Edgar Filing: J P MORGAN CHASE & CO

10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934


For the Quarterly Period Ended June 30, 2008		Commission file number 1-5805

JPMORGAN CHASE & CO.

(Exact name of registrant as specified in its charter)


Delaware		13-2624428
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

270 Park Avenue, New York, New York		10017
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (212) 270-6000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer þ		Accelerated filer o
Non-accelerated filer (Do not check if a smaller reporting company) o		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes þ No

Number of shares of common stock outstanding as of July 31, 2008: 3,437,039,645

FORM 10-Q
TABLE OF CONTENTS


		Page
Part I – Financial information
Item 1	Consolidated Financial Statements — JPMorgan Chase & Co.:

	Consolidated Statements of Income (unaudited) for the three and six months ended June 30, 2008 and 2007	76

	Consolidated Balance Sheets (unaudited) at June 30, 2008, and December 31, 2007	77

	Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income (unaudited) for the six months ended June 30, 2008 and 2007	78

	Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2008 and 2007	79

	Notes to Consolidated Financial Statements (unaudited)	80

	Consolidated Average Balance Sheets, Interest and Rates (unaudited) for the three and six months ended June 30, 2008 and 2007	128

	Glossary of Terms and Line of Business Metrics	130

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations:

	Consolidated Financial Highlights	3

	Introduction	4

	Executive Overview	7

	Consolidated Results of Operations	11

	Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures	15

	Business Segment Results	18

	Balance Sheet Analysis	45

	Capital Management	48

	Off-Balance Sheet Arrangements and Contractual Cash Obligations	51

	Risk Management	53

	Supervision and Regulation	72

	Critical Accounting Estimates Used by the Firm	72

	Accounting and Reporting Developments	74

	Forward-Looking Statements	135

Item 3	Quantitative and Qualitative Disclosures About Market Risk	136

Item 4	Controls and Procedures	136

Part II – Other information

Item 1	Legal Proceedings	136

Item 1A	Risk Factors	139

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	140

Item 3	Defaults Upon Senior Securities	140

Item 4	Submission of Matters to a Vote of Security Holders	140

Item 5	Other Information	140

Item 6	Exhibits	140


EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32: CERTIFICATION

JPMORGAN CHASE & CO.

CONSOLIDATED FINANCIAL HIGHLIGHTS


(unaudited)
(in millions, except per share, headcount and ratio data)																Six months ended June 30,
As of or for the period ended,	2Q08			1Q08			4Q07			3Q07			2Q07			2008			2007

Selected income statement data
Noninterest revenue	$	10,105		$	9,231		$	10,161		$	9,199		$	12,740		$	19,336		$	25,606
Net interest income		8,294			7,659			7,223			6,913			6,168			15,953			12,270

Total net revenue		18,399			16,890			17,384			16,112			18,908			35,289			37,876
Provision for credit losses		3,455			4,424			2,542			1,785			1,529			7,879			2,537
Noninterest expense		12,177			8,931			10,720			9,327			11,028			21,108			21,656

Income before income tax expense		2,767			3,535			4,122			5,000			6,351			6,302			13,683
Income tax expense		764			1,162			1,151			1,627			2,117			1,926			4,662

Net income	$	2,003		$	2,373		$	2,971		$	3,373		$	4,234		$	4,376		$	9,021

Per common share
Net income per share: Basic	$	0.56		$	0.70		$	0.88		$	1.00		$	1.24		$	1.26		$	2.63
Diluted		0.54			0.68			0.86			0.97			1.20			1.22			2.55
Cash dividends declared per share		0.38			0.38			0.38			0.38			0.38			0.76			0.72
Book value per share		37.02			36.94			36.59			35.72			35.08
Common shares outstanding
Average: Basic		3,426			3,396			3,367			3,376			3,415			3,411			3,436
Diluted		3,531			3,495			3,472			3,478			3,522			3,513			3,541
Common shares at period end		3,436			3,401			3,367			3,359			3,399
Share price^(a)
High	$	49.95		$	49.29		$	48.02		$	50.48		$	53.25		$	49.95		$	53.25
Low		33.96			36.01			40.15			42.16			47.70			33.96			45.91
Close		34.31			42.95			43.65			45.82			48.45
Market capitalization		117,881			146,066			146,986			153,901			164,659
Financial ratios
Return on common equity (“ROE”)		6	%		8	%		10	%		11	%		14	%		7	%		16	%
Return on assets (“ROA”)		0.48			0.61			0.77			0.91			1.19			0.54			1.29
Overhead ratio		66			53			62			58			58			60			57
Tier 1 capital ratio		9.2			8.3			8.4			8.4			8.4
Total capital ratio		13.4			12.5			12.6			12.5			12.0
Tier 1 leverage ratio		6.4			5.9			6.0			6.0			6.2
Selected balance sheet data (period-end)
Trading assets	$	531,997		$	485,280		$	491,409		$	453,711		$	450,546
Securities		119,173			101,647			85,450			97,706			95,984
Loans		538,029			537,056			519,374			486,320			465,037
Total assets		1,775,670			1,642,862			1,562,147			1,479,575			1,458,042
Deposits		722,905			761,626			740,728			678,091			651,370
Long-term debt		260,192			189,995			183,862			173,696			159,493
Common stockholders’ equity		127,176			125,627			123,221			119,978			119,211
Total stockholders’ equity		133,176			125,627			123,221			119,978			119,211
Headcount		195,594			182,166			180,667			179,847			179,664
Credit quality metrics
Allowance for credit losses	$	13,932		$	12,601		$	10,084		$	8,971		$	8,399
Nonperforming assets^(b)		6,233			5,143			3,933			3,009			2,423
Allowance for loan losses to total loans^(c)		2.57	%		2.29	%		1.88	%		1.76	%		1.71	%
Net charge-offs	$	2,130		$	1,906		$	1,429		$	1,221		$	985		$	4,036		$	1,888
Net charge-off rate^(c)		1.67	%		1.53	%		1.19	%		1.07	%		0.90	%		1.60	%		0.88	%
Wholesale net charge-off (recovery) rate^(c)		0.08			0.18			0.05			0.19			(0.07	)		0.13			(0.04	)
Managed Card net charge-off rate		4.98			4.37			3.89			3.64			3.62			4.68			3.59


(a)		JPMorgan Chase’s common stock is listed and traded on the New York Stock Exchange, the London Stock Exchange Limited and the Tokyo Stock Exchange. The high, low and closing prices of JPMorgan Chase’s common stock are from The New York Stock Exchange Composite Transaction Tape.
(b)		Excludes purchased held-for-sale wholesale loans.
(c)		End-of-period and average loans accounted for at fair value and loans held-for-sale were excluded when calculating the allowance coverage ratios and net charge-off rates, respectively.

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section of the Form 10-Q provides management’s discussion and analysis (“MD&A”) of the financial condition and results of operations for JPMorgan Chase. See the Glossary of Terms on pages 130–133 for definitions of terms used throughout this Form 10-Q. The MD&A included in this Form 10-Q contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based upon the current beliefs and expectations of JPMorgan Chase’s management and are subject to significant risks and uncertainties. These risks and uncertainties could cause JPMorgan Chase’s results to differ materially from those set forth in such forward-looking statements. Certain of such risks and uncertainties are described herein (see Forward-looking Statements on page 135 and Item 1A: Risk Factors on page 139 of this Form 10-Q), as well as in the JPMorgan Chase Annual Report on Form 10-K for the year ended December 31, 2007 (“2007 Annual Report” or “2007 Form 10-K”), including Part I, Item 1A: Risk factors, and the JPMorgan Chase quarterly report on Form 10-Q for the quarter ended March 31, 2008, including Part II, Item 1A thereof, to which reference is hereby made.

INTRODUCTION
JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”), a financial holding company incorporated under Delaware law in 1968, is a leading global financial services firm and one of the largest banking institutions in the United States of America (“U.S.”), with $1.8 trillion in assets, $133.2 billion in total stockholders’ equity and operations in more than 60 countries. The Firm is a leader in investment banking, financial services for consumers and businesses, financial transaction processing and asset management. Under the JPMorgan and Chase brands, the Firm serves millions of customers in the U.S. and many of the world’s most prominent corporate, institutional and government clients.

JPMorgan Chase’s principal bank subsidiaries are JPMorgan Chase Bank, National Association (“JPMorgan Chase Bank, N.A.”), a national banking association with branches in 17 states; and Chase Bank USA, National Association (“Chase Bank USA, N.A.”), a national bank that is the Firm’s credit card issuing bank. JPMorgan Chase’s principal nonbank subsidiaries are J.P. Morgan Securities Inc. and Bear, Stearns & Co., Inc. (“Bear Stearns & Co.”), the Firm’s U.S. investment banking firms, and Bear, Stearns International Limited, a full service broker-dealer based in London, England. The Firm plans to merge J.P. Morgan Securities Inc. and Bear Stearns & Co. on or about October 1, 2008.

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
JPMorgan is one of the world’s leading investment banks, with deep client relationships and broad product capabilities. The Investment Bank’s clients are corporations, financial institutions, governments and institutional investors. The Firm offers a full range of investment banking products and services in all major capital markets, including advising on corporate strategy and structure, capital raising in equity and debt markets, sophisticated risk management, market-making in cash securities and derivative instruments, prime brokerage and research. The Investment Bank (“IB”) also commits the Firm’s own capital to proprietary investing and trading activities.

Retail Financial Services
Retail Financial Services (“RFS”), which includes the Regional Banking, Mortgage Banking and Auto Finance reporting segments, serves consumers and businesses through bank branches, ATMs, online banking and telephone banking. Customers can use more than 3,100 bank branches (fourth-largest nationally), 9,300 ATMs (third-largest nationally) and 300 mortgage offices. More than 14,100 branch salespeople assist customers with checking and savings accounts, mortgages, home equity and business loans and investments across the 17-state footprint from New York to Arizona. Consumers also can obtain loans through more than 14,100 auto dealerships and 5,200 schools and universities nationwide.

Card Services
With more than 157 million cards in circulation and more than $155 billion in managed loans, Card Services (“CS”) is one of the nation’s largest credit card issuers. Customers used Chase cards to meet $179 billion worth of their spending needs in the six months ended June 30, 2008.

With hundreds of partnerships, Chase has a market leadership position in building loyalty programs with many of the world’s most respected brands.

Chase Paymentech Solutions, LLC, a joint venture between JPMorgan Chase and First Data Corporation, is a processor of MasterCard and Visa payments, which handled more than 10 billion transactions in the six months ended June 30, 2008. On May 27, 2008, the termination of Chase Paymentech Solutions was announced. The dissolution is expected to be completed by year-end 2008 and JPMorgan Chase will retain approximately 51% of the business under the Chase Paymentech name.

Commercial Banking
Commercial Banking (“CB”) serves more than 30,000 clients nationally, including corporations, municipalities, financial institutions and not-for-profit entities with annual revenue generally ranging from $10 million to $2 billion. Commercial Banking delivers extensive industry knowledge, local expertise and a dedicated service model. In partnership with the Firm’s other businesses, it provides comprehensive solutions including lending, treasury services, investment banking and asset management to meet its clients’ domestic and international financial needs.

Treasury & Securities Services
Treasury & Securities Services (“TSS”) is a global leader in transaction, investment and information services. TSS is one of the world’s largest cash management providers and a leading global custodian. Treasury Services (“TS”) provides cash management, trade, wholesale card and liquidity products and services to small and mid-sized companies, multinational corporations, financial institutions and government entities. TS partners with the Commercial Banking, Retail Financial Services and Asset Management businesses to serve clients firmwide. As a result, certain TS revenue is included in other segments’ results. Worldwide Securities Services (“WSS”) holds, values, clears and services securities, cash and alternative investments for investors and broker-dealers, and manages depositary receipt programs globally.

Asset Management
With assets under supervision of $1.6 trillion, Asset Management (“AM”) is a global leader in investment and wealth management. AM clients include institutions, retail investors and high-net-worth individuals in every major market throughout the world. AM offers global investment management in equities, fixed income, real estate, hedge funds, private equity and liquidity, including both money market instruments and bank deposits. AM also provides trust and estate, banking and brokerage services to high-net-worth clients, and retirement services for corporations and individuals. The majority of AM’s client assets are in actively managed portfolios.

OTHER BUSINESS EVENTS

Merger with The Bear Stearns Companies Inc.
Effective May 30, 2008, BSC Merger Corporation, a wholly-owned subsidiary of JPMorgan Chase, merged with The Bear Stearns Companies Inc. (“Bear Stearns”) pursuant to the Agreement and Plan of Merger, dated as of March 16, 2008, as amended March 24, 2008, and Bear Stearns became a wholly-owned subsidiary of JPMorgan Chase (the “Merger”). The Merger provides the Firm with a leading global prime brokerage platform; strengthens the Firm’s equities and asset management businesses; enhances capabilities in mortgage origination, securitization and servicing; and expands the platform of the Firm’s energy business. The Merger is being accounted for under the purchase method of accounting, which requires that the assets and liabilities of Bear Stearns be fair valued. The total purchase price to complete the Merger was $1.5 billion.

The Merger was accomplished through a series of transactions that were reflected as step acquisitions in accordance with SFAS 141. On April 8, 2008, pursuant to the share exchange agreement, JPMorgan Chase acquired 95 million newly issued shares of Bear Stearns common stock (or 39.5% of Bear Stearns common stock after giving effect to the issuance) for 21 million shares of JPMorgan Chase common stock. Further, between March 24, 2008, and May 12, 2008, JPMorgan Chase acquired approximately 24 million shares of Bear Stearns common stock in the open market at an average purchase price of $12.37 per share. The share exchange and cash purchase transactions resulted in JPMorgan Chase owning approximately 49.4% of Bear Stearns common stock immediately prior to consummation of the Merger. Finally, on May 30, 2008, JPMorgan Chase completed the Merger, and as a result of the Merger, each outstanding share of Bear Stearns common stock (other than shares then held by JPMorgan Chase) was converted into the right to receive 0.21753 shares of common stock of JPMorgan Chase. Also, on May 30, 2008, the shares of common stock that JPMorgan Chase and Bear Stearns acquired from each other in the share exchange transaction were cancelled. From April 8, 2008, through May 30, 2008, JPMorgan Chase accounted for the investment in Bear Stearns under the equity method of accounting in accordance with APB 18. During this period, JPMorgan Chase recorded reductions to its investment in Bear Stearns representing its share of Bear Stearns net losses, which was recorded in other income and accumulated other comprehensive income.

In conjunction with the Merger, in June 2008, the Federal Reserve Bank of New York (the “FRBNY”) took control, through a limited liability company (“LLC”) formed for this purpose, of a portfolio of $30 billion in assets acquired from Bear Stearns, based on the value of the portfolio as of March 14, 2008. The assets of the LLC were funded by a $28.85 billion, term loan from the FRBNY, and a $1.15 billion, subordinated note from JPMorgan Chase. The JPMorgan Chase note is subordinated to the FRBNY loan and will bear the first $1.15 billion of any losses of the portfolio. Any remaining assets in the portfolio after repayment of the FRBNY loan, the JPMorgan Chase note and the expenses of the LLC, will be for the account of the FRBNY.

For further discussion of the Merger, see Note 2 on pages 80–83 of this Form 10-Q.

Purchase of additional interest in Highbridge Capital Management
In January 2008, JPMorgan Chase purchased an additional equity interest in Highbridge Capital Management, LLC (“Highbridge”). As a result, the Firm owns 77.5% of Highbridge as of June 30, 2008. Highbridge is a manager of hedge funds with $28 billion of assets under management at June 30, 2008. The Firm acquired a majority interest in Highbridge in 2004.

EXECUTIVE OVERVIEW

This overview of management’s discussion and analysis highlights selected information and may not contain all of the information that is important to readers of this Form 10-Q. For a complete description of events, trends and uncertainties, as well as the capital, liquidity, credit and market risks, and the critical accounting estimates affecting the Firm and its various lines of business, this Form 10-Q should be read in its entirety.

Financial performance of JPMorgan Chase


	Three months ended June 30,									Six months ended June 30,
(in millions, except per share and ratio data)	2008			2007			Change			2008			2007			Change

Selected income statement data
Total net revenue	$	18,399		$	18,908			(3	)%	$	35,289		$	37,876			(7	)%
Provision for credit losses		3,455			1,529			126			7,879			2,537			211
Total noninterest expense		12,177			11,028			10			21,108			21,656			(3	)
Net income		2,003			4,234			(53	)		4,376			9,021			(51	)
Earnings per share — diluted	$	0.54		$	1.20			(55	)%	$	1.22		$	2.55			(52	)%
Return on common equity		6	%		14	%					7	%		16	%

Business overview

As previously noted, on May 30, 2008, the Firm completed the merger with Bear Stearns. The Merger created an expanded platform to better serve institutional clients, with new capabilities in prime brokerage and clearing and improved strength in equities, mortgage trading, commodities and asset management. The Firm has made substantial progress towards full integration of Bear Stearns with the Firm’s operations and in significantly reducing risk positions.

The Firm reported 2008 second-quarter net income of $2.0 billion, or $0.54 per share, compared with net income of $4.2 billion, or $1.20 per share, for the second quarter of 2007. Return on common equity for the quarter was 6%, compared with 14% in the prior year. Results in the second quarter of 2008 included a net loss of $540 million (after-tax) related to the merger with Bear Stearns. Excluding these merger-related items, net income would have been $2.5 billion. Additional factors contributing to the decline in net income from the second quarter of 2007 were an increase in the provision for credit losses reflecting higher estimated losses and an increase in the allowance for credit losses, higher total noninterest expense and lower total net revenue. Total net revenue for the second quarter of 2008 reflected markdowns on legacy leveraged loans and certain mortgage-related positions in the Investment Bank, lower levels of private equity gains and lower investment banking fees offset partially by an increase in net interest income. The provision for credit losses in the second quarter of 2008 reflected increases in the allowance for credit losses predominantly related to subprime and prime mortgage, wholesale and credit card loans, as well as for higher estimated losses across all home-lending products. The increase in total noninterest expense for the quarter was driven by higher compensation expense and the effect of the merger with Bear Stearns (including merger-related costs).

Net income for the first six months of 2008 was $4.4 billion, or $1.22 per share, compared with net income of $9.0 billion, or $2.55 per share, for the first six months of 2007. Return on common equity for the first six months of 2008 was 7%, compared with 16% for the same period in 2007. The lower results in the first half of 2008 were due to the same drivers highlighted for the second quarter: significantly higher credit provisions, markdowns on legacy leveraged loans and certain mortgage-related positions, lower private equity gains and the effect of the Bear Stearns merger, partially offset by lower total noninterest expense and higher net interest income. The increase in the provision for credit losses in the first six months of 2008 was the result of the same drivers as those highlighted for the second quarter of 2008, plus a significant increase in the allowance for home equity credit losses. Total noninterest expense for the first six months of 2008 declined compared to the prior year due to lower compensation expense.

Although the U.S. economy strengthened modestly in the second quarter of 2008, partly in response to fiscal stimulus actions, the negative effects of the credit market turmoil, declining housing prices and rising energy prices remained severe. Labor markets remained weak as unemployment climbed to 5.5% by the end of the quarter up from 4.6% in the prior-year quarter and 5.1% in the first quarter of 2008. Financial markets remained under considerable stress and funding markets continued to be affected by credit concerns. The S&P 500 stock index was down from both the end of the first quarter of 2008 and from the second quarter of 2007. Capital markets activity was generally consistent with the levels in the first quarter of 2008, but was down significantly compared with the levels in the first half of 2007. The Federal Reserve reduced the federal funds rate by 25 basis points in the quarter to 2.0%, a total reduction of 225 basis points year-to-date in 2008, while also providing increased term liquidity through the Primary Dealer Credit Facility. The global economy in the second quarter evolved along two different paths: the industrial economies

continued to show signs of slowing growth, with some countries actually contracting in the quarter; conversely, developing economies continued to grow rapidly, although in many instances at slower rates than in 2007.

During the second quarter of 2008, the Firm’s performance was negatively affected by the overall global economic environment, as four of the Firm’s six principal lines of business posted lower net income than in the second quarter of 2007. The decline in net income in the Investment Bank reflected additional markdowns related to legacy leveraged loans and mortgage-related exposures. Lower results in Retail Financial Services and Card Services were driven by a higher provision for credit losses in each business reflecting the weakening consumer credit environment and declining housing prices, resulting in higher estimated losses. Asset Management’s net income decreased due to lower performance fees and the effects of lower markets. The lines of business did, however, continue to generate solid underlying business momentum, producing growth in balances, accounts and volumes. Commercial Banking and Treasury & Securities Services delivered record earnings and revenue, benefiting from continued double-digit growth in loans and deposits as well as increased client volumes, and RFS saw organic revenue growth as well. Notably the IB was ranked #1 for Global Investment Banking Fees and #1 for Global Debt, Equity and Equity-related volumes for the first half of 2008.

The discussion that follows highlights the current-quarter performance of each business segment, compared with the prior-year quarter, and discusses results on a managed basis unless otherwise noted. For more information about managed basis, see Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures on pages 15-18 of this Form 10-Q .

Investment Bank net income was lower compared with the second quarter of 2007, reflecting increased noninterest expense, lower total net revenue and a higher provision for credit losses. Total net revenue declined, driven largely by markdowns on legacy leveraged lending funded and unfunded commitments and certain mortgage-related positions. In addition, weak equities trading results and lower investment banking advisory fees contributed to the revenue decline. The decline was partially offset by strong performance in rates, currencies, emerging markets and credit trading, and strong client revenue in equities. The provision for credit losses reflected an increase in the allowance for credit losses due to the effect of a weakening credit environment. The increase in total noninterest expense was largely driven by higher compensation expense and the effect of the Merger.

Retail Financial Services net income declined due to a significant increase in the provision for credit losses, largely offset by revenue growth in all businesses within RFS. Higher total net revenue benefited from higher loan balances, higher net mortgage servicing revenue, higher mortgage production revenue, wider deposit spreads, increased deposit-related fees and higher deposit balances. The provision for credit losses increased substantially as housing price declines continued to result in significant increases in estimated losses, particularly for high loan-to-value home equity and mortgage loans. Total noninterest expense rose from the prior year, reflecting higher mortgage production and servicing expense, and investment in the retail distribution network.

Card Services net income decreased, driven by a higher provision for credit losses. Total managed net revenue increased slightly, as higher average managed loan balances, an increased level of fees and wider loan spreads were largely offset by the effect of higher revenue reversals associated with higher charge-offs. The managed provision for credit losses increased from the prior year due to a higher level of charge-offs and an increase in the allowance for loan losses reflecting higher estimated losses. Total noninterest expense was flat compared with the prior-year quarter.

Commercial Banking net income was a record, driven by record total net revenue and lower total noninterest expense. The increase in revenue resulted from double-digit growth in liability and loan balances and higher deposit-related fees, largely offset by spread compression in the liability and loan portfolios and a continued shift to narrower-spread liability products. The provision for credit losses largely reflected growth in loan balances. Total noninterest expense declined modestly compared with the prior year.

Treasury & Securities Services net income was a record, driven by record total net revenue, partially offset by higher total noninterest expense. Both Worldwide Securities Services and Treasury Services posted record revenue. Worldwide Securities Services revenue growth was driven by increased product usage by new and existing clients, wider spreads in securities lending and higher levels of market volatility in foreign exchange driven by recent market conditions. Partially offsetting these benefits was spread compression on liability products. Treasury Services revenue growth reflected higher liability balances and wider market-driven spreads as well as growth in electronic and trade loan volumes. Total noninterest expense was up, reflecting higher expense related to business and volume growth, as well as continued investment in new product platforms.

Asset Management net income decreased from the prior year reflecting lower revenue and higher noninterest expense. The decrease in revenue was driven by lower performance fees and the effect of lower markets. The lower revenue was predominantly offset by higher net asset flows, higher deposit and loan balances and the benefit of the Merger. The provision for credit losses increased from a benefit in the prior year, reflecting an increase in loan balances and a lower level of recoveries. The increase in total noninterest expense was largely driven by the effect of the Merger and increased headcount offset partially by lower performance-based compensation.

Corporate/Private Equity reported a net loss for the quarter compared with net income in the prior year. The net loss was driven by the after-tax effect of Bear Stearns merger-related items. These items included losses representing JPMorgan Chase’s equity ownership in Bear Stearns from April 8 to May 30, 2008, and other merger-related expense and revenue items. Also contributing to the decline in net income from the prior year were lower results in Private Equity, reflecting a lower level of gains. Providing a partial offset to these lower results was improved performance in Corporate (excluding the Bear Stearns merger-related items), which benefited from a higher level of securities gains (including a gain from the sale of MasterCard shares), a wider net interest spread and a decline in total noninterest expense (largely reflecting a lower level of litigation expense). These benefits were partially offset by an increase in the provision for credit losses for prime mortgage.

The Firm’s managed provision for credit losses was $4.3 billion, up $2.2 billion, or 102%, from the prior year, predominantly reflecting the effect of a weakening credit environment as well as loan growth. The total consumer-managed provision for credit losses was $3.8 billion, compared with $1.9 billion in the prior year. The current-quarter consumer provision reflected an increase in estimated losses across both the home-lending and credit card portfolios, including an increase to the allowance for credit losses predominantly related to subprime mortgage, prime mortgage and credit card loans. Consumer managed net charge-offs were $2.9 billion, compared with $1.6 billion in the second quarter of 2007, resulting in managed net charge-off rates of 3.08% and 1.90%, respectively. The wholesale provision for credit losses was $505 million, compared with $198 million in the prior year, reflecting an increase in the allowance for credit losses. Wholesale net charge-offs were $41 million, compared with net recoveries of $29 million, resulting in a net charge-off rate of 0.08% and a net recovery rate of 0.07%, respectively. The Firm had total nonperforming assets of $6.2 billion at June 30, 2008, up from the prior-year level of $2.4 billion.

Total stockholders’ equity at June 30, 2008, was $133.2 billion, and the Tier 1 capital ratio was 9.2%, compared with 8.4% at June 30, 2007.

Business outlook

The following forward-looking statements are based upon the current beliefs and expectations of JPMorgan Chase’s management and are subject to significant risks and uncertainties. These risks and uncertainties could cause JPMorgan Chase’s results to differ materially from those set forth in such forward-looking statements.

JPMorgan Chase’s outlook for the third quarter of 2008 should be viewed against the backdrop of the global and U.S. economies, financial markets activity, the geopolitical environment, the competitive environment and client activity levels. Each of these linked factors will affect the performance of the Firm and its lines of business. The Firm’s current expectations are for the global and U.S. economic environments to continue to be weak, for capital markets to remain under stress and for a continued decline in U.S. housing prices. These factors have affected, and are likely to continue to adversely impact, the Firm’s credit losses, overall business volumes and earnings.

The consumer provision for credit losses could increase substantially as a result of a higher level of losses in Retail Financial Services’ $95.1 billion home equity loan portfolio, $14.8 billion subprime mortgage loan portfolio, $47.2 billion prime mortgage loan portfolio (mostly held in the Corporate/Private Equity segment), and in Card Services’ $155.4 billion managed credit card portfolio. Given the potential stress on the consumer from the continued downward pressure on housing prices and the elevated national inventory of unsold homes, management remains extremely cautious with respect to the home equity, mortgage and credit card portfolios. As described below, management expects continued deterioration in credit trends for the consumer portfolios which will likely require additions to the consumer loan loss allowance during the remainder of 2008. Housing price declines in specific geographic regions and slowing economic growth continue to drive higher estimated losses and nonperforming assets for the home equity and subprime mortgage segments and have increasingly affected the prime mortgage segment, due in part to the high concentration of more recent (2006 and later) originations in this portfolio. Based on management’s current economic outlook, quarterly net charge-offs in the home equity portfolio could continue to increase during the remainder of 2008; prime and subprime mortgage net charge-offs are expected to continue to rise significantly during the second half of 2008, with deterioration expected to continue into 2009. Continued housing price declines could also lead to increases in non-credit losses, including losses on repurchases of previously securitized loans

and higher mortgage reinsurance losses. Management expects the managed net charge-off rate for Card Services to increase and potentially average 6% during 2009. These charge-off rates could increase if the economic environment continues to deteriorate. The wholesale provision for credit losses may also increase over time as a result of loan growth, portfolio activity and deterioration in underlying credit conditions.

The Investment Bank continues to be negatively affected by the disruption in the credit and mortgage markets, as well as by overall lower levels of liquidity and wider credit spreads. The continuation of these factors could potentially lead to reduced levels of client activity, lower investment banking fees and lower trading revenue. In addition, if the Firm’s own credit spreads tighten, the change in the fair value of certain trading liabilities would also negatively affect trading results. The Firm held $16.3 billion (gross notional) of legacy leveraged loans and unfunded commitments as held-for-sale as of June 30, 2008. Markdowns averaging 20% of the gross notional value have been taken on these legacy positions as of June 30, 2008. Leveraged loans and unfunded commitments are difficult to hedge effectively, and if market conditions further deteriorate, additional markdowns may be necessary on this asset class. The Investment Bank also held, at June 30, 2008, an aggregate $19.5 billion of prime and Alt-A mortgage exposure and $1.9 billion of subprime mortgage exposure. In addition, the Investment Bank had $11.6 billion of Commercial Mortgage-Backed Securities (“CMBS”) exposure, which is substantially credit hedged. These mortgage exposures could be adversely affected by worsening market conditions, further deterioration in the housing market and market activity reflecting distressed sellers. For the third quarter to date, trading conditions have substantially deteriorated versus the second quarter. In particular, spreads on mortgage-backed securities and loans have sharply widened causing the company to incur losses (net of hedges) of approximately $1.5 billion for the quarter to date.

Earnings in Treasury & Securities Services and Asset Management could deteriorate if business volumes or assets under management or supervision decline. Such declines could occur if the economy weakens, as a result of lower equity markets, lower volatility in certain products or the narrowing of spreads (which had recently been driven wider by market conditions). In addition, Treasury & Securities Services’ third-quarter 2008 results will not include the benefit of the seasonally-strong second quarter securities lending and depositary receipts activity. Management believes remaining Bear Stearns merger-related costs will be approximately $500 million (after-tax); these costs are expected to be largely incurred during the second half of 2008 (approximately $150 million per quarter). Management continues to believe the net quarterly loss in Corporate could average over time approximately $50 million to $100 million, excluding trading results related to the Firm’s investment portfolio and credit costs related to prime mortgage exposures which are expected to increase from second quarter levels (as discussed within the consumer outlook section above). Private Equity results, which are dependent upon the capital markets, could remain volatile and may be significantly lower in 2008 than 2007.

CONSOLIDATED RESULTS OF OPERATIONS

The following section provides a comparative discussion of JPMorgan Chase’s Consolidated Results of Operations on a reported basis. Factors that related primarily to a single business segment are discussed in more detail within that business segment. For a discussion of the Critical Accounting Estimates Used by the Firm that affect the Consolidated Results of Operations, see pages 72–74 of this Form 10-Q and pages 96–98 of JPMorgan Chase’s 2007 Annual Report.

Total net revenue
The following table presents the components of total net revenue.


	Three months ended June 30,									Six months ended June 30,
(in millions)	2008			2007			Change			2008			2007			Change

Investment banking fees	$	1,612		$	1,898			(15	)%	$	2,828		$	3,637			(22	)%
Principal transactions		752			3,713			(80	)		(51	)		8,200		NM
Lending & deposit-related fees		1,105			951			16			2,144			1,846			16
Asset management, administration and commissions		3,628			3,611			—			7,224			6,797			6
Securities gains (losses)		647			(223	)	NM				680			(221	)	NM
Mortgage fees and related income		696			523			33			1,221			999			22
Credit card income		1,803			1,714			5			3,599			3,277			10
Other income		(138	)		553		NM				1,691			1,071			58

Noninterest revenue		10,105			12,740			(21	)		19,336			25,606			(24	)
Net interest income		8,294			6,168			34			15,953			12,270			30

Total net revenue	$	18,399		$	18,908			(3	)	$	35,289		$	37,876			(7	)

Total net revenue for the second quarter of 2008 was $18.4 billion, down $509 million, or 3%, from the prior year. The decline was due to lower principal transactions revenue, which reflected net markdowns on leveraged lending funded and unfunded commitments and mortgage-related net markdowns, and lower levels of private equity gains. In addition, the Firm’s share of Bear Stearns’ losses from April 8 to May 30, 2008, and lower investment banking fees contributed to the decline in revenue. Higher net interest income and a gain on the sale of MasterCard shares predominantly offset the decline. For the first six months of 2008, total net revenue was $35.3 billion, down $2.6 billion, or 7%, from the prior year, largely reflecting the same drivers as the quarter, as well as increases due to the proceeds from the sale of Visa shares in its initial public offering and higher asset management, administration and commissions revenue, which reflected higher brokerage commissions and growth in assets under custody and management.

Investment banking fees in the second quarter and first six months of 2008 declined from the record levels of the comparable periods last year. These results were predominantly driven by lower debt underwriting fees as well as lower advisory fees. For a further discussion of investment banking fees, which are primarily recorded in IB, see the IB segment results on pages 19–22 of this Form 10-Q.

Principal transactions revenue consists of trading revenue and private equity gains. The Firm’s trading activities in the second quarter and first six months of 2008 decreased significantly from the comparable periods in 2007, which reflected strong performance in most of the fixed income and equities products. The decrease for the quarter was largely due to net markdowns of $696 million on leveraged lending funded and unfunded commitments, as well as mortgage-related net markdowns of $405 million. Also contributing to the decrease was weaker Equity Markets trading results. Partially offsetting these declines was strong performance in rates, currencies, emerging markets, credit trading and equities client revenue, as well as a combined benefit of $314 million from the widening of the Firm’s credit spread on certain structured liabilities. The significant decrease in trading revenue for the first six months of 2008 was largely due to markdowns taken in the IB, including $1.8 billion on leveraged lending funded and unfunded commitments and $1.6 billion on mortgage-related positions. These markdowns were offset partially by strong performances in rates, currencies, emerging markets, credit trading and equities client revenue, as well as a combined benefit of $1.3 billion from the widening of the Firm’s credit spread on certain structured liabilities. Private equity gains also declined significantly compared with the second quarter and first six months of 2007, driven by lower gains. In addition, the first quarter of 2007 included a fair value adjustment related to the adoption of SFAS 157 (“Fair Value Measurements”). For a further discussion of principal transactions revenue, see the IB and Corporate/Private Equity segment results on pages 19–22 and 43–45, respectively, and Note 5 on pages 92–94 of this Form 10-Q.

Lending & deposit-related fees rose from the second quarter and first six months of 2007, predominantly resulting from higher deposit-related fees. For a further discussion of lending & deposit-related fees, which are mostly recorded in RFS, TSS and CB, see the RFS segment results on pages 23–29, the TSS segment results on pages 36–38, and the CB segment results on pages 34–36 of this Form 10-Q.

The increase in asset management, administration and commissions revenue compared with the second quarter and first six months of 2007 was largely due to increased commissions revenue due mainly to higher brokerage transaction volume (primarily included within equity markets revenue of IB) and the absence of a charge in RFS in the first quarter of 2007, resulting from accelerated surrenders of customer annuity contracts. TSS also contributed to the increase in asset management, administration and commissions, driven by increased product usage by new and existing clients (largely in custody, funds services and depositary receipts). For the second quarter and first six months of 2008, asset management fees in AM were down slightly due to lower performance fees and the impact of market movements. This decline was largely offset by the impact of growth in assets under management, due to liquidity product inflows across all segments and alternative product inflows in the Institutional and Private Bank client segments. For additional information on these fees and commissions, see the segment discussions for IB on pages 19–22, RFS on pages 23–29, TSS on pages 36–38, and AM on pages 39–42, of this Form 10-Q.

The favorable variances resulting from securities gains for the second quarter and first six months of 2008, compared with securities losses in the same periods in 2007, were predominantly driven by a gain of $668 million from the sale of MasterCard shares and a repositioning of the Corporate investment securities portfolio. For a further discussion of securities gains, which are mostly recorded in the Firm’s Corporate business, see the Corporate/Private Equity segment discussion on pages 43–45 of this Form 10-Q.

Mortgage fees and related income increased from the second quarter of 2007, driven by higher net mortgage servicing revenue, which benefited from an improvement in mortgage servicing rights (“MSR”) risk management results and increased loan servicing revenue, and higher production revenue, which benefited from higher loan originations. Mortgage fees and related income also increased from the first six months of 2007, driven predominantly by increased production revenue and higher net mortgage servicing revenue. For a discussion of mortgage fees and related income, which is recorded primarily in RFS’ Mortgage Banking business, see the Mortgage Banking discussion on pages 27–28 of this Form 10-Q.

Credit card income increased from the second quarter and first six months of 2007, due to higher interchange income from higher credit card charge volume in CS and higher debit card transaction volume in RFS, and higher servicing fees earned in connection with CS securitization activities, predominantly reflecting wider loan margins. Also contributing to the increase was higher revenue from fee-based products. These were offset partially by increases in volume-driven payments to partners and expense related to reward programs. For a further discussion of credit card income, see CS’ segment results on pages 30–33 of this Form 10-Q.

The decrease in other income from the second quarter of 2007 was predominantly due to losses of $423 million after tax reflecting the Firm’s 49.4% ownership in Bear Stearns’ losses from April 8 to May 30, 2008, markdowns on certain investments, higher losses on other real estate owned and lower gains related to the sale of securities acquired in the satisfaction of debt. These losses were partially offset by higher credit card net securitization gains and automobile operating lease revenue. For the first six months of 2008, other income increased due to the proceeds from the sale of Visa shares in its initial public offering ($1.5 billion pretax), partially offset by the net unfavorable impact of the aforementioned items.

Net interest income rose from the second quarter and first six months of 2007, primarily due to the following: higher trading-related net interest income, wider spreads on higher balances of consumer loans, growth in liability and deposit balances in the wholesale and consumer businesses, and a wider net interest spread in the Corporate business. These benefits were offset partly by spread compression on deposit and liability products. The Firm’s total average interest-earning assets for the second quarter of 2008 were $1.3 trillion, up 15% from the second quarter of 2007. The increase was predominantly driven by higher loans, federal funds sold and securities purchased under resale agreements, deposits with banks, other assets and available-for-sale (“AFS”) securities. The net interest yield on these assets, on a fully taxable equivalent basis, was 2.71%, an increase of 41 basis points from the second quarter of 2007. The Firm’s total average interest earning assets for the first six months of 2008 were $1.2 trillion, up 15% from the first six months of 2007, driven by the aforementioned items, as well as higher trading assets – debt instruments. The net interest yield on these assets, on a fully taxable equivalent basis, was 2.65%, an increase of 31 basis points from the first six months of 2007.


Provision for credit losses	Three months ended June 30,							Six months ended June 30,
(in millions)	2008		2007		Change			2008		2007		Change

Provision for credit losses	$	3,455	$	1,529		126	%	$	7,879	$	2,537		211	%

Provision for credit losses
The provision for credit losses in the second quarter and first half of 2008 rose from the comparable prior-year periods, due to increases in both the consumer and wholesale provisions. The increase in the consumer provision reflected increases in estimated losses for the home equity, subprime mortgage, prime mortgage and credit card loan portfolios. The increase to wholesale provision for the second quarter and first half of 2008 compared with prior periods was primarily driven by the effect of a weakening credit environment. The first half of 2008 also included the effect of the transfer of funded and unfunded leverage lending commitments to retained loans from held-for-sale. For a more detailed discussion of the loan portfolio and the allowance for loan losses, see the segment discussions for RFS on pages 23–29, CS on pages 30–33, IB on pages 19–22, CB on pages 34–36 and Credit Risk Management on pages 55–68 of this Form 10-Q.

Noninterest expense
The following table presents the components of noninterest expense.


	Three months ended June 30,							Six months ended June 30,
(in millions)	2008		2007		Change			2008		2007		Change

Compensation expense	$	6,913	$	6,309		10	%	$	11,864	$	12,543		(5	)%
Occupancy expense		669		652		3			1,317		1,292		2
Technology, communications and equipment expense		1,028		921		12			1,996		1,843		8
Professional & outside services		1,450		1,259		15			2,783		2,459		13
Marketing		413		457		(10	)		959		939		2
Other expense		1,233		1,013		22			1,402		1,748		(20	)
Amortization of intangibles		316		353		(10	)		632		706		(10	)
Merger costs		155		64		142			155		126		23

Total noninterest expense	$	12,177	$	11,028		10		$	21,108	$	21,656		(3	)

Total noninterest expense for the second quarter of 2008 was $12.2 billion, up $1.1 billion, or 10%, from the second quarter of 2007. The increase was driven by higher compensation expense, the merger with Bear Stearns (including merger-related costs) and higher mortgage production and servicing expense. For the first six months of 2008, total noninterest expense was $21.1 billion, down $548 million, or 3%, from the prior year, primarily due to lower performance-based incentives.

The increase in compensation expense from the second quarter of 2007 was predominantly driven by the merger with Bear Stearns and additional headcount due to investment in the businesses. Compensation expense for the first six months of 2008 decreased from the prior-year period, primarily due to lower performance-based compensation, partially offset by the aforementioned items.

The increases in occupancy expense from the second quarter and first six months of 2007 were driven by the merger with Bear Stearns.

Technology, communications and equipment expense increased compared with the second quarter and first six months of 2007, due to higher technology expense related to business growth, the merger with Bear Stearns and higher depreciation expense on owned automobiles subject to operating leases in the Auto Finance business.

Professional & outside services rose from the second quarter and first six months of 2007, reflecting the merger with Bear Stearns, higher expense related to business and volume growth, including higher brokerage expense in IB and continued investment in new product platforms in TSS.

Marketing expense decreased compared with the second quarter of 2007, reflecting lower retail and credit card marketing expense. The increase in marketing expense from the first six months of 2007 was due to higher credit card marketing expense, partly offset by lower retail marketing expense.

The increase in other expense from the second quarter of 2007 was due to higher mortgage production and servicing expense, the merger with Bear Stearns and higher litigation expense. For the first six months of 2008, other expense decreased due largely to a net reduction of litigation expense, offset partially by higher mortgage production and servicing expense and the merger with Bear Stearns.

For a discussion of amortization of intangibles and merger costs, refer to Note 18 and Note 10 on pages 114–116 and 97, respectively, of this Form 10-Q.

Income tax expense
The Firm’s income before income tax expense, income tax expense and effective tax rate were as follows for each of the periods indicated.


	Three months ended June 30,						Six months ended June 30,
(in millions, except rate)	2008			2007			2008			2007

Income before income tax expense	$	2,767		$	6,351		$	6,302		$	13,683
Income tax expense		764			2,117			1,926			4,662
Effective tax rate		27.6	%		33.3	%		30.6	%		34.1	%

The decrease in the effective tax rate for the second quarter and first six months of 2008, compared with the same periods for 2007, was the result of lower reported pretax income combined with an increased proportion of income that was not subject to U.S. federal income taxes, and a benefit from the release of deferred tax liabilities associated with earnings of certain non-U.S. subsidiaries that were deemed to be reinvested indefinitely. These benefits were partially offset by losses representing the Firm’s 49.4% ownership in Bear Stearns’ losses from April 8 to May 30, 2008, for which no income tax benefit was recorded.

EXPLANATION AND RECONCILIATION OF THE FIRM’S USE OF NON-GAAP FINANCIAL MEASURES

The Firm prepares its consolidated financial statements using accounting principles generally accepted in the United States of America (“U.S. GAAP”); these financial statements appear on pages 76–79 of this Form 10-Q. That presentation, which is referred to as “reported basis,” provides the reader with an understanding of the Firm’s results that can be tracked consistently from year to year and enables a comparison of the Firm’s performance with other companies’ U.S. GAAP financial statements.

In addition to analyzing the Firm’s results on a reported basis, management reviews the Firm’s and the lines’ of business results on a “managed” basis, which is a non-GAAP financial measure. The Firm’s definition of managed basis starts with the reported U.S. GAAP results and includes certain reclassifications that assume credit card loans securitized by CS remain on the balance sheet and presents revenue on a fully taxable-equivalent (“FTE”) basis. These adjustments do not have any impact on net income as reported by the lines of business or by the Firm as a whole.

The presentation of CS results on a managed basis assumes that credit card loans that have been securitized and sold in accordance with SFAS 140 remain on the Consolidated Balance Sheets and that the earnings on the securitized loans are classified in the same manner as the earnings on retained loans recorded on the Consolidated Balance Sheets. JPMorgan Chase uses the concept of managed basis to evaluate the credit performance and overall financial performance of the entire managed credit card portfolio. Operations are funded and decisions are made about allocating resources, such as employees and capital, based upon managed financial information. In addition, the same underwriting standards and ongoing risk monitoring are used for both loans on the Consolidated Balance Sheets and securitized loans. Although securitizations result in the sale of credit card receivables to a trust, JPMorgan Chase retains the ongoing customer relationships, as the customers may continue to use their credit cards; accordingly, the customer’s credit performance will affect both the securitized loans and the loans retained on the Consolidated Balance Sheets. JPMorgan Chase believes managed basis information is useful to investors, enabling them to understand both the credit risks associated with the loans reported on the Consolidated Balance Sheets and the Firm’s retained interests in securitized loans. For a reconciliation of reported to managed basis results for CS, see CS segment results on pages 30–33 of this Form 10-Q. For information regarding the securitization process, and loans and residual interests sold and securitized, see Note 16 on pages 103–109 of this Form 10-Q.

Total net revenue for each of the business segments and the Firm is presented on a FTE basis. Accordingly, revenue from tax-exempt securities and investments that receive tax credits is presented in the managed results on a basis comparable to taxable securities and investments. This non-GAAP financial measure allows management to assess the comparability of revenue arising from both taxable and tax-exempt sources. The corresponding income tax impact related to these items is recorded within income tax expense.

Management also uses certain non-GAAP financial measures at the business segment level because it believes these other non-GAAP financial measures provide information to investors about the underlying operational performance and trends of the particular business segment and therefore facilitate a comparison of the business segment with the performance of its competitors.

The following summary table provides a reconciliation from the Firm’s reported U.S. GAAP results to managed basis.

Three months ended June 30, 2008

Fully tax-

Reported

Credit

equivalent

Managed

(in millions, except per share and ratio data)

results

card^(a)

adjustments

basis

Revenue

Investment banking fees

1,612

—

1,612

Principal transactions

752

—

752

Lending & deposit-related fees

1,105

—

1,105

Asset management, administration and commissions

3,628

—

3,628

Securities gains

647

—

647

Mortgage fees and related income

696

—

696

Credit card income

1,803

(843

)

—

960

Other income

(138

)

—

247

109

Noninterest revenue

10,105

(843

)

247

9,509

Net interest income

8,294

1,673

202

10,169

Total net revenue

18,399

830

449

19,678

Provision for credit losses

3,455

830

—

4,285

Noninterest expense

12,177

—

12,177

Income before income tax expense

2,767

—

449

3,216

Income tax expense

764

—

449

1,213

Net income

2,003

—

2,003

Diluted earnings per share

0.54

—

0.54

Return on common equity

—

Return on equity less goodwill

—

Return on assets

0.48

0.46

Overhead ratio


	Three months ended June 30, 2007
							Fully tax-
	Reported			Credit			equivalent			Managed
(in millions, except per share and ratio data)	results			card^(a)			adjustments			basis

Revenue
Investment banking fees	$	1,898		$	—		$	—		$	1,898
Principal transactions		3,713			—			—			3,713
Lending & deposit-related fees		951			—			—			951
Asset management, administration and commissions		3,611			—			—			3,611
Securities gains		(223	)		—			—			(223	)
Mortgage fees and related income		523			—			—			523
Credit card income		1,714			(788	)		—			926
Other income		553			—			199			752

Noninterest revenue		12,740			(788	)		199			12,151
Net interest income		6,168			1,378			122			7,668

Total net revenue		18,908			590			321			19,819
Provision for credit losses		1,529			590			—			2,119
Noninterest expense		11,028			—			—			11,028

Income before income tax expense		6,351			—			321			6,672
Income tax expense		2,117			—			321			2,438

Net income	$	4,234		$	—		$	—		$	4,234

Diluted earnings per share	$	1.20		$	—		$	—		$	1.20

Return on common equity		14	%		—	%		—	%		14	%
Return on equity less goodwill		23			—			—			23
Return on assets		1.19		NM			NM				1.13
Overhead ratio		58		NM			NM				56

Six months ended June 30, 2008

Fully tax-

Reported

Credit

equivalent

Managed

(in millions, except per share and ratio data)

results

card^(a)

adjustments

basis

Revenue

Investment banking fees

2,828

—

2,828

Principal transactions

(51

)

—

(51

)

Lending & deposit-related fees

2,144

—

2,144

Asset management, administration and commissions

7,224

—

7,224

Securities gains

680

—

680

Mortgage fees and related income

1,221

—

1,221

Credit card income

3,599

(1,780

)

—

1,819

Other income

1,691

—

450

2,141

Noninterest revenue

19,336

(1,780

)

450

18,006

Net interest income

15,953

3,291

326

19,570

Total net revenue

35,289

1,511

776

37,576

Provision for credit losses

7,879

1,511

—

9,390

Noninterest expense

21,108

—

21,108

Income before income tax expense

6,302

—

776

7,078

Income tax expense

1,926

—

776

2,702

Net income

4,376

—

4,376

Diluted earnings per share

1.22

—

1.22

Return on common equity

—

Return on equity less goodwill

—

Return on assets

0.54

0.52

Overhead ratio


	Six months ended June 30, 2007
							Fully tax-
	Reported			Credit			equivalent			Managed
(in millions, except per share and ratio data)	results			card^(a)			adjustments			basis

Revenue
Investment banking fees	$	3,637		$	—		$	—		$	3,637
Principal transactions		8,200			—			—			8,200
Lending & deposit-related fees		1,846			—			—			1,846
Asset management, administration and commissions		6,797			—			—			6,797
Securities gains		(221	)		—			—			(221	)
Mortgage fees and related income		999			—			—			999
Credit card income		3,277			(1,534	)		—			1,743
Other income		1,071			—			309			1,380

Noninterest revenue		25,606			(1,534	)		309			24,381
Net interest income		12,270			2,717			192			15,179

Total net revenue		37,876			1,183			501			39,560
Provision for credit losses		2,537			1,183			—			3,720
Noninterest expense		21,656			—			—			21,656

Income before income tax expense		13,683			—			501			14,184
Income tax expense		4,662			—			501			5,163

Net income	$	9,021		$	—		$	—		$	9,021

Diluted earnings per share	$	2.55		$	—		$	—		$	2.55

Return on common equity		16	%		—	%		—	%		16	%
Return on equity less goodwill		25			—			—			25
Return on assets		1.29		NM			NM				1.24
Overhead ratio		57		NM			NM				55


(a)		Credit card securitizations affect CS. See pages 30-33 of this Form 10-Q for further information.


Three months ended June 30,	2008						2007
(in millions)	Reported		Securitized		Managed		Reported		Securitized		Managed

Loans – Period-end	$	538,029	$	79,120	$	617,149	$	465,037	$	67,506	$	532,543
Total assets – average		1,668,699		74,580		1,743,279		1,431,986		65,920		1,497,906


Six months ended June 30,	2008						2007
(in millions)	Reported		Securitized		Managed		Reported		Securitized		Managed

Loans – Period-end	$	538,029	$	79,120	$	617,149	$	465,037	$	67,506	$	532,543
Total assets – average		1,619,248		73,084		1,692,332		1,405,597		65,519		1,471,116

BUSINESS SEGMENT RESULTS

The Firm is managed on a line-of-business basis. The business segment financial results presented reflect the current organization of JPMorgan Chase. There are six major reportable business segments: the Investment Bank, Retail Financial Services, Card Services, Commercial Banking, Treasury & Securities Services and Asset Management, as well as a Corporate/Private Equity segment. The business segments are determined based upon the products and services provided, or the type of customer served, and they reflect the manner in which financial information is currently evaluated by management. Results of these lines of business are presented on a managed basis. For further discussion of Business Segment Results, see pages 38-39 of JPMorgan Chase’s 2007 Annual Report.

As part of the Bear Stearns merger integration, the businesses of Bear Stearns were reviewed and aligned with the business segments of JPMorgan Chase. The Merger predominantly affected the IB and AM lines of business. The impact of the Merger on the JPMorgan Chase business segments is discussed in the segment results of the applicable line of business.

Description of business segment reporting methodology
Results of the business segments are intended to reflect each segment as if it were essentially a stand-alone business. The management reporting process that derives business segment results allocates income and expense using market-based methodologies. For a further discussion of those methodologies, see Business Segment Results – Description of business segment reporting methodology on page 38 of JPMorgan Chase’s 2007 Annual Report. The Firm continues to assess the assumptions, methodologies and reporting classifications used for segment reporting, and further refinements may be implemented in future periods.

Segment Results – Managed Basis^(a)
The following table summarizes the business segment results for the periods indicated.



Three months ended June 30,	Total net revenue							Noninterest expense							Net income (loss)								Return on equity
(in millions, except ratios)	2008		2007		Change			2008		2007		Change			2008			2007		Change			2008			2007

Investment Bank	$	5,470	$	5,798		(6	)%	$	4,734	$	3,854		23	%	$	394		$	1,179		(67	)%		7	%		23	%
Retail Financial Services		5,015		4,357		15			2,670		2,484		7			606			785		(23	)		14			20
Card Services		3,775		3,717		2			1,185		1,188		—			250			759		(67	)		7			22
Commercial Banking		1,106		1,007		10			476		496		(4	)		355			284		25			20			18
Treasury & Securities Services		2,019		1,741		16			1,317		1,149		15			425			352		21			49			47
Asset Management		2,064		2,137		(3	)		1,400		1,355		3			395			493		(20	)		31			53
Corporate/Private Equity		229		1,062		(78	)		395		502		(21	)		(422	)		382	NM			NM			NM

Total	$	19,678	$	19,819		(1	)%	$	12,177	$	11,028		10	%	$	2,003		$	4,234		(53	)%		6	%		14	%


Six months ended June 30,	Total net revenue							Noninterest expense								Net income							Return on equity
(in millions, except ratios)	2008		2007		Change			2008			2007		Change			2008		2007		Change			2008			2007

Investment Bank	$	8,481	$	12,052		(30	)%	$	7,287		$	7,685		(5	)%	$	307	$	2,719		(89	)%		3	%		26	%
Retail Financial Services		9,717		8,463		15			5,240			4,891		7			379		1,644		(77	)		4			21
Card Services		7,679		7,397		4			2,457			2,429		1			859		1,524		(44	)		12			22
Commercial Banking		2,173		2,010		8			961			981		(2	)		647		588		10			19			19
Treasury & Securities Services		3,932		3,267		20			2,545			2,224		14			828		615		35			48			41
Asset Management		3,965		4,041		(2	)		2,723			2,590		5			751		918		(18	)		30			49
Corporate/Private Equity		1,629		2,330		(30	)		(105	)		856	NM				605		1,013		(40	)	NM			NM

Total	$	37,576	$	39,560		(5	)%	$	21,108		$	21,656		(3	)%	$	4,376	$	9,021		(51	)%		7	%		16	%


(a)		Represents reported results on a tax-equivalent basis and excludes the impact of credit card securitizations.

INVESTMENT BANK

For a discussion of the business profile of the IB, see pages 40-42 of JPMorgan Chase’s 2007 Annual Report and page 4 of this Form 10-Q.


Selected income statement data	Three months ended June 30,										Six months ended June 30,
(in millions, except ratios)	2008			2007			Change			2008			2007			Change

Revenue
Investment banking fees	$	1,735		$	1,900			(9	)%	$	2,941		$	3,629			(19	)%
Principal transactions		838			2,325			(64	)		40			5,467			(99	)
Lending & deposit-related fees		105			93			13			207			186			11
Asset management, administration and commissions		709			643			10			1,453			1,284			13
All other income		(226	)		122		NM				(292	)		164		NM

Noninterest revenue		3,161			5,083			(38	)		4,349			10,730			(59	)
Net interest income		2,309			715			223			4,132			1,322			213


Total net revenue^(a)		5,470			5,798			(6	)		8,481			12,052			(30	)
Provision for credit losses		398			164			143			1,016			227			348
Credit reimbursement from TSS^(b)		30			30			—			60			60			—

Noninterest expense
Compensation expense		3,132			2,589			21			4,373			5,226			(16	)
Noncompensation expense		1,602			1,265			27			2,914			2,459			19

Total noninterest expense		4,734			3,854			23			7,287			7,685			(5	)

Income (loss) before income tax expense		368			1,810			(80	)		238			4,200			(94	)
Income tax expense (benefit)		(26	)		631		NM				(69	)		1,481		NM

Net income (loss)	$	394		$	1,179			(67	)	$	307		$	2,719			(89	)


Financial ratios
ROE		7	%		23	%					3	%		26	%
ROA		0.19			0.68						0.08			0.81
Overhead ratio		87			66						86			64
Compensation expense as a % of total net revenue		57			45						52			43


Revenue by business
Investment banking fees:
Advisory	$	370		$	560			(34	)	$	853		$	1,032			(17	)
Equity underwriting		542			509			6			901			902			—
Debt underwriting		823			831			(1	)		1,187			1,695			(30	)

Total investment banking fees		1,735			1,900			(9	)		2,941			3,629			(19	)
Fixed income markets		2,347			2,445			(4	)		2,813			5,037			(44	)
Equity markets		1,079			1,249			(14	)		2,055			2,788			(26	)
Credit portfolio		309			204			51			672			598			12

Total net revenue	$	5,470		$	5,798			(6	)	$	8,481		$	12,052			(30	)


Revenue by region
Americas	$	3,165		$	2,655			19		$	3,701		$	6,021			(39	)
Europe/Middle East/Africa		1,512			2,327			(35	)		3,153			4,578			(31	)
Asia/Pacific		793			816			(3	)		1,627			1,453			12

Total net revenue	$	5,470		$	5,798			(6	)	$	8,481		$	12,052			(30	)


(a)		Total net revenue included tax-equivalent adjustments, predominantly due to tax-exempt income from municipal bond investments and income tax credits related to affordable housing investments, of $404 million and $290 million for the quarters ended June 30, 2008 and 2007, respectively, and $693 million and $442 million for year-to-date 2008 and 2007, respectively.
(b)		TSS is charged a credit reimbursement related to certain exposures managed within the IB credit portfolio on behalf of clients shared with TSS.

Quarterly results
Net income was $394 million, a decrease from $1.2 billion in the prior year. The lower results reflected increased noninterest expense, a decline in total net revenue and a higher provision for credit losses, partially offset by the benefit of reduced deferred tax liabilities.

Total net revenue was $5.5 billion, a decrease of $328 million, or 6%, from the prior year. Investment banking fees were $1.7 billion (the second-highest quarter ever), down 9% from the prior year. Advisory fees of $370 million were down 34% from the prior year, reflecting reduced levels of activity. Debt underwriting fees of $823 million were down 1%, driven by a decline in loan syndication fees reflecting market conditions offset by higher bond underwriting fees. Equity underwriting fees were $542 million, up 6% from the prior year. Fixed Income Markets revenue was $2.3 billion, down $98 million, or 4%, from the prior year, driven largely by net markdowns of $696 million on leveraged lending funded and unfunded commitments, as well as mortgage-related net markdowns of $405 million. These marks were partially offset by strong performance in rates, currencies, emerging markets, and credit trading, as well as gains of $165 million from the widening of the Firm’s credit spread on certain structured liabilities. Equity Markets revenue was $1.1 billion, down $170 million, or 14% from the prior year, driven by weak trading results offset partially by strong client revenue and a gain of $149 million from the widening of the Firm’s credit spread on certain structured liabilities. Credit Portfolio revenue was $309 million, up $105 million, or 51% from the prior year, reflecting increased net interest income on higher loan balances.

The provision for credit losses was $398 million, compared with $164 million in the prior year. The current-quarter provision reflects a weakening credit environment. Net recoveries were $8 million, compared with net recoveries of $16 million in the prior year. The allowance for loan losses to total loans retained was 3.19% for the current quarter, an increase from 1.76% in the prior year.

Average loans retained were $76.2 billion, an increase of $17.2 billion, or 29%, from the prior year, largely driven by growth in acquisition finance activity, including leveraged lending, and a facility extended to Bear Stearns. Average fair value and held-for-sale loans were $20.4 billion, up $5.6 billion, or 38%, from the prior year.

Noninterest expense was $4.7 billion, an increase of $880 million, or 23%, from the prior year, largely driven by higher compensation expense and the Merger.

Year-to-date results
Net income was $307 million, down 89%, or $2.4 billion, from the prior year. The lower results reflected a decline in total net revenue and a higher provision for credit losses, partially offset by lower noninterest expense.

Total net revenue was $8.5 billion, a decrease of $3.6 billion, or 30%, from the prior year. Investment banking fees were $2.9 billion, down 19% from the prior year, predominantly reflecting lower debt underwriting and advisory fees. Advisory fees of $853 million were down 17% from the prior year reflecting reduced levels of activity. Debt underwriting fees of $1.2 billion were down 30%, driven by lower loan syndication and bond underwriting fees, reflecting market conditions. Equity underwriting fees of $901 million were flat to the prior year. Fixed Income Markets revenue was $2.8 billion, down $2.2 billion, or 44%, from the prior year driven largely by net markdowns of $1.8 billion on leveraged lending funded and unfunded commitments and mortgage-related net markdowns of approximately $1.6 billion. These marks were partially offset by strong performance in rates, currencies, credit trading, and emerging markets as well as gains of $827 million from the widening of the Firm’s credit spread on certain structured liabilities. Equity Markets revenue was $2.1 billion, down $733 million, or 26% from the prior year, driven by weak trading results offset partially by strong client revenue and a gain of $436 million from the widening of the Firm’s credit spread on certain structured liabilities. Credit Portfolio revenue was $672 million, up $74 million, or 12% from the prior year, reflecting higher net interest income on higher loan balances.

The provision for credit losses was $1.0 billion, compared with $227 million in the prior year, primarily reflecting an increase in the allowance for credit losses due to the effect of a weakening credit environment as well as the effect of the transfer of funded and unfunded leverage lending commitments to retained loans from held-for-sale. The allowance for loan losses to total loans retained was 3.23% compared with 1.76% in the prior year.

Total average loans retained were $75.2 billion, an increase of $16.2 billion, or 27%, from the prior year, principally driven by growth in acquisition finance activity, including leveraged lending, as well as liquidity financing and the Bear Stearns financing. Average fair value and held-for-sale loans were $20.0 billion, up $5.8 billion, or 41%, from the prior year.

Noninterest expense was $7.3 billion, a decrease of $398 million, or 5%, from the prior year, driven by lower compensation expense, partially offset by higher noncompensation expense and the Merger.


Selected metrics	Three months ended June 30,									Six months ended June 30,
(in millions, except headcount and ratio data)	2008			2007			Change			2008			2007			Change

Selected average balances
Total assets	$	814,860		$	696,230			17	%	$	785,344		$	677,581			16	%
Trading assets-debt and equity instruments		367,184			359,387			2			368,320			347,320			6
Trading assets-derivatives receivables		99,395			58,520			70			94,814			57,465			65
Loans:
Loans retained^(a)		76,239			59,065			29			75,173			59,019			27
Loans held-for-sale and loans at fair value		20,440			14,794			38			20,026			14,242			41

Total loans		96,679			73,859			31			95,199			73,261			30
Adjusted assets^(b)		676,777			603,839			12			669,598			588,016			14
Equity		23,319			21,000			11			22,659			21,000			8

Headcount		37,057			25,356			46			37,057			25,356			46
Credit data and quality statistics
Net charge-offs (recoveries)	$	(8	)	$	(16	)		50		$	5		$	(22	)	NM
Nonperforming assets:
Nonperforming loans^(c)		313			72			335			313			72			335
Other nonperforming assets		177			47			277			177			47			277
Allowance for credit losses:
Allowance for loan losses		2,429			1,037			134			2,429			1,037			134
Allowance for lending-related commitments		469			487			(4	)		469			487			(4	)

Total allowance for credit losses		2,898			1,524			90			2,898			1,524			90

Net charge-off (recovery) rate^(c)(d)		(0.04	)%		(0.11	)%					0.01	%		(0.08	)%
Allowance for loan losses to average loans^(c)(d)		3.19	⁽ⁱ⁾		1.76						3.23	⁽ⁱ⁾		1.76
Allowance for loan losses to nonperforming loans^(c)		843			2,206						843			2,206
Nonperforming loans to average loans		0.32			0.10						0.33			0.10
Market risk-average trading and credit portfolio VAR^(e)
By risk type:
Fixed income	$	155		$	74			109		$	137		$	60			128
Foreign exchange		26			20			30			30			19			58
Equities		30			51			(41	)		31			46			(33	)
Commodities and other		31			40			(23	)		29			37			(22	)
Diversification^(f)		(92	)		(73	)		(26	)		(91	)		(65	)		(40	)

Total trading VAR^(g)		150			112			34			136			97			40
Credit portfolio VAR^(h)		35			12			192			33			12			175
Diversification^(f)		(36	)		(14	)		(157	)		(34	)		(12	)		(183	)

Total trading and credit portfolio VAR	$	149		$	110			35		$	135		$	97			39


(a)		Loans retained included credit portfolio loans, leveraged leases and other accrual loans, and excluded loans at fair value.
(b)		Adjusted assets, a non-GAAP financial measure, equals total assets minus (1) securities purchased under resale agreements and securities borrowed less securities sold, not yet purchased; (2) assets of variable interest entities (“VIEs”) consolidated under FIN 46R; (3) cash and securities segregated and on deposit for regulatory and other purposes; and (4) goodwill and intangibles. The amount of adjusted assets is presented to assist the reader in comparing IB’s asset and capital levels to other investment banks in the securities industry. Asset-to-equity leverage ratios are commonly used as one measure to assess a company’s capital adequacy. IB believes an adjusted asset amount that excludes the assets discussed above, which were considered to have a low risk profile, provides a more meaningful measure of balance sheet leverage in the securities industry.
(c)		Nonperforming loans include loans held-for-sale and loans at fair value of $25 million at both June 30, 2008, and June 30, 2007, which were excluded from the allowance coverage ratios. Nonperforming loans excluded distressed loans held-for-sale that were purchased as part of IB’s proprietary activities.
(d)		Loans held-for-sale and loans accounted for at fair value were excluded when calculating the allowance coverage ratio and net charge-off (recovery) rate.
(e)		Results for second quarter 2008 include one month of the combined Firm’s results and two months of heritage JPMorgan Chase results. All prior periods reflect heritage JPMorgan Chase results. For a more complete description of value-at-risk (“VAR”), see pages 69-70 of this Form 10-Q.
(f)		Average VARs were less than the sum of the VARs of their market risk components, which was due to risk offsets resulting from portfolio diversification. The diversification effect reflected the fact that the risks were not perfectly correlated. The risk of a portfolio of positions is usually less than the sum of the risks of the positions themselves.


(g)		Trading VAR includes predominantly all trading activities in IB; however, particular risk parameters of certain products are not fully captured, for example, correlation risk or the credit spread sensitivity of certain mortgage products. Trading VAR does not include VAR related to held-for-sale funded loans and unfunded commitments, nor the debit valuation adjustments (“DVA”) taken on derivative and structured liabilities to reflect the credit quality of the Firm. See the DVA Sensitivity table on page 71 of this Form 10-Q for further details. Trading VAR also does not include the MSR portfolio or VAR related to other corporate functions, such as Corporate/Private Equity.
(h)		Included VAR on derivative credit valuation adjustments, hedges of the credit valuation adjustment and mark-to-market hedges of the retained loan portfolio, which were all reported in principal transactions revenue. The VAR does not include the retained loan portfolio.
(i)		Excluding the impact of a loan originated in March, 2008 to Bear Stearns, the adjusted ratio would be 3.46% for the quarter ended June 30, 2008, and 3.40% for year-to-date 2008. The average balance of the loan extended to Bear Stearns was $6.0 billion for the quarter ended June 30, 2008, and $3.8 billion for year-to-date 2008. The allowance for loan losses to period-end loans was 3.35% at June 30, 2008.

According to Thomson Reuters, for the first six months of 2008, the Firm was ranked #1 in Global Debt, Equity and Equity-Related; #1 in Global Equity and Equity-Related; #1 in Global Syndicated Loans; #1 in Global Long-term Debt and #3 in Global Announced M&A based upon volume.

Six months ended June 30, 2008

Full Year 2007

Market shares and rankings^(a)

Market Share

Rankings

Market Share

Rankings

Global debt, equity and equity-related

Global syndicated loans

Global long-term debt^(b)

Global equity and equity-related^(c)

Global announced M&A^(d)

U.S. debt, equity and equity-related

U.S. syndicated loans

U.S. long-term debt^(b)

U.S. equity and equity-related^(c)

U.S. announced M&A^(d)


(a)		Source: Thomson Reuters. The results for the six months ended June 30, 2008, are pro forma for the merger with Bear Stearns. Full-year 2007 results represent heritage JPMorgan Chase only.
(b)		Includes asset-backed securities, mortgage-backed securities and municipal securities.
(c)		Includes rights offerings; U.S. domiciled equity and equity-related transactions.
(d)		Global announced M&A is based upon rank value; all other rankings are based upon proceeds, with full credit to each book manager/equal if joint. Because of joint assignments, market share of all participants will add up to more than 100%. Global and U.S. announced M&A market share and rankings for 2007 included transactions withdrawn since December 31, 2007. U.S. announced M&A represents any U.S. involvement ranking.

RETAIL FINANCIAL SERVICES

For a discussion of the business profile of RFS, see pages 43-48 of JPMorgan Chase’s 2007 Annual Report and page 4 of this Form 10-Q.


Selected income statement data	Three months ended June 30,									Six months ended June 30,
(in millions, except ratios)	2008			2007			Change			2008			2007			Change

Revenue
Lending & deposit-related fees	$	497		$	470			6	%	$	958		$	893			7	%
Asset management, administration and commissions		375			344			9			752			607			24
Mortgage fees and related income		696			495			41			1,221			977			25
Credit card income		194			163			19			368			305			21
Other income		198			212			(7	)		352			391			(10	)

Noninterest revenue		1,960			1,684			16			3,651			3,173			15
Net interest income		3,055			2,673			14			6,066			5,290			15

Total net revenue		5,015			4,357			15			9,717			8,463			15

Provision for credit losses		1,332			587			127			3,824			879			335

Noninterest expense
Compensation expense		1,184			1,104			7			2,344			2,169			8
Noncompensation expense		1,386			1,264			10			2,696			2,488			8
Amortization of intangibles		100			116			(14	)		200			234			(15	)

Total noninterest expense		2,670			2,484			7			5,240			4,891			7

Income (loss) before income tax expense		1,013			1,286			(21	)		653			2,693			(76	)
Income tax expense (benefit)		407			501			(19	)		274			1,049			(74	)

Net income (loss)	$	606		$	785			(23	)	$	379		$	1,644			(77	)


Financial ratios
ROE		14	%		20	%					4	%		21	%
Overhead ratio		53			57						54			58
Overhead ratio excluding core deposit intangibles^(a)		51			54						52			55


(a)		Retail Financial Services uses the overhead ratio (excluding the amortization of core deposit intangibles (“CDI”)), a non-GAAP financial measure, to evaluate the underlying expense trends of the business. Including CDI amortization expense in the overhead ratio calculation results in a higher overhead ratio in the earlier years and a lower overhead ratio in later years; this method would result in an improving overhead ratio over time, all things remaining equal. This non-GAAP ratio excludes Regional Banking’s core deposit intangible amortization expense related to The Bank of New York transaction and the Bank One merger of $99 million and $115 million for the quarters ended June 30, 2008 and 2007, respectively, and $198 million and $231 million for year-to-date June 30, 2008 and 2007, respectively.

Quarterly results
Net income was $606 million, a decrease of $179 million, or 23%, from the prior year, as a significant increase in the provision for credit losses in Regional Banking was offset largely by revenue growth in all businesses.

Total net revenue was $5.0 billion, an increase of $658 million, or 15%, from the prior year. Net interest income was $3.0 billion, up $382 million, or 14%, due to higher loan balances, wider deposit spreads and higher deposit balances. Noninterest revenue was $2.0 billion, up $276 million, or 16%, driven by higher net mortgage servicing revenue, higher mortgage production revenue and increased deposit-related fees.

The provision for credit losses was $1.3 billion, as housing price declines have continued to result in significant increases in estimated losses, particularly for high loan-to-value home equity and mortgage loans. Home equity net charge-offs were $511 million (2.16% net charge-off rate), compared with $98 million (0.44% net charge-off rate) in the prior year. Subprime mortgage net charge-offs were $192 million (4.98% net charge-off rate), compared with $26 million (1.21% net charge-off rate) in the prior year. Prime mortgage net charge-offs (including net charge-offs reflected in the Corporate/Private Equity segment) were $104 million (0.91% net charge-off rate), compared with $4 million (0.05% net charge-off rate) in the prior year. The current-quarter provision includes an increase in the allowance for loan losses of $430 million due to increases in estimated losses in the subprime and prime mortgage portfolios. An additional increase in the allowance for loan losses for prime mortgage loans of $170 million has been reflected in the Corporate/Private Equity segment.

Noninterest expense was $2.7 billion, an increase of $186 million, or 7%, from the prior year, reflecting higher mortgage production and servicing expense, and investment in the retail distribution network.

Year-to-date results
Net income was $379 million, a decrease of $1.3 billion, or 77%, from the prior year, as a significant increase in the provision for credit losses in Regional Banking was offset partially by revenue growth in all businesses.

Total net revenue was $9.7 billion, an increase of $1.3 billion, or 15%, from the prior year. Net interest income was $6.1 billion, up $776 million, or 15%, due to higher loan balances and spreads, wider deposit spreads, and higher deposit balances. These benefits were offset partially by a shift to narrower spread deposit products. Noninterest revenue was $3.6 billion, up $478 million, or 15%, driven by increased deposit-related fees, higher net mortgage servicing revenue, higher mortgage production revenue and the absence of a prior-year charge resulting from accelerated surrenders of customer annuity contracts.

The provision for credit losses was $3.8 billion, as housing price declines have continued to result in significant increases in estimated losses, particularly for high loan-to-value home equity and mortgage loans. Home equity net charge-offs were $958 million (2.03% net charge-off rate), compared with $166 million (0.38% net charge-off rate) in the prior year. Subprime mortgage net charge-offs were $341 million (4.41% net charge-off rate), compared with $46 million (1.09% net charge-off rate) in the prior year. Prime mortgage net charge-offs (including net charge-offs reflected in the Corporate/Private Equity segment) were $154 million (0.70% net charge-off rate), compared with $7 million (0.05% net charge-off rate) in the prior year. The year-to-date provision includes an increase in the allowance for loan losses of $1.1 billion for Home Equity loans and $943 million for the subprime and prime mortgage portfolios. An additional increase in the allowance for loan losses for prime mortgage loans of $330 million has been reflected in the Corporate/Private Equity segment.

Noninterest expense was $5.2 billion, an increase of $349 million, or 7%, from the prior year, reflecting higher mortgage production and servicing expense, and investment in the retail distribution network.


Selected metrics	Three months ended June 30,									Six months ended June 30,
(in millions, except headcount and ratios)	2008			2007			Change			2008			2007			Change

Selected ending balances
Assets	$	230,695		$	217,421			6	%	$	230,695		$	217,421			6	%
Loans:
Loans retained		187,595			166,992			12			187,595			166,992			12
Loans held-for-sale and loans at fair value^(a)		16,282			23,501			(31	)		16,282			23,501			(31	)

Total loans		203,877			190,493			7			203,877			190,493			7
Deposits		223,121			217,689			2			223,121			217,689			2

Selected average balances
Assets	$	232,725		$	216,692			7		$	230,143		$	216,912			6
Loans:
Loans retained		185,993			165,136			13			184,106			163,946			12
Loans held-for-sale and loans at fair value^(a)		20,492			25,166			(19	)		19,167			26,692			(28	)

Total loans		206,485			190,302			9			203,273			190,638			7
Deposits		226,487			219,171			3			226,021			218,058			4
Equity		17,000			16,000			6			17,000			16,000			6

Headcount		69,550			68,254			2			69,550			68,254			2

Credit data and quality statistics
Net charge-offs	$	941		$	270			249		$	1,730		$	455			280
Nonperforming loans^(b)(c)(d)		3,515			1,597			120			3,515			1,597			120
Nonperforming assets^(b)(c)(d)		4,123			1,936			113			4,123			1,936			113
Allowance for loan losses		4,475			1,772			153			4,475			1,772			153

Net charge-off rate^(e)(f)		1.99	%		0.66	%					1.85	%		0.56	%
Allowance for loan losses to ending loans^(e)		2.39			1.06						2.39			1.06
Allowance for loan losses to nonperforming loans^(e)		134			125						134			125
Nonperforming loans to total loans		1.72			0.84						1.72			0.84


(a)		Loans included prime mortgage loans originated with the intent to sell, which were accounted for at fair value. These loans, classified as trading assets on the Consolidated Balance Sheets, totaled $14.1 billion and $15.2 billion at June 30, 2008 and 2007, respectively. Average loans included prime mortgage loans, classified as trading assets on the Consolidated Balance Sheets, of $16.9 billion and $13.5 billion for the three months ended June 30, 2008 and 2007, respectively, and $15.2 billion and $10.0 billion for the six months ended June 30, 2008 and 2007, respectively.
(b)		Nonperforming loans and assets included loans held-for-sale and loans accounted for at fair value of $180 million and $178 million at June 30, 2008 and 2007, respectively. Certain of these loans are classified as trading assets on the Consolidated Balance Sheets.
(c)		Nonperforming loans and assets excluded (1) loans eligible for repurchase as well as loans repurchased from Governmental National Mortgage Association (“GNMA”) pools that are insured by U.S. government agencies of $1.9 billion and $1.2 billion at June 30, 2008 and 2007, respectively, and (2) education loans that are 90 days past due and still accruing, which are insured by U.S. government agencies under the Federal Family Education Loan Program of $371 million and $200 million at June 30, 2008 and 2007, respectively. These amounts were excluded, as reimbursement is proceeding normally.
(d)		For the second quarter of 2008, the policy for classifying subprime mortgage and home equity loans as nonperforming was changed to conform with all other home lending products. Prior period nonperforming assets have been revised to conform with this change.
(e)		Loans held-for-sale and loans accounted for at fair value were excluded when calculating the allowance coverage ratio and net charge-off rate.
(f)		The net charge-off rate for the three and six months ended June 30, 2008, excluded $19 million and $33 million, respectively, of charge-offs related to prime mortgage loans held by the Corporate/Private Equity segment.

REGIONAL BANKING


Selected income statement data	Three months ended June 30,									Six months ended June 30,
(in millions, except ratios)	2008			2007			Change			2008			2007			Change


Noninterest revenue	$	1,022		$	977			5	%	$	1,900		$	1,770			7	%
Net interest income		2,571			2,296			12			5,114			4,595			11

Total net revenue		3,593			3,273			10			7,014			6,365			10
Provision for credit losses		1,213			494			146			3,537			727			387
Noninterest expense		1,778			1,749			2			3,572			3,478			3

Income (loss) before income tax expense		602			1,030			(42	)		(95	)		2,160		NM
Net income (loss)	$	354		$	629			(44	)	$	(79	)	$	1,319		NM


ROE		11	%		21	%					(1	)%		23	%
Overhead ratio		49			53						51			55
Overhead ratio excluding core deposit intangibles^(a)		47			50						48			51


(a)		Regional Banking uses the overhead ratio (excluding the amortization of core deposit intangibles (“CDI”)), a non-GAAP financial measure, to evaluate the underlying expense trends of the business. Including CDI amortization expense in the overhead ratio calculation results in a higher overhead ratio in the earlier years and a lower overhead ratio in later years; this inclusion would result in an improving overhead ratio over time, all things remaining equal. This non-GAAP ratio excludes Regional Banking’s core deposit intangible amortization expense related to The Bank of New York transaction and the Bank One merger of $99 million and $115 million for the quarters ended June 30, 2008 and 2007, respectively, and $198 million and $231 million for year-to-date 2008 and 2007, respectively.

Quarterly results
Regional Banking net income was $354 million, down $275 million, or 44%, from the prior year. Total net revenue was $3.6 billion, up $320 million, or 10%, benefiting from higher loan balances, wider deposit spreads, higher deposit-related fees and higher deposit balances. The provision for credit losses was $1.2 billion, compared with $494 million in the prior year. The provision reflected weakness in the home equity and mortgage portfolios (see Retail Financial Services discussion of the provision for credit losses for further detail). Noninterest expense was $1.8 billion, up $29 million, or 2%, from the prior year, due to investment in the retail distribution network.

Year-to-date results
Regional Banking net loss was $79 million, compared with net income of $1.3 billion in the prior year. Total net revenue was $7.0 billion, up $649 million, or 10%, benefiting from higher loan balances, higher deposit-related fees, wider deposit spreads, higher deposit balances and the absence of a prior-year charge resulting from accelerated surrenders of customer annuity contracts. These benefits were offset partially by a shift to narrower spread deposit products. The provision for credit losses was $3.5 billion, compared with $727 million in the prior year. The provision reflected weakness in the home equity and mortgage portfolios (see Retail Financial Services discussion of the provision for credit losses for further detail). Noninterest expense was $3.6 billion, up $94 million, or 3%, from the prior year, due to investment in the retail distribution network.


Selected metrics	Three months ended June 30,									Six months ended June 30,
(in billions, except ratios and where otherwise noted)		2008		2007			Change			2008			2007			Change

Business metrics
Home equity origination volume	$	5.3		$	14.6			(64	)%	$	12.0		$	27.3			(56	)%
End-of-period loans owned
Home equity	$	95.1		$	91.0			5		$	95.1		$	91.0			5
Mortgage^(a)		14.9			8.8			69			14.9			8.8			69
Business banking		16.4			14.6			12			16.4			14.6			12
Education		13.0			10.2			27			13.0			10.2			27
Other loans^(b)		1.1			2.5			(56	)		1.1			2.5			(56	)

Total end of period loans		140.5			127.1			11			140.5			127.1			11
End-of-period deposits
Checking	$	69.1		$	67.3			3		$	69.1		$	67.3			3
Savings		105.8			97.7			8			105.8			97.7			8
Time and other		37.0			41.9			(12	)		37.0			41.9			(12	)

Total end of period deposits		211.9			206.9			2			211.9			206.9			2
Average loans owned
Home equity	$	95.1		$	89.2			7		$	95.0		$	87.8			8
Mortgage^(a)		15.6			8.8			77			15.7			8.8			78
Business banking		16.1			14.5			11			15.9			14.4			10
Education^(c)		12.7			10.5			21			12.4			10.8			15
Other loans^(b)		1.1			2.4			(54	)		1.3			2.7			(52	)

Total average loans^(c)		140.6			125.4			12			140.3			124.5			13
Average deposits
Checking	$	68.5		$	67.2			2		$	67.4		$	67.3			—
Savings		105.8			98.4			8			103.1			97.6			6
Time and other		39.6			41.7			(5	)		43.6			42.1			4

Total average deposits		213.9			207.3			3			214.1			207.0			3
Average assets		149.3			137.7			8			149.6			136.8			9
Average equity		12.4			11.8			5			12.4			11.8			5


Credit data and quality statistics (in millions, except ratios)
30+ day delinquency rate^(d)(e)		3.61	%		1.88	%					3.61	%		1.88	%
Net charge-offs
Home equity	$	511		$	98			421		$	958		$	166			477
Mortgage		211			26		NM				374			46		NM
Business banking		51			30			70			91			55			65
Other loans		48			52			(8	)		69			65			6

Total net charge-offs		821			206			299			1,492			332			349
Net charge-off rate
Home equity		2.16	%		0.44	%					2.03	%		0.38	%
Mortgage^(f)		4.95			1.19						4.37			1.05
Business banking		1.27			0.83						1.15			0.77
Other loans		1.80			2.32						1.37			1.39
Total net charge-off rate^(c)(f)		2.35			0.68						2.15			0.56

Nonperforming assets^(g)(h)	$	3,506		$	1,588			121		$	3,506		$	1,588			121


(a)		Balance reported predominantly reflected subprime mortgage loans owned.
(b)		Included commercial loans derived from community development activities prior to March 31, 2008.
(c)		Average loans include loans held-for-sale of $3.1 billion and $3.9 billion for the quarters ended June 30, 2008 and 2007, respectively, and $3.6 billion and $4.1 billion for the six months ended June 30, 2008 and 2007, respectively. These amounts were excluded when calculating the net charge-off rate.
(d)		Excluded loans eligible for repurchase as well as loans repurchased from GNMA pools that are insured by U.S. government agencies of $1.5 billion and $879 million at June 30, 2008 and 2007, respectively. These amounts are excluded as reimbursement is proceeding normally.
(e)		Excluded loans that are 30 days past due and still accruing, which are insured by U.S. government agencies under the Federal Family Education Loan Program of $594 million and $523 million at June 30, 2008 and 2007, respectively. These amounts are excluded as reimbursement is proceeding normally.
(f)		The mortgage and total net charge-off rate for the three and six months ended June 30, 2008, excluded $19 million and $33 million, respectively, of charge-offs related to prime mortgage loans held by the Corporate/Private Equity segment.
(g)		Excluded (1) loans eligible for repurchase as well as loans repurchased from GNMA pools that are insured by U.S. government agencies of $1.9 billion and $1.2 billion at June 30, 2008 and 2007, respectively, and (2) education loans that are 90 days past due and still accruing, which are insured by U.S. government agencies under the Federal Family Education Loan Program of $371 million and $200 million at June 30, 2008 and 2007, respectively. These amounts for GNMA and education loans are excluded, as reimbursement is proceeding normally.
(h)		For the second quarter of 2008, the policy for classifying subprime mortgage and home equity loans as nonperforming was changed to conform with all other home lending products. Prior period nonperforming assets have been revised to conform with this change.


Retail branch business metrics	Three months ended June 30,							Six months ended June 30,
(in millions, except where otherwise noted)	2008		2007		Change			2008		2007		Change

Investment sales volume	$	5,211	$	5,117		2	%	$	9,295	$	9,900		(6	)%

Number of:
Branches		3,157		3,089		2			3,157		3,089		2
ATMs		9,310		8,649		8			9,310		8,649		8
Personal bankers		9,995		9,025		11			9,995		9,025		11
Sales specialists		4,116		3,915		5			4,116		3,915		5
Active online customers (in thousands)		7,180		5,448		32			7,180		5,448		32
Checking accounts (in thousands)		11,336		10,356		9			11,336		10,356		9

MORTGAGE BANKING


Selected income statement data	Three months ended June 30,									Six months ended June 30,
(in millions, except ratios and where otherwise noted)	2008			2007			Change			2008			2007			Change


Production revenue	$	597		$	463			29	%	$	1,173		$	863			36	%
Net mortgage servicing revenue:
Servicing revenue		678			615			10			1,312			1,216			8
Changes in MSR asset fair value:
Due to inputs or assumptions in model		1,519			952			60			887			1,060			(16	)
Other changes in fair value		(394	)		(383	)		(3	)		(819	)		(761	)		(8	)

Total changes in MSR asset fair value		1,125			569			98			68			299			(77	)
Derivative valuation adjustments and other		(1,478	)		(1,014	)		(46	)		(880	)		(1,141	)		23

Total net mortgage servicing revenue		325			170			91			500			374			34

Total net revenue		922			633			46			1,673			1,237			35
Noninterest expense		649			516			26			1,185			984			20

Income before income tax expense		273			117			133			488			253			93
Net income	$	169		$	71			138		$	301		$	155			94


ROE		28	%		14	%					25	%		16	%

Business metrics (in billions)
Third-party mortgage loans serviced (ending)	$	659.1		$	572.4			15		$	659.1		$	572.4			15
MSR net carrying value (ending)		10.9			9.5			15			10.9			9.5			15
Average mortgage loans held-for-sale^(a)		17.4			21.3			(18	)		15.6			22.6			(31	)
Average assets		36.2			35.6			2			34.2			36.8			(7	)
Average equity		2.4			2.0			20			2.4			2.0			20

Mortgage origination volume by channel (in billions)
Retail	$	12.5		$	13.6			(8	)	$	25.1		$	24.5			2
Wholesale		9.1			12.8			(29	)		19.7			22.7			(13	)
Correspondent		17.0			6.4			166			29.0			11.2			159
CNT (Negotiated transactions)		17.5			11.3			55			29.4			21.8			35

Total	$	56.1		$	44.1			27		$	103.2		$	80.2			29


(a)		Included $16.9 billion and $13.5 billion of prime mortgage loans at fair value for the three months ended June 30, 2008 and 2007, respectively, and $15.2 billion and $10.0 billion for the six months ended June 30, 2008 and 2007. These loans are classified as trading assets on the Consolidated Balance Sheets.

Quarterly results
Mortgage Banking net income was $169 million, an increase of $98 million, or 138% from the prior year. Total net revenue was $922 million, up $289 million, or 46%. Total net revenue comprises production revenue and net mortgage servicing revenue. Production revenue was $597 million, up $134 million, predominantly benefiting from higher loan originations. Net mortgage servicing revenue, which includes loan servicing revenue, MSR risk management results and other changes in fair value, was $325 million, compared with $170 million in the prior year. Loan servicing revenue of $678 million increased $63 million on growth of 15% in third-party loans serviced. MSR risk management results were positive $41 million compared with negative $62 million in the prior year. Other changes in fair value of the MSR asset were negative $394 million compared with negative $383 million in the prior year. Noninterest expense was $649 million, an increase of $133 million, or 26%. The increase reflected higher mortgage reinsurance losses, higher production expense due, in part, to growth in origination volume, and higher servicing costs due to increased delinquencies and defaults.

Year-to-date results
Mortgage Banking net income was $301 million, an increase of $146 million, or 94%, from the prior year. Total net revenue was $1.7 billion, up $436 million, or 35%. Total net revenue comprises production revenue and net mortgage servicing revenue. Production revenue was $1.2 billion, up $310 million, predominantly benefiting from higher loan originations. Net mortgage servicing revenue, which includes loan servicing revenue, MSR risk management results and other changes in fair value, was $500 million, compared with $374 million in the prior year. Loan servicing revenue of $1.3 billion increased $96 million on growth of 15% in third-party loans serviced. MSR risk management results were positive $7 million compared with negative $81 million in the prior year. Other changes in fair value of the MSR asset were negative $819 million compared with negative $761 million in the prior year. Noninterest expense was $1.2 billion, an increase of $201 million, or 20%. The increase reflected higher mortgage reinsurance losses, higher production expense due, in part, to growth in origination volume, and higher servicing costs due to increased delinquencies and defaults.

AUTO FINANCE


Selected income statement data
(in millions, except ratios and where	Three months ended June 30,									Six months ended June 30,
otherwise noted)	2008			2007			Change			2008			2007			Change

Noninterest revenue	$	155		$	138			12	%	$	306		$	269			14	%
Net interest income		343			312			10			722			591			22

Total net revenue		498			450			11			1,028			860			20
Provision for credit losses		117			92			27			285			151			89
Noninterest expense		243			219			11			483			429			13

Income before income tax expense		138			139			(1	)		260			280			(7	)
Net income	$	83		$	85			(2	)	$	157		$	170			(8	)


ROE		15	%		15	%					14	%		16	%
ROA		0.71			0.79						0.68			0.79

Business metrics (in billions)
Auto origination volume	$	5.6		$	5.3			6		$	12.8		$	10.5			22
End-of-period loans and lease-related assets
Loans outstanding	$	44.7		$	40.4			11		$	44.7		$	40.4			11
Lease financing receivables		0.2			0.8			(75	)		0.2			0.8			(75	)
Operating lease assets		2.1			1.8			17			2.1			1.8			17

Total end-of-period loans and lease-related assets		47.0			43.0			9			47.0			43.0			9
Average loans and lease-related assets
Loans outstanding	$	44.7		$	40.1			11		$	43.8		$	39.8			10
Lease financing receivables		0.2			1.0			(80	)		0.3			1.2			(75	)
Operating lease assets		2.1			1.7			24			2.0			1.7			18

Total average loans and lease-related assets		47.0			42.8			10			46.1			42.7			8
Average assets		47.3			43.4			9			46.4			43.3			7
Average equity		2.3			2.2			5			2.3			2.2			5


Credit quality statistics
30+ day delinquency rate		1.57	%		1.43	%					1.57	%		1.43	%
Net charge-offs
Loans	$	118		$	62			90		$	235		$	120			96
Lease receivables		1			1			—			2			2			—

Total net charge-offs		119			63			89			237			122			94
Net charge-off rate
Loans		1.06	%		0.62	%					1.08	%		0.61	%
Lease receivables		2.01			0.40						1.34			0.34
Total net charge-off rate		1.07			0.61						1.08			0.60
Nonperforming assets	$	164		$	131			25		$	164		$	131			25

Quarterly results
Auto Finance net income was $83 million, a decrease of $2 million, or 2%, from the prior year. Total net revenue was $498 million, up $48 million, or 11%, driven by higher loan balances and increased automobile operating lease revenue. The provision for credit losses was $117 million, up $25 million, reflecting higher estimated losses. The net charge-off rate was 1.07%, compared with 0.61% in the prior year. Noninterest expense of $243 million increased $24 million, or 11%, driven by increased depreciation expense on owned automobiles subject to operating leases.

Year-to-date results
Auto Finance net income was $157 million, a decrease of $13 million, or 8%, from the prior year. Total net revenue was $1.0 billion, up $168 million, or 20%, driven by increased automobile operating lease revenue, a reduction in residual value reserves for direct finance leases and higher loan balances. The provision for credit losses was $285 million, up $134 million, reflecting higher estimated losses. The net charge-off rate was 1.08%, compared with 0.60% in the prior year. Noninterest expense of $483 million increased $54 million, or 13%, driven by increased depreciation expense on owned automobiles subject to operating leases.

CARD SERVICES

For a discussion of the business profile of CS, see pages 49-51 of JPMorgan Chase’s 2007 Annual Report and pages 4-5 of this Form 10-Q.

JPMorgan Chase uses the concept of “managed basis” to evaluate the credit performance of its credit card loans, both loans on the balance sheet and loans that have been securitized. For further information, see Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures on pages 15-18 of this Form 10-Q. Managed results exclude the impact of credit card securitizations on total net revenue, the provision for credit losses, net charge-offs and loan receivables. Securitization does not change reported net income; however, it does affect the classification of items on the Consolidated Statements of Income and Consolidated Balance Sheets.


Selected income statement data-managed basis	Three months ended June 30,									Six months ended June 30,
(in millions, except ratios)	2008			2007			Change			2008			2007			Change

Revenue
Credit card income	$	673		$	682			(1	)%	$	1,273		$	1,281			(1	)%
All other income		91			80			14			210			172			22

Noninterest revenue		764			762			—			1,483			1,453			2
Net interest income		3,011			2,955			2			6,196			5,944			4

Total net revenue		3,775			3,717			2			7,679			7,397			4

Provision for credit losses		2,194			1,331			65			3,864			2,560			51

Noninterest expense
Compensation expense		258			251			3			525			505			4
Noncompensation expense		763			753			1			1,604			1,556			3
Amortization of intangibles		164			184			(11	)		328			368			(11	)

Total noninterest expense		1,185			1,188			—			2,457			2,429			1


Income before income tax expense		396			1,198			(67	)		1,358			2,408			(44	)
Income tax expense		146			439			(67	)		499			884			(44	)

Net income	$	250		$	759			(67	)	$	859		$	1,524			(44	)


Memo: Net securitization gains	$	36		$	16			125		$	106		$	39			172

Financial ratios
ROE		7	%		22	%					12	%		22	%
Overhead ratio		31			32						32			33

Quarterly results
Net income was $250 million, a decline of $509 million, or 67%, from the prior year. The decrease was driven by a higher provision for credit losses.

End-of-period managed loans of $155.4 billion grew by $7.4 billion, or 5%, from the prior year. Average managed loans of $152.8 billion increased $5.4 billion, or 4%, from the prior year. The increase in both end-of-period and average managed loans reflects organic portfolio growth.

Managed total net revenue was $3.8 billion, an increase of $58 million, or 2%, from the prior year. Net interest income was $3.0 billion, up $56 million, or 2%, from the prior year. The increase in net interest income was driven by higher average managed loan balances, an increased level of fees and wider loan spreads. These benefits were offset largely by the effect of higher revenue reversals associated with higher charge-offs. Noninterest revenue of $764 million was flat compared with the prior year. Increased interchange income (the result of charge volume growth of 6%), higher revenue from fee-based products, and higher securitization income were offset by increased rewards expense and higher volume-driven payments to partners (both netted against interchange income).

The managed provision for credit losses was $2.2 billion, an increase of $863 million, or 65%, from the prior year, due to a higher level of charge-offs and an increase of $300 million in the allowance for loan losses, reflecting higher estimated losses. The managed net charge-off rate for the quarter was 4.98%, up from 3.62% in the prior year. The 30-day managed delinquency rate was 3.46%, up from 3.00% in the prior year.

Noninterest expense of $1.2 billion was flat compared with the prior year.

Year-to-date results

Net income was $859 million, a decline of $665 million, or 44%, from the prior year. The decrease was driven by a higher provision for credit losses offset partially by growth in managed total net revenue.

Average managed loans of $153.2 billion increased $4.8 billion, or 3%, from the prior year, reflecting organic portfolio growth.

Managed total net revenue was $7.7 billion, an increase of $282 million, or 4%, from the prior year. Net interest income was $6.2 billion, up $252 million, or 4%, from the prior year. The increase in net interest income was driven by an increased level of fees, higher average managed loan balances and wider loan spreads. These benefits were offset partially by the effect of higher revenue reversals associated with higher charge-offs. Noninterest revenue of $1.5 billion was up $30 million, or 2%, from the prior year. Increased interchange income (the result of charge volume growth of 6%) and higher securitization income were offset partially by increased rewards expense and higher volume-driven payments to partners (both of which are netted against interchange income).

The managed provision for credit losses was $3.9 billion, an increase of $1.3 billion, or 51%, from the prior year, due to a higher level of charge-offs and an increase in the allowance for loan losses (an increase of $300 million compared with a prior year release of $85 million), reflecting higher estimated losses. The managed net charge-off rate increased to 4.68%, up from 3.59% in the prior year.

Noninterest expense was $2.5 billion, up $28 million, or 1%, from the prior year.


Selected metrics	Three months ended June 30,									Six months ended June 30,
(in millions, except headcount, ratios
and where otherwise noted)	2008			2007			Change			2008			2007			Change

Financial metrics
% of average managed outstandings:
Net interest income		7.92	%		8.04	%					8.13	%		8.08	%
Provision for credit losses		5.77			3.62						5.07			3.48
Noninterest revenue		2.01			2.07						1.95			1.97
Risk adjusted margin^(a)		4.16			6.49						5.01			6.57
Noninterest expense		3.12			3.23						3.23			3.30
Pretax income (ROO)^(b)		1.04			3.26						1.78			3.27
Net income		0.66			2.06						1.13			2.07

Business metrics
Charge volume (in billions)	$	93.6		$	88.0			6	%	$	179.0		$	169.3			6	%
Net accounts opened (in millions)		3.6			3.7			(3	)		7.0			7.1			(1	)
Credit cards issued (in millions)		157.6			150.9			4			157.6			150.9			4
Number of registered internet customers (in millions)		28.0			24.6			14			28.0			24.6			14
Merchant acquiring business^(c)
Bank card volume (in billions)	$	199.3		$	179.7			11		$	381.7		$	343.3			11
Total transactions (in billions)		5.6			4.8			17			10.8			9.3			16

Selected ending balances
Loans:
Loans on balance sheets	$	76,278		$	80,495			(5	)	$	76,278		$	80,495			(5	)
Securitized loans		79,120			67,506			17			79,120			67,506			17

Managed loans	$	155,398		$	148,001			5		$	155,398		$	148,001			5


Selected average balances
Managed assets	$	161,601		$	154,406			5		$	160,601		$	155,333			3
Loans:
Loans on balance sheets	$	75,630		$	79,000			(4	)	$	77,537		$	80,458			(4	)
Securitized loans		77,195			68,428			13			75,652			67,959			11

Managed average loans	$	152,825		$	147,428			4		$	153,189		$	148,417			3

Equity	$	14,100		$	14,100			—		$	14,100		$	14,100			—

Headcount		19,570			18,913			3			19,570			18,913			3

Managed credit quality statistics
Net charge-offs	$	1,894		$	1,331			42		$	3,564		$	2,645			35
Net charge-off rate		4.98	%		3.62	%					4.68	%		3.59	%
Managed delinquency ratios
30+ days		3.46	%		3.00	%					3.46	%		3.00	%
90+ days		1.76			1.42						1.76			1.42

Allowance for loan losses^(d)	$	3,705		$	3,096			20		$	3,705		$	3,096			20
Allowance for loan losses to period-end loans^(d)		4.86	%		3.85	%					4.86	%		3.85	%


(a)		Represents total net revenue less provision for credit losses.
(b)		Pretax return on average managed outstandings.
(c)		Represents 100% of the merchant acquiring business.
(d)		Loans on a reported basis.

Reconciliation from reported basis to managed basis

The financial information presented below reconciles reported basis and managed basis to disclose the effect of securitizations.


	Three months ended June 30,									Six months ended June 30,
(in millions)	2008			2007			Change			2008			2007			Change

Income statement data^(a)
Credit card income
Reported	$	1,516		$	1,470			3	%	$	3,053		$	2,815			8	%
Securitization adjustments		(843	)		(788	)		(7	)		(1,780	)		(1,534	)		(16	)

Managed credit card income	$	673		$	682			(1	)	$	1,273		$	1,281			(1	)

Net interest income
Reported	$	1,338		$	1,577			(15	)	$	2,905		$	3,227			(10	)
Securitization adjustments		1,673			1,378			21			3,291			2,717			21

Managed net interest income	$	3,011		$	2,955			2		$	6,196		$	5,944			4

Total net revenue
Reported	$	2,945		$	3,127			(6	)	$	6,168		$	6,214			(1	)
Securitization adjustments		830			590			41			1,511			1,183			28

Managed total net revenue	$	3,775		$	3,717			2		$	7,679		$	7,397			4

Provision for credit losses
Reported	$	1,364		$	741			84		$	2,353		$	1,377			71
Securitization adjustments		830			590			41			1,511			1,183			28

Managed provision for credit losses	$	2,194		$	1,331			65		$	3,864		$	2,560			51

Balance sheet – average balances^(a)
Total average assets
Reported	$	87,021		$	88,486			(2	)	$	87,517		$	89,814			(3	)
Securitization adjustments		74,580			65,920			13			73,084			65,519			12

Managed average assets	$	161,601		$	154,406			5		$	160,601		$	155,333			3

Credit quality statistics^(a)
Net charge-offs
Reported	$	1,064		$	741			44		$	2,053		$	1,462			40
Securitization adjustments		830			590			41			1,511			1,183			28

Managed net charge-offs	$	1,894		$	1,331			42		$	3,564		$	2,645			35


(a)		JPMorgan Chase uses the concept of “managed basis” to evaluate the credit performance and overall performance of the underlying credit card loans, both sold and not sold; as the same borrower is continuing to use the credit card for ongoing charges, a borrower’s credit performance will affect both the receivables sold under SFAS 140 and those not sold. Thus, in its disclosures regarding managed receivables, JPMorgan Chase treats the sold receivables as if they were still on the balance sheet in order to disclose the credit performance (such as net charge-off rates) of the entire managed credit card portfolio. Managed results exclude the impact of credit card securitizations on total net revenue, the provision for credit losses, net charge-offs and loan receivables. Securitization does not change reported net income versus managed earnings; however, it does affect the classification of items on the Consolidated Statements of Income and Consolidated Balance Sheets. For further information, see Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures on pages 15–18 of this Form 10-Q.

COMMERCIAL BANKING

For a discussion of the business profile of CB, see pages 52–53 of JPMorgan Chase’s 2007 Annual Report and page 5 of this Form 10-Q.


Selected income statement data	Three months ended June 30,									Six months ended June 30,
(in millions, except ratios)	2008			2007			Change			2008			2007			Change

Revenue
Lending & deposit-related fees	$	207		$	158			31	%	$	400		$	316			27	%
Asset management, administration and commissions		26			21			24			52			44			18
All other income^(a)		150			133			13			265			287			(8	)

Noninterest revenue		383			312			23			717			647			11
Net interest income		723			695			4			1,456			1,363			7

Total net revenue		1,106			1,007			10			2,173			2,010			8

Provision for credit losses		47			45			4			148			62			139

Noninterest expense
Compensation expense		173			182			(5	)		351			362			(3	)
Noncompensation expense		290			300			(3	)		584			590			(1	)
Amortization of intangibles		13			14			(7	)		26			29			(10	)

Total noninterest expense		476			496			(4	)		961			981			(2	)

Income before income tax expense		583			466			25			1,064			967			10
Income tax expense		228			182			25			417			379			10

Net income	$	355		$	284			25		$	647		$	588			10


Financial ratios
ROE		20	%		18	%					19	%		19	%
Overhead ratio		43			49						44			49


(a)		IB-related and commercial card revenue is included in all other income.

Quarterly results

Net income was a record $355 million, an increase of $71 million, or 25%, from the prior year driven by record total net revenue and lower noninterest expense.

Total net revenue was a record $1.1 billion, an increase of $99 million, or 10%, from the prior year. Net interest income was $723 million, up $28 million, or 4%. The increase was driven by double-digit growth in liability and loan balances, largely offset by spread compression in the liability and loan portfolios and a continued shift to narrower–spread liability products. Noninterest revenue was $383 million, an increase of $71 million, or 23%, from the prior year, largely reflecting higher deposit-related fees as well as increases in other fee income.

Middle Market Banking revenue was $708 million, an increase of $55 million, or 8%, from the prior year. Mid-Corporate Banking revenue was $235 million, an increase of $38 million, or 19%. Real Estate Banking revenue was $94 million, a decline of $15 million, or 14%.

The provision for credit losses was $47 million, an increase of $2 million, or 4%, from the prior year. The current-quarter provision largely reflects growth in loan balances. The allowance for loan losses to total loans retained was 2.61% for the current quarter, down from 2.63% in the prior year. Nonperforming loans were $486 million, up $351 million from the prior year, reflecting increases in nonperforming loans in each business segment and the effect of a weakening credit environment. Net charge-offs were $49 million (0.28% net charge-off rate), compared with net recoveries of $8 million (0.05% net recovery rate) in the prior year.

Noninterest expense was $476 million, a decrease of $20 million, or 4%, from the prior year.

Year-to-date results

Net income was $647 million, an increase of $59 million, or 10%, from the prior year driven by growth in total net revenue largely offset by a higher provision for credit losses.

Total net revenue was $2.2 billion, an increase of $163 million, or 8%, from the prior year. Net interest income was $1.5 billion, an increase of $93 million, or 7%, driven by double-digit growth in liability balances and loans, largely offset by spread compression in the liability and loan portfolios and the continued shift to narrower-spread liability products.

Noninterest revenue was $717 million, up $70 million, or 11%, due to higher deposit-related fees as well as increases in other fee income partially offset by lower gains related to the sale of securities acquired in the satisfaction of debt.

Middle Market Banking revenue was $1.4 billion, an increase of $100 million, or 8%. Mid-Corporate Banking revenue was $442 million, an increase of $33 million, or 8%. Real Estate Banking revenue was $191 million, a decline of $20 million, or 9%.

The provision for credit losses was $148 million, compared with $62 million in the prior year, largely reflecting growth in loan balances. The allowance for loan losses to average loans was 2.67%, flat compared with the prior year. Net charge-offs were $130 million (0.38% net charge-off rate), compared with net recoveries of $9 million (0.03% net recovery rate) in the prior year.

Noninterest expense was $961 million, a decrease of $20 million, or 2%, largely due to lower compensation expense.


Selected metrics	Three months ended June 30,									Six months ended June 30,
(in millions, except ratio and headcount data)	2008			2007			Change			2008			2007			Change

Revenue by product:
Lending	$	376		$	348			8	%	$	755		$	696			8	%
Treasury services		630			569			11			1,246			1,125			11
Investment banking		91			82			11			159			158			1
Other		9			8			13			13			31			(58	)

Total Commercial Banking revenue	$	1,106		$	1,007			10		$	2,173		$	2,010			8


IB revenue, gross^(a)	$	270		$	236			14		$	473		$	467			1

Revenue by business:
Middle Market Banking	$	708		$	653			8		$	1,414		$	1,314			8
Mid-Corporate Banking		235			197			19			442			409			8
Real Estate Banking		94			109			(14	)		191			211			(9	)
Other		69			48			44			126			76			66

Total Commercial Banking revenue	$	1,106		$	1,007			10		$	2,173		$	2,010			8


Selected average balances:
Total assets	$	103,469		$	84,687			22		$	102,724		$	83,622			23
Loans:
Loans retained		70,682			59,071			20			69,096			58,133			19
Loans held-for-sale and loans at fair value		379			741			(49	)		450			609			(26	)

Total loans^(b)		71,061			59,812			19			69,546			58,742			18
Liability balances^(c)		99,404			84,187			18			99,441			82,976			20
Equity		7,000			6,300			11			7,000			6,300			11

Average loans by business:
Middle Market Banking	$	42,879		$	37,099			16		$	41,495		$	36,710			13
Mid-Corporate Banking		15,357			11,692			31			15,253			11,183			36
Real Estate Banking		7,500			6,894			9			7,479			6,984			7
Other		5,325			4,127			29			5,319			3,865			38

Total Commercial Banking loans	$	71,061		$	59,812			19		$	69,546		$	58,742			18

Headcount		4,028			4,295			(6	)		4,028			4,295			(6	)

Credit data and quality statistics:
Net charge-offs (recoveries)	$	49		$	(8	)		NM		$	130		$	(9	)		NM
Nonperforming loans^(d)		486			135			260			486			135			260
Allowance for credit losses:
Allowance for loan losses^(e)		1,843			1,551			19			1,843			1,551			19
Allowance for lending-related commitments		170			222			(23	)		170			222			(23	)

Total allowance for credit losses		2,013			1,773			14			2,013			1,773			14
Net charge-off (recovery) rate^(b)		0.28	%		(0.05	)%					0.38	%		(0.03	)%
Allowance for loan losses to average loans^(b)		2.61			2.63						2.67			2.67
Allowance for loan losses to nonperforming loans^(d)		401			1,149						401			1,149
Nonperforming loans to average loans		0.68			0.23						0.70			0.23


(a)		Represents the total revenue related to investment banking products sold to CB clients.
(b)		Loans held-for-sale and loans accounted for at fair value were excluded when calculating the allowance coverage ratio and net charge-off (recovery) rate.
(c)		Liability balances include deposits and deposits swept to on-balance sheet liabilities such as commercial paper, federal funds purchased and securities loaned or sold under repurchase agreements.
(d)		Nonperforming loans included loans held-for-sale and loans at fair value of $26 million at June 30, 2008. This amount was excluded when calculating the allowance coverage ratios. There were no nonperforming loans held-for-sale or held at fair value at June 30, 2007.
(e)		The allowance for loan losses at June 30, 2008, included an amount related to loans acquired in the merger with Bear Stearns.

TREASURY & SECURITIES SERVICES

For a discussion of the business profile of TSS, see pages 54–55 of JPMorgan Chase’s 2007 Annual Report and page 5 of this Form 10-Q.


Selected income statement data	Three months ended June 30,									Six months ended June 30,
(in millions, except headcount and ratio data)	2008			2007			Change			2008			2007			Change

Revenue
Lending & deposit-related fees	$	283		$	219			29	%	$	552		$	432			28	%
Asset management, administration and commissions		846			828			2			1,666			1,514			10
All other income		228			184			24			428			309			39

Noninterest revenue		1,357			1,231			10			2,646			2,255			17
Net interest income		662			510			30			1,286			1,012			27

Total net revenue		2,019			1,741			16			3,932			3,267			20

Provision for credit losses		7			—			NM			19			6			217
Credit reimbursement to IB^(a)		(30	)		(30	)		—			(60	)		(60	)		—

Noninterest expense
Compensation expense		669			609			10			1,310			1,167			12
Noncompensation expense		632			523			21			1,203			1,025			17
Amortization of intangibles		16			17			(6	)		32			32			—

Total noninterest expense		1,317			1,149			15			2,545			2,224			14

Income before income tax expense		665			562			18			1,308			977			34
Income tax expense		240			210			14			480			362			33

Net income	$	425		$	352			21		$	828		$	615			35


Revenue by business
Treasury Services	$	852		$	720			18		$	1,665		$	1,409			18
Worldwide Securities Services		1,167			1,021			14			2,267			1,858			22

Total net revenue	$	2,019		$	1,741			16		$	3,932		$	3,267			20
Financial ratios
ROE		49	%		47	%					48	%		41	%
Overhead ratio		65			66						65			68
Pretax margin ratio^(b)		33			32						33			30

Selected average balances
Total assets	$	56,192		$	50,687			11		$	56,698		$	48,359			17
Loans^(c)		23,822			20,195			18			23,454			19,575			20
Liability balances^(d)		268,293			217,514			23			261,331			214,095			22
Equity		3,500			3,000			17			3,500			3,000			17

Headcount		27,232			25,206			8			27,232			25,206			8


(a)		TSS is charged a credit reimbursement related to certain exposures managed within the IB credit portfolio on behalf of clients shared with TSS.
(b)		Pretax margin represents income before income tax expense divided by total net revenue, which is a measure of pretax performance and another basis by which management evaluates its performance and that of its competitors.
(c)		Loan balances include wholesale overdrafts, commercial card and trade finance loans.
(d)		Liability balances include deposits and deposits swept to on-balance sheet liabilities such as commercial paper, federal funds purchased and securities loaned or sold under repurchase agreements.

Quarterly results

Net income was a record $425 million, an increase of $73 million, or 21%, from the prior year, driven by record total net revenue, partially offset by higher noninterest expense.

Total net revenue was a record $2.0 billion, an increase of $278 million, or 16%, from the prior year. Worldwide Securities Services net revenue of $1.2 billion was a record, up $146 million, or 14%, from the prior year. The growth was driven by increased product usage by new and existing clients (largely in custody, funds services and depositary receipts), wider spreads in securities lending and higher levels of market volatility in foreign exchange driven by recent market conditions. These benefits were offset partially by spread compression on liability products. Treasury Services net revenue was a record $852 million, an increase of $132 million, or 18%, from the prior year. This increase reflected higher liability balances and wider market-driven spreads as well as growth in electronic and trade loan volumes. TSS firmwide net revenue, which includes Treasury Services net revenue recorded in other lines of business, grew to $2.7 billion, up $346 million, or 15%. Treasury Services firmwide net revenue grew to $1.6 billion, up $200 million, or 15%.

Noninterest expense was $1.3 billion, an increase of $168 million, or 15%, from the prior year, reflecting higher expense related to business and volume growth as well as continued investment in new product platforms.

Year-to-date results

Net income was $828 million, an increase of $213 million, or 35%, from the prior year. The increase was driven by higher total net revenue, partially offset by higher noninterest expense.

Total net revenue was $3.9 billion, an increase of $665 million, or 20%, from the prior year. Worldwide Securities Services net revenue of $2.3 billion was up $409 million, or 22%, driven by increased product usage by new and existing clients (largely in custody, funds services and depositary receipts), and wider spreads in securities lending and higher levels of market volatility in foreign exchange driven by recent market conditions. These benefits were offset partially by spread compression on liability products. Treasury Services net revenue was $1.7 billion, an increase of $256 million, or 18%, reflecting higher liability balances and wider market-driven spreads, as well as growth in electronic and trade loan volumes. TSS firmwide revenue grew to $5.3 billion, up $802 million, or 18%. Treasury Services firmwide net revenue grew to $3.1 billion, up $393 million, or 15%.

Noninterest expense was $2.5 billion, up $321 million, or 14%, from the prior year, reflecting higher expense related to business and volume growth as well as continued investment in new product platforms.

TSS firmwide metrics

TSS firmwide metrics include revenue recorded in the CB, Regional Banking and AM lines of business and excludes FX revenue recorded in the IB for TSS-related FX activity. In order to capture the firmwide impact of TS and TSS products and revenue, management reviews firmwide metrics such as liability balances, revenue and overhead ratios in assessing financial performance for TSS. Firmwide metrics are necessary in order to understand the aggregate TSS business.


Selected metrics	Three months ended June 30,									Six months ended June 30,
(in millions, except ratio data and where otherwise noted)	2008			2007			Change			2008			2007			Change

TSS firmwide disclosures
Treasury Services revenue – reported	$	852		$	720			18	%	$	1,665		$	1,409			18	%
Treasury Services revenue reported in Commercial Banking		630			569			11			1,246			1,125			11
Treasury Services revenue reported in other lines of business		72			65			11			141			125			13

Treasury Services firmwide revenue^(a)		1,554			1,354			15			3,052			2,659			15
Worldwide Securities Services revenue		1,167			1,021			14			2,267			1,858			22

Treasury & Securities Services firmwide revenue^(a)	$	2,721		$	2,375			15		$	5,319		$	4,517			18

Treasury Services firmwide liability balances (average)^(b)	$	230,689		$	189,214			22		$	226,203		$	187,930			20
Treasury & Securities Services firmwide liability balances (average)^(b)		367,670			301,701			22			360,758			297,072			21

TSS firmwide financial ratios
Treasury Services firmwide overhead ratio^(c)		54	%		59	%					54	%		59	%
Treasury & Securities Services overhead ratio^(c)		58			60						58			61

Firmwide business metrics
Assets under custody (in billions)	$	15,476		$	15,203			2		$	15,476		$	15,203			2
Number of:
US$ ACH transactions originated (in millions)		993			972			2			1,997			1,943			3
Total US$ clearing volume (in thousands)		29,063			27,779			5			57,119			54,619			5
International electronic funds transfer volume (in thousands)^(d)		41,432			42,068			(2	)		81,471			84,467			(4	)
Wholesale check volume (in millions)		618			767			(19	)		1,241			1,538			(19	)
Wholesale cards issued (in thousands)^(e)		19,917			17,535			14			19,917			17,535			14


(a)		TSS firmwide FX revenue, which includes FX revenue recorded in TSS and FX revenue associated with TSS customers who are FX customers of the IB, was $222 million and $139 million for the quarters ended June 30, 2008 and 2007, respectively, and $413 million and $251 million year-to-date 2008 and 2007, respectively.
(b)		Firmwide liability balances include TS’ liability balances recorded in the Commercial Banking line of business.
(c)		Overhead ratios have been calculated based upon firmwide revenue and TSS and TS expense, respectively, including those allocated to certain other lines of business. FX revenue and expense recorded in the IB for TSS-related FX activity are not included in this ratio.
(d)		International electronic funds transfer includes non-US$ ACH and clearing volume.
(e)		Wholesale cards issued include domestic commercial card, stored value card, prepaid card and government electronic benefit card products.

ASSET MANAGEMENT

For a discussion of the business profile of AM, see pages 56–58 of JPMorgan Chase’s 2007 Annual Report and on page 5 of this Form 10-Q.


Selected income statement data	Three months ended June 30,									Six months ended June 30,
(in millions, except ratios)	2008			2007			Change			2008			2007			Change

Revenue
Asset management, administration and commissions	$	1,573		$	1,671			(6	)%	$	3,104		$	3,160			(2	)%
All other income		130			173			(25	)		189			343			(45	)

Noninterest revenue		1,703			1,844			(8	)		3,293			3,503			(6	)
Net interest income		361			293			23			672			538			25

Total net revenue		2,064			2,137			(3	)		3,965			4,041			(2	)

Provision for credit losses		17			(11	)		NM			33			(20	)		NM

Noninterest expense
Compensation expense		886			879			1			1,711			1,643			4
Noncompensation expense		494			456			8			971			907			7
Amortization of intangibles		20			20			—			41			40			2

Total noninterest expense		1,400			1,355			3			2,723			2,590			5

Income before income tax expense		647			793			(18	)		1,209			1,471			(18	)
Income tax expense		252			300			(16	)		458			553			(17	)

Net income	$	395		$	493			(20	)	$	751		$	918			(18	)


Revenue by client segment
Private bank	$	765		$	646			18		$	1,420		$	1,206			18
Retail		490			602			(19	)		956			1,129			(15	)
Institutional		472			617			(24	)		962			1,168			(18	)
Private client services		299			272			10			589			538			9
Bear Stearns brokerage		38			—			NM			38			—			NM

Total net revenue	$	2,064		$	2,137			(3	)	$	3,965		$	4,041			(2	)

Financial ratios
ROE		31	%		53	%					30	%		49	%
Overhead ratio		68			63						69			64
Pretax margin ratio(a)		31			37						30			36


(a)		Pretax margin represents income before income tax expense divided by total net revenue, which is a measure of pretax performance and another basis by which management evaluates its performance and that of its competitors.

Quarterly results
Net income was $395 million, a decline of $98 million, or 20%, from the prior year driven largely by lower performance fees and higher expense offset partially by increased total net revenue from growth in deposit and loan balances.

Total net revenue was $2.1 billion, a decrease of $73 million, or 3%, from the prior year. Noninterest revenue was $1.7 billion, a decline of $141 million, or 8%, due to lower performance fees and the effect of lower markets, offset partially by increased revenue from net asset inflows, higher placement fees and the benefit of the Merger. Net interest income was $361 million, up $68 million, or 23%, from the prior year, predominantly due to higher deposit and loan balances.

Private Bank revenue grew 18% to $765 million due to increased deposit and loan balances, higher placement fees and higher assets under management, partially offset by lower performance fees. Retail revenue declined 19% to $490 million due to net equity outflows. Institutional revenue declined 24% to $472 million due to lower performance fees, partially offset by growth in assets under management. Private Client Services revenue grew 10% to $299 million due to higher deposit and loan balances and growth in assets under management. Bear Stearns Brokerage added $38 million to revenue.

The provision for credit losses was $17 million, compared with a benefit of $11 million in the prior year, reflecting an increase in loan balances and a lower level of recoveries.

Noninterest expense was $1.4 billion, up $45 million, or 3%, from the prior year, largely driven by the effect of the Merger and increased headcount offset partially by lower performance-based compensation.

Year-to-date results
Net income was $751 million, a decline of $167 million, or 18%, from the prior year reflecting higher noninterest expense and lower revenue.

Total net revenue was $4.0 billion, a decrease of $76 million, or 2%, from the prior year. Noninterest revenue was $3.3 billion, a decline of $210 million, or 6%, due to lower performance fees, reduced valuations for seed capital investments in JPMorgan Funds, and the effect of lower markets. The lower results were largely offset by increased revenue from net asset inflows, the benefit of the Merger, and higher placement fees. Net interest income was $672 million, up $134 million, or 25%, from the prior year, predominantly due to higher deposit and loan balances.

Private Bank revenue grew 18% to $1.4 billion due to increased deposit and loan balances, higher placement fees and higher assets under management, partially offset by lower performance fees. Institutional revenue declined 18% to $962 million due to lower performance fees, partially offset by growth in assets under management. Retail revenue declined 15% to $956 million due to lower market valuations for seed capital investments and net equity outflows. Private Client Services revenue grew 9% to $589 million due to higher deposit and loan balances and growth in assets under management. Bear Stearns Brokerage added $38 million to revenue.

The provision for credit losses was $33 million, compared with a benefit of $20 million in the prior year, reflecting an increase in loan balances and a lower level of recoveries.

Noninterest expense was $2.7 billion, up $133 million, or 5%, from the prior year. The increase was due predominantly to higher compensation, reflecting increased headcount, and the effect of the Merger.


Business metrics
(in millions, except headcount, ratios and ranking data,	Three months ended June 30,									Six months ended June 30,
and where otherwise noted)	2008			2007			Change			2008			2007			Change

Number of:
Client advisors		1,717			1,582			9	%		1,717			1,582			9	%
Retirement planning services participants		1,505,000			1,477,000			2			1,505,000			1,477,000			2
Bear Stearns brokers		326			—			NM			326			—			NM

% of customer assets in 4 & 5 Star Funds^(a)		40	%		65	%		(38	)		40	%		65	%		(38	)
% of AUM in 1st and 2nd quartiles:^(b)
1 year		51	%		65	%		(22	)		51	%		65	%		(22	)
3 years		70	%		77	%		(9	)		70	%		77	%		(9	)
5 years		76	%		76	%		—			76	%		76	%		—

Selected balance sheets data (average)
Total assets	$	65,015		$	51,710			26		$	62,651		$	48,779			28
Loans^(c)		39,264			28,695			37			37,946			27,176			40
Deposits		69,975			55,981			25			69,079			55,402			25
Equity		5,066			3,750			35			5,033			3,750			34

Headcount		15,840			14,108			12			15,840			14,108			12

Credit data and quality statistics
Net charge-offs (recoveries)	$	2		$	(5	)		NM		$	—		$	(5	)		NM
Nonperforming loans		68			21			224			68			21			224
Allowance for loan losses		147			105			40			147			105			40
Allowance for lending-related commitments		5			7			(29	)		5			7			(29	)

Net charge-off (recovery) rate		0.02	%		(0.07	)%					—	%		(0.04	)%
Allowance for loan losses to average loans		0.37			0.37						0.39			0.39
Allowance for loan losses to nonperforming loans		216			500						216			500
Nonperforming loans to average loans		0.17			0.07						0.18			0.08


(a)		Derived from following rating services: Morningstar for the United States; Micropal for the United Kingdom, Luxembourg, Hong Kong and Taiwan; and Nomura for Japan.
(b)		Derived from following rating services: Lipper for the United States and Taiwan; Micropal for the United Kingdom, Luxembourg and Hong Kong; and Nomura for Japan.
(c)		Reflects the transfer in 2007 of held-for-investment prime mortgage loans transferred from AM to Corporate within the Corporate/Private Equity segment.

Assets under supervision
Assets under supervision were $1.6 trillion, an increase of $139 billion, or 9%, from the prior year. Assets under management were $1.2 trillion, up $76 billion, or 7%, from the prior year. The increase was due largely to liquidity product inflows across all segments and the Merger, partially offset by lower equity markets and equity product outflows. Custody, brokerage, administration and deposit balances were $426 billion, up $63 billion, driven by the acquisition of Bear Stearns Brokerage.


ASSETS UNDER SUPERVISION^(a) (in billions)
As of June 30,	2008		2007

Assets by asset class
Liquidity	$	478	$	333
Fixed income		199		190
Equities & balanced		378		467
Alternatives		130		119

Total assets under management		1,185		1,109
Custody/brokerage/administration/deposits		426		363

Total assets under supervision	$	1,611	$	1,472


Assets by client segment
Institutional	$	645	$	565
Private Bank		196		185
Retail		276		300
Private Client Services		60		59
Bear Stearns Brokerage		8		—

Total assets under management	$	1,185	$	1,109

Institutional	$	646	$	566
Private Bank		442		402
Retail		357		393
Private Client Services		106		111
Bear Stearns Brokerage		60		—

Total assets under supervision	$	1,611	$	1,472


Assets by geographic region
U.S./Canada	$	771	$	700
International		414		409

Total assets under management	$	1,185	$	1,109

U.S./Canada	$	1,093	$	971
International		518		501

Total assets under supervision	$	1,611	$	1,472


Mutual fund assets by asset class
Liquidity	$	416	$	268
Fixed income		47		49
Equity		179		235

Total mutual fund assets	$	642	$	552


(a)		Excludes assets under management of American Century Companies, Inc., in which the Firm has 43% ownership.


Assets under management rollforward	Three months ended June 30,					Six months ended June 30,
	2008			2007		2008			2007

Beginning balance	$	1,187		$	1,053	$	1,193		$	1,013
Net asset flows:
Liquidity		1			12		69			19
Fixed income		(1	)		6		(1	)		8
Equities, balanced and alternative		(3	)		12		(24	)		22
Market/performance/other impacts^(a)		1			26		(52	)		47

Total assets under management	$	1,185		$	1,109	$	1,185		$	1,109


Assets under supervision rollforward
Beginning balance	$	1,569		$	1,395	$	1,572		$	1,347
Net asset flows		(5	)		38		47			65
Market/performance/other impacts^(a)		47			39		(8	)		60

Total assets under supervision	$	1,611		$	1,472	$	1,611		$	1,472


(a)		Second quarter 2008 reflects $15 billion for assets under management and $68 billion for assets under supervision from the Merger.

CORPORATE / PRIVATE EQUITY

For a discussion of the business profile of Corporate/Private Equity, see pages 59–60 of JPMorgan Chase’s 2007 Annual Report.


Selected income statement data	Three months ended June 30,									Six months ended June 30,
(in millions, except headcount)	2008			2007			Change			2008			2007			Change

Revenue
Principal transactions	$	(97	)	$	1,372			NM	%	$	(92	)	$	2,697			NM	%
Securities gains (losses)^(a)		656			(227	)		NM			698			(235	)		NM
All other income^(b)		(378	)		90			NM			1,261			158			NM

Noninterest revenue		181			1,235			(85	)		1,867			2,620			(29	)
Net interest income (expense)		48			(173	)		NM			(238	)		(290	)		18

Total net revenue		229			1,062			(78	)		1,629			2,330			(30	)

Provision for credit losses		290			3			NM			486			6			NM

Noninterest expense
Compensation expense		611			695			(12	)		1,250			1,471			(15	)
Noncompensation expense^(c)		699			818			(15	)		617			1,374			(55	)
Merger costs		155			64			142			155			126			23

Subtotal		1,465			1,577			(7	)		2,022			2,971			(32	)
Net expense allocated to other businesses		(1,070	)		(1,075	)		—			(2,127	)		(2,115	)		(1	)

Total noninterest expense		395			502			(21	)		(105	)		856			NM

Income (loss) before income tax expense		(456	)		557			NM			1,248			1,468			(15	)
Income tax expense (benefit)		(34	)		175			NM			643			455			41

Net income (loss)	$	(422	)	$	382			NM		$	605		$	1,013			(40	)

Total net revenue
Private equity	$	197		$	1,293			(85	)	$	360		$	2,546			(86	)
Corporate		32			(231	)		NM			1,269			(216	)		NM

Total net revenue	$	229		$	1,062			(78	)	$	1,629		$	2,330			(30	)


Net income (loss)
Private equity	$	99		$	702			(86	)	$	156		$	1,400			(89	)
Corporate		19			(280	)		NM			989			(309	)		NM
Merger-related items^(d)		(540	)		(40	)		NM			(540	)		(78	)		NM

Total net income (loss)	$	(422	)	$	382			NM		$	605		$	1,013			(40	)

Headcount		22,317			23,532			(5	)		22,317			23,532			(5	)


(a)		The second quarter of 2008 included a gain on the sale of MasterCard shares.
(b)		Included proceeds from the sale of Visa shares in its initial public offering in the first quarter of 2008.
(c)		Included a release of credit card litigation reserves in the first quarter of 2008.
(d)		The second quarter of 2008 reflects items related to the Merger, which include the Bear Stearns equity method investment losses, merger costs, Bear Stearns asset management liquidation costs and Bear Stearns private client services broker retention expense. Prior periods represent costs related to the Bank One and Bank of New York transactions.

Quarterly results
Net loss for Corporate/Private Equity was $422 million, compared with net income of $382 million in the prior year.

Net loss included the after-tax effects of Bear Stearns merger-related items amounting to a net loss of $540 million. These items included losses of $423 million, which represent JPMorgan Chase’s 49.4% ownership in Bear Stearns’ losses from April 8 to May 30, 2008, which were reflected in total net revenue. In addition, other merger-related items of $117 million ($188 million pretax) were reflected almost entirely in noninterest expense.

Net income for Private Equity was $99 million, compared with $702 million in the prior year. Total net revenue was $197 million, a decrease of $1.1 billion, reflecting Private Equity gains of $220 million, compared with gains of $1.3 billion in the prior year. Noninterest expense was $44 million, a decline of $154 million from the prior year, reflecting lower compensation expense.

Excluding the after-tax effect of Bear Stearns merger-related items of negative $540 million, net income for Corporate was $19 million, compared with a net loss of $320 million in the prior year. Total net revenue was $452 million, compared with a negative $231 million in the prior year, reflecting a higher level of securities gains, predominantly related to a gain of

$668 million from the sale of MasterCard shares, and a wider net interest spread. These benefits were offset partially by trading-related losses. The current-quarter provision for credit losses includes an increase in the allowance for loan losses of $170 million for prime mortgage (see Retail Financial Services’ discussion of provision for loan losses for further detail). Noninterest expense was $170 million, a decrease of $135 million, or 44%, from the prior year. The decrease reflected reduced litigation expense and the absence of prior-year merger expense related to the Bank One merger.

Year-to-date results
Net income for Corporate/Private Equity was $605 million, compared with $1.0 billion in the prior year.

Results included the after-tax proceeds from the sale of Visa shares in its initial public offering ($1.5 billion pretax and $955 million after-tax). In addition, the impact of Bear Stearns merger-related items resulted in a net loss of $540 million (see Corporate/Private Equity quarterly results discussion for further detail on Bear Stearns merger-related items).

Net income for Private Equity was $156 million, compared with $1.4 billion in the prior year. Total net revenue was $360 million, reflecting Private Equity gains of $409 million, compared with gains of $2.6 billion in the prior year. Noninterest expense was $119 million, a decline of $242 million from the prior year, representing lower compensation expense.

Excluding the after-tax effect of Visa sale proceeds and the impact of Bear Stearns merger-related items, net income for Corporate was $34 million, compared with a net loss of $387 million in the prior year. Total net revenue (excluding the effect of Visa sale proceeds and Bear Stearns merger-related items) was $149 million, compared with a negative $216 million in the prior year. This increase was driven by a pretax gain of $668 million from the sale of MasterCard shares offset largely by trading-related losses. Provision for credit losses was $476 million compared with $6 million in the prior year, predominantly reflecting an increase in the allowance for loan losses and higher net charge-offs for prime mortgages. Noninterest expense was negative $406 million, compared with expense of $495 million in the prior year, reflecting a reduction of credit card-related litigation expense and the absence of prior-year merger expense related to the Bank One merger.


Selected income statement and balance sheet data	Three months ended June 30,									Six months ended June 30,
(in millions)	2008			2007			Change			2008			2007			Change

Corporate
Securities gains (losses)^(a)	$	656		$	(227	)		NM	%	$	698		$	(235	)		NM	%
Investment securities portfolio (average)		97,223			87,760			11			88,833			87,102			2
Investment securities portfolio (ending)		103,751			86,821			19			103,751			86,821			19
Mortgage loans (average)^(b)		42,143			26,830			57			40,620			26,041			56
Mortgage loans (ending)^(b)		42,602			27,299			56			42,602			27,299			56

Private equity
Realized gains	$	540		$	985			(45	)	$	1,653		$	1,708			(3	)
Unrealized gains (losses)^(c)		(326	)		290			NM			(1,207	)		811			NM

Total direct investments		214			1,275			(83	)		446			2,519			(82	)
Third-party fund investments		6			53			(89	)		(37	)		87			NM

Total private equity gains^(d)	$	220		$	1,328			(83	)	$	409		$	2,606			(84	)


Private equity portfolio information^(e)
Direct investments	June 30, 2008		December 31, 2007		Change

Publicly held securities
Carrying value	$	615	$	390		58	%
Cost		665		288		131
Quoted public value		732		536		37

Privately held direct securities
Carrying value		6,270		5,914		6
Cost		6,113		4,867		26

Third-party fund investments^(f)
Carrying value		838		849		(1	)
Cost		1,094		1,076		2

Total private equity portfolio – Carrying value	$	7,723	$	7,153		8
Total private equity portfolio – Cost	$	7,872	$	6,231		26


(a)		The second quarter of 2008 included a gain on the sale of MasterCard shares. All periods reflect repositioning of the Corporate investment securities portfolio and exclude gains/losses on securities used to manage risk associated with MSRs.
(b)		Held-for-investment prime mortgage loans were transferred from RFS and AM to the Corporate/Private Equity segment for risk management and reporting purposes. The initial transfers had no material impact on the financial results of Corporate/Private Equity.
(c)		Unrealized gains (losses) contain reversals of unrealized gains and losses that were recognized in prior periods and have now been realized.
(d)		Included in principal transactions revenue in the Consolidated Statements of Income.
(e)		For more information on the Firm’s policies regarding the valuation of the private equity portfolio, see Note 3 on pages 83–89 of this Form 10-Q.
(f)		Unfunded commitments to third-party private equity funds were $861 million and $881 million at June 30, 2008, and December 31, 2007, respectively.

The carrying value of the private equity portfolio at June 30, 2008, was $7.7 billion, up from $7.2 billion at December 31, 2007. The portfolio represented 8.9% of the Firm’s stockholders’ equity less goodwill at June 30, 2008, down from 9.2% at December 31, 2007.

BALANCE SHEET ANALYSIS


Selected balance sheet data (in millions)	June 30, 2008			December 31, 2007

Assets
Cash and due from banks	$	32,255		$	40,144
Deposits with banks		17,150			11,466
Federal funds sold and securities purchased under resale agreements		176,287			170,897
Securities borrowed		142,854			84,184
Trading assets:
Debt and equity instruments		409,608			414,273
Derivative receivables		122,389			77,136
Securities		119,173			85,450
Loans		538,029			519,374
Allowance for loan losses		(13,246	)		(9,234	)

Loans, net of allowance for loan losses		524,783			510,140
Accrued interest and accounts receivable		64,294			24,823
Goodwill		45,993			45,270
Other intangible assets		17,276			14,731
Other assets		103,608			83,633

Total assets	$	1,775,670		$	1,562,147


Liabilities
Deposits	$	722,905		$	740,728
Federal funds purchased and securities loaned or sold under repurchase agreements		194,724			154,398
Commercial paper and other borrowed funds		72,745			78,431
Trading liabilities:
Debt and equity instruments		87,841			89,162
Derivative payables		95,749			68,705
Accounts payable, accrued expense and other liabilities		171,004			94,476
Beneficial interests issued by consolidated VIEs		20,071			14,016
Long-term debt and trust preferred capital debt securities		277,455			199,010

Total liabilities		1,642,494			1,438,926
Stockholders’ equity		133,176			123,221

Total liabilities and stockholders’ equity	$	1,775,670		$	1,562,147

Consolidated Balance Sheets overview
The following is a discussion of the significant changes in the Consolidated Balance Sheet items from December 31, 2007.

Deposits with banks; federal funds sold and securities purchased under resale agreements; securities borrowed; federal funds purchased and securities loaned or sold under repurchase agreements
The Firm utilizes deposits with banks, federal funds sold and securities purchased under resale agreements, securities borrowed, and federal funds purchased and securities loaned or sold under repurchase agreements as part of its liquidity management activities to manage the Firm’s cash positions and risk-based capital requirements and to support the Firm’s trading and risk management activities. In particular, the Firm uses securities purchased under resale agreements and securities borrowed to provide funding or liquidity to clients by purchasing and borrowing clients’ securities for the short-term. Federal funds purchased and securities loaned or sold under repurchase agreements are used as short-term funding sources for the Firm. The increase from December 31, 2007, in securities borrowed, deposits with banks, and securities purchased under resale agreements was related to the assets acquired as a result of the Merger and growth in demand from clients for liquidity. The increase in securities loaned or sold under repurchase agreements reflected higher short-term funding requirements to fulfill clients’ demand for liquidity and to finance the Firm’s AFS securities inventory, as well as the liabilities assumed in connection with the Merger. For additional information on the Firm’s Liquidity Risk Management, see pages 53–55 of this Form 10-Q.

Trading assets and liabilities – debt and equity instruments
The Firm uses debt and equity trading instruments for both market-making and proprietary risk-taking activities. These instruments consist predominantly of fixed income securities, including government and corporate debt; equity, including convertible securities; loans (including certain prime mortgage and other loans warehoused by RFS and IB for sale or securitization purposes and accounted for at fair value under SFAS 159); and physical commodities inventories. The decreases in trading assets and liabilities from December 31, 2007, were largely due to the more challenging capital markets environment, particularly for debt securities, partially offset by the positions acquired as a result of the Merger. For additional information, refer to Note 4 and Note 5 on pages 90–92 and 92–94, respectively, of this Form 10-Q.

Trading assets and liabilities – derivative receivables and payables
The Firm utilizes various interest rate, foreign exchange, equity, credit and commodity derivatives for market-making, proprietary risk-taking and risk-management purposes. The increase in derivative receivables and payables was largely driven by receivables and payables positions acquired due to the Merger, the increase in commodity derivative receivables due to sharply higher energy prices and the effect of the weakening U.S. dollar on interest rate and foreign exchange derivative receivables. For additional information, refer to derivative contracts and Note 5 on pages 60–62 and 92–94, respectively, of this Form 10-Q.

Securities
Almost all of the Firm’s securities portfolio is classified as AFS and is used predominantly to manage the Firm’s exposure to interest rate movements. The AFS portfolio increased from December 31, 2007, predominantly as a result of net purchases, partially offset by maturities and paydowns of mortgage-related securities. For additional information related to securities, refer to the Corporate/Private Equity segment discussion and to Note 11 on pages 43–45 and 97–98, respectively, of this Form 10-Q.

Loans and allowance for loan losses
The Firm provides loans to a variety of customers, from large corporate and institutional clients to individual consumers. Loans increased from December 31, 2007, largely due to business growth in lending across all the wholesale businesses, as well as growth in the consumer prime mortgage portfolio driven by the decision to retain, rather than sell, new originations of nonconforming mortgage loans. These increases were partly offset by the seasonal decline in credit card receivables. Both the consumer and wholesale components of the allowance for loan losses increased from December 31, 2007. The rise in the consumer allowance was driven by an increase in estimated losses for home equity, prime and subprime mortgage and credit card loans due to the effects of continued weak housing prices and slowing economic growth. The increase in the wholesale allowance was due to the effects of a weakening credit environment and the impact of the transfer of leveraged lending loans in the IB to retained loans from held-for-sale loans, as well as to loan growth. For a more detailed discussion of the loan portfolio and the allowance for loan losses, refer to Credit Risk Management on pages 55–68 of this Form 10-Q.

Accrued interest and accounts receivable; accounts payable, accrued expense and other liabilities
The Firm’s accrued interest and accounts receivable consist of accrued interest receivable from interest-earning assets; receivables from customers (margin loans), brokers, dealers and clearing organizations, including trade date/settlement date receivables; and sales fails receivables. The Firm’s accounts payables, accrued expense, and other liabilities consist of accounts payable to customers, brokers, dealers and clearing organizations, including trade date/settlement date payables

and sales fails payables; accrued expense, including for interest-bearing liabilities; and all other liabilities, including obligations to return securities received as collateral. The increase in accrued interest and accounts receivable from December 31, 2007, was due largely to the Merger, reflecting higher customer receivables in IB’s prime brokerage business. The increase in accounts payable, accrued expense and other liabilities was also due to the Merger, reflecting higher customer payables in IB’s prime brokerage business, as well as higher obligations to return securities received as collateral. For additional information, see Note 15 on page 102 of this Form 10-Q.

Goodwill
Goodwill arises from business combinations and represents the excess of the cost of an acquired entity over the net fair value amounts assigned to assets acquired and liabilities assumed. The increase in goodwill was due to the purchase of an additional equity interest in Highbridge, tax-related purchase accounting adjustments associated with the Bank One merger and the merger with Bear Stearns. For additional information, see Note 18 on pages 114–116 of this Form 10-Q.

Other intangible assets
The Firm’s other intangible assets consist of MSRs, purchased credit card relationships, other credit card-related intangibles, core deposit intangibles, and all other intangibles. MSRs increased largely due to sales of originated loans and purchases of MSRs, a net increase in the fair value of MSRs (driven primarily by higher mortgage borrowing rates) and MSRs acquired as a result of the Merger, partially offset by servicing portfolio runoff. The decrease in other intangible assets reflects amortization expense associated with credit card-related and core deposit intangibles, partially offset by an increase as a result of the purchase of an additional equity interest in Highbridge. For additional information on MSRs and other intangible assets, see Note 18 on pages 114–116 of this Form 10-Q.

Other assets
The Firm’s other assets consist of private equity and other investments, collateral received, corporate and bank-owned life insurance policies, premises and equipment, and all other assets. The increase in other assets from December 31, 2007, was driven predominantly by the Merger, reflecting higher volume of collateral received.

Deposits
The Firm’s deposits represent a liability to customers, both retail and wholesale, for funds held on their behalf. Deposits are generally classified by location (U.S. and non-U.S.), whether they are interest or noninterest-bearing, and by type (i.e., demand, money market deposit accounts, savings, time or negotiable order of withdrawal accounts). Deposits help provide a stable and consistent source of funding for the Firm. Deposits were lower, compared with December 31, 2007, predominantly from a decrease in interest-bearing U.S. deposits in Corporate, which reflected a declining interest rate environment, reduced wholesale funding activity and maturities; partly offset by a net increase in non-U.S. interest-bearing deposits in TSS, driven by growth in business volumes. For more information on deposits, refer to the TSS and RFS segment discussions and the Liquidity Risk Management discussion on pages 36–38, 23–29 and 53–55 of this Form 10-Q. For more information on wholesale liability balances, including deposits, refer to the CB and TSS segment discussions on pages 34–36 and 36–38 of this Form 10-Q.

Commercial paper and other borrowed funds
The Firm utilizes commercial paper and other borrowed funds as part of its liquidity management activities to meet short-term funding needs, and in connection with TSS’ cash management product whereby excess client funds, predominantly in TSS, CB and RFS, are transferred into commercial paper overnight sweep accounts. The decrease in commercial paper and other borrowed funds was largely due to lower short-term requirements to fund trading positions, partly offset by growth in the volume of liability balances in sweep accounts. For additional information on the Firm’s Liquidity Risk Management, see pages 53–55 of this Form 10-Q.

Beneficial interests issued by consolidated variable interest entities (“VIEs”)
Beneficial interests issued by consolidated VIEs increased from December 31, 2007, largely as a result of VIEs acquired in the Merger.

Long-term debt and trust preferred capital debt securities
The Firm utilizes long-term debt and trust preferred capital debt securities to provide stable, reliable and cost-effective sources of funding as part of its longer-term liquidity and capital management activities. Long-term debt and trust preferred capital debt securities increased from December 31, 2007, predominantly due to the debt assumed in connection with the Merger and net new issuances. For additional information on the Firm’s long-term debt activities, see the Liquidity Risk Management discussion on pages 53–55 of this Form 10-Q.

Stockholders’ equity
The increase in total stockholders’ equity from year-end 2007 was predominantly the result of net income for the first six months of 2008; the issuance of noncumulative perpetual preferred stock in the second quarter of 2008; and net issuances of common stock in connection with the Merger and under the Firm’s employee stock-based compensation plans. These

additions were partially offset by the declaration of cash dividends. For a further discussion of capital, see the Capital Management section that follows.

CAPITAL MANAGEMENT

The following discussion of JPMorgan Chase’s capital management highlights developments since December 31, 2007, and should be read in conjunction with Capital Management on pages 63–65 of JPMorgan Chase’s 2007 Annual Report.

The Firm’s capital management framework is intended to ensure that there is capital sufficient to support the underlying risks of the Firm’s business activities and to maintain “well-capitalized” status under regulatory requirements. In addition, the Firm holds capital above these requirements in amounts deemed appropriate to achieve management’s regulatory and debt rating objectives. The process of assigning equity to the lines of business is integrated into the Firm’s capital framework and is overseen by the Asset-Liability Committee (“ALCO”).

Line of business equity
Equity for a line of business represents the amount the Firm believes the business would require if it were operating independently, incorporating sufficient capital to address economic risk measures, regulatory capital requirements and capital levels for similarly rated peers. Return on equity is measured and internal targets for expected returns are established as a key measure of a business segment’s performance. Line of business equity increased during the second quarter of 2008 in IB and AM due to the Bear Stearns merger. Relative to the second quarter of 2007, line of business equity increased due to the Bear Stearns merger, business growth across the businesses and, for AM, the purchase of the additional equity interest in Highbridge. The Firm may revise its equity capital-allocation methodology in the future.

In accordance with SFAS 142, the lines of business perform the required goodwill impairment testing. For a further discussion of goodwill and impairment testing, see Critical Accounting Estimates Used by the Firm and Note 18 on pages 98 and 154, respectively, of JPMorgan Chase’s 2007 Annual Report, and Note 18 on page 114 of this Form 10-Q.


Line of business equity	Quarterly Averages
(in billions)	2Q08		1Q08		2Q07

Investment Bank^(a)	$	23.3	$	22.0	$	21.0
Retail Financial Services		17.0		17.0		16.0
Card Services		14.1		14.1		14.1
Commercial Banking		7.0		7.0		6.3
Treasury & Securities Services		3.5		3.5		3.0
Asset Management^(a)		5.1		5.0		3.8
Corporate/Private Equity		56.4		56.0		53.9

Total common stockholders’ equity	$	126.4	$	124.6	$	118.1

(a)

Amounts provided are quarterly averages. Equity allocated to the IB and AM as of June 30, 2008 was $26.0 billion and $5.2 billion, respectively.

Economic risk capital
JPMorgan Chase assesses its capital adequacy relative to the risks underlying the Firm’s business activities, utilizing internal risk-assessment methodologies. The Firm assigns economic capital primarily based upon four risk factors: credit risk, market risk, operational risk and private equity risk, principally for the Firm’s private equity business.


Economic risk capital	Quarterly Averages
(in billions)	2Q08		1Q08		2Q07

Credit risk^(a)	$	34.8	$	32.9	$	28.8
Market risk		8.5		8.7		9.9
Operational risk		5.8		5.6		5.6
Private equity risk		5.0		4.3		3.8

Economic risk capital		54.1		51.5		48.1
Goodwill		45.8		45.7		45.2
Other^(b)		26.5		27.4		24.8

Total common stockholders’ equity	$	126.4	$	124.6	$	118.1

(a)		Incorporates a change to the wholesale credit risk methodology, which was modified to include a through-the-cycle adjustment. The second quarter of 2007 has been revised to reflect this methodology change. For further discussion of this change, see Credit risk capital on page 63 of JPMorgan Chase’s 2007 Annual Report.
(b)		Reflects additional capital required, in management’s view, to meet its regulatory and debt rating objectives.

Regulatory capital
The Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) establishes capital requirements, including well-capitalized standards for the bank holding company. The Office of the Comptroller of the Currency (“OCC”) establishes similar capital requirements and standards for the Firm’s national banks, including JPMorgan Chase Bank, N.A., and Chase Bank USA, N.A.

The Federal Reserve Board granted the Firm, for a period of 18 months following the merger with Bear Stearns, relief up to a certain specified amount and subject to certain conditions from the Federal Reserve Board’s risk-based capital and leverage requirements with respect to Bear Stearns’ risk-weighted assets and other exposures acquired. The amount of such relief is subject to reduction by one-sixth each quarter subsequent to the merger and expires on October 1, 2009. The OCC granted JPMorgan Chase Bank, N.A. similar relief from its risk-based capital and leverage requirements.

The following table presents the risk-based capital ratios for JPMorgan Chase and its significant banking subsidiaries at June 30, 2008, and December 31, 2007. The table indicates that the Firm and its significant banking subsidiaries were well-capitalized.


							Adjusted		Tier 1			Total			Tier 1
	Tier 1				Risk-weighted		average		capital			capital			leverage
(in millions, except ratios)	capital		Total capital		assets^(c)		assets^(d)		ratio			ratio			ratio

June 30, 2008^(a)
JPMorgan Chase & Co.	$	98,775	$	145,012	$	1,079,199	$	1,536,439		9.2	%		13.4	%		6.4	%
JPMorgan Chase Bank, N.A.		80,996		118,411		988,113		1,332,324		8.2			12.0			6.1
Chase Bank USA, N.A.		10,358		11,649		68,104		61,279		15.2			17.1			16.9

December 31, 2007^(a)
JPMorgan Chase & Co.	$	88,746	$	132,242	$	1,051,879	$	1,473,541		8.4	%		12.6	%		6.0	%
JPMorgan Chase Bank, N.A.		78,453		112,253		950,001		1,268,304		8.3			11.8			6.2
Chase Bank USA, N.A.		9,407		10,720		73,169		60,905		12.9			14.7			15.5

Well-capitalized ratios^(b)										6.0	%		10.0	%		5.0	%^(e)
Minimum capital ratios^(b)										4.0			8.0			3.0	^(f)

(a)		Asset and capital amounts for JPMorgan Chase’s banking subsidiaries reflect intercompany transactions, whereas the respective amounts for JPMorgan Chase reflect the elimination of intercompany transactions.
(b)		As defined by the regulations issued by the Federal Reserve Board, OCC and Federal Deposit Insurance Corporation (“FDIC”).
(c)		Includes off-balance sheet risk-weighted assets of $414.1 billion, $356.6 billion and $12.5 billion, respectively, at June 30, 2008, and of $352.7 billion, $336.8 billion and $13.4 billion, respectively, at December 31, 2007, for JPMorgan Chase and its significant banking subsidiaries.
(d)		Average adjusted assets, for purposes of calculating the leverage ratio, include total average assets adjusted for unrealized gains/losses on securities, less deductions for disallowed goodwill and other intangible assets, investments in certain subsidiaries and the total adjusted carrying value of nonfinancial equity investments that are subject to deductions from Tier 1 capital.
(e)		Represents requirements for banking subsidiaries pursuant to regulations issued under the Federal Deposit Insurance Corporation Improvement Act. There is no Tier 1 leverage component in the definition of a well-capitalized bank holding company.
(f)		The minimum Tier 1 leverage ratio for bank holding companies and banks is 3% or 4% depending on factors specified in regulations issued by the Federal Reserve Board and OCC.
Note:		Rating agencies allow measures of capital to be adjusted upward for deferred tax liabilities which have resulted from both nontaxable business combinations and from tax deductible goodwill. The Firm had deferred tax liabilities resulting from nontaxable business combinations totaling $1.9 billion at June 30, 2008, and $2.0 billion at December 31, 2007. Additionally, the Firm had deferred tax liabilities resulting from tax deductible goodwill of $1.2 billion at June 30, 2008, and $939 million at December 31, 2007. The rates presented do not include adjustments for such amounts.

The Firm’s Tier 1 capital was $98.8 billion at June 30, 2008, compared with $88.7 billion at December 31, 2007, an increase of $10.0 billion. The increase was due primarily to net income of $4.4 billion, the issuance of noncumulative perpetual preferred stock of $6.0 billion, net issuances of common stock under the Firm’s employee stock-based compensation plans of $1.8 billion, net issuances of common stock in connection with the Bear Stearns merger of $1.2 billion and net issuances of qualifying trust preferred capital debt securities of $1.4 billion. These increases were partially offset by decreases in stockholders’ equity net of accumulated other comprehensive income (loss) primarily due to dividends declared of $2.8 billion, a $604 million increase in the deduction for goodwill and other nonqualifying intangibles, and a $1.1 billion (after-tax) increase in the valuation adjustment to certain liabilities to reflect the credit quality of the Firm. Additional information regarding the Firm’s capital ratios and the federal regulatory capital standards to which it is subject is presented in Note 28 on pages 166–167 of JPMorgan Chase’s 2007 Annual Report.

Basel II
The minimum risk-based capital requirements adopted by the federal banking agencies follow the Capital Accord of the Basel Committee on Banking Supervision. In 2004, the Basel Committee published a revision to the Accord (“Basel II”), and in December 2007, U.S. banking regulators published a final Basel II rule. The final U.S. rule will require JPMorgan Chase to implement Basel II at the holding company level, as well as at certain key U.S. bank subsidiaries. The U.S. implementation timetable consists of a qualification period, starting any time between April 1, 2008, and April 1, 2010, followed by a minimum transition period of three years. During the transition period, Basel II risk-based capital requirements cannot fall below certain floors based on current (“Basel I”) regulations. JPMorgan Chase expects to be in compliance with all relevant Basel II rules within the established timelines. In addition, the Firm has adopted, and will continue to adopt, based on various established timelines, Basel II rules in certain non-U.S. jurisdictions, as required. For additional information, see Basel II, on page 65 of JPMorgan Chase’s 2007 Annual Report.

Broker-dealer regulatory capital
JPMorgan Chase’s principal U.S. broker-dealer subsidiaries are J.P. Morgan Securities Inc. (“JPMorgan Securities”), Bear, Stearns & Co. Inc. (“Bear Stearns & Co.”) and Bear, Stearns Securities Corp. (“Bear Stearns Securities”). JPMorgan Securities, Bear Stearns & Co. and Bear Stearns Securities are each subject to Rule 15c3-1 under the Securities Exchange Act of 1934 (“Net Capital Rule”). Bear Stearns & Co. and Bear Stearns Securities are also registered as futures commissions merchants and subject to Rule 1.17 under the Commodity Futures Trading Commission (“CFTC”). JPMorgan Securities and Bear Stearns & Co. have been approved by the Securities and Exchange Commission (“SEC”) to use Appendix E of the Net Capital Rule (“Appendix E”), which establishes alternative net capital requirements for broker-dealers that are subject to consolidated supervision and examination at the holding company level. Appendix E allows JPMorgan Securities and Bear Stearns & Co. to calculate net capital charges for market risk and derivatives-related credit risk based on mathematical models, provided that JPMorgan Securities and Bear Stearns & Co. hold tentative net capital in excess of $1 billion and net capital in excess of $500 million. At June 30, 2008, JPMorgan Securities’ net capital of $8.3 billion exceeded the minimum requirement by $7.8 billion. Bear Stearns & Co.’s net capital at June 30, 2008, of $5.7 billion exceeded the minimum requirement by $5.1 billion. The Firm plans to merge JPMorgan Securities and Bear Stearns & Co. on or about October 1, 2008.

Bear Stearns Securities, a guaranteed subsidiary of Bear Stearns & Co., provides clearing and settlement services. Bear Stearns Securities is required to maintain minimum net capital, as defined, of not less than the greater of (i) 2% of aggregate debit items arising from customer transactions, as defined in the Net Capital Rule, or (ii) 8% of customer risk maintenance margin requirements plus 4% of non-customer risk maintenance margin requirements, all as defined in the capital rules of the CFTC. At June 30, 2008, Bear Stearns Securities’ net capital of $4.7 billion exceeded the minimum requirement by $3.6 billion.

Dividends
The Firm’s common stock dividend policy reflects JPMorgan Chase’s earnings outlook, desired dividend payout ratios, need to maintain an adequate capital level and alternative investment opportunities. The Firm continues to target a dividend payout ratio of approximately 30-40% of net income over time. On May 20, 2008, the Firm declared a quarterly common stock dividend of $0.38 per share, payable on July 31, 2008, to shareholders of record at the close of business on July 3, 2008.

Issuance
On April 23, 2008, the Firm issued $6.0 billion of noncumulative perpetual preferred stock. The proceeds were used for general corporate purposes. For additional information regarding preferred stock, see Note 21 on page 119 of this Form 10-Q.

Stock repurchases
For a discussion of the Firm’s current stock repurchase program, see Stock repurchases on page 65 of JPMorgan Chase’s 2007 Annual Report. During the six months ended June 30, 2008, the Firm did not repurchase any shares. During the three and six months ended June 30, 2007, under the respective stock repurchase programs then in effect, the Firm repurchased a total of 37 million and 118 million shares for $1.9 billion and $5.9 billion, respectively, at an average price per share of $51.13 and $49.97, respectively. As of June 30, 2008, $6.2 billion of authorized repurchase capacity remained under the current $10.0 billion stock repurchase program.

The current $10.0 billion authorization to repurchase stock will be utilized at management’s discretion, and the timing of purchases and the exact number of shares purchased will depend on market conditions and alternative investment opportunities. The repurchase program does not include specific price targets or timetables; may be executed through open market purchases, privately negotiated transactions or utilizing Rule 10b5-1 programs; and may be suspended at any time. For additional information regarding repurchases of the Firm’s equity securities, see Part II, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds, on page 140 of this Form 10-Q.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS

JPMorgan Chase has several types of off-balance sheet arrangements, including arrangements with special purpose entities (“SPEs”) and issuance of lending-related financial instruments (e.g., commitments and guarantees). For further discussion of contractual cash obligations, see Off-Balance Sheet Arrangements and Contractual Cash Obligations on page 67 of JPMorgan Chase’s 2007 Annual Report.

Special-purpose entities
The basic SPE structure involves a company selling assets to the SPE. The SPE funds the purchase of those assets by issuing securities to investors in the form of commercial paper, short-term asset-backed notes, medium-term notes and other forms of interest. SPEs are generally structured to insulate investors from claims on the SPE’s assets by creditors of other entities, including the creditors of the seller of the assets.

JPMorgan Chase uses SPEs as a source of liquidity for itself and its clients by securitizing financial assets, and by creating investment products for clients. The Firm is involved with SPEs through multi-seller conduits and investor intermediation activities, and as a result of its loan securitizations through qualifying special purpose entities (“QSPEs”). For a detailed discussion of all SPEs with which the Firm is involved, and the related accounting, see Note 1 on page 108, Note 16 on pages 139–145 and Note 17 on pages 146–154 of JPMorgan Chase’s 2007 Annual Report.

The Firm holds capital, as deemed appropriate, against all SPE-related transactions and related exposures, such as derivative transactions and lending-related commitments and guarantees.

Implications of a credit rating downgrade to JPMorgan Chase Bank, N.A.
For certain liquidity commitments to SPEs, the Firm could be required to provide funding if the short-term credit rating of JPMorgan Chase Bank, N.A., was downgraded below specific levels, primarily “P-1”, “A-1” and “F1” for Moody’s, Standard & Poor’s and Fitch, respectively. The amount of these liquidity commitments was $74.3 billion and $94.0 billion at June 30, 2008, and December 31, 2007, respectively. Alternatively, if JPMorgan Chase Bank, N.A., were downgraded, the Firm could be replaced by another liquidity provider in lieu of providing funding under the liquidity commitments, or in certain circumstances, the Firm could facilitate the sale or refinancing of the assets in the SPE in order to provide liquidity. These commitments are included in other unfunded commitments to extend credit and asset purchase agreements, as shown in the Off-balance sheet lending-related financial instruments and guarantees table on page 52 of this Form 10-Q.

Special-purpose entities revenue
The following table summarizes certain revenue information related to consolidated and nonconsolidated VIEs and QSPEs with which the Firm has significant involvement. The revenue reported in the table below predominantly represents contractual servicing and credit fee income (i.e., income from acting as administrator, structurer, or liquidity provider). It does not include mark-to-market gains and losses from changes in the fair value of trading positions (such as derivative transactions) entered into with VIEs. Those gains and losses are recorded in principal transactions revenue.


Revenue from VIEs and QSPEs	Three months ended June 30,				Six months ended June 30,
(in millions)	2008		2007		2008		2007

VIEs:^(a)
Multi-seller conduits	$	67	$	46	$	124	$	84
Investor intermediation		8		9		5		18

Total VIEs		75		55		129		102
QSPEs		1,083		841		1,981		1,687

Total	$	1,158	$	896	$	2,110	$	1,789

(a)

Includes revenue associated with consolidated VIEs and significant nonconsolidated VIEs.

American Securitization Forum subprime adjustable rate mortgage loans modifications
In December 2007, the American Securitization Forum (“ASF”) issued the “Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans” (the “Framework”). The Framework provides guidance for servicers to streamline evaluation procedures of borrowers with certain subprime adjustable rate mortgage (“ARM”) loans in order to more quickly and efficiently provide modification of such loans with terms that are more appropriate for the individual needs of such borrowers. The Framework applies to all first-lien subprime ARM loans that have a fixed rate of interest for an initial period of 36 months or less; are included in securitized pools; were originated between January 1, 2005, and July 31, 2007; and have an initial interest rate reset date between January 1, 2008, and July 31, 2010. JPMorgan Chase has adopted the Framework, and during the three and six months ended June 30, 2008, had modified $649 million and $836 million, respectively, of Segment 2 subprime mortgage loans. In addition,

during the three and six months ended June 30, 2008, $483 million and $524 million, respectively, of Segment 3 loans were modified, $302 million and $377 million, respectively, were subjected to other loss mitigation activities, and $43 million and $76 million, respectively, were prepaid by borrowers. For additional discussion of the Framework, see Note 16 on pages 108–109 of this Form 10-Q and Note 16 on page 145 of JPMorgan Chase’s 2007 Annual Report.

Off-balance sheet lending-related financial instruments and guarantees
JPMorgan Chase utilizes lending-related financial instruments (e.g., commitments and guarantees) to meet the financing needs of its customers. The contractual amount of these financial instruments represents the maximum possible credit risk should the counterparty draw down the commitment or the Firm be required to fulfill its obligation under the guarantee, and the counterparty subsequently fail to perform according to the terms of the contract. These commitments and guarantees predominantly expire without being drawn and even higher proportions expire without a default. As a result, the total contractual amount of these instruments is not, in the Firm’s view, representative of its actual future credit exposure or funding requirements. Further, certain commitments, primarily related to consumer financings, are cancelable, upon notice, at the Firm’s option. For further discussion of lending-related commitments and guarantees and the Firm’s accounting for them, see Credit Risk Management on pages 73–89 and Note 31 on pages 170–173 of JPMorgan Chase’s 2007 Annual Report.

The following table presents off-balance sheet lending-related financial instruments and guarantees for the periods indicated.

June 30, 2008

Dec. 31,
2007

By remaining maturity

1-<3

3-5

(in millions)

< 1 year

years

> 5 years

Total

Lending-related

Consumer^(a)

759,011

1,866

2,880

63,672

827,429

815,936

Wholesale:

Unfunded commitments to extend credit^(b)(c)(d)(e)

90,166

76,623

70,896

17,668

255,353

250,954

Asset purchase agreements^(f)

23,518

38,282

5,254

1,252

68,306

90,105

Standby letters of credit and guarantees^(c)(g)(h)

29,839

28,340

35,518

6,519

100,216

100,222

Other letters of credit^(c)

5,192

738

177

6,153

5,371

Total wholesale

148,715

143,983

111,845

25,485

430,028

446,652

Total lending-related

907,726

145,849

114,725

89,157

1,257,457

1,262,588

Other guarantees

Securities lending guarantees⁽ⁱ⁾

362,246

—

362,246

385,758

Derivatives qualifying as guarantees^(j)

25,456

12,654

26,555

39,118

103,783

85,262

(a)		Included credit card and home equity lending-related commitments of $736.4 billion and $66.7 billion, respectively, at June 30, 2008, and $714.8 billion and $74.2 billion, respectively, at December 31, 2007. These amounts for credit card and home equity lending-related commitments represent the total available credit for these products. The Firm has not experienced, and does not anticipate, that all available lines of credit for these products will be utilized at the same time. For credit card commitments and if certain conditions are met for home equity commitments, the Firm can reduce or cancel these lines of credit by providing the borrower prior notice or, in some cases, without notice as permitted by law.
(b)		Included unused advised lines of credit totaling $34.0 billion at June 30, 2008, and $38.4 billion at December 31, 2007, which are not legally binding. In regulatory filings with the Federal Reserve Board, unused advised lines are not reportable. See the Glossary of Terms on page 130 of this Form 10-Q for the Firm’s definition of advised lines of credit.
(c)		Represents contractual amount net of risk participations totaling $29.7 billion and $28.3 billion at June 30, 2008, and December 31, 2007, respectively.
(d)		Excluded unfunded commitments to third-party private equity funds of $861 million and $881 million at June 30, 2008, and December 31, 2007, respectively. Also excludes unfunded commitments for other equity investments of $940 million and $903 million at June 30, 2008, and December 31, 2007, respectively.
(e)		Included in other unfunded commitments to extend credit are commitments to investment and noninvestment grade counterparties in connection with leveraged acquisitions of $7.2 billion and $8.2 billion at June 30, 2008, and December 31, 2007, respectively.
(f)		Largely represents asset purchase agreements to the Firm’s administered multi-seller, asset-backed commercial paper conduits. The maturity is based upon the weighted-average expected life of the underlying assets in the SPE, which are based upon the remainder of each conduit transaction’s committed liquidity plus either the expected weighted average life of the assets should the committed liquidity expire without renewal, or the expected time to sell the underlying assets in the securitization market. It also includes $248 million and $1.1 billion of asset purchase agreements to other third-party entities at June 30, 2008, and December 31, 2007, respectively.
(g)		JPMorgan Chase held collateral relating to $19.1 billion and $15.8 billion of these arrangements at June 30, 2008, and December 31, 2007, respectively.
(h)		Included unused commitments to issue standby letters of credit of $46.3 billion and $50.7 billion at June 30, 2008, and December 31, 2007, respectively.
(i)		Collateral held by the Firm in support of securities lending indemnification agreements was $369.5 billion at June 30, 2008, and $390.5 billion at December 31, 2007, respectively.
(j)		Represents notional amounts of derivatives qualifying as guarantees. For further discussion of guarantees, see Note 31 on pages 170–173 of JPMorgan Chase’s 2007 Annual Report.

RISK MANAGEMENT

Risk is an inherent part of JPMorgan Chase’s business activities. The Firm’s risk management framework and governance structure are intended to provide comprehensive controls and ongoing management of the major risks inherent in its business activities. In addition, this framework recognizes the diversity among the Firm’s core businesses, which helps reduce the impact of volatility in any particular area on the Firm’s operating results as a whole. There are eight major risk types identified in the business activities of the Firm: liquidity risk, credit risk, market risk, interest rate risk, operational risk, legal and reputation risk, fiduciary risk and private equity risk.

For further discussion of these risks, see pages 69–95 of JPMorgan Chase’s 2007 Annual Report and the information below.

LIQUIDITY RISK MANAGEMENT

The following discussion of JPMorgan Chase’s liquidity management framework highlights developments since December 31, 2007, and should be read in conjunction with pages 70–73 of JPMorgan Chase’s 2007 Annual Report.

Liquidity risk arises from the general funding needs of the Firm’s activities and in the management of its assets and liabilities. JPMorgan Chase’s liquidity management framework is intended to maximize liquidity access and minimize funding costs. Through active liquidity management, the Firm seeks to preserve stable, reliable and cost-effective sources of funding to meet actual and contingent liquidity needs over time. This access enables the Firm to replace maturing obligations when due and fund assets at appropriate maturities and rates. To accomplish this, management uses a variety of methods to mitigate liquidity and related risks which take into consideration market conditions, prevailing interest rates, liquidity needs and the desired maturity profile of liabilities, among other factors.

Funding

Sources of funds
As of June 30, 2008, the Firm’s liquidity position remained strong based upon its liquidity metrics. JPMorgan Chase’s long-dated funding, including core liabilities exceeded illiquid assets and the Firm believes its obligations can be met even if access to funding is impaired.

Consistent with its liquidity management policy, the Firm has raised funds at the parent holding company level sufficient to cover its obligations and those of its nonbank subsidiaries that mature over the next 12 months.

The diversity of the Firm’s funding sources enhances financial flexibility and limits dependence on any one source, thereby minimizing the cost of funds. The deposits held by the RFS, CB, TSS and AM lines of business are generally a consistent source of funding for JPMorgan Chase Bank, N.A. As of June 30, 2008, total deposits for the Firm were $722.9 billion. A significant portion of the Firm’s deposits are retail deposits, which are less sensitive to interest rate changes and therefore are considered more stable than market-based (i.e., wholesale) liability balances. The Firm also benefits from substantial liability balances originated by RFS, CB, TSS and AM through the normal course of business. Liability balances include deposits and deposits that are swept to on-balance sheet liabilities (e.g., commercial paper, federal funds purchased and securities loaned or sold under repurchase agreements). These franchise-generated liability balances are also a stable and consistent source of funding due to the nature of the businesses from which they are generated. For further discussions of deposit and liability balance trends, see the discussion of the results for the Firm’s business segments and the Balance Sheet Analysis on pages 19–42 and 45–48, respectively, of this Form 10-Q.

Additional sources of funds include a variety of both short- and long-term instruments, including federal funds purchased, commercial paper, bank notes, long-term debt, trust preferred capital debt securities and preferred stock. This funding is managed centrally, using regional expertise and local market access, to ensure active participation by the Firm in the global financial markets while maintaining consistent global pricing. These markets serve as cost-effective and diversified sources of funds and are critical components of the Firm’s liquidity management. Decisions concerning the timing and tenor of accessing these markets are based upon relative costs, general market conditions, prospective views of balance sheet growth and a targeted liquidity profile.

Finally, funding flexibility is provided by the Firm’s ability to access the repurchase and asset securitization markets. These markets are evaluated on an ongoing basis to achieve an appropriate balance of secured and unsecured funding. The ability to securitize loans, and the associated gains on those securitizations, are principally dependent upon the credit quality and yields of the assets securitized and are generally not dependent upon the credit ratings of the issuing entity. Transactions between the Firm and its securitization structures are reflected in JPMorgan Chase’s consolidated financial statements and notes to the consolidated financial statements; these relationships include retained interests in securitization trusts, liquidity facilities and derivative transactions. For further details, see Off-Balance Sheet Arrangements and Contractual Cash Obligations and Notes 16 and 27 on pages 51–52, 103–109 and 122–124, respectively, of this Form 10-Q.

Issuance
During the second quarter and first half of 2008, JPMorgan Chase issued approximately $18.7 billion and $38.2 billion, respectively, of long-term debt and trust preferred capital debt securities; in the second quarter of 2008, the Firm also issued $6.0 billion of noncumulative perpetual preferred stock. The debt issuances included $7.9 billion and $16.9 billion, respectively, of IB structured notes, the issuances of which are generally client-driven and not for funding or capital management purposes as the proceeds from such transactions are generally used to purchase securities to mitigate the risk associated with structured note exposure. The issuances of long-term debt and trust preferred capital debt securities were offset partially by $12.5 billion and $30.0 billion of such securities that matured or were redeemed during the second quarter and first half of 2008, respectively, including $7.4 billion and $18.8 billion, respectively, of IB structured notes. In addition, during the second quarter and first half of 2008, the Firm securitized $10.8 billion and $15.3 billion, respectively, of credit card loans. The Firm did not securitize any other consumer loans during the first half of 2008. For further discussion of loan securitizations, see Note 16 on pages 103–109 of this Form 10-Q.

In connection with the issuance of certain of its trust preferred capital debt securities and its noncumulative perpetual preferred stock, the Firm has entered into Replacement Capital Covenants (“RCCs”) granting certain rights to the holder of “covered debt,” as defined in the RCCs, that prohibit the repayment, redemption or purchase of such trust preferred capital debt securities and noncumulative perpetual preferred stock except, with limited exceptions, to the extent that JPMorgan Chase has received, in each such case, specified amounts of proceeds from the sale of certain qualifying securities. Currently the Firm’s covered debt is its 5.875% Junior Subordinated Deferrable Interest Debentures, Series O, due in 2035. For more information regarding these covenants, reference is made to the respective RCCs entered into by the Firm in connection with the issuances of such trust preferred capital debt securities and noncumulative perpetual preferred stock, which are filed with the U.S. Securities and Exchange Commission under cover of Forms 8-K.

Cash Flows
Cash and due from banks was $32.3 billion and $35.4 billion at June 30, 2008 and 2007, respectively. These balances declined $7.9 billion and $5.0 billion from December 31, 2007 and 2006, respectively. The following discussion highlights the major activities and transactions that affected JPMorgan Chase’s cash flows during the first six months of 2008 and 2007.

Cash Flows from Operating Activities
JPMorgan Chase’s operating assets and liabilities vary significantly in the normal course of business due to the amount and timing of cash flows. Management believes cash flows from operations, available cash balances and the Firm’s ability to generate cash through short- and long-term borrowings will be sufficient to fund the Firm’s operating liquidity needs.

For the six months ended June 30, 2008, net cash provided by operating activities was $24.0 billion. Net cash generated from operating activities was higher than net income largely as a result of adjustments for operating items such as the provision for credit losses, depreciation and amortization, stock-based compensation, certain other expenses and gains or losses from sales of investment securities. In addition, proceeds from sales of loans originated or purchased with an initial intent to sell was slightly higher than cash used to acquire such loans, but the cash flows from these loan sales activities were at a much lower level than for the same period in 2007 as a result of the current market conditions that have continued since the last half of 2007.

For the six months ended June 30, 2007, net cash used in operating activities was $66.4 billion, which supported growth in the Firm’s capital markets and certain lending activities during the period. The net use of cash was partially offset by proceeds from sales of loans originated or purchased with an initial intent to sell, which were higher than cash used to acquire such loans.

Cash Flows from Investing Activities
The Firm’s investing activities primarily include originating loans to be held to maturity, other receivables, and the available-for-sale investment portfolio. For the six months ended June 30, 2008, net cash of $54.1 billion was used in investing activities, primarily for purchases of investment securities in Corporate’s AFS portfolio to manage the Firm’s exposure to interest rates; net additions to the wholesale loan portfolio, primarily from increased lending activities across all the wholesale businesses; additions to the consumer prime mortgage portfolio as a result of the decision to retain, rather than sell, new originations of nonconforming prime mortgage loans; and an increase in securities purchased under resale agreements reflecting growth in demand from clients for liquidity. Partially offsetting these uses of cash were proceeds from sales and maturities of AFS securities; credit card securitization activities; the seasonal decline in consumer credit card receivables and cash received from the sale of an investment net of cash used for acquisitions. Additionally, in June 2008, in connection with the merger with Bear Stearns, the Firm sold assets acquired from Bear Stearns to the FRBNY and received cash proceeds of $28.85 billion.

For the six months ended June 30, 2007, net cash of $28.3 billion was used in investing activities, primarily for purchases of investment securities in Corporate’s AFS portfolio to manage the Firm’s exposure to interest rates; net additions to the retained wholesale and consumer (primarily home equity) loans portfolios; and to increase deposits with banks as a result of the availability of excess cash for short-term investment opportunities. Partially offsetting these uses of cash were cash proceeds received from sales and maturities of AFS securities; credit card, residential mortgage, auto and wholesale loan sales and

securitization activities; a decrease in securities purchased under resale agreements; and the seasonal decline in consumer credit card receivables.

Cash Flows from Financing Activities

The Firm’s financing activities primarily include the receipt of customer deposits and issuance of long-term debt and trust preferred capital debt securities. In addition, JPMorgan Chase pays quarterly dividends on its common stock and has a stock repurchase program. In the first six months of 2008, net cash provided by financing activities was $22.0 billion due to increases in federal funds purchased and securities loaned or sold under repurchase agreements in connection with higher short-term requirements to fulfill clients’ demand for liquidity and to finance the Firm’s AFS securities inventory levels; net new issuances of long-term debt and trust preferred capital debt securities; and the issuance of noncumulative perpetual preferred stock. Partially offsetting these cash proceeds was a decline in commercial paper and other borrowed funds due to lower short-term requirements to fund trading positions partially offset by growth in the volume of liability balances in sweep accounts; a decrease in U.S. interest-bearing deposits in Corporate, partially offset by an increase in non-U.S. interest-bearing deposits in TSS from growth in business volume and the payment of cash dividends. There were no stock repurchases during the first six months of 2008.

In the first half of 2007, net cash provided by financing activities was $89.6 billion due to a higher level of securities loaned or sold under repurchase agreements in connection with the funding of trading and AFS securities positions; net issuances of long-term debt and trust preferred capital debt securities and a net increase in wholesale deposits from growth in business volumes, in particular, interest-bearing deposits in TSS. Cash was used to repurchase common stock and the payment of cash dividends on common stock (including a 12% increase in the quarterly dividend in the second quarter of 2007).

Credit ratings

The credit ratings of the parent holding company and each of the Firm’s significant banking subsidiaries as of June 30, 2008, were as follows.

Short-term debt

Senior long-term debt

Moody’s

S&P

Fitch

Moody’s

S&P

Fitch

JPMorgan Chase & Co.

P-1

A-1+

F1+

Aa2

AA-

JPMorgan Chase Bank, N.A.

P-1

A-1+

F1+

Aaa

AA-

Chase Bank USA, N.A.

P-1

A-1+

F1+

Aaa

AA-

The cost and availability of unsecured financing are influenced by credit ratings. A reduction in these ratings could have an adverse effect on the Firm’s access to liquidity sources, increase the cost of funds, trigger additional collateral requirements and decrease the number of investors and counterparties willing to lend. Critical factors in maintaining high credit ratings include a stable and diverse earnings stream, strong capital ratios, strong credit quality and risk management controls, diverse funding sources, and disciplined liquidity monitoring procedures.

If the Firm’s ratings were downgraded by one notch, the Firm estimates the incremental cost of funds and the potential loss of funding to be negligible. Additionally, the Firm estimates the additional funding requirements for VIEs and other third-party commitments would not be material. Currently, the Firm believes a downgrade in the near-term is unlikely. For additional information on the impact of a credit ratings downgrade on the funding requirements for VIEs, and on derivatives and collateral agreements, see Special-purpose entities on page 51 and Ratings profile of derivative receivables marked-to-market (“MTM”) on page 61 of this Form 10-Q.

CREDIT RISK MANAGEMENT

The following discussion of JPMorgan Chase’s credit portfolio as of June 30, 2008, highlights developments since December 31, 2007. This section should be read in conjunction with pages 73–89 and pages 96–97 and Notes 14, 15, 31, and 32 of JPMorgan Chase’s 2007 Annual Report.

The Firm assesses its consumer credit exposure on a managed basis, which includes credit card receivables that have been securitized. For a reconciliation of the provision for credit losses on a reported basis to managed basis, see pages 15–17 of this Form 10-Q.

CREDIT PORTFOLIO

The following table presents JPMorgan Chase’s credit portfolio as of June 30, 2008, and December 31, 2007. Total credit exposure at June 30, 2008, increased $91.8 billion from December 31, 2007, reflecting increases of $71.5 billion and $20.3 billion in the wholesale and consumer portfolios, respectively. Derivative receivables increased $45.3 billion, receivables from customers increased $26.0 billion (due to the merger with Bear Stearns) and managed loans increased $25.1 billion ($16.3 billion and $8.8 billion in the wholesale and consumer portfolios, respectively). Partially offsetting

these increases was a decrease in lending-related commitments of $5.1 billion (a decrease of $16.6 billion in the wholesale portfolio offset by an $11.5 billion increase in the consumer portfolio).

In the table below, reported loans include loans accounted for at fair value and loans held-for-sale, which are carried at the lower of cost or fair value with changes in value recorded in noninterest revenue. However, these held-for-sale loans and loans accounted for at fair value are excluded from the average loan balances used for the net charge-off rate calculations.


	Credit exposure						Nonperforming assets^(i)(j)
	June 30,			December 31,			June 30,			December 31,
(in millions, except ratios)	2008			2007			2008			2007

Total credit portfolio
Loans retained^(a)	$	515,828		$	491,736		$	5,222	⁽ⁱ⁾	$	3,232	⁽ⁱ⁾
Loans held-for-sale		10,822			18,899			46			45
Loans at fair value		11,379			8,739			5			5

Loans – reported^(a)	$	538,029		$	519,374		$	5,273		$	3,282
Loans – securitized^(b)		79,120			72,701			—			—

Total managed loans^(c)		617,149			592,075		$	5,273		$	3,282
Derivative receivables		122,389			77,136			80			29
Receivables from customers^(d)		26,572			—			—			—

Total managed credit-related assets		766,110			669,211		$	5,353		$	3,311
Lending-related commitments^(e)(f)		1,257,457			1,262,588			NA			NA
Assets acquired in loan satisfactions		NA			NA			880			622

Total credit portfolio	$	2,023,567		$	1,931,799		$	6,233		$	3,933

Net credit derivative hedges notional^(g)	$	(86,051	)	$	(67,999	)	$	(3	)	$	(3	)
Collateral held against derivatives^(h)		(12,952	)		(9,824	)		NA			NA


	Three months ended June 30,										Six months ended June 30,
					Average annual										Average annual
(in millions, except ratios)	Net charge-offs				net charge-off rate						Net charge-offs				net charge-off rate

	2008		2007		2008			2007			2008		2007		2008			2007

Total credit portfolio
Loans – reported	$	2,130	$	985		1.67	%		0.90	%	$	4,036	$	1,888		1.60	%		0.88	%
Loans – securitized^(b)		830		590		4.32			3.46			1,511		1,183		4.02			3.51

Total managed loans	$	2,960	$	1,575		2.02	%		1.25	%	$	5,547	$	3,071		1.91	%		1.23	%


(a)		Loans (other than those for which the SFAS 159 fair value option has been elected) are presented net of unearned income and net deferred loan fees of $702 million and $1.0 billion at June 30, 2008, and December 31, 2007, respectively.

(b)		Represents securitized credit card receivables. For a further discussion of credit card securitizations, see Card Services on pages 30–33 of this Form 10-Q.

(c)		Loans past-due 90 days and over and accruing include: credit card receivables reported of $1.5 billion at both June 30, 2008, and December 31, 2007, respectively, and credit card securitizations of $1.2 billion and $1.1 billion at June 30, 2008, and December 31, 2007, respectively; and wholesale loans of $90 million and $75 million at June 30, 2008, and December 31, 2007, respectively.

(d)		Primarily represents margin loans to prime and retail brokerage customers included in accrued interest and accounts receivable on the Consolidated Balance Sheets.

(e)		Included credit card and home equity lending-related commitments of $736.4 billion and $66.7 billion, respectively, at June 30, 2008; and $714.8 billion and $74.2 billion, respectively, at December 31, 2007. These amounts for credit card and home equity lending-related commitments represent the total available credit for these products. The Firm has not experienced, and does not anticipate, that all available lines of credit for these products will be utilized at the same time. For credit card commitments and if certain conditions are met for home equity commitments, the Firm can reduce or cancel these lines of credit by providing the borrower prior notice or, in some cases, without notice as permitted by law.

(f)		Included unused advised lines of credit totaling $34.0 billion and $38.4 billion at June 30, 2008, and December 31, 2007, respectively, which are not legally binding. In regulatory filings with the Federal Reserve Board, unused advised lines are not reportable. See the Glossary of Terms on page 130 of this form 10-Q for the Firm’s definition of advised lines of credit.

(g)		Represents the net notional amount of protection purchased and sold of single-name and portfolio credit derivatives used to manage the credit exposures; these derivatives do not qualify for hedge accounting under SFAS 133. Includes $34.4 billion and $31.1 billion at June 30, 2008, and December 31, 2007, respectively, which represent the notional amount of structured portfolio protection; the Firm retains a minimal first risk of loss on this portfolio.

(h)		Represents other liquid securities collateral held by the Firm as of June 30, 2008, and December 31, 2007, respectively.

(i)		Excludes nonperforming assets related to (1) loans eligible for repurchase as well as loans repurchased from GNMA pools that are insured by U.S. government agencies of $1.9 billion and $1.5 billion at June 30, 2008, and December 31, 2007, respectively, and (2) education loans that are 90 days past due and still accruing, which are insured by U.S. government agencies under the Federal Family Education Loan Program, of $371 million and $279 million at June 30, 2008, and December 31, 2007, respectively. These amounts for GNMA and education loans are excluded, as reimbursement is proceeding normally.

(j)		For the second quarter of 2008, the policy for classifying subprime mortgage and home equity loans as nonperforming was changed to conform with all other home lending products. Prior period nonperforming assets have been revised to conform with this change.

WHOLESALE CREDIT PORTFOLIO

As of June 30, 2008, wholesale exposure (IB, CB, TSS and AM) increased $71.5 billion from December 31, 2007, primarily due to $54.3 billion of wholesale exposure acquired in connection with the merger with Bear Stearns, including $26.0 billion of receivables from customers, $18.9 billion of derivative receivables, $5.0 billion of lending-related commitments and $4.4 billion of loans. The remaining increase of $17.2 billion was largely driven by $26.3 billion of derivative receivables and $11.9 billion of loans, partially offset by a decrease of $21.6 billion in lending-related commitments. The increase in derivative receivables was due to the increase in commodity receivables reflecting sharply higher energy prices and the effect of the weakening U.S. dollar on interest rate and foreign exchange derivative receivables. The increase in loans was primarily due to lending activity across most wholesale businesses and other portfolio growth. The decrease in lending-related commitments was mainly due to the cancellation of primarily investment-grade commitments as well as other portfolio activity.


	Credit exposure						Nonperforming assets
	June 30,			December 31,			June 30,			December 31,
(in millions)	2008			2007			2008			2007

Loans retained^(a)	$	209,354		$	189,427		$	819		$	464
Loans held-for-sale		8,626			14,910			46			45
Loans at fair value		11,379			8,739			5			5

Loans – reported^(a)	$	229,359		$	213,076		$	870		$	514
Derivative receivables		122,389			77,136			80			29
Receivables from customers^(b)		26,572			—			NA			—

Total wholesale credit-related assets		378,320			290,212			950			543
Lending-related commitments^(c)		430,028			446,652			NA			NA
Assets acquired in loan satisfactions		NA			NA			121			73

Total wholesale credit exposure	$	808,348		$	736,864		$	1,071		$	616

Net credit derivative hedges notional^(d)	$	(86,051	)	$	(67,999	)	$	(3	)	$	(3	)
Collateral held against derivatives^(e)		(12,952	)		(9,824	)		NA			NA


(a)		Includes loans greater than or equal to 90 days past due that continue to accrue interest. The principal balance of these loans totaled $90 million and $75 million at June 30, 2008, and December 31, 2007, respectively. Also, see Note 4 on pages 90–92 and Note 13 on pages 99–101 of this Form 10-Q.

(b)		Primarily represents margin loans to prime and retail brokerage customers which are included in accrued interest and accounts receivable on the Consolidated Balance Sheets.

(c)		Included unused advised lines of credit totaling $34.0 billion and $38.4 billion at June 30, 2008, and December 31, 2007, respectively, which are not legally binding. In regulatory filings with the Federal Reserve Board, unused advised lines are not reportable.

(d)		Represents the net notional amount of protection purchased and sold of single-name and portfolio credit derivatives used to manage the credit exposures; these derivatives do not qualify for hedge accounting under SFAS 133. Includes $34.4 billion and $31.1 billion at June 30, 2008, and December 31, 2007, respectively, which represents the notional amount of structured portfolio protection; the Firm retains a minimal first risk of loss on this portfolio.
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