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.

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 March 31,
 (in millions, except per share data and ratios)        2009            2008       Change

 Selected income statement data
 Total net revenue                                  $   25,025       $ 16,890         48 %
 Total noninterest expense                              13,373          8,931         50
 Provision for credit losses                             8,596          4,424         94
 Net income                                              2,141          2,373        (10 )

 Diluted earnings per share(a)                      $     0.40       $   0.67        (40 )
 Return on common equity                                     5 %            8 %

(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 20 on page 140 of this Form 10-Q.

Business overview
JPMorgan Chase reported first-quarter 2009 net income of $2.1 billion, or $0.40 per share, compared with net income of $2.4 billion, or $0.67 per share, in the first quarter of 2008. Return on common equity for the quarter was 5%, compared with 8% in the prior year. The decline in earnings was driven by a higher provision for credit losses and increased noninterest expense, predominantly offset by record net revenue. 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 revenue in the Investment Bank and positive mortgage servicing rights ("MSR") risk management results in Retail Financial Services contributed to revenue growth, while higher performance-based compensation expense in the Investment Bank and higher FDIC insurance premiums contributed to expense growth. Continued deterioration in the credit environment resulted in a higher provision for credit losses compared with the prior year, with the largest increases in Card Services and Retail Financial Services.
The global economy continued to contract in the first quarter of 2009 at about the same rate as in the fourth quarter of 2008. Labor markets deteriorated rapidly as U.S. firms reduced the number of jobs by another two million in the first quarter alone, driving the U.S. unemployment rate to 8.5% in March. The S&P 500 index was down 40% and 11% from the first and fourth quarters of last year, respectively; bankruptcies increased 30% from March of last year; auto companies reported weak results; and volatile currency swings in the current quarter ended with the U.S. dollar continuing to weaken against the Japanese yen but appreciate against the Euro. The U.S. federal government ("U.S. government") and regulators continued their efforts to stabilize the U.S. economy during the quarter, putting in place a financial rescue plan that supplements the interest rate and other actions taken by the Board of Governors of the Federal Reserve System ("Federal Reserve") and the U.S. Department of the Treasury (the "U.S. Treasury") last fall and winter. The rescue plan includes, among other actions, the U.S. Treasury Capital Assistance Program and the Supervisory Capital Assessment Program intended to reinforce confidence in the capitalization of the U.S. banking system; the Federal Reserve's Term Asset-Backed Securities Loan Facility ("TALF") program, which is intended to promote the flow of credit to consumers and mortgage markets; the U.S. Treasury's Public-Private Investment Program, which is intended to repair balance sheets and ensure that credit is available to households and businesses; and the Federal Reserve's intent to purchase and hold on its own books additional U.S. Treasury and agency debt and mortgage-backed securities. Recent positive trends, such as the narrowing of certain credit spreads and the stabilization of consumer spending, indicate that all these efforts may be starting to take effect.
In the midst of this challenging environment, in the first quarter of 2009, JPMorgan Chase generated record firmwide revenue; generated record revenue and net income in the Investment Bank; and benefited from underlying growth in Retail Financial Services, including increased deposits and checking accounts, higher mortgage refinancing volumes and excellent progress on the Washington Mutual integration. Specifically, the Firm rebranded 708 Washington Mutual branches and 1,900 ATMs, and opened nine regional homeownership centers in California. Nationally, Retail Financial Services consolidated nearly 300 Washington Mutual branches, and Card Services successfully completed the conversion of the Washington Mutual portfolio to the Chase TSYS processing system. In addition, Commercial Banking, Treasury & Securities Services and Asset Management continued to report solid volumes and earnings.

The Firm continued to focus on its capital and balance sheet strength in the first quarter of 2009, ending the quarter with a Tier 1 capital ratio of 11.4%, or 9.3% excluding the capital received under the Capital Purchase Program component of the U.S. government's Troubled Asset Relief Program ("TARP"). The Firm added $4.2 billion to the allowance for credit losses, which reached $28.0 billion, resulting in a firmwide loan loss coverage ratio of 4.53%. In addition, the Firm lowered its quarterly dividend to $0.05 per common share, which will enable the Firm to retain approximately $5.0 billion in common equity per year. Management believes these levels of capital and reserves, combined with significant earnings power, will enable JPMorgan Chase to withstand an even worse economic scenario than it faces today.
During the quarter, JPMorgan Chase extended more than $150.0 billion in new credit to consumer and corporate customers, purchased nearly $34.0 billion of mortgage-backed and asset-backed securities, and made progress on its goal of preventing 650,000 foreclosures by the end of next year to help keep people in their homes. JPMorgan Chase remains committed to helping bring stability to the communities in which it operates and to the financial system overall. 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 14-16 of this Form 10-Q .
Investment Bank net income reached a record level, reflecting record revenue, partially offset by higher noninterest expense and a higher provision for credit losses. Both Fixed Income Markets and Equity Markets reported record revenue driven by strong trading results and client revenue, including the prime services business acquired in the Bear Stearns merger, and higher debt underwriting fees drove an increase in investment banking fees. The provision for credit losses increased due to a higher allowance reflecting a weakening credit environment. The increase in noninterest expense primarily reflected higher performance-based compensation expense and the impact of the Bear Stearns merger.
Retail Financial Services reported net income for the quarter compared with a net loss reported in the prior year, as higher revenue was offset partially by a higher provision for credit losses and noninterest expense. Revenue growth was driven by the impact of the Washington Mutual transaction, positive MSR risk management results, wider deposit and loan spreads, higher mortgage production revenue and higher deposit-related fees. The provision for credit losses included a significant increase in the allowance for loan losses, primarily for the home lending portfolio. The increase in noninterest expense reflected the impact of the Washington Mutual transaction, higher servicing expense, higher mortgage reinsurance losses and higher FDIC insurance premiums.
Card Services reported a net loss for the quarter, 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 lower securitization income, the effect of 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, and an increase in the allowance for loan losses, reflecting a weakening credit environment. Noninterest expense increased due to the impact of the Washington Mutual transaction and the dissolution of the Chase Paymentech Solutions joint venture, predominantly offset by lower marketing expense.
Commercial Banking net income increased from the prior year, driven by higher net revenue reflecting the impact of the Washington Mutual transaction, offset largely by a higher provision for credit losses. Revenue growth resulted from double-digit growth in liability balances and higher deposit- and lending-related fees offset partially by spread compression on liability products. The increase in the provision for credit losses reflected a weakening credit environment. Noninterest expense rose due to the impact of the Washington Mutual transaction and higher FDIC insurance premiums.
Treasury & Securities Services net income decreased from the prior year, driven by lower net revenue and higher noninterest expense. The decrease in net revenue was driven by lower revenue in Worldwide Securities Services, reflecting a decline in securities lending balances, primarily as a result of declines in asset valuations and demand, and the effects of market depreciation on assets under custody, which were partially offset by higher net interest income. Revenue in Treasury Services increased, reflecting higher liability balances, higher trade revenue and growth across cash management products offset largely by spread compression on liability products. The increase in noninterest expense reflected higher FDIC insurance premiums and higher expense related to investment in new product platforms.

Asset Management net income declined from the prior year, due to lower net revenue offset partially by lower noninterest expense. The decline in net revenue was due to the effect of lower markets and lower performance fees; these effects were offset partially by the benefit of the Bear Stearns merger, higher deposit balances and wider deposit spreads. Noninterest expense decreased due to lower performance-based compensation and lower headcount-related expense, offset by the impact of the Bear Stearns merger and higher FDIC insurance premiums. Corporate/Private Equity reported a net loss for the quarter, compared with net income in the prior year (which included a benefit from the proceeds of the sale of Visa shares in its initial public offering). Net revenue declined, reflecting Private Equity losses compared with gains in the prior year. Firmwide, the managed provision for credit losses was $10.1 billion, up $5.0 billion, or 97%, from the prior year. The total consumer-managed provision for credit losses was $8.5 billion, compared with $4.4 billion in the prior year, reflecting higher net charge-offs, as well as increases in the allowance for credit losses primarily related to credit card loans and home lending. Consumer-managed net charge-offs were $5.7 billion, compared with $2.5 billion in the prior year, resulting in managed net charge-off rates of 4.12% and 2.68%, respectively. The wholesale provision for credit losses was $1.5 billion, compared with $747 million in the prior year, and resulted from an increase in the allowance for credit losses reflecting a weakening credit environment. Wholesale net charge-offs were $191 million, compared with prior-year net charge-offs of $92 million, resulting in net charge-off rates of 0.32% and 0.18%, respectively. The Firm had total nonperforming assets of $14.7 billion at March 31, 2009, up from the prior-year level of $5.1 billion. The allowance for credit losses increased $4.2 billion from December 31, 2008, to $28.0 billion at March 31, 2009, and the loan loss coverage ratio increased to 4.53% of loans at March 31, 2009, compared with 3.62% at December 31, 2008, reflecting the continuing weakening credit environment. 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 quarter 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. In addition, as a result of recent market conditions and events, Congress and regulators have increased their focus on the regulation of financial institutions. The Firm's current expectations are for the global and U.S. economic environments to weaken further and potentially faster, capital markets to remain under stress, for there to be a continued decline in U.S. housing prices, and for the unemployment rate to continue to rise into 2010, likely reaching the 9-10% level before the U.S. economy recovers and strengthens enough to increase labor demand. In addition, the Firm currently expects Congress and regulators to continue to adopt legislation and regulations that 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. Any of these factors could adversely impact the Firm's revenue, credit costs, overall business volumes or earnings. For example, it is likely the Firm will be subject to a one-time special assessment by the FDIC, subject to terms being finalized between the FDIC and the banking industry. The total assessment, based on the size of the Firm's deposit base, could reach between $750 million and $1.5 billion, which would be recorded as an expense in the quarter the terms become final.
Given the potential stress on the consumer from rising unemployment, the continued downward pressure on housing prices and the elevated national inventory of unsold homes, management remains extremely cautious with respect to the credit outlook for the consumer loan portfolios. Management expects possible continued deterioration in credit trends, which could require additions to the consumer loan loss allowance. 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, $500 million for the prime mortgage portfolio, and $375 million to $475 million for the subprime mortgage portfolio. Management expects the managed net charge-off rate for Card Services (excluding the Washington Mutual credit card portfolio) to approach 9% in the second quarter of 2009 and possibly trend higher in the second half of the year, depending on unemployment levels. The managed net charge-off rate for the Washington Mutual credit card portfolio is expected to approach 18%-24% by the end of 2009; these charge-off rates could increase even further if the economic environment continues to deteriorate further than management's current expectations. Similarly, the wholesale provision for credit losses and nonperforming assets as well as charge-offs are likely to increase over time as a result of the deterioration in underlying credit conditions.

The Investment Bank is operating in an uncertain environment. Trading revenue is volatile and could be affected by further disruption in the credit and mortgage markets, as well as lower levels of liquidity. In addition, if the Firm's own credit spreads tighten the change in the fair value of certain trading liabilities would also negatively affect trading results. The Firm held $11.5 billion (gross notional) of legacy leveraged loans and unfunded commitments as held-for-sale as of March 31, 2009. Markdowns averaging 52% of the gross notional value have been taken on these legacy positions as of March 31, 2009, resulting in a net carrying value of $5.5 billion. Leveraged loans and unfunded commitments are difficult to hedge effectively, and if market conditions further deteriorate, additional markdowns may be necessary on this asset class. The Investment Bank also held, at March 31, 2009, an aggregate $5.5 billion of prime and Alt-A mortgage exposure, which is also difficult to hedge effectively, and $678 million of subprime mortgage exposure. In addition, the Investment Bank had $6.5 billion of commercial mortgage exposure. In spite of active hedging, mortgage exposures could be adversely affected by worsening market conditions and further deterioration in the housing market.
Earnings in Commercial Banking and Treasury & Securities Services could decline due to the impact of tighter spreads in the current low interest rate environment or due to a decline in the level of liability balances. Earnings in Treasury & Securities Services and Asset Management will likely deteriorate if market levels continue to decline, due to reduced levels of assets under management, supervision and custody. Management believes that, at current market valuation and activity levels, it is reasonable to expect quarterly net revenue over the near-term of approximately $1.4 billion in Commercial Banking, $2.0 billion in Treasury & Securities Services and $1.8 billion in Asset Management. Earnings in the Corporate/Private Equity segment could be more volatile this year due to increases in the size of the Firm's investment portfolio, which is comprised largely of investment-grade securities. Private Equity results are dependent upon the capital markets, the performance of the broader economy and investment-specific issues.
Assuming economic conditions do not worsen beyond management's current expectations, management continues to believe that the net income impact of Washington Mutual's banking operations could be approximately $0.50 per share in 2009; the Bear Stearns businesses could contribute $1 billion (after-tax) annualized after 2009; and merger-related items, which include both the Washington Mutual transaction and the Bear Stearns merger, could be approximately $600 million (after-tax) in 2009.