JPMorgan Chase & Co.
J P MORGAN CHASE & CO (Form: 10-Q, Received: 11/09/2010 06:04:10)
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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 October 31, 2010: 3,909,181,427
 
 

 


 

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
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  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)                                           Nine months ended September 30,
As of or for the period ended,   3Q10   2Q10   1Q10   4Q09   3Q09   2010   2009
 
Selected income statement data
                                                       
Total net revenue
  $ 23,824     $ 25,101     $ 27,671     $ 23,164     $ 26,622     $ 76,596     $ 77,270  
Total noninterest expense
    14,398       14,631       16,124       12,004       13,455       45,153       40,348  
 
Pre-provision profit (a)
    9,426       10,470       11,547       11,160       13,167       31,443       36,922  
Provision for credit losses
    3,223       3,363       7,010       7,284       8,104       13,596       24,731  
 
Income before income tax expense and extraordinary gain
    6,203       7,107       4,537       3,876       5,063       17,847       12,191  
Income tax expense
    1,785       2,312       1,211       598       1,551       5,308       3,817  
 
Income before extraordinary gain
    4,418       4,795       3,326       3,278       3,512       12,539       8,374  
Extraordinary gain (b)
                            76             76  
 
Net income
  $ 4,418     $ 4,795     $ 3,326     $ 3,278     $ 3,588     $ 12,539     $ 8,450  
 
Per common share data
                                                       
Basic earnings
                                                       
Income before extraordinary gain
  $ 1.02     $ 1.10     $ 0.75     $ 0.75     $ 0.80     $ 2.86     $ 1.50  
Net income
    1.02       1.10       0.75       0.75       0.82       2.86       1.52  
Diluted earnings (c)
                                                       
Income before extraordinary gain
  $ 1.01     $ 1.09     $ 0.74     $ 0.74     $ 0.80     $ 2.84     $ 1.50  
Net income
    1.01       1.09       0.74       0.74       0.82       2.84       1.51  
Cash dividends declared
    0.05       0.05       0.05       0.05       0.05       0.15       0.15  
Book value
    42.29       40.99       39.38       39.88       39.12       42.29       39.12  
Common shares outstanding
                                                       
Weighted-average: Basic (d)
    3,954.3       3,983.5       3,970.5       3,946.1       3,937.9       3,969.4       3,835.0  
Diluted (d)
    3,971.9       4,005.6       3,994.7       3,974.1       3,962.0       3,990.7       3,848.3  
Common shares at period-end
    3,925.8       3,975.8       3,975.4       3,942.0       3,938.7       3,925.8       3,938.7  
Share price (e)
                                                       
High
  $ 41.70     $ 48.20     $ 46.05     $ 47.47     $ 46.50     $ 48.20     $ 46.50  
Low
    35.16       36.51       37.03       40.04       31.59       35.16       14.96  
Close
    38.06       36.61       44.75       41.67       43.82       38.06       43.82  
Market capitalization
    149,418       145,554       177,897       164,261       172,596       149,418       172,596  
 
                                                       
Selected ratios
                                                       
Return on common equity (“ROE”) (c)
                                                       
Income before extraordinary gain
    10 %     12 %     8 %     8 %     9 %     10 %     6 %
Net income
    10       12       8       8       9       10       6  
Return on tangible common equity (“ROTCE”) (c)
                                                       
Income before extraordinary gain
    15       17       12       12       13       15       9  
Net income
    15       17       12       12       14       15       9  
Return on assets (“ROA”)
                                                       
Income before extraordinary gain
    0.86       0.94       0.66       0.65       0.70       0.82       0.55  
Net income
    0.86       0.94       0.66       0.65       0.71       0.82       0.56  
Overhead ratio
    60       58       58       52       51       59       52  
Deposits-to-loans ratio
    131       127       130       148       133       131       133  
Tier 1 capital ratio (f)
    11.9       12.1       11.5       11.1       10.2                  
Total capital ratio
    15.4       15.8       15.1       14.8       13.9                  
Tier 1 leverage ratio
    7.1       6.9       6.6       6.9       6.5                  
Tier 1 common capital ratio (g)
    9.5       9.6       9.1       8.8       8.2                  
 
                                                       
Selected balance sheet data (period-end) (f)
                                                       
Trading assets
  $ 475,515     $ 397,508     $ 426,128     $ 411,128     $ 424,435     $ 475,515     $ 424,435  
Securities
    340,168       312,013       344,376       360,390       372,867       340,168       372,867  
Loans
    690,531       699,483       713,799       633,458       653,144       690,531       653,144  
Total assets
    2,141,595       2,014,019       2,135,796       2,031,989       2,041,009       2,141,595       2,041,009  
Deposits
    903,138       887,805       925,303       938,367       867,977       903,138       867,977  
Long-term debt
    255,589       248,618       262,857       266,318       272,124       255,589       272,124  
Common stockholders’ equity
    166,030       162,968       156,569       157,213       154,101       166,030       154,101  
Total stockholders’ equity
    173,830       171,120       164,721       165,365       162,253       173,830       162,253  
Headcount
    236,810       232,939       226,623       222,316       220,861       236,810       220,861  
 

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(unaudited)                                           Nine months ended
(in millions, except ratios)                                           September 30,
As of or for the period ended,   3Q10   2Q10   1Q10   4Q09   3Q09   2010   2009
 
Credit quality metrics
                                                       
Allowance for credit losses (f)
  $ 35,034     $ 36,748     $ 39,126     $ 32,541     $ 31,454     $ 35,034     $ 31,454  
Allowance for loan losses to total retained loans (f)
    4.97 %     5.15 %     5.40 %     5.04 %     4.74 %     4.97 %     4.74 %
Allowance for loan losses to retained loans excluding purchased credit-impaired loans (f)(h)
    5.12       5.34       5.64       5.51       5.28       5.12       5.28  
Nonperforming assets
  $ 17,656     $ 18,156     $ 19,019     $ 19,741     $ 20,362     $ 17,656     $ 20,362  
Net charge-offs
    4,945       5,714       7,910       6,177       6,373       18,569       16,788  
Net charge-off rate
    2.84 %     3.28 %     4.46 %     3.85 %     3.84 %     3.53 %     3.28 %
Wholesale net charge-off rate
    0.49       0.44       1.84       2.31       1.93       0.92       1.13  
Consumer net charge-off rate
    3.90       4.49       5.56       4.60       4.79       4.66       4.36  
 
(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 year-to-date 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 year-to-date 2009 would have been 7% and 11%, 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 (“PCI”) loans for all periods. Also excludes, as of December 31, 2009, and September 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. No allowance for loan losses was recorded for these loans as of December 31, 2009 and September 30, 2009. The balance of these loans held by the WMMT was zero at September 30, 2010, June 30, 2010 and March 31, 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 185–188 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 191–192 and Part II, Item 1A: Risk Factors on pages 200–201 of this Form 10-Q).
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 $2.1 trillion in assets, $173.8 billion in stockholders’ equity and operations in more than 60 countries as of September 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 LLC (“JPMorgan Securities”), formerly 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 15,800 ATMs (second-largest nationally), as well as online and mobile banking around the clock. More than 28,500 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 16,000 auto dealerships and 1,700 schools and universities nationwide.

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Card Services
Card Services (“CS”) is one of the nation’s largest credit card issuers, with over $136 billion in loans and nearly 90 million open accounts. In the nine months ended September 30, 2010, customers used Chase cards to meet over $227 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 more than 35,000 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 $1.8 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. economy continued to grow, albeit slowly, during the third quarter of 2010. U.S. consumer spending continued to increase at a moderate pace, in the face of high unemployment and modest income growth. Spending on equipment and technology rose during the quarter, supported by the healthy financial condition of U.S. businesses. However, hiring slowed modestly, and bank lending continued to trend lower, though at a reduced rate. Outside the U.S., the pace of growth slowed in the third quarter, reflecting a moderation in most developed and developing economies. A modest pickup in Japan and continued strong growth in China and India were the exceptions.
The equity markets rebounded in the third quarter, as recent economic data implied the U.S. economy, while recovering slowly, was not falling back into recession. The Federal Reserve maintained the target range for the federal funds rate at zero to one-quarter percent and continued to indicate that economic conditions are likely to warrant a low federal funds rate for an extended period. Also, the Federal Reserve began to buy U.S. Treasuries using the proceeds received from repayments or refinancings of outstanding mortgages in its portfolio. The Federal Reserve also announced that it was considering other options to help the economy.
Financial performance of JPMorgan Chase
                                                 
    Three months ended September 30,   Nine months ended September 30,
(in millions, except per share data and ratios)   2010   2009   Change   2010   2009   Change
 
Selected income statement data
                                               
Total net revenue
  $ 23,824     $ 26,622       (11 )%   $ 76,596     $ 77,270       (1 )%
Total noninterest expense
    14,398       13,455       7       45,153       40,348       12  
Pre-provision profit
    9,426       13,167       (28 )     31,443       36,922       (15 )
Provision for credit losses
    3,223       8,104       (60 )     13,596       24,731       (45 )
Income before extraordinary gain
    4,418       3,512       26       12,539       8,374       50  
Extraordinary gain (a)
          76     NM           76     NM
Net income
    4,418       3,588       23       12,539       8,450       48  
 
                                               
Diluted earnings per share (b)
                                               
Income before extraordinary gain
  $ 1.01     $ 0.80       26     $ 2.84     $ 1.50       89  
Net income
    1.01       0.82       23       2.84       1.51       88  
Return on common equity (b)
                                               
Income before extraordinary gain
    10 %     9 %             10 %     6 %        
Net income
    10       9               10       6          
 
                                               
Capital ratios
                                               
Tier 1 capital
    11.9       10.2                                  
Tier 1 common
    9.5       8.2                                  
 
(a)   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.
 
(b)   The calculation of EPS and net income applicable to common equity for the nine months ended September 30, 2009, included a one-time noncash reduction of $1.1 billion, or $0.27 per share, resulting from repayment of TARP preferred capital. Excluding this reduction, the adjusted ROE for the first nine months of 2009 would have been 7%. The Firm views the adjusted ROE, a non-GAAP financial measure, as meaningful because it enables 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.
Business overview
JPMorgan Chase reported third-quarter 2010 net income of $4.4 billion, or $1.01 per share, compared with net income of $3.6 billion, or $0.82 per share, in the third quarter of 2009. Current-quarter EPS included a $1.3 billion pretax ($0.18 per share after-tax) increase to litigation reserves, including those for mortgage-related matters; a $1.0 billion pretax ($0.15 per share after-tax) increase to mortgage repurchase reserves; and a benefit from a $1.5 billion pretax ($0.22 per share after-tax) reduction of loan loss reserves in Card Services. ROE for the quarter was 10%, compared with 9% in the prior year.
The increase in earnings from the third quarter of 2009 was driven by a significantly lower provision for credit losses, predominantly 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. The lower provision for credit losses reflected improvements in both the consumer and wholesale provisions. The consumer provision declined due to a reduction in the allowance for credit losses associated with the credit card portfolio as a result of improved delinquency trends and reduced net charge-offs. The decrease in the wholesale provision was driven by a reduction in the allowance for credit losses predominantly as

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a result of continued improvement in the credit quality of the commercial and industrial loan portfolio, reduced net charge-offs and net repayments. The increase in noninterest expense in the third quarter of 2010 was largely due to higher litigation expense. JPMorgan Chase maintained very high liquidity, with a deposits-to-loans ratio of 131%, and increased its capital, ending the quarter with a strong Tier 1 common ratio of 9.5%.
While overall credit costs continued to decline in the third quarter of 2010, the levels of net charge-offs in the mortgage and credit card portfolios continued to be very high. Mortgage delinquency trends remained relatively flat compared with the prior quarter, while credit card delinquencies continued to improve. Total firmwide credit reserves declined to $35.0 billion, resulting in a firmwide coverage ratio of 5.1% of total loans.
Net income for the first nine months of 2010 was $12.5 billion, or $2.84 per share, compared with $8.5 billion, or $1.51 per share, in the first nine months of 2009. The increase in earnings from the comparable 2009 nine-month period was driven by a lower provision for credit losses, partially offset by higher noninterest expense. The factors that drove the lower provision for credit losses and the higher noninterest expense in the nine-month results comparison were the same as those that drove the third-quarter results comparison. Net revenue decreased modestly in the first nine months of 2010 compared with the prior year, reflecting lower markets revenue, lower mortgage fees and related income, and lower credit card revenue, largely offset by a higher level of both private equity and securities gains.
JPMorgan Chase continued to support the economic recovery by providing capital, financing and liquidity to its clients in the U.S. and around the world. During the first nine months of 2010, the Firm loaned or raised capital for its clients of more than $1.0 trillion, and its small-business originations were up 37% over the same period last year. The Firm has offered 975,000 mortgage modifications and has approved 292,000 since the beginning of 2009. In addition, JPMorgan Chase is on track to hire over 10,000 people in the U.S. this year.
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, partially offset by lower noninterest expense and 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 and rates markets. Investment banking fees also decreased, driven by lower levels of equity underwriting fees, offset partially by higher levels of debt underwriting 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 third quarter of 2010, compared with an expense in the third quarter of 2009, and reflected a reduction in the allowance for loan losses, largely related to net repayments and loan sales. Noninterest expense decreased, primarily due to lower compensation expense.
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 deposit-related fees, lower loan balances, lower mortgage fees and related income and narrower loan spreads. These decreases were partially offset by a shift to wider-spread deposit products and growth in debit card income and auto operating lease income. The provision for credit losses decreased from the prior year, reflecting improved delinquency trends and reduced net charge-offs. Noninterest expense increased from the prior year, driven by sales force increases in Business Banking and bank branches.
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 were partially offset by lower revenue reversals associated with lower charge-offs. The provision for credit losses decreased from the prior year, reflecting lower net charge-offs and a reduction to the allowance for loan losses due to lower estimated losses. 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. Results included the impact of the purchase of a $3.5 billion loan portfolio during the third quarter of 2010. Net revenue was a record, driven by growth in liability balances, wider loan spreads, changes in the valuation of investments held at fair value and higher investment banking fees, largely offset by spread compression on liability products and lower loan

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balances. The provision for credit losses decreased from the third quarter of 2009, reflecting continued improvement in the credit quality of the commercial and industrial loan portfolio. Noninterest expense increased, reflecting higher headcount-related expense.
Treasury and Securities Services net income decreased from the prior year, driven by higher noninterest expense, partially offset by higher net revenue. Treasury Services net revenue increased, driven by higher trade loan and card product volumes, partially offset by lower spreads on liability products. Worldwide Securities Services net revenue also increased, driven by higher market levels and net inflows of assets under custody, partially offset by lower spreads on liability products and securities lending. Noninterest expense for TSS increased, driven by continued investment in new product platforms, primarily related to international expansion, and higher performance-based compensation.
Asset Management net income decreased modestly from the prior year, as higher noninterest expense was largely offset by higher net revenue and a lower provision for credit losses. The growth in net revenue was driven by higher loan originations, the effect of higher market levels, net inflows to products with higher margins and higher deposit and loan balances, partially offset by narrower deposit and loan spreads, lower brokerage revenue and lower quarterly valuations of seed capital investments. Noninterest expense rose due to an increase in headcount.
Corporate/Private Equity net income decreased from the prior year, driven by lower net revenue and higher noninterest expense. The decrease in net revenue reflected lower net interest income from the investment portfolio and lower trading and securities gains, offset partially by higher private equity gains. The increase in noninterest expense was largely due to an increase in litigation reserves, including those for mortgage-related matters.
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. As noted above, these risks and uncertainties could cause the Firm’s actual results to differ materially from those set forth in such forward-looking statements. See Forward-Looking Statements on pages 191–192 and Risk Factors on pages 200–201 of this Form 10-Q.
JPMorgan Chase’s outlook for the fourth 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.
In the Retail Banking business within RFS, management expects revenue to be stable over the next several quarters, despite continued economic pressure on consumers and consumer spending levels. The Firm has made changes in its policies consistent with and, in certain respects, beyond the requirements of the newly-enacted legislation relating to non-sufficient funds and overdraft fees. Results in the third quarter of 2010 reflected the full impact of the approximately $700 million reduction to annualized Retail Banking net income associated with these changes.
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, for example, to U.S. government-sponsored entities (“GSEs”). Management estimates that realized repurchase losses could total approximately $1.2 billion in 2011.
In addition, during the third quarter of 2010, the Firm determined that certain documents executed in connection with mortgage loan foreclosures may not have complied with all applicable procedural requirements. Accordingly, the Firm temporarily halted foreclosures, foreclosure sales and evictions in certain states so that it could review its foreclosure processes. Furthermore, state and federal officials have announced investigations into the procedures followed by mortgage servicing companies and banks, including the Firm and its affiliates, in completing affidavits relating to foreclosures. The Firm is cooperating with these investigations and is dedicating significant resources to address these issues. The Firm expects to incur additional costs and expenses in resolving these issues. For further discussion, see “Loan modification activities” on pages 91–94 of this Form 10-Q.
In the Real Estate Portfolios business within RFS, management believes that, given the continued economic and housing market uncertainty, it remains possible that 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. For the purchased credit impaired real estate portfolios, the lifetime loss estimates assume some improvement in both delinquency and loss severity trends over time; if the timing of these improvements differs from current projections, loan loss reserves could increase. For example, if delinquencies and severities for these portfolios do not follow recent trends and instead remain at current levels over the next two years, related reserves could increase by approximately $3.0 billion over that time period. 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. The effect of such a reduction in the residential real estate portfolio is expected to reduce the portfolio’s 2010 net interest income by approximately $1.0 billion from the 2009 level. The continued portfolio runoff will

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reduce net interest income over time; however, this reduction in net interest income will be more than offset by an improvement in credit costs and lower expenses. As the portfolio continues to run off, management anticipates that approximately $1.0 billion of capital may be redeployed each year, subject to the capital requirements associated with the remaining portfolio.
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 end-of-period outstandings for the Chase portfolio (excluding the Washington Mutual portfolio) to decline by approximately 15%, or $21 billion, from 2009 levels, to approximately $123 billion by the end of 2010. More than half of this decline is driven by a planned reduction in balance transfer offers. Management estimates that this decline could bottom out in the third quarter of 2011 and by the end of 2011 the outstandings in the portfolio could be approximately $120 billion and reflect a better mix of customers. The Washington Mutual portfolio declined to $15 billion at the end of the third quarter of 2010, from $20 billion at the end of 2009. Management estimates that the Washington Mutual portfolio could decline to $10 billion by the end of 2011.
Also, 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 Accountability, Responsibility and Disclosure Act of 2009 (“CARD Act”), including the regulatory guidance defining reasonable and proportional fees. Third-quarter 2010 net income reflected approximately 65% of the estimated quarterly impact, and management estimates that the full impact could be reflected in the fourth quarter of 2010. The net charge-off rates for both the Chase and Washington Mutual credit card portfolios are anticipated to continue to improve if current delinquency trends continue. The net charge-off rate for the Chase portfolio (excluding the Washington Mutual portfolio) could be approximately 7.5% in the fourth quarter of 2010. However, overall results for CS will depend on the economic environment and any resulting reserve actions.
While recent economic data implied the U.S. economy was not falling back into recession, high unemployment persisted. Even as consumer-lending net charge-offs and delinquencies have improved 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, and excluding merger-related items, material litigation expenses and significant nonrecurring items, if any) is anticipated to trend toward a level of approximately $300 million per quarter.
Management expects modest continued downward pressure on the net interest margin in the fourth 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.
Regarding regulatory reform, JPMorgan Chase intends to work with the Firm’s regulators as they proceed with the extensive rulemaking required to implement financial reforms. The Firm will continue to devote substantial resources to achieving implementation of regulatory reforms in a way that preserves the value the Firm delivers to its clients.
Management and the Firm’s Board of Directors continually 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 of 2010 under its preexisting 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, 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 104–106 of this Form 10-Q and pages 127–131 of JPMorgan Chase’s 2009 Annual Report.
Revenue
                                                 
    Three months ended September 30,   Nine months ended September 30,
(in millions)   2010   2009   Change   2010   2009   Change
 
Investment banking fees
  $ 1,476     $ 1,679       (12 )%   $ 4,358     $ 5,171       (16 )%
Principal transactions
    2,341       3,860       (39 )     8,979       8,958        
Lending- and deposit-related fees
    1,563       1,826       (14 )     4,795       5,280       (9 )
Asset management, administration and commissions
    3,188       3,158       1       9,802       9,179       7  
Securities gains
    102       184       (45 )     1,712       729       135  
Mortgage fees and related income
    707       843       (16 )     2,253       3,228       (30 )
Credit card income
    1,477       1,710       (14 )     4,333       5,266       (18 )
Other income
    468       625       (25 )     1,465       685       114  
                     
Noninterest revenue
    11,322       13,885       (18 )     37,697       38,496       (2 )
Net interest income
    12,502       12,737       (2 )     38,899       38,774        
                     
Total net revenue
  $ 23,824     $ 26,622       (11 )%   $ 76,596     $ 77,270       (1 )%
 
Total net revenue for the third quarter of 2010 was $23.8 billion, down by $2.8 billion, or 11%, from the third quarter of 2009. Results were driven by lower principal transactions revenue, reflecting lower trading revenue in IB partially offset by an increase in private equity gains. Total net revenue for the first nine months of 2010 was $76.6 billion, down by $674 million, or 1%, from the prior year. The decline reflected lower markets revenue in IB and Corporate, lower mortgage fees and related income in RFS, and lower credit card revenue, largely offset by a higher level of both private equity and securities gains in Corporate.
Investment banking fees for the third quarter and first nine months of 2010 decreased from the comparable periods of 2009 due to lower equity underwriting fees, partially offset by higher debt underwriting fees. Lower advisory fees also contributed to the decline for the first nine months of 2010. Overall industry-wide equity underwriting volumes were lower in the third quarter and first nine 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 third quarter of 2009 and was relatively flat compared with the first nine months of 2009. Trading revenue declined in both comparable periods, driven by lower fixed income revenue in IB, reflecting lower results in credit and rates markets. Trading revenue also reflected third-quarter losses of $493 million, compared with $1.0 billion in the prior- year third quarter; and gains in the first nine months of 2010 of $494 million, compared with losses of $1.9 billion in the comparable 2009 period. These results were associated with changes in the Firm’s credit spreads on certain structured and derivative liabilities. A partial offset to the decline in the nine-month period was the absence of mark-to-market losses on hedges of retained loans in IB compared with the prior year. Private equity gains in both the third quarter and first nine months of 2010 improved from the comparable 2009 periods. Results in the nine-month period swung to gains in 2010 from losses in 2009. 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 6 on page 140 of this Form 10-Q.
Lending- and deposit-related fees for the third quarter and first nine months of 2010 decreased from the prior-year periods. These declines reflected lower deposit-related fees in RFS associated, in part, with newly-enacted legislation related to non-sufficient funds and overdraft fees; this was partially offset by higher lending-related service fees – in particular, for the first nine months of 2010, 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.

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Asset management, administration and commissions revenue was relatively flat in the third quarter of 2010 compared with the prior year and increased in the first nine months of 2010 compared with the prior year. Results in both periods included higher asset management fees in AM, driven by the effect of higher market levels, net inflows to products with higher margins and higher performance fees; higher administration fees in TSS, resulting from the effect of higher market levels and net inflows of assets under custody; and lower brokerage commissions in IB. 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 decreased in the third quarter of 2010 compared with the third quarter of 2009 and increased in the first nine months of 2010 compared with the first nine months of 2009. Results for both comparable periods were affected by actions taken to reposition the Corporate investment securities portfolio in connection with managing the Firm’s structural interest rate risk; for the third-quarter comparison, gains from the repositioning activities were lower, while for the nine-month comparison, the gains were higher. 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 decreased from the third quarter and first nine months of 2009, driven by lower net production revenue, predominantly reflecting higher repurchase losses. The third quarter of 2010 included a $1.0 billion increase in the repurchase reserve, as a result of higher estimated future repurchase demands; for the first nine months of 2010, the increase in the reserve was $1.6 billion. (These charges for increasing the reserve are booked as contra-revenue.) Production revenue, excluding repurchase losses, increased from both periods, reflecting wider margins; also contributing to the increase for the third quarter of 2010 were higher mortgage origination volumes. For the first nine months of 2010, an additional driver of the decline in mortgage fees and related income from the comparable 2009 period was lower net mortgage servicing revenue, reflecting lower MSR risk management results, which were predominantly offset 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 third quarter and first nine months of 2009, due predominantly to the impact of the new consolidation guidance related to variable interest entities (“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 related increases in net interest income and the provision for credit losses, and the elimination of securitization income/losses in other income). Lower revenue from fee-based products also contributed to the decrease in credit card income for both periods. 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 decreased in the third quarter of 2010 compared with the prior year, as a result of a gain recognized in the third quarter of 2009 in Corporate on the sale of certain assets, and lower valuations on seed capital investments in AM. For the first nine months of 2010, other income increased compared with the prior year, due to the write-down of securitization interests during the first nine months of 2009. Higher auto operating lease income in RFS also contributed to the increase in other income. These items were offset partially by lower valuations on seed capital investments in AM.
Net interest income declined modestly in the third quarter of 2010 compared with the prior-year quarter and was relatively flat for the first nine months of 2010 compared with the prior-year period. Declining loan balances were predominantly offset by the impact of the adoption of the new consolidation guidance related to VIEs (which increased net interest income by approximately $1.4 billion for the third quarter of 2010 and by approximately $4.6 billion for the first nine months of 2010). Excluding the impact of the adoption of the new accounting guidance, net interest income decreased for both the third quarter and first nine months of 2010 compared with the comparable 2009 periods, 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 third quarter of 2010 were $1.7 trillion, and the net yield on those assets, on a fully taxable-equivalent (“FTE”) basis, was 3.01%, a decrease of nine basis points from the third quarter of 2009. The Firm’s interest-earning assets for the first nine months of 2010 were $1.7 trillion, and the net yield on those assets, on a FTE basis, was 3.13%, a decrease of two basis points from the first nine months of 2009. For a more detailed discussion of the impact of the adoption of the new consolidation guidance related to VIEs on the

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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 a further information on the impact of the legislative changes on the Consolidated Statements of Income, see CS discussion on Credit Card Legislation on page 37 of this Form 10-Q.
                                                 
Provision for credit losses   Three months ended September 30,   Nine months ended September 30,
(in millions)   2010   2009   Change   2010   2009   Change
 
Wholesale
  $ 44     $ 779       (94 )%   $ (764 )   $ 3,553     NM
Consumer
    3,179       7,325       (57 )     14,360       21,178       (32 )%
                     
Total provision for credit losses
  $ 3,223     $ 8,104       (60 )%   $ 13,596     $ 24,731       (45 )%
 
The provision for credit losses decreased significantly from the third quarter and first nine months of 2009. The decrease in the consumer provision for both 2010 periods reflected a reduction in the allowance for credit losses as a result of improved delinquency trends and reduced net charge-offs; the reductions in the allowance for loan losses in CS were $1.5 billion and $4.0 billion in the third quarter and first nine months of 2010, respectively (compared with additions of $575 million and $2.0 billion in the comparable 2009 periods). The decrease in the wholesale provision in both 2010 periods reflected a reduction in the allowance for credit losses predominantly as a result of continued improvement in the credit quality of the commercial and industrial loan portfolio, reduced net charge-offs and repayments. 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 95–98 of this Form 10-Q.
Noninterest expense
                                                 
    Three months ended September 30,   Nine months ended September 30,
(in millions)   2010   2009   Change   2010   2009   Change
 
Compensation expense (a)
  $ 6,661     $ 7,311       (9 )%   $ 21,553     $ 21,816       (1 )%
Noncompensation expense:
                                               
Occupancy
    884       923       (4 )     2,636       2,722       (3 )
Technology, communications and equipment
    1,184       1,140       4       3,486       3,442       1  
Professional and outside services
    1,718       1,517       13       4,978       4,550       9  
Marketing
    651       440       48       1,862       1,241       50  
Other (b)(c)(d)
    3,082       1,767       74       9,942       5,332       86  
Amortization of intangibles
    218       254       (14 )     696       794       (12 )
                     
Total noncompensation expense
    7,737       6,041       28       23,600       18,081       31  
Merger costs
          103     NM           451     NM
                     
Total noninterest expense
  $ 14,398     $ 13,455       7 %   $ 45,153     $ 40,348       12 %
 
(a)   Year-to-date 2010 included a payroll 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 $1.5 billion and $5.2 billion for the three and nine months ended September 30, 2010, compared with $246 million and a net benefit of $10 million for the three and nine months ended September 30, 2009, respectively.
 
(c)   Includes foreclosed property expense of $251 million and $798 million for the three and nine months ended September 30, 2010, respectively, compared with $346 million and $965 million for the three and nine months ended September 30, 2009, respectively. For additional information regarding foreclosed property, see Note 13 on page 196 of JPMorgan Chase’s 2009 Annual Report.
 
(d)   Year-to-date 2009 included a $675 million Federal Deposit Insurance Corporation (“FDIC”) special assessment.
Total noninterest expense for the third quarter of 2010 was $14.4 billion, up by $943 million, or 7%, from the third quarter of 2009. For the first nine months of 2010, total noninterest expense was $45.2 billion, up by $4.8 billion, or 12%, from the comparable 2009 period. The increase for both periods was driven by higher noncompensation expense, predominantly due to higher litigation expense.
The decrease in compensation expense from the third quarter of 2009 was predominantly due to lower performance-based incentives, particularly in IB; this was partially offset by higher salary expense related to investments in the businesses, including the addition of sales force in RFS and client advisors in AM. Compensation expense for the first nine months of 2010 decreased from the prior-year period, predominantly due to lower performance-based incentives, largely offset by the impact of the U.K. Bank Payroll Tax and higher salary expense related to investments in the businesses.

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Noncompensation expense increased for the third quarter and first nine months of 2010 compared with the prior-year periods, due to higher litigation expense. Also contributing to the increase were higher marketing expense in CS and higher professional services expense, due to investments in systems in the businesses and increased brokerage, clearing and exchange transaction processing expense in IB. Partially offsetting the increase in the nine-month comparison was the absence of a $675 million FDIC special assessment recognized in the second quarter of 2009. For a further discussion of litigation expense, see Litigation reserve in Note 21 – Commitments and Contingencies on pages 173–174 of this Form 10-Q. For a discussion of amortization of intangibles, refer to Note 16 on pages 167–170 of this Form 10-Q.
There were no merger costs recorded in 2010. Merger costs of $103 million and $451 million were recorded in the third quarter and first nine months of 2009, respectively. For additional information on merger costs, refer to Note 10 on page 143 of this Form 10-Q.
Income tax expense
                                 
    Three months ended September 30,   Nine months ended September 30,
(in millions, except rate)   2010   2009   2010   2009
 
Income before income tax expense
  $ 6,203     $ 5,063     $ 17,847     $ 12,191  
Income tax expense
    1,785       1,551       5,308       3,817  
Effective tax rate
    28.8 %     30.6 %     29.7 %     31.3 %
 
The decrease in the effective tax rate for the third quarter and first nine 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 both 2010 periods. These decreases were 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 104–106 of this Form 10-Q.
Extraordinary gain
On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual. This transaction was accounted for under the purchase method of accounting for business combinations. The adjusted net asset value of the banking operations after purchase accounting adjustments was higher than the consideration paid by JPMorgan Chase, resulting in an extraordinary gain. In the third quarter of 2009, the Firm recognized a $76 million increase in the extraordinary gain associated with the final purchase accounting adjustments for the acquisition. The preliminary gain recognized in 2008 was $1.9 billion. For a further discussion of the Washington Mutual transaction, see Note 2 on pages 143–148 of the Firm’s 2009 Annual Report.

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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 108–111 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 155–167 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 155–167 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 September 30, 2010
                    Fully    
    Reported   Credit   tax-equivalent   Managed
(in millions, except per share and ratios)   results   card (b)   adjustments   basis
 
Revenue
                               
Investment banking fees
  $ 1,476     NA   $     $ 1,476  
Principal transactions
    2,341     NA           2,341  
Lending– and deposit–related fees
    1,563     NA           1,563  
Asset management, administration and commissions
    3,188     NA           3,188  
Securities gains
    102     NA           102  
Mortgage fees and related income
    707     NA           707  
Credit card income
    1,477     NA           1,477  
Other income
    468     NA     415       883  
 
Noninterest revenue
    11,322     NA     415       11,737  
Net interest income
    12,502     NA     96       12,598  
 
Total net revenue
    23,824     NA     511       24,335  
Noninterest expense
    14,398     NA           14,398  
 
Pre-provision profit
    9,426     NA     511       9,937  
Provision for credit losses
    3,223     NA           3,223  
 
Income before income tax expense
    6,203     NA     511       6,714  
Income tax expense
    1,785     NA     511       2,296  
 
Net income
  $ 4,418     NA   $     $ 4,418  
 
Diluted earnings per share
  $ 1.01     NA   $     $ 1.01  
Return on assets
    0.86 %   NA   NM     0.86 %
Overhead ratio
    60     NA   NM     59  
 
                                 
    Three months ended September 30, 2009
                    Fully    
    Reported   Credit   tax-equivalent   Managed
(in millions, except per share and ratios)   results   card (b)   adjustments   basis
 
Revenue
                               
Investment banking fees
  $ 1,679     $     $     $ 1,679  
Principal transactions
    3,860                   3,860  
Lending– and deposit–related fees
    1,826                   1,826  
Asset management, administration and commissions
    3,158                   3,158  
Securities gains
    184                   184  
Mortgage fees and related income
    843                   843  
Credit card income
    1,710       (285 )           1,425  
Other income
    625             371       996  
 
Noninterest revenue
    13,885       (285 )     371       13,971  
Net interest income
    12,737       1,983       89       14,809  
 
Total net revenue
    26,622       1,698       460       28,780  
Noninterest expense
    13,455                   13,455  
 
Pre-provision profit
    13,167       1,698       460       15,325  
Provision for credit losses
    8,104       1,698             9,802  
 
Income before income tax expense and extraordinary gain
    5,063             460       5,523  
Income tax expense
    1,551             460       2,011  
 
Income before extraordinary gain
    3,512                   3,512  
Extraordinary gain
    76                   76  
 
Net income
  $ 3,588     $     $     $ 3,588  
 
Diluted earnings per share (a)
  $ 0.80     $     $     $ 0.80  
Return on assets (a)
    0.70 %   NM   NM     0.67 %
Overhead ratio
    51     NM   NM     47  
 
NA: Not applicable

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    Nine months ended September 30, 2010
                    Fully    
    Reported   Credit   tax-equivalent   Managed
(in millions, except per share and ratios)   results   card (b)   adjustments   basis
 
Revenue
                               
Investment banking fees
  $ 4,358     NA   $     $ 4,358  
Principal transactions
    8,979     NA           8,979  
Lending– and deposit–related fees
    4,795     NA           4,795  
Asset management, administration and commissions
    9,802     NA           9,802  
Securities gains
    1,712     NA           1,712  
Mortgage fees and related income
    2,253     NA           2,253  
Credit card income
    4,333     NA           4,333  
Other income
    1,465     NA     1,242       2,707  
 
Noninterest revenue
    37,697     NA     1,242       38,939  
Net interest income
    38,899     NA     282       39,181  
 
Total net revenue
    76,596     NA     1,524       78,120  
Noninterest expense
    45,153     NA           45,153  
 
Pre-provision profit
    31,443     NA     1,524       32,967  
Provision for credit losses
    13,596     NA           13,596  
 
Income before income tax expense
    17,847     NA     1,524       19,371  
Income tax expense
    5,308     NA     1,524       6,832  
 
Net income
  $ 12,539     NA   $     $ 12,539  
 
Diluted earnings per share
  $ 2.84     NA   $     $ 2.84  
Return on assets
    0.82 %   NA   NM     0.82 %
Overhead ratio
    59     NA   NM     58  
 
                                 
    Nine months ended September 30, 2009
                    Fully    
    Reported   Credit   tax-equivalent   Managed
(in millions, except per share and ratios)   results   card (b)   adjustments   basis
 
Revenue
                               
Investment banking fees
  $ 5,171     $     $     $ 5,171  
Principal transactions
    8,958                   8,958  
Lending– and deposit–related fees
    5,280                   5,280  
Asset management, administration and commissions
    9,179                   9,179  
Securities gains
    729                   729  
Mortgage fees and related income
    3,228                   3,228  
Credit card income
    5,266       (1,119 )           4,147  
Other income
    685             1,043       1,728  
 
Noninterest revenue
    38,496       (1,119 )     1,043       38,420  
Net interest income
    38,774       5,945       272       44,991  
 
Total net revenue
    77,270       4,826       1,315       83,411  
Noninterest expense
    40,348                   40,348  
 
Pre-provision profit
    36,922       4,826       1,315       43,063  
Provision for credit losses
    24,731       4,826             29,557  
 
Income before income tax expense and extraordinary gain
    12,191             1,315       13,506  
Income tax expense
    3,817             1,315       5,132  
 
Income before extraordinary gain
    8,374                   8,374  
Extraordinary gain
    76                   76  
 
Net income
  $ 8,450     $     $     $ 8,450  
 
Diluted earnings per share (a)
  $ 1.50     $     $     $ 1.50  
Return on assets (a)
    0.55 %   NM   NM     0.53 %
Overhead ratio
    52     NM   NM     48  
 
(a)   Based on income before extraordinary gain.
 
(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 September 30,   2010   2009
(in millions)   Reported   Securitized (a)   Managed   Reported   Securitized (a)   Managed
 
Loans – Period-end
  $ 690,531     NA   $ 690,531     $ 653,144     $ 87,028     $ 740,172  
Total assets – average
    2,041,113     NA     2,041,113       1,999,176       82,779       2,081,955  
 
                                                 
Nine months ended September 30,   2010   2009
(in millions)   Reported   Securitized (a)   Managed   Reported   Securitized (a)   Managed
 
Loans – Period-end
  $ 690,531     NA   $ 690,531     $ 653,144     $ 87,028     $ 740,172  
Total assets – average
    2,041,156     NA     2,041,156       2,034,640       82,383       2,117,023  
 
(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 nine months ended September 30, 2009. For further discussion of credit card securitizations, see Note 15 on pages 155–167 of this Form 10-Q.
Average tangible common equity
                                                         
    Three months ended   Nine months ended
    Sept. 30,   June 30,   March 31,   Dec. 31,   Sept. 30,   Sept. 30,   Sept. 30,
(in millions)   2010   2010   2010   2009   2009   2010   2009
 
Common stockholders’ equity
  $ 163,962     $ 159,069     $ 156,094     $ 156,525     $ 149,468     $ 159,737     $ 142,322  
Less: Goodwill
    48,745       48,348       48,542       48,341       48,328       48,546       48,225  
Less: Certain identifiable intangible assets
    4,094       4,265       4,307       4,741       4,984       4,221       5,214  
Add: Deferred tax liabilities (a)
    2,620       2,564       2,541       2,533       2,531       2,575       2,552  
 
Tangible common equity (TCE)
  $ 113,743     $ 109,020     $ 105,786     $ 105,976     $ 98,687     $ 109,545     $ 91,435  
 
(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. Department of the Treasury (“U.S. Treasury”)
The calculation of year-to-date 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 7% for 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.
                 
    Nine months ended September 30, 2009
            Excluding the
(in millions, except ratios)   As reported   TARP redemption
 
Return on equity
               
Net income
  $ 8,450     $ 8,450  
Less: Preferred stock dividends
    1,165       1,165  
Less: Accelerated amortization from redemption of preferred stock issued to the U.S. Treasury
    1,112        
 
Net income applicable to common equity
  $ 6,173     $ 7,285  
 
Average common stockholders’ equity
  $ 142,322     $ 142,322  
 
Return on common equity
    6 %     7 %
 

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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 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 year-to-date 2009 and the $0.27 reduction to diluted EPS which resulted from the repayment.
                 
    Nine months ended September 30, 2009
            Effect of TARP
(in millions, except per share)   As reported   redemption
 
Diluted earnings per share
               
Net income
  $ 8,450     $  
Less: Preferred stock dividends
    1,165        
Less: Accelerated amortization from redemption of preferred stock issued to the U.S. Treasury
    1,112       1,112  
 
Net income applicable to common equity
  $ 6,173     $ (1,112 )
Less: Dividends and undistributed earnings allocated to participating securities
    348       (64 )
 
Net income applicable to common stockholders
  $ 5,825     $ (1,048 )
 
Total weighted average diluted shares outstanding
    3,848.3       3,848.3  
 
Net income per share
  $ 1.51     $ (0.27 )
 
Other financial measures
The Firm also discloses the allowance for loan losses to total retained loans, excluding home lending PCI loans and loans held by the WMMT. For a further discussion of this credit metric, see Allowance for Credit Losses on pages 95-98 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. The lines of business are now capitalized 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 page 65 of this Form 10-Q.
Segment Results — Managed Basis (a)
The following table summarizes the business segment results for the periods indicated.
                                                                                         
Three months ended                                                                           Return
September 30,   Total net revenue   Noninterest expense   Net income/(loss)   on equity
(in millions, except ratios)   2010   2009   Change   2010   2009   Change   2010   2009   Change   2010   2009
 
Investment Bank (b)
  $ 5,353     $ 7,508       (29 )%   $ 3,704     $ 4,274       (13 )%   $ 1,286     $ 1,921       (33 )%     13 %     23 %
Retail Financial Services
    7,646       8,218       (7 )     4,517       4,196       8       907       7     NM     13        
Card Services
    4,253       5,159       (18 )     1,445       1,306       11       735       (700 )   NM     19       (19 )
Commercial Banking
    1,527       1,459       5       560       545       3       471       341       38       23       17  
Treasury & Securities Services
    1,831       1,788       2       1,410       1,280       10       251       302       (17 )     15       24  
Asset Management
    2,172       2,085       4       1,488       1,351       10       420       430       (2 )     26       24  
Corporate/Private Equity (b)
    1,553       2,563       (39 )     1,274       503       153       348       1,287       (73 )   NM   NM
                                                         
Total
  $ 24,335     $ 28,780       (15 )%   $ 14,398     $ 13,455       7 %   $ 4,418     $ 3,588       23 %     10 %     9 %
 
                                                                                         
Nine months ended                                                                           Return
September 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)
  $ 20,004     $ 23,180       (14 )%   $ 13,064     $ 13,115       %   $ 5,138     $ 4,998       3 %     17 %     20 %
Retail Financial Services
    23,231       25,023       (7 )     13,040       12,446       5       1,818       496       267       9       3  
Card Services
    12,917       15,156       (15 )     4,283       3,985       7       775       (1,919 )   NM     7       (17 )
Commercial Banking
    4,429       4,314       3       1,641       1,633             1,554       1,047       48       26       17  
Treasury & Securities Services
    5,468       5,509       (1 )     4,134       3,887       6       822       989       (17 )     17       26  
Asset Management
    6,371       5,770       10       4,335       4,003       8       1,203       1,006       20       25       19  
Corporate/Private Equity (b)
    5,700       4,459       28       4,656       1,279       264       1,229       1,833       (33 )   NM   NM
                                                         
Total
  $ 78,120     $ 83,411       (6 )%   $ 45,153     $ 40,348       12 %   $ 12,539     $ 8,450       48 %     10 %     6 %
 
(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 September 30,   Nine months ended September 30,
(in millions, except ratios)   2010   2009   Change   2010   2009   Change
 
Revenue
                                               
Investment banking fees
  $ 1,502     $ 1,658       (9 )%   $ 4,353     $ 5,277       (18 )%
Principal transactions
    1,129       2,714       (58 )     7,165       8,070       (11 )
Lending- and deposit-related fees
    205       185       11       610       490       24  
Asset management, administration and commissions
    565       633       (11 )     1,761       2,042       (14 )
All other income (a)
    61       63       (3 )     196       (101 )   NM
                           
Noninterest revenue
    3,462       5,253       (34 )     14,085       15,778       (11 )
Net interest income (b)
    1,891       2,255       (16 )     5,919       7,402       (20 )
                           
Total net revenue (c)
    5,353       7,508       (29 )     20,004       23,180       (14 )
Provision for credit losses
    (142 )     379     NM     (929 )     2,460     NM
Noninterest expense
                                               
Compensation expense
    2,031       2,778       (27 )     7,882       8,785       (10 )
Noncompensation expense
    1,673       1,496       12       5,182       4,330       20  
                           
Total noninterest expense
    3,704       4,274       (13 )     13,064       13,115        
                           
Income before income tax expense
    1,791       2,855       (37 )     7,869       7,605       3  
Income tax expense
    505       934       (46 )     2,731       2,607       5  
                           
Net income
  $ 1,286     $ 1,921       (33 )   $ 5,138     $ 4,998       3  
                           
Financial ratios
                                               
Return on common equity
    13 %     23 %             17 %     20 %        
Return on assets
    0.68       1.12               0.97       0.94          
Overhead ratio
    69       57               65       57          
Compensation expense as a percentage of total net revenue (d)
    38       37               39       38          
                           
Revenue by business
                                               
Investment banking fees:
                                               
Advisory
  $ 385     $ 384           $ 1,045     $ 1,256       (17 )
Equity underwriting
    333       681       (51 )     1,100       2,092       (47 )
Debt underwriting
    784       593       32       2,208       1,929       14  
                           
Total investment banking fees
    1,502       1,658       (9 )     4,353       5,277       (18 )
Fixed income markets
    3,123       5,011       (38 )     12,150       14,829       (18 )
Equity markets
    1,135       941       21       3,635       3,422       6  
Credit portfolio (a)
    (407 )     (102 )     (299 )     (134 )     (348 )     61  
                           
Total net revenue
  $ 5,353     $ 7,508       (29 )   $ 20,004     $ 23,180       (14 )
                           
Revenue by region (a)
                                               
Americas
  $ 2,857     $ 3,850       (26 )   $ 11,354     $ 12,284       (8 )
Europe/Middle East/Africa
    1,531       2,912       (47 )     5,882       8,288       (29 )
Asia/Pacific
    965       746       29       2,768       2,608       6  
                           
Total net revenue
  $ 5,353     $ 7,508       (29 )   $ 20,004     $ 23,180       (14 )
     
(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 third quarter and year-to-date 2010 was primarily due to lower loan balances, lower Prime Services spreads and lower yielding fixed income trading balances.
 
(c)   Total net revenue included tax-equivalent adjustments, predominantly due to income tax credits related to affordable housing and alternative energy investments, as well as tax-exempt income from municipal bond investments of $390 million and $371 million for the quarters ended September 30, 2010 and 2009, respectively, and $1.2 billion and $1.1 billion for year-to-date 2010 and 2009, respectively.
 
(d)   The compensation expense as a percentage of total net revenue ratio for year-to-date of 2010 excluding the payroll 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, which is a non-GAAP financial measure, was 37%. IB excludes this tax from the ratio because it enables comparability with prior periods.

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Quarterly results
Net income was $1.3 billion, down 33% compared with the prior year. The decrease reflected lower revenue, partially offset by lower noninterest expense and a benefit from the provision for credit losses.
Net revenue was $5.4 billion, compared with $7.5 billion in the prior year. Investment banking fees were $1.5 billion, down 9%; these consisted of equity underwriting fees of $333 million (down 51%), debt underwriting fees of $784 million (up 32%) and advisory fees of $385 million (flat compared with the prior year). Fixed Income Markets revenue was $3.1 billion, compared with $5.0 billion in the prior year. The decrease largely reflected lower results in credit and rates markets. The current period also included losses of $149 million from the tightening of the Firm’s credit spreads on certain structured liabilities, compared with losses of $497 million in the prior period. Equity Markets revenue was $1.1 billion, compared with $941 million in the prior year, reflecting solid client revenue. The current period also included losses of $96 million from the tightening of the Firm’s credit spreads on certain structured liabilities, compared with losses of $343 million in the prior period. Credit Portfolio revenue was a loss of $407 million, primarily reflecting the negative net impact of credit spreads on derivative assets and liabilities, partially offset by net interest income and fees on retained loans.
The provision for credit losses was a benefit of $142 million, compared with an expense of $379 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 3.85%, compared with 8.44% 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 6.20%. Net charge-offs were $33 million, compared with $750 million in the prior year. Nonperforming loans were $2.4 billion, down by $2.5 billion from the prior year.
Noninterest expense was $3.7 billion, down 13% from the prior year, primarily due to lower compensation expense.
ROE was 13% on $40.0 billion of average allocated capital.
Year-to-date results
Net income was $5.1 billion, up 3% compared with the prior year. These results primarily reflected a benefit from the provision for credit losses, compared with an expense in the prior year, partially offset by lower net revenue.
Net revenue was $20.0 billion, compared with $23.2 billion in the prior year. Investment banking fees were $4.4 billion, down 18% from the prior year; these consisted of debt underwriting fees of $2.2 billion (up 14%), equity underwriting fees of $1.1 billion (down 47%), and advisory fees of $1.0 billion (down 17%). Fixed Income Markets revenue was $12.2 billion, compared with $14.8 billion in the prior year. The decrease from the prior year largely reflected lower results in rates and credit markets, partially offset by gains of $307 million from the widening of the Firm’s credit spread on certain structured liabilities, compared with losses of $848 million in the prior year. Equity Markets revenue was $3.6 billion, compared with $3.4 billion in the prior year, reflecting solid client revenue, as well as gains of $142 million from the widening of the Firm’s credit spread on certain structured liabilities, compared with losses of $453 million in the prior year. Credit Portfolio revenue was a loss of $134 million, primarily reflecting negative impact of credit spreads on derivative assets as well as mark-to-market losses on hedges of retained loans, partially offset by net interest income and fees on loans.
The provision for credit losses was a benefit of $929 million, compared with an expense of $2.5 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 $758 million, compared with $1.2 billion in the prior year.
Noninterest expense was $13.1 billion, flat to the prior year, as lower performance-based compensation expense was largely offset by increased litigation reserves, including those for mortgage-related matters. Current-year results also included the impact of the U.K. Bank Payroll Tax.
ROE on equity was 17% on $40.0 billion of average allocated capital.

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Selected metrics   Three months ended September 30,   Nine months ended September 30,
(in millions, except headcount and ratios)   2010   2009   Change   2010   2009   Change
 
Selected balance sheet data (period-end)
                                               
Loans: (a)
                                               
Loans retained (b)
  $ 51,299     $ 55,703       (8 )%   $ 51,299     $ 55,703       (8 )%
Loans held-for-sale and loans at fair value
    2,252       4,582       (51 )     2,252       4,582       (51 )
                     
Total loans
    53,551       60,285       (11 )     53,551       60,285       (11 )
Equity
    40,000       33,000       21       40,000       33,000       21  
 
                                               
Selected balance sheet data (average)
                                               
Total assets
  $ 746,926     $ 678,796       10     $ 711,277     $ 707,396       1  
Trading assets—debt and equity instruments
    300,517       270,695       11       293,605       269,668       9  
Trading assets—derivative receivables
    76,530       86,651       (12 )     69,547       103,929       (33 )
Loans: (a)
                                               
Loans retained (b)
    53,331       61,269       (13 )     55,042       66,479       (17 )
Loans held-for-sale and loans at fair value
    2,678       4,981       (46 )     3,118       8,745       (64 )
                     
Total loans
    56,009       66,250       (15 )     58,160       75,224       (23 )
Adjusted assets (c)
    539,459       515,718       5       524,658       545,235       (4 )
Equity
    40,000       33,000       21       40,000       33,000       21  
 
                                               
Headcount
    26,373       24,828       6       26,373       24,828       6  
 
                                               
Credit data and quality statistics
                                               
Net charge-offs
  $ 33     $ 750       (96 )   $ 758     $ 1,219       (38 )
Nonperforming assets:
                                               
Nonperforming loans:
                                               
Nonperforming loans retained (b)(d)
    2,025       4,782       (58 )     2,025       4,782       (58 )
Nonperforming loans held-for-sale and loans at fair value
    361       128       182       361       128       182  
                     
Total nonperforming loans
    2,386       4,910       (51 )     2,386       4,910       (51 )
Derivative receivables
    255       624       (59 )     255       624       (59 )
Assets acquired in loan satisfactions
    148       248       (40 )     148       248       (40 )
                     
Total nonperforming assets
    2,789       5,782       (52 )     2,789       5,782       (52 )
Allowance for credit losses:
                                               
Allowance for loan losses
    1,976       4,703       (58 )     1,976       4,703       (58 )
Allowance for lending-related commitments
    570       401       42       570       401       42  
                     
Total allowance for credit losses
    2,546       5,104       (50 )     2,546       5,104       (50 )
Net charge-off rate (b)(e)
    0.25 %     4.86 %             1.84 %     2.45 %        
Allowance for loan losses to period-end loans retained (b)(e)
    3.85       8.44               3.85       8.44          
Allowance for loan losses to average loans retained (b)(e)
    3.71       7.68               3.59       7.07          
Allowance for loan losses to nonperforming loans retained (b)(d)(e)
    98       98               98       98          
Nonperforming loans to period-end loans
    4.46       8.14               4.46       8.14          
Nonperforming loans to average loans
    4.26       7.41               4.10       6.53          
Market risk—average trading and credit portfolio VaR — 95% confidence level
                                               
Trading activities:
                                               
Fixed income
  $ 72     $ 182       (60 )   $ 68     $ 173       (61 )
Foreign exchange
    9       19       (53 )     11       19       (42 )
Equities
    21       19       11       22       55       (60 )
Commodities and other
    13       23       (43 )     16       22       (27 )
Diversification (f)
    (38 )     (97 )     61       (43 )     (101 )     57  
                     
Total trading VaR (g)
    77       146       (47 )     74       168       (56 )
Credit portfolio VaR (h)
    30       29       3       25       61       (59 )
Diversification (f)
    (8 )     (32 )     75       (9 )     (52 )     83  
                     
Total trading and credit portfolio VaR
  $ 99     $ 143       (31 )   $ 90     $ 177       (49 )
 
(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.

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(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 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 $603 million and $1.8 billion were held against these nonperforming loans at September 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 99—101 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 99—101 and the DVA Sensitivity table on page 101 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 nine months of 2010, the Firm was ranked #1 in Global Debt, Equity and Equity-Related; #1 in Global Equity and Equity-Related; #1 in Global Long-Term Debt; #2 in Global Syndicated Loans and #2 in Global Announced M&A based on volume.
According to Dealogic, the Firm was ranked #1 in Investment Banking fees generated for the first nine months of 2010, based on revenue.
                                 
    Nine months ended September 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
    9       #2       8       #1  
Global long-term debt (c)
    7       #1       8       #1  
Global equity and equity-related (d)
    8       #1       12       #1  
Global announced M&A (e)
    18       #2       23       #3  
U.S. debt, equity and equity-related
    11       #1       15       #1  
U.S. syndicated loans
    20       #2       22       #1  
U.S. long-term debt (c)
    11       #1       14       #1  
U.S. equity and equity-related
    16       #1       16       #2  
U.S. announced M&A (e)
    23       #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 15,800 ATMs (second-largest nationally), as well as online and mobile banking around the clock. More than 28,500 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 16,000 auto dealerships and 1,700 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 PCI 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 September 30,   Nine months ended September 30,
(in millions, except ratios)   2010   2009   Change   2010   2009   Change
 
Revenue
                                               
Lending- and deposit-related fees
  $ 759     $ 1,046       (27 )%   $ 2,380     $ 2,997       (21 )%
Asset management, administration and commissions
    443       408       9       1,328       1,268       5  
Mortgage fees and related income
    705       873       (19 )     2,246       3,313       (32 )
Credit card income
    502       416       21       1,432       1,194       20  
Other income
    379       321       18       1,146       829       38  
                     
Noninterest revenue
    2,788       3,064       (9 )     8,532       9,601       (11 )
Net interest income
    4,858       5,154       (6 )     14,699       15,422       (5 )
                     
Total net revenue (a)
    7,646       8,218       (7 )     23,231       25,023       (7 )
 
                                               
Provision for credit losses
    1,548       3,988       (61 )     6,996       11,711       (40 )
 
                                               
Compensation expense
    1,915       1,728       11       5,527       4,990       11  
Noncompensation expense
    2,533       2,385       6       7,304       7,207       1  
Amortization of intangibles
    69       83       (17 )     209       249       (16 )
                     
Total noninterest expense
    4,517       4,196       8       13,040       12,446       5  
                     
Income before income tax expense
    1,581       34     NM     3,195       866       269  
Income tax expense
    674       27     NM     1,377       370       272  
                     
Net income
  $ 907     $ 7     NM   $ 1,818     $ 496       267  
                     
 
                                               
Financial ratios
                                               
Return on common equity
    13 %     %             9 %     3 %        
Overhead ratio
    59       51               56       50          
Overhead ratio excluding core deposit intangibles (b)
    58       50               55       49          
 
(a)   Total net revenue included tax-equivalent adjustments associated with tax-exempt loans to municipalities and other qualified entities of $4 million and $6 million for the quarters ended September 30, 2010 and 2009, respectively, and $14 million and $18 million for the nine months ended September 30, 2010 and 2009, respectively.
 
(b)   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 $83 million for the quarters ended September 30, 2010 and 2009, respectively, and $208 million and $248 million for the nine months ended September 30, 2010 and 2009, respectively.

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Quarterly results
Net income was $907 million, compared with $7 million in the prior year.
Net revenue was $7.6 billion, a decrease of $572 million, or 7%, compared with the prior year. Net interest income was $4.9 billion, down by $296 million, or 6%, reflecting the impact of lower loan balances and narrower loan spreads, partially offset by a shift to wider-spread deposit products. Noninterest revenue was $2.8 billion, down by $276 million, or 9%, as lower deposit-related fees and mortgage fees and related income were partially offset by higher debit card income and auto operating lease income.
The provision for credit losses was $1.5 billion, a decrease of $2.4 billion from the prior year. While delinquency trends and net charge-offs improved compared with the prior year, the current-quarter provision continued to reflect elevated losses for the mortgage and home equity portfolios. Home equity net charge-offs were $730 million (3.10% net charge-off rate), compared with $1.1 billion (4.25% net charge-off rate) in the prior year. Subprime mortgage net charge-offs were $206 million (6.64% net charge-off rate), compared with $422 million (12.31% net charge-off rate). Prime mortgage net charge-offs were $265 million (1.84% net charge-off rate), compared with $525 million (3.45% net charge-off rate). There was no change to the allowance for loan losses in the quarter, while $1.4 billion was added in the prior year. The allowance for loan losses to ending loans retained, excluding purchased credit-impaired loans, was 5.36%, compared with 4.63% in the prior year.
Noninterest expense was $4.5 billion, an increase of $321 million, or 8%, from the prior year.
Year-to-date results
Net income was $1.8 billion, compared with $496 million in the prior year.
Net revenue was $23.2 billion, a decrease of $1.8 billion, or 7%, compared with the prior year. Net interest income was $14.7 billion, down by $723 million, or 5%, reflecting the impact of lower loan and deposit balances and narrower loan spreads, partially offset by a shift to wider-spread deposit products. Noninterest revenue was $8.5 billion, down by $1.1 billion, or 11%, as lower mortgage fees and related income and deposit-related fees were partially offset by higher debit card income and auto operating lease income.
The provision for credit losses was $7.0 billion, compared with $11.7 billion in the prior year. The current-year provision reflects an addition to the allowance for loan losses of $1.2 billion for the purchased credit-impaired portfolio, compared with prior year additions of $3.2 billion predominantly for the home equity and mortgage portfolios and $1.1 billion for the purchased credit-impaired portfolio. While delinquency trends and net charge-offs improved compared with the prior year, the provision continued to reflect elevated losses for the mortgage and home equity portfolios. Home equity net charge-offs were $2.7 billion (3.68% net charge-off rate), compared with $3.5 billion (4.26% net charge-off rate) in the prior year. Subprime mortgage net charge-offs were $945 million (9.72% net charge-off rate), compared with $1.2 billion (11.18% net charge-off rate). Prime mortgage net charge-offs were $988 million (2.24% net charge-off rate), compared with $1.3 billion (2.81% net charge-off rate).
Noninterest expense was $13.0 billion, an increase of $594 million, or 5%, from the prior year.

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Selected metrics   Three months ended September 30,   Nine months ended September 30,
(in millions, except headcount and ratios)   2010   2009   Change   2010   2009   Change
 
Selected balance sheet data (period-end)
                                               
Assets
  $ 367,675     $ 397,673       (8 )%   $ 367,675     $ 397,673       (8 )%
Loans:
                                               
Loans retained
    323,481       346,765       (7 )     323,481       346,765       (7 )
Loans held-for-sale and loans at fair value (a)
    13,071       14,303       (9 )     13,071       14,303       (9 )
                     
Total loans
    336,552       361,068       (7 )     336,552       361,068       (7 )
Deposits
    364,186       361,046       1       364,186       361,046       1  
Equity
    28,000       25,000       12       28,000       25,000       12  
 
                                               
Selected balance sheet data (average)
                                               
Assets
  $ 375,968     $ 401,620       (6 )   $ 383,848     $ 411,693       (7 )
Loans:
                                               
Loans retained
    326,905       349,762       (7 )     335,011       358,623       (7 )
Loans held-for-sale and loans at fair value (a)
    15,683       19,025       (18 )     15,717       18,208       (14 )
                     
Total loans
    342,588       368,787       (7 )     350,728       376,831       (7 )
Deposits
    362,559       366,944       (1 )     360,521       371,482       (3 )
Equity
    28,000       25,000       12       28,000       25,000       12  
 
                                               
Headcount
    119,424       106,951       12       119,424       106,951       12  
 
                                               
Credit data and quality statistics
                                               
Net charge-offs
  $ 1,548     $ 2,550       (39 )   $ 5,747     $ 7,375       (22 )
Nonperforming loans :
                                               
Nonperforming loans retained
    9,801       10,091       (3 )     9,801       10,091       (3 )
Nonperforming loans held-for-sale and loans at fair value
    166       242       (31 )     166       242       (31 )
                     
Total nonperforming loans (b)(c)(d)
    9,967       10,333       (4 )     9,967       10,333       (4 )
Nonperforming assets (b)(c)(d)
    11,421       11,883       (4 )     11,421       11,883       (4 )
Allowance for loan losses
    16,154       13,286       22       16,154       13,286       22  
Net charge-off rate (e)
    1.88 %     2.89 %             2.29 %     2.75 %        
Net charge-off rate excluding purchased credit-impaired loans (e)(f)
    2.44       3.81               2.99       3.62          
Allowance for loan losses to ending loans retained (e)
    4.99       3.83               4.99       3.83          
Allowance for loan losses to ending loans retained excluding purchased credit-impaired loans (e)(f)
    5.36       4.63               5.36       4.63          
Allowance for loan losses to nonperforming loans retained (b)(e)(f)
    136       121               136       121          
Nonperforming loans to total loans
    2.96       2.86               2.96       2.86          
Nonperforming loans to total loans excluding purchased credit-impaired loans (b)
    3.81       3.72               3.81       3.72          
 
(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 $12.6 billion and $12.8 billion at September 30, 2010 and 2009, respectively. Average balances of these loans totaled $15.3 billion and $17.7 billion for the quarters ended September 30, 2010 and 2009, respectively, and $14.0 billion and $15.8 billion for the nine months ended September 30, 2010 and 2009, respectively.
 
(b)   Excludes PCI loans that were acquired as part of the Washington Mutual transaction. These loans are accounted for on a pool basis, and the pools are considered to be performing.
 
(c)   Certain of these loans are classified as trading assets on the Consolidated Balance Sheets.
 
(d)   At September 30, 2010 and 2009, nonperforming loans and assets exclude: (1) mortgage loans insured by U.S. government agencies of $10.2 billion and $7.0 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 $1.7 billion and $579 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 $572 million and $511 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 PCI 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 and $1.1 billion was recorded for these loans at September 30, 2010 and 2009, respectively, which has also been excluded from applicable ratios. To date, no charge-offs have been recorded for these loans.

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RETAIL BANKING
                                                 
Selected income statement data   Three months ended September 30,   Nine months ended September 30,
(in millions, except ratios)   2010   2009   Change   2010   2009   Change
 
Noninterest revenue
  $ 1,691     $ 1,844       (8 )%   $ 5,077     $ 5,365       (5 )%
Net interest income
    2,745       2,732             8,092       8,065        
                     
Total net revenue
    4,436       4,576       (3 )     13,169       13,430       (2 )
Provision for credit losses
    175       208       (16 )     534       894       (40 )
Noninterest expense
    2,779       2,646       5       7,989       7,783       3  
                     
Income before income tax expense
    1,482       1,722       (14 )     4,646       4,753       (2 )
                     
Net income
  $ 848     $ 1,043       (19 )   $ 2,660     $ 2,876       (8 )
                     
Overhead ratio
    63 %     58 %             61 %     58 %        
Overhead ratio excluding core deposit intangibles (a)
    61       56               59       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 $83 million for the quarters ended September 30, 2010 and 2009, respectively, and $208 million and $248 million for the nine months ended September 30, 2010 and 2009, respectively.
Quarterly results
Retail Banking reported net income of $848 million, a decrease of $195 million, or 19%, 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, largely offset by a shift to wider-spread deposit products and higher debit card income.
The provision for credit losses was $175 million, down $33 million compared with the prior year. Retail Banking net charge-offs were $175 million (4.18% net charge-off rate), compared with $208 million (4.66% net charge-off rate) in the prior year.
Noninterest expense was $2.8 billion, up 5% compared with the prior year, resulting from sales force increases in Business Banking and bank branches.
Year-to-date results
Retail Banking reported net income of $2.7 million, a decrease of $216 million, or 8%, compared with the prior year.
Net revenue was $13.2 billion, down 2% compared with the prior year. The decrease was driven by declining deposit-related fees and a decline in deposit balances, largely offset by a shift to wider-spread deposit products and higher debit card income.
The provision for credit losses was $534 million, down $360 million compared with the prior year. Retail Banking net charge-offs were $534 million (4.28% net charge-off rate), compared with $594 million (4.41% net charge-off rate) in the prior year.
Noninterest expense was $8.0 billion, up 3% compared with the prior year, resulting from sales force increases in Business Banking and bank branches.

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Selected metrics   Three months ended September 30,   Nine months ended September 30,
(in billions, except ratios and where                        
otherwise noted)   2010   2009   Change   2010   2009   Change
 
Business metrics
                                               
 
                                               
Business banking origination volume
  $ 1.2     $ 0.5       91 %   $ 3.3     $ 1.6       99 %
End-of-period loans owned
    16.6       17.4       (5 )     16.6       17.4       (5 )
End-of-period deposits:
                                               
Checking
  $ 124.2     $ 115.5       8     $ 124.2     $ 115.5       8  
Savings
    162.4       151.6       7       162.4       151.6       7  
Time and other
    48.9       66.6       (27 )     48.9       66.6       (27 )
                     
Total end-of-period deposits
    335.5       333.7       1       335.5       333.7       1  
Average loans owned
  $ 16.6     $ 17.7       (6 )   $ 16.7     $ 18.0       (7 )
Average deposits:
                                               
Checking
  $ 123.5     $ 114.0       8     $ 122.3     $ 112.6       9  
Savings
    162.2       151.2       7       161.2       150.1       7  
Time and other
    49.8       74.4       (33 )     52.2       81.8       (36 )
                     
Total average deposits
    335.5       339.6       (1 )     335.7       344.5       (3 )
Deposit margin
    3.08 %     2.99 %         3.05 %     2.92 %    
Average assets
  $ 27.7     $ 28.1       (1 )   $ 28.3     $ 29.1       (3 )
                     
Credit data and quality statistics (in millions, except ratio)
                                               
Net charge-offs
  $ 175     $ 208       (16 )   $ 534     $ 594       (10 )
Net charge-off rate
    4.18 %     4.66 %         4.28 %     4.41 %    
Nonperforming assets
  $ 913     $ 816       12     $ 913     $ 816       12  
                     
Retail branch business metrics
                                               
Investment sales volume (in millions)
  $ 5,798     $ 6,243       (7 )   $ 17,510     $ 15,933       10  
 
                                               
Number of:
                                               
Branches
    5,192       5,126       1       5,192       5,126       1  
ATMs
    15,815       15,038       5       15,815       15,038       5  
Personal bankers
    21,438       16,941       27       21,438       16,941       27  
Sales specialists
    7,123       5,530       29       7,123       5,530       29  
Active online customers (in thousands)
    17,167       13,852       24       17,167       13,852       24  
Checking accounts (in thousands)
    27,014       25,546       6       27,014       25,546       6  
 
MORTGAGE BANKING & OTHER CONSUMER LENDING
                                                 
Selected income statement data   Three months ended September 30,   Nine months ended September 30,
(in millions, except ratio)   2010   2009   Change   2010   2009   Change
 
Noninterest revenue (a)
  $ 1,076     $ 1,201       (10 )%   $ 3,350     $ 4,256       (21 )%
Net interest income
    809       834       (3 )     2,494       2,363       6  
                     
Total net revenue
    1,885       2,035       (7 )     5,844       6,619       (12 )
Provision for credit losses
    176       222       (21 )     568       993       (43 )
Noninterest expense
    1,348       1,139       18       3,837       3,381       13  
                     
Income before income tax expense
    361       674       (46 )     1,439       2,245       (36 )
                     
Net income (a)
  $ 207     $ 412       (50 )   $ 828     $ 1,377       (40 )
                     
Overhead ratio
    72 %     56 %             66 %     51 %        
 
(a)   Losses related to the repurchase of previously-sold loans are recorded as a reduction of production revenue. These losses totaled $1.5 billion and $465 million for the quarters ended September 30, 2010 and 2009, respectively, and $2.6 billion and $940 million for the nine months ended September 30, 2010 and 2009, respectively. The losses resulted in a negative impact on net income of $853 million and $286 million for the quarters ended September 30, 2010 and 2009, respectively, and $1.5 billion and $578 million for the nine months ended September 30, 2010 and 2009, respectively. For further discussion, see Repurchase liability on pages 58—61 and Note 22 on pages 174—178 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 $207 million, a decrease of $205 million, or 50%, from the prior year.
Net revenue was $1.9 billion, down by $150 million, or 7%, from the prior year. Mortgage Banking net revenue was $1.1 billion, down by $219 million. Other Consumer Lending net revenue, comprising Auto and Student Lending, was $832 million, up by $69 million, predominantly as a result of higher auto loan and lease balances.
Mortgage Banking net revenue included $232 million of net interest income and $821 million of noninterest revenue, comprising production, servicing and other noninterest revenue. Total production revenue was a net loss of $231 million, a decrease of $161 million compared with the prior year. Production revenue, excluding repurchase losses, was $1.2 billion, an increase of $838 million, reflecting higher mortgage origination volumes and wider margins. Total production revenue was reduced by $1.5 billion of repurchase losses, compared with $465 million in the prior year, and included a $1.0 billion increase in the repurchase reserve during the current quarter, reflecting higher estimated future repurchase demands. Net mortgage servicing revenue, which comprises operating revenue and MSR risk management, was $936 million, a decrease of $7 million. Operating revenue was $549 million, an increase of $41 million, reflecting an improvement in other changes in MSR asset fair value driven by lower runoff of the MSR asset due to time decay, largely offset by lower loan servicing revenue as a result of lower third-party loans serviced. MSR risk management revenue was $387 million, a decrease of $48 million.
The provision for credit losses, predominantly related to the student and auto loan portfolios, was $176 million, compared with $222 million in the prior year. Student loan and other net charge-offs were $82 million (2.21% net charge-off rate), compared with $60 million (1.66% net charge-off rate) in the prior year. Auto loan net charge-offs were $67 million (0.56% net charge-off rate), compared with $159 million (1.46% net charge-off rate) in the prior year.
Noninterest expense was $1.3 billion, up by $209 million, or 18%, from the prior year, driven by an increase in default-related expense for the serviced portfolio.
Year-to-date results
Mortgage Banking & Other Consumer Lending reported net income of $828 million, a decrease of $549 million, or 40%, from the prior year.
Net revenue was $5.8 billion, down by $775 million, or 12%, from the prior year. Mortgage Banking net revenue was $3.2 billion, down by $1.2 billion. Other Consumer Lending net revenue, comprising Auto and Student Lending, was $2.6 billion, up by $400 million, predominantly as a result of higher auto loan and lease balances.
Mortgage Banking net revenue included $660 million of net interest income and $2.6 billion of noninterest revenue, comprising production, servicing and other noninterest revenue. Total production revenue was a net loss of $221 million, compared with income of $695 million in the prior year. Production revenue, excluding repurchase losses, was $2.3 billion, an increase of $707 million, reflecting wider mortgage margins. Total production revenue was reduced by $2.6 billion of repurchase losses, compared with $940 million in the prior year, and included a $1.6 billion increase in the repurchase reserve during the current year, reflecting higher estimated future repurchase demands. Net mortgage servicing revenue, which comprises operating revenue and MSR risk management, was $2.5 billion, a decrease of $151 million. Operating revenue was $1.6 billion, an increase of $518 million, reflecting an improvement in other changes in MSR asset fair value driven by lower runoff of the MSR asset due to time decay, partially offset by lower loan servicing revenue as a result of lower third-party loans serviced. MSR risk management revenue was $850 million, a decrease of $669 million.
The provision for credit losses, predominantly related to the student and auto loan portfolios, was $568 million, compared with $993 million in the prior year. Student loan and other net charge-offs were $296 million (2.62% net charge-off rate), compared with $195 million (1.80% net charge-off rate) in the prior year. Auto loan net charge-offs were $227 million (0.64% net charge-off rate), compared with $479 million (1.49% net charge-off rate) in the prior year.
Noninterest expense was $3.8 billion, up by $456 million, or 13%, from the prior year, driven by an increase in default-related expense for the serviced portfolio.

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Selected metrics   Three months ended September 30,   Nine months ended September 30,
(in billions, except ratios and where otherwise noted)   2010   2009   Change   2010   2009   Change
 
Business metrics
                                               
End-of-period loans owned:
                                               
Auto loans
  $ 48.2     $ 44.3       9 %   $ 48.2     $ 44.3       9 %
Mortgage (a)
    13.8       10.1       37       13.8       10.1       37  
Student loans and other
    14.6       15.6       (6 )     14.6       15.6       (6 )
                     
Total end-of-period loans owned
    76.6       70.0       9       76.6       70.0       9  
                     
Average loans owned:
                                               
Auto loans
  $ 47.7     $ 43.3       10     $ 47.4     $ 43.0       10  
Mortgage (a)
    13.6       8.9       53       13.3       8.3       60  
Student loans and other
    14.8       15.3       (3 )     16.6       16.5       1  
                     
Total average loans owned (b)
    76.1       67.5       13       77.3       67.8       14  
                     
Credit data and quality statistics (in millions, except ratios)
                                               
Net charge-offs:
                                               
Auto loans
  $ 67     $ 159       (58 )   $ 227     $ 479       (53 )
Mortgage
    10       7       43       29       14       107  
Student loans and other
    82       60       37       296       195       52  
                     
Total net charge-offs
    159       226       (30 )     552       688       (20 )
                     
Net charge-off rate:
                                               
Auto loans
    0.56 %     1.46 %             0.64 %     1.49 %        
Mortgage
    0.30       0.32               0.30       0.24          
Student loans and other
    2.21       1.66               2.62       1.80          
                     
Total net charge-off rate (b)
    0.83       1.35               0.98       1.41          
                     
 
                                               
30+ day delinquency rate (c)(d)
    1.54 %     1.76 %             1.54 %     1.76 %        
Nonperforming assets (in millions) (e)
  $ 1,052     $ 872       21     $ 1,052     $ 872       21  
                     
 
                                               
Origination volume:
                                               
Mortgage origination volume by channel
                                               
Retail
  $ 19.2     $ 13.3       44     $ 45.9     $ 41.6       10  
Wholesale (f)
    0.2       0.7       (71 )     1.0       3.0       (67 )
Correspondent (f)
    19.1       21.1       (9 )     49.8       61.0       (18 )
CNT (negotiated transactions)
    2.4       2.0       20       8.1       10.3       (21 )
                     
Total mortgage origination volume
    40.9       37.1       10       104.8       115.9       (10 )
                     
Student loans
  $ 0.2     $ 1.5       (87 )   $ 1.9     $ 3.6       (47 )
Auto
    6.1       6.9       (12 )     18.2       17.8       2  
 

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Selected metrics   Three months ended September 30,   Nine months ended September 30,
(in billions, except ratios and where otherwise noted)   2010   2009   Change   2010   2009   Change
 
Application volume:
                                               
Mortgage application volume by channel
                                               
Retail
  $ 34.6     $ 17.8       94 %   $ 82.7     $ 73.5       13 %
Wholesale (f)
    0.6       1.1       (45 )     2.0       4.2       (52 )
Correspondent (f)
    30.7       26.6       15       72.4       85.5       (15 )
                     
Total mortgage application volume
  $ 65.9     $ 45.5       45     $ 157.1     $ 163.2       (4 )
                     
Average mortgage loans held-for-sale and loans at fair value (g)
  $ 15.6     $ 18.0       (13 )   $ 14.2     $ 16.2       (12 )
Average assets
    125.8       115.2       9       124.6       113.4       10  
Repurchase reserve (ending)
    3.0       0.9       233       3.0       0.9       233  
Third-party mortgage loans serviced (ending)
    1,012.7       1,098.9       (8 )     1,012.7       1,098.9       (8 )
Third-party mortgage loans serviced (average)
    1,028.6       1,104.4       (7 )     1,056.3       1,129.2       (6 )
MSR net carrying value (ending)
    10.3       13.6       (24 )     10.3       13.6       (24 )
Ratio of MSR net carrying value (ending) to third-party mortgage loans serviced (ending)
    1.02 %     1.24 %             1.02 %     1.24 %        
Ratio of annualized loan servicing revenue to third-party mortgage loans serviced (average)
    0.44       0.44               0.44       0.44          
MSR revenue multiple (h)
    2.32x       2.82x               2.32x       2.82x          
                     
 
                                               
Supplemental mortgage fees and related income details
                                               
(in millions)
                                               
                     
Net production revenue:
                                               
Production revenue
  $ 1,233     $ 395       212     $ 2,342     $ 1,635       43  
Repurchase losses
    (1,464 )     (465 )     (215 )     (2,563 )     (940 )     (173 )
                     
Net production revenue
    (231 )     (70 )     (230 )     (221 )     695     NM
                     
Net mortgage servicing revenue:
                                               
Operating revenue:
                                               
Loan servicing revenue
    1,153       1,220       (5 )     3,446       3,721       (7 )
Other changes in MSR asset fair value
    (604 )     (712 )     15       (1,829 )     (2,622 )     30  
                     
Total operating revenue
    549       508       8       1,617       1,099       47  
Risk management:
                                               
Changes in MSR asset fair value due to inputs or assumptions in model
    (1,497 )     (1,099 )     (36 )     (5,177 )     4,042     NM
Derivative valuation adjustments and other
    1,884       1,534       23       6,027       (2,523 )   NM
                     
Total risk management
    387       435       (11 )     850       1,519       (44 )
                     
Total net mortgage servicing revenue
    936       943       (1 )     2,467       2,618       (6 )
                     
Mortgage fees and related income
  $ 705     $ 873       (19 )   $ 2,246     $ 3,313       (32 )
 
(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—61 of this Form 10-Q.
 
(b)   Total average loans owned includes loans held-for-sale of $338 million and $1.3 billion for the quarters ended September 30, 2010 and 2009, respectively, and $1.7 billion and $2.4 billion for the nine months ended September 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 $11.1 billion and $7.7 billion at September 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 $1.0 billion and $903 million at September 30, 2010 and 2009, respectively. These amounts are excluded as reimbursement of insured amounts is proceeding normally.
 
(e)   At September 30, 2010 and 2009, nonperforming loans and assets exclude: (1) mortgage loans insured by U.S. government agencies of $10.2 billion and $7.0 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 $1.7 billion and $579 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 $572 million and $511 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 $15.3 billion and $17.7 billion for the quarters ended September 30, 2010 and 2009, respectively, and $14.0 billion and $15.8 billion for the nine months ended September 30, 2010 and 2009, respectively.
 
(h)   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 September 30,   Nine months ended September 30,
(in millions, except ratios)   2010   2009   Change   2010   2009   Change
 
Noninterest revenue
  $ 21     $ 19       11 %   $ 105     $ (20 )   NM
Net interest income
    1,304       1,588       (18 )     4,113       4,994       (18 )%
                     
Total net revenue
    1,325       1,607       (18 )     4,218       4,974       (15 )
                     
Provision for credit losses
    1,197       3,558       (66 )     5,894       9,824       (40 )
Noninterest expense
    390       411       (5 )     1,214       1,282       (5 )
Income/(loss) before income tax expense/(benefit)
    (262 )     (2,362 )     89       (2,890 )     (6,132 )     53  
                     
Net income/(loss)
  $ (148 )   $ (1,448 )     90     $ (1,670 )   $ (3,757 )     56  
                     
Overhead ratio
    29 %     26 %             29 %     26 %        
 
Quarterly results
Real Estate Portfolios reported a net loss of $148 million, compared with a net loss of $1.4 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 $1.3 billion, down by $282 million, or 18%, from the prior year. The decrease was driven by a decline in net interest income as a result of lower loan balances, reflecting net portfolio runoff, and a decline in mortgage loan yields.
The provision for credit losses was $1.2 billion, compared with $3.6 billion in the prior year. The current-quarter provision reflected improved delinquency trends and a $902 million reduction in net charge-offs. Additionally, the prior-year provision included an addition to the allowance for loan losses of $1.4 billion in the home equity and mortgage loan portfolios. (For further detail, see RFS discussion of the provision for credit losses.)
Noninterest expense was $390 million, down by $21 million, or 5%, from the prior year.
Year-to-date results
Real Estate Portfolios reported a net loss of $1.7 billion, compared with a net loss of $3.8 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 $4.2 billion, down by $756 million, or 15%, from the prior year. The decrease was driven by a decline in net interest income as a result of lower loan balances, reflecting net portfolio runoff.
The provision for credit losses was $5.9 billion, compared with $9.8 billion in the prior year. The current-year provision reflected improved delinquency trends and a $1.4 billion reduction in net charge-offs. Additionally, the current-year provision reflects an addition to the allowance for loan losses of $1.2 billion for the purchased credit-impaired portfolio, compared with prior year additions of $2.6 billion for the home equity and mortgage portfolios and $1.1 billion for the purchased credit-impaired portfolio. (For further detail, see RFS discussion of the provision for credit losses.)
Noninterest expense was $1.2 billion, down by $68 million, or 5%, from the prior year.

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Selected metrics   Three months ended September 30,   Nine months ended September 30,
(in billions)   2010   2009   Change   2010   2009   Change
 
Loans excluding purchased credit-impaired loans (a)
                                               
End-of-period loans owned:
                                               
Home equity
  $ 91.7     $ 104.8       (13 )%   $ 91.7     $ 104.8       (13 )%
Prime mortgage
    42.9       50.0       (14 )     42.9       50.0       (14 )
Subprime mortgage
    12.0       13.3       (10 )     12.0       13.3       (10 )
Option ARMs
    8.4       8.9       (6 )     8.4       8.9       (6 )
Other
    0.9       0.7       29       0.9       0.7       29  
                     
Total end-of-period loans owned
  $ 155.9     $ 177.7       (12 )   $ 155.9     $ 177.7       (12 )
                     
 
                                               
Average loans owned:
                                               
Home equity
  $ 93.3     $ 106.6       (12 )   $ 96.4     $ 110.0       (12 )
Prime mortgage
    43.8       51.7       (15 )     45.8       54.8       (16 )
Subprime mortgage
    12.3       13.6       (10 )     13.0       14.3       (9 )
Option ARMs
    8.4       8.9       (6 )     8.5       8.9       (4 )
Other
    1.0       0.8       25       1.0       0.9       11  
                     
Total average loans owned
  $ 158.8     $ 181.6       (13 )   $ 164.7     $ 188.9       (13 )
                     
 
                                               
Purchased credit-impaired loans (a)
                                               
End-of-period loans owned:
                                               
Home equity
  $ 25.0     $ 27.1       (8 )   $ 25.0     $ 27.1       (8 )
Prime mortgage
    17.9       20.2       (11 )     17.9       20.2       (11 )
Subprime mortgage
    5.5       6.1       (10 )     5.5       6.1       (10 )
Option ARMs
    26.4       29.8       (11 )     26.4       29.8       (11 )
                     
Total end-of-period loans owned
  $ 74.8     $ 83.2       (10 )   $ 74.8     $ 83.2       (10 )
                     
 
                                               
Average loans owned:
                                               
Home equity
  $ 25.2     $ 27.4       (8 )   $ 25.7     $ 27.9       (8 )
Prime mortgage
    18.2       20.5       (11 )     18.8       21.1       (11 )
Subprime mortgage
    5.6       6.2       (10 )     5.8       6.5       (11 )
Option ARMs
    26.7       30.2       (12 )     27.7       30.8       (10 )
                     
Total average loans owned
  $ 75.7     $ 84.3       (10 )   $ 78.0     $ 86.3       (10 )
                     
 
                                               
Total Real Estate Portfolios
                                               
End-of-period loans owned:
                                               
Home equity
  $ 116.7     $ 131.9       (12 )   $ 116.7     $ 131.9       (12 )
Prime mortgage
    60.8       70.2       (13 )     60.8       70.2       (13 )
Subprime mortgage
    17.5       19.4       (10 )     17.5       19.4       (10 )
Option ARMs
    34.8       38.7       (10 )     34.8       38.7       (10 )
Other
    0.9       0.7       29       0.9       0.7       29  
                     
Total end-of-period loans owned
  $ 230.7     $ 260.9       (12 )   $ 230.7     $ 260.9       (12 )
                     
Average loans owned:
                                               
Home equity
  $ 118.5     $ 134.0       (12 )   $ 122.1     $ 137.9       (11 )
Prime mortgage
    62.0       72.2       (14 )     64.6       75.9       (15 )
Subprime mortgage
    17.9       19.8       (10 )     18.8       20.8       (10 )
Option ARMs
    35.1       39.1       (10 )     36.2       39.7       (9 )
Other
    1.0       0.8       25       1.0       0.9       11  
                     
Total average loans owned
  $ 234.5     $ 265.9       (12 )   $ 242.7     $ 275.2       (12 )
                     
Average assets
  $ 222.5     $ 258.3       (14 )   $ 230.9     $ 269.2       (14 )
Home equity origination volume
    0.3       0.5       (40 )     0.9       2.0       (55 )
 
(a)   PCI 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 underlying loans as long as cash flows are reasonably estimable, even if the underlying loans are contractually past due.
Included within Real Estate Portfolios are PCI loans that the Firm acquired in the Washington Mutual transaction. For PCI 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 would trigger the recognition of impairment through the provision for loan losses; probable and significant increases in expected cash flows (e.g., decreased principal credit losses, the net benefit of modifications) would first reverse any previously recorded allowance for loan losses with any remaining increases recognized prospectively in interest income over the remaining estimated lives of the underlying loans.

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The net spread between the PCI 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 September 30, 2010, the remaining weighted-average life of the PCI loan portfolio is expected to be 7.2 years. For further information, see Note 13, PCI loans, on pages 153-154 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 PCI 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 September 30,   Nine months ended September 30,
(in millions, except ratios)   2010   2009   Change   2010   2009   Change
 
Net charge-offs excluding purchased credit-impaired loans (a) :
                                               
Home equity
  $ 730     $ 1,142       (36 )%   $ 2,652     $ 3,505       (24 )%
Prime mortgage
    255       518       (51 )     959       1,304       (26 )
Subprime mortgage
    206       422       (51 )     945       1,196       (21 )
Option ARMs
    11       15       (27 )     56       34       65  
Other
    12       19       (37 )     49       54       (9 )
                     
Total net charge-offs
  $ 1,214     $ 2,116       (43 )   $ 4,661     $ 6,093       (24 )
                     
Net charge-off rate excluding purchased credit-impaired loans (a) :
                                               
Home equity
    3.10 %     4.25 %             3.68 %     4.26 %        
Prime mortgage
    2.31       3.98               2.80       3.18          
Subprime mortgage
    6.64       12.31               9.72       11.18          
Option ARMs
    0.52       0.67               0.88       0.51          
Other
    4.76       9.42               6.55       8.02          
Total net charge-off rate excluding purchased credit-impaired loans
    3.03       4.62               3.78       4.31          
                     
Net charge-off rate — reported:
                                               
Home equity
    2.44 %     3.38 %             2.90 %     3.40 %        
Prime mortgage
    1.63       2.85               1.98       2.30          
Subprime mortgage
    4.57       8.46               6.72       7.69          
Option ARMs
    0.12       0.15               0.21       0.11          
Other
    4.76       9.42               6.55       8.02          
Total net charge-off rate — reported
    2.05       3.16               2.57       2.96          
                     
30+ day delinquency rate excluding purchased credit-impaired loans (b)
    6.77 %     7.46 %             6.77 %     7.46 %        
Allowance for loan losses
  $ 14,111     $ 11,261       25     $ 14,111     $ 11,261       25  
Nonperforming assets (c)
    9,456       10,196       (7 )     9,456       10,196       (7 )
Allowance for loan losses to ending loans retained
    6.12 %     4.32 %             6.12 %     4.32 %        
Allowance for loan losses to ending loans retained excluding purchased credit-impaired loans (a)
    7.25       5.72               7.25       5.72          
 
(a)   Excludes the impact of PCI 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 and $1.1 billion was recorded for these loans at September 30, 2010 and 2009, respectively, which has also been excluded from the applicable ratios. To date, no charge-offs have been recorded for these loans.
 
(b)   The delinquency rate for PCI loans was 28.07% and 25.56% at September 30, 2010 and 2009, respectively.
 
(c)   Excludes PCI 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 Sheets. 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 September 30,   Nine months ended September 30,
(in millions, except ratios)   2010   2009   Change   2010   2009   Change
 
Revenue
                                               
Credit card income
  $ 864     $ 916       (6 )%   $ 2,585     $ 2,681       (4 )%
All other income (b)
    (58 )     (85 )     32       (160 )     (646 )     75  
                     
Noninterest revenue
    806       831       (3 )     2,425       2,035       19  
Net interest income
    3,447       4,328       (20 )     10,492       13,121       (20 )
                     
Total net revenue
    4,253       5,159       (18 )     12,917       15,156       (15 )
 
                                               
Provision for credit losses
    1,633       4,967       (67 )     7,366       14,223       (48 )
 
                                               
Noninterest expense
                                               
Compensation expense
    316       354       (11 )     973       1,040       (6 )
Noncompensation expense
    1,023       829       23       2,958       2,552       16  
Amortization of intangibles
    106       123       (14 )     352       393       (10 )
                     
Total noninterest expense
    1,445       1,306       11       4,283       3,985       7  
                     
Income/(loss) before income tax expense/(benefit)
    1,175       (1,114 )   NM     1,268       (3,052 )   NM
Income tax expense/(benefit)
    440       (414 )   NM     493       (1,133 )   NM
                     
Net income/(loss)
  $ 735     $ (700 )   NM   $ 775     $ (1,919 )   NM
                     
 
                                               
Memo: Net securitization income/(loss)
  NA   $ (43 )   NM   NA   $ (491 )   NM
Financial ratios
                                               
Return on common equity
    19 %     (19 )%             7 %     (17 )%        
Overhead ratio
    34       25               33       26          
 
(a)   Effective January 1, 2010, the Firm adopted new accounting guidance related to VIEs. For further details regarding the Firm’s application and impact of the new guidance, see Note 15 on pages 155-167 of this Form 10-Q.
 
(b)   Includes the impact of revenue sharing agreements with other JPMorgan Chase business segments. For periods prior to January 1, 2010, net securitization income/(loss) is also included.
NA: Not applicable
Quarterly results
Net income was $735 million, compared with a net loss of $700 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 $136.4 billion, a decrease of $28.8 billion, or 17%, from the prior year. Average loans were $140.1 billion, a decrease of $29.1 billion, or 17%, from the prior year. The declines in both end-of-period and average loans were consistent with expected portfolio runoff.
Net revenue was $4.3 billion, a decrease of $906 million, or 18%, from the prior year. Net interest income was $3.4 billion, down by $881 million, or 20%. 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 $806 million, a decrease of $25 million, or 3%, due to lower revenue from fee-based products.

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The provision for credit losses was $1.6 billion, compared with $5.0 billion in the prior year. The current-quarter provision reflected lower net charge-offs and a reduction of $1.5 billion to the allowance for loan losses due to lower estimated losses. The prior year provision included an addition of $575 million to the allowance for loan losses. The net charge-off rate was 8.87%, down from 10.30% in the prior year. The 30-day delinquency rate was 4.57%, down from 5.99% in the prior year. Excluding the Washington Mutual portfolio, the net charge-off rate was 8.06%, down from 9.41% in the prior year; and the 30-day delinquency rate was 4.13%, down from 5.38% in the prior year.
Noninterest expense was $1.4 billion, an increase of $139 million, or 11%, due to higher marketing expense.
Year-to-date results
Net income was $775 million, compared with a net loss of $1.9 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 $147.3 billion, a decrease of $28.2 billion, or 16%, from the prior year, consistent with expected portfolio runoff.
Net revenue was $12.9 billion, a decrease of $2.2 billion, or 15%, from the prior year. Net interest income was $10.5 billion, down by $2.6 billion, or 20%. The decrease was driven by lower average loan balances, a decreased level of fees, and the impact of legislative changes. These decreases were offset partially by lower revenue reversals associated with lower charge-offs. Noninterest revenue was $2.4 billion, an increase of $390 million, or 19%, driven by a prior-year write-down of securitization interests, offset partially by lower revenue from fee-based products.
The provision for credit losses was $7.4 billion, compared with $14.2 billion in the prior year. The current-year provision reflected lower net charge-offs and a reduction of $4.0 billion to the allowance for loan losses due to lower estimated losses. The prior-year provision included an addition of $2.0 billion to the allowance for loan losses. The net charge-off rate was 10.31%, up from 9.32% in the prior year. Excluding the Washington Mutual portfolio, the net charge-off rate was 9.24%, up from 8.39% in the prior year.
Noninterest expense was $4.3 billion, an increase of $298 million, or 7%, due to higher marketing expense.
Credit Card Legislation
In May 2009, the CARD Act was enacted. Management estimates that the total annualized reduction in net income from the CARD Act, including regulatory guidance that defines reasonable and proportional fees, is approximately $750 million. Results in the third quarter of 2010 reflect approximately 65% of the estimated quarterly impact of this reduction in net income, with expectations of full run-rate impact in the fourth quarter of 2010.
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; (d) the requirement that statements must be mailed or delivered not later than 21 days before the payment due date; (e) the limiting of the amount of penalty fees that can be assessed; and (f) the requirement 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 September 30,   Nine months ended September 30,
otherwise noted)   2010   2009   Change   2010   2009   Change
 
Financial ratios (a)
                                               
Percentage of average outstandings:
                                               
Net interest income
    9.76 %     10.15 %             9.52 %     10.00 %        
Provision for credit losses
    4.63       11.65               6.68       10.84          
Noninterest revenue
    2.28       1.95               2.20       1.55          
Risk adjusted margin (b)
    7.42       0.45               5.04       0.71          
Noninterest expense
    4.09       3.06               3.89       3.04          
Pretax income/(loss) (ROO) (c)
    3.33       (2.61 )             1.15       (2.32 )        
Net income/(loss)
    2.08       (1.64 )             0.70       (1.46 )        
 
                                               
Business metrics
                                               
Sales volume (in billions)
  $ 79.6     $ 74.7       7 %   $ 227.1     $ 215.3       5 %
New accounts opened (in millions)
    2.7       2.4       13       7.9       7.0       13  
Open accounts (in millions)
    89.0       93.6       (5 )     89.0       93.6       (5 )
 
                                               
Merchant acquiring business
                                               
Bank card volume (in billions)
  $ 117.0     $ 103.5       13     $ 342.1     $ 299.3       14  
Total transactions (in billions)
    5.2       4.5       16       14.9       13.1       14  
 
                                               
Selected balance sheet data (period-end)
                                               
Loans:
                                               
Loans on balance sheets
  $ 136,436     $ 78,215       74     $ 136,436     $ 78,215       74  
Securitized loans (a)
  NA     87,028     NM   NA     87,028     NM
                     
Total loans
  $ 136,436     $ 165,243       (17 )   $ 136,436     $ 165,243       (17 )
                     
Equity
  $ 15,000     $ 15,000           $ 15,000     $ 15,000        
 
                                               
Selected balance sheet data (average)
                                               
Managed assets
  $ 141,029     $ 192,141       (27 )   $ 148,212     $ 195,517       (24 )
Loans:
                                               
Loans on balance sheets
  $ 140,059     $ 83,146       68     $ 147,326     $ 90,154       63  
Securitized loans (a)
  NA     86,017     NM   NA     85,352     NM
                     
Total average loans
  $ 140,059     $ 169,163       (17 )   $ 147,326     $ 175,506       (16 )
                     
Equity
  $ 15,000     $ 15,000           $ 15,000     $ 15,000        
 
                                               
Headcount
    21,398       22,850       (6 )     21,398       22,850       (6 )
 

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Selected metrics   Three months ended September 30,   Nine months ended September 30,
(in millions, except ratios)   2010   2009   Change   2010   2009   Change
 
Credit quality statistics (a)
                                               
Net charge-offs
  $ 3,133     $ 4,392       (29 )%   $ 11,366     $ 12,238       (7 )%
Net charge-off rate (d)
    8.87 %     10.30 %             10.31 %     9.32 %        
Delinquency rates (a)(d)
                                               
30+ day
    4.57 %     5.99 %             4.57 %     5.99 %        
90+ day
    2.41       2.76               2.41       2.76          
 
                                               
Allowance for loan losses (a)(e)
  $ 13,029     $ 9,297       40     $ 13,029     $ 9,297       40  
Allowance for loan losses to period-end loans (a)(e)(f)
    9.55 %     11.89 %             9.55 %     11.89 %        
 
                                               
Key stats — Washington Mutual only
                                               
Loans
  $ 14,504     $ 21,163       (31 )   $ 14,504     $ 21,163       (31 )
Average loans
    15,126       22,287       (32 )     16,716       24,742       (32 )
Net interest income (g)
    16.27 %     17.04 %             15.40 %     17.11 %        
Risk adjusted margin (b)(g)
    12.90       (4.45 )             9.91       (1.01 )        
Net charge-off rate (h)
    15.58       21.94               20.02       18.32          
30+ day delinquency rate (h)
    8.29       12.44               8.29       12.44          
90+ day delinquency rate (h)
    4.54       6.21               4.54       6.21          
 
                                               
Key stats — excluding Washington Mutual
                                               
Loans
  $ 121,932     $ 144,080       (15 )   $ 121,932     $ 144,080       (15 )
Average loans
    124,933       146,876       (15 )     130,610       150,764       (13 )
Net interest income (g)
    8.98 %     9.10 %             8.77 %     8.83 %        
Risk adjusted margin (b)(g)
    6.76       1.19               4.41       0.99          
Net charge-off rate
    8.06       9.41               9.24       8.39          
30+ day delinquency rate
    4.13       5.38               4.13       5.38          
90+ day delinquency rate
    2.16       2.48               2.16       2.48          
 
(a)   Effective January 1, 2010, the Firm adopted new accounting guidance related to 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 155-167 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. The net charge-off rate for the three months ended September 30, 2010, and delinquency rates as of September 30, 2010, were not affected.
 
(e)   Based on loans on the Consolidated Balance Sheets.
 
(f)   Includes $3.0 billion of loans at September 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 September 30, 2009. Excluding these loans, the allowance for loan losses to period-end loans would have been 12.36%.
 
(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 155-167 of this Form 10-Q.
                                                 
    Three months ended September 30,   Nine months ended September 30,
(in millions, except ratios)   2010   2009   Change   2010   2009   Change
 
Income statement data
                                               
Credit card income
                                               
Reported
  $ 864     $ 1,201       (28 )%   $ 2,585     $ 3,800       (32 )%
Securitization adjustments
  NA     (285 )   NM   NA     (1,119 )   NM
                     
Managed credit card income
  $ 864     $ 916       (6 )   $ 2,585     $ 2,681       (4 )
                     
 
                                               
Net interest income
                                               
Reported
  $ 3,447     $ 2,345       47     $ 10,492     $ 7,176       46  
Securitization adjustments
  NA     1,983     NM   NA     5,945     NM
                     
Managed net interest income
  $ 3,447     $ 4,328       (20 )   $ 10,492     $ 13,121       (20 )
                     
Total net revenue
                                               
Reported
  $ 4,253     $ 3,461       23     $ 12,917     $ 10,330       25  
Securitization adjustments
  NA     1,698     NM   NA     4,826     NM
                     
Managed total net revenue
  $ 4,253     $ 5,159       (18 )   $ 12,917     $ 15,156       (15 )
                     
 
                                               
Provision for credit losses
                                               
Reported
  $ 1,633     $ 3,269       (50 )   $ 7,366     $ 9,397       (22 )
Securitization adjustments
  NA     1,698     NM   NA     4,826     NM
                     
Managed provision for credit losses
  $ 1,633     $ 4,967       (67 )   $ 7,366     $ 14,223       (48 )
                     
 
                                               
Balance sheets — average balances
                                               
Total average assets
                                               
Reported
  $ 141,029     $ 109,362       29     $ 148,212     $ 113,134       31  
Securitization adjustments
  NA     82,779     NM   NA     82,383     NM
                     
Managed average assets
  $ 141,029     $ 192,141       (27 )   $ 148,212     $ 195,517       (24 )
                     
 
                                               
Credit quality statistics
                                               
Net charge-offs
                                               
Reported
  $ 3,133     $ 2,694       16     $ 11,366     $ 7,412       53  
Securitization adjustments
  NA     1,698     NM   NA     4,826     NM
                     
Managed net charge-offs
  $ 3,133     $ 4,392       (29 )   $ 11,366     $ 12,238       (7 )
                     
 
                                               
Net charge-off rates
                                               
Reported
    8.87 %     12.85 %             10.31 %     10.99 %        
Securitized
  NA     7.83             NA     7.56          
Managed net charge-off rate
    8.87       10.30               10.31       9.32          
 
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 September 30,   Nine months ended September 30,
(in millions, except ratios)   2010   2009   Change   2010   2009   Change
 
Revenue
                                               
Lending- and deposit-related fees
  $ 269     $ 269       %   $ 826     $ 802       3 %
Asset management, administration and commissions
    36       35       3       109       105       4  
All other income (a)
    242       170       42       658       447       47  
                     
Noninterest revenue
    547       474       15       1,593       1,354       18  
Net interest income
    980       985       (1 )     2,836       2,960       (4 )
                     
Total net revenue (b)
    1,527       1,459       5       4,429       4,314       3  
 
                                               
Provision for credit losses
    166       355       (53 )     145       960       (85 )
 
                                               
Noninterest expense
                                               
Compensation expense
    210       196       7       612       593       3  
Noncompensation expense
    341       339       1       1,002       1,008       (1 )
Amortization of intangibles
    9       10       (10 )     27       32       (16 )
                     
Total noninterest expense
    560       545       3       1,641       1,633        
                     
Income before income tax expense
    801       559       43       2,643       1,721       54  
Income tax expense
    330       218       51       1,089       674       62  
                     
Net income
  $ 471     $ 341       38     $ 1,554     $ 1,047       48  
                     
 
                                               
Revenue by product
                                               
Lending
  $ 693     $ 675       3     $ 2,000     $ 2,024       (1 )
Treasury services
    670       672             1,973       1,997       (1 )
Investment banking
    120       99       21       340       286       19  
Other
    44       13       238       116       7     NM
                     
Total Commercial Banking revenue
  $ 1,527     $ 1,459       5     $ 4,429     $ 4,314       3  
 
                                               
IB revenue, gross
  $ 344     $ 301       14     $ 988     $ 835       18  
 
                                               
Revenue by client segment
                                               
Middle Market Banking
  $ 766     $ 771       (1 )   $ 2,279     $ 2,295       (1 )
Commercial Term Lending
    256       232       10       722       684       6  
Mid-Corporate Banking
    304       278       9       852       825       3  
Real Estate Banking
    118       121       (2 )     343       361       (5 )
Other (c)
    83       57       46       233       149       56  
                     
Total Commercial Banking revenue
  $ 1,527     $ 1,459       5     $ 4,429     $ 4,314       3  
                     
 
                                               
Financial ratios
                                               
Return on common equity
    23 %     17 %             26 %     17 %        
Overhead ratio
    37       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 $59 million and $43 million for the quarters ended September 30, 2010 and 2009, respectively, and $153 million and $117 million for year-to-date 2010 and 2009, respectively.
 
(c)   Other primarily includes revenue related to the Community Development and Chase Capital segments.

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Quarterly results
Net income was $471 million, an increase of $130 million, or 38%, from the prior year. The increase was driven by a reduction in the provision for credit losses. Results included the impact of the purchase of a $3.5 billion loan portfolio during the current quarter.
Net revenue was a record $1.5 billion, up by $68 million, or 5%, compared with the prior year. Net interest income was $980 million, down by $5 million, or 1%, driven by spread compression on liability products and lower loan balances, offset by growth in liability balances and wider loan spreads. Noninterest revenue was $547 million, an increase of $73 million, or 15%, driven by changes in the valuation of investments held at fair value, higher investment banking fees, higher lending-related fees, gains on sales of loans, and higher other fees.
Revenue from Middle Market Banking was $766 million, a decrease of $5 million, or 1%, from the prior year. Revenue from Commercial Term Lending was $256 million, an increase of $24 million, or 10%, and included the impact of the loan portfolio purchased during the quarter. Revenue from Mid-Corporate Banking was $304 million, an increase of $26 million, or 9%. Revenue from Real Estate Banking was $118 million, a decrease of $3 million, or 2%.
The provision for credit losses was $166 million, compared with $355 million in the prior year. Net charge-offs were $218 million (0.89% net charge-off rate) and were largely related to commercial real estate, compared with $291 million (1.11% net charge-off rate) in the prior year. The allowance for loan losses to end-of-period loans retained was 2.72%, down from 3.01% in the prior year. Nonperforming loans were $2.9 billion, up by $644 million from the prior year, reflecting increases in commercial real estate.
Noninterest expense was $560 million, an increase of $15 million, or 3%, compared with the prior year, reflecting higher headcount-related expense.
Year-to-date results
Net income was $1.6 billion, an increase of $507 million, or 48%, from the prior year. The increase was driven by a reduction in the provision for credit losses.
Net revenue was $4.4 billion, up by $115 million, or 3%, compared with the prior year. Net interest income was $2.8 billion, down by $124 million, or 4%, driven by spread compression on liability products and lower loan balances, largely offset by growth in liability balances and wider loan spreads. Noninterest revenue was $1.6 billion, an increase of $239 million, or 18%, from the prior year, reflecting higher lending- related fees, changes in the valuation of investments held at fair value, and higher investment banking fees.
Revenue from Middle Market Banking was $2.3 billion, relatively flat compared with the prior year. Revenue from Commercial Term Lending was $722 million, an increase of $38 million, or 6%, and included the impact of the loan portfolio purchased during the third quarter. Mid-Corporate Banking revenue was $852 million, an increase of $27 million, or 3%. Real Estate Banking revenue was $343 million, a decrease of $18 million, or 5%.
The provision for credit losses was $145 million, compared with $960 million in the prior year, and reflected a reduction in the allowance for credit losses, primarily due to refinements to credit loss estimates and improvements in the credit quality of the commercial and industrial portfolio. Net charge-offs were $623 million (0.87% net charge-off rate), compared with $606 million (0.75% net charge-off rate) in the prior year.
Noninterest expense was $1.6 billion, flat compared with the prior year.

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Selected metrics   Three months ended September 30,   Nine months ended September 30,
(in millions, except headcount and ratios)   2010   2009   Change   2010   2009   Change
 
Selected balance sheet data (period-end):
                                               
Loans:
                                               
Loans retained
  $ 97,738     $ 101,608       (4 )%   $ 97,738     $ 101,608       (4 )%
Loans held-for-sale and loans at fair value
    399       288       39       399       288       39  
                     
Total loans
    98,137       101,896       (4 )     98,137       101,896       (4 )
Equity
    8,000       8,000             8,000       8,000        
Selected balance sheet data (average):
                                               
Total assets
  $ 130,237     $ 130,316           $ 132,176     $ 137,248       (4 )
Loans:
                                               
Loans retained
    96,657       103,752       (7 )     96,166       108,654       (11 )
Loans held-for-sale and loans at fair value
    384       297       29       358       294       22  
                     
Total loans
    97,041       104,049       (7 )     96,524       108,948       (11 )
Liability balances
    137,853       109,293       26       135,939       110,012       24  
Equity
    8,000       8,000             8,000       8,000        
Average loans by client segment:
                                               
Middle Market Banking
  $ 35,299     $ 36,200       (2 )   $ 34,552     $ 38,357       (10 )
Commercial Term Lending
    37,509       36,943       2       36,513       36,907       (1 )
Mid-Corporate Banking
    11,807       14,933       (21 )     11,978       16,774       (29 )
Real Estate Banking
    8,983       11,547       (22 )     9,740       12,380       (21 )
Other (a)
    3,443       4,426       (22 )     3,741       4,530       (17 )
                     
Total Commercial Banking loans
  $ 97,041     $ 104,049       (7 )   $ 96,524     $ 108,948       (11 )
 
                                               
Headcount
    4,805       4,177       15       4,805       4,177       15  
 
                                               
Credit data and quality statistics:
                                               
Net charge-offs
  $ 218     $ 291       (25 )   $ 623     $ 606       3  
Nonperforming loans:
                                               
Nonperforming loans retained (b)
    2,898       2,284       27       2,898       2,284       27  
Nonperforming loans held-for-sale and loans at fair value
    48       18       167       48       18       167  
                     
Total nonperforming loans
    2,946       2,302       28       2,946       2,302       28  
Nonperforming assets
    3,227       2,461       31       3,227       2,461       31  
Allowance for credit losses:
                                               
Allowance for loan losses
    2,661       3,063       (13 )     2,661       3,063       (13 )
Allowance for lending-related commitments
    241       300       (20 )     241       300       (20 )
                     
Total allowance for credit losses
    2,902       3,363       (14 )     2,902       3,363       (14 )
Net charge-off rate
    0.89 %     1.11 %             0.87 %     0.75 %        
Allowance for loan losses to period-end loans retained
    2.72       3.01               2.72       3.01          
Allowance for loan losses to average loans retained
    2.75       2.95               2.77       2.82          
Allowance for loan losses to nonperforming loans retained
    92       134               92       134          
Nonperforming loans to total period-end loans
    3.00       2.26               3.00       2.26          
Nonperforming loans to total average loans
    3.04       2.21               3.05       2.11          
 
(a)   Other primarily includes loans related to the Community Development and Chase Capital segments.
 
(b)   Allowance for loan losses of $535 million and $496 million were held against nonperforming loans retained at September 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 September 30,   Nine months ended September 30,
(in millions, except headcount and ratios)   2010   2009   Change   2010   2009   Change
 
Revenue
                                               
Lending- and deposit-related fees
  $ 318     $ 316       1 %   $ 942     $ 955       (1 )%
Asset management, administration and commissions
    644       620       4       2,008       1,956       3  
All other income
    210       201       4       595       619       (4 )
                     
Noninterest revenue
    1,172       1,137       3       3,545       3,530        
Net interest income
    659       651       1       1,923       1,979       (3 )
                     
Total net revenue
    1,831       1,788       2       5,468       5,509       (1 )
 
                                               
Provision for credit losses
    (2 )     13     NM       (57 )     2     NM  
Credit reimbursement to IB (a)
    (31 )     (31 )           (91 )     (91 )      
 
                                               
Noninterest expense
                                               
Compensation expense
    701       629       11       2,055       1,876       10  
Noncompensation expense
    693       633       9       2,027       1,954       4  
Amortization of intangibles
    16       18       (11 )     52       57       (9 )
                     
Total noninterest expense
    1,410       1,280       10       4,134       3,887       6  
                     
Income before income tax expense
    392       464       (16 )     1,300       1,529       (15 )
Income tax expense
    141       162       (13 )     478       540       (11 )
                     
Net income
  $ 251     $ 302       (17 )   $ 822     $ 989       (17 )
                     
 
                                               
Revenue by business
                                               
Treasury Services
  $ 937     $ 919       2     $ 2,745     $ 2,784       (1 )
Worldwide Securities Services
    894       869       3       2,723       2,725        
                     
Total net revenue
  $ 1,831     $ 1,788       2     $ 5,468     $ 5,509       (1 )
 
                                               
Financial ratios
                                               
Return on common equity
    15 %     24 %             17 %     26 %        
Overhead ratio
    77       72               76       71          
Pretax margin ratio
    21       26               24       28          
 
                                               
Selected balance sheet data (period-end)
                                               
Loans (b)
  $ 26,899     $ 19,693       37     $ 26,899     $ 19,693       37  
Equity
    6,500       5,000       30       6,500       5,000       30  
 
                                               
Selected balance sheet data (average)
                                               
Total assets
  $ 42,445     $ 33,117       28     $ 41,211     $ 35,753       15  
Loans (b)
    24,337       17,062       43       22,035       18,231       21  
Liability balances
    242,517       231,502       5       245,684       247,219       (1 )
Equity
    6,500       5,000       30       6,500       5,000       30  
 
                                               
Headcount
    28,544       26,389       8       28,544       26,389       8  
 
(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.

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Quarterly results
Net income was $251 million, a decrease of $51 million, or 17%, from the prior year. These results reflected higher noninterest expense, partially offset by higher net revenue.
Net revenue was $1.8 billion, an increase of $43 million, or 2%, from the prior year. Treasury Services net revenue was $937 million, an increase of $18 million, or 2%. The increase was driven by higher trade loan and card product volumes, partially offset by lower spreads on liability products. Worldwide Securities Services net revenue was $894 million, an increase of $25 million, or 3%. The increase was driven by higher market levels and net inflows of assets under custody, partially offset by lower spreads on liability products and securities lending.
TSS generated firmwide net revenue of $2.6 billion, including $1.7 billion by Treasury Services; of that amount, $937 million was recorded in Treasury Services, $670 million in Commercial Banking and $64 million in other lines of business. The remaining $894 million of firmwide net revenue was recorded in Worldwide Securities Services.
Noninterest expense was $1.4 billion, an increase of $130 million, or 10%, from the prior year. The increase was driven by continued investment in new product platforms, primarily related to international expansion, and higher performance-based compensation.
Year-to-date results
Net income was $822 million, a decrease of $167 million, or 17%, from the prior year. These results reflected higher noninterest expense and lower net revenue.
Net revenue was $5.5 billion, a decrease of $41 million, or 1%, from the prior year. Treasury Services net revenue was $2.7 billion, relatively flat compared with the prior year as lower spreads on liability products were offset by higher trade loan and card product volumes. Similarly, Worldwide Securities Services net revenue was $2.7 billion, relatively flat compared with the prior year as lower spreads in securities lending, lower volatility on foreign exchange, and lower balances on liability products were offset by higher market levels and net inflows of assets under custody.
TSS generated firmwide net revenue of $7.6 billion, including $4.9 billion by Treasury Services; of that amount, $2.7 billion was recorded in Treasury Services, $2.0 billion in Commercial Banking and $182 million in other lines of business. The remaining $2.7 billion of firmwide net revenue was recorded in Worldwide Securities Services.
Noninterest expense was $4.1 billion, up $247 million, or 6%, from the prior year. The increase was driven by continued investment in new product platforms, primarily related to international expansion, and higher performance-based compensation.

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Selected metrics   Three months ended September 30,   Nine months ended September 30,
(in millions, except ratios and where otherwise noted)   2010   2009   Change   2010   2009   Change
 
TSS firmwide disclosures
                                               
Treasury Services revenue – reported
  $ 937     $ 919       2 %   $ 2,745     $ 2,784       (1 )%
Treasury Services revenue reported in CB
    670       672             1,973       1,997       (1 )
Treasury Services revenue reported in other lines of business
    64       63       2       182       188       (3 )
                     
Treasury Services firmwide revenue (a)
    1,671       1,654       1       4,900       4,969       (1 )
Worldwide Securities Services revenue
    894       869       3       2,723       2,725        
                     
Treasury & Securities Services firmwide revenue (a)
  $ 2,565     $ 2,523       2     $ 7,623     $ 7,694       (1 )
 
                                               
Treasury Services firmwide liability balances (average) (b)
  $ 302,921     $ 261,059       16     $ 303,742     $ 269,568       13  
Treasury & Securities Services firmwide liability balances (average) (b)
    380,370       340,795       12       381,623       357,231       7  
 
                                               
TSS firmwide financial ratios
                                               
Treasury Services firmwide overhead ratio (c)
    55 %     52 %             55 %     52 %        
Treasury & Securities Services firmwide overhead ratio (c)
    65       62               65       61          
 
                                               
Firmwide business metrics
                                               
Assets under custody (in billions)
  $ 15,863     $ 14,887       7     $ 15,863     $ 14,887       7  
 
                                               
Number of:
                                               
U.S.$ ACH transactions originated (in millions)
    978       965       1       2,897       2,921       (1 )
Total U.S.$ clearing volume (in thousands)
    30,779       28,604       8       89,979       83,983       7  
International electronic funds transfer volume (in thousands) (d)
    57,333       48,533       18       171,571       139,994       23  
Wholesale check volume (in millions)
    531       530             1,535       1,670       (8 )
Wholesale cards issued (in thousands) (e)
    28,404       26,977       5       28,404       26,977       5  
                     
 
                                               
Credit data and quality statistics
                                               
Net charge-offs
  $ 1     $     NM     $ 1     $ 19       (95 )
Nonperforming loans
    14       14             14       14        
Allowance for credit losses:
                                               
Allowance for loan losses
    54       15       260       54       15       260  
Allowance for lending-related commitments
    52       104       (50 )     52       104       (50 )
                     
Total allowance for credit losses
    106       119       (11 )     106       119       (11 )
 
                                               
Net charge-off rate
    0.02 %     %             0.01 %     0.14 %        
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               0.25       0.08          
Allowance for loan losses to nonperforming loans
    386       107               386       107          
Nonperforming loans to period-end loans
    0.05       0.07               0.05       0.07          
Nonperforming loans to average loans
    0.06       0.08               0.06       0.08          
 
(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 $143 million and $154 million for the three months ended September 30, 2010 and 2009, respectively, and $455 million and $499 million for the nine months ended September 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 September 30,   Nine months ended September 30,
(in millions, except ratios)   2010   2009   Change   2010   2009   Change
 
Revenue:
                                               
Asset management, administration and commissions
  $ 1,498     $ 1,443       4 %   $ 4,528     $ 3,989       14 %
All other income
    282       238       18       725       560       29  
                     
Noninterest revenue
    1,780       1,681       6       5,253       4,549       15  
Net interest income
    392       404       (3 )     1,118       1,221       (8 )
                     
Total net revenue
    2,172       2,085       4       6,371       5,770       10  
 
                                               
Provision for credit losses
    23       38       (39 )     63       130       (52 )
 
                                               
Noninterest expense:
                                               
Compensation expense
    914       858       7       2,685       2,468       9  
Noncompensation expense
    557       474       18       1,598       1,478       8  
Amortization of intangibles
    17       19       (11 )