SEC Filing | JPMorgan Chase & Co.

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FORM 10-K: J.P. MORGAN CHASE & CO.

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

Annual report pursuant to section 13 or 15(d) of
The Securities Exchange Act of 1934


For the fiscal year ended		Commission file
December 31, 2002		number 1-5805

J.P. Morgan Chase & Co.

(Exact name of registrant as specified in its charter)


Delaware		13-2624428
(State or other jurisdiction of		(I.R.S. employer
incorporation or organization)		identification no.)

270 Park Avenue, New York, NY		10017
(Address of principal executive offices)		(Zip code)

Registrant’s telephone number, including area code: (212) 270-6000
Securities registered pursuant to Section 12(b) of the Act:

Title of each class


Common stock Depositary shares representing a one-tenth interest in 6 5/8% cumulative preferred stock (stated value—$500) Adjustable rate cumulative preferred stock, Series A (stated value—$100) Adjustable rate cumulative preferred stock, Series L (stated value—$100) Adjustable rate cumulative preferred stock, Series N (stated value—$25) Floating rate subordinated notes due 2003 Floating rate subordinated notes due August 1, 2003 6.50% subordinated notes due 2005 6.25% subordinated notes due 2006 6 1/8% subordinated notes due 2008 6.75% subordinated notes due 2008 6.50% subordinated notes due 2009		Guarantee of 7.34% Capital Securities, Series D, of Chase Capital IV Guarantee of 7.03% Capital Securities, Series E, of Chase Capital V Guarantee of 7.00% Capital Securities, Series G, of Chase Capital VII Guarantee of 8.25% Capital Securities, Series H, of Chase Capital VIII Guarantee of 7.50% Capital Securities, Series I, of J.P. Morgan Chase Capital IX Guarantee of 7.00% Capital Securities, Series J, of J.P. Morgan Chase Capital X Indexed Linked Notes on the S&P 500® Index due November 26, 2007 JPMorgan Market Participation Notes on the S&P 500® Index due March 12, 2008

The Indexed Linked Notes and JPMorgan Market Participation Notes are listed on the American Stock Exchange;
all other securities named above are listed on the New York Stock Exchange.

Securities registered pursuant to Section 12(g) of the Act: none

Number of shares of common stock outstanding on February 28, 2003: 2,001,935,479

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ..X.. No .....

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

Indicate by check mark whether Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ..X.. No .....

The aggregate market value of J.P. Morgan Chase & Co. common stock held by non-affiliates of J.P. Morgan Chase & Co. on June 28, 2002 was approximately $67,549,000,000.

Document Incorporated by Reference: Portions of Registrant’s proxy statement for the annual meeting of stockholders to be held May 20, 2003, are incorporated by reference in this Form 10-K in response to Items 10, 11, 12 and 13 of Part III.

Form 10-K Index


Part I		Page

Item 1	Business		1
	Overview		1
	Business segments		1
	Competition		1
	Supervision and regulation		1
	Important factors that may affect future results		6
	Non-U.S. operations		8
	Distribution of assets, liabilities and stockholders’ equity; interest rates and interest differentials		115-119
	Return on equity and assets		112, 116
	Securities portfolio		120
	Loan portfolio		46-55, 80-81, 121-123
	Summary of loan and lending-related commitments loss experience		56-57, 80-82, 124-125
	Deposits		126
	Short-term and other borrowed funds		126
Item 2	Properties		8
Item 3	Legal proceedings		9
Item 4	Submission of matters to a vote of security holders		11
	Executive officers of the registrant		11

Part II

Item 5	Market for registrant’s common equity and related stockholder matters		12
Item 6	Selected financial data		12
Item 7	Management’s discussion and analysis of financial condition and results of operations		12
Item 7A	Quantitative and qualitative disclosures about market risk		12
Item 8	Financial statements and supplementary data		12
Item 9	Changes in and disagreements with accountants on accounting and financial disclosure		12

Part III

Item 10	Directors and executive officers of JPMorgan Chase		12
Item 11	Executive compensation		12
Item 12	Security ownership of certain beneficial owners and management and related stockholder matters		12
Item 13	Certain relationships and related transactions		13
Item 14	Controls and procedures		13

Part IV

Item 15	Exhibits, financial statement schedules and reports on form 8-K		127

Part I

Item 1: Business

Overview

J.P. Morgan Chase & Co. (“JPMorgan Chase” or “the Firm”) is a financial holding company incorporated under Delaware law in 1968. As of December 31, 2002, JPMorgan Chase was one of the largest banking institutions in the United States, with $759 billion in assets and $42 billion in stockholders’ equity.

On December 31, 2000, J.P. Morgan & Co. Incorporated (“J.P. Morgan”) merged with and into The Chase Manhattan Corporation (“Chase”). Upon completion of the merger, Chase changed its name to “J.P. Morgan Chase & Co.” The merger was accounted for as a pooling of interests. As a result, the financial information provided herein presents the combined results of Chase and J.P. Morgan as if the merger had been in effect for all periods presented. In addition, certain prior-period amounts for the predecessor institutions’ financial statements have been reclassified to conform to the current presentation.

JPMorgan Chase is a global financial services firm with operations in more than 50 countries. Its principal bank subsidiaries are JPMorgan Chase Bank (“JPMorgan Chase Bank”), a New York banking corporation headquartered in New York City, and Chase Manhattan Bank USA, National Association (“Chase USA”), headquartered in Delaware. The Firm’s principal nonbank subsidiary is J.P. Morgan Securities Inc. (“JPMSI”).

The bank and nonbank subsidiaries of JPMorgan Chase operate nationally as well as through overseas branches and subsidiaries, representative offices and affiliated banks.

The Firm’s website is www.jpmorganchase.com. JPMorgan Chase makes available free of charge, through its website, annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to those reports filed or furnished, pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after it electronically files such material with, or furnishes such material to, the Securities and Exchange Commission (the “SEC”).

Business segments

JPMorgan Chase’s activities are internally organized, for management reporting purposes, into five major business segments (Investment Bank, Treasury & Securities Services, Investment Management & Private Banking, JPMorgan Partners and Chase Financial Services). A description of the Firm’s business segments and the products and services they provide to their respective client bases are discussed in the “Segment results” section of Management’s discussion and analysis (“MD&A”) beginning on page 24, and in Note 33 on page 108.

Competition

JPMorgan Chase and its subsidiaries and affiliates operate in a highly competitive environment. Competitors include other banks, brokerage firms, investment banking companies, merchant banks, insurance companies, mutual fund companies, credit card companies, mortgage banking companies, automobile financing companies, leasing companies, e-commerce and other Internet-based companies, and a variety of other financial services and advisory companies. JPMorgan Chase’s businesses compete with these other firms with respect to the range of products and services offered and the types of clients, customers, industries and geographies served. With respect to some of its geographies and products, JPMorgan Chase competes globally; with respect to others, the Firm competes on a regional basis. JPMorgan Chase’s ability to compete effectively depends on the relative performance of its products, the degree to which the features of its products appeal to customers, and the extent to which the Firm is able to meet its clients’ objectives or needs. The Firm’s ability to compete also depends on its ability to attract and retain its professional and other personnel, and on its reputation.

The financial services industry has experienced consolidation and convergence in recent years, as financial institutions involved in a broad range of financial services industries have merged, of which the merger of Chase and J.P. Morgan is an example. This convergence trend is expected to continue and could result in competitors of JPMorgan Chase gaining greater capital and other resources, such as a broader range of products and services and geographic diversity. It is possible that competition will become even more intense as the Firm continues to compete with financial institutions that may be larger, or better capitalized, or may have a stronger local presence in certain geographies.

Supervision and regulation

Permissible business activities: The Firm is subject to regulation under state and federal law, including the Bank Holding Company Act of 1956, as amended (the “BHCA”). In November 1999, the Gramm-Leach-Bliley Act (“GLBA”) was enacted which eliminated certain legal barriers separating the conduct of various types of financial services businesses, such as commercial banking, investment banking and insurance. In addition, GLBA substantially revamped the regulatory scheme within which financial institutions such as JPMorgan Chase operate.

Under GLBA, bank holding companies meeting certain eligibility criteria may elect to become “financial holding companies,” which may engage in any activities that are “financial in nature,” as well as in additional activities that the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and the United States Department of the Treasury (“U.S. Treasury Department”) determine are financial in nature or incidental or complementary to financial activities. Under GLBA, “financial activities” specifically include insurance, securities underwriting and dealing, merchant banking, investment advisory and lending activities. JPMorgan Chase elected to become a financial holding company as of March 13, 2000.

Part I

Under regulations implemented by the Federal Reserve Board, if any depository institution controlled by a financial holding company ceases to be “well-capitalized” or “well-managed” (as defined below), the Federal Reserve Board may impose corrective capital or managerial requirements on the financial holding company and place limitations on its ability to conduct the broader financial activities permissible for financial holding companies.

In addition, the Federal Reserve Board may require divestiture of the holding company’s depository institutions if the deficiencies persist. The regulations also provide that if any depository institution controlled by a financial holding company fails to maintain a satisfactory rating under the Community Reinvestment Act (“CRA”), the Federal Reserve Board must prohibit the financial holding company and its subsidiaries from engaging in any additional activities other than those permissible for bank holding companies that are not financial holding companies. The depository institution subsidiaries of JPMorgan Chase currently meet the capital, management and CRA requirements necessary to permit the Firm to conduct the broader activities permitted under GLBA. However, there can be no assurance that this will continue to be the case in the future.

Regulation by Federal Reserve Board under GLBA: Under GLBA’s system of “functional regulation,” the Federal Reserve Board acts as an “umbrella regulator,” and certain of JPMorgan Chase’s subsidiaries are regulated directly by additional regulatory authorities based on the particular activities of those subsidiaries (e.g., securities and investment advisory activities are regulated by the SEC, and insurance activities are regulated by state insurance commissioners). The Firm must continue to file reports and other information with, and submit to examination by, the Federal Reserve Board as umbrella regulator. However, under GLBA, with respect to matters affecting functionally regulated subsidiaries, the Federal Reserve Board is required to defer to the applicable functional regulators unless the Federal Reserve Board concludes that the activities at issue pose a risk to a depository institution or breach a specific law the Federal Reserve Board has authority to enforce.

Effect of GLBA on bank broker-dealer and investment advisory activities: To promote the system of functional regulation described above, GLBA provides for the amendment of certain federal securities laws to eliminate various exemptions previously available to banks. For example, banks will no longer be generally exempt from the broker-dealer provisions of the Securities Exchange Act of 1934. As a result, JPMorgan Chase’s bank subsidiaries will either need to register with the SEC as broker-dealers or cease conducting many activities deemed broker-dealer activities. GLBA does retain a more limited exemption from broker-dealer registration for certain “banking” products and activities, including, among others, municipal and exempted securities transactions; safekeeping and custody arrangements; and trust, securitization and derivatives products and activities. The Investment Advisers Act of 1940 has also been amended to eliminate certain provisions exempting banks from the registration requirements of that statute, and the Investment Company Act of 1940 has been amended to provide the SEC with regulatory authority over various bank mutual fund activities. The provisions discussed in this paragraph had an original effective date of May 12, 2001. The SEC has delayed the effective date of the provisions dealing with dealer registration until September 30, 2003. The provisions dealing with registration as a broker are currently scheduled to be effective May 12, 2003. However, the SEC has stated that it intends to promulgate proposed regulations prior to that date, and the staff has indicated that there will be further extensions of the effective date to give banks sufficient time to comply with the SEC’s implementing regulations.

Dividend restrictions: Federal law imposes limitations on the payment of dividends by the subsidiaries of JPMorgan Chase that are chartered by a state and are member banks of the Federal Reserve System (a “state member bank”) or national banks. Nonbank subsidiaries of JPMorgan Chase are not subject to those limitations. The amount of dividends that may be paid by a state member bank, such as JPMorgan Chase Bank, or by a national bank, such as Chase USA, is limited to the lesser of the amounts calculated under a “recent earnings” test and an “undivided profits” test. Under the recent earnings test, a dividend may not be paid if the total of all dividends declared by a bank in any calendar year is in excess of the current year’s net income combined with the retained net income of the two preceding years, unless the bank obtains the approval of its appropriate federal banking regulator (which, in the case of a state member bank, is the Federal Reserve Board and, in the case of a national bank, is the Office of the Comptroller of the Currency (the “Comptroller of the Currency”)). Under the undivided profits test, a dividend may not be paid in excess of a bank’s “undivided profits.” Similar restrictions on the payment of dividends by JPMorgan Chase Bank are imposed by New York law. See Note 25 on page 99 for the amount of dividends that the Firm’s principal bank subsidiaries could pay, at December 31, 2002 and 2001, to their respective bank holding companies without the approval of their relevant banking regulators.

In addition to the dividend restrictions described above, the Federal Reserve Board, the Comptroller of the Currency and the Federal Deposit Insurance Corporation (the “FDIC”) have authority to prohibit or to limit the payment of dividends by the banking organizations they supervise, including JPMorgan Chase and its bank and bank holding company subsidiaries, if, in the banking regulator’s opinion, payment of a dividend would constitute an unsafe or unsound practice in light of the financial condition of the banking organization.

Capital requirements: The federal banking regulators have adopted risk-based capital and leverage guidelines that require the Firm’s capital-to-assets ratios meet certain minimum standards.

The risk-based capital ratio is determined by allocating assets and specified off-balance sheet financial instruments into four weighted categories, with higher levels of capital being required for the categories perceived as representing greater risk. Under the guidelines, capital is divided into two tiers: Tier 1 capital and Tier 2 capital. For a further discussion of Tier 1 capital and Tier 2 capital, see Note 26 on page 99. The amount of Tier 2 capital may not exceed the amount of Tier 1 capital. Total capital is the sum of Tier 1 capital and Tier 2 capital.

Banking organizations are required to maintain a total capital ratio (total capital to risk-weighted assets) of 8% and a Tier 1 capital ratio of 4%.

The risk-based capital requirements explicitly identify concentrations of credit risk and certain risks arising from non-traditional banking activities, and the management of those risks, as important factors to consider in assessing an institution’s overall capital adequacy. Other factors taken into consideration by federal regulators include: interest rate exposure; liquidity, funding and market risk; the quality and level of earnings; the quality of loans and investments; the effectiveness of loan and investment policies; and management’s overall ability to monitor and control financial and operational risks, including the risks presented by concentrations of credit and non-traditional banking activities. In addition, the risk-based capital rules incorporate a measure for market risk in foreign exchange and commodity activities and in the trading of debt and equity instruments. The market risk-based capital rules require banking organizations with large trading activities (such as JPMorgan Chase) to maintain capital for market risk in an amount calculated by using the banking organizations’ own internal Value-at-Risk models (subject to parameters set by the regulators).

The federal banking agencies amended their regulatory capital standards, effective January 1, 2002, to address the treatment of residual interests, recourse obligations and direct credit substitutes. The amendment defines “residual interests” as on-balance sheet interests that are retained by a seller after a securitization or other transfer of financial assets and that expose the seller to a greater than pro rata share of the credit risk in such assets. Under the amendment, risk-based capital must be held in an amount equal to such residual interests even if that amount exceeds the full risk-based capital charge that would have been required to be held against the assets transferred. The amendment also imposes a concentration limit of 25% of Tier 1 capital on credit-enhancing interest-only strips (a type of residual interest), requiring any amount in excess of that limit to be deducted from Tier 1 capital. The amendment also treats recourse obligations and direct credit substitutes (such as letters of credit) more consistently for risk-based capital purposes than previously. The amendment introduces a multi-level approach to assessing capital requirements to positions in certain asset securitizations based on the credit ratings assigned to such position by nationally recognized statistical rating organizations (NRSROs). For certain unrated positions other than residual interests, the amendment provides alternative methods for assessing capital requirements, including the limited use of a banking organization’s internal risk rating system, and, for positions arising under securitization programs covering multiple participants, ratings assigned to the program by NRSROs.

The federal banking agencies have also adopted, effective April 1, 2002, regulations that impose increased capital charges on a banking organization’s equity investments in nonfinancial companies. In general, the new risk-based capital requirements apply to such investments regardless of the legal authority under which they are made. The level of capital charge increases as the banking organization’s concentration in such investments increases. If the aggregate value of a banking organization’s nonfinancial equity investments is less than 15% of its Tier 1 capital, then 8% of such value is required to be deducted from the banking organization’s Tier 1 capital. If the aggregate value of a banking organization’s nonfinancial equity investments is more than 15% but less than 25% of the banking organization’s Tier 1 capital, the deduction increases to 12% of such value, and if such aggregate value is more than 25% of the banking organization’s Tier 1 capital, the deduction rises to 25%. The new charges do not apply to investments made prior to March 13, 2000. Equity investments made through small business investment companies in an amount equal to up to 15% of the banking organization’s Tier 1 capital are exempt from the new charges, but the full amount of the equity investments is still included when calculating the aggregate value of the banking organization’s nonfinancial equity investments.

The federal banking regulators have established minimum leverage ratio guidelines. The leverage ratio is defined as Tier 1 capital divided by average total assets (net of allowance for loan losses, goodwill and certain intangible assets). The minimum leverage ratio is 3% for strong bank holding companies (i.e., those rated composite 1 under the Bank subsidiaries, Other subsidiaries, Parent company, Earnings and Capital adequacy, or “BOPEC,” rating system) and for bank holding companies that have implemented the Federal Reserve Board’s risk-based capital measure for market risk. Other bank holding companies must have a minimum leverage ratio of 4%. Bank holding companies may be expected to maintain ratios well above the minimum levels depending upon their particular condition, risk profile and growth plans.

Tier 1 components: capital surplus and common stock remain the most important forms of capital at JPMorgan Chase. Because common equity has no maturity date and because dividends on common stock are paid only when and if declared by the Board of Directors, common equity is available to absorb losses over long periods of time. Noncumulative perpetual preferred stock is similar to common stock in its ability to absorb losses. If the Board of Directors does not declare a dividend on noncumulative perpetual preferred stock in any dividend period, the holders of the instrument are never entitled to receive that dividend payment. JPMorgan Chase’s outstanding noncumulative preferred stock is a type commonly referenced as a “FRAP”: a fixed-rate/adjustable preferred stock. However, because the interest rate on FRAPs may increase (up to a predetermined ceiling), the Federal Reserve Board treats the Firm’s noncumulative FRAPs in a manner similar to cumulative perpetual preferred and trust preferred securities. The Federal Reserve Board permits cumulative perpetual preferred stock and trust preferred securities to be included in Tier 1 capital but only up to certain limits, as these financial instruments do not provide as strong protection against losses as common equity and noncumulative, non-FRAP securities. Cumulative perpetual preferred stock does not have a maturity date, similar to other forms of Tier 1 capital. However, any dividends not declared on cumulative preferred stock accumulate and thus continue to be due to the holder of the instrument until all arrearages are satisfied. Trust preferred securities are a type of security generally issued by a special-purpose trust established and owned by JPMorgan Chase. Proceeds from the issuance to the public of the trust preferred security are lent to the Firm for at least 30 (but not more than 50) years. The intercompany note

Part I

that evidences this loan provides that the interest payments by JPMorgan Chase on the note may be deferred for up to five years. During the period of any such deferral, no payments of dividends may be made on any outstanding JPMorgan Chase preferred or common stock or on the outstanding trust preferred securities issued to the public.

Tier 2 components: Long-term subordinated debt (generally having an original maturity of 10-12 years) is the primary form of JPMorgan Chase’s Tier 2 capital. Subordinated debt is deemed a form of regulatory capital because payments on the debt are subordinated to other creditors of JPMorgan Chase, including holders of senior and medium long-term debt and counterparties on derivative contracts.

Under GLBA, all financial holding companies are bank holding companies for purposes of the capital requirements described above. However, GLBA specifically prohibits the Federal Reserve Board from imposing capital adequacy rules on certain functionally regulated subsidiaries (such as broker-dealers and insurance companies) that are in compliance with the applicable capital requirements of their functional regulators.

The minimum risk-based capital requirements adopted by the federal banking agencies follow the Capital Accord of the Basel Committee on Banking Supervision. The Basel Committee, which is comprised of bank supervisors and central banks from the Group of Ten countries, issued its Capital Accord in 1988 to achieve convergence in the capital regulations applicable to internationally active banking organizations. The Basel Committee issued a proposed replacement for the Capital Accord in January, 2001 and, subsequently, issued a number of working papers supplementing various aspects of that replacement (the “New Accord”). Based on these documents, the New Accord would adopt a three-pillar framework for addressing capital adequacy. These pillars would include minimum capital requirements, more emphasis on supervisory assessment of capital adequacy and greater reliance on market discipline. Under the New Accord, minimum capital requirements would be more differentiated based upon perceived distinctions in creditworthiness. Such requirements would be based either on ratings assigned by rating agencies or, in the case of a banking organization that met certain supervisory standards, on the organization’s internal credit ratings. The minimum capital requirements in the New Accord would also incorporate a capital charge for operational risk. At present, the target date for implementing the New Accord is the end of 2006.

FDICIA: The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) revised certain provisions of the Federal Deposit Insurance Act, as well as certain other federal banking statutes. In general, FDICIA provides for expanded regulation of depository institutions and their affiliates, including parent holding companies, by their federal banking regulators and, among other things, requires the relevant federal banking regulator to take “prompt corrective action” with respect to a depository institution if that institution does not meet certain capital adequacy standards.

Pursuant to FDICIA, the Federal Reserve Board, the FDIC and the Comptroller of the Currency adopted regulations setting forth a five-tier scheme for measuring the capital adequacy of the depository institutions they supervise. Under the regulations (commonly referred to as the “prompt corrective action” rules), an institution would be placed in one of the following five capital categories when these ratios fall within the prescribed ranges:


	Ratios

	Total			Tier 1				Tier 1
	capital			capital				leverage

	At Least

Well-capitalized		10	%		6	%	5		%
Adequately capitalized		8	%		4	%	4		%	(a	)

	Less Than

Undercapitalized		8	%		4	%	4		%	(a	)
Significantly undercapitalized		6	%		3	%	3		%

Critically undercapitalized	Tangible equity to total assets of 2% or less

(a) May be 3% in some cases

An institution may be treated as being in a capital category lower than that indicated based on other supervisory criteria.

Supervisory actions by the appropriate federal banking regulator under the “prompt corrective action” rules generally will depend upon an institution’s classification within the five capital categories. The regulations apply only to banks and not to bank holding companies such as JPMorgan Chase; however, subject to limitations that may be imposed pursuant to GLBA, as described below, the Federal Reserve Board is authorized to take appropriate action at the holding company level based on the undercapitalized status of the holding company’s subsidiary banking institutions. In certain instances relating to an undercapitalized banking institution, the bank holding company would be required to guarantee the performance of the undercapitalized subsidiary and may be liable for civil money damages for failure to fulfill its commitments on that guarantee.

As of December 31, 2002, each of JPMorgan Chase’s banking subsidiaries was “well-capitalized.”

FDIC Insurance Assessments: FDICIA also required the FDIC to establish a risk-based assessment system for FDIC deposit insurance. Under the FDIC’s risk-based insurance premium assessment system, each depository institution is assigned to one of nine risk classifications based upon certain capital and supervisory measures and, depending upon its classification, is assessed insurance premiums on its deposits.

Depository institutions insured by the Bank Insurance Fund are required to pay premiums ranging from 0 basis points to 27 basis points of U.S. deposits. Each of JPMorgan Chase’s banks, including JPMorgan Chase Bank and Chase USA, currently qualifies for the 0 basis point assessment. Legislation has been introduced in Congress that, if enacted, would give the FDIC discretion to impose deposit insurance premiums on all depository institutions. In addition, if the ratio of insured deposits to money in the Bank Insurance Fund drops below specified levels, the FDIC would be required to impose premiums on all banks insured by the Bank Insurance Fund. All depository institutions must also pay an annual assessment so that the Financing Corporation (“FICO”) may pay interest on bonds it issued in connection with the resolution of savings association insolvencies occurring prior to 1991. The FICO assessment for the first quarter of 2003 is 1.68 basis points

of U.S. deposits. The rate schedules are subject to future adjustments by the FDIC. In addition, the FDIC has authority to impose special assessments from time to time, subject to certain limitations specified in the Deposit Insurance Funds Act.

Powers of the FDIC upon insolvency of an insured depository institution: An FDIC-insured depository institution can be held liable for any loss incurred or expected to be incurred by the FDIC in connection with another FDIC-insured institution under common control with such institution being in “default” or “in danger of default” (commonly referred to as “cross-guarantee” liability). “Default” is generally defined as the appointment of a conservator or receiver and “in danger of default” is defined as certain conditions indicating that a default is likely to occur absent regulatory assistance. An FDIC cross-guarantee claim against a depository institution is generally superior in right of payment to claims of the holding company and its affiliates against such depository institution.

If the FDIC is appointed the conservator or receiver of an insured depository institution, upon its insolvency or in certain other events, the FDIC has the power: (1) to transfer any of the depository institution’s assets and liabilities to a new obligor without the approval of the depository institution’s creditors; (2) to enforce the terms of the depository institution’s contracts pursuant to their terms; or (3) to repudiate or disaffirm any contract or lease to which the depository institution is a party, the performance of which is determined by the FDIC to be burdensome and the disaffirmance or repudiation of which is determined by the FDIC to promote the orderly administration of the depository institution. The above provisions would be applicable to obligations and liabilities of those of JPMorgan Chase’s subsidiaries that are insured depository institutions, such as JPMorgan Chase Bank and Chase USA, including, without limitation, obligations under senior or subordinated debt issued by those banks to investors (referred to below as “public noteholders”) in the public markets.

Under federal law, the claims of a receiver of an insured depository institution for administrative expenses and the claims of holders of U.S. deposit liabilities (including the FDIC, as subrogee of the depositors) have priority over the claims of other unsecured creditors of the institution, including public noteholders, in the event of the liquidation or other resolution of the institution. As a result, whether or not the FDIC ever sought to repudiate any obligations held by public noteholders of any subsidiary of the Firm that is an insured depository institution, such as JPMorgan Chase Bank or Chase USA, the public noteholders would be treated differently from, and could receive, if anything, substantially less than, the depositors of the depository institution.

The USA PATRIOT Act: Following the September 11, 2001 attacks on New York and Washington, D.C., the United States government acted in several ways to tighten control on activities perceived to be connected to money laundering and terrorist funding. Beginning on September 23, 2001, President Bush issued a series of orders which identify terrorists and terrorist organizations and require the blocking of property and assets of, as well as prohibiting all transactions or dealing with, such terrorists, terrorist organizations and those that assist or sponsor them. On October 26, 2001, President Bush signed into law The USA PATRIOT Act of 2001 (the “Act”).

The Act substantially broadens existing anti-money laundering legislation and the extraterritorial jurisdiction of the United States, imposes new compliance and due diligence obligations, creates new crimes and penalties, compels the production of documents located both inside and outside the United States, including those of non-U.S. institutions that have a correspondent relationship in the United States, and clarifies the safe harbor from civil liability to customers. The Act mandates the U.S. Treasury Department to issue a number of regulations to further clarify the Act’s requirements or provide more specific guidance on their application.

The Act requires all “financial institutions,” as defined, to establish anti-money laundering compliance and due diligence programs. Such programs must include, among other things, adequate policies, the designation of a compliance officer, employee training programs, and an independent audit function to review and test the program. JPMorgan Chase has had in place, pursuant to previously existing laws and regulations, a “Know Your Customer” policy and an anti-money laundering compliance program which requires, as appropriate based on a risk-based analysis, performing due diligence with respect to establishing the identity and address of the beneficial owners of an account, the source of the account’s funds and the proposed use of the account, as well as requiring the identification and reporting of suspicious transactions to appropriate law enforcement authorities. JPMorgan Chase believes its programs satisfy the requirements of the Act.

The Act requires financial institutions that maintain correspondent accounts for non-U.S. institutions or persons or that are involved in private banking for “non-United States persons” or their representatives, to establish “appropriate, specific and, where necessary, enhanced due diligence policies, procedures, and controls that are reasonably designed to detect and report instances of money laundering through those accounts.” In furtherance of these provisions, the Act mandates specific minimum standards regarding the establishment of private banking accounts and prohibits financial institutions from establishing, maintaining, administering or managing correspondent accounts with any non-U.S. bank that does not have a physical presence in any jurisdiction unless the so-called “shell bank” is affiliated with a regulated physically-established bank. JPMorgan Chase will continue to revise and update its “Know Your Customer” policy and its anti-money laundering programs to reflect changes required by the Act, and the U.S. Treasury Department regulations to be issued thereunder, in order to remain in compliance with the Act and its provisions.

Other supervision and regulation: Under current Federal Reserve Board policy, JPMorgan Chase is expected to act as a source of financial strength to its bank subsidiaries and to commit resources to support the bank subsidiaries in circumstances where it might not do so absent such policy. However, because GLBA provides for functional regulation of financial holding company activities by various regulators, GLBA prohibits the Federal Reserve Board from requiring payment by a holding company or subsidiary to a depository institution if the functional regulator of the payor objects to such payment. In such a case, the Federal Reserve Board could instead require the divestiture of the depository institution and impose operating restrictions pending the divestiture.

Part I

Any loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of the subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank at a certain level will be assumed by the bankruptcy trustee and entitled to a priority of payment.

The bank subsidiaries of JPMorgan Chase are subject to certain restrictions imposed by federal law on extensions of credit to, and certain other transactions with, the Firm and certain other affiliates and on investments in stock or securities of JPMorgan Chase and those affiliates. These restrictions prevent JPMorgan Chase and other affiliates from borrowing from a bank subsidiary unless the loans are secured in specified amounts.

The Firm’s bank and certain of its nonbank subsidiaries are subject to direct supervision and regulation by various other federal and state authorities (many of which will be considered “functional regulators” under GLBA). JPMorgan Chase Bank as a New York State-chartered bank and a state member bank, is subject to supervision and regulation by the New York State Banking Department as well as by the Federal Reserve Board and the FDIC. JPMorgan Chase’s national bank subsidiaries, such as Chase USA, are subject to substantially similar supervision and regulation by the Comptroller of the Currency. Supervision and regulation by each of the foregoing regulatory agencies generally include comprehensive annual reviews of all major aspects of the relevant bank’s business and condition, as well as the imposition of periodic reporting requirements and limitations on investments and other powers. The Firm also conducts securities underwriting, dealing and brokerage activities through JPMSI and other broker-dealer subsidiaries, all of which are subject to the regulations of the SEC and the National Association of Securities Dealers, Inc. JPMSI is a member of the New York Stock Exchange. The operations of JPMorgan Chase’s mutual funds also are subject to regulation by the SEC. The types of activities in which the non-U.S. branches of JPMorgan Chase Bank and the international subsidiaries of JPMorgan Chase may engage are subject to various restrictions imposed by the Federal Reserve Board. Those non-U.S. branches and international subsidiaries also are subject to the laws and regulatory authorities of the countries in which they operate.

The activities of JPMorgan Chase Bank and Chase USA as consumer lenders also are subject to regulation under various federal laws, including the Truth-in-Lending, the Equal Credit Opportunity, the Fair Credit Reporting, the Fair Debt Collection Practice and the Electronic Funds Transfer Acts, as well as various state laws. These statutes impose requirements on the making, enforcement and collection of consumer loans and on the types of disclosures that need to be made in connection with such loans.

In addition, under the requirements imposed by GLBA, JPMorgan Chase and its subsidiaries are required periodically to disclose to their retail customers the Firm’s policies and practices with respect to (1) the sharing of non-public customer information with JPMorgan Chase affiliates and others and (2) the confidentiality and security of that information. Under GLBA, retail customers also must be given the opportunity to “opt out” of information sharing arrangements with non-affiliates, subject to certain exceptions set forth in GLBA.

Important factors that may affect future results

From time to time, the Firm has made and will 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” or other words of similar meaning. Forward-looking statements give JPMorgan Chase’s current expectations or forecasts of future events, circumstances or results. JPMorgan Chase’s disclosure in this report, including in the MD&A section, contains forward-looking statements. The Firm also may make forward-looking statements in its other documents filed with the SEC and in other written materials. In addition, the Firm’s senior management may make forward-looking statements orally to analysts, investors, representatives of the media and others.

Any forward-looking statements made by or on behalf of the Firm speak only as of the date they are made. 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 Chase may make in its Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q and its Current Reports on Form 8-K.

All forward-looking statements, by their nature, are subject to risks and uncertainties. The Firm’s actual future results may differ materially from those set forth in JPMorgan Chase’s forward-looking statements. Factors that might cause JPMorgan Chase’s future financial performance to vary from that described in its forward-looking statements include the credit, market, operational, liquidity, interest rate and other risks discussed in the MD&A section of this report and in other periodic reports filed with the SEC. In addition, the following discussion sets forth certain risks and uncertainties that the Firm believes could cause its actual future results to differ materially from expected results. However, other factors besides those listed below or discussed in JPMorgan Chase’s reports to the SEC also could adversely affect the Firm’s results, and the reader should not consider any such list of factors to be a complete set of all potential risks or uncertainties. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.

Business conditions and general economy. The profitability of JPMorgan Chase’s businesses could be adversely affected by a worsening of general economic conditions in the United States or abroad. The difficult global market and economic conditions that existed in 2001 continued in 2002 and this challenging environment could persist for some period of time in 2003. Uncertainties in the financial markets have been exacerbated by investor concerns over the integrity of the U.S. financial markets and uncertainty surrounding terrorists threats and the possible outbreak of war. Factors such as the liquidity of the global financial markets, the level and volatility of equity prices and interest rates, investor sentiment, inflation, and the availability and cost of credit could significantly affect the activity level of clients with respect to size, number and timing of transactions effected by the Firm’s investment banking business, including its underwriting and advisory

businesses, and also may affect the realization of cash returns from JPMorgan Chase’s private equity business. A further market downturn would likely lead to a decline in the volume of transactions that JPMorgan Chase executes for its customers and, therefore, lead to a decline in the revenues it receives from trading commissions and spreads. Higher interest rates or continued weakness in the market also could affect the willingness of financial investors to participate in loan syndications or underwritings managed by JPMorgan Chase. The Firm generally maintains large trading portfolios in the fixed income, currency, commodity and equity markets and has significant investment positions, including merchant banking investments at JPMorgan Partners. The revenues derived from mark-to-market values of JPMorgan Chase’s business are affected by many factors, including JPMorgan Chase’s credit standing; its success in proprietary positioning; volatility in interest rates and in equity and debt markets; and the economic, political and business factors described below. JPMorgan Chase anticipates that these revenues will experience volatility from time to time. Continued market weakness or worsening of the economy could cause the Firm to incur mark-to-market losses in the values of these positions.

A market downturn also could result in a decline in the fees JPMorgan Chase earns for managing assets. For example, a higher level of U.S. or non-U.S. interest rates or a downturn in trading markets could affect the flows of moneys to or from the mutual funds managed by the Firm. Moreover, even in the absence of a market downturn, below-market performance by JPMorgan Chase’s mutual funds could result in a decline in assets under management and, therefore, in the fees the Firm receives.

An economic downturn or significantly higher interest rates could adversely affect the credit quality of JPMorgan Chase’s on-balance sheet and off-balance sheet assets by increasing the risk that a greater number of the Firm’s customers would become delinquent on their loans or other obligations to JPMorgan Chase. Further, a continuing challenging economic environment could lead to a higher rate of delinquencies by customers or counterparties which, in turn, would result in a higher level of charge-offs and a higher level of provision for credit losses for JPMorgan Chase, all of which could adversely affect the Firm’s earnings. The Firm’s consumer businesses are particularly affected by domestic economic conditions, including U.S. interest rates, the rate of unemployment, the level of consumer confidence, changes in consumer spending, and the number of personal bankruptcies, as these factors will affect the level of consumer loans and credit quality.

Competition. JPMorgan Chase operates in a highly competitive environment and expects various factors to cause competitive conditions to continue to intensify. For example, technological advances and the growth of e-commerce have made it possible for non-depository institutions to offer products and services that traditionally were banking products and for financial institutions to compete with technology companies in providing electronic and Internet-based financial solutions. In addition, the Firm expects cross-industry competition to continue to intensify, particularly as continued merger activity in the financial services industry produces larger, better-capitalized companies that are capable of offering a wider array of financial products and services, and at more competitive prices.

Non-U.S. operations; trading in non-U.S. securities. The Firm does business throughout the world, including in developing regions of the world commonly known as emerging markets. JPMorgan Chase’s businesses and revenues derived from non-U.S. operations are subject to risk of loss from unfavorable political and diplomatic developments, currency fluctuations, social instability, changes in governmental policies or policies of central banks, expropriation, nationalization, confiscation of assets and changes in legislation relating to non-U.S. ownership. JPMorgan Chase also invests in the securities of corporations located in non-U.S. jurisdictions, including emerging markets. Revenues from the trading of non-U.S. securities also may be subject to negative fluctuations as a result of the above factors. The impact of these fluctuations could be accentuated because, generally, non-U.S. trading markets, particularly in emerging market countries, are smaller, less liquid and more volatile than U.S. trading markets.

Operational risk. JPMorgan Chase, like all large corporations, is exposed to many types of operational risk, including the risk of fraud by employees or outsiders, unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or errors resulting from faulty or disabled computer or telecommunications systems. Given the high volume of transactions at JPMorgan Chase, certain errors may be repeated or compounded before they are discovered and successfully rectified. In addition, the Firm’s necessary dependence upon automated systems to record and process its transaction volume may further increase the risk that technical system flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. The Firm may also be subject to disruptions of its operating systems, arising from events that are wholly or partially beyond its control (including, for example, computer viruses or electrical or telecommunications outages), which may give rise to losses in service to customers and to loss or liability to the Firm. The Firm is further exposed to the risk that its external vendors may be unable to fulfill their contractual obligation to the Firm (or will be subject to the same risk of fraud or operational errors by their respective employees as is the Firm), and to the risk that its (or its vendors’) business continuity and data security systems prove not to be sufficiently adequate. Although JPMorgan Chase maintains a system of controls designed to keep operational risk at appropriate levels, the Firm has in the past suffered losses from operational risk, and there can be no assurance that JPMorgan Chase will not suffer losses from operational risks in the future.

Government monetary policies and economic controls. JPMorgan Chase’s businesses and earnings are affected by general economic conditions, both domestic and international. JPMorgan Chase’s businesses and earnings also are affected by the fiscal or other policies that are adopted by various regulatory authorities of the U.S., non-U.S. governments and international agencies. For example, policies and regulations of the Federal Reserve Board influence, directly and indirectly, the rate of interest paid by commercial banks on their interest-bearing deposits and also may impact the value of financial instruments held by the Firm. These actions of the Federal Reserve Board also determine to a significant degree the cost to JPMorgan Chase of funds for lending and investing. The nature and impact of future changes in economic and market conditions and fiscal policies are not predictable and are beyond JPMorgan Chase’s control. In addition, these policies and conditions can impact the Firm’s cus-

Part I

tomers and counterparties, both in the U.S. and abroad, which may increase the risk that such customers or counterparties default on their obligations to JPMorgan Chase.

Reputational and legal risk. The Firm’s ability to attract and retain customers and employees could be adversely affected to the extent its reputation is damaged. The failure of the Firm to deal, or to appear to fail to deal, with various issues that could give rise to reputational risk could cause harm to the Firm and its business prospects. These issues include, but are not limited to, appropriately dealing with potential conflicts of interest, legal and regulatory requirements, ethical issues, money-laundering, privacy, record-keeping, sales and trading practices and the proper identification of the legal, reputational, credit, liquidity and market risks inherent in its products. Failure to address appropriately these issues could also give rise to additional legal risk to the Firm, which could, in turn, increase the size and number of claims and damages asserted against the Firm or subject the Firm to enforcement actions, fines and penalties.

Credit, market, liquidity and private equity risk. JPMorgan Chase’s revenues also are dependent upon the extent to which management can successfully achieve its business strategies within a disciplined risk environment. JPMorgan Chase’s ability to grow its businesses is affected by pricing and competitive pressures, as well as by the costs associated with the introduction of new products and services and the expansion and development of new distribution channels. The ability of management to utilize the “Shareholder Value Added” methodology to evaluate investment opportunities and the ability to maintain expense discipline will be important factors in determining the extent to which the Firm achieves its financial targets. In addition, to the extent any of the instruments and strategies JPMorgan Chase uses to hedge or otherwise manage its exposure to market, credit and private equity risk are not effective, the Firm may not be able to mitigate effectively its risk exposures in particular market environments or against particular types of risk. JPMorgan Chase’s balance sheet growth will be dependent upon the economic conditions described above, as well as on its determination to securitize, sell, purchase or syndicate particular loans or loan portfolios. JPMorgan Chase’s trading revenues and interest rate risk are dependent upon its ability to identify properly, and mark-to-market, changes in the value of its financial instruments caused by changes in market prices or rates. The Firm’s earnings will also be dependent upon how effectively it determines and assesses the cost of credit, and manages risk concentrations, including exposure limits for industry and single-name obligors. To the extent its assessment of migrations in credit quality, risk concentrations, or assumptions or estimates used in establishing its loan loss reserves prove inaccurate or not predictive of actual results, the Firm could suffer higher-than-anticipated credit losses. The successful management of credit, market, operational and private equity risk is an important consideration in managing the Firm’s liquidity risk, as evaluation by rating agencies of the management of these risks affects their determinations as to the Firm’s credit ratings and, therefore, its cost of funds.

Non-U.S. operations

For geographic distributions of total revenue, total expense, income before income tax expense and net income, see Note 32 on page 107. For a discussion of non-U.S. loans, see Note 9 on page 81 and the sections entitled “Country exposure” in the MD&A on page 53 and “Cross-border outstandings” on page 122.

Item 2: Properties

The headquarters of JPMorgan Chase is located in New York City at 270 Park Avenue, which is a 50-story bank and office building owned by JPMorgan Chase. This location contains approximately 1.3 million square feet of commercial office and retail space.

JPMorgan Chase entered into 2 leases for approximately 2.2 million square feet of office space in two midtown Manhattan office buildings, 277 Park Avenue and 245 Park Avenue. The 277 Park Avenue building is fully occupied, and 245 Park Avenue is in the process of being prepared for occupancy. JPMorgan Chase also has a number of other large office leaseholds in various locations in Manhattan.

JPMorgan Chase owns and occupies a 60-story building at One Chase Manhattan Plaza in New York City. This location has approximately 2 million square feet of commercial office and retail space, of which approximately 800,000 square feet is leased to outside tenants.

JPMorgan Chase also owns and occupies a 22-story building at 4 New York Plaza, New York City. This location has 900,000 square feet of commercial office and retail space, none of which is leased to outside tenants.

On May 31, 2001, JPMorgan Chase had entered into a contract with the City of New York to sell to the City of New York, or its designee, the two-building complex at 23 Wall Street/15 Broad Street in New York City. The two buildings comprise approximately 1 million square feet of commercial office and retail space. The City of New York and the New York Stock Exchange had previously announced their intention to build a new Exchange on the land currently occupied by these facilities. The City of New York elected to cancel its purchase contract with JPMorgan Chase in September 2002. The two-building complex is currently being marketed for sale.

JPMorgan Chase built and fully occupies a two-building complex known as Chase MetroTech Center in downtown Brooklyn, New York that was completed in 1992. This facility contains approximately 1.75 million square feet and houses operations and product support functions.

In 2000 JPMorgan Chase entered into leases for two “build to suit” office buildings at The Newport Office Center in Jersey City, New Jersey. The two buildings, comprising approximately 1.1 million square feet of office and retail space, were occupied by JPMorgan Chase during 2002.

JPMorgan Chase and its subsidiaries also own and occupy administrative and operational facilities in Hicksville, New York; Tampa, Florida; Tempe, Arizona; Newark, Delaware; and in Houston, Arlington and El Paso, Texas.

JPMorgan Chase occupies, in the aggregate, approximately 2.6 million square feet of space in the United Kingdom. The most significant components of leased space in London are 350,000 square feet at 125 London Wall, 325,000 square feet at Aldermanbury, and a 450,000 square-foot office complex at 60 Victoria Embankment in London. JPMorgan Chase also owns and occupies a 350,000 square-foot operations center in Bournemouth.

In addition, JPMorgan Chase and its subsidiaries occupy branch offices and other administrative and operational facilities throughout the U.S. and in non-U.S. countries under various types of ownership and leasehold agreements.

The majority of the properties occupied by JPMorgan Chase are used across all of JPMorgan Chase’s business segments and for corporate purposes.

In the third quarter of 2002, JPMorgan Chase incurred a $98 million charge to cover the costs of exiting excess vacant space on the West Coast. JPMorgan Chase’s space requirements continue to be affected by the present economic downturn and by the consolidation of operations as a result of the merger. JPMorgan Chase will continue to evaluate its current and projected space requirements and, as opportunities arise, may dispose of additional premises, although there is no assurance that it will be able to do so, nor is there any assurance that the Firm will not have to incur additional charges in connection with any such disposition.

Item 3: Legal proceedings

Enron litigation. JPMorgan Chase is involved in a number of lawsuits and investigations arising out of its banking relationships with Enron Corp. and its subsidiaries (“Enron”). On January 2, 2003, the Firm settled its dispute with eleven insurance companies that had issued surety bonds guaranteeing obligations of Enron Corp., and received from the insurance companies $502 million in cash and $75 million of unsecured claims. Still pending in London is a lawsuit by the Firm against Westdeutsche Landesbank Girozentrale seeking to compel payment of $165 million under an Enron-related letter of credit issued by the bank.

Actions involving Enron have also been initiated by other parties against JPMorgan Chase and its directors and certain of its officers. These lawsuits include a series of purported class actions brought on behalf of shareholders of Enron, including the lead action captioned Newby v. Enron Corp., and a series of purported class actions brought on behalf of Enron employees who participated in various employee stock ownership plans, including the lead action captioned Tittle v. Enron Corp., both of which are pending in U.S. District Court in Houston. The consolidated complaint filed in Newby named as defendants, among others, JPMorgan Chase, several other investment banking firms, two law firms, Enron’s former accountants and affiliated entities and individuals and other individual defendants, including present and former officers and directors of Enron and purports to allege claims against JPMorgan Chase and the other defendants under federal and state securities laws. The Tittle complaint named as defendants, among others, JPMorgan Chase, several other investment banking firms, a law firm, Enron’s former accountants and affiliated entities and individuals and other individual defendants, including present and former officers and directors of Enron and purports to allege claims against JPMorgan Chase and certain other defendants under the Racketeer Influenced and Corrupt Organizations Act (“RICO”) and state common law. On December 20, 2002, the Court denied the motions of JPMorgan Chase and other defendants to dismiss the Newby action.

Additional actions against JPMorgan Chase or its affiliates relating to Enron have been filed. These actions include a purported consolidated class action lawsuit by JPMorgan Chase stockholders alleging that JPMorgan Chase issued false and misleading press releases and other public documents relating to Enron in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; shareholder derivative actions alleging breaches of fiduciary duties and alleged failures to exercise due care and diligence by the Firm’s directors and named officers in the management of JPMorgan Chase; and various actions in disparate courts by Enron investors and creditors alleging state law and common law claims against JPMorgan Chase and many other defendants.

In addition, a number of federal, state and local regulatory and law enforcement authorities and Congressional committees, and an examiner appointed in the Enron bankruptcy case, have initiated investigations of Enron and of certain of the Firm’s financial transactions with Enron. In that regard, the Firm has delivered, or is currently in the process of delivering, voluntarily and pursuant to subpoena, information to the House Energy and Commerce Committee, the Senate Government Affairs Committee, the Senate Permanent Subcommittee on Investigations, U.S. Representative Henry Waxman, the Securities and Exchange Commission, the Federal Reserve Bank of New York, the New York State Banking Department, the New York County District Attorney’s Office, the U.S. Department of Justice, and the Enron bankruptcy examiner. The Firm intends to continue to cooperate with these authorities and with such other agencies and authorities as may request information from JPMorgan Chase.

WorldCom litigation. JPMSI and JPMorgan Chase have been named as defendants in fifteen actions that were filed in either United States District Courts or state courts in six states and the District of Columbia and in one arbitral panel beginning in July 2002 arising out of alleged accounting irregularities in the books and records of WorldCom Inc. Plaintiffs in all but one of these actions are institutional investors, including state pension funds, who purchased debt securities issued by WorldCom pursuant to public offerings in May 2000 and May 2001. JPMSI acted as an underwriter of both of those offerings. In addition to JPMSI and JPMorgan Chase, the defendants in various of the actions include other underwriters, certain executives of WorldCom and WorldCom’s auditors. In the actions, plaintiffs allege that defendants either knew or were reckless or negligent in not knowing that the securities were sold to plaintiffs on the basis of misrepresentations and omissions of material facts concerning the financial condition of WorldCom. The complaints against JPMorgan Chase and JPMSI assert claims under federal and state securities laws, ERISA, other state statutes and under common law theories of fraud and negligent misrepresentation.

Commercial Financial Services litigation. JPMSI (formerly known as Chase Securities, Inc.) has been named as a defendant or third-party defendant in 14 actions that were filed in or transferred to the United States District Court for the Northern District of Oklahoma or filed in Oklahoma state court beginning in October 1999 arising out of the failure of Commercial Financial Services, Inc. (“CFSI”). Plaintiffs in these actions are institutional investors who purchased over $1.6 billion in original face amount of asset-backed securities issued by CFSI. The securities were backed by delinquent credit card receivables. In addition to JPMSI, the defendants in various of the actions are the founders and key executives of CFSI, as well as its auditors and outside counsel. JPMSI is alleged to have been the investment banker to CFSI and to

Part I

have acted as an initial purchaser and as placement agent in connection with the issuance of certain of the securities. Plaintiffs allege that defendants either knew or were reckless in not knowing that the securities were sold to plaintiffs on the basis of misleading misrepresentations and omissions of material facts. The complaints against JPMSI assert claims under the Securities Exchange Act of 1934, the Oklahoma Securities Act, and under common law theories of fraud and negligent misrepresentation. In the actions against JPMSI, damages in the amount of approximately $1.6 billion allegedly suffered as a result of defendants’ misrepresentations and omissions, plus punitive damages, are being claimed. JPMSI also has entered into tolling agreements with certain investors. CFSI has commenced an action against JPMSI in Oklahoma state court and has asserted claims against JPMSI for professional negligence and breach of fiduciary duty. CFSI alleges that JPMSI failed to detect and prevent its insolvency. CFSI seeks unspecified damages.

IPO allocation litigation. Beginning in May 2001, JPMorgan Chase and certain of its securities subsidiaries have been named, along with numerous other firms in the securities industry, as defendants in a large number of putative class action lawsuits filed in the United States District Court for the Southern District of New York. These suits purport to challenge alleged improprieties in the allocation of stock in various public offerings, including some offerings for which a JPMorgan Chase entity served as an underwriter. The suits allege violations of securities and antitrust laws arising from alleged material misstatements and omissions in registration statements and prospectuses for the initial public offerings and with respect to aftermarket transactions in the offered securities. The securities claims allege, among other things, misrepresentations concerning commissions paid to JPMorgan Chase and aftermarket transactions by customers who received allocations of shares in the respective initial public offerings. The antitrust claims allege an illegal conspiracy to require customers, in exchange for initial public offering allocations, to pay undisclosed and excessive commissions and to make after-market purchases of the initial public offering securities at a price higher than the offering price as a precondition to receiving allocations. On February 13, 2003, the Court denied the motions of JPMorgan Chase and others to dismiss the securities complaints. JPMorgan Chase also has received various subpoenas and informal requests from governmental and other agencies seeking information relating to initial public offering allocation practices. On February 20, 2003, the National Association of Securities Dealers (“NASD”) censured JPMSI and fined it $6 million for activities it found to constitute unlawful profit sharing by Hambrecht & Quist Group prior to its acquisition in 2000. In agreeing to the resolution of the charges, JPMSI neither admitted nor denied the NASD’s contentions. JPMSI has been advised by the SEC that it is also considering bringing a disciplinary action against JPMSI. JPMSI has submitted to the staff of the SEC a letter outlining the basis for JPMSI’s position that no such action is warranted and is currently in discussions with the SEC.

Research analysts’ conflicts. On December 20, 2002, the Firm reached an agreement in principle with the SEC, the NASD, the New York Stock Exchange, the New York State Attorney General’s Office, and the North American Securities Administrators Association, on behalf of state securities regulators, to resolve their investigations of JPMorgan Chase relating to research analyst independence. Pursuant to the agreement in principle, JPMorgan Chase will agree, among other things (i) to pay $50 million for retrospective relief, (ii) to adopt internal structural and operational reforms that will further augment the steps it has already taken to ensure the integrity of JPMorgan Chase analyst research, (iii) to contribute $25 million spread over five years to provide independent third-party research to clients, and (iv) to contribute $5 million towards investor education. The settlement is subject to finalization of mutually satisfactory settlement documents and must be approved by the SEC and state regulatory authorities.

Litigation reserve and other. During the fourth quarter of 2002, the Firm established a reserve of $900 million related to costs anticipated to be incurred in connection with the various private litigations and regulatory inquiries involving Enron and the other material legal actions, proceedings and investigations discussed above. This reserve represents management’s best estimate, after consultation with counsel, of the current probable aggregate costs associated with these matters. Of the $900 million, $600 million has been allocated to the various cases, proceedings and investigations associated with Enron. The balance of $300 million has been allocated to the various litigations, proceedings and investigations involving the Firm’s debt and equity underwriting activities and equity research practices, and includes the $80 million settlement in December 2002 relating to equity research practices. It is possible that the reserve could be subject to revision in the future.

In addition to the various cases, proceedings and investigations for which the reserve has been established, 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 or involve a large number of parties, the Firm cannot state with confidence what the eventual outcome of the pending matters (including the pending matters as to which the reserve has been established) will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss related to each pending matter will be. Subject to the foregoing caveat, JPMorgan Chase anticipates, based upon its current knowledge, after consultation with counsel and after taking into account the establishment of the aforementioned $900 million reserve, 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, although the outcome of a particular proceeding or the imposition of a particular fine or penalty 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 and the level of JPMorgan Chase’s income for that period.

Item 4: Submission of matters to a vote of security holders

None.

Executive officers of the registrant


Name	Age	Positions and offices held with JPMorgan Chase
	(at December 31, 2002)
William B. Harrison, Jr.	59	Chairman and Chief Executive Officer since November 2001, prior to which he was President and Chief Executive Officer from December 2000. He was Chairman and Chief Executive Officer from January through December 2000 and President and Chief Executive Officer from June through December 1999, prior to which he had been Vice Chairman of the Board.

David A. Coulter	55	Head of the Investment Bank and of Investment Management & Private Banking. He had been head of Chase Financial Services until May 2002. Prior to joining JPMorgan Chase in 2000, he led the West Coast operations of The Beacon Group, prior to which he was Chairman and Chief Executive Officer of BankAmerica Corporation and Bank of America NT & SA.

Dina Dublon	49	Chief Financial Officer. Until 1998, she was Executive Vice President and Corporate Treasurer.

John J. Farrell	50	Director Human Resources.

Thomas B. Ketchum	52	Chairman of the Technology Council. Prior to the merger, he was an executive of J.P. Morgan & Co. Incorporated, serving as Chief Financial Officer since September 2000 and Chief Administrative Officer since 1998, prior to which he was Regional Executive and Head of Investment Banking for the Americas.

Donald H. Layton	52	Head of Chase Financial Services and of Treasury & Securities Services. He had been co-head of the Investment Bank until May 2002. Prior to the merger, he was responsible for global markets, the international infrastructure and cash management and securities processing services.

Marc J. Shapiro	55	Head of Finance, Risk Management and Administration. Until 1997, he was Chairman and Chief Executive Officer of Texas Commerce Bank, which now is part of JPMorgan Chase Bank.

Jeffrey C. Walker	47	Head of JPMorgan Partners, JPMorgan Chase’s global private equity group.

Lesley Daniels Webster	50	Head of Market Risk Management.

Frederick W. Hill	52	Director of Corporate Marketing and Communications. Until 1997, he had been Senior Vice President, Communications and Community Relations, for McDonnell Douglas Corporation.

Donald H. McCree, III	41	Senior Credit Officer since January 2003 and head of Credit Risk Policy and Global Credit Management. He had been co-head of North American Credit Markets Group and until January 2001 had been co-head of Investment Banking in Europe.

William H. McDavid	56	General Counsel.

Joseph L. Sclafani	53	Controller.

Unless otherwise noted, during the five fiscal years ended December 31, 2002, all of JPMorgan Chase’s above-named executive officers have continuously held senior-level positions with JPMorgan Chase or its predecessor institutions, J.P. Morgan & Co. Incorporated and The Chase Manhattan Corporation. There are no family relationships among the foregoing executive officers.

Parts II & III

Part II

Item 5: Market for registrant’s common equity and related stockholder matters

The outstanding shares of JPMorgan Chase’s common stock are listed and traded on the New York Stock Exchange, the London Stock Exchange Limited and the Tokyo Stock Exchange. For the quarterly high and low prices of JPMorgan Chase’s common stock on the New York Stock Exchange for the last two years, see the section entitled “Supplementary information – selected quarterly financial data (unaudited)” on page 111. JPMorgan Chase declared quarterly cash dividends on its common stock in the amount of $0.34 per share for each quarter of 2002 and 2001. The common dividend payout ratio based on reported net income was 171% for 2002, 168% for 2001 and 42% for 2000. At February 28, 2003, there were 126,759 holders of record of JPMorgan Chase’s common stock. For information regarding securities authorized for issuance under the Firm’s employee stock-based compensation plans, see Note 24 on page 96.

Item 6: Selected financial data

For five-year selected financial data, see “Five-year summary of financial highlights (unaudited)” on page 112.

Item 7: Management’s discussion and analysis of financial condition and results of operations

Management’s discussion and analysis of the financial condition and results of operations, entitled “Management’s discussion and analysis,” appears on pages 17 through 69. Such information should be read in conjunction with the Consolidated financial statements and Notes thereto, which appear on pages 71 through 110.

Item 7A: Quantitative and qualitative disclosures about market risk

For information related to market risk, see the “Market risk management” section on pages 58 through 62 and Note 28 on page 101.

Item 8: Financial statements and supplementary data

The consolidated financial statements, together with the notes thereto and the report of PricewaterhouseCoopers LLP dated January 21, 2003 thereon, appear on pages 70 through 110.

Supplementary financial data for each full quarter within the two years ended December 31, 2002 are included on page 111 in the table entitled “Supplementary information – selected quarterly financial data (unaudited).” Also included is a “Glossary of terms’’ on pages 113 and 114.

Item 9: Changes in and disagreements with accountants on accounting and financial disclosure

None.

Part III

Item 10: Directors and executive officers of JPMorgan Chase

See Item 13 on page 13.

Item 11: Executive compensation

See Item 13 on page 13.

Item 12: Security ownership of certain beneficial owners and management and related stockholder matters

For security ownership of certain beneficial owners and management, see Item 13 on page 13. For stockholders’ matters regarding securities authorized for issuance under the Firm’s employee stock-based compensation plans, see Note 24 on page 96.

Item 13: Certain relationships and related transactions

Information related to JPMorgan Chase’s Executive Officers is included on page 11. Pursuant to Instruction G (3) to Form 10-K, the remainder of the information to be provided in Items 10, 11, 12 and 13 of Form 10-K (other than information pursuant to Rule 402 (i), (k) and (l) of Regulation S-K) is incorporated by reference to JPMorgan Chase’s definitive proxy statement for the annual meeting of stockholders, to be held May 20, 2003, which proxy statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the close of JPMorgan Chase’s 2002 fiscal year.

Item 14: Controls and procedures

Within the 90-day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of the Firm’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective. No significant changes were made in the Firm’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

Pages 14-15 not used

Table of contents

Financial:


Management’s discussion and analysis:

	17	Overview
	18	Results of operations
	22	Reconciliation from reported results to operating basis
	24	Segment results
	40	Risk and Capital management
	41	Capital and Liquidity management
	45	Credit risk management
	58	Market risk management
	63	Operational risk management
	65	Private equity risk management
	65	Critical accounting estimates used by the Firm
	68	Accounting and reporting developments
	69	Comparison between 2001 and 2000

Audited financial statements:

	70	Management’s report on responsibility for financial reporting
	70	Report of independent accountants
	71	Consolidated financial statements
	75	Notes to consolidated financial statements

Supplementary information:

	111	Selected quarterly financial data
	112	Five-year summary of financial highlights
	113	Glossary of terms

This section of the Annual Report provides management’s discussion and analysis (“MD&A”) of the financial condition and results of operations for JPMorgan Chase. See Glossary of terms on pages 113 and 114 for a definition of terms used throughout this Annual Report.

Certain forward-looking statements

The MD&A contains certain forward-looking statements. Those forward-looking statements are subject to risks and uncertainties, and JPMorgan Chase’s actual results may differ from those set forth in the forward-looking statements. See JPMorgan Chase’s reports filed with the Securities and Exchange Commission for a discussion of factors that could cause JPMorgan Chase’s actual results to differ materially from those described in the forward-looking statements.

Management’s discussion and analysis

J.P. Morgan Chase & Co.

Overview

J.P. Morgan Chase & Co. is a leading global financial services firm with assets of $759 billion and operations in more than 50 countries. The Firm serves more than 30 million consumer customers and the world’s most prominent corporate, institutional and government clients. The Firm’s wholesale businesses are comprised of the Investment Bank, Treasury & Securities Services, Investment Management & Private Banking and JPMorgan Partners. Chase Financial Services is composed of the Firm’s retail and middle market businesses.

Financial performance of JPMorgan Chase


As of or for the year ended December 31,							Over/(under)
(in millions, except per share and ratio data)	2002			2001			2001

Revenue	$	29,614		$	29,344			1	%
Noninterest expense		22,764			23,596			(4	)
Provision for credit losses		4,331			3,182			36
Net income		1,663			1,694			(2	)
Net income per share — diluted		0.80			0.80			—
Return on average common equity (“ROCE”)		3.9	%		3.9	%		—	bp

Tier 1 capital ratio		8.2	%		8.3	%		(10	)bp
Total capital ratio		12.0			11.9			10
Tier 1 leverage ratio		5.1			5.2			(10	)

bp- Denotes basis points; 100 bp equals 1%.

J.P. Morgan Chase &Co. (“JPMorgan Chase” or the “Firm”) reported 2002 net income of $1.7 billion, or $0.80 per share, compared with net income of $1.7 billion, or $0.80 per share, in 2001. The results for the year were negatively affected by sluggish capital markets, by concentrated exposures in certain segments of the Firm’s private equity and commercial credit portfolios, by large charges related to litigation and by continuing integration expenses resulting from the merger of J.P. Morgan and Chase. On the positive side, the consumer businesses reported record results, and Treasury & Securities Services (“T&SS”) had a solid year, highlighting the benefits of the Firm’s diversified business model.

As a result of the Firm’s balance of businesses, 2002 total reported revenues of $29.6 billion were up 1% from 2001. The national consumer credit businesses at Chase Financial Services (“CFS”) benefited from the low-interest rate environment, with the mortgage company, in particular, having an exceptional year. T&SS reported modest revenue growth, as strong gains in Treasury Services and Institutional Trust Services offset a decline in Investor Services. At the Investment Bank (“IB”), the slower-than-expected economic recovery and diminished investor confidence led to continued weakness in capital markets activity, which was reflected in lower trading revenue and investment banking fees. Investment Management & Private Banking (“IMPB”) revenues declined as a result of lower global equity valuations and reduced investor activity; assets under supervision declined primarily due to market depreciation and institutional outflows. Deterioration in equity markets adversely affected JPMorgan Partners (“JPMP”); write-offs and write-downs of private holdings and net mark-to-market losses on public securities were not offset by cash gains, as financing and exit opportunities remained constrained.

The Firm’s total reported noninterest expense declined 4% from 2001 and included several large charges in both years. In 2002, the costs associated with merger and restructuring initiatives were $1.2 billion, versus $2.5 billion the previous year. Also in 2002, the Firm recorded a $1.3 billion charge in connection with the settlement of its Enron-related surety litigation and the establishment of a reserve related to certain material litigation, proceedings and investigations and recorded a $0.1 billion charge related to excess real estate. Excluding the impact of these charges in both years, the Firm’s full-year 2002 noninterest expense of $20.2 billion was lower than that of 2001.

In addition, in 2002, the Firm announced several programs aiming to align expense levels with lower revenue prospects. Severance and related costs from these initiatives added $890 million to noninterest expense for the year, approximately 70% of which were in IB. Despite those costs, all business segments reported lower-to-flat noninterest expenses, except CFS, where higher business volumes drove expense growth. IB reduced headcount in line with lower market activity levels. IMPB has reduced its expense run-rate by more than half a billion dollars since the beginning of 2001. In T&SS, tight expense management allowed for investments while keeping expense levels flat with 2001 levels. The Firm’s expenses were further reduced by the adoption in 2002 of SFAS 142, which eliminated the amortization of goodwill.

The provision for credit losses increased 36% from 2001. This was principally attributable to troubled commercial credits in the telecommunications and cable sectors, partially offset by a decrease in the consumer provision.

In addition to analyzing results on a reported basis, management looks at results on an “operating basis” to assess the overall Firm and each of its business segments and to facilitate an estimate of future earnings for the business segments, absent unusual events. JPMorgan Chase’s operating earnings, which exclude merger and restructuring costs and special items, were $3.4 billion, compared with $3.8 billion in 2001. For additional information and a reconciliation between the Firm’s reported and operating results, see pages 22 and 23.

Risk management

Management of credit, market, operational and private equity risk is central to the Firm’s businesses.

Total nonperforming assets rose to $4.8 billion at December 31, 2002, an increase of 22% from year-end 2001, primarily as a result of significant and rapid deterioration in credit quality in the telecommunications, cable and merchant energy sectors. The Firm established a more stringent exposure review process and lower absolute exposure limits for industry and single-name concentrations, including investment-grade obligors.


17		J.P. Morgan Chase & Co./2002 Annual Report

Management’s discussion and analysis

J.P. Morgan Chase & Co.

Market risk parameters across the Firm remained stable, and trading results were within Value-at-risk (“VAR”) limits throughout the year.

The Firm continued to develop its self-assessment, operational risk-event monitoring and internal control processes to enhance its operational risk management discipline.

The Firm created a Policy Review Office to enhance the procedures it uses to examine transactions with clients in terms of appropriateness, ethical issues and reputational risk. The Policy Review Office has intensified the scrutiny of the Firm’s transactions from the client’s point of view, with the goal that these transactions are not used to deceive investors or others.

Finally, the Firm reviewed the level of private equity risk in its portfolio and has decided to reduce, over time, the amount of capital invested in private equity to approximately 10% of the Firm’s common stockholders’ equity, from approximately 20% at December 31, 2002.

Capital and liquidity management

At December 31, 2002, the Firm’s Tier 1 capital ratio was 8.2%, compared with 8.3% at year-end 2001. In the third quarter, the Board of Directors declared its intention to continue the current quarterly dividend of $0.34 per share on the Firm’s common stock, provided that capital ratios remain strong and earnings prospects exceed the current dividend.

Sound liquidity management remains an important factor in maintaining the Firm’s credit ratings. Liquidity management takes into account the need to fund both on- and off-balance sheet liabilities and commitments. It seeks to ensure that the Firm’s obligations will be met even if access to funding is temporarily impaired. Although the Firm’s debt ratings were downgraded one notch this year to AA-/Aa3 at JPMorgan Chase Bank and to A+/A1 at the holding company, the Firm’s funding costs and capital markets businesses were not materially adversely affected.

Corporate governance

The Firm has adopted the New York Stock Exchange proposals relating to corporate governance practices for boards of directors and has posted the board’s practices, as well as charters of the principal board committees, on the Firm’s website, www.jpmorganchase.com. The Firm seeks to be a leader in corporate governance and disclosure practices.

Business outlook

Global economic conditions and activity in financial markets are expected to remain uncertain in 2003. Accordingly, the outlook for the Firm’s investment banking and capital markets activities remains cautious. Earnings improvements in IB are anticipated to be primarily driven in 2003 by lower credit costs in a still challenging — but stabilizing — credit environment and by lower expenses. At CFS, continuation of the current low-interest rate environment should enable the credit-related businesses (mortgage, credit card and auto) to perform well, although it is likely revenues and earnings will be lower than the record set in 2002, which included large net gains on hedging of mortgage servicing rights (“MSRs”).

Expenses for the Firm in 2003 may be slightly higher than in 2002 (excluding from 2002 expenses the impact of the litigation and merger charges). Expensing stock options, higher pension and occupancy costs and increased spending (primarily at CFS) are likely to more than offset the savings anticipated from IB right-sizing initiatives and lower severance costs.

Despite this cautious view for the short term, the Firm remains committed to its diversified business model and believes that it is well positioned to produce higher returns when economic conditions improve and capital markets recover.

Results of operations

This section discusses JPMorgan Chase’s results of operations on a reported basis. The accompanying financial data conforms with U.S. generally accepted accounting principles (“GAAP”). The section should be read in conjunction with the financial statements and footnotes beginning on page 71.

Investment banking fees were 24% lower than last year, reflecting the industry-wide slowdown in corporate M&A activities and new issuance of debt and equity securities. Advisory fees of $756 million were 39% lower than last year, and underwriting fees for debt and equity instruments of $2.0 billion were 15% lower than last year. For a table that breaks out investment banking fees, see Note 4 on page 77, and for a further discussion on these revenues, see the IB results on pages 26—28.

Revenues


Year ended December 31,							Over/(under)
(in millions)	2002			2001			2001

Investment banking fees	$	2,763		$	3,612			(24	)%
Trading revenue		2,594			4,918			(47	)
Fees and commissions		10,756			9,481			13
Private equity — realized gains (losses)		(105	)		651		NM
Private equity — unrealized gains (losses)		(641	)		(1,884	)		66
Securities gains		1,563			866			80
Other revenue		1,158			898			29
Net interest income		11,526			10,802			7

Total revenue	$	29,614		$	29,344			1	%

NM-Not meaningful.

The 47% decline in trading revenue was primarily attributable to the challenging market conditions that persisted throughout 2002.


J.P. Morgan Chase & Co./2002 Annual Report		18

Equity markets declined substantially, contributing to lower client activity and revenues, primarily in equity derivatives. Also contributing to lower equity trading results was a shift in the classification of broker-dealer trading revenues, from “trading revenues” in 2001 to “brokerage and investment services fees” in 2002. Beginning in 2001, bid and offer prices on Nasdaq stocks were quoted in dollars and cents, instead of fractions of whole dollars. As a result, in 2002, JPMorgan Chase began to negotiate with its institutional clients commission-based pricing structures that would support the costs of delivering enhanced brokerage services in connection with their Nasdaq trades. Revenues earned from agreed-upon commissions are now recorded as “brokerage and investment services” within Fees and commissions.

Fixed income trading revenues declined 33% from last year, as lower portfolio management results, primarily in interest rate trading, offset an overall increase in client activity.

Trading revenue, on a reported basis, excludes the impact of net interest income related to IB’s trading activities; this income is recorded within Net interest income. However, in assessing the profitability of IB’s trading business, the Firm combines these revenues for segment reporting. For a table that breaks out trading revenues, see Note 3 on page 76, and for a further discussion on these revenues, see the IB results on pages 26–28.

Fees and commissions

Fees and commissions were $10.8 billion in 2002, an increase of 13% from last year, reflecting the following:

•		Mortgage servicing fees were $298 million, compared with a loss of $230 million in 2001, stemming from the favorable impact of Chase Home Finance’s hedging of MSRs. In 2002, hedging gains resulting from wider mortgage swap spreads and a favorable interest rate environment were significantly greater than the offsetting impairment of the MSRs’ value. For a further discussion of these fees, see the Chase Home Finance discussion on page 36.

•		Credit card revenue of $2.9 billion was a record for the Firm. Revenues were 36% above 2001, reflecting the positive impact on servicing fees from the growth in securitized receivables managed by Chase Cardmember Services; average securitized receivables grew by more than $8.5 billion. The increase in credit card revenue also reflected the impact of the Providian acquisition, higher late charges and higher interchange income as a result of increased purchase volume. For a further discussion of credit card business revenues, see page 37.

•		Other lending-related service fees increased 10%, a result of higher standby letter-of-credit fees from new business volumes. Also contributing to the increase were higher auto loan servicing fees, the result of increased securitizations in 2002.

•		Deposit service fees were 10% above 2001. Lower interest rates reduced the value of customers’ compensating deposit balances; consequently, customers paid increased fees for deposit services. Also contributing to the increase were higher cash management fees, primarily at Treasury Services, reflecting growth in payment processing volumes from institutional clients.

These fees and commissions were offset by lower investment management, custody and processing service fees. These fees were down 5% to $3.8 billion in 2002, primarily a result of the lower value of equity-related assets under supervision at IMPB, as well as lower fees earned at T&SS from non-U.S. assets under custody. Both investment management and custody fees were affected by the decline in the value of assets under supervision and assets under custody, respectively, as these fees are generally calculated as a percentage of the total market value of the assets. Also contributing to the lower fees was the market-driven slowdown in securities lending, as well as a decrease in processing service fees for unit investment trusts.

Brokerage and investment services declined slightly, despite the aforementioned reclassification into this line of approximately $100 million of broker-dealer revenues related to Nasdaq transactions. The decline was the result of reduced trading volume and narrower spreads on brokerage transactions.

For a table showing the components of Fees and commissions, see Note 4 on page 77.

Private equity gains (losses)

Aggregate private equity losses (realized and unrealized) totaled $746 million in 2002, reflecting the continuing difficult capital markets environment. The private equity markets offered limited exit opportunities and constrained financing, thereby depressing realized gains. Further, the results in 2002 reflected net mark-to-market losses on public securities, as well as write-downs and write-offs on private holdings, particularly in the telecommunications and technology sectors. For a further discussion of private equity gains (losses), see JPMP results on pages 33–34.

Securities gains

Securities gains of $1.6 billion were up 80% from last year. Of these gains, $1.1 billion was attributable to the Firm’s available-for-sale (“AFS”) investment securities portfolio, which was favorably positioned in a lower interest rate environment. The balance was directly related to the hedging of MSRs that offset impairment charges due to mortgage prepayments. For a further discussion of securities gains, see both the IB and Chase Home Finance discussions on pages 26–28 and 36, respectively.

Other revenue

The increase in Other revenue of $260 million reflected the following:

•

Increased revenues from residential mortgage origination and sales activities, to $671 million in 2002 from $576 million in 2001, were driven by the surge in loan applications and originations. The growth in originations allowed for larger volumes of loan sales and securitizations. For a further discussion of this revenue, see Chase Home Finance on page 36.


19		J.P. Morgan Chase & Co./2002 Annual Report

Management’s discussion and analysis

J.P. Morgan Chase & Co.

•

Unfavorable valuation adjustments were $36 million, compared with $177 million in 2001. The adjustment in 2002 was related to residual positions held after the completion of loan syndications and commercial real estate loan securitizations. These residual positions are recorded at the lower of cost or market value. The higher negative valuation adjustments in 2001 primarily related to loans in the technology and telecommunications sectors.

For a table that breaks out Other revenue, see Note 4 on page 78.

Net interest income

Net interest income (“NII”) rose 7% to $11.5 billion, compared with $10.8 billion in 2001. The primary contributors to the increase were the significant growth in average consumer loans, which were 7% higher than last year, and higher trading-related NII. These were offset by a decline in commercial loans and the narrowing of spreads in the deposit businesses.

Average consumer loan volume grew, benefiting from low interest rates, as well as the acquisition in February 2002 of the Providian Master Trust, including $7.9 billion of credit card receivables and related relationships. Total average credit card receivables rose 11% to $21.6 billion; of this amount $4.8 billion related to Providian. NII at Chase Home Finance increased due to higher average available-for-sale mortgage loans, higher spreads and lower asset funding costs.

NII related to commercial loans declined, the result of lower outstanding volumes. At the same time, spreads narrowed, reflecting the reduction in interest rates. Also contributing to the decline was the higher level of nonperforming loans. Nonperforming commercial loans rose 84% to $3.7 billion. For a further discussion of nonperforming loans in the commercial portfolio, see page 47.

A portion of the Firm’s NII relates to trading-related assets. In 2002, this component was $1.9 billion, compared with $1.4 billion in the prior year. The increase was attributable to the change in the composition of trading assets and improved spreads.

On an aggregate basis, the Firm’s total average interest-earning assets for 2002 were $555 billion, compared with $547 billion last year. The net interest spread on these assets, on a fully taxable-equivalent basis, was 2.09% in 2002, 10 basis points higher than last year.

Expenses


Year ended December 31,					Over/(under)
(in millions)	2002		2001		2001

Compensation expense	$	10,983	$	11,844		(7	)%
Occupancy expense		1,606		1,348		19
Technology and communications expense		2,554		2,631		(3	)
Amortization of intangibles		323		729		(56	)
Other expense		4,788		4,521		6
Surety settlement and litigation reserve		1,300		—	NM
Merger and restructuring costs		1,210		2,523		(52	)

Total noninterest expense	$	22,764	$	23,596		(4	)%

NM- Not meaningful.

Compensation expense

Compensation expense in 2002 was $11.0 billion, 7% lower than last year, and included severance costs of $746 million associated with expense initiatives undertaken during the year. In 2001, severance related to the merger of J.P. Morgan and Chase and other previously announced restructuring programs was recorded within Merger and restructuring costs. The decline reflected reductions in staffing levels, as well as lower incentives reflecting the lower level of earnings. The amounts accrued for incentives are subject to management’s discretion and to calculations that correlate incentives with income before incentives.

Expense-management programs had a significant impact in IB and, to a lesser extent, IMPB, the two business segments whose revenues were most negatively affected by the downturn in the economy. As a result, these two segments reduced the number of employees in their businesses. Also contributing to the decline in expenses was the reversal of previously accrued expenses of $120 million related to forfeitable stock-based compensation awards issued under employee benefit plans. The awards contained stock price targets that were deemed unlikely to be attained within the timeframes specified under the terms of the awards.

The decline in compensation expense was partially offset by the hiring of new employees at expanding business segments, primarily CFS and T&SS.

The total number of full-time equivalent employees at December 31, 2002, was 94,335, compared with 95,812 at the prior year-end. Although overall levels remained relatively stable, headcount in IB and IMPB was reduced by approximately 3,100 full-time equivalent employees, whereas in CFS headcount increased by more than 2,400.

The Firm reviews the actuarial assumptions for its pension and other postretirement benefit plans on an annual basis. To reflect the decline in market interest rates during 2002, the year-end discount rate for the Firm’s U.S. plans was set at 6.50%, a 75-basis point decline from the prior year. Additionally, considering the current mix of plan assets, the year-end assumed long-term rate of return was adjusted downward to 8.00% for both U.S. pension plan assets and other postretirement benefit plan assets, from 9.25% and 9.00%, respectively. The assumed long-term rate of return is a blended average of the Firm’s investment advisor’s projected long-term (10 years or more) returns for various asset classes. The impact of these changes is expected to increase 2003 U.S. pension and other postretirement benefit expenses by approximately $60 million. Additionally, the adverse effect of losses on U.S. plan assets is expected to further increase U.S. pension and other postretirement benefit expenses by approximately $70 million. In 2002, these expenses included curtailment charges and special termination benefits totaling $64 million resulting from management-initiated and outsourcing-related employee terminations. Actuarial assumptions for the Firm’s various non-U.S. plans also were adjusted to reflect local market conditions. The impact of these changes on non-


J.P. Morgan Chase & Co./2002 Annual Report		20

U.S. pension and other postretirement benefit expenses is not expected to be material. For further information on postretirement employee benefit plans, see Note 23 on pages 94–96.

Occupancy expense

Occupancy expense rose 19% from last year, partly the result of a $98 million charge in the third quarter of 2002 to cover the costs of exiting excess vacant premises on the West Coast of the United States, principally in the San Francisco area. Also contributing to the increase was the leasing of additional space in New Jersey and in midtown Manhattan, partly necessitated by the relocation of certain functions at the beginning of the year from a previously-owned building in downtown Manhattan. The Firm expects 2003 occupancy costs to increase by approximately $150 million due to the move to midtown Manhattan, extra safety measures and higher anticipated real estate taxes in New York.

Technology and communications expense

The decline in Technology and communications expense was primarily attributable to an initiative to rationalize and reshape the Firm’s technology infrastructure. This initiative resulted in reduced spending for software, equipment and workstations. Additionally, the technology sourcing process was streamlined in favor of a select list of preferred vendors, resulting in additional expense reductions. The impact of these initiatives was partially offset by the higher amortization of capitalized software, as well as expenditures to enhance the telecommunications network.

Amortization of intangibles

Amortization of intangibles declined 56% from 2001. The decline primarily reflected the implementation of SFAS 142, which now requires a periodic review of goodwill for impairment rather than the amortization of goodwill, as was the case last year. This was partly offset by the impact of the acquisition of the Providian Master Trust’s credit card relationship intangibles. In 2002, there were no impairments recognized on goodwill recorded the Consolidated balance sheet. For a discussion on the impact of SFAS 142 on the Firm’s amortization of intangibles expense and the expected level of expense for 2003, see Note 14 on page 89.

Other expense

Other expense increased 6% in 2002 compared with 2001 as a result of the following (for the table showing the components within Other expense, see Note 6 on page 79):

•		Professional services expense increased $164 million from 2001, primarily as a result of legal fees. Also contributing to the increase was the hiring of professionals who assisted in the collection of credit card accounts and fees paid by IB for sub-advisor services for a fund in Europe. These incremental expense items were partly offset by lower systems consultant costs.

•		Higher outside services expense of $106 million was driven by the costs of servicing the Providian credit card portfolio and processing higher mortgage servicing volume. During a transition period, from the acquisition in February until August 2002, Providian Financial Corp. provided servicing for the portfolio.

•		Higher marketing expense of $88 million principally stemmed from direct-marketing campaigns for credit cards.

These expense increases were partially offset by lower travel and entertainment expense of $42 million.

Surety settlement and litigation reserve

The $1.3 billion charge in 2002 reflected the settlement of the Enron-related surety litigation and the establishment of a litigation reserve. On January 2, 2003, the Firm announced it had settled its dispute with 11 insurance companies that had issued surety bonds that guaranteed obligations of Enron Corp. (“Enron”) under prepaid commodity forward contracts. The Firm settled for 60% of the principal amount of the bonds and received a cash payment of $502 million and $75 million of unsecured claims. In connection with this agreement — and one additional, ongoing lawsuit related to a prepaid contract backed by a letter of credit — the Firm took a pre-tax charge of $400 million (approximately $260 million after-tax). The Firm also established a $900 million reserve (approximately $600 million after-tax) related to litigation and regulatory matters involving Enron, as well as other material legal actions, proceedings and investigations in which it is involved.

Merger and restructuring costs

During 2002, the Firm incurred merger and restructuring costs of $1.2 billion, a 52% decline from 2001. Refer to the discussion of compensation expense on page 20 for a description of other severance costs incurred in 2002 and to Note 6 on page 78.

Provision for credit losses

The Provision for credit losses increased $1.1 billion or 36% from the prior year, primarily reflecting higher charge-offs of loans and lending-related commitments in the telecommunications and cable sectors. The consumer provision decreased 21% from last year reflecting growth in credit card securitizations, partially offset by the impact of the Providian acquisition. In 2002, the Firm increased the allowance for credit losses by $443 million (by making provisions in excess of net charge-offs), compared with an $850 million increase in the allowance last year. For further information on the Provision for credit losses, see page 56.

Income tax expense

JPMorgan Chase recognized income tax expense of $856 million in 2002, compared with $847 million in 2001. The effective tax rate was 34% in 2002, versus 33% last year. The increase in the effective tax rate was principally attributable to the level of income in certain state and local tax jurisdictions in 2002. For a further discussion of income taxes, see Note 22 on pages 93 and 94.


21		J.P. Morgan Chase & Co./2002 Annual Report

Management’s discussion and analysis

J.P. Morgan Chase & Co.

Reconciliation from reported results to operating basis

The Firm prepares its financial statements using U.S. generally accepted accounting principles (“GAAP”). The financial statements prepared in accordance with GAAP appear on pages 71–74 of this Annual Report. That presentation, which is referred to as “reported basis,” provides the reader with an understanding of the Firm’s results that can be consistently tracked from year to year and enables a comparison of the Firm’s performance with other companies’ GAAP financial statements.

In addition to analyzing the Firm’s results on a reported basis, management looks at results on an “operating basis” to assess each of its businesses and to measure overall Firm results against targeted goals. The definition of operating basis starts with the reported GAAP results and then excludes the impact of merger and restructuring costs, credit card securitizations, the amortization of goodwill and special items (which management defined during 2002 as significant nonrecurring gains or losses of $75 million or more). Both restructuring charges and special items are viewed by management as transactions that are not part of the Firm’s normal daily business operations or are unusual in nature and therefore are not indicative of trends.

The following summary table provides a reconciliation between the Firm’s reported and operating results:


		2002															2001

Year ended December 31,		Reported			Credit			Special						Operating			Reported			Credit			Special			Amortization						Operating
(in millions, except per share data)		results (a)			card (b)			items (c)			Reclasses			basis			results (a)			card (b)			items (c)			of goodwill (d)			Reclasses			basis

Consolidated income statement
Revenue:
	Investment banking fees	$	2,763		$	—		$	—		$	—		$	2,763		$	3,612		$	—		$	—		$	—		$	—		$	3,612
	Trading revenue (e)		2,594			—			—			1,880			4,474			4,918			—			—			—			1,361			6,279
	Fees and commissions		10,756			(698	)		—			—			10,058			9,481			(340	)		—			—			—			9,141
	Private equity — gains (losses)		(746	)		—			—			—			(746	)		(1,233	)		—			—			—			—			(1,233	)
	Securities gains		1,563			—			—			—			1,563			866			—			—			—			—			866
	Other revenue		1,158			(36	)		—			—			1,122			898			(17	)		—			—			—			881
	Net interest income (e)		11,526			2,173			—			(1,880	)		11,819			10,802			1,405			—			—			(1,361	)		10,846

Total revenue			29,614			1,439			—			—			31,053			29,344			1,048			—			—			—			30,392

Noninterest expense:
	Compensation expense (f)		10,983			—			—			(746	)		10,237			11,844			—			—			—			—			11,844
	Noncompensation expense(f)(g)		10,571			—			(1,398	)		(144	)		9,029			9,229			—			—			(585	)		—			8,644
	Merger and restructuring costs		1,210			—			(1,210	)		—			—			2,523			—			(2,523	)		—			—			—
	Severance and related costs(f)		—			—			—			890			890			—			—			—			—			—			—

Total noninterest expense			22,764			—			(2,608	)		—			20,156			23,596			—			(2,523	)		(585	)		—			20,488
Operating margin			6,850			1,439			2,608			—			10,897			5,748			1,048			2,523			585			—			9,904
Credit costs			4,331			1,439			—			—			5,770			3,182			1,048			—			—			—			4,230

Income before income tax expense and effect of accounting change			2,519			—			2,608			—			5,127			2,566			—			2,523			585			—			5,674
Income tax expense			856			—			887			—			1,743			847			—			833			192			—			1,872

Income before effect of accounting change			1,663			—			1,721			—			3,384			1,719			—			1,690			393			—			3,802
Net effect of change in accounting principle			—			—			—			—			—			(25	)		—			25			—			—			—

Net income		$	1,663		$	—		$	1,721		$	—		$	3,384		$	1,694		$	—		$	1,715		$	393		$	—		$	3,802

Earnings per share — diluted		$	0.80		$	—		$	0.86		$	—		$	1.66		$	0.80		$	—		$	0.86		$	0.19		$	—		$	1.85

(a)		Represents condensed results as reported in JPMorgan Chase’s financial statements.
(b)		Represents the impact of credit card securitizations. For securitized receivables, amounts that normally would be reported as net interest income and as provisions for credit losses are reported as noninterest revenue.
(c)		Includes merger and restructuring costs and special items. For a description of special items, see Glossary of terms on page 114.
(d)		Prior-period operating earnings for 2001 have been adjusted by adding back goodwill amortization to report results on a basis comparable with 2002. For further explanations, see page 23.
(e)		On an operating basis, JPMorgan Chase reclassifies trading-related net interest income from Net interest income to Trading revenue.
(f)		The Compensation and Noncompensation expense categories include severance and other related costs associated with expense containment programs implemented in 2002. For purposes of reviewing results on an operating basis, these costs have been reclassified to a separate line.
(g)		Includes Occupancy expense, Technology and communications expense, Amortization of intangibles, Other expense and Surety settlement and litigation reserve.


J.P. Morgan Chase & Co./2002 Annual Report		22

As previously mentioned, operating results exclude the impact of credit card securitizations. JPMorgan Chase periodically securitizes a portion of its credit card portfolio by selling a pool of credit card receivables to a trust, which issues securities to investors. When credit card receivables are securitized, the Firm ceases to accrue the related interest and credit costs; instead, the Firm receives fee revenue for continuing to service those receivables and additional revenue from any interest and fees on the receivables in excess of the interest paid to investors, net of credit losses and servicing fees. As a result, securitization does not change JPMorgan Chase’s reported or operating net income; however, it does affect the classification of items in the Consolidated statement of income.

The Firm also reports credit costs on a “managed” or “operating” basis. Credit costs on an operating basis are composed of the Provision for credit losses in the Consolidated statement of income (which includes a provision for credit card receivables on the Consolidated balance sheet) as well as the credit costs associated with securitized credit card loans. As the holder of the residual interest in the securitization trust, the Firm bears its share of the credit costs for securitized loans. In the Firm’s GAAP financial statements, credit costs associated with securitized credit card loans reduce the noninterest income remitted to the Firm from the trust. This income is reported in Credit card revenue in Fees and commissions over the life of the securitization.

Commencing January 1, 2002, the Firm adopted SFAS 142 and, accordingly, ceased amortizing goodwill. There was no impairment of goodwill upon adoption of SFAS 142. Prior-period operating earnings have been adjusted by adding back amortization of goodwill to report results on a basis comparable with 2002.

The following table provides a reconciliation of earnings per share (“EPS”) based on the Firm’s reported net income to EPS calculated on an operating basis.


Year ended December 31,						Over/(under)
(per share data)		2002		2001		2001

Net income		$	0.80	$	0.80		—	%
Amortization of goodwill (net of taxes)			—		0.19	NM
Special items (net of taxes):
	Merger and restructuring costs		0.40		0.85		(53	)
	Real estate charge		0.03		—	NM
	Surety settlement and litigation reserve		0.43		—	NM
Net effect of change in accounting principle			—		0.01	NM

Operating earnings		$	1.66	$	1.85		(10	)%

NM-Not meaningful.

For a five-year trend of the Firm’s results on an operating basis, see page 112. All years are calculated on a basis using the same definition for operating results.


23		J.P. Morgan Chase & Co./2002 Annual Report

Management’s discussion and analysis

J.P. Morgan Chase & Co.

Segment results

The wholesale businesses of JPMorgan Chase are known globally as “JPMorgan” and are comprised of the Investment Bank, Treasury & Securities Services, Investment Management & Private Banking and JPMorgan Partners. The retail and middle market businesses are known as “Chase” and make up Chase Financial Services.

JPMorgan Chase’s segment results reflect the manner in which financial information is currently evaluated by the Firm’s management. The Firm allocates equity to its business units utilizing a risk-adjusted methodology, which quantifies credit, market and operational risks within each business and, for JPMP, private equity risk. For a discussion of those risks, see the Risk management section on pages 45-65. The Firm allocates additional equity to its businesses incorporating an “asset capital tax” on managed assets and some off-balance sheet instruments. In addition, businesses are allocated equity equal to 100% of goodwill and 50% for certain other intangibles generated through acquisitions. The Firm estimates the portfolio effect on required economic capital based on correlations of risk across risk categories. This estimated diversification benefit is not allocated to the business segments.

The Firm uses the shareholder value added (“SVA”) framework to measure performance of its business segments. To derive SVA for its business segments, the Firm applies a 12% (after-tax) cost of equity to each segment, except JPMP; this business is charged a 15% (after-tax) cost of equity. The capital elements and resultant capital charges provide the businesses with the financial framework to evaluate the trade-off between the use of capital by each business unit versus its return to shareholders. Capital charges are an integral part of the SVA measurement for each business. Under the Firm’s economic capital model, economic capital is overallocated to

(JPMORGAN CHASE FLOW CHART)

Segment results

Operating basis


							Treasury &						Investment Management
	Investment Bank						Securities Services						& Private Banking

Year ended December 31,				Over/(under)						Over/(under)						Over/(under)
(in millions, except ratios)	2002			2001(b)			2002			2001(b)			2002			2001(b)

Operating revenue	$	12,399			(15	)%	$	4,046			2	%	$	2,868			(11	)%
Operating expense		7,978			(9	)		3,001			—			2,336			(9	)
Operating margin		4,421			(25	)		1,045			8			532			(19	)
Credit costs		2,392			108			1			(86	)		85			143
Operating earnings (losses)		1,365			(53	)		677			7			384			(20	)
Average common equity		18,323			(3	)		2,998			1			6,115			(3	)
Average managed assets		494,958			(3	)		18,018			(4	)		35,729			(3	)
Shareholder value added		(853	)	NM				313			15			(357	)		(26	)
ROCE		7	%	(800		)bp		23	%	200		bp		6	%	(200		)bp
Overhead ratio		64			400			74			(200	)		81			100

(a)		Includes support units and the effects remaining at the corporate level after the application of management accounting policies.
(b)		Prior period amounts have been adjusted to conform with current methodologies.

bp- Denotes basis points; 100 bp equals 1%.

NM- Not meaningful.


J.P. Morgan Chase & Co./2002 Annual Report		24

the business segments, as compared with the Firm’s total common stockholders’ equity. The revenue and SVA impact of the overallocation is reported in Support Units and Corporate. (See Glossary of terms on page 114 for a definition of SVA and page 39 for more details).

In allocating the allowance (and provision) for credit losses, each business is responsible for its credit costs, including actual net charge-offs and changes in the specific and expected components of the allowance. The residual component of the allowance, available for losses in any business segment, is maintained at the corporate level. Management views the residual component as necessary to address uncertainties at December 31, 2002, primarily in the commercial portfolio.

The segment results also reflect revenue- and expense-sharing agreements between certain lines of business. In 2002, agreements between Treasury Services and Middle Market were revised, and prior periods have been restated to conform to the current presentation. Revenues and expenses attributed to their shared activities are recognized in each line of business, and the double counting is eliminated at each of the segments (e.g., Treasury & Securities Services and Chase Financial Services). These arrangements promote cross-selling and management of shared client expenses. They also ensure that the contributions of both businesses are fully recognized.

Prior-period segment results have been adjusted to reflect alignment of management accounting policies or changes in organizational structure among businesses. Restatements of segment results may occur in the future.

See Note 33 for further information about JPMorgan Chase’s five business segments.



Contribution of businesses — Operating revenue (in millions)										Contribution of businesses — Operating earnings (losses) (in millions)
							%										%
	2001			2002			Change				2001			2002			Change






Investment Bank	$	14,671		$	12,399			(15	)%	Investment Bank	$	2,918		$	1,365			(53	)%




Treasury & Securities Services	$	3,978		$	4,046			2	%	Treasury & Securities Services	$	632		$	677			7	%




Investment Management & Private Banking	$	3,226		$	2,868			(11	)%	Investment Management & Private Banking	$	479		$	384			(20	)%




JPMorgan Partners	$	(1,470	)	$	(954	)		35	%	JPMorgan Partners	$	(1,116	)	$	(789	)		29	%




Chase Financial Services	$	10,951		$	13,541			24	%	Chase Financial Services	$	1,538		$	2,490			62	%

Segment results (continued)

Operating basis


							Chase
	JPMorgan Partners						Financial Services						JPMorgan Chase (a)

Year ended December 31,				Over/(under)						Over/(under)						Over/(under)
(in millions, except ratios)	2002			2001(b)			2002			2001(b)			2002			2001(b)

Operating revenue	$	(954	)		35	%	$	13,541			24	%	$	31,053			2	%
Operating expense		298			2			6,421			14			20,156			(2	)
Operating margin		(1,252	)		29			7,120			33			10,897			10
Credit costs		—			—			3,159			10			5,770			36
Operating earnings (losses)		(789	)		29			2,490			62			3,384			(11	)
Average common equity		5,454			(16	)		10,293			13			41,368			—
Average managed assets		10,210			(16	)		179,404			10			759,876			1
Shareholder value added		(1,614	)		23			1,242			189			(1,631	)		(31	)
ROCE	NM			NM				24	%	700		bp		8	%	(100		)bp
Overhead ratio	NM			NM				47			(400	)		65			(200	)


25		J.P. Morgan Chase & Co./2002 Annual Report

Management’s discussion and analysis

J.P. Morgan Chase & Co.

Investment Bank

JPMorgan Chase is one of the world’s leading investment banks, as evidenced by the breadth of its client relationships and product capabilities. At the center of the Investment Bank’s franchise are extensive relationships with corporations, financial institutions, governments and institutional investors worldwide. The Firm provides a full range of investment banking and commercial banking products and services, 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 in all major capital markets. The Firm also commits its own capital to proprietary investing and trading activities to capture market opportunities.

Selected financial data


Year ended December 31,
(in millions, except ratios								Over/(under)
and employees)		2002			2001			2001

Operating revenue		$	12,399		$	14,671			(15	)%
Operating expense:
	Compensation expense		3,952			5,286			(25	)
	Noncompensation expense		3,439			3,496			(2	)
	Severance and related costs		587			—		NM

	Total operating expense		7,978			8,782			(9	)
Operating margin			4,421			5,889			(25	)
Credit costs			2,392			1,148			108
Operating earnings		$	1,365		$	2,918			(53	)%

Average common equity		$	18,323		$	18,964			(3	)%
Average assets			494,958			510,282			(3	)
Shareholder value added			(853	)		615		NM
ROCE			7	%		15	%	(800		)bp
Overhead ratio			64			60			400
Overhead ratio (excluding severance and related costs)			60			60			—
Compensation as % of revenue (excluding severance and related costs)			32			36			(400	)
Full-time equivalent employees			14,837			17,619			(16	)%

bp- Denotes basis points; 100 bp equals 1%.

NM-Not meaningful.

Financial results overview

Performance at the Investment Bank (“IB”) is influenced by numerous factors, including global economic conditions and their impact on capital markets and IB’s clients. Changes in market share, risks and expenses can also impact financial performance. The year 2002 presented a challenging economic and credit environment for investment banking. In response, IB increased its focus on the management of credit and market risks, as well as the management of staffing and expense levels. While the outlook for 2003 remains uncertain, IB believes it is well positioned to improve results as economic conditions and the capital markets recover.

Reflecting the difficult market environment in 2002, IB’s operating margin declined 25% from last year. Operating revenue declined 15%, driven by a reduction in capital markets and lending revenue and in investment banking fees. This was partially offset by a 9% decline in operating expenses. Credit costs rose to $2.4 billion in 2002. The lower operating margin together with higher credit costs resulted in operating earnings of $1.4 billion, a decline of 53% from 2001.


Operating revenue: (in millions)			Operating earnings: (in millions, except ratios)
						ROCE

2000	$	15,692	2000	$	3,522		19	%
2001	$	14,671	2001	$	2,918		15	%
2002	$	12,399	2002	$	1,365		7	%

Operating revenue of $12.4 billion consisted of investment banking fees for advisory and underwriting services; capital markets revenue related to market-making, trading and investing, and corporate lending activities.

Investment banking fees were 25% lower than last year. Advisory revenues declined 40%, reflecting lower global announced M&A volumes. Underwriting and other fees declined 17%, reflecting lower levels of debt underwriting following record levels in 2001 and lower loan syndications. Equity underwriting revenues were down from last year, reflecting decreased market volumes, partially offset by increased market share.

The Firm maintained its No. 2 ranking in underwriting U.S. investment-grade bonds and its No. 1 ranking in global loan syndications. It also improved its ranking and market share in U.S. equity and equity-related underwriting. In addition, the Firm finished the year ranked No. 5 in global announced M&A.

IB’s Capital markets and lending activities are comprised of four primary areas:


J.P. Morgan Chase & Co./2002 Annual Report	26

Market shares and rankings (a)

2002

2001

December 31,

Market share

Ranking

Market share

Ranking

* Global syndicated loans

* U.S. investment-grade bonds

* Euro-denominated corporate international bonds

* Global equity & equity-related

* U.S. equity & equity-related (b)

* Global announced M&A

(a)		Derived from Thomson Financial Securities Data. Global announced M&A based on rank value; all others based on 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%.
(b)		U.S. equity and equity-related adjusted to reflect all equity issuances in the U.S. market for both U.S. and non-U.S. issuers.

Fixed income includes revenues from market-making activities and from portfolio management and proprietary risk-taking activities across the complete range of global fixed income markets (including government and corporate debt, foreign exchange, interest rate and commodities markets).

Treasury activities include managing the Firm’s overall interest rate exposure and investment securities activities. Assets, liabilities and capital are transfer-priced to Global Treasury to reduce the sensitivity of business segment results to changes in interest rates. Global Treasury’s activities complement, and offer a strategic balance and diversification benefit to, the Firm’s trading activities.

Credit portfolio revenues include net interest income, credit-related fees and loan sale activity for the Investment Bank’s commercial credit portfolio. Additionally, Credit portfolio revenues reflect 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 (see page 51 of Credit risk for a further discussion of the CVA). Credit portfolio revenues also include the results of single-name and portfolio hedging activity used to manage the credit exposures arising from the Firm’s lending and derivative activities. (See pages 50–53 of Credit risk for a further discussion on credit derivatives). Credit portfolio revenues also reflect any market gains or losses related to assets received as part of a loan restructuring.

Equities includes revenues from market-making activities, including portfolio management and proprietary risk-taking in cash instruments and derivatives, across the complete range of global equity markets.

IB evaluates its capital markets and lending activities by considering all revenues related to these activities. These revenues include trading, fees and commissions, securities gains and related net interest income and other revenues. In addition, these activities are managed on a total-return revenue basis. This represents total operating revenues plus the unrealized gains or losses on third-party or internally transfer-priced assets and liabilities in fixed income and treasury activities, which are not accounted for on a mark-to-market basis through earnings.


						Over/(under)
Year ended December 31,		2002		2001		2001

Business revenue:
	*Investment banking fees*
	Advisory	$	743	$	1,248		(40	)%
	Underwriting and other fees		1,953		2,343		(17	)

	Total	$	2,696	$	3,591		(25	)%

	*Capital markets and lending*
	Fixed income	$	5,417	$	6,215		(13	)%
	Treasury		1,839		1,521		21
	Credit portfolio		1,443		1,092		32
	Equities		1,004		2,252		(55	)

	Total	$	9,703	$	11,080		(12	)%

Operating revenue		$	12,399	$	14,671		(15	)%

	*Capital markets and lending total return revenue*
	Fixed income	$	5,394	$	6,301		(14	)%
	Treasury		1,514		950		59
	Credit portfolio		1,443		1,092		32
	Equities		1,004		2,252		(55	)

	Total	$	9,355	$	10,595		(12	)%

Capital markets and lending total-return revenues were $9.4 billion, down 12% from 2001. Fixed income total-return revenues of $5.4 billion decreased 14% from 2001, driven by lower portfolio management results related to market-making activities and lower results within proprietary risk-taking activities, which offset higher client trading activities. Offsetting the total-return revenue decline was the performance of Global Treasury, which produced strong returns in fixed income markets. Global Treasury’s total-return revenues of $1.5 billion were up 59% from last year. Credit portfolio revenues were $1.4 billion, up 32% from 2001; losses related to exposure to Enron and Argentina depressed 2001 results. The 55% decline in Equities from 2001 to $1.0 billion was attributable to lower portfolio management results in equity derivatives and lower client revenues. On an operating revenue basis, Capital Markets revenues of $9.7 billion in 2002 were 12% below 2001.

2002 Selected industry awards

•		Derivatives house of the year — Risk Magazine

•		Interest rate derivatives house of the year — Risk Magazine

•		Credit derivatives house of the year — Risk Magazine

•		Structured finance house of the year — The Banker

•		World’s best debt house — Euromoney


	27	J.P. Morgan Chase & Co./2002 Annual Report

Management’s discussion and analysis

J.P. Morgan Chase & Co.

(CHARTS OF 2002 REV. DIVERS.)

Dimensions of 2002 revenue diversification — By business revenues:






Equity capital markets	8	%




Advisory	6	%




Fixed income capital markets	44	%




Credit portfolio	11	%




Treasury	15	%




Underwriting fees	16	%

Dimensions of 2002 revenue diversification — By client segment:






Media and telecommunications	15	%




General industries	35	%




Financial institutions	50	%

Dimensions of 2002 revenue diversification — By geographic region:






Asia/Pacific	10	%




Europe/Middle East and Africa	27	%




North America	59	%




Latin America	4	%

Operating expense declined 9% from 2001 and included $587 million of severance and related costs associated with expense-management initiatives. Excluding these costs, expenses would have been down 16%, with compensation costs down 25% and noncompensation costs down 2% from 2001. The decline in compensation costs reflected lower incentive compensation, as well as the impact of lower staffing levels. Lower noncompensation costs reflected declines in travel and entertainment costs and lower technology and communications costs, partially offset by higher legal costs. Including the severance and related costs, the overhead ratio for 2002 was 64%, compared with 60% in 2001. Excluding the severance and related costs, the overhead ratio was 60% in 2002.

In October 2002, IB completed a review of all major businesses. The analysis underscored the value of the Firm’s integrated business model, the breadth of its product offerings and the strength of the client franchise. To improve financial performance under current market conditions, IB announced a series of initiatives intended to improve efficiency as well as enable selective strategic investment. These initiatives, which began in the fourth quarter of 2002, are expected to generate approximately $700 million of savings and result in a reduction in staffing levels of more than 2,000, as well as a reduction in consultants employed by the Firm. Severance and other costs related to these initiatives are estimated at approximately $450 million, with $293 million recorded in the fourth quarter of 2002 and the remaining costs to be recognized in 2003. Another $294 million of severance and related costs recorded in 2002 related to initiatives announced earlier in the year. In a revenue environment similar to 2002, and with credit costs substantially lower than in 2002, these initiatives would enable the Investment Bank to target a return on equity of 12% in 2003.

Credit costs increased 108%, reflecting significantly higher charge-offs, primarily in the telecommunications and cable sectors, and provisions in excess of charge-offs. For a further discussion, see Credit Risk Management on pages 45–57.


J.P. Morgan Chase & Co./2002 Annual Report	28

Treasury & Securities Services

Treasury & Securities Services, a global leader in transaction processing and information services to wholesale clients, is composed of three businesses. Institutional Trust Services provides a range of fiduciary services to debt and equity issuers and broker-dealers, from traditional trustee and paying-agent functions to global securities clearance. Investor Services provides securities custody and related functions, such as securities lending, investment analytics and reporting, to mutual funds, investment managers, pension funds, insurance companies and banks worldwide. Treasury Services provides treasury and cash management, as well as payment, liquidity management and trade finance services, to a diversified global client base of corporations, financial institutions and governments.


Selected financial data

Year ended December 31,
(in millions, except ratios							Over/(under)
and employees)	2002			2001			2001

Operating revenue	$	4,046		$	3,978			2	%
Operating expense		3,001			3,006			—

Operating margin		1,045			972			8
Credit costs		1			7			(86	)
Operating earnings	$	677		$	632			7	%

Average common equity	$	2,998		$	2,958			1	%
Average assets		18,018			18,794			(4	)
Shareholder value added		313			272			15
ROCE		23	%		21	%	200		bp
Overhead ratio		74			76			(200	)
Assets under custody (in billions)	$	6,336		$	6,264			1	%
Full-time equivalent employees		14,416			14,367			—

bp- Denotes basis points; 100 bp equals 1%.

Financial results overview

Treasury & Securities Services (“T&SS”) operating earnings increased 7% over 2001 and delivered a return on equity of 23%. Expense discipline mitigated a weak revenue environment. Revenue growth of 2% was limited by weakness in the economy and financial markets.

Operating revenue increase of 2% was driven by growth at Institutional Trust Services (“ITS”) of 14%. Growth came mainly from new business volumes in global securities clearance and securitization services. Acquisitions also provided growth, most notably Systems & Services Technologies, Inc., a third-party and backup servicer specializing in subprime auto receivables, which generated $40 million of new revenue in 2002. Revenue at Treasury Services rose 5% on higher revenues associated with middle market customers, increased volumes, new product initiatives and higher balance deficiency fees. Revenue at Investor Services contracted 9% as the value of assets held in custody and, consequently, fees declined. Foreign exchange revenue dropped, along with securities lending activity due to reduced market activity. Also contributing to the decline were higher deposit balances in 2001 following the events of September 11, as clients looked to depository institutions to hold cash funds. Across all business units, low interest rates have reduced earnings from the value of deposits linked to transaction processing. T&SS results for 2002 included a pre-tax gain of $50 million on the sale of the Firm’s interest in Centrale de Livraison de Valeurs Mobilieres (“CEDEL”), an overseas securities clearing firm.


Operating revenue: (in millions)			Operating earnings: (in millions, except ratios)
							ROCE

2000	$	3,930		2000		$	671		23	%
2001	$	3,978		2001		$	632		21	%
2002	$	4,046	2002		$	677		23	%


	29	J.P. Morgan Chase & Co./2002 Annual Report

Management’s discussion and analysis

J.P. Morgan Chase & Co.

(DIM. OF 2002 REV. DIVERS. PIE CHARTS)

Dimensions of 2002 revenue diversification — By business revenues:






Institutional Trust Services	22	%




Investor Services	38	%




Other	1	%




Treasury Services	39	%

Dimensions of 2002 revenue diversification — By client segment (a):






Non-bank financial institutions	48	%




Banks	12	%




Large corporates	24	%




Middle market	11	%




Public sector/Governments	5	%


(a)	Represents relationships as a percentage of revenues

Dimensions of 2002 revenue diversification — By geographic region:






Europe, Middle East & Africa	25	%




Asia	8	%




The Americas (b)	67	%


(b)	Includes North America, Latin America and the Caribbean

Operating expense was virtually flat to 2001, despite higher expenses related to acquisitions. During 2002, T&SS achieved expense reductions through productivity and quality initiatives, including Six Sigma and selected staff reductions. In addition, Investor Services restructured its expense base in response to the weak revenue environment. Despite low revenue growth, the overhead ratio for T&SS was 74%, compared with 76% in 2001.

League Table #1 Rankings

•		U.S. dollar clearing and commercial payments

•		U.S. corporate debt trusteeship

•		Securities lending

•		CHIPS, Fedwire, ACH origination

•		U.S. commercial paper issuing and paying agent

•		American depositary receipts

•		U.S. provider of non-indigenous Euro clearing services

(TREASURY)


J.P. Morgan Chase & Co./2002 Annual Report		30

Investment Management & Private Banking

JPMorgan Fleming Asset Management provides investment management services to private- and public-sector institutional investors, high net worth individuals and retail customers across asset classes and global markets. JPMorgan Private Bank provides personalized advice and solutions to wealthy individuals and families. Assets under supervision (“AUS”) totaled $636 billion.

Selected financial data


Year ended December 31,
(in millions, except ratios							Over/(under)
and employees)	2002			2001			2001

Operating revenue	$	2,868		$	3,226			(11	)%
Operating expense		2,336			2,570			(9	)
Credit costs		85			35			143

Pre-tax margin		447			621			(28	)
Operating earnings	$	384		$	479			(20	)%

Average common equity	$	6,115		$	6,275			(3	)%
Average assets		35,729			36,896			(3	)
Shareholder value added		(357	)		(284	)		(26	)
ROCE		6	%		8	%	(200		)bp
Tangible ROCE		20			23			(300	)
Overhead ratio		81			80			100
Pre-tax margin ratio(a)		16			19			(300	)
Full-time equivalent employees		7,793			8,162			(5	)%

(a)

Measures the percentage of operating earnings before taxes to total operating revenue.

bp- Denotes basis points; 100 bp equals 1%.

Financial results overview

Investment Management & Private Banking (“IMPB”) operating earnings are influenced by numerous factors, including global economic conditions, equity and fixed income asset valuations, investor activity levels and investment performance. Global economic conditions remained weak in 2002. In addition, poor investor sentiment driven by the uncertain economic outlook and concerns surrounding corporate governance weighed heavily on the financial markets. These factors led to significantly depressed equity markets (the S&P 500 index declined 23% for the year 2002) and reduced levels of investor activity across IMPB’s private banking and retail client bases. In response to these challenges, IMPB undertook restructuring and productivity programs and reduced incentives, without impairing its core capabilities. IMPB is well positioned to enhance earnings when economic conditions improve.

Operating revenue of $2.9 billion was 11% lower than last year. Investment Management operating revenues of $1.5 billion decreased 11% from the prior year, reflecting the impact of equity market depreciation and institutional outflows across all asset classes. During the third quarter of 2002, Brown & Co., the Firm’s specialty online brokerage unit, was transferred from CFS to IMPB as part of the Firm’s strategy to grow its retail asset management business. (All prior periods have been restated to reflect the reorganization.)

Private Banking operating revenues of $1.4 billion decreased 12% from 2001. Net interest income decreased 15%, reflecting the Private Bank’s smaller loan portfolio and lower deposit balances, as well as narrower interest rate spreads. Fees from assets under management declined as a result of equity market depreciation and client outflows in the early part of 2002. Brokerage commissions declined as Private Banking clients executed fewer transactions.


Operating revenue: (in millions)			Operating earnings: (in millions, except ratios)
						ROCE

2000	$	4,024	2000	$	711		11	%
2001	$	3,226	2001	$	479		8	%
2002	$	2,868	2002	$	384		6	%

Leadership positions:

•		No. 1 private bank in the United States and No. 3 globally based on AUS

•		Awarded Global Finance’s “Best Asset Management Bank’’

•		Awarded Worth Magazine Editor’s choice as “Best U.S. private bank’’
y
•		No. 5 institutional asset management worldwide —Pensions & Investments

•		Relationships with nearly 40% of the individuals listed in the Forbes billionaires’ global list

•		No. 4 provider of global money market funds —iMoneyNet


31		J.P. Morgan Chase & Co./2002 Annual Report

Management’s discussion and analysis

J.P. Morgan Chase & Co.

(DIVERS. OF IMPB'S PIE CHARTS)


Diversification of IMPB’s $636 billion of assets under supervision at December 31, 2002 — By client segment:

($ in billions)

Institutional			$341/54%




Private Banking			$232/36%




Retail			$63/10%

Diversification of IMPB’s $636 billion of assets under supervision at December 31, 2002 — By geographic region:

($ in billions)

Americas			$447/70%




Europe/Asia			$189/30%

Diversification of IMPB’s $636 billion of assets under supervision at December 31, 2002 — By product class:

($ in billions)

Custody, restricted stock, brokerage, deposits			$120/19%




AUM — Fixed income and cash			$297/47%




AUM — Equities and other			$219/34%

Operating expense decreased 9%, reflecting the full-year benefit of merger and other programs initiated in 2002, as well as reductions in performance-related incentives due to lower earnings. Severance and related costs associated with expense initiatives announced in 2002 were $47 million. There were no such costs in 2001.

The increase in credit costs of $50 million was concentrated in a small number of U.S. private clients.

Assets under supervision at December 31, 2002, were $636 billion, a decline of 16% from the prior year-end. AUS represent assets under management (“AUM”), as well as custody, restricted stock, deposit and brokerage accounts. Assets under management represent assets actively managed by IMPB on behalf of private banking, institutional and retail clients. AUM at December 31, 2002, declined 15% from the prior year-end primarily due to equity market depreciation and institutional outflows, offset by an increase in retail mutual fund assets. Custody, restricted stock, deposit and brokerage accounts, which are lower-fee products than AUM, declined 20%. The diversification of AUS across client segments, geographic regions and product classes helps to mitigate the impact of market volatility on revenues. The Firm has a 45% interest in American Century Companies, Inc., whose AUM totaled $72 billion and $89 billion at December 31, 2002 and 2001, respectively.

Assets under supervision(a)


						Over/(under)
At December 31, (in billions)		2002		2001		2001

Client segment:
Private banking		$	129	$	142		(9	)%
Institutional			324		405		(20	)
Retail			63		59		7

	Assets under management		516		606		(15	)
Custody/restricted stock/brokerage/deposits			120		150		(20	)

	Assets under supervision	$	636	$	756		(16	)%

Geographic region:
Americas		$	362	$	442		(18	)%
Europe and Asia			154		164		(6	)

	Assets under management		516		606		(15	)
Custody/restricted stock/brokerage/deposits			120		150		(20	)

	Assets under supervision	$	636	$	756		(16	)%

Product class:
Fixed income and cash		$	297	$	329		(10	)%
Equities and other			219		277		(21	)

	Assets under management		516		606		(15	)
Custody/restricted stock/brokerage/deposits			120		150		(20	)

	Assets under supervision	$	636	$	756		(16	)%

(a)

Excludes AUM of American Century Companies, Inc.


J.P. Morgan Chase & Co./2002 Annual Report		32

JPMorgan Partners

JPMorgan Partners, the global private equity organization of JPMorgan Chase, provides equity and mezzanine capital financing to private companies. It is a diversified investor, investing in buyouts, growth equity and venture opportunities across a variety of industry sectors, with the objective of creating long-term value for the Firm and third-party investors.

Selected financial data


Year ended December 31,
(in millions, except ratios							Over/(under)
and employees)	2002			2001			2001

Operating revenue	$	(954	)	$	(1,470	)		35	%
Operating expense		298			293			2

Operating margin		(1,252	)		(1,763	)		29
Operating losses	$	(789	)	$	(1,116	)		29	%

Average common equity	$	5,454		$	6,475			(16	)%
Average assets		10,210			12,143			(16	)
Shareholder value added		(1,614	)		(2,097	)		23
Full-time equivalent employees		361			320			13

Financial results overview

JPMorgan Partners (“JPMP”) faced a challenging year in 2002, resulting in negative operating revenue of $954 million and operating losses of $789 million. Opportunities to realize value through sales or initial public offerings (“IPOs”) of investments were limited, because of constrained M&A and IPO markets. In addition, JPMP recorded negative valuation adjustments in investments concentrated in telecommunications and technology, industries that continue to face poor operating conditions and limited financing opportunities.

Private equity losses totaled $733 million in 2002, consisting of losses of $647 million in direct investments and $150 million in private funds, partially offset by $64 million in gains from portfolio hedging activities.

Realized cash gains of $563 million declined 45% from the previous year due to limited exit opportunities. Realized cash gains were recognized across all industries but were primarily harvested from investments in the industrial and consumer sectors.


Private equity gains (losses)

Year ended December 31,									Over/(under)
(in millions)			2002			2001			2001

Realized gains (losses):
	Cash gains		$	563		$	1,030			(45	)%
	Write-offs			(654	)		(355	)		(84	)

		Subtotal		(91	)		675		NM

Unrealized gains (losses):
	Public mark-to-market (a)			(210	)		(520	)		60
	Private write-downs			(432	)		(1,338	)		68

		Subtotal		(642	)		(1,858	)		65

Private equity gains (losses) (b)			$	(733	)	$	(1,183	)		38	%

(a)		Includes mark-to-market and reversals of mark-to-market due to public securities sales.
(b)		Includes the impact of portfolio hedging activities.
NM-		Not meaningful.

JPMP’s realized gains were more than offset by net write-offs (realized losses) and write-downs (unrealized losses) of $1.1 billion. These write-downs and write-offs included $621 million from the technology, media and telecommunications (“TMT”) sector, which continues to suffer from an industry-wide contraction. JPMP also recorded unrealized losses of $210 million from mark-to-market losses on its public portfolio, largely in TMT.

JPMP’s operating revenue also includes third-party management fees and net revenue allocated to or from other JPMorgan Chase business segments.

Investment pace, portfolio diversification and capital under management

In 2002, increased emphasis was placed on leveraged buyouts and growth equity opportunities. JPMP’s direct investment pace for the Firm’s account in 2002 was essentially flat with 2001 at $950 million, with investment activity primarily related to buyouts. More than 60% of the total direct investment activity was in the industrial growth and life sciences/healthcare industry sectors.

JPMP investment portfolio


December 31, 2002 (in millions)	Carrying value		Cost

Public securities (101 companies)(a)	$	520	$	663
Private direct securities (945 companies)		5,865		7,316
Private fund investments (324 funds)(b)		1,843		2,333

Total investment portfolio	$	8,228	$	10,312

(a)		Quoted public value was $761 million at December 31, 2002.
(b)		Unfunded commitments to private equity funds were $2.0 billion at December 31, 2002.

33 J.P. Morgan Chase & Co./2002 Annual Report

Management’s discussion and analysis

J.P. Morgan Chase & Co.

During 2002, several factors contributed to improved diversification. At December 31, 2002, the portfolio was $8.2 billion, a reduction of $1.0 billion from year-end 2001, primarily due to a decline in TMT investments. At the end of 2002, TMT investments were $1.5 billion, or 18%, of the total portfolio, compared with $2.5 billion, or 27%, of the portfolio at year-end 2001. Industrial growth investments have increased to 27% of the portfolio as of December 31, 2002, from 22% at the end of 2001, reflecting increased investment in industrial buyout activity during 2002.

At December 31, 2002, JPMP’s public securities portfolio was $520 million, a 48% decline from 2001 and less than one-sixth of the $3.4 billion public securities balance at December 31, 1999. The 2002 decline resulted from lower market valuations and from accelerated sales of public securities that were not subject to restrictions. These sales of public securities reduced the earnings volatility created by this portfolio segment. Although 2002 reflected a reduction in the amount of publicly-held securities in JPMP’s portfolio, this portion of the portfolio could increase significantly, both in dollar amount and as a proportion of the total portfolio, due to changes in equity market prices and IPO opportunities available to portfolio companies.

Currently, there are limited sales and financing activity in private equity markets, constraining realization opportunities.

The Firm continues to regard JPMP as a strategic business that will create value over the long term. JPMP is seeking to reduce or exit selected businesses and investments that are not central to its operations with the goal that, over time, JPMP’s private equity portfolio will be reduced from approximately 20% of the Firm’s common stockholders’ equity as of December 31, 2002, to approximately 10%.

(JPMP'S DIVERS. PRIV.)

JPMP’s diversified private equity portfolio by industry group

% of carrying value as of December 31, 2002 and 2001
Amounts above the bars represent the carrying values of the investments.


(in billions)	2001		2002

Telecommunications, media & technology	$	2.5	$	1.5




Life sciences/Healthcare infrastructure	$	0.7	$	0.7




Industrial growth	$	2.0	$	2.2




Consumer retail & services	$	1.1	$	1.0




Real estate	$	0.4	$	0.4




Financial services	$	0.6	$	0.6




Funds	$	1.9	$	1.8

J.P. Morgan Chase & Co./2002 Annual Report

Chase Financial Services

Chase Financial Services is a major provider of banking, investment and financing products and services to consumers and small and middle market businesses throughout the United States. The majority of its revenues and earnings are produced by its national consumer credit businesses, Chase Home Finance (“CHF”), Chase Cardmember Services (“CCS”) and Chase Auto Finance (“CAF”). It also serves as a full-service bank for consumers and small- and medium-sized businesses through Chase Regional Banking (“CRB”) and Chase Middle Market (“CMM”).

Selected financial data


Year ended December 31,
(in millions, except ratios							Over/(under)
and employees)	2002			2001			2001

Operating revenue	$	13,541		$	10,951			24	%
Operating expense		6,421			5,617			14

Operating margin		7,120			5,334			33
Credit costs		3,159			2,873			10
Operating earnings	$	2,490		$	1,538			62	%

Average common equity	$	10,293		$	9,118			13	%
Average managed assets		179,404			162,753			10
Shareholder value added		1,242			430			189
ROCE		24	%		17	%	700		bp
Overhead ratio		47			51			(400	)
Full-time equivalent employees		43,607			41,195			6	%

bp- Denotes basis points; 100 bp equals 1%.

Financial results overview

Chase Financial Services (“CFS”) operating earnings increased 62% to a record $2.5 billion in 2002. Shareholder value added almost tripled to $1.2 billion, and return on common equity increased to 24% from 17% last year. Revenue growth of 24% reflected high business volumes across all consumer credit businesses and significant gains in Home Finance on the hedging of MSRs, partially offset by the negative impact of lower interest rates on deposits. Expenses increased 14% as a result of higher business volumes, partially offset by Six Sigma and other productivity efforts. The overhead ratio improved in 2002 to 47%, down from 51% in 2001. Credit costs increased, primarily due to higher average loans.

The Firm anticipates that CFS operating revenue and earnings will be lower in 2003 due to reduced MSR hedging gains and the impact of declining interest rates on its deposit businesses.

Operating revenue exceeded $13.5 billion in 2002, an increase of 24% from 2001. The national consumer credit businesses drove the revenue increase. Home Finance revenues increased 73% over the prior year, driven by strong mortgage originations and gains on the hedging of MSRs. Credit card revenues increased 34% due to the Providian acquisition, lower funding costs and higher purchase volume. Auto Finance revenues grew 26%, driven by originations of over $25 billion and lower funding costs. Middle Market revenues increased 4%, driven by growth in average deposit volume and higher fees for deposit services; the low-interest rate environment reduced the value of customers’ deposit balances and, consequently, increased deposit fees. Regional Banking revenues declined 9% on lower deposit spreads resulting from lower interest rates, partially offset by higher deposit volume.

Operating expense rose 14% to $6.4 billion. The increase reflects the acquisition of the Providian Master Trust, growth in consumer credit business volumes, higher incentive costs on better business results and higher credit card marketing expenditures. Partially offsetting these increases were almost $250 million in expense savings achieved through Six Sigma and other productivity efforts. The overhead ratio improved to 47% from 51% a year ago, as a result of both revenue increases and expense initiatives.

Credit costs, on a managed basis, increased 10%, driven by a 23% increase in credit card receivables, including the Providian portfolio. Credit quality of the card portfolio remained relatively stable, the result of proactive credit risk management and enhanced collections initiatives. CFS increased its allowance for credit losses in 2002 by $233 million, primarily due to the Providian acquisition. Higher securitizations, however, mitigated the increase in the allowance. For a further discussion of the consumer credit portfolio, see pages 54-55.


Operating revenue: (in millions)			Operating earnings: (in millions, except ratios)
							ROCE

2000	$	10,059		2000		$	1,638		19	%
2001	$	10,951		2001		$	1,538		17	%
2002	$	13,541	2002		$	2,490		24	%


	35	J.P. Morgan Chase & Co./2002 Annual Report

Management’s discussion and analysis

J.P. Morgan Chase & Co.

Chase Financial Services’ businesses


	2002									Over/(under) 2001

Year ended December 31,	Operating			Operating			Operating			Operating			Operating			Operating
(in millions, except ratios)	revenue			expenses			earnings			revenue			expenses			earnings

Home Finance	$	2,919		$	1,270		$	948			73	%		28	%		136	%
Cardmember Services		5,992			2,121			716			34			33			44
Auto Finance		696			236			180			26			17			41
Regional Banking		2,795			2,114			399			(9	)		(2	)		(15	)
Middle Market		1,493			818			359			4			1			22
Other consumer services (a)		(354	)		(138	)		(112	)		(36	)		—			56

Total	$	13,541		$	6,421		$	2,490			24	%		14	%		62	%

(a)

Includes the elimination of revenues and expenses related to the shared activities with Treasury Services, discontinued operations, support services and, in 2001, unallocated credit costs.

Chase Home Finance

CHF is the fourth-largest mortgage originator and the fourth-largest mortgage servicer in the United States, with more than 4 million customers. In 2002, CHF capitalized on a record year for the U.S. mortgage industry as historically low interest rates contributed to higher production volumes and favorable margins. CHF experienced its own record year, with total revenues and operating earnings increasing 73% and 136%, respectively, demonstrating CHF’s strength in both origination and servicing.

During 2002, CHF successfully shifted its origination growth into higher-margin business sectors. Loan originations in these higher-margin sectors (i.e., retail, wholesale, telephone-based and e-commerce) contributed to a record $113 billion in origination volume, an increase of 30% over 2001. As part of this increase in origination volume during 2002, home equity, a strategic growth area, rose 52% to $14 billion. CHF’s correspondent-negotiated business, a lower-margin sector, was down 56% to $43 billion, due to pricing and market conditions. Low interest rates also contributed to the increase in revenue through improved net interest margins. In 2003, CHF will continue its initiatives to retain customers considered likely to refinance.

In mortgage servicing, lower interest rates led to high prepayment levels, which resulted in the accelerated amortization and impairment of MSRs. In 2002, CHF partnered with the Firm’s Global Treasury Group to manage the interest rate sensitivity of MSRs. Global Treasury managed the risk exposure of the MSRs through a series of derivatives (e.g., a combination of swaps, swaptions and floors) and AFS securities that increased in value when interest rates declined. During 2002, MSR valuation adjustments of $4.1 billion were more than offset by $4.7 billion in gains on derivatives, realized gains from sales of AFS securities and net interest earned on AFS securities. The net positive result of $582 million was an increase of $838 million over 2001, driven by wider mortgage-swap spreads and a falling interest rate environment. Management anticipates an eventual decrease in this revenue category, as mortgage-swap spreads and interest rates revert to normal levels. The carrying value of MSRs also declined $1.4 billion as a result of periodic amortization, $244 million more than in 2001. For a further discussion of MSR activities, see Note 12 on pages 87–88.

Operating expense increased 28% on the growth in origination volume and a very high level of loan servicing activity, partially offset by gains in productivity and benefits realized from Six Sigma initiatives. The overhead ratio declined to 44% from 59% in 2001, a result of strong revenue growth. Net charge-offs remained low, reflecting the continued strong credit quality of CHF’s loan portfolio.

Business-related metrics


As of or for the year ended December 31,							Over/(under)
(in billions, except ratios)	2002			2001			2001

Originations:
Retail, wholesale and correspondent	$	113		$	87			30	%
Correspondent negotiated transactions		43			97			(56	)
Loans serviced		426			430			(1	)
End-of-period outstandings		63.6			59.0			8
Total average loans owned		56.2			55.7			1
Number of customers (in millions)		4			4			—
MSR carrying value		3.2			6.6			(52	)
Net charge-off ratio		0.25	%		0.18	%	7		bp
Overhead ratio		44			59			(1,500	)

bp- Denotes basis points; 100 bp equals 1%.

J.P. Morgan Chase & Co./2002 Annual Report

Chase Cardmember Services

CCS is the fourth-largest U.S. credit card issuer, with more than $51 billion in managed receivables. Operating earnings for 2002 were a record $716 million, 44% greater than 2001. The primary drivers were the acquisition of the Providian portfolio and overall higher revenue. These results were achieved in a highly competitive market environment and a weak U.S. economy. Industry challenges included competitive pricing, increased competition for new accounts, depressed response rates to credit card solicitations as costs to acquire new accounts increased, and declining acceptances to balance consolidation offers.

Total operating revenue increased 34%, reflecting receivables growth, lower funding costs, higher late fees, an increase in interchange revenue due to higher purchase volumes and successful sales of fee-based products. Excluding the Providian portfolio, operating revenues increased 12%. Operating expenses increased 33%; excluding Providian, operating expenses increased 14%, driven by higher volumes and an increase in marketing expenditures, which enabled CCS to maintain a consistent level of new cardmember acquisitions amid a competitive market environment. Total accounts increased 22%, reflecting the addition of 3.7 million new accounts, as well as accounts related to the Providian acquisition. Total volume (purchases, cash advances and balance transfers) increased 16% to a record $84 billion. Managed credit card-related receivables increased 23% to $51.1 billion.


Business-related metrics
As of or for the year ended December 31,							Over/(under)
(in billions, except ratios)	2002			2001			2001

End-of-period outstandings	$	51.1		$	41.6			23	%
Average outstandings		49.1			38.5			28
Total purchases & cash advances (a)		84.0			72.2			16
Total accounts (in millions)		29.2			23.9			22
Net charge-off ratio		5.89	%		5.49	%	40		bp
30+ day delinquency rate		4.67			4.77			(10	)
Overhead ratio		35			36			(100	)

Note: The above metrics include other consumer loans.


(a) Sum of total customer purchases, cash advances and balance transfers.
bp- Denotes basis points; 100 bp equals 1%.

The managed credit card-related net charge-off ratio was 5.89%, an increase of 40 basis points from 2001. This increase partly reflects the inclusion of the Providian portfolio. Excluding the Providian portfolio, this ratio was 5.66%, an increase of 17 basis points from 2001. This increase reflected higher contractual losses (nonbankruptcy-related), partially offset by receivable growth. Including Providian, the total managed 30+ day delinquency rate improved to 4.67% at December 31, 2002, from 4.77% a year ago.

Chase Auto Finance

CAF is the largest U.S. bank originator of auto loans and leases, with more than 2.5 million accounts. In 2002, CAF had a record number of auto loan and lease originations, growing 28% over 2001 to $25.4 billion. Loan and lease receivables of $36.4 billion were 28% higher than the prior year. Operating earnings grew 41% to $180 million. These results reflected higher revenue on increases in average loan and lease receivables and lower funding costs, offset by higher operating expenses and higher credit costs driven by loan volumes.

In 2002, CAF’s operating revenues grew 26% to $696 million. Its market share among auto finance companies improved from 4.1% in 2001 to 5.7% in 2002, the result of strong organic growth and an origination strategy that allies the business with manufacturers and dealers. CAF relationships with several major car manufacturers contributed to 2002 growth, as did CAF’s dealer relationships, which increased from approximately 12,200 dealers in 2001 to approximately 12,700 dealers in 2002. Operating expenses increased by 17%, reflecting volume growth.

Business-related metrics (a)


As of or for the year ended December 31,							Over/(under)
(in billions, except ratios)	2002			2001			2001

Loan and lease receivables	$	36.4		$	28.4			28	%
Average loan and lease receivables		30.6			24.7			24
Origination volume		25.4			19.9			28
Market share		5.7	%		4.1	%	160		bp
Net charge-off ratio		0.53			0.55			(2	)
Overhead ratio		35			37			(200	)


(a) Excludes amounts related to Chase Education Finance.
bp- Denotes basis points; 100 bp equals 1%.

The resulting overhead ratio improved to 35% from 37%. The net charge-off ratio was 0.53% in 2002, down from 0.55% in 2001.

CAF is also comprised of Chase Education Finance, a top provider of government-guaranteed and private loans for higher education. Loans are provided through a joint venture with Sallie Mae, a government-sponsored enterprise and the leader in funding and servicing education loans. Chase Education Finance’s origination volume totaled $2.6 billion, an increase of 12% from last year.


	37		J.P. Morgan Chase & Co./2002 Annual Report

Management’s discussion and analysis

J.P. Morgan Chase & Co.

Chase Regional Banking

CRB provides payment, liquidity, investment, insurance and credit products and services to three primary customer segments: small businesses, affluent consumers and mass-market consumers. Within these segments, CRB serves 324,000 small businesses and 2.9 million consumers and is the No. 1 bank, ranked by deposits, in the New York tri-state area and is a leading bank in Texas.

In 2002, CRB divested two nonstrategic businesses — the National Deposit business was sold to E*Trade in February, and the Virgin Islands branches were sold to FirstBank Puerto Rico in October. In addition, Brown & Co., the specialty online brokerage unit, was transferred to IMPB. Prior-period amounts have been adjusted for the Brown & Co. transfer.

CRB had operating earnings of $399 million in 2002, down 15% from 2001. The decrease was attributable to 9% lower revenue, predominantly driven by lower interest rates, which compressed spreads on deposits. Customer deposit balances grew 6% (10% excluding divestitures) to $71 billion at December 31, 2002.


Business-related metrics

As of or for the year ended December 31,							Over/(under)
(in billions, except ratios)	2002			2001			2001

Total average deposits (in billions)	$	70		$	66			6	%
Total average assets under management (a) (in billions)		104			103			1
Number of branches		528			531			(1	)
Number of ATMs		1,876			1,907			(2	)
Number of online customers (in thousands)		1,185			937			26
Overhead ratio		76	%		70	%	600bp


(a)		Assets under management includes deposits.

bp- Denotes basis points; 100 bp equals 1%.

Operating expenses were down $38 million, or 2%, from 2001, principally driven by productivity initiatives and expense management. Despite the decline in expenses, the overhead ratio increased to 76% as a result of lower revenue. Credit costs declined $96 million, primarily reflecting the run-off of an installment loan portfolio.

Chase Middle Market

Business-related metrics


As of or for the year ended December 31,							Over/(under)
(in billions, except ratios)	2002			2001			2001

Total average loans	$	13.7		$	14.3			(4	)%
Total average deposits		24.1			18.5			30
Nonperforming average loans as a % of total average loans		1.91	%		2.35	%	(44		)bp
Overhead ratio		55			57			(200	)

bp- Denotes basis points; 100 bp equals 1%.

CMM is a premier provider of commercial banking and corporate financial services to companies with annual sales of $10 million to $1 billion, as well as to not-for-profit, real estate and public-sector entities. CMM maintains a leadership position in the New York tri-state market and select Texas markets; it also leverages its expertise in distinct industry segments and select regional markets across the country.

The CMM relationship management model brings customized solutions to more than 14,000 middle market companies, utilizing the products and services of the entire Firm. Product offerings include cash management, credit, corporate finance, international banking services and various credit products, such as leasing and asset-backed financing. CMM is organized around geographies, industries and products to deliver greater value to customers. CMM’s 2002 and 2001 results included 100% of the revenues and expenses attributed to the shared activities with Treasury Services. See page 25 for a discussion of the Firm’s revenue- and expense-sharing agreements between business segments.

CMM’s operating earnings increased 22% compared with the prior year, the result of deposit volume growth, increased fees for deposit services, expense discipline and a reduction in credit costs. Lower interest rates reduced the value of customer deposit balances and, consequently, increased the fees paid by customers for deposit services. The lower credit costs reflect reduced charge-offs and improving credit quality. The overhead ratio improved to 55%, compared with 57% last year.


J.P. Morgan Chase & Co./2002 Annual Report			38

Support Units and Corporate

Selected financial data


Year ended December 31,							Over/(under)
(in millions, except employees)	2002			2001			2001

Operating revenue	$	(847	)	$	(964	)	$	117
Operating expense		122			220			(98	)
Credit costs		133			167			(34	)

Pre-tax loss		(1,102	)		(1,351	)		249
Income tax benefit		(359	)		(702	)		343

Operating losses	$	(743	)	$	(649	)		(94	)

Average common equity	$	(1,815	)	$	(2,266	)		451
Average assets		21,557			13,080			8,477
Shareholder value added		(362	)		(183	)		(179	)

Full-time equivalent employees		13,321			14,149			(828	)

Note: Amounts are shown in place of % changes.

The Support Units and Corporate sector includes Enterprise Technology Services (“ETS”), Corporate Business Services (“CBS”), legal, audit, corporate finance, human resources, risk management, executive management and corporate marketing.

Support Units and Corporate reflects the accounting effects remaining at the corporate level after the application of the Firm’s management accounting policies. These policies allocate the costs associated with technology, operational and staff support services to the business segments. The residual component of the allowance for credit losses is not allocated to the business segments.

ETS is an internal technology service organization, and CBS manages the Firm’s support services, including real estate management, human resources and finance operations and procurement. ETS and CBS seek to provide services to the Firm’s businesses that are competitive with comparable third-party providers in terms of price and service quality. These units leverage the Firm’s global scale and technology to gain efficiencies through consolidation, standardization, vendor management and outsourcing.

In December 2002, JPMorgan Chase entered into a seven-year agreement with IBM to outsource portions of the Firm’s internal technology infrastructure services. This agreement will enable the Firm to transform its technology infrastructure through absolute cost savings, increased cost variability, access to the best research and innovation and improved service levels. By moving from a traditional fixed-cost approach to one with increased capacity and cost variability, the Firm expects to be able to respond more quickly to changing market conditions. The impact on expenses as a result of this agreement is expected to be minimal in 2003.

For 2002, Support Units and Corporate had an operating loss of $743 million, compared with a loss of $649 million in 2001. This sector usually operates at a moderate loss. Negative operating revenue usually results from the application of the Firm’s transfer pricing policies and the overallocation of capital to the various business segments. Expense items usually result from timing differences in allocations to other business sectors and residuals from interoffice allocation among the business segments. Income tax benefit reflects the difference between the aggregate recorded at the consolidated level and the amount recorded at the business segments. Included in 2002 operating expense was a $120 million reversal of previously accrued expenses; these were associated with forfeitable stock-based compensation awards issued under employee benefit plans that contained stock price targets that were deemed unlikely to be attained within the timeframes specified under the terms of the awards.

In 2002, credit costs in excess of net charge-offs not allocated to the segments were $133 million, compared with $167 million of such costs in 2001. Although the Support Units and Corporate sector has no traditional credit assets, the residual component of the allowance for credit losses is maintained at the corporate level and is not allocated to any specific business segment. For a further discussion of the residual component, see page 56.

Included in the 2001 operating losses of $649 million was a pretax loss of $152 million at LabMorgan, resulting from the write-downs of investments and equity accounting losses. LabMorgan was restructured in 2001, and its remaining investment portfolio of $49 million at December 31, 2002, is managed by JPMorgan Partners.

The negative capital position of $1.8 billion in Support Units and Corporate results from an overallocation of economic capital to the businesses as compared with available common stockholders’ equity.


	39		J.P. Morgan Chase & Co./2002 Annual Report

Management’s discussion and analysis

J.P. Morgan Chase & Co.

Risk and Capital management

Risk management at JPMorgan Chase is guided by several principles, including:

•		Defined risk governance

•		Independent oversight

•		Continual evaluation of risk appetite, managed through risk limits

•		Portfolio diversification

•		Risk assessment and measurement, including value-at-risk analysis and portfolio stress testing

•		Performance measurement (SVA) that allocates risk-adjusted capital to business units and charges a cost against that capital

Risk management and oversight begins with the Risk Policy Committee of the Board of Directors, which reviews the governance of these activities, delegating the formulation of policy and day-today risk oversight and management to the Executive Committee and to the two corporate risk committees: Capital and Risk Management.

The Executive Committee provides guidance regarding strategies and risk appetite and is responsible for an integrated view of risk exposures, including the interdependencies among JPMorgan Chase’s various risk categories.

The Capital Committee focuses on Firm-wide capital planning, internal capital allocation and liquidity management. The Risk Management Committee focuses on credit risk, market risk, operational risk, private equity risk and fiduciary risk. Both risk committees have decision-making authority, with major policy decisions and risk exposures subject to review by the Executive Committee.

In addition to the Risk Policy Committee, the Audit Committee of the Board of Directors is responsible for discussion of guidelines and policies to govern the process by which risk assessment and management is undertaken. In addition, the Audit Committee reviews with management the system of internal controls and financial reporting that is relied upon to provide reasonable assurance of compliance with the Firm’s operational risk management processes.

The Firm’s use of SVA, which incorporates a risk-adjusted capital methodology as its primary performance measure, has strengthened its risk management discipline by charging the businesses the cost of capital linked to the risks associated with their respective activities.

For a discussion of capital allocation methodologies, see the respective risk management sections on pages 45-65.

(RISK POL. CHART)


J.P. Morgan Chase & Co./2002 Annual Report		40

Capital and Liquidity management

Capital management

JPMorgan Chase’s capital management framework helps to optimize the use of capital by:

•

Determining the amount of capital commensurate with:

	—		Internal assessments of risk as estimated by the Firm’s economic capital allocation model

	—		The Firm’s goal to limit losses, even under stress conditions

	—		Targeted regulatory ratios and credit ratings

	—		The Firm’s liquidity management strategy

•

Directing capital investment to activities with the most favorable risk-adjusted returns

Available versus required capital


		Yearly Averages

(in billions)		2002			2001

Common stockholders’ equity		$	41.4		$	41.5
Required economic risk capital:
	Credit risk		13.1			12.8
	Market risk		4.8			4.6
	Operating risk		8.7			8.8
	Private equity risk		5.1			6.4
	Goodwill /Intangibles		8.8			8.5
	Asset capital tax		3.8			3.9
	Diversification effect		(7.0	)		(7.2	)

Total required economic risk capital			37.3			37.8

Capital in excess of required economic capital		$	4.1		$	3.7

Economic risk capital: JPMorgan Chase assesses capital adequacy utilizing internal risk assessment methodologies. The Firm assigns economic capital based primarily on four risk factors. The methodology quantifies credit, market and operating risk for each business and, for JPMP, private equity risk, and assigns capital accordingly. These methodologies are discussed in the risk management sections of this Annual Report.

Capital also is assessed against business units for certain nonrisk factors. Businesses are assessed capital equal to 100% of any goodwill and 50% for certain other intangibles generated through acquisitions. Additionally, JPMorgan Chase assesses an “asset capital tax” against managed assets and some off-balance sheet instruments. These assessments recognize that certain minimum regulatory capital ratios must be maintained by the Firm. JPMorgan Chase also estimates the portfolio effect on required economic capital based on correlations of risk in stress scenarios across risk categories. This estimated diversification benefit leads to a reduction in required economic capital for the Firm.

The total required economic capital for JPMorgan Chase as determined by its models and after considering the Firm’s estimated diversification benefits is then compared with available common stockholders’ equity to evaluate overall capital utilization. The Firm’s policy is to maintain an appropriate level of excess capital to provide for growth and additional protection against losses.

The 2002 excess capital position was slightly higher than in 2001. The increase was primarily due to a decline in private equity risk capital due to the lower carrying value of the portfolio, partially offset by increases in credit risk capital and goodwill/intangibles capital at Chase Financial Services, principally as a result of the acquisition of the Providian Master Trust.

Internal capital allocations may change from time to time to reflect refinements of economic capital methodologies. For 2003, the Firm is revising its capital measurement methodologies for commercial credit risk and operating risk. These changes are discussed on pages 57 and 64.

Regulatory capital: JPMorgan Chase’s primary federal banking regulator, the Board of Governors of the Federal Reserve System (“Federal Reserve Board”), establishes capital requirements, including well-capitalized standards and leverage ratios, for the consolidated financial holding company and its state-chartered banks, including JPMorgan Chase Bank. The Office of the Comptroller of the Currency establishes similar capital requirements and standards for the Firm’s national bank subsidiaries, including Chase Manhattan Bank USA, N.A. As of December 31, 2002, the financial holding company and its banking subsidiaries maintained capital levels well in excess of the minimum capital requirements.

Currently, the Firm targets a Tier 1 capital ratio of 8% to 8.25%. The Capital Committee reviews the Firm’s capital targets and policies regularly in light of changing economic conditions and business needs. Additional information regarding the Firm’s capital ratios and a more detailed discussion of federal regulatory capital standards are presented in Note 26 on pages 99 and 100.

Dividends: Dividends declared in any quarter will be determined by JPMorgan Chase’s Board of Directors. The Board of Directors expressed its intent, on September 17, 2002, to continue the current dividend level, provided that capital ratios remain strong and earnings prospects exceed the current dividend.


41		J.P. Morgan Chase & Co./2002 Annual Report

Management’s discussion and analysis

J.P. Morgan Chase & Co.

Liquidity management

In managing liquidity, management considers a variety of liquidity risk measures as well as market conditions, prevailing interest rates, liquidity needs and the desired maturity profile of its liabilities.

Overview

Liquidity risk arises from the general funding needs of the Firm’s activities and in the management of its assets and liabilities. JPMorgan Chase recognizes the importance of sound liquidity management as a key factor in maintaining strong credit ratings and utilizes a liquidity framework intended to maximize liquidity access and minimize funding costs. Active liquidity management seeks to ensure that the Firm will be able to replace maturing obligations when due and fund its assets at appropriate maturities and rates in all market environments.

Liquidity management framework

The Capital Committee sets the overall liquidity policy for the Firm and reviews the contingency funding plan. In addition, the Capital Committee provides oversight of the Firm’s exposure to special-purpose entities (“SPEs”), with particular focus on potential liquidity support requirements that the Firm may have to those SPEs. The Liquidity Risk Committee, reporting to the Capital Committee, meets monthly to identify and monitor liquidity issues, provide policy guidance, oversee adherence and maintain an evolving contingency plan.

JPMorgan Chase utilizes liquidity monitoring tools to maintain appropriate levels of liquidity through normal and stress periods. The Firm’s liquidity analytics rely on management’s judgment about JPMorgan Chase’s ability to liquidate assets or use them as collateral for borrowings. These analytics also involve estimates and assumptions, taking into account credit risk management’s historical data on the funding of loan commitments (e.g., commercial paper back-up facilities), liquidity commitments to SPEs, commitments with rating triggers and collateral-posting requirements. For a further discussion on SPEs and other off-balance sheet arrangements, see Off-balance sheet arrangements on page 44 as well as Note 11 on pages 83–87.

The Firm’s three primary measures of liquidity are:

•		Holding company short-term surplus: Measures the parent holding company’s ability to repay all obligations with a maturity under one year at a time when the ability of the Firm’s banks to pay dividends to the parent holding company is constrained.

•		Cash capital surplus: Measures the Firm’s ability to fund assets on a fully collateralized basis, assuming access to unsecured funding is lost.

•		Basic surplus: Measures JPMorgan Chase Bank’s ability to sustain a 90-day stress event that is specific to the Firm where no new funding can be raised to meet obligations as they come due.

Each of the Firm’s liquidity surplus positions, as of December 31, 2002, indicates that JPMorgan Chase’s long-dated funding, including core deposits, exceeds illiquid assets and that the Firm’s obligations can be met if access to funding is temporarily impaired.

An extension of the Firm’s ongoing liquidity management is its contingency funding plan, which is intended to help the Firm manage through liquidity stress periods. The plan considers temporary and long-term stress scenarios and forecasts potential funding needs where access to unsecured funding is severely limited or nonexistent. These scenarios take into account both on- and off-balance sheet exposures, evaluating access to funds by the parent holding company, JPMorgan Chase Bank and Chase Manhattan Bank USA, N.A., separately.

Funding

Credit ratings: JPMorgan Chase’s parent holding company and JPMorgan Chase Bank’s credit ratings as of December 31, 2002, were as follows:

JPMorgan Chase

JPMorgan Chase Bank

Short-term

Senior

Short-term

Senior

debt

long-term debt

debt

long-term debt

Moody’s

P-1

Aa3

S&P

A-1

A+

A-1

AA-

Fitch

F-1

A+

F-1

A+

As of February 28, 2003, the ratings outlook for the parent holding company by Moody’s Investor Services (“Moody’s”) was stable, and the ratings outlook for the parent holding company by Standard & Poor’s (“S&P”) and Fitch, Inc. (“Fitch”) was negative.

The cost and availability of unsecured financing are influenced by credit ratings. During 2002, S&P, Moody’s and Fitch lowered the debt ratings of JPMorgan Chase’s parent holding company and its subsidiaries one notch to the levels noted above. This resulted in an increase in the marginal cost of long-term wholesale funds to the parent holding company. JPMorgan Chase Bank’s cost of short-term funds has not been materially affected by the downgrade, although certain counterparties and investors have reduced limits and maturities of exposure to the Firm as a result of these actions. The financial impact of the ratings downgrade on the Firm has not been material. See page 44, 52 and Note 11 on page 86 for further information about the implications of a ratings downgrade for the Firm.


J.P. Morgan Chase & Co./2002 Annual Report		42

Balance sheet: The Firm’s total assets increased to $759 billion at December 31, 2002, from $694 billion at December 31, 2001. Auto financing and residential consumer loans increased on higher originations, offset by increased loan securitizations; commercial loans declined, reflecting weaker loan demand and the Firm’s ongoing efforts to reduce commercial exposures. Increases in debt and equity trading assets and investment security assets were driven by increased trading and hedging activity. Derivative receivables increased primarily as a result of the decline in interest rates. Growth in trading assets and investment securities was financed primarily by increases in repurchase agreements, trading liabilities and deposits.

Sources of funds: The diversity of the Firm’s funding sources enhances flexibility and limits dependence on any one source of funds, while minimizing the cost of funds. JPMorgan Chase has access to funding markets across the globe and leverages a broad investor base. Liquidity is generated using a variety of both short-term and long-term instruments, including deposits, federal funds purchased, repurchase agreements, commercial paper, bank notes, medium- and long-term debt, capital securities and stockholders’ equity. During the year, the Firm extended its liability maturity profile while reducing reliance on shorter-dated wholesale funding instruments (e.g., federal funds purchased and commercial paper). A major source of liquidity for JPMorgan Chase Bank is provided by its large core deposit base. Core deposits include all U.S. deposits, except noninterest-bearing time deposits and certificates of deposit of $100,000 or more. In addition to core deposits, the Firm benefits from substantial, stable deposit balances originated by T&SS through the normal course of its business.

Additional funding flexibility is provided by the Firm’s ability to access the repurchase and asset securitization markets. These alternatives are evaluated on an ongoing basis to achieve the appropriate balance of secured and unsecured funding. The ability to securitize loans, and the associated gains on those securitizations, are principally dependent on the credit quality and yields on the assets securitized and are generally not dependent on the ratings of the issuing entity. Transactions between the Firm and its securitization structures are reflected in JPMorgan Chase’s financial statements; these relationships include retained interests in securitization trusts, derivative transactions and liquidity facilities. For further details, see Notes 11 and 29.

Issuance: Corporate credit spreads widened in 2002 across industries and sectors, driven by headline risk, increased investment-grade defaults and investor risk aversion. JPMorgan Chase’s credit spreads increased relative to peer commercial bank spreads but remained comparable with peer investment bank spreads.

Consistent with the policy discussed earlier in this section, the Firm maintains funding at the holding company sufficient to cover maturing obligations over the next 12 months, which requires periodic issuance of long-term debt and capital. The Firm raised the majority of its liquidity needs earlier in the year before the increase in cost of funding occurred. The Firm believes that the financial impact from the increased cost of long-term debt to be raised in 2003 will not be material.

During 2002, JPMorgan Chase issued approximately $11 billion of long-term debt and $1 billion of trust preferred capital securities. During the year, $12.2 billion of long-term debt matured or was redeemed, and $550 million of preferred stock of subsidiary was redeemed. In addition, the Firm securitized approximately $7.2 billion of residential mortgage loans, $9.4 billion of credit card loans and $3.4 billion of auto loans, resulting in pre-tax gains on securitizations of $214 million, $45 million and $6 million, respectively. For a further discussion of loan securitizations, see Note 11 on pages 83-87.

Derivatives are used in liquidity risk management and funding to achieve the Firm’s desired interest rate risk profile. The Firm enters into derivatives contracts to swap fixed-rate debt to floating-rate obligations and to swap floating-rate debt to fixed-rate obligations. Derivatives contracts are also used to hedge the variability in interest rates that arises from other floating-rate financial instruments and forecasted transactions, such as the rollover of short-term assets and liabilities.


43		J.P. Morgan Chase & Co./2002 Annual Report

Management’s discussion and analysis

J.P. Morgan Chase & Co.

Off-balance sheet arrangements

Special-purpose entities or special-purpose vehicles (“SPVs”) are an important part of the financial markets, providing market liquidity by facilitating investors’ access to specific portfolios of assets and risks. SPEs are not operating entities; typically they are set up for a single, discrete purpose, have a limited life, and have no employees. The basic SPE structure involves a company selling assets to the SPE. The SPE funds the purchase by selling securities to investors. To insulate investors from creditors of other entities, including the seller of the assets, SPEs can be structured to be bankruptcy-remote. They are critical to the functioning of many investor markets, including, for example, the market for mortgage-backed securities, asset-backed securities and commercial paper. JPMorgan Chase is involved with SPEs in three broad categories of transactions: loan securitizations, multi-seller conduits, and client intermediation. Capital is held, as appropriate, against all SPE-related transactions and exposures such as derivative transactions and lending commitments.

The Firm has no commitments to issue its own stock to support an SPE transaction, and its policies require that transactions with SPEs be conducted at arms’ length and reflect market pricing. Consistent with this policy, no JPMorgan Chase employee is permitted to invest in SPEs with which the Firm is involved where such investment would violate the Firm’s Worldwide Rules of Conduct. These rules prohibit employees from self-dealing and prohibit employees from acting on behalf of the Firm in transactions with which they or their family have any significant financial interest. For a further discussion of SPEs and the Firm’s accounting for SPEs, see Note 11 on pages 83-87.

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 A-1, P-1 and F-1. The amount of these liquidity commitments was $48.6 billion at December 31, 2002; $35.5 billion relate to the Firm’s multi-seller conduits and structured commercial loan vehicles further described in Note 11 on page 86. The total commercial paper outstanding for the multi-seller conduits and structured commercial loan vehicles was $24.7 billion at December 31, 2002. The remaining $13.1 billion in commitments relate to vehicles established by third parties. If JPMorgan Chase Bank is required to provide funding under these commitments, the Firm could be replaced as liquidity provider. Additionally, for the multi-seller conduits and the structured commercial loan vehicles, JPMorgan Chase Bank could facilitate the sale or refinancing of the assets in the SPE. All of these commitments are included in the Firm’s total $196.7 billion in other unfunded commitments to extend credit, described in more detail in Note 29 on pages 102 and 103.

The following table summarizes JPMorgan Chase’s contractual cash obligations and off-balance sheet lending-related financial instruments by remaining maturity at December 31, 2002:


(in millions)		Under		1-3		4-5		After
Contractual cash obligations		1 year		years		years		5 years		Total

Long-term debt		$	7,053	$	10,056	$	9,257	$	13,385	$	39,751
Operating leases			737		1,371		1,161		4,849		8,118

Total		$	7,790	$	11,427	$	10,418	$	18,234	$	47,869

Off-balance sheet lending-related commitments
Consumer-related		$	136,429	$	44	$	—	$	14,665	$	151,138
Commercial-related:
	Other unfunded commitments to extend credit		132,547		51,380		11,419		1,308		196,654
	Standby letters of credit and guarantees		23,925		11,904		1,697		1,322		38,848
	Other letters of credit		2,383		230		—		5		2,618

Total commercial-related			158,855		63,514		13,116		2,635		238,120

Total lending-related commitments		$	295,284	$	63,558	$	13,116	$	17,300	$	389,258

For further information about off-balance sheet lending-related financial instruments, see Note 29 on pages 102 and 103.


J.P. Morgan Chase & Co./2002 Annual Report		44

Credit risk management

Credit risk is the risk of loss due to obligor or counterparty default. This risk is managed at both the transaction and portfolio levels. Credit risk management practices are designed to preserve the independence and integrity of the risk assessment process.

Credit risk

Credit risk represents the loss the Firm would experience if an obligor or counterparty could not meet its contractual obligations. The Firm is subject to credit risk in its lending (e.g., loans and lending-related commitments) and in its derivatives and certain other trading activities. The credit risk related to the issuers of the securities used in the Firm’s capital market activities is marked-to-market, measured and managed through the Firm’s market risk management process.

The credit risks of the consumer and commercial portfolios are markedly different. Broadly speaking, losses on consumer exposures are more predictable, less volatile and less cyclical than losses on commercial exposures. For the commercial portfolio, the actual loss volatility can be much greater over the course of an economic cycle.

Credit risk management practices

Credit risk management begins with an assessment of the likelihood of default and the risk of loss that could result from an obligor or counterparty default. The Firm seeks to assess all credit exposures, whether on- or off-balance sheet. These exposures include loans, derivative receivables and lending-related commitments (e.g., letters of credit and undrawn commitments to extend credit). At both the business unit and corporate levels, processes in place are intended to ensure that credit risks are accurately assessed, properly approved, continually monitored and actively managed.

To measure these risks, estimates are made of both expected and unexpected losses for each segment of the portfolio using statistical techniques. First, off-balance sheet exposures are converted to “on-balance sheet loan equivalent amounts,” based on the amount expected to be drawn at the time of default. Then expected and unexpected losses are calculated. Expected losses are statistically-based estimates of credit losses over time, anticipated as a result of counterparty default. Expected losses are used to set risk-adjusted credit loss provisions. However, expected credit losses are not the sole indicators of risk. For commercial assets, if losses were entirely predictable, the expected loss rate could be factored into pricing and covered as a normal and recurring cost of doing business. Unexpected losses represent the potential volatility of actual losses relative to the expected level of loss. Unexpected losses are what create risk and represent the primary focus of credit risk management.

The responsibility for credit risk management resides with two functions that were integrated in early 2003: Credit Risk Policy and Global Credit Management. Both are now headed by the Senior Credit Officer who, in turn, reports to the Vice Chairman for Finance, Risk Management and Administration.

Credit Risk Policy formulates credit policies, limits, allowance adequacy and guidelines. Independently from the groups that approve and support the Firm’s credit activities, this group monitors and assesses risk profiles and risk management processes at multiple levels — individual credits, industry groups, product groups and entire business segments of the Firm. Credit Risk Policy is also responsible for managing problem credits. Credit Risk Policy works jointly with Market Risk Management to address country risk, counterparty risk, risk measurement and capital allocation methodologies.

Global Credit Management has three functions: Credit Risk Management, Corporate Banking and the Credit Portfolio Group. The first two functions participate in client coverage and are responsible for approving and monitoring all credit exposures. Experienced credit officers make decisions to extend credit based on an evaluation of the counterparty’s creditworthiness and the type of credit arrangement. These officers consider the current and projected financial condition of the counterparty. Also considered are the covenants, collateral and protection available should the credit quality of the counterparty deteriorate. After credit is extended, credit officers and industry analysts, in collaboration with senior business managers, monitor the counterparty’s credit quality. In addition to ongoing review of counterparty financial data and documentation, the Credit Risk Management and Corporate Banking groups manage the formal client- and industry-based portfolio review processes. Senior credit officers regularly review current and potential exposure and compliance with limits on both individual counterparties and portfolios. The Credit Portfolio Group manages the Firm’s credit exposures resulting from both traditional lending and derivative trading activities.


45		J.P. Morgan Chase & Co./2002 Annual Report

Management’s discussion and analysis
J.P. Morgan Chase & Co.

Credit portfolio

JPMorgan Chase’s managed credit-related assets (including $30.7 billion of securitized credit cards) totaled $330 billion at December 31, 2002, an increase of 7% over year-end 2001. The growth reflects a 16% increase in managed consumer loans, offset by a 13% decline in commercial loans, and a 17% increase in derivative receivables. At December 31, 2002, managed consumer loans represented 47% of total managed credit-related assets, compared with 43% at December 31, 2001.

The following table presents a summary of managed credit-related information for the dates indicated:


							Nonperforming											Past due 90 days and				Average annual
As of or for the year ended	Credit exposure						assets(f)						Net charge-offs					over and accruing				net charge-off rate
December 31,
(in millions, except ratios)	2002			2001			2002			2001			2002		2001			2002		2001		2002			2001

COMMERCIAL
Loans	$	91,548		$	104,864		$	3,672		$	1,997		$	1,881	$	982		$	57	$	35		1.93	%		0.87	%
Derivative receivables(a)		83,102			71,157			289			1,300			NA		NA			—		—		NA			NA
Other receivables(b)		108			—			108			—			NA		NA			NA		NA		NA			NA

Total commercial credit-related assets		174,758			176,021			4,069			3,297			1,881		982			57		35		1.93			0.87
Lending-related commitments		238,120			247,711			NA			NA			212		(3	)		NA		NA		0.09			—

Total commercial credit exposure	$	412,878		$	423,732		$	4,069		$	3,297		$	2,093	$	979		$	57	$	35		0.62	%		0.27	%

CONSUMER
Loans — Reported	$	124,816		$	112,580		$	521		$	499		$	1,795	$	1,353		$	473	$	486		1.57	%		1.27	%
Loans — Securitized(c)		30,722			21,424			—			—			1,439		1,048			630		457		5.43			5.83

Total managed consumer loans	$	155,538		$	134,004		$	521		$	499		$	3,234	$	2,401		$	1,103	$	943		2.30	%		1.92	%

TOTAL CREDIT PORTFOLIO
Managed loans	$	247,086		$	238,868		$	4,193		$	2,496		$	5,115	$	3,383		$	1,160	$	978		2.15	%		1.42	%
Derivative receivables(a)		83,102			71,157			289			1,300			NA		NA			—		—		NA			NA
Other receivables(b)		108			—			108			—			NA		NA			NA		NA		NA			NA

Total managed credit-related assets		330,296			310,025			4,590			3,796			5,115		3,383			1,160		978		2.15			1.42
Commercial lending-related commitments		238,120			247,711			NA			NA			212		(3	)		NA		NA		0.09			—
Assets acquired in loan satisfactions		NA			NA			190			124			NA		NA			NA		NA		NA			NA

Total credit portfolio	$	568,416		$	557,736		$	4,780		$	3,920		$	5,327	$	3,380		$	1,160	$	978		1.11	%		0.69	%

Credit derivative hedges notional(d)	$	(33,767	)	$	(39,271	)	$	(66	)	$	(42	)		NA		NA		$	—	$	—		NA			NA
Collateral held against derivatives(e)		(30,410	)		(17,536	)		—			—			NA		NA			—		—		NA			NA

(a)		Credit exposure and nonperforming assets include amounts related to the Enron surety receivables and letter of credit, which were the subject of litigation in 2001 and 2002. See page 50 for a further discussion.
(b)		Other receivables at December 31, 2002 represents the Enron-related letter of credit, which continues to be the subject of litigation and was classified in Other assets.
(c)		Represents securitized credit cards. For a further discussion of credit card securitizations, see page 23.
(d)		Represents hedges of commercial credit exposure that do not qualify for hedge accounting under SFAS 133.
(e)		Represents eligible collateral. Excludes credit enhancements in the form of letters of credit and surety receivables.
(f)		Nonperforming assets exclude nonaccrual loans held for sale (“HFS”) of $43 million and $138 million at December 31, 2002 and 2001, respectively. HFS loans are carried at the lower of cost or market and declines in value are recorded in Other revenue.

NA-Not applicable.


J.P. Morgan Chase & Co./2002 Annual Report		46

Commercial portfolio

Management of commercial credit risk begins with the individual client selection and evaluation process. The Firm monitors and evaluates industry risk profiles globally. Exposures in industries deemed to have increasing risk are more closely managed, both individually and in the aggregate. The Firm’s global strategy, particularly in emerging markets, is to focus on large, leading firms with cross-border financing needs.

Concentration management continues to be key in managing commercial credit risk. From the perspective of aggregate portfolio risk management, concentration management is addressed partly by the Firm’s established strategy of loan origination for distribution, and partly by the purchase of credit protection through credit derivatives and secondary market loan sales. The Firm manages concentrations by obligor, risk rating, industry, product and geography. As a result of a particularly difficult credit environment in 2002, the Firm placed increased emphasis on the management and further reduction of industry and single-name concentrations. The Firm established an exposure and capital threshold review process for single-name concentrations and enhanced its procedures to reduce single-name and industry concentrations. The Firm will continue to refine these credit risk management processes in 2003.

The Firm’s business strategy for its commercial portfolio remains one of origination for distribution, primarily for large corporate obligors. The majority of the Firm’s wholesale loan originations in IB continue to be distributed into the marketplace, with residual holds by the Firm averaging less than 10%. The commercial loan portfolio declined 13% in 2002, reflecting a combination of continued weak loan demand and charge-offs, as well as the Firm’s ongoing goal of reducing commercial credit exposure. In addition, the Firm’s SVA discipline discourages the retention of loan assets that do not generate a positive return above the cost of risk-adjusted capital. SVA remains a critical discipline in making loans and commitments, particularly when combined with other credit and capital management disciplines.

Markets for traditional credit products have become more liquid, with increased opportunities for risk management using credit derivatives and secondary market loan sales. The Firm will begin in 2003 to derive more of its assessment of credit risk capital from these market-based parameters which will, in turn, affect SVA. See the discussion on capital allocation on page 57.

Total commercial exposure (loans, derivatives and unfunded lending-related commitments) was $413 billion at December 31, 2002, compared with $424 billion at December 31, 2001. At year-end 2002, 80% of the Firm’s commercial credit exposure was considered investment-grade; only 1% of the total commercial credit exposure was nonperforming. This compares with 77% investment-grade exposure at year-end 2001; 0.8% of the total commercial credit exposure was nonperforming at that date.

Total commercial nonperforming assets were $4.1 billion at December 31, 2002 which included $337 million related to Enron. This represented an increase of $772 million from year-end 2001 and equaled 2% of the total commercial credit-related assets. The increase in nonperforming assets in 2002 was largely driven by loans in the telecommunications and related, cable and merchant energy and related sectors. Nonperforming assets related to Enron declined by $936 million, primarily as a result of the settlement of the Firm’s litigation with the surety providers.

Commercial loan net charge-offs in 2002 were $1.9 billion, compared with $1.0 billion in 2001. Charge-offs of commercial lending-related commitments were $212 million in 2002, compared with a net recovery of $3 million in 2001. The charge-off ratio for commercial loans was 1.93% in 2002 and 0.87% in 2001.

While the economic and associated credit environments are expected to remain challenging in 2003, the Firm does not anticipate commercial charge-offs in 2003 to reach 2002 levels.

Below are summaries of the maturity and risk profiles of the commercial portfolio as of December 31, 2002. The ratings scale is based on the Firm’s internal risk ratings and is presented on an S&P-equivalent basis.

Commercial exposure


	Maturity profile (a)												Risk profile

													Investment-grade									Noninvestment-grade
																															Total % of
At December 31, 2002													AAA			A+			BBB+			BB+			CCC+						investment-
(in billions, except ratios)	<1 year			1-5 years			> 5 years			Total			to AA-			to A-			to BBB-			to B-			& below			Total			grade

Loans		45	%		39	%		16	%		100	%	$	18		$	10		$	23		$	30		$	11		$	92			55	%
Derivative receivables		29			40			31			100			42			16			14			9			2			83			87
Lending-related commitments		62			34			4			100			82			80			46			26			4			238			87

Total exposure (b)		52	%		36	%		12	%		100	%	$	142		$	106		$	83		$	65		$	17		$	413			80	%

Credit derivative hedges notional		39	%		55	%		6	%		100	%	$	(9	)	$	(10	)	$	(10	)	$	(4	)	$	(1	)	$	(34	)		85	%

(a)		The maturity profile of loans and lending-related commitments is based upon remaining contractual maturity. The maturity profile of derivative receivables is based upon the estimated expected maturity profile net of the benefit of collateral.
(b)		Includes Enron-related letter of credit, which is the subject of litigation and was classified in Other assets.


47		J.P. Morgan Chase & Co./2002 Annual Report

Management’s discussion and analysis
J.P. Morgan Chase & Co.

Commercial exposure — selected industry concentrations

The Firm remains highly focused on diversifying its commercial exposure. The following table sets forth certain information related to the Firm’s commercial credit exposure (loans, derivatives and lending-related commitments):

Risk profile of credit exposure

Noninvestment-grade

Credit

As of or for the year ended December 31, 2002

Credit

% of

Investment-

Criticized

Net

derivative

(in millions, except ratios)

exposure(a)

total portfolio

grade

Noncriticized

performing

nonperforming(b)

charge-offs(c)

hedges(d)

Top 10 industries

Commercial banking

44,494

10.8

2,214

(8,275

)

Finance companies

24,194

5.9

658

—

(1,950

)

Investment management and private banking

18,041

4.4

4,617

105

—

Securities brokers, dealers, exchanges

17,913

4.3

1,528

—

(434

)

Telecom and related industries

16,770

4.1

5,076

1,487

831

909

(1,319

)

Investment and pension funds

14,164

3.4

2,603

—

State and municipal government

11,278

2.7

102

—

(671

)

Central government

10,242

2.5

302

—

110

)

(1,926

)

Oil and gas exploration and production

8,816

2.1

1,520

342

(946

)

General merchants and retailers

8,553

2.1

2,720

197

(1,373

)

Other selected industries

Automotive

8,402

2.0

2,120

320

)

(1,232

)

Merchant energy and related industries

6,230

1.5

423

1,849

378

117

(830

)

Cable

5,982

1.4

1,096

1,673

532

144

(367

)

Airlines

2,955

0.7

823

(207

)

All other(e)

214,844

52.1

39,179

6,404

1,976

688

(14,237

)

Total

412,878

100.0

64,981

12,509

4,069

2,093

(33,767

)


							Risk profile of credit exposure

										Noninvestment-grade
																			Credit
As of or for the year ended December 31, 2001		Credit		% of			Investment-					Criticized		Criticized		Net			derivative
(in millions, except ratios)		exposure(a)		total portfolio			grade			Noncriticized		performing		nonperforming(b)		charge-offs(c)			hedges(d)

Top 10 industries
	Commercial banking	$	36,007		8.5	%		90	%	$	3,470	$	106	$	26	$	(2	)	$	(7,396	)
	Finance companies		23,550		5.6			97			753		71		—		14			(1,959	)
	Investment management and private banking		18,948		4.5			83			3,065		85		100		35			—
	Securities brokers, dealers, exchanges		19,969		4.7			91			1,726		—		22		(1	)		(524	)
	Telecom and related industries		20,430		4.8			55			7,047		1,906		236		312			(1,640	)
	Investment and pension funds		17,219		4.1			87			2,139		34		8		(4	)		(290	)
	State and municipal government		10,339		2.4			94			602		—		—		—			(1,051	)
	Central government		9,581		2.3			96			341		23		11		6			(1,702	)
	Oil and gas exploration and production		8,824		2.1			71			2,575		8		9		8			(866	)
	General merchants and retailers		6,354		1.5			57			2,587		117		15		1			(1,123	)
Other selected industries
	Automotive		9,353		2.2			76			1,800		456		6		15			(1,151	)
	Merchant energy and related industries		5,609		1.3			69			1,669		93		—		—			(743	)
	Cable		5,017		1.2			40			2,893		102		39		—			(229	)
	Airlines		4,096		1.0			71			1,103		65		15		12			(373	)
	All other		228,436		53.8			73			52,559		6,848		2,810		583			(20,224	)

Total		$	423,732		100.0	%		77	%	$	84,329	$	9,914	$	3,297	$	979		$	(39,271	)

(a)		Credit exposure excludes risk participations and does not reflect the benefit of credit derivative hedges.
(b)		Nonperforming assets exclude nonaccrual HFS loans of $18 million and $96 million at December 31, 2002 and 2001, respectively. HFS loans are carried at the lower of cost or market and declines in value are recorded in Other Revenue.
(c)		Represents net charge-offs on loans and lending-related commitments. The amounts in parentheses represent net recoveries.
(d)		Represents notional amounts only; these hedges do not qualify for hedge accounting under SFAS 133.
(e)		Criticized exposure includes $1.17 billion of emerging-markets criticized performing exposure attributable to country risk and not industry or single-name risk. This exposure was included in noninvestment-grade noncriticized for industry reporting.

J.P. Morgan Chase & Co./2002 Annual Report

Selected industry discussion

•		Financial institutions — This group of industries includes Commercial banking, Finance companies and Securities brokers, dealers and exchanges, which are traditionally among the largest industry groups. The Firm is a market-leader in structuring derivatives for and lending to these sectors. In addition, at December 31, 2002, financial institutions represented 54% of the Firm’s derivatives counterparties in its trading transactions. Commercial exposure to this group of industries continues to be predominantly high-investment-grade. Of the approximately $30 billion in aggregate liquid collateral held by the Firm against all its derivatives contracts, approximately $18 billion supports contracts with the commercial banking industry.

•		Telecom and related industries — In 2002, the telecommunications industry worldwide was adversely affected by severe capital and liquidity constraints, and the Firm saw a concurrent deterioration in the risk profile of its credit portfolio in this sector, particularly in the third quarter. This resulted in exposures migrating to risk ratings deemed by the Firm to be criticized, and a higher level of nonperforming loans and charge-offs. During the year, the Firm reduced its exposure to this sector by 18% as a result of charge-offs of $909 million and by $2.75 billion of selective reductions in exposures. At year-end 2002, 56% of the Firm’s exposure to this sector was considered investment-grade; 5% of the total exposure was nonperforming. This compares with 55% investment-grade exposure at year-end 2001.

•		General merchants and retailers — The Firm’s larger exposures in this segment are to industry leaders. While exposure increased 35% in 2002, the increase was primarily to investment-grade obligors, with 65% of the total portfolio investment-grade as of year-end 2002.

•		Automotive — The Firm has historically viewed the automotive industry as cyclical and capital-intensive. In 2001, automotive companies began to experience cyclical pressure, exacerbated by the events of September 11, 2001. However, in 2002, auto sales remained strong, and these companies took the opportunity to access capital markets to supplement liquidity and strengthen their balance sheets. While total exposure to this industry is significant, a material portion of the exposure is to the largest automotive companies and is 80% undrawn. This portfolio was 71% investment-grade at December 31, 2002.

•		Merchant energy and related industries — The Firm experienced an acceleration in criticized loans in the merchant energy sector beginning in the third quarter of 2002 and accelerating into the fourth quarter. The Firm may experience an increase in nonperforming loans in this sector in 2003. At December 31, 2002, credit exposure in this sector was $6.2 billion (or approximately 1.5% of total commercial credit exposure), with 57% investment-grade.

•		Cable — The cable industry, particularly in Europe, was also adversely affected by severe capital and liquidity constraints in 2002. As a result, there was a concurrent deterioration in the risk profile of the Firm’s credit portfolio in this sector, evidenced by an increase in exposure deemed criticized and a higher level of nonperforming loans and charge-offs, which largely represented a migration within noninvestment-grade exposures. At December 31, 2002, 45% of the portfolio was investment-grade.

•		Airlines — This segment includes passenger airlines, airport authorities, courier services and other support activities related to air transportation. Both prior to and particularly in the aftermath of September 11, 2001, the airline industry experienced performance and financial deterioration. In response, the Firm reduced, and increasingly collateralized, its exposure to this sector. Credit exposure to this industry was reduced from $4.1 billion to $3.0 billion during 2002. At December 31, 2002, 70% of this portfolio was investment-grade.

•		All other — All other at December 31, 2002 included $45 billion of credit exposure to holding and investment companies, which was 91% investment-grade and comprised of exposures that are not highly correlated. Liquidity back-up facilities represented 35% of total credit exposure to the sector. This group includes trusts and estates, as well as special-purpose entities providing secured financing of accounts receivable originated by companies in a diverse group of industries. The remaining $170 billion of credit exposure is well diversified across over 50 other industries, with none comprising more than 2% of exposure; 74% of the $170 billion of credit exposure was investment-grade at December 31, 2002. Nonperforming assets comprised 0.9% of total All other exposure at December 31, 2002.


Commercial criticized exposure trends (a): (in billions)
		12/31/01		3/31/02		6/30/02		9/30/02		12/31/02

Emerging markets		$	—	$	—	$	0.1	$	1.2	$	1.2
Merchant Energy			0.1		0.1		0.4		1.6		2.2
Cable			0.1		0.3		1.3		2.1		2.2
Telecom & related			2.1		2.7		2.4		3.2		2.3
All other			9.8		9.3		8.6		8.6		8.4
	Total		12.1		12.4		12.8		16.7		16.3

(a) Enron-related surety receivables and a letter of credit were excluded for all periods to present a normalized trend.

J.P. Morgan Chase & Co./2002 Annual Report

Management’s discussion and analysis
J.P. Morgan Chase & Co.

Exposures deemed criticized generally represent a risk profile similar to a rating of CCC+/Caa1 or lower. Of the total $16.6 billion in criticized exposure as of year-end 2002, representing 4% of total commercial credit exposure, $4.1 billion was non-performing. The telecom and related, cable and merchant energy and related sectors represented, in the aggregate, $6.8 billion, or 41%, of total criticized exposure, but only 1.6% of total commercial credit exposure. The balance of the criticized exposure represented exposures diversified across a large number of customers, with limited industry concentration.

Enron-related exposure

The Firm’s exposure to Enron and Enron-related entities was reduced by $1.38 billion during 2002, from $2.06 billion at December 31, 2001 to $688 million at December 31, 2002. In January 2003, the Firm settled its surety-bond litigation with 11 insurance companies for 60% of the principal amount of the bonds and received a cash payment of $502 million and unsecured claims valued at $75 million (or 13% of face value). In connection with the settlement, the Firm charged off an aggregate $395 million relating to the remaining exposure on the prepaid forward contracts and on a prepaid forward contract that is backed by a letter of credit that is the subject of continuing litigation. The Firm has reclassified the remaining value of the derivative contracts covered by the surety bonds and the $75 million in unsecured claims as Trading assets. In addition to these write-downs and charge-offs, during 2002, $76 million of other Enron-related exposure was charged-off or written-down and $402 million of Enron-related assets were sold or matured, including $125 million of debtor-in-possession financing exposure which matured without being drawn.

At December 31, 2002, the Firm’s Enron-related exposure was as follows:

Enron-related exposure (a)

December 31, 2002 (in millions)

Secured

Unsecured

Total

Trading assets

163

165

Loans

218

284

Other assets

—

108

Lending-related commitments

131

—

131

Total exposure

351

337

688

(a)

Enron-related exposure at December 31, 2002 takes into account the surety settlement on January 2, 2003.

Of the $131 million in lending-related commitments, $125 million relates to debtor-in-possession financing. The $108 million in Other assets relates to the Enron-related letter of credit that is the subject of litigation. Trading assets (both performing and nonperforming) are carried at fair value. Secured loans are performing and are reported on an amortized cost basis. All unsecured amounts are nonperforming; nonperforming loans have been written down to reflect management’s estimate of current recoverable value, and nonperforming other assets are being carried at their current estimated realizable value in accordance with SFAS 5.

Derivative contracts

In the normal course of business, the Firm utilizes derivative instruments to meet the needs of customers, generate revenues through trading activities, manage exposure to fluctuations in interest and currency rates and manage its own credit risk. The Firm uses the same credit risk management procedures to assess and approve potential credit exposures when entering into derivative transactions as those used for traditional lending.

The following table summarizes the aggregate notional amounts and derivative receivables (i.e., the mark-to-market or fair value of the derivative contract after taking into account the effects of legally enforceable master netting agreements) at each of the dates indicated:

Notional amounts and derivative receivables


	Notional amounts (a)				Derivative receivables (b)

December 31, (in billions)	2002		2001		2002		2001

Interest rate contracts (c)	$	23,591	$	19,085	$	55	$	41
Foreign exchange contracts (c)		1,505		1,636		7		10
Equity		307		284		13		12
Credit derivatives		366		262		6		3
Commodity (d)		36		36		2		5

Total notional and credit exposures	$	25,805	$	21,303	$	83	$	71

(a)		The notional amounts represent the gross sum of long and short third-party notional derivative contracts.
(b)		Represents the amount of derivative receivables on the balance sheet after the impact of master netting agreements.
(c)		Gold bullion notional amounts were $41 billion and $42 billion at December 31, 2002 and 2001, respectively. The corresponding derivative receivables (before the impact of master netting agreements) were $2.6 billion and $5.3 billion at December 31, 2002 and 2001, respectively. The corresponding derivative payables were $2.0 billion and $5.1 billion at December 31, 2002 and 2001, respectively. At December 31, 2002, the VAR related to the Firm’s gold trading position was $1.4 million.
(d)		Energy-related notional amounts, including written options, were $39 billion and $41 billion at December 31, 2002 and 2001, respectively. The corresponding derivative receivables (before the impact of master netting agreements) were $2.8 billion and $4.3 billion at December 31, 2002 and 2001, respectively. The corresponding derivative payables were $1.9 billion and $2.8 billion at December 31, 2002 and 2001, respectively. At December 31, 2002, the VAR related to the Firm’s energy-related trading positions was $1.4 million.

J.P. Morgan Chase & Co./2002 Annual Report

The $26 trillion of notional principal of the Firm’s derivative contracts outstanding at December 31, 2002, significantly exceeds 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. In terms of current credit risk exposure, the appropriate measure of risk is the mark-to-market (“MTM”) value of the contract. The MTM exposure 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 the counterparty, the net MTM exposure, less collateral held, represents, in the Firm’s view, the appropriate measure of current credit risk with that counterparty as of the reporting date. At December 31, 2002, the MTM value of derivatives receivables (after taking into account the effects of master netting agreements) was $83 billion. Further, after taking into account $30 billion of collateral held by the Firm, the net current credit exposure was $53 billion.

While useful as a current view of credit exposure, the net MTM value of the derivatives receivable does not capture the potential future variability of that credit exposure. To capture the potential future variability of credit exposure, the Firm measures, on a client-by-client basis, both the worst-case, or peak, future credit risk (at a 97.5% confidence level), as well as the expected credit risk. However, the total potential future credit risk embedded in the Firm’s derivatives portfolio is not the simple sum of all peak or expected client credit risks. This is because, at the portfolio level, credit risk is reduced by the fact that when offsetting transactions are done with separate counterparties, only one of the two trades can generate a credit loss even if both counterparties were to default simultaneously. The Firm refers to this effect as market diversification.

The Firm defines the “market-diversified peak” as the maximum loss (estimated at the 97.5% confidence level) that would occur if all counterparties were to default over a one-year time horizon without any recovery. The market-diversified peak, after taking into account both collateral and netting, was approximately $57 billion at December 31, 2002. Since, generally, all counterparties will not default at once nor all default when their exposures are at peak levels, this is a conservative measure, in the Firm’s view, of its potential future derivatives credit risk.

The MTM value of the Firm’s derivative receivables incorporates an adjustment to reflect the credit quality of counterparties. This is called the Credit Valuation Adjustment (“CVA”) and was $1.3 billion as of December 31, 2002, compared with $1.2 billion at December 31, 2001. The CVA is based on the expected future exposure (incorporating netting and collateral) to a counterparty, and on the counterparty’s credit spread in the credit derivatives market. The primary components of changes in CVA are credit spreads, new deal activity, deal unwinds and changes in the interest rate, equity, foreign exchange or commodity environment. The CVA increase in 2002 was primarily due to derivative receivables, which increased as a result of a drop in U.S. interest rates, increased interest rate volatility and widening of credit spreads during the year.

The Firm believes that dynamic risk management is essential to controlling the credit risk in the derivatives portfolio. The Firm hedges components of the CVA change by entering into credit derivative transactions as well as interest rate, foreign exchange, equity and commodity derivatives transactions when client deals are originated. These hedges are rebalanced as market conditions dictate, driven primarily by changes in the counterparties’ credit quality. If counterparty credit risk increases, the CVA increases to reflect the increased likelihood that the client will not perform. Correspondingly, the required market hedges to protect against subsequent credit-quality deterioration increase. The net impact of the change in CVA, plus the result of all forms of related hedging activity, is accounted for in Trading revenue and was not material to the overall trading results of the Firm for the year.

At December 31, 2002, 52% of the Firm’s counterparties in derivative transactions were investment-grade financial institutions, most of which are dealers in these products. The investment-grade portion of the derivative receivables was 87% at December 31, 2002. Nonperforming derivative receivables at December 31, 2002, were $289 million, compared with $1.3 billion at December 31, 2001. This decrease of $1.0 billion primarily related to the settlement of the Enron surety litigation.

J.P. Morgan Chase & Co./2002 Annual Report

Management’s discussion and analysis
J.P. Morgan Chase & Co.

The table below summarizes the risk profile, as of December 31, 2002, of the Firm’s balance sheet exposure to derivative contracts, net of cash and other highly liquid collateral:


Rating equivalent	Exposure net		% of exposure
(in millions)	of collateral (a)		net of collateral

AAA to AA-	$	25,560		49	%
A+ to A-		8,668		16
BBB+ to BBB-		9,467		18
BB+ to B-		7,440		14
CCC+ and below		1,557		3

Total	$	52,692		100	%

(a)

Total derivative receivables exposure and collateral held by the Firm against this exposure were $83 billion and $30 billion, respectively. The $30 billion excludes $2.7 billion of collateral delivered by clients at the initiation of transactions; this collateral secures exposure that could arise in the existing portfolio of derivatives should the MTM of the clients’ transactions move in the Firm’s favor. The $30 billion also excludes credit enhancements in the form of letters of credit and surety receivables.

Approximately two-thirds of the Firm’s derivatives transactions have associated collateral agreements, and collateralization as a primary form of credit risk mitigation continues to increase. The Firm held $30 billion of collateral as of December 31, 2002, compared with $20 billion as of December 31, 2001. The Firm posted $19 billion of collateral at year-end 2002, compared with $11 billion at the end of 2001. The increases were driven largely by the drop in U.S. interest rates and by new collateral agreements. In addition, derivative and collateral agreements include provisions that require both the Firm and the counterparty, upon specified downgrades in their respective credit ratings, to post collateral for the benefit of the other party. The impact on required collateral of a single-notch ratings downgrade to JPMorgan Chase Bank from its current rating of AA- to A+ would have been an additional $1.2 billion of collateral as of December 31, 2002. The impact of a six-notch ratings downgrade to JPMorgan Chase Bank (from AA- to BBB-) would have been $3.7 billion of additional collateral from current levels as of December 31, 2002. The amount of additional collateral required upon downgrade moves in tandem with the mark-to-market value of the derivatives portfolio and ranged from $2.6 billion to $3.8 billion through 2002 (related to a six-notch downgrade), as the level of U.S. interest rates changed. Moreover, certain derivatives contracts also provide for termination of the contract, generally upon JPMorgan Chase Bank being downgraded, at the then-existing mark-to-market value of the derivative receivables.

Use of credit derivatives

The following table presents the notional amounts of credit derivatives protection bought and sold at December 31, 2002:

Credit derivatives activity


	Portfolio management					Dealer/Client

	Notional amount					Notional amount

	Protection			Protection		Protection		Protection
(in millions)	bought			sold		bought		sold		Total

	$	34,262	(a)	$	495	$	158,794	$	172,494	$	366,045

(a)

Includes $10.1 billion of portfolio credit derivatives, of which $8 billion matures by June 30, 2003.

JPMorgan Chase has limited counterparty exposure as a result of credit derivatives transactions. Of the $83 billion of total derivative receivables at December 31, 2002, approximately $5.5 billion, or 7%, was associated with credit derivatives, before the benefit of collateral. The use of derivatives to manage exposures does not reduce the reported level of assets on the balance sheet or the level of reported off-balance sheet commitments.

Portfolio management activity

JPMorgan Chase’s commercial credit portfolio is composed of credit exposures to clients arising from both lending and derivatives activities. In managing this portfolio, single-name and portfolio credit derivatives are purchased by the Credit Portfolio Group to hedge these exposures. As of December 31, 2002, the notional outstanding of protection purchased via single-name and portfolio credit derivatives was $24 billion and $10 billion, respectively. The Firm also diversifies its exposures by providing (i.e., selling) small amounts of 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, and credit protection sold totaled less than $500 million in notional exposure at December 31, 2002.


Single-name and portfolio credit derivatives	Notional amount of
December 31, 2002 (in millions)	protection bought

Loans and lending-related commitments	$	25,222
Derivative receivables		9,040

Total	$	34,262

JPMorgan Chase’s utilization of credit derivatives for its portfolio management activities related to loans and lending-related commitments does not qualify for hedge accounting under SFAS 133. These derivatives are marked-to-market in Trading revenue, whereas the loans and lending-related commitments being hedged are accounted for on an accrual basis in Net interest income. This asymmetry in accounting treatment between loans and lending-related commitments and the derivatives utilized


J.P. Morgan Chase & Co./2002 Annual Report		52

in the portfolio management activities causes earnings volatility that is not representative of the true changes in value of the Firm’s overall credit exposures. The mark-to-market treatment of both the Firm’s derivatives hedges (“short” credit positions) and derivatives counterparty exposure (“long” credit positions) provide some natural offset of each other. Included in Trading revenue are gains of $127 million in 2002 related to credit derivatives that were used to hedge the Firm’s credit exposure. Of the $127 million, approximately $94 million was associated with credit derivatives used to hedge accrual lending activities. Trading revenues incorporate both the cost of hedge premiums and changes in value due to spread movements and credit events.

Dealer/client activity

JPMorgan Chase’s dealer activity in credit derivatives is client-driven. The business acts as a market maker in single-name credit derivatives and also structures more complex transactions for clients’ investment or risk management purposes. The credit derivatives trading function operates within the same framework as other market-making desks. Risk limits are established and closely monitored.

As of December 31, 2002, the total notional amounts of protection purchased and sold by the dealer business were $159 billion and $172 billion, respectively. The mismatch between these notional amounts is attributable to the Firm selling protection on large, diversified, predominantly investment-grade portfolios (including the most senior tranches), and then hedging these positions by buying protection on the more subordinated tranches of the same portfolios. In addition, the Firm may use securities to hedge certain derivative positions. Consequently, while there is a mismatch in notional amounts of credit derivatives, the risk positions are largely matched. The amount of credit risk contributed by the Firm’s credit derivatives dealer activity is immaterial in the context of JPMorgan Chase’s overall credit exposures.

Country exposure

The Firm has a comprehensive process for measuring and managing its country exposures and risk. Exposures to a country include all credit-related lending, trading and investment activities, whether cross-border or locally funded.

The table below presents JPMorgan Chase’s exposure to selected countries. This disclosure is based on management’s view of country exposure. 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 commercial risk. Total exposure includes exposure to both government and private-sector entities in a country.

While exposure to Mexico fluctuates as a result of trading activities, the decrease over the prior year was primarily due to loan maturities and reductions in counterparty exposure on derivatives. The decrease in exposure to Brazil over the prior year-end was due to reductions in loans and derivative exposures, as well as reductions in local government trading positions. Reductions in Argentina were due to a combination of maturities and write-downs. Exposure to Venezuela increased modestly as a result of trading positions.

Selected country exposure

At December 31, 2002

At December 31,

Cross-border

2001

Total

total

(in billions)

Lending (a)

Trading (b)

Other (c)

Total

local (d)

exposure

exposure

Mexico

1.0

0.6

0.2

1.8

0.4

2.2

2.6

Brazil

0.5

0.3

1.2

2.0

0.1

2.1

3.3

Argentina (e)

0.2

0.1

0.4

—

0.4

0.6

Venezuela

0.2

—

0.4

—

0.4

0.3

Japan

2.5

2.3

0.7

5.5

3.9

9.4

10.7

South Korea

0.9

0.6

0.3

1.8

0.9

2.7

3.1

Hong Kong

0.7

0.3

1.2

2.2

—

2.2

2.1

Indonesia

0.2

0.1

—

0.3

0.1

0.4

0.6

South Africa

0.3

0.2

0.1

0.6

—

0.6

0.7

Saudi Arabia

0.6

0.2

—

0.8

—

0.8

0.7

(a)		Lending includes loans and accrued interest receivable, interest-bearing deposits with banks, acceptances, other monetary assets, issued letters of credit, and undrawn commitments to extend credit.
(b)		Trading includes (1) issuer exposure on cross-border debt and equity instruments, held in both trading and investment accounts, adjusted for the impact of issuer hedges, including credit derivatives; and (2) counterparty exposure on derivative and foreign exchange contracts as well as security financing trades (resale agreements and securities borrowed).
(c)		Other represents mainly local exposure funded cross-border.
(d)		Local exposure is defined as exposure to a country denominated in local currency, booked and funded locally.
(e)		Trading exposure at December 31,2002 to Argentina is net of credit protection provided by third-party insurers in the form of surety bonds valued at $157 million against performing derivative trades.


53		J.P. Morgan Chase & Co./2002 Annual Report

Management’s discussion and analysis
J.P. Morgan Chase & Co.

Consumer portfolio

Consumer credit risk management uses sophisticated portfolio modeling, credit scoring and decision-support tools to project credit risks and establish underwriting standards. Risk parameters are established in the early stages of product development, and the cost of credit risk is an integral part of product pricing and evaluating profit dynamics. Consumer portfolios are monitored to identify deviations from expected performance and shifts in patterns of consumer behavior.

JPMorgan Chase’s consumer portfolio consists primarily of mortgages, credit cards and auto financings. This portfolio is predominantly U.S.-based and continues to be geographically well-diversified. The Firm’s managed consumer portfolio totaled $156 billion at December 31, 2002, an increase of $22 billion, or 16%, from 2001. The pie graph to the right provides a summary of the consumer portfolio by loan type at year-end 2002 and each loan type’s charge-off rate. The Firm’s largest component, residential mortgage loans, comprised 41% of the total consumer portfolio and is primarily secured by first mortgages.


			Charge-off rate:
Consumer managed loan portfolio:			2002			2001

Residential mortgage	41	%		0.10	%		0.09	%
Credit card managed	32	%		5.87	%		5.45	%
Auto	22	%		0.57	%		0.59	%
Other consumer	5	%		2.41	%		2.17	%

The following table presents managed consumer credit-related information for the dates indicated:

Credit-related

Nonperforming

Past due 90 days and

Average annual

As of or for the year ended

loans

assets (c)

Net charge-offs

over and accruing

net charge-off rate

December 31,

(in millions, except ratios)

2002

2001

2002

2001

2002

2001

2002

2001

2002

2001

Consumer:

U.S. consumer: