UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10–10–Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the Quarterly Period EndedSeptember 30, 2005March 31, 2006 Commission file number1-5805

JPMORGAN CHASE & CO.
(Exact name of registrant as specified in its charter)
   
Delaware 13-2624428
(State or other jurisdiction of
incorporation or organization)		 (I.R.S. Employer
incorporation or organization)
Identification No.)
   
270 Park Avenue, New York, New York 10017
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code(212) 270-6000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or15(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.
xYes [X] No [  o]No
Indicate by check mark whether the registrantRegistrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerxAccelerated fileroNon-accelerated filero
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
oYes [X] No [  x]No
Common Stock, $1 Par Value3,499,064,504
 
Number of shares outstanding of each of the issuer’s classes of common stock on October 31, 2005.outstanding as of April 30, 2006: 3,474,553,532
 

 

 

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,March 31, 2006, and March 31, 2005 and September 30, 2004
  6560
 
    
Consolidated balance sheets (unaudited) at September 30, 2005,March 31, 2006, and December 31, 20042005
  6661
 
    
Consolidated statements of changes in stockholders’ equity (unaudited) for the ninethree months ended September 30,March 31, 2006, and March 31, 2005 and September 30, 2004
  6762
 
    
Consolidated statements of cash flows (unaudited) for the ninethree months ended September 30,March 31, 2006, and March 31, 2005 and September 30, 2004
  6863
 
    
Notes to consolidated financial statements (unaudited)
  6964
 
    
Consolidated average balance sheet, interest and rates (unaudited) for the three and nine months ended September 30,March 31, 2006, and March 31, 2005 and September 30, 2004
  8987
 
    
Glossary of Terms and Line of Business Metrics
  9188
 
Item 2 
Management’s Discussion and Analysis of Financial Condition and Results of Operations:
    
    
Consolidated Financial Highlights
  3 
    
Introduction
  4
 
    
Executive Overview
  6 
    
Consolidated Results of Operations
  8
 
    
Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures
  11 
    
Business Segment Results
  1513
 
    
Balance Sheet Analysis
  4235
 
    
Capital Management
  4337
 
    
Off-Balance Sheet Arrangements and Contractual Cash Obligations
  4640
 
    
Risk Management
  4741
 
    
Supervision and Regulation
  6257
 
    
Critical Accounting Estimates Used by the Firm
  6358
 
    
Accounting and Reporting Developments
  6359
Forward-looking Statements
92
 
Item 3 
Quantitative and Qualitative Disclosures About Market Risk
  9693
 
Item 4 
Controls and Procedures
  9693
 
Part II —– Other information
    
Item 1 
Legal Proceedings
  9693
Item 1A
Risk Factors
94
 
Item 2 
Unregistered Sales of Equity Securities and Use of Proceeds
  9794
 
Item 3 
Defaults Upon Senior Securities
  9895
 
Item 4 
Submission of Matters to a Vote of Security Holders
  9895
 
Item 5 
Other Information
  9895
 
Item 6 
Exhibits
  9895 
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32: CERTIFICATION

2

JPMORGAN CHASE & CO.
CONSOLIDATED FINANCIAL HIGHLIGHTS
                                                
 Nine months ended 
(in millions, except per share, ratio and headcount data) September 30, 
(unaudited) 
(in millions, except per share, headcount and ratio data)(in millions, except per share, headcount and ratio data)
As of or for the period ended 3Q 2005 2Q 2005 1Q 2005 4Q 2004 3Q 2004 2005  2004(f) 1Q06 4Q05 3Q05 2Q05 1Q05 
Selected income statement data
  
Noninterest revenue $10,176 $8,925 $9,613 $7,742 $8,422 
Net interest income $4,852 $5,001 $5,225 $5,329 $5,452 $15,078 $11,432  5,060 4,753 4,852 5,001 5,225 
Noninterest revenue 9,613 7,742 8,422 7,621 7,053 25,777 18,715 
Total net revenue 14,465 12,743 13,647 12,950 12,505 40,855 30,147  15,236 13,678 14,465 12,743 13,647 
Provision for credit losses(a)
 1,245 587 427 1,157 1,169 2,259 1,387 
Noninterest expense before Merger costs and Litigation reserve charge 9,243 8,748 8,892 8,863 8,625 26,883 20,431 
Merger costs 221 279 145 523 752 645 842 
Litigation reserve charge — 1,872 900 — — 2,772 3,700 
Total noninterest expense 9,464 10,899 9,937 9,386 9,377 30,300 24,973 
Provision for credit losses 831 1,224  1,245(f) 587 427 
Noninterest expense 9,752 8,535 9,464 10,899 9,937 
Income before income tax expense 3,756 1,257 3,283 2,407 1,959 8,296 3,787  4,653 3,919 3,756 1,257 3,283 
Income tax expense 1,229 263 1,019 741 541 2,511 987  1,572 1,221 1,229 263 1,019 
Net income $2,527 $994 $2,264 $1,666 $1,418 $5,785 $2,800  $3,081 $2,698 $2,527 $994 $2,264 
 
Per common share
  
Net income per share: 
Basic $0.72 $0.28 $0.64 $0.47 $0.40 $1.65 $1.09 
Net income per share: Basic $0.89 $0.78 $0.72 $0.28 $0.64 
Diluted 0.71 0.28 0.63 0.46 0.39 1.62 1.06  0.86 0.76 0.71 0.28 0.63 
Cash dividends declared per share 0.34 0.34 0.34 0.34 0.34 1.02 1.02  0.34 0.34 0.34 0.34 0.34 
Book value per share 30.26 29.95 29.78 29.61 29.42  31.19 30.71 30.26 29.95 29.78 
Common shares outstanding (average)
 
Basic 3,485 3,493 3,518 3,515 3,514 3,498 2,533 
 
Common shares outstanding
 
Average: Basic 3,473 3,472 3,485 3,493 3,518 
Diluted 3,548 3,548 3,570 3,602 3,592 3,555 2,599  3,571 3,564 3,548 3,548 3,570 
Common shares at period-end 3,503 3,514 3,525 3,556 3,564  3,473 3,487 3,503 3,514 3,525 
 
Selected ratios
  
Return on common equity (“ROE”)(b)
  9%  4%  9%  6%  5%  7%  6%
Return on assets (“ROA”)(b)(c)
 0.84 0.34 0.79 0.57 0.50 0.66 0.42 
Return on common equity (“ROE”)(a)
  12%  10%  9%  4%  9%
Return on assets (“ROA”)(a)(b)
 1.00 0.89 0.84 0.34 0.79 
Tier 1 capital ratio 8.2 8.2 8.6 8.7 8.6  8.5 8.5 8.2 8.2 8.6 
Total capital ratio 11.3 11.3 11.9 12.2 12.0  12.1 12.0 11.3 11.3 11.9 
Tier 1 leverage ratio 6.2 6.2 6.3 6.2 6.5  6.1 6.3 6.2 6.2 6.3 
 
Selected balance sheet data (period-end)
  
Total assets $1,203,033 $1,171,283 $1,178,305 $1,157,248 $1,138,469  $1,273,282 $1,198,942 $1,203,033 $1,171,283 $1,178,305 
Securities 68,697 58,573 75,251 94,512 92,816  67,126 47,600 68,697 58,573 75,251 
Total loans 420,504 416,025 402,669 402,114 393,701 
Loans 432,081 419,148 420,504 416,025 402,669 
Deposits 535,123 534,640 531,379 521,456 496,454  584,465 554,991 535,123 534,640 531,379 
Long-term debt 101,853 101,182 99,329 95,422 91,754  112,133 108,357 101,853 101,182 99,329 
Common stockholders’ equity 105,996 105,246 105,001 105,314 104,844  108,337 107,072 105,996 105,246 105,001 
Total stockholders’ equity 106,135 105,385 105,340 105,653 105,853  108,337 107,211 106,135 105,385 105,340 
 
Credit quality metrics
  
Allowance for credit losses $7,615 $7,233 $7,423 $7,812 $8,034 $7,615 $8,034  $7,659 $7,490 $7,615 $7,233 $7,423 
Nonperforming assets(c) 2,839 2,832 2,949 3,231 3,637 2,839 3,637  2,348 2,590 2,839 2,832 2,949 
Allowance for loan losses to total loans(d)
  1.88%  1.76%  1.83%  1.94%  2.01%  1.88%  2.01%  1.83%  1.84%  1.86%  1.76%  1.82%
Net charge-offs $870 $773 $816 $1,398 $865 $2,459 $1,701  $668 $1,360 $870 $773 $816 
Net charge-off rate(b)(d)
  0.90%  0.83%  0.88%  1.47%  0.93%  0.87%  0.89%
Wholesale net charge-off (recovery) rate(b)(d)
  (0.12)  (0.17)  (0.03) 0.21  (0.08)  (0.11) 0.17 
Managed Card net charge-off rate(b)
 4.70 4.87 4.83 5.24 4.88 4.80 5.29 
Net charge-off rate(a)(d)
  0.69%  1.39%  0.89%  0.82%  0.88%
Wholesale net charge-off (recovery) rate(a)(d)
  (0.06) 0.07  (0.12)  (0.16)  (0.03)
Managed card net charge-off rate(a)
 2.99 6.39 4.70 4.87 4.83 
 
Headcount
 168,955 168,708 164,381 160,968 162,275  170,787 168,847 168,955 168,708 164,381 
 
Share price(e)
  
High $35.95 $36.50 $39.69 $40.45 $40.25 $39.69 $43.84  $42.43 $40.56 $35.95 $36.50 $39.69 
Low 33.31 33.35 34.32 36.32 35.50 33.31 34.62  37.88 32.92 33.31 33.35 34.32 
Close 33.93 35.32 34.60 39.01 39.73 33.93 39.73  41.64 39.69 33.93 35.32 34.60 
(a) 
Third quarter 2005 includes a $400 million special provision related to Hurricane Katrina: Retail Financial Services $250 million, Card Services $100 million, Commercial Banking $35 million, Asset & Wealth Management $3 million and Corporate $12 million.
(b)
Based onupon annualized amounts.
(c)(b) 
Represents Net income divided by Total average assets.
(c)
Excludes wholesale held-for-sale (“HFS”) loans purchased as part of the Investment Bank’s proprietary activities.
(d) 
Excluded from this ratiothe allowance coverage ratios were end-of-period loans held-for-sale; and excluded from the net charge-off rates were average loans held-for-sale.
(e) 
JPMorgan Chase’s common stock is listed and traded on the New York Stock Exchange, the London Stock Exchange Limited and the Tokyo Stock Exchange. The high, low and closing prices of JPMorgan Chase’s common stock are from The New York Stock Exchange Composite Transaction Tape.
(f) 
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.Third-quarter 2005 includes a $400 million special provision related to Hurricane Katrina.

3

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section of this Form 10–Q provides management’s discussion and analysis (“MD&A”) of the financial condition and results of operations offor JPMorgan Chase.Chase & Co. See the Glossary of terms on pages 91–9288–89 for a definitiondefinitions of terms used throughout this Form 10–Q. The MD&A included in this Form 10–Q contains statements that are forward lookingforward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based upon the current beliefs and expectations of JPMorgan Chase’s management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. Factors thatThese risks and uncertainties could cause JPMorgan Chase’s results to differ materially from those describedset forth in thesuch forward-looking statements. See Forward-looking statements can be found on page 95.92 of this Form 10–Q.
INTRODUCTION
JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”), a financial holding company incorporated under Delaware law in 1968, is a leading global financial services firm and one of the largest banking institutions in the United States, with $1.2$1.3 trillion in assets, $106$108 billion in stockholders’ equity and operations in more than 50 countries.worldwide. The Firm is a leader in investment banking, financial services for consumers and businesses, financial transaction processing, asset and wealth management and private equity. Under the JPMorgan Chase and Bank OneChase brands, the Firm serves millions of customers in the United States 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”), a national banking association with branches in 17 states; and Chase Bank USA, National Association, a national bank headquartered in Delaware that is the Firm’s credit card issuing bank. JPMorgan Chase’s principal nonbank subsidiary is J.P. Morgan Securities Inc. (“JPMSI”), itsthe Firm’s U.S. investment banking firm.
The headquarters for JPMorgan Chase is in New York City. The retail banking business, which includes the consumer banking, small business banking and consumer lending activities (with the exception of credit card), is headquartered in Chicago. Chicago also serves as the headquarters for Commercial Banking.
JPMorgan Chase’s activities are organized, for management reporting purposes, into six business segments, as well as Corporate. The Firm’s wholesale businesses are comprised ofcomprise the Investment Bank, Commercial Banking, Treasury & Securities Services and Asset & Wealth Management.Management segments. The Firm’s consumer businesses are comprised ofcomprise the Retail Financial Services and Card Services.Services segments. A description of the Firm’s business segments, and the products and services they provide to their respective client bases, follows:follows.
Investment Bank
JPMorgan Chase is one of the world’s leading investment banks, as evidenced by the breadth of itsthe Investment Bank client relationships and product capabilities. The Investment Bank (“IB”) has extensive relationships with corporations, financial institutions, governments and institutional investors worldwide. The Firm provides 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, and market-making in cash securities and derivative instruments. The IB also commits the Firm’s own capital to proprietary investing and trading activities.
Retail Financial Services
Retail Financial Services (“RFS”) includes Home Finance, Consumer & Small Businessrealigned its business reporting segments on January 1, 2006, into Regional Banking, Mortgage Banking and Auto & Education Finance and Insurance. Through this group of businesses, the Firm provides consumers and small businesses with a broad range of financial products and services including deposits, investments, loans and insurance. Home Finance is a leading provider of consumer real estate loan products and is one of the largest originators and servicers of home mortgages. Consumer & Small BusinessFinance. Regional Banking offers one of the largest branch networks in the United States, covering 17 states with 2,5492,638 branches and 7,1367,400 automated teller machines.machines (“ATMs”). Regional Banking distributes, through its network, a variety of products including checking, savings and time deposit accounts; home equity, residential mortgage, small business banking, and education loans; mutual fund and annuity investments; and on-line banking services. Mortgage Banking is a leading provider of mortgage loan products and is one of the largest originators and servicers of home mortgages. Auto & Education Finance is the largest banknoncaptive originator of automobile loans, as well asprimarily through a top providernetwork of loansautomotive dealers across the United States. The Firm has announced an agreement to acquire the consumer, small-business and middle-market banking businesses of The Bank of New York Company (“The Bank of New York”) in exchange for college students. Through its Insurance operations,certain portions of the Firm sells and underwrites an extensive range of financial protection products and investment alternatives, including life insurance, annuities and debt protection products.Firm’s corporate trust business.
Card Services
Card Services (“CS”) is one of the largest issuerissuers of general purpose credit cards in the United States, with over 98more than 112 million cards in circulation, and is the largest merchant acquirer.circulation. CS offers a wide variety of productscards to satisfy the needs of its cardmembers, including cards issued on behalfindividual consumers, small businesses and partner organizations. The Chase Paymentech Solutions, LLC joint venture is the largest processor of many well-known partners, such as major airlines, hotels, universities, retailersMasterCard® and other financial institutions.Visa® payments in the world.

4

Commercial Banking
Commercial Banking (“CB”) serves more than 25,000 clients, including corporations, municipalities, financial institutions and not-for-profit entities, with annual revenues generally ranging from $10 million to $2 billion. AWhile most Middle Market clients are located within the RFS footprint, CB also serves larger corporations, as well as local governments and financial institutions on a national basis. CB is a market leader with superior client penetration across the businesses it serves. Local market presence, and a strong customer service model, coupled with a focus onindustry expertise and excellent client service and risk management, provide a solid infrastructure forenables CB to provide the Firm’s completeoffer superior financial advice. Partnership with other JPMorgan Chase businesses positions CB to deliver broad product setcapabilities – including lending, treasury services, investment banking, and investment management. CB clients benefit from the Firm’s retail branch networkasset and commercial banking offices, including locationswealth management – in 10 out of the top 15 major metropolitan areas in the U.S.order to meet its clients’ financial needs.

4

Treasury & Securities Services
Treasury & Securities Services (“TSS”) is a global leader in providing transaction, investment and information services to support the needs of corporations, issuers and institutional investors worldwide. TSS is one of the largest cash management providerproviders in the world and a leading global custodian. The Treasury Services (“TS”) business provides clients with a broad rangevariety of capabilities, including U.S. dollarcash management products, trade finance and multi-currency clearing, ACH, trade,logistics solutions, wholesale card products, and short-term liquidity and working capitalmanagement tools. The Investor Services (“IS”) business provides a wide range of capabilities, including custody, funds services, securities lending, and performance measurement and execution products. The Institutional Trust Services (“ITS”) business provides trustee, depository and administrative services for debt and equity issuers. Treasury ServicesTS partners with the Commercial Banking, Consumer & Small BusinessCB, Regional Banking and Asset & Wealth Management businesses to serve clients firmwide. As a result, certain Treasury ServicesTS revenues are included in other segments’ results. As previously announced, TSS has combined the management ofreorganized the Investor Services and Institutional Trust Services businesses under the nameinto a single business called Worldwide Securities Services (“WSS”). The WSS business provides: safekeeping, valuing, clearing and servicing of securities and portfolios for investors and broker-dealers; trustee and agent services; and management of American Depositary Receipt programs. The Firm has announced an agreement to create an integrated franchise which will provide custodyacquire the consumer, small-business and investor services as well as securities clearance andmiddle-market banking businesses of The Bank of New York in exchange for certain portions of the Firm’s corporate trust services to clients globally.business. For a description of the transaction, see Other Business Events below.
Asset & Wealth Management
Asset & Wealth Management (“AWM”) provides investment advice and management to retailfor institutions and institutional investors, financial intermediariesindividuals. With $1.2 trillion of Assets under supervision, AWM is one of the largest asset and wealth managers in the world. AWM serves four distinct client groups through three businesses: institutions through JPMorgan Asset Management; ultra-high-net-worth clients through the Private Bank; high-net-worth families and individuals globally. For retail investors, AWM provides investment management products and services, including a global mutual fund franchise, retirement plan administration and brokerage services. AWM delivers investment management to institutional investors across all asset classes. The Private Bank andclients through Private Client Services businesses provide integrated wealth managementServices; and retail clients through JPMorgan Asset Management. The majority of AWM’s client assets are in actively managed portfolios. AWM has global investment expertise in equities, fixed income, real estate, hedge funds, private equity and liquidity, including both money market instruments and bank deposits. AWM also provides trust and estate services to ultra-high-net-worth and high-net-worth clients respectively.and retirement services for corporations and individuals.
OTHER BUSINESS EVENTS
IPO allocation litigation
On April 19, 2006, JPMorgan Securities Inc. (“JPMSI”) entered into a Memorandum of Understanding (the “MOU”) with plaintiffs’ executive committees in the consolidated IPO securities cases and the consolidated IPO antitrust cases. The MOU is an agreement in principle to settle these class action lawsuits for $425 million. The MOU is subject to approval by the plaintiffs in each of the cases and by the district court judges presiding over the respective lawsuits. The settlement would not have a material adverse impact on the Firm’s financial results. See Part II Other Information, Item 1 Legal Proceedings on page 93 of this Form 10–Q for additional information.
Sears Canada credit cardAcquisition of the consumer, small-business and middle-market banking businesses of The Bank of New York in exchange for certain portions of the corporate trust business
On August 31, 2005,April 8, 2006, JPMorgan Chase announced that it hadan agreement to acquire The Bank of New York’s consumer, small-business and middle-market banking businesses in exchange for certain portions of the Firm’s corporate trust business plus a cash payment of $150 million. The Bank of New York businesses being acquired are valued at a premium of $2.30 billion; certain portions of the Firm’s corporate trust business being sold are valued at a premium of $2.15 billion. The Firm may also make a future payment to The Bank of New York of up to $50 million depending on the number of new account openings at the Firm’s retail branches. The transaction has been approved by both companies’ boards of directors and is subject to regulatory approvals. It is expected to close in late third quarter or the fourth quarter of 2006.
Acquisition of Kohl’s private label credit card portfolio
On March 5, 2006, JPMorgan Chase entered into an agreement with Kohl’s Corporation (“Kohl’s”) to purchase theacquire $1.6 billion of Kohl’s private label credit card operation, including both the private-label Sears card accountsreceivables and the co-branded Sears MasterCard® accounts, of Sears Canada Inc.13 million accounts. The credit card operation includes approximately 10 million accounts and CAD$2.5 billion in outstanding loans. Sears Canada andtransaction was completed on April 21, 2006. JPMorgan Chase will enterand Kohl’s have also entered into an ongoing arrangementagreement under which JPMorgan Chase will offer private-label and co-branded credit cards to both new and existing Kohl’s customers. The transaction is expected to close by year-end 2005.
Neovest Holdings, Inc.Collegiate Funding Services
On SeptemberMarch 1, 2005,2006, JPMorgan Chase completed itsacquired, for approximately $663 million, Collegiate Funding Services, a leader in education loan servicing and consolidation. This acquisition included $6 billion of Neovest Holdings, Inc.education loans and enables the Firm to create a comprehensive education finance business.
Acquisition of certain operations from Paloma Partners
On March 1, 2006, JPMorgan Chase acquired the middle and back office operations of Paloma Partners Management Company (“Paloma”), which is part of a privately-owned investment fund management group based in Greenwich, CT. The parties have also entered into a multi-year contract pursuant to which JPMorgan Chase will provide daily operational services to Paloma. The acquired operations will be combined with JPMorgan Chase’s current hedge fund administration unit, JPMorgan Tranaut.

5

JPMorgan and Fidelity Brokerage Company
On February 28, 2006, the Firm announced a strategic alliance with Fidelity Brokerage to become the exclusive provider of high-performance trading technologynew issue equity securities and direct market access. This transaction will enable the Investment Bankprimary provider of fixed income products to offer a leading, broker-neutral trading platform across asset classes to institutional investors, asset managersFidelity’s brokerage clients and hedge funds.retail customers, effectively expanding the Firm’s existing distribution platform.
Sale of BrownCoinsurance underwriting business
On September 29, 2005,February 7, 2006, JPMorgan Chase announced that it had signed a definitive agreementagreed to sell BrownCo, an on-line deep-discount brokerage business,its life insurance and annuity underwriting businesses to E*TRADE FinancialProtective Life Corporation for a cash purchase price of $1.6approximately $1.2 billion. JPMorganThe sale, which includes both the heritage Chase expects to recognize an after-tax gain of approximately $700 million. The saleinsurance business and the life business that Bank One had bought from Zurich Insurance in 2003, is subject to normal regulatory approvals and is expected to close by year-end 2005.
Agreement with First Data Corp. to integrate Chase Merchant Services, Paymentech
On October 5, 2005,in the third quarter of 2006. JPMorgan Chase and First Data Corp. announced that theyanticipates the transaction will have completed an agreement to integrate the companies’ jointly-owned Chase Merchant Services and Paymentech merchant businesses, to be operated under the name of Chase Paymentech Solutions, LLC. The combined business will be the largest financial transaction processor in the U.S. for businesses accepting payments via traditional point of sale, internet, catalog and recurring billing.no material impact on earnings.

5

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 more complete understanding of events, trends and uncertainties, as well as the liquidity, capital, 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.
CEO transition
The Board of Directors of JPMorgan Chase announced on October 19, 2005, that James Dimon, currently President and Chief Operating Officer, will succeed Chairman and Chief Executive Officer William B. Harrison, Jr. at year-end as Chief Executive Officer. Mr. Harrison will continue as Chairman of the Board.
Business overview
The Firm reported 2005 third-quarter2006 first-quarter net income of $2.5$3.1 billion, or $0.71$0.86 per share, compared with net income of $1.4$2.3 billion, or $0.39$0.63 per share, for the thirdfirst quarter of 2004.2005. Return on common equity for the quarter was 12% compared with 9%. in the prior year. The comparison with the prior year benefited from the absence of a charge of $558 million after-tax, or $0.15 per share, related to settlement of the Firm’s WorldCom litigation, which occurred in the first quarter of 2005. Results for the current quarter included $137$44 million of after-tax Mergermerger charges, or $0.04 per share. Excluding these charges, operating earnings were $2.7 billion, or $0.75$0.01 per share, and return on common equity was 10%.
Earnings forcompared with $90 million, or $0.03 per share, in the thirdfirst quarter of 2005 also included a special provision for credit losses of $400 million, or $0.07 per share, to cover probable credit losses due to Hurricane Katrina. This provision is related to expected credit losses for businesses and individuals located in the affected areas of the Gulf Coast region. The $400 million was allocated to the lines of business as follows: $250 million in RFS ($140 million in Consumer Real Estate Lending, $90 million in Consumer & Small Business Banking and $20 million in Auto & Education Finance), $100 million in CS, $35 million in CB, $3 million in AWM and $12 million in Corporate.2005.
Net income for the first nine monthsquarter of 2005 was $5.8 billion, or $1.62 per share, compared with $2.8 billion, or $1.06 per share, in the comparable period last year. The increase was primarily attributable2006 also included incremental expense of $459 million (pre-tax) related to the Merger. Return on common equityadoption of Statement of Financial Accounting Standards No. 123 (Revised 2004) (“Share-Based Payment”), as of January 1, 2006, under the modified prospective method. The $459 million of incremental expense was 7%.allocated to the business segments as follows: Investment Bank – $256 million; Retail Financial Services – $17 million; Card Services – $4 million; Commercial Banking – $29 million; Treasury & Securities Services – $25 million; Asset & Wealth Management – $71 million; and Corporate – $57 million.
On April 8, 2006, the Firm announced an agreement to acquire The results included after-tax nonoperating litigation reserve chargesBank of $1.7 billionNew York’s consumer, small-business and Merger costsmiddle-market banking businesses in exchange for certain portions of $400 million. Nonoperating litigation charges consisted of a $1.2 billion after-tax charge taken in the second quarter of 2005 in connection with the Firm’s settlementcorporate trust business plus a cash payment of $150 million. The transaction will add 338 branches, 400 ATMs, and approximately 600,000 households, 100,000 businesses, $15 billion in deposits and $8 billion of loans to the Enron class action lawsuitFirm’s New York City/Tri-State franchise. The transaction is subject to regulatory approvals and for certain of its other material legal proceedings, and a $558 million after-tax charge taken in the first quarter of 2005 for the settlement costs of the WorldCom class action litigation. Excluding these litigation charges and Merger costs, operating earnings were $7.9 billion, or $2.22 per share, and return on common equity was 10%.
The Firm successfully completed two large conversionsis expected to close late in the third quarter. The Firm converted 31 million heritage Chase credit card accounts with $69 billion in balances to a new processing system and completed its major systems conversion in Texas, uniting 400 Chase and Bank One branches, and over 800 ATMs under common systems and branding. These conversions continued a successful yearquarter or during the fourth quarter of technology and operations upgrades following the Merger.2006.
Global economic and market conditions affectaffected the performance inof each of the Firm’s businesses. In the thirdfirst quarter of 2005,2006, both the global and U.S. economies continued to grow steadily, and the capital market environment wasremained favorable. However, Hurricanes Katrina and Rita contributed to a surge in energy prices, and consumer confidence declined sharply lateFirst quarter growth in the quarter.U.S. economy was boosted by recovery from last fall’s hurricane disruptions, although growth appeared to be moderating as the quarter ended. The volatilityU.S. economy experienced a continued rise in energyinterest rates driven by improving global economic prospects, resulting in two quarter-point increases in the federal funds rate, from 4.25% to 4.75%; at the same time the yield curve remained relatively flat. Equity markets, provided opportunities forboth domestic and international, enjoyed positive returns versus the trading businesses within the Investment Bankprior quarter and contributed to the quarter’s record trading results. While there was no immediate material adverse impact on the Firm’s consumer businesses’ revenue as a result of these events, the Firm did provide for higher probable credit losses associated with Hurricane Katrina. In addition, record bankruptcy filings leading up to new bankruptcy legislation that went into effect on October 17 raised credit costs within Card Services.prior year.
The following discussion ofthat follows highlights the performance inof each line of business comparessegment during the thirdfirst quarter of 20052006 with the comparable period in the prior year, unless otherwise noted.
StrongThe Investment Bank earnings wereachieved record quarterly revenues driven by record revenues, resultingEquity Markets revenue and strong investment banking fees and Fixed Income Markets revenue, which benefited from record trading revenues and continued strength in investment banking fees. Trading results were strong across all areas, with particular strengthglobal capital markets activity and continuing investments in energy,strategic initiatives. However, net income declined due to an area of significant investment. Partially offsettingincrease in the improved revenues were higher performance-based incentive compensation and a reduced benefit from the loan loss provision.
Retail Financial Services earnings declined from the prior year and included a special provision for credit losses related to Hurricane Katrina. Performance reflectedand higher compensation expense. Record Equity Markets revenue was driven by record trading and strong commissions across all regions. Fixed Income Markets revenue, although strong, was lower MSR risk management results, a net loss associated withthan the transfer of auto loans to held-for-sale, and narrower spreads on consumer real estate loans. Earnings benefited from favorable credit trends and lower expensesprior year due to merger-related expense savingsweaker results in commodities and other efficiencies. Production results were strong across most product offerings and included year-over-year increases in checking accounts, average total deposits, mortgage originations, third-party mortgage loans serviced and average home equity balances.
Card Services earnings growth resulted from higher revenues and lower expenses. The increased revenues reflected higher loan balances and increased interchange income from higher charge volume,rates markets, partially offset by an increasestronger results in emerging markets, currencies and credit markets. Investment banking fees were higher than the prior year due to strong growth in advisory fees and record loan balances in their introductory rate period,syndication revenue. The higher volume-driven payments to partners and by rewards expense. Lower expenses were driven by merger savings, including lower compensation and processing costs. Partially offsetting these benefits was a higherlevel of provision for credit losses reflected increased loan balances; credit quality remained stable. Expense increased due primarily to higher incentive compensation, reflecting improved performance, and the incremental expense related to increased bankruptciesthe adoption of SFAS 123R.
Retail Financial Services’ net income declined due to lower Mortgage Banking performance and continued spread compression on deposits and home equity loans in Regional Banking. Partially offsetting these lower results were growth in deposit and loan balances. Credit quality remained favorable in all loan portfolios, which led to the special provision for credit losses related to Hurricane Katrina.

6

Commercial Banking produced strong earnings growth, driven by a lower provision for credit losses, increased revenue and a decline in expenses. Results included a special provision for credit losses attributable to Hurricane Katrina. Improved underlying credit quality and management of the portfolio drove the decline in the provision for credit losses. HigherExpense increased due to the ongoing investment in retail distribution, partially offset by merger-related expense savings and

6

other efficiencies. The underlying business drivers benefited from the continuing investment in the retail distribution network and the overall strength of the U.S. economy, both of which contributed to increases in checking accounts, deposits, loans, and improved cross-selling of credit cards, mortgages and investment products. During the quarter the acquisition of Collegiate Funding Services was completed, adding $6 billion of education finance loans and providing a loan servicing capability.
Card Services net income increased, primarily due to lower bankruptcy-related losses following the new bankruptcy legislation that became effective in the fourth quarter of 2005. Net income also benefited from lower credit losses (excluding the impact of the bankruptcy legislation), merger savings and higher managed loan balances, including the acquisition of the Sears Canada credit card business. These benefits were offset partially by narrower loan spreads and higher marketing expense. Both Total net revenue and Noninterest expense were lower due to the restructuring and related deconsolidation of Paymentech in the fourth quarter of 2005.
Commercial Banking net income benefited from higher revenues, primarily offset by higher expense and an increased provision for credit losses, while credit quality remained stable. Revenues increased due to wider spreads and higher volume related to liability balances and increased loan balances, and growth in investment banking revenue, partially offset by lowernarrower loan spreads resulted in higher revenues. Expenses declinedreflecting continued competitive pressure. Expense increased primarily due to lower compensation costs, partially offset by increased unit costs for Treasury Services products.the incremental expense related to the adoption of SFAS 123R.
Treasury & Securities Services earningsnet income increased significantly benefiting from higher revenues and lower expenses.revenue, partially offset by increased expense. Revenue growth reflected business growth and wider spreads on liability balances, which both benefited from global economic strength and stronger capital market activity. The increase in expense was due to higher compensation expense related to business growth and increased average liability balances, while the reduction in expenses was primarilyincremental expense due to a significant software-impairment charge in the prior year, lower allocationsadoption of Corporate segment expenses and increased product unit costs charged to other lines of business.SFAS 123R.
Record earnings in Asset & Wealth Management resultednet income benefited from increased revenues,revenue, partially offset by higher compensation expense. Revenue growth was driven by the acquisition of a majority interest in Highbridge Capital Management, LLC in the fourth quarter of 2004 and net asset inflows, mainly in equity-related and liquidity products. Also contributingproducts, and by asset appreciation, benefiting from strength in global equity markets and improved investment performance. These factors also lead to increased levels of assets under supervision and assets under management. The increase in expense was due to the incremental expense related to the adoption of SFAS 123R and higher performance-based compensation.
Corporate segment net loss improved due to higher revenue and lower expense. The increase in revenue were global equity market appreciation and increased brokerage activity. Assets under supervision increased over the prior year, and Assets under management grew to a record level.
The loss in the Corporate segment increased from the prior year as lower revenues more than offset lower expenses. The decline in revenues was driven primarily by lower Treasury securities portfolio losses and improved Treasury net interest spread. These benefits were offset partially by lower private equity gains. Expense benefited from the absence of a one-time gain on the sale of an investment and by treasury portfolio losses versus gainsWorldCom litigation settlement in the prior year. This was partially offset by higher private equity gains. Lower compensation,first quarter of 2005, lower merger-related costs and increased merger-related savings and other efficiencies droveefficiencies. These benefits were partially offset by the incremental expense decline.related to the adoption of SFAS 123R.
ForDuring the quarter ended September 30, 2005,March 31, 2006, approximately $500$580 million (pre-tax) of merger savings have beenwere realized, which is an annualized rate of $2.0approximately $2.3 billion. Management estimates that annualized savings will be approximately $2.8 billion by the end of 2006. Merger costs of $71 million were expensed during the first quarter of 2006, bringing the total amount expensed, since the merger announcement, to $2.2 billion. Management continues to estimate that annualremaining merger savings of approximately $3.0 billion (pre-tax) will be achieved by the end of 2007; approximately two-thirds of the savings are anticipated to be realized by the end of 2005. Merger costs of $221$800 million (pre-tax) were expensed during the third quarter of 2005, bringing the total amount expensed year-to-date to $645 million and $2.0$1.3 billion, (pre-tax) cumulative since the Merger announcement. Management continues to estimate remaining Merger costs of $1.0 billion to $1.5 billion (pre-tax), which are expected to be expensed overduring the next two years. These estimated merger-related charges will result from actions taken with respect to both JPMorgan Chase’sremainder of 2006 and Bank One’s operations, facilities and employees. The charges will be recorded based upon the nature and timing of these integration actions.2007.
The Firm’s balance sheet remained strong, withFirm had, at March 31, 2006, total stockholders’ equity of $106$108 billion and a Tier 1 capital ratio of 8.2% at September 30, 2005.8.5%. The Firm repurchased $500 million,purchased $1.3 billion, or 14.431.8 million shares, of common stock during the quarter and $2.4 billion, or 67.2 million shares, of common stock during the first nine months of the year.quarter.
Business outlook
WithinThe following forward-looking statements are based upon the current beliefs and expectations of JPMorgan Chase’s management and are subject to significant risks and uncertainties. These risks and uncertainties could cause JPMorgan Chase’s results to differ materially from those set forth in such forward-looking statements.
The performance of the Firm’s capital markets and wholesale businesses are affected by overall global economic growth and by financial market movements and activity levels. The Investment Bank enters the outlook for Investment banking fees remains favorable, reflectingsecond quarter of 2006 with a strong pipeline at September 30, 2005. Tradingfee pipeline. Market conditions can impact trading results, reflect market conditions andwhich are difficult to predict. However, given thatThe Investment Bank remains focused on new product expansion initiatives, which are intended to promote growth and reduce volatility in trading results in the third quarter were at record levels, trading revenue in the fourth quarter is likely to be lower than the third quarter. In addition, the Firm anticipates that wholesale credit costs will return to more normal levels in 2006.over time.
In Retail Financial Services, a flatterthe consumer businesses, the relatively flat yield curve and rising short termcontinuing increase in interest rates may contribute to modest compression of net interest margin for Consumer & Small Business Banking. Credit costs for RFS have been at historically low levels; the business anticipates a return to more normal levels in coming quarters, in part due to a seasonal uptick in the fourth quarter. Investment in retail banking distributionhas put pressure on deposit and sales is expected to continue.
Card Services also expects modest net interest margin compression to continue, due, not only to the flattening yield curve and rising interest rates, but also to the increased number of balances in their introductory period.
The industry experienced an accelerated level of bankruptcy filings related to the new bankruptcy legislation, which generally became effective on October 17, 2005. The unprecedented number of bankruptcy filings, particularly in the week immediately preceding the effective date of the new legislation, led to a backlog in the processing of such bankruptcy filings and, accordingly, credit card net charge-offs are currently expected to be higher than previously anticipated. It is currently estimated that total managed credit card net charge-offs in the fourth quarter of 2005 will be approximately $2.3 billion, up from $1.6 billion in the prior quarter. The Firm believes that a portion of the expected increase in bankruptcy losses is an acceleration of net charge-offs that would have been experienced in future periods. The Firm will evaluate the impact of the surge in bankruptcy filings on its allowance for credit losses and currently believes that there could be a reduction in the allowance in the fourth quarter, given that the allowance provides for expected losses, which may be lower as a result of the large number of accelerated filings (assuming all other factors affecting the allowance are equal).
Finally, new minimum-payment rules are anticipated to be fully implemented by the end ofloan spreads. During the first quarter of 2006 resultingthe deposit spread compression began to abate.
The Corporate segment includes Private Equity, Treasury and Corporate Other support units. The revenue outlook for the Private Equity business is directly related to the strength of the equity markets and the performance of the underlying portfolio investments. If current market conditions persist, the Firm anticipates continued realization of private equity gains in 2006, but results can be volatile from quarter to quarter. The Firm remains on target for achieving improvement in Treasury net interest income and reduction of the net loss in Corporate Other.
Credit quality overall remains stable across the wholesale and consumer portfolios. However, management continues to anticipate higher required payments from some customers. Itcredit losses over time. The managed provision for credit losses for Card Services is anticipated to increase in the second quarter of 2006 as compared with the first quarter of 2006, as the benefit of lower bankruptcy-related losses decreases. Excluding the bankruptcy-related impact, the underlying credit quality of the managed credit card portfolio was strong. During the second half of 2006, it is anticipated that this may increase delinquency and net charge-offs and lower revenues in 2006. The magnitude of the impact of the new minimum-paymentrecently implemented FFIEC minimum payment rules is currently being assessed.
Private Equity gains are generally not stable quarter to quarter and are therefore difficult to predict. Given the large gains realized year-to-date, management currently estimates that gains for the fourth quarter will be in the range of $100 million to $200 million, although results can be volatile.

7

negatively affect both revenues and net charge-offs in Card Services, estimated by management to be approximately $500 million (split evenly between revenue and charge-offs).
CONSOLIDATED RESULTS OF OPERATIONS
The following section provides a comparative discussion of JPMorgan Chase’s consolidated results of operations on a reported basis. Factors that arerelate primarily related to a single business segment are discussed in more detail within that business segment.segment than they are in this consolidated section. For a discussion of the Critical accounting estimates used by the Firm that affect the Consolidated results of operations, see page 6358 of this Form 10–Q and pages 77–7981–83 of the JPMorgan Chase 2004 Annual Report.Report on Form 10–K for the year ended December 31, 2005 (“2005 Annual Report”).
The following table presents the components of Total net revenue:
                                    
Total net revenue Three months ended September 30, Nine months ended September 30,  Three months ended March 31,
(in millions) 2005 2004 Change 2005 2004(a) Change  2006 2005 Change 
Investment banking fees $989 $879  13% $2,943 $2,464  19% $1,169 $993  18%
Trading revenue 2,499 408 NM 4,745 3,001 58 
Principal transactions 2,602 2,636  (1)
Lending & deposit related fees 865 943  (8) 2,536 1,769 43  841 820 3 
Asset management, administration and commissions 2,628 2,185 20 7,667 5,835 31  2,973 2,498 19 
Securities/private equity gains (losses) 343 413  (17) 705 1,305  (46)
Securities gains (losses)  (116)  (822) 86 
Mortgage fees and related income 201 233  (14) 899 721 25  241 362  (33)
Credit card income 1,855 1,782 4 5,352 3,018 77  1,910 1,734 10 
Other income 233 210 11 930 602 54  556 201 177 
     
Noninterest revenue 9,613 7,053 36 25,777 18,715 38  10,176 8,422 21 
Net interest income 4,852 5,452  (11) 15,078 11,432 32  5,060 5,225  (3)
     
Total net revenue $14,465 $12,505  16% $40,855 $30,147  36% $15,236 $13,647  12%
(a)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
NetTotal net revenue for the thirdfirst quarter of 20052006 was up $2.0by $1.6 billion, or 16%12%, from the prior year. The increase was due primarily due to record Tradinglower Treasury security portfolio losses; increased trading revenue of $2.5 billion and(within Principal transactions); higher Asset management, administration, and commissions revenue. For the first nine months of the year, net revenue was up 36%revenues; and increased Other income, Credit card income, and Investment banking fees. Partially offsetting this growth were lower Private equity gains (within Principal transactions), primarily as a result of the Merger.decline in Net interest income, and lower Mortgage Banking production and servicing income.
Investment banking fees roseof $1.2 billion were the highest since 2000, up 18% from the thirdfirst quarter and first nine months of 2004. The improvement from both periods reflected strong advisory2005. Advisory fees with particular strength in Europe, which benefitedwere also the highest since 2000. Underwriting fees were up from the joint venture with Cazenove Group plc (“Cazenove”). In addition, the third quarter 2005 results wereprior year driven by higher equityrecord loan syndication fees offset partially by lower bond underwriting fees, while the year-to-date results included increased debt underwriting fees. Trading revenue for both periods benefited from strong results across all areas. For a further discussion of Investment banking fees, and Trading revenue, which are primarily recorded in the IB, see the IB segment results on pages 16–2014–16 of this Form 10–Q.
Effective January 1, 2006, Principal transactions is a new caption in the Consolidated income statements that combines Trading revenue (which includes physical commodities carried at the lower of cost or market), primarily in the Investment Bank, and Private equity gains (losses), primarily in the Private Equity business of Corporate. The prior period’s presentation of Trading revenue and Private equity gains (losses) have been reclassified to this new caption. The decline from last year in Principal transactions primarily reflected two large private equity gains that were realized in the prior year’s first quarter. The decline was partially offset by higher trading revenue as a result of record revenues in equity markets, along with strong fixed income markets results in emerging markets, currencies and credit markets. Fixed income trading results from commodities and rate markets were weaker than last year. For a further discussion of Principal transactions, see the IB and Corporate segment results on pages 14–16 and 33–34, respectively, of this Form 10–Q.
Lending & deposit related fees declinedrose as a result of increased fee income on deposit-related products from growth in comparison with the 2004 third quarter, primarily driven by lower service charges on wholesale deposits due to rising interest rates. In this environment, customers earn more credit from their deposit balances, and thus compensate the Firm using balances instead of fees. For the first nine months of 2005, the unfavorable effect of the rising rate environment was more than offset by the positive contributions from the Merger.business volume. For a further discussion of deposit fees, which are partly recorded at RFS, see the RFS segment results on liability balances (including deposits), see page 43pages 17–22 of this Form 10–Q.
The increases in Asset management, administration and commissions revenue for the third quarter and first nine months of 2005 were driven by incremental fees from several recent investments, including a majority interest in Highbridge Capital Management, LLC, the joint venture with Cazenove and the acquisition of Vastera. Also contributingdue to the higher level of revenue were an increasegrowth in assets under management and custody, reflecting net asset inflows, mainly in equity-related and liquidity products, as well as global equity market appreciation, an increase in assets under custody, reflecting market value appreciation, and new business, the acquisition of Vastera in the second quarter of 2005 and higher placement and performance fees. Commissions were higher due to increases in brokerage commissions.transaction volume across regions, partly offset by the sale of BrownCo. For additional information on these fees and commissions, see the segment discussions for the IB on pages 16–20,14–16, TSS on pages 28–29 and AWM on pages 36–39 and TSS on pages 33–3530–32 of this Form 10–Q.
The decline in Securities/private equitySecurities gains (losses) reflected securities losses recognized in the third quarter and first nine monthssignificantly improved, primarily as a result of 2005 related to repositioning thelower Treasury portfolio to manage the Firm’s exposure to rising interest rates. In particular, duringlosses of $158 million in the first quarter of 2005,2006, compared with losses of $902 million in the Firm recognized a loss of $822 million on the sale of securities available-for-sale. The securities losses were partly offset by higher private equity gains due to improved market conditions.prior year period. For a further discussion of Securities/private equitySecurities gains (losses), which are primarily recorded in the Firm’s Treasury and Private Equity businesses,business, see the Corporate segment discussion on pages 39–4133–34 of this Form 10–Q.

8

Mortgage fees and related income declined, in comparison with the third quarter of 2004, primarily due to lower mortgage servicing and production income. Servicing income results were driven primarily by lower MSR risk management results, which were a $38 million loss compared with a $153 million gain inpartially offset by increased revenue stemming from higher third-party loan servicing volume. Production income decreased, reflecting lower net gains on the 2004 third quarter. Higher production-related revenue attributable to higher margins and volume provided a favorable offset. For the first nine months, Mortgage fees and related income rose from the prior-year period, reflecting higher production-related revenue. Mortgage fees and related income excludes the impactsale of NII and AFS securities gains related to home mortgage activities.mortgages. For a discussion of Mortgage fees and related income, which is recorded primarily recorded in RFS’s Home FinanceMortgage Banking business, see the Home FinanceMortgage Banking discussion on pages 22–24page 21 of this Form 10–Q.

8

Credit card income increased from both the third quarter and first nine months of 2004rose as a result of higher customer charge volume, which favorably affected interchange income, and servicing fees associated with growth in charge volume. This increase wasvolume of securitized credit card receivables. These were partially offset by higheran increase in volume-driven payments to partners and by rewards expense.higher expenses related to reward programs, as well as the impact of the deconsolidation of Paymentech. For a further discussion of Credit card income, see CS’s segment results on pages 28–3023–25 of this Form 10–Q.
The increase in Other income was up slightly compared with the third quarter of 2004, reflectingreflected higher gains on securities from loan workouts and loan sales, increased revenues from autoautomobile operating leases, partly offset by the absence of a one-time gain in the prior year on the sale of anhigher dividend and equity investment income and by a current period write-down on autolower write-downs for loans transferred to held-for-sale. OnThese increases were offset partly by a year-to-date basis, Other income increased significantly due todecrease in the Merger, partially offset by write-downs on auto loans transferred to held-for-sale in 2005.net results of corporate and bank-owned life insurance policies.
Net interest income declined from the 2004 third quarter, primarily due to narrower spreads on trading assets, wholesale and consumer loans, as well as on consumer deposits. These decreases were offset partially by improvement in Treasury’s net interest spread and in the spreads on wholesale liability balances. In addition, higher balances related to wholesale and consumer loans and reduced Treasury portfolio levels. These declines were partially offset by higher volumelevel of and wider spreads on, liability balances. On a year-to-date basis, netconsumer deposits also contributed positively to Net interest income increased due to the Merger.income. The Firm’s total average interest-earning assets for the three months ended September 30, 2005,March 31, 2006, were $922$957 billion, up 6%7% from September 30, 2004,the first quarter of 2005, as a result of an increase in loans and other liquid interest-earning assets.earning assets, partially offset by a decline resulting from the repositioning of Treasury’s investment portfolio during 2005. The net interest yield on these assets, on a fully taxable-equivalent basis, was 2.12%2.17%, a decrease of 3622 basis points from the prior year. The Firm’s total average interest-earning assets for the nine months ended September 30, 2005, were $911 billion, up 31% from September 30, 2004, primarily as a result of the Merger. The net interest yield on these assets, on a fully taxable-equivalent basis, was 2.24%, an increase of 4 basis points from the prior-year period.
Provision for credit losses
The Provision for credit losses rose fromwas $831 million, $404 million higher than the thirdfirst quarter of 2004, primarily due to a $400 million special provision2005. The higher Provision for credit losses related to Hurricane Katrina, partially offset bywas primarily the result of a $333 million charge taken in the third quarter of 2004 to conform accounting policies. The special provision was related to expected credit losses for businesses and individuals who are located in the affected areas of the Gulf Coast region and was established based upon management’s current estimate of probable loss. In developing the estimate of probable credit losses, management considered factors such as the areas most severely affected, level and type of insurance coverage, collateral and lien position, direct communication with customers, financial condition of the borrower, environmental impact and other factors. The provision may need to be increased in the future as the quality of data and access to the affected areas improve. Excluding the impact of the special provision in the current quarter and the impact of conforming accounting policies in the third quarter of last year, the wholesale provision for credit losses would have been a benefit of $149$179 million for the quarter, compared with a benefit of $137$386 million in the prior year, reflecting continued strengthloan growth in credit quality. Totalthe Investment Bank. The wholesale loan net recovery rate was 0.06% for the quarter, an improvement from a net recovery rate of 0.03% in the prior year. The total consumer provision for credit losses, excludingwas $652 million, $161 million lower than the Hurricane Katrina impact, would have been $1.0 billion, up slightly from the third quarter of 2004, which excludes the impact of conforming accounting policies in the third quarter of last year. Lowerprior year, primarily due to lower bankruptcy-related net charge-offs and positive delinquency trends in Retail Financial Services were offset by a higher provision in Card Services, primarily related to accelerated bankruptcy filings prior to the enactment of new legislation that became effective on October 17, 2005.
For the first nine months of 2005, the higher Provision for credit losses was due primarily to the Merger. The impact of Hurricane Katrina and accelerated bankruptcy filings also contributed to the increase.Services. For further information aboutregarding the Provision for credit losses, see the tableCredit Risk Management on page 5954 of this Form 10–Q.
Noninterest expense
The following table presents the components of Noninterest expense:
                                   
 Three months ended September 30, Nine months ended September 30,  Three months ended March 31,
(in millions) 2005 2004 Change 2005 2004(a) Change  2006 2005 Change
Compensation expense $5,001 $4,050  23% $13,969 $10,295  36% $5,600 $4,702  19%
Occupancy expense 549 604  (9) 1,654 1,475 12  602 525 15 
Technology and communications expense 899 1,046  (14) 2,715 2,651 2  874 920  (5)
Professional & outside services 1,018 1,103  (8) 3,222 2,671 21  888 1,074  (17)
Marketing 512 506 1 1,532 907 69  519 483 7 
Other expense(a) 882 920  (4) 2,641 1,878 41  834 1,705  (51)
Amortization of intangibles 382 396  (4) 1,150 554 108  364 383  (5)
Merger costs 71 145  (51)
   
Total noninterest expense before merger costs and litigation reserve charge 9,243 8,625 7 26,883 20,431 32 
Merger costs 221 752  (71) 645 842  (23)
Litigation reserve charge — — NM 2,772 3,700  (25)
Total Noninterest expense $9,752 $9,937  (2)%
   
Total noninterest expense $9,464 $9,377  1% $30,300 $24,973  21%
(a) 
Includes three monthsinsurance recovery relating to certain material litigation of $98 million recorded in the combined Firm’s results and six monthsfirst quarter of heritage JPMorgan Chase results.2006. In the first quarter of 2005, a litigation reserve charge of $900 million, relating to the settlement of WorldCom class action, was recorded.
Total Noninterest expense forwas $9.8 billion, down by $185 million, or 2%, from the thirdprior year. The decrease was due primarily to lower Other expense and Professional & outside services, partially offset by an increase in Compensation expense. Excluding in the first quarter of 2005 was essentially flat tothis year both the 2004 third quarter, as higher performance-based incentive compensation was offset by significantly lowerincremental expense of $459 million from the adoption of SFAS 123R and $71 million of Merger costs, and other declinesexcluding in noncompensation expense, reflecting merger-related savings, other efficiencies and lower software-impairment charges. For the first nine monthsquarter of 2005,last year both the material litigation charge of $900 million primarily related to WorldCom and $145 million of Merger costs, Noninterest expense would have been up by $330 million. The increase in noninterest expense due to the Merger was partlydriven by higher performance-based compensation, partially offset by lower nonoperating Litigation reserve charges and Merger costs andmerger savings.

9

lower noninterest expense-resulting from expense-management initiatives. The discussion that follows highlights factors other than the Merger that affected the comparison of results.
The increases in Compensation expense from the third quarter and first nine months of 2004 were primarily therose as a result of $459 million of incremental expense related to the adoption of SFAS 123R, higher performance-based incentive accruals;incentives and additional headcount due to the insourcing of the Firm’s global technology infrastructure (effective December 31, 2004, JPMorgan Chase terminated its outsourcing agreementin connection with IBM); the impact of several investments including Highbridge, Cazenovein businesses. The increase was offset partially by ongoing efficiency improvements and Vastera; and business growth. These increases were partially offset by merger-related savings throughout the Firm. For a detailed discussion of the adoption of SFAS 123R and employee stock-based incentives, see Note 6 on pages 68–71 of this Form 10–Q.
Higher Occupancy expense included a net release of excess property-tax accruals, compared with charges for excess real estate of $35 million in the third quarter of 2004.
Technology and communications expense declined from the third quarter of last year, reflecting the insourcing of the Firm’s global technology infrastructure, which resulted in a shift of certain expenses to compensation expense and to professional and outside services expense. On a year-to-date basis, the expense increased slightly, with the decrease from the insourcing offset by the costs ofreflected investments in the Firm’s hardware and software.retail distribution network, partly offset by operating efficiencies.
Professional & outside services were slightly lower compared with the third quarter of 2004, reflecting the benefits ofdue to expense management initiatives. These savings were partly offset byinitiatives, the terminationsettlement of several legal matters in 2005 and the aforementioned IBM outsourcing agreement. For the first nine months, the addition of the costs from the Merger was partly offset by expense-management initiatives.Paymentech deconsolidation.
Marketing expense compared with the 2004 third quarter, was flat. Onhigher, stemming from an increase in advertising for credit card and retail products.
Other expense was lower due to insurance recoveries relating to certain material litigation and expense management initiatives in 2006 and a year-to-date basis marketing expense increased as a resultmaterial litigation charge of $900 million, primarily related to settlement costs of the Merger and the cost of advertising campaigns to introduce the Chase brand to Bank One markets.
The decline in Other expense from the third quarter of 2004 was due to lower software-impairment charges and a decrease in operating charges for legal matters. These declines were partly offset by incremental expenses related to several recent investments, including Highbridge, Cazenove and Vastera. For the first nine months, the addition from the Merger was the primary driver of the increase in Other expense. In addition, business growth, a $93 million (pre-tax) charge taken in the 2005 second quarter to terminate a client contract in Treasury & Securities ServicesWorldCom class action litigation, and a $40 million (pre-tax) charge taken in the first quarter of 2005by RFS related to the dissolution of a student loanan education finance joint venture, contributed to the increase.both of which occurred in 2005. These items were partially offset by merger-related savingsincreased expense as a result of growth in business volume, including higher minority interest expense related to Cazenove and other efficiencies.Highbridge.
For a discussion of Amortization of intangibles and Merger costs, refer to Note 14 and Note 7 on pages 81–8279–81 and 73,71, respectively, of this Form 10–Q.
There were no nonoperating Litigation charges in the third quarters of 2005 and 2004. In the second quarter of 2005, the Firm recorded a $1.9 billion ($1.2 billion after-tax) nonoperating charge related to the settlement of the Enron class action litigation and for certain of its other material legal proceedings. In the first quarter of 2005, the Firm took a $900 million charge ($558 million after-tax) for the settlement costs of the WorldCom class action litigation. In the second quarter of 2004, the Firm recorded a $3.7 billion ($2.3 billion after-tax) nonoperating litigation charge to increase litigation reserves. For a further discussion of litigation, refer to Note 17 on page 84, and Part II, Item 1, Legal Proceedings, on pages 96–97 of this Form 10–Q.
Income tax expense
The Firm’s Income before income tax expense, Income tax expense and effective tax rate were as follows for each of the periods indicated:
                 
  Three months ended  Nine months ended 
  September 30,  September 30, 
(in millions, except rate) 2005  2004  2005  2004(a) 
 
Income before income tax expense $3,756  $1,959  $8,296  $3,787 
Income tax expense  1,229   541   2,511   987 
Effective tax rate  32.7%  27.6%  30.3%  26.1%
 
(a)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
         
Three months ended March 31,(in millions, except rate) 2006  2005 
 
Income before income tax expense $4,653  $3,283 
Income tax expense  1,572   1,019 
Effective tax rate  33.8%  31.0%
 
The increase in the effective tax rate for the third quarter and first nine months of 2005, as compared with prior-year periods, was primarily the result ofrelated to higher reported pre-tax income combined with changes in the proportion of income subject to federal, state and local taxes. Also contributing to the increase were the Merger costs and Litigation reserve charge in the effectivefirst quarter of 2005, which reflected tax rate were lower 2005 nonoperating charges, reflecting a tax benefitbenefits at a 38% marginal tax rate.

10

 
EXPLANATION AND RECONCILIATION OF THE FIRM’S USE OF NON-GAAP FINANCIAL MEASURES
 
The Firm prepares its Consolidated financial statements using accounting principles generally accepted in the United States of America (“U.S. GAAP”); these financial statements appear on pages 65–6860–63 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 tracked from year to year and enables a comparison of the Firm’s performance with other companies’ U.S. GAAP financial statements.
In addition to analyzing the Firm’s results on a reported basis, management reviews the Firm’s and the lineslines’ of business’business results on an “operatinga “managed” basis,” which is a non-GAAP financial measure. The Firm’s definition of operatingmanaged basis starts with the reported U.S. GAAP results and includes certain reclassifications that are adjusted to exclude credit card securitizations and present revenue on a fully taxable equivalent (“FTE”) basis. These adjustments do not have any impact on Net income as reported by the lines of business or by the Firm as a whole. Effective January 1, 2006, JPMorgan Chase’s presentation of “operating earnings” that excluded merger costs and material litigation reserve charges and recoveries from reported results has been eliminated. These items had been previously excluded from operating results because they were deemed non-recurring; they are now included in the Corporate business segment’s results. In the case of the IB, noninterest revenue on an operating basis includes, in Trading revenue, Netaddition, Trading-related net interest income relatedis no longer reclassified from net interest income to trading activities. Trading activities generate revenues, which are recorded for U.S. GAAP purposes in two line items on the income statement: Trading revenue, which includes the mark-to-market gains or losses on trading positions; and Net interest income, which includes the interest income or expense related to those positions. Combining both the Trading revenue and related Net interest income enables management to evaluate IB’s trading activities, by considering all revenue related to these activities, and facilitates operating comparisons to other competitors.revenue.
In the case of CS, operating, orCard Services’ managed basisresults excludes the impact of credit card securitizations on totalTotal net revenue, the Provisionprovision for credit losses, net charge-offs and loan receivables. This presentation is provided to facilitate the comparability to competitors. Through securitization, the Firm transforms a portion of its credit card receivables into securities, which are sold to investors. The credit card receivables are removed from the Consolidatedconsolidated balance sheets through the transfer of principal credit cardthe receivables to a trust, and the sale of undivided interests in the trusts to investors that entitle the investors to specific cash flows generated from the credit card receivables. The Firm retains the remaining undivided interests in the trust as seller’s interests, which are recorded in Loans on the Consolidated balance sheets. A gain or loss on the sale of credit card receivables to investors is recorded in Other income. Securitization also affects the Firm’s Consolidated statements of income by reclassifying as Credit card income,the aggregate amount of interest income, certain fee revenue and recoveries that is in excess of the aggregate amount of interest paid to the investors, gross credit losses and other trust expenses related to the securitized receivables.receivables are reclassified into credit card income. For a reconciliation of reported to managed basis of CSCard Services results, see page 3025 of this Form 10–Q. For information regarding loans and residual interests sold and securitized, see Note 12 on pages 76–7974–77 of this Form 10–Q. JPMorgan Chase uses the concept of “managed receivables” to evaluate the credit performance and overall financial performance of itsthe underlying credit card loans, both sold and not sold:sold; as the same borrower is continuing to use the credit card for ongoing charges, a borrower’s credit performance will affect both the loan receivables sold under SFAS 140 and those not sold. Thus, in its disclosures regarding managed loan receivables, JPMorgan Chase treats the sold receivables as if they were still on the balance sheet in order to disclose the credit performance (such as net charge-off rates) of the entire managed credit card portfolio. In addition, CSCard Services operations are funded, operatingmanaged results are evaluated, and decisions are made about allocating resources such as employees and capital are based onupon managed financial information.
Operating basis also excludes Merger costs, litigation reserve charges deemed nonoperating and accounting policy conformity adjustments, as management believes these items are not part of the Firm’s normal daily business operations (and, therefore, are not indicative of trends) and do not provide meaningful comparisons with other periods. For additional detail on nonoperating litigation charges, see the Glossary of Terms on page 92 of this Form 10–Q.
Finally, commencing with the first quarter of 2005, OperatingTotal net revenue (Noninterest Revenue and Net interest income) for each of the business segments and the Firm is presented on a tax-equivalent basis. Accordingly, revenue from tax-exempttax exempt securities and investments that receive tax credits areis presented in the operatingmanaged results on a basis comparable to taxable securities and investments. This non-GAAP financial measure allows management to assess the comparability of revenues arising from both taxable and tax-exempt sources. The corresponding income tax impact related to these items is recorded within Incomeincome tax expense. The Corporate sector’s and the Firm’s operating revenue and income tax expense for the periods prior to the first quarter of 2005 have been restated to be similarly presented on a tax-equivalent basis. Previously, only the segments’ operating results were presented on a tax-equivalent basis, and the impact of the segments’ tax-equivalent adjustments was eliminated in the Corporate sector. This restatement had no impact on the Corporate sector’s or the Firm’s operating earnings.
Management also uses certain non-GAAP financial measures at the segment level. Managementlevel because it believes these non-GAAP financial measures provide information to investors in understanding the underlying operational performance and trends of the particular business segment and facilitate a comparison of the business segment with the performance of competitors.

11

The following summary table provides a reconciliation from the Firm’s reported U.S. GAAP results to operating results:managed basis:
                                            
Three months ended September 30, 2005 
Three months ended March 31, 2006
 Reported Trading Credit Merger Litigation Tax-equivalent Operating  Reported Credit Tax-equivalent Managed
(in millions, except per share and ratio data) results reclass(d) card(e) costs(f) charge(f) adjustments basis  results card(a) adjustments basis
Revenue
  
Investment banking fees $989 $— $— $— $— $— $989  $1,169 $— $— $1,169 
Trading revenue 2,499  (103) — — — — 2,396 
Principal transactions 2,602 — — 2,602 
Lending & deposit related fees 865 — — — — — 865  841 — — 841 
Asset management, administration and commissions 2,628 — — — — — 2,628  2,973 — — 2,973 
Securities/private equity gains (losses) 343 — — — — — 343 
Securities gains (losses)  (116) — —  (116)
Mortgage fees and related income 201 — — — — — 201  241 — — 241 
Credit card income 1,855 —  (733) — — — 1,122  1,910  (1,125) — 785 
Other income 233 — — — — 155 388  556 — 146 702 
Noninterest revenue
 9,613  (103)  (733) — — 155 8,932  10,176  (1,125) 146 9,197 
Net interest income
 4,852 103�� 1,600 — — 67 6,622  5,060 1,574 71 6,705 
Total net revenue
 14,465 — 867 — — 222 15,554  15,236 449 217 15,902 
Provision for credit losses(a)
 1,245 — 867 — — — 2,112  831 449 — 1,280 
Noninterest expense
Merger costs
 221 — —  (221) — — — 
Litigation reserve charge — — — — — — — 
All other noninterest expense 9,243 — — — — — 9,243 
Total noninterest expense
 9,464 — —  (221) — — 9,243 
Noninterest expense 9,752 — — 9,752 
Income before income tax expense 3,756 — — 221 — 222 4,199  4,653 — 217 4,870 
Income tax expense 1,229 — — 84 — 222 1,535  1,572 — 217 1,789 
Net income
 $2,527 $— $— $137 $— $— $2,664  $3,081 $— $— $3,081 
Earnings per share — diluted $0.71 $— $— $0.04 $— $— $0.75 
Earnings per share – diluted $0.86 $— $— $0.86 
Return on common equity  9%  —%  —%  1%  —%  —%  10%  12%  —%  —%  12%
Return on equity — goodwill(b)
 16 — — 1 — — 17 
Return on equity less goodwill 20 — — 20 
Return on assets 0.84 NM NM NM NM NM 0.84  1.00 NM NM 0.95 
Overhead ratio 65 NM NM NM NM NM 59  64 NM NM 61 
Effective income tax rate 33 NM NM 38 NM 100 37  34 NM 100 37 
                                                
Three months ended September 30, 2004 
 Accounting     
Three months ended March 31, 2005
 Reported Trading Credit Merger Litigation policy Tax-equivalent Operating  Reported Credit Tax-equivalent Managed
(in millions, except per share and ratio data) results reclass(d) card(e) costs(f) charge(f) conformity adjustments basis  results card(a) adjustments basis
Revenue
  
Investment banking fees $879 $— $— $— $— $— $— $879  $993 $— $— $993 
Trading revenue 408 424 — — — — — 832 
Principal transactions 2,636 — — 2,636 
Lending & deposit related fees 943 — — — — — — 943  820 — — 820 
Asset management, administration and commissions 2,185 — — — — — — 2,185  2,498 — — 2,498 
Securities/private equity gains (losses) 413 — — — — — — 413 
Securities gains (losses)  (822) — —  (822)
Mortgage fees and related income 233 — — — — — — 233  362 — — 362 
Credit card income 1,782 —  (848) — — — — 934  1,734  (815) — 919 
Other income 210 —  (3) — — 118 64 389  201 — 115 316 
Noninterest revenue
 7,053 424  (851) — — 118 64 6,808  8,422  (815) 115 7,722 
Net interest income
 5,452  (424) 1,779 — — —  (36) 6,771  5,225 1,732 61 7,018 
Total net revenue
 12,505 — 928 — — 118 28 13,579  13,647 917 176 14,740 
Provision for credit losses
 1,169 — 928 — —  (333) — 1,764  427 917 — 1,344 
Noninterest expense
  9,937 — — 9,937 
Merger costs 752 — —  (752) — — — — 
Litigation reserve charge — — — — — — — — 
All other noninterest expense 8,625 — — — — — — 8,625 
Total noninterest expense
 9,377 — —  (752) — — — 8,625 
Income before income tax expense 1,959 — — 752 — 451 28 3,190  3,283 — 176 3,459 
Income tax expense 541 — — 290 — 172 28 1,031  1,019 — 176 1,195 
Net income
 $1,418 $— $— $462 $— $279 $— $2,159  $2,264 $— $— $2,264 
Earnings per share – diluted $0.63 $— $— $0.63 
Return on common equity  9%  —%  —%  9%
Return on equity less goodwill 15 — — 15 
Return on assets 0.79 NM NM 0.75 
Overhead ratio 73 NM NM 67 
Effective income tax rate 31 NM 100 35 

12

Earnings per share — diluted $0.39  $—  $—  $0.13  $—  $0.08  $—  $0.60 
 
Return on common equity  5%  —   —   2%  —   1%  —   8%
Return on equity — goodwill(b)
  9   —   —   3   —   2   —   14 
 
Return on assets  0.50   NM   NM   NM   NM   NM   NM   0.72 
 
Overhead ratio  75   NM   NM   NM   NM   NM   NM   64 
 
Effective income tax rate  28   NM   NM   39   NM   38   100%  32 
 
                             
Nine months ended September 30, 2005 
  Reported  Trading  Credit  Merger  Litigation  Tax-equivalent  Operating 
(in millions, except per share and ratio data) results  reclass(d)  card(e)  costs(f)  charge(f)  adjustments  basis 
 
Revenue
                            
Investment banking fees $2,943  $—  $—  $—  $—  $—  $2,943 
Trading revenue  4,745   423   —   —   —   —   5,168 
Lending & deposit related fees  2,536   —   —   —   —   —   2,536 
Asset management, administration and commissions  7,667   —   —   —   —   —   7,667 
Securities/private equity gains (losses)  705   —   —   —   —   —   705 
Mortgage fees and related income  899   —   —   —   —   —   899 
Credit card income  5,352   —   (2,276)  —   —   —   3,076 
Other income  930   —   —   —   —   413   1,343 
 
Noninterest revenue
  25,777   423   (2,276)  —   —   413   24,337 
Net interest income
  15,078   (423)  4,990   —   —   212   19,857 
 
Total net revenue
  40,855   —   2,714   —   —   625   44,194 
Provision for credit losses(a)
  2,259   —   2,714   —   —   —   4,973 
Noninterest expense
Merger costs
  645   —   —   (645)  —   —   — 
Litigation reserve charge  2,772   —   —   —   (2,772)  —   — 
All other noninterest expense  26,883   —   —   —   —   —   26,883 
 
Total noninterest expense
  30,300   —   —   (645)  (2,772)  —   26,883 
 
Income before income tax expense  8,296   —   —   645   2,772   625   12,338 
Income tax expense  2,511   —   —   245   1,053   625   4,434 
 
Net income
 $5,785  $—  $—  $400  $1,719  $—  $7,904 
 
Earnings per share — diluted $1.62  $—  $—  $0.12  $0.48  $—  $2.22 
                             
Return on common equity  7%  —%  —%  1%  2%  —%  10%
Return on equity — goodwill(b)
  12   —   —   1   4   —   17 
 
Return on assets  0.66   NM   NM   NM   NM   NM   0.85 
 
Overhead ratio  74   NM   NM   NM   NM   NM   61 
 
Effective income tax rate  30   NM   NM   38   38   100   36 
 

13

                                 
Nine months ended September 30,(c) 2004 
                      Accounting       
(in millions, except per share and Reported  Trading  Credit  Merger  Litigation  policy  Tax-equivalent  Operating 
  ratio data) results  reclass(d)  card(e)  costs(f)  charge(f)  conformity  adjustments  basis 
 
Revenue
                                
Investment banking fees $2,464  $—  $—  $—  $—  $—  $—  $2,464 
Trading revenue  3,001   1,439   —   —   —   —   —   4,440 
Lending & deposit related fees  1,769   —   —   —   —   —   —   1,769 
Asset management, administration and commissions  5,835   —   —   —   —   —   —   5,835 
Securities/private equity gains (losses)  1,305   —   —   —   —   —   —   1,305 
Mortgage fees and related income  721   —   —   —   —   —   —   721 
Credit card income  3,018   —   (1,481)  —   —   —   —   1,537 
Other income  602   —   (87)  —   —   118   139   772 
 
Noninterest revenue
  18,715   1,439   (1,568)  —   —   118   139   18,843 
Net interest income
  11,432   (1,439)  3,455   —   —   —   (4)  13,444 
 
Total net revenue
  30,147   —   1,887   —   —   118   135   32,287 
Provision for credit losses
  1,387   —   1,887   —   —   (333)  —   2,941 
Noninterest expense
                                
Merger costs  842   —   —   (842)  —   —   —   — 
Litigation reserve charge  3,700   —   —   —   (3,700)  —   —   — 
All other noninterest expense  20,431   —   —   —   —   —   —   20,431 
 
Total noninterest expense
  24,973   —   —   (842)  (3,700)  —   —   20,431 
 
Income before income tax expense  3,787   —   —   842   3,700   451   135   8,915 
Income tax expense  987   —   —   320   1,406   172   135   3,020 
 
                                 
Net income
 $2,800  $—  $—  $522  $2,294  $279  $—  $5,895 
 
Earnings per share — diluted $1.06  $—  $—  $0.20  $0.88  $0.11  $—  $2.25 
 
Return on common equity  6%  —%  —%  1%  5%  —%  —%  12%
Return on equity — goodwill(b)
  8   —   —   2   6   1   —   17 
 
Return on assets  0.42   NM   NM   NM   NM   NM   NM   0.83 
 
Overhead ratio  83   NM   NM   NM   NM   NM   NM   63 
 
Effective income tax rate  26   NM   NM   38   38   38   100   34 
 
(a)
Third quarter 2005 includes a $400 million special provision related to Hurricane Katrina: Retail Financial Services $250 million, Card Services $100 million, Commercial Banking $35 million, Asset & Wealth Management $3 million and Corporate $12 million.
(b)
Net income applicable to common stock divided by total average common equity (net of goodwill). The Firm uses return on equity less goodwill, a non-GAAP financial measure, to evaluate the operating performance of the Firm. The Firm utilizes this measure to facilitate operating comparisons to other competitors.
(c)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
(d)
The reclassification of trading-related net interest income from Net interest income to Trading revenue primarily impacts the Investment Bank segment results.
(e) 
The impact of credit card securitizations affects Card Services. See pages 28–3023–25 of this Form 10–Q for further information.
(f)
The impact of Merger costs and nonoperating Litigation reserve charges are excluded from Operating earnings, as management believes these items are not part of the Firm’s normal daily business operations (and, therefore, are not indicative of trends), and do not provide meaningful comparisons with other periods.
                         
Three months ended September 30, 2005  2004 
(in millions) Reported  Securitized  Managed  Reported  Securitized  Managed 
 
Loans — Period-end $420,504  $69,095  $489,599  $393,701  $71,256  $464,957 
Total assets — average  1,196,045   67,021   1,263,066   1,117,335   69,035   1,186,370 
 
                         
Nine months ended September 30, 2005  2004 
(in millions) Reported  Securitized  Managed  Reported  Securitized  Managed 
 
Loans — Period-end $420,504  $69,095  $489,599  $393,701  $71,256  $464,957 
Total assets — average  1,178,420   66,917   1,245,337   897,978(a)  45,227(a)  943,205(a)
 
(a)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
                         
Three months ended March 31, 2006  2005 
(in millions) Reported  Securitized  Managed  Reported  Securitized  Managed 
 
Loans – Period-end $432,081  $69,580  $501,661  $402,669  $67,328  $469,997 
Total assets – average  1,248,357   67,557   1,315,914   1,162,818   67,509   1,230,327 
 

1412

 
BUSINESS SEGMENT RESULTS
 
The Firm is managed on a line-of-business basis. The business segment financial results presented reflect the organization of JPMorgan Chase. Currently, there are six major reportable business segments: the Investment Bank, Retail Financial Services, Card Services, Commercial Banking, Treasury & Securities Services and Asset & Wealth Management, as well as a Corporate segment. The segments are based onupon the products and services provided, or the type of customer served, and they reflect the manner in which financial information is currently evaluated by management. Results of these lines of business are presented on an operatinga managed basis. For a further discussion of Business segment results, see pages 28–2934–35 of JPMorgan Chase’s 20042005 Annual Report.
Segment results for the nine months ended September 30, 2004, reflect three months of the combined Firm’s results and six months of heritage JPMorgan Chase results and have been restated to reflect the current business segment organization and reporting classifications. The following table summarizes the business segment results for the periods indicated:
                                             
Segment results – Operating basis(a)                                     Return on 
Three months ended September 30, Total net revenue  Noninterest expense  Operating earnings  equity-goodwill 
(in millions, except ratios) 2005  2004  Change  2005  2004  Change  2005  2004  Change  2005  2004 
 
Investment Bank $4,461  $2,701   65% $2,875  $1,924   49% $1,063  $627   70%  21%  12%
Retail Financial Services  3,590   3,800   (6)  2,156   2,238   (4)  656   822   (20)  19   25 
Card Services  3,980   3,771   6   1,286   1,437   (11)  541   421   29   18   14 
Commercial Banking  909   833   9   461   480   (4)  301   215   40   35   25 
Treasury & Securities Services  1,556   1,339   16   1,107   1,156   (4)  263   96   174   55   20 
Asset & Wealth Management  1,449   1,193   21   976   884   10   315   197   60   52   33 
Corporate  (391)  (58)  NM   382   506   (25)  (475)  (219)  (117)  NM   NM 
 
Total $15,554  $13,579   15% $9,243  $8,625   7% $2,664  $2,159   23%  17%  14%
 
                                             
                                      Return on 
Nine months ended September 30,(b) Total net revenue  Noninterest expense  Operating earnings  equity-goodwill 
(in millions, except ratios) 2005  2004  Change  2005  2004  Change  2005  2004  Change  2005  2004 
 
Investment Bank $11,391  $9,404   21% $7,578  $6,306   20% $2,994  $2,288   31%  20%  19%
Retail Financial Services  11,236   7,246   55   6,444   4,610   40   2,624   1,424   84   26   24 
Card Services  11,645   6,915   68   3,982   2,601   53   1,605   759   111   18   16 
Commercial Banking  2,659   1,489   79   1,392   892   56   718   354   103   28   29 
Treasury & Securities Services  4,626   3,444   34   3,366   2,967   13   737   295   150   52   14 
Asset & Wealth Management  4,153   2,869   45   2,827   2,214   28   874   418   109   49   13 
Corporate  (1,516)  920   NM   1,294   841   54   (1,648)  357   NM   NM   NM 
 
Total $44,194  $32,287   37% $26,883  $20,431   32% $7,904  $5,895   34%  17%  17%
 
(a)
Represents reported results on a tax-equivalent basis and excludes the impact of credit card securitizations, Merger costs and litigation reserve charges deemed nonoperating.
(b)
Year-to-date 2004 results include three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
Description of business segment reporting methodology
Results of the business segments are intended to reflect each segment as if it were essentially a stand-alone business. The management reporting process that derives these results generally allocates income and expense using market-based methodologies. At the effective time of the Merger, July 1, 2004, several of the allocation methodologies were revised. For a further discussion of those methodologies, see page 2935 of JPMorgan Chase’s 20042005 Annual Report. In addition, during the first quarter of 2005, the Firm refined cost allocation methodologies related to certain corporate functions and technology and operations expense in order to provide better consistency in reporting across business segments. Prior periods have not been revised to reflect these new cost allocation methodologies. The Firm intends to continuecontinues to assess the assumptions, methodologies and reporting reclassifications used for segment reporting, and it is anticipated that further refinements may be implemented in future periods.
Business segment financial disclosures
Effective January 1, 2006, JPMorgan Chase modified certain of its financial disclosures to reflect more closely the manner in which the Firm’s business segments are managed and to provide improved comparability with competitors. These financial disclosure revisions are reflected in this Form 10–Q, and the financial information for prior periods has been revised to reflect the disclosure changes as if they had been in effect throughout 2005. A summary of the changes are described below.
Reported versus Operating Basis Changes
The presentation of operating earnings that excluded merger costs and material litigation reserve charges and recoveries from reported results has been eliminated. These items had been excluded previously from operating results because they were deemed nonrecurring; they are now included in the Corporate business segment’s results. In addition, trading-related net interest income is no longer reclassified from Net interest income to trading revenue. As a result of these changes, effective January 1, 2006, management has discontinued reporting on an “operating” basis.
Business Segment Disclosures
RFS has been reorganized into the following business segments: Regional Banking, Mortgage Banking and Auto Finance. For more detailed information on the RFS reorganization, see the RFS business segment discussion on page 17 of this Form 10–Q.
TSS, as previously announced, has been reorganized by combining the Investor Services and Institutional Trust Services businesses into a single business called Worldwide Securities Services. Also, TSS firmwide disclosures have been adjusted to reflect a refined set of TSS products and a revised allocation of liability balances and lending-related revenue related to certain client transfers.
Effective January 1, 2006, various wholesale banking clients, together with the related revenue and expense, are being transferred among CB, the IB and TSS. In the first quarter of 2006, the primary client transfer was corporate mortgage finance from CB to the IB.
CB’s business metrics now include gross investment banking revenue, which reflects revenue recorded in both CB and the IB.
Corporate’s disclosure has been expanded to include Total net revenue and Net income for Treasury and Other Corporate segments.
Certain expenses that are managed by the business segments, but that had been previously recorded in Corporate and allocated to the businesses, are now recorded as direct expenses within the businesses.
Capital allocation changes
Effective January 1, 2006, the Firm refined its methodology for allocating capital to the business segments. As prior periods have not been revised to reflect the new capital allocations, certain business metrics, such as ROE, are not comparable to the current presentation. For a further discussion of the changes, see Capital Management – Line of business equity on page 37 of this Form 10–Q.
Segment results – Managed basis(a)
The following table summarizes the business segment results for the periods indicated:
                                             
Three months ended March 31, Total net revenue Noninterest expense Net income Return on equity
(in millions, except ratios) 2006 2005 Change 2006 2005 Change 2006 2005 Change 2006 2005
 
Investment Bank $4,699  $4,187   12% $3,191  $2,527   26% $850  $1,328   (36)%  17%  27%
Retail Financial Services  3,763   3,847   (2)  2,238   2,162   4   881   988   (11)  26   31 
Card Services  3,685   3,779   (2)  1,243   1,313   (5)  901   522   73   26   18 
Commercial Banking  900   827   9   498   454   10   240   231   4   18   28 
Treasury & Securities Services  1,677   1,498   12   1,158   1,067   9   312   254   23   44   54 
Asset & Wealth Management  1,584   1,361   16   1,098   934   18   313   276   13   36   47 
Corporate  (406)  (759)  47   326   1,480   (78)  (416)  (1,335)  69  NM  NM 
 
Total $15,902  $14,740   8% $9,752  $9,937   (2)% $3,081  $2,264   36%  12%  9%
 
(a)
Represents reported results on a tax-equivalent basis and excludes the impact of credit card securitizations.

1513

 
INVESTMENT BANK
 
For a discussion of the business profile of the IB, see pages 30–3236–38 of JPMorgan Chase’s 20042005 Annual Report.
                                    
Selected income statement data(a) Three months ended September 30, Nine months ended September 30,  Three months ended March 31,
(in millions, except ratios) 2005 2004 Change 2005 2004(f) Change  2006 2005 Change 
Revenue
  
Investment banking fees: 
Advisory $300 $273  10% $922 $688  34%
Equity underwriting 210 170 24 553 568  (3)
Debt underwriting 475 468 1 1,460 1,236 18 
   
Total investment banking fees
 985 911 8 2,935 2,492 18 
 
Trading-related revenue: 
Fixed income and other 2,083 657 217 4,938 3,835 29 
Equities 329 220 50 274 469  (42)
Credit portfolio 23  (35) NM 36 50  (28)
   
Total trading-related revenue(b)
 2,435 842 189 5,248 4,354 21 
 
Investment banking fees $1,170 $985  19%
Principal transactions 2,375 1,875 27 
Lending & deposit related fees 148 155  (5) 451 363 24  137 157  (13)
Asset management, administration and commissions 445 313 42 1,266 1,054 20  552 409 35 
Other income 94 91 3 491 150 227 
All other income 275 127 117 
     
Noninterest revenue
 4,107 2,312 78 10,391 8,413 24  4,509 3,553 27 
Net interest income(b)
 354 389  (9) 1,000 991 1 
Net interest income 190 634  (70)
     
Total net revenue(c)
 4,461 2,701 65 11,391 9,404 21 
Total net revenue(a)
 4,699 4,187 12 
  
Provision for credit losses  (46)  (151) 70  (755)  (467)  (62) 183  (366) NM 
Credit reimbursement from TSS(d)
 38 43  (12) 114 47 143 
Credit reimbursement from TSS(b)
 30 38  (21)
  
Noninterest expense
  
Compensation expense 1,883 992 90 4,691 3,504 34  2,256 1,618 39 
Noncompensation expense 992 932 6 2,887 2,802 3  935 909 3 
     
Total noninterest expense
 2,875 1,924 49 7,578 6,306 20  3,191 2,527 26 
     
Operating earnings before income tax expense
 1,670 971 72 4,682 3,612 30 
Income before income tax expense 1,355 2,064  (34)
Income tax expense 607 344 76 1,688 1,324 27  505 736  (31)
     
Operating earnings
 $1,063 $627 70 $2,994 $2,288 31 
Net income
 $850 $1,328  (36)
     
  
Financial ratios
  
ROE  21%  12%  20%  19%   17%  27% 
ROA 0.68 0.50 0.68 0.68  0.53 0.95 
Overhead ratio 64 71 67 67  68 60 
Compensation expense as % of total net revenue 42 37 41 37 
Compensation expense as % of total net revenue(c)
 43 39 
     
Revenue by business(e)
 
Investment banking fees $985 $911 8 $2,935 $2,492 18 
 
Revenue by business
 
Investment banking fees: 
Advisory $389 $263 48 
Equity underwriting 212 239  (11)
Debt underwriting 569 483 18 
 
Total investment banking fees
 1,170 985 19 
Fixed income markets 2,431 1,115 118 6,138 4,784 28  1,993 2,296  (13)
Equities markets 713 455 57 1,341 1,248 7  1,215 556 119 
Credit portfolio 332 220 51 977 880 11  321 350  (8)
     
Total net revenue $4,461 $2,701 65 $11,391 $9,404 21  $4,699 $4,187 12 
 
    
Revenue by region
  
Americas $2,690 $1,591 69 $6,747 $5,041 34  $2,067 $2,231  (7)
Europe/Middle East/Africa 1,272 741 72 3,361 3,069 10  2,047 1,535 33 
Asia/Pacific 499 369 35 1,283 1,294  (1) 585 421 39 
     
Total net revenue $4,461 $2,701 65 $11,391 $9,404 21  $4,699 $4,187 12 
(a)
For a discussion of selected lines of business metrics, see page 93 of this Form 10–Q.
(b)
Trading revenue, on a reported basis, excludes the impact of net interest income related to the IB’s trading activities; this income is recorded in Net interest income. However, in this presentation, to assess the profitability of the IB’s trading business, the Firm combines these revenues for segment reporting. The amount reclassified from Net interest income to Trading revenue was $(101) million and $430 million for the three months ended September 30, 2005 and 2004, respectively, and $430 million and $1.4 billion for the nine months ended September 30, 2005 and 2004, respectively.

16

(c) 
Total net revenue includes tax-equivalent adjustments, primarily due to tax-exempt income from municipal bondsbond investments and income tax credits related to affordable housing investments, of $200$194 million and $9$155 million for the three monthsquarters ended September 30,March 31, 2006 and 2005, and 2004, respectively, and $561 million and $107 million for the nine months ended September 30, 2005 and 2004, respectively.
(d)(b) 
TSS is charged a credit reimbursement related to certain exposures managed within the IB credit portfolio on behalf of clients shared with TSS. For a further discussion, see Credit reimbursement on page 29 of the JPMorgan Chase 2004 Annual Report.
(e)(c) 
See account details of Fixed Income Markets, Equities Markets and Credit PortfolioFor the three months ended March 31, 2006, Compensation expense to Total net revenue ratio is adjusted to present this ratio as if SFAS 123R had always been in effect. IB management believes that adjusting the Compensation expense to Total net revenue ratio in the Compositionfirst quarter of Revenues table on pages 19–20.
(f)
Includes three months2006 for the incremental impact of adopting SFAS 123R provides a more meaningful measure of IB’s Compensation expense to Total net revenue ratio for the combined Firm’s results and six months of heritage JPMorgan Chase results.quarter.

14

Quarterly results
Operating earningsNet income of $1.1$850 million was driven by record quarterly revenues of $4.7 billion. Net income declined 36% compared with the prior year due to an increase in the provision for credit losses related to higher loan balances, incremental expense from the adoption of SFAS 123R and higher performance-based compensation.
Net revenue was a record $4.7 billion, up by $512 million, or 12%, compared with the prior year. Investment banking fees of $1.2 billion were strong,the highest since 2000, up $43619% from the prior year. Advisory fees of $389 million, or 70%,up 48% from last year, were also the highest since 2000. Debt underwriting fees of $569 million were up 18% from the prior year, and 75% from the prior quarter. The increases were driven primarily by record trading revenuesloan syndication fees offset partially by lower bond underwriting fees. Equity underwriting fees of $2.4 billion, up $1.6 billion$212 million were down 11% from the prior year, and $1.8 billion from the prior quarter. Trading results were strong across all trading areas. In addition, results benefited from continued strength in investment banking fees. Partially offsetting the improved revenues were higher performance-based incentive compensation and a reduced benefit from the loan loss provision.
Net revenue of $4.5 billion was a quarterly record, up $1.8 billion, or 65%, from the prior year and up 62% from the prior quarter. Investment banking fees of $985 million were up 8% from the prior year showing continued strength. Europe was a strong contributor to these results, benefiting from the joint venture with Cazenove. Advisory fees of $300 million were up 10% over the prior year. Debt underwriting fees of $475 million were roughly flat to the prior year, while equity underwriting fees of $210 million were up 24% over the prior year and more than doubled versus last quarter.reflecting lower market share. Fixed Income Markets revenue of $2.4$2.0 billion represented a record quarter, more than doublewas down 13% from the prior year due to weaker performance in commodities and up 71%, or $1.0rates markets, partially offset by stronger results in emerging markets, currencies and credit markets. Equity Markets produced record revenues of $1.2 billion in the quarter driven by record trading and strong commissions across all regions. Credit Portfolio revenues of $321 million were down 8% from the prior quarter. The increase over both periods was driven by strong trading results in all areas, with particular strength in energy, an area of significant investment. Client-related and proprietary trading were very strong across all asset classes. Equity Markets revenue of $713 million increased by $258 million, or 57%, over the prior year and $641 million over the prior quarter. This performance was driven primarily by improved trading results across regions and by higher commissions.year.
The provision for credit losses was a benefit of $46$183 million, as compared with a benefit of $151$366 million in the prior yearyear. The current quarter’s provision reflects growth in loan balances and a $343 million benefit in the prior quarter. The benefit reflects the continued strong quality of thestable credit portfolio.quality.
Noninterest expense was $2.9$3.2 billion, up $951 million, or 49%,26% from the prior year andyear. Excluding incremental expense of $256 million from the adoption of SFAS 123R, expenses were up $697by $408 million, or 32%, from the prior quarter. The increase in both periods was primarily driven by higher performance-based incentive compensation. The comparison to the prior year was also affected by the joint venture with Cazenove, which closed in the first quarter of 2005.
Year-to-date results
Variances to the prior nine-month period are due, in part, to the Merger. Operating earnings of $3.0 billion increased by $706 million, or 31%16%, from the prior year. IncreasesThe increase was primarily due to higher incentive compensation related to improved performance, and an increase in Trading-relatedthe compensation expense to total net revenue Investment banking fees and other noninterest revenue,ratio, as well as an increased benefit from the Provision for credit losses, were partially offset by higher compensation expense.continued investments in strategic initiatives.
Net revenue of $11.4 billion was up $2.0 billion, or 21%, over the prior year driven by strong Trading-related revenue and Investment banking fees. Investment banking fees of $2.9 billion increased 18% from the prior year driven by strong advisory and debt underwriting fees as well as the Cazenove joint venture. Advisory revenues of $922 million were up 34% from the prior year. Debt underwriting revenues increased 18% to $1.5 billion driven by strong loan syndication fees. Equity underwriting fees of $553 million were down slightly from the prior year. Fixed Income Markets revenues of $6.1 billion increased 28%, or $1.4 billion, driven by improved trading performance across currency and commodities, emerging markets, rate markets and proprietary trading. Equities Markets revenues increased 7% to $1.3 billion, primarily due to increased commissions, which were partially offset by lower trading revenues. Credit Portfolio revenues were $977 million, up 11% from the prior year, due to gains from loan workouts and sales, partially offset by lower average loan balances and spreads.
             
Selected metrics Three months ended March 31,
(in millions, except headcount and ratio data) 2006  2005  Change 
 
Selected average balances
            
         
Total assets $646,220  $568,222   14%
Trading assets–debt and equity instruments  252,415   225,367   12 
Trading assets–derivatives receivables  49,388   63,574   (22)
Loans:            
Loans retained(a)
  53,678   41,233   30 
Loans held-for-sale(b)
  19,212   7,674   150 
     
Total loans  72,890   48,907   49 
Adjusted assets(c)
  492,304   445,840   10 
Equity  20,000   20,000   — 
             
Headcount
  21,705   18,021   20 
             
Credit data and quality statistics
            
Net charge-offs (recoveries) $(21) $(5)  (320)
Nonperforming assets:            
Nonperforming loans(d)
  434   814   (47)
Other nonperforming assets  50   242   (79)
Allowance for loan losses  1,117   1,191   (6)
Allowance for lending related commitments  220   296   (26)
             
Net charge-off (recovery) rate(b)
  (0.16)%  (0.05)%    
Allowance for loan losses to average loans(b)
  2.08   2.89     
Allowance for loan losses to nonperforming loans(d)
  305   147     
Nonperforming loans to average loans  0.60   1.66     
Market risk—average trading and credit portfolio VAR
            
Trading activities:            
Fixed income $60  $57   5 
Foreign exchange  20   23   (13)
Equities  32   18   78 
Commodities and other  47   10   370 
Diversification(e)
  (68)  (43)  (58)
     
Trading VAR(f)
  91   65   40 
Credit portfolio VAR(g)
  14   13   8 
Diversification(e)
  (11)  (8)  (38)
     
Total trading and credit portfolio VAR
 $94  $70   34 
 
The provision for credit losses was a benefit of $755 million, compared with a benefit of $467 million a year ago. The increased benefit was due primarily to the improvement in the credit quality of the loan portfolio and to net recoveries compared with net charge-offs for the prior nine-month period. Nonperforming loans decreased by 26% from year-end 2004.
Noninterest expense increased 20% to $7.6 billion, largely reflecting higher performance-based incentive compensation due to improved performance. The compensation-to-revenue ratio increased to 41% versus 37% for the prior year, reflecting current market conditions as well as a change in business mix. Noncompensation expenses were up 3% from the prior year, while the overhead ratio remained flat at 67%.

17

                         
Selected metrics Three months ended September 30,  Nine months ended September 30, 
(in millions, except headcount                  
and ratio data) 2005  2004  Change  2005  2004(h)  Change 
 
Selected balance sheets data (average)
                        
Total assets $615,888  $496,347   24% $591,863  $452,714   31%
Trading assets–debt and equity instruments  234,722   197,150   19   231,057   187,008   24 
Trading assets–derivatives receivables  52,399   60,465   (13)  57,429   56,492   2 
Loans:                        
Credit portfolio  33,819   31,129   9   31,180   28,357   10 
Other loans(a)
  24,517   14,650   67   21,262   12,563   69 
           
Total loans(b)
  58,336   45,779   27   52,442   40,920   28 
Adjusted assets(c)
  462,056   401,010   15   453,990   380,740   19 
Equity(d)
  20,000   20,000   —   20,000   16,380   22 
                         
Headcount
  19,526   17,420   12   19,526   17,420   12 
                         
Credit data and quality statistics
                        
Net charge-offs (recovery) $(69) $(16)  (331) $(121) $33   NM 
Nonperforming assets:                        
Nonperforming loans(e)
  702   1,075   (35)  702   1,075   (35)
Other nonperforming assets  232   246   (6)  232   246   (6)
Allowance for loan losses  1,002   1,841   (46)  1,002   1,841   (46)
Allowance for lending-related commitments  211   358   (41)  211   358   (41)
                         
Net charge-off (recovery) rate(b)
  (0.67)%  (0.17)%      (0.43)%  0.13%    
Allowance for loan losses to average loans(b)
  2.45   4.78       2.65   5.26     
Allowance for loan losses to nonperformingloans(e)
  168   172       168   172     
Nonperforming loans to average loans  1.20   2.35       1.34   2.63     
                         
Market risk–average trading and credit portfolio VAR(f)(g)
                        
Trading activities:                        
Fixed income(f)
 $57  $80   (29) $66  $77   (14)
Foreign exchange  24   13   85   23   17   35 
Equities  41   25   64   35   31   13 
Commodities and other  24   10   140   16   9   78 
Diversification  (62)  (43)  (44)  (56)  (45)  (24)
           
Total trading VAR  84   85   (1)  84   89   (6)
Credit portfolio VAR(g)
  15   13   15   14   14   — 
Diversification  (13)  (9)  (44)  (12)  (8)  (50)
           
Total trading and credit portfolio VAR $86  $89   (3) $86  $95   (9)
 
(a) 
Other Loans retained include Credit Portfolio, Conduit loans, leverage leases, bridge loans for underwriting and other accrual loans.
(b)
Loans held-for-sale, which include warehouse loans held as part of the IB’s mortgage-backed, asset-backed and other securitization businesses, loans held for proprietary investing purposes and certain other loans.
(b)
Total loans include loans held-for-sale, which are excluded from Total loans for the allowance coverage ratio and net charge-off rate. Average third quarter 2005 loans held-for-sale were $17,357 million. Prior end-of-period loans held-for-sale were $7,281 million for the quarter ended September 30, 2004.

15

(c) 
Adjusted assets, a non-GAAP financial measure, equals total assets minus (i)(1) securities purchased under resale agreements and securities borrowed less securities sold, not yet purchased; (ii)(2) assets of variable interest entities (VIEs) consolidated under FIN 46R; (iii)(3) cash and securities segregated and on deposit for regulatory and other purposes; and (iv)(4) goodwill and intangibles. The amount of adjusted assets is presented to assist the reader in comparing the IB’s asset and capital levels to other investment banks in the securities industry. Asset-to-equity leverage ratios are commonly used as one measure to assess a company’s capital adequacy. The IB believes an adjusted asset amount, which excludes certain assets considered to have a low-risklow risk profile, provides a more meaningful measure of balance sheet leverage in the securities industry. See Capital management on pages 43–45 of this Form 10–Q for a discussion of the Firm’s overall capital adequacy and capital management.
(d)
Equity includes $15.2 billion and $15.7 billion of economic risk capital assigned to the IB for the quarters ended September 30, 2005 and 2004, respectively.

18

(e)(d) 
Nonperforming loans include loans held-for-sale of $106$68 million and $4$2 million as of September 30,March 31, 2006 and 2005, and 2004, respectively. These amounts are not included in the allowance coverage ratios.
(e)
Average VARs are less than the sum of the VARs of its market risk components due to risk offsets resulting from portfolio diversification. The diversification effect reflects the fact that the risks are not perfectly correlated. The risk of a portfolio of positions is therefore usually less than the sum of the risks of the positions themselves
(f) 
Includes substantially all mark-to-market trading activities, plus available-for-sale securities heldactivities; however, particular risk parameters of certain products are not fully captured, for proprietary purposes.example, correlation risk.
(g) 
Includes VAR on derivative credit valuation adjustments, credit valuation adjustment hedges and mark-to-market hedges of the accrual loan portfolio, which are all reported in Trading revenue.Principal transactions. This VAR does not include the accrual loan portfolio, which is not marked to market.
(h)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
According to Thomson Financial, the Firm was ranked #1 in Global Syndicated Loans, #3 in Global Announced M&A #4and #2 in Global Long TermLong-Term Debt and #6 in Global Equity and Equity-Related for the first ninethree months of 2005.2006.
According to Dealogic, the Firm was ranked #2#3 in Investment Banking Feesfees generated forduring the first ninethree months of 2005.2006.
                         
 Nine months ended September 30, 2005 Full Year 2004 Three months ended March 31, 2006 Full Year 2005
Market shares and rankings(a) Market Share Rankings Market Share Rankings Market Share Rankings Market Share Rankings
Global debt, equity and equity-related  6% # 4  7% # 3   7% #2  6% #4 
Global syndicated loans 16 # 1 19 # 1  13 #1 16 #1 
Global long-term debt 6 # 4 7 # 2  7 #2 6 #4 
Global equity and equity-related 7 # 6 6 # 6  5 #9 7 #6 
Global announced M&A 22 # 3 25 # 2  31 #3 24 #3 
U.S. debt, equity and equity-related 7 # 4 8 # 5  10 #2 8 #4 
U.S. syndicated loans 29 # 1 32 # 1  23 #1 28 #1 
U.S. long-term debt 11 # 2 12 # 2  14 #1 11 #2 
U.S. equity and equity-related 8 # 6 8 # 6  8 #5 9 #5 
U.S. announced M&A 16 # 8 33 # 1  19 #6 24 #3 
(a) 
Source: Thomson Financial Securities data. Global announced M&A is based upon rank value; all other rankings are based upon proceeds, with full credit to each book manager/equal if joint. Because of joint assignments, market share of all participants will add up to more than 100%. The market share and rankings for the year ended December 31, 2004, are presented on a combined basis, as if the merger of JPMorgan Chase and Bank One had been in effect during the period.
COMPOSITION OF REVENUES
                             
              Asset           
  Investment  Trading-  Lending &  management,           
Three months ended September 30, banking  related  deposit  administration  Other      Total net 
(in millions) fees  revenue  related fees  and commissions  income  NII  revenue 
 
2005
                            
Investment banking fees
 $985  $—  $—  $—  $—  $—  $985 
Fixed income markets
  —   2,083   64   52   40   192   2,431 
Equities markets
  —   329   —   384   (18)  18   713 
Credit portfolio
  —   23   84   9   72   144   332 
 
Total
 $985  $2,435  $148  $445  $94  $354  $4,461 
 
                             
2004                            
Investment banking fees $911  $—  $—  $—  $—  $—  $911 
Fixed income markets  —   657   69   54   154   181   1,115 
Equities markets  —   220   —   252   (29)  12   455 
Credit portfolio  —   (35)  86   7   (34)  196   220 
 
Total $911  $842  $155  $313  $91  $389  $2,701 
 

1916

                             
              Asset           
  Investment  Trading-  Lending &  management,           
Nine months ended September 30, banking  related  deposit  administration  Other      Total net 
(in millions) fees  revenue  related fees  and commissions  income  NII  revenue 
 
2005
                            
Investment banking fees
 $2,935  $—  $—  $—  $—  $—  $2,935 
Fixed income markets
  —   4,938   189   166   336   509   6,138 
Equities markets
  —   274   —   1,067   (55)  55   1,341 
Credit portfolio
  —   36   262   33   210   436   977 
 
Total
 $2,935  $5,248  $451  $1,266  $491  $1,000  $11,391 
 
                             
2004(a)
                            
Investment banking fees $2,492  $—  $—  $—  $—  $—  $2,492 
Fixed income markets  —   3,835   123   222   215   389   4,784 
Equities markets  —   469   —   809   (80)  50   1,248 
Credit portfolio  —   50   240   23   15   552   880 
 
Total $2,492  $4,354  $363  $1,054  $150  $991  $9,404 
 
(a)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
 
RETAIL FINANCIAL SERVICES
 
For a discussionRetail Financial Services (“RFS”) realigned its business reporting segments on January 1, 2006, into Regional Banking, Mortgage Banking and Auto Finance. Regional Banking offers one of the largest branch networks in the United States, covering 17 states with 2,638 branches and 7,400 automated teller machines (“ATMs”). Regional Banking distributes, through its network, a variety of products including checking, savings and time deposit accounts; home equity, residential mortgage, small business profilebanking, and education loans; mutual fund and annuity investments; and on-line banking services. Mortgage Banking is a leading provider of mortgage loan products and is one of the largest originators and servicers of home mortgages. Auto Finance is the largest noncaptive originator of automobile loans, primarily through a network of automotive dealers across the United States.
During the quarter, RFS completed the purchase of Collegiate Funding Services, adding an education loan servicing capability and eachentry into the Federal Family Education Loan Program consolidation market. RFS also has agreed to sell its life insurance and annuity underwriting businesses to Protective Life Corporation; the sale is expected to close in the third quarter of its businesses, see pages 33–382006. Finally, on April 8, 2006, the Firm announced an agreement to acquire The Bank of JPMorgan Chase’s 2004 Annual Report.New York’s consumer and small-business banking businesses; this acquisition will significantly strengthen RFS’s distribution network in the New York City/Tri-State area, adding 338 branches and 400 ATMs.
                                    
Selected income statement data Three months ended September 30, Nine months ended September 30,  Three months ended March 31,
(in millions, except ratios) 2005 2004 Change 2005 2004(b) Change  2006 2005 Change 
Revenue
  
Lending & deposit related fees $380 $395  (4)% $1,078 $640  68% $371 $340  9%
Asset management, administration and commissions 370 375  (1) 1,133 652 74  437 394 11 
Securities/private equity gains — 6 NM 10 6 67 
Securities gains (losses)  (6) 10 NM 
Mortgage fees and related income 212 211 — 921 749 23  236 368  (36)
Credit card income 109 89 22 308 133 132  115 94 22 
Other income 7 18  (61) 63 4 NM  48  (12) NM 
     
Noninterest revenue
 1,078 1,094  (1) 3,513 2,184 61  1,201 1,194 1 
Net interest income 2,512 2,706  (7) 7,723 5,062 53  2,562 2,653  (3)
     
 
Total net revenue
 3,590 3,800  (6) 11,236 7,246 55  3,763 3,847  (2)
Provision for credit losses(a)
 378 239 58 566 371 53 
 
Provision for credit losses 85 94  (10)
 
Noninterest expense
  
Compensation expense 842 855  (2) 2,484 1,814 37  920 822 12 
Noncompensation expense 1,189 1,250  (5) 3,585 2,661 35  1,207 1,215  (1)
Amortization of intangibles 125 133  (6) 375 135 178  111 125  (11)
     
Total noninterest expense
 2,156 2,238  (4) 6,444 4,610 40  2,238 2,162 4 
   
Operating earnings before income tax expense
 1,056 1,323  (20) 4,226 2,265 87 
Income before income tax expense 1,440 1,591  (9)
Income tax expense 400 501  (20) 1,602 841 90  559 603  (7)
     
Operating earnings
 $656 $822  (20) $2,624 $1,424 84 
Net income
 $881 $988  (11)
     
  
Financial ratios
  
ROE  19%  25%  26%  24%   26%  31% 
ROA 1.14 1.44 1.55 1.11  1.54 1.78 
Overhead ratio 60 59 57 64  59 56 
Overhead ratio excluding core deposit intangibles(a)
 57 53 
(a) 
Third quarter 2005 includesRetail Financial Services uses the overhead ratio (excluding the amortization of core deposit intangibles (“CDI”)), a $250 million special provisionnon-GAAP financial measure, to evaluate the underlying expense trends of the business. Including CDI amortization expense in the overhead ratio calculation results in a higher overhead ratio in the earlier years and a lower overhead ratio in later years; this would result in an improving overhead ratio over time, all things remaining equal. This non-GAAP ratio excludes Regional Banking’s core deposit intangible amortization expense related to Hurricane Katrina allocated as follows: $140the Bank One merger of $109 million in Consumer Real Estate Lending, $90and $124 million in Consumer & Small Business Bankingfor the quarters ended March 31, 2006 and $20 million in Auto & Education Finance.
(b)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.2005, respectively.

2017

Quarterly results
Operating earningsNet income of $656$881 million werewas down $166by $107 million, or 20%11%, from the prior year. Results reflected a special provision for credit losses of $250 million attributableCurrent and prior period results included charges to Hurricane Katrina. Excluding the impact of the special provision, operating earnings would have been $811 million, down $11 million, or 1%. Performance reflected lower MSR risk management results, a net loss associated with the transfer of autoautomobile loans to held-for-sale and narrower spreadsprior-year results also included a charge for the termination of an Education Finance joint venture and a gain on consumer real estate loans. Earnings benefited fromthe sale of a recreational vehicle loan portfolio. Excluding all of these items, net income declined by $131 million or 13%. The decrease reflected weakness in Mortgage Banking and continued spread compression on deposits and loans in Regional Banking, as well as continued investment in the retail distribution network. These declines were offset partially by deposit and loan balance growth in Regional Banking and continued favorable credit trends and lower expenses due to merger-related expense savings and other efficiencies. Production results were strong across most product offerings and included year-over-year increases of 8%quality in checking accounts, 15% in mortgage originations and 8% in average home equity balances.all loan portfolios.
Net revenue of $3.8 billion was down 6%,by $84 million, or $210 million,2%, from the prior year, to $3.6 billion.year. Net interest income of $2.5$2.6 billion declined by $194$91 million, primarily due to bothor 3%, reflecting narrower spreads on consumer real estatedeposits and loans in Regional Banking as well as reduced balances in the auto loan and the absence of loan portfolios sold in late 2004 and early 2005.lease portfolios. These decreases were offset partially offset by increased deposit balances and higher mortgage andlevels of home equity balances.loans. Noninterest revenue of $1.1$1.2 billion was down $16up by $7 million, or 1%, driven by a reduction of $191 million in MSR risk management revenue and a $48 million write-down on auto loans transferred to held-for-sale. Higher prime mortgage production revenue provided a favorable offset.
The provision for credit losses was $378 million, up $139 million, or 58%, from the prior year. Excluding the special provision for Hurricane Katrina, the provision for credit losses would have been $128 million, down $111 million, or 46%. Results reflected continued good credit quality trends across all business segments and the benefit of certain portfolios in run-off.
Noninterest expense was $2.2 billion, down $82 million, or 4%, from the prior year. The reduction reflected increasedhigher automobile operating efficiencies in nearly all businesses, partially offset by ongoing investments in retail banking distribution and saleslease income and increased depreciation expensefee income on owned automobiles subject to operating leases.
Year-to-date results
Operating earnings were $2.6 billion, up $1.2 billion from the prior year. The increase was largely due to the Merger but also reflected increased deposit balances and spreads, improved credit quality, higher mortgage and home equity balances, and expense savings in all businesses. These benefits were partially offset by net losses associated with transfers of auto loans to held-for-sale and by narrower spreads on consumer real-estate loans.
Net revenue increased to $11.2 billion, up $4.0 billion, or 55%, primarily due to the Merger. Net interest income of $7.7 billion increased $2.7 billion as a result of the Merger, increased deposit balances and spreads, and growth in retained consumer real estate loans. These benefits were partially offset by lower prime mortgage warehouse balances, the absence of loan portfolios sold in late 2004 and early 2005, and narrower spreads on consumer real-estate loans. Noninterest revenue of $3.5 billion increased $1.3 billion due to the Merger, higher mortgage production revenue and banking card fees.deposit-related products. These increases were offset in part by losseslower Mortgage Banking production and servicing income. Current quarter results also included a $50 million write-down on $1.3 billion of automobile loans transferred to held-for-sale, compared with an $88 million write-down last year on $2.7 billon of auto loans transferred to held-for-sale.
The provision for credit losses totaled $566 million, up $195 million, or 53%, from last year. Excluding the special provision for Hurricane Katrina, the provision for credit losses would have been $316$85 million, down $55by $9 million or 15%. The decline reflected reductions in the allowance for loan losses due to improved credit trends in most consumer lending portfolios, and loan portfolio sales. These reductions were partially offset by the Merger and higher provision expense related to the decision to retain subprime mortgage loans.
Noninterest expense rose to $6.4 billion, an increase of $1.8 billion from the prior year. The increase primarily reflectedCredit quality continued to be favorable across all businesses.
Noninterest expense of $2.2 billion was up by $76 million, or 4%, as a result of ongoing investments in the Merger, but also included continued investment in retail banking distribution and sales, increasednetwork, higher depreciation expense on owned automobiles subject toacquired under operating leases, and incremental expense of $17 million from the adoption of SFAS 123R. These increases were offset in part by operating and merger-related efficiencies and the absence of a $40 million charge related to the dissolution of a student loanan Education Finance joint venture. These increases were more than offset by expense savings across all businesses.
                         
Selected metrics Three months ended September 30,  Nine months ended September 30, 
(in millions, except headcount and ratios) 2005  2004  Change  2005  2004(e)  Change 
 
Selected balance sheets (ending)
                        
Total assets $230,698  $227,952   1% $230,698  $227,952   1%
Loans(a)
  200,434   201,116   —   200,434   201,116   — 
Core deposits(b)
  160,592   154,589   4   160,592   154,589   4 
Total deposits  187,621   180,307   4   187,621   180,307   4 
                         
Selected balance sheets (average)
                        
Total assets $227,875  $227,716   —  $226,200  $171,585   32 
Loans(c)
  199,057   198,244   —   198,421   149,454   33 
Core deposits(b)
  160,914   158,800   1   160,552   107,912   49 
Total deposits  187,216   183,501   2   186,035   122,059   52 
Equity  13,475   13,050   3   13,276   7,764   71 
Headcount
  60,375   60,691   (1)  60,375   60,691   (1)
             
Selected metrics Three months ended March 31,
(in millions, except headcount and ratios) 2006  2005  Change
 
Selected ending balances
            
Assets $235,127  $224,562   5%
Loans(a)
  202,591   199,215   2 
Deposits  200,154   187,225   7 
             
Selected average balances
            
Assets $231,587  $225,120   3 
Loans(b)
  198,797   198,494   — 
Deposits  194,382   184,336   5 
Equity  13,896   13,100   6 
             
Headcount
  62,472   59,322   5 
             
Credit data and quality statistics
            
Net charge-offs $121  $152   (20)
Nonperforming loans(c)
  1,349   1,150   17 
Nonperforming assets  1,537   1,351   14 
Allowance for loan losses  1,333   1,168   14 
             
Net charge-off rate(b)
  0.27%  0.34%    
Allowance for loan losses to ending loans(a)
  0.71   0.64     
Allowance for loan losses to nonperforming loans(c)
  100   104     
Nonperforming loans to total loans  0.67   0.58     
 

21

                         
Credit data and quality statistics
                        
Net charge-offs $144  $219   (34) $410  $384   7 
Nonperforming loans(d)
  1,203   1,308   (8)  1,203   1,308   (8)
Nonperforming assets  1,387   1,557   (11)  1,387   1,557   (11)
Allowance for loan losses  1,375   1,764   (22)  1,375   1,764   (22)
Net charge-off rate(c)
  0.31%  0.47%      0.30%  0.38%    
Allowance for loan losses to ending loans(a)
  0.75   0.94       0.75   0.94     
Allowance for loan losses to nonperformingloans(d)
  115   143       115   143     
Nonperforming loans to total loans  0.60   0.65       0.60   0.65     
 
(a) 
Includes loans held-for-sale of $17,695$14,343 million and $12,816$16,532 million at September 30,for the three months ended March 31, 2006 and 2005, and 2004, respectively. These amounts are not included in the allowance coverage ratios.
(b)
Includes demand and savings deposits.
(c)(b) 
Average loans include loans held-for-sale of $15,707$16,362 million and $14,479$15,861 million for the quartersthree months ended September 30,March 31, 2006 and 2005, and 2004, respectively. The year-to-date average loans held-for-sale were $15,395 million and $15,140 million for 2005 and 2004, respectively. These amounts are not included in the net charge-off rate.
(d)(c) 
Nonperforming loans include loans held-for-sale of $10$16 million and $74$31 million at September 30,March 31, 2006 and 2005, and 2004, respectively. These amounts are not included in the allowance coverage ratios.

18

REGIONAL BANKING
             
Selected income statement data Three months ended March 31,
(in millions, except ratios) 2006  2005  Change
 
             
Noninterest revenue $820  $827   (1)%
Net interest income  2,220   2,210   — 
     
Total Net revenue  3,040   3,037   — 
Provision for credit losses  66   65   2 
Noninterest expense  1,738   1,705   2 
     
Income before income tax expense  1,236   1,267   (2)
     
Net income  757   786   (4)
ROE  31%  36%    
ROA  1.95   2.17     
Overhead ratio  57   56     
Overhead ratio excluding core deposit intangibles(a)
  54   52     
 
(e)(a) 
Includes three monthsRegional Banking uses the overhead ratio (excluding the amortization of core deposit intangibles (“CDI”)), a non-GAAP financial measure, to evaluate the underlying expense trends of the combined Firm’sbusiness. Including CDI amortization expense in the overhead ratio calculation results in a higher overhead ratio in the earlier years and six monthsa lower overhead ratio in later years; this would result in an improving overhead ratio over time, all things remaining equal. This non-GAAP ratio excludes Regional Banking’s core deposit intangible amortization expense related to the Bank One merger of heritage JPMorgan Chase results.$109 million and $124 million for the quarters ended March 31, 2006 and 2005, respectively.
Quarterly results
HOME FINANCERegional Bankingnet income totaled $757 million, down by $29 million, or 4%, from the prior year. Net revenue of $3.0 billion increased by $3 million, essentially flat from the prior year. Results reflected higher deposit balances, growth in home equity and mortgage loan balances, and increased deposit-related fees. These increases were offset by narrower spreads on deposits and loans, and lower investment sales revenue. Credit quality remained favorable for all loan portfolios. Expenses of $1.7 billion were up by $33 million, or 2%, from the prior year. Prior-year results included a $40 million charge to terminate an education finance joint venture. Excluding this item, expenses increased as investments in the retail distribution network and incremental expense from the adoption of SFAS 123R offset merger savings and other operating efficiencies. Compared with the prior quarter, net income increased 13%, in part due to the seasonal tax-refund anticipation business.

19

                         
Selected income statement data Three months ended September 30,  Nine months ended September 30, 
(in millions) 2005  2004  Change  2005  2004(a)  Change 
 
Prime production and servicing
                        
Production $214  $168   27% $577  $532   8%
Servicing:                        
Mortgage servicing revenue, net of amortization  161   134   20   449   482   (7)
MSR risk management results  (38)  153   NM   234   300   (22)
           
Total net revenue  337   455   (26)  1,260   1,314   (4)
Noninterest expense  231   296   (22)  689   849   (19)
Operating earnings  67   103   (35)  361   296   22 
Consumer real estate lending
                        
Total net revenue $684  $704   (3) $2,104  $1,651   27 
Provision for credit losses  177   65   172   245   94   161 
Noninterest expense  244   264   (8)  716   639   12 
Operating earnings  168   237   (29)  729   586   24 
Total Home Finance
                        
Total net revenue $1,021  $1,159   (12) $3,364  $2,965   13 
Provision for credit losses  177   65   172   245   94   161 
Noninterest expense  475   560   (15)  1,405   1,488   (6)
Operating earnings  235   340   (31)  1,090   882   24 
 
             
Business metrics Three months ended March 31,
(in billions, except ratios) 2006  2005  Change
 
             
Home equity origination volume $11.7  $11.9   (2)%
End of period loans owned            
Home equity $75.3  $67.7   11 
Mortgage  47.0   46.6   1 
Business banking  12.8   12.7   1 
Education  9.5   4.3   121 
Other loans(a)
  2.7   2.9   (7)
     
Total end of period loans  147.3   134.2   10 
End of period deposits            
Checking  64.9   62.6   4 
Savings  91.0   88.3   3 
Time and other  34.2   25.0   37 
     
Total end of period deposits  190.1   175.9   8 
Average loans owned            
Home equity $74.1  $66.2   12 
Mortgage  44.6   43.4   3 
Business banking  12.8   12.5   2 
Education  5.4   4.6   17 
Other loans(a)
  3.0   3.4   (12)
     
Total average loans(b)
  139.9   130.1   8 
Average deposits            
Checking  63.0   61.7   2 
Savings  89.3   87.8   2 
Time and other  32.4   24.6   32 
     
Total average deposits  184.7   174.1   6 
Average assets  157.1   146.9   7 
Average equity  9.8   8.8   11 
     
Credit data and quality statistics
            
30+ day delinquency rate(c)(d)
  1.36%  1.34%    
Net charge-offs            
Home equity $33  $35   (6)
Mortgage  12   6   100 
Business banking  18   19   (5)
Other loans(e)
  7   9   (22)
     
Total net charge-offs  70   69   1 
Net charge-off rate            
Home equity  0.18%  0.21%    
Mortgage  0.11   0.06     
Business banking  0.57   0.62     
Other loans(b)(e)
  0.56   1.04     
Total net charge-off rate(b)(e)
  0.21   0.22     
             
Nonperforming assets(f)(g)(h)
 $1,339  $1,136   18 
 
(a) 
Includes three months of the combined Firm’s resultscommercial loans derived from community development activities and six months of heritage JPMorgan Chase results.insurance policy loans.
Quarterly results
Home Finance operating earnings were $235 million, down $105 million from the prior year. Excluding the special provision for credit losses associated with Hurricane Katrina, operating earnings would have been $322 million, down $18 million from the prior year.
Operating earnings for the Prime production & servicing segment totaled $67 million, down $36 million. The decline in performance was the result of MSR risk management losses of $38 million, a decrease of $191 million. Earnings benefited from higher production-related revenue attributable to increased margins and volume and lower expenses. Improvement during the quarter reflected a better mix of loan production from more profitable origination channels and reduced cost to originate. Mortgage servicing revenue was $161 million, up $27 million, benefiting from a 5% increase in third-party loans serviced.
Operating earnings for the Consumer Real Estate Lending segment totaled $168 million, down $69 million. Excluding the special provision for credit losses related to Hurricane Katrina, operating earnings would have totaled $255 million, up $18 million. Improvement reflected increased loan balances and the absence of prior-year write-downs attributable to subprime mortgage loans held-for-sale. These benefits were offset by narrower spreads on the home equity loan portfolio, largely due to accelerated loan payoffs.

22

Year-to-date results
Operating earnings were $1.1 billion, up $208 million from the prior year, primarily due to the Merger and lower expenses.
Operating earnings for the Prime Production & Servicing segment totaled $361 million, up $65 million from the prior year. Net revenue of $1.3 billion declined by $54 million, reflecting lower MSR risk management results. Higher mortgage production revenue attributable to increased margins provided a favorable offset. Noninterest expense of $689 million decreased by $160 million, reflecting production-related expense savings.
Operating earnings for the Consumer Real Estate Lending segment increased by $143 million to $729 million. Net revenues of $2.1 billion were up $453 million primarily due to the Merger, as well as growth in home equity and subprime mortgage loan balances. These benefits were partially offset by the absence of the $4 billion manufactured home loan portfolio sold in late 2004 and narrower spreads in the prime mortgage portfolio. The provision for credit losses was $245 million, up $151 million from the prior year, largely due to the special provision for Hurricane Katrina and the effect of the Merger. Noninterest expense rose $77 million to $716 million, primarily due to the Merger, partially offset by expense savings.
                         
Selected metrics(a) Three months ended September 30,  Nine months ended September 30, 
(in millions, except ratios and where                  
otherwise noted) 2005  2004  Change  2005  2004(f)  Change 
 
Origination volume by channel (in billions)
                        
Retail $23.7  $19.7   20% $64.8  $55.7   16%
Wholesale  14.6   11.6   26   38.5   36.8   5 
Correspondent  5.1   5.4   (6)  11.0   18.6   (41)
Correspondent negotiated transactions  10.2   11.3   (10)  24.5   31.5   (22)
           
Total $53.6  $48.0   12  $138.8  $142.6   (3)
           
Origination volume by business (in billions)
                        
Mortgage $39.3  $34.1   15  $96.8  $112.2   (14)
Home equity  14.3   13.9   3   42.0   30.4   38 
           
Total $53.6  $48.0   12  $138.8  $142.6   (3)
           
Business metrics (in billions)
                        
Third party mortgage loans serviced (ending)(b)
 $450.3  $427.3   5  $450.3  $427.3   5 
MSR net carrying value (ending)  6.1   5.2   17   6.1   5.2   17 
End of period loans owned                        
Mortgage loans held-for-sale $13.4  $9.5   41  $13.4  $9.5   41 
Mortgage loans retained  46.7   46.5   —   46.7   46.5   — 
Home equity and other loans  74.3   67.3   10   74.3   67.3   10 
           
Total end of period loans owned $134.4  $123.3   9  $134.4  $123.3   9 
Average loans owned                        
Mortgage loans held-for-sale $13.5  $10.9   24  $11.8  $12.8   (8)
Mortgage loans retained  47.6   44.0   8   46.3   39.4   18 
Home equity and other loans  71.8   66.2   8   69.2   39.2   77 
           
Total average loans owned $132.9  $121.1   10  $127.3  $91.4   39 
           
Overhead ratio  47%  48%      42%  50%    
Credit quality statistics
                        
30+ day delinquency rate(c)
  1.31%  1.50%      1.31%  1.50%    
Net charge-offs                        
Mortgage $6  $6   —  $20  $14   43 
Home equity and other loans  32   57   (44)  97   105   (8)
           
Total net charge-offs  38   63   (40)  117   119   (2)
Net charge-off rate                        
Mortgage  0.05%  0.05%      0.06%  0.05%    
Home equity and other loans  0.18   0.34       0.19   0.36     
Total net charge-off rate(d)
  0.13   0.23       0.14   0.20     
Nonperforming assets(e)
 $846  $997   (15) $846  $997   (15)
 
(a)
For a discussion of selected line of business metrics, see page 93 of this Form 10–Q.
(b) 
Includes prime first mortgageAverage loans include loans held-for-sale of $3.3 billion and subprime loans.$4.5 billion for the three months ended March 31, 2006 and 2005, respectively.
(c) 
Excludes delinquencies related to loans eligible for repurchase as well as loans repurchased from GNMA pools that are insured by government agencies of $0.8$0.9 billion and $0.9$0.7 billion for September 30,at March 31, 2006 and 2005, and 2004, respectively. These amounts are excluded as reimbursement is proceeding normally.
(d) 
Excludes mortgage loans held for sale.delinquencies that are insured by government agencies under the Federal Family Education Loan Program of $0.4 billion at March 31, 2006. Delinquencies were insignificant at March 31, 2005. These amounts are excluded as reimbursement is proceeding normally.

23

(e)
Includes insignificant amounts of Education net charge-offs.
(f) 
Excludes nonperforming assets related to loans eligible for repurchase as well as loans repurchased from GNMA pools that are insured by government agencies of $1.0$1.1 billion at both March 31, 2006 and $1.3 billion for September 30, 2005 and 2004, respectively.2005. These amounts are excluded as reimbursement is proceeding normally.
(f)(g)
Excludes loans that are 90 days past due and still accruing, which are insured by government agencies under the Federal Family Education Loan Program of $0.2 billion at March 31, 2006. The Education loans past due 90 days were insignificant at March 31, 2005. These amounts are excluded as reimbursement is proceeding normally.
(h) 
Includes three monthsnonperforming loans held-for-sale related to mortgage banking activities of the combined Firm’s results$16 million and six months of heritage JPMorgan Chase results.$31 million at March 31, 2006 and 2005, respectively.

20

             
Retail branch business metrics Three months ended March 31,
(in millions, except ratios and where otherwise noted) 2006  2005  Change
 
             
Investment sales volume $3,553  $2,870   24%
             
Number of:
            
Branches  2,638   2,517   121#
ATMs  7,400   6,687   713 
Personal bankers  7,019   5,798   1,221 
Sales specialists  3,318   2,846   472 
Active online customers (in thousands)  5,030   3,671   1,359 
Checking accounts (in thousands)  8,936   8,287   649 
 
The table below reconciles management’s disclosure of Home Finance’s revenue to the reported U.S. GAAP line items shown on the Consolidated statements of income and in the related Notes to consolidated financial statements:MORTGAGE BANKING
                         
  Prime production  Consumer real    
Three months ended September 30, and servicing  estate lending  Total revenue 
(in millions) 2005  2004  2005  2004  2005  2004 
 
Net interest income $115  $183  $663  $732  $778  $915 
Securities/private equity gains  —   5   —   —   —   5 
Mortgage fees and related income(a)
  222   267   21   (28)  243   239 
 
Total $337  $455  $684  $704  $1,021  $1,159 
 
             
Selected income statement data Three months ended March 31,
(in millions, except ratios and where otherwise noted) 2006  2005  Change
 
             
Production income $219  $237   (8)%
Mortgage servicing income:            
Servicing revenue  560   519   8 
Changes in MSR asset fair value:            
Due to inputs or assumptions in model(a)
  711   548   30 
Other changes in fair value(b)
  (349)  (339)  (3)
Derivative valuation adjustments and other  (753)  (445)  (69)
     
Total mortgage servicing income  169   283   (40)
     
Total net revenue  388   520   (25)
Noninterest expense  324   299   8 
Income before income tax expense  64   221   (71)
Net income  39   139   (72)
             
ROE  9%  35%    
ROA  0.58   2.71     
             
Business metrics (in billions)
            
Third party mortgage loans serviced (ending) $484.1  $435.5   11 
MSR net carrying value (ending)  7.5   5.7   32 
Average mortgage loans held-for-sale  13.0   11.4   14 
Average assets  27.1   20.8   30 
Average equity  1.7   1.6   6 
             
Mortgage origination volume by channel (in billions)
            
Retail $9.1  $10.0   (9)
Wholesale  7.4   7.2   3 
Correspondent (including negotiated transactions)  12.4   9.5   31 
     
Total  28.9   26.7   8 
 
                         
  Prime production  Consumer real    
Nine months ended September 30,(b) and servicing  estate lending  Total revenue 
(in millions) 2005  2004  2005  2004  2005  2004 
 
Net interest income $341  $568  $2,014  $1,538  $2,355  $2,106 
Securities/private equity gains  3   1   —   —   3   1 
Mortgage fees and related income(a)
  916   745   90   113   1,006   858 
 
Total $1,260  $1,314  $2,104  $1,651  $3,364  $2,965 
 
(a) 
Includes activity reported elsewhereRepresents MSR asset fair value adjustments due to changes in inputs, such as Other income.interest rates and volatility, as well as updates to assumptions used in the valuation model.
(b)
Year-to-date 2004 results include three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
The following table details the MSR risk management results in the Home Finance business:
                 
MSR Risk Management Results Three months ended September 30,  Nine months ended September 30, 
(in millions) 2005  2004  2005  2004(c) 
 
Reported amounts:                
MSR valuation adjustments(a)
 $775  $(722) $623  $(126)
Derivative valuation adjustments and other risk management gains (losses)(b)
  (813)  875   (389)  426 
 
MSR risk management results $(38) $153  $234  $300 
 
(a)
Excludes subprime loan MSR activity of $(9) million and $(4) million for the three months ended September 30, 2005 and 2004, respectively, and $(10) million for the nine months ended September 30, 2005. Subprime MSR loan activity for the nine months ended September 30, 2004, was less than $1 million.
(b) 
Includes gains, losses, and interest income associatedchanges in the MSR value due to servicing portfolio runoff (or time decay). Effective January 1, 2006, the Firm implemented SFAS 156, adopting fair value accounting for the MSR asset. For the period ending March 31, 2005, this amount represents MSR asset amortization expense calculated in accordance with derivatives, both designated and not designated, as a SFAS 133 hedge, and securities classified as both trading and available-for-sale.
(c)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.140.
Quarterly results
Home Finance uses a combinationMortgage Bankingnet income was $39 million, down from net income of derivatives, AFS securities and trading securities to manage changes$139 million in the fair valueprior year. Production revenue decreased, reflecting lower gain-on-sale margins on higher mortgage originations. Servicing income of $169 million was down from $283 million in the prior year. The results were primarily driven by lower MSR asset. These risk management activities are intended to protect the economic value of the MSR asset by providing offsetting changes in the fair value of related risk management instruments. The type and amount of hedging instruments used in this risk management activity change over time as market conditions and approach dictate.
During the third quarter of 2005, positive MSR valuation adjustments of $775 million were more thanresults, partially offset by $813increased servicing revenue due to increased levels of third-party loans serviced. Noninterest expense was $324 million, of aggregate risk management losses, including net interest earned on AFS securities. In the third quarter of 2004, negative MSR valuation adjustments of $722up by $25 million, were more than offset by $875 million of aggregate risk management gains, including net interest earned on AFS securities. There were no unrealized gains/(losses) on AFS securities at September 30, 2005. Unrealized gains/(losses) on AFS securities were $(121) million at September 30, 2004. For a further discussion of MSRs, see Critical accounting estimates on page 63 and Note 14 on pages 81–82 of this Form 10–Q.reflecting increased mortgage originations.

2421

CONSUMER & SMALL BUSINESS BANKINGAUTO FINANCE
                                   
Selected income statement data Three months ended September 30, Nine months ended September 30,  Three months ended March 31,
(in millions) 2005 2004 Change 2005 2004(a) Change 
(in millions, except ratios and where otherwise noted) 2006 2005 Change
 
Noninterest revenue $733 $734  —% $2,203 $1,154  91% $44 $(35) NM 
Net interest income 1,336 1,342 — 4,128 2,126 94  291 325  (10)%
     
Total net revenue 2,069 2,076 — 6,331 3,280 93  335 290 16 
Provision for credit losses 119 79 51 180 126 43  19 29  (34)
Noninterest expense 1,369 1,379  (1) 4,070 2,619 55  176 158 11 
Operating earnings 356 377  (6) 1,270 330 285 
 
Income before income tax expense 140 103 36 
 
Net income 85 63 35 
 
ROE  14%  9% 
ROA 0.73 0.45 
 
Business metrics (in billions)
 
Auto origination volume $4.3 $4.8  (10)
End-of-period loans and lease related assets 
Loans outstanding $41.0 $48.4  (15)
Lease financing receivables 3.6 7.0  (49)
Operating lease assets 1.1 0.2 450 
 
Total end-of-period loans and lease related assets 45.7 55.6  (18)
Average loans and lease related assets 
Loans outstanding(a)
 $41.2 $48.8  (16)
Lease financing receivables 4.0 7.6  (47)
Operating lease assets 1.0 0.1 NM 
 
Total average loans and lease related assets 46.2 56.5  (18)
Average assets 47.3 57.4  (18)
Average equity 2.4 2.7  (11)
 
 
Credit quality statistics
 
30+ day delinquency rate  1.39%  1.37% 
Net charge-offs 
Loans $48 $74  (35)
Lease receivables 3 9  (67)
 
Total net charge-offs 51 83  (39)
Net charge-off rate 
Loans(a)
  0.47%  0.61% 
Lease receivables 0.30 0.48 
Total net charge-off rate(a)
 0.46 0.60 
Nonperforming assets $198 $215  (8)
(a) 
Includes three months ofAverage loans held-for-sale were insignificant for the combined Firm’s resultsquarters ended March 31, 2006 and six months of heritage JPMorgan Chase results.2005.
Quarterly results
Consumer & Small Business operating earnings were $356
Auto Financenet income of $85 million down $21was up by $22 million, or 35%, from the prior year. Excluding the special provision for credit lossesCurrent-period results included a net $45 million loss related to Hurricane Katrina, operating earnings would have been $412auto loans transferred to held-for-sale. Prior-year results included a net $78 million up $35 million. Net revenue was essentially unchangedloss associated with auto loans transferred to held-for-sale and a $34 million net benefit from the prior year. Higher deposit balances and increased debit and credit card fees were offset by declines in depositsale of a recreational vehicle loan portfolio. Excluding these items, the benefit of wider loan spreads and service charges and by lower investment sales revenue related to a shift in the product sales mix. Earnings benefited from a lower provision and a decline in expenses as a result of merger efficiencies, despite continued investment in retail banking distribution and sales.
Year-to-date results
Operating earnings totaled $1.3 billion, up $940 million from the prior year. While growth largely reflected the Merger, results also included wider spreads on deposits and higher deposit balances. These factors contributed to net revenue increasing to $6.3 billion from $3.3 billion in the prior year. The provision for credit losses of $180 million increased by $54 million; excluding the special provision related to Hurricane Katrina, it would have decreased by $36 million from the prior year reflecting lower net charge-offs and improved credit quality trends. Noninterest expense increased $1.5 billion to $4.1 billion, which reflected the Merger and continued investment in branch distribution and sales, partially offset by merger efficiencies.
                         
Selected metrics(a) Three months ended September 30,  Nine months ended September 30, 
(in millions, except ratios and where                  
  otherwise noted) 2005  2004  Change  2005  2004(d)  Change 
 
Business metrics (in billions)
                        
End-of-period balances
                        
Small business loans $12.6  $12.4   2% $12.6  $12.4   2%
Consumer and other loans(b)
  1.7   2.3   (26)  1.7   2.3   (26)
           
Total loans  14.3   14.7   (3)  14.3   14.7   (3)
Core deposits(c)
  149.0   144.5   3   149.0   144.5   3 
Total deposits  176.0   170.2   3   176.0   170.2   3 
                         
Average balances
                        
Small business loans  12.5   12.4   1   12.4   5.6   121 
Consumer and other loans(b)
  1.8   2.3   (22)  2.1   2.1   — 
           
Total loans  14.3   14.7   (3)  14.5   7.7   88 
Core deposits(c)
  148.0   147.8   —   148.9   96.8   54 
Total deposits  174.2   172.5   1   174.3   110.9   57 
                         
Number of:
                        
Branches  2,549   2,467   82#  2,549   2,467   82#
ATMs  7,136   6,587   549   7,136   6,587   549 
Personal bankers  6,719   5,744   975   6,719   5,744   975 
Personal checking accounts (in thousands)  7,866   7,222   644   7,866   7,222   644 
Business checking accounts (in thousands)  930   891   39   930   891   39 
Active online customers (in thousands)  4,099   3,152   947   4,099   3,152   947 
Debit cards issued (in thousands)  9,102   8,282   820   9,102   8,282   820 
                         
Overhead ratio  66%  66%      64%  80%    
                         
Retail brokerage business metrics
                        
Investment sales volume $2,745  $2,563   7% $8,522  $4,554   87%
Number of dedicated investment sales representatives  1,478   1,393   6   1,478   1,393   6 

25

                         
Credit quality statistics
                        
Net charge-offs
Small business		 $25  $24   4  $69  $45   53 
Consumer and other loans  11   36   (69)  24   53   (55)
           
Total net charge-offs  36   60   (40)  93   98   (5)
Net charge-off rate
Small business		  0.79%  0.77%      0.74%  1.07%    
Consumer and other loans  2.42   6.23       1.53   3.37     
Total net charge-off rate  1.00   1.62       0.86   1.70     
Nonperforming assets $293  $313   (6) $293  $313   (6)
 
(a)
For a discussion of selected line of business metrics, see page 93 of this Form 10-Q.
(b)
Primarily community development loans.
(c)
Includes demand and savings deposits.
(d)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
AUTO & EDUCATION FINANCE
                         
Selected income statement data Three months ended September 30,  Nine months ended September 30, 
(in millions) 2005  2004  Change  2005  2004(a)  Change 
 
Total net revenue $342  $397   (14)% $1,061  $781   36%
Provision for credit losses  82   95   (14)  141   151   (7)
Noninterest expense  184   163   13   559   324   73 
Operating earnings  47   85   (45)  220   186   18 
 
(a)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
Quarterly results
Auto & Education Finance operating earnings were $47 million, down $38 million from the prior year. Excluding the special provision for credit losses related to Hurricane Katrina, operating earnings would have been $59 million, down $26 million. This decline in performance reflected a net loss of $43 million associated with the transfer of $1.5 billion of auto loans to held-for-sale, as well as lower loan and lease-related assets. Favorable credit trends and lower credit costs continued to provide an offset to reduced operating revenue. Excludingthe decline in loan and lease balances. After adjusting for the impact of increased depreciation expense on owned automobiles subject to operating leases, expenses would have declined as the cost structure was aligned with reduced production volumes.
Year-to-date results
Operating earnings were $220 million, up $34 million from the prior year. The current period included a net loss of $83 million associated with a $2.3 billion auto loan securitization; a net loss of $43 million associated with the transfer of $1.5 billion of auto loans to held-for-sale; a $40 million charge related to the dissolution of a student loan joint venture; a benefit of $34 million arising from the sale of a $2 billion recreational vehicle loan portfolio; and the $20 million special provision for credit losses related to Hurricane Katrina. The prior-year results included a $40 million charge related to auto lease residuals. Excluding the after-tax impact of these items, operating earnings would have increased by $102 million over the prior year, primarily due to the Merger and improved credit quality. Results continued to reflectreflecting lower production volumes and narrower spreads.
                         
Selected metrics Three months ended September 30,  Nine months ended September 30, 
(in millions, except ratios and where otherwise noted) 2005  2004  Change  2005  2004(d)  Change 
 
Business metrics (in billions)
                        
End of period loans and lease related assets
                        
Loans outstanding $46.2  $53.7   (14)% $46.2  $53.7   (14)%
Lease related assets(a)
  5.8   8.9   (35)  5.8   8.9   (35)
           
Total end-of-period loans and lease related assets  52.0   62.6   (17)  52.0   62.6   (17)
                         
Average loans and lease related assets
                        
Loans outstanding(b)
 $45.9  $52.9   (13) $49.6  $41.1   21 
Lease related assets(c)
  6.2   9.2   (33)  6.9   9.1   (24)
           
Total average loans and lease related assets(b)(c)
  52.1   62.1   (16)  56.5   50.2   13 
                         
Overhead ratio  54%  41%      53%  41%    
operating efficiencies.

2622

                         
Credit quality statistics
                        
30+ day delinquency rate  1.59%  1.38%      1.59%  1.38%    
Net charge-offs                        
Loans $66  $83   (20) $185  $134   38 
Lease receivables(c)
  4   13   (69)  15   33   (55)
           
Total net charge-offs  70   96   (27)  200   167   20 
Net charge off rate                        
Loans(b)
  0.60%  0.65%      0.54%  0.46%    
Lease receivables  0.28   0.56       0.30   0.48     
Total net charge-off rate(b)
  0.56   0.64       0.51   0.46     
Nonperforming assets $248  $247   —  $248  $247   — 
 
(a)
Includes operating lease related assets of $0.7 billion for the quarter ended September 30, 2005. Balances prior to March 31, 2005, were insignificant.
(b)
Average loans include loans held-for-sale of $2.2 billion for each of the quarters ended September 30, 2005 and 2004. The year-to-date average loans held-for-sale were $3.6 billion and $1.9 billion for 2005 and 2004, respectively. These are not included in the net charge-off rate.
(c)
Includes operating lease related assets of $0.6 billion for the quarter ended September 30, 2005. The year-to-date average operating lease related assets were $0.3 billion for 2005. Balances prior to March 31, 2005, were insignificant. These are not included in the net charge-off rate.
(d)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
INSURANCE
                         
Selected income statement data Three months ended September 30,  Nine months ended September 30, 
(in millions) 2005  2004  Change  2005  2004(b)  Change 
 
Total net revenue $158  $168   (6)% $480  $220   118%
Noninterest expense  128   136   (6)  410   179   129 
Operating earnings  18   20   (10)  44   26   69 
                         
Memo: Consolidated gross insurance-related revenue(a)
  409   429   (5)  1,229   770   60 
 
(a)
Includes revenue reported in the results of other businesses.
(b)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
Quarterly results
Insurance operating earnings were $18 million, down $2 million from the prior year, on net revenue of $158 million. The decline was primarily due to increased proprietary annuity sales commissions, partially offset by increased net interest spread earned on proprietary annuity activity.
Year-to-date results
Operating earnings totaled $44 million, an increase of $18 million from the prior year, on net revenues of $480 million. The increase was primarily due to the Merger. Results also reflected an increase in proprietary annuity sales commissions paid.
                         
Selected metrics(a) Three months ended September 30,  Nine months ended September 30, 
(in millions, except where otherwise noted) 2005  2004  Change  2005  2004(b)  Change 
 
Business metrics — ending balances
                        
Invested assets $7,754  $7,489   4% $7,754  $7,489   4%
Policy loans  391   398   (2)  391   398   (2)
Insurance policy and claims reserves  7,672   7,477   3   7,672   7,477   3 
Term life sales — first year annualized premiums  15   15   —   45   15   200 
Term life premium revenues  119   115   3   351   115   205 
Proprietary annuity sales  151   39   287   552   173   219 
Number of policies in force — direct/assumed (in thousands)  2,195   2,633   (17)  2,195   2,633   (17)
Insurance in force — direct/assumed  283,766   274,390   3   283,766   274,390   3 
Insurance in force — retained  87,764   76,727   14   87,764   76,727   14 
A.M. Best rating  A   A       A   A     
 
(a)
For a discussion of selected line of business metrics, see page 93 of this Form 10-Q.
(b)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.

27

 
CARD SERVICES
 
For a discussion of the business profile of CS, see pages 39–4045–46 of JPMorgan Chase’s 20042005 Annual Report.
JPMorgan Chase uses the concept of “managed receivables” to evaluate the credit performance of its underlying credit card loans, both sold and not sold. For further information, see Explanation and reconciliation of the Firm’s use of non-GAAP financial measures on page 11pages 11–12 of this Form 10–Q. OperatingManaged results exclude the impact of credit card securitizations on totalTotal net revenue, the provisionProvision for credit losses, net charge-offs and loan receivables. Securitization does not change reported net income versus operating earnings;Net income; however, it does affect the classification of items on the Consolidated statements of income.
                                   
Selected income statement data – managed basis Three months ended September 30, Nine months ended September 30, 
Selected income statement data-managed basis Three months ended March 31,
(in millions, except ratios) 2005 2004 Change 2005 2004(b) Change  2006 2005 Change
Revenue
  
Asset management, administration and commissions $— $26 NM $— $75 NM 
Credit card income 950 784  21% 2,579 1,293  99% $601 $761  (21)%
Other income 60 44 36 113 86 31 
All other income 71 11 NM 
     
Noninterest revenue
 1,010 854 18 2,692 1,454 85  672 772  (13)
Net interest income 2,970 2,917 2 8,953 5,461 64  3,013 3,007 — 
     
Total net revenue
 3,980 3,771 6 11,645 6,915 68 
Total net revenue(a)
 3,685 3,779  (2)
  
Provision for credit losses(a)
 1,833 1,662 10 5,110 3,116 64 
Provision for credit losses 1,016 1,636  (38)
  
Noninterest expense
  
Compensation expense 284 317  (10) 860 623 38  259 285  (9)
Noncompensation expense 813 926  (12) 2,556 1,660 54  796 839  (5)
Amortization of intangibles 189 194  (3) 566 318 78  188 189  (1)
     
Total noninterest expense
 1,286 1,437  (11) 3,982 2,601 53 
Total noninterest expense(a)
 1,243 1,313  (5)
     
Operating earnings before income tax expense
 861 672 28 2,553 1,198 113 
 
Income before income tax expense(a)
 1,426 830 72 
Income tax expense 320 251 27 948 439 116  525 308 70 
     
Operating earnings
 $541 $421 29 $1,605 $759 111 
Net income
 $901 $522 73 
     
  
Memo: Net securitization gains (amortization) $8 $(12) NM 
Financial metrics
  
ROE  18%  14%  18%  16%   26%  18% 
Overhead ratio 32 38 34 38  34 35 
(a) 
Third quarter 2005 includesAs a $100 million special provision related to Hurricane Katrina.
(b)
Includes three monthsresult of the combined Firm’s resultsintegration of Chase Merchant Services and six monthsPaymentech merchant processing businesses into a joint venture, beginning in the fourth quarter of heritage JPMorgan Chase results.2005, Total net revenue, Total noninterest expense and Income before income tax expense have been reduced to reflect the deconsolidation of Paymentech. There is no impact to Net income.
Quarterly results
Operating earnings
Net income of $541$901 million werewas up $120by $379 million, or 29%73%, from the prior year. ResultsThe results for the quarter reflected a special provision forpre-tax benefit of $550 million, which is based on an estimate by management of the impact of lower bankruptcies following the new bankruptcy legislation that became effective in the fourth-quarter of 2005. Results were also driven by lower credit losses (excluding the impact from the bankruptcy legislation), merger savings and higher loan balances, including the acquisition of $100the Sears Canada credit card business. These benefits were offset partially by narrower spreads on loans and higher marketing expense.
Net revenue was $3.7 billion, down by $94 million, attributable to Hurricane Katrina. Excludingor 2%, from the prior year. After adjusting the prior-year results for the impact of the special provision, operating earnings would have been $603 million, up $182 million, or 43%. Results benefited from higher revenue and lower expenses. Lower expenses were driven by merger savings, including lower compensation and processing costs. Partially offsetting these benefits was a higher provision for credit losses related to increased bankruptcies.
Netdeconsolidation of Paymentech, revenue was $4.0 billion, up $209 million, or 6%, from the prior year.1%. Net interest income was $3.0 billion, up $53 million, or 2%,flat to the prior year. Higher loan balances, including the acquisition of the Sears Canada credit card business, and increased revenues due to higher loan balances, partiallythe decline in bankruptcy-related revenue reversals, were offset by an increasenarrower loan spreads. Net interest income to average managed receivables was 8.85% down from 9.13% in loan balancesthe prior year, but up from 8.14% in their introductory rate period.the prior quarter. Noninterest revenue of $1.0 billion$672 million was down by $100 million, or 13%. After adjusting the prior-year results for the impact of the deconsolidation of Paymentech, noninterest revenue was up $156 million, or 18%. This increase was driven by5% due to higher charge volume, resulting in increased interchange income, partially offset by higher volume-driven payments to partners and higher expense related to reward programs.
Average managed loans of $138.0 billion increased by rewards expense.$4.4 billion, or 3%, from the prior year, but decreased $0.9 billion from the prior quarter. The current quarter included an average of $2.2 billion, and the prior quarter included an average of $1.2 billion, of loans from the Sears Canada acquisition. End-of-period managed loans of $134.3 billion increased by $0.9 billion, or 1%, from the prior year (including $2.0 billion of loans from the Sears Canada acquisition) and decreased by $8.0 billion from the prior quarter. The decline from the prior quarter was caused by higher-than-normal customer payment rates, which management believes may be partially related to the recently implemented new minimum payment rules.

23

The provision for credit losses was $1.8$1.0 billion, up $171down by $620 million, or 10%.38%, from the prior year. This increasedecrease was driven by three factors. First, there were higherdue primarily to lower bankruptcy-related net charge-offs, which were partially offsetbased upon an estimate by lower contractual net charge-offs. Second, the provision was increased by $100 million, related to significantly higher bankruptcy filings prior to the enactmentmanagement, had an impact of new legislation on October 17, 2005. The final factor was the special provision for credit losses of $100 million, related to Hurricane Katrina. Despite a record level of bankruptcy losses, the net charge-off rate improved, and the delinquency rate continued to be low.$475 million. The managed net charge-off rate for the quarter declineddecreased to 4.70%2.99%, down from 4.88%4.83% in the prior year and 4.87%6.39% in the prior quarter. The 30-day managed delinquency rate was 3.39%3.10%, down from 3.81%3.54% in the prior year, butand up seasonally from 3.34%2.79% in the prior quarter. These credit statistics reflect the impact of the new bankruptcy legislation. In addition, management believes the underlying credit quality of the managed loan portfolio remains strong.
Noninterest expense of $1.3$1.2 billion decreased by $151$70 million, or 11%5%. After adjusting the prior year’s results for the impact of the deconsolidation of Paymentech, expenses were up 5%. The decreaseincrease was driven primarily by lower processing and compensation costs. Both of these reductions were primarily related to merger savings, reduced vendor cost, the TSYS conversion and headcount reductions.

28

Year-to-date results
Operating earnings of $1.6 billion were up $846 million from the prior year due to the Merger,increased marketing activity, higher revenuefraud-related losses and lower expenses.
Net revenue was $11.6 billion, up $4.7 billion, or 68%. Net interest income of $9.0 billion increased by $3.5 billion, primarily due to the Merger, including the acquisition of a private label portfolio. In addition, higher loan balances were partiallythe Sears Canada credit card business, largely offset by an increase in loan balances in their introductory rate period, driven by a significant increase in new account originations. Noninterest revenue of $2.7 billion was up $1.2 billion, driven primarily by the Merger and by higher charge volume resulting in increased interchange income, partially offset by higher volume-driven payments to partners and by rewards expense.merger savings.
The provision for credit losses was $5.1 billion, up $2.0 billion, or 64%, primarily due to the Merger, including the acquisition of a private label portfolio. The provision also increased due to three other factors: higher bankruptcy-related net charge-offs, which were partially offset by lower contractual net charge-offs; significantly higher bankruptcy filings prior to the enactment of new legislation on October 17, 2005; and the special provision for credit losses related to Hurricane Katrina. Despite a record level of bankruptcy losses, the net charge-off rate improved, and the delinquency rate continued to be low. The year-to-date managed net charge-off rate was 4.80%, down from 5.29% in the prior year. The 30-day managed delinquency rate was 3.39%, down from 3.81% in the prior year.
             
Selected metrics Three months ended March 31,
(in millions, except headcount, ratios         
and where otherwise noted) 2006  2005  Change
 
% of average managed outstandings:            
Net interest income  8.85%  9.13%    
Provision for credit losses  2.99   4.97     
Noninterest revenue  1.97   2.34     
Risk adjusted margin(a)
  7.84   6.51     
Noninterest expense  3.65   3.99     
Pre-tax income (ROO)  4.19   2.52     
Net income  2.65   1.58     
             
Business metrics
            
Charge volume (in billions) $74.3  $70.3   6%
Net accounts opened (in thousands)  2,718   2,744   (1)
Credit cards issued (in thousands)  112,446   94,367   19 
Number of registered Internet customers (in millions)  15.9   10.9   46 
Merchant acquiring business(b)
            
Bank card volume (in billions) $147.7  $125.1   18 
Total transactions (in millions)(c)
  4,130   3,459   19 
             
Selected ending balances
            
Loans:            
Loans on balance sheets $64,691  $66,053   (2)
Securitized loans  69,580   67,328   3 
     
Managed loans $134,271  $133,381   1 
     
             
Selected average balances
            
Managed assets $145,994  $138,512   5 
Loans:            
Loans on balance sheets $68,455  $64,218   7 
Securitized loans  69,571   69,370   — 
     
Managed loans $138,026  $133,588   3 
     
Equity  14,100   11,800   19 
             
Headcount
  18,801   20,137   (7)
             
Credit quality statistics
            
Net charge-offs $1,016  $1,590   (36)
Managed net charge-off rate  2.99%  4.83%    
             
Delinquency ratios
            
30+ days  3.10%  3.54%    
90+ days  1.39   1.71     
             
Allowance for loan losses $3,274  $3,040   8 
Allowance for loan losses to period-end loans  5.06%  4.60%    
 
Noninterest expense of $4.0 billion increased by $1.4 billion, or 53%, primarily due to the Merger, including the acquisition of a private label portfolio. Additionally, merger savings, including lower processing and compensation costs, were partially offset by higher marketing expenses and an operating charge to increase litigation reserves.
                         
Selected metrics(a) Three months ended September 30,  Nine months ended September 30, 
(in millions, except headcount, ratios and where otherwise noted) 2005  2004  Change  2005  2004(d)  Change 
 
Net securitization gains (amortization) $25  $(2)  NM  $28  $(8)  NM 
                         
% of average managed outstandings:                        
Net interest income  8.55%  8.90%      8.83%  9.37%    
Provision for credit losses  5.28   5.07       5.04   5.35     
Noninterest revenue  2.91   2.61       2.66   2.49     
Risk adjusted margin(b)
  6.18   6.44       6.45   6.52     
Noninterest expense  3.70   4.39       3.93   4.46     
Pre-tax income  2.48   2.05  ��    2.52   2.05     
Operating earnings  1.56   1.28       1.58   1.30     
                         
Business metrics
                        
Charge volume (in billions) $76.4  $73.3   4% $222.3  $118.3   88%
Net accounts opened (in thousands)  3,022   2,755   10   8,555   4,794   78 
Credit cards issued (in thousands)  98,236   95,946   2   98,236   95,946   2 
Number of registered internet customers (in millions)  14.6   12.4   18   14.6   12.4   18 
                         
Merchant acquiring business                        
Bank card volume (in billions) $143.4  $123.5   16  $409.7  $260.3   57 
Total transactions (in millions)  4,872   3,972   23   13,892   7,604   83 
                         
Selected ending balances
                        
Loans:                        
Loans on balance sheets $68,479  $60,241   14  $68,479  $60,241   14 
Securitized loans  69,095   71,256   (3)  69,095   71,256   (3)
           
Managed loans $137,574  $131,497   5  $137,574  $131,497   5 
           
                         
Selected average balances
                        
Managed assets $144,225  $136,753   5  $141,180  $80,211   76 
Loans:                        
Loans on balance sheets $68,877  $59,386   16  $66,759  $31,296   113 
Securitized loans  68,933   70,980   (3)  68,791   46,575   48 
           
Managed loans $137,810  $130,366   6  $135,550  $77,871   74 
           
Equity  11,800   11,800   —   11,800   6,200   90 
                         
Headcount
  19,463   20,473   (5)  19,463   20,473   (5)

29

                         
Credit quality statistics
                        
Net charge-offs $1,633  $1,598   2  $4,864  $3,086   58 
Net charge-off rate  4.70%  4.88%      4.80%  5.29%    
12 month lagged loss ratio(c)
  4.97   5.08       5.09   NA     
                         
Delinquency ratios                        
30+ days  3.39%  3.81%      3.39%  3.81%    
90+ days  1.55   1.75       1.55   1.75     
                         
Allowance for loan losses $3,255  $2,273   43  $3,255  $2,273   43 
Allowance for loan losses to period-end loans  4.75%  3.77%      4.75%  3.77%    
 
(a)
For a discussion of selected line of business metrics, see page 94 of this Form 10–Q.
(b) 
Represents Total net revenue less Provision for credit losses.
(b)
Represents 100% of the merchant acquiring business.
(c) 
For further information on this business metric, see the Form 8-K/A furnished by JPMorgan ChasePeriods prior to the Securitiesfourth quarter of 2005 have been restated to conform methodologies following the integration of Chase Merchant Services and Exchange Commission on July 20, 2005.
(d)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.Paymentech merchant processing businesses.

24

The financial information presented below reconciles reported basis and managed basis to disclose the effect of securitizations.
                                   
 Three months ended September 30, Nine months ended September 30,  Three months ended March 31,
(in millions) 2005 2004 Change 2005 2004(c) Change  2006 2005 Change
Income statement data(a)
  
Credit card income  
Reported data for the period $1,683 $1,632  3% $4,855 $2,774  75% $1,726 $1,576  10%
Securitization adjustments  (733)  (848) 14  (2,276)  (1,481)  (54)  (1,125)  (815)  (38)
     
Managed credit card income $950 $784 21 $2,579 $1,293 99  $601 $761  (21)
     
  
Other income 
Reported data for the period $60 $47 28 $113 $173  (35)
Securitization adjustments —  (3) NM —  (87) NM 
   
Managed other income $60 $44 36 $113 $86 31 
   
 
Net interest income  
Reported data for the period $1,370 $1,138 20 $3,963 $2,006 98  $1,439 $1,275 13 
Securitization adjustments 1,600 1,779  (10) 4,990 3,455 44  1,574 1,732  (9)
     
Managed net interest income $2,970 $2,917 2 $8,953 $5,461 64  $3,013 $3,007 — 
     
  
Total net revenue(a)
 
Total net revenue 
Reported data for the period $3,113 $2,843 9 $8,931 $5,028 78  $3,236 $2,862 13 
Securitization adjustments 867 928  (7) 2,714 1,887 44  449 917  (51)
     
Managed total net revenue $3,980 $3,771 6 $11,645 $6,915 68  $3,685 $3,779  (2)
     
  
Provision for credit losses  
Reported data for the period(b)
 $966 $734 32 $2,396 $1,229 95 
Reported data for the period $567 $719  (21)
Securitization adjustments 867 928  (7) 2,714 1,887 44  449 917  (51)
     
Managed provision for credit losses(b)
 $1,833 $1,662 10 $5,110 $3,116 64 
Managed provision for credit losses $1,016 $1,636  (38)
     
  
Balance sheets — average balances
 
Balance sheet – average balances(a)
 
Total average assets  
Reported data for the period $77,204 $67,718 14 $74,263 $34,984 112  $78,437 $71,003 10 
Securitization adjustments 67,021 69,035  (3) 66,917 45,227 48  67,557 67,509 — 
     
Managed average assets $144,225 $136,753 5 $141,180 $80,211 76  $145,994 $138,512 5 
     
  
Credit quality statistics
 
Credit quality statistics(a)
 
Net charge-offs  
Reported net charge-offs data for the period $766 $670 14 $2,150 $1,199 79  $567 $673  (16)
Securitization adjustments 867 928  (7) 2,714 1,887 44  449 917  (51)
     
Managed net charge-offs $1,633 $1,598 2 $4,864 $3,086 58  $1,016 $1,590  (36)
(a) 
Includes CreditJPMorgan Chase uses the concept of “managed receivables” to evaluate the credit performance and overall performance of the underlying credit card loans, both sold and not sold; as the same borrower is continuing to use the credit card for ongoing charges, a borrower’s credit performance will affect both the receivables sold under SFAS 140 and those not sold. Thus, in its disclosures regarding managed receivables, JPMorgan Chase treats the sold receivables as if they were still on the balance sheet in order to disclose the credit performance (such as net charge-off rates) of the entire managed credit card portfolio. Managed results exclude the impact of credit card securitizations on Total net revenue, the Provision for credit losses, net charge-offs and loan receivables. Securitization does not change reported net income Other income and Net interestversus managed earnings; however, it does affect the classification of items on the Consolidated statements of income.
(b)
Third quarter 2005 includes a $100 million special provision related to Hurricane Katrina.
(c)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.

3025

 
COMMERCIAL BANKING
 
For a discussion of the business profile of CB, see pages 41–42page 4 of JPMorgan Chase’s 2004 Annual Report.this Form 10–Q. As previously announced, various wholesale banking clients, and the related income and balance sheet items, have been transferred between Commercial Banking, the Investment Bank and Treasury & Securities Services. As a result, prior period amounts have been reclassified to conform to the current year presentation. For additional information on these transfers, see page 13 of this Form 10–Q.
                         
Selected income statement data Three months ended September 30,  Nine months ended September 30, 
(in millions, except ratios) 2005  2004  Change  2005  2004(c)  Change 
 
Revenue
                        
Lending & deposit related fees $146  $162   (10)% $431  $294   47%
Asset management, administration and commissions  16   12   33   46   20   130 
Other income(a)
  93   51   82   255   106   141 
           
Noninterest revenue
  255   225   13   732   420   74 
Net interest income  654   608   8   1,927   1,069   80 
           
Total net revenue
  909   833   9   2,659   1,489   79 
                         
Provision for credit losses(b)
  (46)  14   NM   90   20   350 
                         
Noninterest expense
                        
Compensation expense  165   176   (6)  488   312   56 
Noncompensation expense  281   286   (2)  855   562   52 
Amortization of intangibles  15   18   (17)  49   18   172 
           
Total noninterest expense
  461   480   (4)  1,392   892   56 
           
Operating earnings before income tax expense
  494   339   46   1,177   577   104 
Income tax expense  193   124   56   459   223   106 
           
Operating earnings
 $301  $215   40  $718  $354   103 
           
                         
Financial ratios
                        
ROE  35%  25%      28%  29%    
ROA  2.12   1.53       1.72   1.58     
Overhead ratio  51   58       52   60     
 
The agreement to acquire The Bank of New York’s middle-market banking business will add approximately 2,000 clients, $2.9 billion of loans and $1.6 billion in deposits.
             
Selected income statement data Three months ended March 31,
(in millions, except ratios) 2006  2005  Change
 
Revenue
            
Lending & deposit related fees $142  $142   —%
Asset management, administration and commissions  15   14   7 
All other income(a)
  76   71   7 
     
Noninterest revenue
  233   227   3 
Net interest income
  667   600   11 
     
Total net revenue
  900   827   9 
             
Provision for credit losses  7   (6) NM 
             
Noninterest expense
            
Compensation expense  197   161   22 
Noncompensation expense  285   276   3 
Amortization of intangibles  16   17   (6)
     
Total noninterest expense
  498   454   10 
     
Income before income tax expense
  395   379   4 
Income tax expense  155   148   5 
     
Net income
 $240  $231   4 
     
             
Financial ratios
            
ROE  18%  28%    
ROA  1.78   1.83     
Overhead ratio  55   55     
 
(a) 
IB-related and commercial card revenues are included in OtherAll other income.
(b)
Third quarter 2005 includes a $35 million special provision related to Hurricane Katrina.
(c)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
Quarterly results
Operating earnings were $301Net income was $240 million, up $86by $9 million, or 40%4%, from the prior year. Results reflected a specialThe increase from the prior year was the result of growth in net interest income offset partially by incremental expense from the adoption of SFAS 123R and an increase in provision for credit losses of $35 million, attributable to Hurricane Katrina. Excluding the impact of the special provision, earnings would have been $323 million, up $108 million, or 50%. This increase was due to a lower provision for credit losses, growth in revenue and a decline in expenses.losses.
Net revenue was $909$900 million, up $76by $73 million, or 9%, from the prior year. Net interest income was $654$667 million, up $46by $67 million, or 8%11%, due to higherwider spreads and volumehigher volumes related to liability balances and increased loan balances, partially offset by lowernarrower loan spreads.spreads reflecting continuing competitive pressure. Noninterest revenue was $255$233 million, up $30by $6 million, or 13%3%, primarily reflecting growth in investment banking revenue, partially offset by lower service charges on deposits.from the prior year.
Each business within Commercial Banking showedgrew revenue growth over the prior year. Middle Market Banking revenue was $592$623 million, an increase of $41$53 million, or 7%9%, driven by increased liability spreads and higher liability and loan balances. Corporate Banking revenue of $140 million increased by $31 million, or 28%,primarily due to growth inhigher treasury services and investment banking revenuerevenue. Mid-Corporate Banking and wider spreads on higher liability balances. Real Estate revenue was $143 million, up $20 million, or 16%revenues increased 11% and 7%, respectively, due primarily reflecting increased liability balances and wider spreads.to an increase in treasury services revenue.
Provision for credit losses was $7 million, compared with a net benefit of $46 million, an improvement from both the prior year and prior quarter of $60 million and $188 million, respectively. Excluding the special provision of $35 million related to Hurricane Katrina, the provision for credit losses would have been a net benefit of $81 million, compared with a provision of $14$6 million in the prior year and $142year.
Noninterest expense was $498 million, in the prior quarter. The positive variance from the prior periods was the result of improved underlying credit quality, particularly in Middle Market. In addition, continued management of the portfolio led to a decline in nonperforming loans of $210up by $44 million, or 36%10%, from the prior year and $65year. The increase was due primarily to incremental expense of $29 million or 15%, from the prior quarter.
Noninterest expense was $461 million, down $19 million, or 4%, from the prior year, primarily due to lower compensation costs. Partially offsetting this benefit were increased unit costs for Treasury Services products.adoption of SFAS 123R.

3126

Year-to-date results
Operating earnings of $718 million were up $364 million from the prior year, primarily due to the Merger.
             
Selected metrics Three months ended March 31,
(in millions, except ratio and headcount data) 2006  2005  Change
 
Revenue by product:
            
Lending $319  $292   9%
Treasury services  550   497   11 
Investment banking  40   39   3 
Other  (9)  (1) NM 
     
Total Commercial Banking revenue  900   827   9 
     
             
IB revenues, gross
 $114  $107   7 
     
             
Revenue by business:
            
Middle Market Banking $623  $570   9 
Mid-Corporate Banking  137   123   11 
Real Estate  105   98   7 
Other  35   36   (3)
     
Total Commercial Banking revenue  900   827   9 
     
Selected average balances
            
Total assets $54,771  $51,135   7 
Loans and leases  50,836   46,599   9 
Liability balances(a)
  70,763   65,380   8 
Equity  5,500   3,400   62 
             
Average loans by business:            
Middle market banking $31,861  $30,243   5 
Mid-corporate banking  7,577   5,799   31 
Real estate  7,436   6,937   7 
Other  3,962   3,620   9 
     
Total Commercial Banking loans  50,836   46,599   9 
     
             
Headcount
  4,310   4,464   (3)
             
Credit data and quality statistics:
            
Net charge-offs $(7) $2  NM 
Nonperforming loans  202   433   (53)
Allowance for loan losses  1,415   1,312   8 
Allowance for lending-related commitments  145   170   (15)
             
Net charge-off (recovery) rate  (0.06)%  0.02%    
Allowance for loan losses to average loans  2.78   2.82     
Allowance for loan losses to nonperforming loans  700   303     
Nonperforming loans to average loans  0.40   0.93     
 
Net revenue of $2.7 billion increased by $1.2 billion, or 79%, primarily as a result of the Merger. In addition to the increase from the Merger, net interest income was $1.9 billion, up $858 million, driven by wider spreads on liability balances and growth in liability and loan balances, partially offset by narrower loan spreads. Noninterest revenue of $732 million was negatively affected by lower services charges on deposits.
Each business within Commercial Banking showed revenue growth over the prior year, primarily due to the Merger. Middle Market revenue was $1.8 billion, an increase of $830 million over the prior year; Corporate Banking revenue was $401 million, an increase of $176 million; and Real Estate revenue was $393 million, up $158 million. In addition to the Merger, revenue was higher for each business due to higher spreads and volume related to liability balances and higher investment banking revenue, partially offset by lower loan spreads.
Provision for credit losses of $90 million increased by $70 million, primarily due to refinements in the data used to estimate the prior quarter’s allowance for credit losses and the special provision related to Hurricane Katrina recorded in the current quarter, partially offset by improved underlying credit quality and continued management of the portfolio. The credit quality of the portfolio remains strong with net charge-offs of $5 million, down $11 million from the prior year, and nonperforming loans of $369 million, down $210 million.
Noninterest expense of $1.4 billion increased by $500 million, or 56%, primarily due to the Merger and to increased unit costs for Treasury Services products.
                         
Selected metrics(a) Three months ended September 30,  Nine months ended September 30, 
(in millions, except headcount and ratio data) 2005  2004  Change  2005  2004(c)  Change 
 
Revenue by product:
                        
Lending $265  $314   (16)% $819  $484   69%
Treasury services  582   499   17   1,682   939   79 
Investment banking  53   24   121   155   59   163 
Other  9   (4)  NM   3   7   (57)
           
Total Commercial Banking revenue $909  $833   9  $2,659  $1,489   79 
           
                         
Revenue by business:
                        
Middle market $592  $551   7  $1,758  $928   89 
Corporate banking  140   109   28   401   225   78 
Real estate  143   123   16   393   235   67 
Other  34   50   (32)  107   101   6 
           
Total Commercial Banking revenue $909  $833   9  $2,659  $1,489   79 
           
Selected balance sheet data (average)
                        
Total assets $56,265  $55,957   1  $55,774  $29,921   86 
Loans and leases  51,756   50,324   3   50,976   26,356   93 
Liability balances(b)
  72,699   66,944   9   72,274   47,271   53 
Equity  3,400   3,400   —   3,400   1,654   106 
                         
Memo:
                        
Loans by business:                        
Middle market $31,362  $29,307   7  $30,880  $13,265   133 
Corporate banking  6,421   6,087   5   6,152   3,757   64 
Real estate  10,433   11,646   (10)  10,316   6,547   58 
Other  3,540   3,284   8   3,628   2,787   30 
           
Total Commercial Banking loans $51,756  $50,324   3  $50,976  $26,356   93 
                         
Headcount
  4,478   4,595   (3)  4,478   4,595   (3)
                         
Credit data and quality statistics
                        
Net charge-offs (recoveries) $6  $(13)  NM  $5  $16   (69)
Nonperforming loans  369   579   (36)  369   579   (36)
Allowance for loan losses  1,423   1,350   5   1,423   1,350   5 
Allowance for lending-related commitments  161   164   (2)  161   164   (2)
                         
Net charge-off (recovery) rate  0.05%  (0.10)%      0.01%  0.08%    
Allowance for loan losses to average loans  2.75   2.68       2.79   5.12     
Allowance for loan losses to nonperforming loans  386   233       386   233     
Nonperforming loans to average loans  0.71   1.15       0.72   2.20     
 
(a)
For a discussion of selected line of business metrics, see page 94 of this Form 10–Q.
(b) 
Liability balances include deposits and deposits that are swept to on-balance sheet liabilities.
(c)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.

3227

 
TREASURY & SECURITIES SERVICES
 
For a discussion of the business profile of TSS, see pages 43–44page 5 of JPMorgan Chase’s 2004 Annual Report.this Form 10–Q. TSS, as previously announced, reorganized by combining the Investor Services and Institutional Trust Services businesses into a single business called WSS. In 2006, various wholesale banking clients, and the related revenue and expense, have been transferred among CB, IB and TSS. As a result, prior period amounts have been reclassified to conform to the current year presentation. TSS firmwide disclosures have also been adjusted to reflect a refined set of TSS products and a revised split of liability balances and lending-related revenue related to the client transfers described on page 13 of this Form 10–Q.
                                   
Selected income statement data Three months ended September 30, Nine months ended September 30,  Three months ended March 31,
(in millions, except ratios) 2005 2004 Change 2005 2004(c) Change  2006 2005 Change
Revenue
  
Lending & deposit related fees $178 $218  (18)% $545 $447  22% $182 $170  7%
Asset management, administration and commissions 733 600 22 2,161 1,815 19  774 692 12 
Other income 135 103 31 404 270 50 
All other income 149 121 23 
     
Noninterest revenue
 1,046 921 14 3,110 2,532 23  1,105 983 12 
Net interest income 510 418 22 1,516 912 66  572 515 11 
     
Total net revenue
 1,556 1,339 16 4,626 3,444 34  1,677 1,498 12 
  
Provision for credit losses  (1) — NM  (2) 4 NM   (4)  (3)  (33)
Credit reimbursement to IB(a)
  (38)  (43) 12  (114)  (47)  (143)  (30)  (38) 21 
  
Noninterest expense
  
Compensation expense 533 472 13 1,559 1,158 35  601 504 19 
Noncompensation expense 546 654  (17) 1,720 1,748  (2) 529 534  (1)
Amortization of intangibles 28 30  (7) 87 61 43  28 29  (3)
     
Total noninterest expense
 1,107 1,156  (4) 3,366 2,967 13  1,158 1,067 9 
    
Operating earnings before income tax expense
 412 140 194 1,148 426 169 
Income before income tax expense
 493 396 24 
Income tax expense 149 44 239 411 131 214  181 142 27 
     
Operating earnings
 $263 $96 174 $737 $295 150 
    
Net income
 $312 $254 23 
   
Financial ratios
  
ROE  55%  20%  52%  14%   44%  54% 
Overhead ratio 71 86 73 86  69 71 
Pre-tax margin ratio(b)
 26 10 25 12  29 26 
(a) 
TSS is charged a credit reimbursement related to certain exposures managed within the IB credit portfolio on behalf of clients shared with TSS. For a further discussion, see Credit reimbursement on page 2935 of the JPMorgan Chase 2004Chase’s 2005 Annual Report.
(b) 
Pre-tax margin represents operating earningsIncome before income taxestax expense divided by totalTotal net revenue, which is a comprehensive measure of pre-tax performance and is another basis by which TSS management evaluates its performance and that of its competitors. Pre-tax margin is an effective measure of TSS’ earnings, after all operating costs are taken into consideration.
(c)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
Quarterly results
Operating earnings were $263
Net income was a record $312 million, up $167by $58 million, from the prior year.or 23%. Earnings benefited from higher revenues due to business growth and wider spreads on average liability balances, partially offset by higher compensation expense resulting from business growth and increased average liability balances, and lower expenses. Prior-year results included a software-impairment chargeincremental expense from the adoption of $53 million (after-tax).SFAS 123R.
Net revenue of $1.6$1.7 billion was up $217by $179 million, or 16%, from the prior year.12%. Noninterest revenue was $1.0$1.1 billion, up $125by $122 million, or 14%12%. The improvement was due to an increase in assets under custody to $11.0$11.7 trillion, primarilywhich was driven by market value appreciation and new business;business. Also contributing to the improvement was the acquisition of Vastera;Vastera and growth in Fund Services, foreign exchange securities lending and wholesale card, revenues, all of which were driven primarily by broader producta combination of increased usage by existing customers. Partially offsetting this growth in noninterest revenue were lower service charges on deposits.clients and new business. Net interest income was $510$572 million, up $92by $57 million, from the prior year, primarily resulting from wider spreads on liability balances and an increase of 22% inhigher average liability balances, which increased 22% to $167$196 billion.
Treasury ServicesTS net revenue of $648$693 million grew by $19$59 million, or 3%, from the prior year. Investor Services9%. WSS net revenue of $536$984 million grew by $132$120 million, or 33%, and Institutional Trust Services net revenue of $372 million grew by $66 million, or 22%14%. TSS firmwide net revenue, which includes Treasury Services net revenue recorded in other lines of business, grew to $2.2$2.3 billion, up $299$237 million, or 16%12%. Treasury Services firmwide net revenue grew to $1.3 billion, up $101$117 million, or 8%10%.

33

Credit reimbursement to the Investment BankIB was $38$30 million, a decrease of $5 million from the prior year.$8 million. TSS is charged a credit reimbursement related to certain exposures managed within the Investment Bank credit portfolio on behalf of clients shared with TSS.
Noninterest expense was $1.1$1.2 billion, down $49up by $91 million, or 9%. The increase was due to higher compensation expense related to business growth, incremental expense of $25 million from the prior year. The reduction was primarily due to a significant software-impairment chargeadoption of $85 million in the prior year, lower allocations of Corporate segment expensesSFAS 123R, and increased product unit costs charged to other lines of business, primarily Commercial Banking. Partially offsetting these decreases was higher compensation expense, primarily related to new business growth and the Vastera acquisition.
Year-to-date results
Operating earnings were $737 million, an increase of $442 million, or 150%. Widening spreads on liability balances, business growth, average liability balance growth and the Merger were the primary drivers of revenue growth and more than offset the merger-related expense growth. Current period results included charges of $58 million (after-tax) to terminate a client contract. Results for the first nine months of 2004 included software-impairment charges of $95 million (after-tax) and a gain of $10 million (after-tax) on the sale of a business.
TSS net revenue of $4.6 billion increased $1.2 billion, or 34%. Net interest income grew to $1.5 billion, up $604 million, due to wider spreads on and growth in average liability balances, and the Merger. Noninterest revenue of $3.1 billion increased by $578 million, or 23%. This improvement was due to the Merger; an increase in assets under custody to $11.0 trillion, primarily driven by market value appreciation and new business; growth in securities lending; the acquisition of Vastera; and growth in wholesale cards and foreign exchange. Partially offsetting this growth were lower service charges on deposits and the absence, in the current period, of a gain on the sale of a business.
Treasury Services net revenue of $1.9 billion grew by $596 million, Investor Services net revenue of $1.6 billion grew by $333 million, and Institutional Trust Services net revenue of $1.1 billion grew by $253 million. TSS firmwide net revenue, which includes Treasury Services net revenue recorded in other lines of business, grew to $6.5 billion, up $2.0 billion, or 45%. Treasury Services firmwide net revenue grew to $3.9 billion, up $1.4 billion, or 59%.
Credit reimbursement to the Investment Bank was $114 million, an increase of $67 million, primarily as a result of the Merger. TSS is charged a credit reimbursement related to certain exposures managed within the Investment Bank credit portfolio on behalf of clients shared with TSS.
Noninterest expense of $3.4 billion was up $399 million, or 13%, due to the Merger, increased compensation expense resulting from new business growth and the Vastera acquisition, and charges of $93 million (pre-tax) to terminate a client contract. Partially offsetting these increases were lower allocations of Corporate segment expenses and increased product unit costs charged to other lines of business, primarily Commercial Banking. The prior year included software-impairment charges of $152 million (pre-tax).
                         
Selected metrics(a) Three months ended September 30,  Nine months ended September 30, 
(in millions, except headcount and where otherwise noted) 2005  2004  Change  2005  2004(k)  Change 
 
Revenue by business
                        
Treasury Services $648  $629   3% $1,948  $1,352   44%
Investor Services  536   404   33   1,588   1,255   27 
Institutional Trust Services  372   306   22   1,090   837   30 
           
Total net revenue
 $1,556  $1,339   16  $4,626  $3,444   34 
           
                         
Business metrics
                        
Assets under custody (in billions)(b)
 $10,991  $8,427   30  $10,991  $8,427   30 
Corporate trust securities under administration (in billions)(c)
  6,706   6,569   2   6,706   6,569   2 
                         
Number of:                        
US$ ACH transactions originated (in millions)  753   651   16   2,179   1,301   67 
Total US$ clearing volume (in thousands)  24,906   21,781   14   70,811   58,572   21 
International electronic funds transfer volume (in thousands)(d)(e)
  22,723   11,794   93   59,896   29,911   100 
Wholesale check volume (in millions)(e)
  952  NA  NM   2,953  NA  NM 
Wholesale cards issued (in thousands)(f)
  12,810   11,260   14   12,810   11,260   14 
Vastera.

3428

                         
Selected balance sheets (average)
                        
Total assets $26,798  $24,831   8  $26,755  $21,715   23 
Loans  10,328   8,457   22   10,126   7,131   42 
Liability balances(g)
  166,836   136,606   22   161,893   118,299   37 
Equity  1,900   1,900   —   1,900   2,761   (31)
                         
Headcount
  24,176   22,246   9   24,176   22,246   9 
                         
TSS Firmwide metrics
                        
Treasury Services firmwide revenue(h)
 $1,306  $1,205   8  $3,857  $2,427   59 
Treasury & Securities Services firmwide revenue(h)
  2,214   1,915   16   6,535   4,519   45 
Treasury Services firmwide overhead ratio(i)
  56%  59%      55%  63%    
Treasury & Securities Services firmwide overhead ratio(i)
  62   72       63   76     
Treasury Services firmwide liability balances(j)
 $140,079  $125,813   11  $137,325  $93,478   47 
Treasury & Securities Services firmwide liability balances(j)
  239,535   203,550   18   234,167   165,571   41 
 
The Firm has announced the exchange of a portion of the corporate trust business for the consumer, small-business and middle-market banking businesses of The Bank of New York. For a description of the transaction, see Other Business Events on page 5 of this Form 10–Q.
             
Selected metrics Three months ended March 31,
(in millions, except headcount, ratio data and where        
otherwise noted) 2006  2005  Change
 
Revenue by business
            
Treasury Services $693  $634   9%
Worldwide Securities Services  984   864   14 
     
Total net revenue
 $1,677  $1,498   12 
             
Business metrics
            
Assets under custody (in billions)(a)
 $11,737  $10,154   16 
Corporate trust securities under administration (in billions)(b)
  7,040   6,745   4 
Number of:            
US$ ACH transactions originated (in millions)  838   699   20 
Total US$ clearing volume (in thousands)  25,182   21,705   16 
International electronic funds transfer volume (in thousands)(c)
  33,741   17,159   97 
Wholesale check volume (in millions)  852   940   (9)
Wholesale cards issued (in thousands)(d)
  16,977   11,834   43 
Selected balance sheets (average)
            
Total assets $30,131  $29,534   2 
Loans  13,137   12,021   9 
Liability balances(e)
  196,255   160,906   22 
Equity  2,900   1,900   53 
             
Headcount
  25,924   23,076   12 
             
TSS firmwide metrics
            
Treasury Services firmwide revenue(f)
 $1,291  $1,174   10 
Treasury & Securities Services firmwide revenue(f)
  2,275   2,038   12 
Treasury Services firmwide overhead ratio(g)
  56%  59%    
Treasury & Securities Services firmwide overhead ratio(g)
  62   64     
Treasury Services firmwide liability balances (average)(h)
 $155,422  $133,770   16 
Treasury & Securities Services firmwide liability balances (average)(h)
  266,450   226,286   18 
 
(a) 
For a discussion of selected line of business metrics, see page 94 of this Form 10–Q.
(b)
Beginning March 31, 2005, assets under custody include an estimated $400 billion of Institutional Trust Services (“ITS”) assets under custody that have not been included previously. At September 30, 2005, an additional estimate ofapproximately $130 billion of ITS-related AUCTrust-related assets under custody (“AUC”) were included in the total amount. Approximately 6%5% of total assets under custody wereAUC are trust related.
(c)(b) 
Corporate trust securities under administration include debt held in trust on behalf of third parties and debt serviced as agent.
(d)(c) 
International electronic funds transfer includes non-US$ ACH and clearing volume.
(e)
Prior periods have been restated to conform to current period presentation.
(f)(d) 
Wholesale cards issued include domestic commercial card, stored value card, prepaid card, and government electronic benefit card products.
(g)(e) 
Liability balances include deposits and deposits swept to on-balance sheet liabilities.
TSS Firmwidefirmwide metrics
Treasury & Securities ServicesTSS firmwide metrics include certain TSS product revenues and liability balances reported in other lines of business for customers who are also customers of those lines of business. In order to capture the firmwide impact of Treasury Services (“TS”) and TSS products and revenues, management reviews firmwide metrics such as liability balances, revenues and overhead ratios in assessing financial performance for TSS. Firmwide metrics are necessary in order to understand the aggregate TSS business. Prior periods have been restated to reflect the impact of the client transfers described on page 13 of this Form 10–Q.
 (h)(f) 
Firmwide revenue includes TS revenue recorded in the Commercial Banking Consumer & Small Business(“CB”), Regional Banking and Asset & Wealth Management businesseslines of business (see below) and excludeexcludes FX revenues recorded in the IBInvestment Bank (“IB”) for TSS-related FX activity. TSS firmwide FX revenue, which includeincludes FX revenue recorded in TSS and FX revenue associated with TSS customers who are FX customers of the IB, was $96$118 million for the quarter ended September 30, 2005, and $282 million for the ninethree months ended September 30, 2005.March 31, 2006.
 
(i)(g) 
Overhead ratios have been calculated based onupon firmwide revenues and TSS and TS expenses, respectively, including those allocated to certain other lines of business. FX revenues and expenses recorded in the IB for TSS-related FX activity are not included in this ratio.
 
(j)(h) 
Firmwide liability balances include TS’TS liability balances recorded in certain other lines of business. Liability balances associated with TS customers who are also customers of the Commercial BankingCB line of business are not included in TS liability balances.
                         
  Three months ended September 30,  Nine months ended September 30, 
  2005  2004  Change  2005  2004(k)  Change 
 
Treasury Services revenue reported in Commercial Banking $582  $499   17% $1,682  $939   79%
Treasury Services revenue reported in other lines of business  76   77   (1)  227   136   67 
 
(k)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
             
  Three months ended March 31, 
(in millions) 2006  2005  Change
 
Treasury Services revenue reported in CB $550  $497   11%
Treasury Services revenue reported in other lines of business  48   43   12 
 

3529

 
ASSET & WEALTH MANAGEMENT
 
For a discussion of the business profile of AWM, see pages 45–4651–52 of JPMorgan Chase’s 20042005 Annual Report.
                                    
Selected income statement data Three months ended September 30, Nine months ended September 30,  Three months ended March 31,
(in millions, except ratios) 2005 2004 Change 2005 2004(c) Change  2006 2005 Change
Revenue
  
Lending & deposit related fees $7 $10  (30)% $22 $18  22%
Asset management, administration and commissions 1,065 859 24 3,034 2,188 39  $1,222 $975  25%
Other income 110 55 100 274 155 77 
All other income 116 104 12 
     
Noninterest revenue
 1,182 924 28 3,330 2,361 41  1,338 1,079 24 
Net interest income 267 269  (1) 823 508 62  246 282  (13)
     
Total net revenue
 1,449 1,193 21 4,153 2,869 45  1,584 1,361 16 
  
Provision for credit losses(a)
  (19) 1 NM  (46) 7 NM 
Provision for credit losses  (7)  (7) — 
  
Noninterest expense
  
Compensation expense 554 452 23 1,601 1,120 43  682 538 27 
Noncompensation expense 397 409  (3) 1,151 1,066 8  394 371 6 
Amortization of intangibles 25 23 9 75 28 168  22 25  (12)
     
Total noninterest expense
 976 884 10 2,827 2,214 28  1,098 934 18 
     
Operating earnings before income tax expense
 492 308 60 1,372 648 112 
Income before income tax expense
 493 434 14 
Income tax expense 177 111 59 498 230 117  180 158 14 
     
Operating earnings
 $315 $197 60 $874 $418 109 
Net income $313 $276 13 
     
  
Financial ratios
  
ROE  52%  33%  49%  13%   36%  47% 
Overhead ratio 67 74 68 77  69 69 
Pre-tax margin ratio(b)
 34 26 33 23 
Pre-tax margin ratio(a)
 31 32 
(a) 
Third quarter 2005 includes a $3 million special provision related to Hurricane Katrina.
(b)
Pre-tax margin represents Operating earningsIncome before income tax expense divided by Total net revenue, which is a comprehensive measure of pre-tax performance and is another basis by which AWM management evaluates its performance and that of its competitors. Pre-tax margin is an effective measure of AWM’s earnings, after all costs are taken into consideration.
(c)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
Quarterly results
Operating earnings were a record $315
Net income was $313 million, up $118by $37 million, or 60%13%, from the prior year. Performance was driven by increased revenues offset partially offset by a higher compensation expense.expense related to incremental expense from the adoption of SFAS 123R and higher performance-based compensation.
Net revenue was $1.4$1.6 billion, up $256by $223 million, or 21%16%, from the prior year. Noninterest revenue, principally fees and commissions, of $1.2$1.3 billion was up $258by $259 million, or 28%24%. This increase was due primarily due to the acquisition of a majority interest in Highbridge Capital Management in the fourth quarter of 2004 and net asset inflows, mainly in equity-related and liquidity products. Also contributing to the increase wereproducts; global equity market appreciationappreciation; and increased brokerage activity.higher placement and performance fees. Net interest income was $267$246 million, essentially unchangeddown by $36 million, or 13%, from the prior year, asprimarily due to narrower deposit spreads and the sale of BrownCo in the fourth-quarter of 2005, partially offset by higher deposit and loan balances and wider loan spreads werebalances.
Retail client segment revenue grew 28%, to $442 million, primarily due to net asset inflows, partially offset by lower deposit spreads.
the sale of BrownCo. Private Bank client segment revenue grew 10%5% from the prior year to $421$441 million, due to increased placement activity and Retail client segment revenue grew 42%, to $415 million.management fees, and higher deposit balances, partially offset by narrower deposit spreads. Institutional client segment revenue grew 34%35%, to $358$435 million, primarily due to the consolidation impact of Highbridge.net asset inflows and higher performance fees. Private Client Services client segment revenue grewdecreased 2%, to $255 million.
Assets under supervision were $1.2 trillion, up 15% from the prior year, and Assets under management were a record $828 billion, up 13%. The increases were primarily the result of market appreciation; net asset inflows primarily in equities and liquidity products; and the acquisition of a majority interest in Highbridge Capital Management. Custody, brokerage, administration and deposits were $325 billion, up 21%, primarily$266 million, due to market appreciationnarrower deposit and net inflows.loan spreads, partially offset by higher deposit and loan balances.
Provision for credit losses was a $19$7 million benefit, compared with a $1 million provision inflat from the prior year.
Noninterest expense of $976 million$1.1 billion was up $92by $164 million, or 10%18%, from the prior year. This increase was primarilydue to incremental expense of $71 million from the resultadoption of the acquisition of HighbridgeSFAS 123R, and higher performance-based incentives,compensation, partially offset by the benefitsale of expense efficiencies.BrownCo.

3630

Year-to-date results
Operating earnings of $874 million were up $456 million from the prior year, due to the Merger and increased revenue, partially offset by higher compensation expense.
Net revenue was $4.2 billion, up $1.3 billion, or 45%. Noninterest revenue, principally fees and commissions, of $3.3 billion was up $969 million, principally due to the Merger, the acquisition of a majority interest in Highbridge Capital Management, LLC in the fourth quarter of 2004, net asset inflows and global equity market appreciation. Net interest income of $823 million was up $315 million primarily due to the Merger, higher deposit and loan balances and wider loan spreads, partially offset by lower deposit spreads.
Private Bank client segment revenue of $1.3 billion increased by $125 million. Retail client revenue of $1.1 billion increased by $298 million. Institutional client segment revenue was up $367 million to $993 million, which includes the consolidation impact of Highbridge. Private Client Services client segment revenue grew by $494 million, to $784 million.
Provision for credit losses was a benefit of $46 million, compared with a charge of $7 million in the prior year, due to lower net charge-offs and refinements in the data used to estimate the allowance for credit losses.
Noninterest expense of $2.8 billion increased by $613 million, or 28%, reflecting the Merger, the acquisition of Highbridge and increased compensation expense primarily related to higher performance-based incentives.
                                    
Selected metrics(a) Three months ended September 30, Nine months ended September 30,  Three months ended March 31,
(in millions, except ratio, headcount and ranking data, and where otherwise noted) 2005 2004 Change 2005 2004(e) Change 
(in millions, except headcount and ranking       
data, and where otherwise noted) 2006 2005 Change 
Revenue by client segment
  
Retail $442 $346  28%
Private bank $421 $383  10% $1,252 $1,127  11% 441 422 5 
Retail 415 292 42 1,124 826 36 
Institutional 358 267 34 993 626 59  435 322 35 
Private client services 255 251 2 784 290 170  266 271  (2)
     
Total net revenue
 $1,449 $1,193 21 $4,153 $2,869 45  $1,584 $1,361 16 
    
 
Business metrics
  
Number of:  
Client advisors 1,417 1,334 6 1,417 1,334 6  1,439 1,390 4 
BrownCo average daily trades 28,357 23,969 18 28,126 29,714  (5)
Retirement plan services participants 1,293,000 874,000 48 1,293,000 874,000 48 
Retirement planning services participants 1,327,000 1,181,000 12 
  
Star rankings:(b)
 
% of customer assets in funds ranked 4 or better  44%  56%  (21)  44%  56%  (21)
% of customer assets in funds ranked 3 or better  77%  80%  (4)  77%  80%  (4)
Funds quartile ranking (1 year):(c)
 
% of AUM in 1stand 2nd quartiles
  62%  63%  (2)  62%  63%  (2)
% of customer assets in 4 & 5 Star Funds(a)
  54%  48% 13 
% of AUM in 1st and 2nd quartiles:(b)
 
1 year  72%  71% 1 
3 years  75%  73% 3 
5 years  75%  71% 6 
  
Selected balance sheet data (average)
 
Selected balance sheets data (average)
 
Total assets $42,427 $39,882 6 $41,391 $36,765 13  $41,012 $39,716 3 
Loans 26,850 25,408 6 26,595 20,061 33 
Deposits(d)
 41,453 38,940 6 41,421 28,743 44 
Loans(c)
 24,482 26,357  (7)
Deposits(c)(d)
 48,066 42,043 14 
Equity 2,400 2,400 — 2,400 4,406  (46) 3,500 2,400 46 
  
Headcount
 12,531 12,368 1 12,531 12,368 1  12,511 12,378 1 
  
Credit quality statistics
 
Net charge-offs $23 $6 283 $15 $67  (78)
Credit data and quality statistics
 
Net charge-offs (recoveries) $7 $(6) NM
Nonperforming loans 118 125  (6) 118 125  (6) 79 78 1 
Allowance for loan losses 148 241  (39) 148 241  (39) 119 214  (44)
Allowance for lending-related commitments 6 5 20 6 5 20  3 5  (40)
  
Net charge-off rate  0.34%  0.09%  0.08%  0.45% 
Net charge-off (recovery) rate  0.12%  (0.09)% 
Allowance for loan losses to average loans 0.55 0.95 0.56 1.20  0.49 0.81 
Allowance for loan losses to nonperforming loans 125 193 125 193  151 274 
Nonperforming loans to average loans 0.44 0.49 0.44 0.62  0.32 0.30 
(a)
For a discussion of selected line of business metrics, see page 94 of this Form 10–Q.
(b) 
Derived from Morningstar for the United States; Micropal for the United Kingdom, Luxembourg, Hong Kong and Taiwan; and Nomura for Japan.

37

(c)(b) 
Quartile rankings sourced from Lipper for the United States and Taiwan; Micropal for the United Kingdom, Luxembourg and Hong Kong; and Nomura for Japan.
(c)
The sale of BrownCo, which occurred on November 30, 2005, included $3.0 billion in both loans and deposits.
(d) 
Reflects the transfer in 2005 of certain consumer deposits from Retail Financial Services to Asset & Wealth Management.
(e)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
Assets under supervision
Assets under supervision (“AUS”) at September 30, 2005, were $1.2 trillion, up 15%10%, or $105 billion, from the prior year, andincluding a $33 billion reduction due to the sale of BrownCo. Assets under management (“AUM”) were $828$873 billion, up 13%.11%, or $83 billion, from the prior year. The increases resulted from global equity market appreciation; net asset inflows,increase was primarily in equities and liquidity products; and the acquisitionresult of a majority interest in Highbridge Capital Management, LLC. The Firm also has a 43% interest in American Century Companies, Inc., whose AUM totaled $100 billion and $89 billion at September 30, 2005 and 2004, respectively. Custody, brokerage, administration, and deposits were $325 billion, up 21%, due to market appreciation and net asset inflows.
         
ASSETS UNDER SUPERVISION(a)      
September 30, (in billions) 2005  2004 
 
Asset class
        
Liquidity $239  $210 
Fixed income  166   174 
Equities & balanced  351   298 
Alternatives  72   53 
 
Assets under management  828   735 
Custody/brokerage/administration/deposits  325   268 
 
Total Assets under supervision
 $1,153  $1,003 
 
         
Client segment
        
Institutional
        
Assets under management $479  $426 
Custody/brokerage/administration/deposits  4   4 
 
Assets under supervision  483   430 
Private bank
        
Assets under management  142   136 
Custody/brokerage/administration/deposits  167   143 
 
Assets under supervision  309   279 
Retail
        
Assets under management  155   122 
Custody/brokerage/administration/deposits  106   81 
 
Assets under supervision  261   203 
Private client services
        
Assets under management  52   51 
Custody/brokerage/administration/deposits  48   40 
 
Assets under supervision  100   91 
 
Total Assets under supervision
 $1,153  $1,003 
 
         
Geographic region
        
Americas
        
Assets under management $557  $531 
Custody/brokerage/administration/deposits  287   238 
 
Assets under supervision  844   769 
International
        
Assets under management  271   204 
Custody/brokerage/administration/deposits  38   30 
 
Assets under supervision  309   234 
 
Total Assets under supervision
 $1,153  $1,003 
 
         
Memo:
        
Mutual fund assets:
        
Liquidity $188  $163 
Fixed income  39   48 
Equity, balanced & alternatives  137   97 
 
Total mutual funds assets $364  $308 
 
inflows driven by retail flows from third-party distribution, primarily in equity-related products, and institutional flows in liquidity products. Custody, brokerage, administration and deposit balances were $324 billion, up $22 billion, after reflecting a $33 billion reduction from the sale of BrownCo.

3831

                 
  Three months ended September 30,  Nine months ended September 30, 
Assets under management rollforward 2005  2004  2005  2004(d) 
   
Beginning balance $783  $575  $791  $561 
Liquidity net asset flows  19   (9)  8   (13)
Fixed income net asset flows  (4)  (5)  (2)  (6)
Equity, balanced & alternative net asset flows  4   (2)  13   8 
Acquisitions(b)
  —   176   —   176 
Market/performance/other impacts(c)
  26   —   18   9 
 
Ending balance
 $828  $735  $828  $735 
 
                 
Custody/brokerage/administration/deposits rollforward
                
Beginning balance $310  $221  $315  $203 
Custody/brokerage/administration net asset flows  9   12   15   21 
Acquisitions(b)
  —   38   —   38 
Market/performance/other impacts(c)
  6   (3)  (5)  6 
 
Ending balance
 $325  $268  $325  $268 
 
                 
Assets under supervision rollforward
                
Beginning balance $1,093  $796  $1,106  $764 
Net asset flows  28   (4)  34   10 
Acquisitions(b)
  —   214   —   214 
Market/performance/other impacts(c)
  32   (3)  13   15 
 
Ending balance
 $1,153  $1,003  $1,153  $1,003 
 
         
ASSETS UNDER SUPERVISION(in billions)      
As of March 31, 2006  2005 
 
Assets by asset class
        
Liquidity $236  $228 
Fixed income  166   171 
Equities & balanced  397   326 
Alternatives  74   65 
 
Total Assets under management
  873   790 
Custody/brokerage/administration/deposits  324   302 
 
Total Assets under supervision
 $1,197  $1,092 
 
         
Assets by client segment
        
Institutional(a)
 $468  $462 
Private Bank  137   138 
Retail(a)
  214   138 
Private Client Services  54   52 
 
Total Assets under management
 $873  $790 
 
Institutional(a)
 $471  $467 
Private Bank  332   299 
Retail(a)
  291   232 
Private Client Services  103   94 
 
Total Assets under supervision
 $1,197  $1,092 
 
         
Assets by geographic region
        
U.S./Canada $564  $550 
International  309   240 
 
Total Assets under management
 $873  $790 
 
U.S./Canada $822  $792 
International  375   300 
 
Total Assets under supervision
 $1,197  $1,092 
 
         
Mutual fund assets by asset class
        
Liquidity $167  $175 
Fixed income  48   45 
Equity  189   106 
 
Total mutual fund assets
 $404  $326 
 
         
Assets under management rollforward        
Beginning balance, January 1 $847  $791 
Flows:        
Liquidity  (5)  (6)
Fixed income  —   4 
Equities, balanced and alternatives  13   1 
Market/performance/other impacts  18   — 
 
Ending balance
 $873  $790 
 
Assets under supervision rollforward
        
Beginning balance, January 1 $1,149  $1,106 
Net asset flows  12   6 
Market/performance/other impacts  36   (20)
 
Ending balance
 $1,197  $1,092 
 
(a) 
ExcludesDuring the first quarter of 2006, assets under management of American Century.
(b)
Reflects the Merger with Bank One in the third quarter of 2004 ($214 billion).
(c)
Includes AWM’s strategic decision to exit$22 billion from Retirement planning services has been reclassified from the Institutional Fiduciary businessclient segment to the Retail client segment in order to be consistent with the second quarter of 2005 ($12 billion).
(d)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.revenue by client segment reporting.

32

 
CORPORATE
 
For a discussion of the business profile of Corporate, see pages 47-4853–54 of JPMorgan Chase’s 20042005 Annual Report. For additional information regarding enhanced disclosures related to the Corporate segment, refer to page 13 of this Form 10–Q.
                                    
Selected income statement data Three months ended September 30, Nine months ended September 30,  Three months ended March 31,
(in millions) 2005 2004 Change 2005(b) 2004(c) Change  2006 2005 Change 
Revenue
  
Securities/private equity gains (losses) $274 $347  (21)% $454 $1,202  (62)%
Other income  (20) 131 NM 115 277  (58)
Principal transactions $196 $743  (74)%
Securities (losses)  (158)  (902) 82 
All other income 101 73 38 
     
Noninterest revenue
 254 478  (47) 569 1,479  (62) 139  (86) NM 
Net interest income  (645)  (536)  (20)  (2,085)  (559)  (273)  (545)  (673) 19 
     
Total net revenue
  (391)  (58) NM  (1,516) 920 NM   (406)  (759) 47 
  
Provision for credit losses(a)
 13  (1) NM 10  (110) NM 
Provision for credit losses —  (4) NM 
  
Noninterest expense
  
Compensation expense 740 786  (6) 2,286 1,764 30  685 774  (11)
Noncompensation expense 987 1,146  (14) 3,025 2,873 5 
Noncompensation expense(a)
 608 1,703  (64)
Merger costs 71 145  (51)
     
Subtotal 1,727 1,932  (11) 5,311 4,637 15  1,364 2,622  (48)
Net expenses allocated to other businesses  (1,345)  (1,426) 6  (4,017)  (3,796)  (6)  (1,038)  (1,142) 9 
     
Total noninterest expense
 382 506  (25) 1,294 841 54  326 1,480  (78)
     
Operating earnings before income tax expense
  (786)  (563)  (40)  (2,820) 189 NM 
 
Income before income tax expense  (732)  (2,235) 67 
Income tax expense (benefit)  (311)  (344) 10  (1,172)  (168) NM   (316)  (900) 65 
     
Operating earnings(loss)
 $(475) $(219)  (117) $(1,648) $357 NM 
Net income (loss)
 $(416) $(1,335) 69 
(a) 
ThirdIncludes litigation reserve charges of $900 million in the first quarter of 2005 includes a $12 million special provision relatedrelating to Hurricane Katrina.
(b)
the settlement of WorldCom class action litigation. In the first quarter of 2005, the Corporate sector’s and the Firm’s operating revenue and income tax expense have been restated2006, insurance recoveries relating to be presented on a tax-equivalent basis. Previously, only the business segments’ operating revenue and income tax expensecertain material litigation of $98 million were presented on a tax-equivalent basis, and the impact of the business segments’ tax-equivalent adjustments was eliminated in the Corporate sector. This restatement had no impact on the Corporate sector’s or the Firm’s operating earnings.recorded
(c)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results..

39

Quarterly results
Operating
Net loss was $475$416 million compared with a net loss of $219 million$1.3 billion in the prior year. In comparison to the prior year, Private Equity earnings were $103 million, down from $437 million; Treasury net loss was $270 million compared with a net loss of $828 million; and the net loss in Other Corporate was $249 million compared with a net loss of $944 million.
Net revenue was negative $391$406 million compared with negative $58$759 million in the prior year. Net interest income was negative $645$545 million compared with negative $536 million. The decline$673 million in the prior year. Treasury was driven primarily by repositioningthe primary driver of the Treasury portfolioimprovement, with net interest income of negative $278 million compared with negative $409 million in the prior periods.year. The benefit was due primarily to an improvement in Treasury’s net interest spread, offset partially by a reduction in the level of the available-for-sale securities portfolio. Noninterest revenue of $254was $139 million declined by $224compared with negative $86 million, primarily due to the absence of a one-time gain on the sale of an investment andreflecting lower Treasury securities portfolio losses of $43$158 million versus gainscompared with losses of $109$902 million in the prior year. This increase was offset partially offset by private equitylower Private Equity gains of $313$237 million an increasecompared with gains of $78$789 million fromin the prior year.
Noninterest expense was $382$326 million, down $124 million, or 25%,$1.2 billion from $1.5 billion in the prior year. Excluding in the current quarter, $71 million of merger costs and incremental expense of $57 million from the adoption of SFAS 123R, and excluding in the prior year a material litigation charge of $900 million, primarily related to WorldCom, and $145 million of merger costs, noninterest expense would have been down $237 million. The decrease in expense decline was primarily due to lower compensation, merger-related savings and other efficiencies.

33

Year-to-date results
Operating loss was $1.6 billion, down from earnings of $357 million in the prior year.
Net revenue was negative $1.5 billion, compared with $920 million in the prior year. Noninterest revenue of $569 million declined by $910 million and included securities losses in the Treasury portfolio of $955 million. These losses were the result of repositioning the portfolio to manage exposure to rising interest rates. Private equity gains were $1.4 billion, an increase of $479 million from the prior year.
Net interest income was negative $2.1 billion, compared with negative $559 million in the prior year. Actions and policies adopted in conjunction with the Merger and the repositioning of the Treasury portfolio were the main drivers of the decline.
Noninterest expense was $1.3 billion, up $453 million, or 54%, from the prior year, primarily due to the Merger, partially offset by merger-related savings, expense efficiencies and further refinements to certain cost allocation methodologies in order to provide consistency in reporting across business segments.
                         
Selected metrics Three months ended September 30,  Nine months ended September 30, 
(in millions, except headcount data) 2005  2004  Change  2005  2004(e)  Change 
 
Selected average balance sheets
                        
Short-term investments(a)
 $15,538  $26,432   (41)% $15,169  $13,025   16%
Investment portfolio(b)
  47,311   74,708   (37)  57,518   63,769   (10)
Goodwill(c)
  43,535   42,958   1   43,456   14,652   197 
Total assets  149,589   204,884   (27)  162,175   150,293   8 
                         
Headcount
  28,406   24,482   16   28,406   24,482   16 
                         
Treasury
                        
Securities gains (losses)(d)
 $(43) $109   NM  $(955) $270   NM 
Investment portfolio (average)  39,351   65,508   (40)  49,453   55,901   (12)
Investment portfolio (ending)  42,754   61,331   (30)  42,754   61,331   (30)
 
             
Selected metrics Three months ended March 31,
(in millions) 2006  2005  Change 
 
Net revenue
            
Private equity
 $204  $744   (73)%
Treasury  (464)  (1,344)  65 
Corporate other  (146)  (159)  8 
     
Total net revenue
 $(406) $(759)  47 
 
             
Net income (loss)
            
Private equity
 $103  $437   (76)
Treasury  (270)  (828)  67 
Corporate other(a)
  (205)  (854)  76 
Merger costs  (44)  (90)  51 
     
Total net income (loss)
 $(416) $(1,335)  69 
 
(a) 
Represents Federal funds sold, Securities borrowed, Trading assets – debt and equity instruments, and Trading assets – derivative receivables.See Footnote (a) on page 33.
             
Selected income statement and balance sheet data Three months ended March 31,
(in millions) 2006  2005  Change 
 
Treasury
            
Securities (losses)(a)
 $(158) $(902)  82%
Investment portfolio (average)  39,989   65,646   (39)
Investment portfolio (ending)  46,093   46,943   (2)
             
Private equity
            
Private equity gains (losses)
            
Realized gains $207  $633   (67)
Write-ups / (write-downs)  10   206   (95)
Mark-to-market gains (losses)  4   (89) NM
     
Total direct investments  221   750   (71)
Third-party fund investments  16   39   (59)
     
Total private equity gains(b)
 $237  $789   (70)
 
             
Private equity portfolio information         
Direct investments March 31, 2006  December 31, 2005  Change
 
Publicly – held securities
            
Carrying value $501  $479   5%
Cost  395   403   (2)
Quoted public value  677   683   (1)
             
Privately – held direct securities
            
Carrying value  5,077   5,028   1 
Cost  6,501   6,463   1 
             
Third-party fund investments
            
Carrying value  675   669   1 
Cost  1,000   1,003   — 
     
Total private equity portfolio – Carrying value
 $6,253  $6,176   1 
Total private equity portfolio – Cost
 $7,896  $7,869   — 
 
(b)
Represents investment securities and private equity investments.
(c)
Effective with the third quarter of 2004, all goodwill is allocated to the Corporate line of business. Prior to the third quarter of 2004, goodwill was allocated to the various lines of business.
(d)(a) 
Losses in the first quarterquarters of 2006 and 2005 were primarily due toreflect repositioning of the sale of $20 billion ofTreasury investment securities during the month of March 2005.portfolio. Excludes gains/losses on securities used to manage risk associated with MSRs.
(e)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.

40

                         
Selected income statement and balance sheet data – Private equity        
  Three months ended September 30,  Nine months ended September 30, 
(in millions) 2005  2004  Change  2005  2004(c)  Change 
 
Private equity gains (losses)
                        
Direct investments                        
Realized gains $430  $277   55% $1,618  $981   65%
Write-ups/(write-downs)  (71)  (31)  (129)  2   (81)  NM 
Mark-to-market (losses)  (64)  (27)  (137)  (306)  (3)  NM 
           
Total direct investments  295   219   35   1,314   897   46 
Third-party fund investments  18   16   13   88   26   238 
           
Total private equity gains (losses)
  313   235   33   1,402   923   52 
Other income  10   14   (29)  26   37   (30)
Net interest income  (51)  (89)  43   (157)  (201)  22 
           
Total net revenue  272   160   70   1,271   759   67 
Total noninterest expense  53   73   (27)  181   209   (13)
           
Operating earnings before income tax expense  219   87   152   1,090   550   98 
Income tax expense  78   27   189   390   187   109 
           
Operating earnings
 $141  $60   135  $700  $363   93 
 
             
Private equity portfolio information(a)         
Direct investments September 30, 2005  December 31, 2004  Change 
 
Publicly-held securities
            
Carrying value $563  $1,170   (52)%
Cost  451   744   (39)
Quoted public value  795   1,758   (55)
             
Privately-held direct securities
            
Carrying value  4,793   5,686   (16)
Cost  6,187   7,178   (14)
             
Third-party fund investments(b)
            
Carrying value  561   641   (12)
Cost  920   1,042   (12)
     
Total private equity portfolio
            
Carrying value $5,917  $7,497   (21)
Cost $7,558  $8,964   (16)
 
(a)
For further information on the Firm’s policies regarding the valuation of the private equity portfolio, see Note 9 on pages 98–100 of JPMorgan Chase’s 2004 Annual Report.
(b) 
Unfunded commitments to private third-party equity funds were $402 million and $563 million at September 30, 2005, and December 31, 2004, respectively.
(c)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.Included in Principal transactions.
The carrying value of the Private Equityprivate equity portfolio at September 30, 2005, was $5.9March 31, 2006, stands at $6.3 billion, a net decrease of $1.6 billiondown $936 million from DecemberMarch 31, 2004.2005. The decreaseportfolio decline was primarily the result ofdue to sales of investments, consistent with management’s intention to reduce over time the capital committed to private equity.activity.

4134

 
BALANCE SHEET ANALYSIS
 
              
Selected balance sheet data(in millions) September 30, 2005 December 31, 2004  March 31, 2006 December 31, 2005 
Assets
  
Cash and due from banks $33,036 $35,168  $36,903 $36,670 
Deposits with banks and Federal funds sold 19,804 28,958 
Securities purchased under resale agreements and Securities borrowed 181,790 141,504 
Trading assets — debt and equity instruments 250,171 222,832 
Trading assets — derivative receivables 54,389 65,982 
Deposits with banks 10,545 21,661 
Federal funds sold and securities purchased under resale agreements 153,755 133,981 
Securities borrowed 93,280 74,604 
Trading assets: 
Debt and equity instruments 259,275 248,590 
Derivative receivables 52,750 49,787 
Securities:  
Available-for-sale 68,613 94,402  67,054 47,523 
Held-to-maturity 84 110  72 77 
Loans, net of allowance for loan losses 413,284 394,794  424,806 412,058 
Other receivables 39,630 31,086  26,537 27,643 
Goodwill and other intangible assets 58,103 57,887  59,513 58,180 
All other assets 84,129 84,525  88,792 88,168 
Total assets $1,203,033 $1,157,248  $1,273,282 $1,198,942 
 
Liabilities
  
Deposits $535,123 $521,456  $584,465 $554,991 
Securities sold under repurchase agreements and securities lent 134,027 112,347 
Trading liabilities — debt and equity instruments 99,163 87,942 
Trading liabilities — derivative payables 53,329 63,265 
Federal funds purchased and securities sold under repurchase agreements 151,006 125,925 
Commercial paper and other borrowed funds 30,333 24,342 
Trading liabilities: 
Debt and equity instruments 104,160 94,157 
Derivative payables 55,938 51,773 
Long-term debt and capital debt securities 113,475 105,718  123,113 119,886 
Beneficial interests issued by consolidated VIEs 42,237 42,197 
All other liabilities 161,781 160,867  73,693 78,460 
Total liabilities 1,096,898 1,051,595  1,164,945 1,091,731 
Stockholders’ equity
 106,135 105,653  108,337 107,211 
Total liabilities and stockholders’ equity $1,203,033 $1,157,248  $1,273,282 $1,198,942 
Balance sheet overview
At September 30, 2005,March 31, 2006, the Firm’s total assets were $1.3 trillion, an increase of $74.3 billion, or 6%, from December 31, 2005. Growth was primarily in Federal funds sold and securities purchased under resale agreements, Securities borrowed, AFS securities, Trading assets – debt and equity instruments, and Loans.
At March 31, 2006, the Firm’s total liabilities were $1.2 trillion, an increase of $45.8$73.2 billion, or 4%7%, from December 31, 2004.2005. Growth was primarily in Federal funds purchased and securities sold under repurchase agreements, interest-bearing U.S. and Non-U.S. deposits, and debt and equity trading liabilities.

35

Federal funds sold and securities purchased under resale agreements and securities borrowed, wholesale loansFederal funds purchased and debt and equity trading assets, partially offset by declines in available-for-sale (“AFS”) securities, derivative receivables trading assets, and deposits with banks and federal funds sold.
At September 30, 2005, the Firm’s total liabilities were $1.1 trillion, an increase of $45.3 billion, or 4%, from December 31, 2004. Growth was primarily driven by securities sold under repurchase agreements
During the first quarter of 2006, the Firm’s liability growth outpaced growth on the asset side of the balance sheet resulting in an increase in short-term investments, specifically Federal funds sold and securities lent, deposits, debt and equity trading liabilities, and long-term debt and capital debt securities. This growth was partially offset by a decline in derivative payables trading liabilities.
Securities purchased under resale agreements and Securities sold under repurchase agreements
The increase in Securities purchased under resale agreements and Securities sold under repurchase agreements from December 31, 2004, was primarily due to growth in client-driven financing activities in North America and Europe.agreements.
Trading assets and liabilities – debt and equity instruments
The Firm’s debt and equity trading instruments consist primarily of fixed income securities (including government and corporate debt) and equity and convertible cash instruments used for both market-making and proprietary risk-taking activities. The increase over December 31, 2004,2005, was due primarily due to growth in client-driven market-making activities across interest rate, credit and equity markets, as well as an increase in proprietary trading activities.markets. For additional information, refer to Note 3 on page 7166 of this Form 10–Q.
Trading assets and liabilities – derivative receivables and payables
The Firm uses various interest rate, foreign exchange, equity, credit and commodity derivatives for market-making, proprietary risk-taking and risk managementrisk-management purposes. The declineincrease from December 31, 2004,2005, was due primarily due to the appreciation of the U.S. dollarincreased interest rate, equity and to a lesser extent, higher interest rates, partially offset bycommodity trading activity and rising commodity prices. For additional information, refer to Credit risk management and Note 3 on pages 49–5943–54 and 71,66, respectively, of this Form 10–Q.
Securities
The AFS portfolio declined $25.8increased by $19.5 billion from December 31, 2004,2005 year-end, primarily due to purchases in the Treasury investment securities sales as a result of management’s decision to reposition the investment portfolio to manage exposure to rising interest rates.portfolio. For additional information related to securities, refer to the Corporate segment discussion and to Note 8 on pages 73–7433–34 and 72, respectively, of this Form 10–Q.

42

Loans
The $18.4$12.9 billion increase in gross loans was due primarily to an increase of $16.5$14.7 billion in the wholesale portfolio. Theportfolio, mainly in the IB, reflecting an increase in wholesale loans was primarily from the IB, reflectingcapital markets activity, including leveraged financings and syndications and higher balances of loans held-for-sale (“HFS”),held-for-sale. The $1.8 billion decrease in consumer loans was primarily due to a decline of $7.0 billion in the credit card portfolio, partially offset by an increase of $6.0 billion in education loans. The decrease in the credit card portfolio was primarily due to the seasonal pattern and higher-than-normal customer payment rates of credit card receivables. The increase in education loans was the result of the purchase of Collegiate Funding Services. Management believes the higher-than-normal customer payment rates in Card Services may partially be related to securitization and syndication activities, and growth in the IB Credit Portfolio. Wholesale HFS loans were $17.9 billion as of September 30, 2005, compared with $7.7 billion as of December 31, 2004. For consumer loans, growth in consumer real estate and credit card loans from December 31, 2004, to September 30, 2005, was mostly offset by a decline in the auto portfolio.recently implemented new minimum payment rules. For a more detailed discussion of the loan portfolio and the Allowance for loan losses, refer to Credit risk management on pages 49–5943–54 of this Form 10–Q.
Goodwill and Other intangible assets
The $216 million$1.3 billion increase in Goodwill and Other intangible assets primarily resulted from the Cazenove joint venture; the Vastera and Neovest acquisitions; and higher MSRs due to growth in the resultservicing portfolio and an overall increase in the MSR valuation from improved market conditions, as well as the acquisition of business growth and favorable risk management results.Collegiate Funding Services. Partially offsetting the increase were declines from the amortization of purchased credit card relationships and core deposit intangibles. For additional information, see Note 14 on pages 81–8279–81 of this Form 10–Q.
Deposits
Deposits increased by 3%5% from December 31, 2004.2005. Retail deposits increased, reflecting growth from new account acquisitions and the ongoing expansion of the retail branch distribution network. Wholesale deposits were higher driven by growth in business volumes. For more information on deposits, refer to the RFS segment discussion and the Liquidity risk management discussion on pages 20–2717–22 and 47–48,42–43, respectively, of this Form 10–Q. For more information on liability balances, refer to the CB and TSS segment discussions on pages 31–3226–27 and 33–35,28–29, respectively, of this Form 10–Q.
Long-term debt and capital debt securities
Long-term debt and capital debt securities increased by $7.8$3.2 billion, or 7%3%, from December 31, 2004,2005, primarily due to net new issuances of long-term debt issuances.offset partially by a redemption of capital debt securities. The Firm took advantage of narrow credit spreads globally to satisfy long-term debt and capital debt securities needs in the first quarter of 2006. Consistent with its liquidity management policy, the Firm has raised funds at the parent holding company sufficient to cover its obligations and those of its nonbank subsidiaries that mature over the next 12 months. Large investor cash positions and increased foreign investor participation in the corporate markets allowed JPMorgan Chase to diversify further its funding sources across the global markets while lengthening maturities at historically attractive costs. For additional information on the Firm’s long-term debt activity, see the Liquidity risk management discussion on pages 47–4842–43 of this Form 10–Q.
Stockholders’ equity
Total stockholders’ equity increased $482 millionby $1.1 billion from year-end 2004,2005 to $106.1$108.3 billion at September 30, 2005.March 31, 2006. The increase was the result of net income for the first ninethree months of 2005 and2006, common stock issued under employee plans and the beneficial effect of changes in accounting principles. This increase was offset partially offset by payment of cash dividends, stock repurchases, and the redemption of $200$139 million of preferred stock.stock and net unrealized losses in Accumulated other comprehensive income. For a further discussion of capital, see the Capital management section that follows.

36

 
CAPITAL MANAGEMENT
 
The following discussion of JPMorgan Chase’s Capital Management highlights developments since December 31, 2004,2005, and should be read in conjunction with pages 50-5256–58 of JPMorgan Chase’s 20042005 Annual Report.
The Firm’s capital management framework is intended to ensure that there is capital sufficient to support the underlying risks of the Firm’s business activities, as measured by economic risk capital and to maintain “well-capitalized” status under regulatory requirements. In addition, the Firm holds capital above these requirements in amounts deemed appropriate to achieve management’s debt ratingregulatory and debt-rating objectives. The Firm’s capital framework is integrated into the process of assigning equity to the lines of business. The Firm may refine its methodology for assigning equity tobusiness is integrated into the lines of business as the merger integration process continues.Firm’s capital framework.
Line of Business Equitybusiness equity
Equity for a line of business represents the amount the Firm believes the business would require if it were operating independently, incorporating sufficient capital to address economic risk measures, regulatory capital requirements and capital levels for similarly rated peers. Return on equity is measured and internal targets for expected returns are established as a primarykey measure of a business segment’s performance.
For performance management purposes,Effective January 1, 2006, the Firm does not allocaterefined its methodology for allocating capital to the lines of business. As a result of this refinement, Retail Financial Services, Card Services, Commercial Banking, Treasury & Securities Services and Asset & Wealth Management have higher amounts of capital allocated to them, commencing in the first quarter of 2006, while the amount of capital allocated to the Investment Bank has remained unchanged. The revised methodology considers for each line of business, among other things, goodwill associated with such line of business’ acquisitions since the Merger. In management’s view, the revised methodology assigns responsibility to the lines of business because it believes thatto generate returns on the accounting-drivenamount of capital supporting acquisition-related goodwill. As part of this refinement in the capital allocation of goodwill could distort assessments of relative returns. In management’s view, this approach fosters better comparison of returns amongmethodology, the lines of business, as well as a better comparison of line of business returns with external peers. The Firm assignsassigned to the Corporate segment an amount of equity capital equal to the then currentthen-current book value of the Firm’s goodwill from and prior to the Corporate segment. The return on investedMerger. As prior periods have not been revised to reflect the new capital relatedallocations, capital allocated to the Firm’s goodwill assetsrespective lines of business for 2006 is managed withinnot comparable to prior periods and certain business metrics, such as ROE, are not comparable to the Corporate segment.current presentation. The Firm may revise its equity capital allocation methodology again in the future. In accordance with SFAS 142, the Firm allocates goodwill to the lines of business based onwill continue to perform the underlying fair values of the businesses and then performs the required goodwill impairment testing. For a further discussion of goodwill and impairment testing, see Critical accounting estimates and Note 1415 on pages 81–82 of this Form 10–Q,83 and Critical accounting estimates on page 79114–116, respectively, of JPMorgan Chase’s 20042005 Annual Report.
         
(in billions) Quarterly Averages
Line of business equity 1Q06  1Q05 
 
Investment Bank $20.0  $20.0 
Retail Financial Services  13.9   13.1 
Card Services  14.1   11.8 
Commercial Banking  5.5   3.4 
Treasury & Securities Services  2.9   1.9 
Asset & Wealth Management  3.5   2.4 
Corporate  47.3   52.7 
 
Total common stockholders’ equity $107.2  $105.3 
 

4337

The current methodology used to assign line of business equity is not comparable to equity assigned to the lines of business prior to July 1, 2004.
         
(in billions) Quarterly Averages
Line of business equity 3Q05  3Q04 
 
Investment Bank $20.0  $20.0 
Retail Financial Services  13.5   13.1 
Card Services  11.8   11.8 
Commercial Banking  3.4   3.4 
Treasury & Securities Services  1.9   1.9 
Asset & Wealth Management  2.4   2.4 
Corporate(a)
  52.5   51.8 
 
Total common stockholders’ equity $105.5  $104.4 
 
(a)
Third quarter of 2005 includes $43.5 billion of equity to offset goodwill and $9.0 billion of equity primarily related to Treasury, Private Equity and the Corporate Pension Plan.
Economic Risk Capitalrisk capital
JPMorgan Chase assesses its capital adequacy relative to the underlying risks ofunderlying the Firm’s business activities, utilizing internal risk-assessment methodologies. The Firm assigns economic capital based primarily on fiveupon four risk factors: credit risk, market risk operational risk and businessoperational risk for each business; andin addition, the Firm assigns capital based on private equity risk principally forto the Firm’sCorporate segment in connection with the segment’s private equity business.
                
(in billions) Quarterly Averages Quarterly Averages
Economic risk capital 3Q05 3Q04  1Q06 1Q05 
Credit risk $22.2 $24.1  $21.7 $23.1 
Market risk 10.3 9.3  10.0 8.7 
Operational risk 5.5 5.7  5.7 5.3 
Business risk 2.1 2.1 
Private equity risk 3.7 4.5  3.6 4.1 
Economic risk capital
 43.8 45.7  41.0 41.2 
Goodwill 43.5 43.0  43.8 43.3 
Other(a)
 18.2 15.7  22.4 20.8 
Total common stockholders’ equity $105.5 $104.4  $107.2 $105.3 
(a) 
Additional capital required to meet internal regulatory/regulatory and debt rating objectives.
Regulatory Capitalcapital
The Firm’s federal banking regulator, the Federal Reserve Board (“FRB”), establishes capital requirements, including well-capitalized standards for the consolidated financial holding company. The Office of the Comptroller of the Currency (“OCC”) establishes similar capital requirements and standards for the Firm’s national banks, including JPMorgan Chase Bank and Chase Bank USA, National Association.
In the first quarter of 2006, the federal banking regulatory agencies issued a final rule that makes permanent an interim rule issued in 2000 that provides regulatory capital relief for certain cash-collateralized securities borrowed transactions. The final rule, which became effective February 22, 2006, also broadens the types of transactions qualifying for regulatory capital relief under the interim rule. Adoption of the rule did not have a material effect on the Firm’s capital ratios.
On March 1, 2005, the FRB issued a final rule, which became effective April 11, 2005, that continues the inclusion of trust preferred securities in Tier 1 capital, subject to stricter quantitative limits and revised qualitative standards.standards, and broadens the definition of restricted core capital elements. The rule provides for a five-year transition period. As an internationally active bank holding company, JPMorgan Chase is subject to the rule’s limitation on restricted core capital elements, including trust preferred securities, to 15% of total core capital elements, net of goodwill less any associated deferred tax liability. At September 30, 2005,March 31, 2006, JPMorgan Chase’s restricted core capital elements were 16.3%15.7% of total core capital elements. JPMorgan Chase expects to be in compliance with the 15% limit by the March 31, 2009, implementation date.
On July 20, 2004, the federal banking regulatory agencies issued a final rule that excludes assets of asset-backed commercial paper programs that are consolidated as a result of FIN 46R from risk-weighted assets for purposes of computing Tier 1 and Total risk-based capital ratios. The final rule also requires that capital be held against short-term liquidity facilities supporting asset-backed commercial paper programs. The final rule became effective September 30, 2004. In addition, under the final rule, both short- and long-term liquidity facilities are subject to certain asset quality tests effective September 30, 2005. Adoption of the rule did not have a material effect on the capital ratios of the Firm.

4438

The following table sets forth certain regulatorypresents the risk-based capital ratios for JPMorgan Chase and its principal banksignificant banking subsidiaries as of September 30, 2005,at March 31, 2006, and December 31, 2004. At each of such dates, JPMorgan Chase maintained a well-capitalized position.2005:
                            
                             Risk- Adjusted Tier 1 Total Tier 1 
 Tier 1 Total Risk-weighted Adjusted
average		 Tier 1 Total Tier 1 Tier 1 Total weighted average capital capital leverage 
(in millions, except ratios) capital capital assets(c) assets(d) capital ratio capital ratio leverage ratio capital capital assets(c) assets(d) ratio ratio ratio 
September 30, 2005
 
March 31, 2006
 
JPMorgan Chase & Co.(a)
 $70,745 $98,254 $866,289 $1,143,449  8.2%  11.3%  6.2% $73,085 $103,800 $858,080 $1,195,231  8.5%  12.1%  6.1%
JPMorgan Chase Bank, N.A. 60,074 82,409 758,838 972,393 7.9 10.9 6.2  62,001 85,228 769,012 1,046,442 8.1 11.1 5.9 
Chase Bank USA, N.A. 9,414 11,679 67,336 71,865 14.0 17.3 13.1  9,196 11,280 60,940 58,440 15.1 18.5 15.7 
  
December 31, 2004
JPMorgan Chase & Co.(a)
 $68,621 $96,807 $791,373 $1,102,456  8.7%  12.2%  6.2%
December 31, 2005 
JPMorgan Chase & Co.(a)
 $72,474 $102,437 $850,643 $1,152,546  8.5%  12.0%  6.3%
JPMorgan Chase Bank, N.A. 55,489 78,478 670,295 922,877 8.3 11.7 6.0  61,050 84,227 750,397 995,095 8.1 11.2 6.1 
Chase Bank USA, N.A. 8,726 11,186 86,955 71,797 10.0 12.9 12.2  8,608 10,941 72,229 59,882 11.9 15.2 14.4 
  
Well capitalized ratios(b)
  6.0%  10.0%  5.0%(e)
Well-capitalized ratios(b)
  6.0%  10.0%  5.0%(e)
Minimum capital ratios(b)
 4.0 8.0  3.0(f) 4.0 8.0  3.0(f)
(a) 
AssetsAsset and capital amounts for JPMorgan Chase’s banking subsidiaries includereflect intercompany transactions, whereas the respective amounts for JPMorgan Chase reflect the elimination of intercompany transactions.
(b) 
As defined by the regulations issued by the FRB, Federal Deposit Insurance Corporation (“FDIC”),FDIC and OCC.
(c) 
Includes off–balance sheet risk-weighted assets in the amounts of $268.4$280.3 billion, $251.1$267.1 billion and $11.7$9.8 billion, respectively, at September 30, 2005,March 31, 2006, and $250.3$279.2 billion, $229.6$260.0 billion and $15.5 billion, respectively, at December 31, 2004.2005.
(d) 
Average adjusted assets for purposes of calculating the leverage ratio include total average assets adjusted for unrealized gains/losses on securities, less deductions for disallowed goodwill and other intangible assets, investments in subsidiaries and the total adjusted carrying value of nonfinancial equity investments that are subject to deductions from Tier 1 capital.
(e) 
Represents requirements for bank subsidiaries pursuant to regulations issued under the Federal Deposit Insurance Corporation Improvement Act. There is no Tier 1 leverage component in the definition of a well-capitalized bank holding company.
(f) 
The minimum Tier 1 leverage ratio for bank holding companies and banks is 3% at the Bank Holding Company level, and 3% or 4% at the Bank level asdepending on factors specified in regulations issued by the FRB and OCC.
Tier 1 capital was $70.7$73.1 billion at September 30, 2005,March 31, 2006, compared with $68.6$72.5 billion at December 31, 2004,2005, an increase of $2.1 billion.$611 million. The increase was due primarily due to net income of $5.8$3.1 billion $1.3and net issuances of common stock under employee plans of $903 million. Offsetting these increases were changes in equity net of other comprehensive income due to dividends declared of $1.2 billion and redemptions of additionalpreferred stock and common share repurchases totaling $1.4 billion, as well as the redemption of qualifying trust preferred securities and net common stock issued under employee plans of $1.3 billion. Offsetting these increases were dividends declared of $3.6 billion, common share repurchases of $2.4 billion, an increase in the deduction for goodwill of $352 millionand other nonqualifying intangibles. Additional information regarding the Firm’s capital ratios and the redemptionfederal regulatory capital standards to which it is subject is presented in Note 24 on pages 121–122 of $200 million of preferred stock.JPMorgan Chase’s 2005 Annual Report.
Dividends
The Firm’s common stock dividend policy reflects itsJPMorgan Chase’s earnings outlook, desired payout ratios, the need to maintain an adequate capital level and alternative investment opportunities. In the thirdfirst quarter of 2005,2006, JPMorgan Chase declared a quarterly cash dividend on its common stock of $0.34 per share, payable October 31, 2005,April 30, 2006, to stockholders of record at the close of business on OctoberApril 6, 2005.2006. The Firm has targetedcontinues to target a common stock dividend payout ratio of approximately 30%-40%30-40% of the Firm’s operating earningsnet income over time.
Stock repurchases
On July 20, 2004,March 21, 2006, the Board of Directors approved an initiala stock repurchase program inwhich authorizes the aggregaterepurchase of up to $8 billion of the Firm’s common shares. The new stock repurchase program replaces the Firm’s previous repurchase authorization. The amount of $6.0 billion. This amountauthorized includes shares to be repurchased to offset issuances under the Firm’s employee stock-based plans. The actual amount of shares repurchased will be subject to various factors, including market conditions; legal considerations affecting the amount and timing of repurchase activity; the Firm’s capital position (taking into account goodwill and intangibles); internal capital generation; and alternative potential investment opportunities. UnderThe repurchase program does not include specific price targets or time tables; may be executed through open market purchases or privately negotiated transactions or utilizing Rule 10b5-1 programs; and may be suspended at any time.
During the first quarter of 2006, under the stock repurchase program,programs then in effect, the Firm repurchased 14.4 million shares and 67.2a total of 31.8 million shares for $500 million and $2.4$1.3 billion at an average price per share of $34.61$40.54. Of the $1.3 billion of shares repurchased in the first quarter of 2006, $1.1 billion was repurchased under the original $6 billion stock repurchase program, and $35.84 for$143 million was repurchased under the three and nine months ended September 30,new $8 billion stock repurchase program. During the first quarter of 2005, respectively. Theunder the original $6 billion stock repurchase program, the Firm repurchased 3.536.0 million shares for $138 million$1.3 billion at an average price per share of $39.42 for the three months ended September 30, 2004. The Firm did not repurchase any shares of its common stock during the first half of 2004.$36.57. As of September 30, 2005, $2.9March 31, 2006, $7.9 billion of authorized repurchase capacity remains.
The Firm has determined that it may, from time to time, enter into written trading plansremained under Rule 10b5-1 of the Securities Exchange Act of 1934 to facilitate the repurchase of its commonnew stock in accordance with the repurchase program. A Rule 10b5-1 repurchase plan would allow the Firm to repurchase its shares during its internal trading black out periods when it would not otherwise be repurchasing its common stock. All purchases under a Rule 10b5-1 plan must be made according to a predefined plan that is established when the Firm is not aware of material non-public information. There is no assurance that the Firm will, in fact, enter into any Rule 10b5-1 program in respect of any “black out period.” Irrespective of entering into any Rule 10b5-1 program, the Firm intends to continue to purchase shares, without further announcement, pursuant to its authorized repurchase program.

39

For additional information regarding repurchases of the Firm’s equity securities, see Part II, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds, on page 97pages 94–95 of this Form 10–Q.

45

 
OFF-BALANCEOFF–BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS
 
Special-purpose entities
JPMorgan Chase is involved with several types of off-balanceoff–balance sheet arrangements, including special purpose entities (“SPEs”), lines of credit and loan commitments. The principal uses of SPEs are to obtain sources of liquidity for JPMorgan Chase and its clients by securitizing their respective financial assets, and to create other investment products for clients. These arrangements are an important part of the financial markets, providing market liquidity by facilitating investors’ access to specific portfolios of assets and risks. For example, SPEs are integral to the markets for mortgage-backed securities, commercial paper and other asset-backed securities.
JPMorgan Chase is involved with SPEs in three broad categories of transactions:categories: loan securitizations, multi-seller conduits and client intermediation. Capital is held, as deemed appropriate, against all SPE-related transactions and related exposures, such as derivative transactions and lending-related commitments. For a further discussion of SPEs and the Firm’s accounting for them, see Note 121 on pages 76–79 andpage 91, Note 13 on pages 79–80 of this Form 10–Q, and Off-balance sheet arrangements and contractual cash obligations on pages 52–53, Note 1 on page 88, Note 13 on pages 103–106108–111 and Note 14 on pages 106–109111–113 of JPMorgan Chase’s 20042005 Annual Report.
For certain liquidity commitments to SPEs, the Firm could be required to provide funding if the credit rating of JPMorgan Chase Bank were downgraded below specific levels, primarily P-1, A-1 and F1 for Moody’s, Standard & Poor’s and Fitch, respectively. The amount of these liquidity commitments was $74.3$73.8 billion and $79.4$71.3 billion at September 30, 2005,March 31, 2006, and December 31, 2004,2005, respectively. Alternatively, if JPMorgan Chase Bank were downgraded, the Firm could be replaced by another liquidity provider in lieu of providing funding under the liquidity commitment, or, in certain circumstances, could facilitate the sale or refinancing of the assets in the SPE in order to provide liquidity.
Of the $74.3its $73.8 billion ofin liquidity commitments to SPEs at September 30, 2005, $45.7March 31, 2006, $42.6 billion was included in the Firm’s total other unfunded commitments to extend credit and asset purchase agreements, included in the table below.following table. Of the $79.4$71.3 billion of liquidity commitments to SPEs at December 31, 2004, $47.72005, $38.9 billion was included in the Firm’s total other unfunded commitments to extend credit.credit and asset purchase agreements. As a result of the Firm’s consolidation of multi-seller conduits in accordance with FIN 46R, $28.6$31.2 billion of the September 30, 2005,these commitments wereare excluded from the table at March 31, 2006, compared with $32.4 billion at December 31, 2005, as the underlying assets of the SPEs have been included on the Firm’s Consolidated balance sheets; this comparessheets.
The Firm also has exposure to certain SPEs arising from derivative transactions; these transactions are recorded at fair value on the Firm’s Consolidated balance sheets with $31.7 billion of commitments that were excluded at December 31, 2004.changes in fair value (i.e., MTM gains and losses) recorded in Trading revenue. Such MTM gains and losses are not included in the revenue amounts reported in the table below.
The following table summarizes certain revenue information related to consolidated and nonconsolidated variable interest entities (“VIEs”) with which the Firm has significant involvement, and to qualifying SPEs (“QSPEs”). The revenue reported in the table below primarily represents servicing and credit fee income. For a further discussion of VIEs and QSPEs, see Note 1, Note 13 and Note 14, on page 88pages 91, 108–111 and 111–113, respectively, of JPMorgan Chase’s 20042005 Annual Report. The revenue reported in the table below primarily represents servicing and custodial fee income.
Revenue from VIEs and QSPEs
                         
  Three months ended September 30,  Nine months ended September 30,(b)
(in millions) VIEs(a)  QSPEs  Total  VIEs(a)  QSPEs  Total 
 
2005
 $57  $415  $472  $167  $1,207  $1,374 
2004  53   424   477   96   979   1,075 
 
             
  Three months ended March 31,
(in millions) VIEs  QSPEs  Total 
 
2006
 $54  $793  $847 
2005(a)  57   743   800 
 
(a) Prior period results have been restated to reflect current methodology.

40

Off–balance sheet lending-related financial instruments and guarantees
JPMorgan Chase utilizes lending-related financial instruments (e.g., commitments and guarantees) to meet the financing needs of its customers. The contractual amount of these financial instruments represents the maximum possible credit risk should the counterparty draw down the commitment or the Firm fulfill its obligation under the guarantee, and the counterparty subsequently fails to perform according to the terms of the contract. Most of these commitments and guarantees expire without a default occurring or without being drawn. As a result, the total contractual amount of these instruments is not, in the Firm’s view, representative of its actual future credit exposure or funding requirements. Further, certain commitments, primarily related to consumer financings, are cancelable upon notice at the option of the Firm. For a further discussion of lending-related commitments and guarantees and the Firm’s accounting for them, see Credit risk management on pages 63–72 and Note 27 on pages 124–125 of JPMorgan Chase’s 2005 Annual Report.
The following table presents off–balance sheet lending-related financial instruments and guarantees for the periods indicated:
                         
                      Dec. 31, 
  March 31, 2006 2005
By remaining maturity Under  1-3  3-5  Over       
(in millions) 1 year  years  years  5 years  Total  Total 
 
Lending-related
                        
Consumer(a)
 $608,498  $4,012  $3,776  $53,116  $669,402  $655,596 
Wholesale:                        
Other unfunded commitments to extend credit(b)(c)
  77,324   45,981   62,109   15,772   201,186   208,469 
Asset purchase agreements(d)
  14,072   13,943   5,804   1,002   34,821   31,095 
Standby letters of credit and guarantees(c)(e)
  27,176   18,992   31,028   5,417   82,613   77,199 
Other letters of credit(c)
  3,288   368   294   5   3,955   4,346 
 
Total wholesale  121,860   79,284   99,235   22,196   322,575   321,109 
 
Total lending-related $730,358  $83,296  $103,011  $75,312  $991,977  $976,705 
 
Other guarantees
                        
Securities lending guarantees(f)
 $283,111  $—  $—  $—  $283,111  $244,316 
Derivatives qualifying as guarantees(g)
  28,889   13,537   3,330   19,180   64,936   61,759 
 
(a) 
Includes VIE-related revenue (i.e., revenue associated with consolidated and significant interests in nonconsolidated VIEs).
(b)
Year-to-date 2004 results include three monthsCredit card lending-related commitments of the combined Firm’s results and six months of heritage JPMorgan Chase results.
The Firm also has exposure to certain SPEs arising from derivative transactions; these transactions are recorded at fair value on the Firm’s Consolidated balance sheets, with changes in fair value (i.e., mark-to-market (“MTM”) gains and losses) recorded in Trading revenue. Such MTM gains and losses are not included in the revenue amounts reported in the table above.
The accompanying table summarizes JPMorgan Chase’s off–balance sheet lending-related financial instruments by remaining maturity, at September 30, 2005.
                         
                      Dec. 31, 
Off–balance sheet lending-related financial instruments September 30, 2005  2004 
By remaining maturity Under  1–3  3–5  Over       
(in millions) 1 year  years  years  5 years  Total  Total 
 
Consumer $574,605  $3,478  $3,090  $51,137  $632,310  $601,196 
Wholesale:                        
Other unfunded commitments to extend credit(a)(b)
  91,809   65,273   62,762   16,098   235,942   225,152 
Standby letters of credit and guarantees(a)(c)
  28,033   18,379   23,444   4,007   73,863   78,084 
Other letters of credit(a)
  6,340   640   181   18   7,179   6,163 
 
Total wholesale  126,182   84,292   86,387   20,123   316,984   309,399 
 
Total off-balance sheet lending-related financial instruments
 $700,787  $87,770  $89,477  $71,260  $949,294  $910,595 
 
(a)
Represents contractual amount net of risk participations totaling $28.5$589 billion at September 30, 2005,March 31, 2006, and $26.4$579 billion at December 31, 2004.2005, which represent the total available credit to the Firm’s cardholders. The Firm has not experienced, and does not anticipate, that all of its cardholders will exercise their entire available lines of credit at the same point in time. The Firm can reduce or cancel a credit card commitment by providing the cardholder prior notice or, in some cases, without notice as permitted by law.
(b) 
Includes unused advised lines of credit totaling $24.9$28.4 billion at September 30, 2005,March 31, 2006, and $22.8$28.3 billion at December 31, 2004,2005, which are not legally binding. In regulatory filings with the FRB, unused advised lines are not reportable.
(c)
Represents contractual amount net of risk participations totaling $36.8 billion at March 31, 2006, and $29.3 billion at December 31, 2005.
(d)
The maturity is based upon the weighted average life of the underlying assets in the SPE, primarily multi-seller asset-backed commercial paper conduits.
(e) 
Includes unused commitments to issue standby letters of credit of $34.7$39.8 billion at September 30, 2005,March 31, 2006, and $38.4$37.5 billion at December 31, 2004.2005.
(f)
Collateral held by the Firm in support of securities lending indemnification agreements was $283 billion at March 31, 2006, and $245 billion at December 31, 2005.
(g)
Represents notional amounts of derivative guarantees. For a further discussion of guarantees, see Note 27 on pages 124–125 of JPMorgan Chase’s 2005 Annual Report.

46

 
RISK MANAGEMENT
 
Risk is an inherent part of JPMorgan Chase’s business activities. The Firm’s risk management framework and governance structure is intended to provide comprehensive controls and ongoing management of the major risks inherent in its major risks.business activities. In addition, this framework recognizes the diversity among the Firm’s core businesses, which helps reduce the impact of volatility in any particular area on the Firm’s operating results as a whole. There are seveneight major risk types identified in the business activities of the Firm: liquidity risk, credit risk, market risk, interest rate risk, operational risk, legal and reputationalreputation risk, fiduciary risk and principalprivate equity risk.
For a further discussion of these risks see pages 54–7660–80 of JPMorgan Chase’s 20042005 Annual Report.

41

��
LIQUIDITY RISK MANAGEMENT
 
The following discussion of JPMorgan Chase’s liquidity management framework highlights developments since December 31, 2004,2005, and should be read in conjunction with pages 55–5661–62 of JPMorgan Chase’s 20042005 Annual Report.
Liquidity risk arises from the general funding needs of the Firm’s activities and in the management of its assets and liabilities. JPMorgan Chase’s liquidity management framework is intended to maximize liquidity access and minimize funding costs. Through active liquidity management, the Firm seeks to preserve stable, reliable and cost-effective sources of funding. This enables the Firm to replace maturing obligations when due and fund assets at appropriate maturities and rates in all market environments.rates. To accomplish this task, management uses a variety of liquidity risk measures that take into consideration market conditions, prevailing interest rates, liquidity needs and the desired maturity profile of liabilities. JPMorgan Chase uses its funding to service debt obligations, pay dividends to its stockholders, support organic growth, fund acquisitions and repurchase its shares in the market or otherwise.
Funding
Sources of funds
Consistent with its liquidity management policy, the Firm has raised funds at the parent holding company sufficient to cover its obligations maturingand those of its nonbank subsidiaries that mature over the next 12 months. Long-term funding needs for the parent holding company over the next several quarters are expected to be consistent with prior periods.
As of September 30, 2005,March 31, 2006, the Firm’s liquidity position remainsremained strong based upon its liquidity metrics. JPMorgan Chase’s long-dated funding, including core deposits, exceeds illiquid assets, and the Firm believes its obligations can be met even if access to funding is impaired.
The diversity of the Firm’s funding sources enhances financial flexibility and limits dependence uponon any one source, thereby minimizing the cost of funds. AThe deposits held by the RFS, CB and TSS lines of business are a stable and consistent source of funding for JPMorgan Chase Bank is provided by its RFS, CB and TSS deposit base.Bank. As of September 30, 2005,March 31, 2006, total deposits for the Firm were $535$584 billion, which represents 65%represented 66% of the Firm’s funding liabilities. A significant portion of the Firm’s retail deposits are core“core” deposits, which are less sensitive to interest rate changes and therefore are considered more stable than market-based deposits. Core deposits include all U.S. deposits insured by the FDIC, up to the legal limit of $100,000 per depositor. Throughout the first nine monthsquarter of 2005,2006, core bank deposits remained at approximately the same level as at 2004the 2005 year-end. In addition to core retail deposits, the Firm benefits from substantial, geographically diverse corporate liability balances originated by TSS and CB through the normal course of business. These franchise-generated core liability balances are also a stable and consistent source of funding due to the nature of the businesses from which they are generated. For a further discussion of deposit and liability balance trends, see Business Segment Results and Balance Sheet Analysis on pages 15–4113 and 42–4335–36, respectively, of this Form 10–Q.
Additional sources of funds include a variety of both short- and long-term instruments, including federal funds purchased, commercial paper, bank notes, medium- and long-term debt, and capital debt securities. This funding is managed centrally, using regional expertise and local market access, to ensure active participation in the global financial markets while maintaining consistent global pricing. These markets serve as a cost-effective and diversified source of funds and are a critical component of the Firm’s liquidity management. Decisions concerning the timing and tenor of accessing these markets are based upon relative costs, general market conditions, prospective views of balance sheet growth and a targeted liquidity profile.
Finally, funding flexibility is provided by the Firm’s ability to access the repo and asset securitization markets. These markets are evaluated on an ongoing basis to achieve an appropriate balance of secured and unsecured funding. The ability to securitize loans, and the associated gains on those securitizations, are principally dependent upon the credit quality and yields of the assets securitized and are generally not dependent upon the credit ratings of the issuing entity. Transactions between the Firm and its securitization structures are reflected in JPMorgan Chase’s consolidated financial statements; these relationships include retained interests in securitization trusts, liquidity facilities and derivative transactions. For further details, see Off–balance sheet arrangements and contractual cash obligations and Notes 12 and 1319 on pages 76–7940–41, 74–77 and 79–80,83–84, respectively, of this Form 10–Q.

4742

Issuance
Corporate credit spreads tightened modestly in the thirdfirst quarter of 2005 due to strong2006 across most industries and sectors. On an historical basis, credit spreads remain near historic tight levels as corporate profits are generally healthy and investor appetite and good primary and secondary market liquidity. Higher energy costs put pressure on corporate market conditionsdemand remains strong. JPMorgan Chase’s credit spreads performed in August; however, sentiment improved as energy prices retreated in September.line with peer spreads.
During the thirdfirst quarter of 2005,2006, JPMorgan Chase issued approximately $8.9$12.4 billion of long-term debt and capital debt securities. These issuances were offset partially offset by $8.2$9.3 billion of long-term debt and capital debt securities that matured or were redeemed.redeemed and by the Firm’s redemption of $139 million of preferred stock. In addition, during the thirdfirst quarter of 20052006 the Firm securitized approximately $4.8$3.2 billion of residential mortgage loans and $4.8approximately $4.5 billion of credit card loans, resulting in pre-tax gains on securitizations of $2$89 million and $32$30 million, respectively. During the first nine months of 2005, JPMorgan Chase issued approximately $32.0 billion of long-term debt and capital securities. These issuances were partially offset by $22.2 billion of long-term debt and capital securities that matured or were redeemed. In addition,The Firm did not securitize any automobile loans during the first nine monthsquarter of 2005, the Firm securitized approximately $11.1 billion of residential mortgage loans, $10.1 billion of credit card loans and $2.3 billion of automobile loans, resulting in pre-tax gains on securitizations of $22 million, $67 million and $10 million, respectively.2006. For a further discussion of loan securitizations, see Note 12 on pages 76–7974–77 of this Form 10–Q.
Credit ratings
The credit ratings of JPMorgan Chase’s parent holding company and each of its significant banking subsidiaries were, as of September 30, 2005,March 31, 2006, as follows:
             
  Short-term debt Senior long-term debt
  Moody’sMoody's S&P Fitch Moody’sMoody's S&P Fitch
 
JPMorgan Chase & Co. P-1 A-1 F1 Aa3 A+ A+
JPMorgan Chase Bank, N.A. P-1 A-1+ F1+ Aa2 AA- A+
Chase Bank USA, N.A. P-1 A-1+ F1+ Aa2 AA- A+
The Firm’s principal insurance subsidiaries had the following financial strength ratings as of September 30, 2005:
Moody’sS&PA.M. Best
Chase Insurance Life and Annuity CompanyA2A+A
Chase Insurance Life CompanyA2A+A
 
The cost and availability of unsecured financing are influenced by credit ratings. A reduction in these ratings could adversely affect the Firm’s access to liquidity sources, increase the cost of funds, trigger additional collateral requirements and decrease the number of investors and counterparties willing to lend. Critical factors in maintaining high credit ratings include a stable and diverse earnings stream, strong capital ratios, strong credit quality and risk management controls, diverse funding sources and strong liquidity monitoring procedures.
If the Firm’s ratings were downgraded by one notch, the Firm estimates the incremental cost of funds and the potential loss of funding to be negligible. Additionally, the Firm estimates the additional funding requirements for VIEs and other third-party commitments would not be material. In the current environment, the Firm believes a downgrade is unlikely. For additional information on the impact of a credit ratings downgrade on the funding requirements for VIEs, and on derivatives and collateral agreements, see Off–balance Sheet ArrangementsSpecial-purpose entities on page 46pages 40–41 and Ratings profile of derivative receivables mark-to-market (“MTM”) on page 5448, of this Form 10–Q.

48

 
CREDIT RISK MANAGEMENT
 
The following discussion of JPMorgan Chase’s credit portfolio as of September 30, 2005,March 31, 2006, highlights developments since December 31, 2004,2005, and should be read in conjunction with pages 57–69,63–74 and page 7781, and Notes 11, 12,11,12, 27, and 28 of JPMorgan Chase’s 20042005 Annual Report.
The Firm assesses its consumer credit exposure on a managed basis, which includes credit card securitizations. For a reconciliation of the Provision for credit losses on a reported basis to operating, or managed basis, see pages 11–1412 of this Form 10–Q.

43

 
CREDIT PORTFOLIO
 
The following table presents JPMorgan Chase’s credit portfolio as of September 30, 2005,March 31, 2006, and December 31, 2004.2005. Total wholesale credit exposure (Investment Bank, Commercial Banking, Treasury & Securities Services and Asset & Wealth Management) at September 30, 2005,March 31, 2006, increased $9.6by $29.5 billion from December 31, 2004, while total2005, reflecting an increase of $18.4 billion and $11.1 billion in the wholesale and consumer credit exposure (Retail Financial Services and Card Services) increased $31.3 billion from year-end 2004.portfolios, respectively. In the table below, reported loans include all HFS loans, which are carried at the lower of cost or market and declinesfair value with changes in value are recorded in Other income. However, these HFS loans are excluded from the average loan balances used for the net charge-off rate calculations.
Wholesale and consumer credit portfolio
                 
  Credit exposure  Nonperforming assets(n)(o)
(in millions, except ratios) Sept. 30, 2005  Dec. 31, 2004  Sept. 30, 2005  Dec. 31, 2004 
 
Wholesale
                
Loans — reported(a)
 $151,591  $135,067  $1,192  $1,574 
Derivative receivables(b)
  54,389   65,982   231   241 
Interests in purchased receivables  28,766   31,722   —   — 
 
Total wholesale credit-related assets  234,746   232,771   1,423   1,815 
Lending-related commitments(c)(d)
  316,984   309,399   NA   NA 
 
Total wholesale credit exposure $551,730  $542,170  $1,423  $1,815 
 
                 
Consumer
                
Loans — reported(e)
 $268,913  $267,047  $1,212(p) $1,169(p)
Loans — securitized(e)(f)
  69,095   70,795   —   — 
 
Total managed consumer loans  338,008   337,842   1,212   1,169 
Lending-related commitments  632,310   601,196   NA   NA 
 
Total consumer credit exposure $970,318  $939,038  $1,212  $1,169 
 
Total credit portfolio
                
Loans — reported(g)
 $420,504  $402,114  $2,404  $2,743 
Loans — securitized  69,095   70,795   —   — 
 
Total managed loans  489,599   472,909   2,404   2,743 
Derivative receivables  54,389   65,982   231   241 
Interests in purchased receivables  28,766   31,722   —   — 
 
Total managed credit-related assets  572,754   570,613   2,635   2,984 
Wholesale lending-related commitments  316,984   309,399   NA   NA 
Consumer lending-related commitments  632,310   601,196   NA   NA 
Assets acquired in loan satisfactions(h)
  NA   NA   204  247
 
Total credit portfolio $1,522,048  $1,481,208  $2,839  $3,231 
 
Purchased held-for-sale wholesale loans(i)
 $358  $351  $358  $351 
Credit derivative hedges notional(j)
  (32,131)  (37,200)  (17)  (15)
Collateral held against derivatives  (7,236)  (9,301)  NA   NA 
 

49

                                 
  Three months ended September 30,  Nine months ended September 30,
  Net charge-offs  Net charge-off rate  Net charge-offs  Net charge-off rate
(in millions, except ratios) 2005  2004  2005  2004  2005  2004(q)  2005  2004(q)
 
Wholesale(k)
                                
Loans — reported(l)
 $(40) $(24)  (0.12)%  (0.08)% $(101) $118   (0.11)%  0.17%
 
Consumer
                                
Loans — reported(m)
 $910  $889   1.43%  1.45% $2,560  $1,583   1.37%  1.28%
Loans — securitized  867   928   4.99   5.20   2,714   1,887   5.27   5.41 
 
Total managed consumer loans  1,777   1,817   2.20   2.30   5,274   3,470   2.21   2.18 
Lending-related commitments  NA   NA   NA   NA   NA   NA   NA   NA 
 
Total consumer credit exposure $1,777  $1,817   2.20%  2.30% $5,274  $3,470   2.21%  2.18%
 
Total credit portfolio
                                
Loans — reported $870  $865   0.90%  0.93% $2,459  $1,701   0.87%  0.89%
Loans — securitized  867   928   4.99   5.20   2,714   1,887   5.27   5.41 
 
Total managed loans $1,737  $1,793   1.53%  1.62% $5,173  $3,588   1.55%  1.58%
 
                                 
                  Three months ended March 31,
          Nonperforming          Average annual 
  Credit exposure assets(h) Net charge-offs net charge-off rate(j)
  Mar. 31, Dec. 31, Mar. 31, Dec. 31,             
(in millions, except ratios) 2006 2005 2006 2005 2006 2005 2006 2005
 
Total credit portfolio
                                
Loans – reported(a)
 $432,081  $419,148  $2,098(i) $2,343(i) $668  $816   0.69%  0.88%
Loans – securitized(b)
  69,580   70,527   —   —   449   917   2.62   5.36 
 
Total managed loans(c)
  501,661   489,675   2,098   2,343   1,117   1,733   0.98   1.58 
Derivative receivables(d)
  52,750   49,787   49   50  NA NA NA NA
Interests in purchased receivables  29,029   29,740   —   —  NA NA NA NA
 
Total managed credit-related assets  583,440   569,202   2,147   2,393   1,117   1,733   0.98   1.58 
Lending-related commitments(e)
  991,977   976,705  NA NA NA NA NA NA
Assets acquired in loan satisfactions NA NA  201   197  NA NA NA NA
 
Total credit portfolio
 $1,575,417  $1,545,907  $2,348  $2,590  $1,117  $1,733   0.98%  1.58%
 
Credit derivative hedges notional(f)
 $(29,286) $(29,882) $(18) $(17) NA NA NA NA
Collateral held against derivatives  (6,101)  (6,000) NA NA NA NA NA NA
Held-for-sale
                                
Total average HFS loans  35,842   32,086  NA NA NA NA NA NA
Nonperforming – purchased(g)
  340   341  NA NA NA NA NA NA
 
(a) 
Wholesale loans past-due 90 daysLoans are presented net of unearned income of $2.7 billion and over and accruing were $6 million and $8 million as of September 30, 2005,$3.0 billion at March 31, 2006, and December 31, 2004,2005, respectively.
(b) 
The Firm also views itsRepresents securitized credit exposurecard receivables. For a further discussion of credit card securitizations, see Card Services on an economic basis. For derivative receivables, economic credit exposure is the three-year average of a measure known as Average exposure (which is the expected MTM value of derivative receivables at future time periods, including the benefit of collateral). Average exposure was $37 billion and $38 billion at September 30, 2005, and December 31, 2004, respectively. See pages 53–5523–25 of this Form 10–Q, and pages 62–65 of JPMorgan Chase’s 2004 Annual Report, for a further discussion of the Firm’s derivative receivables.Q.
(c) 
The Firm also views itsPast-due 90 days and over and accruing includes credit exposure on an economic basis. For lending-related commitments, economic credit exposure is represented by a “loan equivalent” amount, which is the portioncard receivables of the unused commitment or other contingent exposure that is expected, based upon average portfolio historical experience, to become outstanding in the event of a default by the obligor. Loan equivalents were $175$956 million and $1.1 billion, and $162 billionrelated credit card securitizations of $913 million and $730 million at September 30, 2005,March 31, 2006, and December 31, 2004,2005, respectively. See page 55 of this Form 10–Q for a further discussion of this measure.
(d)
Reflects net cash received under credit support annexes to legally enforceable master netting agreements of $23 billion and $27 billion as of March 31, 2006, and December 31, 2005, respectively.
(e)
Includes wholesale unused advised lines of credit totaling $28.4 billion and $28.3 billion at March 31, 2006, and December 31, 2005, respectively, which are not legally binding. In regulatory filings with the Federal Reserve Board, unused advised lines are not reportable. Credit card lending-related commitments of $589 billion and $579 billion at March 31, 2006, and December 31, 2005, respectively, represent the total available credit to its cardholders. The Firm has not experienced, and does not anticipate, that all of its cardholders will exercise their entire available lines of credit at the same point in time. The Firm can reduce or cancel a credit card commitment by providing the cardholder prior notice or, in some cases, without notice as permitted by law.
(f)
Represents the net notional amount of protection purchased and sold of single-name and portfolio credit derivatives used to manage the credit risk of credit exposures; these derivatives do not qualify for hedge accounting under SFAS 133.
(g)
Represents distressed HFS wholesale loans purchased as part of IB’s proprietary activities, which are excluded from nonperforming assets.
(h)
Includes nonperforming HFS loans of $84 million and $136 million as of March 31, 2006, and December 31, 2005, respectively.
(i)
Excludes nonperforming assets related to (i) loans eligible for repurchase as well as loans repurchased from GNMA pools that are insured by government agencies of $1.1 billion for both March 31, 2006, and December 31, 2005, and (ii) education loans that are 90 days past due and still accruing, which are insured by government agencies under the Federal Family Education Loan Program of $0.2 billion at March 31, 2006. These amounts for GNMA and education loans are excluded, as reimbursement is proceeding normally.
(j)
Net charge-off rates exclude average loans HFS of $36 billion and $24 billion for the quarter ended March 31, 2006 and 2005, respectively.

44

WHOLESALE CREDIT PORTFOLIO
As of March 31, 2006, wholesale exposure (IB, CB, TSS and AWM) increased by $18.4 billion from December 31, 2005, due primarily to $14.7 billion in loan growth. As described on page 36 of this Form 10–Q, the increase in Loans was primarily in the IB, reflecting an increase in capital markets activity, including leveraged financings and syndications and higher balances of loans held-for-sale.
                                 
                  Three months ended March 31,
                          Average annual net
          Nonperforming Net charge-offs/ charge-off/(recovery)
  Credit exposure assets(f) (recoveries) rate(h)
  Mar. 31, Dec. 31, Mar. 31, Dec. 31,            
(in millions, except ratios) 2006 2005 2006 2005 2006 2005 2006 2005
 
Loans – reported(a)
 $164,799  $150,111  $737  $992  $(20) $(9)  (0.06)%  (0.03)%
Derivative receivables(b)
  52,750   49,787   49   50  NA NA NA NA
Interests in purchased receivables  29,029   29,740   —   —  NA NA NA NA
 
Total wholesale credit-related assets  246,578   229,638   786   1,042   (20)  (9)  (0.06)  (0.03)
Lending-related commitments(c)
  322,575   321,109  NA NA NA NA NA NA
Assets acquired in loan satisfactions NA NA  13   17  NA NA NA NA
 
Total wholesale credit exposure
 $569,153  $550,747  $799  $1,059  $(20)(g) $(9)(g)  (0.06)%  (0.03)%
 
Credit derivative hedges notional(d)
 $(29,286) $(29,882) $(18) $(17) NA NA NA NA
Collateral held against derivatives  (6,101)  (6,000) NA NA NA NA NA NA
Held-for-sale
                                
Total average HFS loans  19,480   15,581  NA NA NA NA NA NA
Nonperforming – purchased(e)
  340   341  NA NA NA NA NA NA
 
(a)
Past-due 90 days and over and accruing include loans of $64 million and $50 million at March 31, 2006, and December 31, 2005, respectively.
(b)
Reflects net cash received under credit support annexes to legally enforceable master netting agreements of $23 billion and $27 billion as of March 31, 2006, and December 31, 2005, respectively.
(c) 
Includes unused advised lines of credit totaling $24.9$28.4 billion and $22.8$28.3 billion at September 30, 2005,March 31, 2006, and December 31, 2004,2005, respectively, which are not legally binding. In regulatory filings with the Federal Reserve Board, unused advised lines are not reportable.
(e)
Consumer loans past-due 90 days and over and accruing include credit card receivables of $1.1 billion and $1.0 billion, and related credit card securitizations of $1.0 billion and $1.3 billion at September 30, 2005, and December 31, 2004, respectively.
(f)
Represents securitized credit card receivables. For a further discussion of credit card securitizations, see Card Services on pages 28–30 of this Form 10–Q.
(g)
Loans are presented net of unearned income of $3.2 billion and $4.1 billion at September 30, 2005, and December 31, 2004, respectively.
(h)
At September 30, 2005, and December 31, 2004, includes $20 million and $23 million, respectively, of wholesale assets acquired in loan satisfactions, and $184 million and $224 million, respectively, of consumer assets acquired in loan satisfactions.
(i)
Represents distressed wholesale loans purchased as part of IB’s proprietary activities, which are included in wholesale loans held-for-sale, but are excluded from nonperforming assets.
(j)(d) 
Represents the net notional amount of protection boughtpurchased and sold of single-name and portfolio credit derivatives used to manage the credit risk of wholesale credit exposure;exposures; these derivatives do not qualify for hedge accounting under SFAS 133.
(k)(e) 
Wholesale net charge-offsRepresents distressed HFS loans purchased as part of IB’s proprietary activities, which are not applicable for Derivative receivables, Interests in purchased receivables and lending-related commitments.excluded from nonperforming assets.
(l)(f)
Includes nonperforming HFS loans of $68 million and $109 million as of March 31, 2006, and December 31, 2005, respectively.
(g)
Excludes $20 million and $8 million in the first quarter of 2006 and the first quarter of 2005, respectively, in gains on sales of nonperforming loans. For a further discussion, see the discussion below.
(h) 
Net charge-off rates exclude average wholesale loans HFS of $17.4 billion as of September 30, 2005, and $7.3 billion at September 30, 2004.
(m)
Net charge-off rates exclude average HFS retail loans in the amount of $15.7$20 billion and $14.5$8 billion for the three monthsquarter ended September 30,March 31, 2006 and 2005, and 2004, respectively, and $15.4 billion and $15.1 billion for the nine months ended September 30, 2005 and 2004, respectively. Card Services has no average held-for-sale loans.
(n)
Nonperforming assets include wholesale HFS loans of $106 million and $2 million as of September 30, 2005, and December 31, 2004, and consumer HFS loans of $10 million and $13 million as of September 30, 2005, and December 31, 2004, respectively.
(o)
Excludes purchased HFS wholesale loans.
(p)
Excludes nonperforming assets related to loans eligible for repurchase as well as loans repurchased from GNMA pools that are insured by government agencies of $1.0 billion and $1.5 billion for September 30, 2005, and December 31, 2004, respectively. These amounts are excluded, as reimbursement is proceeding normally.
(q)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
Net charge-offs/recoveries
Wholesale net recoveries were $20 million compared with net recoveries of $9 million in the prior year, primarily due to lower gross charge-offs. The net recovery rate was 0.06% compared with a net recovery rate of 0.03% for the prior year. These net recoveries do not include $20 million of gains from sales of nonperforming loans that were sold from the credit portfolio during the first quarter of 2006. This compares with $8 million of gains from nonperforming loans sold from the credit portfolio in the same period in the prior year. When it is determined that a loan will be sold, it is transferred into a held-for-sale account. HFS loans are accounted for at lower of cost or fair value, with changes in value recorded in Other income.

5045

WHOLESALE CREDIT PORTFOLIO
As of September 30, 2005, wholesale exposure increased $9.6 billion from December 31, 2004. Increases in loans and lending-related commitments of $16.5 billion and $7.6 billion, respectively, were partially offset by reductions in derivative receivables and interests in purchased receivables of $11.6 billion and $2.9 billion, respectively. As described on page 43 of this Form 10–Q, the increase in loans was primarily in the IB, reflecting more loans held-for-sale related to securitization and syndication activities and growth in the IB Credit Portfolio. The increase in leading-related commitments was also due to IB activity. The decrease in derivative receivables was primarily due to the appreciation of the U.S. dollar and, to a lesser extent, higher interest rates, partially offset by rising commodity prices. Below are summaries of the maturity and ratings profiles of the wholesale portfolio as of September 30, 2005,March 31, 2006, and December 31, 2004.2005. The ratings scale is based upon the Firm’s internal risk ratings and is presented on an S&P-equivalent basis.
Wholesale exposure
                                 
  Maturity profile(a)  Ratings profile 
                  Investment-grade       
                  (“IG”)  Noninvestment-grade       
                              Total 
At September 30, 2005                             % of 
(in billions, except ratios) <1 year  1–5 years  > 5 years  Total  AAA to BBB-  BB+ & below  Total  IG 
 
Loans  50%  37%  13%  100% $90  $62  $152   59%
Derivative receivables(b)
  10   40   50   100   44   10   54   81 
Interests in purchased                                
receivables  30   66   4   100   29   —   29   100 
Lending-related                                
commitments(b)(c)
  40   54   6   100   274   43   317   86 
 
Total exposure(d)
  40%  48%  12%  100% $437  $115  $552   79%
 
Credit derivative                                
hedges notional(e)
  15%  74%  11%  100% $(28) $(4) $(32)  88%
 
                                 
                              Total 
At December 31, 2004                             % of 
(in billions, except ratios) <1 year  1-5 years  > 5 years  Total  AAA to BBB-  BB+ & below  Total  IG 
 
Loans  43%  43%  14%  100% $87  $48  $135   64%
Derivative receivables(b)
  19   39   42   100   57   9   66   86 
Interests in purchased                                
receivables  37   61   2   100   32   —   32   100 
Lending-related                                
commitments(b)(c)
  46   52   2   100   266   43   309   86 
 
Total exposure(d)
  42%  49%  9%  100% $442  $100  $542   82%
 
Credit derivative                                
hedges notional(e)
  18%  77%  5%  100% $(35) $(2) $(37)  95%
 
                                 
  Maturity profile(c) Ratings profile       
                  Investment- Noninvestment-       
                  grade ("IG")(d) grade(d)       
At March 31, 2006     1-5 >5                 Total %
(in billions, except ratios) <1 year(d) years(d) years(d) Total AAA to BBB- BB+ & below Total of IG(d)
 
Loans  44%  42%  14%  100% $95  $50  $145   66%
Derivative receivables  12   37   51   100   46   7   53   87 
Interests in purchased receivables  48   50   2   100   29   —   29   100 
Lending-related commitments  38   55   7   100   275   47   322   85 
 
Total excluding HFS  34%  54%  12%  100% $445  $104   549   81%
Held-for-sale(a)
                          20     
 
Total exposure                         $569     
 
Credit derivative hedges notional(b)
  16%  72%  12%  100% $(26) $(3) $(29)  90%
 
                                 
  Maturity profile(c) Ratings profile       
                  Investment- Noninvestment-       
                  grade ("IG")(d) grade(d)       
At December 31, 2005     1-5 >5                 Total %
(in billions, except ratios) <1 year(d) years(d) years(d) Total AAA to BBB- BB+ & below Total of IG(d)
 
Loans  43%  44%  13%  100% $87  $45  $132   66%
Derivative receivables  2   42   56   100   42   8   50   84 
Interests in purchased receivables  41   57   2   100   30   —   30   100 
Lending-related commitments  36   57   7   100   273   48   321   85 
 
Total excluding HFS  35%  52%  13%  100% $432  $101   533   81%
Held-for-sale(a)
                          18     
 
Total exposure                         $551     
 
Credit derivative hedges notional(b)
  15%  74%  11%  100% $(27) $(3) $(30)  90%
 
(a) 
HFS loans relate primarily to securitization and syndication activities.
(b)
Ratings are based upon the underlying referenced assets.
(c)
The maturity profile of loansLoans and lending-related commitments is based upon the remaining contractual maturity. The maturity profile of derivativeDerivative receivables is based upon the maturity profile of Average exposure. See footnote (b) on page 5068 of this Form 10–QJPMorgan Chase’s 2005 Annual Report for a further discussion of Average exposure.
(b)
Based upon economic credit exposure, the total percentage of Investment-grade for derivative receivables was 88% and 92% as of September 30, 2005, and December 31, 2004, respectively, and for lending-related commitments was 87% and 85% as of September 30, 2005, and December 31, 2004, respectively. See footnotes (b) and (c) on page 50 of this Form 10–Q for a further discussion of economic credit exposure.
(c)
Based upon economic credit exposure, the maturity profile for the <1 year, 1–5 years and >5 years categories would have been 27%, 64% and 9%, respectively, as of September 30, 2005, and 31%, 65% and 4%, respectively, as of December 31, 2004. See footnote (c) on page 50 of this Form 10–Q for a further discussion of economic credit exposure.
(d) 
Based upon economic credit exposure, the maturity profile for <1 year, 1–5 years and >5 years categories would have been 34%, 51% and 15%, respectively, as of September 30, 2005, and 35%, 54% and 11%, respectively, as of December 31, 2004. See footnotes (b) and (c) on page 50 of this Form 10–Q for a further discussion of economic credit exposure.
(e)
Ratings are based upon the underlying referenced assets.Excludes HFS loans.

5146

The percentage of the investment-grade wholesale exposure decreased to 79% at September 30, 2005, from 82% at December 31, 2004. The decrease was primarily attributable to the absolute decline in derivative receivables, which are predominantly investment-grade. The decrease in investment-grade loans from 64% at year-end 2004 to 59% as of September 30, 2005, was due to the increase of the IB’s loans held-for-sale during 2005; see page 43 of this Form 10–Q.
Wholesale credit exposure – selected industry concentration
The Firm continues to focus on the management and diversification of its industry concentrations, with particular attention paid to industries with actual or potential credit concerns; at September 30,concerns. As of March 31, 2006, the top 10 industry exposure remained predominantly unchanged compared with December 31, 2005, these includedwith the Airlinesexception of exposures to Securities firms and Automotive industries.exchanges, which increased primarily as a result of changes in derivatives exposures. Below are summariesis a summary of the Top 10 industry concentrations as of September 30, 2005,March 31, 2006, and December 31, 2004. Nine of the ten industries that were in the Top 10 at December 31, 2004, remain in the Top 10 at September 30, 2005. During the third quarter of 2005, Oil and gas moved into the Top 10, replacing Media.
                                
 September 30, 2005 December 31, 2004  March 31, 2006 December 31, 2005
Top 10 industries(a) Credit % of Credit % of  Credit % of Credit % of
(in millions, except ratios) exposure portfolio exposure portfolio  exposure(c) portfolio exposure(c) portfolio
Banks and finance companies $54,466  9.9% $56,184  10.4% $52,535  10% $50,924  10%
Real estate 31,578 5.7 28,230 5.2  29,511 5 29,974 5 
State and municipal governments(b)
 27,348 5.0 19,794 3.7 
Consumer products 24,455 4.4 21,427 4.0  26,635 5 25,678 5 
State and municipal governments 26,177 5 25,328 5 
Healthcare 23,365 4.2 22,003 4.1  24,871 5 25,435 5 
Securities firms and exchanges 24,176 4 17,094 3 
Utilities 20,253 3.7 21,262 3.9  22,513 4 20,482 4 
Retail and consumer services 20,090 4 19,920 4 
Asset managers 19,653 3.6 20,389 3.8  19,105 3 17,358 3 
Oil and gas 19,617 3.6 14,523 2.7  18,106 3 18,200 3 
Retail and consumer services(b)
 19,398 3.5 21,732 4.0 
Securities firms and exchanges 18,222 3.3 18,176 3.4 
All Other 293,375 53.1 298,450 54.8 
All other 285,539 52 282,802 53 
Total
 $551,730  100.0% $542,170  100.0%
Total excluding HFS $549,258  100% $533,195  100%
Held-for-sale(b)
 19,895 17,552 
Total exposure $569,153 $550,747 
(a) 
Based upon September 30, 2005March 31, 2006, determination of Top 10 industries.
(b) 
DuringHFS loans primarily relate to securitization and syndication activities.
(c)
Credit exposure is net of risk participations and excludes the second quarterbenefit of credit derivative hedges and collateral held against derivative receivables or loans. At March 31, 2006, and December 31, 2005, collateral held against derivative receivables excludes $23 billion and $27 billion, respectively, of cash collateral as a result of the Firm revised its industry classification for educational institutionselecting to better reflect risk correlationsreport the fair value of derivative assets and enhance the Firm’s managementliabilities net of industry risk, resulting in an increase to Statecash received and municipal governments and a decrease to Retail and consumer services.paid, respectively, under legally enforceable master netting agreements.
Wholesale criticized exposure
Exposures deemed criticized generally represent a ratings profile similar to a rating of CCC+/Caa1 and lower, as defined by Standard & Poors/Poor’s/Moody’s. At March 31, 2006, the top 10 criticized industries exposure remained predominantly unchanged compared with December 31, 2005, with Healthcare moving into the top 10, replacing Airlines.
The criticized component of the portfolio decreased to $6.9$5.1 billion (excluding HFS loans) at September 30, 2005,March 31, 2006, from $8.3$5.2 billion at year-end 2004,2005, reflecting strongstable credit quality, refinancings,quality. Wholesale nonperforming assets (excluding purchased held-for-sale wholesale loans) decreased by $260 million to $799 million at March 31, 2006, from $1.1 billion at December 31, 2005, due primarily to loan sales, repayments and gross charge-offs.
During 2005, the industries in the Top 10 remained predominately unchanged from December 31, 2004. At September 30, 2005, both Automotive and Retail and consumer services moved into the Top 10, replacing Chemicals/plastics and Metals/mining industries.
                 
  September 30, 2005  December 31, 2004 
Criticized exposure – industry concentrations     % of      % of 
(in millions, except ratios) Amount  portfolio  Amount  portfolio 
 
Media $958   13.9% $509   6.1%
Consumer products  661   9.6   479   5.8 
Utilities  625   9.0   890   10.7 
Real estate  384   5.6   765   9.2 
Airlines  370   5.4   450   5.4 
Automotive  351   5.0   359   4.3 
Machinery and equipment manufacturing  345   5.0   459   5.6 
Retail and consumer services  337   4.9   393   4.8 
Building materials/construction  318   4.6   430   5.2 
Business services  279   4.0   444   5.4 
All Other  2,281   33.0   3,106   37.5 
 
Total
 $6,909   100.0% $8,284   100.0%
 

52

Wholesale nonperforming assets (“NPA”)criticized exposure – industry concentrations

Nonperforming assets by line of business

(in millions, except ratios) Sept. 30, 2005  % of NPA  December 31, 2004  % of NPA  Change 
 
Investment Bank $934   65% $1,196   65%  (22)%
Commercial Banking  388   27   547   30   (29)
Treasury & Securities Services  3   —   14   1   (79)
Asset & Wealth Management  118   8   81   4   46 
 
Total(a)
 $1,443   100% $1,838   100%  (21)%
 
                 
  March 31, 2006 December 31, 2005
Top 10 industries(a)     % of     % of
(in millions, except ratios) Amount  portfolio Amount  portfolio
 
Media $679   13% $684   13%
Automotive  560   11   643   12 
Consumer products  511   10   590   11 
Telecom services  419   8   430   8 
Real estate  392   8   276   5 
Retail and consumer services  273   5   288   6 
Utilities  257   5   295   6 
Machinery and equipment manufacturing  249   5   290   6 
Healthcare  235   5   243   5 
Building materials/construction  227   5   266   5 
All other  1,254   25   1,167   23 
 
Total excluding HFS $5,056   100% $5,172   100%
Held-for-sale(b)
  652       1,069     
 
Total $5,708      $6,241     
 
(a) 
Includes assets acquired in loan satisfactionsBased upon March 31, 2006, determination of $20 millionTop 10 industries.
(b)
HFS loans primarily relate to securitization and $23 million at September 30, 2005, and December 31, 2004, respectively.syndication activities; excludes purchased nonperforming HFS loans.

47

Wholesale nonperforming assets (excluding purchased nonperforming held-for-sale wholesale loans) decreased by $395 million from $1.8 billion at December 31, 2004, to $1.4 billion at September 30, 2005, as a result of loan sales, repayments and gross charge-offs. For the three months ended September 30, 2005, wholesale net recoveries were $40 million, compared with $24 million in the prior year. For the nine months ended September 30, 2005, wholesale net recoveries were $101 million compared with net charge-offs of $118 million for the same period in 2004, primarily due to lower gross charge-offs; the net recovery rate was 0.11%, compared with a net charge-off rate of 0.17% in the prior year.
Derivative contracts
In the normal course of business, the Firm uses derivative instruments to meet the needs of customers,customers; to generate revenues through trading activities,activities; to manage exposure to fluctuations in interest rates, currencies and other marketsmarkets; and to manage the Firm’s credit exposure. For a further discussion of derivative contracts, see Note 18 on page 8483 of this Form 10–Q, and pages 62–6567–70 of JPMorgan Chase’s 20042005 Annual Report.
The following table summarizes the aggregate notional amounts and the reported derivative receivables (i.e., the MTM or fair value of the derivative contracts after taking into account the effects of legally enforceable master netting agreements) at each of the dates indicated:
                 
(in billions) Notional amounts(a)  Derivative receivables MTM 
  September 30, 2005  December 31, 2004  September 30, 2005  December 31, 2004 
 
Interest rate $38,293  $37,022  $33  $46 
Foreign exchange  1,760   1,886   4   8 
Equity  542   434   7   6 
Credit derivatives  2,039   1,071   4   3 
Commodity  218   101   6   3 
 
Total $42,852  $40,514  $54  $66 
Collateral held against derivative receivables  NA   NA   (7)(b)  (9)(c)
 
Total  NA   NA  $47  $57 
 
Notional amounts and derivative receivables marked-to-market (“MTM”)
                 
(in billions) Notional amounts(a) Derivative receivables MTM
  March 31, 2006  December 31, 2005  March 31, 2006  December 31, 2005 
 
Interest rate $41,429  $38,493  $31  $30 
Foreign exchange  2,334   2,136   2   3 
Equity  531   458   7   6 
Credit derivatives  2,848   2,241   4   4 
Commodity  331   265   9   7 
 
Total $47,473  $43,593   53   50 
Collateral held against derivative receivables NA  NA   (6)  (6)
 
Exposure net total of collateral NA  NA  $47(b) $44(c)
 
(a) 
The notional amounts represent the gross sum of long and short third-party notional derivative contracts, excluding written options and foreign exchange spot contracts.
(b) 
The Firm held $38$29 billion of collateral against derivative receivables as of September 30, 2005,March 31, 2006, consisting of $31$23 billion in net cash received under credit support annexes to legally enforceable master netting agreements, and $7$6 billion of other highly liquid securities collateral. The benefit of the $31$23 billion is reflected within the $54$53 billion of derivative receivables MTM. Excluded from the $38 billion of collateral is $11 billion of collateral delivered by clients at the initiation of transactions; this collateral secures exposure that could arise in the existing derivatives portfolio should the MTM of the client’s transactions move in the Firm’s favor. Also excluded are credit enhancements in the form of letter-of-credit and surety receivables.
(c)
The Firm held $41 billion of collateral against derivative receivables as of December 31, 2004, consisting of $32 billion in net cash received under credit support annexes to legally enforceable master netting agreements, and $9 billion of other highly liquid collateral. The benefit of the $32 billion is reflected within the $66 billion of derivative receivables MTM. Excluded from the $41$29 billion of collateral is $10 billion of collateral delivered by clients at the initiation of transactions; this collateral secures exposure that could arise in the existing derivatives portfolio should the MTM of the client’s transactions move in the Firm’s favor. Also excluded are credit enhancements in the form of letter-of-creditletters of credit and surety receivables.
(c)
The Firm held $33 billion of collateral against derivative receivables as of December 31, 2005, consisting of $27 billion in net cash received under credit support annexes to legally enforceable master netting agreements, and $6 billion of other liquid securities collateral. The benefit of the $27 billion is reflected within the $50 billion of derivative receivables MTM. Excluded from the $33 billion of collateral is $10 billion of collateral delivered by clients at the initiation of transactions; this collateral secures exposure that could arise in the derivatives portfolio should the MTM of the client’s transactions move in the Firm’s favor. Also excluded are credit enhancements in the form of letters of credit and surety receivables.
The $43 trillionMTM of notional principal of the Firm’s derivative receivables contracts outstanding at September 30, 2005, significantly exceeded, in the Firm’s view, the possible credit losses that could arise from such transactions. For most derivative transactions, the notional principal amount does not change hands; it is simply used as a reference to calculate payments. The appropriate measure of current credit risk is, in the Firm’s view, the MTM value of the contract, which represents the cost to replace the contracts at current market rates should the counterparty default. When JPMorgan Chase has more than one transaction outstanding with a counterparty, and a legally enforceable master netting agreement exists with that counterparty, the netted MTM exposure, less collateral held, represents, in the Firm’s view, the appropriate measure of current credit risk. At September 30, 2005, the MTM value of derivative receivables (after taking into account the effects of legally enforceable master netting agreements and the impact of net cash received under credit support annexes to such legally enforceable master netting agreements) was $54 billion. Further, after taking into account $7 billion of other highly liquid collateral held by the Firm, the net current MTM credit exposure was $47 billion.

53

The following table summarizes the ratings profile of the Firm’s Consolidated balance sheets Derivative receivables MTM, net of cash and other highly liquid securities collateral for the dates indicated:
Ratings profile of derivative receivables MTM
                                
 September 30, 2005 December 31, 2004  March 31, 2006 December 31, 2005
Rating equivalent Exposure net % of exposure Exposure net % of exposure  Exposure net % of exposure Exposure net % of exposure
(in millions) of collateral(a) net of collateral of collateral(b) net of collateral  of collateral(b) net of collateral of collateral(c) net of collateral
AAA to AA- $20,978  45% $30,384  53% $20,513  44% $20,735  48%
A+ to A-(a) 8,225 17 9,109 16  12,454 27 8,074 18 
BBB+ to BBB- 9,496 20 9,522 17  8,557 18 8,243 19 
BB+ to B- 8,065 17 7,271 13  5,030 11 6,580 15 
CCC+ and below 390 1 395 1  95 — 155 — 
Total $47,154  100% $56,681  100% $46,649  100% $43,787  100%
(a) 
See footnote (b) on page 53.Increase from December 31, 2005, primarily related to customers in the Securities firms and exchanges industry.
(b) 
See footnote (b) above.
(c)
See footnote (c) on page 53.above.

48

The Firm actively pursues the use of collateral agreements to mitigate counterparty credit risk in derivatives. The percentage of the Firm’s derivatives transactions subject to collateral agreements increaseddecreased slightly, to 81%80% as of September 30, 2005,March 31, 2006, from 79%81% at December 31, 2004.2005. The Firm posted $32$26 billion and $31$27 billion of collateral as of September 30, 2005,March 31, 2006, and December 31, 2004,2005, respectively.
Certain derivative and collateral agreements include provisions that require the counterparty and/or the Firm, upon specified downgrades in their respective credit ratings, to post collateral for the benefit of the other party. As of September 30, 2005,March 31, 2006, the impact of a single-notch ratings downgrade to JPMorgan Chase Bank, from its current rating of AA- to A+, would have been an additional $1.4$1.2 billion of collateral posted by the Firm; the impact of a six-notch ratings downgrade (from AA- to BBB-) would have been $3.8$3.5 billion of additional collateral. Certain derivative contracts also provide for termination of the contract, generally upon a downgrade of either the Firm or the counterparty, at the then-existing MTM value of the derivative contracts.
Use of creditCredit derivatives
The following table presents the Firm’s notional amounts of credit derivatives protection boughtpurchased and sold by the respective businesses as of September 30, 2005,March 31, 2006, and December 31, 2004:2005:
Credit derivatives positions
                     
  Notional amount    
  Portfolio management  Dealer/client    
  Protection  Protection  Protection  Protection    
(in millions) bought  sold  bought  sold  Total 
 
September 30, 2005
 $33,334  $1,203  $986,810  $1,017,837  $2,039,184 
December 31, 2004  37,237   37   501,266   532,335   1,070,875 
 
                     
  Notional amount   
  Credit portfolio Dealer/client   
  Protection  Protection  Protection  Protection    
(in billions) purchased(a) sold  purchased  sold  Total 
 
March 31, 2006
 $30  $1  $1,401  $1,416  $2,848 
December 31, 2005  31   1   1,096   1,113   2,241 
 
JPMorgan Chase has limited counterparty
(a)
Includes $790 million and $848 million of portfolio credit derivatives at March 31, 2006, and December 31, 2005, respectively.
In managing wholesale credit exposure, as a result of itsthe Firm purchases single-name and portfolio credit derivatives transactions. Of the $54 billion of total Derivative receivables at September 30, 2005, approximately $4 billion, or 7%, was associated with credit derivatives, before the benefit of highly liquid collateral. The use of credit derivatives to manage exposures by the Credit Portfolio Groupderivatives; this activity does not reduce the reported level of assets on the balance sheet or the level of reported off–balance sheet commitments.
Credit portfolio management activity
In managing its wholesale credit portfolio exposure, the Firm purchases single-name and portfolio credit derivatives. As of September 30, 2005, the notional outstanding amount of protection bought via single-name and portfolio credit derivatives was $31 billion and $2 billion, respectively, compared with $35 billion and $2 billion at December 31, 2004. The Firm also diversifies its exposures by providing (i.e., selling) credit protection, which increases exposure to industries or clients where the Firm has little or no client-related exposure. This activity is not material to the Firm’s overall credit exposure.
JPMorgan Chase has limited counterparty exposure as a result of credit derivatives transactions. Of the $53 billion of total Derivative receivables MTM at March 31, 2006, approximately $4 billion, or 7%, was associated with credit derivatives, before the benefit of liquid securities collateral.
Dealer/client
As of March 31, 2006, the total notional amount of protection purchased and sold in the dealer/client business increased by $607 billion from year-end 2005 as a result of increased trade volume in the market. This business has a mismatch between the total notional amounts of protection purchased and sold. However, in the Firm’s view, the risk positions are largely matched when securities used to risk manage certain derivative positions are taken into consideration and the notional amounts are adjusted to a duration-based equivalent basis or to reflect different degrees of subordination in tranched structures.
Use of single-name and portfolio credit derivatives
                
 Notional amount of protection bought  Notional amount of protection purchased
(in millions) September 30, 2005 December 31, 2004  March 31, 2006 December 31, 2005 
Credit derivatives used to manage:  
Loans and lending-related commitments $20,739 $25,002  $18,725 $18,926 
Derivative receivables 12,595 12,235  11,783 12,088 
Total $33,334 $37,237  $30,508 $31,014 

5449

Credit portfolio management activities
The credit derivatives used by JPMorgan Chase for itscredit portfolio management activities do not qualify for hedge accounting under SFAS 133.133, and therefore, effectiveness testing under SFAS 133 is not performed. These derivatives are reported at fair value, with gains and losses recognized as Trading revenue.in Principal transactions. The MTM value incorporates both the cost of credit derivative premiums and changes in value due to movement in spreads and credit events; in contrast, the loans and lending-related commitments being risk-managed are accounted for on an accrual basis. Loan interest and fees are generally recognized in Net interest income, and impairment is recognized in the Provision for credit losses. This asymmetry in accounting treatment, between loans and lending-related commitments and the credit derivatives utilized in credit portfolio management activities, causes earnings volatility that is not representative, in the Firm’s view, of the true changes in value of the Firm’s overall credit exposure. The MTM treatment of bothrelated to the Firm’s credit derivatives used for managing credit exposure, (“short” credit positions) andas well as the Credit Valuation Adjustment (“CVA”),mark related to the CVA, which reflects the credit quality of derivatives counterparty exposure, (“long” credit positions), generally provides some natural offset.
Portfolio management activityare included in the third quarter of 2005 resulted in a net gain of $23 million included in Trading revenue, largely due to credit spread tightening on derivative counterparty exposure. These results compare with a net loss of $35 million in the third quarter of 2004. Portfolio management activity in the first nine months of 2005 resulted in a gain of $36 million included in Trading revenue, primarily resulting from the MTM of the CVA and the derivatives used to manage this exposure. These results compare with a net gain of $50 million in the first nine months of 2004 as spreads generally tightened.table below:
         
For the quarter ended March 31,      
(in millions) 2006  2005 
 
CVA and hedges of CVA(a)
 $23  $21 
Hedges of lending-related commitments(a)
  (82)  33 
 
Net gains (losses)(b)
 $(59) $54 
 
(a)
These hedges do not qualify for hedge accounting under SFAS 133.
(b)
Excludes $6 million and $22 million at March 31, 2006 and 2005, respectively, of other Principal transaction revenues that are not associated with hedging activities.
The Firm also actively manages its wholesale credit exposure through loan and commitment sales. During the thirdfirst quarters of 20052006 and 2004,2005, the Firm sold $946$665 million and $1.9 billion of loans and commitments, respectively. In connection with the management of its wholesale credit exposure, the Firm recognized gains of $33$944 million during the third quarter of 2005, and losses of $6 million during the third quarter of 2004. During the first nine months of 2005 and 2004, the Firm sold $3.1 billion and $5.1 billion of loans and commitments, respectively, in connection with the management of its wholesale credit exposure, resulting inrecognizing gains of $77$20 million and losses of $17$11 million, respectively. These activities are not related to the Firm’s securitization activities, which are undertaken for liquidity and balance sheet management purposes. For a further discussion of securitization activity, see Note 12 on pages 76–7974–77 of this Form 10–Q.
Dealer/client activity
As of September 30, 2005, the total notional amounts of protection purchased and sold by the dealer business were $987 billion and $1,018 billion, respectively, compared with $501 billion and $532 billion, respectively, at December 31, 2004. Although there is a mismatch between these notional amounts, when securities used to risk manage certain derivative positions are taken into consideration and the notional amounts are adjusted to a duration-based equivalent basis or to reflect different degrees of subordination in tranched structures, in the Firm’s view, the risk positions are largely matched.
Lending-related commitments
The contractual amount of wholesale lending-related commitments was $317$323 billion at September 30, 2005,March 31, 2006, compared with $309$321 billion at December 31, 2004.2005. In the Firm’s view, the total contractual amount of these instruments is not representative of the Firm’s actual credit risk exposure or funding requirements. In determining the amount of credit risk exposure the Firm has to wholesale lending-related commitments, which is used as the basis for allocating credit risk capital to these instruments, the Firm has established a “loan-equivalent” amount for each commitment; this amount represents the portion of the unused commitment or other contingent exposure that is expected, based upon average portfolio historical experience, to become outstanding in the event of a default by an obligor. The loan equivalent amount of the loan equivalentsFirm’s lending-related commitments was $178 billion as of September 30, 2005,both March 31, 2006, and December 31, 2004, was $175 billion and $162 billion, respectively.2005.
Country exposure
The Firm has a comprehensive process for measuring and managing its exposures and risk in emerging markets countries – defined as those countries potentially vulnerable to sovereign events. Exposures to a country include all credit-related lending, trading, and investment activities, whether cross-border or locally funded. Exposure amounts are adjusted for credit enhancements (e.g., guarantees and letters of credit) provided by third parties located outside the country, if the enhancements fully cover the country risk as well as the business risk. As of September 30, 2005,March 31, 2006, the Firm’s exposure to any individual emerging markets country was not material.

5550

 
CONSUMER CREDIT PORTFOLIO
 
JPMorgan Chase’s consumer portfolio consists primarily of residential mortgages, and home equity loans, credit cards, auto loans and leases, education financingsloans and loans to small businesses. The domestic consumer portfolio reflects the benefit of diversification from both a product and a geographical perspective. The primary focus is on serving the prime consumer credit market.
The following table presents managed consumer credit–related information for the dates indicated:
Consumer portfolio
                 
  Credit-related exposure  Nonperforming assets 
(in millions, except ratios) Sept. 30, 2005  Dec. 31, 2004  Sept. 30, 2005  Dec. 31, 2004 
 
Home finance                
Home equity and other $74,309  $67,837  $316  $416 
Mortgage  60,076   56,816   394   257 
 
Total Home finance  134,385   124,653   710   673 
Auto & education finance  51,309   62,712   204   193 
Consumer & small business and other  14,740   15,107   289   295 
Credit card receivables — reported(a)
  68,479   64,575   9   8 
 
Total consumer loans — reported
  268,913   267,047   1,212   1,169 
Credit card securitizations(a)(b)
  69,095   70,795   —   — 
 
Total consumer loans — managed
  338,008   337,842   1,212   1,169 
Assets acquired in loan satisfactions  N/A   N/A   184   224 
 
Total consumer related assets — managed
  338,008   337,842   1,396   1,393 
Consumer lending-related commitments:                
Home finance  64,987   53,223   N/A   N/A 
Auto & education finance  6,686   5,193   N/A   N/A 
Consumer & small business and other  5,186   10,312   N/A   N/A 
Credit cards  555,451   532,468   N/A   N/A 
 
Total lending-related commitments
  632,310   601,196   N/A   N/A 
 
Total consumer credit portfolio
 $970,318  $939,038  $1,396  $1,393 
 
                                 
          Average annual net          Average annual net 
  Net Charge-offs  charge-off rate(c)  Net Charge-offs  charge-off rate(c) 
  Three months ended September 30,  Nine months ended September 30, 
(in millions, except ratios) 2005  2004  2005  2004  2005  2004(d)  2005  2004(d) 
 
Home finance                                
Home equity and other $32  $57   0.18%  0.34% $97  $105   0.19%  0.36%
Mortgage  6   6   0.05   0.05   20   14   0.06   0.05 
 
Total Home finance  38   63   0.13   0.23   117   119   0.14   0.20 
Auto & education finance  70   96   0.56   0.64   200   167   0.51   0.46 
Consumer & small business and other  36   60   1.00   1.62   93   98   0.86   1.70 
Credit card receivables — reported  766   670   4.41   4.49   2,150   1,199   4.31   5.12 
 
Total consumer loans — reported
  910   889   1.43   1.45   2,560   1,583   1.37   1.28 
Credit card securitizations(b)
  867   928   4.99   5.20   2,714   1,887   5.27   5.41 
 
Total consumer loans — managed
 $1,777  $1,817   2.20%  2.30% $5,274  $3,470   2.21%  2.18%
 
Memo: Credit card — managed
 $1,633  $1,598   4.70%  4.88% $4,864  $3,086   4.80%  5.29%
 
                                 
                  Three months ended March 31,
          Nonperforming         Average annual net
  Credit exposure assets(e) Net charge-offs charge-off rate(g)
  Mar. 31,  Dec. 31,  Mar. 31,  Dec. 31,             
(in millions, except ratios) 2006  2005  2006  2005  2006  2005  2006  2005 
 
Retail Financial Services
                                
Home Equity $75,241  $73,866  $451  $422  $33  $35   0.18%  0.21%
Mortgage  57,690   58,959   451   442   12   6   0.11   0.06 
Auto loans and leases(a)
  44,600   46,081   157   193   51   83   0.46   0.60 
All other loans  25,060   18,393   290   281   25   28   0.57   0.71 
Card Services – reported(b)
  64,691   71,738   12   13   567   673   3.36   4.25 
 
Total consumer loans – reported
  267,282   269,037   1,361(f)  1,351(f)  688   825   1.11   1.36 
Card Services – securitizations(b)(c)
  69,580   70,527   —   —   449   917   2.62   5.36 
 
Total consumer loans – managed(b)
  336,862   339,564   1,361   1,351   1,137   1,742   1.44   2.23 
Assets acquired in loan satisfactions NA  NA   188   180  NA  NA  NA  NA 
 
Total consumer related assets – managed
  336,862   339,564   1,549   1,531   1,137   1,742   1.44   2.23 
Consumer lending–related commitments:                                
Home equity  61,474   58,281  NA  NA  NA  NA  NA  NA 
Mortgage  6,885   5,944  NA  NA  NA  NA  NA  NA 
Auto loans and leases  6,060   5,665  NA  NA  NA  NA  NA  NA 
All other loans  6,222   6,385  NA  NA  NA  NA  NA  NA 
Card Services(d)
  588,761   579,321  NA  NA  NA  NA  NA  NA 
 
Total lending-related commitments
  669,402   655,596  NA  NA  NA  NA  NA  NA 
 
Total consumer credit portfolio
 $1,006,264  $995,160  $1,549  $1,531  $1,137  $1,742   1.44%  2.23%
 
Total end-of-period HFS loans $14,343  $16,598  NA  NA  NA  NA  NA  NA 
Total average HFS loans  16,362   16,505  NA  NA  NA  NA  NA  NA 
Memo: Credit card – managed  134,271   142,265  $12  $13  $1,016  $1,590   2.99%  4.83%
 
(a)
Excludes operating lease-related assets of $1.1 billion and $858 million for March 31, 2006, and December 31, 2005, respectively.
(b) 
Past-due loans 90 days and over and accruing includes credit card receivables of $1.1 billion$956 million and $1.0$1.1 billion, and related credit card securitizations of $1.0 billion$913 million and $1.3 billion$730 million at September 30, 2005,March 31, 2006, and December 31, 2004,2005, respectively.
(b)(c) 
Represents securitized credit card receivables. For a further discussion of credit card securitizations, see Card Services on pages 28–3023–25 of this Form 10–Q.
(c)(d)
The credit card lending–related commitments represent the total available credit to the Firm’s cardholders. The Firm has not experienced, and does not anticipate, that all of its cardholders will exercise their entire available lines of credit at the same point in time. The Firm can reduce or cancel a credit card commitment by providing the cardholder prior notice or, in some cases, without notice as permitted by law.
(e)
Includes nonperforming HFS loans of $16 million and $27 million at March 31, 2006, and December 31, 2005, respectively.
(f)
Excludes nonperforming assets related to (i) loans eligible for repurchase as well as loans repurchased from GNMA pools that are insured by government agencies of $1.1 billion for each of March 31, 2006, and December 31, 2005, and (ii) education loans that are 90 days past due and still accruing, which are insured by government agencies under the Federal Family Education Loan Program of $0.2 billion at March 31, 2006. These amounts for GNMA and education loans are excluded, as reimbursement is proceeding normally.
(g) 
Net charge-off rates exclude average loans HFS retail loans in the amount of $15.7 billion and $14.5$16 billion for the three monthsboth quarters ended September 30, 2005March 31, 2006 and 2004, respectively, and $15.4 billion and $15.1 billion for the nine months ended September 30, 2005 and 2004, respectively. Card Services has no average held-for-sale loans.
(d)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.2005.

5651

Consumer credit quality trends reflect continued underlying credit quality. Total managed consumer loans as of September 30,March 31, 2006, were $337 billion, down from $340 billion at year-end 2005, were $338 billion, flat to year-end 2004. Growth in consumer real estatereflecting the seasonal pattern and higher-than-normal customer payment rates of credit card receivables, partially offset by an increase in education loans offsetas a smaller auto portfolio reflecting a securitization, the saleresult of the $2 billion recreational vehicle loan portfolio, and a targeted reductionpurchase of the auto lease portfolio.Collegiate Funding Services. Consumer lending-related commitments increased by 2%, to $632$669 billion at September 30, 2005. Approximately $5.8 billion in consumer loans are outstanding in areas severely affected by Hurricane Katrina. A special provision for credit losses of $350 million attributable to these loans was established ($140 million in Home Finance, $90 million in Consumer & Small Business Banking, $20 million in Auto & Education FinanceMarch 31, 2006, reflecting a general increase across most Retail Financial Services and $100 million in Card Services).Services portfolios. The following discussion relates to the specific loan and lending-related categories within the consumer portfolio:
Retail Financial Services
Loan balances for Retail Financial Services were $200$203 billion at September 30, 2005, down approximately $2March 31, 2006, an increase of $5 billion or 1%, from December 31, 2004.2005. The decreaseincrease was driven primarily by the $6 billion increase in education loans as a smaller auto portfolio reflecting an auto loan securitization, the saleresult of the $2 billion recreational vehicle loan portfolio, and a targeted reductionacquisition of the auto lease portfolio. Growth in Home Finance loans partially offset these declines.Collegiate Funding Services on March 1, 2006. The net charge-off rate was 0.31% and 0.30% for the thirdfirst quarter of 2005 and first nine months of 2005, respectively,2006 was 0.27%, a decrease from 0.34% in the first quarter of 16 and 8 basis points from the comparable prior year periods.2005. The decrease was primarily attributable to improvedreflected the benefits of stable credit trends in most consumer lending portfolios as a result of continued favorable asset valuation trends in Home and Auto Finance which has moderated loss severity and to the absencesale of the recreational vehicle loan portfolio. portfolio in the first quarter of 2005.
The Firm proactively manages its retail credit operation. Ongoing efforts include continual review and enhancement of credit underwriting criteria and refinement of pricing and risk management models.
Home Finance:Equity:Home FinanceEquity loans on the balance sheet at March 31, 2006, were $134$75 billion, asan increase of September 30,$1 billion from year-end 2005. The portfolio reflects a high concentration of prime quality credits. There are no products in the Home Equity portfolio that result in negative amortization.
Mortgage:Mortgage loans on the balance sheet at March 31, 2006, were $58 billion, a decrease of $1 billion from year-end 2005. Credit metrics were affected by the decision in early 2005 up $10 billion, or 8%, from December 31, 2004. The loan balances comprised $74 billion of home equity and other loans and $60 billion of mortgages, including mortgage loans held-for-sale. The increase was largely due to higher retained balances in home equity andretain, rather than securitize, subprime mortgage loans. Home Finance provides real estate lendingMortgage loans include some interest-only payment options to predominantly prime borrowers. There are no products in the full spectrum of credit borrowers and maintains a geographic distribution of consumer real estate loansmortgage portfolio that is well diversified.result in negative amortization.
Auto & Education Finance:loans and leases:Loan balances inAs of March 31, 2006, Auto & Education Finance totaled $51loans and leases were $45 billion, at September 30, 2005, down $11a decrease of $1 billion from year-end 2004.2005. The decrease in outstanding loans was attributable to an auto loan securitization,caused partially by the salede-emphasis of a $2vehicle leasing, which comprised $4 billion recreational vehicle loan portfolio in early 2005, a decline in auto lease outstandings from $8 billion to $5 billion, and lower prime auto loan originations. During 2004, the Firm completed a strategic review of all consumer lending portfolio segments, which resulted in the Firm choosing to de-emphasize vehicle leasing.outstanding loans as of March 31, 2006. It is anticipated that over time vehicle leases will account for a smaller share of loan balancesbalance sheet receivables and exposure. This strategic review also resulted in the aforementioned sale of the $2 billion recreational vehicle portfolio. The remaining Auto & education loanloans and leases portfolio reflects a high concentration of prime-qualityprime quality credits.
Consumer & small business and other:All other loans:As of September 30, 2005, Small business &March 31, 2006, other consumer loans declined slightlywere $25 billion, an increase of $7 billion from 2004 year-end levels2005, primarily due to an increase in Education loans as a result of $15 billion. This portfolio segment is primarily composedthe acquisition of the Collegiate Funding Services education loan portfolio. Other loans toalso include small businesses, whichbusiness banking loans (which are highly collateralized loans, often with personal loan guarantees.guarantees) and community development loans.
Card Services
JPMorgan Chase analyzes its credit card portfolio on a managed basis, which includes credit card receivables on the consolidated balance sheet and those receivables sold to investors through securitization. Managed credit card receivables were $138$134 billion at September 30, 2005, an increaseMarch 31, 2006, a decrease of $2$8 billion or 2% from year-end 2004.2005, reflecting the normal seasonal pattern and higher-than-normal customer payment rates, which management believes may partially be related to the recently implemented new minimum payment rules.
Consumer credit quality trends remained stable, delinquencies remained low and theThe managed credit card net charge-off rate decreased to 4.70% and 4.80%2.99% in the thirdfirst quarter of 2005 and year-to-date 2005, respectively,2006 from 4.88% and 5.29%4.83% in the comparable prior year periods. Management continues its emphasisfirst quarter of 2005. This decrease was due primarily to lower bankruptcy-related net charge-offs, which based upon an estimate by management, was lower by $475 million following the accelerated bankruptcy filings in the fourth quarter of 2005. The 30-day delinquency rate increased to 3.10% on credit risk management, including disciplined underwriting and account management practices targeted toMarch 31, 2006 from 2.79% on December 31, 2005, primarily driven by accelerated loss recognition of delinquent accounts on December 31, 2005 following the prime and super-prime credit sectors. Credit risk management tools used to manage the level and volatility of losses for credit card accounts are being continually updated, and, where appropriate, adjusted with the goal of reducing credit risk.significant 2005 fourth-quarter increase in bankruptcy filings. The managed credit card portfolio continues to reflect a well-seasoned portfolio that has good U.S. geographic diversification.

5752

 
ALLOWANCE FOR CREDIT LOSSES
 
For afurther discussion of the components of the allowanceAllowance for credit losses, see Critical accounting estimates used by the Firm on page 7781 and Note 12 on pages 102–103107–108 of the JPMorgan Chase 2004Chase’s 2005 Annual Report. At September 30, 2005,March 31, 2006, management deemed the allowance for credit losses to be sufficient to absorb losses that are inherent in the portfolio, including losses that are not specifically identified or for which the size of the loss has not yet been fully determined.
                         
Nine months ended September 30,     2005          2004(d)     
    
(in millions) Wholesale  Consumer  Total  Wholesale  Consumer  Total 
 
Loans:                        
Beginning balance at January 1 $3,098  $4,222  $7,320  $2,204  $2,319  $4,523 
Addition resulting from the merger, July 1  —   —   —   1,788   1,335   3,123 
Gross charge-offs  (132)  (3,024)  (3,156)  (420)  (1,820)  (2,240)
Gross recoveries  233   464   697   302   237   539 
 
Net charge-offs  101   (2,560)  (2,459)  (118)  (1,583)  (1,701)
Provision for loan losses:                        
Provision excluding accounting policy conformity  (603)  2,959   2,356   (484)  1,601   1,117 
Accounting policy conformity  —   —   —   66   494   560(g)
 
Total provision for loan losses  (603)  2,959   2,356   (418)  2,095   1,677 
Other  (6)  9   3   —   (129)  (129)(h)
 
Ending balance at September 30 $2,590(a) $4,630(b) $7,220  $3,456(e) $4,037(f) $7,493 
 
                         
Lending-related commitments:                        
Beginning balance at January 1 $480  $12  $492  $320  $4  $324 
Addition resulting from the merger, July 1  —   —   —   499   9   508 
Provision for lending-related commitments:                        
Provision excluding accounting policy conformity  (100)  3   (97)  (63)  —   (63)
Accounting policy conformity  —   —   —   (227)  —   (227)
 
Total provision for lending-related commitments  (100)  3   (97)  (290)  —   (290)
Other  —   —   —   —   (1)  (1)
 
Ending balance at September 30 $380  $15  $395(c) $529  $12  $541(i)
 
Summary of changes in the allowance for credit losses
                         
Three months ended March 31, 2006 2005
(in millions) Wholesale  Consumer  Total  Wholesale  Consumer  Total 
 
Loans:
                        
Beginning balance at January 1, $2,453  $4,637  $7,090  $3,098  $4,222  $7,320 
Gross charge-offs  (39)  (843)  (882)  (61)  (972)  (1,033)
Gross recoveries  59   155   214   70   147   217 
 
Net (charge-offs) recoveries  20   (688)  (668)  9   (825)  (816)
Provision for loan losses  195   652   847   (380)  811   431 
Other  —   6   6   —   —   — 
 
Ending balance $2,668(a) $4,607(b) $7,275  $2,727(a) $4,208(b) $6,935 
 
Components:                        
Asset specific $118  $—  $118  $385  $—  $385 
Statistical component  1,713   3,288   5,001   1,448   3,113   4,561 
Adjustment to statistical component  837   1,319   2,156   894   1,095   1,989 
 
Total Allowance for loan losses $2,668  $4,607  $7,275  $2,727  $4,208  $6,935 
 
Lending-related commitments:
                        
Beginning balance at January 1, $385  $15  $400  $480  $12  $492 
Provision for lending-related commitments  (16)  —   (16)  (6)  2   (4)
 
Ending balance $369  $15  $384(c) $474  $14  $488(d)
 
(a) 
Includes $341 millionThe ratio of asset-specificthe wholesale allowance for loan losses to total wholesale loans was 1.84% and $2.32.06%, excluding wholesale HFS loans of $19.9 billion of formula-based allowance. Included within the formula-based allowance is $1.6and $5.3 billion related to a statistical calculation (including $50 million related to Hurricane Katrina),at March 31, 2006 and adjustments to the statistical calculation of $659 million.2005, respectively.
(b) 
Includes $3.4 billionThe ratio of the consumer statistical component (including $350 million relatedallowance for loan losses to Hurricane Katrina)total consumer loans was 1.82% and $1.21.69%, excluding consumer HFS loans of $14.3 billion of adjustments to the statistical component.and $16.5 billion at March 31, 2006 and 2005, respectively.
(c) 
Includes $90$49 million of asset-specific and $305$335 million of formula-based allowance at September 30, 2005.March 31, 2006. The formula-based allowance for lending-related commitments is based upon statistical calculation. There is no adjustment to the statistical calculation for lending-related commitments.
(d) 
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
(e)
Includes $498$144 million of asset-specific and $3.0 billion of formula-based allowance. Included within the formula-based allowance is $1.9 billion related to a statistical calculation and adjustments to the statistical calculation of $1.1 billion.
(f)
Includes $3.1 billion and $878 million of the consumer statistical component and adjustments to the statistical component, respectively.
(g)
Reflects an increase of $721 million as a result of the decertification of heritage Bank One seller’s interest in credit card securitizations, partially offset by a $161 million decrease in the allowance to conform methodologies during the third quarter of 2004.
(h)
Primarily represents the transfer of the allowance for accrued interest and fees on reported and securitized credit card loans.
(i)
Includes $107 million of asset-specific and $434$344 million of formula-based allowance at September 30, 2004.March 31, 2005. The formula-based allowance for lending-related commitments is based upon a statistical calculation. There is no adjustment to the statistical calculation for lending-related commitments.

53

The reduction in the allowance for credit losses of $197 million from December 31, 2004, was driven primarily by continued credit strength in the wholesale businesses, partially offset by an increase in the consumer allowance as a result of the special provision taken in the third quarter of 2005 to cover probable credit losses due to Hurricane Katrina and higher bankruptcy filings in anticipation of the change in legislation that became effective on October 17, 2005.
Excluding held-for-sale loans, the Allowancetotal allowance for loan losses represented 1.88%1.83% of total loans at September 30, 2005,March 31, 2006, compared with 1.94%1.84% at December 31, 2004.2005. The wholesale component of the Allowance drove the improvement, decreasingallowance increased to $2.6$2.7 billion as of September 30, 2005,March 31, 2006, from $3.1$2.5 billion at year-end 2004. The decrease was driven by strong credit quality across all wholesale businesses. Excluding the special credit charge for Hurricane Katrina, the consumer component of the allowance would have been $4.3 billion as of September 30, 2005, a slight increase from December 31, 2004, which was primarily due to higher bankruptcy filingsloan growth in anticipationthe Investment Bank. The consumer allowance remained relatively unchanged from year-end 2005.
To provide for the risk of loss inherent in the change in legislationFirm’s process of extending credit, management also computes an asset-specific component and a formula-based component for lending–related commitments. These components are computed using a methodology similar to that became effective on October 17, 2005.

58

Theused for the wholesale loan portfolio, but modified for expected maturities and probabilities of drawdown. This allowance, for lending-related commitmentswhich is reported in Other liabilities, was $384 million and was $395$400 million at September 30, 2005, compared with $492 million atMarch 31, 2006, and December 31, 2004, reflecting continued credit strength in the wholesale businesses.2005, respectively.
Provision for credit losses
For a discussion of the reported Provision for credit losses, see page 9 of this Form 10–Q. In addition, theThe managed provision for credit losses reflectsincludes credit card securitizations. For the three months ended September 30, 2005,March 31, 2006, securitized credit card securitizationslosses were slightly lower compared with the prior year. For the nine months ended September 30, 2005, the increase from the prior year, was primarily due to the Merger.as a result of lower bankruptcy-related charge-offs in Card Services.
                         
          Provision for    
          lending-related  Total provision for 
  Provision for loan losses  commitments  credit losses 
Three months ended September 30, (in millions) 2005  2004  2005  2004  2005(c)  2004 
 
Investment Bank $(32) $(148) $(14) $(3) $(46) $(151)
Commercial Banking  (11)  10   (35)  4   (46)  14 
Treasury & Securities Services  (1)  —   —   —   (1)  — 
Asset & Wealth Management  (22)  1   3   —   (19)  1 
Corporate  13   (1)  —   —   13   (1)
 
Total Wholesale  (53)  (138)  (46)  1   (99)  (137)
Retail Financial Services  376   239   2   —   378   239 
Card Services — reported  966   734   —   —   966   734 
 
Total Consumer  1,342   973   2   —   1,344   973 
Accounting policy conformity  —   560   —   (227)  —   333 
 
Total provision(a)
  1,289   1,395   (44)  (226)  1,245   1,169 
Credit card securitizations  867   928   —   —   867   928 
Accounting policy conformity  —   (560)  —   227   —   (333)
 
Total managed provision $2,156  $1,763  $(44) $1  $2,112  $1,764 
 
                         
          Provision for    
          lending-related  Total provision for 
  Provision for loan losses  commitments  credit losses 
Nine months ended September 30, (in millions) 2005  2004(b)  2005  2004(b)  2005(c)  2004(b) 
 
Investment Bank $(659) $(405) $(96) $(62) $(755) $(467)
Commercial Banking  97   18   (7)  2   90   20 
Treasury & Securities Services  (4)  4   2   —   (2)  4 
Asset & Wealth Management  (47)  9   1   (2)  (46)  7 
Corporate  10   (110)  —   —   10   (110)
 
Total Wholesale  (603)  (484)  (100)  (62)  (703)  (546)
Retail Financial Services  563   372   3   (1)  566   371 
Card Services — reported  2,396   1,229   —   —   2,396   1,229 
 
Total Consumer  2,959   1,601   3   (1)  2,962   1,600 
Accounting policy conformity  —   560   —   (227)  —   333 
 
Total provision(a)
  2,356   1,677   (97)  (290)  2,259   1,387 
Credit card securitizations  2,714   1,887   —   —   2,714   1,887 
Accounting policy conformity  —   (560)  —   227   —   (333)
 
Total managed provision $5,070  $3,004  $(97) $(63) $4,973  $2,941 
 
(a)
The provision for loan losses in the third quarter of 2004 includes an increase of $721 million as a result of the decertification of heritage Bank One seller’s interest in credit card securitizations, partially offset by a reduction of $161 million to conform provision methodologies. The provision for lending-related commitments in the third quarter of 2004 reflects a reduction of $227 million to conform provision methodologies in the wholesale portfolio.
(b)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
(c)
Third quarter 2005 includes a $400 million special provision related to Hurricane Katrina: Retail Financial Services $250 million, Card Services $100 million, Commercial Banking $35 million, Asset & Wealth Management $3 million and Corporate $12 million.
                         
          Provision for  
          lending-related Total provision for
  Provision for loan losses commitments credit losses
Three months ended March 31, (in millions) 2006  2005  2006  2005  2006  2005 
 
Investment Bank $189  $(356) $(6) $(10) $183  $(366)
Commercial Banking  16   (8)  (9)  2   7   (6)
Treasury & Securities Services  (4)  (5)  —   2   (4)  (3)
Asset & Wealth Management  (6)  (7)  (1)  —   (7)  (7)
Corporate  —   (4)  —   —   —   (4)
 
Total Wholesale  195   (380)  (16)  (6)  179   (386)
Retail Financial Services  85   92   —   2   85   94 
Card Services  567   719   —   —   567   719 
 
Total Consumer  652   811   —   2   652   813 
 
Total provision for credit losses
  847   431   (16)  (4)  831   427 
Credit card securitizations  449   917   —   —   449   917 
 
Total managed provision for credit losses
 $1,296  $1,348  $(16) $(4) $1,280  $1,344 
 

5954

 
MARKET RISK MANAGEMENT
 
Risk management process
For a discussion of the Firm’s market risk management organization, see pages 70–7475–78 of JPMorgan Chase’s 20042005 Annual Report.
Value-at-risk (“VAR”)
JPMorgan Chase’s primary statistical risk measure, VAR, gaugesestimates the potential loss from adverse market moves in an ordinary market environment and provides a consistent cross-business measure of risk profiles and levels of risk diversification. VAR is used to comparefor comparing risks across businesses, to monitormonitoring limits, one-off approvals, and as an input to allocate economic capital to the business segments.calculations. VAR provides risk transparency in a normal trading environment. Each business day the Firm undertakes a comprehensive VAR calculation that includes both its trading and its nontrading activities. VAR for nontrading activities measures the amount of potential change in economic value.the fair values of the exposures related to these activities; however, for such activities, VAR is not a measure of reported revenue since nontrading activities are generally not marked to market through earnings. The Firm calculates VAR using a one-day time horizon and an expected tail-loss methodology, which approximates a 99% confidence level. This means the Firm would expect to incur losses greater than that predicted by VAR estimates only once in every 100 trading days, or about 2.5 times a year. For a further discussion of the Firm’s VAR methodology, see pages 71–7375–77 of JPMorgan Chase’s 2004 Annual Report.
Trading VAR
IB trading VAR by risk type and credit portfolio VAR(a)
                                                                
 2005 2004(e)  2006 2005
 At At 
Nine months ended Sept. 30, Average Minimum Maximum September 30, Average Minimum Maximum September 30, 
Three months ended March 31, Average Minimum Maximum At Average Minimum Maximum At 
(in millions) VAR VAR VAR 2005 VAR VAR VAR 2004  VAR VAR VAR March 31, 2006 VAR VAR VAR March 31, 2005 
By risk type:  
Fixed income $65.6 $37.2 $110.2 $62.1 $76.7 $45.3 $117.5 $73.0  $60 $47 $94 $47 $57 $46 $72 $72 
Foreign exchange 22.5 16.7 30.0 26.9 17.1 10.2 32.8 11.9  20 15 30 19 23 17 30 21 
Equities 35.0 15.3 64.9 34.9 30.9 19.7 57.8 22.0  32 22 39 23 18 15 21 18 
Commodities and other 16.2 6.5 37.8 37.8 8.6 6.9 12.2 10.2  47 22 68 52 10 7 17 10 
Less: portfolio diversification (55.4)(c)  N/A(d)  N/A(d)  (67.2)(c)  (44.4)(c)  N/A(d)  N/A(d)  (38.5)(c)  (68)(c) NM(d) NM(d)  (61)(c)  (43)(c) NM(d) NM(d)  (48)(c)
Total trading VAR $83.9 $52.9 $129.9 $94.5 $88.9 $51.6 $125.2 $78.6 
Trading VAR(a)
 $91 $76 $109 $80 $65 $53 $78 $73 
Credit portfolio VAR(b)
 14.0 11.3 16.6 15.7 14.2 10.8 16.6 13.2  14 13 16 14 13 12 16 13 
Less: portfolio diversification (11.8)(c)  N/A(d)  N/A(d)  (11.7)(c)  (8.5)(c)  N/A(d)  N/A(d)  (8.2)(c)  (11)(c) NM(d) NM(d)  (10)(c)  (8)(c) NM(d) NM(d)  (6)(c)
Total trading and credit portfolio VAR $86.1 $57.4 $129.9 $98.5 $94.6 $55.3 $131.6 $83.6  $94 $75 $113 $84 $70 $57 $83 $80 
(a) 
Includes all mark-to-market trading activities in the IB, plus available-for-sale securities held for the IB’s proprietary purposes (included within Fixed income). Amounts excludeTrading VAR excludes VAR related to the Firm’s private equity business.business and certain exposures used to manage MSRs. For a discussion of Private equity risk management and MSRs, see page 6257 and Note 14 on page 80 of this Form 10–Q.Q, respectively. Trading VAR includes substantially all trading activities in the IB; however, particular risk parameters of certain products are not fully captured, for example, correlation risk.
(b) 
Includes VAR on derivative credit valuation adjustments, credit valuation adjustment hedges and mark-to-market hedges of the accrual loan portfolio, which are all reported in Trading revenue.Principal transactions. This VAR does not include the accrual loan portfolio, which is not marked to market.
(c) 
JPMorgan Chase’s averageAverage and period-end VARs are less than the sum of the VARs of its market risk components, which is due to risk offsets resulting from portfolio diversification. The diversification effect reflects the fact that the risks are not perfectly correlated. The risk of a portfolio of positions is therefore usually less than the sum of the risks of the positions themselves.
(d) 
Designated as NMnot meaningful (“NM”) because the minimum and maximum may occur on different days for different risk components, and hence it is not meaningful to compute a portfolio diversification effect.
(e)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
Average IBIB’s average total trading and Credit Portfoliocredit portfolio VAR declinedincreased during the first nine monthsquarter of 20052006 to $86.1$94 million compared with $94.6$70 million for the same period in 2004.2005. The decreaseincrease was primarily driven by reductions in fixed income VAR and increased portfolio diversification, partially offset by increases inhigher VAR for foreign exchange,commodities and equities, and commodities. The increase in average commodities VAR, from $8.6 million for the nine months ended September 30, 2004, to $16.2 million for the nine months ended September 30, 2005, was a result of the IB’s growth in energy trading, which has also contributed to increased portfolio diversification. Total Trading VAR diversification increased to $68 million, or 43% of the sum of the components, from $43 million, or 40% of the sum of the components. In general, over the course of athe year, VAR exposures can vary significantly as trading positions change, and market volatility fluctuates.fluctuates and diversification benefits change.

6055

VAR backtesting
To evaluate the soundness of its VAR model, the Firm conducts daily backtesting of trading VAR against actualdaily financial results based upon daily market risk–relatedrisk-related revenue. Market risk–relatedrisk-related revenue is defined as the daily change in value of the mark-to-market trading portfolios plus any trading-related net interest income, brokerage commissions, underwriting fees or other revenue. The Firm’s definition of market risk–related revenue is consistent with the FRB’s implementation of the Basel Committee’s market risk capital rules. Thefollowing histogram below illustrates the daily market risk–relatedrisk-related gains and losses for the IB trading businesses for the ninethree months ended September 30, 2005.March 31, 2006. The chart shows that the IB posted market risk–relatedrisk-related gains on 16257 out of 19565 days in this period, with 184 days exceeding $100 million. The inset graph looks at those days on which the IB experienced losses and depicts the amount by which VAR exceeded the actual loss on each of those days. Losses were sustained on 338 days, with only one day with a loss greater than $50 million, and with no losses exceededloss exceeding the VAR measure.
(PERFORMANCE CHART)(BAR CHART)
Economic value stress testing
While VAR reflects the risk of loss due to unlikely events in normal markets, stress testing captures the Firm’s exposure to unlikely but plausible events in abnormal markets. The Firm conducts economic-value stress tests monthly for both its trading and its nontrading activities using multiple scenarios for both types of activities. ScenariosPeriodically, scenarios are continually reviewed and updated to reflect changes in the Firm’s risk profile and economic events. Stress testing is as important as VAR in measuring and controlling risk. Stress testing enhances the understanding of the Firm’s risk profile and loss potential, and is used for monitoring limits, one-off approvals and cross-business risk measurement, andas well as an input to economic capital allocation. It also helps the Firm understand how the economic value of its balance sheet (not the amounts reported under U.S. GAAP) would change under certain scenarios.
Based upon the Firm’s stress scenarios, the stress-teststress test loss (pre-tax) in the IB’s trading portfolio ranged from $848 million to $1.3 billion, and from $469 million to $1.4 billion$745 million, for the ninethree months ended September 30,March 31, 2006, and March 31, 2005, and from $226 million to $1.2 billion for the nine months ended September 30, 2004. The 2005 results reflect the combined Firm’s results, while 2004 includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results. For a further discussion of the Firm’s stress-testing methodology, see page 73 of JPMorgan Chase’s 2004 Annual Report.respectively.

6156

Earnings-at-risk stress testing
The VAR and stress-test measures described above illustrate the total economic sensitivity of the Firm’s balance sheet to changes in market variables. The effect of interest rate exposure on reported Net income also is also critical. Interest rate risk exposure in the Firm’s core nontrading business activities (i.e., asset/liability management positions) results from on– and off–balance sheet positions. The Firm conducts simulations of changes in NII forfrom its nontrading activities under a variety of interest rate scenarios, which are consistent with the scenarios used for economic-value stress testing. Earnings-at-risk tests measure the potential change in the Firm’s Net interest income over the next 12 months. These testsmonths and highlight exposures to various rate-sensitive factors, such as the rates themselves (e.g., the prime lending rate), pricing strategies on deposits, optionality and changes in product mix. The tests include forecasted balance sheet changes, such as asset sales and securitizations, as well as prepayment and reinvestment behavior.
Earnings-at-risk also can also result from changes in the slope of the yield curve, because the Firm has the ability to lend at fixed rates and borrow at variable or short-term fixed rates. Based upon these scenarios, the Firm’s earnings would be affected negatively affected by a sudden and unanticipated increase in short-term rates without a corresponding increase in long-term rates. Conversely, higher long-term rates generally are generally beneficial to earnings, particularly when the increase is not accompanied by rising short-term rates.
Immediate changes in interest rates present a limited view of risk, and so a number of alternative scenarios also are also reviewed. These scenarios include the implied forward curve, nonparallel rate shifts and severe interest rate shocks on selected key rates. These scenarios are intended to provide a comprehensive view of JPMorgan Chase’s earnings-at-risk over a wide range of outcomes.
JPMorgan Chase’s 12-month pre-tax earnings sensitivity profile as of September 30, 2005,March 31, 2006, and December 31, 2004,2005, were as follows:
             
  Immediate change in rates 
(in millions) +200bp  +100bp  -100bp 
 
September 30, 2005
 $(195) $(52) $51 
December 31, 2004  (557)  (164)  (180)
 
             
  Immediate change in rates
(in millions) +200bp  +100bp  -100bp 
 
March 31, 2006
 $(626) $(272) $152 
December 31, 2005  265   172   (162)
 
The primary change in earnings-at-risk from December 31, 2005, reflects a higher level of AFS securities and other Treasury repositioning. The Firm’s risk to rising and falling interest rates is due primarily due to corresponding increases and decreases in short-term funding costs.
 
OPERATIONAL RISK MANAGEMENT
 
For a discussion of JPMorgan Chase’s operational risk management, refer to page 7579 of JPMorgan Chase’s 20042005 Annual Report.
 
REPUTATIONALREPUTATION AND FIDUCIARY RISK MANAGEMENT
 
For a discussion of the Firm’s Reputation and Fiduciary Risk Management, see page 7680 of JPMorgan Chase’s 20042005 Annual Report.
 
PRIVATE EQUITY RISK MANAGEMENT
 
For a discussion of Private Equity Risk Management, see page 7680 of JPMorgan Chase’s 20042005 Annual Report. At September 30, 2005,March 31, 2006, the aggregate carrying value of the private equity portfolios of the JPMorgan Partners and ONE Equity Partners businesses was $5.9 billion.$6.3 billion, of which $501 million represented positions traded in the public market.
 
SUPERVISION AND REGULATION
 
The following discussion should be read in conjunction with the Supervision and Regulation section on pages 1–41-4 of JPMorgan Chase’s 20042005 Form 10–K.
Dividends
At March 31, 2006, JPMorgan Chase’s bank subsidiaries could pay, in the aggregate, $9.1 billion in dividends to their respective bank holding companies without theprior approval of their relevant banking regulators, in amounts up to the limitations imposed upon such banks by regulatory restrictions. These limitations, in the aggregate, totaled approximately $10.0 billion at September 30, 2005.regulators.

6257

 
CRITICAL ACCOUNTING ESTIMATES USED BY THE FIRM
 
JPMorgan Chase’s accounting policies and use of estimates are integral to understanding its reported results. The Firm’s most complex accounting estimates require management’s judgment to ascertain the valuation of assets and liabilities. The Firm has established detailed policies and control procedures intended to ensure that valuation methods, including any judgments made as part of such methods, are well controlled, independently reviewed and applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The Firm believes its estimates for determining the valuation of its assets and liabilities are appropriate. For a further description of the Firm’s critical accounting estimates involving significant management valuation judgments, see pages 77–7981–83 and the Notes to consolidated financial statements in JPMorgan Chase’s 20042005 Annual Report.
Allowance for credit losses
JPMorgan Chase’s allowance for credit losses covers the wholesale and consumer loan portfolios as well as the Firm’s portfolio of wholesale lending-related commitments. The Allowance for loan losses is intended to adjust the value of the Firm’s loan assets for probable credit losses as of the balance sheet date. For a further discussion of the methodologies used in establishing the Firm’s allowance for credit losses, see Note 12 on pages 102–103107–108 of JPMorgan Chase’s 20042005 Annual Report. The methodology for calculating the Allowance for loan losses and the Allowance for lending-related commitments involves significant judgment. For a further description of these judgments, see theAllowance for credit losses on page 81 of JPMorgan Chase 2004Chase’s 2005 Annual Report; for amounts recorded as of September 30,March 31, 2006 and 2005, and 2004, see allowance for credit losses on pages 58–59,page 53, and Note 11 on page 7674 of this Form 10–Q.
Fair value of financial instruments
A portion of JPMorgan Chase’s assets and liabilities are carried at fair value, including trading assets and liabilities, AFS securities, and private equity investments.investments and mortgage servicing rights. Held-for-sale loans and mortgage servicing rights (“MSRs”)physical commodities are carried at the lower of fair valuecost or cost.market. At September 30, 2005,March 31, 2006, approximately $415$427 billion of the Firm’s assets were recorded at fair value.
Trading and available-for-sale portfolios
The following table summarizes the Firm’s trading and available-for-sale portfolios by valuation methodology at September 30, 2005:March 31, 2006:
                                        
 Trading assets Trading liabilities   Trading assets Trading liabilities   
 Securities Securities AFS Securities Securities AFS
 purchased(a) Derivatives(b) sold(a) Derivatives(b) securities purchased(a) Derivatives(b) sold(a) Derivatives(b) securities
Fair value based on:
 
Fair value based upon:
 
Quoted market prices  85%  2%  97%  1%  94%  94%  1%  99%  2%  94%
Internal models with significant observable market parameters 14 97 2 97 5  4 96 1 96 4 
Internal models with significant unobservable market parameters 1 1 1 2 1  2 3 — 2 2 
Total  100%  100%  100%  100%  100%  100%  100%  100%  100%  100%
(a) 
Reflected as debt and equity instruments on the Firm’s Consolidated balance sheets.
(b) 
Based onupon gross mark-to-market valuations of the Firm’s derivatives portfolio prior to netting positions pursuant to FIN 39, as cross-product netting is not relevant to an analysis based upon valuation methodologies.

58

 
ACCOUNTING AND REPORTING DEVELOPMENTS
 
Accounting for income taxes – repatriation of foreign earnings under the American Jobs Creation Act of 2004Share-Based Payments
In December 2004, the FASB issued FSP SFAS 109-2, which provides accounting and disclosure guidance for the foreign earnings repatriation provision within the American Jobs Creation Act of 2004 (the “Act”). The Act was signed into law on October 22, 2004.
The Act creates a temporary incentive for U.S. companies to repatriate accumulated foreign earnings at a substantially reduced U.S. effective tax rate by providing a dividends received deduction on the repatriation of certain foreign earnings to the U.S. taxpayer (the “repatriation provision”). The new deduction is subject to a number of limitations and requirements.
The FSP provides a practical exception to the SFAS 109 requirement to reflect the effect of a new tax law in the period of enactment because of the lack of clarification of certain provisions of the Act at the time the FSP was issued and the timing of the enactment. Thus, companies have additional time to assess the effect of the Act on their plans for reinvestment or repatriation of foreign earnings for purposes of applying SFAS 109. A company should apply the provisions of SFAS 109 (i.e., reflect the tax impact in the financial statements) in the period in which it makes the decision to repatriate or reinvest unremitted foreign earnings in accordance with the

63

Act. Decisions can be made in stages (e.g., by foreign country). The repatriation provision is effective for either the 2004 or 2005 tax years for calendar year taxpayers. The Firm did not utilize the repatriation provision for its 2004 tax year.
The range of possible amounts that may be considered by the Firm for repatriation under this provision in 2005 is between zero and $1.9 billion. The Firm is currently assessing the impact of the repatriation provision and, at this time, cannot yet reasonably estimate the related range of income tax effects of the provision. Accordingly, the Firm has not reflected the tax effect of the repatriation provision in income tax expense or income tax liabilities.
Accounting for share-based payments
In December 2004, the FASB issued SFAS 123R, which revises SFAS 123 and supersedes APB 25. In March 2005, the SECSecurities and Exchange Commission (“SEC”) issued SAB 107, which provides interpretive guidance on SFAS 123R. Accounting and reporting under SFAS 123R is generally similar to the SFAS 123 approach. However, SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. SFAS 123R permits adoption using one of two methods – modified prospective or modified retrospective. In April 2005, the Securities and Exchange Commission approved a new rule that, for public companies, delays the effective date of SFAS 123R to no later than January 1, 2006. The Firm intends to adoptadopted SFAS 123R on January 1, 2006, under the modified prospective method.
The Firm has continued For additional information related to account for stock options that were outstanding as of December 31, 2002, under APB 25 using the intrinsic value method. Therefore, compensation expense for some previously-granted awards that was not recognized under SFAS 123 will be recognized under SFAS 123R. Had the Firm adopted SFAS 123R, in prior periods, the impact would have approximated the impact of SFAS 123 as described insee Note 6 on page 73pages 68–71 of this Form 10–Q.
Accounting for Certain Hybrid Financial Instruments – an Amendment of FASB Statements No. 133 and 140
In May 2005,February 2006, the Securities and Exchange Commission provided guidance on accountingFASB issued SFAS 155, which applies to certain “hybrid financial instruments,” which are instruments that contain embedded derivatives. The new standard establishes a requirement to evaluate beneficial interests in securitized financial assets to determine if the interests represent freestanding derivatives or are hybrid financial instruments containing embedded derivatives requiring bifurcation. It also permits an election for share–based paymentsfair value remeasurement of any hybrid financial instrument containing an embedded derivative that are retained upon retirement.otherwise would require bifurcation under SFAS 133. The Firm is awareadopted this standard effective January 1, 2006. For additional information related to SFAS 155, see Note 1 on page 64 of differing interpretations among accounting professionals about the accounting for certain awards to employees who either are or will become retirement eligible during the vesting period. The Firm will continue to monitor these interpretations as it assesses the future impact of the accounting for these awards on its financial condition and results of operations.this Form 10–Q.
Accounting for conditional asset retirement obligationsServicing of Financial Assets
In March 2005,the first quarter of 2006, the FASB issued FIN 47 to clarify the term “conditional asset retirement obligation” as used in SFAS 143. Conditional asset retirement obligations are legal obligations to perform an asset retirement activity in which the timing and/or method of settlement are conditional based on a future event that may or may not be within the control of the company. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and/or method of settlement. FIN 47 clarifies that a company is required to recognize a liability for the fair value of the conditional asset retirement obligation if the fair value of the liability can be reasonably estimated and provides guidance for determining when a company would have sufficient information to reasonably estimate the fair value of the obligation. The Firm will adopt FIN 47 on December 31, 2005. While the Firm continues to assess the impact of adoption, based on current estimates, the Firm does not believe the implementation will have a material impact on its financial position or results of operations.
Accounting by insurance enterprises for deferred acquisition costs in connection with modifications or exchanges of insurance contracts
In September 2005, the AICPA issued SOP 05-1,156, which is effective foras of the beginning of the first fiscal yearsyear beginning after DecemberSeptember 15, 2006, with early adoption permitted. JPMorgan Chase has elected to adopt the standard effective January 1, 2006. The SOP provides guidance onstandard permits an entity a one-time irrevocable election to adopt fair value accounting by insurance enterprises for deferred acquisition costs on internal replacementsa class of insurance and certain investment contracts.servicing assets. The Firm has defined MSRs as one class of servicing assets for this election. For additional information related to the Firm’s adoption of SFAS 156 with respect to MSRs, see Note 14 on page 80 of this Form 10-Q.
Accounting for Variable Interest Entities
In April 2006, the FASB issued FSP FIN 46(R)-6, which requires an analysis of the design of a VIE in determining the variability to be considered in the application of FIN 46(R). The guidance in this FSP will adopt SOP 05-1 on Januarybe applied prospectively as of July 1, 2007,2006 to all entities with which the Firm first becomes involved after such date and does not believe that adoption will haveto all entities previously required to be analyzed under FIN 46(R) when a material impact on its financial position or results of operations.reconsideration event occurs after such date. The Firm expects to arrive at similar consolidation conclusions under the FSP as those reached currently under FIN 46(R).

6459

JPMORGAN CHASE & CO.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in millions, except per share data)
                 
  Three months ended September 30,  Nine months ended September 30, 
  2005  2004  2005  2004(a) 
 
Revenue
                
Investment banking fees $989  $879  $2,943  $2,464 
Trading revenue  2,499   408   4,745   3,001 
Lending & deposit related fees  865   943   2,536   1,769 
Asset management, administration and commissions  2,628   2,185   7,667   5,835 
Securities/private equity gains (losses)  343   413   705   1,305 
Mortgage fees and related income  201   233   899   721 
Credit card income  1,855   1,782   5,352   3,018 
Other income  233   210   930   602 
 
Noninterest revenue
  9,613   7,053   25,777   18,715 
 
                 
Interest income  11,435   9,493   33,016   20,733 
Interest expense  6,583   4,041   17,938   9,301 
 
Net interest income
  4,852   5,452   15,078   11,432 
 
Total net revenue
  14,465   12,505   40,855   30,147 
 
                 
Provision for credit losses  1,245   1,169   2,259   1,387 
                 
Noninterest expense
                
Compensation expense  5,001   4,050   13,969   10,295 
Occupancy expense  549   604   1,654   1,475 
Technology and communications expense  899   1,046   2,715   2,651 
Professional & outside services  1,018   1,103   3,222   2,671 
Marketing  512   506   1,532   907 
Other expense  882   920   2,641   1,878 
Amortization of intangibles  382   396   1,150   554 
 
Total noninterest expense before merger costs and litigation reserve charge
  9,243   8,625   26,883   20,431 
Merger costs  221   752   645   842 
Litigation reserve charge  —   —   2,772   3,700 
 
Total noninterest expense
  9,464   9,377   30,300   24,973 
 
                 
Income before income tax expense  3,756   1,959   8,296   3,787 
Income tax expense  1,229   541   2,511   987 
 
Net income
 $2,527  $1,418  $5,785  $2,800 
 
Net income applicable to common stock
 $2,524  $1,405  $5,774  $2,761 
 
                 
Net income per common share
                
Basic earnings per share $0.72  $0.40  $1.65  $1.09 
Diluted earnings per share  0.71   0.39   1.62   1.06 
                 
Average basic shares  3,485.0   3,513.5   3,498.4   2,533.1 
Average diluted shares  3,547.7   3,592.0   3,555.1   2,598.5 
                 
Cash dividends per common share $0.34  $0.34  $1.02  $1.02 
 
(a)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
         
  Three months ended March 31,
  2006  2005 
 
Revenue
        
Investment banking fees $1,169  $993 
Principal transactions  2,602   2,636 
Lending & deposit related fees  841   820 
Asset management, administration and commissions  2,973   2,498 
Securities gains (losses)  (116)  (822)
Mortgage fees and related income  241   362 
Credit card income  1,910   1,734 
Other income  556   201 
 
Noninterest revenue
  10,176   8,422 
 
         
Interest income  13,301   10,632 
Interest expense  8,241   5,407 
 
Net interest income
  5,060   5,225 
 
Total net revenue
  15,236   13,647 
 
         
Provision for credit losses  831   427 
         
Noninterest expense
        
Compensation expense  5,600   4,702 
Occupancy expense  602   525 
Technology and communications expense  874   920 
Professional & outside services  888   1,074 
Marketing  519   483 
Other expense  834   1,705 
Amortization of intangibles  364   383 
Merger costs  71   145 
 
Total noninterest expense
  9,752   9,937 
 
         
Income before income tax expense  4,653   3,283 
Income tax expense  1,572   1,019 
 
Net income
 $3,081  $2,264 
 
Net income applicable to common stock
 $3,077  $2,259 
 
         
Net income per common share
        
Basic earnings per share $0.89  $0.64 
Diluted earnings per share  0.86   0.63 
         
Average basic shares  3,472.7   3,517.5 
Average diluted shares  3,570.8   3,569.8 
         
Cash dividends per common share $0.34  $0.34 
 
The Notes to consolidated financial statements (unaudited) are an integral part of these statements.

6560

JPMORGAN CHASE & CO.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions, except share data)
                
 September 30, December 31,  March 31, December 31, 
 2005 2004  2006 2005 
Assets
  
Cash and due from banks $33,036 $35,168  $36,903 $36,670 
Deposits with banks 14,337 21,680  10,545 21,661 
Federal funds sold and securities purchased under resale agreements 122,876 101,354  153,755 133,981 
Securities borrowed 64,381 47,428  93,280 74,604 
Trading assets (including assets pledged of $108,558 at September 30, 2005, and $77,266 at December 31, 2004) 304,560 288,814 
Trading assets (including assets pledged of $86,839 at March 31, 2006, and $79,657 at December 31, 2005) 312,025 298,377 
Securities:  
Available-for-sale (including assets pledged of $23,595 at September 30, 2005, and $26,881 at December 31, 2004) 68,613 94,402 
Held-to-maturity (fair value: $88 at September 30, 2005, and $117 at December 31, 2004) 84 110 
Available-for-sale (including assets pledged of $40,445 at March 31, 2006, and $17,614 at December 31, 2005) 67,054 47,523 
Held-to-maturity (fair value: $74 at March 31, 2006, and $80 at December 31, 2005) 72 77 
Interests in purchased receivables 28,766 31,722  29,029 29,740 
  
Loans 420,504 402,114  432,081 419,148 
Allowance for loan losses  (7,220)  (7,320)  (7,275)  (7,090)
Loans, net of Allowance for loan losses 413,284 394,794  424,806 412,058 
  
Private equity investments 6,081 7,735  6,499 6,374 
Accrued interest and accounts receivable 28,872 21,409  21,657 22,421 
Premises and equipment 9,297 9,145  8,985 9,081 
Goodwill 43,555 43,203  43,899 43,621 
Other intangible assets:  
Mortgage servicing rights 6,057 5,080  7,539 6,452 
Purchased credit card relationships 3,352 3,878  3,243 3,275 
All other intangibles 5,139 5,726  4,832 4,832 
Other assets 50,743 45,600  49,159 48,195 
Total assets
 $1,203,033 $1,157,248  $1,273,282 $1,198,942 
Liabilities
  
Deposits:  
U.S. offices:  
Noninterest-bearing $134,129 $129,257  $128,982 $135,599 
Interest-bearing 267,288 261,673  309,779 287,774 
Non-U.S. offices:  
Noninterest-bearing 6,723 6,931  6,591 7,476 
Interest-bearing 126,983 123,595  139,113 124,142 
Total deposits 535,123 521,456  584,465 554,991 
  
Federal funds purchased and securities sold under repurchase agreements 143,404 127,787  151,006 125,925 
Commercial paper 16,166 12,605  15,933 13,863 
Other borrowed funds 15,400 9,039  14,400 10,479 
Trading liabilities 152,492 151,207  160,098 145,930 
Accounts payable, accrued expenses and other liabilities (including the Allowance for lending-related commitments of $395 at September 30, 2005, and $492 at December 31, 2004) 74,698 75,722 
Accounts payable, accrued expenses and other liabilities (including the Allowance for lending-related commitments of $384 at March 31, 2006, and $400 at December 31, 2005) 73,693 78,460 
Beneficial interests issued by consolidated VIEs 46,140 48,061  42,237 42,197 
Long-term debt 101,853 95,422 
Long-term debt (including structured notes accounted for at fair value of $8.4 billion at March 31, 2006) 112,133 108,357 
Junior subordinated deferrable interest debentures held by trusts that issued guaranteed capital debt securities 11,622 10,296  10,980 11,529 
Total liabilities
 1,096,898 1,051,595  1,164,945 1,091,731 
Commitments and contingencies (see Note 17 of this Form 10–Q)  
Stockholders’ equity
  
Preferred stock 139 339  — 139 
Common stock (authorized 9,000,000,000 shares; issued 3,608,462,457 shares and 3,584,747,502 shares at September 30, 2005, and December 31, 2004, respectively) 3,608 3,585 
Common stock ($1 par value; authorized 9,000,000,000 shares; issued 3,644,744,120 shares and 3,618,189,597 shares at March 31, 2006, and December 31, 2005, respectively) 3,645 3,618 
Capital surplus 74,396 72,801  76,153 74,994 
Retained earnings 32,350 30,209  35,892 33,848 
Accumulated other comprehensive income (loss)  (602)  (208)  (1,017)  (626)
Treasury stock, at cost (105,055,027 shares at September 30, 2005, and 28,556,534 shares at December 31, 2004)  (3,756)  (1,073)
Treasury stock, at cost (171,793,672 shares at March 31, 2006, and 131,500,350 shares at December 31, 2005)  (6,336)  (4,762)
Total stockholders’ equity
 106,135 105,653  108,337 107,211 
Total liabilities and stockholders’ equity
 $1,203,033 $1,157,248  $1,273,282 $1,198,942 
The Notes to consolidated financial statements (unaudited) are an integral part of these statements.

6661

JPMORGAN CHASE & CO.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
(in millions, except per share data)
         
  Nine months ended 
  September 30, 
  2005  2004(a) 
 
Preferred stock
        
Balance at beginning of the year $339  $1,009 
Redemption of preferred stock  (200)  — 
 
Balance at end of period  139   1,009 
 
         
Common stock
        
Balance at beginning of year  3,585   2,044 
Issuance of common stock  23   63 
Issuance of common stock for purchase accounting acquisition  —   1,469 
 
Balance at end of period  3,608   3,576 
 
         
Capital surplus
        
Balance at beginning of year  72,801   13,512 
Issuance of common stock and options for purchase accounting acquisition  —   55,867 
Issuance of common stock and commitments to issue common stock for employee stock-based awards and related tax effects  1,595   2,804 
 
Balance at end of period  74,396   72,183 
 
         
Retained earnings
        
Balance at beginning of year  30,209   29,681 
Net income  5,785   2,800 
Cash dividends declared:        
Preferred stock  (11)  (39)
Common stock ($1.02 per share each period)  (3,633)  (2,663)
 
Balance at end of period  32,350   29,779 
 
         
Accumulated other comprehensive income (loss)
        
Balance at beginning of year  (208)  (30)
Other comprehensive income (loss)  (394)  (212)
 
Balance at end of period  (602)  (242)
 
         
Treasury stock, at cost
        
Balance at beginning of year  (1,073)  (62)
Purchase of treasury stock  (2,411)  (138)
Share repurchases related to employee stock-based awards  (272)  (252)
 
Balance at end of period  (3,756)  (452)
 
Total stockholders’ equity at end of period $106,135  $105,853 
 
         
Comprehensive income
        
Net income $5,785  $2,800 
Other comprehensive income (loss)  (394)  (212)
 
Comprehensive income $5,391  $2,588 
 
(a)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
         
  Three months ended March 31, 
  2006  2005 
 
Preferred stock
        
Balance at beginning of the year $139  $339 
Redemption of preferred stock  (139)  — 
 
Balance at end of period  —   339 
 
         
Common stock
        
Balance at beginning of year  3,618   3,585 
Issuance of common stock  27   13 
 
Balance at end of period  3,645   3,598 
 
         
Capital surplus
        
Balance at beginning of year  74,994   72,801 
Issuance of common stock and commitments to issue common stock for employee stock-based awards and related tax effects  1,159   593 
 
Balance at end of period  76,153   73,394 
 
         
Retained earnings
        
Balance at beginning of year  33,848   30,209 
Cumulative effect of change in accounting principles  172   — 
 
Balance at beginning of year, adjusted  34,020   30,209 
Net income  3,081   2,264 
Cash dividends declared:        
Preferred stock  (4)  (5)
Common stock ($0.34 per share each period)  (1,205)  (1,215)
 
Balance at end of period  35,892   31,253 
 
         
Accumulated other comprehensive income (loss)
        
Balance at beginning of year  (626)  (208)
Other comprehensive income (loss)  (391)  (415)
 
Balance at end of period  (1,017)  (623)
 
         
Treasury stock, at cost
        
Balance at beginning of year  (4,762)  (1,073)
Purchase of treasury stock  (1,291)  (1,316)
Share repurchases related to employee stock-based awards  (283)  (232)
 
Balance at end of period  (6,336)  (2,621)
 
Total stockholders’ equity at end of period $108,337  $105,340 
 
         
Comprehensive income
        
Net income $3,081  $2,264 
Other comprehensive income (loss)  (391)  (415)
 
Comprehensive income $2,690  $1,849 
 
The Notes to consolidated financial statements (unaudited) are an integral part of these statements.

6762

JPMORGAN CHASE & CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in millions)
         
  Nine months ended September 30, 
  2005  2004(a) 
 
Operating activities
        
Net income $5,785  $2,800 
Adjustments to reconcile net income to net cash (used in) operating activities:        
Provision for credit losses  2,259   1,387 
Depreciation and amortization  3,255   2,604 
Deferred tax benefit  (531)  (684)
Investment securities (gains) losses  796   (305)
Private equity unrealized (gains) losses  30   (408)
Net change in:        
Trading assets  (13,400)  (29,795)
Securities borrowed  (16,953)  (7,934)
Accrued interest and accounts receivable  (7,414)  (858)
Other assets  (7,315)  (8,585)
Trading liabilities  768   (5,293)
Accounts payable, accrued expenses and other liabilities  (290)  5,942 
Other operating adjustments  —   (64)
 
Net cash (used in) operating activities  (33,010)  (41,193)
         
Investing activities
        
Net change in:        
Deposits with banks  7,460   (15,598)
Federal funds sold and securities purchased under resale agreements  (21,364)  (7,778)
Other change in loans  (109,283)  (100,866)
Held-to-maturity securities:        
Proceeds  26   55 
Available-for-sale securities:        
Proceeds from maturities  24,113   8,554 
Proceeds from sales  58,159   108,314 
Purchases  (62,709)  (108,530)
Loans due to sales and securitizations  88,449   82,463 
Net cash (used) received in business acquisitions  (503)  14,281 
All other investing activities, net  4,445   515 
 
Net cash (used in) investing activities  (11,207)  (18,590)
         
Financing activities
        
Net change in:        
Deposits  12,153   23,178 
Federal funds purchased and securities sold under repurchase agreements  15,617   46,591 
Commercial paper and other borrowed funds  9,922   (6,226)
Proceeds from the issuance of long-term debt and capital debt securities  31,995   19,828 
Repayments of long-term debt and capital debt securities  (22,211)  (11,580)
Net issuance of stock and stock-based awards  429   1,444 
Redemption of preferred stock  (200)  — 
Treasury stock purchased  (2,411)  (138)
Cash dividends paid  (3,669)  (2,691)
All other financing activities, net  804   — 
 
Net cash provided by financing activities  42,429   70,406 
 
Effect of exchange rate changes on cash and due from banks  (344)  (76)
Net increase (decrease) in cash and due from banks  (2,132)  10,547 
Cash and due from banks at the beginning of the year  35,168   20,268 
 
Cash and due from banks at the end of the period $33,036  $30,815 
 
Cash interest paid $17,849  $9,152 
Cash income taxes paid  3,585   947 
 
(a)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
         
  Three months ended March 31, 
  2006  2005 
 
Operating activities
        
Net income $3,081  $2,264 
Adjustments to reconcile net income to net cash (used in) operating activities:        
Provision for credit losses  831   427 
Depreciation and amortization  837   1,165 
Deferred tax provision  554   462 
Investment securities (gains) losses  116   822 
Private equity unrealized (gains) losses  (84)  (201)
Stock-based compensation  839   381 
Net change in:        
Trading assets  (9,330)  545 
Securities borrowed  (18,676)  (5,746)
Accrued interest and accounts receivable  848   338 
Other assets  (2,459)  (6,974)
Trading liabilities  11,383   (472)
Accounts payable, accrued expenses and other liabilities  (6,330)  (4,730)
Other operating adjustments  222   184 
 
Net cash (used in) operating activities  (18,168)  (11,535)
         
Investing activities
        
Net change in:        
Deposits with banks  11,405   7,465 
Federal funds sold and securities purchased under resale agreements  (19,774)  (31,239)
Other change in loans  (40,394)  (22,732)
Held-to-maturity securities:        
Proceeds  5   9 
Available-for-sale securities:        
Proceeds from maturities  6,456   8,703 
Proceeds from sales  30,369   28,232 
Purchases  (56,931)  (19,543)
Proceeds due to the sale and securitization of loans  33,180   21,373 
Net cash (used) received in business acquisitions  (663)  (304)
All other investing activities, net  873   1,374 
 
Net cash (used in) investing activities  (35,474)  (6,662)
         
Financing activities
        
Net change in:        
Deposits  25,483   6,377 
Federal funds purchased and securities sold under repurchase agreements  25,081   9,275 
Commercial paper and other borrowed funds  943   1,543 
Proceeds from the issuance of long-term debt and capital debt securities  12,354   15,796 
Repayments of long-term debt and capital debt securities  (9,316)  (9,903)
Net issuance of stock and stock-based awards  393   190 
Excess tax benefits related to stock-based compensation  135   — 
Redemption of preferred stock  (139)  — 
Treasury stock purchased  (1,291)  (1,316)
Cash dividends paid  (1,215)  (1,227)
All other financing activities, net  1,393   8 
 
Net cash provided by financing activities  53,821   20,743 
 
Effect of exchange rate changes on cash and due from banks  54   (121)
Net increase in cash and due from banks  233   2,425 
Cash and due from banks at the beginning of the year  36,670   35,168 
 
Cash and due from banks at the end of the period $36,903  $37,593 
 
Cash interest paid $8,395  $5,191 
Cash income taxes paid  234   1,187 
 
The Notes to consolidated financial statements (unaudited) are an integral part of these statements.

6863

 
See Glossary of Terms on pages 91–9288–89 of this Form 10–Q for definitions of terms used throughout the Notes to consolidated financial statements.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1 —– BASIS OF PRESENTATION
JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”), a financial holding company incorporated under Delaware law in 1968, is a leading global financial services firm and one of the largest banking institutions in the United States, with operations in more than 50 countries.worldwide. The Firm is a leader in investment banking, financial services for consumers and businesses, financial transaction processing, asset and wealthinvestment management, private banking and private equity. For a discussion of the Firm’s business segment information, see Note 20 on pages 86–8884–86 of this Form 10–Q.
The accounting and financial reporting policies of JPMorgan Chase and its subsidiaries conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and prevailing industry practices for interim reporting.practices. Additionally, where applicable, the policies conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. The unaudited consolidated financial statements prepared in conformity with U.S. GAAP require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and disclosures of contingent assets and liabilities. Actual results could be different from these estimates. In the opinion of management, all normal recurring adjustments have been included for a fair statement of this interim financial information. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in JPMorgan Chase’s Annual Report on Form 10–K for the year ended December 31, 20042005 (“20042005 Annual Report”).
As further described in Note 2 below, on July 1, 2004, the Firm merged with Bank One Corporation (“Bank One”) and acquired all of its outstanding stock. The merger was accounted for using the purchase method of accounting. Bank One’s results of operations were included in the Firm’s results beginning July 1, 2004.
Certain amounts in the prior periods have been reclassified to conform to the current presentation.
Accounting for certain hybrid financial instruments
SFAS 155 applies to certain “hybrid financial instruments” which are instruments that contain embedded derivatives. The standard establishes a requirement to evaluate beneficial interests in securitized financial assets to determine if the interests represent freestanding derivatives or are hybrid financial instruments containing embedded derivatives requiring bifurcation. SFAS 155 also permits an election for fair value measurement of any hybrid financial instrument containing an embedded derivative that otherwise would require bifurcation under SFAS 133. The fair value election can be applied to existing instruments on an instrument-by-instrument basis at the date of adoption and can be applied to new instruments on a prospective basis.
The Firm adopted SFAS 155 effective January 1, 2006. The Firm has elected to fair value all instruments issued, acquired or modified after December 31, 2005, that are required to be bifurcated under SFAS 133/149 and SFAS 155. In addition, the Firm elected to fair value certain structured notes existing as of December 31, 2005, resulting in a $22 million cumulative effect increase to Retained earnings. The cumulative effect adjustment includes gross unrealized gains of $29 million and gross unrealized losses of $7 million.
The substantial majority of the structured notes to which the fair value election has been applied are classified in Long-term debt on the Consolidated balance sheets. The change in fair value associated with structured notes is classified within Principal transactions on the Consolidated statements of income.
NOTE 2 —– BUSINESS CHANGES AND DEVELOPMENTS
Acquisition of the consumer, small-business and middle-market banking businesses of The Bank of New York in exchange for the corporate trust business
On April 8, 2006, JPMorgan Chase announced an agreement to acquire The Bank of New York’s consumer, small-business and middle-market banking businesses in exchange for the Firm’s corporate trust business plus a cash payment of $150 million. The Bank of New York businesses being acquired are valued at a premium of $2.30 billion; the Firm’s corporate trust business being sold is valued at a premium of $2.15 billion. The Firm may also make a future payment to The Bank of New York of up to $50 million depending on the number of new account openings at the Firm’s retail business. The transaction has been approved by both companies’ boards of directors and is subject to regulatory approvals. It is expected to close in late third quarter or the fourth quarter of 2006.
Acquisition of Kohl’s private label credit card portfolio
On March 5, 2006, JPMorgan Chase entered into an agreement with Kohl’s Corporation (“Kohl’s”) to acquire $1.6 billion of Kohl’s private label credit card receivables and 13 million accounts. The transaction was completed on April 21, 2006. JPMorgan Chase and Kohl’s have also entered into an agreement under which JPMorgan Chase will offer private label credit cards to both new and existing Kohl’s customers.

64

Collegiate Funding Services
On March 1, 2006, JPMorgan Chase acquired, for approximately $663 million, Collegiate Funding Services, a leader in education loan servicing and consolidation. This acquisition included $6 billion of education loans and enables the Firm to create a comprehensive education finance business.
Acquisition of certain operations from Paloma Partners
On March 1, 2006, JPMorgan Chase acquired the middle and back office operations of Paloma Partners Management Company (“Paloma”), which is part of a privately-owned investment fund management group based in Greenwich, CT. The parties have also entered into a multi-year contract pursuant to which JPMorgan Chase will provide daily operational services to Paloma. The acquired operations will be combined with JPMorgan Chase’s current hedge fund administration unit, JPMorgan Tranaut.
JPMorgan and Fidelity Brokerage Company
On February 28, 2006, the Firm announced a strategic alliance with Fidelity Brokerage to become the exclusive provider of new issue equity securities and the primary provider of fixed income products to Fidelity’s brokerage clients and retail customers, effectively expanding the Firm’s existing distribution platform.
Sale of BrownCoinsurance underwriting business
On September 29, 2005,February 7, 2006, JPMorgan Chase announced that it had signed a definitive agreementagreed to sell BrownCo, an on-line deep-discount brokerage business,its life insurance and annuity underwriting businesses to E*TRADE FinancialProtective Life Corporation for a cash purchase price of $1.6approximately $1.2 billion. JPMorganThe sale, which includes both the heritage Chase expects to recognize an after-tax gain of approximately $700 million. The saleinsurance business and the life business that Bank One had bought from Zurich Insurance in 2003, is subject to normal regulatory approvals and is expected to close by year-end 2005. A condensed summaryin the third quarter of the results of operation of BrownCo and its effect on the per share earnings of the Firm follows:
                 
  Three months ended September 30,  Nine months ended September 30, 
(in millions, except per share data) 2005  2004  2005  2004 
 
Net interest income $30  $25  $83  $69 
Noninterest revenue  22   18   67   64 
 
Total net revenue  52   43   150   133 
Provision for credit losses  —   —   —   — 
Noninterest expense  31   36   96   102 
 
Operating earnings before income taxes  21   7   54   31 
Income tax expense  8   2   21   9 
 
Operating earnings $13  $5  $33  $22 
 
                 
JPMorgan Chase basic earnings per share:                
Including BrownCo $0.72  $0.40  $1.65  $1.09 
Excluding BrownCo  0.72   0.40   1.64   1.08 
                 
JPMorgan Chase diluted earnings per share:                
Including BrownCo $0.71  $0.39  $1.62  $1.06 
Excluding BrownCo  0.71   0.39   1.61   1.05 
                 
Selected balance sheet data (average)
                
Total assets $3,892  $3,906  $3,866  $3,944 
Loans  3,031   2,741   2,994   2,662 
Deposits  3,118   3,414   3,339   3,460 
Equity  284   284   284   284 
                 
Business metrics
                
Assets under supervision (in billions) $34  $30         
 

69

Sears Canada credit card business
On August 31, 2005,2006. JPMorgan Chase announced that it had entered into an agreement to purchaseanticipates the credit card operation, including both the private-label Sears card accounts and the co-branded Sears MasterCard® accounts, of Sears Canada Inc. The credit card operation includes approximately 10 million accounts and CAD$2.5 billion in outstanding loans. Sears Canada and JPMorgan Chase will enter into an ongoing arrangement under which JPMorgan Chase will offer private-label and co-branded credit cards to both new and existing customers. The transaction is expected to close by year-end 2005.
Neovest Holdings, Inc.
On September 1, 2005, JPMorgan Chase completed its acquisition of Neovest Holdings, Inc., a provider of high-performance trading technology and direct market access. This transaction will enablehave no material impact on earnings.
NOTE 3—PRINCIPAL TRANSACTIONS
Principal transactions is a new caption, effective January 1, 2006, in the Consolidated income statements. Principal transactions revenue consists of realized and unrealized gains and losses from trading activities including physical commodities inventories that are accounted for at the lower of cost or market, primarily in the Investment Bank, to offer a leading, broker-neutral trading platform across asset classes to institutional investors, asset managers and hedge funds.
Agreement with First Data Corp. to integrate Chase Merchant Services, Paymentech
On October 5, 2005, JPMorgan Chase and First Data Corp. announced that they have completed an agreement to integrate the companies’ jointly-owned Chase Merchant Services and Paymentech merchant businesses, to be operated under the name of Chase Paymentech Solutions, LLC. The combined business will be the largest financial transaction processorPrivate equity gains (losses), primarily in the U.S. for businesses accepting payments via traditional pointprivate equity business of sale, Internet, catalogCorporate. The prior period presentation of Trading revenue and recurring billing.
Merger with Bank One Corporation
ReferPrivate equity gains (losses) have been reclassified to Note 2 on pages 89–90 of JPMorgan Chase’s 2004 Annual Report for a discussion of JPMorgan Chase’s merger with Bank One Corporation (the “Merger”) on July 1, 2004, including its purchase price allocation and goodwill, Unaudited condensed statement of net assets acquired, and Acquired, identifiable intangible assets. The Merger was accounted for using the purchase method of accounting, which requires that the assets and liabilities of Bank One that were acquired be fair valued as of July 1, 2004. The purchase price to complete the Merger was $58.5 billion.
Pro forma condensed combined financial information
this new caption. The following pro forma condensed combined financial informationtable presents the results of operations of the Firm, for the nine months ended September 30, 2004, had the Merger taken place as of January 1, 2004.Principal transactions revenue:
     
  Nine months ended 
(in millions, except per share data) September 30, 2004 
 
Noninterest revenue $23,554 
Net interest income  16,037 
 
Total net revenue  39,591 
Provision for credit losses  1,570 
Noninterest expense  31,118 
 
Income before income tax expense  6,903 
Net income $4,878 
     
Net income per common share:    
Basic $1.38 
Diluted  1.35 
Average common shares outstanding:    
Basic  3,508.9 
Diluted  3,590.0 
 
         
  Three months ended March 31, 
(in millions) 2006  2005 
 
Trading revenue $2,343  $1,859 
Private equity gains (losses)  259   777 
 
Principal transactions
 $2,602  $2,636 
 

70

NOTE 3 — TRADING ASSETS AND LIABILITIES
For a discussion of the accounting policies related to tradingTrading assets and Trading liabilities and Private equity investments, see NoteNotes 3 and 9 on pages 90-9194 and 103–105, respectively, of JPMorgan Chase’s 20042005 Annual Report.

65

Trading assets and liabilities
The following table presents the fair value of Trading assets and Trading liabilities for the dates indicated:
                
 September 30, December 31,  March 31, December 31, 
(in millions) 2005 2004  2006 2005 
Trading assets
  
Debt and equity instruments:  
U.S. government and federal agency obligations $17,883 $16,867  $16,018 $16,283 
U.S. government-sponsored enterprise obligations 35,287 23,513  18,175 24,172 
Obligations of state and political subdivisions 7,914 3,486  7,650 9,887 
Certificates of deposit, bankers’ acceptances and commercial paper 8,542 7,341  9,169 5,652 
Debt securities issued by non-U.S. governments 54,393 50,699  53,049 48,671 
Corporate securities and other 126,152 120,926  155,214 143,925 
Total debt and equity instruments 250,171 222,832  259,275 248,590 
Derivative receivables(a)
 
Derivative receivables:(a)
 
Interest rate 33,043 45,892  31,328 30,416 
Foreign exchange 4,069 7,939  2,179 2,855 
Equity 6,659 6,120  6,813 5,575 
Credit derivatives 3,975 2,945  3,881 3,464 
Commodity 6,643 3,086  8,549 7,477 
Total derivative receivables 54,389 65,982  52,750 49,787 
Total trading assets
 $304,560 $288,814  $312,025 $298,377 
Trading liabilities
  
Debt and equity instruments(b)
 $99,163 $87,942  $104,160 $94,157 
Derivative payables:(a)
  
Interest rate 31,283 41,075  28,095 28,488 
Foreign exchange 4,114 8,969  3,265 3,453 
Equity 10,739 9,096  14,656 11,539 
Credit derivatives 2,435 2,499  2,904 2,445 
Commodity 4,758 1,626  7,018 5,848 
Total derivative payables 53,329 63,265  55,938 51,773 
Total trading liabilities
 $152,492 $151,207  $160,098 $145,930 
(a) 
Included in Trading assets and Trading liabilities are the reported receivables (unrealized gains) and payables (unrealized losses) related to derivatives. These amounts include the effectderivative assets and liabilities net of cash received and paid of $22.7 billion and $17.5 billion at March 31, 2006, and $26.7 billion and $18.9 billion at December 31, 2005, respectively, under legally enforceable master netting agreements, including cash paid and received.agreements.
(b) 
Primarily represents securities sold, not yet purchased.
The following table presents the carrying value and cost of the Private Equity investment portfolio for the dates indicated:
                 
  March 31, 2006  December 31, 2005 
(in millions) Carrying value  Cost  Carrying value  Cost 
 
Total private equity investments
 $6,499  $8,104  $6,374  $8,036 
 

66

NOTE 4 —– INTEREST INCOME AND INTEREST EXPENSE
Details of Interest income and Interest expense were as follows:
                
 Three months ended September 30, Nine months ended September 30,         
 Three months ended March 31, 
(in millions) 2005 2004 2005  2004(a) 2006 2005 
Interest income
  
Loans $6,721 $5,648 $19,050 $11,029  $7,497 $6,034 
Securities 707 1,011 2,395 2,390  748 1,078 
Trading assets 2,237 1,990 6,853 5,455  2,550 2,232 
Federal funds sold and securities purchased under resale agreements 1,094 474 2,762 1,095  1,543 727 
Securities borrowed 301 120 835 303  385 221 
Deposits with banks 128 131 472 331  247 154 
Interests in purchased receivables 247 119 649 130  331 186 
Total interest income 11,435 9,493 33,016 20,733  13,301 10,632 
Interest expense
  
Interest-bearing deposits 2,720 1,324 7,069 2,956  3,665 1,997 
Short-term and other liabilities 2,469 1,758 6,945 4,502  2,934 2,214 
Long-term debt 1,031 788 2,970 1,595  1,235 924 
Beneficial interests issued by consolidated VIEs 363 171 954 248  407 272 
Total interest expense 6,583 4,041 17,938 9,301  8,241 5,407 
Net interest income
 4,852 5,452 15,078 11,432  5,060 5,225 
Provision for credit losses 1,245 1,169 2,259 1,387  831 427 
Net interest income after provision for credit losses
 $3,607 $4,283 $12,819 $10,045  $4,229 $4,798 
(a)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.

71

NOTE 5 —– PENSION AND OTHER POSTRETIREMENT EMPLOYEE BENEFIT PLANS
For a discussion of JPMorgan Chase’s pension and other postretirement employee benefitOPEB plans, see Note 6 on pages 92-9596–100 of JPMorgan Chase’s 20042005 Annual Report. The following table presents the components of net periodic benefit costs reported in the Consolidated statements of income for the Firm’s U.S. and non-U.S. defined benefit pension and other postretirement benefit plans of the Firm.OPEB plan:
                                                
 Other  Pension plans   
 Pension plans Postretirement  U.S. Non-U.S. OPEB 
Three months ended March 31,(in millions) 2006 2005 2006 2005 2006 2005 
 U.S. Non-U.S. benefit plans 
Three months ended September 30,(in millions) 2005 2004 2005 2004 2005 2004 
Components of net periodic benefit costs
 
Defined benefit plans: 
Components of net periodic benefit cost
 
Benefits earned during the period $60 $74 $7 $4 $2 $3  $68 $75 $7 $5 $2 $4 
Interest cost on benefit obligations 108 108 26 21 18 20  107 108 28 26 18 21 
Expected return on plan assets  (174)  (195)  (27)  (22)  (24)  (22)  (173)  (173)  (29)  (27)  (23)  (22)
Amortization of unrecognized amounts:  
Prior service cost (1) 2 — — (9) —  1 2 — —  (5) 1 
Net actuarial (gain) loss 4  (9) 9 11 10  — 
Curtailment (gain) loss — — — —  (16) 8 
Settlement loss — — — — — — 
Net actuarial loss 3 — 10 10 6 — 
Curtailment loss — — 1 — — — 
Subtotal  (3)  (20) 15 14  (19) 9  6 12 17 14  (2) 4 
Other defined benefit pension plans(a)
 7 6 9 5 — —  6 7 10 9 — — 
Total defined benefit pension plans 4  (14) 24 19  (19) 9  12 19 27 23  (2) 4 
Defined contribution plans 60 60 42 43 — —  59 61 44 45 — — 
Total pension and other postretirement benefit expense $64 $46 $66 $62 $(19) $9  $71 $80 $71 $68 $(2) $4 
                         
                  Other 
  Pension plans  Postretirement 
  U.S.  Non-U.S.  benefit plans 
Nine months ended September 30,(in millions)(b) 2005  2004  2005  2004  2005  2004 
 
Components of net periodic benefit costs
                        
Defined benefit plans:                        
Benefits earned during the period $210  $172  $19  $11  $10  $12 
Interest cost on benefit obligations  323   242   79   64   60   58 
Expected return on plan assets  (520)  (386)  (82)  (66)  (68)  (64)
Amortization of unrecognized amounts:                        
Prior service cost  3   10   —   —   (7)  — 
Net actuarial (gain) loss  4   12   29   33   10   — 
Curtailment loss  —   —   —   —   (16)  8 
Settlement loss  —   —   —   5   —   — 
 
Subtotal  20   50   45   47   (11)  14 
Other defined benefit pension plans(a)
  20   21   29   22   —   — 
 
Total defined benefit pension plans  40   71   74   69   (11)  14 
Defined contribution plans  182   132   130   103   —   — 
 
Total pension and other postretirement benefit expense $222  $203  $204  $172  $(11) $14 
 
(a) 
Includes U.S. defined benefit pension plans not subject to Title IV of the Employee Retirement Income Security Act of 1974 (e.g., Excess Retirement Plan) and immaterial non-U.S. defined benefit pension plans.
(b)
Year-to-date 2004 results include three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
The fair value of the plan assets for the U.S. pension and OPEB plans and material non-U.S. pension and other postretirement benefit plans was $10.7$11.1 billion and $2.1$2.3 billion, respectively, as of September 30, 2005,March 31, 2006, and $10.9 billion and $1.9$2.2 billion, respectively, as of December 31, 2004.2005.

7267

NOTE 6 —– EMPLOYEE STOCK-BASED INCENTIVES
The Firm has granted restricted stock, restricted stock units (“RSUs”), stock options, and stock-settled stock appreciation rights (“SARs”) to certain of its employees, as further discussed below. The Firm’s policy for issuing shares upon settlement of employee share-based payment awards is to issue either new shares of common stock or treasury shares. For a discussionthe three months ended March 31, 2006, the Firm issued new shares of common stock to settle employee share-based payment awards.
Key employee stock-based awards
Effective May 17, 2005, the Firm adopted the 2005 Long-Term Incentive Plan (the “2005” Plan”). The 2005 Plan replaces three previous stock compensation plans (collectively, the “LTI Plans”). Under the terms of the accounting policies relating2005 Plan, 275 million shares of common stock are available for issuance during its five-year term. The 2005 Plan is the only plan under which the Firm is currently granting stock-based incentive awards.
Restricted stock and restricted stock units
Restricted stock and RSUs were granted under the LTI Plans at no cost to the recipient. These awards are subject to forfeiture until certain restrictions have lapsed, including continued employment for a specified period. The recipient of a share of restricted stock is entitled to voting rights and dividends on the common stock. An RSU entitles the recipient to receive a share of common stock after the applicable restrictions lapse; the recipient is entitled to receive cash payments equivalent to any dividends paid on the underlying common stock during the period the RSU is outstanding. Effective January 2005, the equity portion of the Firm’s annual incentive awards is granted primarily in the form of RSUs.
Compensation expense for restricted stock and RSUs is measured based upon the number of shares granted multiplied by the stock price at the grant date, and is recognized in earnings over the required service period.
The following table summarizes JPMorgan Chase’s restricted stock and RSU activity for the three months ended March 31, 2006:
         
(in thousands, except weighted average data) SharesWeighed average fair value
 
Restricted stock / RSUs outstanding, January 1  84,604  $35.22 
Granted  41,988   39.16 
Lapsed(a)
  (30,610)  30.45 
Forfeited  (2,732)  43.20 
 
Restricted stock / RSUs outstanding, March 31  93,250  $38.32 
 
(a)
Lapsed awards represent awards granted in prior years for which, in the case of restricted stock restrictions have lapsed and, in the case of RSUs, the awards have been converted into common stock.
The total fair value of shares vested during the three months ended March 31, 2006, and March 31, 2005, was $932.0 million and $982.7 million, respectively.
Key employee stock-based compensation, see Note 7stock options and SARs
Under the LTI Plans, stock options and SARs are granted with an exercise price equal to JPMorgan Chase’s common stock price on pages 95-97the grant date. Generally, options and SARs cannot be exercised until at least one year after the grant date and become exercisable over various periods as determined at the time of the grant. These awards generally expire 10 years after the grant date.
The Firm uses the Black-Scholes valuation model to estimate the fair value of all stock options and SARs. Compensation expense, which is measured at the grant-date as the fair value of stock options and SARs, is recognized in earnings on a straight-line basis over the required service period.

68

The following table summarizes JPMorgan Chase’s option and SARs activity for the three months ended March 31, 2006:
                 
(in thousands, except Number of Weighted-average Weighted-average remaining Aggregate
weighted-average data) options/SARs exercise price contractual life (in years) intrinsic value
 
Outstanding, January 1  338,575  $37.93         
Granted  670   40.25         
Exercised  (17,175)  28.12         
Forfeited  (323)  36.61         
Cancelled  (1,772)  46.89         
 
Outstanding, March 31  319,975  $38.42   4.9  $2,000,498 
Exercisable, March 31  285,095   38.89   4.5   1,749,350 
 
The weighted-average grant-date fair value of options granted during the three months ended March 31, 2006, and March 31, 2005, was $11.83 and $12.10, respectively. The total intrinsic value of options exercised during the three months ended March 31, 2006, and March 31, 2005, was $213.7 million and $94.4 million, respectively.
Broad-based employee stock options
No broad-based employee stock options were granted in 2005, or in the three months ended March 31, 2006. In prior years, awards were granted by JPMorgan Chase under the Value Sharing Plan, a nonshareholder-approved plan. For each grant, the exercise price was equal to JPMorgan Chase’s common stock price on the grant date. The options became exercisable over various periods and generally expire 10 years after the grant date.
The following table presents a summary of JPMorgan Chase’s 2004 Annual Report. broad-based employee stock option activity for the three months ended March 31, 2006:
                 
(in thousands, except Number of Weighted-average Weighted-average remaining Aggregate
weighted-average data) options exercise price contractual life (in years) intrinsic value
 
Outstanding, January 1  105,582  $40.78         
Granted  —   —         
Exercised  (2,468)  25.46         
Forfeited  (410)  37.83         
Cancelled  (484)  46.08         
 
Outstanding, March 31  102,220  $41.14   4.3  $395,988 
Exercisable, March 31  76,787   42.46   3.8   280,862 
 
The total intrinsic value of options exercised during the three months ended March 31, 2006 and 2005, was $36.4 million and $15.1 million, respectively.
Compensation expense related to stock-based incentives
JPMorgan Chase adopted SFAS 123, effective January 1, 2003, using the prospective transition method. SFAS 123 requires all stock-based compensation awards, including stock options and “SARs”, to be accounted for at fair value. Unmodified stock options that were outstanding as of December 31, 2002, continued to be accounted for under APB 25 through December 31, 2005, using the intrinsic value method. Under this method, no expense was recognized for stock options or SARs granted at an exercise price equal to the stock price on the grant date, since such options have no intrinsic value.
Effective January 1, 2006, the Firm adopted SFAS 123R and all related interpretations using the modified prospective transition method. SFAS 123R requires all share-based payments to employees, including employee stock options and SARs, to be recognized in the income statement at their fair values. Results for prior periods have not been restated. The Firm also adopted the transition election provided by FSP FAS 123(R)-3.
Upon adopting SFAS 123R, the Firm began to recognize in the income statement compensation expense for unvested stock options previously accounted for under APB 25. Additionally, the Firm recognized as compensation expense an immaterial cumulative effect adjustment resulting from the requirement to estimate forfeitures at the grant date instead of recognizing them as incurred. Prior to adopting SFAS 123R, the Firm’s accounting policy for share-based payment awards granted to retirement-eligible employees was to recognize compensation cost over the awards’ stated service period. For awards granted to retirement-eligible employees in January 2006, which are subject to SFAS 123R, the Firm recognized compensation expense on the grant date without giving consideration to the impact of post-employment restrictions. The Firm also began to accrue in the first quarter of 2006 the estimated cost of stock awards to be granted to retirement-eligible employees in January 2007. The incremental expense in the first quarter of 2006 related to the Firm’s adoption of SFAS 123R was $458.7 million. This amount represents a noncash charge and an accelerated recognition of costs that would otherwise have been incurred in future periods.

69

The Firm recognized noncash compensation expense related to its various employee stock-based incentives of $839.2 million (including the $458.7 million incremental impact of adopting SFAS 123R) and $380.9 million for the quarters ended March 31, 2006, and March 31, 2005, respectively, in its Consolidated statements of income. The total income tax benefit related to stock-based compensation arrangements recognized in the Firm’s Consolidated statements of income for the quarter ended March 31, 2006 and March 31, 2005, was $335.7 million and $152.4 million, respectively. At March 31, 2006, $1.8 billion of compensation cost related to unvested awards has not yet been charged to earnings. That cost is expected to be recognized over a weighted average period of 1.5 years. The Firm does not capitalize any compensation cost related to share-based payment awards to employees.
As a result of adopting SFAS 123R on January 1, 2006, the Firm’s Income before income tax expense and Net income for the three months ended March 31, 2006, are lower by $458.7 million and $285 million, respectively, than if the Firm had continued to account for share-based compensation under APB 25 and SFAS 123. The Firm’s reported basic and diluted earnings per share for the three months ended March 31, 2006, were $0.89 and $0.86, respectively. Had the Firm not adopted SFAS 123R, basic and diluted earnings per share for the three months ended March 31, 2006, would have been $0.97 and $0.94, respectively.
The Firm’s share-based payment awards generally have graded vesting schedules, with typically two vesting tranches: 50 percent vests in two years, and 50 percent vests in three years. The Firm separately recognizes compensation expense for each tranche of each award as if it were a separate award with its own vesting date. For each tranche granted (other than those granted to employees who either are or will become retirement eligible during the stated vesting period), compensation expense is recognized on a straight-line basis from the grant date until the vesting date of the respective tranche.
In December 2005, the Firm accelerated the vesting of approximately 41 million unvested, out-of-the-money employee stock options granted in 2001 under the Growth and Performance Incentive Program (“GPIP”), which were scheduled to vest in January 2007. These options were not modified other than to accelerate vesting. The related expense was approximately $145 million, and was recognized as compensation expense in the fourth quarter of 2005. The Firm believed that at the time the options were accelerated they had limited economic value since the exercise price of the accelerated options was $51.22 and the closing price of the Firm’s common stock on the effective date of the acceleration was $39.69.
Cash flows and tax benefits
Prior to adopting SFAS 123R, the Firm presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in its Consolidated statements of cash flows. SFAS 123R requires the cash flows resulting from the tax benefits of tax deductions in excess of the compensation expense recognized for those options (i.e., excess tax benefits) to be classified as financing cash flows. The $134.7 million of excess tax benefits classified as a financing cash inflow in the quarter ended March 31, 2006, would have been classified as an operating cash inflow if the Firm had not adopted SFAS 123R. Cash received from option exercise under all share-based payment arrangements for the quarters ended March 31, 2006, and March 31, 2005, was $534.2 million and $173.4 million, respectively. The actual tax benefit realized related to tax deductions from the exercise of options totaled $51.4 million and $16.6 million, for the quarters ended March 31, 2006, and March 31, 2005, respectively.
Comparison of the fair and intrinsic value measurement methods
The following table presents net income (after-tax) and basic and diluted earnings per share as reported, and as if all outstanding awards were accounted for at fair value:value for 2005 only, as all share-based payments in 2006 were accounted for at fair value.
                  
 Three months ended Nine months ended 
 September 30, September 30 
Three months ended March 31,   
(in millions, except per share data) 2005 2004 2005 2004(a)  2005 
Net income as reported $2,527 $1,418 $5,785 $2,800  $2,264 
Add: Employee stock-based compensation expense originally included in reported net income 205 227 649 581 
Deduct: Employee stock-based compensation expense determined under the fair value method for all awards  (238)  (265)  (775)  (703)
Add: Employee stock-based compensation expense included in reported net income, net of related tax effects 229 
Deduct: Employee stock-based compensation expense determined under the fair-value method for all awards, net of related tax effects  (289)
Pro forma net income $2,494 $1,380 $5,659 $2,678  $2,204 
Earnings per share:  
Basic: As reported $0.72 $0.40 $1.65 $1.09  $0.64 
Pro forma 0.71 0.39 1.61 1.04  0.62 
Diluted: As reported $0.71 $0.39 $1.62 $1.06  $0.63 
Pro forma 0.70 0.38 1.59 1.01  0.62 

70

The following table presents the assumptions used to value key employee stock options and SARs granted during the period under a Black-Scholes valuation model:
(a)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
         
Three months ended March 31 2006  2005 
 
Weighted-average annualized valuation assumptions
        
Risk-free interest rate  4.41%  4.23%
Expected dividend yield  3.38   3.55 
Expected common stock price volatility  36   41 
Expected life (in years)  7.0   6.8 
 
Prior to the adoption of SFAS 123R, the Firm used the historical volatility of its common stock price as the expected volatility assumption in valuing options. The Firm is currently evaluating whether the implied volatility of actively traded options on its own stock would represent a better valuation assumption.
The expected life assumption is an estimate of the length of time that an employee might hold an option before option exercise, option expiration or employment termination. The expected life assumption was developed using historical experience.
NOTE 7 —– NONINTEREST EXPENSE
In the first quarter of 2006, Other expense includes insurance recoveries relating to certain material litigation of $98 million. In the first quarter of 2005, a litigation reserve charge of $900 million, relating to the settlement of WorldCom class action, was included in Other expense.
Merger costs
A summary of Merger costs by expense category is shown in the following table.table:
                
 Three months ended Nine months ended         
 September 30, September 30,  Three months ended March 31, 
(in millions) 2005 2004 2005 2004(b)  2006 2005 
Expense category
  
Compensation $11 $380 $175 $445  $4 $55 
Occupancy 17 147 42 167 
Technology and communications and other 193 225 428 230  67 90 
Total(a)
 $221 $752 $645 $842  $71 $145 
(a) 
With the exception of occupancy-related write-offs, allAll of the costs in the table require the expenditure of cash.
(b)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
The table below shows the change in the liability balance related to the costs associated with the Bank One merger.Merger:
            
(in millions) 2005  2006 2005 
Liability balance, January 1 $952  $797 $952 
Recorded as merger costs 645  71 145 
Recorded as goodwill  (460)
Liability utilized  (815)  (133)  (180)
Liability balance, September 30 $322 
Liability balance, March 31 $735 $917 

71

NOTE 8 —– SECURITIES AND PRIVATE EQUITY INVESTMENTS
For a discussion of the accounting policies relating to Securities, and Private equity investments, see Note 9 on pages 98-100103–105 of JPMorgan Chase’s 20042005 Annual Report. The following table presents realized gains and losses from AFS securities and private equity gains:securities:
                        
 Three months ended September 30, Nine months ended September 30,  Three months ended March 31, 
(in millions) 2005 2004 2005 2004(a)  2006 2005 
Realized gains $25 $167 $263 $423  $101 $101 
Realized losses  (69)  (27)  (1,059)  (118)  (217)  (923)
Net realized securities gains (losses)  (44) 140  (796) 305 
Private equity gains 387 273 1,501 1,000 
Total Securities/private equity gains (losses) $343 $413 $705 $1,305 
Securities gains (losses) $(116) $(822)
(a)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.

73

The amortized cost and estimated fair value of AFS and held-to-maturity securities were as follows for the dates indicated:
                                                                
 September 30, 2005 December 31, 2004  March 31, 2006 December 31, 2005 
 Gross Gross Gross Gross    Gross Gross Gross Gross   
 Amortized unrealized unrealized Fair Amortized unrealized unrealized Fair  Amortized unrealized unrealized Fair Amortized unrealized unrealized Fair 
(in millions) cost gains losses value cost gains losses value  cost gains losses value cost gains losses value 
Available-for-sale securities
  
U.S. government and federal agency obligations:  
U.S. treasuries $11,098 $1 $164 $10,935 $13,621 $7 $222 $13,406  $5,890 $2 $32 $5,860 $4,245 $24 $2 $4,267 
Mortgage-backed securities 83 3 — 86 2,405 41 17 2,429  71 3 1 73 80 3 — 83 
Agency obligations 90 7 1 96 12 — — 12  82 7 — 89 165 16 — 181 
Collateralized mortgage obligations 39 — — 39 71 4 4 71  25 — — 25 4 — — 4 
U.S. government-sponsored enterprise obligations 29,024 10 638 28,396 46,143 142 593 45,692  41,703 55 1,070 40,688 22,604 9 596 22,017 
Obligations of state and political subdivisions 724 25 6 743 2,748 126 8 2,866  663 18 8 673 712 21 7 726 
Debt securities issued by non-U.S. governments 5,444 16 13 5,447 7,901 59 38 7,922  5,491 5 37 5,459 5,512 12 18 5,506 
Corporate debt securities 6,141 63 45 6,159 7,007 127 18 7,116  5,934 12 115 5,831 5,754 39 74 5,719 
Equity securities 3,470 176 6 3,640 5,810 39 14 5,835  3,055 115 3 3,167 3,179 110 7 3,282 
Other, primarily asset-backed securities(a)
 13,052 56 36 13,072 9,103 25 75 9,053  5,150 68 29 5,189 5,738 23 23 5,738 
Total available-for-sale securities $69,165 $357 $909 $68,613 $94,821 $570 $989 $94,402  $68,064 $285 $1,295 $67,054 $47,993 $257 $727 $47,523 
Held-to-maturity securities(b)
  
Total held-to-maturity securities $84 $4 $— $88 $110 $7 $— $117  $72 $2 $— $74 $77 $3 $— $80 
(a) 
Includes collateralized mortgage obligations of private issuers.issuers, which generally have underlying collateral consisting of obligations of the U.S. government and federal agencies and corporations.
(b) 
Consists primarily of mortgage-backed securities issued by U.S. government-sponsored enterprises.securities.
The following table presents the carrying value and cost of the Private Equity investment portfolio for the dates indicated:
                 
  September 30, 2005  December 31, 2004 
(in millions) Carrying value  Cost  Carrying value  Cost 
 
Total private equity investments $6,081  $7,712  $7,735  $9,103 
 
NOTE 9 —– SECURITIES FINANCING ACTIVITIES
For a discussion of the accounting policies relating to securitiesSecurities financing activities, see Note 10 on page 100pages 105–106 of JPMorgan Chase’s 20042005 Annual Report. The following table details the components of securitiesSecurities financing activities at each of the dates indicated:
         
(in millions) September 30, 2005  December 31, 2004 
 
Securities purchased under resale agreements $117,409  $94,076 
Securities borrowed  64,381   47,428 
 
Securities sold under repurchase agreements $123,688  $105,912 
Securities loaned  10,339   6,435 
 
Transactions similar to financing activities that do not meet the SFAS 140 definition of a repurchase agreement are accounted for as “buys” and “sells” rather than financing transactions. There were no transactions accounted for as purchases and sales under SFAS 140 at September 30, 2005. Notional amounts of transactions accounted for as purchases and sales under SFAS 140 were $6 billion and $20 billion at December 31, 2004, respectively.
         
(in millions) March 31, 2006 December 31, 2005 
 
Securities purchased under resale agreements $147,111  $129,570 
Securities borrowed  93,280   74,604 
 
Securities sold under repurchase agreements $129,238  $103,052 
Securities loaned  14,170   14,072 
 
JPMorgan Chase pledges certain financial instruments itthe Firm owns to collateralize repurchase agreements and other securities financings. Pledged securities that can be sold or repledged by the secured party are identified as financial instruments owned (pledged to various parties) on the Consolidated balance sheets.
At September 30, 2005, and DecemberMarch 31, 2004,2006, the Firm had received securities as collateral that cancould be repledged, delivered or otherwise used with a fair value of approximately $336 billion and $252 billion, respectively.$347 billion. This collateral was generally obtained under resale or securities borrowing agreements. Of these securities, approximately $317$330 billion and $238 billion, respectively, were repledged, delivered or otherwise used, generally as collateral under repurchase agreements, securities lending agreements or to cover short sales.

7472

NOTE 10 —– LOANS
For a discussion of the accounting policies relating to Loans, see Note 11 on pages 101–102106–107 of JPMorgan Chase’s 20042005 Annual Report. The composition of the loan portfolio at each of the dates indicated was as follows:
              
(in millions) September 30, 2005 December 31, 2004  March 31, 2006 December 31, 2005
U.S. wholesale loans:
  
Commercial and industrial $64,852 $60,223  $73,830 $70,233 
Real estate 14,115 13,038  12,980 13,612 
Financial institutions 16,178 14,060  13,163 11,100 
Lease financing receivables 2,724 4,043  2,513 2,621 
Other 15,179 8,504  16,015 14,499 
Total U.S. wholesale loans 113,048 99,868  118,501 112,065 
Non-U.S. wholesale loans:
  
Commercial and industrial 26,185 25,115  33,456 27,452 
Real estate 2,306 1,747  1,397 1,475 
Financial institutions 9,014 7,269  10,375 7,975 
Lease financing receivables 1,038 1,068  1,070 1,144 
Total non-U.S. wholesale loans 38,543 35,199  46,298 38,046 
Total wholesale loans:(a)
  
Commercial and industrial 91,037 85,338  107,286 97,685 
Real estate(b)
 16,421 14,785  14,377 15,087 
Financial institutions 25,192 21,329  23,538 19,075 
Lease financing receivables 3,762 5,111  3,583 3,765 
Other 15,179 8,504  16,015 14,499 
Total wholesale loans
 151,591 135,067  164,799 150,111 
Total consumer loans:(c)
  
Home finance Home equity & other 74,309 67,837 
Home equity 75,241 73,866 
Mortgage 60,076 56,816  57,690 58,959 
Total Home finance 134,385 124,653 
Auto & education finance 51,309 62,712 
Consumer & small business and other 14,740 15,107 
Auto loans and leases 44,600 46,081 
All other loans 25,060 18,393 
Credit card receivables(d)
 68,479 64,575  64,691 71,738 
Total consumer loans
 268,913 267,047  267,282 269,037 
Total loans(e)(f)(g)
 $420,504 $402,114  $432,081 $419,148 
(a) 
Includes Investment Bank, Commercial Banking, Treasury & Securities Services and Asset & Wealth Management.
(b) 
Represents credits extended for real estate–estate–related purposes to borrowers who are primarily in the real estate development or investment businesses and for which the primary repayment is from the sale, lease, management, operations or refinancing of the property.
(c) 
Includes Retail Financial Services and Card Services.
(d) 
Includes billed finance charges and fees net of an allowance for uncollectible amounts.
(e) 
Loans are presented net of unearned income of $3.2$2.7 billion and $4.1$3.0 billion at September 30, 2005,March 31, 2006, and December 31, 2004,2005, respectively.
(f) 
Includes loans held-for-sale (principally mortgage-related loans)(primarily related to securitization and syndication activities) of $35.6 billion and $25.7$34.2 billion at September 30, 2005,both March 31, 2006, and December 31, 2004, respectively.2005.
(g) 
Amounts are presented gross of the Allowance for loan losses.
The following table reflects information about the Firm’s loans held-for-sale, principally mortgage-related:
                 
  Three months ended September 30,  Nine months ended September 30, 
(in millions) 2005  2004  2005  2004(a) 
 
Net gains on sales of loans held-for-sale $158  $(6) $459  $287 
Lower of cost or market adjustments  (76)  15   (193)  25 
 
(a)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
         
  Three months ended March 31, 
(in millions) 2006  2005 
 
Net gains on sales of loans held-for-sale $164  $152 
Lower of cost or market adjustments  (85)  (126)
 

7573

NOTE 11—11– ALLOWANCE FOR CREDIT LOSSES
For a discussion of the Allowance for credit losses and the related accounting policies, see Note 12 on pages 102–103107–108 of JPMorgan Chase’s 20042005 Annual Report. The table below summarizes the changes in the Allowance for loan losses:
                
 Nine months ended September 30,  Three months ended March 31, 
(in millions) 2005 2004(b)  2006 2005 
Allowance for loan losses at January 1 $7,320 $4,523  $7,090 $7,320 
Addition resulting from the Merger, July 1 — 3,123 
 
Gross charge-offs  (3,156)  (2,240)  (882)  (1,033)
Gross recoveries 697 539  214 217 
Net charge-offs  (2,459)  (1,701)  (668)  (816)
Provision for loan losses: 
Provision excluding accounting policy conformity 2,356 1,117 
Accounting policy conformity —  560(c)
Total provision for loan losses 2,356 1,677 
Provision for loan losses 847 431 
Other 3  (129)(d) 6 — 
Allowance for loan losses at September 30 $7,220(a) $7,493(e)
Allowance for loan losses at March 31 $7,275(a) $6,935(b)
(a) 
Includes $341$118 million of asset-specific and $6.9$7.2 billion of formula-based allowance at September 30, 2005.allowance. Included within the formula-based allowance iswas $5.0 billion related to a statistical calculation (including $400 million related to Hurricane Katrina), and an adjustment to the statistical calculation of $1.9$2.2 billion.
(b) 
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
(c)
Represents an increase of $721 million as a result of the decertification of heritage Bank One seller’s interest in credit card securitizations, partially offset by a reduction of $161 million to conform provision methodologies.
(d)
Primarily represents the transfer of the allowance for accrued interest and fees on reported and securitized credit card loans.
(e)
Includes $498$385 million of asset-specific and $7.0$6.5 billion of formula-based allowance at December 31, 2004.allowance. Included within the formula-based allowance is $5.0was $4.5 billion related to a statistical calculation and an adjustment to the statistical calculation of $2.0 billion.
The provision for loan losses for the third quarter and first nine months of 2005 includes a $400 million special provision for credit losses related to Hurricane Katrina. The special provision was related to expected credit losses for businesses and individuals who are located in the affected areas of the Gulf Coast region and was established based upon management’s current estimate of probable loss. In developing the estimate of probable credit losses, management considered factors such as the areas most severely affected, level and type of insurance coverage, collateral and lien position, direct communication with customers, financial condition of the borrower, environmental impact and other factors. The provision may need to be increased in the future as the quality of data and access to the affected areas improves.
The table below summarizes the changes in the Allowance for lending-related commitments:
         
  Nine months ended September 30, 
(in millions) 2005  2004(b) 
 
Allowance for lending-related commitments at January 1 $492  $324 
Addition resulting from the Merger, July 1  —   508 
Provision for lending-related commitments:        
Provision excluding accounting policy conformity  (97)  (63)
Accounting policy conformity  —   (227)
 
Total provision for lending-related commitments  (97)  (290)
Other  —   (1)
 
Allowance for lending-related commitments at September 30 $395(a) $541(c)
 
         
  Three months ended March 31, 
(in millions) 2006  2005 
 
Allowance for lending-related commitments at January 1 $400  $492 
Provision for lending-related commitments  (16)  (4)
 
Allowance for lending-related commitments at March 31(a)
 $384  $488 
 
(a) 
Includes $90At March 31, 2006, includes $49 million of asset-specific and $305$335 million of formula-based allowance at September 30, 2005.allowance. At March 31, 2005, includes $144 million of asset-specific and $344 million of formula-based allowance. The formula-based allowance for lending-related commitments is based onupon a statistical calculation. There is no adjustment to the statistical calculation for lending-related commitments.
(b)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
(c)
Includes $107 million of asset specific and $434 million of formula-based allowance at September 30, 2004. The formula-based allowance for lending-related commitments is based on a statistical calculation. There is no adjustment to the statistical calculation for lending-related commitments.
NOTE 12 —– LOAN SECURITIZATIONS
For a discussion of the accounting policies relating to Loan Securitizations,loan securitizations, see Note 13 on pages 103–106108–111 of JPMorgan Chase’s 20042005 Annual Report. JPMorgan Chase securitizes, sells and services various consumer loans, such as consumer real estate, credit card and automobile loans, as well as certain wholesale loans (primarily commercial real estate) originated by the Investment Bank. In addition, the Investment Bank purchases, packages and securitizes wholesale and consumer loans. All IB activity is collectively referred to below as Wholesale activities. JPMorgan Chase–sponsored securitizations utilize special purpose entities (“SPEs”) as part of the securitization

76

process. These SPEs meet the definition of a “qualifying” special purpose entity (“QSPE”), as discussed in Note 1 on page 8891 of JPMorgan Chase’s 20042005 Annual Report; accordingly, the assets and liabilities of securitization–relatedsecuritization-related QSPEs are included on the balance sheet of the QSPE purchasing the assets and are not reflected in the Firm’s Consolidated balance sheets (except for retained interests, as described below) but are included on the balance sheet of the QSPE purchasing the assets.. Assets held by securitization–relatedsecuritization-related QSPEs as of September 30, 2005,March 31, 2006, and December 31, 2004,2005, were as follows:
                
(in billions) September 30, 2005 December 31, 2004  March 31, 2006 December 31, 2005
Credit card receivables $96.3 $106.3  $87.9 $96.0 
Residential mortgage receivables 24.4 19.1  31.3 29.8 
Wholesale activities(a)
 61.7 44.8  85.0 72.9 
Automobile loans 4.9 4.9  4.7 5.5 
Total $187.3 $175.1  $208.9 $204.2 
(a) 
Co-sponsoredIncludes co-sponsored securitizations, maywhich include non-JPMCnon-JPMorgan Chase originated assets.

74

The following table summarizes new securitization transactions that were completed during the threefirst quarters of 2006 and nine months ended September 30, 2005, and 2004, the resulting gains or losses arising from such securitizations, certain cash flows received from such securitizations, and the key economic assumptions used in measuring the retained interests, as of the dates of such sales:
                                                                
 Three months ended September 30,  Three months ended March 31, 
 2005 2004  2006 2005 
 Wholesale Wholesale  Residential Wholesale Residential Wholesale 
(in millions) Mortgage(b) Credit card Automobile Activities(c) Mortgage Credit card Automobile Activities  mortgage Credit card Automobile activities(b) mortgage Credit card Automobile activities(b) 
Principal securitized $4,775 $4,825 $— $7,364 $841 $3,050 $— $1,920  $3,178 $4,525 $— $9,897 $3,574 $425 $— $2,764 
Pre-tax gains (losses) 2 32 — 20  (12) 17 — 25 
Pre-tax gains 89 30 — 53 10 2 — 36 
Cash flow information:
  
Proceeds from securitizations $4,772 $4,825 $— $7,467 $839 $3,050 $— $1,511  $3,140 $4,525 $— $10,006 $3,596 $425 $— $2,803 
Servicing fees collected 5 31 — — 3 22 — 1  — 12 — — 1 1 — — 
Other cash flows received — 114 — — — 74 — —  — 69 — — — 4 — — 
Proceeds from collections reinvested in revolving securitizations — 33,117 — — — 42,044 — —  — 51,896 — — — 31,464 — — 
 
Key assumptions (rates per annum):
  
Prepayment rate(a)
 —  20% —  0-41% —  16.7% —  50.0% —  22.2% —  35-45% —  16.7% — — 
 PPR PPR  PPR PPR 
Weighted-average life (in years) — 0.4 — 1.8-13.3 — 0.5 — 2.0  — 0.4 — 1.5-4.7 — 0.5 — — 
Expected credit losses —  4.7% —  0.8-1.8% —  5.6% — NA(e) —  3.3% —  1.3-2.4% —  5.7% — — 
Discount rate —  12.0% —  11.1-20.0% —  12.0% —  0.7% —  12.0% —  14.5-18.5% —  12.0% — — 
                                
   
 Nine months ended September 30, 
 2005 2004(f) 
 Wholesale Wholesale 
(in millions) Mortgage(b) Credit card Automobile Activities(c) Mortgage Credit card Automobile Activities 
Principal securitized $11,056 $10,100 $2,300 $13,760 $4,650 $6,300 $1,600 $6,401 
Pre-tax gains (losses) 22 67  10(d) 74 52 36  (3) 94 
Cash flow information:
 
Proceeds from securitizations $11,074 $10,100 $1,618 $13,912 $4,702 $6,300 $1,597 $6,471 
Servicing fees collected 9 44 2 — 7 35 1 2 
Other cash flows received — 169 — — — 109 — 12 
Proceeds from collections reinvested in revolving securitizations — 95,623 — — — 71,234 — — 
Key assumptions (rates per annum):
 
Prepayment rate(a)
 —  16.7-20.0%  1.5%  0-50%  23.8-25.9%  15.5-16.7%  1.5%  17.0-50.0%
 PPR ABS CPR PPR ABS 
Weighted-average life (in years) — 0.4-0.5 1.5 1.0-13.3 2.8-3.0 0.5-0.6 1.8 2.0-4.0 
Expected credit losses —  4.7-5.7%  0.6%  0-1.8%  1.0%(e)  5.5-5.8%  0.6% NA(e)
Discount rate —  12.0%  6.3%  0.6-20.0%  15.0-30.0%  12.0%  4.1%  0.6-5.0%
(a) 
CPR: constant prepayment rate; ABS: absolute prepayment speed; PPR: principal payment rate.
(b)
No interests other than servicing assets were retained in Mortgage in the first three quarters of 2005.
(c)(b) 
Wholesale activities consist of wholesale loans (primarily commercial real estate) originated by the Investment Bank as well as $4.4$6.7 billion and $6.3 billion for the three months and nine months ended September 30, 2005, respectively,$537 million of consumer loans purchased from the market during the quarter ended March 31, 2006 and 2005, respectively, and then packaged and securitized by the Investment Bank.
(d)
The auto securitization gain of $10 million does not include the write-down of loans transferred to held-for-sale in the first quarter of 2005 and risk management activities intended to protect the economic value of loans while held-for-sale.
(e)
Expected credit losses for prime residential mortgage and certain wholesale securitizations are minimal and are incorporated into other assumptions.
(f)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.

77

In addition to securitization transactions, the Firm sold residential mortgage loans totaling $16.3$13.6 billion and $15.2$11.3 billion during the three months ended September 30,first quarters of 2006 and 2005, and 2004, respectively, primarily as GNMA, FNMA and Freddie Mac mortgage-backed securities; these sales resulted in pre-tax gains (losses) of $62$10 million and $(14) million, respectively. During the first nine months of 2005 and 2004, JPMorgan Chase sold residential mortgage loans totaling $39.4 billion and $53.1 billion, respectively; these sales resulted in pre-tax gains of $171 million and $45$37 million, respectively.
At September 30, 2005,March 31, 2006, and December 31, 2004,2005, the Firm had, with respect to its credit card master trusts, $26.6$18.1 billion and $35.2$24.8 billion, respectively, related to its undivided interest,interests, and $3.2 billion and $2.2 billion and $2.1 billion, respectively, related to its subordinated interest,interests in accrued interest and fees on the securitized receivables, net of an allowance for uncollectible amounts. Credit card securitization trusts require the Firm to maintain a minimum undivided interest of 4% to 7%12% of the principal receivables in the trusts. The Firm maintained an average undivided interest in its principal receivables in the trusts of approximately 25%22% for the three months ended March 31, 2006, and 23% for the nine months ended September 30, 2005, and for the year ended December 31, 2004, respectively.2005.
The Firm also maintains escrow accounts up to predetermined limits for some of its credit card and automobile securitizations in the unlikely event of deficiencies in cash flows owed to investors. The amounts available in such escrow accounts are recorded in Other assets and, as of September 30, 2005,March 31, 2006, amounted to $584$214 million and $93$61 million for credit card and automobile securitizations, respectively; as of December 31, 2004, the2005, these amounts available in escrow accounts were $395$754 million and $132$76 million for credit card and automobile securitizations, respectively.
The table below summarizes other retained securitization interests, which are primarily subordinated or residual interests and are carried at fair value on the Firm’s Consolidated balance sheets:
                
(in millions) September 30, 2005 December 31, 2004  March 31, 2006��December 31, 2005
Residential mortgage(a)
 $272 $433  $172 $182 
Credit card(a)
 473 494  816 808 
Automobile(a)(b)
 116 85  133 150 
Wholesale activities(c) 167 23  470 265 
Total $1,028 $1,035  $1,591 $1,405 
(a) 
Pre-tax unrealized gains (losses) recorded in Stockholders’ equity that relate to retained securitization interests totaled $93$62 million and $118$60 million for residential mortgage;Residential mortgage, and $3 million and $(3)$6 million for credit cards; and $7 million and $11 million for automobileCredit card at September 30, 2005,March 31, 2006 and December 31, 2004, respectively.2005, respectively; and $5 million for Automobile at both March 31, 2006, and December 31, 2005.
(b) 
In addition to the automobile retained interest amounts noted above, the Firm also retained senior securities totaling $208 million at March 31, 2006, and $490 million at December 31, 2005, from a second quarter 2005 auto securitizationsecuritizations that are classified as available-for-saleAFS securities. The remaining balance of $348 million at September 30, 2005, isThese securities are valued using quoted market prices. These securitiesprices and are therefore not included in the key economic assumption and sensitivities table below.that follows.
(c)
In addition to the wholesale retained interest amounts noted above, the Firm also retained subordinated securities totaling $56 million at March 31, 2006, and $51 million at December 31, 2005, predominantly from re-securitization activities. These securities are valued using quoted market prices and are therefore not included in the key assumptions and sensitivities table that follows.

75

The table below outlines the key economic assumptions used to determine the fair value of the remainingother retained interests at September 30, 2005,March 31, 2006, and December 31, 2004, respectively;2005, respectively, and outlines the sensitivities of those fair values to immediate 10% and 20% adverse changes in those assumptions:
                                
September 30, 2005(in millions) Mortgage Credit card Automobile Wholesale activities 
 Residential       
March 31, 2006(in millions) Mortgage Credit card Automobile Wholesale activities 
Weighted-average life (in years) 0.6-3.6 0.4-0.8 1.1 0.2-13.3  0.7-3.6 0.4-0.5 1.1 0.2-4.5 
Prepayment rate(a) 10.6-43.3% CPR 11.1-20.0% PPR 1.5% ABS  0.0-50.0%(a) 16.6-44.2% CPR 18.2-22.2% PPR 1.4% ABS  0.0-50%(d)
Impact of 10% adverse change $(1) $(39) $(2) $(4) $(2) $(45) $(2) $(5)
Impact of 20% adverse change  (3)  (77)  (5)  (7)  (5)  (90)  (4)  (11)
Loss assumption  0.0-4.7%(b)  4.8-8.3%  0.7%  0.8-1.8%  0.0-4.4%(b)  3.2-5.6%  0.8%  0.0-2.7%(b)
Impact of 10% adverse change $(10) $(115) $(4) $(4) $(8) $(98) $(4) $(16)
Impact of 20% adverse change  (19)  (229)  (7)  (7)  (15)  (196)  (8)  (30)
Discount rate  13.0-30.0%(c)  4.5-12.0%  6.6%  0.2-20.0%  14-30%(c)  7.2-12.0%  7.6%  0.0-21.8%
Impact of 10% adverse change $(5) $(1) $(1) $(4) $(3) $(2) $(1) $(13)
Impact of 20% adverse change  (9)  (3)  (2)  (8)  (7)  (3)  (2)  (27)
                                
December 31, 2004 (in millions) Mortgage Credit card Automobile Wholesale activities 
 Residential       
December 31, 2005 (in millions) Mortgage Credit card Automobile Wholesale activities 
Weighted-average life (in years) 0.8–3.4 0.5–1.0 1.3 0.2–4.0  0.5–3.5 0.4–0.7 1.2 0.2–4.1 
Prepayment rate 15.1–37.1% CPR 8.3–16.7% PPR 1.4% ABS  0.0–50.0%(a)
Prepayment rate(a)
 20.1–43.7% CPR 11.9–20.8% PPR 1.5% ABS  0.0–50.0%(d)
Impact of 10% adverse change $(5) $(34) $(6) $(1) $(3) $(44) $— $(5)
Impact of 20% adverse change  (8)  (69)  (13)  (1)  (5)  (88)  (2)  (6)
Loss assumption  0.0–5.0%(b)  5.7–8.4%  0.7%  0.0–3.0%(b)  0.0–5.2%(b)  3.2–8.1%  0.7%  0.0–2.0%(b)
Impact of 10% adverse change $(17) $(144) $(4) $—  $(10) $(77) $(4) $(6)
Impact of 20% adverse change  (34)  (280)  (8) —   (19)  (153)  (9)  (11)
Discount rate  13.0–30.0%(c)  4.9–12.0%  5.5%  1.0–22.9%  12.7–30.0%(c)  6.9–12.0%  7.2%  0.2–18.5%
Impact of 10% adverse change $(9) $(2) $(1) $—  $(4) $(2) $(1) $(6)
Impact of 20% adverse change  (18)  (4)  (2) —   (8)  (4)  (3)  (12)

78

(a) 
Prepayment risk on certain wholesale retained interests are minimal and are incorporated into other assumptions.CPR: constant prepayment rate; PPR: principal payment rate; ABS: absolute prepayment speed.
(b) 
Expected credit losses for prime residential mortgage and certain wholesale securitizations are minimal and are incorporated into other assumptions.
(c) 
The Firm sellssold certain residual interests from subprimesub-prime mortgage securitizations via Net Interest Margin (“NIM”) securitizations and retainsretained residual interests in these NIM transactions, which are valued using a 30% discount rate.an 18% yield.
(d)
Prepayment risk on certain wholesale retained interests are minimal and are incorporated into other assumptions.
The sensitivity analysis in the preceding table is hypothetical. Changes in fair value based onupon a 10% or 20% variation in assumptions generally cannot be extrapolated easily, because the relationship of the change in the assumptions to the change in fair value may not be linear. Also, in this table, the effect that a change in a particular assumption may have on the fair value is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another assumption, which couldmight counteract or magnify the sensitivities.

76

The table below presents information about delinquencies, net credit losses and components of reported and securitized financial assets at September 30, 2005,March 31, 2006, and December 31, 2004:2005:
                                
 Nonaccrual and 90 days                           
 Total Loans or more past due Net loan charge-offs  Nonaccrual and 90 days   
 Three months ended Nine months ended  Total Loans or more past due Net loan charge-offs 
 Sept. 30, Dec. 31, Sept. 30, Dec. 31, September 30, September 30,  March 31, Dec. 31, March 31, Dec. 31, Three months ended March 31, 
(in millions) 2005 2004 2005 2004 2005 2004 2005 2004(d)  2006 2005 2006 2005 2006 2005 
Loans reported
 
Home finance $134,385 $124,653 $710 $673 $38 $63 $117 $119 
Auto & education finance 51,309 62,712 204 193 70 96 200 167 
Consumer & small business and other 14,740 15,107 289 295 36 60 93 98 
Home equity $75,241 $73,866 $451 $422 $33 $35 
Mortgage 57,690 58,959 451 442 12 6 
Auto loans and leases 44,600 46,081 157 193 51 83 
All other loans 25,060 18,393 290 281 25 28 
Credit card receivables 68,479 64,575 1,110 1,006 766 670 2,150 1,199  64,691 71,738 968 1,091 567 673 
Total consumer loans 268,913 267,047 2,313 2,167 910 889 2,560 1,583  267,282 269,037 2,317 2,429 688 825 
Total wholesale loans 151,591 135,067 1,198 1,582  (40)  (24)  (101) 118  164,799 150,111 801 1,042  (20)  (9)
Total loans reported 420,504 402,114 3,511 3,749 870 865 2,459 1,701  432,081 419,148 3,118 3,471 668 816 
Securitized loans:  
Residential mortgage(a)
 8,146 11,533 356 460 22 39 81 119  7,296 8,061 289 370 15 32 
Automobile 4,840 4,763 10 12 4 6 11 18  4,629 5,439 8 11 4 5 
Credit card 69,095 70,795 1,037 1,337 867 928 2,714 1,887  69,580 70,527 913 730 449 917 
Total consumer loans securitized
 82,081 87,091 1,403 1,809 893 973 2,806 2,024  81,505 84,027 1,210 1,111 468 954 
Securitized wholesale activities 5,329 1,401 — — — 12 — —  16,154 9,049 11 4 — — 
Total loan securitized(b)
 87,410 88,492 1,403 1,809 893 985 2,806 2,024  97,659 93,076 1,221 1,115 468 954 
Total loans reported and securitized(c)
 $507,914 $490,606 $4,914 $5,558 $1,763 $1,850 $5,265 $3,725  $529,740 $512,224 $4,339 $4,586 $1,136 $1,770 
(a) 
Includes $6.7$5.3 billion and $10.3$5.9 billion of outstanding principal balances on securitized subprime 1–sub-prime 1–4 family residential mortgage loans as of September 30, 2005,March 31, 2006, and December 31, 2004,2005, respectively.
(b) 
Total assets held in securitization-related SPEs were $187.3$208.9 billion and $175.1$204.2 billion at September 30, 2005,March 31, 2006, and December 31, 2004,2005, respectively. The $87.4$97.7 billion and $88.5$93.1 billion of loans securitized at September 30, 2005,March 31 2006, and December 31, 2004,2005, respectively, excludes: $72.5$92.8 billion and $50.8$85.6 billion respectively, of securitized loans, respectively, in which the Firm’s only continuing involvement is the servicing of the assets; $26.6$18.1 billion and $35.2$24.8 billion respectively, of seller’s interests in credit card master trusts;trusts, respectively; and $0.8$0.3 billion and $0.6$0.7 billion respectively, of escrow accounts and other assets.assets, respectively.
(c) 
Represents both loans on the Consolidated balance sheets and loans that have been securitized, but excludes loans for which the Firm’s only continuing involvement is servicing of the assets.
(d)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
NOTE 13 —– VARIABLE INTEREST ENTITIES
Refer to Note 1 on page 8891 and Note 14 on pages 106–109111–113 of JPMorgan Chase’s 20042005 Annual Report for a further description of JPMorgan Chase’s policies regarding consolidation of variable interest entities (“VIEs”) as well as the utilization of VIEs by the Firm.
Multi-seller conduits
The following table summarizes the Firm’s involvement with Firm-administered multi-seller conduits:
                        
                         Consolidated Nonconsolidated Total 
 Consolidated Nonconsolidated Total  Mar. 31, Dec. 31, Mar. 31, Dec. 31, Mar. 31, Dec. 31, 
(in billions) Sept. 30, 2005 Dec. 31, 2004 Sept. 30, 2005 Dec. 31, 2004 Sept. 30, 2005 Dec. 31, 2004  2006 2005 2006 2005 2006 2005 
Total commercial paper issued by conduits
 $31.5 $35.8 $8.3 $9.3 $39.8 $45.1  $34.2 $35.2 $9.0 $8.9 $43.2 $44.1 
Commitments
  
Asset-purchase agreements $45.7 $47.2 $15.3 $16.3 $61.0 $63.5  $49.6 $47.9 $15.1 $14.3 $64.7 $62.2 
Program-wide liquidity commitments 4.0 4.0 1.0 2.0 5.0 6.0  5.0 5.0 1.0 1.0 6.0 6.0 
Limited credit enhancements 1.3 1.4 1.0 1.2 2.3 2.6 
Program-wide limited credit enhancements 1.3 1.3 1.0 1.0 2.3 2.3 
 
Maximum exposure to loss(a)
 46.4 48.2 15.6 16.9 62.0 65.1  50.1 48.4 15.4 14.8 65.5 63.2 

79

(a) 
The Firm’s maximum exposure to loss is limited to the amount of drawn commitments (i.e., sellers’ assets held by the multi-seller conduits for which the Firm provides liquidity support) of $37.3$40.4 billion and $42.2$41.6 billion at September 30, 2005,March 31, 2006, and December 31, 2004,2005, respectively, plus contractual but undrawn commitments of $24.7$25.1 billion and $22.9$21.6 billion at September 30, 2005,March 31, 2006, and December 31, 2004,2005, respectively. Since the Firm provides credit enhancement and liquidity to these multi-seller conduits, the maximum exposure is not adjusted to exclude exposure absorbed by third-party liquidity providers.

77

The Firm views its credit exposure to multi-seller conduit transactions as limited. This is because, for the most part, the Firm is not required to fund under the liquidity facilities if the assets in the VIE are in default. Additionally, the Firm’s obligations under the letters of credit are secondary to the risk of first loss provided by the customer or other third parties – for example, by the overcollateralization of the VIE with the assets sold to it or notes subordinated to the Firm’s liquidity facilities.
Additionally, the Firm is involved with a structured investment vehicle (“SIV”) that funds a diversified portfolio of highly rated assets by issuing medium-term notes, commercial paper and capital. The assets and liabilities of this SIV were approximately $8.3 billion and $7.1 billion at September 30, 2005, and December 31, 2004, respectively, and were included in the Firm’s Consolidated balance sheets.
Client intermediation
Assets held by certain client intermediation–related VIEscredit-linked and municipal bond vehicles at September 30, 2005,March 31, 2006, and December 31, 2004,2005, were as follows:
                
(in billions) September 30, 2005 December 31, 2004  March 31, 2006 December 31, 2005
Credit-linked note vehicles(a)
 $16.2 $17.8  $15.4 $13.5 
Municipal bond vehicles(b)
 12.7 7.5  12.6 13.7 
(a) 
Assets of $1.9$1.8 billion and $2.3$1.8 billion reported in the table above were recorded on the Firm’s Consolidated balance sheets at September 30, 2005,March 31, 2006 and December 31, 2004,2005, respectively, due to contractual relationships held by the Firm that relate to collateral held by the VIE.
(b) 
Total amounts consolidated due to the Firm owning residual interests was $4.5were $4.8 billion and $2.6$4.9 billion at September 30, 2005,March 31, 2006, and December 31, 2004,2005, respectively, and are reported in the table above.table. Total liquidity commitments were $5.7$6.0 billion and $3.1$5.8 billion at September 30, 2005,March 31, 2006, and December 31, 2004,2005, respectively. The Firm’s maximum credit exposure to all municipal bond vehicles was $10.2$10.8 billion and $5.7$10.7 billion at September 30,March 31, 2006, and December 31, 2005, and December��31, 2004, respectively.
Finally, theThe Firm may enter into transactions with VIEs structured by other parties. These transactions can include, for example, acting as a derivative counterparty, liquidity provider, investor, underwriter, placement agent, trustee or custodian. These transactions are conducted at arm’s length, and individual credit decisions are based upon the analysis of the specific VIE, taking into consideration the quality of the underlying assets. JPMorgan Chase records and reports these positions similarly to any other third-party transaction. These activities do not cause JPMorgan Chase to absorb a majority of the expected losses of the VIEs or to receive a majority of the residual returns of the VIE, and they are not considered significant for disclosure purposes.
Consolidated VIE assets
The following table summarizes the Firm’s total consolidated VIE assets, by classification, on the Consolidated balance sheets, as of September 30, 2005,March 31, 2006, and December 31, 2004.2005:
                
(in billions) September 30, 2005 December 31, 2004  March 31, 2006 December 31, 2005
Consolidated VIE assets(a)
      
Investment securities $9.3 $10.6  $1.9 $1.9 
Trading assets(b)
 8.6 4.7  9.5 9.3 
Loans 5.5 3.4  10.1 8.1 
Interests in purchased receivables 28.7 31.6  27.8 29.6 
Other assets 3.0 0.4  5.6 3.0 
Total consolidated assets $55.1 $50.7  $54.9 $51.9 
(a) 
The Firm also holds $4.2$3.7 billion and $3.4$3.9 billion of assets, at September 30, 2005,March 31, 2006, and December 31, 2004,2005, respectively, primarily as a seller’s interest, in certain consumer securitizations in a segregated entity, as part of a two-step securitization transaction. This interest is included in the securitization activities disclosed in Note 12 on pages 76–7974–77 of this Form 10–10–Q.
(b) 
Includes the fair value of securities and derivatives.
The interest-bearing beneficial interest liabilities issued by consolidated VIEs are classified in the line item titled, “Beneficial interests issued by consolidated VIEs”variable interest entities” on the Consolidated balance sheets. The holders of these beneficial interests do not have recourse to the general credit of JPMorgan Chase.

78

80

NOTE 14 —– GOODWILL AND OTHER INTANGIBLE ASSETS
For a discussion of accounting policies related to Goodwill and Other intangible assets, see Note 15 on pages 109–111114–116 of JPMorgan Chase’s 20042005 Annual Report.
Goodwill and Otherother intangible assets consist of the following:
                
(in millions) September 30, 2005 December 31, 2004  March 31, 2006 December 31, 2005
Goodwill $43,555 $43,203  $43,899 $43,621 
Mortgage servicing rights 6,057 5,080  7,539 6,452 
Purchased credit card relationships 3,352 3,878  3,243 3,275 
 
All other intangibles:  
Other credit card-related intangibles $239 $272 
Other credit card–related intangibles $288 $124 
Core deposit intangibles 2,859 3,328  2,567 2,705 
Other intangibles 2,041 2,126  1,977 2,003 
Total All other intangible assets $5,139 $5,726  $4,832 $4,832 
Goodwill
As of September 30, 2005,March 31, 2006, goodwill increased by $352$278 million compared with December 31, 2004,2005, principally in connection with the joint venture partnership established with Cazenove andacquisition of Collegiate Funding Services. Partially offsetting this increase were reductions resulting from purchase accounting adjustments related to the acquisitionsNovember 15, 2005, acquisition of Vastera and Neovest.the Sears Canada credit card business. Goodwill was not impaired at September 30, 2005,March 31, 2006, or December 31, 2004,2005, nor was any goodwill written off due to impairment during either the ninethree months ended September 30, 2005March 31, 2006 or 2004.March 31, 2005.
Under SFAS 142, goodwill must be allocated to reporting units and tested for impairment. Goodwill attributed to the business segments was as follows:
            
 Goodwill resulting         
(in millions) September 30, 2005 December 31, 2004 from the Merger  March 31, 2006 December 31, 2005
Investment Bank $3,550 $3,309 $1,179  $3,536 $3,531 
Retail Financial Services 15,027 15,022 14,576  15,531 14,991 
Card Services 12,835 12,781 12,802  12,693 12,984 
Commercial Banking 2,659 2,650 2,599  2,656 2,651 
Treasury & Securities Services 2,059 2,044 465  2,078 2,062 
Asset & Wealth Management 7,048 7,020 2,539  7,028 7,025 
Corporate (Private Equity) 377 377 —  377 377 
Total goodwill $43,555 $43,203 $34,160  $43,899 $43,621 

79

Mortgage servicing rights
For a further description of the mortgage servicing rights (“MSRs”) asset, and the interest rate risk management, and valuation methodology of MSRs, see Note 15 on pages 109–111114–116 of JPMorgan Chase’s 20042005 Annual Report. The following table summarizestables summarize MSR activity during the nine months ended September 30, 2005first quarters of 2006 and 2004:2005.
         
Nine months ended September 30,(in millions) 2005  2004(a) 
 
Balance at January 1 $6,111  $6,159 
Additions  1,350   1,400 
Additions resulting from the Merger, July 1  —   90 
Sales  —   (3)
Other-than-temporary impairment  —   (126)
Amortization  (987)  (974)
SFAS 133 hedge valuation adjustments  18   (588)
 
Balance at September 30  6,492   5,958 
Less: valuation allowance  435   790 
 
Balance at September 30, after valuation allowance $6,057  $5,168 
Estimated fair value at September 30 $6,118  $5,254 
Weighted-average prepayment speed assumption (CPR)  13.8%  17.7%
Weighted-average discount rate  8.96%  7.55%
 
     
Three months ended March 31,(in millions) 2006 
 
Balance at beginning of period after valuation allowance $6,452 
Cumulative effect of change in accounting principle  230 
 
Fair value at beginning of period  6,682 
     
Originations of MSRs  344 
Purchase of MSRs  151 
 
Total additions  495 
     
Sales  -- 
Change in valuation due to inputs and assumptions  711 
Change in valuation due to runoff and other  (349)
 
Fair value at March 31 $7,539 
Weighted-average prepayment speed assumption (CPR)  14.99%
Weighted-average discount rate  9.67%
 
     
Three months ended March 31, (in millions) 2005 
 
Balance at beginning of period $6,111 
Additions  374 
Sales  — 
Other-than-temporary impairment  — 
Amortization  (339)
SFAS 133 hedge valuation adjustments  371 
 
Balance at March 31  6,517 
     
Valuation allowance at beginning of period  1,031 
SFAS 140 impairment (recovery) adjustment  (177)
 
Less: Valuation allowance at end of period  854 
 
Balance at March 31, after valuation allowance $5,663 
Estimated fair value at March 31 $5,663 
Weighted-average prepayment speed assumption (CPR)  14.97%
Weighted-average discount rate  8.27%
 
(a) 
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
CPR: Constant prepayment rate
JPMorgan Chase uses a combination of derivatives, AFS securities and trading instruments to manage changes in the fair value of MSRs. The intent is to offset any changes in the fair value of MSRs with changes in the fair value of the related risk management instruments. MSRs decrease in value when interest rates decline. Conversely, securities (such as mortgage–backed securities), principal-only certificates and certain derivatives (when the Firm receives fixed–rate interest payments) increase in value when interest rates decline. Contractual service fees, late fees, and other ancillary fees earned for the three months ended March 31, 2006 were $490 million, which is recorded in Mortgage fees and related income.

81

In the first quarter of 2006, the FASB issued SFAS 156. The standard is effective as of the beginning of the first fiscal year beginning after September 15, 2006, with early adoption permitted. JPMorgan Chase elected to adopt the standard effective January 1, 2006. The standard permits an entity a one-time irrevocable election to adopt fair value accounting for a class of servicing assets. The Firm has defined MSRs as one class of servicing assets for this election. This election is accounted for as a change in accounting principle. The difference between the fair value and the carrying amount, net of any related valuation allowance, representsof the MSRs as of the date of the initial application of the subsequent fair value measurement was recorded as a cumulative–effect adjustment to retained earnings of $150 million as of the beginning of the fiscal year. With the adoption of SFAS 156, changes in the fair values of the MSRs will be recorded in Mortgage fees and related income
For the three months ended March 31, 2005, MSRs were accounted for under SFAS 140, using a lower of cost or market method, with applicable hedging activity accounted for under SFAS 133. Changes to the valuation allowance represented the extent to which the carrying value of the MSR asset exceedsexceeded its estimated fair value for its applicable SFAS 140 strata. Changes in the valuation allowance arewere the result of the recognition of impairment or the recovery of previously recognized impairment charges due to changes in market conditions during the period. The changes in the valuation allowance for MSRs were as follows:are identified above.

80

         
Nine months ended September 30,(in millions) 2005  2004(a) 
 
Balance at January 1 $1,031  $1,378 
Other-than-temporary impairment  —   (126)
SFAS 140 impairment (recovery) adjustment  (596)  (462)
 
Balance at September 30 $435  $790 
 
(a)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
Purchased credit card relationships and All other intangible assets
There were noFor the three months ended March 31, 2006, Purchased credit card relationship intangibles added during the nine months ended September 30, 2005. All other intangibles increased approximately $48 million during the nine months ended September 30, 2005. For the nine months ended September 30, 2005, Purchased credit card relationship intangibles and All other intangibles decreased by $526$32 million and $635 million, respectively, as a result of amortization.$185 million in amortization expense, partially offset by increases from purchase accounting adjustments related to the November 15, 2005, acquisition of the Sears Canada credit card business. During the three months ended March 31, 2006, all other intangible assets remained flat, as intangibles resulting predominantly from the acquisition of the Sears credit card business were offset by $182 million in amortization expense. Except for $513 million of indefinite-lived intangible assets,intangibles related to asset management advisory contracts which are not amortized but instead are tested for impairment at least annually, the remainder of the Firm’s other acquired intangible assets are subject to amortization.
The components of credit card relationships, core deposits and other intangible assets were as follows:
                                                
 September 30, 2005 December 31, 2004  March 31, 2006 December 31, 2005 
 Net Net  Net Net 
 Gross Accumulated carrying Gross Accumulated carrying  Gross Accumulated carrying Gross Accumulated carrying 
(in millions) amount amortization value amount amortization value  amount amortization value amount amortization value 
Purchased credit card relationships $5,225 $1,873 $3,352 $5,225 $1,347 $3,878  $5,478 $2,235 $3,243 $5,325 $2,050 $3,275 
 
All other intangibles:  
Other credit card-related intangibles $295 $56 $239 $295 $23 $272 
Other credit card–related intangibles $348 $60 $288 $183 $59 $124 
Core deposit intangibles 3,797 938 2,859 3,797 469 3,328  3,797 1,230 2,567 3,797 1,092 2,705 
Other intangibles 2,576  535(a) 2,041 2,528  402(a) 2,126  2,599  622(a) 1,977 2,582  579(a) 2,003 
Total All other intangibles $6,668 $1,529 $5,139 $6,620 $894 $5,726  $6,744 $1,912 $4,832 $6,562 $1,730 $4,832 
                 
  Three months ended  Nine months ended 
Amortization expense September 30,  September 30, 
(in millions) 2005  2004  2005  2004(b) 
 
Purchased credit card relationships $176  $179  $526  $299 
Other credit card-related intangibles  11   15   33   15 
Core deposit intangibles  157   164   469   165 
Other intangibles  38   38   122   75 
 
Total amortization expense $382  $396  $1,150  $554 
 
(a) 
Includes $11$3 million and $13$4 million of amortization expense related to servicing assets on securitized automobile loans, which is recorded in Asset management, administration and commissions, for the ninethree months ended September 30, 2005March 31, 2006 and 2004, respectively.
(b)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.2005.
         
  Three months ended 
Amortization expense March 31, 
(in millions) 2006  2005 
 
Purchased credit card relationships $185  $175 
Other credit card–related intangibles  1   11 
Core deposit intangibles  138   157 
Other intangibles  40   40 
 
Total amortization expense $364  $383 
 
Future amortization expense
The following table presents future estimated amortization expenseexpenses related to credit card relationships, core deposits and All other intangible assets at September 30, 2005:March 31, 2006:
                                        
 Purchased Other credit Core      Purchased Other credit Core     
For the year: credit card card–related deposit Other   
(in millions) relationships intangibles intangibles intangibles Total 
 credit card card-related deposit Other   
For the year: (in millions) relationships intangibles intangibles intangibles Total 
2005(a)
 $701 $45 $622 $177 $1,545 
2006 674 42 532 162 1,410 
2006(a)
 $712 $7 $547 $162 $1,428 
2007 606 36 410 145 1,197  640 11 469 147 1,267 
2008 502 32 314 134 982  534 17 402 134 1,087 
2009 360 29 256 126 771  390 23 329 125 867 
2010 301 25 232 113 671  329 28 276 112 745 
(a) 
Includes $526$185 million, $33$1 million, $469$138 million and $122$40 million of amortization expense related to Purchasedpurchased credit card relationships, other credit card-related intangibles, core deposit intangibles and other intangibles, respectively, recognized during the first ninethree months of 2005.2006.

8281

NOTE 15 —– EARNINGS PER SHARE
For a discussion of the computation of basic and diluted earnings per share (“EPS”), see Note 20 on page 114119 of JPMorgan Chase’s 20042005 Annual Report. The following table presents the calculation of basic and diluted EPS for the three and nine months ended September 30, 2005March 31, 2006 and 2004:2005:
                        
 Three months ended September 30, Nine months ended September 30,  Three months ended March 31, 
(in millions, except per share amounts) 2005 2004 2005 2004(b)  2006 2005 
Basic earnings per share
  
Net income $2,527 $1,418 $5,785 $2,800  $3,081 $2,264 
Less: preferred stock dividends 3 13 11 39  4 5 
Net income applicable to common stock $2,524 $1,405 $5,774 $2,761  $3,077 $2,259 
Weighted-average basic shares outstanding 3,485.0 3,513.5 3,498.4 2,533.1  3,472.7 3,517.5 
Net income per share $0.72 $0.40 $1.65 $1.09  $0.89 $0.64 
Diluted earnings per share
  
Net income applicable to common stock $2,524 $1,405 $5,774 $2,761  $3,077 $2,259 
Weighted-average basic shares outstanding 3,485.0 3,513.5 3,498.4 2,533.1  3,472.7 3,517.5 
Add: Broad-based options 3.3 4.5 3.5 5.7  5.2 3.8 
Restricted stock and key employee options 59.4 74.0 53.2 59.7 
Restricted stock, restricted stock units and key employee options 92.9 48.5 
Weighted-average diluted shares outstanding 3,547.7 3,592.0 3,555.1 2,598.5  3,570.8 3,569.8 
Net income per share(a)
 $0.71 $0.39 $1.62 $1.06  $0.86 $0.63 
(a) 
Options issued under employee benefit plans to purchase 383162 million and 207305 million shares of common stock were outstanding for the three months ended September 30,March 31, 2006 and 2005, and 2004, respectively, but were not included in the computation of diluted EPS because the options’ exercise pricesoptions were greater than the average market price of the common shares. For the nine months ended September 30, 2005 and 2004, options issued under employee benefit plans to purchase common stock excluded from the computation were 361 million and 207 million shares, respectively.
(b)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.anti-dilutive.
NOTE 16 —– ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) includes the after-tax change in unrealized gains and losses on AFS securities, cash flow hedging activities and foreign currency translation adjustments (including the impact of related derivatives).
                 
  Unrealized      Cash  Accumulated other 
(in millions) gains (losses)  Translation  flow  comprehensive 
Nine months ended September 30, 2005 on AFS securities(a)  adjustments  hedges  income (loss) 
 
Balance at December 31, 2004 $(61) $(8) $(139) $(208)
Net change  (192)(b)  —(c)  (202)(d)  (394)
 
Balance at September 30, 2005 $(253) $(8) $(341) $(602)
 
                 
Nine months ended September 30, 2004                
 
Balance at December 31, 2003 $19  $(6) $(43) $(30)
Net change  (88)(b)  (2)(c)  (122)(d)  (212)
 
Balance at September 30, 2004 $(69) $(8) $(165) $(242)
 
                 
  Unrealized     Cash Accumulated other
(in millions) gains (losses) Translation flow comprehensive
Three months ended March 31, 2006 on AFS securities(a) adjustments hedges income (loss)
 
Balance at December 31, 2005 $(224) $(8) $(394) $(626)
Net change  (398)(b)  (5)(c)  12(d)  (391)
 
Balance at March 31, 2006 $(622) $(13) $(382) $(1,017)
 
                 
  Unrealized     Cash Accumulated other
(in millions) gains (losses) Translation flow comprehensive
Three months ended March 31, 2005 on AFS securities(a) adjustments hedges income (loss)
 
Balance at December 31, 2004 $(61) $(8) $(139) $(208)
Net change  (246)(b)  —(c)  (169)(d)  (415)
 
Balance at March 31, 2005 $(307) $(8) $(308) $(623)
 
(a) 
Represents the after-tax difference between the fair value and amortized cost of the AFS securities portfolio and retained interests in securitizations recorded in Other assets.
(b) 
The net change forchanges during the nine months ended September 30,first quarter of 2006 and 2005 waswere due primarily due to higher interestan increase in rates, partially offset by sales of investment securities. The net change for the nine months ended September 30, 2004, was primarily due to rising interest rates.securities at losses.
(c) 
At September 30,March 31, 2006 and 2005, and 2004, included $(259)$58 million and $(31)$(130) million, respectively, of after-tax gains (losses) on foreign currency translation from operations for which the functional currency is other than the U.S. dollar, offset by $259$(63) million and $29$130 million, respectively, of after-tax gains (losses) on hedges.
(d) 
The net change for the ninethree months ended September 30,March 31, 2006, included $12 million of after-tax losses recognized in income. The net change for the three months ended March 31, 2005, included $24$64 million of after-tax losses recognized in income and $226 million of after-tax losses representing the net change in derivative fair values that were recorded in comprehensive income. The net change for the nine months ended September 30, 2004, included $36 million of after-tax losses recognized in income and $158$233 million of after-tax losses representing the net change in derivative fair values that were reported in comprehensive income.

8382

NOTE 17 —– COMMITMENTS AND CONTINGENCIES
Litigation reserve
On August 16, 2005, JPMorgan Chase announced that it had reached an agreement in principle to settle the adversary proceedings brought by Enron in the U.S. Bankruptcy Court for the Southern District of New York. Under the terms of the settlement, JPMorgan Chase will pay $350 million to the bankrupt estate and will give up certain contested claims it has filed in the bankruptcy. Enron will allow JPMorgan Chase’s other claims in the bankruptcy and will dismiss or release all claims it has against JPMorgan Chase. JPMorgan Chase will have the option of increasing its cash payment in exchange for retaining more of its claims and having them allowed in the bankruptcy. The settlement is subject to the approval of the Bankruptcy Court.
On June 14, 2005, JPMorgan Chase reached an agreement in principle to settle, for $2.2 billion (pre-tax), the Enron class action litigation entitled Newby v. Enron Corp. The Firm also recorded in the second quarter a nonoperating charge of $1.9 billion to cover the settlement and to increase itsmaintains litigation reserves for certain other remainingof its outstanding litigation, including material legal matters.
On March 17, 2005, JPMorgan Chase reached an agreement to settle, for $2.0 billion (pre-tax), its class action litigation regarding WorldCom, Inc. In connection with the settlement, JPMorgan Chase increased its Litigation reserve by $900 million (pre-tax).
proceedings. While the outcome of litigation is inherently uncertain, the amount of the Firm’s litigation reserves at September 30, 2005, reflected management’s assessment of the appropriate litigation reserve level at that datemanagement believes, in light of all information then known;known to it at March 31, 2006, the Firm believes itsFirm’s litigation reserves were adequate at September 30, 2005, are adequate to meet its remaining litigation expenses.such date. Management reviews litigation reserves periodically, and the reservereserves may be increased or decreased in the future to reflect further litigation developments. The Firm believes it has meritorious defenses to claims asserted against it in its currently outstanding litigation and, with respect to such litigation, intends to continue to defend itself vigorously, litigating or settling cases according to management’s judgment as to what is in the best interest of stockholders.
NOTE 18 —– ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The majority of JPMorgan Chase’s derivatives are entered into for trading purposes. TheDerivatives are also utilized by the Firm also utilizes derivatives as an end-user to hedge market exposures, to modify the interest rate characteristics of related balance sheet instruments or to meet longer-term investment objectives. Both trading and end-user derivatives are recorded in Trading assets and Trading liabilities. For a further discussion of the Firm’s use of and accounting policies regarding derivative instruments, see pages 62–6567–70 and Note 26 on pages 118–119page 123 of JPMorgan Chase’s 20042005 Annual Report. The following table presents derivative instrument hedging-related activities for the periods indicated:
                 
  Three months ended  Nine months ended 
  September 30,  September 30, 
 
(in millions) 2005  2004  2005  2004(b) 
 
Fair value hedge ineffective net losses(a)
 $(101) $34  $(142) $(66)
Cash flow hedge ineffective net losses(a)
  —   (1)  —   (2)
Cash flow hedging gains on forecasted transactions that failed to occur  —   —   —   — 
 
         
Three months ended March 31, (in millions) 2006  2005 
 
Fair value hedge ineffective net gains/(losses)(a)
 $(30) $(101)
Cash flow hedge ineffective net gains/(losses)(a)
  (2)  — 
Cash flow hedging gains on forecasted transactions that failed to occur  —   — 
 
(a) 
Includes ineffectiveness and the components of hedging instruments that have been excluded from the assessment of hedge effectiveness.
(b)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
Over the next 12 months, it is expected that $25$26 million (after-tax) of net gains recorded in OtherAccumulated other comprehensive income (loss) at September 30, 2005,March 31, 2006, will be recognized in earnings. The maximum length of time over which forecasted transactions are hedged is 10 years, relatedand such transactions primarily relate to core lending and borrowing activities.

84

NOTE 19 — OFF-BALANCE– OFF–BALANCE SHEET LENDING-RELATED FINANCIAL INSTRUMENTS AND GUARANTEES
For a discussion of off-balanceoff–balance sheet lending-related financial instruments and guarantees, and the Firm’s related accounting policies, see Note 27 on pages 119–120124–125 of JPMorgan Chase’s 20042005 Annual Report. To provide for the risk of loss inherent in wholesale-related contracts an allowance for credit losses on lending-related commitments is maintained. See Note 1211 on pages 102–103page 74 of JPMorgan Chase’s 2004 Annual Reportthis Form 10–Q for a further discussion regarding the allowance for credit losses on lending-related commitments.
The following table summarizes the contractual amounts of off-balanceoff–balance sheet lending-related financial instruments and guarantees and the related allowance for credit losses on lending-related commitments at September 30, 2005,March 31, 2006 and December 31, 2004:2005:
Off-balanceOff–balance sheet lending-related financial instruments and guarantees
                 
          Allowance for lending- 
  Contractual amount  related commitments 
  September 30,  December 31,  September 30,  December 31, 
(in millions) 2005  2004  2005  2004 
 
Consumer $632,310  $601,196  $15  $12 
Wholesale:                
Other unfunded commitments to extend credit(a)(b)(c)
  235,942   225,152   165   185 
Standby letters of credit and guarantees(a)(d)(e)
  73,863   78,084   210   292 
Other letters of credit(a)
  7,179   6,163   5   3 
 
Total wholesale  316,984   309,399   380   480 
 
Total off-balance sheet lending-related financial instruments $949,294  $910,595  $395  $492 
 
Customers’ securities lent(f)
 $235,069  $215,972  $NA   NA 
 
                 
          Allowance for 
  Contractual amount  lending-related commitments 
  March 31,  December 31,  March 31,  December 31, 
(in millions) 2006  2005  2006  2005 
 
Lending-related
                
Consumer(a)
 $669,402  $655,596  $15  $15 
Wholesale:                
Other unfunded commitments to extend credit(b)(c)(d)
  201,186   208,469   192   208 
Asset purchase agreements(e)
  34,821   31,095   5   3 
Standby letters of credit and guarantees(c)(f)(g)
  82,613   77,199   171   173 
Other letters of credit(c)
  3,955   4,346   1   1 
 
Total wholesale  322,575   321,109   369   385 
 
Total lending-related $991,977  $976,705  $384  $400 
 
Other guarantees
                
Securities lending guarantees(h)
 $283,111  $244,316   NA   NA 
Derivatives qualifying as guarantees(i)
  64,936   61,759   NA   NA 
 
(a) 
Represents contractual amount netIncludes Credit card lending–related commitments of risk participations totaling $28.5$589 billion and $26.4$579 billion at September 30, 2005,March 31, 2006 and December 31, 2004, respectively.2005, respectively, which represent the total available credit to the Firm’s cardholders. The Firm has not experienced, and does not anticipate, that all of its cardholders will exercise their entire available lines of credit at the same point in time. The Firm can reduce or cancel a credit card commitment by providing the cardholder prior notice or, in some cases, without notice, as permitted by law.
(b) 
Includes unused advised lines of credit totaling $24.9$28.4 billion and $22.8$28.3 billion at September 30, 2005,March 31, 2006, and December 31, 2004,2005, respectively, which are not legally binding. In regulatory filings with the Federal Reserve Board,FRB, unused advised lines are not reportable.

83

(c) 
Includes certainRepresents contractual amount net of risk participations totaling $36.8 billion and $29.3 billion at March 31, 2006, and December 31, 2005, respectively.
(d)
Excludes unfunded commitments to private third-party equity funds of $227 million and $242 million at March 31, 2006, and December 31, 2005, respectively.
(e)
Represents asset purchase agreements towith the Firm’s administered multi-seller asset-backed commercial paper conduits, ofwhich excludes $31.2 billion and $32.4 billion and $31.8 billion at September 30, 2005,March 31, 2006, and December 31, 2004, respectively; excludes $28.6 billion and $31.7 billion at September 30, 2005, and December 31, 2004, respectively, of asset purchase agreements related to the Firm’s administered multi-seller asset-backed commercial paper conduits that were consolidated in accordance with FIN 46R, as the underlying assets of the conduits are reported in the Firm’s Consolidated balance sheets. It also includes $3.2$1.3 billion and $7.5$1.3 billion at September 30, 2005, and December 31, 2004, respectively, of asset purchase agreements to structured wholesale loan vehicles and other third-party entities. The allowance for credit losses on lending-related commitments related to these agreements was insignificantentities at September 30, 2005,March 31, 2006 and December 31, 2004.2005, respectively.
(d)(f) 
JPMorgan Chase held collateral relating to $8.6$10.5 billion and $7.4$9.0 billion of these arrangements at September 30, 2005,March 31, 2006, and December 31, 2004,2005, respectively.
(e)(g) 
Includes unused commitments to issue standby letters of credit of $34.7$39.8 billion and $38.4$37.5 billion at September 30, 2005,March 31, 2006, and December 31, 2004,2005, respectively.
(f)(h) 
Collateral held by the Firm in support of securities lending indemnification agreements was $241.5 billion and $221.6$283 billion at September 30, 2005,March 31, 2006, and $245 billion at December 31, 2004,2005, respectively.
(i)
Represents notional amounts of derivative guarantees. For a further discussion of guarantees, see Note 27 on pages 124–125 of JPMorgan Chase’s 2005 Annual Report.
For a discussion of the off-balanceoff–balance sheet lending-related arrangements the Firm considers to be guarantees under FIN 45, and the related accounting policies, see Note 27 on pages 119–120124–125 of JPMorgan Chase’s 20042005 Annual Report. The amount of the liability related to FIN 45 guarantees recorded at September 30, 2005,March 31, 2006, and December 31, 2004,2005, excluding the allowance for credit losses on lending-related commitments and derivative contracts discussed below,above, was $318$315 million and $341$313 million, respectively.
In addition to the contracts noteddescribed above, there are certain derivative contracts to which the Firm is a counterparty that meet the characteristics of a guarantee under FIN 45. For a discussion of the derivatives the Firm considers to be guarantees, and the related accounting policies, see Note 27 on pages 119–120124–125 of JPMorgan Chase’s 20042005 Annual Report. The total notional value of the derivatives that the Firm deems to be guarantees was $63$65 billion and $53$62 billion at September 30, 2005,March 31, 2006, and December 31, 2004,2005, respectively. The fair value related to these contracts was a derivative receivable of $200$197 million and $180$198 million, and a derivative payable of $742$945 million and $622$767 million at September 30, 2005,March 31, 2006, and December 31, 2004,2005, respectively.

85

NOTE 20 —– BUSINESS SEGMENTS
JPMorgan Chase is organized into six major reportable business segments: thesegments (the Investment Bank (“IB”), Retail Financial Services (“RFS”), Card Services (“CS”), Commercial Banking (“CB”), Treasury & Securities Services (“TSS”) and Asset & Wealth Management (“AWM”)), as well as a Corporate segment. The segments are based upon the products and services provided or the type of customer served, and they reflect the manner in which financial information is currently evaluated by management. Results of these lines of business are presented on an operatinga managed basis. For a definition of operatingmanaged basis, see the footnotes to the table below. For a further discussion concerning JPMorgan Chase’s business segments, see Business segment results on pages 15–41page 13 of this Form 10–Q, and pages 28–2934–35 and Note 31 on pages 126–127130–131 of JPMorgan Chase’s 20042005 Annual Report.
Business segment financial disclosures
Effective January 1, 2006, JPMorgan Chase modified certain of its financial disclosures to reflect more closely the manner in which the Firm’s business segments are managed and to provide improved comparability with competitors. These financial disclosure revisions are reflected in this Form 10–Q, and the financial information for prior periods has been revised to reflect the disclosure changes as if they had been in effect throughout 2005. A summary of the changes are described below.
Reported versus Operating Basis Changes
The presentation of operating earnings that excluded merger costs and material litigation reserve charges and recoveries from reported results has been eliminated. These items had been excluded previously from operating results because they were deemed nonrecurring; they are now included in the Corporate business segment’s results. In addition, trading-related net interest income is no longer reclassified from Net interest income to trading revenue. As a result of these changes, effective January 1, 2006, management has discontinued reporting on an “operating” basis.
Business Segment Disclosures
Effective January 1, 2006, various wholesale banking clients, together with the related revenue and expense, are being transferred between CB, the IB and TSS. In the first quarter of 2006, the primary client transfer was corporate mortgage finance from CB to the IB.
Certain expenses that are managed by the business segments, but that had been previously recorded in Corporate and allocated to the businesses, are now recorded as direct expenses within the businesses.
Capital allocation changes
Effective January 1, 2006, the Firm refined its methodology for allocating capital (i.e. equity) to the business segments. As a result of this refinement, RFS, CS, CB, TSS and AWM have higher amounts of capital allocated to them, commencing in the first quarter of 2006, while the amount of capital allocated to the IB has remained unchanged. The revised methodology considers for each line of business, among other things, goodwill associated with such business segment’s acquisitions since the Merger. In management’s view, the revised methodology assigns responsibility to the lines of business to generate returns on the amount of capital supporting acquisition-related goodwill. As part of this refinement in the capital allocation methodology, the Firm assigned to the Corporate segment an amount of equity capital equal to the then-current book value of goodwill from and prior to the Merger. As prior periods have not been revised to reflect the new capital allocations, capital allocated to the respective lines of business for 2006 is not

84

comparable to prior periods and certain business metrics, such as ROE, are not comparable to the current presentation. The Firm may revise its equity capital allocation methodology again in the future.
The following table provides a summary of the Firm’s segment results for the three and nine months ended September 30,March 31, 2006, and 2005, and 2004, on an operatinga managed basis. The effectimpact of credit card securitizations, Merger costs and nonoperating Litigation reserve chargessecuritization adjustments have been included in Corporate/Reconciling items so that the total Firm results are on a reported basis. Finally, OperatingTotal net revenue (Noninterest revenue and Net interest income) for each of the segments is presented on a tax-equivalent basis. Accordingly, revenue from tax-exempttax exempt securities and investments that receive tax credits are presented in the operatingmanaged results on a basis comparable to taxable securities and investments. This approach allows management to assess the comparability of revenues arising from both taxable and tax-exempt sources. The corresponding income tax impact related to these items is recorded within Incomeincome tax expense.expense (benefit). The effect offollowing table summarizes the tax-equivalent basis adjustments is eliminated in Corporate/Reconciling items to reflect results on a reported basis. Segment results for the nine months ended September 30, 2004, include three months of the combined Firm’sbusiness segment results and six months of heritage JPMorgan Chase results and have been restatedreconciliation to reflect the current business segment organization and reporting classifications.reported U.S. GAAP results.
Segment results and reconciliation(a)
                                
 Retail Treasury & Asset Corporate/                   
(in millions, except ratios) Investment Financial Card Commercial Securities & Wealth Reconciling    Investment Retail Financial Card Commercial 
Three months ended Sept. 30, 2005 Bank(d) Services Services(e) Banking Services Management Items(d)(e)(f) Total 
Three months ended March 31, 2006 Bank Services(d) Services(e) Banking 
Net interest income $354 $2,512 $2,970 $654 $510 $267 $(2,415) $4,852  $190 $2,562 $3,013 $667 
Noninterest revenue 4,107 1,078 1,010 255 1,046 1,182 935 9,613  4,509 1,201 672 233 
Total net revenue 4,461 3,590 3,980 909 1,556 1,449  (1,480) 14,465  4,699 3,763 3,685 900 
Provision for credit losses  (46) 378 1,833  (46)  (1)  (19)  (854) 1,245  183 85 1,016 7 
Credit reimbursement (to)/fromTSS(b)
 38 — — —  (38) — — —  30 — — -- 
Merger costs — — — — — —  221(g) 221 
Litigation reserve charge — — — — — — — — 
Merger costs(c)
 — — — -- 
Other noninterest expense 2,875 2,156 1,286 461 1,107 976 382 9,243  3,191 2,238 1,243 498 
Income (loss) before income tax expense 1,670 1,056 861 494 412 492  (1,229) 3,756  1,355 1,440 1,426 395 
Income tax expense (benefit) 607 400 320 193 149 177  (617) 1,229  505 559 525 155 
Net income (loss) $1,063 $656 $541 $301 $263 $315 $(612) $2,527  $850 $881 $901 $240 
Average equity $20,000 $13,475 $11,800 $3,400 $1,900 $2,400 $52,506 $105,481  $20,000 $13,896 $14,100 $5,500 
Average assets 615,888 227,875 144,225 56,265 26,798 42,427 82,567 1,196,045  646,220 231,587 145,994 54,771 
Return on average equity  21%  19%  18%  35%  55%  52% NM  9%  17%  26%  26%  18%
Overhead ratio 64 60 32 51 71 67 NM 65  68 59 34 55 
                                
 Retail Treasury & Asset Corporate/                       
(in millions, except ratios) Investment Financial Card Commercial Securities & Wealth Reconciling    Treasury & Asset & Wealth Reconciling  
Three months ended Sept. 30, 2004 Bank(d) Services Services(e) Banking Services Management Items(d)(e)(f) Total 
Three months ended March 31, 2006 Securities Services Management Corporate Items(e)(f) Total
Net interest income $389 $2,706 $2,917 $608 $418 $269 $(1,855) $5,452  $572 $246 $(545) $(1,645) $5,060 
Noninterest revenue 2,312 1,094 854 225 921 924 723 7,053  1,105 1,338 139 979 10,176 
Total net revenue 2,701 3,800 3,771 833 1,339 1,193  (1,132) 12,505  1,677 1,584  (406)  (666) 15,236 
Provision for credit losses  (151) 239 1,662 14 — 1  (596) 1,169   (4)  (7) —  (449) 831 
Credit reimbursement (to)/from TSS(b)
 43 — — —  (43) — — —   (30) — — — -- 
Merger costs — — — — — —  752(g) 752 
Litigation reserve charge — — — — — — — — 
Merger costs(c)
 — — 71 — 71 
Other noninterest expense 1,924 2,238 1,437 480 1,156 884 506 8,625  1,158 1,098 255 — 9,681 
Income (loss) before income tax expense 971 1,323 672 339 140 308  (1,794) 1,959  493 493  (732)  (217) 4,653 
Income tax expense (benefit) 344 501 251 124 44 111  (834) 541  181 180  (316)  (217) 1,572 
Net income (loss) $627 $822 $421 $215 $96 $197 $(960) $1,418  $312 $313 $(416) $— $3,081 
Average equity $20,000 $13,050 $11,800 $3,400 $1,900 $2,400 $51,819 $104,369  $2,900 $3,500 $47,271 $— $107,167 
Average assets 496,347 227,716 136,753 55,957 24,831 39,882 135,849 1,117,335  30,131 41,012 166,199  (67,557) 1,248,357 
Return on average equity  12%  25%  14%  25%  20%  33% NM  5%  44%  36% NM NM  12%
Overhead ratio 71 59 38 58 86 74 NM 75  69 69 NM NM 64 

8685

                                
 Retail Treasury & Asset Corporate/                   
(in millions, except ratios) Investment Financial Card Commercial Securities & Wealth Reconciling    Investment Retail Financial Card Commercial
Nine months ended Sept. 30, 2005 Bank(d) Services Services(e) Banking Services Management Items(d)(e)(f) Total 
Three months ended March 31, 2005 Bank Services(d) Services(e) Banking
Net interest income $1,000 $7,723 $8,953 $1,927 $1,516 $823 $(6,864) $15,078  $634 $2,653 $3,007 $600 
Noninterest revenue 10,391 3,513 2,692 732 3,110 3,330 2,009 25,777  3,553 1,194 772 227 
Total net revenue 11,391 11,236 11,645 2,659 4,626 4,153  (4,855) 40,855  4,187 3,847 3,779 827 
Provision for credit losses  (755) 566 5,110 90  (2)  (46)  (2,704) 2,259   (366) 94 1,636  (6)
Credit reimbursement (to)/from TSS(b)
 114 — — —  (114) — — —  38 — — — 
Merger costs — — — — — —  645(g) 645 
Litigation reserve charge — — — — — — 2,772 2,772 
Merger costs(c)
 — — — — 
Other noninterest expense 7,578 6,444 3,982 1,392 3,366 2,827 1,294 26,883  2,527 2,162 1,313 454 
Income (loss) before income tax expense 4,682 4,226 2,553 1,177 1,148 1,372  (6,862) 8,296  2,064 1,591 830 379 
Income tax expense (benefit) 1,688 1,602 948 459 411 498  (3,095) 2,511  736 603 308 148 
Net income (loss) $2,994 $2,624 $1,605 $718 $737 $874 $(3,767) $5,785  $1,328 $988 $522 $231 
Average equity $20,000 $13,276 $11,800 $3,400 $1,900 $2,400 $52,590 $105,366  $20,000 $13,100 $11,800 $3,400 
Average assets 591,863 226,200 141,180 55,774 26,755 41,391 95,257 1,178,420  568,222 225,120 138,512 51,135 
Return on average equity  20%  26%  18%  28%  52%  49% NM  7%  27%  31%  18%  28%
Overhead ratio 67 57 34 52 73 68 NM 74  60 56 35 55 
                                
 Retail Treasury & Asset Corporate/                       
(in millions, except ratios) Investment Financial Card Commercial Securities & Wealth Reconciling    Treasury & Asset & Wealth Reconciling  
Nine months ended Sept. 30, 2004(c) Bank(d) Services Services(e) Banking Services Management Items(d)(e)(f) Total 
Three months ended March 31, 2005 Securities Services Management Corporate Items(e)(f) Total
Net interest income $991 $5,062 $5,461 $1,069 $912 $508 $(2,571) $11,432  $515 $282 $(673) $(1,793) $5,225 
Noninterest revenue 8,413 2,184 1,454 420 2,532 2,361 1,351 18,715  983 1,079  (86) 700 8,422 
Total net revenue 9,404 7,246 6,915 1,489 3,444 2,869  (1,220) 30,147  1,498 1,361  (759)  (1,093) 13,647 
Provision for credit losses  (467) 371 3,116 20 4 7  (1,664) 1,387   (3)  (7)  (4)  (917) 427 
Credit reimbursement (to)/from TSS(b)
 47 — — —  (47) — — —   (38) — — — — 
Merger costs — — — — — —  842(g) 842 
Litigation reserve charge — — — — — — 3,700 3,700 
Merger costs(c)
 — — 145 — 145 
Other noninterest expense 6,306 4,610 2,601 892 2,967 2,214 841 20,431  1,067 934 1,335 — 9,792 
Income (loss) before income tax expense 3,612 2,265 1,198 577 426 648  (4,939) 3,787  396 434  (2,235)  (176) 3,283 
Income tax expense (benefit) 1,324 841 439 223 131 230  (2,201) 987  142 158  (900)  (176) 1,019 
Net income (loss) $2,288 $1,424 $759 $354 $295 $418 $(2,738) $2,800  $254 $276 $(1,335) $— $2,264 
Average equity $16,380 $7,764 $6,200 $1,654 $2,761 $4,406 $26,660 $65,825  $1,900 $2,400 $52,745 $— $105,345 
Average assets 452,714 171,585 80,211 29,921 21,715 36,765 105,067 897,978  29,534 39,716 178,088  (67,509) 1,162,818 
Return on average equity  19%  24%  16%  29%  14%  13% NM  6%  54%  47% NM NM  9%
Overhead ratio 67 64 38 60 86 77 NM 83  71 69 NM NM 73 
(a) 
In addition to analyzing the Firm’s results on a reported basis, management reviews the lineFirm’s and the lines’ of business results on an “operatinga “managed” basis,” which is a non-GAAP financial measure. The Firm’s definition of operatingmanaged basis starts with the reported U.S. GAAP results. In the case of the Investment Bank, operating basis noninterest revenueresults and includes in Trading revenue, Net interest income (“NII”) related to trading activities. In the case of Card Services, refer to footnote (e). These adjustmentscertain reclassifications that do not change JPMorgan Chase’shave any impact on Net income as reported net income. Operating basis also excludes Merger costs and nonoperating Litigation reserve charges,by the lines of business or by the Firm as management believes these items are not part of the Firm’s normal daily business operations (and, therefore, not indicative of trends) and do not provide meaningful comparisons with other periods. Finally, operating results reflect revenues (Noninterest revenue and NII) on a tax-equivalent basis. Refer to footnote (f) for the impact of these adjustments.whole.
(b) 
TSS reimburses the IB for credit portfolio exposures the IB manages on behalf of clients the segments share. At the time of the Merger, the reimbursement methodology was revised to be based upon pre-tax earnings, net of the cost of capital related to those exposures. Prior to the Merger, the credit reimbursement was based upon pre-tax earnings, plus the allocated capital associated with the shared clients.
(c) 
Includes three months ofAll Merger costs are reported in the combined Firm’s resultsCorporate business segment. Merger costs attributed to the business segments for 2006 and six months of heritage JPMorgan Chase results.2005 were as follows:
         
Three months ended March 31, (in    
millions) 2006 2005
 
Investment Bank $2  $5 
Retail Financial Services  7   26 
Card Services  13   11 
Commercial Banking  —   2 
Treasury & Securities Services  26   20 
Asset & Wealth Management  6   14 
Corporate  17   67 
 
Total Merger costs $71  $145 
 
(d) 
Segment operating results include the reclassificationRetail Financial Services has been reorganized into three businesses: Regional Banking, Mortgage Banking and Auto Finance. For a further discussion see page 13 of NII related to trading activities to Trading revenue within Noninterest revenue, which primarily impacts the Investment Bank. Trading-related NII reclassified to Trading revenue was $(103) million and $424 million for the three months ended September 30, 2005 and 2004, respectively, and $423 million and $1.4 billion for the nine months ended September 30, 2005 and 2004, respectively. These amounts are eliminated in Corporate/reconciling items to arrive at NII and Noninterest revenue on a reported GAAP basis for JPMorgan Chase.this Form 10—Q.

87

(e) 
OperatingManaged results for Card Services exclude the impact of credit card securitizations on Total net revenue, provisionProvision for credit losses and averageAverage assets, as JPMorgan Chase treats the sold receivables as if they were still on the balance sheet in evaluating the overall performance of the credit card portfolio.net charge-offs and receivables. These adjustments are eliminated in Reconciling items to arrive at the Firm’s reported U.S. GAAP results. The related securitization adjustments were as follows:
                 
  Three months ended  Nine months ended 
  September 30,  September 30, 
 
(in millions) 2005  2004  2005  2004(a) 
 
Net interest income $1,600  $1,779  $4,990  $3,455 
Noninterest revenue  (733)  (851)  (2,276)  (1,568)
Provision for credit losses  867   928   2,714   1,887 
Average assets  67,021   69,035   66,917   45,227 
 
(a)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
These adjustments are eliminated in Corporate/reconciling items to arrive at the Firm’s reported GAAP results.
         
Three months ended March 31, (in    
millions) 2006 2005
 
Net interest income $1,574  $1,732 
Noninterest revenue  (1,125)  (815)
Provision for credit losses  449   917 
Average assets  67,557   67,509 
 
(f) 
Segment operatingmanaged results reflect revenues on a tax-equivalent basis with the corresponding income tax impact recorded within income tax expense. These adjustments are eliminated in Reconciling items to arrive at the Firm’s reported U.S. GAAP results. Tax-equivalent adjustments were as follows:
                 
  Three months ended  Nine months ended 
  September 30,  September 30, 
 
(in millions) 2005  2004  2005  2004(a) 
 
Net interest income $67  $(36) $212  $(4)
Noninterest revenue  155   64   413   139 
Income tax expense  222   28   625   135 
 
(a)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
These adjustments are eliminated in Corporate/reconciling items to arrive at the Firm’s reported GAAP results.
(g)
Merger costs attributed to the lines of business were as follows:
                 
  Three months ended  Nine months ended 
  September 30,  September 30, 
 
(in millions) 2005  2004  2005  2004(a) 
 
Investment Bank $4  $38  $18  $43 
Retail Financial Services  24   148   101   171 
Card Services  100   71   185   72 
Commercial Banking  3   14   2   20 
Treasury & Securities Services  24   43   67   48 
Asset & Wealth Management  9   17   47   17 
Corporate  57   421   225   471 
 
(a)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
         
Three months ended March 31, (in    
millions) 2006 2005
 
Net interest income $71  $61 
Noninterest revenue  146   115 
Income tax expense  217   176 
 

8886

JPMORGAN CHASE & CO.
CONSOLIDATED AVERAGE BALANCE SHEET, INTEREST AND RATES
(Taxable-Equivalent Interest and Rates; in millions, except rates)
                        
                Three months ended March 31, 2006 Three months ended March 31, 2005
 Three months ended September 30, 2005 Three months ended September 30, 2004 Average Rate Average Rate
 Average Rate Average Rate Balance Interest (Annualized) Balance Interest (Annualized)
 Balance Interest (Annualized) Balance Interest (Annualized)            
ASSETS
  
Deposits with Banks $11,388 $128  4.48% $34,166 $131  1.53% $20,672 $247  4.85% $15,232 $154  4.11%
Federal Funds Sold and Securities Purchased under Resale Agreements 146,048 1,094 2.97 102,042 474 1.85  147,391 1,543 4.25 121,189 727 2.43 
Securities Borrowed 66,817 301 1.78 47,087 120 1.01  84,220 385 1.86 52,449 221 1.71 
Trading Assets — Debt Instruments 189,198 2,286 4.79 170,663 1,991 4.64  185,679 2,597 5.67 187,669 2,264 4.89 
Securities: Available-for-sale 65,103 746  4.55(a) 94,590 1,048  4.41(a)
Held-to-maturity 89 3 12.36 130 3 10.02 
Interests in purchased receivables 27,905 247 3.52 28,917 119 1.63 
Securities: Available-for-Sale 60,146 792  5.34(a) 93,332 1,133  4.92(a)
Held-to-Maturity 77 1 6.63 106 3 9.73 
Interests in Purchased Receivables 30,028 331 4.47 29,277 186 2.58 
Loans 415,676 6,696 6.39 390,753 5,571 5.67  429,239 7,476 7.06 398,494 6,005 6.11 
Total Interest-Earning Assets 922,224 11,501 4.95 868,348 9,457 4.33  957,452 13,372 5.66 897,748 10,693 4.83 
Allowance for loan losses  (7,003)  (7,450) 
Cash and due from banks 32,166 30,773 
Allowance for Loan Losses  (7,121)  (7,192) 
Cash and Due from Banks 32,286 29,831 
Trading assets — Equity instruments 53,025 30,275  70,762 43,717 
Trading assets — Derivative receivables 54,522 59,232  52,031 65,237 
Other assets 141,111 136,157  142,947 133,477 
Total Assets
 $1,196,045 $1,117,335  $1,248,357 $1,162,818 
  
LIABILITIES
  
Interest-Bearing Deposits $398,059 $2,720  2.71% $365,104 $1,324  1.44% $434,100 $3,665  3.42% $388,355 $1,997  2.09%
Federal Funds Purchased and Securities Sold under Repurchase Agreements 160,967 1,137 2.80 163,206 629 1.53  158,818 1,358 3.47 151,335 924 2.48 
Commercial Paper 15,188 120 3.13 12,497 34 1.08  15,310 150 3.97 12,665 62 2.00 
Other Borrowings(b)
 111,010 1,212 4.33 84,387 1,095 5.16  124,773 1,426 4.64 98,259 1,228 5.06 
Beneficial interests issued by consolidated VIEs 44,381 363 3.25 43,308 171 1.58 
Long-term debt 111,921 1,031 3.65 101,061 788 3.10 
Beneficial Interests Issued by Consolidated VIEs 42,192 407 3.92 45,294 272 2.44 
Long-term Debt 118,875 1,235 4.21 108,004 924 3.47 
Total Interest-Bearing Liabilities 841,526 6,583 3.10 769,563 4,041 2.09  894,068 8,241 3.74 803,912 5,407 2.73 
Noninterest-Bearing deposits 129,512 120,991 
Trading liabilities — Derivative payables 51,128 51,387 
All other liabilities, including the allowance for lending-related commitments 68,259 70,016 
Noninterest-Bearing Deposits 128,553 127,405 
Trading liabilities — Derivative Payables 54,842 63,741 
All Other Liabilities, including the 
Allowance for Lending-related Commitments 63,590 62,076 
Total Liabilities
 1,090,425 1,011,957  1,141,053 1,057,134 
  
STOCKHOLDERS’ EQUITY
  
Preferred Stock 139 1,009  137 339 
Common Stockholders’ Equity 105,481 104,369  107,167 105,345 
Total Stockholders’ Equity
 105,620 105,378  107,304 105,684 
Total Liabilities, Preferred Stock and Stockholders’ Equity
 $1,196,045 $1,117,335  $1,248,357 $1,162,818 
INTEREST RATE SPREAD
  1.85%  2.24%  1.92%  2.10%
NET INTEREST INCOME AND MARGIN ON INTEREST-EARNING ASSETS
 $4,918  2.12% $5,416  2.48%
NET INTEREST INCOME AND MARGIN
 
ON INTEREST-EARNING ASSETS
 $5,131  2.17% $5,286  2.39%
(a) 
For the three months ended September 30,March 31, 2006 and 2005, and 2004, the annualized rate for available-for-sale securities based onupon amortized cost was 4.54%5.29% and 4.38%4.90%, respectively.
 
(b) 
Includes securities sold but not yet purchased.

8987

JPMORGAN CHASE & CO.
CONSOLIDATED AVERAGE BALANCE SHEET, INTEREST AND RATES
(Taxable-Equivalent Interest and Rates; in millions, except rates)
                         
  Nine months ended September 30, 2005 Nine months ended September 30, 2004(c)
  Average     Rate Average     Rate
  Balance Interest (Annualized) Balance Interest (Annualized)
ASSETS
                        
Deposits with Banks $15,075  $472   4.19% $27,560  $331   1.60%
Federal Funds Sold and Securities Purchased under Resale Agreements  135,792   2,762   2.72   90,601   1,095   1.61 
Securities Borrowed  59,877   835   1.86   49,966   303   0.81 
Trading Assets — Debt Instruments  190,181   6,995   4.92   163,559   5,459   4.46 
Securities: Available-for-sale  75,244   2,513   4.47(a)  74,171   2,443   4.40(a)
Held-to-maturity  97   8   10.42   191   9   6.46 
Interests in purchased receivables  28,416   649   3.06   10,552   130   1.64 
Loans  406,226   18,994   6.25   277,428   10,959   5.28 
 
Total Interest-Earning Assets  910,908   33,228   4.88   694,028   20,729   3.99 
Allowance for loan losses  (7,050)          (5,363)        
Cash and due from banks  30,474           23,494         
Trading assets — Equity instruments  46,926           29,739         
Trading assets — Derivative receivables  59,315           57,151         
Other assets  137,847           98,929         
 
Total Assets
 $1,178,420          $897,978         
 
                         
LIABILITIES
                        
Interest-Bearing Deposits $393,659  $7,069   2.40% $286,071  $2,956   1.38%
Federal Funds Purchased and Securities Sold under Repurchase Agreements  156,892   3,122   2.66   154,669   1,530   1.32 
Commercial Paper  13,459   258   2.56   13,308   85   0.86 
Other Borrowings(b)
  102,782   3,565   4.64   81,722   2,887   4.72 
Beneficial interests issued by consolidated VIEs  44,469   954   2.87   20,253   248   1.64 
Long-term debt  110,608   2,970   3.59   70,663   1,595   3.02 
 
Total Interest-Bearing Liabilities  821,869   17,938   2.92   626,686   9,301   1.98 
Noninterest-Bearing deposits  128,259           93,487         
Trading liabilities — Derivative payables  56,747           49,701         
All other liabilities, including the allowance for lending-related commitments  65,949           61,270         
 
Total Liabilities
  1,072,824           831,144         
                         
STOCKHOLDERS’ EQUITY
                        
Preferred Stock  230           1,009         
Common Stockholders’ Equity  105,366           65,825         
 
Total Stockholders’ Equity
  105,596           66,834         
 
Total Liabilities, Preferred Stock and Stockholders’ Equity
 $1,178,420          $879,978         
 
INTEREST RATE SPREAD
          1.96%          2.01%
NET INTEREST INCOME AND MARGIN ON INTEREST-EARNING ASSETS
     $15,290   2.24%     $11,428   2.20%
 
(a)
For the nine months ended September 30, 2005 and 2004, the annualized rate for available-for-sale securities based upon amortized cost was 4.45% and 4.37%, respectively.
(b)
Includes securities sold but not yet purchased.
(c)
Includes three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.

90

GLOSSARY OF TERMS
 
ACH:Automated Clearing House.
APB:Accounting Principles Board Opinion.
APB 25:“Accounting for Stock Issued to Employees.”
Assets under management:Represent assets actively managed by Asset & Wealth Management on behalf of institutional, private banking, private client services and retail clients. Excludes assets managed by American Century Companies, Inc., in which the Firm has a 43% ownership interest.
Assets under supervision:Represent assets under management as well as custody, brokerage, administration and deposit accounts.
Average managed assets:Refers to total assets on the Firm’s balance sheet plus credit card receivables that have been securitized.
bp:Denotes basis points; 100 bp equals 1%.
Contractual credit card charge-off:In accordance with the Federal Financial Institutions Examination Council policy, credit card loans are charged-offcharged off by the end of the month in which the account becomes 180 days past due or within 60 days from receiving notification of the filing of bankruptcy, whichever is earlier.
Core deposits:U.S. deposits insured by the Federal Deposit Insurance Corporation, up to the legal limit of $100,000 per depositor.
Credit derivativesare contractual agreements that provide protection against a credit event of one or more referenced credits. The nature of a credit event is established by the protection buyer and protection seller at the inception of a transaction, and such events include bankruptcy, insolvency andor failure to meet payment obligations when due. The buyer of the credit derivative pays a periodic fee in return for a payment by the protection seller upon the occurrence, if any, of a credit event.
Credit cycle:a period of time over which credit quality improves, deteriorates and then improves again. While portfolios may differ in terms of risk, the credit cycle is typically driven by many factors, including market events and the economy. The duration of a credit cycle can vary from a couple of years to several years.
FASB:Financial Accounting Standards Board.
FIN 39:FASB Interpretation No. 39, “Offsetting of Amounts Related to Certain Contracts.”
FIN 45:FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirement for Guarantees, including Indirect Guarantees of Indebtedness of Others.”
FIN 46R:FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51.”
FSP FIN 47:46(R)-6:“Determining the Variability to be Considered in Applying FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations — an interpretation of FASB Statement No. 143.46(R).”
FASB Staff Position (“FSP”) SFAS 109-2:FSP FAS 123(R)-3:“Transition Election Related to Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation ActTax Effects of 2004.Share-Based Payment Awards.”
Interests in Purchased Receivables:Represent an ownership interest in a percentage of cash flows of an underlying pool of receivables transferred by a third-party seller into a bankruptcy remote entity, generally a trust, and then securitizedfinanced through a commercial paper conduit.
Investment-grade:An indication of credit quality based onupon JPMorgan Chase’s internal risk assessment system. “Investment-grade” generally represents a risk profile similar to a rating of a BBB-/Baa3 or better, as defined by independent rating agencies.

91

Litigation reserve charges and recoveries:There was a $98 million insurance recovery in the first quarter 2006 and a $900 million charge taken in the first quarter of 2005; both of which relate to certain of the legal cases named in the JPMorgan Chase Quarterly Report on Form 10—Q for the quarter ended September 30, 2004.

Managed Basis:Includes reclassifications related to credit card securitizations and taxable equivalents. Management uses certain non-GAAP financial measures at the segment level because it believes these non-GAAP financial measures provide information to investors in understanding the underlying operational performance and trends of the particular business segment and facilitate a comparison of the business segment with the performance of competitors.
Managed Credit Card Receivables:Refers to credit card receivables on the Firm’s balance sheet plus credit card receivables that have been securitized.
Mark-to-market exposure:A measure, at a point in time, of the value of a derivative or foreign exchange contract in the open market. When the mark-to-market value is positive, it indicates the counterparty owes JPMorgan Chase and, therefore, creates a repayment risk for the Firm. When the mark-to-market value is negative, JPMorgan Chase owes the counterparty. In this situation, the Firm does not have repayment risk.

88

Master netting agreement:An agreement between two counterparties that have multiple derivative contracts with each other that provides for the net settlement of all contracts through a single payment, in a single currency, in the event of default on or termination of any one contract. See FIN 39.
NA:Data is not applicable or available for the period presented.
Net yield on interest-earning assets:The average rate for interest-earning assets less the average rate paid for all sources of funds.
NM:Not meaningful.
Nonoperating litigation reserve chargesOPEB:are the $1.9 billion (pre-tax) charge taken in the second quarter of 2005, the $900 million (pre-tax) charge taken in the first quarter of 2005 and the $3.7 billion (pre-tax) charge taken in the second quarter of 2004, all of which relate to the legal cases named in the JPMorgan Chase Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.Other postretirement employee benefits.
Overhead ratio:Noninterest expense as a percentage of total net revenue.
Principal Transactions:Represents Trading revenue (which includes physical commodities carried at the lower of cost or market), primarily in the Investment Bank, plus Private equity gains (losses), primarily in the Private Equity business of Corporate.
Reported Basis:Financial statements prepared under accounting principles generally accepted in the United States of America (“U.S. GAAP”). The reported basis includes the impact of credit card securitizations, but excludes the impact of taxable equivalent adjustments.
Return on equity-goodwill:common equity less goodwill:Represents net income applicable to common stock divided by total average common equity (net of goodwill). The Firm uses return on equity less goodwill, a non-GAAP financial measure, to evaluate the operating performance of the Firm. The Firm also utilizes this measure to facilitate operating comparisons to other competitors.
SFAS:Statement of Financial Accounting Standards.
SFAS 109:“Accounting for Income Taxes.”
SFAS 123:“Accounting for Stock-Based Compensation.”
SFAS 123R:“Share-Based Payment.”
SFAS 128:“Earnings per Share.”
SFAS 133:“Accounting for Derivative Instruments and Hedging Activities.”
SFAS 140:“Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities — a replacement of FASB Statement No. 125.”
SFAS 142:“Goodwill and Other Intangible Assets.”
SFAS 143:149:“Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities.”
SFAS 155:“Accounting for Asset Retirement Obligations.Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140.”
SFAS 156:“Accounting for Servicing of Financial Assets — an amendment of FASB Statements No. 140.”
Staff Accounting Bulletin (“SAB”) 107:“Application of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment.”
Statement of Position (“SOP”) 05-1:“Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts.”
Stress testing:A scenario that measures market risk under unlikely but plausible events in abnormal markets.
Unaudited:The financial statements and information included throughout this document are unaudited and have not been subjected to auditing procedures sufficient to permit an independent certified public accountant to express an opinion.
U.S. GAAP:Accounting principles generally accepted in the United States of America.
U.S. government and federal agency obligations:Obligations of the U.S. government or an instrumentality of the U.S. government whose obligations are fully and explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the U.S. government.
U.S. government-sponsored enterprise obligations:Obligations of agencies originally established or chartered by the U.S. government to serve public purposes as specified by the U.S. Congress; these obligations are not explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the U.S. government.
Value-at-Risk (“VAR”):A measure of the dollar amount of potential loss from adverse market moves in an ordinary market environment.

9289

 
LINE OF BUSINESS METRICS
 
Investment Banking
IB’s revenues are comprised ofcomprise the following:
Investment banking feesincludes advisory, equity underwriting, bond underwriting and loan syndication fees.
Fixed income marketsincludes client and portfolio management revenue related to both market-making and proprietary risk-taking across global fixed income markets, including government and corporate debt, foreign exchange, interest rate and commodities markets.
Equities marketsincludes client and portfolio management revenue related to market-making and proprietary risk-taking across global equity products, including cash instruments, derivatives and convertibles.
Credit portfolio revenueincludes Net interest income, fees and loan sale activity for IB’s credit portfolio. Credit portfolio revenue also includes gains or losses on securities received as part of a loan restructuring, and changes in the credit valuation adjustment (“CVA”), which is the component of the fair value of a derivative that reflects the credit quality of the counterparty. Credit portfolio revenue also includes the results of risk management related to the Firm’s lending and derivative activities.
Retail Financial Services
Description of selected business metrics within Home Finance:Regional Banking:
SecondaryPersonal bankers— Retail branch office personnel who acquire, retain and expand new and existing customer relationships by assessing customer needs and recommending and selling appropriate banking products and services.
Sales specialists— Retail branch office personnel who specialize in the marketinginvolves of a single product, including mortgages, investments and business banking, by partnering with the sale of mortgage loans intopersonal bankers.
Mortgage banking revenues comprise the secondary market and risk management of this activityfollowing:
Production incomeincludes Mortgage Servicing Rights created from the pointsales of loan commitment to customers through loan closingloans, net gains or losses on the sales of loans, and subsequent sale.other production-related fees. Also includes revenue associated with originations of subprime mortgage loans.
Mortgage servicing income
(a)Servicing revenue represents all gross income earned from servicing third-party mortgage loans including stated service fee, excess service fees, late fees, and other ancillary fees. Also includes income associated with the servicing of subprime mortgages.
(b)Changes in MSR asset fair value due to:
-inputs or assumptions in the model include interest rates and other market-based factors. Also includes updates to assumption used in the MSR valuation process and changes in the value of servicing assets associated with subprime loans.
-other changes in fair value include any factors other than those noted in the definition above. The single largest component of this line item is the change in MSR value due to servicing portfolio runoff (or time decay). For periods prior to January 1, 2006, this amount represents MSR asset amortization expense under SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities — a replacement of FASB Statement No. 125. Includes the results of both prime and subprime servicing assets.
-derivative valuation adjustments and other represents fair value adjustments to the derivatives and other instruments used to hedge the MSR asset.
Home Finance’sMortgage Banking’s origination channels are comprised ofcomprise the following:
Retail– A mortgage banker employed by the Firm directly contacts borrowers— Borrowers who are buying or refinancing a home throughare directly contacted by a mortgage banker employed by the Firm using a branch office, through the Internet or by phone. Borrowers are frequently referred to a mortgage banker by real estate brokers, home builders or other third parties.
Wholesale–— A third-party mortgage broker refers loansloan applications to a mortgage banker at the Firm. Brokers are independent loan originators that specialize in finding and counseling borrowers but do not provide funding for loans.
Correspondent (including negotiated transactions)– Banks,— Correspondents are banks, thrifts, other mortgage banks and other financial institutions that sell closed loans to the Firm.
Correspondent negotiated transactions (“CNT”)– Mid-occur when mid- to large-sized mortgage lenders, banks and bank-owned mortgage companies sell servicing to the Firm on an as-originated basis. These transactions supplement traditional production channels and provide growth opportunities in the servicing portfolio in stable and rising-rate periods.
Description of selected business metrics within Consumer & Small Business Banking:
Personal bankers– Retail branch office personnel who acquire, retain and expand new and existing customer relationships by assessing customer needs and recommending and selling appropriate banking products and services.
Investment sales representatives– Licensed retail branch sales personnel, assigned to support several branches, who assist with the sale of investment products including college planning accounts, mutual funds, annuities and retirement accounts.
Description of selected business metrics within Insurance:
Proprietary annuity salesrepresent annuity contracts marketed through and issued by subsidiaries of the Firm.
Insurance in force – direct/assumedincludes the aggregate face amount of insurance policies directly underwritten and assumed through reinsurance.
Insurance in force – retainedincludes the aggregate face amounts of insurance policies directly underwritten and assumed through reinsurance, after reduction for face amounts ceded to reinsurers.

9390

Card Services
Description of selected business metrics within Card Services:
Charge volume–— Represents the dollar amount of cardmember purchases, balance transfers and cash advance activity.
Net accounts opened–— Includes originations, purchases and sales.
Merchant acquiring business–— Represents an entity that processes payments for merchants. JPMorgan Chase is a majority owner ofpartner in Chase Paymentech Inc. and a 50% owner of Chase Merchant Services.Solutions, LLC.
Bank card volume–— Represents the dollar amount of transactions processed for the merchants.
Total transactions–— Represents the number of transactions and authorizations processed for the merchants.
12 month lagged loss ratio– Represents the current period net charge-offs annualized divided by the average pro forma managed loans for the same period in the prior year.
Commercial Banking
Commercial Banking revenues are comprised ofcomprise the following:
Lendingincorporatesincludes a variety of financing alternatives, such as term loans, revolving lines of credit and asset-based structures and leases, which are often provided on a basis secured by receivables, inventory, equipment, real estate or real estate.other assets. Products include Term loans, Revolving lines of credit, Bridge financing, Asset-backed structures, and Leases.
Treasury servicesincorporatesincludes a broad range of products and services enabling clients to help clientstransfer, invest and manage short-term liquidity throughthe receipt and disbursement of funds, while providing the related information reporting. These products and services include U.S. dollar and multi-currency clearing, ACH, Lockbox, Disbursement and reconciliation services, Check deposits, Other check and currency-related services, Trade finance and logistics solutions, Commercial card, and Deposit products, sweeps and longer-term investment needs through money market accounts, certificates of deposit and mutual funds; manage working capital through lockbox, global trade, global clearing and commercial card products; and have ready access to information to manage their business through on-line reporting tools.funds.
Investment bankingproducts provide clients with more sophisticated capital-raising alternatives, through loan syndications, investment-grade debt, asset-backed securities, private placements, high-yield bonds and equity underwriting, andas well as balance sheet and risk management tools through foreignLoan syndications, Investment-grade debt, Asset-backed securities, Private placements, High-yield bonds, Equity underwriting, Advisory, Interest rate derivatives, and Foreign exchange derivatives, M&A and advisory services.hedges.
Description of selected business metrics within Commercial Banking:commercial banking:
Liability balancesinclude deposits and deposits that are swept to on-balanceon—balance sheet liabilities (e.g., commercial paper, fedFed funds purchases,purchased, and repurchase agreements).
IB revenues, gross— Represents 100% of the revenue related to investment banking products for which there is a sharing agreement between Commercial Banking and the Investment Bank and for the investment banking products that are sold through Commercial Banking.
Treasury & Securities Services
Treasury & Securities Servicesfirmwide metricsinclude certain TSS product revenues and liability balances reported in other lines of business forrelated to customers who are also customers of those other lines of business. In order to capture the firmwide impact of TS and TSS products and revenues, management reviews firmwide metrics such as firmwide liability balances, firmwide revenuerevenues and firmwide overhead ratios in assessing financial performance for TSS. Firmwide metrics are necessary, in management’s view, in order to understand the aggregate TSS business.
Description of selected business metrics within Treasury & Securities Services:
Liability balancesinclude deposits and deposits that are swept to on-balanceon—balance sheet liabilities (e.g., commercial paper, fedFed funds purchases,purchased, and repurchase agreements).
Asset & Wealth Management
AWM’s client segments are comprised ofcomprise the following:
Institutionalserves large and mid-size corporate and public institutions, endowments and foundations, and governments globally. AWM offers these institutions comprehensive global investment services, including investment management across asset classes, pension analytics, asset-liability management, active risk budgeting and overlay strategies.
ThePrivate bankaddresses every facet of wealth management for ultra-high-net-worth individuals and families worldwide, including investment management, capital markets and risk management, tax and estate planning, banking, capital raising and specialty wealth advisory services.
Retailprovides more than 2 million customers worldwide with investment management services and retirement planning and administration and brokerage services through third-party and direct distribution channels.
Institutionalserves more than 3,000 large and mid-size corporate and public institutions, endowments and foundations, and governments globally. AWM offers institutions comprehensive global investment services, including investment management across asset classes, pension analytics, asset-liability management, active risk budgeting and overlay strategies.
Private client servicesoffers high-net-worth individuals, families and business owners comprehensive wealth management solutions that include financial planning, personal trust, investment and banking products and services.

9491

 
FORWARD-LOOKING STATEMENTS
 
The Management’s DiscussionFrom time to time, the Firm has made and Analysis includedwill make forward-looking statements. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often use words such as “anticipate,” “target,” “expect,” “estimate,” “intend,” “plan,” “goal,” “believe,” “anticipate” or other words of similar meaning. Forward-looking statements provide JPMorgan Chase’s current expectations or forecasts of future events, circumstances, results or aspirations. JPMorgan Chase’s disclosures in this Form 10-Q containsreport contain forward-looking statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. SuchThe Firm also may make forward-looking statements are based uponin its other documents filed or furnished with the current beliefsSecurities and expectationsExchange Commission (“SEC”). In addition, the Firm’s senior management may make forward-looking statements orally to analysts, investors, representatives of the management of JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”)media and others.
All forward-looking statements, by their nature, are subject to significant risks and uncertainties. These risks and uncertainties could cause the Firm’sJPMorgan Chase’s actual future results tomay differ materially from those set forth in suchits forward-looking statements. Such risksFactors that could cause this difference—many of which are beyond the Firm’s control—include the following: local, regional and uncertainties are described hereininternational business, political or economic conditions; changes in trade, monetary and fiscal policies and laws; technological changes instituted by the Firm and by other entities which may affect the Firm’s business; mergers and acquisitions, including the Firm’s ability to integrate acquisitions; ability of the Firm to develop new products and services; acceptance of new products and services and the ability of the Firm to increase market share; ability of the Firm to control expenses; competitive pressures; changes in laws and regulatory requirements; changes in applicable accounting policies; costs, outcomes and effects of litigation and regulatory investigations; changes in the JPMorgan Chasecredit quality of the Firm’s customers; and adequacy of the Firm’s risk management framework.
Additional factors that may cause future results to differ materially from forward-looking statements are discussed in Part I, Item 1A: Risk Factors in the Firm’s Annual Report on Form 10-K10—K for the year ended December 31, 2004, filed with the U.S. Securities and Exchange Commission (“SEC”) and available at the SEC’s Internet site (www.sec.gov),2005, to which reference is hereby made.
Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “estimates,” “targeted” and similar expressions, and future or conditional verbs, such as “will,” “would,” “should,” “could” or “may,” are intended to identify forward-looking statements but are not the only means to identify these statements.
Forward-looking statements involve risks and uncertainties. Actual conditions, events or results may differ materially from those contemplated by a forward-looking statement. Factors that could cause this difference—many of which are beyond the Firm’s control—include the following, without limitation:
•Local, regional and international business or economic conditions may differ from those expected.
•The effects of and changes in trade, monetary and fiscal policies and laws, including the U.S. Federal Reserve Board’s interest rate policies, may adversely affect the Firm’s business.
•The timeliness of development and acceptance of new products and services may be different than anticipated.
•Technological changes instituted by the Firm and by persons who may affect the Firm’s business may be more difficult to accomplish or more expensive than anticipated or may have unforeseen consequences.
•Mergers and/or acquisitions and integration of merged and/or acquired businesses may be more difficult or expensive than expected.
•The ability to increase market share and control expenses may be more difficult than anticipated.
•Competitive pressures among financial services companies may increase significantly.
•Changes in laws and regulatory requirements (including those concerning taxes, banking, securities and insurance) may adversely affect the Firm or its businesses.
•Changes in accounting policies and practices, as may be adopted by regulatory agencies, the Public Company Accounting Oversight Board and the Financial Accounting Standards Board, may affect expected financial reporting.
•The costs, effects and outcomes of litigation may adversely affect the Firm or its businesses.
•The Firm may not manage the risks involved in the foregoing as well as anticipated.
There is no assurance that any list of risks and uncertainties or risk factors is complete.
Any forward-looking statements made by or on behalf of the Firm in this Form 10-Q speak only as of the date of this Form 10-Q.they are made and JPMorgan Chase does not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made. The reader should, however, consult any further disclosures of a forward-looking nature JPMorgan Chasethe Firm may make in itsany subsequent Annual Reports on Form 10-K,10—K, its Quarterly Reports on Form 10-Q10—Q and its Current Reports on Form 8-K.

9592

Item 3Quantitative and Qualitative Disclosures about Market Risk
For a discussion of the quantitative and qualitative disclosures about market risk, see the Market Risk Management section of the MD&A on pages 60–6255—57 of this Form 10–10—Q.
Item 4Controls and Procedures
As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of the Firm’s management, including its Chief Executive Officer Chief Operating Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). See Exhibits 31.1 31.2 and 31.331.2 for the Certification statements issued by the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer. Based upon that evaluation, the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective.
There was no change in the Firm’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that occurred during the thirdfirst quarter of 20052006 that has materially affected, or is reasonably likely to materially affect, the Firm’s internal control over financial reporting.
Part II Other Information
Item 1Legal proceedings
The following information supplements and amends the disclosure set forth under Part I, Item 3 “Legal proceedings” in the Firm’s Annual Report on Form 10—K10-K for the fiscal year ended December 31, 2004 and Part II, Item 1 “Legal Proceedings” in the Firm’s Quarterly Report on Form 10—Q for the quarterly periods ending March 31, 2005 and June 30, 2005, respectively (the “Firm’s SEC filings”).
Enron litigation.Litigation. On August 16, 2005, the Firm announced that it had reached an agreement in principle to settle the adversary proceedings brought by Enron inFebruary 22, 2006, the United States BankruptcyDistrict Court for the Southern District of New York. The Firm will pay $350 million toTexas preliminarily approved the bankruptcy estate and will give up certain contested claims it had filed in the bankruptcy. Enron will allow the Firm’s other claims in the bankruptcy and will dismiss or release all claims it has against the Firm. The Firm will have the option of increasing its cash payment in exchange for retaining more of its claims and having them allowed in the bankruptcy. Thepreviously described settlement is subject to negotiation of a definitive agreement, and approval of the Bankruptcy Court. In addition,lead class action captionedNewby v. Enron Corp., and set a hearing on the motion for final approval for May 24, 2006. On March 6, 2006, two actions were filed alleging state law claims against JPMorgan Chase Bank relating to its role as indenture trustee in connection with respect to the case brought bycertain Enron securities. On March 24, 2006, a putative class of employees who participatedshareholder derivative complaint was filed in the Firm’s 401(k) plan, in August 2005, the United States District Court for the Southern District of New York denied plaintiffs’ motion for class certificationalleging breaches of fiduciary duty, mismanagement and ordered some of plaintiffs’ claims dismissed. A petition has been filedcorporate waste by the plaintiffs seeking reviewFirm’s directors and named officers in the management of the denial of class certificationFirm in the United States Court of Appeals for the Second Circuit. Finally, the Firm has reached agreement or agreement in principlevarious alleged activities, including but not limited to settle several of the individual actions brought by investors arising from their investment in Enron-related securities. However, in certain of the individual actions, several plaintiffs have filed or sought to file new or amended complaints.
WorldCom.The Court approved the class action settlement, and the Firm’s $2 billion payment has been placed into escrow. An appeal of the approval of that settlement has been filed. With respect to the individual actions by plaintiffs that had opted out of the class action settlement, court approval required for one of the two previously reached settlements has been received, and a third settlement has been finalized with the largest group of individual plaintiffs, all jointly representedEnron. A prior litigation by the same counsel. The Firm’s share of the settlements paidplaintiff relating only to date in respect of all the individual actions totals approximately $300 million.
Commercial Financial Services litigation.Enron had previously been dismissed. The Firm has consummatednot yet responded to these new complaints. On April 11, 2006, the Firm filed its settlement of allopposition to the summary judgment motions filed initially in two of the lawsuits broughtbank lender cases (and subsequently joined by institutional investors against JPMSI in the United States District Court for the Northern District of Oklahoma. Additionally, the institutional investors that had sued JPMSI in Oklahoma state court have dismissed their action against JPMSI. In the Oklahoma state court action by CFS against JPMSI, JPMSI has moved for summary judgment, and that motion is fully briefed. The state court set a trial date of December 5, 2005.other bank lender case plaintiffs).
IPO allocation litigation.On August 30, 2005,April 19, 2006, JPMSI’s counsel entered into a Memorandum of Understanding (“MOU”) with Plaintiffs’ Executive Committees in the consolidated IPO securities cases (“IPO Securities Litigation”) and the consolidated IPO antitrust cases (“IPO Antitrust Litigation”) intended to result in a unitary settlement of (i) all claims against JPMSI in the 192 putative class actions coordinated in the IPO Securities Litigation involving an IPO or secondary public offering in which any JPMSI entity acted as a member of the underwriting syndicate, (ii) all of the class actions against JPMSI alleging violations of federal and state antitrust laws coordinated and consolidated in the IPO Antitrust Litigation, and (iii) theLaSalaActions. JPMSI agreed to pay $425,000,000 in order to achieve the unitary settlement. The MOU is subject to approval by the plaintiffs in each of the cases, finalization of necessary stipulation(s) of settlement between the parties and approval by the district court stayedjudges presiding over the various actions pending against JPMSIIPO Securities Litigation and other underwriters in connectionIPO Antitrust Litigation. The settlement does not include the separate lawsuit involving an alleged conspiracy to fix underwriting fees.
National Century Financial Enterprises litigation:The settlements with the proposed “Issuers Settlement”, in which a trustee designated by the plaintiffs asserted state law claims conditionally assigned to them by the issuers relating to “excess compensation” allegedly paid to the underwriters by their customers (the “LaSala Actions”). On October 12, 2005, the district court granted the underwriter defendants’ motion to dismiss one such LaSala Action. By stipulation of the parties, this dismissal applies to all other pending and future-filed LaSala Actions. The district court did, however, grant plaintiffs leave to replead within twenty days of the Opinion and Order and noted that the stay of the LaSala Actions remains in effect. A fairness hearing concerning the proposed Issuer Settlement has been rescheduled for April 24, 2006. On September 28, 2005, the United States Court of Appeals for the Second Circuit vacated and remanded the district court’s November 3, 2003 dismissal of the antitrust claims relating to IPO allocation practices in the IPO Allocation Antitrust Litigation. In the separate appeal of the district court’s decision in the securities cases to certify classes in its “focus” cases, a briefing schedule has been set that will result in final briefs being filed in December 2005.

96

Research analyst conflicts.Based on the decision of the West Virginia Supreme Court that the state consumer protection law did not authorize the Attorney General to bring the case, the action filed by the West Virginia Attorney General has been dismissed with prejudice by the trial court as against the Firm and all of the other defendants.
Mutual Fund Litigation. JPMorgan Investment Advisors, Inc., F/K/A Banc One Investment Advisors Corporation, and JPMorgan Chase & Co. were named as respondents in an action filed by the West Virginia Commissioner of Securities related to alleged market timing events in the One Group mutual funds that had been the subject of a previous settlement with the Securities and Exchange CommissionArizona Noteholders and the New York Attorney General.
Bank One Securities Litigation.The Firm has settled all First Commerce Shareholder claims against it and former officers and directors for $39.9 million. The United States District Court for the Northern District of Illinois preliminarily approved the settlement agreement on November 3, 2005.UAT have been fully consummated.
In addition to the various cases, proceedings and investigations discussed above, and in the Firm’s SEC filings, JPMorgan Chase and its subsidiaries are named as defendants in a number of other legal actions and governmental proceedings arising in connection with their respective businesses. Additional actions, investigations or proceedings may be brought from time to time in the future. In view of the inherent difficulty of predicting the outcome of legal matters, particularly where the claimants seek very large or indeterminate damages, or where the cases present novel legal theories, involve a large number of parties or are in early stages of discovery, the Firm cannot state with confidence what the eventual outcome of these pending matters will be, what the timing of the ultimate resolution of these matters will be or what the eventual loss, fines or penalties related to each pending matter may be. JPMorgan Chase believes, based upon its current knowledge, after consultation with counsel and after taking into account its current litigation reserves, that the outcome of the legal actions, proceedings and investigations currently pending against it should not have a material, adverse effect on the consolidated financial condition of the Firm. However, in light of the uncertainties involved in such proceedings, actions and investigations, there is no assurance that the ultimate resolution of these matters will not significantly exceed the reserves currently accrued by the Firm; as a result, the outcome of a particular matter may be material to JPMorgan Chase’s operating results for a particular period, depending upon, among other factors, the size of the loss or liability imposed and the level of JPMorgan Chase’s income for that period.

93

Item 1A Risk Factors
For a discussion of the risk factors affecting the Firm, see Part 1, Item 1A, Risk Factors, on pages 4—6 and Forward-Looking Statements on page 135, of JPMorgan Chase’s 2005 Form 10—K.
Additionally, in connection with the announcement by the Firm on April 8, 2006, of its agreement to acquire the consumer, small-business and middle-market banking businesses of The Bank of New York, certain additional risks and uncertainties should be considered. These additional risks and uncertainties include: changes in the financial performance of the businesses the Firm is purchasing or the businesses it is selling; regulatory or legal issues, such as unanticipated difficulties in securing the regulatory or other approvals or consents required in connection with the transactions; difficulties or delays in converting the businesses between the parties’ information systems, or any inability to integrate the businesses being purchased as fully, or in as timely or cost-efficient a manner, as expected; and costs associated with the transaction, or employee or customer attrition being greater than expected.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
During the thirdfirst quarter of 2005, there were no2006, shares of common stock of JPMorgan Chase & Co. were issued in transactions exempt from registration under the Securities Act of 1933, pursuant to Section 4(2) thereof.thereof, as follows: (1) to retired directors who had deferred receipt of such common stock pursuant to the Deferred Compensation Plan for Non-Employee Directors: 5,068 shares on January 3, 2006; and (2) to retired employees who had deferred receipt of such common shares pursuant to the Corporate Performance Incentive Plan: 31,737 shares on January 24, 2006.
On July 20, 2004,March 21, 2006, the Board of Directors approved an initiala stock repurchase program inwhich authorizes the aggregaterepurchase of up to $8 billion of the Firm’s common shares. The new stock repurchase program replaces the Firm’s previous repurchase authorization. The amount of $6.0 billion. This amountauthorized includes shares to be repurchased to offset issuances under the Firm’s employee equity-basedstock-based plans. The actual amount of shares repurchased will be subject to various factors, including market conditions; legal considerations affecting the amount and timing of repurchase activity; the Firm’s capital position (taking into account goodwill and intangibles); internal capital generation; and alternative potential investment opportunities. The repurchase program does not include specific price targets or time tables; may be executed through open market purchases or privately negotiated transactions or utilizing Rule 10b5-1 programs; and may be suspended at any time.
During the first quarter of 2006, under the respective stock repurchase programs then in effect, the Firm repurchased a total of 31.8 million shares for $1.3 billion at an average price per share of $40.54. Of the $1.3 billion shares repurchased in the first quarter of 2006, $1.1 billion was repurchased under the original $6 billion stock repurchase program, and $143 million was repurchased under the new $8 billion stock repurchase program. During the first quarter of 2005, under the original $6 billion stock repurchase program, the Firm repurchased 36.0 million shares for $1.3 billion at an average price per share of $36.57. As of March 31, 2006, $7.9 billion of authorized repurchase capacity remained under the new stock repurchase program.
The Firm has no set expiration or termination date.determined that it may, from time to time, enter into written trading plans under Rule 10b5-1 of the Securities Exchange Act of 1934 to facilitate the repurchase of common stock in accordance with the repurchase program. A Rule 10b5-1 repurchase plan would allow the Firm to repurchase shares during periods when it would not otherwise be repurchasing common stock — for example, during internal trading “black-out periods.” All purchases under a Rule 10b5-1 plan must be made according to a predefined plan that is established when the Firm is not aware of material nonpublic information.
The Firm’s repurchases of equity securities induring the thirdfirst quarter and first nine months of 20052006 were as follows:
             
  Total open Average Dollar value of
For the nine months ended market shares price paid remaining authorized
September 30, 2005 repurchased per share(a) repurchase program
 
First quarter  35,972,000  $36.57  $3,946 
Second quarter  16,807,465   35.32   3,352 
July  1,759,000   35.38   3,290 
August  8,574,600   34.57   2,994 
September  4,111,700   34.36   2,853 
     
Third quarter  14,445,300   34.61     
     
Year-to-date  67,224,765  $35.84     
     
             
          Dollar value of
  Total open Average remaining authorized
For the three months ended market shares price paid repurchase program
March 31, 2006 repurchased per share(a) (in millions)
 
Repurchases under the $6 billion program:
            
January  6,977,500  $39.05  $1,580 
February  12,650,300   40.40   1,069 
March 1—20  8,780,500   41.43   — 
Repurchases under the $8 billion program:
            
March 21—31  3,420,300   41.77   7,857 
     
Total  31,828,600  $40.54     
     
(a) 
Excludes commission costs.

94

In addition to the repurchases disclosed above, participants in the Long-term Incentive Plan and Stock Option PlanFirm’s stock-based incentive plans may have shares withheld to cover income taxes. Shares withheld to pay income taxes are repurchased pursuant to the terms of the applicable Planplan and not under the Firm’s publicly announced share repurchase program. A total of 386,526 shares wereShares repurchased in the 2005 third quarter at an average price per share of $33.36: July—208,127 shares at an average price per share of $32.39; August—79,117 shares at an average price per share of $33.40; September—99,282 shares at an average price per share of $35.37. Duringpursuant to these plans during the first quarter of 2005, a total of 6,993,164 shares2006 were repurchased at an average per share price of $27.20. During the second quarter of 2005, a total of 680,851 shares were repurchased at an average per share price of $32.78. For the nine month period ended September 30, 2005, a total of 8,060,541 shares were repurchased at an average price per share of $27.97.as follows:

97

         
For the three months     Average
ended Total shares price paid
March 31, 2006 repurchased per share
 
January  7,339,071  $38.63 
February  226,524   39.82 
March  159,138   41.51 
 
Total  7,724,733  $38.72 
 

Item 3    Defaults Upon Senior Securities
              None
Item 4    Submission of Matters to a Vote of Security Holders
              None
Item 5   Other Information
              None
Item 6 Exhibits
     
31.1 – Certification
31.2 – Certification
31.3 – Certification
32 – Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
31.1-Certification
31.2-Certification
32-Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

9895

SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
     
    JPMORGAN CHASE & CO.
     
    (Registrant)
     
Date: November May 8, 2005
2006		    
  By /s/ Joseph L. Sclafani
     
    Joseph L. Sclafani

Executive Vice President and Controller
[Principal Accounting Officer]

9996

INDEX TO EXHIBITS
SEQUENTIALLY NUMBERED
              
EXHIBIT NO.EXHIBIT NO. EXHIBITS PAGE AT WHICH LOCATED EXHIBITS PAGE AT WHICH LOCATED
              
31.1 Certification  98 
31.1  Certification  101       
        
31.2  Certification  102 
        
31.3  Certification  103 
        
The following exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section. In addition, Exhibit No. 32 shall not be deemed incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
        
32  Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  104 
31.2 Certification  99 
The following exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section. In addition, Exhibit No. 32 shall not be deemed incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
       
32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  100 

10097