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JPMorgan Chase & Co.
Jul 15, 2010
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JPMorgan Chase Reports Second-Quarter 2010 Net Income Of $4.8 Billion, Or $1.09 Per Share, On Revenue 1 Of $25.6 Billion

Includes Benefit From Reduction In Loan Loss Reserves ($0.36 Per Share) And Charge For U.K. Bonus Tax ($0.14 Per Share)

New York, July 15, 2010 - JPMorgan Chase & Co. (NYSE: JPM) today reported second-quarter 2010 net income of $4.8 billion, compared with $2.7 billion in the second quarter of 2009. Earnings per share were $1.09, compared with $0.28 in the second quarter of 2009.

Jamie Dimon, Chairman and Chief Executive Officer, commented on the quarter: "Our net income increased to $4.8 billion, including the benefit from a $1.5 billion reduction of loan loss reserves - which we do not believe represents normal ongoing earnings - partially offset by a charge of $550 million for the U.K. bonus tax."

Continuing on the businesses, Dimon added: "Although we are gratified to see consumer-lending net charge-offs and delinquencies decline, they remain at extremely high levels and therefore returns in our consumer-lending businesses are still unacceptable. As a result, these businesses did not meet expectations nor generate satisfactory returns on capital for our shareholders. It is too early to say how much improvement we will see from here.

"We saw solid performance in our other businesses. In particular, our wholesale businesses experienced reduced net charge-offs that led to reductions in loan loss reserves, and are currently seeing credit costs which reflect the increasingly healthy condition of our wholesale clients."

Commenting on the strength of the balance sheet, Dimon said: "We 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%. Total firmwide credit reserves fell to $36.7 billion, as loan balances remained flat and credit costs declined, resulting in a firmwide coverage ratio of 5.3% of total loans1. Our strong and growing capital base has enabled us to buy back over $500 million of stock to date, and we will continue to do so opportunistically."

Dimon further remarked: "We continue to aggressively do all that we can reasonably and responsibly to contribute to the economic recovery. During the first half of the year, we loaned or raised capital for our clients of nearly $700 billion, and our small-business originations were up 37%."

Looking ahead, Dimon concluded: "We recognize a number of positive aspects of the pending regulatory reform legislation, including systemic risk oversight and resolution authority. However, many challenges and uncertainties remain which may result in unintended consequences for our clients, the markets and our businesses. With a need for global regulatory coordination and hundreds of rules to be written, increased focus is critical in order to implement these reforms in a way that protects consumers and the competitiveness of the U.S. financial system, while ensuring the flow of safe and sound credit. As always, and regardless of uncertainties about the credit environment and pending regulation, we remain committed to the long-term growth of our franchise. We continue to invest in our infrastructure to enable us to deliver the quality products and services that our customers demand, and to provide good returns for our shareholders."

1 Revenue on a managed basis, credit reserves, credit ratios and capital ratios reflect the impact of the January 1, 2010, adoption of new accounting guidance that amended the accounting for transfers of financial assets and consolidation of VIEs. For notes on managed basis and other non-GAAP measures, see page 13.

In the discussion below of the business segments and of JPMorgan Chase as a Firm, information is presented on a managed basis. For more information about managed basis, as well as other non-GAAP financial measures used by management to evaluate the performance of each line of business, see page 13. The following discussion compares the second quarters of 2010 and 2009 unless otherwise noted.

Discussion of 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. The decrease largely reflected lower results in credit markets, rates and commodities. Equity Markets revenue was $1.0 billion, compared with $708 million in the prior year, reflecting solid client revenue. 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 and $481 million from the prior quarter.

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. bonus tax.

Key Metrics and Business Updates:
(All comparisons refer to the prior-year quarter except as noted, and all rankings are according to Dealogic)

Discussion of 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 and $2.0 billion from the prior quarter. 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 to prior periods. Additionally, the prior-year and prior-quarter provisions included additions to the allowance for loan losses of $1.2 billion and $1.3 billion, respectively. Home equity net charge-offs were $796 million (3.32% net charge-off rate1), compared with $1.3 billion (4.61% net charge-off rate1) in the prior year. Subprime mortgage net charge-offs were $282 million (8.63% net charge-off rate1), compared with $410 million (11.50% net charge-off rate1). Prime mortgage net charge-offs were $264 million (1.79% net charge-off rate1), compared with $481 million (3.07% net charge-off rate1). 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 and 5.16% in the prior quarter.

Noninterest expense was $4.3 billion, an increase of $202 million, or 5%, from the prior year.

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.

Key Metrics and Business Updates:
(All comparisons refer to the prior-year quarter except as noted)

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 and $432 million in the prior quarter. 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.

Key Metrics and Business Updates:
(All comparisons refer to the prior-year quarter except as noted)

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 run-off.

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.

Key Metrics and Business Updates:
(All comparisons refer to the prior-year quarter except as noted)

Discussion of 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 and $6.3 billion, or 4%, from the prior quarter. Average loans were $146.3 billion, a decrease of $27.8 billion, or 16%, from the prior year and $9.5 billion, or 6%, from the prior quarter. The declines in both end-of-period and average loans were consistent with expected portfolio run-off.

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.

The provision for credit losses was $2.2 billion, compared with $4.6 billion in the prior year and $3.5 billion in the prior quarter. 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. 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 and down from 11.75% in the prior quarter. The prior-quarter net charge-off rate was negatively affected by approximately 60 basis points from a payment-holiday program offered in the second quarter of 2009. The 30-day delinquency rate was 4.96%, down from 5.86% in the prior year and 5.62% in the prior quarter. Excluding the Washington Mutual portfolio, the net charge-off rate was 9.02%, up from 8.97% in the prior year and down from 10.54% in the prior quarter; and the 30-day delinquency rate was 4.48%, down from 5.27% in the prior year and 4.99% in the prior quarter.

Noninterest expense was $1.4 billion, an increase of $103 million, or 8%, due to higher marketing expense.

Key Metrics and Business Updates:
(All comparisons refer to the prior-year quarter except as noted)

Discussion of 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 and $229 million (0.96% net charge-off rate) in the prior quarter. 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 and 3.15% in the prior quarter. Nonperforming loans were $3.1 billion, up by $1.0 billion from the prior year and $81 million from the prior quarter, 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.

Key Metrics and Business Updates:
(All comparisons refer to the prior-year quarter except as noted)

Discussion of 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. Compared with the prior quarter, net income increased by $13 million, or 5%, reflecting seasonal activity in securities lending and depositary receipts.

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, Treasury Services 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 revenue1 of $2.6 billion, including $1.7 billion by Treasury Services; of that amount, $926 million was recorded in Treasury Services, $665 million in Commercial Banking 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.

Key Metrics and Business Updates:
(All comparisons refer to the prior-year quarter except as noted)

Discussion of 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 effect 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.

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.

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.

Key Metrics and Business Updates:
(All comparisons refer to the prior-year quarter except as noted)

Discussion of Results:
Net income was $653 million, compared with net income of $808 million in the prior year.

Private Equity net income was $11 million, compared with a net loss of $27 million in the prior year. Net revenue was $48 million, an increase of $49 million, driven by higher private equity gains. Noninterest expense was $32 million, a decrease of $10 million.

Corporate net income was $642 million, compared with $835 million in the prior year. Net revenue was $1.8 billion, including $775 million of net interest income and $990 million of securities gains, reflecting repositioning of the investment portfolio. Noninterest expense was $1.0 billion, up from $822 million in the prior year, largely due to higher litigation expense.

Discussion of Results:
Net income was $4.8 billion, up by $2.1 billion, or 76%, from the prior year. The increase in earnings was driven by a significantly lower provision for credit losses, partially offset by lower net revenue and higher noninterest expense.

Net revenue was $25.6 billion, a decrease of $2.1 billion, or 8%, from the prior year. Noninterest revenue was $12.8 billion, down modestly from the prior year. The decline was driven by lower principal transactions revenue, reflecting lower trading results, and lower investment banking fees, partially offset by higher securities gains. Net interest income was $12.8 billion, down by $1.9 billion, or 13%, largely driven by lower loan balances.

The provision for credit losses was $3.4 billion, down by $6.3 billion, or 65%, from the prior-year provision. The resulting firmwide allowance for loan losses to end-of-period loans retained1 was 5.34%, compared with 5.01% in the prior year. The total consumer provision for credit losses was $3.9 billion, compared with $8.5 billion, reflecting a reduction in the allowance for credit losses as a result of improved delinquency trends and reduced net charge-offs. Consumer net charge-offs1 were $5.5 billion, compared with $7.0 billion, resulting in net charge-off rates of 5.34% and 6.18%, respectively. The wholesale provision for credit losses was a benefit of $572 million, compared with an expense of $1.2 billion, 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. Wholesale net charge-offs were $231 million, compared with $679 million, resulting in net charge-off rates of 0.44% and 1.19%, respectively. The Firm's nonperforming assets totaled $18.2 billion at June 30, 2010, up from the prior-year level of $17.5 billion and down from the prior-quarter level of $19.0 billion.

Noninterest expense was $14.6 billion, up by $1.1 billion, or 8%. Current-quarter results included the impact of the U.K. bonus tax and higher litigation expense.

Key Metrics and Business Updates:
(All comparisons refer to the prior-year quarter except as noted)

1. Notes on non-GAAP financial measures:



JPMorgan Chase & Co. (NYSE: JPM) is a leading global financial services firm with assets of $2.0 trillion and operations in more than 60 countries. The Firm is a leader in investment banking, financial services for consumers, small-business and commercial banking, financial transaction processing, asset management and private equity. A component of the Dow Jones Industrial Average, JPMorgan Chase & Co. serves millions of consumers in the United States and many of the world's most prominent corporate, institutional and government clients under its J.P. Morgan and Chase brands. Information about JPMorgan Chase & Co. is available at www.jpmorganchase.com.

JPMorgan Chase & Co. will host a conference call today at 8:00 a.m. (Eastern Time) to review second-quarter financial results. The general public can access the call by dialing (866) 541-2724, or (877) 368-8360 in the U.S. and Canada, and (706) 634-7246 for international participants. The live audio webcast and presentation slides will be available at the Firm's website, www.jpmorganchase.com, under Investor Relations, Investor Presentations.

A replay of the conference call will be available beginning at approximately noon on Thursday, July 15, through midnight, Friday, July 30, by telephone at (800) 642-1687 (U.S. and Canada) or (706) 645-9291 (international); use Conference ID #79875086. The replay will also be available via webcast on www.jpmorganchase.com under Investor Relations, Investor Presentations. Additional detailed financial, statistical and business-related information is included in a financial supplement. The earnings release and the financial supplement are available at www.jpmorganchase.com.

This earnings release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based upon the current beliefs and expectations of JPMorgan Chase & Co.'s management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. Factors that could cause JPMorgan Chase & Co.'s actual results to differ materially from those described in the forward-looking statements can be found in JPMorgan Chase & Co.'s Annual Report on Form 10-K for the year ended December 31, 2009, and Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, which have been filed with the U.S. Securities and Exchange Commission and are available on JPMorgan Chase & Co.'s website (www.jpmorganchase.com) and on the Securities and Exchange Commission's website (www.sec.gov). JPMorgan Chase & Co. does not undertake to update the forward-looking statements to reflect the impact of circumstances or events that may arise after the date of the forward-looking statements.