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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2010       Commission file number 1-5805
JPMORGAN CHASE & CO.
(Exact name of registrant as specified in its charter)
     
Delaware   13-2624428
     
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
270 Park Avenue, New York, New York   10017
     
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code (212) 270-6000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
    (Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes þ No
Number of shares of common stock outstanding as of July 31, 2010: 3,965,167,399
 
 

 


 

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

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JPMORGAN CHASE & CO.
CONSOLIDATED FINANCIAL HIGHLIGHTS
                                                         
(unaudited)                                            
(in millions, except per share, headcount and ratios)                                           Six months ended June 30,
As of or for the period ended,   2Q10   1Q10   4Q09   3Q09   2Q09   2010   2009
 
Selected income statement data
                                                       
Total net revenue
  $ 25,101     $ 27,671     $ 23,164     $ 26,622     $ 25,623     $ 52,772     $ 50,648  
Total noninterest expense
    14,631       16,124       12,004       13,455       13,520       30,755       26,893  
 
Pre-provision profit(a)
    10,470       11,547       11,160       13,167       12,103       22,017       23,755  
Provision for credit losses
    3,363       7,010       7,284       8,104       8,031       10,373       16,627  
 
Income before income tax expense and extraordinary gain
    7,107       4,537       3,876       5,063       4,072       11,644       7,128  
Income tax expense
    2,312       1,211       598       1,551       1,351       3,523       2,266  
 
Income before extraordinary gain
    4,795       3,326       3,278       3,512       2,721       8,121       4,862  
Extraordinary gain(b)
                      76                    
 
Net income
  $ 4,795     $ 3,326     $ 3,278     $ 3,588     $ 2,721     $ 8,121     $ 4,862  
 
Per common share data
                                                       
Basic earnings
                                                       
Income before extraordinary gain
  $ 1.10     $ 0.75     $ 0.75     $ 0.80     $ 0.28     $ 1.84     $ 0.68  
Net income
    1.10       0.75       0.75       0.82       0.28       1.84       0.68  
Diluted earnings(c)
                                                       
Income before extraordinary gain
  $ 1.09     $ 0.74     $ 0.74     $ 0.80     $ 0.28     $ 1.83     $ 0.68  
Net income
    1.09       0.74       0.74       0.82       0.28       1.83       0.68  
Cash dividends declared
    0.05       0.05       0.05       0.05       0.05       0.10       0.10  
Book value
    40.99       39.38       39.88       39.12       37.36                  
Common shares outstanding
                                                       
Weighted-average: Basic
    3,983.5       3,970.5       3,946.1       3,937.9       3,811.5       3,977.0       3,783.6  
Diluted
    4,005.6       3,994.7       3,974.1       3,962.0       3,824.1       4,000.2       3,791.4  
Common shares at period-end(d)
    3,975.8       3,975.4       3,942.0       3,938.7       3,924.1                  
Share price(e)
                                                       
High
  $ 48.20     $ 46.05     $ 47.47     $ 46.50     $ 38.94     $ 48.20     $ 38.94  
Low
    36.51       37.03       40.04       31.59       25.29       36.51       14.96  
Close
    36.61       44.75       41.67       43.82       34.11                  
Market capitalization
    145,554       177,897       164,261       172,596       133,852                  
 
                                                       
Selected ratios
                                                       
Return on common equity (“ROE”)(c)
                                                       
Income before extraordinary gain
    12 %     8 %     8 %     9 %     3 %     10 %     4 %
Net income
    12       8       8       9       3       10       4  
Return on tangible common equity (“ROTCE”)(c)
                                                       
Income before extraordinary gain
    17       12       12       13       5       15       6  
Net income
    17       12       12       14       5       15       6  
Return on assets (“ROA”)
                                                       
Income before extraordinary gain
    0.94       0.66       0.65       0.70       0.54       0.80       0.48  
Net income
    0.94       0.66       0.65       0.71       0.54       0.80       0.48  
Overhead ratio
    58       58       52       51       53       58       53  
Tier 1 capital ratio(f)
    12.1       11.5       11.1       10.2       9.7                  
Total capital ratio
    15.8       15.1       14.8       13.9       13.3                  
Tier 1 leverage ratio
    6.9       6.6       6.9       6.5       6.2                  
Tier 1 common capital ratio(g)
    9.6       9.1       8.8       8.2       7.7                  
 
                                                       
Selected balance sheet data (period-end)(f)
                                                       
Trading assets
  $ 397,508     $ 426,128     $ 411,128     $ 424,435     $ 395,626                  
Securities
    312,013       344,376       360,390       372,867       345,563                  
Loans
    699,483       713,799       633,458       653,144       680,601                  
Total assets
    2,014,019       2,135,796       2,031,989       2,041,009       2,026,642                  
Deposits
    887,805       925,303       938,367       867,977       866,477                  
Long-term debt
    248,618       262,857       266,318       272,124       271,939                  
Common stockholders’ equity
    162,968       156,569       157,213       154,101       146,614                  
Total stockholders’ equity
    171,120       164,721       165,365       162,253       154,766                  
Headcount
    232,939       226,623       222,316       220,861       220,255                  
 

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(unaudited)                                           Six months ended
(in millions, except ratios)                                           June 30,
As of or for the period ended,   2Q10   1Q10   4Q09   3Q09   2Q09   2010   2009
 
Credit quality metrics
                                                       
Allowance for credit losses(f)
  $ 36,748     $ 39,126     $ 32,541     $ 31,454     $ 29,818                  
Allowance for loan losses to total retained loans(f)
    5.15 %     5.40 %     5.04 %     4.74 %     4.33 %                
Allowance for loan losses to retained loans excluding purchased credit-impaired loans(f)(h)
    5.34       5.64       5.51       5.28       5.01                  
Nonperforming assets
  $ 18,156     $ 19,019     $ 19,741     $ 20,362     $ 17,517                  
Net charge-offs
    5,714       7,910       6,177       6,373       6,019     $ 13,624     $ 10,415  
Net charge-off rate
    3.28 %     4.46 %     3.85 %     3.84 %     3.52 %     3.88 %     3.01 %
Wholesale net charge-off rate
    0.44       1.84       2.31       1.93       1.19       1.14       0.75  
Consumer net charge-off rate
    4.49       5.56       4.60       4.79       4.69       5.03       4.15  
 
(a)   Pre-provision profit is total net revenue less noninterest expense. The Firm believes that this financial measure is useful in assessing the ability of a lending institution to generate income in excess of its provision for credit losses.
 
(b)   On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual Bank (“Washington Mutual”). The acquisition resulted in negative goodwill, and accordingly, the Firm recognized an extraordinary gain. A preliminary gain of $1.9 billion was recognized at December 31, 2008. The final total extraordinary gain that resulted from the Washington Mutual transaction was $2.0 billion.
 
(c)   The calculation of second-quarter 2009 earnings per share (“EPS”) and net income applicable to common equity includes a one-time, noncash reduction of $1.1 billion, or $0.27 per share, resulting from repayment of U.S. Troubled Asset Relief Program (“TARP”) preferred capital. Excluding this reduction, the adjusted ROE and ROTCE for the second quarter 2009 would have been 6% and 10%, respectively. The Firm views the adjusted ROE and ROTCE, both non-GAAP financial measures, as meaningful because they enable the comparability to prior periods. For further discussion, see “Explanation and Reconciliation of the Firm’s use of Non-GAAP Financial measures” on pages 15-19 of this Form 10-Q and pages 50-52 of JPMorgan Chase’s 2009 Annual Report.
 
(d)   On June 5, 2009, the Firm issued $5.8 billion, or 163 million shares, of its common stock at $35.25 per share.
 
(e)   Share prices shown for JPMorgan Chase’s common stock are from the New York Stock Exchange. JPMorgan Chase’s common stock is also listed and traded on the London Stock Exchange and the Tokyo Stock Exchange.
 
(f)   Effective January 1, 2010, the Firm adopted new guidance that amended the accounting for the transfer of financial assets and the consolidation of variable interest entities (“VIEs”). Upon adoption of the new guidance, the Firm consolidated its Firm-sponsored credit card securitization trusts, Firm-administered multi-seller conduits and certain other consumer loan securitization entities, primarily mortgage-related, adding $87.7 billion and $92.2 billion of assets and liabilities, respectively, and decreasing stockholders’ equity and the Tier I capital ratio by $4.5 billion and 34 basis points, respectively. The reduction to stockholders’ equity was driven by the establishment of an allowance for loan losses of $7.5 billion (pretax) primarily related to receivables held in credit card securitization trusts that were consolidated at the adoption date.
 
(g)   The Firm uses Tier 1 common capital (“Tier 1 common”) along with the other capital measures to assess and monitor its capital position. The Tier 1 common capital ratio (“Tier 1 common ratio”) is Tier 1 common divided by risk-weighed assets. For further discussion, see Regulatory capital on pages 82-84 of JPMorgan Chase’s 2009 Annual Report.
 
(h)   Excludes the impact of home lending purchased credit-impaired loans for all periods. Also excludes, as of December 31, 2009, September 30, 2009, and June 30, 2009, the loans held by the Washington Mutual Master Trust (“WMMT”), which were consolidated onto the balance sheet at fair value during the second quarter of 2009; such loans have been fully repaid or charged off as of June 30, 2010. See Note 15 on pages 198-205 of JPMorgan Chase’s 2009 Annual Report.

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section of the Form 10-Q provides management’s discussion and analysis (“MD&A”) of the financial condition and results of operations of JPMorgan Chase. See the Glossary of terms on pages 181-184 for definitions of terms used throughout this Form 10-Q. The MD&A included in this Form 10-Q contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on the current beliefs and expectations of JPMorgan Chase’s management and are subject to significant risks and uncertainties. These risks and uncertainties could cause the Firm’s actual results to differ materially from those set forth in such forward-looking statements. Certain of such risks and uncertainties are described herein (See Forward-looking Statements on pages 187-188 and Part II, Item 1A: Risk Factors on pages 196-197 of this Form 10-Q), and see Part I, Item 1A, Risk Factors on pages 4-10 of JPMorgan Chase’s Annual Report on Form 10-K for the year ended December 31, 2009, filed with the U.S. Securities and Exchange Commission (“2009 Annual Report” or “2009 Form 10-K”), to which reference is hereby made.
INTRODUCTION
JPMorgan Chase & Co., a financial holding company incorporated under Delaware law in 1968, is a leading global financial services firm and one of the largest banking institutions in the United States of America (“U.S.”), with $2.0 trillion in assets, $171.1 billion in stockholders’ equity and operations in more than 60 countries as of June 30, 2010. 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 bank with branches in 23 states in the U.S.; and Chase Bank USA, National Association (“Chase Bank USA, N.A.”), a national bank that is the Firm’s credit card issuing bank. JPMorgan Chase’s principal nonbank subsidiary is J.P. Morgan Securities Inc., the Firm’s U.S. investment banking firm.
JPMorgan Chase’s activities are organized, for management reporting purposes, into six business segments, as well as Corporate/Private Equity. The Firm’s wholesale businesses comprise the Investment Bank, Commercial Banking, Treasury & Securities Services and Asset Management segments. The Firm’s consumer businesses comprise the Retail Financial Services and Card Services segments. A description of the Firm’s business segments, and the products and services they provide to their respective client bases, follows.
Investment Bank
J.P. Morgan is one of the world’s leading investment banks, with deep client relationships and broad product capabilities. The clients of the Investment Bank (“IB”) are corporations, financial institutions, governments and institutional investors. The Firm offers a full range of investment banking products and services in all major capital markets, including advising on corporate strategy and structure, capital-raising in equity and debt markets, sophisticated risk management, market-making in cash securities and derivative instruments, prime brokerage, and research.
Retail Financial Services
Retail Financial Services (“RFS”) serves consumers and businesses through personal service at bank branches and through ATMs, online banking and telephone banking, as well as through auto dealerships and school financial-aid offices. Customers can use more than 5,100 bank branches (third-largest nationally) and 15,600 ATMs (second-largest nationally), as well as online and mobile banking around the clock. More than 26,900 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 15,900 auto dealerships and 1,800 schools and universities nationwide.

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Card Services
Card Services (“CS”) is one of the nation’s largest credit card issuers, with nearly $143 billion in loans and nearly 90 million open accounts. In the six months ended June 30, 2010, customers used Chase cards to meet nearly $148 billion of their spending needs. Through its merchant acquiring business, Chase Paymentech Solutions, CS is a global leader in payment processing and merchant acquiring.
Commercial Banking
Commercial Banking (“CB”) delivers extensive industry knowledge, local expertise and dedicated service to more than 24,000 clients nationally, including corporations, municipalities, financial institutions and not-for-profit entities with annual revenue generally ranging from $10 million to $2 billion, and over 30,000 real estate investors/owners. CB partners with the Firm’s other businesses to provide comprehensive solutions, including lending, treasury services, investment banking and asset management to meet its clients’ domestic and international financial needs.
Treasury & Securities Services
Treasury & Securities Services (“TSS”) is a global leader in transaction, investment and information services. TSS is one of the world’s largest cash management providers and a leading global custodian. Treasury Services (“TS”) provides cash management, trade, wholesale card and liquidity products and services to small- and mid-sized companies, multinational corporations, financial institutions and government entities. TS partners with the CB, RFS 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 manages depositary receipt programs globally.
Asset Management
Asset Management (“AM”), with assets under supervision of $1.6 trillion, is a global leader in investment and wealth management. AM clients include institutions, retail investors and high-net-worth individuals in every major market throughout the world. AM offers global investment management in equities, fixed income, real estate, hedge funds, private equity and liquidity products, including money-market instruments and bank deposits. AM also provides trust and estate, banking and brokerage services to high-net-worth clients, and retirement services for corporations and individuals. The majority of AM’s client assets are in actively managed portfolios.

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EXECUTIVE OVERVIEW
This executive overview of MD&A highlights selected information and may not contain all of the information that is important to readers of this Form 10-Q. For a complete description of events, trends and uncertainties, as well as the capital, liquidity, credit and market risks, and the critical accounting estimates, affecting the Firm and its various lines of business, this Form 10-Q should be read in its entirety.
The U.S. and global economic recovery proceeded in the second quarter of 2010, though the pace of growth slowed, particularly in the U.S. and Asia. Concerns about the outlook for fiscal policy in the developed economies, and the impact that might have on the global economic recovery, led to a decline in equity markets and a rally in the bond markets. However, conditions within the U.S. labor market continued to improve gradually and household spending increased, but at a slow pace. Business spending on equipment and technology rose significantly, supported by the strong financial condition of U.S. businesses; however, investment in nonresidential building projects remained weak. Furthermore, inflation continued to trend lower during the quarter and the Federal Reserve indicated that these economic conditions were likely to warrant an exceptionally low federal funds rate for an extended period.
In response to the recent financial crisis, the U.S. Congress and regulators, as well as legislative and regulatory bodies in other countries, continue to focus on the regulation of financial institutions. On July 21, 2010, the U.S. enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), financial reform legislation that expands the range of financial companies and activities that are subject to federal oversight. This new law also provides more comprehensive regulation of the over-the-counter derivatives market; provides limitations on proprietary trading and the investment activities of banks; imposes limitations on debit card interchange transaction fees; and includes several other provisions that affect the Firm’s business activities. As discussed in the Business outlook section, the full impact of this legislation is unclear, and many challenges and uncertainties remain.
Financial performance of JPMorgan Chase
                                                 
    Three months ended June 30,   Six months ended June 30,
(in millions, except per share data and ratios)   2010   2009   Change   2010   2009   Change
 
Selected income statement data
                                               
Total net revenue
  $ 25,101     $ 25,623       (2 )%   $ 52,772     $ 50,648       4 %
Total noninterest expense
    14,631       13,520       8       30,755       26,893       14  
Pre-provision profit
    10,470       12,103       (13 )     22,017       23,755       (7 )
Provision for credit losses
    3,363       8,031       (58 )     10,373       16,627       (38 )
Net income
    4,795       2,721       76       8,121       4,862       67  
 
                                               
Diluted earnings per share(a)
  $ 1.09     $ 0.28       289     $ 1.83     $ 0.68       169  
Return on common equity(b)
    12 %     3 %             10 %     4 %        
 
                                               
Capital ratios
                                               
Tier 1 capital
    12.1       9.7                                  
Tier 1 common
    9.6       7.7                                  
 
(a)   The calculation of second quarter 2009 EPS includes a one-time, noncash reduction of $1.1 billion, or $0.27 per share ($0.28 per share for the six months ended June 30, 2009), resulting from repayment of TARP preferred capital. For further discussion, see “Impact on diluted EPS of redemption of TARP preferred stock issued to the U.S. Treasury” on page 19 of this Form 10-Q.
 
(b)   The calculation of second quarter 2009 net income applicable to common equity includes a one-time, noncash reduction of $1.1 billion resulting from repayment of TARP preferred capital. Excluding this reduction, the adjusted ROE was 6% for the second quarter and first six months of 2009. For further discussion of adjusted ROE, see “Explanation and reconciliation of the Firm’s use of non-GAAP financial measures” on pages 15-19 of this Form 10-Q.
Business overview
JPMorgan Chase reported second-quarter 2010 net income of $4.8 billion, or $1.09 per share, compared with net income of $2.7 billion, or $0.28 per share, in the second quarter of 2009. Current-quarter EPS included a benefit from a $1.5 billion, or $0.36 per share, reduction of loan loss reserves, partially offset by a charge of $550 million, or $0.14 per share, for the United Kingdom (“U.K.”) Bank Payroll Tax. Prior-year EPS reflected a one-time, noncash reduction in net income applicable to common stockholders of $1.1 billion, or $0.27 per share, resulting from repayment of TARP preferred capital. ROE for the quarter was 12%, compared with 3% in the prior year.
The increase in earnings from the second quarter of 2009 was driven by a significantly lower provision for credit losses, partially offset by lower net revenue and higher noninterest expense. The decline in net revenue was driven by lower principal transactions revenue, reflecting lower trading results, and lower investment banking fees, partially offset by higher securities gains. The lower provision for credit losses reflected improvements in both the consumer and wholesale provisions. The consumer provision reflected a reduction in the allowance for credit losses as a result of improved delinquency trends and reduced net charge-offs. The wholesale provision was a benefit in the second

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quarter of 2010, compared with an expense in the second quarter of 2009. Noninterest expense in the second quarter of 2010 included the impact of the U.K. Bank Payroll Tax on certain compensation awarded from December 9, 2009, to April 5, 2010, to relevant banking employees, and included higher litigation expense. JPMorgan Chase maintained very high liquidity, with a deposit-to-loan ratio of 127%, and generated additional capital, ending the quarter with a strong Tier 1 common ratio of 9.6%.
Credit trends continued to improve during the second quarter; however, the levels of charge-offs and delinquencies in the consumer-lending businesses remained extremely high. The wholesale businesses experienced reduced credit costs, reflecting a reduction in the allowance for credit losses mainly due to net repayments, loan sales, refinements to credit loss estimates, and improvement in the credit quality of the commercial and industrial portfolio. Total firmwide credit reserves fell to $36.7 billion, as loan balances remained flat and credit costs declined, resulting in a ratio of firmwide reserves to total loans (excluding purchased credit-impaired loans) of 5.3%.
Net income for the first six months of 2010 was $8.1 billion, or $1.83 per share, compared with $4.9 billion, or $0.68 per share, in the first half of 2009. The increase in earnings from the comparable 2009 six-month period was driven by a lower provision for credit losses and higher net revenue, partially offset by higher noninterest expense. The lower provision for credit losses and the higher noninterest expense reflected the same factors as those that drove the second quarter 2010 results. The higher net revenue reflected solid markets revenue in IB and elevated levels of securities gains from the investment portfolio in Corporate. Prior-year EPS reflected a one-time, noncash reduction in net income applicable to common stockholders of $1.1 billion, or $0.28 per share, resulting from repayment of TARP preferred capital.
JPMorgan Chase continued to support the economic recovery by assisting customers, providing sound lending and continuing its efforts to prevent foreclosure. The Firm loaned or raised capital for its clients of nearly $700 billion during the first half of 2010, and its small-business originations were up 37%. The Firm has offered 880,000 mortgage modifications and has approved 245,000 since the beginning of 2009. Of these, nearly 193,000 have achieved permanent modification as of June 30, 2010.
The discussion that follows highlights the current-quarter performance of each business segment, compared with the prior-year quarter. Managed basis starts with the reported U.S. GAAP results and, for each line of business and the Firm as a whole, includes certain reclassifications to present total net revenue on a tax-equivalent basis. Effective January 1, 2010, the Firm adopted new accounting guidance that required it to consolidate its Firm-sponsored credit card securitization trusts; as a result, reported and managed basis relating to credit card securitizations are equivalent for periods beginning after January 1, 2010. Prior to the adoption of the new accounting guidance, in 2009 and all other prior periods, the U.S. GAAP results for CS and the Firm were also adjusted for certain reclassifications that assumed credit card loans that had been securitized and sold by CS remained on the Consolidated Balance Sheets. These adjustments had no impact on net income as reported by the Firm as a whole or by the lines of business. For more information about managed basis, as well as other non-GAAP financial measures used by management to evaluate the performance of each line of business, see pages 15-19 of this Form 10-Q.
Investment Bank net income decreased, reflecting lower net revenue and higher noninterest expense, predominantly offset by a benefit from the provision for credit losses. The decrease in net revenue was driven by a decline in Fixed Income Markets revenue, largely reflecting lower results in credit markets, rates and commodities. Investment banking fees also decreased, driven by lower levels of equity underwriting, debt underwriting and advisory fees. Partially offsetting the revenue decline was an increase in Equity Markets revenue, reflecting solid client revenue. The provision for credit losses was a benefit in the second quarter of 2010, compared with an expense in the second quarter of 2009, and reflected a reduction in the allowance for loan losses, largely related to net repayments and loan sales. Noninterest expense in the second quarter of 2010 included the impact of the U.K. Bank Payroll Tax.
Retail Financial Services net income increased significantly from the prior year driven by a lower provision for credit losses. Net revenue decreased, driven by lower loan and deposit balances and declining deposit-related fees. These decreases were predominantly offset by a shift to wider-spread deposit products, and growth in mortgage fees and related income, debit card income and auto operating lease income. The provision for credit losses decreased from the prior year and reflected improved delinquency trends and reduced net charge-offs. Noninterest expense increased from the prior year, driven by higher default-related expense and sales force increases, partially offset by a decrease in foreclosed asset expense.
Card Services reported net income compared with a net loss in the prior year, as a lower provision for credit losses was partially offset by lower net revenue. The decrease in net revenue was driven by a decline in net interest income, reflecting lower average loan balances, the impact of legislative changes and a decreased level of fees. These decreases

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were partially offset by lower revenue reversals associated with lower charge-offs and a prior-year write-down of securitization interests. The provision for credit losses decreased from the prior year, reflecting reduced net charge-offs and lower estimated losses, primarily related to improved delinquency trends and lower loan balances. Noninterest expense increased due to higher marketing expense.
Commercial Banking net income increased from the prior year, driven by a reduction in the provision for credit losses. Net revenue was relatively flat from the prior year, as growth in liability balances, wider loan spreads, gains on sales of loans and other real estate owned, and higher lending-related fees were predominantly offset by spread compression on liability products and lower loan balances. The provision for credit losses was a benefit in the second quarter of 2010 compared with an expense in the second quarter of 2009 and included a reduction to the allowance for credit losses, mainly due to refinements to credit loss estimates and improvement in the credit quality of the commercial and industrial portfolio. Noninterest expense was relatively flat compared with the prior year.
Treasury and Securities Services net income decreased from the prior year, driven by lower net revenue and higher noninterest expense. Worldwide Securities Services net revenue was relatively flat, as lower spreads in securities lending and the impact of lower volatility on foreign exchange were offset by higher market levels and net inflows of assets under custody. Similarly, TS net revenue was relatively flat, as lower deposit spreads were offset by higher trade loan and card product volumes. Noninterest expense for TSS increased, driven by higher performance-based compensation and continued investment in new product platforms, primarily related to international expansion.
Asset Management net income increased from the prior year, as higher net revenue and a lower provision for credit losses were partially offset by higher noninterest expense. Net revenue increased, due to the effects of higher market levels, net inflows to products with higher margins and higher performance fees; partially offset by lower quarterly valuations of seed capital investments and lower net interest income due to narrower deposit spreads, largely offset by higher deposit balances. The increase in noninterest expense was driven by higher headcount.
Corporate/Private Equity net income decreased from the prior year, driven by lower net revenue and higher noninterest expense. Although lower than in the prior year, net revenue included elevated levels of securities gains from the repositioning of the investment portfolio and elevated levels of net interest income from the size of the investment portfolio. Net revenue also included modest private equity gains. Noninterest expense rose, largely due to higher litigation expense.
Business outlook
The following forward-looking statements are based on the current beliefs and expectations of JPMorgan Chase’s management and are subject to significant risks and uncertainties. These risks and uncertainties could cause the Firm’s actual results to differ materially from those set forth in such forward-looking statements.
JPMorgan Chase’s outlook for the third quarter of 2010 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. Accordingly, the Firm continues to monitor closely U.S. and international economies and political environments.
As mentioned above, the Dodd-Frank Act was signed into law on July 21, 2010. There are a number of positive aspects of this new legislation, including systemic risk oversight and resolution authority. However, with hundreds of implementing rules to be written, there remain many challenges and uncertainties. The Firm continues to be committed to helping ensure that the reforms are implemented in a way that protects consumers and the competitiveness of the U.S. financial system, while ensuring the flow of safe and sound credit.
In addition to this legislation, any further legislation or regulations that are adopted in the U.S. or in other countries could limit or restrict the Firm’s operations, impose additional costs on the Firm in order to comply with such new laws or regulations, or significantly and adversely affect the revenue of certain lines of business.
In the Retail Banking business within RFS, management expects continued strong revenue over the next several quarters, despite continued economic pressure on consumers and consumer spending levels. The Firm has already made changes consistent with and, in certain respects, beyond the requirements of the newly-enacted legislation in its policies relating to non-sufficient funds and overdraft fees. Management has refined its estimate of the cost of these changes to the business based on its most recent assessment of customer behavior and now estimates that Retail Banking net income may be reduced, on an annualized basis, by approximately $700 million by the fourth quarter of 2010, an increase from management’s prior estimate of approximately $500 million. Results in the second quarter of 2010 reflect approximately 50% of the estimated quarterly impact of this reduction in net income.
In the Mortgage Banking & Other Consumer Lending business within RFS, management expects revenue to continue to be negatively affected by continued elevated levels of repurchases of mortgages previously sold to, for example, U.S. government-sponsored entities. In the Real Estate Portfolios business within RFS, management believes that, at the current rate

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of delinquencies and loss severity, quarterly net charge-offs could be approximately $1.0 billion for the home equity portfolio, $400 million for the prime mortgage portfolio and $400 million for the subprime mortgage portfolio over the next several quarters. Given current origination and production levels, combined with management’s current estimate of portfolio runoff levels, the residential real estate portfolio is expected to decline by approximately 10% to 15% annually for the foreseeable future. Based on management’s preliminary estimate, the effect of such a reduction in the residential real estate portfolio is expected to reduce the portfolio’s 2010 net interest income up to $1.0 billion from the 2009 level, excluding any impact from further changes in the interest rate environment.
Also, in RFS, management expects noninterest expense to remain modestly above 2009 levels, reflecting investments in new branch builds and sales force hires, as well as continued elevated servicing-, default- and foreclosed asset-related costs.
In CS, management expects full-year average outstandings in 2010 to decline by approximately 15% from 2009 levels, possibly to approximately $140 billion of average outstandings by the end of the fourth quarter of 2010, due to runoff of both the Washington Mutual portfolio and lower-yielding promotional balances. In addition, management estimates that CS net income may be reduced, on an annualized basis, by approximately $750 million as a result of the impact of the Credit Card Act of 2009, including the recent regulatory guidance defining reasonable and proportional fees. Results in the second quarter of 2010 reflect approximately 25% of the estimated quarterly impact of this reduction in net income. The net charge-off rate for CS (excluding the Washington Mutual credit card portfolio) is anticipated to continue to improve if current delinquency trends continue and could be approximately 8.5% in the third quarter of 2010; however, results will depend on the economic environment and any resulting reserve actions.
While some normalization of the financial markets occurred during the second quarter of 2010 and consumer-lending net charge-offs and delinquencies have declined as noted above, the consumer credit portfolio remains under stress. Further declines in U.S. housing prices and increases in the unemployment rate remain possible; if this were to occur, it would adversely affect the Firm’s results.
In IB, TSS and AM, revenue will be affected by market levels, volumes and volatility, which will influence client flows and assets under management, supervision and custody. In addition, IB and CB results will continue to be affected by the credit environment, which will influence levels of charge-offs, repayments and provision for credit losses.
In Private Equity (within the Corporate/Private Equity segment), earnings will likely continue to be volatile and be influenced by capital markets activity, market levels, the performance of the broader economy and investment-specific issues. Corporate’s net interest income levels and securities gains will generally trend with the size and duration of the investment securities portfolio. Corporate net income (excluding Private Equity, merger-related items and any significant nonrecurring items) is anticipated to trend toward a level of approximately $300 million per quarter.
The Firm’s second-quarter results reflected lower net interest margin, compared with the prior quarter. Management expects modest continued downward pressure on net interest margin in the third quarter of 2010, primarily resulting from continued repositioning of the investment securities portfolio in Corporate, runoff of loans with higher contractual interest rates in the Real Estate Portfolios and CS businesses, and the impact of the Card Act legislation on CS.
Management and the Firm’s Board of Directors continuously evaluate alternatives to deploy the Firm’s strong capital base in ways that will enhance shareholder value. Such alternatives could include the repurchase of common stock, increasing the common stock dividend and pursuing alternative investment opportunities. The Firm resumed its repurchases of common stock beginning in the second quarter under its pre-existing Board authorization. The Firm’s current share repurchase activity is intended to offset share count increases resulting from employee equity awards and is consistent with the Firm’s goal of maintaining an appropriate share count. The aggregate amount and timing of future repurchases will depend, among other factors, on market conditions and management’s judgment regarding economic conditions, the Firm’s earnings outlook, the need to maintain adequate capital levels (in light of business needs and regulatory requirements) and alternative investment opportunities. With regard to any decision by the Firm’s Board of Directors concerning any increase in the level of the common stock dividend, their determination will be subject to their judgment that the likelihood of another severe economic downturn has sufficiently diminished; that there is evidence of sustained underlying growth in employment for at least several months; that overall business performance and credit have stabilized or improved; and that such action is warranted, taking into consideration, among other factors, the Firm’s earnings outlook, the need to maintain adequate capital levels (in light of business needs and regulatory requirements), alternative investment opportunities and appropriate dividend payout ratios. Ultimately, the Board would seek to return to the Firm’s historical dividend ratio of approximately 30% to 40% of normalized earnings over time, though it would consider moving to that level in stages.

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CONSOLIDATED RESULTS OF OPERATIONS
This section provides a comparative discussion of JPMorgan Chase’s Consolidated Results of Operations on a reported basis. Factors that relate primarily to a single business segment are discussed in more detail within that business segment. For a discussion of the Critical Accounting Estimates Used by the Firm that affect the Consolidated Results of Operations, see pages 100-102 of this Form 10-Q and pages 127-131 of JPMorgan Chase’s 2009 Annual Report.
Revenue
                                                 
    Three months ended June 30,   Six months ended June 30,
(in millions)   2010   2009   Change   2010   2009   Change
 
Investment banking fees
  $ 1,421     $ 2,106       (33 )%   $ 2,882     $ 3,492       (17 )%
Principal transactions
    2,090       3,097       (33 )     6,638       5,098       30  
Lending- and deposit-related fees
    1,586       1,766       (10 )     3,232       3,454       (6 )
Asset management, administration and commissions
    3,349       3,124       7       6,614       6,021       10  
Securities gains
    1,000       347       188       1,610       545       195  
Mortgage fees and related income
    888       784       13       1,546       2,385       (35 )
Credit card income
    1,495       1,719       (13 )     2,856       3,556       (20 )
Other income
    585       10     NM     997       60     NM
                     
Noninterest revenue
    12,414       12,953       (4 )     26,375       24,611       7  
Net interest income
    12,687       12,670             26,397       26,037       1  
                     
Total net revenue
  $ 25,101     $ 25,623       (2 )%   $ 52,772     $ 50,648       4 %
 
Total net revenue for the second quarter of 2010 was $25.1 billion, down by $522 million, or 2%, from the second quarter of 2009. Total net revenue for the first six months of 2010 was $52.8 billion, up by $2.1 billion, or 4%, from the prior year. The decrease from the prior-year quarter was driven by lower principal transactions revenue, reflecting lower trading results, and lower investment banking fees, partially offset by higher securities gains and other income. The increase from the first six months of 2009 was driven by higher principal transactions revenue, reflecting higher trading revenue and private equity gains (compared with private equity losses in the prior year) in Corporate/Private Equity; the absence of mark-to-market losses on hedges of retained loans in IB; higher securities gains in Corporate; and higher other income. These increases were partially offset by lower mortgage fees and related income in RFS and lower investment banking fees.
Investment banking fees for the second quarter and first six months of 2010 decreased from the comparable periods of 2009, predominantly reflecting a decline from the record level of equity underwriting fees last year and lower advisory fees. Debt underwriting fees also contributed to the decline in the second quarter of 2010; however, for the first six months of 2010, debt underwriting fees increased compared with the prior year. Overall industry-wide volumes across bonds and equity were lower in the second quarter and first six months of 2010 compared with the respective periods in 2009. For additional information on investment banking fees, which are primarily recorded in IB, see IB segment results on pages 21-24 of this Form 10-Q.
Principal transactions revenue, which consists of revenue from the Firm’s trading and private equity investing activities, decreased from the second quarter of 2009, reflecting lower results in Corporate and lower fixed income revenue in IB, largely reflecting weaker results in credit markets, rates and commodities. The decrease was offset partially by gains from the widening of the Firm’s credit spreads on certain structured liabilities in the IB compared with losses in the prior year. Trading revenue increased for the first six months of 2010, primarily due to the absence of mark-to-market losses on hedges of retained loans in IB compared with the prior year. This increase was offset partially by lower fixed income revenue in IB, largely reflecting weaker results in rates, credit markets and commodities. Private equity gains in both the second quarter and first six months of 2010 improved from the losses incurred in the comparable 2009 periods. For additional information on principal transactions revenue, see IB and Corporate/Private Equity segment results on pages 21-24 and 51-53, respectively, and Note 3 on pages 110-124 of this Form 10-Q.
Lending- and deposit-related fees for the second quarter and first six months of 2010 decreased from the prior-year periods, reflecting declining deposit-related fees and lower deposit balances in RFS, offset partially by higher lending-related service fees in IB and CB. For additional information on lending- and deposit-related fees, which are mostly recorded in RFS, TSS and CB, see the RFS segment results on pages 25-35, the TSS segment results on pages 44-46 and the CB segment results on pages 41-43 of this Form 10-Q.
Asset management, administration and commissions revenue for the second quarter and first six months of 2010 rose from the comparable periods of 2009. The increase was driven by higher asset management fees in AM, which reflected the effect of higher market levels, higher placement fees, net inflows to products with higher margins, and higher performance fees. Also contributing to the increase was higher administration fees in TSS, resulting from the effect of

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higher market levels and net inflows of assets under custody. For additional information on these fees and commissions, see the segment discussions for AM on pages 47-51 and TSS on pages 44-46 of this Form 10-Q.
Securities gains increased from the second quarter and first six months of 2009, due to continued repositioning of the Corporate investment portfolio in connection with managing the Firm’s structural interest rate risk. The second quarter of 2009 included a $241 million gain on the sale of MasterCard shares. For additional information on securities gains, which are mostly recorded in the Firm’s Corporate business, and Corporate’s investment securities portfolio, see the Corporate/Private Equity segment discussion on pages 51-53 of this Form 10-Q.
Mortgage fees and related income increased from the second quarter of 2009, due to higher net mortgage servicing revenue, predominantly reflecting higher mortgage servicing rights (“MSR”) risk management results. Partially offsetting this increase was lower production revenue, predominantly reflecting higher repurchase losses. Mortgage fees and related income decreased from the first six months of 2009 due to lower production revenue, reflecting higher repurchase losses and, to a lesser extent, lower net mortgage servicing revenue, as lower MSR risk management results were offset partially by higher operating revenue. For additional information on mortgage fees and related income, which is recorded primarily in RFS, see RFS’s Mortgage Banking & Other Consumer Lending discussion on pages 29-32 of this Form 10-Q.
Credit card income decreased from the second quarter and first six months of 2009, due predominantly to the impact of the new consolidation guidance related to VIEs, effective January 1, 2010, that required the Firm to consolidate the assets and liabilities of its Firm-sponsored credit card securitization trusts. Adoption of the new guidance resulted in the elimination of all servicing fees received from Firm-sponsored credit card securitization trusts (offset by a respective increase in net interest income and the provision for loan losses, and elimination of securitization income/losses in other income). For a more detailed discussion of the impact of the adoption of the new consolidation guidance on the Consolidated Statements of Income, see Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures on pages 15-19 of this Form 10-Q. For additional information on credit card income, see the CS segment results on pages 36-40 of this Form 10-Q.
Other income increased in the second quarter and first six months of 2010 compared with the prior-year periods, due largely to the absence of the write-down of securitization interests in 2010, compared with losses of $268 million and $448 million during the second quarter and first half of 2009, respectively. Higher auto operating lease income in RFS also contributed to the increase in other income.
Net interest income for the second quarter of 2010 was relatively flat compared with the prior-year quarter, as the impact of the adoption of the new consolidation guidance related to VIEs (which increased net interest income by approximately $1.4 billion) offset the decline in loan and deposit balances. The Firm’s interest-earning assets for the second quarter of 2010 were $1.7 trillion, and the net yield on those assets, on a fully taxable-equivalent (“FTE”) basis, was 3.06%, a decrease of one basis point from 2009. Compared with the first quarter of 2010, the net yield on interest-earning assets declined by 26 basis points, driven by lower yields on loans, primarily in CS and RFS, lower credit card outstandings, and lower yields on securities resulting from investment portfolio repositioning. Net interest income for the first six months of 2010 increased slightly from the prior-year period, driven by the impact of the new consolidation guidance related to VIEs which increased net interest income by approximately $3.2 billion, mainly as a result of the consolidation of Firm-sponsored credit card securitization trusts. Excluding the impact of the adoption of the new accounting guidance, net interest income decreased — driven by lower average loan balances, primarily in CS, RFS and IB — and lower yields on credit card receivables, reflecting the impact of legislative changes. The Firm’s interest-earning assets for the first six months of 2010 were $1.7 trillion, and the net yield on those assets, on a FTE basis, was 3.19%, an increase of one basis point from 2009. For a more detailed discussion of the impact of the adoption of the new consolidation guidance related to VIEs on the Consolidated Statements of Income, see Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures on pages 15-19 of this Form 10-Q.
                                                 
Provision for credit losses   Three months ended June 30,   Six months ended June 30,
(in millions)   2010   2009   Change   2010   2009   Change
 
Wholesale
  $ (572 )   $ 1,244     NM   $ (808 )   $ 2,774     NM
Consumer
    3,935       6,787       (42 )%     11,181       13,853       (19 )%
                     
Total provision for credit losses
  $ 3,363     $ 8,031       (58 )%   $ 10,373     $ 16,627       (38 )%
 

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The provision for credit losses decreased from the second quarter and first six months of 2009. The decrease in the wholesale provision in both 2010 periods reflected a reduction in the allowance for credit losses, mainly due to net repayments and loan sales in IB; and refinements to credit loss estimates and improvement in the credit quality of the commercial and industrial portfolio in CB. The decrease in the consumer provision for both 2010 periods reflected improved delinquency trends and reduced net charge-offs across most consumer portfolios; it included reductions in the allowance for loan losses in CS of $1.5 billion and $2.5 billion in the second quarter and first six months of 2010, respectively (compared with additions of $250 million and $1.4 billion in the comparable 2009 periods). The first six months of 2010 also included a $1.2 billion addition to the allowance for loan losses in RFS, related to further estimated deterioration in the Washington Mutual prime and option adjustable-rate mortgage (“ARM”) purchased credit-impaired portfolios. For a more detailed discussion of the loan portfolio and the allowance for credit losses, see the segment discussions for RFS on pages 25-35, CS on pages 36-40, IB on pages 21-24 and CB on pages 41-43, and the Allowance for Credit Losses section on pages 91-94 of this Form 10-Q.
Noninterest expense
The following table presents the components of noninterest expense.
                                                 
    Three months ended June 30,   Six months ended June 30,
(in millions)   2010   2009   Change   2010   2009   Change
 
Compensation expense(a)
  $ 7,616     $ 6,917       10 %   $ 14,892     $ 14,505       3 %
Noncompensation expense:
                                               
Occupancy
    883       914       (3 )     1,752       1,799       (3 )
Technology, communications and equipment
    1,165       1,156       1       2,302       2,302        
Professional and outside services
    1,685       1,518       11       3,260       3,033       7  
Marketing
    628       417       51       1,211       801       51  
Other(b)(c)(d)
    2,419       2,190       10       6,860       3,565       92  
Amortization of intangibles
    235       265       (11 )     478       540       (11 )
                     
Total noncompensation expense
    7,015       6,460       9       15,863       12,040       32  
Merger costs
          143     NM           348     NM
                     
Total noninterest expense
  $ 14,631     $ 13,520       8 %   $ 30,755     $ 26,893       14 %
 
(a)   The second quarter and first six months of 2010 included a tax expense related to the U.K. Bank Payroll Tax on certain compensation awarded from December 9, 2009, to April 5, 2010, to relevant banking employees.
 
(b)   Includes litigation expense of $792 million and $3.7 billion for the three and six months ended June 30, 2010, compared with $14 million and a net benefit of $256 million for the three and six months ended June 30, 2009, respectively.
 
(c)   Includes foreclosed property expense of $244 million and $547 million for the three and six months ended June 30, 2010, respectively, compared with $294 million and $619 million for the three and six months ended June 30, 2009, respectively. For additional information regarding foreclosed property, see Note 13 on page 196 of JPMorgan Chase’s 2009 Annual Report.
 
(d)   The second quarter of 2009 included a $675 million Federal Deposit Insurance Corporation (“FDIC”) special assessment.
Total noninterest expense for the second quarter of 2010 was $14.6 billion, up by $1.1 billion, or 8%, from the second quarter of 2009. For the first six months of 2010, total noninterest expense was $30.8 billion, up by $3.9 billion, or 14%, from the comparable 2009 period. The increase for both periods was driven by higher noncompensation expense, predominantly due to significant additions to litigation reserves; and higher compensation expense, reflecting a payroll tax expense predominantly in IB, related to the U.K. Bank Payroll Tax on certain compensation awarded from December 9, 2009, to April 5, 2010, to relevant banking employees. These increases were partially offset by lower performance-based incentives, and by the absence of a $675 million FDIC special assessment recognized in the second quarter of 2009.
Compensation expense in the second quarter and first six months of 2010 increased compared with the prior-year periods, due to the impact of the U.K. Bank Payroll Tax described above; ongoing investments in the businesses, including sales force increases in RFS; and higher performance-based compensation expense in several businesses. This was offset partially by lower performance-based compensation expense in IB.
Noncompensation expense increased for the second quarter and first six months of 2010 compared with the prior-year periods, due predominantly to significant additions to litigation reserves; higher marketing expense in CS; and higher brokerage, clearing and exchange transaction processing expense in IB. The increase for both periods was partially offset by the absence of a $675 million FDIC special assessment recognized in the second quarter of 2009.
For a discussion of amortization of intangibles, refer to Note 16 on pages 166-167 of this Form 10-Q.

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There were no merger costs recorded in the second quarter or first six months of 2010. Merger costs of $143 million and $348 million were recorded in the second quarter and first six months of 2009, respectively. For additional information on merger costs, refer to Note 10 on page 139 of this Form 10-Q.
Income tax expense
                                 
    Three months ended June 30,   Six months ended June 30,
(in millions, except rate)   2010   2009   2010   2009
 
Income before income tax expense
  $ 7,107     $ 4,072     $ 11,644     $ 7,128  
Income tax expense
    2,312       1,351       3,523       2,266  
Effective tax rate
    32.5 %     33.2 %     30.3 %     31.8 %
 
The decrease in the effective tax rate for the second quarter and first six months of 2010 compared with the prior-year periods was primarily the result of lower state and local income taxes, as well as tax benefits recognized upon the resolution of tax audits in 2010. The decrease was partially offset by the impact of higher reported pretax income for 2010. For additional information on income taxes, see Critical Accounting Estimates Used by the Firm on pages 100-102 of this Form 10-Q.

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EXPLANATION AND RECONCILIATION OF THE FIRM’S USE OF NON-GAAP FINANCIAL MEASURES
The Firm prepares its consolidated financial statements using accounting principles generally accepted in the U.S. (“U.S. GAAP”); these financial statements appear on pages 104-107 of this Form 10-Q. That presentation, which is referred to as “reported basis,” provides the reader with an understanding of the Firm’s results that can be tracked consistently from year to year and enables a comparison of the Firm’s performance with other companies’ U.S. GAAP financial statements.
In addition to analyzing the Firm’s results on a reported basis, management reviews the Firm’s results and the results of the lines of business on a “managed” basis, which is a non-GAAP financial measure. The Firm’s definition of managed basis starts with the reported U.S. GAAP results and includes certain reclassifications to present total net revenue for the Firm (and each of the business segments) on a FTE basis. Accordingly, revenue from tax-exempt securities and investments that receive tax credits is presented in the managed results on a basis comparable to taxable securities and investments. This non-GAAP financial measure allows management to assess the comparability of revenue arising from both taxable and tax-exempt sources. The corresponding income tax impact related to these items is recorded within income tax expense. These adjustments have no impact on net income as reported by the Firm as a whole or by the lines of business.
Prior to January 1, 2010, the Firm’s managed-basis presentation also included certain reclassification adjustments that assumed credit card loans securitized by CS remained on the balance sheet. Effective January 1, 2010, the Firm adopted new accounting guidance that required the Firm to consolidate its Firm-sponsored credit card securitizations trusts. The income, expense and credit costs associated with these securitization activities are now recorded in the 2010 Consolidated Statements of Income in the same classifications that were previously used to report such items on a managed basis. As a result of the consolidation of the credit card securitization trusts, reported and managed basis relating to credit card securitizations are equivalent for periods beginning after January 1, 2010. For additional information on the new accounting guidance, see Note 15 on pages 151-163 of this Form 10-Q.
The presentation in 2009 of CS results on a managed basis assumed that credit card loans that had been securitized and sold in accordance with U.S. GAAP remained on the Consolidated Balance Sheets, and that the earnings on the securitized loans were classified in the same manner as the earnings on retained loans recorded on the Consolidated Balance Sheets. JPMorgan Chase used the concept of managed basis to evaluate the credit performance and overall financial performance of the entire managed credit card portfolio. Operations were funded and decisions were 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 affects both the securitized loans and the loans retained on the Consolidated Balance Sheets. JPMorgan Chase believed that this managed-basis information was useful to investors, as it enabled 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 2009 reported to managed basis results for CS, see CS segment results on pages 36-40 of this Form 10-Q. For information regarding the securitization process, and loans and residual interests sold and securitized, see Note 15 on pages 151-163 of this Form 10-Q.
Tangible common equity (“TCE”) represents common stockholders’ equity (i.e., total stockholders’ equity less preferred stock) less identifiable intangible assets (other than MSRs) and goodwill, net of related deferred tax liabilities. ROTCE, a non-GAAP financial ratio, measures the Firm’s earnings as a percentage of TCE and is, in management’s view, a meaningful measure to assess the Firm’s use of equity.
Management also uses certain non-GAAP financial measures at the business-segment level, because it believes these other non-GAAP financial measures provide information to investors about the underlying operational performance and trends of the particular business segment and, therefore, facilitate a comparison of the business segment with the performance of its competitors.

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The following summary table provides a reconciliation from the Firm’s reported U.S. GAAP results to managed basis.
                                 
    Three months ended June 30, 2010
                    Fully    
    Reported   Credit   tax-equivalent   Managed
(in millions, except per share and ratios)   results   card(b)   adjustments   basis
 
Revenue
                               
Investment banking fees
  $ 1,421     NA   $     $ 1,421  
Principal transactions
    2,090     NA           2,090  
Lending- and deposit-related fees
    1,586     NA           1,586  
Asset management, administration and commissions
    3,349     NA           3,349  
Securities gains
    1,000     NA           1,000  
Mortgage fees and related income
    888     NA           888  
Credit card income
    1,495     NA           1,495  
Other income
    585     NA     416       1,001  
 
Noninterest revenue
    12,414     NA     416       12,830  
Net interest income
    12,687     NA     96       12,783  
 
Total net revenue
    25,101     NA     512       25,613  
Noninterest expense
    14,631     NA           14,631  
 
Pre-provision profit
    10,470     NA     512       10,982  
Provision for credit losses
    3,363     NA           3,363  
 
Income before income tax expense
    7,107     NA     512       7,619  
Income tax expense
    2,312     NA     512       2,824  
 
Net income
  $ 4,795     NA   $     $ 4,795  
 
Diluted earnings per share
  $ 1.09     NA   $     $ 1.09  
Return on assets
    0.94 %   NA   NM     0.94 %
Overhead ratio
    58     NA   NM     57  
 
                                 
    Three months ended June 30, 2009
                    Fully    
    Reported   Credit   tax-equivalent   Managed
(in millions, except per share and ratios)   results   card(b)   adjustments   basis
 
Revenue
                               
Investment banking fees
  $ 2,106     $     $     $ 2,106  
Principal transactions
    3,097                   3,097  
Lending- and deposit-related fees
    1,766                   1,766  
Asset management, administration and commissions
    3,124                   3,124  
Securities gains
    347                   347  
Mortgage fees and related income
    784                   784  
Credit card income
    1,719       (294 )           1,425  
Other income
    10             335       345  
 
Noninterest revenue
    12,953       (294 )     335       12,994  
Net interest income
    12,670       1,958       87       14,715  
 
Total net revenue
    25,623       1,664       422       27,709  
Noninterest expense
    13,520                   13,520  
 
Pre-provision profit
    12,103       1,664       422       14,189  
Provision for credit losses
    8,031       1,664             9,695  
 
Income before income tax expense
    4,072             422       4,494  
Income tax expense
    1,351             422       1,773  
 
Net income
  $ 2,721     $     $     $ 2,721  
 
Diluted earnings per share(a)
  $ 0.28     $     $     $ 0.28  
Return on assets
    0.54 %   NM   NM     0.51 %
Overhead ratio
    53     NM   NM     49  
 
NA: Not applicable

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    Six months ended June 30, 2010
                    Fully    
    Reported   Credit   tax-equivalent   Managed
(in millions, except per share and ratios)   results   card(b)   adjustments   basis
 
Revenue
                               
Investment banking fees
  $ 2,882     NA   $     $ 2,882  
Principal transactions
    6,638     NA           6,638  
Lending- and deposit-related fees
    3,232     NA           3,232  
Asset management, administration and commissions
    6,614     NA           6,614  
Securities gains
    1,610     NA           1,610  
Mortgage fees and related income
    1,546     NA           1,546  
Credit card income
    2,856     NA           2,856  
Other income
    997     NA     827       1,824  
 
Noninterest revenue
    26,375     NA     827       27,202  
Net interest income
    26,397     NA     186       26,583  
 
Total net revenue
    52,772     NA     1,013       53,785  
Noninterest expense
    30,755     NA           30,755  
 
Pre-provision profit
    22,017     NA     1,013       23,030  
Provision for credit losses
    10,373     NA           10,373  
 
Income before income tax expense
    11,644     NA     1,013       12,657  
Income tax expense
    3,523     NA     1,013       4,536  
 
Net income
  $ 8,121     NA   $     $ 8,121  
 
Diluted earnings per share
  $ 1.83     NA   $     $ 1.83  
Return on assets
    0.80 %   NA   NM     0.80 %
Overhead ratio
    58     NA   NM     57  
 
                                 
    Six months ended June 30, 2009
                    Fully    
    Reported   Credit   tax-equivalent   Managed
(in millions, except per share and ratios)   results   card(b)   adjustments   basis
 
Revenue
                               
Investment banking fees
  $ 3,492     $     $     $ 3,492  
Principal transactions
    5,098                   5,098  
Lending- and deposit-related fees
    3,454                   3,454  
Asset management, administration and commissions
    6,021                   6,021  
Securities gains
    545                   545  
Mortgage fees and related income
    2,385                   2,385  
Credit card income
    3,556       (834 )           2,722  
Other income
    60             672       732  
 
Noninterest revenue
    24,611       (834 )     672       24,449  
Net interest income
    26,037       3,962       183       30,182  
 
Total net revenue
    50,648       3,128       855       54,631  
Noninterest expense
    26,893                   26,893  
 
Pre-provision profit
    23,755       3,128       855       27,738  
Provision for credit losses
    16,627       3,128             19,755  
 
Income before income tax expense
    7,128             855       7,983  
Income tax expense
    2,266             855       3,121  
 
Net income
  $ 4,862     $     $     $ 4,862  
 
Diluted earnings per share(a)
  $ 0.68     $     $     $ 0.68  
Return on assets
    0.48 %   NM   NM     0.46 %
Overhead ratio
    53     NM   NM     49  
 
(a)   The calculation of second quarter 2009 EPS includes a one-time, noncash reduction of $1.1 billion, or $0.27 per share ($0.28 per share for the six months ended June 30, 2009), resulting from the repayment of TARP preferred capital.
 
(b)   See pages 36-40 of this Form 10-Q for a discussion of the effect of credit card securitizations on CS results.
NA: Not applicable

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Three months ended June 30,   2010   2009
(in millions)   Reported   Securitized(a)   Managed   Reported   Securitized(a)   Managed
 
Loans — Period-end
  $ 699,483     NA   $ 699,483     $ 680,601     $ 85,790     $ 766,391  
Total assets — average
    2,043,647     NA     2,043,647       2,038,372       81,588       2,119,960  
 
                                                 
Six months ended June 30,   2010   2009
(in millions)   Reported   Securitized(a)   Managed   Reported   Securitized(a)   Managed
 
Loans — Period-end
  $ 699,483     NA   $ 699,483     $ 680,601     $ 85,790     $ 766,391  
Total assets — average
    2,041,177     NA     2,041,177       2,052,666       82,182       2,134,848  
 
(a)   Loans securitized are defined as loans that were sold to nonconsolidated securitization trusts and were not included in reported loans as of or for the three and six months ended June 30, 2009. For further discussion of credit card securitizations, see Note 15 on pages 151-163 of this Form 10-Q.
Average tangible common equity
                                                         
    Three months ended   Six months ended
    June 30,   March 31,   Dec. 31,   Sept. 30,   June 30,   June 30,   June 30,
(in millions)   2010   2010   2009   2009   2009   2010   2009
 
Common stockholders’ equity
  $ 159,069     $ 156,094     $ 156,525     $ 149,468     $ 140,865     $ 157,590     $ 138,691  
Less: Goodwill
    48,348       48,542       48,341       48,328       48,273       48,445       48,173  
Less: Certain identifiable intangible assets
    4,265       4,307       4,741       4,984       5,218       4,285       5,329  
Add: Deferred tax liabilities(a)
    2,564       2,541       2,533       2,531       2,518       2,553       2,562  
 
Tangible common equity (TCE)
  $ 109,020     $ 105,786     $ 105,976     $ 98,687     $ 89,892     $ 107,413     $ 87,751  
 
(a)   Represents deferred tax liabilities related to tax-deductible goodwill and to identifiable intangibles created in non-taxable transactions, which are netted against goodwill and other intangibles when calculating TCE.
Impact on ROE of redemption of TARP preferred stock issued to the U.S. Treasury
The calculation of second quarter and year-to-date of 2009 net income applicable to common equity includes a one-time, noncash reduction of $1.1 billion resulting from the repayment of TARP preferred capital. Excluding this reduction ROE would have been 6% for both the second quarter and year-to-date 2009 as disclosed in the table below. The Firm views the adjusted ROE, a non-GAAP financial measure, as meaningful because it increases the comparability to prior periods.
                                 
    Three months ended June 30, 2009   Six months ended June 30, 2009
            Excluding the           Excluding the
(in millions, except ratios)   As reported   TARP redemption   As reported   TARP redemption
 
Return on equity
                               
Net income
  $ 2,721     $ 2,721     $ 4,862     $ 4,862  
Less: Preferred stock dividends
    473       473       1,002       1,002  
Less: Accelerated amortization from redemption of preferred stock issued to the U.S. Treasury
    1,112             1,112        
 
Net income applicable to common equity
  $ 1,136     $ 2,248     $ 2,748     $ 3,860  
 
Average common stockholders’ equity
  $ 140,865     $ 140,865     $ 138,691     $ 138,691  
 
Return on common equity
    3 %     6 %     4 %     6 %
 

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Impact on diluted earnings per share of redemption of TARP preferred stock issued to the U.S. Treasury
Net income applicable to common equity for the second quarter and year-to-date 2009 includes a one-time, noncash reduction of approximately $1.1 billion resulting from the repayment of TARP preferred capital. The following table presents the calculations of the effect on net income applicable to common stockholders for the second quarter and year-to-date 2009 and the $0.27 and $0.28 reduction, respectively, to diluted EPS which resulted from the repayment.
                                 
    Three months ended June 30, 2009   Six months ended June 30, 2009
            Effect of TARP           Effect of TARP
(in millions, except per share)   As reported   redemption   As reported   redemption
 
Diluted earnings per share
                               
Net income
  $ 2,721     $     $ 4,862     $  
Less: Preferred stock dividends
    473             1,002        
Less: Accelerated amortization from redemption of preferred stock issued to the U.S. Treasury
    1,112       1,112       1,112       1,112  
 
Net income applicable to common equity
  $ 1,136     $ (1,112 )   $ 2,748     $ (1,112 )
Less: Dividends and undistributed earnings allocated to participating securities
    64       (64 )     157       (65 )
 
Net income applicable to common stockholders
  $ 1,072     $ (1,048 )   $ 2,591     $ (1,047 )
 
Total weighted average diluted shares outstanding
    3,824.1       3,824.1       3,791.4       3,791.4  
 
Net income per share
  $ 0.28     $ (0.27 )   $ 0.68     $ (0.28 )
 
Other financial measures
The Firm also discloses the allowance for loan losses to total retained loans, excluding home lending purchased credit-impaired loans and loans held by the WMMT. For a further discussion of this credit metric, see Allowance for Credit Losses on pages 91-94 of this Form 10-Q.

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BUSINESS SEGMENT RESULTS
The Firm is managed on a line of business basis. The business segment financial results presented reflect the current organization of JPMorgan Chase. There are six major reportable business segments: the Investment Bank, Retail Financial Services, Card Services, Commercial Banking, Treasury & Securities Services and Asset Management, as well as a Corporate/Private Equity segment. The business segments are determined based on the products and services provided, or the type of customer served, and reflect the manner in which financial information is currently evaluated by management. Results of these lines of business are presented on a managed basis.
Description of business segment reporting methodology
Results of the business segments are intended to reflect each segment as if it were essentially a stand-alone business. The management reporting process that derives business segment results allocates income and expense using market-based methodologies. For a further discussion of those methodologies, see Business Segment Results — Description of business segment reporting methodology on pages 53-54 of JPMorgan Chase’s 2009 Annual Report. The Firm continues to assess the assumptions, methodologies and reporting classifications used for segment reporting, and further refinements may be implemented in future periods.
Business segment capital allocation changes
Each business segment is allocated capital by taking into consideration stand-alone peer comparisons, economic risk measures and regulatory capital requirements. The amount of capital assigned to each business is referred to as equity. Effective January 1, 2010, the Firm enhanced its line of business equity framework to better align equity assigned to each line of business with the changes anticipated to occur in the business, and in the competitive and regulatory landscape. Equity was assigned to the lines of business based on the Tier 1 common standard, rather than the Tier 1 capital standard. For a further discussion of the changes, see Capital Management — Line-of-business equity on pages 63-64 of this Form 10-Q.
Segment Results — Managed Basis(a)
The following table summarizes the business segment results for the periods indicated.
                                                                                         
Three months ended                                                                           Return
June 30,   Total net revenue   Noninterest expense   Net income/(loss)   on equity
(in millions, except ratios)   2010   2009   Change   2010   2009   Change   2010   2009   Change   2010   2009
 
Investment Bank(b)
  $ 6,332     $ 7,301       (13 )%   $ 4,522     $ 4,067       11 %   $ 1,381     $ 1,471       (6 )%     14 %     18 %
Retail Financial Services
    7,809       7,970       (2 )     4,281       4,079       5       1,042       15     NM     15        
Card Services
    4,217       4,868       (13 )     1,436       1,333       8       343       (672 )   NM     9       (18 )
Commercial Banking
    1,486       1,453       2       542       535       1       693       368       88       35       18  
Treasury & Securities Services
    1,881       1,900       (1 )     1,399       1,288       9       292       379       (23 )     18       30  
Asset Management
    2,068       1,982       4       1,405       1,354       4       391       352       11       24       20  
Corporate/Private Equity(b)
    1,820       2,235       (19 )     1,046       864       21       653       808       (19 )   NM   NM
                                                 
Total
  $ 25,613     $ 27,709       (8 )%   $ 14,631     $ 13,520       8 %   $ 4,795     $ 2,721       76 %     12 %     3 %
 
                                                                                         
Six months ended                                                                           Return
June 30,   Total net revenue   Noninterest expense   Net income/(loss)   on equity
(in millions, except ratios)   2010   2009   Change   2010   2009   Change   2010   2009   Change   2010   2009
 
Investment Bank(b)
  $ 14,651     $ 15,672       (7 )%   $ 9,360     $ 8,841       6 %   $ 3,852     $ 3,077       25 %     19 %     19 %
Retail Financial Services
    15,585       16,805       (7 )     8,523       8,250       3       911       489       86       7       4  
Card Services
    8,664       9,997       (13 )     2,838       2,679       6       40       (1,219 )   NM     1       (16 )
Commercial Banking
    2,902       2,855       2       1,081       1,088       (1 )     1,083       706       53       27       18  
Treasury & Securities Services
    3,637       3,721       (2 )     2,724       2,607       4       571       687       (17 )     18       28  
Asset Management
    4,199       3,685       14       2,847       2,652       7       783       576       36       24       17  
Corporate/Private Equity(b)
    4,147       1,896       119       3,382       776       336       881       546       61     NM   NM
                                                 
Total
  $ 53,785     $ 54,631       (2 )%   $ 30,755     $ 26,893       14 %   $ 8,121     $ 4,862       67 %     10 %     4 %
 
(a)   Represents reported results on a tax-equivalent basis. The managed basis also assumes that credit card loans in Firm-sponsored credit card securitization trusts remained on the balance sheet for 2009. Firm-sponsored credit card securitizations were consolidated at their carrying values on January 1, 2010, under the new consolidation guidance related to VIEs.
 
(b)   Corporate/Private Equity includes an adjustment to offset IB’s inclusion of the credit reimbursement from TSS in total net revenue; TSS reports the reimbursement to IB as a separate line on its income statement (not part of total revenue).

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INVESTMENT BANK
For a discussion of the business profile of IB, see pages 55-57 of JPMorgan Chase’s 2009 Annual Report and Introduction on page 5 of this Form 10-Q.
                                                 
Selected income statement data   Three months ended June 30,   Six months ended June 30,
(in millions, except ratios)   2010   2009   Change   2010   2009   Change
 
Revenue
                                               
Investment banking fees
  $ 1,405     $ 2,239       (37 )%   $ 2,851     $ 3,619       (21 )%
Principal transactions
    2,105       1,841       14       6,036       5,356       13  
Lending- and deposit-related fees
    203       167       22       405       305       33  
Asset management, administration and commissions
    633       717       (12 )     1,196       1,409       (15 )
All other income(a)
    86       (108 )   NM     135       (164 )   NM
                     
Noninterest revenue
    4,432       4,856       (9 )     10,623       10,525       1  
Net interest income(b)
    1,900       2,445       (22 )     4,028       5,147       (22 )
                     
Total net revenue(c)
    6,332       7,301       (13 )     14,651       15,672       (7 )
 
Provision for credit losses
    (325 )     871     NM     (787 )     2,081     NM
 
Noninterest expense
                                               
Compensation expense
    2,923       2,677       9       5,851       6,007       (3 )
Noncompensation expense
    1,599       1,390       15       3,509       2,834       24  
                     
Total noninterest expense
    4,522       4,067       11       9,360       8,841       6  
                     
Income before income tax expense
    2,135       2,363       (10 )     6,078       4,750       28  
Income tax expense
    754       892       (15 )     2,226       1,673       33  
                     
Net income
  $ 1,381     $ 1,471       (6 )   $ 3,852     $ 3,077       25  
                     
Financial ratios
                                               
Return on common equity
    14 %     18 %             19 %     19 %        
Return on assets
    0.78       0.83               1.12       0.86          
Overhead ratio
    71       56               64       56          
Compensation expense as a percentage of total net revenue(d)
    37       37               36       38          
                     
Revenue by business
                                               
Investment banking fees:
                                               
Advisory
  $ 355     $ 393       (10 )   $ 660     $ 872       (24 )
Equity underwriting
    354       1,103       (68 )     767       1,411       (46 )
Debt underwriting
    696       743       (6 )     1,424       1,336       7  
                     
Total investment banking fees
    1,405       2,239       (37 )     2,851       3,619       (21 )
Fixed income markets
    3,563       4,929       (28 )     9,027       9,818       (8 )
Equity markets
    1,038       708       47       2,500       2,481       1  
Credit portfolio(a)
    326       (575 )   NM     273       (246 )   NM
                     
Total net revenue
  $ 6,332     $ 7,301       (13 )   $ 14,651     $ 15,672       (7 )
                     
Revenue by region(a)
                                               
Americas
  $ 3,935     $ 4,118       (4 )   $ 8,497     $ 8,434       1  
Europe/Middle East/Africa
    1,537       2,303       (33 )     4,351       5,376       (19 )
Asia/Pacific
    860       880       (2 )     1,803       1,862       (3 )
                     
Total net revenue
  $ 6,332     $ 7,301       (13 )   $ 14,651     $ 15,672       (7 )
 
(a)   TSS was charged a credit reimbursement related to certain exposures managed within IB credit portfolio on behalf of clients shared with TSS. IB recognizes this credit reimbursement in its credit portfolio business in all other income.
 
(b)   The decrease in net interest income in the second quarter was primarily due to lower loan balance, lower Prime Services spreads and spread tightening and increased liquidity in rates markets.
 
(c)   Total net revenue included tax-equivalent adjustments, predominantly due to income tax credits related to affordable housing and alternative energy investments, as well as tax-exempt income from municipal bond investments of $401 million and $334 million for the quarters ended June 30, 2010 and 2009, respectively, and $804 million and $699 million for year-to-date 2010 and 2009, respectively.
 
(d)   The compensation expense as a percentage of total net revenue ratio for the second quarter and year-to-date of 2010 excludes payroll tax expense related to the U.K. Bank Payroll Tax on certain compensation awarded from December 31, 2009, to April 5, 2010, to relevant banking employees, which is a non-GAAP financial measure. IB excludes this tax from the ratio because it enables comparability with prior periods. If this tax were included in the ratio for the second quarter and year-to-date of 2010, the ratio would have been 46% and 40%, respectively.

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Quarterly results
Net income was $1.4 billion, down 6% compared with the prior year. These results reflected lower revenue and higher noninterest expense, predominantly offset by a benefit from the provision for credit losses.
Net revenue was $6.3 billion, compared with $7.3 billion in the prior year. Investment banking fees decreased by 37% to $1.4 billion, consisting of equity underwriting fees of $354 million (down 68%), debt underwriting fees of $696 million (down 6%) and advisory fees of $355 million (down 10%). Fixed Income Markets revenue was $3.6 billion, compared with $4.9 billion in the prior year, largely reflecting lower results in credit markets, rates and commodities. These declines were offset partially by gains of $397 million from the widening of the Firm’s credit spreads on certain structured liabilities compared to losses of $773 million in the prior year. Equity Markets revenue was $1.0  billion, compared with $708 million in the prior year, reflecting solid client revenue as well as gains of $191 million from the widening of the Firm’s credit spreads on certain structured liabilities compared with losses of $326 million in the prior year. Credit Portfolio revenue was $326 million, primarily reflecting net interest income and fees on retained loans.
The provision for credit losses was a benefit of $325 million, compared with an expense of $871 million in the prior year. The current-quarter provision reflected a reduction in the allowance for loan losses, largely related to net repayments and loan sales. The allowance for loan losses to end-of-period loans retained was 3.98%, compared with 7.91% in the prior year. The decline in the allowance ratio was due largely to the consolidation of asset-backed commercial paper conduits in accordance with new accounting guidance, effective January 1, 2010. Excluding these balances, the current-quarter allowance coverage ratio was 6.49%. Net charge-offs were $28 million, compared with $433 million in the prior year. Nonperforming loans were $2.3 billion, down by $1.3 billion from the prior year.
Noninterest expense was $4.5 billion, compared with $4.1 billion in the prior year. Current-quarter results included the impact of the U.K. Bank Payroll Tax.
ROE was 14% on $40.0 billion of average allocated capital.
Year-to-date results
Net income was $3.9 billion, up 25% compared with the prior year. These results reflect lower net revenue and higher noninterest expense, which was more than offset by a benefit from the provision for credit losses.
Net revenue was $14.7 billion, compared with $15.7 billion in prior year. Investment banking fees decreased 21% to $2.9 billion, consisting of equity underwriting fees of $767 million (down 46%), advisory fees of $660 million (down 24%) and debt underwriting fees of $1.4 billion (up 7%). Fixed Income Markets revenue was $9.0 billion, compared with $9.8 billion in the prior year. The decrease reflected lower results in rates, credit markets, and commodities. Equity Markets revenue of $2.5 billion was flat compared with the prior year, reflecting solid client revenue. Credit Portfolio revenue was $273 million, primarily reflecting net interest income and fees on retained loans.
The provision for credit losses was a benefit of $787 million, compared with an expense of $2.1 billion in the prior year. The current year provision reflected a reduction in the allowance for loan losses, largely related to net repayments and loan sales. Net charge-offs were $725 million, compared with $469 million in prior year.
Noninterest expense was $9.4 billion, compared with $8.8 billion in prior year, driven by increased litigation reserves, including those for mortgage-related matters, partially offset by lower performance-based compensation. Current year results also included the impact of the U.K. Bank Payroll Tax.
ROE was 19% on $40.0 billion of average allocated capital.

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Selected metrics   Three months ended June 30,   Six months ended June 30,
(in millions, except headcount and ratios)   2010   2009   Change   2010   2009   Change
 
Selected balance sheet data (period-end)
                                               
Loans(a):
                                               
Loans retained(b)
  $ 54,049     $ 64,500       (16 )%   $ 54,049     $ 64,500       (16 )%
Loans held-for-sale and loans at fair value
    3,221       6,814       (53 )     3,221       6,814       (53 )
                     
Total loans
    57,270       71,314       (20 )     57,270       71,314       (20 )
Equity
    40,000       33,000       21       40,000       33,000       21  
 
Selected balance sheet data (average)
                                               
Total assets
  $ 710,005     $ 710,825           $ 693,157     $ 721,934       (4 )
Trading assets—debt and equity instruments
    296,031       265,336       12       290,091       269,146       8  
Trading assets—derivative receivables
    65,847       100,536       (35 )     65,998       112,711       (41 )
Loans:(a)
                                               
Loans retained(b)
    53,351       68,224       (22 )     55,912       69,128       (19 )
Loans held-for-sale and loans at fair value
    3,530       8,934       (60 )     3,341       10,658       (69 )
                     
Total loans
    56,881       77,158       (26 )     59,253       79,786       (26 )
Adjusted assets(c)
    527,520       531,632       (1 )     517,135       560,239       (8 )
Equity
    40,000       33,000       21       40,000       33,000       21  
 
Headcount
    26,279       25,783       2       26,279       25,783       2  
 
Credit data and quality statistics
                                               
Net charge-offs
  $ 28     $ 433       (94 )   $ 725     $ 469       55  
Nonperforming assets:
                                               
Nonperforming loans:
                                               
Nonperforming loans retained(b)(d)
    1,926       3,407       (43 )     1,926       3,407       (43 )
Nonperforming loans held-for-sale and loans at fair value
    334       112       198       334       112       198  
                     
Total nonperforming loans
    2,260       3,519       (36 )     2,260       3,519       (36 )
Derivative receivables
    315       704       (55 )     315       704       (55 )
Assets acquired in loan satisfactions
    151       311       (51 )     151       311       (51 )
                     
Total nonperforming assets
    2,726       4,534       (40 )     2,726       4,534       (40 )
Allowance for credit losses:
                                               
Allowance for loan losses
    2,149       5,101       (58 )     2,149       5,101       (58 )
Allowance for lending-related commitments
    564       351       61       564       351       61  
                     
Total allowance for credit losses
    2,713       5,452       (50 )     2,713       5,452       (50 )
Net charge-off rate(b)(e)
    0.21 %     2.55 %             2.61 %     1.37 %        
Allowance for loan losses to period-end loans retained(b)(e)
    3.98       7.91               3.98       7.91          
Allowance for loan losses to average loans retained(b)(e)
    4.03       7.48               3.84       7.38          
Allowance for loan losses to nonperforming loans retained(b)(d)(e)
    112       150               112       150          
Nonperforming loans to period-end loans
    3.95       4.93               3.95       4.93          
Nonperforming loans to average loans
    3.97       4.56               3.81       4.41          
Market risk—average trading and credit portfolio VaR — 95% confidence level
                                               
Trading activities:
                                               
Fixed income
  $ 64     $ 179       (64 )   $ 66     $ 168       (61 )
Foreign exchange
    10       16       (38 )     12       19       (37 )
Equities
    20       50       (60 )     22       73       (70 )
Commodities and other
    20       22       (9 )     18       21       (14 )
Diversification(f)
    (42 )     (97 )     57       (46 )     (101 )     54  
                     
Total trading VaR(g)
    72       170       (58 )     72       180       (60 )
Credit portfolio VaR(h)
    27       68       (60 )     23       77       (70 )
Diversification(f)
    (9 )     (60 )     85       (9 )     (62 )     85  
                     
Total trading and credit portfolio VaR
  $ 90     $ 178       (49 )   $ 86     $ 195       (56 )
 
(a)   Effective January 1, 2010, the Firm adopted new consolidation guidance related to VIEs. Upon adoption of the new guidance, the Firm consolidated its Firm-administered multi-seller conduits. As a result, $15.1 billion of related loans were recorded in loans on the Consolidated Balance Sheets.
 
(b)   Loans retained include credit portfolio loans, leveraged leases and other accrual loans, and exclude loans held-for-sale and loans accounted for at fair value.
 
(c)   Adjusted assets, a non-GAAP financial measure, equals total assets minus: (1) securities purchased under resale agreements and securities borrowed less securities sold, not yet purchased; (2) assets of consolidated VIEs; (3) cash and securities segregated and on deposit for regulatory and other purposes; (4) goodwill and intangibles; (5) securities received as collateral; and (6) investments purchased under the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (“AML Facility”). The amount of adjusted assets is presented to assist the reader

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    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.
 
(d)   Allowance for loan losses of $617 million and $1.6 billion were held against these nonperforming loans at June 30, 2010 and 2009, respectively.
 
(e)   Loans held-for-sale and loans at fair value were excluded when calculating the allowance coverage ratio and net charge-off rate.
 
(f)   Average value-at-risk (“VaR”) was less than the sum of the VaR of the components described above, which is due to portfolio diversification. The diversification effect reflects the fact that the risks were not perfectly correlated. The risk of a portfolio of positions is therefore usually less than the sum of the risks of the positions themselves. For a further discussion of VaR, see pages 95-97 of this Form 10-Q.
 
(g)   Trading VaR includes predominantly all trading activities in IB, as well as syndicated lending facilities that the Firm intends to distribute; however, particular risk parameters of certain products are not fully captured, for example, correlation risk. Trading VaR does not include the debit valuation adjustments (“DVA”) taken on derivative and structured liabilities to reflect the credit quality of the Firm. See VaR discussion on pages 95-97 and the DVA Sensitivity table on page 97 of this Form 10-Q for further details. Trading VaR includes the estimated credit spread sensitivity of certain mortgage products.
 
(h)   Credit portfolio VaR includes the derivative credit valuation adjustments (“CVA”), hedges of the CVA and mark-to-market (“MTM”) hedges of the retained loan portfolio, which were all reported in principal transactions revenue. This VaR does not include the retained loan portfolio.
According to Dealogic, for the first six months of 2010, the Firm was ranked #1 in Global Debt, Equity and Equity-Related; #1 in Global Equity and Equity-Related; #2 in Global Long-Term Debt; #1 in Global Syndicated Loans and #4 in Global Announced M&A based on volume.
According to Dealogic, the Firm was ranked #1 in Investment Banking fees generated for the first six months of 2010, based on revenue.
                                 
    Six months ended June 30, 2010   Full-year 2009
Market shares and rankings(a)   Market Share   Rankings   Market Share   Rankings
 
Global investment banking fees(b)
    8 %     #1       9 %     #1  
Global debt, equity and equity-related
    7       #1       9       #1  
Global syndicated loans
    10       #1       8       #1  
Global long-term debt(c)
    7       #2       8       #1  
Global equity and equity-related(d)
    8       #1       12       #1  
Global announced M&A(e)
    14       #4       24       #3  
U.S. debt, equity and equity-related
    12       #1       15       #1  
U.S. syndicated loans
    21       #2       22       #1  
U.S. long-term debt(c)
    11       #2       14       #1  
U.S. equity and equity-related
    16       #1       16       #2  
U.S. announced M&A(e)
    22       #3       36       #2  
 
(a)   Source: Dealogic. Global Investment Banking fees reflects ranking of fees and market share. Remainder of rankings reflects transaction volume rank and market share.
 
(b)   Global IB fees exclude money market, short-term debt and shelf deals.
 
(c)   Long-term debt tables include investment-grade, high-yield, supranationals, sovereigns, agencies, covered bonds, asset-backed securities and mortgage-backed securities; and exclude money market, short-term debt, and U.S. municipal securities.
 
(d)   Equity and equity-related rankings include rights offerings and Chinese A-Shares.
 
(e)   Global announced M&A is based on transaction value at announcement; all other rankings are based on transaction 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%. M&A for year-to-date 2010 and full-year 2009 reflects the removal of any withdrawn transactions. U.S. announced M&A represents any U.S. involvement ranking.

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RETAIL FINANCIAL SERVICES
Retail Financial Services (“RFS”) serves consumers and businesses through personal service at bank branches and through ATMs, online banking and telephone banking, as well as through auto dealerships and school financial-aid offices. Customers can use more than 5,100 bank branches (third-largest nationally) and 15,600 ATMs (second-largest nationally), as well as online and mobile banking around the clock. More than 26,900 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 15,900 auto dealerships and 1,800 schools and universities nationwide. Prior to January 1, 2010, RFS was reported as: Retail Banking and Consumer Lending. Commencing January 1, 2010, Consumer Lending for reporting purposes is presented as: (1) Mortgage Banking & Other Consumer Lending, and (2) Real Estate Portfolios. Mortgage Banking & Other Consumer Lending comprises mortgage production and servicing, auto finance, and student and other lending activities. Real Estate Portfolios comprises residential mortgages and home equity loans, including the purchased credit-impaired portfolio acquired in the Washington Mutual transaction. This change is intended solely to provide further clarity around the Real Estate Portfolios. Retail Banking, which includes branch banking and business banking activities, is not affected by these reporting revisions.
                                                 
Selected income statement data   Three months ended June 30,   Six months ended June 30,
(in millions, except ratios)   2010   2009   Change   2010   2009   Change
 
Revenue
                                               
Lending- and deposit-related fees
  $ 780     $ 1,003       (22 )%   $ 1,621     $ 1,951       (17 )%
Asset management, administration and commissions
    433       425       2       885       860       3  
Mortgage fees and related income
    886       807       10       1,541       2,440       (37 )
Credit card income
    480       411       17       930       778       20  
Other income
    413       294       40       767       508       51  
                     
Noninterest revenue
    2,992       2,940       2       5,744       6,537       (12 )
Net interest income
    4,817       5,030       (4 )     9,841       10,268       (4 )
                     
Total net revenue
    7,809       7,970       (2 )     15,585       16,805       (7 )
 
Provision for credit losses
    1,715       3,846       (55 )     5,448       7,723       (29 )
 
Noninterest expense
                                               
Compensation expense
    1,842       1,631       13       3,612       3,262       11  
Noncompensation expense
    2,369       2,365             4,771       4,822       (1 )
Amortization of intangibles
    70       83       (16 )     140       166       (16 )
                     
Total noninterest expense
    4,281       4,079       5       8,523       8,250       3  
                     
Income before income tax expense
    1,813       45     NM     1,614       832       94  
Income tax expense
    771       30     NM     703       343       105  
                     
Net income
  $ 1,042     $ 15     NM   $ 911     $ 489       86  
                     
 
                                               
Financial ratios
                                               
Return on common equity
    15 %     %             7 %     4 %        
Overhead ratio
    55       51               55       49          
Overhead ratio excluding core deposit intangibles(a)
    54       50               54       48          
 
(a)   RFS 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 would result in a higher overhead ratio in the earlier years and a lower overhead ratio in later years. This method would therefore result in an improving overhead ratio over time, all things remaining equal. The non-GAAP ratio excludes Retail Banking’s CDI amortization expense related to prior business combination transactions of $69 million and $82 million for the quarters ended June 30, 2010 and 2009, respectively, and $139 million and $165 million for the six months ended June 30, 2010 and 2009, respectively.

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Quarterly results
Net income was $1.0 billion, compared with $15 million in the prior year.
Net revenue was $7.8 billion, a decrease of $161 million, or 2%, compared with the prior year. Net interest income was $4.8 billion, down by $213 million, or 4%, reflecting the impact of lower loan and deposit balances, partially offset by a shift to wider-spread deposit products. Noninterest revenue was $3.0 billion, relatively flat compared with the prior year, as increased mortgage fees and related income, debit card income and auto operating lease income were offset by declining deposit-related fees.
The provision for credit losses was $1.7 billion, a decrease of $2.1 billion from the prior year. Although losses for the mortgage and home equity portfolios continued to be extremely high, the current-quarter provision reflected improved delinquency trends and reduced net charge-offs as compared with the prior period. Additionally, the prior-year provision included an addition to the allowance for loan losses of $1.2 billion. Home equity net charge-offs were $796 million (3.32% net charge-off rate), compared with $1.3 billion (4.61% net charge-off rate) in the prior year. Subprime mortgage net charge-offs were $282 million (8.63% net charge-off rate), compared with $410 million (11.50% net charge-off rate). Prime mortgage net charge-offs were $264 million (1.79% net charge-off rate), compared with $481 million (3.07% net charge-off rate). The allowance for loan losses to ending loans retained, excluding purchased credit-impaired loans, was 5.26%, compared with 4.41% in the prior year.
Noninterest expense was $4.3 billion, an increase of $202 million, or 5%, from the prior year.
Year-to-date results
Net income was $911 million, compared with $489 million in the prior year.
Net revenue was $15.6 billion, a decrease of $1.2 billion, or 7%, compared with the prior year. Net interest income was $9.8 billion, down by $427 million, or 4%, reflecting the impact of lower loan and deposit balances, partially offset by a shift to wider-spread deposit products. Noninterest revenue was $5.7 billion, a decrease of $793 million, or 12%, as a decline in mortgage fees and related income and deposit-related fees were partially offset by an increase in debit card income and auto operating lease income.
The provision for credit losses was $5.4 billion, a decrease of $2.3 billion from the prior year. Although losses for the mortgage and home equity portfolios continued to be extremely high, the provision reflected improved delinquency trends and reduced net charge-offs as compared with the prior period. Additionally, the current period included an addition to the allowance for loan losses of $1.2 billion compared with an addition of $2.9 billion in the prior year. Home equity net charge-offs were $1.9 billion (3.96% net charge-off rate), compared with $2.4 billion (4.27% net charge-off rate) in the prior year. Subprime mortgage net charge-offs were $739 million (11.12% net charge-off rate), compared with $774 million (10.69% net charge-off rate). Prime mortgage net charge-offs were $723 million (2.45% net charge-off rate), compared with $793 million (1.88% net charge-off rate).
Noninterest expense was $8.5 billion, an increase of $273 million, or 3%, from the prior year.

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Selected metrics   Three months ended June 30,   Six months ended June 30,
(in millions, except headcount and ratios)   2010   2009   Change   2010   2009   Change
 
Selected balance sheet data (period-end)
                                               
Assets
  $ 375,329     $ 399,916       (6 )%   $ 375,329     $ 399,916       (6 )%
Loans:
                                               
Loans retained
    330,329       353,934       (7 )     330,329       353,934       (7 )
Loans held-for-sale and loans at fair value(a)
    12,599       13,192       (4 )     12,599       13,192       (4 )
                     
Total loans
    342,928       367,126       (7 )     342,928       367,126       (7 )
Deposits
    359,974       371,241       (3 )     359,974       371,241       (3 )
Equity
    28,000       25,000       12       28,000       25,000       12  
 
Selected balance sheet data (average)
                                               
Assets
  $ 381,906     $ 410,228       (7 )   $ 387,854     $ 416,813       (7 )
Loans:
                                               
Loans retained
    335,308       359,372       (7 )     339,131       363,127       (7 )
Loans held-for-sale and loans at fair value(a)
    14,426       19,043       (24 )     15,734       17,792       (12 )
                     
Total loans
    349,734       378,415       (8 )     354,865       380,919       (7 )
Deposits
    362,010       377,259       (4 )     359,486       373,788       (4 )
Equity
    28,000       25,000       12       28,000       25,000       12  
 
                                               
Headcount
    116,879       103,733       13       116,879       103,733       13  
 
                                               
Credit data and quality statistics
                                               
Net charge-offs
  $ 1,761     $ 2,649       (34 )   $ 4,199     $ 4,825       (13 )
Nonperforming loans:
                                               
Nonperforming loans retained
    10,457       8,792       19       10,457       8,792       19  
Nonperforming loans held-for-sale and loans at fair value
    176       203       (13 )     176       203       (13 )
                     
Total nonperforming loans(b)(c)(d)
    10,633       8,995       18       10,633       8,995       18  
Nonperforming assets(b)(c)(d)
    11,907       10,554       13       11,907       10,554       13  
Allowance for loan losses
    16,152       11,832       37       16,152       11,832       37  
Net charge-off rate(e)
    2.11 %     2.96 %             2.50 %     2.68 %        
Net charge-off rate excluding purchased credit-impaired loans(e)(f)
    2.75       3.89               3.26       3.53          
Allowance for loan losses to ending loans(e)
    4.89       3.34               4.89       3.34          
Allowance for loan losses to ending loans excluding purchased credit-impaired loans(e)(f)
    5.26       4.41               5.26       4.41          
Allowance for loan losses to nonperforming loans retained(b)(e)(f)
    128       135               128       135          
Nonperforming loans to total loans
    3.10       2.45               3.10       2.45          
Nonperforming loans to total loans excluding purchased credit-impaired loans(b)
    4.00       3.19               4.00       3.19          
 
(a)   Loans at fair value consist of prime mortgages originated with the intent to sell that are accounted for at fair value and classified as trading assets on the Consolidated Balance Sheets. These loans totaled $12.2 billion and $11.3 billion at June 30, 2010 and 2009, respectively. Average balances of these loans totaled $12.5 billion and $16.2 billion for the quarters ended June 30, 2010 and 2009, respectively, and $13.3 billion and $14.9 billion for the six months ended June 30, 2010 and 2009, respectively.
 
(b)   Excludes purchased credit-impaired loans that were acquired as part of the Washington Mutual transaction. These loans are accounted for on a pool basis, and the pools are considered to be performing.
 
(c)   Certain of these loans are classified as trading assets on the Consolidated Balance Sheets.
 
(d)   At June 30, 2010 and 2009, nonperforming loans and assets exclude: (1) mortgage loans insured by U.S. government agencies of $10.1 billion and $4.2 billion, respectively, that are 90 days past due and accruing at the guaranteed reimbursement rate; (2) real estate owned insured by U.S. government agencies of $1.4 billion and $508 million, respectively; and (3) student loans that are 90 days past due and still accruing, which are insured by U.S. government agencies under the Federal Family Education Loan Program (“FFELP”), of $447 million and $473 million, respectively. These amounts are excluded as reimbursement of insured amounts is proceeding normally.
 
(e)   Loans held-for-sale and loans accounted for at fair value were excluded when calculating the allowance coverage ratio and the net charge-off rate.
 
(f)   Excludes the impact of purchased credit-impaired loans that were acquired as part of the Washington Mutual transaction. These loans were accounted for at fair value on the acquisition date, which incorporated management’s estimate, as of that date, of credit losses over the remaining life of the portfolio. An allowance for loan losses of $2.8 billion was recorded for these loans at June 30, 2010, which has also been excluded from applicable ratios. No allowance for loan losses was recorded for these loans at June 30, 2009. To date, no charge-offs have been recorded for these loans.

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RETAIL BANKING
                                                 
Selected income statement data   Three months ended June 30,   Six months ended June 30,
(in millions, except ratios)   2010   2009   Change   2010   2009   Change
 
Noninterest revenue
  $ 1,684     $ 1,803       (7 )%   $ 3,386     $ 3,521       (4 )%
Net interest income
    2,712       2,719             5,347       5,333        
                     
Total net revenue
    4,396       4,522       (3 )     8,733       8,854       (1 )
Provision for credit losses
    168       361       (53 )     359       686       (48 )
Noninterest expense
    2,633       2,557       3       5,210       5,137       1  
                     
Income before income tax expense
    1,595       1,604       (1 )     3,164       3,031       4  
                     
Net income
  $ 914     $ 970       (6 )   $ 1,812     $ 1,833       (1 )
                     
Overhead ratio
    60 %     57 %             60 %     58 %        
Overhead ratio excluding core deposit intangibles(a)
    58       55               58       56          
 
(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 would result in a higher overhead ratio in the earlier years and a lower overhead ratio in later years. This method would therefore result in an improving overhead ratio over time, all things remaining equal. The non-GAAP ratio excludes Retail Banking’s CDI amortization expense related to prior business combination transactions of $69 million and $82 million for the quarters ended June 30, 2010 and 2009, respectively, and $139 million and $165 million for the six months ended June 30, 2010 and 2009, respectively.
Quarterly results
Retail Banking reported net income of $914 million, a decrease of $56 million, or 6%, compared with the prior year.
Net revenue was $4.4 billion, down 3% compared with the prior year. The decrease was driven by declining deposit-related fees and lower deposit balances, largely offset by a shift to wider-spread deposit products and higher debit card income.
The provision for credit losses was $168 million, compared with $361 million in the prior year. The prior-year provision reflected an increase in the Business Banking allowance for loan losses. Retail Banking net charge-offs were $168 million (4.04% net charge-off rate), compared with $211 million (4.70% net charge-off rate) in the prior year.
Noninterest expense was $2.6 billion, up 3% compared with the prior year, resulting from sales force increases.
Year-to-date results
Retail Banking reported net income of $1.8 billion, relatively flat compared with the prior year.
Net revenue was $8.7 billion, relatively flat compared with the prior year, with declining deposit-related fees and lower deposit balances, offset by a shift to wider-spread deposit products and higher debit card income.
The provision for credit losses was $359 million, compared with $686 million in the prior year. The prior-year provision reflected an increase in the Business Banking allowance for loan losses. Retail Banking net charge-offs were $359 million (4.31% net charge-off rate), compared with $386 million (4.28% net charge-off rate) in the prior year.
Noninterest expense was $5.2 billion, relatively flat compared with the prior year.

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Selected metrics   Three months ended June 30,   Six months ended June 30,
(in billions, except ratios and where                        
otherwise noted)   2010   2009   Change   2010   2009   Change
 
Business metrics
                                               
 
Business banking origination volume
  $ 1.2     $ 0.6       100 %   $ 2.1     $ 1.1       91 %
End-of-period loans owned
    16.6       17.8       (7 )     16.6       17.8       (7 )
End-of-period deposits:
                                               
Checking
  $ 123.5     $ 114.1       8     $ 123.5     $ 114.1       8  
Savings
    161.8       150.4       8       161.8       150.4       8  
Time and other
    50.5       78.9       (36 )     50.5       78.9       (36 )
                     
Total end-of-period deposits
    335.8       343.4       (2 )     335.8       343.4       (2 )
Average loans owned
  $ 16.7     $ 18.0       (7 )   $ 16.8     $ 18.2       (8 )
Average deposits:
                                               
Checking
  $ 123.6     $ 114.2       8     $ 121.7     $ 111.8       9  
Savings
    162.8       151.2       8       160.7       149.6       7  
Time and other
    51.4       82.7       (38 )     53.5       85.6       (38 )
                     
Total average deposits
    337.8       348.1       (3 )     335.9       347.0       (3 )
Deposit margin
    3.05 %     2.92 %             3.03 %     2.89 %        
Average assets
  $ 28.4     $ 29.1       (2 )   $ 28.7     $ 29.6       (3 )
                     
Credit data and quality statistics
(in millions, except ratio)
                                               
Net charge-offs
  $ 168     $ 211       (20 )   $ 359     $ 386       (7 )
Net charge-off rate
    4.04 %     4.70 %             4.31 %     4.28 %        
Nonperforming assets
  $ 920     $ 686       34     $ 920     $ 686       34  
                     
Retail branch business metrics
                                               
Investment sales volume (in millions)
  $ 5,756     $ 5,292       9     $ 11,712     $ 9,690       21  
 
                                               
Number of:
                                               
Branches
    5,159       5,203       (1 )     5,159       5,203       (1 )
ATMs
    15,654       14,144       11       15,654       14,144       11  
Personal bankers
    20,170       15,959       26       20,170       15,959       26  
Sales specialists
    6,785       5,485       24       6,785       5,485       24  
Active online customers (in thousands)
    16,584       13,930       19       16,584       13,930       19  
Checking accounts (in thousands)
    26,351       25,252       4       26,351       25,252       4  
 
MORTGAGE BANKING & OTHER CONSUMER LENDING
                                                 
Selected income statement data   Three months ended June 30,   Six months ended June 30,
(in millions, except ratio)   2010   2009   Change   2010   2009   Change
 
Noninterest revenue(a)
  $ 1,256     $ 1,134       11 %   $ 2,274     $ 3,055       (26 )%
Net interest income
    792       721       10       1,685       1,529       10  
                     
Total net revenue
    2,048       1,855       10       3,959       4,584       (14 )
Provision for credit losses
    175       366       (52 )     392       771       (49 )
Noninterest expense
    1,243       1,105       12       2,489       2,242       11  
                     
Income before income tax expense
    630       384       64       1,078       1,571       (31 )
                     
Net income(a)
  $ 364     $ 235       55     $ 621     $ 965       (36 )
                     
Overhead ratio
    61 %     60 %             63 %     49 %        
 
(a)   Losses related to the repurchase of previously-sold loans are recorded as a reduction of production revenue. These losses totaled $667 million and $255 million for the quarters ended June 30, 2010 and 2009, respectively, and $1.1 billion and $475 million for the six months ended June 30, 2010 and 2009, respectively. The losses resulted in a negative impact on net income of $388 million and $157 million for the quarters ended June 30, 2010 and 2009, respectively, and $640 million and $292 million for the six months ended June 30, 2010 and 2009, respectively. For further discussion, see Repurchase liability on pages 58-60 and Note 22 on pages 170-174 of this Form 10-Q, and Note 31 on pages 230-234 of JPMorgan Chase’s 2009 Annual Report.

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Quarterly results
Mortgage Banking & Other Consumer Lending reported net income of $364 million, an increase of $129 million, or 55%, from the prior year. The increase was driven by higher noninterest revenue and a lower provision for credit losses, partially offset by higher noninterest expense.
Net revenue of $2.0 billion was up by $193 million, or 10%, from the prior year, and includes Mortgage Banking revenue of $1.2 billion, up by $62 million, and Other Consumer Lending revenue (comprised of Auto and Student Lending) of $850 million, up by $131 million predominantly as a result of higher auto loan and lease balances. Mortgage Banking revenue includes $212 million of net interest income, $886 million of mortgage fees and related income and $100 million of other noninterest revenue. Included in mortgage fees and related income is $9 million of production revenue, compared with $284 million in the prior year, reflecting higher repurchase losses in the current year and the impact of write-downs on the mortgage warehouse in the prior year. Repurchase losses were $667 million, compared with $255 million in the prior year. Also included is net mortgage servicing revenue of $877 million, up by $354 million from the prior year, which is comprised of operating revenue and MSR risk management revenue. Operating revenue of $566 million was up by $124 million as the improvement in other changes in MSR asset fair value was partially offset by lower loan servicing revenue as a result of lower third-party loans serviced. MSR risk management results were $311 million, compared with $81 million in the prior year.
The provision for credit losses, predominantly related to the student and auto loan portfolios, was $175 million, compared with $366 million in the prior year. The prior-year provision reflected an increase in the allowance for loan losses for student and auto loans. Student loan and other net charge-offs were $150 million (4.04% net charge-off rate), compared with $101 million (2.79% net charge-off rate) in the prior year. Auto loan net charge-offs were $58 million (0.49% net charge-off rate), compared with $146 million (1.36% net charge-off rate) in the prior year.
Noninterest expense was $1.2 billion, up by $138 million, or 12%, from the prior year, driven by an increase in default-related expense.
Year-to-date results
Mortgage Banking & Other Consumer Lending reported net income of $621 million, compared with $965 million in the prior year. The decrease was driven by lower noninterest revenue and higher noninterest expense, partially offset by a lower provision for credit losses and higher net interest income.
Net revenue of $4.0 billion was down by $625 million, or 14%, from the prior year, and includes Mortgage Banking revenue of $2.2 billion, down by $955 million, and Other Consumer Lending revenue (comprised of Auto and Student Lending) of $1.8 billion, up by $330 million predominantly as a result of higher auto loan and lease balances. Mortgage Banking revenue includes $428 million of net interest income, $1.5 billion of mortgage fees and related income and $191 million of other noninterest revenue. Included in mortgage fees and related income is $10 million of production revenue, compared with $765 million in the prior year, reflecting higher repurchase losses in the current year and the impact of write-downs on the mortgage warehouse in the prior year. Repurchase losses were $1.1 billion, compared with $475 million in the prior year. Also included is net mortgage servicing revenue of $1.5 billion, down by $144 million from the prior year, which is comprised of operating revenue and MSR risk management revenue. Operating revenue of $1.1 billion was up $477 million as the improvement in other changes in MSR asset fair value was partially offset by lower loan servicing revenue as a result of lower third-party loans serviced. MSR risk management results were $463 million, compared with $1.1 billion in the prior year.
The provision for credit losses, predominantly related to the student and auto loan portfolios, was $392 million, compared with $771 million in the prior year. The prior-year provision reflected an increase in the allowance for loan losses for student and auto loans. Student loan and other net charge-offs were $214 million (2.80% net charge-off rate), compared with $135 million (1.84% net charge-off rate) in the prior year. Auto loan net charge-offs were $160 million (0.68% net charge-off rate), compared with $320 million (1.51% net charge-off rate) in the prior year.
Noninterest expense was $2.5 billion, up by $247 million, or 11%, from the prior year, driven by an increase in default-related expense.

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Selected metrics   Three months ended June 30,   Six months ended June 30,
(in billions, except ratios and where otherwise noted)   2010   2009   Change   2010   2009   Change
 
Business metrics
                                               
End-of-period loans owned:
                                               
Auto loans
  $ 47.5     $ 42.9       11 %   $ 47.5     $ 42.9       11 %
Mortgage(a)
    13.2       8.9       48       13.2       8.9       48  
Student loans and other
    15.1       15.7       (4 )     15.1       15.7       (4 )
                     
Total end-of-period loans owned
    75.8       67.5       12       75.8       67.5       12  
                     
Average loans owned:
                                               
Auto loans
  $ 47.5     $ 43.1       10     $ 47.2     $ 42.8       10  
Mortgage(a)
    13.6       8.4       62       13.0       8.0       63  
Student loans and other
    16.7       16.8       (1 )     17.6       17.2       2  
                     
Total average loans owned(b)
    77.8       68.3       14       77.8       68.0       14  
                     
Credit data and quality statistics
(in millions, except ratios)
                                               
Net charge-offs:
                                               
Auto loans
  $ 58     $ 146       (60 )   $ 160     $ 320       (50 )
Mortgage
    13       2     NM     19       7       171  
Student loans and other
    150       101       49       214       135       59  
                     
Total net charge-offs
    221       249       (11 )     393       462       (15 )
                     
Net charge-off rate:
                                               
Auto loans
    0.49 %     1.36 %             0.68 %     1.51 %        
Mortgage
    0.39       0.10               0.30       0.19          
Student loans and other
    4.04       2.79               2.80       1.84          
                     
Total net charge-off rate(b)
    1.17       1.52               1.05       1.43          
                     
 
30+ day delinquency rate(c)(d)
    1.42 %     1.80 %             1.42 %     1.80 %        
Nonperforming assets (in millions)(e)
  $ 866     $ 783       11     $ 866     $ 783       11  
                     
 
Origination volume:
                                               
Mortgage origination volume by channel
                                               
Retail
  $ 15.3     $ 14.7       4     $ 26.7     $ 28.3       (6 )
Wholesale(f)
    0.4       0.7       (43 )     0.8       2.3       (65 )
Correspondent(f)
    14.7       21.9       (33 )     30.7       39.9       (23 )
CNT (negotiated transactions)
    1.8       3.8       (53 )     5.7       8.3       (31 )
                     
Total mortgage origination volume
    32.2       41.1       (22 )     63.9       78.8       (19 )
                     
Student loans
  $ 0.1     $ 0.4       (75 )   $ 1.7     $ 2.1       (19 )
Auto
    5.8       5.3       9       12.1       10.9       11  
 

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Selected metrics   Three months ended June 30,   Six months ended June 30,
(in billions, except ratios and where otherwise noted)   2010   2009   Change   2010   2009   Change
 
Application volume:
                                               
Mortgage application volume by channel
                                               
Retail
  $ 27.8     $ 23.0       21 %   $ 48.1     $ 55.7       (14 )%
Wholesale(f)
    0.6       1.3       (54 )     1.4       3.1       (55 )
Correspondent(f)
    23.5       29.7       (21 )     41.7       58.9       (29 )
                     
Total mortgage application volume
  $ 51.9     $ 54.0       (4 )   $ 91.2     $ 117.7       (23 )
                     
Average mortgage loans held-for-sale and loans at fair value(g)
  $ 12.6     $ 16.7       (25 )   $ 13.5     $ 15.3       (12 )
Average assets
    123.2       111.6       10       124.0       112.5       10  
Third-party mortgage loans serviced (ending)
    1,055.2       1,117.5       (6 )     1,055.2       1,117.5       (6 )
Third-party mortgage loans serviced (average)
    1,063.7       1,128.1       (6 )     1,070.1       1,141.6       (6 )
MSR net carrying value (ending)
    11.8       14.6       (19 )     11.8       14.6       (19 )
Ratio of MSR net carrying value (ending) to third-party mortgage loans serviced (ending)
    1.12 %     1.31 %             1.12 %     1.31 %        
 
                                               
Supplemental mortgage fees and related income details
                                               
(in millions)
                                               
                     
Production revenue(h)
  $ 9     $ 284       (97 )   $ 10     $ 765       (99 )
                     
Net mortgage servicing revenue:
                                               
Operating revenue:
                                               
Loan servicing revenue
    1,186       1,279       (7 )     2,293       2,501       (8 )
Other changes in MSR asset fair value
    (620 )     (837 )     26       (1,225 )     (1,910 )     36  
                     
Total operating revenue
    566       442       28       1,068       591       81  
Risk management:
                                               
Changes in MSR asset fair value due to inputs or assumptions in model
    (3,584 )     3,831     NM     (3,680 )     5,141     NM
Derivative valuation adjustments and other
    3,895       (3,750 )   NM     4,143       (4,057 )   NM
                     
Total risk management
    311       81       284       463       1,084       (57 )
                     
Total net mortgage servicing revenue
    877       523       68       1,531       1,675       (9 )
                     
Mortgage fees and related income
  $ 886     $ 807       10     $ 1,541     $ 2,440       (37 )
                     
Ratio of annualized loan servicing revenue to third-party mortgage loans serviced (average)
    0.45 %     0.45 %             0.43 %     0.44 %        
MSR revenue multiple(i)
    2.49 x     2.91 x             2.60 x     2.98 x        
 
(a)   Predominantly represents prime loans repurchased from Government National Mortgage Association (“Ginnie Mae”) pools, which are insured by U.S. government agencies. See further discussion of loans repurchased from Ginnie Mae pools in Repurchase liability on pages 58-60 of this Form 10-Q.
 
(b)   Total average loans owned includes loans held-for-sale of $1.9 billion and $2.8 billion for the quarters ended June 30, 2010 and 2009, respectively, and $2.4 billion and $2.9 billion for the six months ended June 30, 2010 and 2009, respectively. These amounts are excluded when calculating the net charge-off rate.
 
(c)   Excludes mortgage loans that are insured by U.S. government agencies of $10.9 billion and $5.1 billion at June 30, 2010 and 2009, respectively. These amounts are excluded as reimbursement of insured amounts is proceeding normally.
 
(d)   Excludes loans that are 30 days past due and still accruing, which are insured by U.S. government agencies under the FFELP, of $988 million and $854 million at June 30, 2010 and 2009, respectively. These amounts are excluded as reimbursement of insured amounts is proceeding normally.
 
(e)   At June 30, 2010 and 2009, nonperforming loans and assets exclude: (1) mortgage loans insured by U.S. government agencies of $10.1 billion and $4.2 billion, respectively, that are 90 days past due and accruing at the guaranteed reimbursement rate; (2) real estate owned insured by U.S. government agencies of $1.4 billion and $508 million, respectively; and (3) student loans that are 90 days past due and still accruing, which are insured by U.S. government agencies under the FFELP, of $447 million and $473 million, respectively. These amounts are excluded as reimbursement of insured amounts is proceeding normally.
 
(f)   Includes rural housing loans sourced through brokers and correspondents, which are underwritten under U.S. Department of Agriculture guidelines. Prior period amounts have been revised to conform with the current period presentation.
 
(g)   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 $12.5 billion and $16.2 billion for the quarters ended June 30, 2010 and 2009, respectively, and $13.3 billion and $14.9 billion for the six months ended June 30, 2010 and 2009, respectively.
 
(h)   Losses related to the repurchase of previously-sold loans are recorded as a reduction of production revenue. These losses totaled $667 million and $255 million for the quarters ended June 30, 2010 and 2009, respectively, and $1.1 billion and $475 million for the six months ended June 30, 2010 and 2009, respectively. For further discussion, see Repurchase liability on pages 58-60 and Note 22 on pages 170-174 of this Form 10-Q, and Note 31 on pages 230-234 of JPMorgan Chase’s 2009 Annual Report.
 
(i)   Represents the ratio of MSR net carrying value (ending) to third-party mortgage loans serviced (ending) divided by the ratio of annualized loan servicing revenue to third-party mortgage loans serviced (average).

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REAL ESTATE PORTFOLIOS
                                                 
Selected income statement data   Three months ended June 30,   Six months ended June 30,
(in millions, except ratios)   2010   2009   Change   2010   2009   Change
 
Noninterest revenue
  $ 52     $ 3     NM   $ 84     $ (39 )   NM
Net interest income
    1,313       1,590       (17 )%     2,809       3,406       (18 )%
                     
Total net revenue
    1,365       1,593       (14 )     2,893       3,367       (14 )
                     
Provision for credit losses
    1,372       3,119       (56 )     4,697       6,266       (25 )
Noninterest expense
    405       417       (3 )     824       871       (5 )
Income/(loss) before income tax expense/(benefit)
    (412 )     (1,943 )     79       (2,628 )     (3,770 )     30  
                     
Net income/(loss)
  $ (236 )   $ (1,190 )     80     $ (1,522 )   $ (2,309 )     34  
                     
Overhead ratio
    30 %     26 %             28 %     26 %        
 
Quarterly results
Real Estate Portfolios reported a net loss of $236 million, compared with a net loss of $1.2 billion in the prior year. The improvement was driven by a lower provision for credit losses, partially offset by lower net interest income.
Net revenue was $1.4 billion, down by $228 million, or 14%, from the prior year. The decrease was driven by a decline in net interest income as a result of lower loan balances, reflecting portfolio runoff.
The provision for credit losses was $1.4 billion, compared with $3.1 billion in the prior year. The current-quarter provision reflected improved delinquency trends and reduced net charge-offs, while the prior-year provision included an addition to the allowance for loan losses of $930 million in the home equity and mortgage loan portfolios. (For further detail, see RFS discussion of the provision for credit losses.)
Noninterest expense was $405 million, down by $12 million, or 3%, from the prior year, reflecting a decrease in foreclosed asset expense.
Year-to-date results
Real Estate Portfolios reported a net loss of $1.5 billion, compared with a net loss of $2.3 billion in the prior year. The improvement was driven by a lower provision for credit losses, partially offset by lower net interest income.
Net revenue was $2.9 billion, down by $474 million, or 14%, from the prior year. The decrease was driven by a decline in net interest income as a result of lower loan balances, reflecting portfolio runoff.
The provision for credit losses was $4.7 billion, compared with $6.3 billion in the prior year. The provision reflected an addition to the allowance for loan losses for the purchased credit-impaired portfolio of $1.2 billion as well as impacts of improved delinquency trends and reduced net charge-offs, while the prior-year provision included an addition to the allowance for loan losses of $2.3 billion in the home equity and mortgage loan portfolios. (For further detail, see RFS discussion of the provision for credit losses.)
Noninterest expense was $824 million, down by $47 million, or 5%, from the prior year, reflecting a decrease in foreclosed asset expense.

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Selected metrics   Three months ended June 30,   Six months ended June 30,
(in billions)   2010   2009   Change   2010   2009   Change
 
Loans excluding purchased credit-impaired loans(a)
                                               
End-of-period loans owned:
                                               
Home equity
  $ 94.8     $ 108.2       (12 )%   $ 94.8     $ 108.2       (12 )%
Prime mortgage
    44.6       53.2       (16 )     44.6       53.2       (16 )
Subprime mortgage
    12.6       13.8       (9 )     12.6       13.8       (9 )
Option ARMs
    8.5       9.0       (6 )     8.5       9.0       (6 )
Other
    1.0       0.9       11       1.0       0.9       11  
                     
Total end-of-period loans owned
  $ 161.5     $ 185.1       (13 )   $ 161.5     $ 185.1       (13 )
                     
 
                                               
Average loans owned:
                                               
Home equity
  $ 96.3     $ 110.1       (13 )   $ 97.9     $ 111.7       (12 )
Prime mortgage
    45.7       54.9       (17 )     46.8       56.4       (17 )
Subprime mortgage
    13.1       14.3       (8 )     13.4       14.6       (8 )
Option ARMs
    8.6       9.1       (5 )     8.7       9.0       (3 )
Other
    1.0       0.9       11       1.0       0.9       11  
                     
Total average loans owned
  $ 164.7     $ 189.3       (13 )   $ 167.8     $ 192.6       (13 )
                     
 
                                               
Purchased credit-impaired loans(a)
                                               
End-of-period loans owned:
                                               
Home equity
  $ 25.5     $ 27.7       (8 )   $ 25.5     $ 27.7       (8 )
Prime mortgage
    18.5       20.8       (11 )     18.5       20.8       (11 )
Subprime mortgage
    5.6       6.4       (13 )     5.6       6.4       (13 )
Option ARMs
    27.3       30.5       (10 )     27.3       30.5       (10 )
                     
Total end-of-period loans owned
  $ 76.9     $ 85.4       (10 )   $ 76.9     $ 85.4       (10 )
                     
 
                                               
Average loans owned:
                                               
Home equity
  $ 25.7     $ 28.0       (8 )   $ 26.0     $ 28.2       (8 )
Prime mortgage
    18.8       21.0       (10 )     19.1       21.3       (10 )
Subprime mortgage
    5.8       6.5       (11 )     5.8       6.6       (12 )
Option ARMs
    27.7       31.0       (11 )     28.2       31.2       (10 )
                     
Total average loans owned
  $ 78.0     $ 86.5       (10 )   $ 79.1     $ 87.3       (9 )
                     
 
                                               
Total Real Estate Portfolios
                                               
End-of-period loans owned:
                                               
Home equity
  $ 120.3     $ 135.9       (11 )   $ 120.3     $ 135.9       (11 )
Prime mortgage
    63.1       74.0       (15 )     63.1       74.0       (15 )
Subprime mortgage
    18.2       20.2       (10 )     18.2       20.2       (10 )
Option ARMs
    35.8       39.5       (9 )     35.8       39.5       (9 )
Other
    1.0       0.9       11       1.0       0.9       11  
                     
Total end-of-period loans owned
  $ 238.4     $ 270.5       (12 )   $ 238.4     $ 270.5       (12 )
                     
Average loans owned:
                                               
Home equity
  $ 122.0     $ 138.1       (12 )   $ 123.9     $ 139.9       (11 )
Prime mortgage
    64.5       75.9       (15 )     65.9       77.7       (15 )
Subprime mortgage
    18.9       20.8       (9 )     19.2       21.2       (9 )
Option ARMs
    36.3       40.1       (9 )     36.9       40.2       (8 )
Other
    1.0       0.9       11       1.0       0.9       11  
                     
Total average loans owned
  $ 242.7     $ 275.8       (12 )   $ 246.9     $ 279.9       (12 )
                     
Average assets
  $ 230.3     $ 269.5       (15 )   $ 235.2     $ 274.7       (14 )
Home equity origination volume
    0.3       0.6       (50 )     0.6       1.5       (60 )
 
(a)   Purchased credit-impaired loans represent loans acquired in the Washington Mutual transaction for which a deterioration in credit quality occurred between the origination date and JPMorgan Chase’s acquisition date. These loans were initially recorded at fair value and accrete interest income over the estimated lives of the loan as long as cash flows are reasonably estimable, even if the underlying loans are contractually past due.
Included within Real Estate Portfolios are purchased credit-impaired loans that the Firm acquired in the Washington Mutual transaction. For purchased credit-impaired loans, the excess of the undiscounted gross cash flows initially expected to be collected over the fair value of the loans at the acquisition date is accreted into interest income at a level rate of return over the expected life of the loans. This is commonly referred to as the “accretable yield.” The estimate of gross cash flows expected to be collected is updated each reporting period based on updated assumptions. Probable decreases in expected loan principal cash flows require recognition of an allowance for loan losses; probable and significant increases in expected cash flows would first reverse any previously recorded allowance for loan losses with any remaining increases recognized over time through interest income.

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The net spread between the purchased credit-impaired loans and the related liabilities should be relatively constant over time, except for any basis risk or other residual interest rate risk that remains and changes in the accretable yield percentage (e.g., extended loan liquidation periods). As of June 30, 2010, the remaining weighted-average life of the purchased credit-impaired loan portfolio is expected to be 6.6 years. For further information, see Note 13, Purchased credit-impaired loans, on pages 149-150 of this Form 10-Q. The loan balances are expected to decline more rapidly in the earlier years as the most troubled loans are liquidated, and more slowly thereafter as the remaining troubled borrowers have limited refinancing opportunities. Similarly, default and servicing expense are expected to be higher in the earlier years and decline over time as liquidations slow down.
To date the impact of the purchased credit-impaired loans on Real Estate Portfolios net income has been modestly negative. This is due to the current net spread of the portfolio, the provision for loan losses recognized subsequent to its acquisition, and the higher level of default and servicing expense associated with the portfolio. Over time, the Firm expects that this portfolio will contribute positively to net income.
                                                 
Credit data and quality statistics   Three months ended June 30,   Six months ended June 30,
(in millions, except ratios)   2010   2009   Change   2010   2009   Change
 
Net charge-offs excluding purchased credit-impaired loans(a):
                                               
Home equity
  $ 796     $ 1,265       (37 )%   $ 1,922     $ 2,363       (19 )%
Prime mortgage
    251       479       (48 )     704       786       (10 )
Subprime mortgage
    282       410       (31 )     739       774       (5 )
Option ARMs
    22       15       47       45       19       137  
Other
    21       20       5       37       35       6  
                     
Total net charge-offs
  $ 1,372     $ 2,189       (37 )   $ 3,447     $ 3,977       (13 )
                     
Net charge-off rate excluding purchased credit-impaired loans(a):
                                               
Home equity
    3.32 %     4.61 %             3.96 %     4.27 %        
Prime mortgage
    2.20       3.50               3.03       2.81          
Subprime mortgage
    8.63       11.50               11.12       10.69          
Option ARMs
    1.03       0.66               1.04       0.43          
Other
    8.42       8.91               7.46       7.84          
Total net charge-off rate excluding purchased credit-impaired loans
    3.34       4.64               4.14       4.16          
                     
Net charge-off rate — reported:
                                               
Home equity
    2.62 %     3.67 %             3.13 %     3.41 %        
Prime mortgage
    1.56       2.53               2.15       2.04          
Subprime mortgage
    5.98       7.91               7.76       7.36          
Option ARMs
    0.24       0.15               0.25       0.10          
Other
    8.42       8.91               7.46       7.84          
Total net charge-off rate — reported
    2.27       3.18               2.82       2.87          
                     
30+ day delinquency rate excluding purchased credit-impaired loans(b)
    6.88 %     6.46 %             6.88 %     6.46 %        
Allowance for loan losses
  $ 14,127     $ 9,821       44     $ 14,127     $ 9,821       44  
Nonperforming assets(c)
    10,121       9,085       11       10,121       9,085       11  
Allowance for loan losses to ending loans retained
    5.93 %     3.63 %             5.93 %     3.63 %        
Allowance for loan losses to ending loans retained excluding purchased credit-impaired loans(a)
    7.01       5.31               7.01       5.31          
 
(a)   Excludes the impact of purchased credit-impaired loans that were acquired as part of the Washington Mutual transaction. These loans were accounted for at fair value on the acquisition date, which incorporated management’s estimate, as of that date, of credit losses over the remaining life of the portfolio. An allowance for loan losses of $2.8 billion was recorded for these loans at June 30, 2010, which has also been excluded from the applicable ratios. No allowance for loan losses was recorded for these loans at June 30, 2009. To date, no charge-offs have been recorded for these loans.
 
(b)   The delinquency rate for purchased credit-impaired loans was 27.91% and 23.37% at June 30, 2010 and 2009, respectively.
 
(c)   Excludes purchased credit-impaired loans that were acquired as part of the Washington Mutual transaction. These loans are accounted for on a pool basis, and the pools are considered to be performing.

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CARD SERVICES
For a discussion of the business profile of CS, see pages 64-66 of JPMorgan Chase’s 2009 Annual Report and Introduction on page 6 of this Form 10-Q.
Effective January 1, 2010, the Firm adopted new consolidation guidance related to VIEs. Prior to the adoption of the new guidance, JPMorgan Chase used the concept of “managed basis” to evaluate the credit performance of its credit card loans, both loans on the balance sheet and loans that had been securitized. Managed results excluded the impact of credit card securitizations on total net revenue, the provision for credit losses, net charge-offs and loan receivables. Securitization did not change reported net income; however, it did affect the classification of items on the Consolidated Statements of Income and Consolidated Balance Sheet. As a result of the consolidation of the securitization trusts, reported and managed basis are equivalent for periods beginning after January 1, 2010. For further information, see Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures on pages 15-19 of this Form 10-Q.
                                                 
Selected income statement data-        
managed basis(a)   Three months ended June 30,   Six months ended June 30,
(in millions, except ratios)   2010   2009   Change   2010   2009   Change
 
Revenue
                                               
Credit card income
  $ 908     $ 921       (1 )%   $ 1,721     $ 1,765       (2 )%
All other income
    (47 )     (364 )     87       (102 )     (561 )     82  
                     
Noninterest revenue
    861       557       55       1,619       1,204       34  
Net interest income
    3,356       4,311       (22 )     7,045       8,793       (20 )
                     
Total net revenue
    4,217       4,868       (13 )     8,664       9,997       (13 )
 
                                               
Provision for credit losses
    2,221       4,603       (52 )     5,733       9,256       (38 )
 
                                               
Noninterest expense
                                               
Compensation expense
    327       329       (1 )     657       686       (4 )
Noncompensation expense
    986       873       13       1,935       1,723       12  
Amortization of intangibles
    123       131       (6 )     246       270       (9 )
                     
Total noninterest expense
    1,436       1,333       8       2,838       2,679       6  
                     
Income/(loss) before income tax expense/(benefit)
    560       (1,068 )   NM     93       (1,938 )   NM
Income tax expense/(benefit)
    217       (396 )   NM     53       (719 )   NM
                     
Net income/(loss)
  $ 343     $ (672 )   NM   $ 40     $ (1,219 )   NM
                     
 
                                               
Memo: Net securitization income/(loss)
  NA   $ (268 )   NM   NA   $ (448 )   NM
Financial ratios
                                               
Return on common equity
    9 %     (18 )%             1 %     (16 )%        
Overhead ratio
    34       27               33       27          
 
(a)   Effective January 1, 2010, the Firm adopted new accounting guidance related to the transfer of financial assets and the consolidation of VIEs. For further details regarding the Firm’s application and impact of the new guidance, see Note 15 on pages 151-163 of this Form 10-Q.
NA: Not applicable
Quarterly results
Net income was $343 million, compared with a net loss of $672 million in the prior year. The improved results were driven by a lower provision for credit losses, partially offset by lower net revenue.
End-of-period loans were $143.0 billion, a decrease of $28.5 billion, or 17%, from the prior year. Average loans were $146.3 billion, a decrease of $27.8 billion, or 16%, from the prior year. The declines in both end-of-period and average loans were due to the decline in lower yielding promotional balances and the Washington Mutual portfolio runoff.
Net revenue was $4.2 billion, a decrease of $651 million, or 13%, from the prior year. Net interest income was $3.4 billion, down by $955 million, or 22%. The decrease was driven by lower average loan balances, the impact of legislative changes and a decreased level of fees. These decreases were offset partially by lower revenue reversals associated with lower charge-offs. Noninterest revenue was $861 million, an increase of $304 million, or 55%. The prior year included a write-down of securitization interests.

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The provision for credit losses was $2.2 billion, compared with $4.6 billion in the prior year. The current-quarter provision included a reduction of $1.5 billion to the allowance for loan losses, reflecting reduced net charge-offs and lower estimated losses primarily related to improved delinquency trends as well as lower loan balances. The prior-year provision included an addition of $250 million to the allowance for loan losses. The net charge-off rate was 10.20%, up from 10.03% in the prior year. The 30-day delinquency rate was 4.96%, down from 5.86% in the prior year. Excluding the Washington Mutual portfolio, the net charge-off rate was 9.02%, up from 8.97% in the prior year; and the 30-day delinquency rate was 4.48%, down from 5.27% in the prior year.
Noninterest expense was $1.4 billion, an increase of $103 million, or 8%, due to higher marketing expense.
Year-to-date results
Net income was $40 million, compared with a net loss of $1.2 billion in the prior year. The improved results were driven by a lower provision for credit losses, partially offset by lower net revenue.
Average loans were $151.0 billion, a decrease of $27.7 billion, or 16%, from the prior year due to the decline in lower yielding promotional balances and the Washington Mutual portfolio runoff.
Net revenue was $8.7 billion, a decrease of $1.3 billion, or 13%, from the prior year. Net interest income was $7.0 billion, down by $1.7 billion, or 20%. The decrease was driven by lower average loan balances, a decreased level of fees, and the impact of legislative changes. Noninterest revenue was $1.6 billion, an increase of $415 million, or 34%, driven by a prior-year write-down of securitization interests.
The provision for credit losses was $5.7 billion, compared with $9.3 billion in the prior year. The current-year provision included a reduction of $2.5 billion to the allowance for loan losses, reflecting lower estimated losses primarily related to improved delinquency trends as well as lower loan balances. The prior-year provision included an addition of $1.4 billion to the allowance for loan losses. The net charge-off rate was 10.99%, up from 8.85% in the prior year. Excluding the Washington Mutual portfolio, the net charge-off rate was 9.80%, up from 7.90% in the prior year.
Noninterest expense was $2.8 billion, an increase of $159 million, or 6%, due to higher marketing expense.
Credit Card Legislation
In May 2009, the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (“CARD Act”) was enacted. Management estimates that the total annualized reduction in net income from the CARD Act, including recent regulatory guidance that defines reasonable and proportional fees, could be approximately $750 million. Results in the second quarter of 2010 reflect approximately 25% of the estimated quarterly impact of this reduction in net income.
The most significant effects of the CARD Act include: (a) the inability to change the pricing of existing balances; (b) the allocation of customer payments above the minimum payment to the existing balance with the highest annual percentage rate (“APR”); (c) the requirement that customers opt-in in order to receive, for a fee, overlimit protection that permits an authorized transaction over their credit limit; and (d) the requirement that statements must be mailed or delivered not later than 21 days before the payment due date. In addition, certain rules were finalized in June, including those limiting the amount of penalty fees that can be assessed and those that would require CS to review customer accounts for potential interest rate reductions in certain circumstances.
As a result of the CARD Act, CS has implemented certain changes to its business practices to manage its inability to price loans to customers at rates that are commensurate with their risk over time. These changes include: (a) selectively increasing pricing; (b) reducing the volume and duration of low-rate promotional pricing offered to customers; and (c) reducing the amount of credit that is granted to certain new and existing customers.

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Selected metrics        
(in millions, except headcount, ratios and where   Three months ended June 30,   Six months ended June 30,
otherwise noted)   2010   2009   Change   2010   2009   Change
 
Financial ratios(a)
                                               
Percentage of average outstandings:
                                               
Net interest income
    9.20 %     9.93 %             9.41 %     9.92 %        
Provision for credit losses
    6.09       10.60               7.66       10.44          
Noninterest revenue
    2.36       1.28               2.16       1.36          
Risk adjusted margin(b)
    5.47       0.61               3.91       0.84          
Noninterest expense
    3.94       3.07               3.79       3.02          
Pretax income/(loss) (ROO)(c)
    1.54       (2.46 )             0.12       (2.19 )        
Net income/(loss)
    0.94       (1.55 )             0.05       (1.38 )        
 
                                               
Business metrics
                                               
Sales volume (in billions)
  $ 78.1     $ 74.0       6 %   $ 147.5     $ 140.6       5 %
New accounts opened (in millions)
    2.7       2.4       13       5.2       4.6       13  
Open accounts (in millions)
    88.9       100.3       (11 )     88.9       100.3       (11 )
 
                                               
Merchant acquiring business
                                               
Bank card volume (in billions)
  $ 117.1     $ 101.4       15     $ 225.1     $ 195.8       15  
Total transactions (in billions)
    5.0       4.5       11       9.7       8.6       13  
 
                                               
Selected balance sheet data (period-end)
                                               
Loans:
                                               
Loans on balance sheets
  $ 142,994     $ 85,736       67     $ 142,994     $ 85,736       67  
Securitized loans(a)
  NA     85,790     NM   NA     85,790     NM
                     
Total loans
  $ 142,994     $ 171,526       (17 )   $ 142,994     $ 171,526       (17 )
                     
Equity
  $ 15,000     $ 15,000           $ 15,000     $ 15,000        
 
                                               
Selected balance sheet data (average)
                                               
Managed assets
  $ 146,816     $ 193,310       (24 )   $ 151,864     $ 197,234       (23 )
Loans:
                                               
Loans on balance sheets
  $ 146,302     $ 89,692       63     $ 151,020     $ 93,715       61  
Securitized loans(a)
  NA     84,417     NM   NA     85,015     NM
                     
Total average loans
  $ 146,302     $ 174,109       (16 )   $ 151,020     $ 178,730       (16 )
                     
Equity
  $ 15,000     $ 15,000           $ 15,000     $ 15,000        
 
                                               
Headcount
    21,529       22,897       (6 )     21,529       22,897       (6 )
 

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Selected metrics   Three months ended June 30,   Six months ended June 30,
(in millions, except ratios)   2010   2009   Change   2010   2009   Change
 
Credit quality statistics(a)
                                               
Net charge-offs
  $ 3,721     $ 4,353       (15 )%   $ 8,233     $ 7,846       5 %
Net charge-off rate(d)
    10.20 %     10.03 %             10.99 %     8.85 %        
Delinquency rates(a)(d)
                                               
30+ day
    4.96 %     5.86 %             4.96 %     5.86 %        
90+ day
    2.76       3.25               2.76       3.25          
 
                                               
Allowance for loan losses(a)(e)
  $ 14,524     $ 8,839       64     $ 14,524     $ 8,839       64  
Allowance for loan losses to period-end loans(a)(e)(f)
    10.16 %     10.31 %             10.16 %     10.31 %        
 
                                               
Key stats — Washington Mutual only
                                               
Loans
  $ 15,615     $ 23,093       (32 )   $ 15,615     $ 23,093       (32 )
Average loans
    16,455       24,418       (33 )     17,525       25,990       (33 )
Net interest income(g)
    14.97 %     17.90 %             15.02 %     17.14 %        
Risk adjusted margin(b)(g)
    15.43       (3.89 )             8.59       0.49          
Net charge-off rate(h)
    19.53       19.17               21.97       16.75          
30+ day delinquency rate(h)
    8.86       11.98               8.86       11.98          
90+ day delinquency rate(h)
    5.17       6.85               5.17       6.85          
 
                                               
Key stats — excluding Washington Mutual
                                               
Loans
  $ 127,379     $ 148,433       (14 )   $ 127,379     $ 148,433       (14 )
Average loans
    129,847       149,691       (13 )     133,495       152,740       (13 )
Net interest income(g)
    8.47 %     8.63 %             8.67 %     8.69 %        
Risk adjusted margin(b)(g)
    4.21       1.34               3.30       0.89          
Net charge-off rate
    9.02       8.97               9.80       7.90          
30+ day delinquency rate
    4.48       5.27               4.48       5.27          
90+ day delinquency rate
    2.47       2.90               2.47       2.90          
 
(a)   Effective January 1, 2010, the Firm adopted new accounting guidance related to the transfer of financial assets and the consolidation of VIEs. As a result of the consolidation of the credit card securitization trusts, reported and managed basis relating to credit card securitizations are equivalent for periods beginning after January 1, 2010. For further details regarding the Firm’s application and impact of the new guidance, see Note 15 on pages 151-163 of this Form 10-Q.
 
(b)   Represents total net revenue less provision for credit losses.
 
(c)   Pretax return on average managed outstandings.
 
(d)   Results reflect the impact of purchase accounting adjustments related to the Washington Mutual transaction and the consolidation of the WMMT in the second quarter of 2009. Net charge-off rate for the three months ended June 30, 2010, and delinquency rates for the three and six months ended June 30, 2010 were not affected.
 
(e)   Based on loans on the Consolidated Balance Sheets.
 
(f)   Includes $5.0 billion of loans at June 30, 2009, held by the WMMT, which were consolidated onto the CS balance sheet at fair value during the second quarter of 2009. No allowance for loan losses was recorded for these loans as of June 30, 2009. Excluding these loans, the allowance for loan losses to period-end loans would have been 10.95%.
 
(g)   As a percentage of average managed outstandings.
 
(h)   Excludes the impact of purchase accounting adjustments related to the Washington Mutual transaction and the consolidation of the WMMT in the second quarter of 2009.
NA: Not applicable.

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Reconciliation from reported basis to managed basis
The financial information presented below reconciles reported basis and managed basis to disclose the effect of securitizations reported in 2009. Effective January 1, 2010, the Firm adopted new accounting guidance that amended the accounting for the transfer of financial assets and the consolidation of VIEs. As a result of the consolidation of the credit card securitization trusts, reported and managed basis relating to credit card securitizations are equivalent for periods beginning after January 1, 2010. For further details regarding the Firm’s application and impact of the new guidance, see Note 15 on pages 151-163 of this Form 10-Q.
                                                 
    Three months ended June 30,   Six months ended June 30,
(in millions, except ratios)   2010   2009   Change   2010   2009   Change
 
Income statement data
                                               
Credit card income
                                               
Reported
  $ 908     $ 1,215       (25 )%   $ 1,721     $ 2,599       (34 )%
Securitization adjustments
  NA     (294 )   NM   NA     (834 )   NM
                     
Managed credit card income
  $ 908     $ 921       (1 )   $ 1,721     $ 1,765       (2 )
                     
 
                                               
Net interest income
                                               
Reported
  $ 3,356     $ 2,353       43     $ 7,045     $ 4,831       46  
Securitization adjustments
  NA     1,958     NM   NA     3,962     NM
                     
Managed net interest income
  $ 3,356     $ 4,311       (22 )   $ 7,045     $ 8,793       (20 )
                     
 
                                               
Total net revenue
                                               
Reported
  $ 4,217     $ 3,204       32     $ 8,664     $ 6,869       26  
Securitization adjustments
  NA     1,664     NM   NA     3,128     NM
                     
Managed total net revenue
  $ 4,217     $ 4,868       (13 )   $ 8,664     $ 9,997       (13 )
                     
 
                                               
Provision for credit losses
                                               
Reported
  $ 2,221     $ 2,939       (24 )   $ 5,733     $ 6,128       (6 )
Securitization adjustments
  NA     1,664     NM   NA     3,128     NM
                     
Managed provision for credit losses
  $ 2,221     $ 4,603       (52 )   $ 5,733     $ 9,256       (38 )
                     
 
                                               
Balance sheets — average balances
                                               
Total average assets
                                               
Reported
  $ 146,816     $ 111,722       31     $ 151,864     $ 115,052       32  
Securitization adjustments
  NA     81,588     NM   NA     82,182     NM
                     
Managed average assets
  $ 146,816     $ 193,310       (24 )   $ 151,864     $ 197,234       (23 )
                     
 
                                               
Credit quality statistics
                                               
Net charge-offs
                                               
Reported
  $ 3,721     $ 2,689       38     $ 8,233     $ 4,718       75  
Securitization adjustments
  NA     1,664     NM   NA     3,128     NM
                     
Managed net charge-offs
  $ 3,721     $ 4,353       (15 )   $ 8,233     $ 7,846       5  
                     
 
                                               
Net charge-off rates
                                               
Reported
    10.20 %     12.03 %             10.99 %     10.15 %        
Securitized
  NA     7.91             NA     7.42          
Managed net charge-off rate
    10.20       10.03               10.99       8.85          
 
NA: Not applicable

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COMMERCIAL BANKING
For a discussion of the business profile of CB, see pages 67-68 of JPMorgan Chase’s 2009 Annual Report and Introduction on page 6 of this Form 10-Q.
                                                 
Selected income statement data   Three months ended June 30,   Six months ended June 30,
(in millions, except ratios)   2010   2009   Change   2010   2009   Change
 
Revenue
                                               
Lending- and deposit-related fees
  $ 280     $ 270       4 %   $ 557     $ 533       5 %
Asset management, administration and commissions
    36       36             73       70       4  
All other income(a)
    230       152       51       416       277       50  
                     
Noninterest revenue
    546       458       19       1,046       880       19  
Net interest income
    940       995       (6 )     1,856       1,975       (6 )
                     
Total net revenue(b)
    1,486       1,453       2       2,902       2,855       2  
 
                                               
Provision for credit losses
    (235 )     312     NM       (21 )     605     NM  
 
                                               
Noninterest expense
                                               
Compensation expense
    196       197       (1 )     402       397       1  
Noncompensation expense
    337       327       3       661       669       (1 )
Amortization of intangibles
    9       11       (18 )     18       22       (18 )
                     
Total noninterest expense
    542       535       1       1,081       1,088       (1 )
                     
Income before income tax expense
    1,179       606       95       1,842       1,162       59  
Income tax expense
    486       238       104       759       456       66  
                     
Net income
  $ 693     $ 368       88     $ 1,083     $ 706       53  
                     
 
                                               
Revenue by product
                                               
Lending
  $ 649     $ 684       (5 )   $ 1,307     $ 1,349       (3 )
Treasury services
    665       679       (2 )     1,303       1,325       (2 )
Investment banking
    115       114       1       220       187       18  
Other
    57       (24 )   NM       72       (6 )   NM  
                     
Total Commercial Banking revenue
  $ 1,486     $ 1,453       2     $ 2,902     $ 2,855       2  
 
                                               
IB revenue, gross(c)
  $ 333     $ 328       2     $ 644     $ 534       21  
 
                                               
Revenue by client segment
                                               
Middle Market Banking
  $ 767     $ 772       (1 )   $ 1,513     $ 1,524       (1 )
Commercial Term Lending
    237       224       6       466       452       3  
Mid-Corporate Banking
    285       305       (7 )     548       547        
Real Estate Banking
    125       120       4       225       240       (6 )
Other
    72       32       125       150       92       63  
                     
Total Commercial Banking revenue
  $ 1,486     $ 1,453       2     $ 2,902     $ 2,855       2  
                     
 
                                               
Financial ratios
                                               
Return on common equity
    35 %     18 %             27 %     18 %        
Overhead ratio
    36       37               37       38          
 
(a)   Revenue from investment banking products sold to CB clients and commercial card fee revenue is included in all other income.
 
(b)   Total net revenue included tax-equivalent adjustments from income tax credits related to equity investments in designated community development entities that provide loans to qualified businesses in low-income communities as well as tax-exempt income from municipal bond activity of $49 million and $39 million for the quarters ended June 30, 2010 and 2009, respectively, and $94 million and $74 million for year-to-date 2010 and 2009, respectively.
 
(c)   Represents the total revenue related to investment banking products sold to CB clients.

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Quarterly results
Net income was $693 million, an increase of $325 million, or 88%, from the prior year. The increase was driven by a reduction in the provision for credit losses.
Net revenue was $1.5 billion, relatively flat compared with the prior year. Net interest income was $940 million, down by $55 million, or 6%, driven by spread compression on liability products and lower loan balances, predominantly offset by growth in liability balances and wider loan spreads. Noninterest revenue was $546 million, an increase of $88 million, or 19%. The current quarter reflected gains on sales of loans and other real estate owned, and higher lending-related fees, while the prior year reflected markdowns on certain assets held at fair value.
Revenue from Middle Market Banking was $767 million, a decrease of $5 million, or 1%, from the prior year. Revenue from Commercial Term Lending was $237 million, an increase of $13 million, or 6%. Revenue from Mid-Corporate Banking was $285 million, a decrease of $20 million, or 7%. Revenue from Real Estate Banking was $125 million, an increase of $5 million, or 4%.
The provision for credit losses was a benefit of $235 million, compared with an expense of $312 million in the prior year. The current-quarter provision included a reduction of $413 million to the allowance for credit losses, mainly due to refinements to credit loss estimates and improvement in the credit quality of the commercial and industrial portfolio. Net charge-offs were $176 million (0.74% net charge-off rate), compared with $181 million (0.67% net charge-off rate) in the prior year. Current-quarter net charge-offs were largely related to commercial real estate. The allowance for loan losses to end-of-period loans retained was 2.82%, down from 2.87% in the prior year. Nonperforming loans were $3.1 billion, up by $1.0 billion from the prior year, reflecting increases in nonperforming commercial real estate loans.
Noninterest expense was $542 million, an increase of $7 million, relatively flat compared with the prior year.
Year-to-date results
Net income was $1.1 billion, an increase of $377 million, or 53%, from the prior year. The increase was driven by a reduction in the provision for credit losses.
Net revenue was $2.9 billion, relatively flat compared with the prior year. Net interest income was $1.9 billion down by $119 million, or 6%, driven by spread compression on liability products and lower loan balances, but largely offset by growth in liability balances and wider loan spreads. Noninterest revenue was $1.0 billion, an increase of $166 million, or 19%, from the prior year. The current year reflected gains on sales of loans and other real estate owned, higher lending-related fees and higher investment banking fees, while the prior year reflected markdowns on certain assets held at fair value.
Revenue from Middle Market Banking was $1.5 billion, relatively flat with the prior year. Revenue from Commercial Term Lending was $466 million, an increase of $14 million, or 3%. Mid-Corporate Banking revenue was $548 million, flat compared with the prior year. Real Estate Banking revenue was $225 million, a decrease of $15 million, or 6%.
The provision for credit losses was a benefit of $21 million, compared with an expense of $605 million in the prior year. The reduction was mainly due to refinements to credit loss estimates and improvement in the credit quality of the commercial and industrial portfolio. Net charge-offs were $405 million (0.85% net charge-off rate), compared with $315 million (0.57% net charge-off rate) in the prior year.
Noninterest expense was $1.1 billion, relatively flat with the prior year.

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Selected metrics   Three months ended June 30,   Six months ended June 30,
(in millions, except headcount and ratios)   2010   2009   Change   2010   2009   Change
 
Selected balance sheet data (period-end):
                                               
Loans:
                                               
Loans retained
  $ 95,090     $ 105,556       (10 )%   $ 95,090     $ 105,556       (10 )%
Loans held-for-sale and loans at fair value
    446       296       51       446       296       51  
                     
Total loans
    95,536       105,852       (10 )     95,536       105,852       (10 )
Equity
    8,000       8,000             8,000       8,000        
 
                                               
Selected balance sheet data (average):
                                               
Total assets
  $ 133,309     $ 137,283       (3 )   $ 133,162     $ 140,771       (5 )
Loans:
                                               
Loans retained
    95,521       108,750       (12 )     95,917       111,146       (14 )
Loans held-for-sale and loans at fair value
    391       288       36       344       292       18  
                     
Total loans
    95,912       109,038       (12 )     96,261       111,438       (14 )
Liability balances(a)
    136,770       105,829       29       134,966       110,377       22  
Equity
    8,000       8,000             8,000       8,000        
Average loans by client segment:
                                               
Middle Market Banking
  $ 34,424     $ 38,193       (10 )   $ 34,173     $ 39,453       (13 )
Commercial Term Lending
    35,956       36,963       (3 )     36,006       36,889       (2 )
Mid-Corporate Banking
    11,875       17,012       (30 )     12,065       17,710       (32 )
Real Estate Banking
    9,814       12,347       (21 )     10,124       12,803       (21 )
Other
    3,843       4,523       (15 )     3,893       4,583       (15 )
                     
Total Commercial Banking loans
  $ 95,912     $ 109,038       (12 )   $ 96,261     $ 111,438       (14 )
 
                                               
Headcount
    4,808       4,228       14       4,808       4,228       14  
 
                                               
Credit data and quality statistics:
                                               
Net charge-offs
  $ 176     $ 181       (3 )   $ 405     $ 315       29  
Nonperforming loans:
                                               
Nonperforming loans retained(b)
    3,036       2,090       45       3,036       2,090       45  
Nonperforming loans held-for-sale and loans at fair value
    41       21       95       41       21       95  
                     
Total nonperforming loans
    3,077       2,111       46       3,077       2,111       46  
Nonperforming assets
    3,285       2,255       46       3,285       2,255       46  
Allowance for credit losses:
                                               
Allowance for loan losses
    2,686       3,034       (11 )     2,686       3,034       (11 )
Allowance for lending-related commitments
    267       272       (2 )     267       272       (2 )
                     
Total allowance for credit losses
    2,953       3,306       (11 )     2,953       3,306       (11 )
 
                                               
Net charge-off rate
    0.74 %     0.67 %             0.85 %     0.57 %        
Allowance for loan losses to period-end loans retained
    2.82       2.87               2.82       2.87          
Allowance for loan losses to average loans retained
    2.81       2.79               2.80       2.73          
Allowance for loan losses to nonperforming loans retained
    88       145               88       145          
Nonperforming loans to period-end loans
    3.22       1.99               3.22       1.99          
Nonperforming loans to average loans
    3.21       1.94               3.20       1.89          
 
(a)   Liability balances include deposits, as well as deposits that are swept to on—balance sheet liabilities (e.g., commercial paper, federal funds purchased, time deposits and securities loaned or sold under repurchase agreements) as part of customer cash management programs.
 
(b)   Allowance for loan losses of $586 million and $460 million were held against nonperforming loans retained at June 30, 2010 and 2009, respectively.

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TREASURY & SECURITIES SERVICES
For a discussion of the business profile of TSS, see pages 56-57 of JPMorgan Chase’s 2009 Annual Report and Introduction on page 6 of this Form 10-Q.
                                                 
Selected income statement data   Three months ended June 30,   Six months ended June 30,
(in millions, except headcount and ratios)   2010   2009   Change   2010   2009   Change
 
Revenue
                                               
Lending- and deposit-related fees
  $ 313     $ 314       %   $ 624     $ 639       (2 )%
Asset management, administration and commissions
    705       710       (1 )     1,364       1,336       2  
All other income
    209       221       (5 )     385       418       (8 )
                     
Noninterest revenue
    1,227       1,245       (1 )     2,373       2,393       (1 )
Net interest income
    654       655             1,264       1,328       (5 )
                     
Total net revenue
    1,881       1,900       (1 )     3,637       3,721       (2 )
 
                                               
Provision for credit losses
    (16 )     (5 )     (220 )     (55 )     (11 )     (400 )
Credit reimbursement to IB(a)
    (30 )     (30 )           (60 )     (60 )      
 
                                               
Noninterest expense
                                               
Compensation expense
    697       618       13       1,354       1,247       9  
Noncompensation expense
    684       650       5       1,334       1,321       1  
Amortization of intangibles
    18       20       (10 )     36       39       (8 )
                     
Total noninterest expense
    1,399       1,288       9       2,724       2,607       4  
                     
Income before income tax expense
    468       587       (20 )     908       1,065       (15 )
Income tax expense
    176       208       (15 )     337       378       (11 )
                     
Net income
  $ 292     $ 379       (23 )   $ 571     $ 687       (17 )
                     
 
                                               
Revenue by business
                                               
Treasury Services
  $ 926     $ 934       (1 )   $ 1,808     $ 1,865       (3 )
Worldwide Securities Services
    955       966       (1 )     1,829       1,856       (1 )
                     
Total net revenue
  $ 1,881     $ 1,900       (1 )   $ 3,637     $ 3,721       (2 )
 
                                               
Financial ratios
                                               
Return on common equity
    18 %     30 %             18 %     28 %        
Overhead ratio
    74       68               75       70          
Pretax margin ratio
    25       31               25       29          
 
                                               
Selected balance sheet data (period-end)
                                               
Loans(b)
  $ 24,513     $ 17,929       37     $ 24,513     $ 17,929       37  
Equity
    6,500       5,000       30       6,500       5,000       30  
 
                                               
Selected balance sheet data (average)
                                               
Total assets
  $ 42,868     $ 35,520       21     $ 40,583     $ 37,092       9  
Loans(b)
    22,137       17,524       26       20,865       18,825       11  
Liability balances(c)
    246,690       234,163       5       247,294       255,208       (3 )
Equity
    6,500       5,000       30       6,500       5,000       30  
 
                                               
Headcount
    27,943       27,252       3       27,943       27,252       3  
 
(a)   IB credit portfolio group manages certain exposures on behalf of clients shared with TSS. TSS reimburses IB for a portion of the total cost of managing the credit portfolio. IB recognizes this credit reimbursement as a component of noninterest revenue.
 
(b)   Loan balances include wholesale overdrafts, commercial card and trade finance loans.
 
(c)   Liability balances include deposits, as well as deposits that are swept to on-balance sheet liabilities (e.g., commercial paper, federal funds purchased, time deposits and securities loaned or sold under repurchase agreements) as part of customer cash management programs.

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Quarterly results
Net income was $292 million, a decrease of $87 million, or 23%, from the prior year. These results reflected lower net revenue and higher noninterest expense.
Net revenue was $1.9 billion, a decrease of $19 million, or 1%, from the prior year. Worldwide Securities Services net revenue was $955 million, relatively flat compared with the prior year, as lower spreads in securities lending and the impact of lower volatility on foreign exchange were offset by higher market levels and net inflows of assets under custody. Similarly, TS net revenue was $926 million, relatively flat as lower deposit spreads were offset by higher trade loan and card product volumes.
TSS generated firmwide net revenue of $2.6 billion, including $1.7 billion by TS; of that amount, $926 million was recorded in TS, $665 million in CB and $62 million in other lines of business. The remaining $955 million of firmwide net revenue was recorded in Worldwide Securities Services.
The provision for credit losses was a benefit of $16 million, compared with a benefit of $5 million in the prior year.
Noninterest expense was $1.4 billion, up $111 million, or 9% from the prior year. The increase was driven by higher performance-based compensation and continued investment in new product platforms, primarily related to international expansion.
Year-to-date results
Net income was $571 million, a decrease of $116 million, or 17%, from the prior year. These results reflected lower net revenue and higher noninterest expense.
Net revenue was $3.6 billion, a decrease of $84 million, or 2% from the prior year. Worldwide Securities Services net revenue of $1.8 billion was relatively flat as lower spreads in securities lending, the impact of lower volatility on foreign exchange and lower balances on liability products, were offset by the effects of higher market levels and net inflows of assets under custody. TS net revenue was $1.8 billion, a decrease of $57 million, or 3%. The decrease primarily reflected lower deposit spreads, partially offset by higher trade loan and card product volumes.
TSS generated firmwide net revenue of $5.1 billion, including $3.2 billion by TS; of that amount, $1.8 billion was recorded in TS, $1.3 billion in CB and $118 million in other lines of business. The remaining $1.8 billion of net revenue was recorded in Worldwide Securities Services.
The provision for credit losses was a benefit of $55 million compared with a benefit of $11 million in the prior year.
Noninterest expense was $2.7 billion, up $117 million, or 4%. The increase was driven by higher performance-based compensation as well as continued investment in new product platforms, primarily related to international expansion.

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Selected metrics   Three months ended June 30,   Six months ended June 30,
(in millions, except ratios and where otherwise noted)   2010   2009   Change   2010   2009   Change
 
TSS firmwide disclosures
                                               
Treasury Services revenue — reported
  $ 926     $ 934       (1 )%   $ 1,808     $ 1,865       (3 )%
Treasury Services revenue reported in CB
    665       679       (2 )     1,303       1,325       (2 )
Treasury Services revenue reported in other lines of business
    62       63       (2 )     118       125       (6 )
                     
Treasury Services firmwide revenue(a)
    1,653       1,676       (1 )     3,229       3,315       (3 )
Worldwide Securities Services revenue
    955       966       (1 )     1,829       1,856       (1 )
                     
Treasury & Securities Services firmwide revenue(a)
  $ 2,608     $ 2,642       (1 )   $ 5,058     $ 5,171       (2 )
 
                                               
Treasury Services firmwide liability balances (average)(b)
  $ 303,224     $ 258,312       17     $ 304,159     $ 273,892       11  
Treasury & Securities Services firmwide liability balances (average)(b)
    383,460       339,992       13       382,260       365,584       5  
 
                                               
TSS firmwide financial ratios
                                               
Treasury Services firmwide overhead ratio(c)
    54 %     51 %             55 %     52 %        
Treasury & Securities Services firmwide overhead ratio(c)
    64       59               65       61          
 
                                               
Firmwide business metrics
                                               
Assets under custody (in billions)
  $ 14,857     $ 13,748       8     $ 14,857     $ 13,748       8  
 
                                               
Number of:
                                               
U.S.$ ACH transactions originated (in millions)
    970       978       (1 )     1,919       1,956       (2 )
Total U.S.$ clearing volume (in thousands)
    30,531       28,193       8       59,200       55,379       7  
International electronic funds transfer volume (in thousands)(d)
    58,484       47,096       24       114,238       91,461       25  
Wholesale check volume (in millions)
    526       572       (8 )     1,004       1,140       (12 )
Wholesale cards issued (in thousands)(e)
    28,066       25,501       10       28,066       25,501       10  
                     
 
                                               
Credit data and quality statistics
                                               
Net charge-offs
  $     $ 17     NM   $     $ 19     NM
Nonperforming loans
    14       14             14       14        
Allowance for credit losses:
                                               
Allowance for loan losses
    48       15       220       48       15       220  
Allowance for lending-related commitments
    68       92       (26 )     68       92       (26 )
                     
Total allowance for credit losses
    116       107       8       116       107       8  
 
                                               
Net charge-off rate
    %     0.39 %             %     0.20 %        
Allowance for loan losses to period-end loans
    0.20       0.08               0.20       0.08          
Allowance for loan losses to average loans
    0.22       0.09               0.23       0.08          
Allowance for loan losses to nonperforming loans
    343       107               343       107          
Nonperforming loans to period-end loans
    0.06       0.08               0.06       0.08          
Nonperforming loans to average loans
    0.06       0.08               0.07       0.07          
 
(a)   TSS firmwide revenue includes foreign exchange (“FX”) revenue recorded in TSS and FX revenue associated with TSS customers who are FX customers of IB. However, some of the FX revenue associated with TSS customers who are FX customers of IB is not included in TS and TSS firmwide revenue. The total FX revenue generated was $175 million and $191 million for the three months ended June 30, 2010 and 2009, respectively, and $312 million and $345 million for the six months ended June 30, 2010 and 2009, respectively.
 
(b)   Firmwide liability balances include liability balances recorded in CB.
 
(c)   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.
 
(d)   International electronic funds transfer includes non-U.S. dollar Automated Clearing House (“ACH”) and clearing volume.
 
(e)   Wholesale cards issued and outstanding include U.S. domestic commercial, stored value, prepaid and government electronic benefit card products.

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ASSET MANAGEMENT
For a discussion of the business profile of AM, see pages 71-73 of JPMorgan Chase’s 2009 Annual Report and Introduction on page 6 of this Form 10-Q.
                                                 
Selected income statement data   Three months ended June 30,   Six months ended June 30,
(in millions, except ratios)   2010   2009   Change   2010   2009   Change
 
Revenue:
                                               
Asset management, administration and commissions
  $ 1,522     $ 1,315       16 %   $ 3,030     $ 2,546       19 %
All other income
    177       253       (30 )     443       322       38  
                     
Noninterest revenue
    1,699       1,568       8       3,473       2,868       21  
Net interest income
    369       414       (11 )     726       817       (11 )
                     
Total net revenue
    2,068       1,982       4       4,199       3,685       14  
 
                                               
Provision for credit losses
    5       59       (92 )     40       92       (57 )
 
                                               
Noninterest expense:
                                               
Compensation expense
    861       810       6       1,771       1,610       10  
Noncompensation expense
    527       525             1,041       1,004       4  
Amortization of intangibles
    17       19       (11 )     35       38       (8 )
                     
Total noninterest expense
    1,405       1,354       4       2,847       2,652       7  
                     
Income before income tax expense
    658       569       16       1,312       941       39  
Income tax expense
    267       217       23       529       365       45  
                     
Net income
  $ 391     $ 352       11     $ 783     $ 576       36  
                     
 
                                               
Revenue by client segment
                                               
Private Bank
  $ 695     $ 640       9     $ 1,393     $ 1,223       14  
Retail
    482       411       17       897       664       35  
Institutional
    433       487       (11 )     999       947       5  
Private Wealth Management
    348       334       4       691       646       7  
JPMorgan Securities(a)
    110       110             219       205       7  
                     
Total net revenue
  $ 2,068     $ 1,982       4     $ 4,199     $ 3,685       14  
                     
Financial ratios
                                               
Return on common equity
    24 %     20 %             24 %     17 %        
Overhead ratio
    68       68               68       72          
Pretax margin ratio
    32       29               31       26          
 
(a)   JPMorgan Securities was formerly known as Bear Stearns Private Client Services prior to January 1, 2010.

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Quarterly results
Net income was $391 million, an increase of $39 million, or 11%, from the prior year. These results reflected higher net revenue and a lower provision for credit losses, partially offset by higher noninterest expense.
Net revenue was $2.1 billion, an increase of $86 million, or 4%, from the prior year. Noninterest revenue was $1.7 billion, up by $131 million, or 8%, due to the effects of higher market levels, net inflows to products with higher margins and higher performance fees, partially offset by lower quarterly valuations of seed capital investments. Net interest income was $369 million, down by $45 million, or 11%, due to narrower deposit spreads, largely offset by higher deposit balances.
Revenue from the Private Bank was $695 million, up 9% from the prior year. Revenue from Retail was $482 million, up 17%. Revenue from Institutional was $433 million, down 11%. Revenue from Private Wealth Management was $348 million, up 4%. Revenue from JPMorgan Securities was $110 million, flat compared with the prior year.
The provision for credit losses was $5 million, compared with $59 million in the prior year.
Noninterest expense was $1.4 billion, an increase of $51 million, or 4%, from the prior year, reflecting higher headcount.
Year-to-date results
Net income was $783 million, an increase of $207 million, or 36%, from the prior year, due to higher net revenue and a lower provision for credit losses, partially offset by higher noninterest expense.
Net revenue was $4.2 billion, an increase of $514 million, or 14%, from the prior year. Noninterest revenue was $3.5 billion, an increase of $605 million, or 21%, due to the effects of higher market levels, higher placement fees, net inflows to products with higher margins and higher performance fees. Net interest income was $726 million, down by $91 million, or 11%, from the prior year, due to narrower deposit spreads, partially offset by higher deposit balances.
Revenue from the Private Bank was $1.4 billion, up 14% from the prior year. Revenue from Institutional was $999 million, up 5%. Revenue from Retail was $897 million, up 35%. Revenue from Private Wealth Management was $691 million, up 7%. Revenue from JPMorgan Securities was $219 million, up 7%.
The provision for credit losses was $40 million, compared with $92 million in the prior year.
Noninterest expense was $2.8 billion, an increase of $195 million, or 7%, from the prior year due to higher performance-based compensation and higher headcount.

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Business metrics   Three months ended June 30,   Six months ended June 30,
(in millions, except headcount, ratios,                        
ranking data, and where otherwise noted)   2010   2009   Change   2010   2009   Change
 
Number of:
                                               
Client advisors
    2,055       1,838       12 %     2,055       1,838       12 %
Retirement planning services participants (in thousands)
    1,653       1,595       4       1,653       1,595       4  
JPMorgan Securities brokers(a)
    402       362       11       402       362       11  
 
                                               
% of customer assets in 4 & 5 Star Funds(b)
    43 %     45 %     (4 )     43 %     45 %     (4 )
% of AUM in 1st and 2nd quartiles:(c)
                                               
1 year
    58 %     62 %     (6 )     58 %     62 %     (6 )
3 years
    67 %     69 %     (3 )     67 %     69 %     (3 )
5 years
    78 %     80 %     (3 )     78 %     80 %     (3 )
 
                                               
Selected balance sheet data (period-end)
                                               
Loans
  $ 38,744     $ 35,474       9     $ 38,744     $ 35,474       9  
Equity
    6,500       7,000       (7 )     6,500       7,000       (7 )
 
                                               
Selected balance sheet data (average)
                                               
Total assets
  $ 63,426     $ 59,334       7     $ 62,978     $ 58,783       7  
Loans
    37,407       34,292       9       37,007       34,438       7  
Deposits
    86,453       75,355       15       83,573       78,534       6  
Equity
    6,500       7,000       (7 )     6,500       7,000       (7 )
 
                                               
Headcount
    16,019       14,840       8       16,019       14,840       8  
 
                                               
Credit data and quality statistics
                                               
Net charge-offs
  $ 27     $ 46       (41 )   $ 55     $ 65       (15 )
Nonperforming loans
    309       313       (1 )     309       313       (1 )
Allowance for credit losses:
                                               
Allowance for loan losses
    250       226       11       250       226       11  
Allowance for lending-related commitments
    3       4       (25 )     3       4       (25 )
                     
Total allowance for credit losses
    253       230       10       253       230       10  
 
                                               
Net charge-off rate
    0.29 %     0.54 %             0.30 %     0.38 %        
Allowance for loan losses to period-end loans
    0.65       0.64               0.65       0.64          
Allowance for loan losses to average loans
    0.67       0.66               0.68       0.66          
Allowance for loan losses to nonperforming loans
    81       72               81       72          
Nonperforming loans to period-end loans
    0.80       0.88               0.80       0.88          
Nonperforming loans to average loans
    0.83       0.91               0.83       0.91          
 
(a)   JPMorgan Securities was formerly known as Bear Stearns Private Client Services prior to January 1, 2010.
 
(b)   Derived from Morningstar for the U.S., the U.K., Luxembourg, France, Hong Kong and Taiwan; and Nomura for Japan.
 
(c)   Quartile rankings sourced from Lipper for the U.S. and Taiwan; Morningstar for the U.K., Luxembourg, France and Hong Kong; and Nomura for Japan.

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Assets under supervision
Assets under supervision were $1.6 trillion, an increase of $97 billion, or 6%, from the prior year. Assets under management were $1.2 trillion, a decrease of $10 billion, or 1%, due to outflows in liquidity products, predominantly offset by inflows in fixed income and equity products and the effect of higher market levels. Custody, brokerage, administration and deposit balances were $479 billion, up by $107 billion, or 29%, due to custody and brokerage inflows and the effect of higher market levels.
                 
ASSETS UNDER SUPERVISION(a) (in billions)        
As of June 30,   2010   2009
 
Assets by asset class
               
Liquidity
  $ 489     $ 617  
Fixed income
    259       194  
Equities and multi-asset
    322       264  
Alternatives
    91       96  
 
Total assets under management
    1,161       1,171  
Custody/brokerage/administration/deposits
    479       372  
 
Total assets under supervision
  $ 1,640     $ 1,543  
 
 
               
Assets by client segment
               
 
               
Institutional
  $ 634     $ 697  
Private Bank
    177       179  
Retail
    269       216  
Private Wealth Management
    66       67  
JPMorgan Securities(b)
    15       12  
 
Total assets under management
  $ 1,161     $ 1,171  
 
 
               
Institutional
  $ 636     $ 697  
Private Bank
    469       390  
Retail
    351       289  
Private Wealth Management
    130       123  
JPMorgan Securities(b)
    54       44  
 
Total assets under supervision
  $ 1,640     $ 1,543  
 
 
               
Assets by geographic region
               
U.S./Canada
  $ 791     $ 814  
International
    370       357  
 
Total assets under management
  $ 1,161     $ 1,171  
 
U.S./Canada
  $ 1,151     $ 1,103  
International
    489       440  
 
Total assets under supervision
  $ 1,640     $ 1,543  
 
 
               
Mutual fund assets by asset class
               
Liquidity
  $ 440     $ 569  
Fixed income
    79       48  
Equities and multi-asset
    133       111  
Alternatives
    8       9  
 
Total mutual fund assets
  $ 660     $ 737  
 
(a)   Excludes assets under management of American Century Companies, Inc., in which the Firm had a 42% ownership at both June 30, 2010 and 2009.
 
(b)   JPMorgan Securities was formerly known as Bear Stearns Private Client Services prior to January 1, 2010.

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Assets under management rollforward   Three months ended June 30,   Six months ended June 30,
(in billions)   2010   2009   2010   2009
 
Beginning balance
  $ 1,219     $ 1,115     $ 1,249     $ 1,133  
Net asset flows:
                               
Liquidity
    (29 )     (7 )     (91 )     12  
Fixed income
    12       8       28       9  
Equities, multi-asset and alternatives
    1       2       7       (3 )
Market/performance/other impacts
    (42 )     53       (32 )     20  
 
Total assets under management
  $ 1,161     $ 1,171     $ 1,161     $ 1,171  
 
 
                               
Assets under supervision rollforward
                               
 
Beginning balance
  $ 1,707     $ 1,464     $ 1,701     $ 1,496  
Net asset flows
    (4 )     (9 )     (14 )     16  
Market/performance/other impacts
    (63 )     88       (47 )     31  
 
Total assets under supervision
  $ 1,640     $ 1,543     $ 1,640     $ 1,543  
 
CORPORATE / PRIVATE EQUITY
For a discussion of the business profile of Corporate/Private Equity, see pages 74-75 of JPMorgan Chase’s 2009 Annual Report.
                                                 
Selected income statement data   Three months ended June 30,   Six months ended June 30,
(in millions, except headcount)   2010   2009   Change   2010   2009   Change
 
Revenue
                                               
Principal transactions
  $ (69 )   $ 1,243     NM     $ 478     $ (250 )   NM  
Securities gains
    990       366       170 %     1,600       580       176 %
All other income
    182       (209 )   NM       306       (228 )   NM  
                     
Noninterest revenue
    1,103       1,400       (21 )     2,384       102     NM  
Net interest income
    747       865       (14 )     1,823       1,854       (2 )
                     
Total net revenue(a)
    1,850       2,265       (18 )     4,207       1,956       115  
 
                                               
Provision for credit losses
    (2 )     9     NM       15       9       67  
 
                                               
Noninterest expense
                                               
Compensation expense
    770       655       18       1,245       1,296       (4 )
Noncompensation expense(b)
    1,468       1,319       11       4,509       1,664       171  
Merger costs
          143     NM             348     NM  
                     
Subtotal
    2,238       2,117       6       5,754       3,308       74  
Net expense allocated to other businesses
    (1,192 )     (1,253 )     5       (2,372 )     (2,532 )     6  
                     
Total noninterest expense
    1,046      <