10-Q 1 y76962e10vq.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 March 31, 2009   Commission file number 1-5805
JPMORGAN CHASE & CO.
(Exact name of registrant as specified in its charter)
     
Delaware   13-2624428
     
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
270 Park Avenue, New York, New York   10017
     
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code (212) 270-6000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o (Do not check if a smaller reporting company)   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 April 30, 2009: 3,759,160,375
 
 
 

 


 

FORM 10-Q
TABLE OF CONTENTS
         
    Page
Part I — Financial information
       
Item 1 Consolidated Financial Statements — JPMorgan Chase & Co.:
       
    82  
    83  
    84  
    85  
    86  
    148  
    149  
       
    3  
    5  
    7  
    11  
    14  
    16  
    41  
    43  
    45  
    49  
    77  
    77  
    80  
    156  
    157  
    157  
       
    157  
    160  
    160  
    160  
    160  
    160  
    160  
 EX-31.1
 EX-31.2
 EX-32

2


Table of Contents

JPMORGAN CHASE & CO.
CONSOLIDATED FINANCIAL HIGHLIGHTS
                                         
(unaudited)                    
(in millions, except per share, headcount and ratios)                    
As of or for the period ended,   1Q09   4Q08   3Q08   2Q08   1Q08
 
Selected income statement data
                                       
Noninterest revenue
  $ 11,658     $ 3,394     $ 5,743     $ 10,105     $ 9,231  
Net interest income
    13,367       13,832       8,994       8,294       7,659  
 
Total net revenue
    25,025       17,226       14,737       18,399       16,890  
Provision for credit losses
    8,596       7,755       3,811       3,455       4,424  
Provision for credit losses — accounting conformity(a)
          (442 )     1,976              
Noninterest expense
    13,373       11,255       11,137       12,177       8,931  
 
Income (loss) before income tax expense and extraordinary gain
    3,056       (1,342 )     (2,187 )     2,767       3,535  
Income tax expense (benefit)(b)
    915       (719 )     (2,133 )     764       1,162  
 
Income (loss) before extraordinary gain
    2,141       (623 )     (54 )     2,003       2,373  
Extraordinary gain(c)
          1,325       581              
 
Net income
  $ 2,141     $ 702     $ 527     $ 2,003     $ 2,373  
 
Per common share
                                       
Basic earnings(d)
                                       
Income (loss) before extraordinary gain
  $ 0.40     $ (0.29 )   $ (0.08 )   $ 0.54     $ 0.67  
Net income
    0.40       0.06       0.09       0.54       0.67  
Diluted earnings(d)
                                       
Income (loss) before extraordinary gain
  $ 0.40     $ (0.29 )   $ (0.08 )   $ 0.53     $ 0.67  
Net income
    0.40       0.06       0.09       0.53       0.67  
Cash dividends declared per share
    0.05       0.38       0.38       0.38       0.38  
Book value per share
    36.78       36.15       36.95       37.02       36.94  
Common shares outstanding
                                       
Weighted-average: Basic
    3,755.7       3,737.5       3,444.6       3,426.2       3,396.0  
Diluted(d)
    3,758.7       3,737.5 (f)     3,444.6 (f)     3,453.1       3,423.3  
Common shares at period end
    3,757.7       3,732.8       3,726.9       3,435.7       3,400.8  
Share price(e)
                                       
High
  $ 31.64     $ 50.63     $ 49.00     $ 49.95     $ 49.29  
Low
    14.96       19.69       29.24       33.96       36.01  
Close
    26.58       31.53       46.70       34.31       42.95  
Market capitalization
    99,881       117,695       174,048       117,881       146,066  
 
                                       
Financial ratios
                                       
Return on common equity (“ROE”)
                                       
Income (loss) before extraordinary gain
    5 %     (3 )%     (1) %     6 %     8 %
Net income
    5       1       1       6       8  
Return on assets (“ROA”)
                                       
Income (loss) before extraordinary gain
    0.42       (0.11 )     (0.01 )     0.48       0.61  
Net income
    0.42       0.13       0.12       0.48       0.61  
Overhead ratio
    53       65       76       66       53  
Tier 1 capital ratio
    11.4       10.9       8.9       9.2       8.3  
Total capital ratio
    15.2       14.8       12.6       13.4       12.5  
Tier 1 leverage ratio
    7.1       6.9       7.2       6.4       5.9  
 
                                       
Selected balance sheet data (period-end)
                                       
Trading assets
  $ 429,700     $ 509,983     $ 520,257     $ 531,997     $ 485,280  
Securities
    333,861       205,943       150,779       119,173       101,647  
Loans
    708,243       744,898       761,381       538,029       537,056  
Total assets
    2,079,188       2,175,052       2,251,469       1,775,670       1,642,862  
Deposits
    906,969       1,009,277       969,783       722,905       761,626  
Long-term debt
    243,569       252,094       238,034       260,192       189,995  
Common stockholders’ equity
    138,201       134,945       137,691       127,176       125,627  
Total stockholders’ equity
    170,194       166,884       145,843       133,176       125,627  
 
                                       
Headcount
    219,569       224,961       228,452       195,594       182,166  
 

3


Table of Contents

                                         
(unaudited)                    
(in millions, except ratios)                    
As of or for the period ended,   1Q09   4Q08   3Q08   2Q08   1Q08
Credit quality metrics
                                       
Allowance for credit losses
  $ 28,019     $ 23,823     $ 19,765     $ 13,932     $ 12,601  
Nonperforming assets
    14,654       12,714       9,520       6,233       5,143  
Net charge-offs
    4,396       3,315       2,484       2,130       1,906  
Net charge-off rate
    2.51 %     1.80 %     1.91 %     1.67 %     1.53 %
Wholesale net charge-off rate
    0.32       0.33       0.10       0.08       0.18  
Consumer net charge-off rate
    3.61       2.59       3.13       2.77       2.43  
Managed Card net charge-off rate
    7.72       5.56       5.00       4.98       4.37  
 
(a)   The third and fourth quarters 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 of 2008 includes the realization of a benefit from the release of deferred tax liabilities associated with the undistributed earnings of certain non-U.S. subsidiaries that were deemed to be reinvested indefinitely.
 
(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)   Effective January 1, 2009, the Firm implemented FSP EITF 03-6-1. Accordingly, prior-period amounts have been revised as required. For further discussion of FSP EITF 03-6-1, see Note 20 on page 140 of this Form 10-Q.
 
(e)   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.
 
(f)   Common equivalent shares have been excluded from the computation of diluted earnings per share for the third and fourth quarters of 2008, as the effect on income (loss) before extraordinary gain would be antidilutive.

4


Table of Contents

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 149-153 for definitions of terms used throughout this Form 10-Q. The MD&A included in this Form 10-Q contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on the current beliefs and expectations of JPMorgan Chase’s management and are subject to significant risks and uncertainties. These risks and uncertainties could cause JPMorgan Chase’s actual results to differ materially from those set forth in such forward-looking statements. Certain of such risks and uncertainties are described herein (see Forward-looking Statements on pages 156-157 and Item 1A: Risk Factors on page 159 of this Form 10-Q), as well as in the JPMorgan Chase Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the U.S. Securities and Exchange Commission (“2008 Annual Report” or “2008 Form 10-K”), including Part I, Item 1A: Risk factors, 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 $2.1 trillion in assets, $170.2 billion in stockholders’ equity and operations in more than 60 countries as of March 31, 2009. The Firm is a leader in investment banking, financial services for consumers and businesses, financial transaction processing and asset management. Under the J.P. Morgan and Chase brands, the Firm serves millions of customers in the U.S. and many of the world’s most prominent corporate, institutional and government clients.
JPMorgan Chase’s principal bank subsidiaries are JPMorgan Chase Bank, National Association (“JPMorgan Chase Bank, N.A.”), a national banking association with branches in 23 states in the U.S.; and Chase Bank USA, National Association (“Chase Bank USA, N.A.”), a national bank that is the Firm’s credit card issuing bank. JPMorgan Chase’s principal nonbank subsidiary is J.P. Morgan Securities Inc., the Firm’s U.S. investment banking firm.
JPMorgan Chase’s activities are organized, for management reporting purposes, into six business segments, as well as Corporate/Private Equity. The Firm’s wholesale businesses comprise the Investment Bank, Commercial Banking, Treasury & Securities Services and Asset Management segments. The Firm’s consumer businesses comprise the Retail Financial Services and Card Services segments. A description of the Firm’s business segments, and the products and services they provide to their respective client bases, follows.
Investment Bank
J.P. Morgan is one of the world’s leading investment banks, with deep client relationships and broad product capabilities. The 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 selectively commits the Firm’s own capital to principal investing and trading activities.
Retail Financial Services
Retail Financial Services (“RFS”), which includes the Retail Banking and Consumer Lending reporting segments, serves consumers and businesses through personal service at bank branches and through ATMs, online banking and telephone banking as well as through auto dealerships and school financial aid offices. Customers can use more than 5,100 bank branches (third-largest nationally) and 14,100 ATMs (second-largest nationally), as well as online and mobile banking around the clock. More than 20,900 branch salespeople assist customers with checking and savings accounts, mortgages, home equity and business loans, and investments across the 23-state footprint from New York and Florida to California. Consumers also can obtain loans through more than 15,700 auto dealerships and 4,800 schools and universities nationwide.
Card Services
Chase Card Services (“CS”) is one of the nation’s largest credit card issuers, with 159 million cards in circulation and more than $176 billion in managed loans. Customers used Chase cards to meet $76 billion worth of their spending needs in the three months ended March 31, 2009. Chase has a market leadership position in building loyalty and rewards programs with many of the world’s most respected brands and through its proprietary products, which include the Chase Freedom program.
Through its merchant acquiring business, Chase Paymentech Solutions, Chase is one of the leading processors of MasterCard and Visa payments.

5


Table of Contents

Commercial Banking
Commercial Banking (“CB”) serves more than 26,000 clients nationally, including corporations, municipalities, financial institutions and not-for-profit entities with annual revenue generally ranging from $10 million to $2 billion, and nearly 30,000 real estate investors/owners. Delivering extensive industry knowledge, local expertise and dedicated service, CB partners with the Firm’s other businesses to provide comprehensive solutions, including lending, treasury services, investment banking and asset management to meet its clients’ domestic and international financial needs.
Treasury & Securities Services
Treasury & Securities Services (“TSS”) is a global leader in transaction, investment and information services. TSS is one of the world’s largest cash management providers and a leading global custodian. Treasury Services (“TS”) provides cash management, trade, wholesale card and liquidity products and services to small and mid-sized companies, multinational corporations, financial institutions and government entities. TS partners with the Commercial Banking, Retail Financial Services and Asset Management businesses to serve clients firmwide. As a result, certain TS revenue is included in other segments’ results. Worldwide Securities Services holds, values, clears and services securities, cash and alternative investments for investors and broker-dealers, and it manages depositary receipt programs globally.
Asset Management
Asset Management (“AM”), with assets under supervision of $1.5 trillion, is a global leader in investment and wealth management. AM clients include institutions, retail investors and high-net-worth individuals in every major market throughout the world. AM offers global investment management in equities, fixed income, real estate, hedge funds, private equity and liquidity, including money-market instruments and bank deposits. AM also provides trust and estate, banking and brokerage services to high-net-worth clients, and retirement services for corporations and individuals. The majority of AM’s client assets are in actively managed portfolios.

6


Table of Contents

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 March 31,
(in millions, except per share data and ratios)   2009   2008   Change
 
Selected income statement data
                       
Total net revenue
  $ 25,025     $ 16,890       48 %
Total noninterest expense
    13,373       8,931       50  
Provision for credit losses
    8,596       4,424       94  
Net income
    2,141       2,373       (10 )
 
                       
Diluted earnings per share(a)
  $ 0.40     $ 0.67       (40 )
Return on common equity
    5 %     8 %        
 
(a)   Effective January 1, 2009, the Firm implemented FSP EITF 03-6-1. Accordingly, prior period amounts have been revised. For further discussion of FSP EITF 03-6-1, see Note 20 on page 140 of this Form 10-Q.
Business overview
JPMorgan Chase reported first-quarter 2009 net income of $2.1 billion, or $0.40 per share, compared with net income of $2.4 billion, or $0.67 per share, in the first quarter of 2008. Return on common equity for the quarter was 5%, compared with 8% in the prior year. The decline in earnings was driven by a higher provision for credit losses and increased noninterest expense, predominantly offset by record net revenue. Both revenue and expense were higher due to the impact of the acquisition of the banking operations of Washington Mutual Bank (“Washington Mutual”) on September 25, 2008. In addition, record revenue in the Investment Bank and positive mortgage servicing rights (“MSR”) risk management results in Retail Financial Services contributed to revenue growth, while higher performance-based compensation expense in the Investment Bank and higher FDIC insurance premiums contributed to expense growth. Continued deterioration in the credit environment resulted in a higher provision for credit losses compared with the prior year, with the largest increases in Card Services and Retail Financial Services.
The global economy continued to contract in the first quarter of 2009 at about the same rate as in the fourth quarter of 2008. Labor markets deteriorated rapidly as U.S. firms reduced the number of jobs by another two million in the first quarter alone, driving the U.S. unemployment rate to 8.5% in March. The S&P 500 index was down 40% and 11% from the first and fourth quarters of last year, respectively; bankruptcies increased 30% from March of last year; auto companies reported weak results; and volatile currency swings in the current quarter ended with the U.S. dollar continuing to weaken against the Japanese yen but appreciate against the Euro. The U.S. federal government (“U.S. government”) and regulators continued their efforts to stabilize the U.S. economy during the quarter, putting in place a financial rescue plan that supplements the interest rate and other actions taken by the Board of Governors of the Federal Reserve System (“Federal Reserve”) and the U.S. Department of the Treasury (the “U.S. Treasury”) last fall and winter. The rescue plan includes, among other actions, the U.S. Treasury Capital Assistance Program and the Supervisory Capital Assessment Program intended to reinforce confidence in the capitalization of the U.S. banking system; the Federal Reserve’s Term Asset-Backed Securities Loan Facility (“TALF”) program, which is intended to promote the flow of credit to consumers and mortgage markets; the U.S. Treasury’s Public-Private Investment Program, which is intended to repair balance sheets and ensure that credit is available to households and businesses; and the Federal Reserve’s intent to purchase and hold on its own books additional U.S. Treasury and agency debt and mortgage-backed securities. Recent positive trends, such as the narrowing of certain credit spreads and the stabilization of consumer spending, indicate that all these efforts may be starting to take effect.
In the midst of this challenging environment, in the first quarter of 2009, JPMorgan Chase generated record firmwide revenue; generated record revenue and net income in the Investment Bank; and benefited from underlying growth in Retail Financial Services, including increased deposits and checking accounts, higher mortgage refinancing volumes and excellent progress on the Washington Mutual integration. Specifically, the Firm rebranded 708 Washington Mutual branches and 1,900 ATMs, and opened nine regional homeownership centers in California. Nationally, Retail Financial Services consolidated nearly 300 Washington Mutual branches, and Card Services successfully completed the conversion of the Washington Mutual portfolio to the Chase TSYS processing system. In addition, Commercial Banking, Treasury & Securities Services and Asset Management continued to report solid volumes and earnings.

7


Table of Contents

The Firm continued to focus on its capital and balance sheet strength in the first quarter of 2009, ending the quarter with a Tier 1 capital ratio of 11.4%, or 9.3% excluding the capital received under the Capital Purchase Program component of the U.S. government’s Troubled Asset Relief Program (“TARP”). The Firm added $4.2 billion to the allowance for credit losses, which reached $28.0 billion, resulting in a firmwide loan loss coverage ratio of 4.53%. In addition, the Firm lowered its quarterly dividend to $0.05 per common share, which will enable the Firm to retain approximately $5.0 billion in common equity per year. Management believes these levels of capital and reserves, combined with significant earnings power, will enable JPMorgan Chase to withstand an even worse economic scenario than it faces today.
During the quarter, JPMorgan Chase extended more than $150.0 billion in new credit to consumer and corporate customers, purchased nearly $34.0 billion of mortgage-backed and asset-backed securities, and made progress on its goal of preventing 650,000 foreclosures by the end of next year to help keep people in their homes. JPMorgan Chase remains committed to helping bring stability to the communities in which it operates and to the financial system overall.
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 managed basis, see Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures on pages 14-16 of this Form 10-Q .
Investment Bank net income reached a record level, reflecting record revenue, partially offset by higher noninterest expense and a higher provision for credit losses. Both Fixed Income Markets and Equity Markets reported record revenue driven by strong trading results and client revenue, including the prime services business acquired in the Bear Stearns merger, and higher debt underwriting fees drove an increase in investment banking fees. The provision for credit losses increased due to a higher allowance reflecting a weakening credit environment. The increase in noninterest expense primarily reflected higher performance-based compensation expense and the impact of the Bear Stearns merger.
Retail Financial Services reported net income for the quarter compared with a net loss reported in the prior year, as higher revenue was offset partially by a higher provision for credit losses and noninterest expense. Revenue growth was driven by the impact of the Washington Mutual transaction, positive MSR risk management results, wider deposit and loan spreads, higher mortgage production revenue and higher deposit-related fees. The provision for credit losses included a significant increase in the allowance for loan losses, primarily for the home lending portfolio. The increase in noninterest expense reflected the impact of the Washington Mutual transaction, higher servicing expense, higher mortgage reinsurance losses and higher FDIC insurance premiums.
Card Services reported a net loss for the quarter, compared with net income in the prior year. The decrease was driven by a higher provision for credit losses, partially offset by higher net revenue. The increase in managed net revenue was driven by the impact of the Washington Mutual transaction, wider loan spreads and higher merchant servicing revenue related to the dissolution of the Chase Paymentech Solutions joint venture. These benefits were offset partially by lower securitization income, the effect of higher revenue reversals associated with higher charge-offs, and a decreased level of fees. The provision for credit losses reflected a higher level of charge-offs, and an increase in the allowance for loan losses, reflecting a weakening credit environment. Noninterest expense increased due to the impact of the Washington Mutual transaction and the dissolution of the Chase Paymentech Solutions joint venture, predominantly offset by lower marketing expense.
Commercial Banking net income increased from the prior year, driven by higher net revenue reflecting the impact of the Washington Mutual transaction, offset largely by a higher provision for credit losses. Revenue growth resulted from double-digit growth in liability balances and higher deposit- and lending-related fees offset partially by spread compression on liability products. The increase in the provision for credit losses reflected a weakening credit environment. Noninterest expense rose due to the impact of the Washington Mutual transaction and higher FDIC insurance premiums.
Treasury & Securities Services net income decreased from the prior year, driven by lower net revenue and higher noninterest expense. The decrease in net revenue was driven by lower revenue in Worldwide Securities Services, reflecting a decline in securities lending balances, primarily as a result of declines in asset valuations and demand, and the effects of market depreciation on assets under custody, which were partially offset by higher net interest income. Revenue in Treasury Services increased, reflecting higher liability balances, higher trade revenue and growth across cash management products offset largely by spread compression on liability products. The increase in noninterest expense reflected higher FDIC insurance premiums and higher expense related to investment in new product platforms.

8


Table of Contents

Asset Management net income declined from the prior year, due to lower net revenue offset partially by lower noninterest expense. The decline in net revenue was due to the effect of lower markets and lower performance fees; these effects were offset partially by the benefit of the Bear Stearns merger, higher deposit balances and wider deposit spreads. Noninterest expense decreased due to lower performance-based compensation and lower headcount-related expense, offset by the impact of the Bear Stearns merger and higher FDIC insurance premiums.
Corporate/Private Equity reported a net loss for the quarter, compared with net income in the prior year (which included a benefit from the proceeds of the sale of Visa shares in its initial public offering). Net revenue declined, reflecting Private Equity losses compared with gains in the prior year.
Firmwide, the managed provision for credit losses was $10.1 billion, up $5.0 billion, or 97%, from the prior year. The total consumer-managed provision for credit losses was $8.5 billion, compared with $4.4 billion in the prior year, reflecting higher net charge-offs, as well as increases in the allowance for credit losses primarily related to credit card loans and home lending. Consumer-managed net charge-offs were $5.7 billion, compared with $2.5 billion in the prior year, resulting in managed net charge-off rates of 4.12% and 2.68%, respectively. The wholesale provision for credit losses was $1.5 billion, compared with $747 million in the prior year, and resulted from an increase in the allowance for credit losses reflecting a weakening credit environment. Wholesale net charge-offs were $191 million, compared with prior-year net charge-offs of $92 million, resulting in net charge-off rates of 0.32% and 0.18%, respectively. The Firm had total nonperforming assets of $14.7 billion at March 31, 2009, up from the prior-year level of $5.1 billion. The allowance for credit losses increased $4.2 billion from December 31, 2008, to $28.0 billion at March 31, 2009, and the loan loss coverage ratio increased to 4.53% of loans at March 31, 2009, compared with 3.62% at December 31, 2008, reflecting the continuing weakening credit environment.
Business outlook
The following forward-looking statements are based on the current beliefs and expectations of JPMorgan Chase’s management and are subject to significant risks and uncertainties. These risks and uncertainties could cause JPMorgan Chase’s actual results to differ materially from those set forth in such forward-looking statements.
JPMorgan Chase’s outlook for the second quarter of 2009 should be viewed against the backdrop of the global and U.S. economies, financial markets activity, the geopolitical environment, the competitive environment and client activity levels. Each of these linked factors will affect the performance of the Firm and its lines of business. In addition, as a result of recent market conditions and events, Congress and regulators have increased their focus on the regulation of financial institutions. The Firm’s current expectations are for the global and U.S. economic environments to weaken further and potentially faster, capital markets to remain under stress, for there to be a continued decline in U.S. housing prices, and for the unemployment rate to continue to rise into 2010, likely reaching the 9-10% level before the U.S. economy recovers and strengthens enough to increase labor demand. In addition, the Firm currently expects Congress and regulators to continue to adopt legislation and regulations that could limit or restrict the Firm’s operations, or impose additional costs upon the Firm in order to comply with such new laws or rules. Any of these factors could adversely impact the Firm’s revenue, credit costs, overall business volumes or earnings. For example, it is likely the Firm will be subject to a one-time special assessment by the FDIC, subject to terms being finalized between the FDIC and the banking industry. The total assessment, based on the size of the Firm’s deposit base, could reach between $750 million and $1.5 billion, which would be recorded as an expense in the quarter the terms become final.
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 the consumer loan portfolios. Management expects possible continued deterioration in credit trends, which could require additions to the consumer loan loss allowance. Based on management’s current economic outlook, quarterly net charge-offs could, over the next several quarters, reach $1.4 billion for the home equity portfolio, $500 million for the prime mortgage portfolio, and $375 million to $475 million for the subprime mortgage portfolio. Management expects the managed net charge-off rate for Card Services (excluding the Washington Mutual credit card portfolio) to approach 9% in the second quarter of 2009 and possibly trend higher in the second half of the year, depending on unemployment levels. The managed net charge-off rate for the Washington Mutual credit card portfolio is expected to approach 18%-24% by the end of 2009; these charge-off rates could increase even further if the economic environment continues to deteriorate further than management’s current expectations. Similarly, the wholesale provision for credit losses and nonperforming assets as well as charge-offs are likely to increase over time as a result of the deterioration in underlying credit conditions.

9


Table of Contents

The Investment Bank is operating in an uncertain environment. Trading revenue is volatile and could be affected by further disruption in the credit and mortgage markets, as well as lower levels of liquidity. 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 $11.5 billion (gross notional) of legacy leveraged loans and unfunded commitments as held-for-sale as of March 31, 2009. Markdowns averaging 52% of the gross notional value have been taken on these legacy positions as of March 31, 2009, resulting in a net carrying value of $5.5 billion. 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 March 31, 2009, an aggregate $5.5 billion of prime and Alt-A mortgage exposure, which is also difficult to hedge effectively, and $678 million of subprime mortgage exposure. In addition, the Investment Bank had $6.5 billion of commercial mortgage exposure. In spite of active hedging, mortgage exposures could be adversely affected by worsening market conditions and further deterioration in the housing market.
Earnings in Commercial Banking and Treasury & Securities Services could decline due to the impact of tighter spreads in the current low interest rate environment or due to a decline in the level of liability balances. Earnings in Treasury & Securities Services and Asset Management will likely deteriorate if market levels continue to decline, due to reduced levels of assets under management, supervision and custody. Management believes that, at current market valuation and activity levels, it is reasonable to expect quarterly net revenue over the near-term of approximately $1.4 billion in Commercial Banking, $2.0 billion in Treasury & Securities Services and $1.8 billion in Asset Management. Earnings in the Corporate/Private Equity segment could be more volatile this year due to increases in the size of the Firm’s investment portfolio, which is comprised largely of investment-grade securities. Private Equity results are dependent upon the capital markets, the performance of the broader economy and investment-specific issues.
Assuming economic conditions do not worsen beyond management’s current expectations, management continues to believe that the net income impact of Washington Mutual’s banking operations could be approximately $0.50 per share in 2009; the Bear Stearns businesses could contribute $1 billion (after-tax) annualized after 2009; and merger-related items, which include both the Washington Mutual transaction and the Bear Stearns merger, could be approximately $600 million (after-tax) in 2009.

10


Table of Contents

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 77-79 of this Form 10-Q and pages 107-111 of JPMorgan Chase’s 2008 Annual Report.
Total net revenue
The following table presents the components of total net revenue.
                         
    Three months ended March 31,
(in millions)   2009   2008   Change
 
Investment banking fees
  $ 1,386     $ 1,216       14 %
Principal transactions
    2,001       (803 )   NM
Lending & deposit-related fees
    1,688       1,039       62  
Asset management, administration and commissions
    2,897       3,596       (19 )
Securities gains
    198       33       500  
Mortgage fees and related income
    1,601       525       205  
Credit card income
    1,837       1,796       2  
Other income
    50       1,829       (97 )
         
Noninterest revenue
    11,658       9,231       26  
Net interest income
    13,367       7,659       75  
         
Total net revenue
  $ 25,025     $ 16,890       48  
 
Total net revenue for the first quarter of 2009 was $25.0 billion, up by $8.1 billion, or 48%, from the first quarter of 2008 and reflected the impact of the Washington Mutual transaction. Revenue growth was also driven by higher net interest income, significantly higher trading results and positive MSR risk management results. These benefits were offset partially by the absence of proceeds from the sale of Visa shares in its initial public offering in the first quarter of 2008, and lower asset management, administration and commissions.
Investment banking fees increased from the first quarter of 2008 due to higher debt underwriting fees, driven by improved bond market conditions, as well as higher loan syndication fees. Predominantly offsetting the increase was a decrease in equity underwriting fees due to continued challenging market conditions. For a further discussion of investment banking fees, which are primarily recorded in IB, see IB segment results on pages 17-20 of this Form 10-Q.
Principal transactions revenue, which consists of revenue from the Firm’s trading and private equity investing activities, rose from the first quarter of 2008. Trading revenue increased to $2.5 billion from negative $1.0 billion in the first quarter of 2008. The increase was driven by record results in credit trading, emerging markets and rates, combined with strong results in currencies. In addition, equity trading results and client revenue were strong, particularly in prime services. Also contributing to the increase in trading revenue were gains of $1.1 billion from a widening of the Firm’s credit spread on certain structured liabilities and derivatives. These results were partially offset by $711 million of net markdowns on leveraged lending funded and unfunded commitments, as well as $214 million of net markdowns on mortgage-related exposures. Private equity revenue declined to a loss of $488 million, from gains of $200 million in the first quarter of 2008. For a further discussion of principal transactions revenue, see IB and Corporate/Private Equity segment results on pages 17-20 and 39-40, respectively, and Note 5 on pages 102-103 of this Form 10-Q.
Lending & deposit-related fees rose from the first quarter of 2008, predominantly resulting from the impact of the Washington Mutual transaction and higher deposit-related fees. For a further discussion of lending & deposit-related fees, which are mostly recorded in RFS, CB and TSS, see the RFS segment results on pages 21-27, the CB segment results on pages 32-33, and the TSS segment results on pages 34-36 of this Form 10-Q.
The decline in asset management, administration and commissions revenue compared with the first quarter of 2008 reflected lower asset management fees in AM due to the effect of lower markets and lower performance fees; lower administration fees in TSS driven by lower securities lending balances and the effects of market depreciation on assets under custody; and lower commissions revenue in IB predominantly related to lower brokerage transaction volume. For additional information on these fees and commissions, see the segment discussions for IB on pages 17-20, RFS on pages 21-27, TSS on pages 34-36, and AM on pages 36-38 of this Form 10-Q.
The increase in securities gains compared with the first quarter of 2008 was due to the repositioning of the Corporate investment securities portfolio as a result of lower interest rates in connection with managing the structural interest rate risk of the Firm. 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 39-40 of this Form 10-Q.
Mortgage fees and related income increased from the first quarter of 2008, driven by the Washington Mutual transaction, higher net mortgage servicing revenue and higher production revenue. Net mortgage servicing revenue benefited from an

11


Table of Contents

improvement in MSR risk management results. Higher mortgage production revenue reflected wider margins on new originations offset partially by an increase in reserves for the repurchase of previously-sold loans and lower mortgage origination volumes. For a discussion of mortgage fees and related income, which is recorded primarily in RFS’ Consumer Lending business, see the Consumer Lending discussion on pages 24-27 of this Form 10-Q.
Credit card income increased slightly compared with the first quarter of 2008, driven by higher merchant servicing revenue related to the dissolution of the Chase Paymentech Solutions joint venture. These increases were offset by lower servicing fees earned in connection with CS securitization activities, which were negatively affected by higher credit losses on securitized credit card loans. For a further discussion of credit card income, see CS’ segment results on pages 28-31 of this Form 10-Q.
Other income decreased compared with the first quarter of 2008, due predominantly to the absence of proceeds of $1.5 billion from the sale of Visa shares in its initial public offering in the first quarter of 2008, lower securitization results at CS, and the dissolution of the Chase Paymentech Solutions joint venture, offset partially by lower markdowns on certain investments.
Net interest income rose from the first quarter of 2008, due predominantly to the following: impact of the Washington Mutual transaction, higher investment-related net interest income in Corporate, higher trading-related net interest income in IB, wider spreads on consumer loans and deposits in RFS, higher consumer loan balances and growth in liability and deposit balances in the wholesale businesses. The Firm’s total average interest-earning assets for the first quarter of 2009 were $1.7 trillion, up 37% from the first quarter of 2008, driven by higher loans, available-for-sale (“AFS”) securities, deposits with banks and securities borrowed partly offset by lower trading assets — debt instruments. The Firm’s total average interest-bearing liabilities for the first quarter of 2009 were $1.5 trillion, up 31% from the first quarter of 2008, driven by higher deposits, higher brokerage payables and other borrowings from the impact of the Bear Stearns merger and Washington Mutual transaction, respectively, higher long-term debt and federal funds purchased and securities loaned or sold under repurchase agreements. The net interest yield on the Firm’s interest-earning assets, on a fully taxable equivalent basis, was 3.29%, an increase of 70 basis points from the first quarter of 2008, driven predominantly by an increase in higher yielding assets associated with the Washington Mutual transaction and trading-related net interest income in IB.
                         
Provision for credit losses   Three months ended March 31,
(in millions)   2009   2008   Change
 
Wholesale
  $ 1,530     $ 747       105 %
Consumer
    7,066       3,677       92  
         
Total provision for credit losses
  $ 8,596     $ 4,424       94  
 
Provision for credit losses
The provision for credit losses in the first quarter of 2009 rose by $4.2 billion compared with the first quarter of 2008 due to increases in both the consumer and wholesale provisions. The consumer provision reflected additions to the allowance for loan losses for the home equity, mortgage and credit card portfolios, as rising unemployment, housing price declines and weak overall economic conditions have contributed to a higher level of charge-offs for these portfolios. The increase in the wholesale provision was driven by a higher allowance for loan losses, reflecting the effect of the weakening credit environment. For a more detailed discussion of the loan portfolio and the allowance for loan losses, see the segment discussions for RFS on pages 21-27, CS on pages 28-31, IB on pages 17-20 and CB on pages 32-33, and the Credit Risk Management section on pages 53-70 of this Form 10-Q.
Noninterest expense
The following table presents the components of noninterest expense.
                         
    Three months ended March 31,
(in millions)   2009   2008   Change
 
Compensation expense
  $ 7,588     $ 4,951       53 %
Noncompensation expense:
                       
Occupancy expense
    885       648       37  
Technology, communications and equipment expense
    1,146       968       18  
Professional & outside services
    1,515       1,333       14  
Marketing
    384       546       (30 )
Other expense
    1,375       169     NM
Amortization of intangibles
    275       316       (13 )
         
Total noncompensation expense
    5,580       3,980       40  
Merger costs
    205           NM
         
Total noninterest expense
  $ 13,373     $ 8,931       50  
 

12


Table of Contents

Total noninterest expense for the first quarter of 2009 was $13.4 billion, up $4.4 billion, or 50%, from the first quarter of 2008. The increase was driven by higher performance-based compensation expense and the additional operating costs related to the Washington Mutual transaction and Bear Stearns merger.
The increase in compensation expense from the first quarter of 2008 was driven by higher performance-based compensation expense, primarily in the Investment Bank due to record revenue, and higher salary expense, predominantly from the Washington Mutual transaction and Bear Stearns merger.
Noncompensation expense increased from the first quarter of 2008 due predominantly to the impact of the Washington Mutual transaction and Bear Stearns merger. Excluding the effects of these transactions, noncompensation expense also increased due to an increase in other expense related to a lower level of benefits from litigation-related items in the current quarter compared with the prior-year quarter, higher FDIC insurance premiums as a result of increased assessment rates, higher mortgage and home equity default-related expense due to higher delinquencies and defaults and higher mortgage reinsurance losses. Also contributing to the increases were higher occupancy expense and technology, communications and equipment expense reflecting investments across the businesses, and the impact of the dissolution of the Chase Paymentech Solutions joint venture. These increases were offset partially by lower credit card marketing expense.
For information on merger costs, refer to Note 11 on page 114 of this Form 10-Q.
Income tax expense
The Firm’s income before income tax expense, income tax expense and effective tax rate were as follows for each of the periods indicated.
                 
    Three months ended March 31,
(in millions, except rate)   2009   2008
 
Income before income tax expense
  $ 3,056     $ 3,535  
Income tax expense
    915       1,162  
Effective tax rate
    29.9 %     32.9 %
 
The decrease in the effective tax rate compared with the first quarter of 2008 was primarily the result of lower reported pretax income, increased business tax credits and changes in the proportion of income subject to federal, state and local taxes. For a further discussion of income taxes, see Critical Accounting Estimates used by the Firm on pages 77-79 of this Form 10-Q.

13


Table of Contents

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 82-85 of this Form 10-Q. That presentation, which is referred to as “reported basis,” provides the reader with an understanding of the Firm’s results that can be tracked consistently from year to year and enables a comparison of the Firm’s performance with other companies’ U.S. GAAP financial statements.
In addition to analyzing the Firm’s results on a reported basis, management reviews the Firm’s results and the results of the lines of business on a “managed” basis, which is a non-GAAP financial measure. The Firm’s definition of managed basis starts with the reported U.S. GAAP results and includes certain reclassifications that assume credit card loans securitized by CS remain on the balance sheet, and it presents revenue on a 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 on managed financial information. In addition, the same underwriting standards and ongoing risk monitoring are used for both loans on the Consolidated Balance Sheets and securitized loans. Although securitizations result in the sale of credit card receivables to a trust, JPMorgan Chase retains the ongoing customer relationships, as the customers may continue to use their credit cards; accordingly, the customer’s credit performance will affect both the securitized loans and the loans retained on the Consolidated Balance Sheets. JPMorgan Chase believes managed basis information is useful to investors, enabling them to understand both the credit risks associated with the loans reported on the Consolidated Balance Sheets and the Firm’s retained interests in securitized loans. For a reconciliation of reported to managed basis results for CS, see CS segment results on pages 28-31 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.

14


Table of Contents

The following summary table provides a reconciliation from the Firm’s reported U.S. GAAP results to managed basis.
                                 
    Three months ended March 31, 2009
    Reported   Credit   Fully tax-equivalent   Managed
(in millions, except per share and ratios)   results   card(c)   adjustments   basis
 
Revenue
                               
Investment banking fees
  $ 1,386     $     $     $ 1,386  
Principal transactions
    2,001                   2,001  
Lending & deposit-related fees
    1,688                   1,688  
Asset management, administration and commissions
    2,897                   2,897  
Securities gains
    198                   198  
Mortgage fees and related income
    1,601                   1,601  
Credit card income
    1,837       (540 )           1,297  
Other income
    50             337       387  
 
Noninterest revenue
    11,658       (540 )     337       11,455  
Net interest income
    13,367       2,004       96       15,467  
 
Total net revenue
    25,025       1,464       433       26,922  
Noninterest expense
    13,373                   13,373  
 
Pre-provision profit
    11,652       1,464       433       13,549  
Provision for credit losses
    8,596       1,464             10,060  
 
Income before income tax expense
    3,056             433       3,489  
Income tax expense
    915             433       1,348  
 
Net income
  $ 2,141     $     $     $ 2,141  
 
Diluted earnings per share(a)(b)
  $ 0.40     $     $     $ 0.40  
 
Return on common equity(a)
    5 %     %     %     5 %
Return on equity less goodwill(a)
    7                   7  
Return on assets(a)
    0.42       NM       NM       0.40  
Overhead ratio
    53       NM       NM       50  
 
                                 
    Three months ended March 31, 2008
    Reported   Credit   Fully tax-equivalent   Managed
(in millions, except per share and ratios)   results   card(c)   adjustments   basis
 
Revenue
                               
Investment banking fees
  $ 1,216     $     $     $ 1,216  
Principal transactions
    (803 )                 (803 )
Lending & deposit-related fees
    1,039                   1,039  
Asset management, administration and commissions
    3,596                   3,596  
Securities gains
    33                   33  
Mortgage fees and related income
    525                   525  
Credit card income
    1,796       (937 )           859  
Other income
    1,829             203       2,032  
 
Noninterest revenue
    9,231       (937 )     203       8,497  
Net interest income
    7,659       1,618       124       9,401  
 
Total net revenue
    16,890       681       327       17,898  
Noninterest expense
    8,931                   8,931  
 
Pre-provision profit
    7,959       681       327       8,967  
Provision for credit losses
    4,424       681             5,105  
 
Income before income tax expense
    3,535             327       3,862  
Income tax expense
    1,162             327       1,489  
 
Net income
  $ 2,373     $     $     $ 2,373  
 
Diluted earnings per share(a)(b)
  $ 0.67     $     $     $ 0.67  
 
Return on common equity(a)
    8 %     %     %     8 %
Return on equity less goodwill(a)
    12                   12  
Return on assets(a)
    0.61       NM       NM       0.58  
Overhead ratio
    53       NM       NM       50  
 
                                                 
Three months ended March 31,   2009   2008
(in millions)   Reported   Securitized   Managed   Reported   Securitized   Managed
 
Loans — Period-end
  $ 708,243     $ 85,220     $ 793,463     $ 537,056     $ 75,062     $ 612,118  
Total assets — average
    2,067,119       82,782       2,149,901       1,569,797       71,589       1,641,386  
 
(a)   Based on net income.
 
(b)   Effective January 1, 2009, the Firm implemented FSP EITF 03-6-1. Accordingly, prior-period amounts have been revised. For further discussion of FSP EITF 03-6-1, see Note 20 on page 140 of this Form 10-Q.
 
(c)   Credit card securitizations affect CS. See pages 28-31 of this Form 10-Q for further information.

15


Table of Contents

BUSINESS SEGMENT RESULTS
The Firm is managed on a line-of-business basis. The business segment financial results presented reflect the current organization of JPMorgan Chase. There are six major reportable business segments: the Investment Bank, Retail Financial Services, Card Services, Commercial Banking, Treasury & Securities Services and Asset Management, as well as a Corporate/Private Equity segment. The business segments are determined based on the products and services provided, or the type of customer served, and 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 40-41 of JPMorgan Chase’s 2008 Annual Report.
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 40 of JPMorgan Chase’s 2008 Annual Report. The Firm continues to assess the assumptions, methodologies and reporting classifications used for segment reporting, and further refinements may be implemented in future periods.
Segment Results — Managed Basis(a)(b)
The following table summarizes the business segment results for the periods indicated.
                                                                                         
Three months ended                                                                           Return  
March 31,   Total net revenue     Noninterest expense     Net income (loss)     on equity  
(in millions, except ratios)   2009     2008     Change     2009     2008     Change     2009     2008     Change     2009     2008  
 
Investment Bank
  $ 8,341     $ 3,011       177 %   $ 4,774     $ 2,553       87 %   $ 1,606     $ (87 )     NM       20 %     (2 )%
Retail Financial Services
    8,835       4,763       85       4,171       2,572       62       474       (311 )     NM       8       (7 )
Card Services
    5,129       3,904       31       1,346       1,272       6       (547 )     609       NM       (15 )     17  
Commercial Banking
    1,402       1,067       31       553       485       14       338       292       16 %     17       17  
Treasury & Securities Services
    1,821       1,913       (5 )     1,319       1,228       7       308       403       (24 )     25       46  
Asset Management
    1,703       1,901       (10 )     1,298       1,323       (2 )     224       356       (37 )     13       29  
Corporate/Private Equity
    (309 )     1,339       NM       (88 )     (502 )     82       (262 )     1,111       NM       NM       NM  
                                                 
Total
  $ 26,922     $ 17,898       50 %   $ 13,373     $ 8,931       50 %   $ 2,141     $ 2,373       (10 )%     5 %     8 %
 
(a)   Represents reported results on a tax-equivalent basis and excludes the impact of credit card securitizations.
 
(b)   On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual Bank. On May 30, 2008, the Bear Stearns merger was consummated. Each of these transactions was accounted for as a purchase, and their respective results of operations are included in the Firm’s results from each respective transaction date. For additional information on these transactions, see Note 2 on pages 123-127 of JPMorgan Chase’s 2008 Annual Report and Note 2 on pages 86-88 of this Form 10-Q.

16


Table of Contents

INVESTMENT BANK
For a discussion of the business profile of IB, see pages 42-44 of JPMorgan Chase’s 2008 Annual Report and page 5 of this Form 10-Q.
                         
Selected income statement data   Three months ended March 31,
(in millions, except ratios)   2009   2008   Change
 
Revenue
                       
Investment banking fees
  $ 1,380     $ 1,206       14 %
Principal transactions
    3,515       (798 )   NM
Lending & deposit-related fees
    138       102       35  
Asset management, administration and commissions
    692       744       (7 )
All other income
    (86 )     (66 )     (30 )
         
Noninterest revenue
    5,639       1,188       375  
Net interest income(a)
    2,702       1,823       48  
         
Total net revenue(b)
    8,341       3,011       177  
                         
Provision for credit losses
    1,210       618       96  
Credit reimbursement from TSS(c)
    30       30        
 
                       
Noninterest expense
                       
Compensation expense
    3,330       1,241       168  
Noncompensation expense
    1,444       1,312       10  
         
Total noninterest expense
    4,774       2,553       87  
         
Income (loss) before income tax expense (benefit)
    2,387       (130 )   NM
Income tax expense (benefit)
    781       (43 )   NM
         
Net income (loss)
  $ 1,606     $ (87 )   NM
         
 
                       
Financial ratios
                       
ROE
    20 %     (2 )%        
ROA
    0.89       (0.05 )        
Overhead ratio
    57       85          
Compensation expense as a % of total net revenue
    40       41          
         
 
Revenue by business
                       
Investment banking fees:
                       
Advisory
  $ 479     $ 483       (1 )
Equity underwriting
    308       359       (14 )
Debt underwriting
    593       364       63  
         
Total investment banking fees
    1,380       1,206       14  
Fixed income markets
    4,889       466     NM
Equity markets
    1,773       976       82  
Credit portfolio
    299       363       (18 )
         
Total net revenue
  $ 8,341     $ 3,011       177  
         
 
Revenue by region
                       
Americas
  $ 4,780     $ 536     NM
Europe/Middle East/Africa
    2,588       1,641       58  
Asia/Pacific
    973       834       17  
         
Total net revenue
  $ 8,341     $ 3,011       177  
 
(a)   The increase in net interest income is due primarily to higher spreads across several fixed income trading businesses as well as the addition of the Bear Stearns Prime Services business.
 
(b)   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 $365 million and $289 million for the quarters ended March 31, 2009 and 2008, respectively.
 
(c)   TSS is charged a credit reimbursement related to certain exposures managed within IB credit portfolio on behalf of clients shared with TSS.

17


Table of Contents

Quarterly results
Net income was a record $1.6 billion, an increase of $1.7 billion from the prior year. The improved results reflected an increase in net revenue, partially offset by higher noninterest expense and a higher provision for credit losses.
Net revenue was a record $8.3 billion, an increase of $5.3 billion from the prior year. Investment banking fees were $1.4 billion, up 14% from the prior year. Advisory fees were $479 million, flat compared with the prior year. Debt underwriting fees were $593 million, up 63% from the prior year, driven by improved bond market conditions, as well as higher loan syndication fees compared with a weak prior year. Equity underwriting fees were $308 million, down 14% from the prior year, due to continued challenging market conditions. Fixed Income Markets revenue was a record $4.9 billion, compared with $466 million in the prior year. The increase was driven by record results in credit trading, emerging markets and rates, combined with strong results in currencies and gains of $422 million from the widening of the Firm’s credit spread on certain structured liabilities. These results were offset partially by $711 million of net markdowns on leveraged lending funded and unfunded commitments, as well as $214 million of net markdowns on mortgage-related exposures. Equity Markets revenue was a record $1.8 billion, up by $797 million from the prior year, reflecting strong trading results and client revenue, particularly in prime services, as well as gains of $216 million from the widening of the Firm’s credit spread on certain structured liabilities. Credit Portfolio revenue was $299 million, down by $64 million from the prior year.
The provision for credit losses was $1.2 billion, compared with $618 million in the prior year, due to a higher allowance reflecting a weakening credit environment. Net charge-offs were $36 million, compared with net charge-offs of $13 million in the prior year. The allowance for loan losses to average loans retained was 6.68% for the current quarter, compared with 2.55% in the prior year. Nonperforming loans were $1.8 billion, up by $1.5 billion from the prior year also reflecting the weakening credit environment.
Average loans retained were $70.0 billion, down 5% from the prior year. Average fair-value and held-for-sale loans were $12.4 billion, down by $7.2 billion, or 37%, from the prior year, as acquisition finance activity declined.
Noninterest expense was $4.8 billion, compared with $2.6 billion in the prior year, primarily reflecting higher performance-based compensation expense on record revenue and the impact of the Bear Stearns merger.

18


Table of Contents

                         
Selected metrics   Three months ended March 31,
(in millions, except headcount and ratios)   2009   2008   Change
 
Selected balance sheet data (period-end)
                       
Equity
  $ 33,000     $ 22,000       50 %
 
                       
Selected balance sheet data (average)
                       
Total assets
    733,166       755,828       (3 )
Trading assets-debt and equity instruments
    272,998       369,456       (26 )
Trading assets-derivative receivables
    125,021       90,234       39  
Loans:
                       
Loans retained(a)
    70,041       74,106       (5 )
Loans held-for-sale and loans at fair value
    12,402       19,612       (37 )
         
Total loans
    82,443       93,718       (12 )
Adjusted assets(b)
    589,163       662,419       (11 )
Equity
    33,000       22,000       50  
 
                       
Headcount
    26,142       25,780       1  
 
                       
Credit data and quality statistics
                       
Net charge-offs
  $ 36     $ 13       177  
Nonperforming assets:
                       
Loans(c)
    1,795       321       459  
Derivative receivables
    1,010       31     NM
Assets acquired in loan satisfactions
    236       87       171  
         
Total nonperforming assets
    3,041       439     NM
Allowance for credit losses:
                       
Allowance for loan losses
    4,682       1,891       148  
Allowance for lending-related commitments
    295       607       (51 )
         
Total allowance for credit losses
    4,977       2,498       99  
 
                       
Net charge-off rate(a)(d)
    0.21 %     0.07 %        
Allowance for loan losses to average loans(a)(d)
    6.68 (i)     2.55 (i)        
Allowance for loan losses to nonperforming loans(c)
    269       683          
Nonperforming loans to average loans
    2.18       0.34          
Market risk-average trading and credit portfolio VaR — 99% confidence level(e)
                       
Trading activities:
                       
Fixed income
  $ 218     $ 120       82  
Foreign exchange
    40       35       14  
Equities
    162       31       423  
Commodities and other
    28       28        
Diversification(f)
    (159 )     (92 )     (73 )
         
Total trading VaR(g)
    289       122       137  
Credit portfolio VaR(h)
    182       30     NM
Diversification(f)
    (135 )     (30 )     (350 )
         
Total trading and credit portfolio VaR
  $ 336     $ 122       175  
 
(a)   Loans retained included credit portfolio loans, leveraged leases and other accrual loans, and excluded loans held-for-sale and loans accounted for at fair value.
 
(b)   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; (4) goodwill and intangibles; (5) securities received as collateral; and (6) investments purchased under the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility. The amount of adjusted assets is presented to assist the reader in comparing IB’s asset and capital levels to other investment banks in the securities industry. Asset-to-equity leverage ratios are commonly used as one measure to assess a company’s capital adequacy. IB believes an adjusted asset amount that excludes the assets discussed above, which were considered to have a low risk profile, provides a more meaningful measure of balance sheet leverage in the securities industry.
 
(c)   Nonperforming loans included loans held-for-sale and loans at fair value of $57 million and $44 million at March 31, 2009 and 2008, 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. Allowance for loan losses of $767 million and $51 million was held against these nonperforming loans at March 31, 2009 and 2008, respectively.
 
(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)   First quarter of 2008 reflects heritage JPMorgan Chase & Co. results. For a more complete description of value-at-risk (“VaR”), see pages 71-76 of this Form 10-Q.

19


Table of Contents

(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. 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 75 of this Form 10-Q for further details. Trading VaR also does not include the MSR portfolio or VaR related to other corporate functions, such as Corporate/Private Equity. Beginning in the fourth quarter of 2008, trading VaR includes the estimated credit spread sensitivity of certain mortgage products.
 
(h)   Included VaR on derivative credit valuation adjustments (“CVA”), hedges of the CVA and mark-to-market hedges of the retained loan portfolio, which were all reported in principal transactions revenue. This VaR does not include the retained loan portfolio.
 
(i)   Excluding the impact of a loan originated in March 2008 to Bear Stearns, the adjusted ratio would be 2.61% for the quarter ended March 31, 2008. The average balance of the loan extended to Bear Stearns was $1.7 billion for the quarter ended March 31, 2008. The allowance for loan losses to period-end loans was 7.04% and 2.46% at March 31, 2009 and 2008, respectively.
According to Thomson Reuters, in the first quarter of 2009, the Firm was ranked #1 in Global Debt, Equity and Equity-Related; #1 in Global Equity and Equity-Related; #6 in Global Syndicated Loans; #2 in Global Long-Term Debt and #2 in Global Announced M&A based on volume.
                         
    Three months ended March 31, 2009   Full Year 2008
Market shares and rankings(a)   Market Share   Rankings   Market Share   Rankings
 
Global debt, equity and equity-related
    11 %   #1     10 %   #1
Global syndicated loans
    6     #6     11     #1
Global long-term debt(b)
    9     #2     9     #3
Global equity and equity-related(c)
    13     #1     10     #1
Global announced M&A(d)
    43     #2     27     #2
U.S. debt, equity and equity-related
    15     #1     15     #2
U.S. syndicated loans
    17     #3     27     #1
U.S. long-term debt(b)
    14     #1     15     #2
U.S. equity and equity-related(c)
    21     #1     11     #1
U.S. announced M&A(d)
    66     #3     34     #2
 
(a)   Source: Thomson Reuters. Full-year 2008 results are pro forma for the Bear Stearns merger.
 
(b)   Includes asset-backed securities, mortgage-backed securities and municipal securities.
 
(c)   Includes rights offerings; U.S.-domiciled equity and equity-related transactions.
 
(d)   Global announced M&A is based on rank value; all other rankings are based on proceeds, with full credit to each book manager/equal if joint. Because of joint assignments, market share of all participants will add up to more than 100%. Global and U.S. announced M&A market share and rankings for 2008 include transactions withdrawn since December 31, 2008. U.S. announced M&A represents any U.S. involvement ranking.

20


Table of Contents

RETAIL FINANCIAL SERVICES
For a discussion of the business profile of RFS, see pages 45-50 of JPMorgan Chase’s 2008 Annual Report and page 5 of this Form 10-Q.
                         
Selected income statement data   Three months ended March 31,
(in millions, except ratios)   2009   2008   Change
 
Revenue
                       
Lending & deposit-related fees
  $ 948     $ 461       106 %
Asset management, administration and commissions
    435       377       15  
Mortgage fees and related income
    1,633       525       211  
Credit card income
    367       174       111  
Other income
    214       152       41  
         
Noninterest revenue
    3,597       1,689       113  
Net interest income
    5,238       3,074       70  
         
Total net revenue
    8,835       4,763       85  
 
                       
Provision for credit losses
    3,877       2,688       44  
 
                       
Noninterest expense
                       
Compensation expense
    1,631       1,160       41  
Noncompensation expense
    2,457       1,312       87  
Amortization of intangibles
    83       100       (17 )
         
Total noninterest expense
    4,171       2,572       62  
         
Income (loss) before income tax expense (loss)
    787       (497 )   NM
Income tax expense (benefit)
    313       (186 )   NM
         
Net income (loss)
  $ 474     $ (311 )   NM
         
 
                       
Financial ratios
                       
ROE
    8 %     (7 )%        
Overhead ratio
    47       54          
Overhead ratio excluding core deposit intangibles(a)
    46       52          
 
(a)   Retail Financial Services uses the overhead ratio (excluding the amortization of core deposit intangibles (“CDI”)), a non-GAAP financial measure, to evaluate the underlying expense trends of the business. Including CDI amortization expense in the overhead ratio calculation results in a higher overhead ratio in the earlier years and a lower overhead ratio in later years; this method would result in an improving overhead ratio over time, all things remaining equal. This non-GAAP ratio excludes Retail Banking’s core deposit intangible amortization expense, related to the 2006 Bank of New York transaction and the 2004 Bank One merger, of $83 million and $99 million for the quarters ended March 31, 2009 and 2008, respectively.
Quarterly results
Net income was $474 million, compared with a net loss of $311 million in the prior year, as the positive impact of the Washington Mutual transaction and positive MSR risk management results were partially offset by an increase in the provision for credit losses.
Net revenue was $8.8 billion, an increase of $4.1 billion, or 85%, from the prior year. Net interest income was $5.2 billion, up by $2.2 billion, or 70%, benefiting from the Washington Mutual transaction and wider deposit and loan spreads. Noninterest revenue was $3.6 billion, up by $1.9 billion, or 113%, driven by the impact of the Washington Mutual transaction, positive MSR risk management results, higher mortgage production revenue and higher deposit-related fees.
The provision for credit losses was $3.9 billion, an increase of $1.2 billion, or 44%, from the prior year. Delinquency rates increased due to overall weak economic conditions, while housing price declines continued to drive increased loss severities, particularly for high loan-to-value home equity and mortgage loans. The provision included $1.7 billion in additions to the allowance for loan losses, primarily for the home lending portfolio. Home equity net charge-offs were $1.1 billion (3.14% net charge-off rate; 3.93% excluding purchased credit-impaired loans), compared with $447 million (1.89% net charge-off rate) in the prior year. Subprime mortgage net charge-offs were $364 million (6.83% net charge-off rate; 9.91% excluding purchased credit-impaired loans), compared with $149 million (3.82% net charge-off rate) in the prior year. Prime mortgage net charge-offs were $312 million (1.46% net charge-off rate; 1.95% excluding purchased credit-impaired loans), compared with $50 million (0.56% net charge-off rate) in the prior year.

21


Table of Contents

Noninterest expense was $4.2 billion, an increase of $1.6 billion, or 62%, from the prior year, reflecting the impact of the Washington Mutual transaction, higher servicing expense, higher mortgage reinsurance losses and higher FDIC insurance premiums.
                         
Selected metrics   Three months ended March 31,  
(in millions, except headcount and ratios)   2009     2008     Change  
 
Selected balance sheet data (period-end)
                       
Assets
  $ 412,505     $ 262,118       57 %
Loans:
                       
Loans retained
    364,220       218,489       67  
Loans held-for-sale and loans at fair value(a)
    12,529       18,000       (30 )
         
Total loans
    376,749       236,489       59  
Deposits
    380,140       230,854       65  
Equity
    25,000       17,000       47  
 
                       
Selected balance sheet data (average)
                       
Assets
  $ 423,472     $ 260,013       63  
Loans:
                       
Loans retained
    366,925       214,586       71  
Loans held-for-sale and loans at fair value(a)
    16,526       17,841       (7 )
         
Total loans
    383,451       232,427       65  
Deposits
    370,278       225,555       64  
Equity
    25,000       17,000       47  
 
                       
Headcount
    100,677       70,095       44  
 
                       
Credit data and quality statistics
                       
Net charge-offs
  $ 2,176     $ 825       164  
Nonperforming loans(b)(c)(d)(e)
    7,978       3,742       113  
Nonperforming assets(b)(c)(d)(e)
    9,846       4,359       126  
Allowance for loan losses
    10,619       4,496       136  
 
                       
Net charge-off rate(f)
    2.41 %     1.55 %        
Net charge-off rate excluding purchased credit-impaired loans(f)(g)
    3.16       1.55          
Allowance for loan losses to ending loans(f)
    2.92       2.06          
Allowance for loan losses to ending loans excluding purchased credit-impaired loans(f)(g)
    3.84       2.06          
Allowance for loan losses to nonperforming loans(b)(f)
    138       124          
Nonperforming loans to total loans
    2.12       1.58          
Nonperforming loans to total loans — excluding purchased credit-impaired loans(b)
    2.76       1.58          
 
(a)   Prime mortgages originated with the intent to sell are accounted for at fair value and classified as trading assets on the Consolidated Balance Sheets. These loans totaled $8.9 billion and $13.5 billion at March 31, 2009 and 2008, respectively. Average balances of these loans totaled $13.4 billion for both of the quarters ended March 31, 2009 and 2008.
 
(b)   Excludes purchased credit-impaired loans accounted for under SOP 03-3 that were acquired as part of the Washington Mutual transaction. These loans are accounted for on a pool basis and the pools are considered to be performing under SOP 03-3.
 
(c)   Nonperforming loans and assets included loans held-for-sale and loans accounted for at fair value of $264 million and $129 million at March 31, 2009 and 2008, respectively. Certain of these loans are classified as trading assets on the Consolidated Balance Sheets.
 
(d)   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 $4.6 billion and $1.8 billion at March 31, 2009 and 2008, respectively; and (2) student loans that are 90 days past due and still accruing, which are insured by U.S. government agencies under the Federal Family Education Loan Program, of $433 million and $418 million at March 31, 2009 and 2008, respectively. These amounts for GNMA and student loans are excluded, as reimbursement is proceeding normally.
 
(e)   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. Amounts for first quarter 2008 have been revised to reflect this change.
 
(f)   Loans held-for-sale and loans accounted for at fair value were excluded when calculating the allowance coverage ratio and the net charge-off rate.
 
(g)   Excludes the impact of purchased credit-impaired loans accounted for under SOP 03-3 that were acquired as part of the Washington Mutual transaction. These loans were accounted for at fair value on the acquisition date, which incorporated management’s estimate, as of that date, of credit losses over the remaining life of the portfolio. No allowance for loan losses has been recorded for these loans.

22


Table of Contents

RETAIL BANKING
                         
Selected income statement data   Three months ended March 31,
(in millions, except ratios)   2009   2008   Change
 
Noninterest revenue
  $ 1,718     $ 966       78 %
Net interest income
    2,614       1,545       69  
         
Total net revenue
    4,332       2,511       73  
Provision for credit losses
    325       49       NM  
Noninterest expense
    2,580       1,562       65  
         
Income before income tax expense
    1,427       900       59  
Net income
  $ 863     $ 545       58  
         
Overhead ratio
    60 %     62 %        
Overhead ratio excluding core deposit intangibles(a)
    58       58          
 
(a)   Retail Banking uses the overhead ratio (excluding the amortization of CDI), a non-GAAP financial measure, to evaluate the underlying expense trends of the business. Including CDI amortization expense in the overhead ratio calculation results in a higher overhead ratio in the earlier years and a lower overhead ratio in later years; this method would result in an improving overhead ratio over time, all things remaining equal. This ratio excludes Retail Banking’s core deposit intangible amortization expense, related to the 2006 Bank of New York transaction and the 2004 Bank One merger, of $83 million and $99 million for the quarters ended March 31, 2009 and 2008, respectively.
Quarterly results
Retail Banking reported net income of $863 million, up by $318 million, or 58%, from the prior year.
Net revenue was $4.3 billion, up by $1.8 billion, or 73%, from the prior year, reflecting the impact of the Washington Mutual transaction, wider deposit spreads and higher deposit-related fees.
The provision for credit losses was $325 million, compared with $49 million in the prior year, due to an increase in the allowance for loan losses for Business Banking loans, reflecting a weakening credit environment.
Noninterest expense was $2.6 billion, up by $1.0 billion, or 65%, from the prior year, due to the impact of the Washington Mutual transaction and higher FDIC insurance premiums.
                         
Selected metrics   Three months ended March 31,
(in billions, except ratios and where otherwise noted)   2009   2008   Change
 
Business metrics
                       
Selected ending balances
                       
 
                       
Business banking origination volume
  $ 0.5     $ 1.8       (72 )%
End-of-period loans owned
    18.2       15.9       14  
End-of-period deposits:
                       
Checking
  $ 113.9     $ 69.0       65  
Savings
    152.4       105.4       45  
Time and other
    86.5       44.6       94  
         
Total end-of-period deposits
    352.8       219.0       61  
Average loans owned
  $ 18.4     $ 15.8       16  
Average deposits:
                       
Checking
  $ 109.4     $ 66.1       66  
Savings
    148.2       100.3       48  
Time and other
    88.2       47.7       85  
         
Total average deposits
    345.8       214.1       62  
Deposit margin
    2.85 %     2.64 %        
Average assets
  $ 30.2     $ 25.4       19  
         
Credit data and quality statistics (in millions)
                       
Net charge-offs
  $ 175     $ 49       257  
Net charge-off rate
    3.86 %     1.25 %        
Nonperforming assets
  $ 579     $ 328       77  
 

23


Table of Contents

                         
    Three months ended March 31,
Retail branch business metrics   2009   2008   Change
 
Investment sales volume (in millions)
  $ 4,398     $ 4,084       8 %
 
                       
Number of:
                       
Branches
    5,186       3,146       65  
ATMs
    14,159       9,237       53  
Personal bankers
    15,544       9,826       58  
Sales specialists
    5,454       4,133       32  
Active online customers (in thousands)
    12,882       6,454       100  
Checking accounts (in thousands)
    24,984       11,068       126  
 
CONSUMER LENDING
                         
Selected income statement data   Three months ended March 31,
(in millions, except ratio)   2009   2008   Change
 
Noninterest revenue
  $ 1,879     $ 723       160 %
Net interest income
    2,624       1,529       72  
         
Total net revenue
    4,503       2,252       100  
Provision for credit losses
    3,552       2,639       35  
Noninterest expense
    1,591       1,010       58  
         
Income (loss) before income tax expense
    (640 )     (1,397 )     54  
         
Net income (loss)
  $ (389 )   $ (856 )     55  
Overhead ratio
    35 %     45 %        
 
Quarterly results
Consumer Lending reported a net loss of $389 million, compared with a net loss of $856 million in the prior year.
Net revenue was $4.5 billion, nearly double the $2.3 billion recorded in the prior year, driven by the impact of the Washington Mutual transaction, higher mortgage fees and related income, and wider loan spreads. The increase in mortgage fees and related income was driven by higher net mortgage servicing revenue and higher mortgage production revenue. Mortgage production revenue was $481 million, up by $105 million, as wider margins on new originations were offset partially by an increase in reserves for the repurchase of previously-sold loans and lower mortgage origination volumes. Net mortgage servicing revenue (which includes loan servicing revenue, MSR risk management results and other changes in fair value) was $1.2 billion, an increase of $1.0 billion from the prior year. Loan servicing revenue was $1.2 billion, up by $629 million, reflecting 83% growth in third-party loans serviced. MSR risk management results were positive $1.0 billion, compared with negative $19 million in the prior year, reflecting the positive impact of a decrease in estimated future mortgage prepayments and positive hedging results. Other changes in fair value of the MSR asset were negative $1.1 billion, compared with negative $425 million in the prior year.
The provision for credit losses was $3.6 billion, compared with $2.6 billion in the prior year. The provision reflected weakness in the home equity, mortgage and student loan portfolios (see Retail Financial Services discussion of the provision for credit losses, above, for further detail).
Noninterest expense was $1.6 billion, up by $581 million, or 58%, from the prior year, reflecting the impact of the Washington Mutual transaction, higher servicing expense due to increased delinquencies and defaults, and higher mortgage reinsurance losses.

24


Table of Contents

                         
Selected metrics   Three months ended March 31,
(in billions)   2009   2008   Change
 
Business metrics
                       
Selected ending balances
                       
Loans excluding purchased credit-impaired loans(a)
                       
End-of-period loans owned:
                       
Home equity
  $ 111.7     $ 95.0       18 %
Prime mortgage
    65.4       38.2       71  
Subprime mortgage
    14.6       15.8       (8 )
Option ARMs
    9.0           NM
Student loans
    17.3       12.4       40  
Auto loans
    43.1       44.7       (4 )
Other
    1.0       1.0        
         
Total end-of-period loans
  $ 262.1     $ 207.1       27  
         
Average loans owned:
                       
Home equity
  $ 113.4     $ 95.0       19  
Prime mortgage
    65.4       36.0       82  
Subprime mortgage
    14.9       15.7       (5 )
Option ARMs
    8.8           NM
Student loans
    17.0       12.0       42  
Auto loans
    42.5       43.2       (2 )
Other
    1.5       1.3       15  
         
Total average loans
  $ 263.5     $ 203.2       30  
         
Purchased credit-impaired loans(a)
                       
End-of-period loans owned:
                       
Home equity
  $ 28.4     $     NM
Prime mortgage
    21.4           NM
Subprime mortgage
    6.6           NM
Option ARMs
    31.2           NM
         
Total end-of-period loans
  $ 87.6     $     NM
         
Average loans owned:
                       
Home equity
  $ 28.4     $     NM
Prime mortgage
    21.6           NM
Subprime mortgage
    6.7           NM
Option ARMs
    31.4           NM
         
Total average loans
  $ 88.1     $     NM
         
Total consumer lending portfolio
                       
End-of-period loans owned:
                       
Home equity
  $ 140.1     $ 95.0       47  
Prime mortgage
    86.8       38.2       127  
Subprime mortgage
    21.2       15.8       34  
Option ARMs
    40.2           NM
Student loans
    17.3       12.4       40  
Auto loans
    43.1       44.7       (4 )
Other
    1.0       1.0        
         
Total end-of-period loans
  $ 349.7     $ 207.1       69  
         
Average loans owned:
                       
Home equity
  $ 141.8     $ 95.0       49  
Prime mortgage
    87.0       36.0       142  
Subprime mortgage
    21.6       15.7       38  
Option ARMs
    40.2           NM
Student loans
    17.0       12.0       42  
Auto loans
    42.5       43.2       (2 )
Other
    1.5       1.3       15  
         
Total average loans owned(b)
  $ 351.6     $ 203.2       73  
 
(a)   Purchased credit-impaired loans represent loans acquired in the Washington Mutual transaction for which a deterioration in credit quality occurred between the origination date and JPMorgan Chase’s acquisition date. Under SOP 03-3, these loans were initially recorded at fair value and accrete interest income over the estimated life of the loan when cash flows are reasonably estimable, even if the underlying loans are contractually past due.
 
(b)   Total average loans includes loans held-for-sale of $3.1 billion and $4.4 billion for the quarters ended March 31, 2009 and 2008, respectively.

25


Table of Contents

                         
Credit data and quality statistics   Three months ended March 31,
(in millions, except ratios)   2009   2008   Change
 
Net charge-offs excluding purchased credit-impaired loans(a):
                       
Home equity
  $ 1,098     $ 447       146 %
Prime mortgage
    312       50       NM  
Subprime mortgage
    364       149       144  
Option ARMs
    4             NM  
Auto loans
    174       118       47  
Other
    49       12       308  
         
Total net charge-offs
  $ 2,001     $ 776       158  
         
Net charge-off rate excluding purchased credit-impaired loans(a):
                       
Home equity
    3.93 %     1.89 %        
Prime mortgage
    1.95       0.56          
Subprime mortgage
    9.91       3.82          
Option ARMs
    0.18                
Auto loans
    1.66       1.10          
Other
    1.25       0.52          
Total net charge-off rate excluding purchased credit-impaired loans(b)
    3.12       1.57          
         
Net charge-off rate — reported:
                       
Home equity
    3.14 %     1.89 %        
Prime mortgage
    1.46       0.56          
Subprime mortgage
    6.83       3.82          
Option ARMs
    0.04                
Auto loans
    1.66       1.10          
Other
    1.25       0.52          
Total net charge-off rate — reported(b)
    2.33       1.57          
         
30+ day delinquency rate excluding purchased credit-impaired loans(c)(d)(e)
    4.73 %     3.33 %        
Nonperforming assets(f)(g)(h)
  $ 9,267     $ 4,031       130  
Allowance for loan losses to ending loans
    2.83 %     2.10 %        
Allowance for loan losses to ending loans excluding purchased credit-impaired loans(a)
    3.79       2.10          
 
(a)   Excludes the impact of purchased credit-impaired loans accounted for under SOP 03-3 that were acquired as part of the Washington Mutual transaction. These loans were accounted for at fair value on the acquisition date, which incorporated management’s estimate, as of that date, of credit losses over the remaining life of the portfolio. No allowance for loan losses and no charge-offs have been recorded for these loans.
 
(b)   Average loans held-for-sale of $3.1 billion and $4.4 billion for the quarters ended March 31, 2009 and 2008, respectively, were excluded when calculating the net charge-off rate.
 
(c)   Excluded loans eligible for repurchase as well as loans repurchased from GNMA pools that are insured by U.S. government agencies, of $4.5 billion and $1.5 billion, at March 31, 2009 and 2008, respectively. These amounts are excluded, as reimbursement is proceeding normally.
 
(d)   Excluded loans that are 30 days past due and still accruing, which are insured by U.S. government agencies under the Federal Family Education Loan Program, of $770 million and $734 million at March 31, 2009 and 2008, respectively. These amounts are excluded, as reimbursement is proceeding normally.
 
(e)   The delinquency rate for purchased credit-impaired loans accounted for under SOP 03-3 was 21.36% at March 31, 2009. There were no purchased credit-impaired loans at March 31, 2008.
 
(f)   Nonperforming 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 $4.6 billion and $1.8 billion at March 31, 2009 and 2008, respectively; and (2) student loans that are 90 days past due and still accruing, which are insured by U.S. government agencies under the Federal Family Education Loan Program, of $433 million and $418 million at March 31, 2009 and 2008, respectively. These amounts for GNMA and student loans are excluded, as reimbursement is proceeding normally.
 
(g)   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. Amounts for first quarter 2008 have been revised to reflect this change.
 
(h)   Excludes purchased credit-impaired loans accounted for under SOP 03-3 that were acquired as part of the Washington Mutual transaction. These loans are accounted for on a pool basis, and the pools are considered to be performing under SOP 03-3.

26


Table of Contents

                         
Consumer Lending (continued)   Three months ended March 31,
(in billions, except where otherwise noted)   2009   2008   Change
 
Origination volume:
                       
Mortgage origination volume by channel
                       
Retail
  $ 13.6     $ 12.6       8 %
Wholesale
    2.6       10.6       (75 )
Correspondent
    17.0       12.0       42  
CNT (negotiated transactions)
    4.5       11.9       (62 )
         
Total mortgage origination volume
    37.7       47.1       (20 )
         
Home equity
    0.9       6.7       (87 )
Student loans
    1.7       2.0       (15 )
Auto loans
    5.6       7.2       (22 )
Average mortgage loans held-for-sale and loans at fair value(a)
    14.0       13.8       1  
Average assets
    393.3       234.6       68  
Third-party mortgage loans serviced (ending)
    1,148.8       627.1       83  
MSR net carrying value (ending)
    10.6       8.4       26  
         
 
Supplemental mortgage fees and related income details                        
(in millions)                        
Production revenue
  $ 481     $ 376       28  
         
Net mortgage servicing revenue:
                       
Loans servicing revenue
    1,222       593       106  
Changes in MSR asset fair value:
                       
Due to inputs or assumptions in model
    1,310       (632 )   NM
Other changes in fair value
    (1,073 )     (425 )     (152 )
         
Total changes in MSR asset fair value
    237       (1,057 )   NM
Derivative valuation adjustments and other
    (307 )     613     NM
         
Total net mortgage servicing revenue
    1,152       149     NM
         
Mortgage fees and related income
    1,633       525       211  
 
(a)   Loans at fair value consist of prime mortgages originated with the intent to sell that are accounted for at fair value and classified as trading assets on the Consolidated Balance Sheets. Average balances of these loans totaled $13.4 billion for both of the quarters ended March 31, 2009 and 2008.

27


Table of Contents

CARD SERVICES
For a discussion of the business profile of CS, see pages 51-53 of JPMorgan Chase’s 2008 Annual Report and page 5 of this Form 10-Q.
JPMorgan Chase uses the concept of “managed basis” to evaluate the credit performance of its credit card loans, both loans on the balance sheet and loans that have been securitized. For further information, see Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures on pages 14-16 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 March 31,
(in millions, except ratios)   2009   2008 Change
 
Revenue
                       
Credit card income
  $ 844     $ 600       41 %
All other income
    (197 )     119     NM
         
Noninterest revenue
    647       719       (10 )
Net interest income
    4,482       3,185       41  
         
Total net revenue
    5,129       3,904       31  
 
                       
Provision for credit losses
    4,653       1,670       179  
 
                       
Noninterest expense
                       
Compensation expense
    357       267       34  
Noncompensation expense
    850       841       1  
Amortization of intangibles
    139       164       (15 )
         
Total noninterest expense
    1,346       1,272       6  
         
 
                       
Income (loss) before income tax expense
    (870 )     962     NM
Income tax expense (benefit)
    (323 )     353     NM
         
Net income (loss)
  $ (547 )   $ 609     NM
         
 
                       
Memo: Net securitization income (loss)
  $ (180 )   $ 70     NM
 
                       
Financial ratios
                       
ROE
    (15 )%     17 %        
Overhead ratio
    26       33          
 
Quarterly results
Net loss was $547 million, a decline of $1.2 billion from the prior year. The decrease was driven by a higher provision for credit losses, partially offset by higher net revenue.
End-of-period managed loans were $176.1 billion, an increase of $25.2 billion, or 17%, from the prior year. Average managed loans were $183.4 billion, an increase of $29.8 billion, or 19%, from the prior year. The increase from the prior year in both end-of-period and average managed loans was predominantly due to the impact of the Washington Mutual transaction. Excluding Washington Mutual, end-of-period and average managed loans were $150.2 billion and $155.8 billion, respectively.
Managed total net revenue was $5.1 billion, an increase of $1.2 billion, or 31%, from the prior year. Net interest income was $4.5 billion, up by $1.3 billion, or 41%, from the prior year, driven by the impact of the Washington Mutual transaction, wider loan spreads and higher average managed loan balances. These benefits were offset partially by the effect of higher revenue reversals associated with higher charge-offs and a decreased level of fees. Noninterest revenue was $647 million, a decrease of $72 million, or 10%, from the prior year; the decline was driven by lower securitization income, offset by the impact of the Washington Mutual transaction and higher merchant servicing revenue related to the dissolution of the Chase Paymentech Solutions joint venture.
The managed provision for credit losses was $4.7 billion, an increase of $3.0 billion, or 179%, from the prior year. The provision reflected a higher level of charge-offs and an increase of $1.2 billion in the allowance for loan losses, due to a weakening credit environment. The managed net charge-off rate for the quarter was 7.72%, up from 4.37% in the prior year. The 30-day managed delinquency rate was 6.16%, up from 3.66% in the prior year. Excluding Washington Mutual, the managed net charge-off rate for the first quarter was 6.86%, and the 30-day delinquency rate was 5.34%.

28


Table of Contents

Noninterest expense was $1.3 billion, an increase of $74 million, or 6%, from the prior year, due to the impact of the Washington Mutual transaction and the dissolution of the Chase Paymentech Solutions joint venture, predominantly offset by lower marketing expense.
                         
Selected metrics   Three months ended March 31,
(in millions, except headcount, ratios and where otherwise noted)   2009   2008   Change
 
Financial metrics
                       
% of average managed outstandings:
                       
Net interest income
    9.91 %     8.34 %        
Provision for credit losses
    10.29       4.37          
Noninterest revenue
    1.43       1.88          
Risk adjusted margin(a)
    1.05       5.85          
Noninterest expense
    2.98       3.33          
Pretax income (loss) (ROO)(b)
    (1.92 )     2.52          
Net income (loss)
    (1.21 )     1.60          
 
                       
Business metrics
                       
Charge volume (in billions)
  $ 76.0     $ 85.4       (11 )%
Net accounts opened (in millions)
    2.2       3.4       (35 )
Credit cards issued (in millions)
    159.0       156.4       2  
Number of registered internet customers (in millions)
    33.8       26.7       27  
Merchant acquiring business(c)
                       
Bank card volume (in billions)
  $ 94.4     $ 182.4       (48 )
Total transactions (in billions)
    4.1       5.2       (21 )
 
                       
Selected balance sheet data (period-end)
                       
Loans:
                       
Loans on balance sheets
  $ 90,911     $ 75,888       20  
Securitized loans
    85,220       75,062       14  
         
Managed loans
  $ 176,131     $ 150,950       17  
         
Equity
  $ 15,000     $ 14,100       6  
 
                       
Selected balance sheet data (average)
                       
Managed assets
  $ 201,200     $ 159,602       26  
Loans:
                       
Loans on balance sheets
  $ 97,783     $ 79,445       23  
Securitized loans
    85,619       74,108       16  
         
Managed average loans
  $ 183,402     $ 153,553       19  
         
Equity
  $ 15,000     $ 14,100       6  
 
                       
Headcount
    23,759       18,931       26  
 

29


Table of Contents

                         
Selected metrics   Three months ended March 31,
(in millions, except ratios and where otherwise noted)   2009   2008   Change
 
Managed credit quality statistics
                       
Net charge-offs
  $ 3,493     $ 1,670       109 %
Net charge-off rate(d)
    7.72 %     4.37 %        
Managed delinquency rates
                       
30+ day(d)
    6.16 %     3.66 %        
90+ day(d)
    3.22       1.84          
 
                       
Allowance for loan losses(e)
  $ 8,849     $ 3,404       160  
Allowance for loan losses to period-end loans(e)
    9.73 %     4.49 %        
 
                       
Key stats — Washington Mutual only(f)
                       
Managed loans
  $ 25,908                  
Managed average loans
    27,578                  
Net interest income(g)
    16.45 %                
Risk adjusted margin(a)(g)
    4.42                  
Net charge-off rate(d)
    12.63                  
30+ day delinquency rate(d)
    10.89                  
90+ day delinquency rate(d)
    5.79                  
 
                       
Key stats — excluding Washington Mutual
                       
Managed loans
  $ 150,223     $ 150,950        
Managed average loans
    155,824       153,553       1  
Net interest income(g)
    8.75 %     8.34 %        
Risk adjusted margin(a)(g)
    0.46       5.85          
Net charge-off rate
    6.86       4.37          
30+ day delinquency rate
    5.34       3.66          
90+ day delinquency rate
    2.78       1.84          
 
(a)   Represents total net revenue less provision for credit losses.
 
(b)   Pretax return on average managed outstandings.
 
(c)   The Chase Paymentech Solutions joint venture was dissolved effective November 1, 2008. JPMorgan Chase retained approximately 51% of the business and operates the business under the name Chase Paymentech Solutions. For the three months ended March 31, 2008, the data presented represents activity for the Chase Paymentech Solutions joint venture, and for the three months ended March 31, 2009, the data presented represents activity for Chase Paymentech Solutions.
 
(d)   Results for first quarter 2009 reflect the impact of purchase accounting adjustments related to the Washington Mutual transaction.
 
(e)   Based on loans on a reported basis.
 
(f)   Statistics are only presented for periods after September 25, 2008, the date of the Washington Mutual transaction.
 
(g)   As a percentage of average managed outstandings.

30


Table of Contents

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 March 31,
(in millions)   2009   2008   Change
 
Income statement data(a)
                       
Credit card income
                       
Reported
  $ 1,384     $ 1,537       (10 )%
Securitization adjustments
    (540 )     (937 )     42  
         
Managed credit card income
  $ 844     $ 600       41  
         
 
                       
Net interest income
                       
Reported
  $ 2,478     $ 1,567       58  
Securitization adjustments
    2,004       1,618       24  
         
Managed net interest income
  $ 4,482     $ 3,185       41  
         
 
                       
Total net revenue
                       
Reported
  $ 3,665     $ 3,223       14  
Securitization adjustments
    1,464       681       115  
         
Managed total net revenue
  $ 5,129     $ 3,904       31  
         
 
                       
Provision for credit losses
                       
Reported
  $ 3,189     $ 989       222  
Securitization adjustments
    1,464       681       115  
         
Managed provision for credit losses
  $ 4,653     $ 1,670       179  
         
 
                       
Balance sheet — average balances(a)
                       
Total average assets
                       
Reported
  $ 118,418     $ 88,013       35  
Securitization adjustments
    82,782       71,589       16  
         
Managed average assets
  $ 201,200     $ 159,602       26  
         
 
                       
Credit quality statistics(a)
                       
Net charge-offs
                       
Reported
  $ 2,029     $ 989       105  
Securitization adjustments
    1,464       681       115  
         
Managed net charge-offs
  $ 3,493     $ 1,670       109  
 
(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 14-16 of this Form 10-Q.

31


Table of Contents

COMMERCIAL BANKING
For a discussion of the business profile of CB, see pages 54-55 of JPMorgan Chase’s 2008 Annual Report and page 6 of this Form 10-Q.
                         
Selected income statement data   Three months ended March 31,
(in millions, except ratios)   2009   2008   Change
 
Revenue
                       
Lending & deposit-related fees
  $ 263     $ 193       36 %
Asset management, administration and commissions
    34       26       31  
All other income(a)
    125       115       9  
         
Noninterest revenue
    422       334       26  
Net interest income
    980       733       34  
         
Total net revenue
    1,402       1,067       31  
 
                       
Provision for credit losses
    293       101       190  
 
                       
Noninterest expense
                       
Compensation expense
    200       178       12  
Noncompensation expense
    342       294       16  
Amortization of intangibles
    11       13       (15 )
         
Total noninterest expense
    553       485       14  
         
Income before income tax expense
    556       481       16  
Income tax expense
    218       189       15  
         
Net income
  $ 338     $ 292       16  
         
 
                       
Revenue by product:
                       
Lending
  $ 665     $ 379       75  
Treasury services
    646       616       5  
Investment banking
    73       68       7  
Other
    18       4       350  
         
Total Commercial Banking revenue
  $ 1,402     $ 1,067       31  
 
                       
IB revenue, gross(b)
  $ 206     $ 203       1  
 
                       
Revenue by business:
                       
Middle Market Banking
  $ 752     $ 706       7  
Commercial Term Lending(c)
    228           NM
Mid-Corporate Banking
    242       207       17  
Real Estate Banking(c)
    120       97       24  
Other(c)
    60       57       5  
         
Total Commercial Banking revenue
  $ 1,402     $ 1,067       31  
         
 
                       
Financial ratios
                       
ROE
    17 %     17 %        
Overhead ratio
    39       45          
 
(a)   Revenue from investment banking products sold to CB clients and commercial card revenue is included in all other income.
 
(b)   Represents the total revenue related to investment banking products sold to CB clients.
 
(c)   Results for 2009 include total net revenue on net assets acquired in the Washington Mutual transaction.
Quarterly results
Net income was $338 million, an increase of $46 million, or 16%, from the prior year, driven by higher net revenue reflecting the impact of the Washington Mutual transaction, offset largely by a higher provision for credit losses.
Net revenue was $1.4 billion, an increase of $335 million, or 31%, from the prior year. Net interest income was $980 million, up by $247 million, or 34%, from the prior year, driven by the impact of the Washington Mutual transaction. Excluding Washington Mutual, net interest income was lower than in the prior year, as spread compression on liability products was predominantly offset by double-digit growth in liability balances, a shift to higher-spread liability products and wider loan spreads. Noninterest revenue was $422 million, an increase of $88 million, or 26%, from the prior year, reflecting record levels of deposit- and lending-related fees.

32


Table of Contents

Revenue from Middle Market Banking was $752 million, an increase of $46 million, or 7%, from the prior year. Revenue from Commercial Term Lending (a new business resulting from the Washington Mutual transaction) was $228 million. Revenue from Mid-Corporate Banking was $242 million, an increase of $35 million, or 17% from the prior year. Revenue from Real Estate Banking was $120 million, an increase of $23 million, or 24%, from the prior year due to the impact of the Washington Mutual transaction.
The provision for credit losses was $293 million, an increase of $192 million, or 190%, from the prior year, reflecting a weakening credit environment. The allowance for loan losses to average loans retained was 2.59% for the current quarter, down from 2.65% in the prior year, reflecting the changed mix of the loan portfolio resulting from the Washington Mutual transaction. Nonperforming loans were $1.5 billion, up by $1.1 billion from the prior year, due to the impact of the Washington Mutual transaction. Net charge-offs were $134 million (0.48% net charge-off rate), compared with $81 million (0.48% net charge-off rate) in the prior year.
Noninterest expense was $553 million, an increase of $68 million, or 14%, from the prior year, due to the impact of the Washington Mutual transaction and higher FDIC insurance premiums.
                         
Selected metrics   Three months ended March 31,
(in millions, except headcount and ratios)   2009   2008   Change
 
Selected balance sheet data (period-end):
                       
Equity
  $ 8,000     $ 7,000       14 %
 
                       
Selected balance sheet data (average):
                       
Total assets
  $ 144,298     $ 101,979       41  
Loans:
                       
Loans retained
    113,568       67,510       68  
Loans held-for-sale and loans at fair value
    297       521       (43 )
         
Total loans
    113,865       68,031       67  
Liability balances(a)
    114,975       99,477       16  
Equity
    8,000       7,000       14  
 
                       
Average loans by business:
                       
Middle Market Banking
  $ 40,728     $ 40,111       2  
Commercial Term Lending(b)
    36,814           NM
Mid-Corporate Banking
    18,416       15,150       22  
Real Estate Banking(b)
    13,264       7,457       78  
Other(b)
    4,643       5,313       (13 )
         
Total Commercial Banking loans
  $ 113,865     $ 68,031       67  
 
                       
Headcount
    4,545       4,075       12  
 
                       
Credit data and quality statistics:
                       
Net charge-offs
  $ 134     $ 81       65  
Nonperforming loans(c)(d)
    1,531       446       243  
Nonperforming assets
    1,651       453       264  
Allowance for credit losses:
                       
Allowance for loan losses
    2,945       1,790       65  
Allowance for lending-related commitments
    240       200       20  
         
Total allowance for credit losses
    3,185       1,990       60  
Net charge-off rate(e)
    0.48 %     0.48 %        
Allowance for loan losses to average loans(d)(e)
    2.59       2.65          
Allowance for loan losses to nonperforming loans(c)(d)
     192        426          
Nonperforming loans to average loans(d)
    1.34       0.66          
 
(a)   Liability balances include deposits and deposits swept to on-balance sheet liabilities such as commercial paper, federal funds purchased and securities loaned or sold under repurchase agreements.
 
(b)   Results for 2009 include loans acquired in the Washington Mutual transaction.
 
(c)   Nonperforming loans included loans held-for-sale and loans at fair value of $26 million at March 31, 2008. This amount was excluded when calculating the allowance for loan losses to nonperforming loans ratio. There were no nonperforming loans held-for-sale or held at fair value at March 31, 2009.
 
(d)   Purchased credit-impaired wholesale loans accounted for under SOP 03-3 that were acquired in the Washington Mutual transaction are considered nonperforming loans, because the timing and amount of expected cash flows are not reasonably estimable. These nonperforming loans were included when calculating the allowance coverage ratio, the allowance for loan losses-to-nonperforming loans ratio, and the nonperforming loans-to-average loans ratio. The carrying amount of these purchased credit-impaired loans was $210 million at March 31, 2009.
 
(e)   Loans held-for-sale and loans accounted for at fair value were excluded when calculating the allowance coverage ratio and the net charge-off rate.

33


Table of Contents

TREASURY & SECURITIES SERVICES
For a discussion of the business profile of TSS, see pages 56-57 of JPMorgan Chase’s 2008 Annual Report and page 6 of this Form 10-Q.
                         
Selected income statement data   Three months ended March 31,
(in millions, except headcount and ratios)   2009   2008   Change
 
Revenue
                       
Lending & deposit-related fees
  $ 325     $ 269       21 %
Asset management, administration and commissions
    626       820       (24 )
All other income
    197       200       (2 )
         
Noninterest revenue
    1,148       1,289       (11 )
Net interest income
    673       624       8  
         
Total net revenue
    1,821       1,913       (5 )
 
                       
Provision for credit losses
    (6 )     12     NM
Credit reimbursement to IB(a)
    (30 )     (30 )      
 
                       
Noninterest expense
                       
Compensation expense
    629       641       (2 )
Noncompensation expense
    671       571       18  
Amortization of intangibles
    19       16       19  
         
Total noninterest expense
    1,319       1,228       7  
         
Income before income tax expense
    478       643       (26 )
Income tax expense
    170       240       (29 )
         
Net income
  $ 308     $ 403       (24 )
         
 
                       
Revenue by business
                       
Treasury Services(b)
  $ 931     $ 860       8  
Worldwide Securities Services(b)
    890       1,053       (15 )
         
Total net revenue
  $ 1,821     $ 1,913       (5 )
 
                       
Financial ratios
                       
ROE
    25 %     46 %        
Overhead ratio
    72       64          
Pretax margin ratio(c)
    26       34          
 
                       
Selected balance sheet data (period-end)
                       
Equity
  $ 5,000     $ 3,500       43  
 
                       
Selected balance sheet data (average)
                       
Total assets
  $ 38,682     $ 57,204       (32 )
Loans(d)
    20,140       23,086       (13 )
Liability balances(e)
    276,486       254,369       9  
Equity
    5,000       3,500       43  
 
                       
Headcount
    26,998       26,561       2  
 
(a)   TSS is charged a credit reimbursement related to certain exposures managed within IB credit portfolio on behalf of clients shared with TSS.
 
(b)   Reflects an internal reorganization for escrow products from Worldwide Securities Services to Treasury Services revenue of $45 million and $47 million for the three months ended March 31, 2009 and 2008, respectively.
 
(c)   Pretax margin represents income before income tax expense divided by total net revenue, which is a measure of pretax performance and another basis by which management evaluates its performance and that of its competitors.
 
(d)   Loan balances include wholesale overdrafts and commercial card and trade finance loans.
 
(e)   Liability balances include deposits and deposits swept to on-balance sheet liabilities such as commercial paper, federal funds purchased and securities loaned or sold under repurchase agreements.
Quarterly results
Net income was $308 million, a decrease of $95 million, or 24%, from the prior year, driven by lower net revenue and higher noninterest expense.
Net revenue was $1.8 billion, a decrease of $92 million, or 5%, from the prior year. Worldwide Securities Services net revenue was $890 million, a decrease of $163 million, or 15%, from the prior year. The decrease was driven by lower securities lending balances, primarily as a result of declines in asset valuations and demand, as well as the effects of market depreciation on assets under custody, partially offset by higher net interest income. Treasury Services net revenue was $931

34


Table of Contents

million, an increase of $71 million, or 8%, reflecting higher liability balances, higher trade revenue and growth across cash management products. These benefits were offset largely by spread compression on liability products. TSS firmwide net revenue, which includes net revenue recorded in other lines of business, was $2.5 billion, a decrease of $69 million, or 3%, compared with the prior year; the decrease was primarily due to declines in Worldwide Securities Services. Treasury Services firmwide net revenue grew to $1.6 billion, an increase of $94 million, or 6%, from the prior year.
The provision for credit losses was a benefit of $6 million, a decrease of $18 million from the prior year. This improvement in the provision was driven by lower balances in trade, partially offset by a weakening credit environment.
Noninterest expense was $1.3 billion, an increase of $91 million, or 7%, from the prior year, reflecting higher FDIC insurance premiums and higher expense related to investment in new product platforms.
TSS firmwide metrics
TSS firmwide metrics include revenue recorded in the CB, Retail Banking and AM lines of business and excludes foreign exchange (“FX”) revenue recorded in 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   Three months ended March 31,
(in millions, except ratios and where otherwise noted)   2009   2008   Change
 
TSS firmwide disclosures
                       
Treasury Services revenue — reported(a)
  $ 931     $ 860       8 %
Treasury Services revenue reported in Commercial Banking
    646       616       5  
Treasury Services revenue reported in other lines of business
    62       69       (10 )
         
 
                       
Treasury Services firmwide revenue(a)(b)
    1,639       1,545       6  
Worldwide Securities Services revenue(a)
    890       1,053       (15 )
         
Treasury & Securities Services firmwide revenue(b)
  $ 2,529     $ 2,598       (3 )
 
                       
Treasury Services firmwide liability balances (average)(c)(d)
  $ 289,645     $ 243,168       19  
Treasury & Securities Services firmwide liability balances (average)(c)
    391,461       353,845       11  
 
                       
TSS firmwide financial ratios
                       
Treasury Services firmwide overhead ratio(e)
    53 %     54 %        
Treasury & Securities Services overhead ratio(e)
    63       58          
 
                       
Firmwide business metrics
                       
Assets under custody (in billions)
  $ 13,532     $ 15,690       (14 )
 
                       
Number of:
                       
U.S.$ ACH transactions originated (in millions)
    978       1,004       (3 )
Total U.S.$ clearing volume (in thousands)
    27,186       28,056       (3 )
International electronic funds transfer volume (in thousands)(f)
    44,365       40,039       11  
Wholesale check volume (in millions)
    568       623       (9 )
Wholesale cards issued (in thousands)(g)
    22,233       19,122       16  
 
                       
Credit data and quality statistics
                       
Net charge-offs
  $ 2     $     NM
Nonperforming loans
    30           NM
Allowance for credit losses:
                       
Allowance for loan losses
    51       26       96  
Allowance for lending-related commitments
    77       33       133  
         
Total allowance for credit losses
    128       59       117  
 
                       
Net charge-off rate
    0.04 %     %        
Allowance for loan losses to average loans
    0.25       0.11          
Allowance for loan losses to nonperforming loans
    170     NM          
Nonperforming loans to average loans
    0.15                
 
(a)   Reflects an internal reorganization for escrow products, from Worldwide Securities Services to Treasury Services revenue, of $45 million and $47 million for the three months ended March 31, 2009 and 2008, respectively.
 
(b)   TSS firmwide FX revenue includes FX revenue recorded in TSS and FX revenue associated with TSS customers who are FX customers of the IB. FX revenue associated with TSS customers who are FX customers of IB was $154 million and $191 million, for the three months ended March 31, 2009 and 2008, respectively. These amounts are not included in TS and TSS firmwide revenue.
 
(c)   Firmwide liability balances include liability balances recorded in Commercial Banking.

35


Table of Contents

(d)   Reflects an internal reorganization for escrow products, from Worldwide Securities Services to Treasury Services liability balances, of $18.2 billion and $21.5 billion for the three months ended March 31, 2009 and 2008, respectively.
 
(e)   Overhead ratios have been calculated based on firmwide revenue and TSS and TS expense, respectively, including those allocated to certain other lines of business. FX revenue and expense recorded in IB for TSS-related FX activity are not included in this ratio.
 
(f)   International electronic funds transfer includes non-U.S. dollar ACH and clearing volume.
 
(g)   Wholesale cards issued include domestic commercial card, stored value card, prepaid card and government electronic benefit card products.
ASSET MANAGEMENT
For a discussion of the business profile of AM, see pages 58-60 of JPMorgan Chase’s 2008 Annual Report and on page 6 of this Form 10-Q.
                         
Selected income statement data   Three months ended March 31,
(in millions, except ratios)   2009   2008   Change
 
Revenue
                       
Asset management, administration and commissions
  $ 1,231     $ 1,531       (20 )%
All other income
    69       59       17  
         
Noninterest revenue
    1,300       1,590       (18 )
Net interest income
    403       311       30  
         
Total net revenue
    1,703       1,901       (10 )
 
                       
Provision for credit losses
    33       16       106  
 
                       
Noninterest expense
                       
Compensation expense
    800       825       (3 )
Noncompensation expense
    479       477        
Amortization of intangibles
    19       21       (10 )
         
Total noninterest expense
    1,298       1,323       (2 )
         
Income before income tax expense
    372       562       (34 )
Income tax expense
    148       206       (28 )
         
Net income
  $ 224     $ 356       (37 )
         
 
                       
Revenue by client segment
                       
Private Bank(a)
  $ 583     $ 596       (2 )
Institutional
    460       490       (6 )
Private Wealth Management(a)
    312       349       (11 )
Retail
    253       466       (46 )
Bear Stearns Brokerage
    95           NM
         
Total net revenue
  $ 1,703     $ 1,901       (10 )
         
Financial ratios
                       
ROE
    13 %     29 %        
Overhead ratio
    76       70          
Pretax margin ratio(b)
    22       30          
 
(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 $224 million, a decline of $132 million, or 37%, from the prior year, due to lower net revenue offset partially by lower noninterest expense.
Net revenue was $1.7 billion, a decrease of $198 million, or 10%, from the prior year. Noninterest revenue was $1.3 billion, a decline of $290 million, or 18%, due to the effect of lower markets and lower performance fees; these effects were offset partially by the benefit of the Bear Stearns merger. Net interest income was $403 million, up by $92 million, or 30%, from the prior year, predominantly due to higher deposit balances and wider deposit spreads.
Private Bank revenue declined 2% to $583 million, as the effects of lower markets and lower placement fees were offset by increased deposit balances and wider deposit spreads. Institutional revenue declined 6% to $460 million, due to lower markets and lower performance fees, offset partially by net liquidity inflows. Private Wealth Management revenue

36


Table of Contents

declined 11% to $312 million, due to the effect of lower markets. Retail revenue declined by 46% to $253 million, due to the effect of lower markets and net equity outflows. Bear Stearns Brokerage contributed $95 million to revenue.
The provision for credit losses was $33 million, an increase of $17 million from the prior year, reflecting a weakening credit environment.
Noninterest expense was $1.3 billion, a decrease of $25 million, or 2%, from the prior year, due to lower performance-based compensation and lower headcount-related expense, offset by the effect of the Bear Stearns merger and higher FDIC insurance premiums.
                         
Business metrics    
(in millions, except headcount, ratios and   Three months ended March 31,
ranking data, and where otherwise noted)   2009   2008   Change
 
Number of:
                       
Client advisors
    1,708       1,744       (2 )%
Retirement planning services participants
    1,628,000       1,519,000       7  
Bear Stearns brokers
    359             NM  
 
                       
% of customer assets in 4 & 5 Star Funds(a)
    42 %     49 %     (14 )
% of AUM in 1st and 2nd quartiles:(b)
                       
1 year
    54 %     52 %     4  
3 years
    62 %     73 %     (15 )
5 years
    66 %     75 %     (12 )
 
                       
Selected balance sheet data (period-end)
                       
Equity
  $ 7,000     $ 5,000       40  
 
                       
Selected balance sheet data (average)
                       
Total assets
  $ 58,227     $ 60,286       (3 )
Loans
    34,585       36,628       (6 )
Deposits
    81,749       68,184       20  
Equity
    7,000       5,000       40  
 
                       
Headcount
    15,109       14,955       1  
 
                       
Credit data and quality statistics
                       
Net charge-offs (recoveries)
  $ 19     $ (2 )     NM  
Nonperforming loans
    301       11       NM  
Allowance for loan losses
    215       130       65  
Allowance for lending-related commitments
    4       6       (33 )
 
                       
Net charge-off (recovery) rate
    0.22 %     (0.02 )%        
Allowance for loan losses to average loans
    0.62       0.35          
Allowance for loan losses to nonperforming loans
    71       1,182          
Nonperforming loans to average loans
    0.87       0.03          
 
(a)   Derived from the following rating services: Morningstar for the United States; Micropal for the United Kingdom, Luxembourg, Hong Kong and Taiwan; and Nomura for Japan.
 
(b)   Derived from the following rating services: Lipper for the United States and Taiwan; Micropal for the United Kingdom, Luxembourg and Hong Kong; and Nomura for Japan
Assets under supervision
Assets under supervision were $1.5 trillion, a decrease of $105 billion, or 7%, from the prior year. Assets under management were $1.1 trillion, down by $72 billion, or 6%, from the prior year. The decrease was due to the effect of lower markets and outflows from non-liquidity products, offset largely by liquidity product inflows across all segments and the addition of Bear Stearns assets under management. Custody, brokerage, administration and deposit balances were $349 billion, down $33 billion, due to the effect of lower markets on brokerage and custody balances, offset by the addition of Bear Stearns Brokerage.

37


Table of Contents

                 
ASSETS UNDER SUPERVISION(a) (in billions)        
As of or for the three months ended March 31,   2009   2008
 
Assets by asset class
               
 
               
Liquidity
  $ 625     $ 471  
Fixed income
    180       200  
Equities & balanced
    215       390  
Alternatives
    95       126  
 
Total assets under management
    1,115       1,187  
Custody/brokerage/administration/deposits
    349       382  
 
Total assets under supervision
  $ 1,464     $ 1,569  
 
 
               
Assets by client segment
               
 
               
Institutional
  $ 668     $ 652  
Private Bank(b)
    181       179  
Retail
    184       279  
Private Wealth Management(b)
    68       77  
Bear Stearns Brokerage
    14        
 
Total assets under management
  $ 1,115     $ 1,187  
 
 
               
Institutional
  $ 669     $ 652  
Private Bank(b)
    375       412  
Retail
    250       366  
Private Wealth Management(b)
    120       139  
Bear Stearns Brokerage
    50        
 
Total assets under supervision
  $ 1,464     $ 1,569  
 
 
               
Assets by geographic region
               
 
               
U.S./Canada
  $ 789     $ 773  
International
    326       414  
 
Total assets under management
  $ 1,115     $ 1,187  
 
U.S./Canada
  $ 1,066     $ 1,063  
International
    398       506  
 
Total assets under supervision
  $ 1,464     $ 1,569  
 
 
               
Mutual fund assets by asset class
               
Liquidity
  $ 570     $ 405  
Fixed income
    42       45  
Equities
    93       186  
 
Total mutual fund assets
  $ 705     $ 636  
 
 
               
Assets under management rollforward
               
Beginning balance, January 1
  $ 1,133     $ 1,193  
Net asset flows:
               
Liquidity
    19       68  
Fixed income
    1        
Equities, balanced and alternatives
    (5 )     (21 )
Market/performance/other impacts
    (33 )     (53 )
 
Ending balance, March 31
  $ 1,115     $ 1,187  
 
 
               
Assets under supervision rollforward
               
Beginning balance
  $ 1,496     $ 1,572  
Net asset flows
    25       52  
Market/performance/other impacts
    (57 )     (55 )
 
Ending balance, March 31
  $ 1,464     $ 1,569  
 
(a)   Excludes assets under management of American Century Companies, Inc., in which the Firm had a 42% and 44% ownership at March 31, 2009 and 2008, respectively.
 
(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.

38


Table of Contents

CORPORATE / PRIVATE EQUITY
For a discussion of the business profile of Corporate/Private Equity, see pages 61-63 of JPMorgan Chase’s 2008 Annual Report.
                         
Selected income statement data   Three months ended March 31,
(in millions, except headcount)   2009   2008   Change
 
 
Revenue
                       
Principal transactions
  $ (1,493 )   $ 5     NM
Securities gains
    214       42       410 %
All other income(a)
    (19 )     1,641     NM
         
Noninterest revenue
    (1,298 )     1,688     NM
Net interest income (expense)
    989       (349 )   NM
         
Total net revenue
    (309 )     1,339     NM
 
                       
Provision for credit losses
                 
 
                       
Noninterest expense
                       
Compensation expense
    641       639        
Noncompensation expense(b)
    345       (84 )   NM
Merger costs
    205           NM
         
Subtotal
    1,191       555       115  
Net expense allocated to other businesses
    (1,279 )     (1,057 )     (21 )
         
Total noninterest expense
    (88 )     (502 )     82  
         
Income (loss) before income tax expense
    (221 )     1,841     NM
Income tax expense
    41       730       (94 )
         
Net income (loss)
  $ (262 )   $ 1,111     NM
         
 
                       
Total net revenue
                       
Private equity
  $ (449 )   $ 163     NM
Corporate
    140       1,176       (88 )
         
Total net revenue
  $ (309 )   $ 1,339     NM
         
 
                       
Net income (loss)
                       
Private equity
  $ (280 )   $ 57     NM
Corporate
    252       1,054       (76 )
Merger-related items(c)
    (234 )         NM
         
Total net income (loss)
  $ (262 )   $ 1,111     NM
         
Headcount
    22,339       21,769       3  
 
(a)   Included proceeds of $1.5 billion from the sale of Visa shares in its initial public offering in the first quarter of 2008.
 
(b)   Included a release of credit card litigation reserves in the first quarter of 2008.
 
(c)   Included merger costs related to the Washington Mutual transaction, as well as items related to the Bear Stearns merger, in the first quarter of 2009.
Quarterly results
Net loss was $262 million, compared with net income of $1.1 billion in the prior year. This segment includes the results of Private Equity and Corporate business segments, as well as merger-related items.
Net loss for Private Equity was $280 million, compared with net income of $57 million in the prior year. Net revenue was negative $449 million, a decrease of $612 million, reflecting Private Equity losses of $462 million, compared with gains of $189 million in the prior year. Noninterest expense was negative $11 million, a decrease of $87 million from the prior year, reflecting lower compensation expense.
Net income for Corporate was $252 million, compared with net income of $1.1 billion in the prior year (which included a benefit of $955 million (after tax) from the proceeds of the sale of Visa shares in its initial public offering).

39


Table of Contents

                         
Selected income statement and balance sheet data   Three months ended March 31,
(in millions)   2009   2008   Change
 
Treasury
                       
Securities gains(a)
  $ 214     $ 42       410 %
Investment securities portfolio (average)(b)
    265,785       83,161       220  
Investment securities portfolio (ending)(b)
    316,498       94,588       235  
Mortgage loans (average)
    7,210       6,730       7  
Mortgage loans (ending)
    7,162       6,847       5  
 
                       
Private equity
                       
Realized gains
  $ 15     $ 1,113       (99 )
Unrealized gains (losses)(c)
    (409 )     (881 )     54  
         
Total direct investments
    (394 )     232     NM
Third-party fund investments
    (68 )     (43 )     (58 )
         
Total private equity gains (losses)(d)
  $ (462 )   $ 189     NM
 
                         
Private equity portfolio information(e)
Direct investments
(in millions)
  March 31, 2009   December 31, 2008   Change
 
Publicly held securities
                       
Carrying value
  $ 305     $ 483       (37 )%
Cost
    778       792       (2 )
Quoted public value
    346       543       (36 )
 
                       
Privately held direct securities
                       
Carrying value
    4,708       5,564       (15 )
Cost
    5,519       6,296       (12 )
 
                       
Third-party fund investments(f)
                       
Carrying value
    1,537       805       91  
Cost
    2,082       1,169       78  
         
Total private equity portfolio — Carrying value
  $ 6,550     $ 6,852       (4 )
Total private equity portfolio — Cost
  $ 8,379     $ 8,257       1  
 
(a)   Reflects repositioning of the Corporate investment securities portfolio, and excludes gains/losses on securities used to manage risk associated with MSRs.
 
(b)   For further discussion, see “Securities” on page 42 of this Form 10-Q.
 
(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 3 on pages 89-99 of this Form 10-Q.
 
(f)   Unfunded commitments to third-party private equity funds were $1.5 billion and $1.4 billion at March 31, 2009, and December 31, 2008, respectively.
The carrying value of the private equity portfolio at March 31, 2009, was $6.6 billion, down by $302 million from December 31, 2008. The portfolio decline was primarily due to write-downs and mark-to-market losses from publicly traded positions. The portfolio represented 5.4% of the Firm’s stockholders’ equity less goodwill at March 31, 2009, down from 5.8% at December 31, 2008.
The increase in the carrying value of third-party fund investments was mainly due to the reclassification of investments from direct securities to third-party funds and the inclusion of fund investments that were previously reported as part of Commercial Banking.

40


Table of Contents

BALANCE SHEET ANALYSIS
                 
Selected balance sheet data (in millions)   March 31, 2009   December 31, 2008
 
Assets
               
Cash and due from banks
  $ 26,681     $ 26,895  
Deposits with banks
    89,865       138,139  
Federal funds sold and securities purchased under resale agreements
    157,237       203,115  
Securities borrowed
    127,928       124,000  
Trading assets:
               
Debt and equity instruments
    298,453       347,357  
Derivative receivables
    131,247       162,626  
Securities
    333,861       205,943  
Loans
    708,243       744,898  
Allowance for loan losses
    (27,381 )     (23,164 )
 
Loans, net of allowance for loan losses
    680,862       721,734  
Accrued interest and accounts receivable
    52,168       60,987  
Goodwill
    48,201       48,027  
Other intangible assets
    15,983       14,984  
Other assets
    116,702       121,245  
 
Total assets
  $ 2,079,188     $ 2,175,052  
 
 
               
Liabilities
               
Deposits
  $ 906,969     $ 1,009,277  
Federal funds purchased and securities loaned or sold under repurchase agreements
    279,837       192,546  
Commercial paper and other borrowed funds
    145,342       170,245  
Trading liabilities:
               
Debt and equity instruments
    53,786       45,274  
Derivative payables
    86,020       121,604  
Accounts payable, accrued expense and other liabilities
    165,521       187,978  
Beneficial interests issued by consolidated VIEs
    9,674       10,561  
Long-term debt and trust-preferred capital debt securities
    261,845       270,683  
 
Total liabilities
    1,908,994       2,008,168  
Stockholders’ equity
    170,194       166,884  
 
Total liabilities and stockholders’ equity
  $ 2,079,188     $ 2,175,052  
 
Consolidated Balance Sheets overview
The following is a discussion of the significant changes in the Consolidated Balance Sheets from December 31, 2008.
Deposits with banks; federal funds sold and securities purchased under resale agreements; securities borrowed; federal funds purchased and securities loaned or sold under repurchase agreements
The Firm utilizes deposits with banks, federal funds sold and securities purchased under resale agreements, securities borrowed, and federal funds purchased and securities loaned or sold under repurchase agreements as part of its liquidity management activities to manage the Firm’s cash positions and risk-based capital requirements and to support the Firm’s trading and risk management activities. In particular, the Firm uses securities purchased under resale agreements and securities borrowed to provide funding or liquidity to clients by purchasing and borrowing clients’ securities for the short-term. Federal funds purchased and securities loaned or sold under repurchase agreements are used as short-term funding sources for the Firm and to make securities available to clients for their short-term purposes. The decrease in deposits with banks primarily reflected lower interbank lending compared with the elevated level at the end of 2008. The decrease in securities purchased under resale agreements was largely due to a lower volume of excess funds available for short-term investments. The increase in securities sold under repurchase agreements was partly attributable to favorable pricing and to finance the increase in the AFS securities portfolio. For additional information on the Firm’s Liquidity Risk Management, see pages 49-53 of this Form 10-Q.
Trading assets and liabilities — debt and equity instruments
The Firm uses debt and equity trading instruments for both market-making and proprietary risk-taking activities. These instruments consist predominantly of fixed income securities, including government and corporate debt; equity securities, including convertible securities; loans, including prime mortgage and other loans warehoused by RFS and IB for sale or securitization purposes and accounted for at fair value under SFAS 159; and physical commodities inventories. The decrease in trading assets — debt and equity instruments reflected continued balance sheet management

41


Table of Contents

during the period as well as the effect of the challenging capital markets environment. For additional information, refer to Note 3 and Note 5 on pages 89-99 and 102-103, respectively, of this Form 10-Q.
Trading assets and liabilities — derivative receivables and payables
Derivative instruments enable end-users to transform or mitigate exposure to credit or market risks. The value of a derivative is derived from its reference to an underlying variable or combination of variables such as interest rate, credit, foreign exchange, equity or commodity prices or indices. JPMorgan Chase makes markets in derivatives for customers and also uses derivatives to hedge or manage risks of market exposures and to make investments. The majority of the Firm’s derivatives are entered into for market-making purposes. The decrease in derivative receivables and payables was primarily related to the effect of the strengthening of the U.S. dollar on foreign exchange, credit and interest rate derivatives. For additional information, refer to derivative contracts, on pages 59-60, Note 3, Note 5 and Note 6 on pages 89-99, 102-103, and 104-111, respectively, of this Form 10-Q.
Securities
Almost all of the securities portfolio is classified as AFS and is used predominantly to manage the Firm’s exposure to interest rate movements, as well as to make strategic longer-term investments. The Firm purchased a significant amount of residential mortgage-backed securities, a majority of which are guaranteed by the U.S. Federal Government and other foreign governments, to position the Firm for the declining interest rate environment experienced in the first quarter. This increase was partially offset by sales of higher coupon instruments as part of this positioning as well as prepayments and maturities. For additional information related to securities, refer to the Corporate/Private Equity segment on pages 39-40, Note 3 and Note 12 on pages 89-99 and 114-119, respectively, of this Form 10-Q.
Loans and allowance for loan losses
The Firm provides loans to a variety of customers, from large corporate and institutional clients to individual consumers. Loans decreased largely reflecting decreases across all wholesale lines of business and the seasonal decline in credit card receivables.
Both the consumer and wholesale components of the allowance for loan losses increased. The consumer allowance rose due to an increase in estimated losses for home equity, mortgage and credit card loans due to the effects of continued housing price declines, rising unemployment and overall weakening economic conditions. The increase in the wholesale allowance was due to the effect of the continuing weakening credit environment. For a more detailed discussion of the loan portfolio and the allowance for loan losses, refer to Credit Risk Management on pages 53-70, and Notes 3, 4, 14 and 15 on pages 89-99, 99-101, 120-123 and 123-124, respectively, of this Form 10-Q.
Accrued interest and accounts receivable; accounts payable, accrued expense and other liabilities
The Firm’s accrued interest and accounts receivable consist of accrued interest receivable from interest-earning assets; receivables from customers (primarily from activities related to IB’s Prime Services business); receivables from brokers, dealers and clearing organizations; and receivables from failed securities sales. The Firm’s accounts payable, accrued expense and other liabilities consist of accounts payable to customers (primarily from activities related to IB’s Prime Services business), payables to brokers, dealers and clearing organizations; payables from failed securities purchases; accrued expense, including for interest-bearing liabilities; and all other liabilities, including obligations to return securities received as collateral. The decrease in accounts payable, accrued expense and other liabilities partly reflected lower levels of fails as a result of loosening in the market for U.S. Treasury securities.
Goodwill
Goodwill arises from business combinations and represents the excess of the cost of an acquired entity over the net fair value amounts assigned to assets acquired and liabilities assumed. The increase in goodwill was largely due to purchase accounting adjustments related to the Bear Stearns merger as well as an acquisition of a commodities business by IB. For additional information, see Note 18 on pages 137-139 of this Form 10-Q.
Other intangible assets
The Firm’s other intangible assets consist of MSRs, purchased credit card relationships, other credit card-related intangibles, core deposit intangibles, and other intangibles. MSRs increased due to sales in RFS of originated loans and markups in the fair value of the MSR asset due to changes to inputs and assumptions in the MSR valuation model, offset partially by servicing portfolio run-off. The decrease in other intangible assets primarily reflects amortization expense associated with credit card-related intangibles, core deposit intangibles, and other intangibles. For additional information on MSRs and other intangible assets, see Note 18 on pages 137-139 of this Form 10-Q.

42


Table of Contents

Deposits
The Firm’s deposits represent a liability to customers, both retail and wholesale, related to non-brokerage funds held on their behalf. Deposits are classified by location (U.S. and non-U.S.), whether they are interest- or noninterest-bearing, and by type (i.e., demand, money market, savings, time or negotiable order of withdrawal accounts). Deposits help provide a stable and consistent source of funding for the Firm. Wholesale deposits declined in TSS from the elevated levels at December 31, 2008, which reflected the strong deposit inflows as a result of the heightened volatility and credit concerns affecting the markets during the latter part of 2008; the decline in deposits during the first quarter of 2009, resulted from the mitigation of some of these credit concerns. For more information on deposits, refer to the RFS, TSS and AM segment discussions on pages 21-27, 34-36 and 36-38, respectively, and the Liquidity Risk Management discussion on pages 49-53 of this Form 10-Q. For more information on wholesale liability balances, including deposits, refer to the CB and TSS segment discussions on pages 32-33 and 34-36, respectively, of this Form 10-Q.
Commercial paper and other borrowed funds
The Firm utilizes commercial paper and other borrowed funds as part of its liquidity management activities to meet short-term funding needs, and in connection with a TSS liquidity management product whereby excess client funds, are transferred into commercial paper overnight sweep accounts. The decrease in other borrowed funds was predominantly due to lower advances from Federal Home Loan Banks and lower nonrecourse advances from the Federal Reserve Bank of Boston (“FRBB”) to fund purchases of asset-backed commercial paper from money market mutual funds. For additional information on the Firm’s Liquidity Risk Management, see pages 49-53 of this Form 10-Q.
Long-term debt and trust-preferred capital debt securities
The Firm utilizes long-term debt and trust-preferred capital debt securities to provide cost-effective and diversified sources of funds and as critical components of the Firm’s liquidity and capital management. Long-term debt and trust-preferred capital debt securities decreased slightly, predominantly due to maturities and redemptions, partially offset by new issuances. For additional information on the Firm’s long-term debt activities, see the Liquidity Risk Management discussion on pages 49-53 of this Form 10-Q.
Stockholders’ equity
The increase in total stockholders’ equity was largely the result of net income for the first three months of 2009; net unrealized gains recorded within accumulated other comprehensive income related to AFS securities; and net issuances under the Firm’s employee stock-based compensation plans. These additions were partially offset by the declaration of cash dividends on preferred and common stocks. The Firm lowered its quarterly dividend from $0.38 to $0.05 per common share, effective with the dividend paid on April 30, 2009. This action will enable the Firm to retain an additional $5.0 billion in common equity per year. For a further discussion, see the Capital Management section that follows, and Note 21 on page 141 of this Form 10-Q.
OFF—BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS
JPMorgan Chase has several types of off—balance sheet arrangements, including arrangements with special-purpose entities (“SPEs”) and the issuance of lending-related financial instruments (e.g., commitments and guarantees). For further discussion of contractual cash obligations, see Off—Balance Sheet Arrangements and Contractual Cash Obligations on page 68 of JPMorgan Chase’s 2008 Annual Report.
Special-purpose entities
The basic SPE structure involves a company selling assets to the SPE. The SPE funds the purchase of those assets by issuing securities to investors in the form of commercial paper, short-term asset-backed notes, medium-term notes and other forms of interest. SPEs are generally structured to insulate investors from claims on the SPE’s assets by creditors of other entities, including the creditors of the seller of the assets.
JPMorgan Chase uses SPEs as a source of liquidity for itself and its clients by securitizing financial assets, and by creating investment products for clients. The Firm is involved with SPEs through multi-seller conduits and investor intermediation activities, and as a result of its loan securitizations through qualifying special-purpose entities (“QSPEs”). For a detailed discussion of all SPEs with which the Firm is involved, and the related accounting, see Note 1 on page 122, Note 16 on pages 168-176 and Note 17 on pages 177-186 of JPMorgan Chase’s 2008 Annual Report.
The Firm holds capital, as deemed appropriate, against all SPE-related transactions and related exposures, such as derivative transactions and lending-related commitments and guarantees.

43


Table of Contents

Implications of a credit rating downgrade to JPMorgan Chase Bank, N.A.
For certain liquidity commitments to SPEs, the Firm could be required to provide funding if the short-term credit rating of JPMorgan Chase Bank, N.A., was downgraded below specific levels, primarily “P-1”, “A-1” and “F1” for Moody’s, Standard & Poor’s and Fitch, respectively. The amount of these liquidity commitments was $53.8 billion and $61.0 billion at March 31, 2009, and December 31, 2008, respectively. Alternatively, if JPMorgan Chase Bank, N.A., were downgraded, the Firm could be replaced by another liquidity provider in lieu of providing funding under the liquidity commitments; or, in certain circumstances, the Firm could facilitate the sale or refinancing of the assets in the SPE in order to provide liquidity. These commitments are included in other unfunded commitments to extend credit and asset purchase agreements, as shown in the Off-balance sheet lending-related financial instruments and guarantees table on page 45 of this Form 10-Q.
Special-purpose entities revenue
The following table summarizes certain revenue information related to consolidated and nonconsolidated VIEs and QSPEs with which the Firm has significant involvement. The revenue reported in the table below predominantly represents contractual servicing and credit fee income (i.e., income from acting as administrator, structurer or liquidity provider). It does not include mark-to-market gains and losses from changes in the fair value of trading positions (such as derivative transactions) entered into with VIEs. Those gains and losses are recorded in principal transactions revenue.
                 
Revenue from VIEs and QSPEs   Three months ended March 31,
(in millions)   2009   2008
 
VIEs(a)
               
Multi-seller conduits
  $ 120     $ 57  
Investor intermediation
    20       (3 )
 
Total VIEs
    140       54  
QSPEs(b)
    623       325  
 
Total
  $ 763     $ 379  
 
(a)   Includes revenue associated with consolidated VIEs and significant nonconsolidated VIEs.
 
(b)   Excludes servicing revenue from loans sold to and securitized by third parties. The prior-period amount has been revised to conform to the current-period presentation.
Off—balance sheet lending-related financial instruments and guarantees
JPMorgan Chase utilizes lending-related financial instruments (e.g., commitments) and guarantees to meet customer financing needs. The contractual amount of these financial instruments represents the maximum possible credit risk should the counterparty draw upon the commitment or the Firm be required to fulfill its obligation under the guarantee, and the counterparty subsequently fail to perform according to the terms of the contract. These commitments and guarantees historically expire without being drawn, and even higher proportions expire without a default. As a result, the total contractual amount of these instruments is not, in the Firm’s view, representative of its actual future credit exposure or funding requirements. Further, certain commitments, primarily related to consumer financings, are cancelable, upon notice, at the option of the Firm. For further discussion of lending-related commitments and guarantees and the Firm’s accounting for them, see Note 6 and Note 23 on pages 104-111 and 142-144, respectively, of this Form 10-Q, and Credit Risk Management on page 90 and Note 32 and Note 33 on pages 202-210 of JPMorgan Chase’s 2008 Annual Report.

44


Table of Contents

The following table presents the contractual amounts of off-balance sheet lending-related financial instruments and guarantees for the periods indicated.
                                                 
    March 31, 2009   Dec. 31, 2008
            Due after   Due after            
            1 year   3 years            
By remaining maturity   Due in 1   through   through   Due after        
(in millions)   year or less   3 years   5 years   5 years   Total   Total
 
Lending-related
                                               
Consumer(a)
  $ 662,685     $ 3,853     $ 10,308     $ 66,458     $ 743,304     $ 741,507  
Wholesale:
                                               
Other unfunded commitments to extend credit(b)(c)(d)(e)
    94,730       72,677       46,817       8,005       222,229       225,863  
Asset purchase agreements(f)
    17,407       25,188       3,301       1,464       47,360       53,729  
Standby letters of credit and other financial guarantees(c)(g)(h)
    24,597       35,648       26,372       2,676       89,293       95,352  
Other letters of credit(c)(g)
    3,374       527       221       9       4,131       4,927  
 
Total wholesale
    140,108       134,040       76,711       12,154       363,013       379,871  
 
Total lending-related
  $ 802,793     $ 137,893     $ 87,019     $ 78,612     $ 1,106,317     $ 1,121,378  
 
Other guarantees
                                               
Securities lending guarantees(i)
  $ 159,667     $     $     $     $ 159,667     $ 169,281  
Residual value guarantees
          670                   670       670  
Derivatives qualifying as guarantees(j)
    11,282       7,240       34,229       32,881       85,632       83,835  
 
(a)   Includes credit card and home equity lending-related commitments of $642.5 billion and $79.4 billion, respectively, at March 31, 2009, and $623.7 billion and $95.7 billion, respectively, at December 31, 2008. These amounts for credit card and home equity lending-related commitments represent the total available credit for these products. The Firm has not experienced, and does not anticipate, that all available lines of credit for these products will be utilized at the same time. The Firm can reduce or cancel these lines of credit by providing the borrower prior notice or, in some cases, without notice as permitted by law.
 
(b)   Includes unused advised lines of credit totaling $37.1 billion at March 31, 2009, and $36.3 billion at December 31, 2008, which are not legally binding. In regulatory filings with the Federal Reserve, unused advised lines are not reportable. See the Glossary of Terms on page 149 of this Form 10-Q for the Firm’s definition of advised lines of credit.
 
(c)   Includes contractual amount of risk participations totaling $27.9 billion and $28.3 billion at March 31, 2009, and December 31, 2008, respectively.
 
(d)   Excludes unfunded commitments to third-party private equity funds of $1.5 billion and $1.4 billion at March 31, 2009, and December 31, 2008, respectively. Also excludes unfunded commitments for other equity investments of $877 million and $1.0 billion at March 31, 2009, and December 31, 2008, respectively.
 
(e)   Includes commitments to investment- and noninvestment-grade counterparties in connection with leveraged acquisitions of $3.2 billion and $3.6 billion at March 31, 2009, and December 31, 2008, respectively.
 
(f)   Largely represents asset purchase agreements to the Firm’s administered multi-seller, asset-backed commercial paper conduits. The maturity is based on the weighted-average life of the underlying assets in the SPE, which are based on the remaining life of each conduit transaction’s committed liquidity facilities plus either the expected weighted-average life of the assets should the committed liquidity facilities expire without renewal, or the expected time to sell the underlying assets in the securitization market. It also includes $96 million of asset purchase agreements to other third-party entities at both March 31, 2009, and December 31, 2008.
 
(g)   JPMorgan Chase held collateral on standby letters of credit and other letters of credit of $28.0 billion and $1.0 billion, respectively, at March 31, 2009, and $31.0 billion and $1.0 billion, respectively, at December 31, 2008.
 
(h)   Includes unissued standby letters-of-credit commitments of $37.2 billion and $39.5 billion at March 31, 2009, and December 31, 2008, respectively.
 
(i)   Collateral held by the Firm in support of securities lending indemnification agreements was $160.5 billion and $170.1 billion at March 31, 2009, and December 31, 2008, respectively. Securities lending collateral is comprised primarily of cash, securities issued by governments that are members of the Organisation for Economic Co-operation and Development (“OECD”) and U.S. government agencies.
 
(j)   Represents notional amounts of derivatives qualifying as guarantees. For further discussion of guarantees, see Note 32 and Note 33 on pages 202-210 of JPMorgan Chase’s 2008 Annual Report.
CAPITAL MANAGEMENT
The following discussion of JPMorgan Chase’s capital management highlights developments since December 31, 2008, and should be read in conjunction with Capital Management on pages 70-73 of JPMorgan Chase’s 2008 Annual Report.
The Firm’s capital management framework is intended to ensure that there is capital sufficient to support the underlying risks of the Firm’s business activities and to maintain “well-capitalized” status under regulatory requirements. In addition, the Firm holds capital above these requirements in amounts deemed appropriate to achieve the Firm’s regulatory and debt rating objectives. The process of assigning equity to the lines of business is integrated into the Firm’s capital framework and is overseen by the Asset-Liability Committee (“ALCO”).

45


Table of Contents

Line of business equity
Equity for a line of business represents the amount the Firm believes the business would require if it were operating independently, incorporating sufficient capital to address economic risk measures, regulatory capital requirements and capital levels for similarly rated peers. Return on common equity is measured and internal targets for expected returns are established as key measures of a business segment’s performance.
In accordance with SFAS 142, the lines of business perform the required goodwill impairment testing. For a further discussion of goodwill and impairment testing, see Critical Accounting Estimates Used by the Firm and Note 18 on pages 110-111 and 186-187, respectively, of JPMorgan Chase’s 2008 Annual Report, and Note 18 on pages 137-139 of this Form 10-Q.
                 
Line of business equity        
(in billions)   March 31, 2009   December 31, 2008
 
Investment Bank
  $ 33.0     $ 33.0  
Retail Financial Services
    25.0       25.0  
Card Services
    15.0       15.0  
Commercial Banking
    8.0       8.0  
Treasury & Securities Services
    5.0       4.5  
Asset Management
    7.0       7.0  
Corporate/Private Equity
    45.2       42.4  
 
Total common stockholders’ equity
  $ 138.2     $ 134.9  
 
                         
Line of business equity   Average for the period  
(in billions)   1Q09     4Q08     1Q08  
 
Investment Bank
  $ 33.0     $ 33.0     $ 22.0  
Retail Financial Services
    25.0       25.0       17.0  
Card Services
    15.0       15.0       14.1  
Commercial Banking
    8.0       8.0       7.0  
Treasury & Securities Services
    5.0       4.5       3.5  
Asset Management
    7.0       7.0       5.0  
Corporate/Private Equity
    43.5       46.3       56.0  
 
Total common stockholders’ equity
  $ 136.5     $ 138.8     $ 124.6  
 
Economic risk capital
JPMorgan Chase assesses its capital adequacy relative to the risks underlying the Firm’s business activities, utilizing internal risk-assessment methodologies. The Firm assigns economic capital primarily based on four risk factors: credit risk, market risk, operational risk and private equity risk.
                         
Economic risk capital   Quarterly Averages  
(in billions)   1Q09     4Q08     1Q08  
 
Credit risk
  $ 55.0     $ 46.3     $ 32.9  
Market risk
    15.0       14.0       8.7  
Operational risk
    9.1       7.5       5.6  
Private equity risk
    4.6       5.6       4.3  
 
Economic risk capital
    83.7       73.4       51.5  
Goodwill
    48.1       46.8       45.7  
Other(a)
    4.7       18.6       27.4  
 
Total common stockholders’ equity
  $ 136.5     $ 138.8     $ 124.6  
 
(a)   Reflects additional capital required, in the Firm’s view, to meet its regulatory and debt rating objectives.
Regulatory capital
The Federal Reserve establishes capital requirements, including well-capitalized standards for the consolidated financial holding company. The Office of the Comptroller of the Currency (“OCC”) establishes similar capital requirements and standards for the Firm’s national banks, including JPMorgan Chase Bank, N.A., and Chase Bank USA, N.A.
The Federal Reserve granted the Firm, for a period of 18 months following the Bear Stearns merger, relief up to a certain specified amount and subject to certain conditions from the Federal Reserve’s risk-based capital and leverage requirements with respect to Bear Stearns’ risk-weighted assets and other exposures acquired. The amount of such relief is subject to reduction by one-sixth each quarter subsequent to the merger and expires on October 1, 2009. The OCC granted JPMorgan Chase Bank, N.A. similar relief from its risk-based capital and leverage requirements.

46


Table of Contents

The following table presents the risk-based capital ratios for JPMorgan Chase and its significant banking subsidiaries at March 31, 2009, and December 31, 2008. The table indicates that the Firm and its significant banking subsidiaries were well-capitalized at each such date.
                                                         
                            Adjusted   Tier 1   Total   Tier 1
    Tier 1           Risk-weighted   average   capital   capital   leverage
(in millions, except ratios)   capital   Total capital   assets(d)   assets(e)   ratio   ratio   ratio
 
March 31, 2009(a)
                                                       
JPMorgan Chase & Co.
  $ 137,144 (c)   $ 183,109     $ 1,207,490     $ 1,923,186       11.4 %     15.2 %     7.1 %
JPMorgan Chase Bank, N.A.
    100,437       143,038       1,113,618       1,651,574       9.0       12.8       6.1  
Chase Bank USA, N.A.
    11,068       12,649       92,063       82,881       12.0       13.7       13.4  
 
                                                       
December 31, 2008(a)
                                                       
JPMorgan Chase & Co.
  $ 136,104     $ 184,720     $ 1,244,659     $ 1,966,895       10.9 %     14.8 %     6.9 %
JPMorgan Chase Bank, N.A.
    100,594       143,854       1,153,039       1,705,750       8.7       12.5       5.9  
Chase Bank USA, N.A.
    11,190       12,901       101,472       87,286       11.0       12.7       12.8  
 
                                                       
Well-capitalized ratios(b)
                                    6.0 %     10.0 %     5.0 %(f)
Minimum capital ratios(b)
                                    4.0       8.0       3.0 (g)
 
(a)   Asset and capital amounts for JPMorgan Chase’s banking subsidiaries reflect intercompany transactions, whereas the respective amounts for JPMorgan Chase reflect the elimination of intercompany transactions.
 
(b)   As defined by the regulations issued by the Federal Reserve, OCC and FDIC.
 
(c)   The FASB has been deliberating certain amendments to both SFAS 140 and FIN 46R that may impact the accounting for transactions that involve QSPEs and VIEs. Based on the provisions of the current proposal and the Firm’s interpretation of the proposal, the Firm estimates that the impact of consolidation of the Firm’s QSPEs (including the Chase Issuance Trust; the “Trust”) and VIEs in accordance with those amendments could be up to $145 billion; the resulting decrease in the Tier 1 capital ratio could be approximately 80 basis points. The ultimate impact could differ significantly due to the FASB’s continuing deliberations on the final provisions of the rule amendments and market conditions. Subsequent to March 31, 2009, the Firm expects to take certain actions to the Trust, including (i) designating as “discount receivables” a percentage of new card receivables for inclusion in the Trust, which will have the effect of increasing the yield in the Trust and (ii) increasing the level of subordination required for the outstanding notes issued by the Trust. The impact of these actions would be to affect the Firm’s Tier 1 capital ratio; this effect is included in (and is not additive to) the 80 basis points negative impact to Tier 1 capital noted above.
 
(d)   Includes off-balance sheet risk-weighted assets of $337.7 billion, $315.5 billion and $19.6 billion, respectively, at March 31, 2009, and of $357.5 billion, $332.2 billion and $18.6 billion, respectively, at December 31, 2008, for JPMorgan Chase, JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A.
 
(e)   Adjusted average assets, for purposes of calculating the leverage ratio, include total average assets adjusted for unrealized gains/losses on securities, less deductions for disallowed goodwill and other intangible assets, investments in certain subsidiaries, and the total adjusted carrying value of nonfinancial equity investments that are subject to deductions from Tier 1 capital.
 
(f)   Represents requirements for banking subsidiaries pursuant to regulations issued under the Federal Deposit Insurance Corporation Improvement Act. There is no Tier 1 leverage component in the definition of a well-capitalized bank holding company.
 
(g)   The minimum Tier 1 leverage ratio for bank holding companies and banks is 3% or 4% depending on factors specified in regulations issued by the Federal Reserve and OCC.
Note:   Rating agencies allow measures of capital to be adjusted upward for deferred tax liabilities, which have resulted from both nontaxable business combinations and from tax-deductible goodwill. The Firm had deferred tax liabilities resulting from nontaxable business combinations totaling $1.0 billion at March 31, 2009, and $1.1 billion at December 31, 2008. Additionally, the Firm had deferred tax liabilities resulting from tax-deductible goodwill of $1.5 billion at March 31, 2009, and $1.6 billion at December 31, 2008.
The Firm’s Tier 1 capital was $137.1 billion at March 31, 2009, compared with $136.1 billion at December 31, 2008, an increase of $1.0 billion.
The following table presents the changes in Tier 1 capital for the quarter ended March 31, 2009.
         
Tier 1 capital, December 31, 2008 (in millions)   $136,104
 
Net income
    2,141  
Net issuance of common stock under employee stock-based compensation plans
    585  
Dividends
    (667 )
DVA on structured debt and derivative liabilities
    (652 )
Goodwill and other nonqualifying intangibles (net of deferred tax liabilities)
    (275 )
Other
    (92 )
 
Increase in Tier 1 capital
    1,040  
 
Tier 1 capital, March 31, 2009
  $ 137,144  
 
Additional information regarding the Firm’s capital ratios and the federal regulatory capital standards to which it is subject is presented in Note 30 on pages 200-201 of JPMorgan Chase’s 2008 Annual Report.

47


Table of Contents

Capital Purchase Program
Pursuant to the Capital Purchase Program, on October 28, 2008, the Firm issued to the U.S. Treasury, for total proceeds of $25.0 billion, (i) 2.5 million shares of Series K Preferred Stock, and (ii) a warrant to purchase up to 88,401,697 shares of the Firm’s common stock, at the exercise price of $42.42 per share, subject to certain antidilution and other adjustments. For a discussion of the Capital Purchase Program (“CPP”), including restrictions on the Firm’s ability to pay dividends and repurchase or redeem common stock or any other equity securities of the Firm, see Capital Purchase Program on page 72 of JPMorgan Chase’s 2008 Annual Report.
The Tier 1 capital for JPMorgan Chase included in the table above includes the impact of $25.0 billion of capital invested by the U.S. Treasury. JPMorgan Chase also measures its capital strength excluding the impact of the capital received under the CPP. Excluding the capital invested by the U.S. Treasury, JPMorgan Chase’s Tier 1 capital and Tier 1 capital ratio were $112.1 billion and 9.3%, and $111.1 billion and 8.9% at March 31, 2009, and December 31, 2008, respectively.
Basel II
The minimum risk-based capital requirements adopted by the U.S. federal banking agencies follow the Capital Accord of the Basel Committee on Banking Supervision. In 2004, the Basel Committee published a revision to the Accord (“Basel II”), and in December 2007, U.S. banking regulators published a final Basel II rule. The final U.S. rule will require JPMorgan Chase to implement Basel II at the holding company level, as well as at certain key U.S. bank subsidiaries. The U.S. implementation timetable consists of a qualification period, starting any time between April 1, 2008, and April 1, 2010, followed by a minimum transition period of three years. During the transition period, Basel II risk-based capital requirements cannot fall below certain floors based on current (“Basel I”) regulations. JPMorgan Chase expects to be in compliance with all relevant Basel II rules within the established timelines. In addition, the Firm has adopted, and will continue to adopt, based on various established timelines, Basel II rules in certain non-U.S. jurisdictions, as required. Equity requirements calculated in accordance with Basel II are expected to be more dynamic over time than equity requirements calculated under Basel I because the drivers of such equity requirements are intended to be a more dynamic reflection of the Firm’s risk profile and balance sheet composition. For additional information, see Basel II, on page 72 of JPMorgan Chase’s 2008 Annual Report.
Broker-dealer regulatory capital
JPMorgan Chase’s principal U.S. broker-dealer subsidiaries are J.P. Morgan Securities Inc. (“JPMorgan Securities”) and J.P. Morgan Clearing Corp. JPMorgan Securities and J.P. Morgan Clearing Corp. are each subject to Rule 15c3-1 under the Securities Exchange Act of 1934 (“Net Capital Rule”). JPMorgan Securities and J.P. Morgan Clearing Corp. are also registered as futures commission merchants and subject to Rule 1.17 under the Commodity Futures Trading Commission (“CFTC”).
JPMorgan Securities and J.P. Morgan Clearing Corp. have elected to compute their minimum net capital requirements in accordance with the “Alternative Net Capital Requirements” of the Net Capital Rule. At March 31, 2009, JPMorgan Securities’ net capital, as defined by the Net Capital Rule, of $8.5 billion exceeded the minimum requirement by $7.9 billion. In addition to its net capital requirements, JPMorgan Securities is required to hold tentative net capital in excess of $1.0 billion and is also required to notify the Securities and Exchange Commission (“SEC”) in the event that tentative net capital is less than $5.0 billion in accordance with the market and credit risk standards of Appendix E of the Net Capital Rule. As of March 31, 2009, JPMorgan Securities had tentative net capital in excess of the minimum and notification requirements.
J.P. Morgan Clearing Corp., a subsidiary of JPMorgan Securities, provides clearing and settlement services. At March 31, 2009, J.P. Morgan Clearing Corp.’s net capital, as defined by the Net Capital Rule, of $4.9 billion exceeded the minimum requirement by $3.5 billion.

48


Table of Contents

Dividends
On February 23, 2009, the Board of Directors reduced the Firm’s quarterly common stock dividend from $0.38 to $0.05 per share, effective with the dividend paid on April 30, 2009, to shareholders of record on April 6, 2009. The action will enable the Firm to retain an additional $5.0 billion in common equity per year and was taken in order to help ensure that the Firm’s balance sheet retained the capital strength necessary to weather a further decline in economic conditions. The Firm expects to maintain the dividend at this level for the time being. The Firm intends to return to a more normalized dividend payout ratio as soon as feasible after the environment has stabilized. JPMorgan Chase declared quarterly cash dividends on its common stock in the amount of $0.38 per share for each quarter of 2008.
The Firm’s ability to pay dividends is subject to restrictions. For information regarding such restrictions, see Capital Purchase Program on page 72, and Note 24 and Note 29 on pages 193-194 and 199, respectively, of JPMorgan Chase’s 2008 Annual Report.
Issuance
The Firm did not issue any common or preferred stock during the first quarter of 2009.
Stock repurchases
The Firm has a stock repurchase program pursuant to which it is authorized to repurchase shares of its stock. The Purchase Agreement concerning the issuance and sale of the Series K Preferred Stock to the U.S. Treasury contains limitations on the Firm’s ability to repurchase its capital stock. See Capital Purchase Program on page 72 of JPMorgan Chase’s 2008 Annual Report. During the three months ended March 31, 2009 and 2008, the Firm did not repurchase any shares. As of March 31, 2009, $6.2 billion of authorized repurchase capacity remained under the current $10.0 billion stock repurchase program. For additional information regarding repurchases of the Firm’s equity securities, see Part II, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds, on page 160 of this Form 10-Q.
The authorization to repurchase stock will be utilized at management’s discretion, and the timing of purchases and the exact number of shares purchased will depend on any limitations on the Firm’s ability to repurchase its stock (such as the terms of the purchase agreement for the Series K Preferred Stock), market conditions and alternative investment opportunities. The repurchase program does not include specific price targets or timetables; may be executed through open market purchases, privately negotiated transactions or utilizing Rule 10b5-1 programs; and may be suspended at any time.
RISK MANAGEMENT
Risk is an inherent part of JPMorgan Chase’s business activities. The Firm’s risk management framework and governance structure are intended to provide comprehensive controls and ongoing management of the major risks inherent in its business activities. In addition, this framework recognizes the diversity among the Firm’s core businesses, which helps reduce the impact of volatility in any particular area on the Firm’s operating results as a whole. There are eight major risk types identified in the business activities of the Firm: liquidity risk, credit risk, market risk, interest rate risk, operational risk, legal and reputation risk, fiduciary risk and private equity risk.
For further discussion of these risks, see pages 74-106 of JPMorgan Chase’s 2008 Annual Report and the information below.
LIQUIDITY RISK MANAGEMENT
The following discussion of JPMorgan Chase’s liquidity management framework highlights developments since December 31, 2008, and should be read in conjunction with pages 76-80 of JPMorgan Chase’s 2008 Annual Report.
The ability to maintain a sufficient level of liquidity is crucial to financial services companies, particularly their ability to maintain appropriate levels of liquidity during periods of adverse conditions. The Firm’s funding strategy is to ensure liquidity and diversity of funding sources to meet actual and contingent liabilities through both stable and adverse conditions.
JPMorgan Chase uses a centralized approach for liquidity risk management. Global funding is managed by Corporate Treasury, using regional expertise as appropriate. Management believes that a centralized framework maximizes liquidity access, minimizes funding costs and permits identification and coordination of global liquidity risk.
Recent events
On February 23, 2009, JPMorgan Chase announced a reduction in the Firm’s quarterly common stock dividend from $0.38 to $0.05 per share, effective with the dividend paid on April 30, 2009, to shareholders of record on April 6, 2009.

49


Table of Contents

This action will enable the Firm to retain an additional $5.0 billion in common equity per year. For additional information, see Capital Management — Dividends, on page 49 of this Form 10-Q.
On February 24, 2009, Standard & Poor’s lowered its ratings on the trust preferred capital debt and noncumulative perpetual preferred securities of JPMorgan Chase & Co. from “A-” to “BBB+.” On April 2, 2009, Standard & Poor’s placed the subordinated credit card asset-backed securities of the Chase Issuance Trust and the Chase Credit Card Master Trust on negative credit watch. On March 4, 2009, Moody’s revised its outlook of JPMorgan Chase & Co. from stable to negative. On April 6, 2009, Moody’s placed $6.4 billion of subordinated credit card asset-backed securities of the Chase Issuance Trust and the Chase Credit Card Master Trust on review for possible downgrade. (For additional information, see Credit Ratings on pages 52-53 of this Form 10-Q).
On March 30, 2009, the Federal Reserve announced that effective April 27, 2009, it will reduce the amount it will lend against certain loans pledged as collateral to the Federal Reserve Banks for discount window or payment system risk purposes, to reflect recent trends in the values of those types of loans. JPMorgan Chase maintains sufficient levels of eligible collateral to pledge to the Federal Reserve to replace the announced reduction in collateral value and, accordingly this change by the Federal Reserve will not have a material impact on the Firm’s aggregate funding capacity.
Despite the market events that occurred during 2008, which continued to affect financial institutions during the first quarter of 2009, as well as the aforementioned actions by the ratings agencies, the Firm believes its liquidity position remained strong, based on its liquidity metrics as of March 31, 2009. The Firm believes that its unsecured and secured funding capacity is sufficient to meet its on- and off-balance sheet obligations. JPMorgan Chase’s long-dated funding, including core liabilities, exceeded illiquid assets. In addition, during the first quarter of 2009, the Firm raised funds at the parent holding company in excess of its minimum threshold to cover its obligations and those of its nonbank subsidiaries maturing over the next 12 months.
Funding
Sources of funds
The deposits held by the RFS, CB, TSS and AM lines of business are generally a consistent source of funding for JPMorgan Chase Bank, N.A. As of March 31, 2009, total deposits for the Firm were $907.0 billion. During the latter half of 2008, the Firm’s deposits increased due in part to heightened volatility and credit concerns in the markets. As a result of the mitigation of some of those credit concerns in the first quarter of 2009, the Firm’s deposits, predominantly wholesale, decreased by $102.3 billion, from $1.0 trillion at December 31, 2008.
A significant portion of the Firm’s deposits are retail deposits, which are less sensitive to interest rate changes or market volatility and therefore are considered more stable than market-based (i.e., wholesale) liability balances. In addition, through the normal course of business, the Firm benefits from substantial liability balances originated by RFS, CB, TSS and AM. These franchise-generated liability balances include deposits and deposits that are swept to on-balance sheet liabilities (e.g., commercial paper, federal funds purchased and securities loaned or sold under repurchase agreements), a significant portion of which are considered to be stable and consistent sources of funding due to the nature of the businesses from which they are generated. For further discussions of deposit and liability balance trends, see the discussion of the results for the Firm’s business segments and the Balance Sheet Analysis on pages 17-38 and 41-43, respectively, of this Form 10-Q.
Additional sources of funding include a variety of unsecured short- and long-term instruments, including federal funds purchased, certificates of deposit, time deposits, bank notes, commercial paper, long-term debt, trust-preferred capital debt securities, preferred stock and common stock. Secured sources of funding include securities loaned or sold under repurchase agreements, asset securitizations, borrowings from the Federal Reserve (including discount window borrowings, the Primary Dealer Credit Facility and the Term Auction Facility) and borrowings from Federal Home Loan Banks. However, the Firm does not view borrowings from the Federal Reserve as a primary means of funding.
Issuance
During the first three months of 2009, the Firm issued approximately $13.8 billion of FDIC-guaranteed long-term debt for general corporate purposes under the TLG Program. The Firm also issued $4.0 billion of IB structured notes that are included within long-term debt. The issuances of long-term debt were more than offset by $18.7 billion of such securities that matured or were redeemed during the three months ended March 31, 2009, including $8.8 billion of IB structured notes. During the first three months of 2009, the Firm securitized $3.9 billion of credit card loans. For further discussion of loan securitizations, see Note 16 on pages 124-130 of this Form 10-Q. In April 2009, the Firm issued 2.0 billion ($2.6 billion) of non-FDIC guaranteed debt in the Euro market and $3.0 billion of non-FDIC guaranteed debt in the U.S. market. JPMorgan Chase was one of the first U.S. financial institutions to access the Euro and U.S. markets without the benefit of the TLG Program, which became effective on October 14, 2008.

50


Table of Contents

Replacement capital covenants
In connection with the issuance of certain of its trust-preferred capital debt securities and its noncumulative perpetual preferred stock, the Firm has entered into Replacement Capital Covenants (“RCCs”) granting certain rights to the holders of “covered debt,” as defined in the RCCs, that prohibit the repayment, redemption or purchase of such trust-preferred capital debt securities and noncumulative perpetual preferred stock except, with limited exceptions, to the extent that JPMorgan Chase has received, in each such case, specified amounts of proceeds from the sale of certain qualifying securities. Currently the Firm’s covered debt is its 5.875% Junior Subordinated Deferrable Interest Debentures, Series O, due in 2035. For more information regarding these covenants, reference is made to the respective RCCs entered into by the Firm in connection with the issuances of such trust-preferred capital debt securities and noncumulative perpetual preferred stock, which are filed with the U.S. Securities and Exchange Commission under cover of Forms 8-K.
Cash flows
Cash and due from banks was $26.7 billion and $46.9 billion at March 31, 2009 and 2008, respectively. These balances decreased $214 million and increased $6.7 billion from December 31, 2008 and 2007, respectively. The following discussion highlights the major activities and transactions that affected JPMorgan Chase’s cash flows during the first three months of 2009 and 2008.
Cash flows from operating activities
JPMorgan Chase’s operating assets and liabilities support the Firm’s capital markets and lending activities, including the origination or purchase of loans initially designated as held-for-sale. The operating assets and liabilities can vary significantly in the normal course of business due to the amount and timing of cash flows, which are affected by client-driven activities, market conditions and trading strategies. Management believes cash flows from operations, available cash balances and the Firm’s ability to generate cash through short- and long-term borrowings are sufficient to fund the Firm’s operating liquidity needs.
For the three months ended March 31, 2009, net cash provided by operating activities was $50.8 billion, largely due to a decline in trading activity reflecting continued balance sheet management during the period as well as the effect of the challenging capital markets environment. In addition, net cash generated from operating activities was higher than net income, largely as a result of noncash adjustments for operating items such as the provision for credit losses, stock-based compensation, and depreciation and amortization. Proceeds from sales, securitizations and paydowns of loans originated or purchased with an initial intent to sell were slightly higher than cash used to acquire such loans, but the cash flows from these loan activities remain at a significantly reduced level as a result of the continued volatility and stress in the markets.
For the three months ended March 31, 2008, net cash used in operating activities was $2.4 billion, which supported growth in the Firm’s capital markets and certain lending activities during the period, and loans originated or purchased with an initial intent to sell; however, these activities were at a low level in the first quarter of 2008 as a result of the turmoil in the markets since the last half of 2007.
Cash flows from investing activities
The Firm’s investing activities predominantly include originating loans to be held for investment, other receivables, the AFS securities portfolio and other short-term investment vehicles. For the three months ended March 31, 2009, net cash of $2.8 billion was provided by investing activities, primarily from a decrease in deposits with banks, as interbank lending declined relative to the elevated level at the end of 2008; a decrease in securities purchased under resale agreements, reflecting a lower volume of excess cash available for short-term investments; a net decrease in the loan portfolio, reflecting declines across all wholesale businesses, the seasonal decline in credit card receivables, and credit card securitization activities; and net maturities of asset-backed commercial paper purchased from money market mutual funds in connection with a special Federal Reserve Bank of Boston (“FRBB”) lending facility. Largely offsetting these cash proceeds were net purchases of AFS securities to manage the Firm’s exposure to a declining interest rate environment.
For the three months ended March 31, 2008, net cash of $68.5 billion was used in investing activities, primarily for purchases of AFS securities to manage the Firm’s exposure to interest rates; net additions to the retained wholesale and consumer (primarily home equity) loans portfolios; and to increase deposits with banks as the result of the availability of excess cash for short-term investment opportunities. Partially offsetting these uses of cash were cash proceeds received from sales and maturities of AFS securities; credit card securitization activities; the seasonal decline in credit card receivables; and cash received from the sale of an investment, net of acquisitions.

51


Table of Contents

Cash flows from financing activities
The Firm’s financing activities primarily reflect cash flows related to customer deposits, issuance of long-term debt and trust-preferred capital debt securities, and issuance of preferred and common stock. In the first three months of 2009, net cash used in financing activities was $53.4 billion reflecting a decline in wholesale deposits in TSS, compared with the elevated level during the latter part of 2008 due to the heightened volatility and credit concerns in the markets — during the first quarter of 2009 some of the credit concerns were mitigated. In addition, there was a decline in other borrowings due to net repayments of advances from Federal Home Loan Banks and nonrecourse advances from the FRBB to fund the purchase of asset-backed commercial paper from money market mutual funds; net repayments of long-term debt as proceeds from new issuances (including $13.8 billion of FDIC-guaranteed debt issued under the TLG Program and $4.0 billion of IB structured notes) were more than offset by repayments; and the payment of cash dividends. Cash proceeds resulted from an increase in securities loaned or sold under repurchase agreements, partly attributable to favorable pricing and to finance the Firm’s increased AFS securities portfolio. There were no open-market stock repurchases during the first three months of 2009.
In the first three months of 2008, net cash provided by financing activities was $77.3 billion, due to increases in wholesale interest- and noninterest-bearing deposits, largely in TSS, and in consumer deposits, in particular interest-bearing deposits in RFS; increases in federal funds purchased and securities sold under repurchase agreements, in connection with higher short-term requirements to fulfill clients’ demand for liquidity and fund the AFS securities portfolio; and net new issuance of long-term debt. Cash was used for the payment of cash dividends, but there were no open-market stock repurchases.
Credit ratings
The cost and availability of financing are influenced by credit ratings. Reductions in these ratings could have an adverse effect on the Firm’s access to liquidity sources, increase the cost of funds, trigger additional collateral or funding requirements, and decrease the number of investors and counterparties willing to lend to the Firm. Additionally, the Firm’s funding requirements for VIEs and other third-party commitments may be adversely affected. For additional information on the impact of a credit-rating downgrade on the funding requirements for VIEs, and on derivatives and collateral agreements, see Special-purpose entities on pages 43-44 and Ratings profile of derivative receivables marked to market (“MTM”) on page 60 and Note 6 on pages 104-111 of this Form 10-Q.
Critical factors in maintaining high credit ratings include a stable and diverse earnings stream, strong capital ratios, strong credit quality and risk management controls, diverse funding sources, and disciplined liquidity monitoring procedures.
The credit ratings of the parent holding company and each of the Firm’s significant banking subsidiaries as of March 31, 2009, were as follows.
                                                 
    Short-term debt   Senior long-term debt
    Moody’s   S&P   Fitch   Moody’s   S&P   Fitch
 
JPMorgan Chase & Co.
  P -1       A-1       F1+     Aa3     A+     AA-
JPMorgan Chase Bank, N.A.
  P -1       A-1 +     F1+     Aa1   AA-   AA-
Chase Bank USA, N.A.
  P -1       A-1 +     F1+     Aa1   AA-   AA-
 
On March 4, 2009, Moody’s revised the outlook on the Firm to negative from stable. This action was the result of Moody’s view that the Firm’s capital generation will be adversely affected by higher credit costs due to the global recession.
On February 24, 2009, S&P lowered the ratings on the trust preferred debt capital securities and other hybrid securities of 45 U.S. financial institutions, including those of JPMorgan Chase & Co. The Firm’s trust preferred capital debt and non cumulative perpetual preferred securities ratings were lowered from A- to BBB+. This action was the result of S&P’s general view that there is an increased likelihood that issuers may suspend interest and dividend payments in the current environment.

52


Table of Contents

On April 2, 2009, S&P placed $2.8 billion of subordinated and certain mezzanine credit card asset-backed securities of the Chase Issuance Trust and the Chase Credit Card Master Trust on negative credit watch. The ratings on $72 billion of currently outstanding senior and mezzanine securities were not affected. The action was the result of S&P’s view that the ratings on certain subordinate securities will come under stress as trust losses continue to accelerate in the current economic environment. On April 6, 2009, Moody’s placed $6.4 billion of subordinated credit card asset-backed securities of the Chase Issuance Trust and the Chase Credit Card Master Trust on review for possible downgrade. The action was the result of Moody’s view that several of the trusts’ collateral performance measures had deteriorated and would continue to deteriorate due to a worsening economic environment. The ratings on the Firm’s asset-backed securities programs are independent from the Firm’s corporate ratings.
Ratings from S&P and Fitch on JPMorgan Chase & Co. and its principal bank subsidiaries remained unchanged from December 31, 2008. At March 31, 2009, S&P’s current outlook remained negative, while Fitch’s outlook remained stable. The recent rating actions by Moody’s did not have a material impact on the cost or availability of the Firm’s funding. If the Firm’s senior long-term debt ratings were downgraded by one additional notch, the Firm believes the incremental cost of funds or loss of funding would be manageable, within the context of current market conditions and the Firm’s liquidity resources. JPMorgan Chase’s unsecured debt other than, in certain cases, IB structured notes does not contain requirements that would call for an acceleration of payments, maturities or changes in the structure of the existing debt, nor contain collateral provisions or the creation of an additional financial obligation, based on unfavorable changes in the Firm’s credit ratings, financial ratios, earnings, cash flows or stock price. To the extent any IB structured notes do contain such provisions, the Firm believes that, in the event of an acceleration of payments or maturities or provision of collateral, the securities used by the Firm to risk-manage such structured notes, together with other liquidity resources, are expected to generate funds sufficient to satisfy the Firm’s obligations.
CREDIT RISK MANAGEMENT
The following pages include a discussion of JPMorgan Chase’s credit portfolio as of March 31, 2009, highlighting developments since December 31, 2008. This section should be read in conjunction with pages 80-99 and pages 107-108 and Notes 14, 15, 33, and 34 of JPMorgan Chase’s 2008 Annual Report.
The Firm assesses its consumer credit exposure on a managed basis, which includes credit card receivables that have been securitized. For a reconciliation of the provision for credit losses on a reported basis to managed basis, see pages 14-15 of this Form 10-Q.
CREDIT PORTFOLIO
The following table presents JPMorgan Chase’s credit portfolio as of March 31, 2009, and December 31, 2008. Total credit exposure at March 31, 2009, decreased by $85.1 billion from December 31, 2008, reflecting decreases of $69.6 billion in the wholesale portfolio and $15.5 billion in the consumer portfolio. During the first quarter of 2009, loans decreased by $37.0 billion, derivative receivables decreased by $31.4 billion, lending-related commitments decreased by $15.1 billion and customer receivables decreased by $1.6 billion.
While overall portfolio exposure declined, the Firm provided over $150 billion in new loans and lines of credit to retail and wholesale clients in the first quarter of 2009, including individual consumers, small businesses, large corporations, not-for-profit organizations, states and municipalities, and other financial institutions.

53


Table of Contents

In the table below, reported loans include loans accounted for at fair value and loans held-for-sale (which are carried at the lower of cost or fair value with changes in value recorded in noninterest revenue); however, the held-for-sale loans and loans accounted for at fair value are excluded from the average loan balances used for the net charge-off rate calculations.
                                                 
    Credit   Nonperforming   90 days past due
    exposure   assets(h)(i)   and still accruing
    March 31,   Dec. 31,   March 31,   Dec. 31,   March 31,   Dec. 31,
(in millions)   2009   2008   2009   2008   2009   2008
 
Total credit portfolio
                                               
Loans retained(a)
  $ 692,828     $ 728,915     $ 11,344     $ 8,921     $ 3,929     $ 3,275  
Loans held-for-sale
    9,441       8,287       20       12              
Loans at fair value
    5,974       7,696       37       20              
 
Loans — reported(a)
  $ 708,243     $ 744,898     $ 11,401     $ 8,953     $ 3,929     $ 3,275  
Loans — securitized(b)
    85,220       85,571                   2,362       1,802  
 
Total managed loans
    793,463       830,469       11,401       8,953       6,291       5,077  
Derivative receivables
    131,247       162,626       1,010       1,079              
Receivables from customers(c)
    14,504       16,141                          
 
Total managed credit-related assets
    939,214       1,009,236       12,411       10,032       6,291       5,077  
Lending-related commitments(d)(e)
    1,106,317       1,121,378     NA     NA     NA     NA  
 
Assets acquired in loan satisfactions
                                               
Real estate owned
  NA     NA       2,098       2,533     NA     NA  
Other
  NA     NA       145       149     NA     NA  
 
Total assets acquired in loan satisfactions
  NA     NA       2,243       2,682     NA     NA  
 
Total credit portfolio
  $ 2,045,531     $ 2,130,614     $ 14,654     $ 12,714     $ 6,291     $ 5,077  
 
Net credit derivative hedges notional(f)
  $ (74,768 )   $ (91,451 )   $ (17 )   $     NA     NA  
Collateral held against derivatives(g)
    (15,488 )     (19,816 )   NA     NA     NA     NA  
 
                                 
    Three months ended March 31,
                    Average annual net
    Net charge-offs   charge-off rate
(in millions, except ratios)   2009   2008   2009   2008
 
Total credit portfolio
                               
Loans — reported
  $ 4,396     $ 1,906       2.51 %     1.53 %
Loans — securitized(b)
    1,464       681       6.93       3.70  
 
Total managed loans
  $ 5,860     $ 2,587       2.98 %     1.81 %
 
(a)   Loans are presented net of unearned income and net deferred loan fees of $796 million and $694 million at March 31, 2009, and December 31, 2008, respectively. For additional information, see Note 14 on pages 120-123 of this Form 10-Q.
 
(b)   Represents securitized credit card receivables. For a further discussion of credit card securitizations, see Card Services on pages 28-31 of this Form 10-Q.
 
(c)   Primarily represents margin loans to prime and retail brokerage customers, which are included in accrued interest and accounts receivable on the Consolidated Balance Sheets.
 
(d)   Included credit card and home equity lending-related commitments of $642.5 billion and $79.4 billion, respectively, at March 31, 2009; and $623.7 billion and $95.7 billion, respectively, at December 31, 2008. For additional information, see pages 44-45 of this Form 10-Q.
 
(e)   Includes unused advised lines of credit totaling $37.1 billion at March 31, 2009, and $36.3 billion at December 31, 2008, which are not legally binding. In regulatory filings with the Federal Reserve, unused advised lines are not reportable. See the Glossary of Terms on page 149 of this Form 10-Q for the Firm’s definition of advised lines of credit.
 
(f)   Represents the net notional amount of protection purchased and sold of single-name and portfolio credit derivatives used to manage both performing and nonperforming credit exposures; these derivatives do not qualify for hedge accounting under SFAS 133. For additional information, see pages 60-61 of this Form 10-Q.
 
(g)   Represents other liquid securities-collateral held by the Firm as of March 31, 2009, and December 31, 2008, respectively.
 
(h)   Excludes nonperforming loans and assets related to: (1) loans eligible for repurchase, as well as loans repurchased from GNMA pools that are insured by U.S. government agencies, of $4.6 billion and $3.3 billion at March 31, 2009, and December 31, 2008, respectively; and (2) student loans that are 90 days past due and still accruing, which are insured by U.S. government agencies under the Federal Family Education Loan Program, of $433 million and $437 million at March 31, 2009, and December 31, 2008, respectively. These amounts for GNMA and education loans are excluded, as reimbursement is proceeding normally.
 
(i)   Excludes home lending purchased credit-impaired loans accounted for under SOP 03-3 that were acquired as part of the Washington Mutual transaction. These loans are accounted for on a pool basis, and the pools are considered to be performing under SOP 03-3. Also excludes loans held-for-sale and loans at fair value.

54


Table of Contents

WHOLESALE CREDIT PORTFOLIO
As of March 31, 2009, wholesale exposure (IB, CB, TSS and AM) decreased by $69.6 billion from December 31, 2008, due to decreases of $31.4 billion of derivative receivables, $19.8 billion of loans, $16.8 billion of lending-related commitments and $1.6 billion of receivables from customers. The decrease in derivative receivables was primarily related to the effect of the strengthening of the U.S. dollar on foreign exchange, credit and interest rate derivative receivables. Loans and lending-related commitments decreased across all wholesale lines of business, as lower customer demand continued to affect the level of lending activity.
                                                 
    Credit   Nonperforming   90 days past due
    exposure   assets(f)   and still accruing
    March 31,   Dec. 31,   March 31,   Dec. 31,   March 31,   Dec. 31,
(in millions)   2009   2008   2009   2008   2009   2008
 
Loans retained(a)
  $ 230,534     $ 248,089     $ 3,605     $ 2,350     $ 179     $ 163  
Loans held-for-sale
    5,776       6,259       20       12              
Loans at fair value
    5,974       7,696       37       20              
 
Loans — reported
  $ 242,284     $ 262,044     $ 3,662     $ 2,382     $ 179     $ 163  
Derivative receivables
    131,247       162,626       1,010       1,079              
Receivables from customers(b)
    14,504       16,141                          
 
Total wholesale credit-related assets
    388,035       440,811       4,672       3,461       179       163  
 
Lending-related commitments(c)
    363,013       379,871     NA     NA     NA     NA  
 
Total wholesale credit exposure
  $ 751,048     $ 820,682     $ 4,672     $ 3,461     $ 179     $ 163  
 
Credit derivative hedges notional(d)
  $ (74,768 )   $ (91,451 )   $ (17 )   $     NA     NA
Collateral held against derivatives(e)
    (15,488 )     (19,816 )   NA     NA     NA     NA
 
(a)   Includes $210 million and $224 million of purchased credit-impaired loans at March 31, 2009, and December 31, 2008, respectively, which are accounted for in accordance with SOP 03-3. They are considered nonperforming loans, because the timing and amount of expected future cash flows is not reasonably estimable. For additional information, see Note 14 on pages 120-123 of this Form 10-Q.
 
(b)   Represents margin loans to prime and retail brokerage customers, which are included in accrued interest and accounts receivable on the Consolidated Balance Sheets.
 
(c)   Includes unused advised lines of credit totaling $37.1 billion at March 31, 2009, and $36.3 billion at December 31, 2008, which are not legally binding. In regulatory filings with the Federal Reserve, unused advised lines are not reportable.
 
(d)   Represents the net notional amount of protection purchased and sold of single-name and portfolio credit derivatives used to manage both performing and nonperforming credit exposures; these derivatives do not qualify for hedge accounting under SFAS 133. For additional information, see pages 60-61 of this Form 10-Q.
 
(e)   Represents other liquid securities collateral held by the Firm as of March 31, 2009, and December 31, 2008, respectively.
 
(f)   Excludes assets acquired in loan satisfactions. See the wholesale nonperforming assets by line of business segment table for additional information.
The following table presents net charge-offs for the three months ended March 31, 2009 and 2008. The amounts in the table below do not include gains from the sales of nonperforming loans.
                 
Net charge-offs    
Wholesale   Three months ended March 31,
(in millions, except ratios)   2009   2008
 
Loans — reported
               
Net charge-offs
  $ 191     $ 92  
Average annual net charge-off rate(a)
    0.32 %     0.18 %
 
(a)   Excludes average wholesale loans held-for-sale and loans at fair value of $13.3 billion and $20.1 billion for the quarters ended March 31, 2009 and 2008, respectively.

55


Table of Contents

The following table presents the change in the nonperforming loan portfolio for the three months ended March 31, 2009 and 2008.
Nonperforming loan activity
                 
Wholesale   Three months ended March 31,
(in millions)   2009   2008
 
Beginning balance at January 1
  $ 2,382     $ 514  
Additions
    1,652       590  
 
Reductions:
               
Paydowns and other
    165       177  
Gross charge-offs
    206       130  
Returned to performing
    1       9  
Sales
          7  
 
Total reductions
    372       323  
 
Net additions (reductions)
    1,280       267  
 
Ending balance
  $ 3,662     $ 781  
 
The following table presents wholesale nonperforming assets by business segment as of March 31, 2009, and December 31, 2008.
                                         
    March 31, 2009
    Nonperforming   Assets acquired in loan satisfactions    
                                    Nonperforming
(in millions)   Loans   Derivatives   Real estate owned   Other   assets
 
Investment Bank
  $ 1,795     $ 1,010 (b)   $  236     $     $ 3,041  
Commercial Banking
    1,531             108       12       1,651  
Treasury & Securities Services
    30                         30  
Asset Management
    301             2       16       319  
Corporate/Private Equity
    5                         5  
 
Total
  $ 3,662 (a)   $ 1,010     $ 346     $ 28     $ 5,046  
 
                                         
    December 31, 2008
    Nonperforming   Assets acquired in loan satisfactions        
                                    Nonperforming
(in millions)   Loans   Derivatives   Real estate owned   Other   assets
 
Investment Bank
  $ 1,175     $ 1,079 (b)   $  247     $     $ 2,501  
Commercial Banking
    1,026             102       14       1,142  
Treasury & Securities Services
    30                         30  
Asset Management
    147                   25       172  
Corporate/Private Equity
    4                         4  
 
Total
  $ 2,382 (a)   $ 1,079     $ 349     $ 39     $ 3,849  
 
(a)   The Firm holds allowance for loan losses of $1.2 billion and $712 million related to these nonperforming loans resulting in allowance coverage ratios of 33% and 30% at March 31, 2009, and December 31, 2008, respectively. Wholesale nonperforming loans represent 1.51% and 0.91% of total wholesale loans at March 31, 2009, and December 31, 2008.
 
(b)   Nonperforming derivatives represent less than 1% of the total derivative receivables net of cash collateral at both March 31, 2009, and December 31, 2008.

56


Table of Contents

The following table presents summaries of the maturity and ratings profiles of the wholesale portfolio as of March 31, 2009, and December 31, 2008. The ratings scale is based on the Firm’s internal risk ratings, which generally correspond to the ratings as defined by S&P and Moody’s.
Wholesale credit exposure — maturity and ratings profile
                                                                 
    Maturity profile(d)   Ratings profile
                                    Investment-   Noninvestment-            
            Due after 1                   grade (“IG”)   grade            
At March 31, 2009   Due in 1   year through   Due after           AAA/Aaa to   BB+/Ba1           Total %
(in billions, except ratios)   year or less   5 years   5 years   Total   BBB-/Baa3   & below   Total   of IG
     
Loans
    31 %     43 %     26 %     100 %   $ 141     $ 90     $ 231       61 %
Derivative receivables
    29       35       36       100       106       25       131       81  
Lending-related commitments
    39       58       3       100       300       63       363       83  
     
Total excluding loans held-for-sale and loans at fair value
    34 %     50 %     16 %     100 %   $ 547     $ 178     $  725       75 %
Loans held-for-sale and loans at fair value(a)
                                                    12          
Receivables from customers(b)
                                                    14          
     
Total exposure
                                                  $ 751          
     
Net credit derivative hedges notional(c)
    38 %     55 %     7 %     100 %   $ (66 )   $ (9 )   $ (75 )     88 %
     
                                                                 
    Maturity profile(d)   Ratings profile
                                    Investment-   Noninvestment-            
            Due after 1                   grade (“IG”)   grade            
At December 31, 2008   Due in 1   year through   Due after           AAA/Aaa to   BB+/Ba1           Total %
(in billions, except ratios)   year or less   5 years   5 years   Total   BBB-/Baa3   & below   Total   of IG
     
Loans
    32 %     43 %     25 %     100 %   $ 161     $ 87     $ 248       65 %
Derivative receivables
    31       36       33       100       127       36       163       78  
Lending-related commitments
    37       59       4       100       317       63       380       83  
     
Total excluding loans held-for-sale and loans at fair value
    34 %     50 %     16 %     100 %   $ 605     $ 186     $ 791       77 %
Loans held-for-sale and loans at fair value(a)
                                                    14          
Receivables from customers(b)
                                                    16          
     
Total exposure
                                                  $ 821          
     
Net credit derivative hedges notional(c)
    47 %     47 %     6 %     100 %   $ (82 )   $ (9 )   $ (91 )     90 %
     
(a)   Loans held-for-sale and loans at fair value relate primarily to syndicated loans and loans transferred from the retained portfolio.
 
(b)   Primarily represents margin loans to prime and retail brokerage customers, which are included in accrued interest and accounts receivable on the Consolidated Balance Sheets.
 
(c)   Represents the net notional amounts of protection purchased and sold of single-name and portfolio credit derivatives used to manage the credit exposures; these derivatives do not qualify for hedge accounting under SFAS 133.
 
(d)   The maturity profile of loans and lending-related commitments is based on the remaining contractual maturity. The maturity profile of derivative receivables is based on the maturity profile of average exposure. See page 87 of JPMorgan Chase’s 2008 Annual Report for further discussion of average exposure.

57


Table of Contents

Wholesale credit exposure — selected industry concentration
The Firm focuses on the management and diversification of its industry concentrations, with particular attention paid to industries with actual or potential credit concerns. At March 31, 2009, the top 15 industries were the same as those at December 31, 2008.
                                 
    March 31, 2009   December 31, 2008
    Credit   % of   Credit   % of
(in millions, except ratios)   exposure(d)   Portfolio   exposure(d)   Portfolio
 
Exposure by industry(a)
                               
Real estate
  $ 81,339       11 %   $ 83,799       11 %
Banks and finance companies
    62,934       9       75,577       10  
Healthcare
    38,021       5       38,032       5  
State and municipal governments
    34,576       5       35,954       5  
Utilities
    34,198       5       34,246       4  
Asset managers
    33,341       5       49,256       6  
Retail and consumer services
    31,763       4       32,714       4  
Consumer products
    28,034       4       29,766       4  
Securities firms and exchanges
    26,906       4       25,590       3  
Oil and gas
    23,934       3       24,746       3  
Insurance
    16,552       2       17,744       2  
Media
    16,059       2       17,254       2  
Metals/mining
    14,937       2       14,980       2  
Technology
    14,825       2       17,555       2  
Central government
    14,032       2       15,259       2  
All other(b)
    253,343       35       278,114       35  
 
Subtotal
  $ 724,794       100 %   $ 790,586       100 %
 
Loans held-for-sale and loans at fair value(c)
    11,750               13,955          
Receivables from customers
    14,504               16,141          
 
Total
  $ 751,048             $ 820,682          
 
(a)   Rankings are based on exposure at March 31, 2009. The industries presented in the December 31, 2008, table reflect the same rankings of the exposure at March 31, 2009.
 
(b)   For more information on exposures to SPEs included in all other, see Note 17 on pages 131-136 of this Form 10-Q.
 
(c)   Loans held-for-sale and loans at fair value relate primarily to syndicated loans and loans transferred from the retained portfolio.
 
(d)   Credit exposure is net of risk participations and excludes the benefit of credit derivative hedges and collateral held against derivative receivables or loans.

58


Table of Contents

Wholesale criticized exposure
Exposures deemed criticized generally represent a ratings profile similar to a rating of “CCC+”/”Caa1” and lower, as defined by S&P and Moody’s. The total criticized component of the portfolio, excluding loans held-for-sale and loans at fair value, increased to $29.9 billion at March 31, 2009, from $26.0 billion at year-end 2008. The increase was primarily related to downgrades within the portfolio, mainly in IB.
                                 
    March 31, 2009   December 31, 2008
    Credit   % of   Credit   % of
(in millions, except ratios)   exposure   portfolio   exposure   portfolio
 
Exposure by industry(a)
                               
Real estate
  $ 10,004       33 %   $ 7,737       30 %
Banks and finance companies
    2,760       9       2,849       11  
Media
    2,103       7       1,674       6  
Automotive
    2,011       7       1,775       7  
Building materials/construction
    1,724       6       1,363       5  
Retail and consumer services
    1,350       5       1,311       5  
Technology
    1,256       4       230       1  
Agricultural/paper manufacturing
    684       2       819       3  
Asset managers
    655       2       792       3  
Insurance
    653       2       726       3  
Consumer products
    627       2       712       3  
Metals and mining
    544       2       591       2  
Chemicals/plastics
    531       2       436       2  
Transportation
    517       2       319       1  
Healthcare
    428       1       262       1  
All other
    4,088       14       4,401       17  
 
Total excluding loans held-for-sale and loans at fair value
  $ 29,935       100 %   $ 25,997       100 %
Loans held-for-sale and loans at fair value(b)
    2,009               2,258          
Receivables from customers
                           
 
Total
  $ 31,944             $ 28,255          
 
(a)   Rankings are based on exposure at March 31, 2009. The industries presented in the December 31, 2008, table reflect the same rankings of the exposure at March 31, 2009.
 
(b)   Loans held-for-sale and loans at fair value relate primarily to syndicated loans and loans transferred from the retained portfolio.
Derivative contracts
In the normal course of business, the Firm uses derivative instruments to meet the needs of customers; to generate revenue through trading activities; to manage exposure to fluctuations in interest rates, currencies and other markets; and to manage the Firm’s credit exposure. For further discussion of these contracts (including notional amounts), see Note 6 on pages 104-111 of this Form 10-Q, and Derivative contracts on pages 87-90 (including notional amounts) and Note 32 and Note 34 on pages 202-205 and 206-210 of JPMorgan Chase’s 2008 Annual Report.
The following table summarizes the net derivative receivables MTM for the periods presented.
Derivative receivables marked to market (“MTM”)
                 
    Derivative receivables MTM
(in millions)   March 31, 2009   December 31, 2008
 
Interest rate(a)
  $ 46,375     $ 49,996  
Credit derivatives
    34,337       44,695  
Foreign exchange(a)
    23,715       38,820  
Equity
    11,486       14,285  
Commodity
    15,334       14,830  
 
Total, net of cash collateral
    131,247       162,626  
Liquid securities collateral held against derivative receivables
    (15,488 )     (19,816 )
 
Total, net of all collateral
  $ 115,759     $ 142,810  
 
(a)   During the first quarter of 2009, cross-currency interest rate swaps previously reported in interest rate contracts were reclassified to foreign exchange contracts to be more consistent with industry practice. The effect of this change resulted in a reclassification of $14.1 billion of cross-currency interest rate swaps to foreign exchange contracts as of December 31, 2008.

59


Table of Contents

The amount of derivative receivables reported on the Consolidated Balance Sheets of $131.2 billion and $162.6 billion at March 31, 2009, and December 31, 2008, respectively, is the amount of the MTM or fair value of the derivative contracts after giving effect to legally enforceable master netting agreements, cash collateral held by the Firm and CVA. These amounts on the Consolidated Balance Sheets represent the cost to the Firm to replace the contracts at current market rates should the counterparty default. However, in management’s view, the appropriate measure of current credit risk should also reflect additional liquid securities held as collateral by the Firm of $15.5 billion and $19.8 billion at March 31, 2009, and December 31, 2008, respectively, resulting in total exposure, net of all collateral, of $115.7 billion and $142.8 billion at March 31, 2009, and December 31, 2008, respectively. The decrease of $27.1 billion in derivative receivables MTM, net of collateral, from December 31, 2008, was primarily related to the effect of the strengthening of the U.S. dollar on foreign exchange, credit and interest rate derivative receivables.
The Firm also holds additional collateral delivered by clients at the initiation of transactions. Though this collateral does not reduce the balances noted in the table above, it is available as security against potential exposure that could arise should the MTM of the client’s derivative transactions move in the Firm’s favor. As of March 31, 2009, and December 31, 2008, the Firm held $21.6 billion and $22.2 billion of this additional collateral, respectively. The derivative receivables MTM, net of all collateral, also does not include other credit enhancements in the form of letters of credit.
The following table summarizes the ratings profile of the Firm’s derivative receivables MTM, net of other liquid securities collateral, for the dates indicated.
Ratings profile of derivative receivables MTM
                                 
    March 31, 2009   December 31, 2008
Rating equivalent   Exposure net of   % of exposure   Exposure net of   % of exposure
(in millions, except ratios)   all collateral   net of all collateral   all collateral   net of all collateral
 
AAA/Aaa to AA-/Aa3
  $ 59,670       51 %   $ 68,708       48 %
A+/A1 to A-/A3
    18,597       16       24,748       17  
BBB+/Baa1 to BBB-/Baa3
    12,351       11       15,747       11  
BB+/Ba1 to B-/B3
    21,587       19       28,186       20  
CCC+/Caa1 and below
    3,554       3       5,421       4  
 
Total
  $ 115,759       100 %   $ 142,810       100 %
 
The Firm actively pursues the use of collateral agreements to mitigate counterparty credit risk in derivatives. The percentage of the Firm’s derivatives transactions subject to collateral agreements, excluding foreign exchange spot trades which are not typically covered by collateral agreements due to their short maturity, was 88% as of both March 31, 2009, and December 31, 2008.
The Firm posted $82.3 billion and $99.1 billion of collateral at March 31, 2009, and December 31, 2008, respectively.
Certain derivative and collateral agreements include provisions that require the counterparty and/or the Firm, upon specified downgrades in the respective credit ratings of their legal entities, to post collateral for the benefit of the other party. At March 31, 2009, the impact of a single-notch and six-notch ratings downgrade to JPMorgan Chase & Co., and its subsidiaries, primarily JPMorgan Chase Bank, N.A., would have required $1.4 billion and $4.9 billion, respectively, of additional collateral to be posted by the Firm. Certain derivative contracts also provide for termination of the contract, generally upon a downgrade to a specified rating of either the Firm or the counterparty, at the then-existing MTM value of the derivative contracts.
Credit derivatives
For further detailed discussion of credit derivatives, including the types of credit derivatives, see Credit derivatives on pages 89-90 and Note 32 on pages 202-205, respectively, of JPMorgan Chase’s 2008 Annual Report. The following table presents the Firm’s notional amounts of credit derivatives protection purchased and sold as of March 31, 2009, and December 31, 2008.
Credit derivative positions
                                         
    Notional amount    
    Dealer/client   Credit portfolio    
    Protection   Protection   Protection   Protection    
(in billions)   purchased(b)   sold(b)   purchased(c)   sold   Total
 
March 31, 2009
  $ 3,757     $ 3,661     $ 76     $ 1     $ 7,495  
December 31, 2008(a)
    4,193       4,102       92       1       8,388  
 
     
(a)   The dealer/client amounts of protection purchased and protection sold have been revised for the prior period.

60


Table of Contents

(b)   Included $3.8 trillion and $3.9 trillion at March 31, 2009, and December 31, 2008, respectively, of notional exposure within protection purchased and protection sold where the underlying reference instrument is identical. The remaining exposure includes single-name and index CDS which the Firm purchased to manage the remaining net protection sold. For a further discussion on credit derivatives, see Note 6 on pages 104-111 of this Form 10-Q.
 
(c)   Included $23.9 billion and $34.9 billion at March 31, 2009, and December 31, 2008, respectively, that represented the notional amount for structured portfolio protection; the Firm retains the first risk of loss on this portfolio.
Dealer/client
For a further discussion on dealer/client business related to credit protection, see Dealer/client on page 89 of JPMorgan Chase’s 2008 Annual Report. At March 31, 2009, the total notional amount of protection purchased and sold in the dealer/client business decreased by $877 billion from year-end 2008 primarily as a result of industry efforts to reduce offsetting trade activity.
Credit portfolio activities
                 
Use of single-name and portfolio credit derivatives   Notional amount of protection purchased
(in millions)   March 31, 2009   December 31, 2008
 
Credit derivatives used to manage:
               
Loans and lending-related commitments
  $ 65,600     $ 81,227  
Derivative receivables
    10,438       10,861  
 
Total(a)
  $ 76,038     $ 92,088  
 
 
(a)   Included $23.9 billion and $34.9 billion at March 31, 2009, and December 31, 2008, respectively, that represented the notional amount for structured portfolio protection; the Firm retains the first risk of loss on this portfolio.
The credit derivatives used by JPMorgan Chase for credit portfolio management activities do not qualify for hedge accounting under SFAS 133; these derivatives are reported at fair value, with gains and losses recognized in principal transactions revenue. In contrast, the loans and lending-related commitments being risk-managed are accounted for on an accrual basis. This asymmetry in accounting treatment, between loans and lending-related commitments and the credit derivatives used in credit portfolio management activities, causes earnings volatility that is not representative, in the Firm’s view, of the true changes in value of the Firm’s overall credit exposure. The MTM related to the Firm’s credit derivatives used for managing credit exposure, as well as the MTM related to the CVA (which reflects the credit quality of derivatives counterparty exposure) are included in the gains and losses realized on credit derivatives disclosed in the table below. These results can vary from year to year due to market conditions that impact specific positions in the portfolio. For a discussion of CVA related to derivative contracts, see Derivative receivables MTM on page 139 of JPMorgan Chase’s 2008 Annual Report and page 60 of this Form 10-Q.
                 
    Three months ended March 31,
(in millions)   2009   2008
 
Hedges of lending-related commitments(a)
  $ (552 )   $ 387  
CVA and hedges of CVA(a)
    123       (734 )
 
Net gains (losses)(b)
  $ (429 )   $ (347 )
 
 
(a)   These hedges do not qualify for hedge accounting under SFAS 133.
 
(b)   Excluded gains of $938 million and $1.3 billion for the quarters ended March 31, 2009 and 2008, respectively, of other principal transaction revenue that are not associated with hedging activities.
The Firm also actively manages wholesale credit exposure through IB and CB loan and commitment sales. During the first three months of 2009 and 2008, the Firm sold $414 million and $1.1 billion of loans and commitments, respectively, recognizing losses of $4 million and $5 million, respectively. These results include gains or losses on sales of nonperforming loans, if any, as discussed on page 56 of this Form 10-Q. These activities are not related to the Firm’s securitization activities, which are undertaken for liquidity and balance sheet management purposes. For further discussion of securitization activity, see Liquidity Risk Management and Note 16 on pages 49-53 and 124-130, respectively, of this Form 10-Q.
Lending-related commitments
Wholesale lending-related commitments were $363.0 billion at March 31, 2009, compared with $379.9 billion at December 31, 2008. See page 45 of this Form 10-Q for an explanation of the decrease in exposure. In the Firm’s view, the total contractual amount of these instruments is not representative of the Firm’s actual credit risk exposure or funding requirements. In determining the amount of credit risk exposure the Firm has to wholesale lending-related commitments, which is used as the basis for allocating credit risk capital to these instruments, the Firm has established a “loan-equivalent” amount for each commitment; this amount represents the portion of the unused commitment or other contingent exposure that is expected, based on average portfolio historical experience, to become drawn upon in an event of a default by an obligor. The loan-equivalent amount of the Firm’s lending-related commitments was $189.6 billion and $204.3 billion as of March 31, 2009, and December 31, 2008, respectively.

61


Table of Contents

Emerging markets country exposure
The Firm has a comprehensive internal process for measuring and managing exposures to emerging markets countries. There is no common definition of emerging markets but the Firm generally includes in its definition those countries whose sovereign debt ratings are equivalent to “A+” or lower. Exposures to a country include all credit-related lending, trading and investment activities, whether cross-border or locally funded. In addition to monitoring country exposures, the Firm uses stress tests to measure and manage the risk of extreme loss associated with sovereign crises.
The table below presents the Firm’s exposure to its top ten emerging markets countries. The selection of countries is based solely on the Firm’s largest total exposures by country and not the Firm’s view of any actual or potentially adverse credit conditions. Exposure is reported based on the country where the assets of the obligor, counterparty or guarantor are located. Exposure amounts are adjusted for collateral and for credit enhancements (e.g., guarantees and letters of credit) provided by third parties; outstandings supported by a guarantor located outside the country or backed by collateral held outside the country are assigned to the country of the enhancement provider. In addition, the effect of credit derivative hedges and other short credit or equity trading positions are reflected in the table below. Total exposure includes exposure to both government and private sector entities in a country.
Top 10 emerging markets country exposure
                                                 
At March 31, 2009   Cross-border           Total
(in billions)   Lending(a)   Trading(b)   Other(c)   Total   Local(d)   exposure
 
South Korea
  $ 2.2     $ 1.7     $ 1.0     $ 4.9     $ 3.1     $ 8.0  
India
    1.8       2.2       0.9       4.9       1.0       5.9  
Brazil
    1.3       0.8       0.2       2.3       1.5       3.8  
China
    1.8       0.9       0.3       3.0       0.3       3.3  
Mexico
    1.8       0.9       0.3       3.0             3.0  
Taiwan
    0.1       0.3       0.3       0.7       2.3       3.0  
Hong Kong
    1.4       0.2       1.2       2.8             2.8  
United Arab Emirates
    1.3       0.5             1.8             1.8  
Thailand
    0.2       0.1       0.4       0.7       1.1       1.8  
South Africa
    0.6       0.4       0.5       1.5       0.1       1.6  
 
                                                 
At December 31, 2008   Cross-border           Total
(in billions)   Lending(a)   Trading(b)   Other(c)   Total   Local(d)   exposure
 
South Korea
  $ 2.9     $ 1.6     $ 0.9     $ 5.4     $ 2.3     $ 7.7  
India
    2.2       2.8       0.9       5.9       0.6       6.5  
China
    1.8       1.6       0.3       3.7       0.8       4.5  
Brazil
    1.8             0.5       2.3       1.3       3.6  
Taiwan
    0.1       0.2       0.3       0.6       2.5       3.1  
Hong Kong
    1.3       0.3       1.2       2.8             2.8  
United Arab Emirates
    1.8       0.7             2.5             2.5  
Mexico
    1.9       0.3       0.3       2.5             2.5  
South Africa
    0.9       0.5       0.4       1.8             1.8  
Russia
    1.3       0.2       0.3       1.8             1.8  
 
(a)   Lending includes loans and accrued interest receivable, interest-bearing deposits with banks, acceptances, other monetary assets, issued letters of credit net of participations, and undrawn commitments to extend credit.
 
(b)   Trading includes: (1) issuer exposure on cross-border debt and equity instruments, held both in trading and investment accounts and adjusted for the impact of issuer hedges, including credit derivatives; and (2) counterparty exposure on derivative and foreign exchange contracts as well as security financing trades (resale agreements and securities borrowed).
 
(c)   Other represents mainly local exposure funded cross-border including capital investments in local entities.
 
(d)   Local exposure is defined as exposure to a country denominated in local currency, booked and funded locally. Any exposure not meeting these criteria is defined as cross-border exposure.

62


Table of Contents

CONSUMER CREDIT PORTFOLIO
JPMorgan Chase’s consumer portfolio consists primarily of residential mortgages, home equity loans, credit cards, auto loans, student loans and business banking loans, with a primary focus on serving the prime consumer credit market. The consumer credit portfolio also includes certain loans acquired in the Washington Mutual transaction, primarily mortgage, home equity and credit card loans. The RFS portfolio includes home equity lines of credit and mortgage loans with interest-only payment options to predominantly prime borrowers, as well as certain payment-option loans acquired from Washington Mutual that may result in negative amortization.
A substantial portion of the consumer loans acquired in the Washington Mutual transaction were identified as credit-impaired based on an analysis of high-risk characteristics, including product type, loan-to-value ratios, FICO scores and delinquency status. These purchased credit-impaired loans are accounted for under SOP 03-3 and were initially recorded at fair value at the transaction date. The fair value of these loans includes an estimate of losses that are expected to be incurred over the estimated remaining lives of the loans, and therefore, no allowance for loan losses was recorded for these loans as of the transaction date.
The credit performance of the consumer portfolio across the entire product spectrum continues to be negatively affected by the economic environment. Higher unemployment and weaker overall economic conditions have led to a significant increase in the number of loans charged off, while continued weak housing prices have driven a significant increase in the amount of loss recognized when the loans are charged off. Delinquencies and nonperforming loans and assets increased in the first quarter of 2009, consistent with the Firm’s expectations, a key indicator that charge-offs will continue to remain elevated through the remainder of 2009. Additional deterioration in the overall economic environment, including continued deterioration in the labor market, could cause delinquencies to increase beyond the Firm’s current expectations, resulting in additional increases in losses.
Since mid-2007, the Firm has taken actions to reduce risk exposure by tightening both underwriting and loan qualification standards for real estate lending, as well as for consumer lending for non-real estate products. Tighter income verification, more conservative collateral valuation, reduced loan-to-value maximums and higher FICO and custom risk score requirements are just some of the actions taken to date to mitigate risk related to new originations. These actions have resulted in significant reductions in new originations of “risk-layered” loans (e.g., loans with high loan-to-value ratios to borrowers with low FICO scores) and improved alignment of loan pricing. New originations of subprime mortgage loans, and broker-originated mortgage and home equity loans have been eliminated entirely.
During the first quarter of 2009, the U.S. Treasury introduced the Making Home Affordable Plan (“MHA”), which includes programs designed to assist eligible homeowners in refinancing or modifying their mortgages. The Firm is participating in MHA, while continuing to expand its other loss-mitigation efforts for financially stressed borrowers who do not qualify for the MHA programs. During the first quarter of 2009, the Firm performed systematic reviews of the real estate portfolio to identify homeowners most in need of assistance, opened new regional counseling centers, hired additional loan counselors, introduced new financing alternatives, proactively reached out to borrowers to offer prequalified modifications, and commenced a new process to independently review each loan before moving it into the foreclosure process.
The MHA modification programs, as well as the Firm’s other loss-mitigation programs, generally represent various forms of term extensions, rate reductions and forbearances, and are expected to result in additional increases in the balance of modified loans carried on the Firm’s balance sheet, including loans accounted for as troubled debt restructurings, while minimizing the economic loss to the Firm and providing alternatives to foreclosure.

63


Table of Contents

The following table presents managed consumer credit-related information for the dates indicated.
                                                 
                    Nonperforming   90 days past due
    Credit exposure   loans(g)(h)   and still accruing
    March 31,   December 31,   March 31,   December 31,   March 31,   December 31,
(in millions, except ratios)   2009   2008   2009   2008   2009   2008
 
Consumer loans — excluding purchased credit-impaired
loans
(a)
                                               
Home equity
  $ 111,781     $ 114,335     $ 1,591     $ 1,394     $     $  
Prime mortgage
    71,731       72,266       2,712       1,895              
Subprime mortgage
    14,594       15,330       2,545       2,690              
Option ARMs
    8,940       9,018       97       10              
Auto loans(b)
    43,065       42,603       165       148              
Credit card — reported
    90,911       104,746       4       4       3,317       2,649  
All other loans
    33,700       33,715       625       430       433       463  
Loans held-for-sale(c)
    3,665       2,028                          
 
Total consumer loans —excluding purchased credit-impaired
loans
(d)
    378,387       394,041       7,739       6,571       3,750       3,112  
 
Consumer loans — purchased credit-impaired loans(d)
                                               
Home equity
    28,366       28,555     NA     NA              
Prime mortgage
    21,398       21,855     NA     NA              
Subprime mortgage
    6,565       6,760     NA     NA              
Option ARMs
    31,243       31,643     NA     NA              
 
Total purchased credit-impaired loans
    87,572       88,813     NA     NA              
 
Total consumer loans — reported
    465,959       482,854       7,739       6,571       3,750       3,112  
 
Credit card — securitized(e)
    85,220       85,571                   2,362       1,802  
 
Total consumer loans — managed
    551,179       568,425       7,739       6,571       6,112       4,914  
 
Consumer lending-related commitments:
                                               
Home equity(f)
    79,448       95,743                                  
Prime mortgage
    4,564       5,079                                  
Subprime mortgage
                                           
Option ARMs
                                           
Auto loans
    5,994       4,726                                  
Credit card(f)
    642,534       623,702                                  
All other loans
    10,764       12,257                                  
                                 
Total lending-related commitments
    743,304       741,507                                  
                                 
Total consumer credit portfolio
  $ 1,294,483     $ 1,309,932                                  
 
Memo: Credit card — managed
  $ 176,131     $ 190,317     $ 4     $ 4     $ 5,679     $ 4,451  
 

64


Table of Contents

                                 
    Three months ended March 31,
                    Average annual
    Net charge-offs   net charge-off rate(i)
(in millions, except ratios)   2009   2008   2009   2008
 
Consumer loans — excluding purchased credit-impaired loans(a)
                               
Home equity
  $ 1,098     $ 447       3.93 %     1.89 %
Prime mortgage
    312       50       1.76       0.48  
Subprime mortgage
    364       149       9.91       3.82  
Option ARMs
    4             0.18        
Auto loans
    174       118       1.66       1.10  
Credit card — reported
    2,029       989       8.42       5.01  
All other loans
    224       61       2.64       0.98  
 
Total consumer loans —excluding purchased credit-impaired loans(d)
    4,205       1,814       4.44       2.43  
 
Total consumer loans — reported
    4,205       1,814       3.61       2.43  
 
Credit card — securitized(e)
    1,464       681       6.93       3.70  
 
Total consumer loans — managed
    5,669       2,495       4.12       2.68  
 
Memo: Credit card — managed
  $ 3,493     $ 1,670       7.72 %     4.37 %
 
 
(a)   Includes RFS, CS and residential mortgage loans reported in the Corporate/Private Equity segment.
 
(b)   Excluded operating lease-related assets of $2.4 billion and $2.2 billion for March 31, 2009, and December 31, 2008, respectively.
 
(c)   Included loans for prime mortgage and other (largely student loans) of $825 million and $2.8 billion at March 31, 2009, respectively, and $206 million and $1.8 billion at December 31, 2008, respectively.
 
(d)   Purchased credit-impaired loans represent loans acquired in the Washington Mutual transaction accounted for under SOP 03-3 for which a deterioration in credit quality occurred between the origination date and JPMorgan Chase’s acquisition date. Under SOP 03-3, these loans were initially recorded at fair value and accrete interest income over the estimated life of the loan when cash flows are reasonably estimable, even if the underlying loans are contractually past due. For additional information, see Note 14 on pages 120-123 of this Form 10-Q.
 
(e)   Represents securitized credit card receivables. For a further discussion of credit card securitizations, see CS on pages 28-31 of this Form 10-Q.
 
(f)   The credit card and home equity lending-related commitments represent the total available lines of credit for these products. The Firm has not experienced, and does not anticipate, that all available lines of credit will be utilized at the same time. For credit card commitments and home equity commitments (if certain conditions are met), the Firm can reduce or cancel these lines of credit by providing the borrower prior notice or, in some cases, without notice as permitted by law.
 
(g)   Excludes purchased credit-impaired loans accounted for under SOP 03-3 that were acquired as part of the Washington Mutual transaction. These loans are accounted for on a pool basis, and the pools are considered to be performing under SOP 03-3.
 
(h)   Nonperforming loans excluded: (1) loans eligible for repurchase, as well as loans repurchased from GNMA pools that are insured by U.S. government agencies, of $4.6 billion and $3.3 billion for March 31, 2009, and December 31, 2008, respectively; and (2) student loans that are 90 days past due and still accruing, which are insured by U.S. government agencies under the Federal Family Education Loan Program, of $433 million and $437 million as of March 31, 2009, and December 31, 2008, respectively. These amounts for GNMA and student loans are excluded, as reimbursement is proceeding normally .
 
(i)   Average consumer (excluding card) loans held-for-sale and loans at fair value were $3.1 billion and $4.4 billion for the quarters ended March 31, 2009 and 2008, respectively. These amounts were excluded when calculating the net charge-off rates.
The following table presents consumer nonperforming assets by business segment as of March 31, 2009, and December 31, 2008.
                                                                 
    March 31, 2009   December 31, 2008
            Assets acquired in loan                   Assets acquired in loan    
            satisfactions                   satisfactions    
    Nonperforming   Real estate           Nonperforming   Nonperforming   Real estate           Nonperforming
(in millions)   loans   owned   Other   assets   loans   owned   Other   assets
 
Retail Financial Services
  $ 7,714     $ 1,751     $ 117     $ 9,582     $ 6,548     $ 2,183     $ 110     $ 8,841  
Card Services
    4                   4       4                   4  
Corporate/Private Equity
    21       1             22       19       1             20  
 
Total
  $ 7,739     $ 1,752     $ 117     $ 9,608     $ 6,571     $ 2,184     $ 110     $ 8,865  
 

65


Table of Contents

The following discussion relates to the specific loan and lending-related categories within the consumer portfolio.
Home equity: Home equity loans at March 31, 2009, were $111.8 billion, excluding purchased credit-impaired loans, a decrease of $2.6 billion from year-end 2008, primarily reflecting slower loan origination growth coupled with loan paydowns and charge-offs. The first-quarter 2009 provision for credit losses for the home equity portfolio includes net increases of $850 million to the allowance for loan losses, reflecting the impact of the weak economic environment noted above. The Firm estimates that loans with effective CLTVs in excess of 100% represented approximately 26% of the home equity portfolio. Since mid-2007, the maximum effective CLTVs for new originations have been reduced significantly (currently 50% to 70% based on Metropolitan Statistical Area) and, new originations of stated income and broker-originated loans have been eliminated entirely. Additional restrictions on new originations have been implemented in geographic areas experiencing the greatest housing price depreciation and highest unemployment. Loss-mitigation strategies include the reduction or closure of outstanding credit lines for borrowers who have experienced significant increases in CLTVs or decreases in creditworthiness (e.g. declines in FICO scores), and modifications of loan terms for borrowers experiencing financial difficulties.
Mortgage: Mortgage loans at March 31, 2009, which include prime mortgages, subprime mortgages, option ARMs and mortgage loans held-for-sale, were $96.1 billion, excluding purchased credit-impaired loans, reflecting a $730 million decrease from year-end 2008, primarily reflecting run-off of the subprime mortgage portfolio.
Prime mortgages of $72.6 billion increased $84 million from December 2008. The first-quarter 2009 provision for credit losses includes a net increase of $560 million to the allowance for loan losses, reflecting the impact of the weak economic environment noted above. The Firm estimates that loans with effective LTVs in excess of 100% represented approximately 27% of the prime mortgage portfolio. Since mid-2007, the Firm has tightened underwriting standards for nonconforming prime mortgages, including eliminating stated income products, reducing LTV maximums, and eliminating the broker-origination channel.
Subprime mortgages of $14.6 billion, excluding purchased credit-impaired loans, decreased $736 million from December 31, 2008, as a result of the discontinuation of new originations. The Firm estimates that loans with effective LTVs in excess of 100% represented approximately 33% of the subprime mortgage portfolio.
Option ARMs of $8.9 billion, excluding purchased credit-impaired loans, decreased slightly from December 31, 2008. New originations of option ARMs were discontinued by Washington Mutual prior to the date of the Washington Mutual transaction. This portfolio is primarily comprised of loans with low LTVs and high borrower FICOs and for which the Firm currently expects substantially lower losses in comparison with the purchased credit-impaired portfolio. The Firm has not, and does not, originate option ARMs.
Auto loans: As of March 31, 2009, auto loans of $43.1 billion increased $462 million from year-end 2008. The auto loan portfolio reflects a high concentration of prime quality credits. In response to recent increases in loan delinquencies and credit losses, particularly in Metropolitan Statistical Areas (“MSAs”) experiencing the greatest housing price depreciation and highest unemployment, credit underwriting criteria have been tightened, which has resulted in the reduction of both extended-term and high loan-to-value financing.
Credit card: JPMorgan Chase analyzes its credit card portfolio on a managed basis, which includes credit card receivables on the Consolidated Balance Sheets and those receivables sold to investors through securitization. Managed credit card receivables were $176.1 billion at March 31, 2009, a decrease of $14.2 billion from year-end 2008, reflecting seasonally lower charge volume.

66


Table of Contents

The managed credit card net charge-off rate increased to 7.72% for the first quarter of 2009 from 4.37% in the first quarter of 2008. This increase was due primarily to higher charge-offs as a result of the credit performance of loans acquired in the Washington Mutual transaction, as well as the current economic environment, especially in areas experiencing the greatest housing price depreciation and highest unemployment. Excluding the Washington Mutual portfolio, the managed credit card net charge-off rate was 6.86% for the first quarter of 2009. The 30-day managed delinquency rate increased to 6.16% at March 31, 2009, from 4.97% at December 31, 2008, as a result of deterioration in the current economic environment noted above. Excluding the Washington Mutual portfolio, the 30-day managed delinquency rate was 5.34%, up from 4.36% at December 31, 2008. The allowance for loan losses was increased by $1.2 billion due to the weakening credit environment. As a result of continued weakness in housing markets, account acquisition credit criteria and account management credit practices have been tightened, particularly in MSAs experiencing significant home-price declines. The managed credit card portfolio continues to reflect a well-seasoned, largely rewards-based portfolio that has good U.S. geographic diversification.
All other loans: All other loans primarily include business banking loans (which are highly collateralized loans, often with personal loan guarantees), student loans, and other secured and unsecured consumer loans. As of March 31, 2009, other loans, including loans held-for-sale, of $36.5 billion were up $1.0 billion from year-end 2008, primarily as a result of organic growth in business banking and student loans. The 2009 provision for credit losses included a net increase of $340 million to the allowance for loan losses, reflecting the impact of the weak economic environment noted above.
Purchased credit-impaired loans: Purchased credit-impaired loans of $87.6 billion in the home lending portfolio represent loans acquired in the Washington Mutual transaction that were recorded at fair value at the time of acquisition under SOP 03-3. At the acquisition date, the fair value of these loans included an estimate of losses that are expected to be incurred over the estimated remaining lives of the loans, and therefore no allowance for loan losses was recorded for these loans as of the acquisition date. Through the first quarter of 2009, the credit performance of these loans has generally been consistent with the assumptions used in determining the initial fair value of these loans, and the Firm’s original expectations regarding the amounts and timing of future cash flows has not changed. A probable decrease in management’s expectation of future cash collections related to these loans could result in the need to record an allowance for credit losses related to these loans in the future. A significant and probable increase in expected cash flows would generally result in an increase in interest income recognized over the remaining life of the underlying pool of loans.
Other real estate owned: As part of the residential real estate foreclosure process, loans are written down to the fair value of the underlying real estate asset. In those instances where the Firm gains title, ownership and possession of individual properties at the completion of the foreclosure process, these Other Real Estate Owned (“OREO”) assets are managed for prompt sale and disposition at the best possible economic value. Any further gains or losses on OREO assets are recorded as part of other income.

67


Table of Contents

The following tables present the geographic distribution of consumer credit outstandings by product as of March 31, 2009, and December 31, 2008, excluding purchased credit-impaired loans acquired in the Washington Mutual transaction.
Consumer loans by geographic region
                                                                                         
                                                                    Total            
March 31,                                   Total                   All   consumer           Total
2009   Home   Prime   Subprime   Option   home loan           Card   other   loans-   Card   consumer
(in billions)   equity   mortgage   mortgage   ARMs   portfolio   Auto   reported   loans   reported   securitized   loans-managed
 
Excluding purchased credit-impaired loans
                                                                                       
California
  $ 22.6     $ 22.4     $ 2.0     $ 3.7     $ 50.7     $ 4.6     $ 12.8     $ 2.1     $ 70.2     $ 12.2     $ 82.4  
New York
    16.4       10.2       1.7       1.0       29.3       3.6       7.2       4.8       44.9       6.4       51.3  
Texas
    7.8       2.9       0.4       0.2       11.3       4.0       6.6       4.2       26.1       6.2       32.3  
Florida
    6.0       6.1       2.2       0.9       15.2       1.5       6.0       1.1       23.8       5.3       29.1  
Illinois
    7.1       3.3       0.7       0.3       11.4       2.4       4.6       2.4       20.8       4.5       25.3  
Ohio
    4.5       0.8       0.3             5.6       3.2       3.5      </