UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

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

JPMORGAN CHASE & CO.

(Exact name of registrant as specified in its charter)

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

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

þ Yes o No

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

þ Yes o No

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

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

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

o Yes þ No

Number of shares of common stock outstanding as of October 31, 2010: 3,909,181,427

 

 

FORM 10-Q
TABLE OF CONTENTS

		Page
Part I — Financial information
Item 1 Consolidated Financial Statements – JPMorgan Chase & Co.:
Consolidated Statements of Income (unaudited) for the three and nine months ended September 30, 2010 and 2009			108
Consolidated Balance Sheets (unaudited) at September 30, 2010, and December 31, 2009			109
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income (unaudited) for the nine months ended September 30, 2010 and 2009			110
Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2010 and 2009			111
Notes to Consolidated Financial Statements (unaudited)			112
Consolidated Average Balance Sheets, Interest and Rates (unaudited) for the three and nine months ended September 30, 2010 and 2009			183
Glossary of Terms and Line of Business Metrics			185
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			56
Capital Management			62
Risk Management			66
Supervision and Regulation			102
Other Matters			103
Critical Accounting Estimates Used by the Firm			104
Accounting and Reporting Developments			107
Forward-Looking Statements			191
Item 3 Quantitative and Qualitative Disclosures About Market Risk			192
Item 4 Controls and Procedures			192
Part II — Other information
Item 1 Legal Proceedings			192
Item 1A Risk Factors			200
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			201
Item 3 Defaults Upon Senior Securities			202
Item 4 Submission of Matters to a Vote of Security Holders			202
Item 5 Other Information			202
Item 6 Exhibits			202
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.

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

(unaudited)																						Nine months ended
(in millions, except ratios)																						September 30,
As of or for the period ended,		3Q10				2Q10				1Q10				4Q09				3Q09				2010				2009
Credit quality metrics
Allowance for credit losses(f)		$	35,034			$	36,748			$	39,126			$	32,541			$	31,454			$	35,034			$	31,454
Allowance for loan losses to total retained loans(f)			4.97	%			5.15	%			5.40	%			5.04	%			4.74	%			4.97	%			4.74	%
Allowance for loan losses to retained loans excluding purchased credit-impaired loans(f)(h)			5.12				5.34				5.64				5.51				5.28				5.12				5.28
Nonperforming assets		$	17,656			$	18,156			$	19,019			$	19,741			$	20,362			$	17,656			$	20,362
Net charge-offs			4,945				5,714				7,910				6,177				6,373				18,569				16,788
Net charge-off rate			2.84	%			3.28	%			4.46	%			3.85	%			3.84	%			3.53	%			3.28	%
Wholesale net charge-off rate			0.49				0.44				1.84				2.31				1.93				0.92				1.13
Consumer net charge-off rate			3.90				4.49				5.56				4.60				4.79				4.66				4.36

(a)		Pre-provision profit is total net revenue less noninterest expense. The Firm believes that this financial measure is useful in assessing the ability of a lending institution to generate income in excess of its provision for credit losses.
(b)		On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual Bank (“Washington Mutual”). The acquisition resulted in negative goodwill, and accordingly, the Firm recognized an extraordinary gain. A preliminary gain of $1.9 billion was recognized at December 31, 2008. The final total extraordinary gain that resulted from the Washington Mutual transaction was $2.0 billion.
(c)		The calculation of year-to-date 2009 earnings per share (“EPS”) and net income applicable to common equity includes a one-time, noncash reduction of $1.1 billion, or $0.27 per share, resulting from repayment of U.S. Troubled Asset Relief Program (“TARP”) preferred capital. Excluding this reduction, the adjusted ROE and ROTCE for the year-to-date 2009 would have been 7% and 11%, respectively. The Firm views the adjusted ROE and ROTCE, both non-GAAP financial measures, as meaningful because they enable the comparability to prior periods. For further discussion, see “Explanation and Reconciliation of the Firm’s use of Non-GAAP Financial measures” on pages 15–19 of this Form 10-Q and pages 50–52 of JPMorgan Chase’s 2009 Annual Report.
(d)		On June 5, 2009, the Firm issued $5.8 billion, or 163 million shares, of its common stock at $35.25 per share.
(e)		Share prices shown for JPMorgan Chase’s common stock are from the New York Stock Exchange. JPMorgan Chase’s common stock is also listed and traded on the London Stock Exchange and the Tokyo Stock Exchange.
(f)		Effective January 1, 2010, the Firm adopted new guidance that amended the accounting for the transfer of financial assets and the consolidation of variable interest entities (“VIEs”). Upon adoption of the new guidance, the Firm consolidated its Firm-sponsored credit card securitization trusts, Firm-administered multi-seller conduits and certain other consumer loan securitization entities, primarily mortgage-related, adding $87.7 billion and $92.2 billion of assets and liabilities, respectively, and decreasing stockholders’ equity and the Tier I capital ratio by $4.5 billion and 34 basis points, respectively. The reduction to stockholders’ equity was driven by the establishment of an allowance for loan losses of $7.5 billion (pretax) primarily related to receivables held in credit card securitization trusts that were consolidated at the adoption date.
(g)		The Firm uses Tier 1 common capital (“Tier 1 common”) along with the other capital measures to assess and monitor its capital position. The Tier 1 common capital ratio (“Tier 1 common ratio”) is Tier 1 common divided by risk-weighed assets. For further discussion, see Regulatory capital on pages 82–84 of JPMorgan Chase’s 2009 Annual Report.
(h)		Excludes the impact of home lending purchased credit-impaired (“PCI”) loans for all periods. Also excludes, as of December 31, 2009, and September 30, 2009, the loans held by the Washington Mutual Master Trust (“WMMT”), which were consolidated onto the balance sheet at fair value during the second quarter of 2009. No allowance for loan losses was recorded for these loans as of December 31, 2009 and September 30, 2009. The balance of these loans held by the WMMT was zero at September 30, 2010, June 30, 2010 and March 31, 2010. See Note 15 on pages 198-205 of JPMorgan Chase’s 2009 Annual Report.

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

This section of the Form 10-Q provides management’s discussion and analysis (“MD&A”) of the financial condition and results of operations of JPMorgan Chase. See the Glossary of terms on pages 185–188 for definitions of terms used throughout this Form 10-Q. The MD&A included in this Form 10-Q contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on the current beliefs and expectations of JPMorgan Chase’s management and are subject to significant risks and uncertainties. These risks and uncertainties could cause the Firm’s actual results to differ materially from those set forth in such forward-looking statements. Certain of such risks and uncertainties are described herein (See Forward-looking Statements on pages 191–192 and Part II, Item 1A: Risk Factors on pages 200–201 of this Form 10-Q).

INTRODUCTION

JPMorgan Chase & Co., a financial holding company incorporated under Delaware law in 1968, is a leading global financial services firm and one of the largest banking institutions in the United States of America (“U.S.”), with $2.1 trillion in assets, $173.8 billion in stockholders’ equity and operations in more than 60 countries as of September 30, 2010. The Firm is a leader in investment banking, financial services for consumers and businesses, financial transaction processing and asset management. Under the J.P. Morgan and Chase brands, the Firm serves millions of customers in the U.S. and many of the world’s most prominent corporate, institutional and government clients.

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

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

Investment Bank

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

Retail Financial Services

Retail Financial Services (“RFS”) serves consumers and businesses through personal service at bank branches and through ATMs, online banking and telephone banking, as well as through auto dealerships and school financial-aid offices. Customers can use more than 5,100 bank branches (third-largest nationally) and 15,800 ATMs (second-largest nationally), as well as online and mobile banking around the clock. More than 28,500 branch salespeople assist customers with checking and savings accounts, mortgages, home equity and business loans, and investments across the 23-state footprint from New York and Florida to California. Consumers also can obtain loans through more than 16,000 auto dealerships and 1,700 schools and universities nationwide.

Card Services

Card Services (“CS”) is one of the nation’s largest credit card issuers, with over $136 billion in loans and nearly 90 million open accounts. In the nine months ended September 30, 2010, customers used Chase cards to meet over $227 billion of their spending needs. Through its merchant acquiring business, Chase Paymentech Solutions, CS is a global leader in payment processing and merchant acquiring.

Commercial Banking

Commercial Banking (“CB”) delivers extensive industry knowledge, local expertise and dedicated service to more than 24,000 clients nationally, including corporations, municipalities, financial institutions and not-for-profit entities with annual revenue generally ranging from $10 million to $2 billion, and more than 35,000 real estate investors/owners. CB partners with the Firm’s other businesses to provide comprehensive solutions, including lending, treasury services, investment banking and asset management to meet its clients’ domestic and international financial needs.

Treasury & Securities Services

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

Asset Management

Asset Management (“AM”), with assets under supervision of $1.8 trillion, is a global leader in investment and wealth management. AM clients include institutions, retail investors and high-net-worth individuals in every major market throughout the world. AM offers global investment management in equities, fixed income, real estate, hedge funds, private equity and liquidity products, including money-market instruments and bank deposits. AM also provides trust and estate, banking and brokerage services to high-net-worth clients, and retirement services for corporations and individuals. The majority of AM’s client assets are in actively managed portfolios.

EXECUTIVE OVERVIEW

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

The U.S. economy continued to grow, albeit slowly, during the third quarter of 2010. U.S. consumer spending continued to increase at a moderate pace, in the face of high unemployment and modest income growth. Spending on equipment and technology rose during the quarter, supported by the healthy financial condition of U.S. businesses. However, hiring slowed modestly, and bank lending continued to trend lower, though at a reduced rate. Outside the U.S., the pace of growth slowed in the third quarter, reflecting a moderation in most developed and developing economies. A modest pickup in Japan and continued strong growth in China and India were the exceptions.

The equity markets rebounded in the third quarter, as recent economic data implied the U.S. economy, while recovering slowly, was not falling back into recession. The Federal Reserve maintained the target range for the federal funds rate at zero to one-quarter percent and continued to indicate that economic conditions are likely to warrant a low federal funds rate for an extended period. Also, the Federal Reserve began to buy U.S. Treasuries using the proceeds received from repayments or refinancings of outstanding mortgages in its portfolio. The Federal Reserve also announced that it was considering other options to help the economy.

Financial performance of JPMorgan Chase

		Three months ended September 30,												Nine months ended September 30,
(in millions, except per share data and ratios)		2010				2009				Change				2010				2009				Change
Selected income statement data
Total net revenue		$	23,824			$	26,622				(11	)%		$	76,596			$	77,270				(1	)%
Total noninterest expense			14,398				13,455				7				45,153				40,348				12
Pre-provision profit			9,426				13,167				(28	)			31,443				36,922				(15	)
Provision for credit losses			3,223				8,104				(60	)			13,596				24,731				(45	)
Income before extraordinary gain			4,418				3,512				26				12,539				8,374				50
Extraordinary gain(a)			—				76			NM					—				76			NM
Net income			4,418				3,588				23				12,539				8,450				48
Diluted earnings per share(b)
Income before extraordinary gain		$	1.01			$	0.80				26			$	2.84			$	1.50				89
Net income			1.01				0.82				23				2.84				1.51				88
Return on common equity(b)
Income before extraordinary gain			10	%			9	%							10	%			6	%
Net income			10				9								10				6
Capital ratios
Tier 1 capital			11.9				10.2
Tier 1 common			9.5				8.2

(a)		On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual Bank (“Washington Mutual”). The acquisition resulted in negative goodwill, and accordingly, the Firm recognized an extraordinary gain. A preliminary gain of $1.9 billion was recognized at December 31, 2008. The final total extraordinary gain that resulted from the Washington Mutual transaction was $2.0 billion.
(b)		The calculation of EPS and net income applicable to common equity for the nine months ended September 30, 2009, included a one-time noncash reduction of $1.1 billion, or $0.27 per share, resulting from repayment of TARP preferred capital. Excluding this reduction, the adjusted ROE for the first nine months of 2009 would have been 7%. The Firm views the adjusted ROE, a non-GAAP financial measure, as meaningful because it enables comparability to prior periods. For further discussion, see “Explanation and Reconciliation of the Firm’s use of Non-GAAP Financial measures” on pages 15–19 of this Form 10-Q and pages 50–52 of JPMorgan Chase’s 2009 Annual Report.

Business overview

JPMorgan Chase reported third-quarter 2010 net income of $4.4 billion, or $1.01 per share, compared with net income of $3.6 billion, or $0.82 per share, in the third quarter of 2009. Current-quarter EPS included a $1.3 billion pretax ($0.18 per share after-tax) increase to litigation reserves, including those for mortgage-related matters; a $1.0 billion pretax ($0.15 per share after-tax) increase to mortgage repurchase reserves; and a benefit from a $1.5 billion pretax ($0.22 per share after-tax) reduction of loan loss reserves in Card Services. ROE for the quarter was 10%, compared with 9% in the prior year.

The increase in earnings from the third quarter of 2009 was driven by a significantly lower provision for credit losses, predominantly offset by lower net revenue and higher noninterest expense. The decline in net revenue was driven by lower principal transactions revenue, reflecting lower trading results. The lower provision for credit losses reflected improvements in both the consumer and wholesale provisions. The consumer provision declined due to a reduction in the allowance for credit losses associated with the credit card portfolio as a result of improved delinquency trends and reduced net charge-offs. The decrease in the wholesale provision was driven by a reduction in the allowance for credit losses predominantly as

a result of continued improvement in the credit quality of the commercial and industrial loan portfolio, reduced net charge-offs and net repayments. The increase in noninterest expense in the third quarter of 2010 was largely due to higher litigation expense. JPMorgan Chase maintained very high liquidity, with a deposits-to-loans ratio of 131%, and increased its capital, ending the quarter with a strong Tier 1 common ratio of 9.5%.

While overall credit costs continued to decline in the third quarter of 2010, the levels of net charge-offs in the mortgage and credit card portfolios continued to be very high. Mortgage delinquency trends remained relatively flat compared with the prior quarter, while credit card delinquencies continued to improve. Total firmwide credit reserves declined to $35.0 billion, resulting in a firmwide coverage ratio of 5.1% of total loans.

Net income for the first nine months of 2010 was $12.5 billion, or $2.84 per share, compared with $8.5 billion, or $1.51 per share, in the first nine months of 2009. The increase in earnings from the comparable 2009 nine-month period was driven by a lower provision for credit losses, partially offset by higher noninterest expense. The factors that drove the lower provision for credit losses and the higher noninterest expense in the nine-month results comparison were the same as those that drove the third-quarter results comparison. Net revenue decreased modestly in the first nine months of 2010 compared with the prior year, reflecting lower markets revenue, lower mortgage fees and related income, and lower credit card revenue, largely offset by a higher level of both private equity and securities gains.

JPMorgan Chase continued to support the economic recovery by providing capital, financing and liquidity to its clients in the U.S. and around the world. During the first nine months of 2010, the Firm loaned or raised capital for its clients of more than $1.0 trillion, and its small-business originations were up 37% over the same period last year. The Firm has offered 975,000 mortgage modifications and has approved 292,000 since the beginning of 2009. In addition, JPMorgan Chase is on track to hire over 10,000 people in the U.S. this year.

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

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

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

Card Services reported net income compared with a net loss in the prior year, as a lower provision for credit losses was partially offset by lower net revenue. The decrease in net revenue was driven by a decline in net interest income, reflecting lower average loan balances, the impact of legislative changes and a decreased level of fees. These decreases were partially offset by lower revenue reversals associated with lower charge-offs. The provision for credit losses decreased from the prior year, reflecting lower net charge-offs and a reduction to the allowance for loan losses due to lower estimated losses. Noninterest expense increased due to higher marketing expense.

Commercial Banking net income increased from the prior year, driven by a reduction in the provision for credit losses. Results included the impact of the purchase of a $3.5 billion loan portfolio during the third quarter of 2010. Net revenue was a record, driven by growth in liability balances, wider loan spreads, changes in the valuation of investments held at fair value and higher investment banking fees, largely offset by spread compression on liability products and lower loan

balances. The provision for credit losses decreased from the third quarter of 2009, reflecting continued improvement in the credit quality of the commercial and industrial loan portfolio. Noninterest expense increased, reflecting higher headcount-related expense.

Treasury and Securities Services net income decreased from the prior year, driven by higher noninterest expense, partially offset by higher net revenue. Treasury Services net revenue increased, driven by higher trade loan and card product volumes, partially offset by lower spreads on liability products. Worldwide Securities Services net revenue also increased, driven by higher market levels and net inflows of assets under custody, partially offset by lower spreads on liability products and securities lending. Noninterest expense for TSS increased, driven by continued investment in new product platforms, primarily related to international expansion, and higher performance-based compensation.

Asset Management net income decreased modestly from the prior year, as higher noninterest expense was largely offset by higher net revenue and a lower provision for credit losses. The growth in net revenue was driven by higher loan originations, the effect of higher market levels, net inflows to products with higher margins and higher deposit and loan balances, partially offset by narrower deposit and loan spreads, lower brokerage revenue and lower quarterly valuations of seed capital investments. Noninterest expense rose due to an increase in headcount.

Corporate/Private Equity net income decreased from the prior year, driven by lower net revenue and higher noninterest expense. The decrease in net revenue reflected lower net interest income from the investment portfolio and lower trading and securities gains, offset partially by higher private equity gains. The increase in noninterest expense was largely due to an increase in litigation reserves, including those for mortgage-related matters.

Business outlook

The following forward-looking statements are based on the current beliefs and expectations of JPMorgan Chase’s management and are subject to significant risks and uncertainties. As noted above, these risks and uncertainties could cause the Firm’s actual results to differ materially from those set forth in such forward-looking statements. See Forward-Looking Statements on pages 191–192 and Risk Factors on pages 200–201 of this Form 10-Q.

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

In the Retail Banking business within RFS, management expects revenue to be stable over the next several quarters, despite continued economic pressure on consumers and consumer spending levels. The Firm has made changes in its policies consistent with and, in certain respects, beyond the requirements of the newly-enacted legislation relating to non-sufficient funds and overdraft fees. Results in the third quarter of 2010 reflected the full impact of the approximately $700 million reduction to annualized Retail Banking net income associated with these changes.

In the Mortgage Banking & Other Consumer Lending business within RFS, management expects revenue to continue to be negatively affected by continued elevated levels of repurchases of mortgages previously sold, for example, to U.S. government-sponsored entities (“GSEs”). Management estimates that realized repurchase losses could total approximately $1.2 billion in 2011.

In addition, during the third quarter of 2010, the Firm determined that certain documents executed in connection with mortgage loan foreclosures may not have complied with all applicable procedural requirements. Accordingly, the Firm temporarily halted foreclosures, foreclosure sales and evictions in certain states so that it could review its foreclosure processes. Furthermore, state and federal officials have announced investigations into the procedures followed by mortgage servicing companies and banks, including the Firm and its affiliates, in completing affidavits relating to foreclosures. The Firm is cooperating with these investigations and is dedicating significant resources to address these issues. The Firm expects to incur additional costs and expenses in resolving these issues. For further discussion, see “Loan modification activities” on pages 91–94 of this Form 10-Q.

In the Real Estate Portfolios business within RFS, management believes that, given the continued economic and housing market uncertainty, it remains possible that quarterly net charge-offs could be approximately $1.0 billion for the home equity portfolio, $400 million for the prime mortgage portfolio and $400 million for the subprime mortgage portfolio over the next several quarters. For the purchased credit impaired real estate portfolios, the lifetime loss estimates assume some improvement in both delinquency and loss severity trends over time; if the timing of these improvements differs from current projections, loan loss reserves could increase. For example, if delinquencies and severities for these portfolios do not follow recent trends and instead remain at current levels over the next two years, related reserves could increase by approximately $3.0 billion over that time period. Given current origination and production levels, combined with management’s current estimate of portfolio runoff levels, the residential real estate portfolio is expected to decline by approximately 10% to 15% annually for the foreseeable future. The effect of such a reduction in the residential real estate portfolio is expected to reduce the portfolio’s 2010 net interest income by approximately $1.0 billion from the 2009 level. The continued portfolio runoff will

reduce net interest income over time; however, this reduction in net interest income will be more than offset by an improvement in credit costs and lower expenses. As the portfolio continues to run off, management anticipates that approximately $1.0 billion of capital may be redeployed each year, subject to the capital requirements associated with the remaining portfolio.

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

In CS, management expects end-of-period outstandings for the Chase portfolio (excluding the Washington Mutual portfolio) to decline by approximately 15%, or $21 billion, from 2009 levels, to approximately $123 billion by the end of 2010. More than half of this decline is driven by a planned reduction in balance transfer offers. Management estimates that this decline could bottom out in the third quarter of 2011 and by the end of 2011 the outstandings in the portfolio could be approximately $120 billion and reflect a better mix of customers. The Washington Mutual portfolio declined to $15 billion at the end of the third quarter of 2010, from $20 billion at the end of 2009. Management estimates that the Washington Mutual portfolio could decline to $10 billion by the end of 2011.

Also, management estimates that CS net income may be reduced, on an annualized basis, by approximately $750 million as a result of the impact of the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (“CARD Act”), including the regulatory guidance defining reasonable and proportional fees. Third-quarter 2010 net income reflected approximately 65% of the estimated quarterly impact, and management estimates that the full impact could be reflected in the fourth quarter of 2010. The net charge-off rates for both the Chase and Washington Mutual credit card portfolios are anticipated to continue to improve if current delinquency trends continue. The net charge-off rate for the Chase portfolio (excluding the Washington Mutual portfolio) could be approximately 7.5% in the fourth quarter of 2010. However, overall results for CS will depend on the economic environment and any resulting reserve actions.

While recent economic data implied the U.S. economy was not falling back into recession, high unemployment persisted. Even as consumer-lending net charge-offs and delinquencies have improved as noted above, the consumer credit portfolio remains under stress. Further declines in U.S. housing prices and increases in the unemployment rate remain possible; if this were to occur, it would adversely affect the Firm’s results.

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

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

Management expects modest continued downward pressure on the net interest margin in the fourth quarter of 2010, primarily resulting from continued repositioning of the investment securities portfolio in Corporate, runoff of loans with higher contractual interest rates in the Real Estate Portfolios and CS businesses, and the impact of the CARD Act legislation on CS.

Regarding regulatory reform, JPMorgan Chase intends to work with the Firm’s regulators as they proceed with the extensive rulemaking required to implement financial reforms. The Firm will continue to devote substantial resources to achieving implementation of regulatory reforms in a way that preserves the value the Firm delivers to its clients.

Management and the Firm’s Board of Directors continually evaluate alternatives to deploy the Firm’s strong capital base in ways that will enhance shareholder value. Such alternatives could include the repurchase of common stock, increasing the common stock dividend and pursuing alternative investment opportunities. The Firm resumed its repurchases of common stock beginning in the second quarter of 2010 under its preexisting Board authorization. The Firm’s current share repurchase activity is intended to offset share count increases resulting from employee equity awards and is consistent with the Firm’s goal of maintaining an appropriate share count. The aggregate amount and timing of future repurchases will depend, among other factors, on market conditions and management’s judgment regarding economic conditions, the Firm’s earnings outlook, the need to maintain adequate capital levels (in light of business needs and regulatory requirements) and alternative investment opportunities. With regard to any decision by the Firm’s Board of Directors concerning any increase in the level of the common stock dividend, their determination will be subject to their judgment that the likelihood of another severe economic downturn has sufficiently diminished; that there is evidence of sustained underlying growth in employment for at least several months; that overall business performance and credit have stabilized or improved; and that such action is warranted, taking into consideration, among other factors, the Firm’s earnings outlook, the need to maintain adequate capital levels, alternative investment opportunities and appropriate dividend payout ratios. Ultimately, the Board would seek to return to the Firm’s historical dividend ratio of approximately 30% to 40% of normalized earnings over time, though it would consider moving to that level in stages.

CONSOLIDATED RESULTS OF OPERATIONS

This section provides a comparative discussion of JPMorgan Chase’s Consolidated Results of Operations on a reported basis. Factors that relate primarily to a single business segment are discussed in more detail within that business segment. For a discussion of the Critical Accounting Estimates Used by the Firm that affect the Consolidated Results of Operations, see pages 104–106 of this Form 10-Q and pages 127–131 of JPMorgan Chase’s 2009 Annual Report.

Revenue

		Three months ended September 30,												Nine months ended September 30,
(in millions)		2010				2009				Change				2010				2009				Change
Investment banking fees		$	1,476			$	1,679				(12	)%		$	4,358			$	5,171				(16	)%
Principal transactions			2,341				3,860				(39	)			8,979				8,958				—
Lending- and deposit-related fees			1,563				1,826				(14	)			4,795				5,280				(9	)
Asset management, administration and commissions			3,188				3,158				1				9,802				9,179				7
Securities gains			102				184				(45	)			1,712				729				135
Mortgage fees and related income			707				843				(16	)			2,253				3,228				(30	)
Credit card income			1,477				1,710				(14	)			4,333				5,266				(18	)
Other income			468				625				(25	)			1,465				685				114
Noninterest revenue			11,322				13,885				(18	)			37,697				38,496				(2	)
Net interest income			12,502				12,737				(2	)			38,899				38,774				—
Total net revenue		$	23,824			$	26,622				(11	)%		$	76,596			$	77,270				(1	)%

Total net revenue for the third quarter of 2010 was $23.8 billion, down by $2.8 billion, or 11%, from the third quarter of 2009. Results were driven by lower principal transactions revenue, reflecting lower trading revenue in IB partially offset by an increase in private equity gains. Total net revenue for the first nine months of 2010 was $76.6 billion, down by $674 million, or 1%, from the prior year. The decline reflected lower markets revenue in IB and Corporate, lower mortgage fees and related income in RFS, and lower credit card revenue, largely offset by a higher level of both private equity and securities gains in Corporate.

Investment banking fees for the third quarter and first nine months of 2010 decreased from the comparable periods of 2009 due to lower equity underwriting fees, partially offset by higher debt underwriting fees. Lower advisory fees also contributed to the decline for the first nine months of 2010. Overall industry-wide equity underwriting volumes were lower in the third quarter and first nine months of 2010 compared with the respective periods in 2009. For additional information on investment banking fees, which are primarily recorded in IB, see IB segment results on pages 21–24 of this Form 10-Q.

Principal transactions revenue, which consists of revenue from the Firm’s trading and private equity investing activities, decreased from the third quarter of 2009 and was relatively flat compared with the first nine months of 2009. Trading revenue declined in both comparable periods, driven by lower fixed income revenue in IB, reflecting lower results in credit and rates markets. Trading revenue also reflected third-quarter losses of $493 million, compared with $1.0 billion in the prior- year third quarter; and gains in the first nine months of 2010 of $494 million, compared with losses of $1.9 billion in the comparable 2009 period. These results were associated with changes in the Firm’s credit spreads on certain structured and derivative liabilities. A partial offset to the decline in the nine-month period was the absence of mark-to-market losses on hedges of retained loans in IB compared with the prior year. Private equity gains in both the third quarter and first nine months of 2010 improved from the comparable 2009 periods. Results in the nine-month period swung to gains in 2010 from losses in 2009. For additional information on principal transactions revenue, see IB and Corporate/Private Equity segment results on pages 21–24 and 51–53, respectively, and Note 6 on page 140 of this Form 10-Q.

Lending- and deposit-related fees for the third quarter and first nine months of 2010 decreased from the prior-year periods. These declines reflected lower deposit-related fees in RFS associated, in part, with newly-enacted legislation related to non-sufficient funds and overdraft fees; this was partially offset by higher lending-related service fees – in particular, for the first nine months of 2010, in IB and CB. For additional information on lending- and deposit-related fees, which are mostly recorded in RFS, TSS and CB, see the RFS segment results on pages 25–35, the TSS segment results on pages 44–46 and the CB segment results on pages 41–43 of this Form 10-Q.

Asset management, administration and commissions revenue was relatively flat in the third quarter of 2010 compared with the prior year and increased in the first nine months of 2010 compared with the prior year. Results in both periods included higher asset management fees in AM, driven by the effect of higher market levels, net inflows to products with higher margins and higher performance fees; higher administration fees in TSS, resulting from the effect of higher market levels and net inflows of assets under custody; and lower brokerage commissions in IB. For additional information on these fees and commissions, see the segment discussions for AM on pages 47–51 and TSS on pages 44–46 of this Form 10-Q.

Securities gains decreased in the third quarter of 2010 compared with the third quarter of 2009 and increased in the first nine months of 2010 compared with the first nine months of 2009. Results for both comparable periods were affected by actions taken to reposition the Corporate investment securities portfolio in connection with managing the Firm’s structural interest rate risk; for the third-quarter comparison, gains from the repositioning activities were lower, while for the nine-month comparison, the gains were higher. For additional information on securities gains, which are mostly recorded in the Firm’s Corporate business, and Corporate’s investment securities portfolio, see the Corporate/Private Equity segment discussion on pages 51–53 of this Form 10-Q.

Mortgage fees and related income decreased from the third quarter and first nine months of 2009, driven by lower net production revenue, predominantly reflecting higher repurchase losses. The third quarter of 2010 included a $1.0 billion increase in the repurchase reserve, as a result of higher estimated future repurchase demands; for the first nine months of 2010, the increase in the reserve was $1.6 billion. (These charges for increasing the reserve are booked as contra-revenue.) Production revenue, excluding repurchase losses, increased from both periods, reflecting wider margins; also contributing to the increase for the third quarter of 2010 were higher mortgage origination volumes. For the first nine months of 2010, an additional driver of the decline in mortgage fees and related income from the comparable 2009 period was lower net mortgage servicing revenue, reflecting lower MSR risk management results, which were predominantly offset by higher operating revenue. For additional information on mortgage fees and related income, which is recorded primarily in RFS, see RFS’s Mortgage Banking & Other Consumer Lending discussion on pages 29–32 of this Form 10-Q.

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

Other income decreased in the third quarter of 2010 compared with the prior year, as a result of a gain recognized in the third quarter of 2009 in Corporate on the sale of certain assets, and lower valuations on seed capital investments in AM. For the first nine months of 2010, other income increased compared with the prior year, due to the write-down of securitization interests during the first nine months of 2009. Higher auto operating lease income in RFS also contributed to the increase in other income. These items were offset partially by lower valuations on seed capital investments in AM.

Net interest income declined modestly in the third quarter of 2010 compared with the prior-year quarter and was relatively flat for the first nine months of 2010 compared with the prior-year period. Declining loan balances were predominantly offset by the impact of the adoption of the new consolidation guidance related to VIEs (which increased net interest income by approximately $1.4 billion for the third quarter of 2010 and by approximately $4.6 billion for the first nine months of 2010). Excluding the impact of the adoption of the new accounting guidance, net interest income decreased for both the third quarter and first nine months of 2010 compared with the comparable 2009 periods, driven by lower average loan balances, primarily in CS, RFS and IB, and lower yields on credit card receivables, reflecting the impact of legislative changes. The Firm’s interest-earning assets for the third quarter of 2010 were $1.7 trillion, and the net yield on those assets, on a fully taxable-equivalent (“FTE”) basis, was 3.01%, a decrease of nine basis points from the third quarter of 2009. The Firm’s interest-earning assets for the first nine months of 2010 were $1.7 trillion, and the net yield on those assets, on a FTE basis, was 3.13%, a decrease of two basis points from the first nine months of 2009. For a more detailed discussion of the impact of the adoption of the new consolidation guidance related to VIEs on the

Consolidated Statements of Income, see Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures on pages 15–19 of this Form 10-Q. For a further information on the impact of the legislative changes on the Consolidated Statements of Income, see CS discussion on Credit Card Legislation on page 37 of this Form 10-Q.

Provision for credit losses		Three months ended September 30,												Nine months ended September 30,
(in millions)		2010				2009				Change				2010				2009				Change
Wholesale		$	44			$	779				(94	)%		$	(764	)		$	3,553			NM
Consumer			3,179				7,325				(57	)			14,360				21,178				(32	)%
Total provision for credit losses		$	3,223			$	8,104				(60	)%		$	13,596			$	24,731				(45	)%

The provision for credit losses decreased significantly from the third quarter and first nine months of 2009. The decrease in the consumer provision for both 2010 periods reflected a reduction in the allowance for credit losses as a result of improved delinquency trends and reduced net charge-offs; the reductions in the allowance for loan losses in CS were $1.5 billion and $4.0 billion in the third quarter and first nine months of 2010, respectively (compared with additions of $575 million and $2.0 billion in the comparable 2009 periods). The decrease in the wholesale provision in both 2010 periods reflected a reduction in the allowance for credit losses predominantly as a result of continued improvement in the credit quality of the commercial and industrial loan portfolio, reduced net charge-offs and repayments. For a more detailed discussion of the loan portfolio and the allowance for credit losses, see the segment discussions for RFS on pages 25–35, CS on pages 36–40, IB on pages 21–24 and CB on pages 41–43, and the Allowance for Credit Losses section on pages 95–98 of this Form 10-Q.

Noninterest expense

		Three months ended September 30,												Nine months ended September 30,
(in millions)		2010				2009				Change				2010				2009				Change
Compensation expense(a)		$	6,661			$	7,311				(9	)%		$	21,553			$	21,816				(1	)%
Noncompensation expense:
Occupancy			884				923				(4	)			2,636				2,722				(3	)
Technology, communications and equipment			1,184				1,140				4				3,486				3,442				1
Professional and outside services			1,718				1,517				13				4,978				4,550				9
Marketing			651				440				48				1,862				1,241				50
Other(b)(c)(d)			3,082				1,767				74				9,942				5,332				86
Amortization of intangibles			218				254				(14	)			696				794				(12	)
Total noncompensation expense			7,737				6,041				28				23,600				18,081				31
Merger costs			—				103			NM					—				451			NM
Total noninterest expense		$	14,398			$	13,455				7	%		$	45,153			$	40,348				12	%

(a)		Year-to-date 2010 included a payroll tax expense related to the U.K. Bank Payroll Tax on certain compensation awarded from December 9, 2009, to April 5, 2010, to relevant banking employees.
(b)		Includes litigation expense of $1.5 billion and $5.2 billion for the three and nine months ended September 30, 2010, compared with $246 million and a net benefit of $10 million for the three and nine months ended September 30, 2009, respectively.
(c)		Includes foreclosed property expense of $251 million and $798 million for the three and nine months ended September 30, 2010, respectively, compared with $346 million and $965 million for the three and nine months ended September 30, 2009, respectively. For additional information regarding foreclosed property, see Note 13 on page 196 of JPMorgan Chase’s 2009 Annual Report.
(d)		Year-to-date 2009 included a $675 million Federal Deposit Insurance Corporation (“FDIC”) special assessment.

Total noninterest expense for the third quarter of 2010 was $14.4 billion, up by $943 million, or 7%, from the third quarter of 2009. For the first nine months of 2010, total noninterest expense was $45.2 billion, up by $4.8 billion, or 12%, from the comparable 2009 period. The increase for both periods was driven by higher noncompensation expense, predominantly due to higher litigation expense.

The decrease in compensation expense from the third quarter of 2009 was predominantly due to lower performance-based incentives, particularly in IB; this was partially offset by higher salary expense related to investments in the businesses, including the addition of sales force in RFS and client advisors in AM. Compensation expense for the first nine months of 2010 decreased from the prior-year period, predominantly due to lower performance-based incentives, largely offset by the impact of the U.K. Bank Payroll Tax and higher salary expense related to investments in the businesses.

Noncompensation expense increased for the third quarter and first nine months of 2010 compared with the prior-year periods, due to higher litigation expense. Also contributing to the increase were higher marketing expense in CS and higher professional services expense, due to investments in systems in the businesses and increased brokerage, clearing and exchange transaction processing expense in IB. Partially offsetting the increase in the nine-month comparison was the absence of a $675 million FDIC special assessment recognized in the second quarter of 2009. For a further discussion of litigation expense, see Litigation reserve in Note 21 – Commitments and Contingencies on pages 173–174 of this Form 10-Q. For a discussion of amortization of intangibles, refer to Note 16 on pages 167–170 of this Form 10-Q.

There were no merger costs recorded in 2010. Merger costs of $103 million and $451 million were recorded in the third quarter and first nine months of 2009, respectively. For additional information on merger costs, refer to Note 10 on page 143 of this Form 10-Q.

Income tax expense

		Three months ended September 30,								Nine months ended September 30,
(in millions, except rate)		2010				2009				2010				2009
Income before income tax expense		$	6,203			$	5,063			$	17,847			$	12,191
Income tax expense			1,785				1,551				5,308				3,817
Effective tax rate			28.8	%			30.6	%			29.7	%			31.3	%

The decrease in the effective tax rate for the third quarter and first nine months of 2010 compared with the prior-year periods was primarily the result of lower state and local income taxes, as well as tax benefits recognized upon the resolution of tax audits in both 2010 periods. These decreases were partially offset by the impact of higher reported pretax income for 2010. For additional information on income taxes, see Critical Accounting Estimates Used by the Firm on pages 104–106 of this Form 10-Q.

Extraordinary gain

On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual. This transaction was accounted for under the purchase method of accounting for business combinations. The adjusted net asset value of the banking operations after purchase accounting adjustments was higher than the consideration paid by JPMorgan Chase, resulting in an extraordinary gain. In the third quarter of 2009, the Firm recognized a $76 million increase in the extraordinary gain associated with the final purchase accounting adjustments for the acquisition. The preliminary gain recognized in 2008 was $1.9 billion. For a further discussion of the Washington Mutual transaction, see Note 2 on pages 143–148 of the Firm’s 2009 Annual Report.

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

The Firm prepares its consolidated financial statements using accounting principles generally accepted in the U.S. (“U.S. GAAP”); these financial statements appear on pages 108–111 of this Form 10-Q. That presentation, which is referred to as “reported basis,” provides the reader with an understanding of the Firm’s results that can be tracked consistently from year to year and enables a comparison of the Firm’s performance with other companies’ U.S. GAAP financial statements.

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

Prior to January 1, 2010, the Firm’s managed-basis presentation also included certain reclassification adjustments that assumed credit card loans securitized by CS remained on the balance sheet. Effective January 1, 2010, the Firm adopted new accounting guidance that required the Firm to consolidate its Firm-sponsored credit card securitizations trusts. The income, expense and credit costs associated with these securitization activities are now recorded in the 2010 Consolidated Statements of Income in the same classifications that were previously used to report such items on a managed basis. As a result of the consolidation of the credit card securitization trusts, reported and managed basis relating to credit card securitizations are equivalent for periods beginning after January 1, 2010. For additional information on the new accounting guidance, see Note 15 on pages 155–167 of this Form 10-Q.

The presentation in 2009 of CS results on a managed basis assumed that credit card loans that had been securitized and sold in accordance with U.S. GAAP remained on the Consolidated Balance Sheets, and that the earnings on the securitized loans were classified in the same manner as the earnings on retained loans recorded on the Consolidated Balance Sheets. JPMorgan Chase used the concept of managed basis to evaluate the credit performance and overall financial performance of the entire managed credit card portfolio. Operations were funded and decisions were made about allocating resources, such as employees and capital, based on managed financial information. In addition, the same underwriting standards and ongoing risk monitoring are used for both loans on the Consolidated Balance Sheets and securitized loans. Although securitizations result in the sale of credit card receivables to a trust, JPMorgan Chase retains the ongoing customer relationships, as the customers may continue to use their credit cards; accordingly, the customer’s credit performance affects both the securitized loans and the loans retained on the Consolidated Balance Sheets. JPMorgan Chase believed that this managed-basis information was useful to investors, as it enabled them to understand both the credit risks associated with the loans reported on the Consolidated Balance Sheets and the Firm’s retained interests in securitized loans. For a reconciliation of 2009 reported to managed basis results for CS, see CS segment results on pages 36–40 of this Form 10-Q. For information regarding the securitization process, and loans and residual interests sold and securitized, see Note 15 on pages 155–167 of this Form 10-Q.

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

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

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

		Three months ended September 30, 2010
										Fully
		Reported				Credit				tax-equivalent				Managed
(in millions, except per share and ratios)		results				card(b)				adjustments				basis
Revenue
Investment banking fees		$	1,476			NA				$	—			$	1,476
Principal transactions			2,341			NA					—				2,341
Lending– and deposit–related fees			1,563			NA					—				1,563
Asset management, administration and commissions			3,188			NA					—				3,188
Securities gains			102			NA					—				102
Mortgage fees and related income			707			NA					—				707
Credit card income			1,477			NA					—				1,477
Other income			468			NA					415				883
Noninterest revenue			11,322			NA					415				11,737
Net interest income			12,502			NA					96				12,598
Total net revenue			23,824			NA					511				24,335
Noninterest expense			14,398			NA					—				14,398
Pre-provision profit			9,426			NA					511				9,937
Provision for credit losses			3,223			NA					—				3,223
Income before income tax expense			6,203			NA					511				6,714
Income tax expense			1,785			NA					511				2,296
Net income		$	4,418			NA				$	—			$	4,418
Diluted earnings per share		$	1.01			NA				$	—			$	1.01
Return on assets			0.86	%		NA				NM					0.86	%
Overhead ratio			60			NA				NM					59

		Three months ended September 30, 2009
										Fully
		Reported				Credit				tax-equivalent				Managed
(in millions, except per share and ratios)		results				card(b)				adjustments				basis
Revenue
Investment banking fees		$	1,679			$	—			$	—			$	1,679
Principal transactions			3,860				—				—				3,860
Lending– and deposit–related fees			1,826				—				—				1,826
Asset management, administration and commissions			3,158				—				—				3,158
Securities gains			184				—				—				184
Mortgage fees and related income			843				—				—				843
Credit card income			1,710				(285	)			—				1,425
Other income			625				—				371				996
Noninterest revenue			13,885				(285	)			371				13,971
Net interest income			12,737				1,983				89				14,809
Total net revenue			26,622				1,698				460				28,780
Noninterest expense			13,455				—				—				13,455
Pre-provision profit			13,167				1,698				460				15,325
Provision for credit losses			8,104				1,698				—				9,802
Income before income tax expense and extraordinary gain			5,063				—				460				5,523
Income tax expense			1,551				—				460				2,011
Income before extraordinary gain			3,512				—				—				3,512
Extraordinary gain			76				—				—				76
Net income		$	3,588			$	—			$	—			$	3,588
Diluted earnings per share(a)		$	0.80			$	—			$	—			$	0.80
Return on assets(a)			0.70	%		NM				NM					0.67	%
Overhead ratio			51			NM				NM					47

NA: Not applicable

		Nine months ended September 30, 2010
										Fully
		Reported				Credit				tax-equivalent				Managed
(in millions, except per share and ratios)		results				card(b)				adjustments				basis
Revenue
Investment banking fees		$	4,358			NA				$	—			$	4,358
Principal transactions			8,979			NA					—				8,979
Lending– and deposit–related fees			4,795			NA					—				4,795
Asset management, administration and commissions			9,802			NA					—				9,802
Securities gains			1,712			NA					—				1,712
Mortgage fees and related income			2,253			NA					—				2,253
Credit card income			4,333			NA					—				4,333
Other income			1,465			NA					1,242				2,707
Noninterest revenue			37,697			NA					1,242				38,939
Net interest income			38,899			NA					282				39,181
Total net revenue			76,596			NA					1,524				78,120
Noninterest expense			45,153			NA					—				45,153
Pre-provision profit			31,443			NA					1,524				32,967
Provision for credit losses			13,596			NA					—				13,596
Income before income tax expense			17,847			NA					1,524				19,371
Income tax expense			5,308			NA					1,524				6,832
Net income		$	12,539			NA				$	—			$	12,539
Diluted earnings per share		$	2.84			NA				$	—			$	2.84
Return on assets			0.82	%		NA				NM					0.82	%
Overhead ratio			59			NA				NM					58

		Nine months ended September 30, 2009
										Fully
		Reported				Credit				tax-equivalent				Managed
(in millions, except per share and ratios)		results				card(b)				adjustments				basis
Revenue
Investment banking fees		$	5,171			$	—			$	—			$	5,171
Principal transactions			8,958				—				—				8,958
Lending– and deposit–related fees			5,280				—				—				5,280
Asset management, administration and commissions			9,179				—				—				9,179
Securities gains			729				—				—				729
Mortgage fees and related income			3,228				—				—				3,228
Credit card income			5,266				(1,119	)			—				4,147
Other income			685				—				1,043				1,728
Noninterest revenue			38,496				(1,119	)			1,043				38,420
Net interest income			38,774				5,945				272				44,991
Total net revenue			77,270				4,826				1,315				83,411
Noninterest expense			40,348				—				—				40,348
Pre-provision profit			36,922				4,826				1,315				43,063
Provision for credit losses			24,731				4,826				—				29,557
Income before income tax expense and extraordinary gain			12,191				—				1,315				13,506
Income tax expense			3,817				—				1,315				5,132
Income before extraordinary gain			8,374				—				—				8,374
Extraordinary gain			76				—				—				76
Net income		$	8,450			$	—			$	—			$	8,450
Diluted earnings per share(a)		$	1.50			$	—			$	—			$	1.50
Return on assets(a)			0.55	%		NM				NM					0.53	%
Overhead ratio			52			NM				NM					48

(a)		Based on income before extraordinary gain.
(b)		See pages 36–40 of this Form 10-Q for a discussion of the effect of credit card securitizations on CS results.

NA: Not applicable

Three months ended September 30,		2010												2009
(in millions)		Reported				Securitized(a)				Managed				Reported				Securitized(a)				Managed
Loans – Period-end		$	690,531			NA				$	690,531			$	653,144			$	87,028			$	740,172
Total assets – average			2,041,113			NA					2,041,113				1,999,176				82,779				2,081,955

Nine months ended September 30,		2010												2009
(in millions)		Reported				Securitized(a)				Managed				Reported				Securitized(a)				Managed
Loans – Period-end		$	690,531			NA				$	690,531			$	653,144			$	87,028			$	740,172
Total assets – average			2,041,156			NA					2,041,156				2,034,640				82,383				2,117,023

(a)		Loans securitized are defined as loans that were sold to nonconsolidated securitization trusts and were not included in reported loans as of or for the three and nine months ended September 30, 2009. For further discussion of credit card securitizations, see Note 15 on pages 155–167 of this Form 10-Q.

Average tangible common equity

		Three months ended																				Nine months ended
		Sept. 30,				June 30,				March 31,				Dec. 31,				Sept. 30,				Sept. 30,				Sept. 30,
(in millions)		2010				2010				2010				2009				2009				2010				2009
Common stockholders’ equity		$	163,962			$	159,069			$	156,094			$	156,525			$	149,468			$	159,737			$	142,322
Less: Goodwill			48,745				48,348				48,542				48,341				48,328				48,546				48,225
Less: Certain identifiable intangible assets			4,094				4,265				4,307				4,741				4,984				4,221				5,214
Add: Deferred tax liabilities(a)			2,620				2,564				2,541				2,533				2,531				2,575				2,552
Tangible common equity (TCE)		$	113,743			$	109,020			$	105,786			$	105,976			$	98,687			$	109,545			$	91,435

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

Impact on ROE of redemption of TARP preferred stock issued to the U.S. Department of the Treasury (“U.S. Treasury”)

The calculation of year-to-date 2009 net income applicable to common equity includes a one-time, noncash reduction of $1.1 billion resulting from the repayment of TARP preferred capital. Excluding this reduction ROE would have been 7% for year-to-date 2009 as disclosed in the table below. The Firm views the adjusted ROE, a non-GAAP financial measure, as meaningful because it increases the comparability to prior periods.

		Nine months ended September 30, 2009
						Excluding the
(in millions, except ratios)		As reported				TARP redemption
Return on equity
Net income		$	8,450			$	8,450
Less: Preferred stock dividends			1,165				1,165
Less: Accelerated amortization from redemption of preferred stock issued to the U.S. Treasury			1,112				—
Net income applicable to common equity		$	6,173			$	7,285
Average common stockholders’ equity		$	142,322			$	142,322
Return on common equity			6	%			7	%

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

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

		Nine months ended September 30, 2009
						Effect of TARP
(in millions, except per share)		As reported				redemption
Diluted earnings per share
Net income		$	8,450			$	—
Less: Preferred stock dividends			1,165				—
Less: Accelerated amortization from redemption of preferred stock issued to the U.S. Treasury			1,112				1,112
Net income applicable to common equity		$	6,173			$	(1,112	)
Less: Dividends and undistributed earnings allocated to participating securities			348				(64	)
Net income applicable to common stockholders		$	5,825			$	(1,048	)
Total weighted average diluted shares outstanding			3,848.3				3,848.3
Net income per share		$	1.51			$	(0.27	)