending)
    115,703       86,495       34       115,703       86,495       34  
Mortgage loans (average)(b)
    42,432       29,854       42       41,228       27,326       51  
Mortgage loans (ending)(b)
    41,976       32,804       28       41,976       32,804       28  
                                                 
Private equity
                                               
Realized gains
  $ 40     $ 504       (92 )   $ 1,693     $ 2,212       (23 )
Unrealized gains (losses)(c)
    (273 )     227       NM       (1,480 )     1,038       NM  
       
Total direct investments
    (233 )     731       NM       213       3,250       (93 )
Third-party fund investments
    27       35       (23 )     (10 )     122       NM  
       
Total private equity gains (losses)(d)
  $ (206 )   $ 766       NM     $ 203     $ 3,372       (94 )
 
                         
Private equity portfolio information(e)                  
Direct investments   September 30, 2008     December 31, 2007     Change  
                         
Publicly held securities
                       
Carrying value
  $ 600     $ 390       54 %
Cost
    705       288       145  
Quoted public value
    657       536       23  
                         
Privately held direct securities
                       
Carrying value
    6,038       5,914       2  
Cost
    6,058       4,867       24  
                         
Third-party fund investments(f)
                       
Carrying value
    889       849       5  
Cost
    1,121       1,076       4  
         
Total private equity portfolio — Carrying value
  $ 7,527     $ 7,153       5  
Total private equity portfolio — Cost
  $ 7,884     $ 6,231       27  
                         
 
(a)  
Year-to-date 2008 included a gain on the sale of MasterCard shares. All periods reflect repositioning of the Corporate investment securities portfolio and exclude gains/losses on securities used to manage risk associated with MSRs.
(b)  
Held-for-investment prime mortgage loans were transferred from RFS and AM to the Corporate/Private Equity segment for risk management and reporting purposes. The initial transfers had no material impact on the financial results of Corporate/Private Equity.
(c)  
Unrealized gains (losses) contain reversals of unrealized gains and losses that were recognized in prior periods and have now been realized.
(d)  
Included in principal transactions revenue in the Consolidated Statements of Income.
(e)  
For more information on the Firm’s policies regarding the valuation of the private equity portfolio, see Note 5 on pages 98—102 of this Form 10-Q.
(f)  
Unfunded commitments to third-party private equity funds were $931 million and $881 million at September 30, 2008, and December 31, 2007, respectively.
The carrying value of the private equity portfolio at September 30, 2008, was $7.5 billion, up from $7.2 billion at December 31, 2007. The portfolio represented 7.5% of the Firm’s stockholders’ equity less goodwill at September 30, 2008, down from 9.2% at December 31, 2007.
 
WASHINGTON MUTUAL
 
The effects of the acquisition of Washington Mutual’s banking operations on September 25, 2008, were not included in the preceding business segment results as such operations did not have a material effect on the results of the quarter ended September 30, 2008, except the charge to conform Washington Mutual’s loan loss reserves and the extraordinary gain related to the transaction which are reflected for JPMorgan Chase in the Corporate/Private Equity segment. The following table presents the September 30, 2008 allocated value of assets and liabilities, and other selected metrics related to the Washington Mutual transaction.

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Selected balance sheet data (in millions)   September 30, 2008  
         
Assets
       
Cash and due from banks
  $ 3,680  
Deposits with banks
    3,517  
Federal funds sold and securities purchased under resale agreements
    1,700  
Trading assets
    5,691  
Securities
    17,240  
Loans (net of allowance for loan losses) (a)
    204,213  
Accrued interest and accounts receivable
    3,332  
Mortgage servicing rights
    5,845  
Other assets
    15,044  
         
Total assets
  $ 260,262  
         
         
Liabilities
       
Deposits
  $ 159,824  
Federal funds purchased and securities loaned or sold under repurchase agreements
    4,549  
Other borrowed funds
    81,759  
Trading liabilities — derivative payables
    585  
Accounts payable, accrued expense and other liabilities
    6,092  
Long-term debt
    6,910  
         
Total liabilities
  $ 259,719  
         
         
Loan balances
       
Consumer loans — excluding purchased credit impaired:
       
Home equity
  $ 22,217  
Prime mortgage
    23,442  
Subprime mortgage
    4,725  
Option ARMs
    18,989  
Credit card
    15,158  
Other loans
    1,858  
         
Consumer loans — excluding purchased credit impaired
    86,389  
Consumer loans — purchased credit impaired
    77,853  
         
Total consumer loans
    164,242  
         
Wholesale loans(b)
    44,482  
         
Total loans
    208,724  
Allowance for loan losses(a) (c)
    (4,511 )
         
Total net loans
  $ 204,213  
         
Total managed loans
  $ 220,643  
         
         
Credit data and credit quality statistics
       
30+ day delinquency rate
    8.18 %
Allowance for loan losses
  $ 4,511  
Allowance for loan losses to ending loans(c)
    3.45 %
         
Deposits
       
Checking
  $ 45,494  
Savings
    19,580  
Time and other
    94,750  
         
Total deposits
  $ 159,824  
         
         
Mortgage banking metrics (in billions)
       
Third-party mortgage loans serviced (ending)
  $ 433.0  
MSR net carrying value (ending)
    5.8  
         
Other metrics
       
Branches
    2,244  
ATMs
    5,081  
Headcount
    41,798  
Checking accounts (in thousands)
    12,818  
Net accounts opened (in millions)(d)
    13  
         
 
(a)  
Includes an adjustment of $2.0 billion to conform Washington Mutual’s loan loss allowance to JPMorgan Chase’s policy.
(b)  
Included $272 million of purchased credit impaired loans.
(c)  
Purchased credit impaired loans of $78.1 billion were excluded when calculating the ratio of the allowance for loan losses to ending loans. These loans were recorded at fair value on the transaction date, including an adjustment for credit impairment. Accordingly, no allowance for loan losses has been recorded for these assets as of September 30, 2008.
(d)  
Represents credit card accounts acquired by JPMorgan Chase in the Washington Mutual transaction.

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BALANCE SHEET ANALYSIS
 
                 
Selected balance sheet data (in millions)   September 30, 2008     December 31, 2007  
                 
Assets
               
Cash and due from banks
  $ 54,350     $ 40,144  
Deposits with banks
    34,372       11,466  
Federal funds sold and securities purchased under resale agreements
    233,668       170,897  
Securities borrowed
    152,050       84,184  
Trading assets:
               
Debt and equity instruments
    401,609       414,273  
Derivative receivables
    118,648       77,136  
Securities
    150,779       85,450  
Loans
    761,381       519,374  
Allowance for loan losses
    (19,052 )     (9,234 )
                 
Loans, net of allowance for loan losses
    742,329       510,140  
Accrued interest and accounts receivable
    104,232       24,823  
Goodwill
    46,121       45,270  
Other intangible assets
    22,528       14,731  
Other assets
    190,783       83,633  
                 
Total assets
  $ 2,251,469     $ 1,562,147  
                 
                 
Liabilities
               
Deposits
  $ 969,783     $ 740,728  
Federal funds purchased and securities loaned or sold under repurchase agreements
    224,075       154,398  
Commercial paper and other borrowed funds
    222,307       78,431  
Trading liabilities:
               
Debt and equity instruments
    76,213       89,162  
Derivative payables
    85,816       68,705  
Accounts payable, accrued expense and other liabilities
    260,563       94,476  
Beneficial interests issued by consolidated VIEs
    11,437       14,016  
Long-term debt and trust preferred capital debt securities
    255,432       199,010  
                 
Total liabilities
    2,105,626       1,438,926  
Stockholders’ equity
    145,843       123,221  
                 
Total liabilities and stockholders’ equity
  $ 2,251,469     $ 1,562,147  
              &nb