Commercial Banking
Commercial Banking ("CB") serves more than 26,000 clients nationally, including corporations, municipalities, financial institutions and not-for-profit entities with annual revenue generally ranging from $10 million to $2 billion, and nearly 30,000 real estate investors/owners. Delivering extensive industry knowledge, local expertise and dedicated service, 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 Commercial Banking, Retail Financial Services and Asset Management businesses to serve clients firmwide. As a result, certain TS revenue is included in other segments' results. Worldwide Securities Services holds, values, clears and services securities, cash and alternative investments for investors and broker-dealers, and it manages depositary receipt programs globally. Asset Management
Asset Management ("AM"), with assets under supervision of $1.5 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, 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.
OTHER BUSINESS EVENTS
FDIC Special Assessment
On May 22, 2009, the Federal Deposit Insurance Corporation ("FDIC") announced a five basis point special assessment on each insured depository institution's assets minus Tier 1 capital as of June 30, 2009. The maximum amount of the special assessment for any institution is 10 basis points times such institution's average U.S. deposits for the second quarter. The FDIC announced that the special assessment will be collected on September 30, 2009. As of June 30, 2009, the Firm had accrued $675 million for the special assessment, which is reported in the Corporate/Private Equity segment. Issuance of common stock
On June 5, 2009, the Firm issued $5.8 billion, or 163 million shares, of common stock. The common stock was issued to satisfy a regulatory supervisory condition requiring the Firm to demonstrate it could access the equity capital markets in order to be eligible to redeem Series K preferred stock issued to the U.S. Treasury under the Troubled Asset Relief Program ("TARP"). Proceeds from this issuance were used for general corporate purposes. TARP Repayment / EPS Impact
On June 17, 2009, the Firm redeemed all of the outstanding shares of Series K preferred stock issued to the U.S. Treasury pursuant to TARP and repaid the full $25.0 billion principal amount. As a result of this redemption, the Firm incurred a one-time, noncash reduction of approximately $1.1 billion in the calculation of earnings per share ("EPS") (i.e., a reduction in net income applicable to common stockholders), reflecting the accelerated amortization of issuance discount on the Series K preferred stock. The effect of this adjustment was to reduce reported diluted earnings per common share for the second quarter of 2009 by $0.27 per share. Following discussions with the U.S. Treasury regarding the warrant issued in connection with its purchase of the Series K preferred stock, on July 7, 2009, JPMorgan Chase notified the U.S. Treasury that it had revoked its warrant repurchase notice. JPMorgan Chase understands, based on the U.S. Treasury's public statements, that the U.S. Treasury intends to pursue a public auction of the warrant. The U.S. Treasury has advised JPMorgan Chase that the Firm will be permitted to participate in any such auction.

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

                                                       Three months ended June 30,              Six months ended June 30,
(in millions, except per share data and ratios)        2009           2008       Change        2009          2008       Change

Selected income statement data
Total net revenue                                  $   25,623      $ 18,399         39 %    $  50,648     $ 35,289         44 %
Total noninterest expense                              13,520        12,177         11         26,893       21,108         27
Pre-provision profit                                   12,103         6,222         95         23,755       14,181         68
Provision for credit losses                             8,031         3,455        132         16,627        7,879        111
Net income                                              2,721         2,003         36          4,862        4,376         11

Diluted earnings per share(a)(b)                   $     0.28      $   0.53        (47 )    $    0.68     $   1.20        (43 )
Return on common equity(c)                                  3 %           6 %                       4 %          7 %

(a) Effective January 1, 2009, the Firm implemented FSP EITF 03-6-1. Accordingly, prior-period amounts have been revised. For further discussion of FSP EITF 03-6-1, see Note 21 on page 158 of this Form 10-Q.

(b) The calculation of second quarter 2009 earnings per share includes a one-time, noncash reduction of $1.1 billion, or $0.27 per share, resulting from repayment of TARP preferred capital. For further discussion, see "Impact on diluted earnings per share of redemption of TARP preferred stock issued to the U.S. Treasury" on page 18 of this Form 10-Q.

(c) 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 of 2009. For further discussion of adjusted ROE, see "Explanation and reconciliation of the Firm's use of non-GAAP financial measures" on pages 15-18 of this Form 10-Q.

Business overview
JPMorgan Chase reported second-quarter 2009 net income of $2.7 billion, or $0.28 per share, compared with net income of $2.0 billion, or $0.53 per share, in the second quarter of 2008. Current-quarter earnings per share 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. Return on common equity for the quarter was 3%, compared with 6% in the prior year.
The increase in earnings from the second quarter of 2008 was driven by record net revenue, predominantly offset by a higher provision for credit losses and increased noninterest expense. Both revenue and expense were higher due to the impact of the acquisition of the banking operations of Washington Mutual Bank ("Washington Mutual") on September 25, 2008. In addition, record Fixed Income Markets revenue and investment banking fees in the Investment Bank contributed to revenue growth. Growth in noninterest expense predominantly reflected an accrual for the FDIC special assessment and higher ongoing FDIC insurance premiums. High levels of credit costs in Retail Financial Services and Card Services drove the increase in the provision for credit losses, as weak economic conditions and housing price declines continued to negatively affect these businesses.
Net income for the first six months of 2009 was $4.9 billion, or $0.68 per share, compared with $4.4 billion, or $1.20 per share, in the first half of 2008. Earnings per share for the first six months reflected the reduction in net income resulting from repayment of TARP preferred capital. The increase in earnings from the comparable 2008 six-month period was due to the same drivers as for the 2009 second quarter: the Washington Mutual acquisition and higher Fixed Income revenue and investment banking fees. The first half of 2009 also reflected higher net revenue from mortgage servicing rights ("MSR") risk management results in Retail Financial Services, higher noninterest expense resulting from higher compensation expense in both the Investment Bank and Retail Financial Services, and higher FDIC insurance premiums and increased credit costs.
The global economy began to stabilize in the second quarter of 2009, with developing economies rebounding significantly and contraction in developed economies slowing. Credit conditions improved in the quarter, with most credit spreads falling from previous wide levels. The credit and asset-purchase programs implemented by the Board of Governors of the Federal Reserve System ("Federal Reserve"), which were modified and in some cases extended in the quarter, helped measurably. The Federal Reserve has announced it intends to have purchased up to $1,750 billion of Treasury, mortgage-backed and agency-debt securities by the spring of 2010; this and the results of the "stress tests" conducted as part of the Supervisory Capital Assessment Program ("SCAP"), which showed that most of the largest U.S. financial institutions had strong capital cushions, reinforced market confidence. Following release of the SCAP results, those banks that participated in the Capital Purchase Program ("CPP") and met the requirements established by their primary federal banking supervisors for the repayment of funds provided by the TARP, were permitted to repay such funds; many, including JPMorgan Chase, did so. The narrowing of credit spreads enabled businesses to refinance outstanding debt and raise new capital, resulting in

strong activity in capital markets that aided bank earnings, and recoveries in many stock markets bolstered consumer and business sentiment. Notwithstanding these favorable market developments, conditions remain fragile and are dependent on the approximately $2 trillion of credit provided by the Federal Reserve through its various market-supporting initiatives. In addition, economic activity was too slow to prevent deterioration in the labor markets: the U.S. unemployment rate rose to 9.5% in the second quarter, the highest level reached since the peak of the 1982 recession.
The improving sentiment amid a continued challenging economic environment was also reflected in JPMorgan Chase's line-of-business results in the second quarter of 2009. Four of the Firm's six main lines of business reported double-digit growth in net revenue, resulting in record firmwide net revenue. The Investment Bank reported record fees and Fixed Income Markets revenue and maintained its leadership positions across products; Commercial Banking continued to grow revenue and earnings; Asset Management maintained good global investment performance; Retail Financial Services reported favorable retail branch production metrics, and Treasury & Securities Services delivered another quarter of solid performance. Although each of the lines of business was negatively affected to some degree by the challenging environment, Card Services and Consumer Lending, a business segment in Retail Financial Services, were hit hardest, with continued high levels of credit costs contributing to a net loss in each business.
JPMorgan Chase maintained a strong balance sheet in the quarter. Even after the repayment in full of $25 billion of TARP preferred capital and the addition of $2 billion to credit reserves, the Firm ended the quarter with a Tier 1 capital ratio of 9.7% and a Tier 1 common capital ratio of 7.7%. The total allowance for credit losses at June 30, 2009, was $29.8 billion, and the firmwide loan loss coverage ratio was 5.0%. Management believes these strong capital and reserve levels, combined with the Firm's significant earnings power, will allow the Firm to continue to reinvest in its businesses over the long term.
The Firm remains committed to helping bring stability to the communities in which it operates and to the financial system overall. During the quarter, JPMorgan Chase extended approximately $150 billion in new credit to consumer and corporate customers and approved 138,000 trial mortgage modifications, bringing total foreclosures prevented since 2007 to 565,000.
The discussion that follows highlights the current-quarter performance of each business segment, compared with the prior-year quarter, and discusses results on a managed basis unless otherwise noted. For more information about managed basis, see Explanation and Reconciliation of the Firm's Use of Non-GAAP Financial Measures on pages 15-18 of this Form 10-Q .
Investment Bank net income increased, reflecting higher net revenue and lower noninterest expense, partially offset by a higher provision for credit losses. Record investment banking fees were driven by record equity underwriting fees. Fixed Income Markets revenue was also a record, driven by strong results across all products, as well as the absence of markdowns related to leveraged lending funded and unfunded commitments and mortgage-related exposure. The provision for credit losses increased due to higher charge-offs as well as a higher allowance, reflecting continued deterioration in the credit environment.
Retail Financial Services net income declined, as a higher provision for credit losses and higher noninterest expense were partially offset by higher net revenue, reflecting the impact of the Washington Mutual transaction, wider loan and deposit spreads, and higher deposit balances. The provision for credit losses included a significant addition to the allowance for loan losses, as weak economic conditions and housing price declines drove higher estimated losses for the home equity and mortgage loan portfolios. The increase in noninterest expense reflected the impact of the Washington Mutual transaction, higher servicing expense and higher FDIC insurance premiums.
Card Services reported a net loss, compared with net income in the prior year. The decrease was driven by a higher provision for credit losses, partially offset by higher net revenue. The increase in managed net revenue was driven by the impact of the Washington Mutual transaction, wider loan spreads and higher merchant servicing revenue related to the dissolution of the Chase Paymentech Solutions joint venture. These benefits were offset partially by the impact of the credit enhancement provided by the Firm for certain of its securitization trusts, lower securitization income, higher revenue reversals associated with higher charge-offs, and a decreased level of fees. The provision for credit losses reflected a higher level of charge-offs due to continued deterioration in the credit environment. Noninterest expense increased due to the dissolution of the Chase Paymentech Solutions joint venture and the impact of the Washington Mutual transaction.

Commercial Banking net income increased, driven by higher net revenue reflecting the impact of the Washington Mutual transaction, predominantly offset by a higher provision for credit losses and higher noninterest expense. Revenue increased due to wider loan spreads, record levels of lending- and deposit-related fees, a shift to higher-spread liability products and overall growth in liability balances. These benefits were offset predominantly by spread compression on liability products and lower loan balances. The increase in the provision for credit losses reflected continued deterioration in the credit environment. Noninterest expense rose due to the impact of the Washington Mutual transaction and higher FDIC insurance premiums, partially offset by lower headcount-related expense.
Treasury & Securities Services net income decreased, driven by lower net revenue offset partially by lower noninterest expense. Worldwide Securities Services revenue declined, driven by the effect of market depreciation on assets under custody and lower securities lending balances, primarily as a result of declines in asset valuations and demand. Revenue in Treasury Services increased, reflecting growth across cash management products and higher trade revenue driven by wider spreads, partially offset by spread compression on deposit products. Noninterest expense decreased, reflecting lower headcount-related expense offset partially by higher FDIC insurance premiums.
Asset Management net income declined, due to lower net revenue and a higher provision for credit losses offset partially by lower noninterest expense. The decline in net revenue was due to the effect of lower market levels and lower placement fees; these effects were offset partially by higher valuations of seed capital investments, wider loan and deposit spreads and higher deposit balances. The increase in the provision for credit losses reflected continued deterioration in the credit environment. Noninterest expense decreased due to lower performance-based compensation and lower headcount-related expense, largely offset by the impact of the Bear Stearns merger and higher FDIC insurance premiums.
Corporate/Private Equity reported net income, compared with a net loss in the prior year, reflecting higher levels of trading and investment income in the investment securities portfolio and a gain from the sale of MasterCard shares, partially offset by an accrual for the FDIC special assessment. Firmwide, the managed provision for credit losses was $9.7 billion, up by $5.4 billion. The total consumer-managed provision for credit losses was $8.5 billion, compared with $3.8 billion in the prior year, reflecting higher net charge-offs and an increase in the allowance for credit losses, largely related to home lending. Consumer-managed net charge-offs were $7.0 billion (6.18% net charge-off rate), compared with $2.9 billion in the prior year (3.08% net charge-off rate). The wholesale provision for credit losses was $1.2 billion, compared with $505 million in the prior year, reflecting an increase in the allowance for credit losses, largely in the Investment Bank. Wholesale net charge-offs were $679 million (1.19% net charge-off rate), compared with net charge-offs of $41 million in the prior year (0.08% net charge-off rate). The Firm's nonperforming assets totaled $17.5 billion at June 30, 2009, up from the prior-year level of $6.2 billion. The allowance for credit losses increased by $1.8 billion during the quarter; this resulted in a loan loss coverage ratio at June 30, 2009 of 5.01%, compared with 4.53% at March 31, 2009. The above net charge-off rates and loan loss coverage ratio exclude purchased credit-impaired loans accounted for under SOP 03-3, loans held-for-sale and loans at fair value. Furthermore, the loan loss coverage ratio also excludes loans from the Washington Mutual Master Trust, which were consolidated on the Firm's balance sheet at fair value during the second quarter of 2009.
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 JPMorgan Chase's actual results to differ materially from those set forth in such forward-looking statements.
JPMorgan Chase's outlook for the second half of 2009 should be viewed against the backdrop of the global and U.S. economies, financial markets activity, the geopolitical environment, the competitive environment and client activity levels. Each of these linked factors will affect the performance of the Firm and its lines of business. The Firm continues to monitor the global and U.S. economic environments. The outlook for capital markets remains uncertain and there continues to be a potential for further declines in U.S. housing prices and an increase in the unemployment rate. In addition, as a result of recent market conditions, the U.S. Congress and regulators have increased their focus on regulation of financial institutions; any legislation or regulations that may be adopted as a result could limit or restrict the Firm's operations, or impose additional costs upon the Firm in order to comply with such new laws or rules. Given the potential stress on the consumer from rising unemployment and continued downward pressure on housing prices, management is still cautious with respect to the credit outlook for the consumer loan portfolios. Possible continued deterioration in credit trends could require additions to the consumer allowance for credit losses. Based on management's current economic outlook, quarterly net charge-offs could, over the next several quarters, reach $1.4

billion for the home equity portfolio, $600 million for the prime mortgage portfolio and $500 million for the subprime mortgage portfolio. The managed net charge-off rate for Card Services (excluding the Washington Mutual credit card portfolio) could approach 10% in the third quarter of 2009, and thereafter will remain highly dependent on unemployment levels; the managed net charge-off rate for the Washington Mutual credit card portfolio is expected to approach 24% by the end of 2009. These charge-off rates could increase if the economic environment deteriorates even further than management's current expectations. Similarly, the wholesale provision for credit losses, nonperforming assets and charge-offs are likely to increase over the remainder of the year as a result of continued deterioration in the credit environment.
The Investment Bank is operating in an uncertain environment. Trading results could be volatile, particularly if there is further disruption in the credit or mortgage markets, or a significant decline in overall liquidity levels. In addition, if the Firm's own credit spreads tighten, as was the case in the . . .