UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2010       Commission file number 1-5805

JPMORGAN CHASE & CO.

(Exact name of registrant as specified in its charter)

Delaware		13-2624428
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
270 Park Avenue, New York, New York		10017
(Address of principal executive offices)		(Zip Code)

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

þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

þ Yes o No

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

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

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

o Yes þ No

Number of shares of common stock outstanding as of July 31, 2010: 3,965,167,399

 

 

FORM 10-Q
TABLE OF CONTENTS

		Page
Part I — Financial information
Item 1 Consolidated Financial Statements — JPMorgan Chase & Co.:
Consolidated Statements of Income (unaudited) for the three and six months ended June 30, 2010 and 2009			104
Consolidated Balance Sheets (unaudited) at June 30, 2010, and December 31, 2009			105
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income (unaudited) for the six months ended June 30, 2010 and 2009			106
Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2010 and 2009			107
Notes to Consolidated Financial Statements (unaudited)			108
Consolidated Average Balance Sheets, Interest and Rates (unaudited) for the three and six months ended June 30, 2010 and 2009			179
Glossary of Terms and Line of Business Metrics			181
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations:
Consolidated Financial Highlights			3
Introduction			5
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			20
Balance Sheet Analysis			53
Off—Balance Sheet Arrangements and Contractual Cash Obligations			56
Capital Management			60
Risk Management			64
Supervision and Regulation			99
Critical Accounting Estimates Used by the Firm			100
Accounting and Reporting Developments			103
Forward-Looking Statements			187
Item 3 Quantitative and Qualitative Disclosures About Market Risk			188
Item 4 Controls and Procedures			188
Part II — Other information
Item 1 Legal Proceedings			188
Item 1A Risk Factors			196
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			197
Item 3 Defaults Upon Senior Securities			198
Item 4 Submission of Matters to a Vote of Security Holders			198
Item 5 Other Information			198
Item 6 Exhibits			198
EX-31.1
EX-31.2
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

JPMORGAN CHASE & CO.
CONSOLIDATED FINANCIAL HIGHLIGHTS

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

(unaudited)																						Six months ended
(in millions, except ratios)																						June 30,
As of or for the period ended,		2Q10				1Q10				4Q09				3Q09				2Q09				2010				2009
Credit quality metrics
Allowance for credit losses(f)		$	36,748			$	39,126			$	32,541			$	31,454			$	29,818
Allowance for loan losses to total retained loans(f)			5.15	%			5.40	%			5.04	%			4.74	%			4.33	%
Allowance for loan losses to retained loans excluding purchased credit-impaired loans(f)(h)			5.34				5.64				5.51				5.28				5.01
Nonperforming assets		$	18,156			$	19,019			$	19,741			$	20,362			$	17,517
Net charge-offs			5,714				7,910				6,177				6,373				6,019			$	13,624			$	10,415
Net charge-off rate			3.28	%			4.46	%			3.85	%			3.84	%			3.52	%			3.88	%			3.01	%
Wholesale net charge-off rate			0.44				1.84				2.31				1.93				1.19				1.14				0.75
Consumer net charge-off rate			4.49				5.56				4.60				4.79				4.69				5.03				4.15

(a)		Pre-provision profit is total net revenue less noninterest expense. The Firm believes that this financial measure is useful in assessing the ability of a lending institution to generate income in excess of its provision for credit losses.
(b)		On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual Bank (“Washington Mutual”). The acquisition resulted in negative goodwill, and accordingly, the Firm recognized an extraordinary gain. A preliminary gain of $1.9 billion was recognized at December 31, 2008. The final total extraordinary gain that resulted from the Washington Mutual transaction was $2.0 billion.
(c)		The calculation of second-quarter 2009 earnings per share (“EPS”) and net income applicable to common equity includes a one-time, noncash reduction of $1.1 billion, or $0.27 per share, resulting from repayment of U.S. Troubled Asset Relief Program (“TARP”) preferred capital. Excluding this reduction, the adjusted ROE and ROTCE for the second quarter 2009 would have been 6% and 10%, respectively. The Firm views the adjusted ROE and ROTCE, both non-GAAP financial measures, as meaningful because they enable the comparability to prior periods. For further discussion, see “Explanation and Reconciliation of the Firm’s use of Non-GAAP Financial measures” on pages 15-19 of this Form 10-Q and pages 50-52 of JPMorgan Chase’s 2009 Annual Report.
(d)		On June 5, 2009, the Firm issued $5.8 billion, or 163 million shares, of its common stock at $35.25 per share.
(e)		Share prices shown for JPMorgan Chase’s common stock are from the New York Stock Exchange. JPMorgan Chase’s common stock is also listed and traded on the London Stock Exchange and the Tokyo Stock Exchange.
(f)		Effective January 1, 2010, the Firm adopted new guidance that amended the accounting for the transfer of financial assets and the consolidation of variable interest entities (“VIEs”). Upon adoption of the new guidance, the Firm consolidated its Firm-sponsored credit card securitization trusts, Firm-administered multi-seller conduits and certain other consumer loan securitization entities, primarily mortgage-related, adding $87.7 billion and $92.2 billion of assets and liabilities, respectively, and decreasing stockholders’ equity and the Tier I capital ratio by $4.5 billion and 34 basis points, respectively. The reduction to stockholders’ equity was driven by the establishment of an allowance for loan losses of $7.5 billion (pretax) primarily related to receivables held in credit card securitization trusts that were consolidated at the adoption date.
(g)		The Firm uses Tier 1 common capital (“Tier 1 common”) along with the other capital measures to assess and monitor its capital position. The Tier 1 common capital ratio (“Tier 1 common ratio”) is Tier 1 common divided by risk-weighed assets. For further discussion, see Regulatory capital on pages 82-84 of JPMorgan Chase’s 2009 Annual Report.
(h)		Excludes the impact of home lending purchased credit-impaired loans for all periods. Also excludes, as of December 31, 2009, September 30, 2009, and June 30, 2009, the loans held by the Washington Mutual Master Trust (“WMMT”), which were consolidated onto the balance sheet at fair value during the second quarter of 2009; such loans have been fully repaid or charged off as of June 30, 2010. See Note 15 on pages 198-205 of JPMorgan Chase’s 2009 Annual Report.

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

This section of the Form 10-Q provides management’s discussion and analysis (“MD&A”) of the financial condition and results of operations of JPMorgan Chase. See the Glossary of terms on pages 181-184 for definitions of terms used throughout this Form 10-Q. The MD&A included in this Form 10-Q contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on the current beliefs and expectations of JPMorgan Chase’s management and are subject to significant risks and uncertainties. These risks and uncertainties could cause the Firm’s actual results to differ materially from those set forth in such forward-looking statements. Certain of such risks and uncertainties are described herein (See Forward-looking Statements on pages 187-188 and Part II, Item 1A: Risk Factors on pages 196-197 of this Form 10-Q), and see Part I, Item 1A, Risk Factors on pages 4-10 of JPMorgan Chase’s Annual Report on Form 10-K for the year ended December 31, 2009, filed with the U.S. Securities and Exchange Commission (“2009 Annual Report” or “2009 Form 10-K”), to which reference is hereby made.

INTRODUCTION

JPMorgan Chase & Co., a financial holding company incorporated under Delaware law in 1968, is a leading global financial services firm and one of the largest banking institutions in the United States of America (“U.S.”), with $2.0 trillion in assets, $171.1 billion in stockholders’ equity and operations in more than 60 countries as of June 30, 2010. The Firm is a leader in investment banking, financial services for consumers and businesses, financial transaction processing and asset management. Under the J.P. Morgan and Chase brands, the Firm serves millions of customers in the U.S. and many of the world’s most prominent corporate, institutional and government clients.

JPMorgan Chase’s principal bank subsidiaries are JPMorgan Chase Bank, National Association (“JPMorgan Chase Bank, N.A.”), a national bank with branches in 23 states in the U.S.; and Chase Bank USA, National Association (“Chase Bank USA, N.A.”), a national bank that is the Firm’s credit card issuing bank. JPMorgan Chase’s principal nonbank subsidiary is J.P. Morgan Securities Inc., the Firm’s U.S. investment banking firm.

JPMorgan Chase’s activities are organized, for management reporting purposes, into six business segments, as well as Corporate/Private Equity. The Firm’s wholesale businesses comprise the Investment Bank, Commercial Banking, Treasury & Securities Services and Asset Management segments. The Firm’s consumer businesses comprise the Retail Financial Services and Card Services segments. A description of the Firm’s business segments, and the products and services they provide to their respective client bases, follows.

Investment Bank

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

Retail Financial Services

Retail Financial Services (“RFS”) serves consumers and businesses through personal service at bank branches and through ATMs, online banking and telephone banking, as well as through auto dealerships and school financial-aid offices. Customers can use more than 5,100 bank branches (third-largest nationally) and 15,600 ATMs (second-largest nationally), as well as online and mobile banking around the clock. More than 26,900 branch salespeople assist customers with checking and savings accounts, mortgages, home equity and business loans, and investments across the 23-state footprint from New York and Florida to California. Consumers also can obtain loans through more than 15,900 auto dealerships and 1,800 schools and universities nationwide.

Card Services

Card Services (“CS”) is one of the nation’s largest credit card issuers, with nearly $143 billion in loans and nearly 90 million open accounts. In the six months ended June 30, 2010, customers used Chase cards to meet nearly $148 billion of their spending needs. Through its merchant acquiring business, Chase Paymentech Solutions, CS is a global leader in payment processing and merchant acquiring.

Commercial Banking

Commercial Banking (“CB”) delivers extensive industry knowledge, local expertise and dedicated service to more than 24,000 clients nationally, including corporations, municipalities, financial institutions and not-for-profit entities with annual revenue generally ranging from $10 million to $2 billion, and over 30,000 real estate investors/owners. CB partners with the Firm’s other businesses to provide comprehensive solutions, including lending, treasury services, investment banking and asset management to meet its clients’ domestic and international financial needs.

Treasury & Securities Services

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

Asset Management

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

EXECUTIVE OVERVIEW

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

The U.S. and global economic recovery proceeded in the second quarter of 2010, though the pace of growth slowed, particularly in the U.S. and Asia. Concerns about the outlook for fiscal policy in the developed economies, and the impact that might have on the global economic recovery, led to a decline in equity markets and a rally in the bond markets. However, conditions within the U.S. labor market continued to improve gradually and household spending increased, but at a slow pace. Business spending on equipment and technology rose significantly, supported by the strong financial condition of U.S. businesses; however, investment in nonresidential building projects remained weak. Furthermore, inflation continued to trend lower during the quarter and the Federal Reserve indicated that these economic conditions were likely to warrant an exceptionally low federal funds rate for an extended period.

In response to the recent financial crisis, the U.S. Congress and regulators, as well as legislative and regulatory bodies in other countries, continue to focus on the regulation of financial institutions. On July 21, 2010, the U.S. enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), financial reform legislation that expands the range of financial companies and activities that are subject to federal oversight. This new law also provides more comprehensive regulation of the over-the-counter derivatives market; provides limitations on proprietary trading and the investment activities of banks; imposes limitations on debit card interchange transaction fees; and includes several other provisions that affect the Firm’s business activities. As discussed in the Business outlook section, the full impact of this legislation is unclear, and many challenges and uncertainties remain.

Financial performance of JPMorgan Chase

		Three months ended June 30,												Six months ended June 30,
(in millions, except per share data and ratios)		2010				2009				Change				2010				2009				Change
Selected income statement data
Total net revenue		$	25,101			$	25,623				(2	)%		$	52,772			$	50,648				4	%
Total noninterest expense			14,631				13,520				8				30,755				26,893				14
Pre-provision profit			10,470				12,103				(13	)			22,017				23,755				(7	)
Provision for credit losses			3,363				8,031				(58	)			10,373				16,627				(38	)
Net income			4,795				2,721				76				8,121				4,862				67
Diluted earnings per share(a)		$	1.09			$	0.28				289			$	1.83			$	0.68				169
Return on common equity(b)			12	%			3	%							10	%			4	%
Capital ratios
Tier 1 capital			12.1				9.7
Tier 1 common			9.6				7.7

(a)		The calculation of second quarter 2009 EPS includes a one-time, noncash reduction of $1.1 billion, or $0.27 per share ($0.28 per share for the six months ended June 30, 2009), resulting from repayment of TARP preferred capital. For further discussion, see “Impact on diluted EPS of redemption of TARP preferred stock issued to the U.S. Treasury” on page 19 of this Form 10-Q.
(b)		The calculation of second quarter 2009 net income applicable to common equity includes a one-time, noncash reduction of $1.1 billion resulting from repayment of TARP preferred capital. Excluding this reduction, the adjusted ROE was 6% for the second quarter and first six months of 2009. For further discussion of adjusted ROE, see “Explanation and reconciliation of the Firm’s use of non-GAAP financial measures” on pages 15-19 of this Form 10-Q.

Business overview

JPMorgan Chase reported second-quarter 2010 net income of $4.8 billion, or $1.09 per share, compared with net income of $2.7 billion, or $0.28 per share, in the second quarter of 2009. Current-quarter EPS included a benefit from a $1.5 billion, or $0.36 per share, reduction of loan loss reserves, partially offset by a charge of $550 million, or $0.14 per share, for the United Kingdom (“U.K.”) Bank Payroll Tax. Prior-year EPS reflected a one-time, noncash reduction in net income applicable to common stockholders of $1.1 billion, or $0.27 per share, resulting from repayment of TARP preferred capital. ROE for the quarter was 12%, compared with 3% in the prior year.

The increase in earnings from the second quarter of 2009 was driven by a significantly lower provision for credit losses, partially offset by lower net revenue and higher noninterest expense. The decline in net revenue was driven by lower principal transactions revenue, reflecting lower trading results, and lower investment banking fees, partially offset by higher securities gains. The lower provision for credit losses reflected improvements in both the consumer and wholesale provisions. The consumer provision reflected a reduction in the allowance for credit losses as a result of improved delinquency trends and reduced net charge-offs. The wholesale provision was a benefit in the second

quarter of 2010, compared with an expense in the second quarter of 2009. Noninterest expense in the second quarter of 2010 included the impact of the U.K. Bank Payroll Tax on certain compensation awarded from December 9, 2009, to April 5, 2010, to relevant banking employees, and included higher litigation expense. JPMorgan Chase maintained very high liquidity, with a deposit-to-loan ratio of 127%, and generated additional capital, ending the quarter with a strong Tier 1 common ratio of 9.6%.

Credit trends continued to improve during the second quarter; however, the levels of charge-offs and delinquencies in the consumer-lending businesses remained extremely high. The wholesale businesses experienced reduced credit costs, reflecting a reduction in the allowance for credit losses mainly due to net repayments, loan sales, refinements to credit loss estimates, and improvement in the credit quality of the commercial and industrial portfolio. Total firmwide credit reserves fell to $36.7 billion, as loan balances remained flat and credit costs declined, resulting in a ratio of firmwide reserves to total loans (excluding purchased credit-impaired loans) of 5.3%.

Net income for the first six months of 2010 was $8.1 billion, or $1.83 per share, compared with $4.9 billion, or $0.68 per share, in the first half of 2009. The increase in earnings from the comparable 2009 six-month period was driven by a lower provision for credit losses and higher net revenue, partially offset by higher noninterest expense. The lower provision for credit losses and the higher noninterest expense reflected the same factors as those that drove the second quarter 2010 results. The higher net revenue reflected solid markets revenue in IB and elevated levels of securities gains from the investment portfolio in Corporate. Prior-year EPS reflected a one-time, noncash reduction in net income applicable to common stockholders of $1.1 billion, or $0.28 per share, resulting from repayment of TARP preferred capital.

JPMorgan Chase continued to support the economic recovery by assisting customers, providing sound lending and continuing its efforts to prevent foreclosure. The Firm loaned or raised capital for its clients of nearly $700 billion during the first half of 2010, and its small-business originations were up 37%. The Firm has offered 880,000 mortgage modifications and has approved 245,000 since the beginning of 2009. Of these, nearly 193,000 have achieved permanent modification as of June 30, 2010.

The discussion that follows highlights the current-quarter performance of each business segment, compared with the prior-year quarter. Managed basis starts with the reported U.S. GAAP results and, for each line of business and the Firm as a whole, includes certain reclassifications to present total net revenue on a tax-equivalent basis. Effective January 1, 2010, the Firm adopted new accounting guidance that required it to consolidate its Firm-sponsored credit card securitization trusts; as a result, reported and managed basis relating to credit card securitizations are equivalent for periods beginning after January 1, 2010. Prior to the adoption of the new accounting guidance, in 2009 and all other prior periods, the U.S. GAAP results for CS and the Firm were also adjusted for certain reclassifications that assumed credit card loans that had been securitized and sold by CS remained on the Consolidated Balance Sheets. These adjustments had no impact on net income as reported by the Firm as a whole or by the lines of business. For more information about managed basis, as well as other non-GAAP financial measures used by management to evaluate the performance of each line of business, see pages 15-19 of this Form 10-Q.

Investment Bank net income decreased, reflecting lower net revenue and higher noninterest expense, predominantly offset by a benefit from the provision for credit losses. The decrease in net revenue was driven by a decline in Fixed Income Markets revenue, largely reflecting lower results in credit markets, rates and commodities. Investment banking fees also decreased, driven by lower levels of equity underwriting, debt underwriting and advisory fees. Partially offsetting the revenue decline was an increase in Equity Markets revenue, reflecting solid client revenue. The provision for credit losses was a benefit in the second quarter of 2010, compared with an expense in the second quarter of 2009, and reflected a reduction in the allowance for loan losses, largely related to net repayments and loan sales. Noninterest expense in the second quarter of 2010 included the impact of the U.K. Bank Payroll Tax.

Retail Financial Services net income increased significantly from the prior year driven by a lower provision for credit losses. Net revenue decreased, driven by lower loan and deposit balances and declining deposit-related fees. These decreases were predominantly offset by a shift to wider-spread deposit products, and growth in mortgage fees and related income, debit card income and auto operating lease income. The provision for credit losses decreased from the prior year and reflected improved delinquency trends and reduced net charge-offs. Noninterest expense increased from the prior year, driven by higher default-related expense and sales force increases, partially offset by a decrease in foreclosed asset expense.

Card Services reported net income compared with a net loss in the prior year, as a lower provision for credit losses was partially offset by lower net revenue. The decrease in net revenue was driven by a decline in net interest income, reflecting lower average loan balances, the impact of legislative changes and a decreased level of fees. These decreases

were partially offset by lower revenue reversals associated with lower charge-offs and a prior-year write-down of securitization interests. The provision for credit losses decreased from the prior year, reflecting reduced net charge-offs and lower estimated losses, primarily related to improved delinquency trends and lower loan balances. Noninterest expense increased due to higher marketing expense.

Commercial Banking net income increased from the prior year, driven by a reduction in the provision for credit losses. Net revenue was relatively flat from the prior year, as growth in liability balances, wider loan spreads, gains on sales of loans and other real estate owned, and higher lending-related fees were predominantly offset by spread compression on liability products and lower loan balances. The provision for credit losses was a benefit in the second quarter of 2010 compared with an expense in the second quarter of 2009 and included a reduction to the allowance for credit losses, mainly due to refinements to credit loss estimates and improvement in the credit quality of the commercial and industrial portfolio. Noninterest expense was relatively flat compared with the prior year.

Treasury and Securities Services net income decreased from the prior year, driven by lower net revenue and higher noninterest expense. Worldwide Securities Services net revenue was relatively flat, as lower spreads in securities lending and the impact of lower volatility on foreign exchange were offset by higher market levels and net inflows of assets under custody. Similarly, TS net revenue was relatively flat, as lower deposit spreads were offset by higher trade loan and card product volumes. Noninterest expense for TSS increased, driven by higher performance-based compensation and continued investment in new product platforms, primarily related to international expansion.

Asset Management net income increased from the prior year, as higher net revenue and a lower provision for credit losses were partially offset by higher noninterest expense. Net revenue increased, due to the effects of higher market levels, net inflows to products with higher margins and higher performance fees; partially offset by lower quarterly valuations of seed capital investments and lower net interest income due to narrower deposit spreads, largely offset by higher deposit balances. The increase in noninterest expense was driven by higher headcount.

Corporate/Private Equity net income decreased from the prior year, driven by lower net revenue and higher noninterest expense. Although lower than in the prior year, net revenue included elevated levels of securities gains from the repositioning of the investment portfolio and elevated levels of net interest income from the size of the investment portfolio. Net revenue also included modest private equity gains. Noninterest expense rose, largely due to higher litigation expense.

Business outlook

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

JPMorgan Chase’s outlook for the third quarter of 2010 should be viewed against the backdrop of the global and U.S. economies, financial markets activity, the geopolitical environment, the competitive environment and client activity levels. Each of these linked factors will affect the performance of the Firm and its lines of business. Accordingly, the Firm continues to monitor closely U.S. and international economies and political environments.

As mentioned above, the Dodd-Frank Act was signed into law on July 21, 2010. There are a number of positive aspects of this new legislation, including systemic risk oversight and resolution authority. However, with hundreds of implementing rules to be written, there remain many challenges and uncertainties. The Firm continues to be committed to helping ensure that the reforms are implemented in a way that protects consumers and the competitiveness of the U.S. financial system, while ensuring the flow of safe and sound credit.

In addition to this legislation, any further legislation or regulations that are adopted in the U.S. or in other countries could limit or restrict the Firm’s operations, impose additional costs on the Firm in order to comply with such new laws or regulations, or significantly and adversely affect the revenue of certain lines of business.

In the Retail Banking business within RFS, management expects continued strong revenue over the next several quarters, despite continued economic pressure on consumers and consumer spending levels. The Firm has already made changes consistent with and, in certain respects, beyond the requirements of the newly-enacted legislation in its policies relating to non-sufficient funds and overdraft fees. Management has refined its estimate of the cost of these changes to the business based on its most recent assessment of customer behavior and now estimates that Retail Banking net income may be reduced, on an annualized basis, by approximately $700 million by the fourth quarter of 2010, an increase from management’s prior estimate of approximately $500 million. Results in the second quarter of 2010 reflect approximately 50% of the estimated quarterly impact of this reduction in net income.

In the Mortgage Banking & Other Consumer Lending business within RFS, management expects revenue to continue to be negatively affected by continued elevated levels of repurchases of mortgages previously sold to, for example, U.S. government-sponsored entities. In the Real Estate Portfolios business within RFS, management believes that, at the current rate

of delinquencies and loss severity, quarterly net charge-offs could be approximately $1.0 billion for the home equity portfolio, $400 million for the prime mortgage portfolio and $400 million for the subprime mortgage portfolio over the next several quarters. Given current origination and production levels, combined with management’s current estimate of portfolio runoff levels, the residential real estate portfolio is expected to decline by approximately 10% to 15% annually for the foreseeable future. Based on management’s preliminary estimate, the effect of such a reduction in the residential real estate portfolio is expected to reduce the portfolio’s 2010 net interest income up to $1.0 billion from the 2009 level, excluding any impact from further changes in the interest rate environment.

Also, in RFS, management expects noninterest expense to remain modestly above 2009 levels, reflecting investments in new branch builds and sales force hires, as well as continued elevated servicing-, default- and foreclosed asset-related costs.

In CS, management expects full-year average outstandings in 2010 to decline by approximately 15% from 2009 levels, possibly to approximately $140 billion of average outstandings by the end of the fourth quarter of 2010, due to runoff of both the Washington Mutual portfolio and lower-yielding promotional balances. In addition, management estimates that CS net income may be reduced, on an annualized basis, by approximately $750 million as a result of the impact of the Credit Card Act of 2009, including the recent regulatory guidance defining reasonable and proportional fees. Results in the second quarter of 2010 reflect approximately 25% of the estimated quarterly impact of this reduction in net income. The net charge-off rate for CS (excluding the Washington Mutual credit card portfolio) is anticipated to continue to improve if current delinquency trends continue and could be approximately 8.5% in the third quarter of 2010; however, results will depend on the economic environment and any resulting reserve actions.

While some normalization of the financial markets occurred during the second quarter of 2010 and consumer-lending net charge-offs and delinquencies have declined as noted above, the consumer credit portfolio remains under stress. Further declines in U.S. housing prices and increases in the unemployment rate remain possible; if this were to occur, it would adversely affect the Firm’s results.

In IB, TSS and AM, revenue will be affected by market levels, volumes and volatility, which will influence client flows and assets under management, supervision and custody. In addition, IB and CB results will continue to be affected by the credit environment, which will influence levels of charge-offs, repayments and provision for credit losses.

In Private Equity (within the Corporate/Private Equity segment), earnings will likely continue to be volatile and be influenced by capital markets activity, market levels, the performance of the broader economy and investment-specific issues. Corporate’s net interest income levels and securities gains will generally trend with the size and duration of the investment securities portfolio. Corporate net income (excluding Private Equity, merger-related items and any significant nonrecurring items) is anticipated to trend toward a level of approximately $300 million per quarter.

The Firm’s second-quarter results reflected lower net interest margin, compared with the prior quarter. Management expects modest continued downward pressure on net interest margin in the third quarter of 2010, primarily resulting from continued repositioning of the investment securities portfolio in Corporate, runoff of loans with higher contractual interest rates in the Real Estate Portfolios and CS businesses, and the impact of the Card Act legislation on CS.

Management and the Firm’s Board of Directors continuously evaluate alternatives to deploy the Firm’s strong capital base in ways that will enhance shareholder value. Such alternatives could include the repurchase of common stock, increasing the common stock dividend and pursuing alternative investment opportunities. The Firm resumed its repurchases of common stock beginning in the second quarter under its pre-existing Board authorization. The Firm’s current share repurchase activity is intended to offset share count increases resulting from employee equity awards and is consistent with the Firm’s goal of maintaining an appropriate share count. The aggregate amount and timing of future repurchases will depend, among other factors, on market conditions and management’s judgment regarding economic conditions, the Firm’s earnings outlook, the need to maintain adequate capital levels (in light of business needs and regulatory requirements) and alternative investment opportunities. With regard to any decision by the Firm’s Board of Directors concerning any increase in the level of the common stock dividend, their determination will be subject to their judgment that the likelihood of another severe economic downturn has sufficiently diminished; that there is evidence of sustained underlying growth in employment for at least several months; that overall business performance and credit have stabilized or improved; and that such action is warranted, taking into consideration, among other factors, the Firm’s earnings outlook, the need to maintain adequate capital levels (in light of business needs and regulatory requirements), alternative investment opportunities and appropriate dividend payout ratios. Ultimately, the Board would seek to return to the Firm’s historical dividend ratio of approximately 30% to 40% of normalized earnings over time, though it would consider moving to that level in stages.

CONSOLIDATED RESULTS OF OPERATIONS

This section provides a comparative discussion of JPMorgan Chase’s Consolidated Results of Operations on a reported basis. Factors that relate primarily to a single business segment are discussed in more detail within that business segment. For a discussion of the Critical Accounting Estimates Used by the Firm that affect the Consolidated Results of Operations, see pages 100-102 of this Form 10-Q and pages 127-131 of JPMorgan Chase’s 2009 Annual Report.

Revenue

		Three months ended June 30,												Six months ended June 30,
(in millions)		2010				2009				Change				2010				2009				Change
Investment banking fees		$	1,421			$	2,106				(33	)%		$	2,882			$	3,492				(17	)%
Principal transactions			2,090				3,097				(33	)			6,638				5,098				30
Lending- and deposit-related fees			1,586				1,766				(10	)			3,232				3,454				(6	)
Asset management, administration and commissions			3,349				3,124				7				6,614				6,021				10
Securities gains			1,000				347				188				1,610				545				195
Mortgage fees and related income			888				784				13				1,546				2,385				(35	)
Credit card income			1,495				1,719				(13	)			2,856				3,556				(20	)
Other income			585				10			NM					997				60			NM
Noninterest revenue			12,414				12,953				(4	)			26,375				24,611				7
Net interest income			12,687				12,670				—				26,397				26,037				1
Total net revenue		$	25,101			$	25,623				(2	)%		$	52,772			$	50,648				4	%

Total net revenue for the second quarter of 2010 was $25.1 billion, down by $522 million, or 2%, from the second quarter of 2009. Total net revenue for the first six months of 2010 was $52.8 billion, up by $2.1 billion, or 4%, from the prior year. The decrease from the prior-year quarter was driven by lower principal transactions revenue, reflecting lower trading results, and lower investment banking fees, partially offset by higher securities gains and other income. The increase from the first six months of 2009 was driven by higher principal transactions revenue, reflecting higher trading revenue and private equity gains (compared with private equity losses in the prior year) in Corporate/Private Equity; the absence of mark-to-market losses on hedges of retained loans in IB; higher securities gains in Corporate; and higher other income. These increases were partially offset by lower mortgage fees and related income in RFS and lower investment banking fees.

Investment banking fees for the second quarter and first six months of 2010 decreased from the comparable periods of 2009, predominantly reflecting a decline from the record level of equity underwriting fees last year and lower advisory fees. Debt underwriting fees also contributed to the decline in the second quarter of 2010; however, for the first six months of 2010, debt underwriting fees increased compared with the prior year. Overall industry-wide volumes across bonds and equity were lower in the second quarter and first six months of 2010 compared with the respective periods in 2009. For additional information on investment banking fees, which are primarily recorded in IB, see IB segment results on pages 21-24 of this Form 10-Q.

Principal transactions revenue, which consists of revenue from the Firm’s trading and private equity investing activities, decreased from the second quarter of 2009, reflecting lower results in Corporate and lower fixed income revenue in IB, largely reflecting weaker results in credit markets, rates and commodities. The decrease was offset partially by gains from the widening of the Firm’s credit spreads on certain structured liabilities in the IB compared with losses in the prior year. Trading revenue increased for the first six months of 2010, primarily due to the absence of mark-to-market losses on hedges of retained loans in IB compared with the prior year. This increase was offset partially by lower fixed income revenue in IB, largely reflecting weaker results in rates, credit markets and commodities. Private equity gains in both the second quarter and first six months of 2010 improved from the losses incurred in the comparable 2009 periods. For additional information on principal transactions revenue, see IB and Corporate/Private Equity segment results on pages 21-24 and 51-53, respectively, and Note 3 on pages 110-124 of this Form 10-Q.

Lending- and deposit-related fees for the second quarter and first six months of 2010 decreased from the prior-year periods, reflecting declining deposit-related fees and lower deposit balances in RFS, offset partially by higher lending-related service fees in IB and CB. For additional information on lending- and deposit-related fees, which are mostly recorded in RFS, TSS and CB, see the RFS segment results on pages 25-35, the TSS segment results on pages 44-46 and the CB segment results on pages 41-43 of this Form 10-Q.

Asset management, administration and commissions revenue for the second quarter and first six months of 2010 rose from the comparable periods of 2009. The increase was driven by higher asset management fees in AM, which reflected the effect of higher market levels, higher placement fees, net inflows to products with higher margins, and higher performance fees. Also contributing to the increase was higher administration fees in TSS, resulting from the effect of

higher market levels and net inflows of assets under custody. For additional information on these fees and commissions, see the segment discussions for AM on pages 47-51 and TSS on pages 44-46 of this Form 10-Q.

Securities gains increased from the second quarter and first six months of 2009, due to continued repositioning of the Corporate investment portfolio in connection with managing the Firm’s structural interest rate risk. The second quarter of 2009 included a $241 million gain on the sale of MasterCard shares. For additional information on securities gains, which are mostly recorded in the Firm’s Corporate business, and Corporate’s investment securities portfolio, see the Corporate/Private Equity segment discussion on pages 51-53 of this Form 10-Q.

Mortgage fees and related income increased from the second quarter of 2009, due to higher net mortgage servicing revenue, predominantly reflecting higher mortgage servicing rights (“MSR”) risk management results. Partially offsetting this increase was lower production revenue, predominantly reflecting higher repurchase losses. Mortgage fees and related income decreased from the first six months of 2009 due to lower production revenue, reflecting higher repurchase losses and, to a lesser extent, lower net mortgage servicing revenue, as lower MSR risk management results were offset partially by higher operating revenue. For additional information on mortgage fees and related income, which is recorded primarily in RFS, see RFS’s Mortgage Banking & Other Consumer Lending discussion on pages 29-32 of this Form 10-Q.

Credit card income decreased from the second quarter and first six months of 2009, due predominantly to the impact of the new consolidation guidance related to VIEs, effective January 1, 2010, that required the Firm to consolidate the assets and liabilities of its Firm-sponsored credit card securitization trusts. Adoption of the new guidance resulted in the elimination of all servicing fees received from Firm-sponsored credit card securitization trusts (offset by a respective increase in net interest income and the provision for loan losses, and elimination of securitization income/losses in other income). For a more detailed discussion of the impact of the adoption of the new consolidation guidance on the Consolidated Statements of Income, see Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures on pages 15-19 of this Form 10-Q. For additional information on credit card income, see the CS segment results on pages 36-40 of this Form 10-Q.

Other income increased in the second quarter and first six months of 2010 compared with the prior-year periods, due largely to the absence of the write-down of securitization interests in 2010, compared with losses of $268 million and $448 million during the second quarter and first half of 2009, respectively. Higher auto operating lease income in RFS also contributed to the increase in other income.

Net interest income for the second quarter of 2010 was relatively flat compared with the prior-year quarter, as the impact of the adoption of the new consolidation guidance related to VIEs (which increased net interest income by approximately $1.4 billion) offset the decline in loan and deposit balances. The Firm’s interest-earning assets for the second quarter of 2010 were $1.7 trillion, and the net yield on those assets, on a fully taxable-equivalent (“FTE”) basis, was 3.06%, a decrease of one basis point from 2009. Compared with the first quarter of 2010, the net yield on interest-earning assets declined by 26 basis points, driven by lower yields on loans, primarily in CS and RFS, lower credit card outstandings, and lower yields on securities resulting from investment portfolio repositioning. Net interest income for the first six months of 2010 increased slightly from the prior-year period, driven by the impact of the new consolidation guidance related to VIEs which increased net interest income by approximately $3.2 billion, mainly as a result of the consolidation of Firm-sponsored credit card securitization trusts. Excluding the impact of the adoption of the new accounting guidance, net interest income decreased — driven by lower average loan balances, primarily in CS, RFS and IB — and lower yields on credit card receivables, reflecting the impact of legislative changes. The Firm’s interest-earning assets for the first six months of 2010 were $1.7 trillion, and the net yield on those assets, on a FTE basis, was 3.19%, an increase of one basis point from 2009. For a more detailed discussion of the impact of the adoption of the new consolidation guidance related to VIEs on the Consolidated Statements of Income, see Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures on pages 15-19 of this Form 10-Q.

Provision for credit losses		Three months ended June 30,												Six months ended June 30,
(in millions)		2010				2009				Change				2010				2009				Change
Wholesale		$	(572	)		$	1,244			NM				$	(808	)		$	2,774			NM
Consumer			3,935				6,787				(42	)%			11,181				13,853				(19	)%
Total provision for credit losses		$	3,363			$	8,031				(58	)%		$	10,373			$	16,627				(38	)%

The provision for credit losses decreased from the second quarter and first six months of 2009. The decrease in the wholesale provision in both 2010 periods reflected a reduction in the allowance for credit losses, mainly due to net repayments and loan sales in IB; and refinements to credit loss estimates and improvement in the credit quality of the commercial and industrial portfolio in CB. The decrease in the consumer provision for both 2010 periods reflected improved delinquency trends and reduced net charge-offs across most consumer portfolios; it included reductions in the allowance for loan losses in CS of $1.5 billion and $2.5 billion in the second quarter and first six months of 2010, respectively (compared with additions of $250 million and $1.4 billion in the comparable 2009 periods). The first six months of 2010 also included a $1.2 billion addition to the allowance for loan losses in RFS, related to further estimated deterioration in the Washington Mutual prime and option adjustable-rate mortgage (“ARM”) purchased credit-impaired portfolios. For a more detailed discussion of the loan portfolio and the allowance for credit losses, see the segment discussions for RFS on pages 25-35, CS on pages 36-40, IB on pages 21-24 and CB on pages 41-43, and the Allowance for Credit Losses section on pages 91-94 of this Form 10-Q.

Noninterest expense

The following table presents the components of noninterest expense.

		Three months ended June 30,												Six months ended June 30,
(in millions)		2010				2009				Change				2010				2009				Change
Compensation expense(a)		$	7,616			$	6,917				10	%		$	14,892			$	14,505				3	%
Noncompensation expense:
Occupancy			883				914				(3	)			1,752				1,799				(3	)
Technology, communications and equipment			1,165				1,156				1				2,302				2,302				—
Professional and outside services			1,685				1,518				11				3,260				3,033				7
Marketing			628				417				51				1,211				801				51
Other(b)(c)(d)			2,419				2,190				10				6,860				3,565				92
Amortization of intangibles			235				265				(11	)			478				540				(11	)
Total noncompensation expense			7,015				6,460				9				15,863				12,040				32
Merger costs			—				143			NM					—				348			NM
Total noninterest expense		$	14,631			$	13,520				8	%		$	30,755			$	26,893				14	%

(a)		The second quarter and first six months of 2010 included a tax expense related to the U.K. Bank Payroll Tax on certain compensation awarded from December 9, 2009, to April 5, 2010, to relevant banking employees.
(b)		Includes litigation expense of $792 million and $3.7 billion for the three and six months ended June 30, 2010, compared with $14 million and a net benefit of $256 million for the three and six months ended June 30, 2009, respectively.
(c)		Includes foreclosed property expense of $244 million and $547 million for the three and six months ended June 30, 2010, respectively, compared with $294 million and $619 million for the three and six months ended June 30, 2009, respectively. For additional information regarding foreclosed property, see Note 13 on page 196 of JPMorgan Chase’s 2009 Annual Report.
(d)		The second quarter of 2009 included a $675 million Federal Deposit Insurance Corporation (“FDIC”) special assessment.

Total noninterest expense for the second quarter of 2010 was $14.6 billion, up by $1.1 billion, or 8%, from the second quarter of 2009. For the first six months of 2010, total noninterest expense was $30.8 billion, up by $3.9 billion, or 14%, from the comparable 2009 period. The increase for both periods was driven by higher noncompensation expense, predominantly due to significant additions to litigation reserves; and higher compensation expense, reflecting a payroll tax expense predominantly in IB, related to the U.K. Bank Payroll Tax on certain compensation awarded from December 9, 2009, to April 5, 2010, to relevant banking employees. These increases were partially offset by lower performance-based incentives, and by the absence of a $675 million FDIC special assessment recognized in the second quarter of 2009.

Compensation expense in the second quarter and first six months of 2010 increased compared with the prior-year periods, due to the impact of the U.K. Bank Payroll Tax described above; ongoing investments in the businesses, including sales force increases in RFS; and higher performance-based compensation expense in several businesses. This was offset partially by lower performance-based compensation expense in IB.

Noncompensation expense increased for the second quarter and first six months of 2010 compared with the prior-year periods, due predominantly to significant additions to litigation reserves; higher marketing expense in CS; and higher brokerage, clearing and exchange transaction processing expense in IB. The increase for both periods was partially offset by the absence of a $675 million FDIC special assessment recognized in the second quarter of 2009.

For a discussion of amortization of intangibles, refer to Note 16 on pages 166-167 of this Form 10-Q.

There were no merger costs recorded in the second quarter or first six months of 2010. Merger costs of $143 million and $348 million were recorded in the second quarter and first six months of 2009, respectively. For additional information on merger costs, refer to Note 10 on page 139 of this Form 10-Q.

Income tax expense

		Three months ended June 30,								Six months ended June 30,
(in millions, except rate)		2010				2009				2010				2009
Income before income tax expense		$	7,107			$	4,072			$	11,644			$	7,128
Income tax expense			2,312				1,351				3,523				2,266
Effective tax rate			32.5	%			33.2	%			30.3	%			31.8	%

The decrease in the effective tax rate for the second quarter and first six months of 2010 compared with the prior-year periods was primarily the result of lower state and local income taxes, as well as tax benefits recognized upon the resolution of tax audits in 2010. The decrease was partially offset by the impact of higher reported pretax income for 2010. For additional information on income taxes, see Critical Accounting Estimates Used by the Firm on pages 100-102 of this Form 10-Q.

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

The Firm prepares its consolidated financial statements using accounting principles generally accepted in the U.S. (“U.S. GAAP”); these financial statements appear on pages 104-107 of this Form 10-Q. That presentation, which is referred to as “reported basis,” provides the reader with an understanding of the Firm’s results that can be tracked consistently from year to year and enables a comparison of the Firm’s performance with other companies’ U.S. GAAP financial statements.

In addition to analyzing the Firm’s results on a reported basis, management reviews the Firm’s results and the results of the lines of business on a “managed” basis, which is a non-GAAP financial measure. The Firm’s definition of managed basis starts with the reported U.S. GAAP results and includes certain reclassifications to present total net revenue for the Firm (and each of the business segments) on a FTE basis. Accordingly, revenue from tax-exempt securities and investments that receive tax credits is presented in the managed results on a basis comparable to taxable securities and investments. This non-GAAP financial measure allows management to assess the comparability of revenue arising from both taxable and tax-exempt sources. The corresponding income tax impact related to these items is recorded within income tax expense. These adjustments have no impact on net income as reported by the Firm as a whole or by the lines of business.

Prior to January 1, 2010, the Firm’s managed-basis presentation also included certain reclassification adjustments that assumed credit card loans securitized by CS remained on the balance sheet. Effective January 1, 2010, the Firm adopted new accounting guidance that required the Firm to consolidate its Firm-sponsored credit card securitizations trusts. The income, expense and credit costs associated with these securitization activities are now recorded in the 2010 Consolidated Statements of Income in the same classifications that were previously used to report such items on a managed basis. As a result of the consolidation of the credit card securitization trusts, reported and managed basis relating to credit card securitizations are equivalent for periods beginning after January 1, 2010. For additional information on the new accounting guidance, see Note 15 on pages 151-163 of this Form 10-Q.

The presentation in 2009 of CS results on a managed basis assumed that credit card loans that had been securitized and sold in accordance with U.S. GAAP remained on the Consolidated Balance Sheets, and that the earnings on the securitized loans were classified in the same manner as the earnings on retained loans recorded on the Consolidated Balance Sheets. JPMorgan Chase used the concept of managed basis to evaluate the credit performance and overall financial performance of the entire managed credit card portfolio. Operations were funded and decisions were made about allocating resources, such as employees and capital, based on managed financial information. In addition, the same underwriting standards and ongoing risk monitoring are used for both loans on the Consolidated Balance Sheets and securitized loans. Although securitizations result in the sale of credit card receivables to a trust, JPMorgan Chase retains the ongoing customer relationships, as the customers may continue to use their credit cards; accordingly, the customer’s credit performance affects both the securitized loans and the loans retained on the Consolidated Balance Sheets. JPMorgan Chase believed that this managed-basis information was useful to investors, as it enabled them to understand both the credit risks associated with the loans reported on the Consolidated Balance Sheets and the Firm’s retained interests in securitized loans. For a reconciliation of 2009 reported to managed basis results for CS, see CS segment results on pages 36-40 of this Form 10-Q. For information regarding the securitization process, and loans and residual interests sold and securitized, see Note 15 on pages 151-163 of this Form 10-Q.

Tangible common equity (“TCE”) represents common stockholders’ equity (i.e., total stockholders’ equity less preferred stock) less identifiable intangible assets (other than MSRs) and goodwill, net of related deferred tax liabilities. ROTCE, a non-GAAP financial ratio, measures the Firm’s earnings as a percentage of TCE and is, in management’s view, a meaningful measure to assess the Firm’s use of equity.

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

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

		Three months ended June 30, 2010
										Fully
		Reported				Credit				tax-equivalent				Managed
(in millions, except per share and ratios)		results				card(b)				adjustments				basis
Revenue
Investment banking fees		$	1,421			NA				$	—			$	1,421
Principal transactions			2,090			NA					—				2,090
Lending- and deposit-related fees			1,586			NA					—				1,586
Asset management, administration and commissions			3,349			NA					—				3,349
Securities gains			1,000			NA					—				1,000
Mortgage fees and related income			888			NA					—				888
Credit card income			1,495			NA					—				1,495
Other income			585			NA					416				1,001
Noninterest revenue			12,414			NA					416				12,830
Net interest income			12,687			NA					96				12,783
Total net revenue			25,101			NA					512				25,613
Noninterest expense			14,631			NA					—				14,631
Pre-provision profit			10,470			NA					512				10,982
Provision for credit losses			3,363			NA					—				3,363
Income before income tax expense			7,107			NA					512				7,619
Income tax expense			2,312			NA					512				2,824
Net income		$	4,795			NA				$	—			$	4,795
Diluted earnings per share		$	1.09			NA				$	—			$	1.09
Return on assets			0.94	%		NA				NM					0.94	%
Overhead ratio			58			NA				NM					57

		Three months ended June 30, 2009
										Fully
		Reported				Credit				tax-equivalent				Managed
(in millions, except per share and ratios)		results				card(b)				adjustments				basis
Revenue
Investment banking fees		$	2,106			$	—			$	—			$	2,106
Principal transactions			3,097				—				—				3,097
Lending- and deposit-related fees			1,766				—				—				1,766
Asset management, administration and commissions			3,124				—				—				3,124
Securities gains			347				—				—				347
Mortgage fees and related income			784				—				—				784
Credit card income			1,719				(294	)			—				1,425
Other income			10				—				335				345
Noninterest revenue			12,953				(294	)			335				12,994
Net interest income			12,670				1,958				87				14,715
Total net revenue			25,623				1,664				422				27,709
Noninterest expense			13,520				—				—				13,520
Pre-provision profit			12,103				1,664				422				14,189
Provision for credit losses			8,031				1,664				—				9,695
Income before income tax expense			4,072				—				422				4,494
Income tax expense			1,351				—				422				1,773
Net income		$	2,721			$	—			$	—			$	2,721
Diluted earnings per share(a)		$	0.28			$	—			$	—			$	0.28
Return on assets			0.54	%		NM				NM					0.51	%
Overhead ratio			53			NM				NM					49

NA: Not applicable

		Six months ended June 30, 2010
										Fully
		Reported				Credit				tax-equivalent				Managed
(in millions, except per share and ratios)		results				card(b)				adjustments				basis
Revenue
Investment banking fees		$	2,882			NA				$	—			$	2,882
Principal transactions			6,638			NA					—				6,638
Lending- and deposit-related fees			3,232			NA					—				3,232
Asset management, administration and commissions			6,614			NA					—				6,614
Securities gains			1,610			NA					—				1,610
Mortgage fees and related income			1,546			NA					—				1,546
Credit card income			2,856			NA					—				2,856
Other income			997			NA					827				1,824
Noninterest revenue			26,375			NA					827				27,202
Net interest income			26,397			NA					186				26,583
Total net revenue			52,772			NA					1,013				53,785
Noninterest expense			30,755			NA					—				30,755
Pre-provision profit			22,017			NA					1,013				23,030
Provision for credit losses			10,373			NA					—				10,373
Income before income tax expense			11,644			NA					1,013				12,657
Income tax expense			3,523			NA					1,013				4,536
Net income		$	8,121			NA				$	—			$	8,121
Diluted earnings per share		$	1.83			NA				$	—			$	1.83
Return on assets			0.80	%		NA				NM					0.80	%
Overhead ratio			58			NA				NM					57

		Six months ended June 30, 2009
										Fully
		Reported				Credit				tax-equivalent				Managed
(in millions, except per share and ratios)		results				card(b)				adjustments				basis
Revenue
Investment banking fees		$	3,492			$	—			$	—			$	3,492
Principal transactions			5,098				—				—				5,098
Lending- and deposit-related fees			3,454				—				—				3,454
Asset management, administration and commissions			6,021				—				—				6,021
Securities gains			545				—				—				545
Mortgage fees and related income			2,385				—				—				2,385
Credit card income			3,556				(834	)			—				2,722
Other income			60				—				672				732
Noninterest revenue			24,611				(834	)			672				24,449
Net interest income			26,037				3,962				183				30,182
Total net revenue			50,648				3,128				855				54,631
Noninterest expense			26,893				—				—				26,893
Pre-provision profit			23,755				3,128				855				27,738
Provision for credit losses			16,627				3,128				—				19,755
Income before income tax expense			7,128				—				855				7,983
Income tax expense			2,266				—				855				3,121
Net income		$	4,862			$	—			$	—			$	4,862
Diluted earnings per share(a)		$	0.68			$	—			$	—			$	0.68
Return on assets			0.48	%		NM				NM					0.46	%
Overhead ratio			53			NM				NM					49

(a)		The calculation of second quarter 2009 EPS includes a one-time, noncash reduction of $1.1 billion, or $0.27 per share ($0.28 per share for the six months ended June 30, 2009), resulting from the repayment of TARP preferred capital.
(b)		See pages 36-40 of this Form 10-Q for a discussion of the effect of credit card securitizations on CS results.

NA: Not applicable

Three months ended June 30,		2010												2009
(in millions)		Reported				Securitized(a)				Managed				Reported				Securitized(a)				Managed
Loans — Period-end		$	699,483			NA				$	699,483			$	680,601			$	85,790			$	766,391
Total assets — average			2,043,647			NA					2,043,647				2,038,372				81,588				2,119,960

Six months ended June 30,		2010												2009
(in millions)		Reported				Securitized(a)				Managed				Reported				Securitized(a)				Managed
Loans — Period-end		$	699,483			NA				$	699,483			$	680,601			$	85,790			$	766,391
Total assets — average			2,041,177			NA					2,041,177				2,052,666				82,182				2,134,848

(a)		Loans securitized are defined as loans that were sold to nonconsolidated securitization trusts and were not included in reported loans as of or for the three and six months ended June 30, 2009. For further discussion of credit card securitizations, see Note 15 on pages 151-163 of this Form 10-Q.

Average tangible common equity

		Three months ended																				Six months ended
		June 30,				March 31,				Dec. 31,				Sept. 30,				June 30,				June 30,				June 30,
(in millions)		2010				2010				2009				2009				2009				2010				2009
Common stockholders’ equity		$	159,069			$	156,094			$	156,525			$	149,468			$	140,865			$	157,590			$	138,691
Less: Goodwill			48,348				48,542				48,341				48,328				48,273				48,445				48,173
Less: Certain identifiable intangible assets			4,265				4,307				4,741				4,984				5,218				4,285				5,329
Add: Deferred tax liabilities(a)			2,564				2,541				2,533				2,531				2,518				2,553				2,562
Tangible common equity (TCE)		$	109,020			$	105,786			$	105,976			$	98,687			$	89,892			$	107,413			$	87,751

(a)		Represents deferred tax liabilities related to tax-deductible goodwill and to identifiable intangibles created in non-taxable transactions, which are netted against goodwill and other intangibles when calculating TCE.

Impact on ROE of redemption of TARP preferred stock issued to the U.S. Treasury

The calculation of second quarter and year-to-date of 2009 net income applicable to common equity includes a one-time, noncash reduction of $1.1 billion resulting from the repayment of TARP preferred capital. Excluding this reduction ROE would have been 6% for both the second quarter and year-to-date 2009 as disclosed in the table below. The Firm views the adjusted ROE, a non-GAAP financial measure, as meaningful because it increases the comparability to prior periods.

		Three months ended June 30, 2009								Six months ended June 30, 2009
						Excluding the								Excluding the
(in millions, except ratios)		As reported				TARP redemption				As reported				TARP redemption
Return on equity
Net income		$	2,721			$	2,721			$	4,862			$	4,862
Less: Preferred stock dividends			473				473				1,002				1,002
Less: Accelerated amortization from redemption of preferred stock issued to the U.S. Treasury			1,112				—				1,112				—
Net income applicable to common equity		$	1,136			$	2,248			$	2,748			$	3,860
Average common stockholders’ equity		$	140,865			$	140,865			$	138,691			$	138,691
Return on common equity			3	%			6	%			4	%			6	%

Impact on diluted earnings per share of redemption of TARP preferred stock issued to the U.S. Treasury

Net income applicable to common equity for the second quarter and year-to-date 2009 includes a one-time, noncash reduction of approximately $1.1 billion resulting from the repayment of TARP preferred capital. The following table presents the calculations of the effect on net income applicable to common stockholders for the second quarter and year-to-date 2009 and the $0.27 and $0.28 reduction, respectively, to diluted EPS which resulted from the repayment.

		Three months ended June 30, 2009								Six months ended June 30, 2009
						Effect of TARP								Effect of TARP
(in millions, except per share)		As reported				redemption				As reported				redemption
Diluted earnings per share
Net income		$	2,721			$	—			$	4,862			$	—
Less: Preferred stock dividends			473				—				1,002				—
Less: Accelerated amortization from redemption of preferred stock issued to the U.S. Treasury			1,112				1,112				1,112				1,112
Net income applicable to common equity		$	1,136			$	(1,112	)		$	2,748			$	(1,112	)
Less: Dividends and undistributed earnings allocated to participating securities			64				(64	)			157				(65	)
Net income applicable to common stockholders		$	1,072			$	(1,048	)		$	2,591			$	(1,047	)
Total weighted average diluted shares outstanding			3,824.1				3,824.1				3,791.4				3,791.4
Net income per share		$	0.28			$	(0.27	)		$	0.68			$	(0.28	)

Other financial measures

The Firm also discloses the allowance for loan losses to total retained loans, excluding home lending purchased credit-impaired loans and loans held by the WMMT. For a further discussion of this credit metric, see Allowance for Credit Losses on pages 91-94 of this Form 10-Q.

BUSINESS SEGMENT RESULTS

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

Description of business segment reporting methodology

Results of the business segments are intended to reflect each segment as if it were essentially a stand-alone business. The management reporting process that derives business segment results allocates income and expense using market-based methodologies. For a further discussion of those methodologies, see Business Segment Results — Description of business segment reporting methodology on pages 53-54 of JPMorgan Chase’s 2009 Annual Report. The Firm continues to assess the assumptions, methodologies and reporting classifications used for segment reporting, and further refinements may be implemented in future periods.

Business segment capital allocation changes

Each business segment is allocated capital by taking into consideration stand-alone peer comparisons, economic risk measures and regulatory capital requirements. The amount of capital assigned to each business is referred to as equity. Effective January 1, 2010, the Firm enhanced its line of business equity framework to better align equity assigned to each line of business with the changes anticipated to occur in the business, and in the competitive and regulatory landscape. Equity was assigned to the lines of business based on the Tier 1 common standard, rather than the Tier 1 capital standard. For a further discussion of the changes, see Capital Management — Line-of-business equity on pages 63-64 of this Form 10-Q.

Segment Results — Managed Basis^(a)

The following table summarizes the business segment results for the periods indicated.

Three months ended																																						Return
June 30,		Total net revenue												Noninterest expense												Net income/(loss)												on equity
(in millions, except ratios)		2010				2009				Change				2010				2009				Change				2010				2009				Change				2010				2009
Investment Bank(b)		$	6,332			$	7,301				(13	)%		$	4,522			$	4,067				11	%		$	1,381			$	1,471				(6	)%			14	%			18	%
Retail Financial Services			7,809				7,970				(2	)			4,281				4,079				5				1,042				15			NM					15				—
Card Services			4,217				4,868				(13	)			1,436				1,333				8				343				(672	)		NM					9				(18	)
Commercial Banking			1,486				1,453				2				542				535				1				693				368				88				35				18
Treasury & Securities Services			1,881				1,900				(1	)			1,399				1,288				9				292				379				(23	)			18				30
Asset Management			2,068				1,982				4				1,405				1,354				4				391				352				11				24				20
Corporate/Private Equity(b)			1,820				2,235				(19	)			1,046				864				21				653				808				(19	)		NM				NM
Total		$	25,613			$	27,709				(8	)%		$	14,631			$	13,520				8	%		$	4,795			$	2,721				76	%			12	%			3	%