FORM 10-Q
Table of Contents

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

     
For the Quarterly Period Ended September 30, 2004   Commission file number 1-5805
     
     
JPMORGAN CHASE & CO.
(Exact name of registrant as specified in its charter)
     
     
Delaware   13-2624428
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
270 Park Avenue, New York, New York   10017
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code (212) 270-6000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes [X] No [   ]

 

Common Stock, $1 Par Value   3,562,463,202

 

Number of shares outstanding of each of the issuer’s classes of common stock on October 31, 2004.

 

 


FORM 10-Q
TABLE OF CONTENTS

             
        Page  
Part I – Financial information        
             
Item 1       60  
             
   
Consolidated Financial Statements – JPMorgan Chase & Co.:
       
             
        61  
             
        62  
             
        63  
             
        64  
             
        65–85  
             
        86–87  
             
        88–89  
             
Item 2       3  
             
           
             
        4  
             
        5-6  
             
        7-9  
             
        9-11  
             
        11-37  
             
        37-56  
             
        56  
             
        57-58  
             
        58-59  
             
Item 3       90  
             
Item 4       90  
             
Part II – Other information        
             
Item 1       91–94  
             
Item 2       95  
             
Item 3       95  
             
Item 4       95  
             
Item 5       95  
             
Item 6       95  
 EX-31.1 CERTIFICATION
 EX-31.2 CERTIFICATION
 EX-31.3 CERTIFICATION
 EX-32 CERTIFICATION

 

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Table of Contents

JPMORGAN CHASE & CO.
CONSOLIDATED FINANCIAL HIGHLIGHTS

                                                         
                                            Nine months ended
            Heritage JPMC Only   Sept. 30, (a)
(in millions, except per share, ratio and headcount data)   3Q 2004     2Q 2004     1Q 2004     4Q 2003     3Q 2003     2004     2003  
 
Selected income statement data
                                                       
Total net revenue
  $ 12,505     $ 8,631     $ 9,011     $ 8,106     $ 7,780     $ 30,147     $ 25,278  
Provision for credit losses
    1,169       203       15       139       223       1,387       1,401  
Noninterest expense
    9,377       9,503       6,093       5,258       5,127       24,973       16,558  
Net income (loss)
    1,418       (548 )     1,930       1,864       1,628       2,800       4,855  
Per common share
                                                       
Net income (loss) per share — diluted
  $ 0.39     $ (0.27 )   $ 0.92     $ 0.89     $ 0.78     $ 1.06     $ 2.35  
Cash dividends declared per share
    0.34       0.34       0.34       0.34       0.34       1.02       1.02  
Book value per share
    29.42       21.52       22.62       22.10       21.55                
Common shares outstanding:
                                                       
Average — diluted
    3,592.0       2,042.8       2,092.7       2,079.3       2,068.2       2,598.5       2,047.0  
Common shares at period-end
    3,564.1       2,087.5       2,081.7       2,042.6       2,039.2                  
Selected ratios
                                                       
Return on common equity (“ROE”) (b)
    5 %     NM       17 %     17 %     15 %     6 %     15 %
Return on equity-goodwill (“ROE-GW”) (b) (c)
    9       NM       21       20       18       8       19  
Return on assets (“ROA”) (b) (d)
    0.50       NM       1.01       0.95       0.83       0.42       0.84  
Tier 1 capital ratio
    8.6       8.2 %     8.4       8.5       8.7                  
Total capital ratio
    12.0       11.2       11.4       11.8       12.1                  
Selected balance sheet data (period end)
                                                       
Total assets
  $ 1,138,469     $ 817,763     $ 801,078     $ 770,912     $ 792,700                  
Wholesale loans
    132,344       77,044       77,068       75,419       74,847                  
Consumer loans
    261,357       148,894       140,562       139,347       150,440                  
Deposits
    496,454       346,539       336,886       326,492       313,626                  
Common stockholders’ equity
    104,844       44,932       47,092       45,145       43,948                  
Headcount
    162,275       94,615       96,010       96,367       95,931                  
Share price (e)
                                                       
High
  $ 40.25     $ 42.57     $ 43.84     $ 36.99     $ 38.26     $ 43.84     $ 38.26  
Low
    35.50       34.62       36.30       34.45       32.40       34.62       20.13  
Close
    39.73       38.77       41.95       36.73       34.33                  
Line of business earnings (f)
                                                       
Investment Bank
  $ 627     $ 644     $ 1,017     $ 809     $ 693     $ 2,288     $ 1,996  
Retail Financial Services
    822       396       206       305       181       1,424       1,242  
Card Services
    421       176       162       173       199       759       510  
Commercial Banking
    215       65       74       89       63       354       218  
Treasury & Securities Services
    96       101       98       123       115       295       299  
Asset & Wealth Management
    197       99       122       106       85       418       181  
Corporate (g)
    (219 )     325       251       259       292       357       409  
 
Total operating earnings
    2,159       1,806       1,930       1,864       1,628       5,895       4,855  
Reconciling items (after-tax)
                                                       
Merger costs
    (462 )     (60 )                       (522 )      
Litigation reserve charge
          (2,294 )                       (2,294 )      
Accounting policy conformity
    (279 )                             (279 )      
 
Net income (loss)
  $ 1,418     $ (548 )   $ 1,930     $ 1,864     $ 1,628     $ 2,800     $ 4,855  
(a)  
2004 year-to-date results include three months of the combined Firm’s results and six months of heritage JPMorgan Chase results, while 2003 year-to-date results include heritage JPMorgan Chase only.
(b)  
Based on annualized amounts.
(c)  
Net income applicable to common stock / Total average common equity (net of goodwill). The Firm uses return on equity less goodwill, a non-GAAP financial measure, to evaluate the operating performance of the Firm. The Firm utilizes this measure to facilitate comparisons to other competitors.
(d)  
U.S. GAAP earnings / Total average assets.
(e)  
JPMorgan Chase’s common stock is listed and traded on the New York Stock Exchange, the London Stock Exchange Limited and the Tokyo Stock Exchange. The high, low and closing prices of JPMorgan Chase’s common stock are from The New York Stock Exchange Composite Transaction Tape.
(f)  
Business segment earnings are presented on an operating basis. Operating basis excludes the after-tax impact of litigation charges taken in the second quarter of 2004, merger costs and accounting policy conformity adjustments. For more information about operating basis, see page 9 of this Form 10-Q.
(g)  
Includes Global Treasury, Private Equity, Support Units and the net effects remaining at the corporate level after the implementation of management accounting policies.
NM – Not meaningful due to net loss.

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See Glossary of Terms on pages 88–89 of this Form 10-Q for definitions of terms used throughout this Form 10-Q.

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

FORWARD-LOOKING STATEMENTS

The Management’s Discussion and Analysis included in this Form 10-Q contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based upon the current beliefs and expectations of the management of JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”) and are subject to significant risks and uncertainties. These risks and uncertainties could cause the Firm’s results to differ materially from those set forth in such forward-looking statements. Such risks and uncertainties are described herein and in the JPMorgan Chase Annual Report on Form 10-K for the year ended December 31, 2003, filed with the U.S. Securities and Exchange Commission (“SEC”) and available at the SEC’s Internet site (www.sec.gov), to which reference is hereby made.

Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “estimates,” “targeted” and similar expressions, and future or conditional verbs, such as “will,” “would,” “should,” “could” or “may,” are intended to identify forward-looking statements but are not the only means to identify these statements.

Forward-looking statements involve risks and uncertainties. Actual conditions, events or results may differ materially from those contemplated by a forward-looking statement. Factors that could cause this difference—many of which are beyond the Firm’s control—include the following, without limitation:

 
Local, regional and international business or economic conditions may differ from those expected.
 
The effects of and changes in trade, monetary and fiscal policies and laws, including the U.S. Federal Reserve Board’s interest rate policies, may adversely affect the Firm’s business.
 
The timeliness of development and acceptance of new products and services may be different than anticipated.
 
Technological changes instituted by the Firm and by persons who may affect the Firm’s business may be more difficult to accomplish or more expensive than anticipated or may have unforeseen consequences.
 
Mergers and/or acquisitions and integration of merged and/or acquired businesses may be more difficult or expensive than expected.
 
The ability to increase market share and control expenses may be more difficult than anticipated.
 
Competitive pressures among financial services companies may increase significantly.
 
Changes in laws and regulatory requirements (including those concerning taxes, banking, securities and insurance) may adversely affect the Firm or its businesses.
 
Changes in accounting policies and practices, as may be adopted by regulatory agencies, the Public Company Accounting Oversight Board and the Financial Accounting Standards Board, may affect expected financial reporting.
 
The costs, effects and outcomes of litigation may adversely affect the Firm or its businesses.
 
The Firm may not manage the risks involved in the foregoing as well as anticipated.

Any forward-looking statements made by or on behalf of the Firm in this Form 10-Q speak only as of the date of this Form 10-Q. 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.

INTRODUCTION

JPMorgan Chase is a financial holding company incorporated under Delaware law in 1968. JPMorgan Chase is a leading global financial services firm and one of the largest banking institutions in the United States, with more than $1.1 trillion in assets and operations in more than 50 countries. The Firm is a leader in investment banking, financial services for consumers and businesses, financial transaction processing, investment management, private banking and private equity. JPMorgan Chase serves more than 90 million customers consisting of consumers nationwide and many of the world’s most prominent wholesale clients. Its principal bank subsidiaries are JPMorgan Chase Bank, a New York banking corporation; Chase Manhattan Bank USA, National Association; Bank One, National Association with its main office located in Chicago, Illinois; and Bank One, National Association with its main office located in Columbus, Ohio. JPMorgan Chase’s principal nonbank subsidiary is J.P. Morgan Securities Inc. The bank and nonbank subsidiaries of JPMorgan Chase operate nationally as well as through overseas branches and subsidiaries, representative offices and affiliated banks.

JPMorgan Chase’s activities are internally organized, for management reporting purposes, into seven major business segments: Investment Bank; Retail Financial Services; Card Services; Commercial Banking; Treasury & Securities Services; Asset & Wealth Management and Corporate.

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MERGER WITH BANK ONE CORPORATION

Effective July 1, 2004, Bank One Corporation (“Bank One”) merged with and into JPMorgan Chase (the “Merger”), pursuant to the Agreement and Plan of Merger dated January 14, 2004. As a result of the Merger, each outstanding share of common stock of Bank One was converted in a stock-for-stock exchange into 1.32 shares of common stock of JPMorgan Chase. The Merger was accounted for using the purchase method of accounting. The purchase price to complete the Merger was $58.5 billion.

Bank One’s results of operations were included in the Firm’s results beginning July 1, 2004. Therefore, the results of operations for the three and nine months ended September 30, 2004, reflect three months of operations of the combined Firm. The results of operations for the three and nine months ended September 30, 2003, reflect only the operations of heritage JPMorgan Chase.

It is expected that cost savings of approximately $3.0 billion (pre-tax) will be achieved by 2007. Merger costs to combine the operations of JPMorgan Chase and Bank One are expected to be approximately $4.0 billion (pre-tax). Of these costs, approximately $1.0 billion, specifically related to Bank One, were accounted for as purchase accounting adjustments and were recorded as an increase to goodwill in the third quarter of 2004. Of the remaining approximately $3.0 billion in merger-related costs, $752 million (pre-tax) of the costs were incurred in the third quarter of 2004. The remaining approximately $2.2 billion is expected to be incurred over the next three years. The estimated merger-related charges will result from actions taken with respect to both JPMorgan Chase’s and Bank One’s operations, facilities and employees. The charges will be recorded based on the nature and timing of these integration actions. To date, Merger costs of $842 million have been charged to income.

As part of the Merger, certain accounting policies and practices were conformed, which resulted in $451 million (pre-tax) of charges in the third quarter of 2004, of which $721 million (pre-tax) related to the decertification of the seller’s retained interest in credit card securitizations. It is anticipated that a similar amount, approximately $700 million, will be taken in the fourth quarter of 2004 related to the decertification of credit card securitizations.

EXECUTIVE OVERVIEW

This overview of management’s discussion and analysis highlights selected information in this Form 10-Q and may not contain all of the information that is important to readers of this Form 10-Q. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources and critical accounting estimates, this entire Form 10-Q should be read carefully. Each of these items could have an impact on the Firm’s financial condition and results of operations. All comparisons are to the same period in prior years unless otherwise specified.

BUSINESS OVERVIEW
JPMorgan Chase reported 2004 third quarter net income of $1.4 billion, or $0.39 per share, compared with net income of $1.6 billion, or $0.78 per share, for the third quarter of 2003. Current-period results include $741 million in after-tax charges, or $0.21 per share, comprised of merger costs of $462 million and charges of $279 million to conform accounting policies, reflecting the Merger with Bank One completed on July 1, 2004. Excluding these charges, operating earnings would have been $2.2 billion, or $0.60 per share.

For the first nine months of 2004, reported net income was $2.8 billion, or $1.06 per share, compared with $4.9 billion, or $2.35 per share in the same period last year. Excluding year-to-date merger costs of $522 million (after-tax), or $0.20 per share, a $2.3 billion (after-tax) charge to increase litigation reserves, or $0.88 per share, and the aforementioned accounting policy conformity adjustments, or $0.11 per share, year-to-date operating earnings would have been $5.9 billion, or $2.25 per share.

Total revenues of $12.5 billion, in the third quarter, rose $4.7 billion or 61%, primarily due to the Merger with Bank One. Net interest income increased $2.3 billion primarily due to the Merger. Also contributing to the increase were higher residential mortgage, home equity and credit card loan balances, strong institutional and retail deposit growth, and improved spreads on deposits. These were partially offset by lower wholesale loan balances in the Investment Bank and lower investment securities, as well as tighter spreads on loans, investment securities and trading assets, stemming from the rise in interest rates.

Noninterest income increased $2.5 billion primarily due to the Merger. Also contributing to the increase were higher investment banking fees, the result of continued strength in debt underwriting and advisory fees. Credit card income increased due to higher charge volume, which generated increased interchange income. Asset management, administration and commissions were up due to the acquisitions of the Corporate Trust business of Bank One in November 2003, and Electronic Financial Services (“EFS”) in January 2004. In addition, global equity market appreciation, improved product mix and net asset inflows favorably impacted asset management and administration fees. Mortgage fees and related income were up reflecting improved performance in secondary marketing activities, partially offset by lower prime mortgage production. Private equity gains were also up due to improvement in the market for investment sales. These benefits were partially offset by the decline in trading revenues in the Investment Bank primarily related to the fixed income markets. Also negatively impacting noninterest income was lower lending and deposit-related fees due to rising interest rates.

For the first nine months of 2004, total revenues of $30.1 billion were up $4.9 billion or 19%, due primarily to the Merger with Bank One. Net interest income and noninterest income both were affected year-to-date in similar fashion to the discussion above for the third quarter of 2004 versus the third quarter of 2003.

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Expenses were $9.4 billion in the third quarter, up $4.3 billion or 83%, due to the addition of Bank One and $752 million of merger costs, partly offset by merger-related savings of $140 million. In addition to the Merger, expenses increased primarily due to the continuing effort to enhance the capabilities and infrastructure of the lines of business. Higher compensation expenses were related to increased salaries primarily in the Investment Bank and higher personnel costs across the Firm, partly offset by lower performance-related incentive accruals. Marketing expense reflected increased marketing activities in Card Services. Technology and communications expenses were impacted by higher usage driven by growth in businesses. Other expense was higher due to software impairment write-offs primarily in Treasury & Securities Services.

For the first nine months of 2004, expenses were $25.0 billion, up $8.4 billion or 51% from last year, primarily due to the addition of Bank One and merger costs of $842 million, partly offset by merger-related savings of $170 million. In addition, a litigation reserve charge of $3.7 billion was recorded in the second quarter of 2004. Absent these factors, expense increases were affected year-to-date in similar fashion to the discussion above for the third quarter of 2004 compared with the third quarter of 2003.

The third quarter of 2004 provision for credit losses of $1.2 billion increased by $946 million from the third quarter of 2003, primarily attributable to the Merger including accounting policy conformity charges.

The provision for credit losses for the first nine months of 2004 of $1.4 billion was flat compared with the same period in 2003. The effect of the Merger and accounting policy conformity charges was offset by releases in the Allowance for credit losses related to the wholesale loan portfolio primarily due to reduced risk in the Investment Bank. Retail Financial Services also experienced lower losses, which resulted in a lower provision. Nonperforming loans declined by 6% compared with the third quarter of 2003. The effect of the Merger was offset by improvement in the wholesale loan portfolio, which saw wholesale nonperforming loans drop 33% even after the inclusion of Bank One.

Tier 1 capital of $69.3 billion increased by 63% year-over-year and by 59% from June 30, 2004, due to the Merger. The Tier 1 capital ratio was 8.6% at September 30, 2004, 8.2% at June 30, 2004, and 8.7% at September 30, 2003.

BUSINESS OUTLOOK
Capital markets remain challenging overall with generally lower client activity and a more difficult trading environment. The Investment Bank remains cautious about trading revenues. The investment banking pipeline for underwriting and mergers and acquisition advisory activities, while lower than levels at the beginning of the third quarter, remains at significantly higher levels than a year ago. Realization of revenues in the Investment Bank fee pipeline is uncertain and can be impacted by changes in market conditions. Likewise, returns in private equity are difficult to predict, and the potential for realization of gains can vary from quarter to quarter.

In the consumer sector, earnings in Retail Financial Services are expected to moderate, as Home Finance earnings are likely to decline due to a market-driven drop in mortgage originations. Earnings in Auto & Education Finance are expected to remain under pressure as well given the competitive nature of the current operating environment. Growth is expected to continue in Consumer & Small Business Banking, with increases in core deposits and associated revenue, partially offset by ongoing investments in the branch network. In addition, Card Services operating results are expected to increase as the fourth quarter is generally seasonally strong.

The reduction in the Firm’s investment securities portfolio negatively impacted Net interest income during the third quarter. This change in the investment securities portfolio will continue to have an impact on Net interest income going forward.

Consumer credit trends are expected to remain stable, although a higher provision for credit losses is anticipated for Card Services due to the seasonal pattern of that business. Wholesale credit costs are expected to increase from the current negative provision level, and should return to more normal levels over time.

Charges to earnings resulting from the conformance of the Firm’s accounting policies will continue to affect earnings for the remainder of the year. The fourth quarter will include a charge of approximately $700 million related to the decertification of retained interests in credit card securitizations.

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CONSOLIDATED RESULTS OF OPERATIONS

The following section provides a discussion of JPMorgan Chase’s results of operations on a reported basis. All comparisons are to the same period in the prior year unless otherwise specified. Factors that are primarily related to a single business segment are discussed in more detail within that business segment than they are in this consolidated section.

TOTAL NET REVENUE

The following table presents the components of Total net revenue:
                                                 
    H-JPMC Only   Nine months ended September 30, (a)
(in millions)   3Q 2004     3Q 2003     Change     2004     2003     Change  
 
Investment banking fees
  $ 879     $ 649       35 %   $ 2,464     $ 2,044       21 %
Trading revenue (b)
    408       829       (51 )     3,001       3,673       (18 )
Lending & deposit related fees
    943       456       107       1,769       1,276       39  
Asset management, administration and commissions
    2,141       1,518       41       5,682       4,320       32  
Securities/private equity gains (losses)
    413       284       45       1,305       1,287       1  
Mortgage fees and related income
    277       15       NM       874       774       13  
Credit card income (c)
    1,782       635       181       3,018       1,781       69  
Other income
    210       196       7       602       340       77  
                     
Subtotal
    7,053       4,582       54       18,715       15,495       21  
Net interest income (b)
    5,452       3,198       70       11,432       9,783       17  
                     
Total net revenue
  $ 12,505     $ 7,780       61 %   $ 30,147     $ 25,278       19 %
(a)  
2004 year-to-date results include three months of the combined Firm’s results and six months of heritage JPMorgan Chase results, while 2003 year-to-date results include heritage JPMorgan Chase only.
(b)  
Trading NII is not included in trading revenue. See IB on pages 13–16 for additional details.
(c)  
Includes debit card revenue in Retail Financial Services.
 

For a discussion of Investment banking fees and Trading revenue, which are primarily recorded in the Investment Bank, see the Investment Bank’s segment results on pages 13–16 of this Form 10-Q.

Lending & deposit-related fees were up from the 2003 quarterly and year-to-date periods due to Bank One’s addition. This was partly offset by lower service charges on deposits resulting from a change in the calculation methodology and an increase in payment of services with deposits, versus fees, due to rising interest rates. Loan commitment fees also decreased from the prior quarter reflecting lower volumes of outstanding commitments.

The increase in Asset management, administration and commissions for all periods was driven by fees and commissions from Bank One. Also contributing to the growth was the impact of other acquisitions, such as Bank One’s Corporate Trust business in November 2003, and EFS in January 2004, and the effect of favorable global equity markets, better product mix and net asset inflows. For additional information on these fees and commissions, see the segment discussions for Asset & Wealth Management on pages 32–34, Treasury & Securities Services on pages 30–31 and Retail Financial Services on pages 17–24 of this Form 10-Q.

Securities/private equity gains (losses) for the three months ended September 30, 2004, rose significantly from the same period of 2003, primarily fueled by the improvement in the Firm’s private equity investment results. This was partly offset by lower securities gains on the treasury investment portfolio as a result of lower volumes of securities sold and lower gains on sales due to higher interest rates. For a further discussion of Private equity gains (losses), which are primarily recorded in the Firm’s private equity business, see the Corporate segment discussion on pages 35–37 of this Form 10-Q.

For a discussion of Mortgage fees and related income, which is primarily recorded in Retail Financial Services’ Home Finance business line, see the Home Finance discussion on pages 19–21 of this Form 10-Q.

The Merger and higher customer purchase volume, which resulted in increased interchange income, were the primary factors for the increases in Credit card income from the 2003 quarterly and year-to-date periods. The increases were partly offset by higher volume-driven payments to partners and reward expenses. See Card Services discussion on pages 25–27 of this Form 10-Q.

The increase in Other income from all prior periods reflected the inclusion of Bank One, as well as a gain on leveraged lease transactions in the third quarter of 2004, partially offset by lower gains from loan workouts and from the securitization of credit cards and wholesale loans backed by commercial real estate.

Net interest income rose from the 2003 quarterly and year-to-date periods principally as a result of the Merger. In addition, increases in volumes of consumer loans and deposits, as well as wider spreads on deposits contributed to higher net interest income compared with the 2003 periods. These were partially offset by lower wholesale loan balances in the Investment Bank and lower investment securities, as well as tighter spreads on loans, investment securities and trading assets, stemming from the rise in interest rates.

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On an aggregate basis, the Firm’s total average interest-earning assets for the third quarter of 2004 were $868 billion, up $277 billion from 2003, largely resulting from the Merger. The net interest yield on these assets, on a fully taxable-equivalent basis, was 2.52% in the 2004 third quarter, 37 basis points higher than in the same period last year. The Firm’s total average interest-earning assets for the nine month period ended September 30, 2004, were $694 billion, up $107 billion from 2003, largely due to the Merger. The net interest yield on these assets, on a fully taxable-equivalent basis, was 2.22% in 2004, two basis points lower than 2003.

PROVISION FOR CREDIT LOSSES

The Provision for credit losses for the third quarter of 2004 was $1.2 billion, up $946 million, primarily due to the Merger, including $333 million of accounting policy conformity adjustments. The accounting policy conformity adjustments included $721 million related to the decertification of the seller’s retained interest in credit card securitizations, partially offset by a benefit of $388 million related to conforming provision methodologies for the combined Firm. Excluding the impact of these adjustments, the total wholesale provision for credit losses was a benefit of $137 million, compared with a benefit of $169 million in the prior year. The total consumer provision for credit losses was $973 million, compared with $392 million in the prior year.

The 2004 year-to-date Provision for credit losses was $1.4 billion, relatively flat when compared with the prior year. Excluding the aforementioned accounting policy conformity adjustments, the Provision for credit losses would have been $1.1 billion, down $347 million, from $1.4 billion in 2003. The decrease was primarily due to improvement in credit quality of the wholesale portfolio. The total wholesale provision for credit losses was a benefit of $546 million, compared with a provision of $248 million in the prior year. The total consumer provision for credit losses was $1.6 billion, compared with $1.2 billion in 2003.

NONINTEREST EXPENSE

The following table presents the components of Noninterest expense:

                                                 

    H-JPMC Only   Nine months ended September 30, (a)
(in millions)   3Q 2004     3Q 2003     Change     2004     2003     Change  
 
Compensation expense
  $ 4,050     $ 2,631       54 %   $ 10,295     $ 8,879       16 %
Occupancy expense
    604       391       54       1,475       1,430       3  
Technology and communications expense
    1,046       719       45       2,651       2,088       27  
Professional & outside services
    1,103       703       57       2,671       2,098       27  
Marketing
    506       179       183       907       510       78  
Other expense
    920       431       113       1,878       1,233       52  
Amortization of intangibles
    396       73       442       554       220       152  
                     
Total noninterest expense before merger costs and litigation reserve charge
    8,625       5,127       68       20,431       16,458       24  
Merger costs
    752             NM       842             NM  
Litigation reserve charge
                NM       3,700       100       NM  
                     
Total noninterest expense
  $ 9,377     $ 5,127       83 %   $ 24,973     $ 16,558       51 %
(a)  
2004 year-to-date results include three months of the combined Firm’s results and six months of heritage JPMorgan Chase results, while 2003 year-to-date results include heritage JPMorgan Chase only.
 

The increase in Compensation expense from the prior-year third quarter and year-to-date periods was primarily driven by the Merger, as well as higher personnel costs, and stock-based incentive accruals, partly offset by lower pension costs and performance-related incentive accruals in 2004. The lower pension costs were mainly attributable to the increase in the expected return on plan assets from a discretionary $1.1 billion contribution to the Firm’s pension plan in April 2004, partially offset by changes in actuarial assumptions for 2004 compared with 2003.

The increase in Occupancy expense from the 2003 third quarter and year-to-date periods was primarily the result of the Merger. The Firm incurred $42 million in higher charges for excess real estate in the 2004 third quarter, compared with 2003; these charges were $138 million lower on a year-to-date basis compared with 2003. The Firm will continue to evaluate its current and projected space requirements in light of the Merger.

Growth in Technology and communications expense from the prior year quarter and year-to-date periods of 2003 were due to the merger with Bank One and higher costs associated with greater use of technology services.

Professional & outside services rose from both comparable 2003 periods as a result of the Merger, as well as higher legal costs. In particular, outside services increased as a result of acquisitions, primarily EFS, at Treasury & Securities Services and Card Services.

The increase in Marketing expense from the 2003 third quarter and year-to-date periods reflected the Merger. In addition, the costs of marketing campaigns in Card Services also contributed to the increase from the 2003 third quarter and year-to-date periods.

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Other expense was higher from both prior year periods due to Bank One, software impairment write-offs of $101 million, primarily in Treasury & Securities Services, and the impact of growth in business volume.

The increase in Amortization of Intangibles was primarily attributable to the Merger.

For further details on Merger costs, refer to Note 7 on page 70 of this Form 10-Q.

At June 30, 2004, JPMorgan Chase recorded a Litigation reserve charge of $3.7 billion for several regulatory and legal-related matters. For a further discussion, see Note 17 on page 82 of this Form 10-Q. The second quarter of 2003 included a charge of $100 million for Enron-related litigation.

Income tax expense

The Firm’s Income before income tax expense, Income tax expense and effective tax rate for each of the periods indicated were as follows:
                                 
            H-JPMC Only     Nine months ended September 30, (a)
(in millions)   3Q 2004     3Q 2003     2004     2003  
 
Income before income tax expense
  $ 1,959     $ 2,430     $ 3,787     $ 7,319  
Income tax expense
    541       802       987       2,464  
Effective tax rate
    27.6 %     33.0 %     26.1 %     33.7 %
(a)  
2004 year-to-date results include three months of the combined Firm’s results and six months of heritage JPMorgan Chase results, while 2003 year-to-date results include heritage JPMorgan Chase only.
 

The reduction in the effective tax rates for the third quarter and first nine months of 2004, as compared with the prior periods was the result of various factors, including lower reported pre-tax income and changes in the proportion of income subject to federal, state and local taxes. The Merger costs and accounting policy conformity adjustments recorded in the third quarter of 2004 and the Litigation reserve charge recorded in the second quarter of 2004 reflect a tax benefit at a 38% marginal tax rate, contributing to the reduction in the effective tax rates compared with prior periods. Additionally, the third quarter and first nine months of 2004 reflect a reduction in income tax expense associated with the settlement of prior year income tax examinations, partly offset by an increase in income tax expense resulting from leveraged lease terminations.

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

The Firm prepares its Consolidated financial statements using U.S. GAAP; these financial statements appear on pages 61–64 of this Form 10-Q. That presentation, which is referred to as “reported basis,” provides the reader with an understanding of the Firm’s results that can be consistently tracked from year to year and enables a comparison of the Firm’s performance with other companies’ U.S. GAAP financial statements.

In addition to analyzing the Firm’s results on a reported basis, management reviews the line-of-business results on an “operating basis,” which is a non-GAAP financial measure. The definition of operating basis starts with the reported U.S. GAAP results. In the case of the Investment Bank, operating basis noninterest revenue includes, in Trading revenue, net interest income related to trading activities. Trading activities generate revenues, which are recorded for U.S. GAAP purposes in two line items on the income statement: Trading revenue, which includes the mark-to-market gains or losses on trading positions; and Net interest income, which includes the interest income or expense related to those positions. Combining both the trading revenue and related net interest income enables management to evaluate Investment Bank’s trading activities, by considering all revenue related to these activities, and facilitates operating comparisons to other competitors. For a further discussion of trading-related revenue, see the Investment Bank on pages 13–16 of this Form 10-Q.

In the case of Card Services, operating or managed basis excludes the impact of credit card securitizations on revenue, the Provision for credit losses, net charge-offs and receivables. JPMorgan Chase uses the concept of “managed receivables” to evaluate the credit performance of the underlying credit card loans, both sold and not sold: as the same borrower is continuing to use the credit card for ongoing charges, a borrower’s credit performance will impact both the receivables sold under SFAS 140 and those not sold. Thus, in its disclosures regarding managed receivables, JPMorgan Chase treats the sold receivables as if they were still on the balance sheet in order to disclose the credit performance (such as net charge-off rates) of the entire managed credit card portfolio. For a further discussion of credit card securitizations, see Card Services on pages 25–27 of this Form 10-Q.

Finally, operating basis excludes the Merger costs, the Litigation reserve charge and accounting policy conformity adjustments related to the Merger, as management believes these items are not part of the Firm’s normal daily business operations (and, therefore, not indicative of trends), and do not provide meaningful comparisons with other periods.

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The following summary table provides a reconciliation from the Firm’s reported to operating results:

 

Reconciliation from reported to operating basis

                                                 
    H-JPMC Only   Nine months ended September 30, (a)
(in millions)   3Q 2004     3Q 2003     Change     2004     2003     Change  
 
Reported
                                               
Revenue
                                               
Investment banking fees
  $ 879     $ 649       35 %   $ 2,464     $ 2,044       21 %
Trading revenue
    408       829       (51 )     3,001       3,673       (18 )
Lending & deposit related fees
    943       456       107       1,769       1,276       39  
Asset management, administration and commissions
    2,141       1,518       41       5,682       4,320       32  
Securities / private equity gains (losses)
    413       284       45       1,305       1,287       1  
Mortgage fees and related income
    277       15       NM       874       774       13  
Credit card income
    1,782       635       181       3,018       1,781       69  
Other income
    210       196       7       602       340       77  
                     
Subtotal
    7,053       4,582       54       18,715       15,495       21  
Net interest income
    5,452       3,198       70       11,432       9,783       17  
                     
Total net revenue
    12,505       7,780       61       30,147       25,278       19  
Provision for credit losses
    1,169       223       424       1,387       1,401       (1 )
Noninterest expense
                                               
Merger costs
    752             NM       842             NM  
Litigation reserve charge
                NM       3,700       100       NM  
All other noninterest expense
    8,625       5,127       68       20,431       16,458       24  
                     
Total noninterest expense
    9,377       5,127       83       24,973       16,558       51  
Income before income tax expense
    1,959       2,430       (19 )     3,787       7,319       (48 )
Income tax expense
    541       802       (33 )     987       2,464       (60 )
                     
Net income
  $ 1,418     $ 1,628       (13 )   $ 2,800     $ 4,855       (42 )
                     
Reconciling items (b)
                                               
Revenue
                                               
Trading-related revenue (c)
  $ 424     $ 449       (6 )   $ 1,439     $ 1,611       (11 )
Credit card income (d)
    (848 )     (363 )     (134 )     (1,481 )     (1,011 )     (46 )
Other income
                                               
Credit card securitizations (d)
    (3 )     (14 )     79       (87 )     (42 )     (107 )
Accounting policy conformity (e)
    118             NM       118             NM  
                     
Total other income
    115       (14 )     NM       31       (42 )     NM  
Net interest income:
                                               
Trading-related (c)
    (424 )     (449 )     6       (1,439 )     (1,611 )     11  
Credit card securitizations (d)
    1,779       848       110       3,455       2,461       40  
                     
Total net interest income
    1,355       399       240       2,016       850       137  
                     
Total net revenue
    1,046       471       122       2,005       1,408       42  
Provision for credit losses
                                               
Credit card securitizations (d)
    928       471       97       1,887       1,408       34  
Accounting policy conformity (e)
    (333 )           NM       (333 )           NM  
                     
Total provision for credit losses
    595       471       26       1,554       1,408       10  
Noninterest expense
                                               
Merger costs (e)
    (752 )           NM       (842 )           NM  
Litigation reserve charge (e)
                NM       (3,700 )           NM  
All other noninterest expense
                NM                   NM  
                     
Total noninterest expense
    (752 )           NM       (4,542 )           NM  
Income before income tax expense
    1,203             NM       4,993             NM  
Income tax expense
    462             NM       1,898             NM  
                     
Net income
  $ 741     $       NM     $ 3,095     $       NM  
 

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    H-JPMC Only   Nine months ended September 30, (a)
(in millions)   3Q 2004     3Q 2003     Change     2004     2003     Change  
 
Operating
                                               
Revenue
                                               
Investment banking fees
  $ 879     $ 649       35 %   $ 2,464     $ 2,044       21 %
Trading-related revenue (including trading NII)
    832       1,278       (35 )     4,440       5,284       (16 )
Lending & deposit related fees
    943       456       107       1,769       1,276       39  
Asset management, administration and commissions
    2,141       1,518       41       5,682       4,320       32  
Securities / private equity gains (losses)
    413       284       45       1,305       1,287       1  
Mortgage fees and related income
    277       15       NM       874       774       13  
Credit card income
    934       272       243       1,537       770       100  
Other income
    325       182       79       633       298       112  
                     
Subtotal
    6,744       4,654       45       18,704       16,053       17  
 
Net interest income
    6,807       3,597       89       13,448       10,633       26  
                     
 
Total net revenue
    13,551       8,251       64       32,152       26,686       20  
 
Managed provision for credit losses
    1,764       694       154       2,941       2,809       5  
 
Noninterest expense
                                               
Merger costs
                NM                   NM  
Litigation reserve charge
                NM                   NM  
All other noninterest expense
    8,625       5,127       68       20,431       16,558       23  
                     
Total noninterest expense
    8,625       5,127       68       20,431       16,558       23  
 
Operating earnings before income tax expense
    3,162       2,430       30       8,780       7,319       20  
Income tax expense
    1,003       802       25       2,885       2,464       17  
                     
Operating earnings
  $ 2,159     $ 1,628       33 %   $ 5,895     $ 4,855       21 %
(a)  
2004 year-to-date results include three months of the combined Firm’s results and six months of heritage JPMorgan Chase results, while 2003 year-to-date results include heritage JPMorgan Chase only.
(b)  
Represents only those line items in the Consolidated statements of income affected by the reclassification of trading-related net interest income and the impact of credit card securitizations, as well as, for the third quarter and first nine months of 2004, the Merger costs and Litigation reserve charge line items on the Consolidated statements of income and the accounting policy conformity adjustments.
(c)  
The reclassification of trading-related net interest income from Net interest income to Trading revenue primarily impacts the Investment Bank segment results. See pages 13–16 of this Form 10-Q for further information.
(d)  
The impact of credit card securitizations impacts Card Services. See pages 25–27 of this Form 10-Q for further information.
(e)  
The impact of the Merger costs, Litigation reserve charge and accounting policy conformity adjustments are excluded from Operating earnings, as management believes these items are not part of the Firm’s normal daily business operations (and, therefore, not indicative of trends), and do not provide meaningful comparisons with other periods.
 

Management uses certain non-GAAP financial measures at the segment level. Management believes these non-GAAP financial measures provide information to investors in understanding the underlying operational performance and performance trends of the particular business segment and facilitate a comparison with the performance of competitors. These include managed loans and managed assets in Card Services. For a discussion of these business segment-specific non-GAAP financial measures, see the disclosures in Card Services on pages 25–27 of this Form 10-Q.

For a reconciliation of the Firm’s consolidated average assets to average managed assets, a non-GAAP financial measure, see Note 20 of this Form 10-Q.

BUSINESS SEGMENT RESULTS

The Firm is managed on a line-of-business basis. The business segment financial results presented reflect the current organization of JPMorgan Chase. There are seven major segments: the Investment Bank (“IB”), Retail Financial Services (“RFS”), Card Services (“CS”), Commercial Banking (“CB”), Treasury & Securities Services (“TSS”), Asset & Wealth Management (“AWM”) and Corporate. These segments are based on the products and services provided, or the type of customer served, and they reflect the manner in which financial information is currently evaluated by management. Results of these lines of business are presented on an operating basis.

In connection with the Merger, business segment reporting was realigned to reflect the new business structure of the combined Firm. Global Treasury was transferred from the IB into Corporate. TSS remains unchanged. Investment Management & Private Banking has been renamed Asset & Wealth Management. JPMorgan Partners, which formerly was a stand-alone business segment, was moved into Corporate. The segment formerly known as Chase Financial Services was comprised of Chase Home Finance,

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Chase Cardmember Services, Chase Auto Finance, Chase Regional Banking and Chase Middle Market. As a result of the Merger, this segment is now called Retail Financial Services and is comprised of Home Finance, Auto & Education Finance, Consumer & Small Business Banking and Insurance. Chase Middle Market moved into CB, and Chase Cardmember Services is now its own segment called Card Services. Lastly, Corporate is currently comprised of Global Treasury and Private Equity, formerly JPMorgan Partners, as well as corporate support areas which include Corporate Treasury, Central Technology and Operations, Internal Audit, the Executive Office, General Services, Global Finance, Human Resources, Marketing and Communications, Office of the General Counsel, Real Estate Business Services, Risk Management and Strategy and Development.

Segment results for periods prior to the third quarter of 2004 reflect heritage JPMorgan Chase only results and have been restated to reflect the current business segments and reporting classifications. The following table summarizes Operating earnings by line of business for the periods indicated:

                                 
Operating earnings (loss)         H-JPMC Only         Nine months ended September 30, (a)
(in millions)   3Q 2004     3Q 2003     2004     2003  
 
Investment Bank
  $ 627     $ 693     $ 2,288     $ 1,996  
Retail Financial Services
    822       181       1,424       1,242  
Card Services
    421       199       759       510  
Commercial Banking
    215       63       354       218  
Treasury & Securities Services
    96       115       295       299  
Asset & Wealth Management
    197       85       418       181  
Corporate
    (219 )     292       357       409  
 
Total operating earnings
  $ 2,159     $ 1,628     $ 5,895     $ 4,855  
(a)  
2004 year-to-date results include three months of the combined Firm’s results and six months of heritage JPMorgan Chase results, while 2003 year-to-date results include heritage JPMorgan Chase only.
 

Description of Methodology

The results of the business segments are intended to reflect each segment as if it were essentially a stand-alone business. The management reporting process that derives these results allocates income and expenses using market-based methodologies. Funds transfer pricing is used to allocate interest income and interest expense to each line of business. Business segments retain interest rate exposure related to customer pricing and other business specific risks that cannot be efficiently risk managed using market-based instruments. The balance of the Firm’s overall interest rate exposure is included and managed in the Corporate sector. In addition, each business segment is allocated capital based on new capital allocation methodologies implemented during the third quarter of 2004 in connection with the Merger. For each line of business, the amount of capital allocated to each of the business segments considers several factors: stand-alone peer comparables, economic risk measures and regulatory capital requirements. The amount of capital assigned to each business is referred to as equity. In addition, effective with the third quarter of 2004, goodwill, as well as the associated capital, is allocated solely to the Corporate line of business. Although U.S. GAAP requires the allocation of goodwill to the business segments for impairment testing (see Note 14), the Firm has elected not to include goodwill or the related capital in each of the businesses for management reporting purposes. Prior periods have not been revised to reflect these new methodologies and thus may not be comparable to the presentation beginning in the third quarter of 2004. See the “Capital Management” section on page 39 of this Form 10-Q for a discussion of the equity framework.

The costs of certain support units are allocated to the lines of business based on actual cost, or the lower of actual or market cost, as well as usage of services provided. This method is consistently applied to all lines of business. Certain expenses related to corporate functions, technology and operations are not allocated to the business segments and are reflected in Corporate. Expenses that have been retained in Corporate and not charged to the business segments include parent company costs that would not be incurred if the segments were stand-alone businesses; market price adjustments for certain corporate functions, technology and operations; and certain start-up and development costs of corporate-wide initiatives.

Certain information provided in the following business segment tables (e.g., Financial Ratios, Business Metrics, Financial Metrics, Market Share/Rankings) is included herein for analytical purposes only and is based on management information systems, assumptions and methodologies that are under continual review by management. It is expected that the Firm will continuously assess the assumptions, methodologies and reporting reclassifications used for segment reporting and further refinements may be implemented in future periods.

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INVESTMENT BANK

JPMorgan Chase’s IB is one of the world’s leading investment banks, with broad client relationships and product capabilities. The Firm’s customers are corporations, financial institutions, governments and institutional investors worldwide. The IB provides a complete platform for its clients, including advising on corporate strategy and structure, equity and debt capital raising, sophisticated risk management and market-making in cash securities and derivative instruments around the world. The IB also participates in proprietary investing and trading. As a result of the Merger, the Global Treasury business has been transferred to the Corporate sector and prior periods have been restated to reflect the reorganization. For a discussion of the business profile of the IB, see pages 29–30 of JPMorgan Chase’s 2003 Annual Report. The following table sets forth selected IB financial and business-related data:
                                                 
    H-JPMC Only   Nine months ended September 30, (a)
(in millions, except headcount and ratio data)   3Q 2004     3Q 2003     Change     2004     2003     Change  
 
Revenue
                                               
Investment banking fees:
                                               
Advisory
  $ 273     $ 161       70 %   $ 688     $ 483       42 %
Equity underwriting
    170       173       (2 )     568       444       28  
Debt underwriting
    468       305       53       1,236       1,104       12  
                     
Total investment banking fees
    911       639       43       2,492       2,031       23  
Trading-related revenue: (b)
                                               
Fixed income and other
    657       1,163       (44 )     3,835       4,857       (21 )
Equities
    220       97       127       469       460       2  
Credit portfolio
    (35 )     (17 )     (106 )     50       (136 )     NM  
                     
Total trading-related revenue
    842       1,243       (32 )     4,354       5,181       (16 )
Lending & deposit related fees
    155       115       35       363       309       17  
Asset management, administration and commissions
    313       314             1,054       908       16  
Other income
    91       50       82       150       38       295  
                     
Subtotal
    2,312       2,361       (2 )     8,413       8,467       (1 )
Net interest income (b)
    389       431       (10 )     991       1,319       (25 )
                     
Total net revenue (c)
  $ 2,701     $ 2,792       (3 )   $ 9,404     $ 9,786       (4 )
Provision for credit losses
    (151 )     (181 )     17       (467 )     60       NM  
Credit reimbursement from TSS (d)
    43       (10 )     NM       47       (31 )     NM  
Noninterest expense
                                               
Compensation expense
    992       956       4       3,504       3,641       (4 )
Noncompensation expense
    932       865       8       2,802       2,860       (2 )
Amortization of intangibles
                NM                   NM  
                     
Total noninterest expense
    1,924       1,821       6       6,306       6,501       (3 )
Operating earnings before income tax expense
    971       1,142       (15 )     3,612       3,194       13  
Income tax expense
    344       449       (23 )     1,324       1,198       11  
                     
Operating earnings
  $ 627     $ 693       (10 )   $ 2,288     $ 1,996       15  
Financial ratios
                                               
ROE
    12 %     15 %     (300 )bp     19 %     14 %     500 bp
ROA
    0.50       0.63       (13 )     0.68       0.61       7  
Overhead ratio
    71       65       600       67       66       100  
Compensation expense as % of total net revenue
    37       34       300       37       37        
Revenue by business:
                                               
Investment banking
  $ 911     $ 639       43 %   $ 2,492     $ 2,031       23 %
Fixed income markets
    1,115       1,451       (23 )     4,784       5,608       (15 )
Equities markets
    455       312       46       1,248       1,088       15  
Credit portfolio
    220       390       (44 )     880       1,059       (17 )
                     
Total net revenue
  $ 2,701     $ 2,792       (3 )   $ 9,404     $ 9,786       (4 )
Revenue by region:
                                               
Americas
  $ 1,591     $ 1,651       (4 )   $ 5,041     $ 5,532       (9 )
Europe/Middle East/Africa
    741       904       (18 )     3,069       3,434       (11 )
Asia/Pacific
    369       237       56       1,294       820       58  
                     
Total net revenue
  $ 2,701     $ 2,792       (3 )   $ 9,404     $ 9,786       (4 )
                     

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    H-JPMC Only Nine months ended September 30, (a)
(in millions, except headcount and ratio data)   3Q 2004     3Q 2003     Change     2004     2003     Change  
 
Selected Balance Sheet (Average)
                                               
Total assets
  $ 496,347     $ 434,911       14 %   $ 452,714     $ 434,717       4 %
Trading assets — debt and equity instruments
    166,795       144,130       16       170,073       152,199       12  
Trading assets — derivative receivables
    60,465       80,850       (25 )     56,492       84,970       (34 )
Loans (e)
    45,779       42,932       7       40,920       46,815       (13 )
Adjusted assets (f)
    431,772       387,804       11       408,841       391,835       4  
Equity (g)
    20,000       17,949       11       16,380       19,074       (14 )
Headcount
    17,420       14,470       20                          
Credit Data and Quality Statistics:
                                               
Net charge-offs
  $ (16 )   $ 217       NM     $ 33     $ 695       (95 )
Nonperforming assets:
                                               
Nonperforming loans (h)
    1,075       2,400       (55 )     1,075       2,400       (55 )
Other nonperforming assets
    246       378       (35 )     246       378       (35 )
Allowance for loan losses
    1,841       1,270       45       1,841       1,270       45  
Allowance for lending related commitments
    358       247       45       358       247       45  
Net charge-off rate
    (0.17 )%     2.17 %     (234 )bp     0.13 %     2.16 %     (203 )bp
Allowance for loan losses to average loans
    4.78       3.21       157       5.26       2.95       231  
Allowance for loan losses to nonperforming loans
    172       56       NM       172       56       NM  
Nonperforming loans to average loans
    2.35       5.59       (324 )     2.63       5.13       (250 )
Market risk — average trading and credit portfolio VAR (i)(j)
                                               
Trading activities:
                                               
Fixed income (i)
  $ 80     $ 62       29 %   $ 77     $ 60       28 %
Foreign exchange
    13       15       (13 )     17       16       6  
Equities
    25       12       108       31       11       182  
Commodities and other
    10       9       11       9       8       13  
Diversification
    (43 )     (32 )     (34 )     (45 )     (38 )     (18 )
                     
Total trading VAR
    85       66       29       89       57       56  
Credit portfolio VAR (j)
    13       19       (32 )     14       18       (22 )
Diversification
    (9 )     (17 )     47       (8 )     (14 )     43  
                     
Total trading and credit portfolio VAR
  $ 89     $ 68       31     $ 95     $ 61       56  
 
(a)  
2004 year-to-date results include three months of the combined Firm’s results and six months of heritage JPMorgan Chase results, while 2003 year-to-date results include heritage JPMorgan Chase only.
(b)  
Trading revenue, on a reported basis, excludes the impact of net interest income related to IB’s trading activities; this income is recorded in Net interest income. However, in this presentation, to assess the profitability of IB’s trading business, the Firm combines these revenues for segment reporting. The amount reclassified from Net interest income to Trading revenue was $0.4 billion during both of the quarters ended September 30, 2004 and 2003, and $1.4 billion and $1.6 billion for the nine months ended September 30, 2004 and 2003, respectively.
(c)  
Operating revenue includes tax equivalent adjustments of $9 million and $57 million during the quarter ended September 30, 2004 and 2003, respectively, and $180 million and $173 million for the nine months ended September 30, 2004 and 2003, respectively.
(d)  
Management has charged TSS a credit reimbursement, which is the pre-tax amount of earnings, less cost of capital, related to certain exposures managed within the IB credit portfolio on behalf of clients shared with TSS.
(e)  
Loans include loans held for sale of $7.3 billion and $3.3 billion as of September 30, 2004, and September 30, 2003, respectively. The year-to-date average loans held for sale are $5.9 billion and $3.8 billion for 2004 and 2003, respectively. These amounts are not included in the allowance coverage ratios and net charge-off rates.
(f)  
Adjusted assets equals total assets minus (1) securities purchased under resale agreements and securities borrowed less securities sold, not yet purchased; (2) assets of VIEs consolidated under FIN46R; (3) cash and securities segregated and on deposit for regulatory and other purposes; and (4) goodwill and intangibles. The amount of adjusted assets is presented to assist the reader in comparing the IB’s asset and capital levels to other investment banks in the securities industry. Asset to equity leverage ratios are commonly used as one measure to assess a company’s capital adequacy. The IB believes an adjusted asset amount, which excludes certain assets considered to have a low risk profile, provides a more meaningful measure of balance sheet leverage in the securities industry. See page 37 for a discussion of the Firm’s overall capital adequacy and capital management.
(g)  
Equity includes $15.7 billion of economic risk capital assigned to the IB for the three months ended September 30, 2004.
(h)  
Nonperforming loans include loans held for sale of $4 million and $138 million as of September 30, 2004, and September 30, 2003, respectively. These amounts are not included in the allowance coverage ratios and net charge-off rates.
(i)  
Includes all mark-to-market trading activities, plus available-for-sale securities held for IB investing purposes.
(j)  
Includes VAR on derivative credit valuation adjustments, credit valuation adjustment hedges and mark-to-market loan hedges, which are reported in Trading revenue. This VAR does not include the accrual loan portfolio, which is not marked to market.
 

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Quarterly Results

Operating earnings were $627 million, down 10% from the prior year. These results were positively affected by the Merger with Bank One, offset by weak trading results in Fixed income markets.

Revenues of $2.7 billion were down 3%. Investment banking fees of $911 million increased by 43%, due to continued strength in debt underwriting and advisory fees, relatively flat equity underwriting fees and the Merger. Fixed income market revenues of $1.1 billion were down 23%, or $336 million, primarily reflecting lower trading results. Equity markets revenues increased by 46% to $455 million, due to higher trading revenues. Credit portfolio revenues of $220 million were down 44%, reflecting lower net interest income and lending fees and lower gains from securities acquired from loan workouts, partially offset by revenue from the Merger.

The provision for credit losses was a benefit of $151 million, reflecting continued favorable credit performance.

Noninterest expenses, at $1.9 billion, were up 6%, due to the Merger, increased personnel costs, higher technology costs and higher legal costs. These increases were partially offset by reduced levels of performance-related incentive compensation.

Year-to-date Results

Year-to-date operating earnings of $2.3 billion increased by 15% compared with the prior year primarily driven by a reduction in the Provision for credit losses. On a year-to-date basis, ROE of 19% was up from the prior year’s first nine months, primarily due to lower equity driven by reduced credit risk capital.

Year-to-date operating revenues of $9.4 billion were down 4% from the prior year primarily due to lower Fixed income trading results and Credit portfolio revenues, partially offset by increases in Investment banking fees and Equity market revenues, as well as the Merger. The Fixed income markets revenue decline was driven by lower trading results. Credit portfolio revenues were down due to lower net interest income and lending fees, due to lower loan balances, and lower gains from workouts. The increases in Investment banking fees and Equity markets revenue were the result of stronger client activity.

For the first nine months of 2004, noninterest expense of $6.3 billion was down 3% from last year. The expense decline from 2003 was driven by lower incentives resulting from lower financial performance, in addition to the Enron-related litigation reserve in 2003 of $100 million, and real estate write-offs in 2003. Partially offsetting these reductions were higher expenses associated with strategic investments, amortization of restricted stock and options expense, increased legal fees and the Merger.

Year-to-date, the provision for credit losses was a benefit of $467 million, compared with $60 million of Provision for credit losses in the first nine months of 2003. The improvement in the provision was the result of a $662 million decline in net charge-offs, partially offset by lower credit reserve releases from moderating improvement in the overall credit quality of the portfolio. For additional information, see Credit risk management on pages 42–53 of this Form 10-Q.

Composition of Revenue

                                                         
                            Asset                      
            Trading-     Lending &     management,                      
    Investment     related     deposit-     administration     Other             Total net  
(in millions)   banking fees     revenue     related fees     and commissions     Income     NII     revenue  
 
Third quarter 2004
                                                       
Investment banking
  $ 911     $     $     $     $     $     $ 911  
Fixed income markets
          657       69       54       154       181       1,115  
Equities markets
          220             252       (29 )     12       455  
Credit portfolio
          (35 )     86       7       (34 )     196       220  
 
Total
  $ 911     $ 842     $ 155     $ 313     $ 91     $ 389     $ 2,701  
 
Third quarter 2003 (a)
                                                       
Investment banking
  $ 639     $     $     $     $     $     $ 639  
Fixed income markets
          1,163       29       80       42       137       1,451  
Equities markets
          97             225       (27 )     17       312  
Credit portfolio
          (17 )     86       9       35       277       390  
 
Total
  $ 639     $ 1,243     $ 115     $ 314     $ 50     $ 431     $ 2,792  
 

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                            Asset                      
            Trading-     Lending &     management,                      
    Investment     related     deposit-     administration     Other             Total net  
(in millions)   banking fees     revenue     related fees     and commissions     Income     NII     revenue  
 
Nine months ended September 30, 2004 (b)
                                                       
Investment banking
  $ 2,492     $     $     $     $     $     $ 2,492  
Fixed income markets
          3,835       123       222       215       389       4,784  
Equities markets
          469             809       (80 )     50       1,248  
Credit portfolio
          50       240       23       15       552       880  
 
Total
  $ 2,492     $ 4,354     $ 363     $ 1,054     $ 150     $ 991     $ 9,404  
 
Nine months ended September 30, 2003 (a)
                                                       
Investment banking
  $ 2,031     $     $     $     $     $     $ 2,031  
Fixed income markets
          4,857       75       267       63       346       5,608  
Equities markets
          460             614       (52 )     66       1,088  
Credit portfolio
          (136 )     234       27       27       907       1,059  
 
Total
  $ 2,031     $ 5,181     $ 309     $ 908     $ 38     $ 1,319     $ 9,786  
 
(a)  
Heritage JPMorgan Chase only.
(b)  
Includes three months of the combined Firm’s activity and six months of heritage JPMorgan Chase activity.
 

According to Thomson Financial, for the first nine months of 2004 compared with full-year 2003, the Investment Bank increased its market share of U.S. initial public offerings to #4 from #15, with the Firm moving to #5 from #4 in the U.S. Equity & Equity-related category. The IB maintained its #1 ranking in U.S. syndicated loans, with a 33% market share year-to-date, and its #3 position in Global debt, Equity and Equity-related.

                 
    Nine months ended   Full year  
Market Share/Rankings (a)   September 30, 2004     2003  
 
Global debt, equity and equity-related
    7% / #3       8% / #3  
Global syndicated loans
    20% / #1       20% / #1  
Global long-term debt
    7% / #2       8% / #2  
Global equity and equity-related
    6% / #6       8% / #4  
Global announced M&A
    24% / #2       16% / #4  
U.S. debt, equity and equity-related
    8% / #5       9% / #3  
U.S. syndicated loans
    33% / #1       35% / #1  
U.S. long-term debt
    8% / #3       10% / #3  
U.S. equity and equity-related
    8% / #5       11% / #4  
U.S. announced M&A
    27% / #1       13% / #8  
 
(a)  
Derived from Thomson Financial Securities data. Global announced M&A is based on rank value; all other rankings are 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%. The market share and rankings are presented on a combined basis for all periods presented reflecting the merger of JPMorgan Chase and Bank One, as disclosed by Thomson Financial Securities data.
 

Outlook: The Investment Bank remains cautious about trading revenues. The investment banking pipeline for underwriting and mergers and acquisition advisory activities, while lower than levels at the beginning of the third quarter, remains at significantly higher levels than a year ago. Realization of revenues in the Investment Bank fee pipeline is uncertain and can be impacted by changes in market conditions.

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Table of Contents

RETAIL FINANCIAL SERVICES

RFS includes Home Finance, Consumer & Small Business Banking, Auto & Education Finance and Insurance. RFS provides consumers and small businesses a broad range of financial products and services including deposits, investments, loans and insurance. Through Consumer & Small Business Banking, the Firm has the fourth largest branch network in the United States, covering 17 states with 2,467 branches and 6,587 ATMs. Home Finance is a leading provider of consumer real estate loan products and is one of the largest originators and servicers of home mortgages. Auto & Education Finance is the largest bank originator of automobile loans as well as a top provider of loans to college students. Through its Insurance operations, the company sells and underwrites an extensive range of financial protection and investment alternatives, including life insurance, annuities and debt protection products.

The following table reflects selected financial data of RFS:

                                                 
    H-JPMC Only   Nine months ended September 30, (a)
(in millions, except headcount and ratio data)   3Q 2004     3Q 2003     Change     2004     2003     Change  
 
Revenue
                                               
Lending & deposit related fees
  $ 395     $ 125       216 %   $ 640     $ 360       78 %
Asset management, administration and commissions
    331       86       285       526       262       101  
Securities / private equity gains (losses)
    6       (62 )     NM       6       363       (98 )
Mortgage fees and related income
    255       12       NM       875       765       14  
Credit card income
    89       27       230       133       83       60  
Other income
    18       (4 )     NM       4       (13 )     NM  
                     
Subtotal
    1,094       184       495       2,184       1,820       20  
Net interest income
    2,706       1,345       101       5,062       3,886       30  
                     
Total net revenue
    3,800       1,529       149       7,246       5,706       27  
Provision for credit losses
    239       158       51       371       449       (17 )
Noninterest expense
                                               
Compensation expense
    855       381       124       1,814       1,252       45  
Noncompensation expense
    1,250       704       78       2,661       2,046       30  
Amortization of intangibles
    133       1       NM       135       3       NM  
                     
Total noninterest expense
    2,238       1,086       106       4,610       3,301       40  
Operating earnings before income tax expense
    1,323       285       364       2,265       1,956       16  
Income tax expense
    501       104       382       841       714       18  
                     
Operating earnings
  $ 822     $ 181       354     $ 1,424     $ 1,242       15  
Financial ratios
                                               
ROE
    25 %     16 %     900 bp     24 %     41 %     (1,700 )bp
ROA
    1.44       0.46       98       1.11       1.13       (2 )
Overhead ratio
    59       71       (1,200 )     64       58       600  
Selected balance sheet (ending)
                                               
Total assets
  $ 227,952       NA       NM     $ 227,952       NA       NM  
Loans (b)
    201,116     $ 133,828       50 %     201,116     $ 133,828       50 %
Core deposits (c)
    154,986       NA       NM       154,986       NA       NM  
Total deposits
    180,727       NA       NM       180,727       NA       NM  
Selected balance sheet (average)
                                               
Total assets
  $ 227,716     $ 155,247       47     $ 171,585     $ 146,425       17  
Loans (d)
    198,244       127,601       55       149,454       118,364       26  
Core deposits (c)
    159,197       85,059       87       108,274       80,478       35  
Total deposits
    183,921       94,563       94       122,451       90,334       36  
Equity
    13,050       4,422       195       7,764       4,095       90  
Headcount
    60,691       32,271       88                          
 

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    H-JPMC Only   Nine months ended September 30, (a)
(in millions, except headcount and ratio data)   3Q 2004     3Q 2003     Change     2004     2003     Change  
 
Credit data and quality statistics
                                               
Net charge-offs
  $ 219     $ 92       138     $ 384     $ 277       39  
Nonperforming loans
    1,308       592       121       1,308       592       121  
Nonperforming assets
    1,557       783       99       1,557       783       99  
Allowance for loan losses
    1,764       1,126       57       1,764       1,126       57  
Net charge-off rate (d)
    0.47 %     0.37 %     10 bp     0.38 %     0.40 %     (2 )bp
Allowance for loan losses to ending loans (b)
    0.94       1.12       (18 )     0.94       1.12       (18 )
Allowance for loan losses to nonperforming loans (e)
    143       201       (5,800 )     143       201       (5,800 )
Nonperforming loans to total loans
    0.65       0.44       21       0.65       0.44       21  
 
(a)  
2004 year-to-date results include three months of the combined Firm’s results and six months of heritage JPMorgan Chase results, while 2003 year-to-date results include heritage JPMorgan Chase only.
(b)  
End of period loans include loans held for sale of $12,816 million and $32,857 million at September 30, 2004 and 2003, respectively. Those amounts are not included in the allowance coverage ratios.
(c)  
Includes demand and savings deposits.
(d)  
Average loans include loans held for sale of $14,479 million and $30,178 million at September 30, 2004 and 2003, respectively. The year-to-date average loans held for sale are $15,140 million and $26,683 million for 2004 and 2003, respectively. These amounts are not included in the net charge-off rate.
(e)  
Nonperforming loans include loans held for sale of $74 million and $33 million at September 30, 2004 and 2003, respectively. These amounts are not included in the allowance coverage ratios.
 

Quarterly Results

Operating earnings were $822 million compared with $181 million in the prior year. The primary reason for growth was the Merger. Other factors affecting performance included growth in loan and deposit balances, higher margin and fee income on deposit products, and improved secondary marketing in the prime mortgage business.

Total revenue increased to $3.8 billion, up from $1.5 billion. Net interest income of $2.7 billion, up from $1.3 billion, benefited from the Merger and growth in retained loan and core deposit balances, as well as wider spreads on deposit products. Noninterest revenue of $1.1 billion, up from $184 million, benefited from the Merger, higher deposit-related fees and higher revenue associated with hedging of the prime mortgage pipeline and warehouse, reflective of hedging losses in the prior year. Both components of total revenue included declines related to lower prime mortgage originations.

The provision for credit losses totaled $239 million, compared with $158 million last year, reflecting the Merger. Credit quality trends remain favorable.

Expenses rose to $2.2 billion from $1.1 billion, primarily due to the Merger.

Year-to-date Results

Operating earnings were $1.4 billion, up from $1.2 billion a year ago. The increase was largely due to the Merger, but also reflected growth in loan and deposit balances, higher margin and fee income on deposit products and improvement in credit costs from the year-ago period. These were partially offset by revenue decreases in the Home and Auto Finance businesses.

Total revenue rose to $7.2 billion, from $5.7 billion in the prior year. Net interest income increased to $5.1 billion compared with $3.9 billion primarily due to the Merger, growth in retained loan and deposit balances, and wider spreads on deposit products. Noninterest revenue increased to $2.2 billion from $1.8 billion due to the Merger. Higher deposit-related fees were offset by a decline in revenue as a result of lower prime mortgage originations.

The provision for credit losses of $371 million was down from $449 million in the year-ago period despite the Merger. This was a result of lower credit costs in the Home and Auto Finance portfolios.

Noninterest expenses totaled $4.6 billion, up from $3.3 billion in the prior year. The increase was primarily due to the Merger, but also included incremental costs associated with the realignment of resources in the Home Finance business in response to lower business volumes.

Outlook: Operating results for Retail Financial Services are expected to moderate, as Home Finance earnings are likely to decline due to a market-driven drop in mortgage originations. The drop in revenue at Home Finance will be partially mitigated by ongoing efforts to bring expenses in line with lower expected origination volumes. Earnings in the Auto & Education Finance business will remain under pressure as well given the competitive nature of the current operating environment. Growth is expected to continue in Consumer & Small Business Banking, with increases in core deposits and associated revenue partially offset by ongoing

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investments in the branch distribution network. New branch openings should continue at a pace consistent with prior quarters. Expanded hours and realigned compensation plans for heritage Chase branches are expected to provide improvements in productivity and incremental net revenue growth. Across all RFS businesses, credit quality trends remain stable with credit costs expected to moderate slightly in the near future.

Home Finance

Home Finance is comprised of two key business segments: Prime Production & Servicing and Consumer Real Estate Lending. The Prime Production & Servicing segment includes the operating results associated with the origination, sale and servicing of prime mortgages. Consumer Real Estate Lending reflects the results of loans secured by real estate made to consumers that are held by the Firm for investment purposes. These include fixed and adjustable-rate first mortgage loans, home equity lines and loans, and manufactured housing loans, a product the Firm stopped originating earlier this year.

The following table sets forth key financial and business-related components of the Home Finance business:

                                                 
    H-JPMC Only   Nine months ended September 30, (a)
(in millions, except ratios and where otherwise noted)   3Q 2004     3Q 2003     Change     2004     2003     Change  
 
Prime production and servicing
                                               
Production
  $ 168     $ 25       NM     $ 532     $ 1,021       (48) %
Servicing
 
Mortgage servicing revenue, net of amortization
    134       168       (20) %     482       312       54  
MSR, net of hedging
    153       89       72       300       790       (62 )
                     
Total Revenue
    455       282       61       1,314       2,123       (38 )
Noninterest expense
    296       293       1       849       813       4  
Operating earnings
    103       (9 )     NM       296       828       (64 )
Consumer real estate lending
 
Net revenue
  $ 704     $ 404       74     $ 1,651     $ 1,055       56  
Provision for credit losses
    65       61       7       94       227       (59 )
Noninterest expense
    264       156       69       639       430       49  
Operating earnings
    237       124       91       586       266       120  
Total home finance
 
Total revenue
    1,159       686       69       2,965       3,178       (7 )
Provision for credit losses
    65       61       7       94       227       (59 )
Noninterest expense
    560       449       25       1,488       1,243       20  
Operating earnings
    340       115       196       882       1,094       (19 )
                     
Origination volume by channel (in billions)
                                               
Retail
  $ 19.7     $ 29.7       (34 )   $ 55.7     $ 74.2       (25 )
Wholesale
    11.6       22.8       (49 )     36.8       54.5       (32 )
Correspondent
    5.4       15.5       (65 )     18.6       35.2       (47 )
Correspondent negotiated transactions
    11.3       25.7       (56 )     31.5       69.3       (55 )
                     
Total
    48.0       93.7       (49 )     142.6       233.2       (39 )
Origination volume by business (in billions)
                                               
Mortgage
  $ 34.1     $ 86.3       (60 )   $ 112.2     $ 215.8       (48 )
Home equity
    13.9       7.4       88       30.4       17.4       75  
                     
Total
    48.0       93.7       (49 )     142.6       233.2       (39 )
Business metrics (in billions)
                                               
Loans serviced (ending)
  $ 553.5     $ 454.9       22     $ 553.5     $ 454.9       22  
MSR net carrying value (ending)
    5.2       4.0       30       5.2       4.0       30  
End of period loans owned
 
Mortgage loans held for sale
    9.5       31.4       (70 )     9.5       31.4       (70 )
Mortgage loans retained
    46.5       33.6       38       46.5       33.6       38  
Home equity and other loans
    67.3       21.6       212       67.3       21.6       212  
                     
Total end of period loans owned
    123.3       86.6       42       123.3       86.6       42  
Average loans owned
                                               
Mortgage loans held for sale
    10.9       28.5       (62 )     12.9       24.9       (48 )
Mortgage loans retained
    44.0       32.8       34       40.2       29.2       38  
Home equity and other loans
    66.2       20.1       229       38.8       18.9       105  
                     
Total average loans owned
    121.1       81.4       49       91.9       73.0       26  
Overhead ratio
    48 %     65 %     (1,700 ) bp     50 %     39 %     1,100 bp
 

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    H-JPMC Only   Nine months ended September 30, (a)
(in millions, except ratios and where otherwise noted)   3Q 2004     3Q 2003     Change     2004     2003     Change  
 
Credit quality statistics
                                               
30+ day delinquency rate
    1.50 %     2.05 %     (55 )     1.50 %     2.05 %     (55 )
Net charge-offs
  $ 6     $ 4       50 %   $ 14     $ 18       (22 )%
Mortgage
 
Home equity and other loans
    57       26       119       105       80       31  
                     
Total net charge-offs
    63       30       110       119       98       21  
Net charge-off rate
                                               
Mortgage
    0.05 %     0.05 %     bp     0.05 %     0.08 %     (3 )bp
Home equity and other loans
    0.34       0.51       (17 )     0.36       0.57       (21 )
Total net charge-off rate (b)
    0.23       0.22       1       0.20       0.27       (7 )
Nonperforming assets
  $ 997     $ 542       84 %   $ 997     $ 542       84 %
(a)  
2004 year-to-date results include three months of the combined Firm’s results and six months of heritage JPMorgan Chase results, while 2003 year-to-date results include heritage JPMorgan Chase only.
(b)  
Excludes mortgage loans held for sale.
 

Quarterly Results

Home Finance operating earnings were $340 million, up from $115 million last year. Total revenues were $1.2 billion, up from $686 million. Operating earnings for the prime production and servicing segment were $103 million. Growth in this segment reflected improved performance in secondary marketing activities, a result of losses associated with hedging the pipeline and warehouse in the prior year. This was partially offset by lower prime mortgage production revenue. Earnings for the Consumer Real Estate Lending segment increased to $237 million. Growth over the prior year was largely due to the Merger, but also reflected higher retained loan balances.

Year-to-date Results

The decrease in operating earnings of $882 million from $1.1 billion in the year-ago period was the result of significantly lower origination volume and lower mortgage servicing rights (“MSRs”) hedging results, partially offset by the Merger, higher retained loan balances and improved credit trends in 2004.

Operating earnings in the Prime Production & Servicing segment dropped to $296 million from $828 million in the prior year. This was due to a decline in mortgage originations, which resulted in total revenue in this segment dropping to $1.3 billion from $2.1 billion in the prior year. The drop in revenue also included reduced earnings derived from the risk management activities associated with the MSR asset, $300 million in the current period versus $790 million in the prior year. Noninterest expense totaled $849 million up from $813 million in the year ago period. The increase reflected costs to realign resources with declining prime mortgage origination volume and higher marketing expenses.

Operating earnings for the Consumer Real Estate Lending segment rose to $586 million from $266 million in the prior year. The increase was largely due to the acquisition of the Bank One home equity lending business, but also reflected growth in retained loan balances. These factors contributed to total revenue rising to $1.7 billion from $1.1 billion. The provision for credit losses of $94 million decreased from $227 million a year ago due to improved credit quality and lower delinquencies, partially offset by the Merger. Noninterest expenses totaled $639 million up from $430 million in the year ago period, largely due to the Merger.

The table below reconciles management’s disclosure on Home Finance’s business to the reported U.S. GAAP line items shown on the Consolidated statement of income and in the related Notes to Consolidated financial statements:

 
                                                 
    Prime production and servicing Consumer real estate lending Total revenue
(in millions)   3Q 2004     3Q 2003(a)     3Q 2004     3Q 2003(a)     3Q 2004     3Q 2003(a)  
 
Net interest income
  $ 183     $ 425     $ 732     $ 312     $ 915     $ 737  
Securities / private equity gains (losses)
    5       (63 )                 5       (63 )
Mortgage fees and related income
    267       (80 )     (28 )     92       239       12  
 
Total
  $ 455     $ 282     $ 704     $ 404     $ 1,159     $ 686  
 

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    Prime production and servicing   Consumer real estate lending   Total revenue
    Nine months ended Sept. 30, (b)   Nine months ended Sept. 30, (b)   Nine months ended Sept. 30, (b)
(in millions)   2004     2003     2004     2003     2004     2003  
 
Net interest income
  $ 568     $ 1,216     $ 1,538     $ 851     $ 2,106     $ 2,067  
Securities / private equity gains (losses)
    1       345                   1       345  
Mortgage fees and related income
    745       562       113       204       858       766  
 
Total
  $ 1,314     $ 2,123     $ 1,651     $ 1,055     $ 2,965     $ 3,178  
(a)  
Heritage JPMorgan Chase only.
(b)  
2004 year-to-date results include three months of the combined Firm’s results and six months of heritage JPMorgan Chase results, while 2003 year-to-date results include heritage JPMorgan Chase only.
 

The decline in the Net interest income component of Prime Production & Servicing revenue from the third quarter and year-to-date 2003 is primarily due to a lower level of both mortgage loans held for sale and AFS securities used to manage the interest rate risk associated with the MSR asset. The improvement in the Mortgage fees and related income component of Prime Production & Servicing revenue from the third quarter and year-to-date 2003 reflects losses in hedging the pipeline and warehouse in 2003. Lastly, the use of differing risk management strategies to manage the interest rate risk in the MSR asset in response to changing market conditions impacts the line items in which these results are reported. Consequently, current results may not be indicative of a particular trend.

MSR Hedging Results

The following table details the amounts shown as MSR, net of hedging in the Home Finance business:
 
                                 
    Three months ended September 30,   Nine months ended September 30,(b)
(in millions)   2004     2003(a)     2004     2003  
 
SFAS 133 hedge — MSR valuation adjustments
  $ (931 )   $ (20 )   $ (804 )   $ (502 )
SFAS 133 hedge — derivative valuation adjustments
    899       (230 )     563       684  
SFAS 140 — MSR recovery (impairment)
    205       371       678       (54 )
Other risk management gains (losses) (c)
    (20 )     (32 )     (137 )     662  
 
MSR, net of hedging
  $ 153     $ 89     $ 300     $ 790  
(a)  
Heritage JPMorgan Chase only.
(b)  
Year-to-date 2004 results include three months of the combined Firm’s results and six months of heritage JPMorgan Chase results, while 2003 year-to-date results include heritage JPMorgan Chase only.
(c)  
Includes gains, losses and interest income associated with derivatives not designated as a hedge, and securities classified as both trading and available for sale.
 

In its risk management activities, Home Finance uses a combination of derivatives, AFS securities and trading instruments to manage changes in the fair value of the MSR asset. The intent is to offset any changes in the fair value of the MSR asset with changes in the fair value of the related risk management instrument. During the third quarter of 2004, negative MSR valuation adjustments of $726 million were offset by $879 million of aggregate risk management gains, including net interest earned on AFS securities. For a further discussion of the most significant assumptions used to value the MSR asset, please see “MSRs and certain other retained interests” in the Critical Accounting Estimates used by the Firm section and in Notes 13 and 16 on pages 100–103 and 107–109 of JPMorgan Chase’s 2003 Annual Report.

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Consumer & Small Business Banking

The following table sets forth key financial and business-related components of the Consumer & Small Business Banking business:
                                                 
    H-JPMC Only   Nine months ended September 30,(a)
(in millions, except ratios)   3Q 2004     3Q 2003     Change     2004     2003     Change  
 
Net revenue
  $ 2,076     $ 599       247 %   $ 3,280     $ 1,807       82 %
Provision for credit losses
    79       36       119       126       58       117  
Noninterest expense
    1,379       541       155       2,619       1,778       47  
Operating earnings
  $ 377     $ 14     NM     $ 330     $ (16 )   NM  
Business metrics (in billions)
                                               
End of period balances
                                               
Small business loans
  $ 12.4     $ 2.1       490     $ 12.4     $ 2.1       490  
Consumer and other loans (b)
    2.3       2.3             2.3       2.3        
                     
Total loans
    14.7       4.4       234       14.7       4.4       234  
Core deposits (c)
    144.9       66.8       117       144.9       66.8       117  
Total deposits
    176.6       75.9       133       176.6       75.9       133  
Average balances
                                               
Small business loans
    12.4       2.1       490       5.1       2.1       143  
Consumer and other loans (b)
    2.3       2.0       15       2.6       2.0       30  
                     
Total loans
    14.7       4.1       259       7.7       4.1       88  
Core deposits (c)
    148.2       65.8       125       97.2       64.0       52  
Total deposits
    172.9       75.2       130       111.3       73.7       51  
Number of:
                                               
Branches
    2,467       560       1,907 #     2,467       560       1,907 #
ATMs
    6,587       1,954       4,633       6,587       1,954       4,633  
Personal bankers
    5,341       1,760       3,581       5,341       1,760       3,581  
Personal checking accounts (in thousands)
    7,222       2,007       5,215       7,222       2,007       5,215  
Business checking accounts (in thousands)
    891       348       543       891       348       543  
Online customers (in thousands)
    6,084     NA     NM       6,084     NA     NM  
Debit cards issued (in thousands)
    8,282       2,381       5,901       8,282       2,381       5,901  
Overhead ratio
    66 %     90 %     (2,400 )bp     80 %     98 %     (1,800 )bp
Retail brokerage business metrics
                                               
Investment sales volume
  $ 2,563     $ 857       199 %   $ 4,554     $ 2,655       72 %
Number of dedicated investment sales representatives
    1,393       346       303       1,393       346       303  
Credit quality statistics
                                               
Net charge-offs
                                               
Small business
  $ 24     $ 9       167     $ 45     $ 27       67 %
Consumer and other loans
    36       10       260       53       24       121  
                     
Total net charge-offs
    60       19       216       98       51       92  
Net charge-off rate
                                               
Small business
    0.77 %     1.70 %     (93 )bp     1.18 %     1.72 %     (54 )bp
Consumer and other loans
    6.23       1.98       425       2.72       1.60       112  
Total net charge-off rate
    1.62       1.84       (22 )     1.70       1.66       4  
Nonperforming assets
  $ 313     $ 91       244 %   $ 313     $ 91       244 %
(a)  
2004 year-to-date results include three months of the combined Firm’s results and six months of heritage JPMorgan Chase results, while 2003 year-to-date results include heritage JPMorgan Chase only.
(b)  
Primarily community development loans.
(c)  
Includes demand and savings deposits.
 

Quarterly Results

Consumer & Small Business operating earnings totaled $377 million, up from $14 million last year. While growth largely reflected the inclusion of the Bank One retail franchise, it also benefited from strong deposit growth and wider spreads. The provision for credit losses increased to $79 million reflecting portfolio write-downs in both the small business and community development loan portfolios.

Year-to-date Results

Operating earnings totaled $330 million, up from a loss of $16 million in the prior year period. The increase is largely due to the Merger, but also reflected higher core deposits, wider spreads on these balances, and higher banking and deposit fee income.

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These benefits were partially offset by higher credit costs.

Total revenue was $3.3 billion compared with $1.8 billion in the prior year. While the increase is primarily attributable to the Merger, revenue also benefited from higher deposit balances and wider spreads on deposits, as well as higher banking and deposit fees.

The provision for credit losses increased to $126 million from $58 million in the first nine months of 2004. The increase primarily reflected the need to build the allowance for credit losses in small business and community development loan portfolios in the third quarter of 2004, and to a lesser extent, the Merger.

The increase in expenses in 2004 to $2.6 billion from $1.8 billion in the year ago period was almost entirely attributable to the Merger. Incremental expense from investments in the distribution network was also a contributing factor.

Auto & Education Finance

The following table sets forth key financial and business-related components of Auto & Education Finance’s business:
                                                 
    H-JPMC Only   Nine months ended September 30,(a)
(in millions, except ratios and where otherwise noted)   3Q 2004     3Q 2003     Change     2004     2003     Change  
 
Net revenue
  $ 397     $ 216       84 %   $ 781     $ 635       23 %
Provision for credit losses
    95       61       56       151       164       (8 )
Noninterest expense
    163       74       120       324       214       51  
Operating earnings
  $ 85     $ 49       73     $ 186     $ 153       22  
Business metrics (in billions)
                                               
End of period loans and lease receivables
                                               
Loans outstanding
  $ 53.7     $ 33.0       63     $ 53.7     $ 33.0       63  
Lease receivables
    8.9       9.8       (9 )     8.9       9.8       (9 )
                     
Total end of period loans and lease receivables
    62.6       42.8       46       62.6       42.8       46  
Average loans and lease receivables
                                               
Loans outstanding (average) (b)
    52.9       32.2       64       41.1       31.4       31  
Lease receivables (average)
    9.2       9.9       (7 )     9.1       9.8       (7 )
                     
Total average loans and lease receivables (b)
    62.1       42.1       48       50.2       41.2       22  
Overhead ratio
    41 %     34 %     700 bp     41 %     34 %     700 bp
Credit quality statistics
                                               
30+ day delinquency rate
    1.38 %     1.12 %     26       1.38 %     1.12 %     26  
Net charge-offs
                                               
Loans
  $ 83     $ 32       159 %   $ 134     $ 97       38 %
Lease receivables
    13       11       18       33       31       6  
                     
Total net charge-offs
    96       43       123       167       128       30  
Net Charge-off Rate
                                               
Loans (b)
    0.65 %     0.42 %     23 bp     0.46 %     0.44 %     2 bp
Lease receivables
    0.56       0.44       12       0.48       0.42       6  
Total net charge-off rate (b)
    0.64       0.42       22       0.46       0.43       3  
Nonperforming assets
  $ 247     $ 150       65 %   $ 247     $ 150       65 %
(a)  
2004 year-to-date results include three months of the combined Firm’s results and six months of heritage JPMorgan Chase results, while 2003 year-to-date results include heritage JPMorgan Chase only.
(b)  
Average loans include loans held for sale of $2.2 billion and $1.7 billion at September 30, 2004 and 2003, respectively. The year-to-date average loans held for sale are $1.9 billion and $1.8 billion for 2004 and 2003, respectively. These are not included in the net charge-off rate.
 

Quarterly Results

Auto Finance operating earnings were $85 million, up from $49 million last year. The increase was primarily due to the Merger. Total revenue of $397 million reflected a competitive operating environment, which contributed to narrower spreads on new loans and reduced origination volumes.

Year-to-date Results

Operating earnings totaled $186 million, up from $153 million a year ago. The increase was due to the Merger and lower credit costs, partially offset by lower revenue given a competitive operating environment.

Total revenue increased to $781 million compared with $635 million in the prior year. This reflected the addition of Bank One, but was partially offset by a $40 million first quarter 2004 write-off of prepaid premiums for residual risk insurance, and a decline in margin revenue given a competitive operating environment that contributed to narrower spreads on new loans and reduced origination volumes in 2004.

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Expenses increased to $324 million in the first nine months of 2004 compared with $214 million in the year ago period. This increase was largely due to the Merger.

The provision for credit losses totaled $151 million, down from $164 million a year ago. The decrease was primarily due to improved credit quality trends, partially offset by the Merger.

Insurance

The following table sets forth key financial and business-related components of the Insurance business:
 
                                                 
    H-JPMC Only   Nine months ended September 30,(a)
(in millions, except ratios and where otherwise noted)   3Q 2004     3Q 2003     Change     2004     2003     Change  
 
Insurance
                                               
Net revenue
  $ 168     $ 28       500 %   $ 220     $ 86       156 %
Noninterest expense
    136       22     NM       179       67       167  
Operating earnings
    20       3     NM       26       11       136  
Memo:
                                               
Consolidated gross insurance-related revenue (b)
    429       146       194       770       452       70  
Business metrics — ending balances
                                               
Invested assets
  $ 7,489     $ 1,458       414     $ 7,489     $ 1,458       414  
Policy loans
    398           NM       398           NM  
Insurance Policy and Claims Reserves
    7,477       1,019     NM       7,477       1,019     NM  
Term life premiums — first year annualized
    15           NM       15           NM  
Policies in force — direct / assumed (in thousands)
    2,633       655       302       2,633       655       302  
Insurance in force — direct / assumed
    274,390       32,434     NM       274,390       32,434     NM  
Insurance in force — retained
    76,727       32,434       137       76,727       32,434       137  
Proprietary annuity sales
    39       127       (69 )     173       468       (63 )
A.M. Best rating
    A       A               A       A          
(a)  
2004 year-to-date results include three months of the combined Firm’s results and six months of heritage JPMorgan Chase results, while 2003 year-to-date results include heritage JPMorgan Chase only.
(b)  
Includes revenue reported in the results of other businesses.
 

Quarterly and Year-to-date Results

Insurance operating earnings totaled $20 million and $26 million on gross revenues of $429 million and $770 million in the third quarter and first nine months of 2004, respectively. The increases in net revenue and expenses over the prior quarter and prior year periods were almost entirely due to the Merger.

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CARD SERVICES

With approximately 96 million cards in circulation, JPMorgan Chase is the second largest issuer of credit cards in the United States and the largest merchant acquirer. JPMorgan Chase offers a wide variety of cards to satisfy the needs of its cardmembers, including cards issued on behalf of major airlines, hotels, universities, top retailers, other financial institutions and other well-known brands.

Through securitization the Firm transforms a substantial portion of its credit card receivables into securities, which are sold to investors. The credit card receivables are removed from the consolidated balance sheet through the transfer of principal credit card receivables to a trust and the sale of undivided interests to investors that entitle the investors to specific cash flows generated from the credit card receivables. The Firm retains the remaining undivided interests as seller’s interest, which is recorded in Loans on the Consolidated balance sheet. A gain or loss on the sale of credit card receivables to investors is recorded in Other income. Securitization also impacts the Firm’s consolidated income statement by reclassifying as credit card income, interest income, fee revenue, and recoveries in excess of interest paid to the investors, gross credit losses and other trust expenses related to the securitized receivables. For a reconciliation from reported to managed basis of Card Services results see page 27 of this Form 10-Q.

For information regarding loans and residual interests sold and securitized, see Note 12 on pages 73-76 of this Form 10-Q. The following table reflects selected financial data of CS on a managed basis:

 
                                                 
      H-JPMC Only     Nine months ended September 30,(a)
(in millions, except headcount and ratios)   3Q 2004     3Q 2003     Change     2004     2003     Change  
 
Revenue
                                               
Asset management, administration and commissions
  $ 26     $ 25       4 %   $ 75     $ 82       (9 )%
Credit card income
    784       236       232       1,293       659       96  
Other income
    44       13       238       86       31       177  
                     
Subtotal
    854       274       212       1,454       772       88  
Net interest income
    2,917       1,291       126       5,461       3,757       45  
                     
Total net revenue
    3,771       1,565       141       6,915       4,529       53  
Managed provision for credit losses
    1,662       705       136       3,116       2,112       48  
Noninterest expense
                                               
Compensation expense
    317       149       113       623       438       42  
Noncompensation expense
    926       337       175       1,660       991       68  
Amortization of intangibles
    194       65       198       318       195       63  
                     
Total noninterest expense
    1,437       551       161       2,601       1,624       60  
Operating earnings before income tax expense
    672       309       117       1,198       793       51  
Income tax expense
    251       110       128       439       283       55  
                     
Operating earnings
  $ 421     $ 199       112     $ 759     $ 510       49  
Memo: net securitization gains (amortization)
  $ (2 )   $ 1     NM     $ (8 )   $ (3 )     (167 )
Financial metrics
                                               
ROE
    14 %     23 %     (900 )bp     16 %     20 %     (400 )bp
Overhead ratio
    38       35       300       38       36       200  
% of average managed outstandings:
                                               
Net interest income
    8.90       10.09       (119 )     9.37       9.90       (53 )
Managed provision for credit losses
    5.07       5.51       (44 )     5.35       5.57       (22 )
Noninterest income
    2.61       2.14       47       2.49       2.04       45  
Risk adjusted margin
    6.44       6.72       (28 )     6.52       6.37       15  
Noninterest expense
    4.39       4.31       8       4.46       4.28       18  
Pre-tax income
    2.05       2.41       (36 )     2.05       2.09       (4 )
Operating earnings
    1.28       1.55       (27 )     1.30       1.34       (4 )
Business metrics
                                               
Charge volume (in billions)
  $ 73.3     $ 22.5       226 %   $ 118.3     $ 64.7       83 %
Net accounts opened (in thousands) (b)
    2,755       1,080       155       4,794       3,153       52  
Credit cards issued (in thousands)
    95,946       34,649       177       95,946       34,649       177  
Number of registered internet customers (in millions)
    12.4       3.3       276       12.4       3.3       276  
Merchant acquiring business
                                               
Bank card volume (in billions)
  $ 123.5     $ 66.8       85     $ 260.3     $ 188.1       38  
Total transactions (in millions)
    3,972       1,845       115       7,604       5,187       47  
 

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      H-JPMC Only     Nine months ended September 30,(a)
(in millions, except headcount and ratio data)   3Q 2004     3Q 2003     Change     2004     2003     Change  
 
Selected ending balances
                                               
Loans:
                                               
Loans on balance sheet
  $ 60,241     $ 16,612       263 %   $ 60,241     $ 16,612       263 %
Securitized loans
    71,256       34,315       108       71,256       34,315       108  
                     
Managed loans
  $ 131,497     $ 50,927       158     $ 131,497     $ 50,927       158  
Selected average balances
                                               
Managed assets
  $ 136,753     $ 51,442       166     $ 80,211     $ 51,380       56  
Loans:
                                               
Loans on balance sheet
  $ 59,386     $ 17,249       244     $ 31,296     $ 17,995       74  
Securitized loans
    70,980       33,527       112       46,575       32,720       42  
                     
Managed loans
  $ 130,366     $ 50,776       157     $ 77,871     $ 50,715       54  
Equity
    11,800       3,422       245       6,200       3,453       80  
Headcount
    20,473       10,575       94                          
Credit quality statistics
                                               
Net charge-offs
  $ 1,598     $ 748       114     $ 3,086     $ 2,255       37  
Net charge-off rate
    4.88 %     5.84 %     (96 )bp     5.29 %     5.94 %     (65 )bp
Delinquency ratios
                                               
30+ days
    3.81 %     4.62 %     (81 )     3.81 %     4.62 %     (81 )
90+ days
    1.75       2.08       (33 )     1.75       2.08       (33 )
Allowance for loan losses
  $ 2,273     $ 1,175       93 %   $ 2,273     $ 1,175       93 %
Allowance for loan losses to period-end loans (c)
    3.77 %     7.07 %     (330 )bp     3.77 %     7.07 %     (330 )bp
 
(a)  
2004 year-to-date results include three months of the combined Firm’s results and six months of heritage JPMorgan Chase results, while 2003 year-to-date results include heritage JPMorgan Chase only.
(b)  
Net accounts opened includes originations, purchases and sales.
(c)  
The heritage Bank One seller’s interest was decertificated effective July 1, 2004, and is reported in Loans on the balance sheet. As a result, the Allowance for loan losses to period-end loans ratio for the third quarter 2004 declined as the remaining portion of the decertificated seller’s interest is recorded at fair value without a corresponding allowance for loan loss at September 30, 2004.
 

Quarterly Results

Operating earnings were $421 million, up $222 million from the prior year primarily due to the Merger. In addition to the Merger, higher loan balances and charge volume positively affected results. Partially offsetting these benefits were increased marketing and a higher managed provision for credit losses.

Total revenue was $3.8 billion, up $2.2 billion, or 141%. Net interest income of $2.9 billion increased due to the Merger and higher loan balances. Noninterest income of $0.9 billion improved because of the Merger and higher charge volume, which generated increased interchange income. This was partially offset by higher volume-driven payments to partners and rewards expense.

The Managed provision for credit losses was $1.7 billion, primarily reflecting the Merger. Managed provision increased due to higher loan balances partially offset by lower credit losses. Managed credit ratios remained strong, benefiting from reduced bankruptcy filings. The managed net charge-off rate for the quarter was 4.88%. The 30-day managed delinquency ratio was 3.81%.

Expenses were $1.4 billion, up 161%, primarily related to the Merger. In addition to the Merger and the impact of amortization of purchased credit card relationships, expenses were up due to increased marketing expenses.

Year-to-date Results

Year-to-date operating earnings of $759 million increased $249 million or 49% compared with the prior year primarily due to the Merger. In addition to the Merger, higher loan balances and charge volume positively affected results. Partially offsetting this benefit was increased marketing spend and a higher managed provision for credit losses.

Year-to-date net revenue of $6.9 billion increased $2.4 billion or 53% compared with the prior year. Net interest income of $5.5 billion increased $1.7 billion or 45% primarily due to the Merger and higher loan balances and spread. Noninterest income of $1.5 billion increased $682 million or 88% primarily due to the Merger and higher charge volume, which generated increased interchange income. This was partially offset by higher volume-driven payments to partners under revenue-sharing agreements and rewards expenses.

Year-to-date operating expenses of $2.6 billion increased $977 million or 60% compared with the prior year primarily due to the Merger. In addition to the Merger and the impact of amortization of purchased credit card relationships, expenses were up due to the increased marketing spend.

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Compared with the prior year, the year-to-date provision of $3.1 billion increased $1.0 billion, or 48%, primarily due to the Merger. In addition, the allowance for loan losses increased due to higher loan balances, partially offset by lower credit losses. Managed credit ratios remained strong, benefiting from reduced bankruptcy filings. The managed net charge-off rate declined to 5.29%, from 5.94% in the prior year. The 30-day delinquency ratio was 3.81%, down from 4.62% in the prior year.

The financial information presented below reconciles reported basis and managed basis to disclose the effect of securitizations.

                                                 
      H-JPMC Only     Nine months ended September 30, (a)
(in millions)   3Q 2004     3Q 2003     Change     2004     2003     Change  
 
Income statement data (b)
                                               
Credit card income
                                               
Reported data for the period
  $ 1,632     $ 599       172 %   $ 2,774     $ 1,670       66 %
Securitization adjustments
    (848 )     (363 )     (134 )     (1,481 )     (1,011 )     (46 )
                     
Managed credit card income
  $ 784     $ 236       232     $ 1,293     $ 659       96  
                     
Other income
                                               
Reported data for the period
  $ 47     $ 27       74     $ 173     $ 73       137  
Securitization adjustments
    (3 )     (14 )     79       (87 )     (42 )     (107 )
                     
Managed other income
  $ 44     $ 13       238     $ 86     $ 31       177  
                     
Net interest income
                                               
Reported data for the period
  $ 1,138     $ 443       157     $ 2,006     $ 1,296       55  
Securitization adjustments
    1,779       848       110       3,455       2,461       40  
                     
Managed net interest income
  $ 2,917     $ 1,291       126     $ 5,461     $ 3,757       45  
                     
Total net revenue (c)
                                               
Reported data for the period
  $ 2,843     $ 1,094       160     $ 5,028     $ 3,121       61  
Securitization adjustments
    928       471       97       1,887       1,408       34  
                     
Managed total net revenue
  $ 3,771     $ 1,565       141     $ 6,915     $ 4,529       53  
                     
Provision for credit losses
                                               
Reported data for the period
  $ 734     $ 234       214     $ 1,229     $ 704       75  
Securitization adjustments
    928       471       97       1,887       1,408       34  
                     
Managed provision for credit losses
  $ 1,662     $ 705       136     $ 3,116     $ 2,112       48  
                     
Balance sheet — average balances
                                               
Total average assets
                                               
Reported data for the period
  $ 67,718     $ 18,945       257     $ 34,984     $ 19,379       81  
Securitization adjustments
    69,035       32,497       112       45,227       32,001       41  
                     
Managed average assets
  $ 136,753     $ 51,442       166     $ 80,211     $ 51,380       56  
                     
Credit quality statistics
                                               
Net charge-offs
                                               
Reported net charge-offs data for the period
  $ 670     $ 277       142     $ 1,199     $ 847       42  
Securitization adjustments
    928       471       97       1,887       1,408       34  
                     
Managed net charge-offs
  $ 1,598     $ 748       114     $ 3,086     $ 2,255       37  
 
(a)  
2004 year-to-date results include three months of the combined Firm’s results and six months of heritage JPMorgan Chase results, while 2003 year-to-date results include heritage JPMorgan Chase only.
(b)  
JPMorgan Chase uses the concept of “managed receivables” to evaluate the credit performance of the underlying credit card loans, both sold and not sold: as the same borrower is continuing to use the credit card for ongoing charges, a borrower’s credit performance will impact both the receivables sold under SFAS 140 and those not sold. Thus, in its disclosures regarding managed receivables, JPMorgan Chase treats the sold receivables as if they were still on the balance sheet in order to disclose the credit performance (such as Net charge-off rates) of the entire managed credit card portfolio. Operating results exclude the impact of credit card securitizations on revenue, the provision for credit losses, net charge-offs and receivables. Securitization does not change reported net income versus operating earnings; however, it does affect the classification of items on the Consolidated statement of income.
(c)  
Includes Asset management, administration and commissions, Credit card income, Other income and Net interest income.
 

Outlook: Operating results for Card Services are expected to increase due to the seasonal nature of the credit card business. Higher interchange revenue will be partially offset by seasonally higher provision for credit losses.

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COMMERCIAL BANKING

Commercial Banking was known prior to the Merger as Chase Middle Market and was a business within the former Chase Financial Services. Commercial Banking, either directly or through other lines of businesses, offers a broad array of products and services to its customer base, including lending and deposit, global cash management, treasury services, commercial card, investment banking and investment management. Commercial Banking’s customer base includes corporations, municipalities, financial institutions and not-for-profit entities with a significant portion of these customers using the Firm exclusively for their financial needs. The loan portfolio is diversified across a broad range of industries and geographic locations.

Commercial Banking includes three client segments: Middle Market Banking, Corporate Banking and Commercial Real Estate, and two product segments: Chase Business Credit (asset-based lending) and Chase Equipment Leasing.

Middle Market Banking generally serves companies with revenues between $10 million and $500 million and is the second largest middle market bank in terms of primary or lending relationships with a position in 10 of the top 25 major metropolitan areas in the U.S. Corporate Banking, which focuses on U.S. companies with revenues in excess of $500 million, delivers a broader range of traditional banking products and serves clients with more significant investment banking needs through a partnership between corporate and investment bankers and a regional coverage network. Commercial Real Estate serves investors and developers of for-sale housing, multifamily rental, retail, office and industrial properties. Chase Business Credit is a leading national provider of highly-structured asset-based financing, syndication and collateral analysis. Finally, Chase Equipment Leasing, which focuses on mid-to large-sized companies, finances a variety of equipment types and offers vendor programs for leading capital and technology equipment manufacturers and software companies. In addition to supporting Commercial Banking, Chase Equipment Leasing also serves as a product resource to the Private Bank, Private Client Services and the Investment Bank.

The following table reflects selected financial data of CB:

 
                                                 
      H-JPMC Only     Nine months ended September 30, (a)
(in millions, except ratios and headcount)   3Q 2004     3Q 2003     Change     2004     2003     Change  
 
Revenue
                                               
Lending & deposit related fees
  $ 162     $ 82       98 %   $ 294     $ 232       27 %
Asset management, administration and commissions
    12       5       140       20       15       33  
Other income (b)
    51       14       264       106       46       130  
                     
Subtotal
    225       101       123       420       293       43  
Net interest income
    608       240       153       1,069       719       49  
                     
Total net revenue
    833       341       144       1,489       1,012       47  
Provision for credit losses
    14       21       (33 )     20       16       25  
Noninterest expense
                                               
Compensation expense
    176       82       115       312       219       42  
Noncompensation expense
    286       130       120       562       403       39  
Amortization of intangibles
    18       1     NM       18       3       500  
                     
Total noninterest expense
    480       213       125       892       625       43  
Operating earnings before income tax expense
    339       107       217       577       371       56  
Income tax expense
    124       44       182       223       153       46  
                     
Operating earnings
  $ 215     $ 63       241     $ 354     $ 218       62  
Memo:
                                               
Revenue by:
                                               
Lending
  $ 310     $ 97       220     $ 480     $ 301       59  
Treasury & securities services
    499       235       112       939       676       39  
Investment banking
    24       12       100       59       38       55  
Other
          (3 )   NM       11       (3 )   NM  
                     
Total Commercial Banking revenue
  $ 833     $ 341       144     $ 1,489     $ 1,012       47  
                     

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      H-JPMC Only     Nine months ended September 30, (a)
(in millions, except ratios and headcount)   3Q 2004     3Q 2003     Change     2004     2003     Change  
 
Financial ratios
                                               
ROE
    25 %     24 %     100 bp     29 %     26 %     300 bp
ROA
    1.53       1.49       4       1.58       1.75       (17 )
Overhead ratio
    58       62       (400 )     60       62       (200 )
Selected balance sheet (average)
                                               
Total assets
  $ 55,957     $ 16,775       234 %   $ 29,921     $ 16,658       80 %
Loans and leases
    50,324       14,256       253       26,356       14,269       85  
Deposits
    64,796       33,728       92       46,550       32,501       43  
Equity
    3,400       1,050       224       1,654       1,103       50  
Headcount
    4,595       1,784       158                          
Credit data and quality statistics
                                               
Net charge-offs (recoveries)
  $ (13 )   $ 30     NM     $ 16     $ 71       (77 )
Nonperforming loans
    579       156       271       579       156       271  
Allowance for loan losses
    1,350       142     NM       1,350       142     NM  
Allowance for lending related commitments
    164       28       486       164       28       486  
Net charge-off rate
    (0.10 )%     0.83 %     (93 )bp     0.08 %     0.67 %     (59 )bp
Allowance for loan losses to average loans
    2.68       1.00       168     NM       1.00     NM  
Allowance for loan losses to nonperforming loans
    233       91     NM       233       91     NM  
Nonperforming loans to average loans
    1.15       1.09       6     NM       1.09     NM  
 
(a)  
2004 year-to-date results include three months of the combined Firm’s results and six months of heritage JPMorgan Chase results, while 2003 year-to-date results include heritage JPMorgan Chase only.
(b)  
IB-related and commercial card revenues are included in Other income.
 

Quarterly Results

Operating earnings were $215 million, an increase of $152 million from the prior year, primarily due to the Merger.

Total net revenues of $833 million increased 144% from the third quarter, primarily as a result of the Merger. In addition to the overall increase related to the Merger, Net interest income of $608 million was positively affected by increased deposit balances and spreads. Noninterest income of $225 million was negatively affected by lower service charges on deposits resulting from a change in the calculation methodology and an increase in the payment of services with deposits, versus fees, due to rising interest rates and lower investment banking revenues, resulting from challenging market conditions.

Noninterest expenses of $480 million increased 125%, primarily related to the Merger.

Provision for credit losses was $14 million for the quarter. Net recoveries for the quarter were $13 million, reflecting the continued improvement in credit quality and a decline in nonperforming loans.

Year-To-Date Results

Operating earnings of $354 million increased 62%, primarily due to the Merger.

Operating revenues of $1.5 billion increased 47%, primarily as a result of the Merger. In addition to the overall increase related to the Merger, Net interest income of $1.1 billion was positively affected by increased deposit balances. Noninterest income of $420 million was negatively affected by lower service charges on deposits resulting from a change in the calculation methodology and an increase in the payment of services with deposits, versus fees, due to rising interest rates, and lower cash management fees. Partially offsetting these decreases were higher gains in the current year on the sale of loans and securities acquired in satisfaction of debt.

Operating expenses of $892 million, increased 43%, primarily related to the Merger.

Provision for credit losses was $20 million and net charge-offs were $16 million for the first three quarters of 2004, reflecting the continued improvement in credit quality and a decline in nonperforming loans.

Outlook: The Commercial Banking’s provision for loan losses is expected to increase from the current level and return to more normal levels over time.

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TREASURY & SECURITIES SERVICES

Treasury & Securities Services (“TSS”) is a global leader in providing transaction, investment and information services to support the needs of issuers and investors worldwide. JPMorgan Chase is one of the world’s largest cash management providers and one of the world’s largest custodians. For a discussion of the profiles for each business within TSS, see pages 32-33 of JPMorgan Chase’s 2003 Annual Report. The following table sets forth selected financial data of TSS:
 
                                                 
(in millions, except ratio and headcount data     H-JPMC Only     Nine months ended September 30, (a)
and where otherwise noted)   3Q 2004     3Q 2003     Change     2004     2003     Change  
 
Revenue
                                               
Lending & deposit related fees
  $ 218     $ 120       82 %   $ 447     $ 355       26 %
Asset management, administration and commissions
    600       484       24       1,815       1,385       31  
Other income
    103       61       69       270       177       53  
                     
Subtotal
    921       665       38       2,532       1,917       32  
Net interest income
    418       241       73       912       711       28  
                     
Total net revenue
    1,339       906       48       3,444       2,628       31  
Provision for credit losses
          (1 )     NM       4       1       300  
Credit reimbursement to IB (b)
    (43 )     10       NM       (47 )     31       NM  
Noninterest expense
                                               
Compensation expense
    472       310       52       1,158       927       25  
Noncompensation expense
    654       433       51       1,748       1,282       36  
Amortization of intangibles
    30       6       400       61       18       239  
                     
Total noninterest expense
    1,156       749       54       2,967       2,227       33  
Operating earnings before income tax expense
    140       168       (17 )     426       431       (1 )
Income tax expense
    44       53       (17 )     131       132       (1 )
                     
Operating earnings
  $ 96     $ 115       (17 )   $ 295     $ 299       (1 )
Revenue by business
                                               
Treasury Services (c)
  $ 629     $ 303       108     $ 1,352     $ 889       52  
Investor Services
    404       370       9       1,255       1,068       18  
Institutional Trust Services
    306       233       31       837       671       25  
                     
Total net revenue
  $ 1,339     $ 906       48     $ 3,444     $ 2,628       31  
Memo
                                               
Treasury Services firmwide revenue (c)
  $ 1,205     $ 570       111     $ 2,427     $ 1,653       47  
Treasury & Securities Services firmwide revenue (c)
    1,915       1,173       63       4,519       3,392       33  
Financial ratios
                                               
ROE
    20 %     17 %     300 bp     14 %     15 %     (100 )bp
Overhead ratio
    86       83       300       86       85       100  
Business metrics
                                               
Assets under custody (in billions)
  $ 8,261     $ 6,926       19 %                        
Selected balance sheet (average)
                                               
Total assets
  $ 24,831     $ 17,564       41     $ 21,715     $ 17,828       22 %
Loans
    8,457       6,412       32       7,131       5,929       20  
Deposits
                                               
U.S. deposits
    90,466       58,061       56       76,742       52,049       47  
Non-U.S. deposits
    48,234       34,714       39       43,778       34,162       28  
                     
Total deposits
    138,700       92,775       50       120,520       86,211       40  
Equity
    1,900       2,627       (28 )     2,761       2,737       1  
Headcount
    22,246       14,784       50                          
 
(a)  
2004 year-to-date results include three months of the combined Firm’s results and six months of heritage JPMorgan Chase results, while 2003 year-to-date results include heritage JPMorgan Chase only.
(b)  
Management has charged TSS a credit reimbursement, which is the pre-tax amount of earnings, less cost of capital, related to certain exposures managed within the IB credit portfolio on behalf of clients shared with TSS.
(c)  
TSS and Treasury Services firmwide revenues include TS revenues recorded in certain other lines of business. Revenue associated with Treasury Services’ customers who are also customers of the Commercial Banking, Consumer & Small Business Banking and Asset & Wealth Management lines of business are reported in these other lines of business and are excluded from Treasury Services as follows:
                                                 
(in millions)   3Q 2004     3Q 2003     Change     2004     2003     Change  
Treasury Services Revenue Reported in Commercial Banking
  $ 499     $ 235       112 %   $ 939     $ 676       39 %
Treasury Services Revenue Reported in Other Lines of Business
    77       32       141       136       88       55  
 
   
Note: Foreign exchange revenues are apportioned between TSS and the IB, and only TSS’s share is included in TSS Firmwide Revenue.
 

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Quarterly Results

Operating earnings for the quarter were $96 million, down $19 million compared with the prior year. Results were negatively affected by an $85 million pre-tax software charge and incremental merger-related operating costs, partially offset by the Merger, the prior acquisition of the Corporate Trust business of Bank One (November 2003) and the acquisition of EFS.

TSS net revenue increased by 48% to $1.3 billion. The increase reflected the benefit of acquisitions; growth in net interest income due to average deposit balances increasing to $139 billion; and a July 1, 2004, change in corporate deposit pricing methodology. Net revenue also benefited from a 19% growth in assets under custody to $8.3 trillion, reflecting market appreciation and underlying business growth. While asset servicing revenues declined, trade-related products, commercial card and global equity volumes led to increased revenue.

Treasury Services revenue grew to $629 million, Investor Services to $404 million and Institutional Trust Services to $306 million. TSS firmwide revenue, which includes reported TSS net revenue and Treasury Services net revenue recorded in certain other lines of business, grew 63% to $1.9 billion.

Credit reimbursement to the Investment Bank was $43 million, compared with a credit of $10 million; this was principally due to the Merger and a change in methodology. Management charges TSS a credit reimbursement, which is the pre-tax amount of earnings less cost of capital, related to certain exposures managed within the IB credit portfolio on behalf of clients shared with TSS.

Expenses totaled $1.2 billion compared with $749 million in the prior year. The increase reflected acquisitions, the $85 million software charge, increases in compensation and technology-related expenses and incremental merger-related operating costs.

Year-to-date Results

For the first nine months of 2004, operating earnings of $295 million were relatively flat compared with the prior year. Results were impacted by $144 million of pre-tax software charges and incremental merger-related operating costs, partially offset by the Merger, and prior acquisitions of the Corporate Trust business of Bank One and EFS.

Net revenue of $3.4 billion was 31% higher compared with the prior year. This increase was attributable to acquisitions, higher average deposit balances, increased custody fees driven by market appreciation and new business and volume growth from existing clients.

TSS firmwide revenue of $4.5 billion was up 33% over the same period last year.

For the first nine months of 2004, credit reimbursement to the Investment Bank was $47 million, compared with a credit of $31 million for the first nine months of 2003, resulting from the Bank One acquisition and a change in methodology.

On a year-to-date basis, expenses of $3.0 billion were 33% higher compared with the prior year driven by acquisitions, software charges coupled with increases in compensation and technology-related expenses and incremental merger-related operating costs.

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ASSET & WEALTH MANAGEMENT

Asset & Wealth Management (“AWM”), known prior to the Merger as Investment Management & Private Banking, provides investment and wealth management services to institutional, high-net-worth and retail investors and their advisors. For wealthy individuals and families, JPMorgan Chase offers personalized financial solutions that integrate investment management, capital markets, trust and banking products. JPMorgan Chase provides retirement plan services, mutual funds and brokerage for retail customers.

For a discussion of the business profile of AWM, see pages 34–35 of JPMorgan Chase’s 2003 Annual Report. The following table reflects selected financial data of AWM:

 
                                                 
    H-JPMC Only   Nine months ended September 30, (a)
(in millions, except ratio and headcount data)   3Q 2004     3Q 2003     Change     2004     2003     Change  
 
Revenue
                                               
Lending & deposit related fees
  $ 10     $ 5       100 %   $ 18     $ 14       29 %
Asset management, administration and commissions
    859       585       47       2,188       1,629       34  
Other income
    55       49       12       155       118       31  
                     
Subtotal
    924       639       45       2,361       1,761       34  
Net interest income
    269       121       122       508       364       40  
                     
Total net revenue
    1,193       760       57       2,869       2,125       35  
Provision for credit losses
    1       (7 )     NM       7       (1 )     NM  
Noninterest expense
                                               
Compensation expense
    452       320       41       1,120       904       24  
Noncompensation expense
    409       313       31       1,066       928       15  
Amortization of intangibles
    23       2       NM       28       6       367  
                     
Total noninterest expense
    884       635       39       2,214       1,838       20  
Operating earnings before income tax expense
    308       132       133       648       288       125  
Income tax expense
    111       47       136       230       107       115  
                     
Operating earnings
  $ 197     $ 85       132     $ 418     $ 181       131  
Financial ratios
                                               
ROE
    33 %     6 %     2,700 bp     13 %     4 %     900 bp
Overhead ratio
    74       84       (1,000 )     77       86       (900 )
Revenue by client segment
                                               
Institutional
  $ 287     $ 181       59 %   $ 698     $ 523       33 %
Private bank
    383       364       5       1,127       1,053       7  
Private client services
    251       20       NM       290       59       392  
Retail
    272       195       39       754       490       54  
                     
Total Net Revenue
  $ 1,193     $ 760       57     $ 2,869     $ 2,125       35  
Selected balance sheet (average)
                                               
Total assets
  $ 39,882     $ 33,290       20     $ 36,765     $ 33,657       9  
Loans
    25,408       16,237       56       20,061       16,632       21  
Deposits
    38,520       20,514       88       28,351       19,891       43  
Equity
    2,400       5,539       (57 )     4,406       5,521       (20 )
Headcount
    12,368       8,476       46                          
Credit data and quality statistics
                                               
Net charge-offs
  $ 6     $ (2 )     NM     $ 67     $ 8       NM  
Nonperforming loans
    125       122       2       125       122       2  
Allowance for loan losses
    241       92       162       241       92       162  
Allowance for lending related commitments
    5       4       25       5       4       25  
Net charge-off rate
    0.09 %     (0.05 )%     14 bp     0.45 %     0.06 %     39 bp
Allowance for loan losses to average loans
    0.95       0.57       38       1.20       0.55       65  
Allowance for loan losses to nonperforming loans
    193       75       NM       193       75       NM  
Nonperforming loans to average loans
    0.49       0.75       (26 )     0.62       0.73       (11 )
 
(a)  
2004 year-to-date results include three months of the combined Firm’s results and six months of heritage JPMorgan Chase results, while 2003 year-to-date results include heritage JPMorgan Chase only.
 

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Quarterly Results
Operating earnings were $197 million, up 132% from the prior year. The primary reason for this growth was the Merger. In addition, performance was driven by global equity market appreciation, growth in assets under supervision and net customer flows.

Total revenue was $1.2 billion, up 57% or $433 million. The primary driver of the increase was the Merger. In addition, asset management fees increased due to global equity market appreciation, improved product mix and net asset inflows. Net interest income increased due to higher deposit product balances. These improvements were partially offset by lower revenue from brokerage activity.

The Provision for credit losses increased due to higher net charge-offs in excess of reserves in the current quarter. Nonperforming loans to average loans decreased to 0.49% from 0.75% and the Allowance for loan losses to average loans was 0.95%.

Expenses were $884 million, up 39%, due to the Merger and increased incentives and salary and benefit expenses.

Year-to-Date Results
Operating earnings were $418 million, up 131% from the prior year-to-date. The primary reason for this growth was the Merger. In addition, performance was driven by global equity market appreciation, growth in assets under supervision and net customer flows.

Total revenue was $2.9 billion, up 35% or $744 million. The primary driver of the increase was the Merger. In addition, asset management fees increased due to global equity market appreciation, improved product mix, net asset inflows and the acquisition of JPMorgan Retirement Plan Services (“RPS”) in the second quarter of 2003. Net interest income increased due to higher deposit product balances and spread. Other income increased due to higher brokerage activity.

The Provision for credit losses increased due to higher charge-offs in excess of reserves. Nonperforming loans to average loans decreased to 0.62% from 0.73% and the Allowance for loan losses to average loans improved to 1.20% from 0.55%, primarily due to the Merger.

Expenses were $2.2 billion, up 20%, due to the Merger, as well as increased incentives and salary and benefit expense, the acquisition of RPS in the second quarter of 2003 and the impact of increased technology and marketing initiatives. These increases were offset by software and real estate write-offs in 2003.

 
                                         
Assets under supervision (a)           Heritage JPMC only   Third quarter change
(in billions, except ranking data)   3Q 2004     4Q 2003     3Q 2003     4Q 2003     3Q 2003  
 
Asset class
                                       
Liquidity
  $ 210     $ 156     $ 145       35 %     45 %
Fixed income
    174       118       121       47       44  
Equities, balanced and other
    351       287       264       22       33  
                 
Assets under management
    735       561       530       31       39  
Custody / brokerage / administration / deposits
    434       203       198       114       119  
                 
Total assets under supervision
  $ 1,169     $ 764     $ 728       53       61  
Client segment
                                       
Institutional
                                       
Assets under management
  $ 426     $ 322     $ 309       32       38  
Custody / brokerage / administration / deposits
    170                   NM       NM  
                 
Assets under supervision
    596       322       309       85       93  
Private bank
                                       
Assets under management
    136       138       132       (1 )     3  
Custody / brokerage / administration / deposits
    143       128       127       12       13  
                 
Assets under supervision
    279       266       259       5       8  
Private client services
                                       
Assets under management
    51       8       7       NM       NM  
Custody / brokerage / administration / deposits
    40       4       5       NM       NM  
                 
Assets under supervision
    91       12       12       NM       NM  
Retail
                                       
Assets under management
    122       93       82       31       49  
Custody / brokerage / administration / deposits
    81       71       66       14       23  
                 
Assets under supervision
    203       164       148       24       37  
                 
Total assets under supervision
  $ 1,169     $ 764     $ 728       53       61  
 

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Assets under supervision (a)           Heritage JPMC only   Third quarter change
(in billions, except ranking data)   3Q 2004     4Q 2003     3Q 2003     4Q 2003     3Q 2003  
 
Geographic region
                                       
Americas
                                       
Assets under management
  $ 531     $ 365     $ 355       45 %     50 %
Custody / brokerage / administration / deposits
    404       168       164       140       146  
                 
Assets under supervision
    935       533       519       75       80  
International
                                       
Assets under management
    204       196       176       4       16  
Custody / brokerage / administration / deposits
    30       35       33       (14 )     (9 )
                 
Assets under supervision
    234       231       209       1       12  
                 
Total assets under supervision
  $ 1,169     $ 764     $ 728       53       61  
                 
Memo:
                                       
Mutual funds assets
  $ 308     $ 213     $ 203       45       52  
Star rankings: (b)
                                       
% of customer assets in funds ranked 4 or better
    56 %     48 %     51 %                
% of customer assets in funds ranked 3 or better
    80 %     69 %     73 %                
Assets under supervision rollforward
                                       
Beginning balance
  $ 796     $ 728     $ 702       9 %     13 %
Net asset flows
    (7 )     (2 )     4       (250 )     NM  
Market / other impact (c)
    380       38       22       NM       NM  
                 
Ending balance
  $ 1,169     $ 764     $ 728       53       61  
 
                                         
    Nine months ended September 30,(d)            
    2004     2003     Change              
                 
Beginning balance
  $ 764     $ 642       19 %                
Net asset flows
    7       (14 )     NM                  
Market / other impact (c)
    398       100       298                  
                       
Ending balance
  $ 1,169     $ 728       61                  
                 
 
(a)  
Excludes Assets under management of American Century.
(b)  
Derived from Morningstar for the United States, Micropal for the United Kingdom, Luxembourg, Hong Kong and Taiwan; and Nomura for Japan.
(c)  
Other reflects the Merger with Bank One ($376 billion) in the third quarter of 2004 and the acquisition of RPS ($41 billion) in the second quarter of 2003.
(d)  
2004 year-to-date results include three months of the combined Firm’s results and six months of heritage JPMorgan Chase results, while 2003 year-to-date results include heritage JPMorgan Chase only.
 

Assets under supervision were $1.17 trillion, up 61% and Assets under management were $735 billion, up 39% from the third quarter of 2003 primarily due to the Merger, as well as market appreciation and net asset inflows.

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CORPORATE

The Corporate Sector is composed of Global Treasury (reported within the IB prior to the Merger) and Private Equity (which includes JPMorgan Partners, reported as a stand-alone business segment prior to the Merger, and Bank One’s ONE Equity Partners) businesses as well as corporate support. With the exception of the business units in Corporate, Global Treasury and Private Equity, expenses incurred by support areas in Corporate are allocated to the business lines based on usage and other factors. However, certain expenses are retained in the Corporate Sector and not allocated to the lines of business due to market pricing or other management accounting policies.

 
                                                 
    H-JPMC Only   Nine months ended September 30, (a)
(in millions, except ratios and headcount)   3Q 2004     3Q 2003     Change     2004     2003     Change  
 
Revenue
                                               
Securities / private equity gains (losses)
  $ 347     $ 349       (1 )%   $ 1,202     $ 863       39 %
Other income
    67       81       (17 )     138       160       (14 )
                     
Subtotal
    414       430       (4 )     1,340       1,023       31  
Net interest income
    (500 )     (72 )     NM       (555 )     (123 )     (351 )
                     
Total net revenue
    (86 )     358       NM       785       900       (13 )
Provision for credit losses
    (1 )     (1 )           (110 )     172       NM  
Noninterest expense
                                               
Compensation expense
    786       433       82       1,764       1,498       18  
Noncompensation expense
    1,146       771       49       2,873       2,405       19  
Net expenses allocated to other businesses
    (1,426 )     (1,132 )     (26 )     (3,796 )     (3,461 )     (10 )
                     
Total noninterest expense
    506       72       NM       841       442       90  
Operating earnings before income tax expense
    (591 )     287       NM       54       286       (81 )
Income tax expense (benefit)
    (372 )     (5 )     NM       (303 )     (123 )     (146 )
                     
Operating earnings
  $ (219 )   $ 292       NM     $ 357     $ 409       (13 )
Selected average balance sheet
                                               
Short-term investments (b)
  $ 26,432     $ 10,108       161     $ 13,025     $ 3,894       234  
Total investment portfolio (c)
    71,050       58,774       21       61,418       66,955       (8 )
Goodwill (d)
    42,958       338       NM       14,652       272       NM  
Total assets
    204,884       105,694       94       150,294       106,458       41  
Headcount
    24,482       13,571       80                          
Treasury
                                               
Securities gains (losses) (e)
  $ 109     $ 229       (52 )   $ 270     $ 993       (73 )
Investment portfolio (average)
    65,508       52,548       25                          
Private equity
                                               
Private equity gains (losses)
                                               
Direct investments
                                               
Realized gains
  $ 277     $ 134       107     $ 981     $ 333       195  
Write-ups / write-downs
    (31 )     1       NM       (81 )     (352 )     77  
Mark-to-market gains (losses)
    (27 )     26       NM       (3 )     167       NM  
                     
Total direct investments
    219       161       36       897       148       NM  
Third-party fund investments
    16       (41 )     NM       26       (280 )     NM  
                     
Total private equity gains (losses)
    235       120       96       923       (132 )     NM  
Other income
    14       12       17       37       36       3  
Net interest income
    (89 )     (61 )     (46 )     (201 )     (200 )      
                     
Total net revenue
    160       71       125       759       (296 )     NM  
Total noninterest expense
    73       63       16       209       197       6  
                     
Operating earnings (loss) before income tax expense
    87       8       NM       550       (493 )     NM  
Income tax expense (benefit)
    27       2       NM       187       (180 )     NM  
                     
Operating earnings (loss)
  $ 60     $ 6       NM     $ 363     $ (313 )     NM  
 

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Private equity portfolio information   At September 30,           At December 31,
Direct investments   2004     2003 (f)     Change           2003 (f)     Change  
             
Public securities
                                               
Carrying value
  $ 958     $ 705       36 %           $ 643       49 %
Cost
    675       560       21               451       50  
Quoted public value
    1,415       1,083       31               994       42  
Private direct securities
                                               
Carrying value
    6,011       5,686       6               5,508       9  
Cost
    7,551       7,188       5               6,960       8  
Third-party fund investments
                                               
Carrying value
    1,138       1,406       (19 )             1,099       4  
Cost
    1,761       2,020       (13 )             1,736       1  
Total private equity portfolio — carrying value
  $ 8,107     $ 7,797       4             $ 7,250       12  
Total private equity portfolio — cost
  $ 9,987     $ 9,768       2             $ 9,147       9  
(a)  
2004 year-to-date results include three months of the combined Firm’s results and six months of heritage JPMorgan Chase results, while 2003 year-to-date results include heritage JPMorgan Chase only.
(b)  
Represents federal funds sold, securities borrowed, trading assets—debt and equity instruments and trading assets—derivative receivables.
(c)  
Represents investment securities and private equity investments.
(d)  
Goodwill amounts prior to September 30, 2004 represent the historical goodwill allocated to the Corporate line of business.
(e)  
Excludes gains/losses on securities used to manage risk associated with mortgage servicing rights.
(f)  
Heritage JPMorgan Chase only.
 

Quarterly Results
Operating earnings were a loss of $219 million down from earnings of $292 million in the prior year. Corporate includes the Firm’s treasury activities, private equity business and unallocated corporate expenses.

Noninterest income was $414 million, down $16 million from the prior year. The primary components of noninterest income are securities and private equity gains (losses), which totaled $347 million, roughly flat with the prior year.

Net interest income was negative $500 million compared with negative $72 million in the prior year. The decline was driven primarily by actions and policies adopted in conjunction with the Merger.

Corporate unallocated expenses of $506 million were up $434 million from the prior year, due to the Merger and policies adopted in conjunction with the Merger. These expenses include the expenses of the private equity and global treasury businesses.

Year-to-date Results
Operating earnings were $357 million down from earnings of $409 million in the prior year.

Noninterest income was $1.3 billion, up $317 million from the prior year. The primary component of noninterest income is Securities / private equity gains (losses), which totaled $1.2 billion, up $339 million from the prior year. The increase was a result of net gains in the Private Equity portfolio of $923 million year-to-date 2004 compared with $132 million in net losses for year-to-date 2003. Offsetting these gains were reductions in investment securities gains in Global Treasury.

Net interest income was a negative $555 million compared with a negative $123 million in the prior year. The decline was driven primarily by actions and policies adopted in conjunction with the Merger.

Corporate unallocated expenses of $841 million were up $399 million from the prior year, due to the Merger and policies adopted in conjunction with the Merger. These expenses include the expenses of the private equity and treasury organizations.

Private equity portfolio
The carrying value of the private equity portfolio at September 30, 2004, increased $857 million from December 31, 2003, and $310 million from September 30, 2003, as a result of the Merger and new investments, partially offset by sales. Unfunded commitments to private third-party equity funds were $968 million at September 30, 2004, $1.3 billion at December 31, 2003, and $1.7 billion at September 30, 2003.

In 2004, new direct private equity investments of $347 million and $705 million were completed during the third quarter and year-to-date, respectively. These new investments consist primarily of buyouts and growth equity in the Industrial and Consumer Retail & Services sectors.

Outlook: The private equity portfolio and financial performance is sensitive to the level of the public equity markets and mergers and acquisitions, IPO and debt financing activity. The potential for realization of gains can vary from quarter to quarter.

During the third quarter of 2004, approximately $9 billion of investment securities were sold. This action, along with other sales of about $19 billion undertaken by heritage Bank One in the second quarter of 2004 prior to the Merger, will continue to have an impact on Net interest income going forward.

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On September 15, 2004, the Firm and IBM announced the Firm’s plans to reintegrate the portions of its technology infrastructure, including data centers, help desks, distributed computing, data networks and voice networks, previously outsourced to IBM. Beginning in January 2005, approximately 4,000 IBM employees and contractors will be transferred to the Firm.

 
RISK MANAGEMENT
 
Risk is an inherent part of the Firm’s business activities. The Firm’s ability to properly and effectively identify, measure, monitor, and report risk in its business activities is critical to its soundness and profitability. The diversity of the Firm’s lines of business helps reduce the impact of volatility in any particular area on its operating results as a whole. Besides general business, reputation and fiduciary risks, the major risks to which the Firm is exposed are capital, liquidity, credit, market, operational and private equity risk. The Firm may refine its methodology for assigning capital to the lines of business as the merger integration process continues. For a discussion of these risks and definitions of terms associated with managing these risks, see pages 45–74 and the Glossary of terms in JPMorgan Chase’s 2003 Annual Report.

 
CAPITAL AND LIQUIDITY MANAGEMENT
 
Capital Management
 
The Firm’s capital management framework is intended to ensure that there is sufficient capital related to the underlying risks of the Firm’s business activities, measured by economic risk capital, and to maintain “well-capitalized” status under regulatory requirements. In addition, the Firm holds sufficient capital above these requirements in order to achieve management’s external debt rating objectives, consistent with similarly rated peers. This framework is integrated into the process of assigning equity to the lines of business.

Regulatory Capital
The Firm’s primary federal banking regulator, the Federal Reserve Board (“FRB”), establishes capital requirements. These include 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 (“OCC”) establishes similar capital requirements and standards for the Firm’s national banks or banking subsidiaries.

On May 6, 2004, the FRB issued a proposed rule that would continue the inclusion of trust preferred securities in Tier 1 capital, subject to stricter quantitative limits. The proposed rule also would make certain provisions required to be included in the terms of trust preferred securities issued after May 31, 2004, more restrictive. The timing for release of a final rule is not known.

On July 20, 2004, the FRB issued a final rule that excludes assets of asset-backed commercial paper programs that are consolidated as a result of FIN 46R from risk-weighted assets for purposes of computing Tier 1 and Total risk-based capital ratios. The final rule also requires that capital be held against short-term asset-backed commercial paper program liquidity facilities that meet certain asset quality tests. The final rule became effective September 30, 2004. Application of the rule did not materially affect the capital ratios of the Firm.

The following table presents the risk-based capital ratios for JPMorgan Chase and its significant banking subsidiaries. At September 30, 2004, the Firm and its primary banking subsidiaries listed in the table below were “well-capitalized” as defined by banking regulators.

 
                                                         
    Tier 1     Total     Risk-weighted     Adjusted     Tier 1     Total     Tier 1  
(in millions, except ratios)   capital     capital     assets (b)     average assets     capital ratio     capital ratio     leverage ratio  
 
September 30, 2004
                                                       
JPMorgan Chase & Co. (a)
  $ 69,309     $ 96,666     $ 803,464     $ 1,065,244       8.6 %     12.0 %     6.5 %
JPMorgan Chase Bank
    35,843       50,662       460,179       648,972       7.8       11.0       5.5  
Chase Manhattan Bank USA, N.A.
    5,663       7,788       61,771       50,773       9.2       12.6       11.2  
Bank One, N.A. (Chicago)
    14,821       20,458       176,069       247,455       8.4       11.6       6.0  
Well capitalized ratios (c)
                                    6.0       10.0       5.0 (d)
Minimum capital ratios (c)
                                    4.0       8.0       3.0  
 
                                                         
    Heritage JPMC Only
    Tier 1     Total     Risk-weighted     Adjusted     Tier 1     Total     Tier 1  
(in millions, except ratios)   capital     capital     assets (b)     average assets     capital ratio     capital ratio     leverage ratio  
 
December 31, 2003
                                                       
JPMorgan Chase & Co. (a)
  $ 43,167     $ 59,816     $ 507,456     $ 765,910       8.5 %     11.8 %     5.6 %
JPMorgan Chase Bank
    34,972       45,290       434,218       628,076       8.1       10.4       5.6  
Chase Manhattan Bank USA, N.A.
    4,950       6,939       48,030       34,565       10.3       14.4       14.3  
Well capitalized ratios (c)
                                    6.0       10.0       5.0 (d)
Minimum capital ratios (c)
                                    4.0       8.0       3.0  
 

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(a)  
Assets and capital amounts for JPMorgan Chase’s banking subsidiaries reflect intercompany transactions, whereas the respective amounts for JPMorgan Chase reflect the elimination of intercompany transactions.
(b)  
Includes off–balance sheet risk-weighted assets in the amounts of $248.4 billion, $153.6 billion, $14.4 billion and $65.5 billion, respectively, at September 30, 2004, and $174.2 billion, $152.1 billion and $13.3 billion, respectively, at December 31, 2003.
(c)  
As defined by the regulations issued by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency.
(d)  
Represents requirements for bank subsidiaries pursuant to regulations issued under the Federal Deposit Insurance Corporation Improvement Act. There is no Tier 1 leverage component in the definition of a well-capitalized bank holding company.
 

The following table shows the components of the Firm’s Tier 1 and total capital, as of the dates indicated:

 
                 
            H-JPMC Only  
    September 30,     December 31,  
(in millions)   2004     2003  
 
Tier 1 capital
               
Common stockholders’ equity
  $ 105,078     $ 45,168  
Nonredeemable preferred stock
    1,009       1,009  
Minority interest and trust preferred securities
    11,278       6,882  
Less: Goodwill
    42,947       8,511  
Investments in certain subsidiaries
    380       266  
Nonqualifying intangible assets and other
    4,729       1,115  
 
Tier 1 capital
    69,309       43,167  
 
Tier 2 capital
               
Long-term debt and other instruments qualifying as Tier 2
    19,632       12,128  
Qualifying allowance for credit losses
    8,000       4,777  
Less: Investment in certain subsidiaries
    275       256  
 
Tier 2 capital
    27,357       16,649  
 
Total qualifying capital
  $ 96,666     $ 59,816  
 

Tier 1 capital was $69.3 billion at September 30, 2004, compared with $43.2 billion at December 31, 2003, an increase of $26.1 billion. The increase was due to an increase in common stockholders’ equity of $59.9 billion, primarily driven by stock issued in connection with the Merger of $57.3 billion, year-to-date net income of $2.8 billion and net common stock issued under employee plans of $2.6 billion; these were partially offset by dividends paid of $2.7 billion and common share repurchases of $138 million. The Merger added Tier 1 components such as $3.3 billion of additional qualifying trust preferred securities and $467 million of minority interests in consolidated subsidiaries; Tier 1 deductions resulting from the Merger included $34.3 billion of merger-related goodwill, and $3.5 billion of nonqualifying intangibles.

Economic Risk Capital
JPMorgan Chase assesses its capital adequacy related to the underlying risks of the Firm’s business activities utilizing internal risk-assessment methodologies. The Firm assigns economic capital based primarily on five risk factors: credit risk, market risk, operational risk and business risk for each business; and private equity risk, principally for the Firm’s private equity businesses. The methodologies to quantify these risks are discussed in the risk management sections on pages 42–56 of this Form 10-Q.

The following table presents quarterly average economic risk capital for JPMorgan Chase.

                 
    Quarterly Averages
(in billions)   3Q 2004     3Q 2003 (a)  
 
Economic risk capital:
               
Credit risk
  $ 24.1     $ 12.7  
Market risk
    9.3       5.0  
Operational risk
    5.7       3.4  
Business risk
    2.1       1.7  
Private equity risk
    4.5       5.4  
 
Economic risk capital
    45.7       28.2  
Goodwill
    43.0       8.0  
Other (b)
    15.7       6.9  
 
Total Common stockholders’ equity
  $ 104.4     $ 43.1  
(a)  
Heritage JPMorgan Chase only.
(b)  
Additional capital required to meet internal regulatory/debt rating objectives.
 

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Line of Business Equity
The Firm’s framework for allocating capital is based on the following objectives:

   
Integrate firmwide capital management activities with capital management activities within each of the lines of business.
 
   
Measure performance in each business segment consistently across all lines of business.
 
   
Provide comparability with peer firms for each of the lines of business.

Equity for a line of business represents the amount the Firm believes the business would require if it were operating independently, incorporating sufficient capital to address the economic risk measures as described in the section above, regulatory capital requirements and capital levels for similarly rated peers. Return on equity is measured and internal targets for expected returns are established as a primary measure of a business segment’s performance.

For performance management purposes, the Firm does not allocate goodwill to the lines of business because management believes that the accounting-driven allocation of goodwill could distort its assessment of relative returns. In Management’s view, its approach fosters better comparison of line of business returns with other internal business segments, as well as with peers. The Firm assigns an amount of equity capital equal to the then current book value of its goodwill to the Corporate segment. The return on invested capital related to the Firm’s goodwill assets is managed within this segment. In accordance with SFAS 142, the Firm allocates goodwill to the lines of business based on the underlying fair values of the businesses and then performs the required impairment testing. For a further discussion of goodwill and impairment testing, see Critical accounting estimates and Note 14 on pages 58 and 79–80, respectively, of this Form 10-Q.

This integrated approach to assigning equity to the lines of business is a new methodology resulting from the Merger. Therefore, the comparison of current quarter line of business equity is not comparable to equity assigned to the lines of business in prior quarters. It is expected that the Firm will continuously assess the assumptions, methodologies and reporting reclassifications used for segment reporting and further refinements may be implemented in future periods.

The following represents average equity for each of the business segments of JPMorgan Chase for the third quarter of 2004.

 
         
(in billions)   3Q 2004  
 
Line of business
       
Investment Bank
  $ 20.0  
Retail Financial Services
    13.1  
Card Services
    11.8  
Commercial Bank
    3.4  
Treasury & Securities Services
    1.9  
Asset & Wealth Management
    2.4  
Corporate (a)
    51.8  
 
Total common stockholders’ equity
  $ 104.4  
(a)  
Includes $43.0 billion of equity to offset goodwill, $7.4 billion of equity related to Global Treasury, Private Equity and Corporate Pension Plan and $1.4 billion of capital retained in Corporate.
 

Dividends
The Firm’s common stock dividend policy reflects its earnings outlook, desired payout ratios, the need to maintain an adequate capital level and alternative investment opportunities. In the third quarter of 2004, JPMorgan Chase declared a quarterly cash dividend on its common stock of $0.34 per share, payable October 31, 2004, to stockholders of record at the close of business October 6, 2004.

Stock repurchases
The Firm did not repurchase any shares of its common stock during the first nine months of 2004 or all of 2003, except as discussed below. On July 20, 2004, the Board of Directors approved an initial stock repurchase program in the aggregate amount of $6.0 billion. This amount includes shares to be repurchased to offset issuances under the Firm’s employee equity-based plans. The actual amount of shares repurchased will be subject to various factors, including market conditions; legal considerations affecting the amount and timing of repurchase activity; the Firm’s capital position (taking into account purchase accounting adjustments); internal capital generation; and alternative potential investment opportunities. During the third quarter of 2004, the Firm repurchased 3.5 million shares for $138 million under the stock repurchase program. For additional information regarding repurchases of the Firm’s equity securities, see Part II, Item 2 on page 95 of this Form 10-Q.

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Liquidity Management
The following discussion of JPMorgan Chase’s liquidity management focuses primarily on developments since December 31, 2003, and should be read in conjunction with pages 47–48 of JPMorgan Chase’s 2003 Annual Report. 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.

Consistent with its liquidity management policy, the Firm has raised funds at the parent holding company sufficient to cover maturing obligations over the next 12 months. Long-term funding needs for the parent holding company over the next several quarters are expected to be consistent with prior periods. The Firm manages its liquidity through a combination of short- and long-term sources of funds to support its balance sheet and its businesses. Under the Firm’s liquidity risk management framework, the Firm maintains sufficient levels of long-term liquidity through a combination of long-term debt, preferred stock, common equity and core deposits to support the less liquid assets on its balance sheet. The Firm’s primary source of short-term funds, excluding unsecured borrowings, includes more than $58 billion of securities available for repurchase agreements and approximately $39 billion of credit card, automobile and mortgage loans available for securitization.

In the event of a disruption in the financial markets, the Firm has a number of liquidity sources it could draw upon to meet liquidity needs. These sources include selling investment portfolio securities, entering into repurchase agreements, securitizing loan assets, and borrowing through the Federal Home Loan Bank system. Depending upon the nature of the disruption, funding may also be available from the Federal Reserve discount window.

Credit ratings
The credit ratings of JPMorgan Chase’s parent holding company and each of its significant banking subsidiaries, as of September 30, 2004, were as follows:

                         
    Short-Term Debt   Senior Long-Term Debt
    Moody’s   S & P   Fitch   Moody’s   S & P   Fitch
 
JPMorgan Chase & Co.
  P- 1   A - 1   F1   Aa3   A+   A+
JPMorgan Chase Bank
  P- 1   A - 1+   F1+   Aa2   AA-   A+
Chase Manhattan Bank USA, N.A.
  P- 1   A - 1+   F1+   Aa2   AA-   A+
Bank One, N.A. (Chicago)
  P- 1   A - 1+   F1+   Aa2   AA-   A+
Bank One, N.A. (Columbus)
  P- 1   A - 1+   F1+   Aa2   AA-   A+
 

The Firm’s principal insurance subsidiaries had the following financial strength ratings:

             
    Moody’s   S & P   A.M. Best
 
Federal Kemper Life Assurance Company
  A2   A+   A
Zurich Life Insurance Company of America
  A2   A+   A
 

At the end of the second quarter of 2004, in anticipation of the July 1, 2004, close of the Merger with Bank One, Moody’s upgraded the ratings of the Firm by one notch, moving the parent holding company’s senior long-term debt rating to Aa3 and JPMorgan Chase Bank’s senior long-term debt rating to Aa2. Moody’s outlook for the Firm is stable. Fitch affirmed its ratings and changed its outlook to positive, while S&P affirmed all its ratings and kept its outlook stable.

The cost and availability of unsecured financing are influenced by credit ratings. A reduction in these ratings could adversely affect the Firm’s access to liquidity sources, increase the cost of funds, trigger additional collateral requirements and decrease the number of investors and counterparties willing to lend. If the Firm’s ratings were downgraded by one notch, the Firm estimates the incremental cost of funds to be in the range of 5 – to – 15 basis points, reflecting a range of terms from three to five years, and the potential loss of funding to be negligible. Additionally, the Firm estimates the additional funding requirements for variable interest entities (“VIEs”) and other third-party commitments to be relatively modest. In the current environment, the Firm believes a downgrade is unlikely. For additional information on the impact of a credit ratings downgrade on funding requirements for VIEs, and on derivatives and collateral agreements, see Off–balance Sheet Arrangements, below, and Ratings profile of derivative receivables mark-to-market (“MTM”) on page 46, respectively, of this Form 10-Q.

Issuances
During the nine months ended September 30, 2004, JPMorgan Chase issued approximately $19.8 billion of long-term debt; during the same period, $11.6 billion of long-term debt matured or was redeemed. In addition, the Firm securitized approximately $5.6 billion of residential mortgage loans, $6.3 billion of credit card loans and $1.6 billion of automobile loans, resulting in pre-tax gains (losses) on securitizations of $54 million, $36 million and $(3) million, respectively. For a further discussion of loan securitizations, see Note 12 on pages 73-76 of this Form 10-Q and Note 13 on pages 100–103 of JPMorgan Chase’s 2003 Annual Report.

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Off–balance Sheet Arrangements
VIEs, including special-purpose entities, are an important part of the financial markets, providing market liquidity by facilitating investors’ access to specific portfolios of assets and risks. JPMorgan Chase is involved with VIEs, in three broad categories of transactions: loan securitizations (through “qualifying” special-purpose entities), multi-seller conduits and client intermediation. Capital is held, as appropriate, against all VIE-related transactions and related exposures, such as derivative transactions and lending-related commitments. For a further discussion of VIEs and the Firm’s accounting for them, see Notes 12 and 13 of this Form 10-Q on pages 73–78, and Note 1 on pages 86–87, Note 13 on pages 100–103 and Note 14 on pages 103–106 of JPMorgan Chase’s 2003 Annual Report.

For certain liquidity commitments to VIEs, the Firm could be required to provide funding if the credit rating of JPMorgan Chase Bank or Bank One, N.A. (Chicago) were downgraded below specific levels, primarily P-1, A-1 and F1 for Moody’s, Standard & Poor’s and Fitch, respectively. The amount of these liquidity commitments was $77.1 billion at September 30, 2004. Alternatively, if JPMorgan Chase Bank or Bank One, N.A. (Chicago) were downgraded, the Firm could be replaced by another liquidity provider in lieu of funding under the liquidity commitment, or, in certain circumstances, could facilitate the sale or refinancing of the assets in the VIE in order to provide liquidity.

Of its $77.1 billion in liquidity commitments to VIEs, $46.3 billion is included in the Firm’s total Other unfunded commitments to extend credit, included in the table below. As a result of the consolidation of multi-seller conduits in accordance with FIN 46R, $30.8 billion of these commitments are excluded from the table, as the underlying assets of the VIEs have been included on the Firm’s Consolidated balance sheet.

The revenue reported in the tables below primarily represents servicing and custodial fee income. The Firm also has exposure to certain VIE vehicles arising from derivative transactions; these transactions are recorded at fair value on the Firm’s Consolidated balance sheet with changes in fair value (i.e., MTM gains and losses) recorded in Trading revenue. Such MTM gains and losses are not included in the revenue amounts reported in the table below.

The following tables summarize certain revenue information related to VIEs with which the Firm has significant involvement, and qualifying SPEs:

                         
    Quarter ended September 30, 2004
(in millions)   VIEs (a)     “Qualifying” SPEs     Total  
 
Revenue
  $ 53     $ 424     $ 477  
 
                         
    Nine months ended September 30, 2004 (b)
(in millions)   VIEs (a)     “Qualifying” SPEs     Total  
 
Revenue
  $ 96     $ 979     $ 1,075  
(a)  
Includes all VIE-related revenue (i.e., revenue associated with consolidated and nonconsolidated VIEs).
(b)  
2004 year-to-date results include three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
 

The following table summarizes JPMorgan Chase’s off–balance sheet lending-related financial instruments by remaining maturity at September 30, 2004:

 
                                         
    Under     1 - 3     4 - 5     After 5        
(in millions)   1 year     Years     Years     Years     Total  
 
Off-balance sheet lending related financial instruments
                                       
Consumer-related
  $ 546,835     $ 2,755     $ 2,841     $ 40,914     $ 593,345  
Wholesale-related:
                                       
Other unfunded commitments to extend credit (a)(b)
    125,601       61,202       26,383       3,987       217,173  
Standby letters of credit and guarantees (a)
    34,363       36,016       19,305       2,672       92,356  
Other letters of credit (a)
    3,514       2,813       55       35       6,417  
 
Total wholesale-related
    163,478       100,031       45,743       6,694       315,946  
 
Total lending-related commitments
  $ 710,313     $ 102,786     $ 48,584     $ 47,608     $ 909,291  
(a)  
Represents contractual amount net of risk participations totaling $29 billion at September 30, 2004.
(b)  
Includes unused advised lines of credit totaling $20 billion at September 30, 2004, which are not legally binding. In regulatory filings with the Federal Reserve Board, unused advised lines are not reportable.
 

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CREDIT RISK MANAGEMENT
 

The following discussion of JPMorgan Chase’s credit portfolio as of September 30, 2004, focuses primarily on developments since December 31, 2003, and should be read in conjunction with pages 51-65, pages 74-77 and Notes 11, 12, 29 and 30 of JPMorgan Chase’s 2003 Annual Report.

The Firm assesses its consumer credit exposure on a managed basis, including credit card securitizations. For a reconciliation of the Provision for credit losses on a reported basis to operating, or managed, basis, see pages 9-11 of this Form 10-Q.

 
CREDIT PORTFOLIO
 

The following table presents a summary of the Firm’s credit portfolio for the dates indicated:

 

Wholesale and consumer credit portfolio

 
                 
    Credit exposure
    H-JPMC Only  
(in millions)   Sept. 30, 2004     Dec. 31, 2003  
 
Wholesale (a)(b)
               
Loans — U.S.
  $ 99,451     $ 44,325  
Loans — non-U.S.
    32,893       31,094  
 
Total wholesale loans — reported
    132,344       75,419  
Consumer (b)(c)
               
Consumer real estate
               
Home finance — home equity & other
  $ 67,368     $ 24,179  
Home finance — mortgage
    56,035       50,381  
Auto & education finance
    62,587       43,157  
Small business & other consumer
    15,126       4,204  
Credit card receivables — reported
    60,241       17,426  
 
Total consumer loans — reported
    261,357       139,347  
Total loans — reported
  $ 393,701     $ 214,766  
Credit card securitizations (d)
    71,256       34,856  
 
Total loans — managed
    464,957       249,622  
Derivative receivables (e)(f)
    57,795       83,751  
Interests in purchased receivables (g)
    30,479       4,752  
Other receivables
          108  
 
Total credit-related assets
    553,231       338,233  
Wholesale lending-related commitments (h)(i)
    315,946       211,483  
Consumer lending-related commitments
    593,345       181,198  
 
Total
    1,462,522       730,914  
Memo: total by category
               
Total wholesale exposure (j)
  $ 536,564     $ 375,513  
Total consumer exposure (k)
    925,958       355,401  
 
Total
    1,462,522       730,914  
Credit derivative hedges notional
  $ (38,326 )   $ (37,282 )
Collateral held against derivative receivables
  $ (8,059 )   $ (36,214 )
 
(a)  
Includes Investment Bank, Commercial Banking, Treasury & Securities Services and Asset & Wealth Management.
(b)  
Amounts are presented gross of the Allowance for credit losses.
(c)  
Includes Retail Financial Services and Card Services.
(d)  
Represents securitized credit cards. For a further discussion of credit card securitizations, see Card Services on pages 25-27 of this Form 10-Q.
(e)  
These amounts include the effect of legally enforceable master netting agreements. Effective January 1, 2004, the Firm elected to net cash paid and received under legally enforceable master netting agreements.
(f)  
Based on economic credit exposure, the measure of expected MTM value of derivative receivables at future time periods, including the benefit of collateral, derivative receivables were $35 billion and $34 billion at September 30, 2004 and December 31, 2003, respectively. See page 53 of JPMorgan Chase’s 2003 Annual Report for a further discussion.
(g)  
These represent undivided interests in pools of receivables and similar types of assets.

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(h)  
Based on Economic credit exposure, which represents the portion of the unused commitments or other contingent exposure that is likely, based on average portfolio historical experience, to become outstanding in the event of a default by the obligor, lending-related commitments were $164 billion and $104 billion at September, 30, 2004 and December 31, 2003, respectively. See page 53 of JPMorgan Chase’s 2003 Annual Report for a further discussion.
(i)  
Includes unused advised lines of credit totaling $20 billion at September 30, 2004, and $19 billion at December 31, 2003, which are not legally binding. In regulatory filings with the Federal Reserve Board, unused advised lines are not reportable.
(j)  
Represents Total wholesale loans, Derivative receivables, Interests in purchased receivables, other receivables and wholesale lending-related commitments.
(k)  
Represents Total consumer loans, credit card securitizations and consumer lending-related commitments.
 

The increase in JPMorgan Chase’s total credit exposure (including $71 billion of securitized credit cards) reflected the Merger with Bank One. Total wholesale exposure increased by $161 billion, while total consumer exposure increased by $571 billion.

 
WHOLESALE CREDIT PORTFOLIO
 
The increase in total wholesale exposure was almost entirely due to the merger with Bank One. Derivative receivables declined by $26 billion, primarily because, effective January 1, 2004, the Firm elected to net cash paid and received as collateral under credit support annexes to legally enforceable master netting agreements. Loans and lending-related commitments increased by $57 billion and $104 billion, respectively, both as a result of the Merger. Interests in purchased receivables increased primarily due to the Merger.

Below are summaries of the maturity and ratings profiles of the wholesale portfolio as of September 30, 2004, and December 31, 2003. The ratings scale is based on the Firm’s internal risk ratings and is presented on an S&P-equivalent basis.

 
                                                                                         
    At September 30, 2004
                                    Ratings profile
                                    Investment-grade(“IG”)   Noninvestment-grade              
    Maturity profile (a)   AAA     A+     BBB+     BB+     CCC+             Total %  
(in billions, except ratios)   < 1 year     1 - 5 years     > 5 years     Total     to AA–     to A–     to BBB–     to B–     & below     Total     of IG (b)  
 
Loans
    46 %     41 %     13 %     100 %   $ 27     $ 19     $ 37     $ 43     $ 7     $ 133       62 %
Derivative receivables (b)
    10       45       45       100       29       11       9       9             58       84  
Interests in purchased receivables
    44       50       6       100       30                               30       100  
Lending-related commitments (b)(c)
    52       46       2       100       123       73       71       46       3       316       84  
       
Total exposure (d)
    46 %     45 %     9 %     100 %   $ 209     $ 103     $ 117     $ 98     $ 10     $ 537       80 %
       
Credit derivative hedges notional (e)
    16 %     79 %     5 %     100 %   $ (11 )   $ (12 )   $ (13 )   $ (2 )   $     $ (38 )     95 %
 
                                                                                         
    At December 31, 2003 (f)
                                    Ratings profile
                                    Investment-grade (“IG”)   Noninvestment-grade              
    Maturity profile (a)   AAA     A+     BBB+     BB+     CCC+             Total %  
(in billions, except ratios)   < 1 year     1 - 5 years     > 5 years     Total     to AA–     to A–     to BBB–     to B–     & below     Total     of IG (b)  
 
Loans
    50 %     35 %     15 %     100 %   $ 14     $ 13     $ 20     $ 22     $ 6     $ 75       63 %
Derivative receivables (b)
    20       41       39       100       47       15       12       9       1       84       88  
Interests in purchased receivables
    27       71       2       100       5                               5       100  
Lending-related commitments (b)(c)
    52       45       3       100       79       57       48       26       2       212       87  
       
Total exposure (d)
    44 %     43 %     13 %     100 %   $ 145     $ 85     $ 80     $ 57     $ 9     $ 376       82 %
       
Credit derivative hedges notional (e)
    16 %     74 %     10 %     100 %   $ (10 )   $ (12 )   $ (12 )   $ (2 )   $ (1 )   $ (37 )     92 %
 
(a)  
The maturity profile of loans and lending-related commitments is based upon the remaining contractual maturity. The maturity profile of derivative receivables is based upon the maturity profile of Average exposure. See page 53 of JPMorgan Chase’s 2003 Annual Report for a further discussion.
(b)  
Based on economic credit exposure, the total percentage of IG for derivative receivables was 89% and 91% as of September 30, 2004 and December 31, 2003, respectively, and for lending-related commitments was 85% and 88% as of September 30, 2004 and December 31, 2003, respectively.
(c)  
Based on economic credit exposure, the maturity profile for the <1 year, 1-5 years and >5 years categories would have been 34%, 62% and 4%, respectively, as of September 30, 2004, and 38%, 58% and 4%, respectively, as of December 31, 2003. See page 53 of JPMorgan Chase’s 2003 Annual Report for a further discussion of economic credit exposure.
(d)  
Based on economic credit exposure, the maturity profile for <1 year, 1-5 years and >5 years categories would have been 37%, 52% and 11%, respectively, as of September 30, 2004, and 36%, 46% and 18%, respectively, as of December 31, 2003. See page 53 of JPMorgan Chase’s 2003 Annual Report for a further discussion.
(e)  
Ratings are based on the underlying referenced assets.
(f)  
Heritage JPMorgan Chase only.
 

As of September 30, 2004, the wholesale exposure ratings profile remained relatively stable compared with December 31, 2003.

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Wholesale Credit Exposure — selected industry concentration

The Firm continues to focus on the management and diversification of its industry concentrations, with particular attention paid to industries with actual or potential credit concerns. The Firm is currently engaged in reviewing industry definitions and assignments in each of the heritage firm’s portfolios. Going forward, the Firm will report industry concentrations based on primary industry risk; as such, the $9.7 billion of reported credit exposure to Telecom services at September 30, 2004, no longer includes exposure to companies related to the telecom services industry, such as suppliers to telecom services companies, and has therefore decreased from the $10.9 billion reported at year-end 2003. Since December 31, 2003, the Firm’s industry structure was modified, resulting in two new industry groups within the top 10 industry concentrations at September 30, 2004: Banks and finance companies (consists of the industries called Commercial banks and Finance companies and lessors at year-end 2003) and Retail and consumer services (previously separate industries at December 31, 2003). The merger with Bank One resulted in increases in nearly every top 10 industry concentration. Banks and finance companies and Asset managers had declines in exposure, both primarily as a result of the Firm’s election to net cash received under legally enforceable master netting agreements, which affected derivative receivables. A significant portion of the Firm’s derivatives portfolio is transacted with customers in these industries.
 
                                                         
                    Noninvestment grade (b)   Credit     Collateral Held  
As of September 30, 2004   Credit     Investment             Criticized     Criticized     Derivative     Against Derivative  
(in millions, except ratios)   Exposure (a)     Grade     Noncriticized     Performing     Nonperforming     Hedges (c)     Receivables  
 
Top 10 Industries (d)
                                                       
Banks and finance companies
  $ 55,714       90 %   $ 5,243     $ 145     $ 66     $ (11,832 )   $ (2,787 )
Real estate
    26,921       62       9,494       757       92       (893 )     (49 )
Retail and consumer services
    24,407       73       6,108       332       122       (1,816 )      
Healthcare
    22,755       84       3,376       261       68       (769 )     (13 )
Utilities
    22,427       82       2,966       517       476       (2,203 )     (10 )
Consumer products
    21,228       69       6,055       396       82       (1,307 )     (58 )
State and municipal governments
    20,113       97       669       15       1       (419 )     (19 )
Securities firms and exchanges
    17,835       88       2,144       1       13       (1,397 )     (1,340 )
Asset managers
    17,672       82       3,129       74       3       (59 )     (593 )
Oil and gas
    16,416       78       3,421       161       2       (1,469 )     (78 )
Other selected industries
                                                       
Automotive
    12,340       67       3,736       268       99       (3,184 )      
Telecom services
    9,732       81       1,536       262       76       (2,515 )     (388 )
All other
    269,004       79       49,188       4,736       921       (10,463 )     (2,724 )
 
Total
  $ 536,564       80 %   $ 97,065     $ 7,925     $ 2,021     $ (38,326 )   $ (8,059 )
 
                                                         
    Heritage JPMC Only (b)
                    Noninvestment grade   Credit     Collateral Held  
As of December 31, 2003   Credit     Investment             Criticized     Criticized     Derivative     Against Derivative  
(in millions, except ratios)   Exposure (a)     Grade     Noncriticized     Performing     Nonperforming     Hedges (c)     Receivables  
 
Top 10 Industries (d)
                                                       
Banks and finance companies
  $ 62,652       96 %   $ 2,633     $ 107     $ 23     $ (12,538 )   $ (24,822 )
Real estate
    14,544       70       4,058       232       49       (718 )     (182 )
Retail and consumer services
    14,451       73       3,613       224       83       (1,637 )     (17 )
Healthcare
    11,332       86       1,403       139       44       (467 )     (35 )
Utilities
    15,296       82       1,714       415       583       (1,960 )     (176 )
Consumer products
    13,774       71       3,628       313       103       (1,104 )     (122 )
State and municipal governments
    14,354       100       36       14       1       (405 )     (12 )
Securities firms and exchanges
    15,599       83       2,582       9       13       (1,369 )     (4,168 )
Asset managers
    21,794       82       3,899       76       13       (245 )     (1,133 )
Oil and gas
    9,178       81       1,479       46       205       (1,413 )     (115 )
Other selected industries
                                                       
Automotive
    7,268       76       1,536       150       82       (2,313 )      
Telecom services
    10,924       75       2,204       340       227       (2,941 )     (402 )
All other
    164,347       80       28,070       4,423       939       (10,172 )     (5,030 )
 
Total
  $ 375,513       83 %   $ 56,855     $ 6,488     $ 2,365     $ (37,282 )   $ (36,214 )
(a)  
Credit exposure is net of risk participations, and excludes the benefit of credit derivative hedges and collateral held against derivative receivables or loans.
(b)  
Excludes purchased nonaccrual loans held for sale of $355 million and $22 million at September 30, 2004 and December 31, 2003, respectively.
(c)  
Represents notional amounts only; these hedges do not qualify for hedging accounting under SFAS 133.
(d)  
Based on September 30, 2004 determination of Top 10 industries.
 

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Wholesale Criticized Exposure

Exposures deemed criticized generally represent a ratings profile similar to a rating of CCC+/Caa1 and lower, as defined by Standard & Poor’s/Moody’s. As a result of the Merger with Bank One, the criticized component of the portfolio increased since December 31, 2003, to $9.9 billion from $8.9 billion. The portion of the criticized portfolio that existed prior to the Merger, however, continued to experience improvement due to debt repayments and facility upgrades as a result of client recapitalizations, additional security and collateral taken in refinancings, client upgrades from improved financial performance, gross charge-offs and a lack of migration of new exposures into the portfolio.

Country Exposure

The selection of countries presented is based on the materiality of the Firm’s exposure and its view of actual or potentially adverse credit conditions. 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. In addition, the benefit of collateral, credit derivatives used to manage wholesale exposure, and short debt or equity trading positions is taken into account. Total exposure includes exposure to both government and private-sector entities in a country.

The exposure to Mexico increased from $1.5 billion at December 31, 2003, to $2.3 billion at September 30, 2004, mainly due to the consolidation of Bank One’s lending portfolio with heritage JPMorgan Chase exposures, as well as increases in trading positions, both cross-border and local. The exposure to South Korea also increased from $2.2 billion at December 31, 2003, to $2.7 billion at September 30, 2004, due to the addition of Bank One’s lending portfolio, partially offset by decreases in local issuer positions.

The Firm’s exposure to other countries disclosed in JPMorgan Chase’s 2003 Annual Report either has declined modestly or has had immaterial changes since year-end 2003. Likewise, during the quarter, the credit conditions in these countries remained relatively stable.

Derivative Contracts

For a further discussion of the derivative contracts utilized by JPMorgan Chase in connection with its trading and end-user activities, see Note 18 on page 82 of this Form 10-Q, and pages 58-61 and Note 28 on pages 116-117 of JPMorgan Chase’s 2003 Annual Report.

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

Notional amounts and derivative receivables marked to market (“MTM”)

 
                                 
    Notional amounts (a)   Derivative receivables MTM
    September 30,     December 31,     September 30,     December 31,  
(in billions)   2004     2003 (b)     2004     2003 (b)  
 
Interest rate
  $ 35,667     $ 31,252     $ 42     $ 60  
Foreign exchange
    1,577       1,582       3       10  
Equity
    413       328       7       9  
Credit derivatives
    898       578       2       3  
Commodity
    96       24       4       2  
 
Total notional and credit exposure
  $ 38,651     $ 33,764     $ 58 (c)   $ 84  
Collateral held against derivative receivables
    NA       NA       (8 )(c)     (36 )
 
Exposure net of collateral
  $ 38,651     $ 33,764     $ 50     $ 48  
(a)  
The notional amounts represent the gross sum of long and short third-party notional derivative contracts, excluding written options and foreign exchange spot contracts.
(b)  
Heritage JPMorgan Chase only.
(c)  
The Firm held $33 billion of collateral against derivative receivables as of September 30, 2004, consisting of $25 billion in net cash received under credit support annexes to legally enforceable master netting agreements, and $8 billion of other highly liquid collateral. The benefit of the $25 billion is reflected within the $58 billion of derivative receivables MTM. Excluded from the $33 billion of collateral is $10 billion of collateral delivered by clients at the initiation of transactions; this collateral secures exposure that could arise in the existing portfolio of derivatives should the MTM of the client’s transactions move in the Firm’s favor. Also excluded are credit enhancements in the form of letter-of-credit and surety receivables.
 

The $39 trillion of notional principal of the Firm’s derivative contracts outstanding at September 30, 2004, significantly exceeds, in the Firm’s view, the possible credit losses that could arise from such transactions. For most derivative transactions, the notional principal amount does not change hands; it is simply used as a reference to calculate payments. In terms of current credit risk exposure, the appropriate measure of risk is, in the Firm’s view, the 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 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 September 30, 2004, the MTM value of derivative receivables (after taking into account

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the effects of legally enforceable master netting agreements and the impact of net cash received under credit support annexes to such legally enforceable master netting agreements) was $58 billion. Further, after taking into account $8 billion of other highly liquid collateral held by the Firm, the net current MTM credit exposure was $50 billion. As of September 30, 2004, based on the MTM value of its derivative receivables and after taking into account the effects of legally enforceable master netting agreements and collateral held, the Firm did not have a concentration to any single derivative receivable counterparty greater than 5%.

The following table summarizes the ratings profile of the Firm’s Consolidated balance sheet Derivative receivables MTM, net of cash and other highly liquid collateral, for the dates indicated:

Ratings profile of Derivative receivables MTM

                                 
                    H-JPMC Only
    September 30, 2004   December 31, 2003
    Exposure net     % of exposure     Exposure net     % of exposure  
(in millions)   of collateral (a)     net of collateral     of collateral     net of collateral  
 
Rating equivalent
                               
AAA to AA-
  $ 25,319       51 %   $ 24,697       52 %
A+ to A-
    8,354       17 %     7,677       16 %
BBB+ to BBB-
    8,148       16 %     7,564       16 %
BB+ to B-
    7,564       15 %     6,777       14 %
CCC+ and below
    351       1 %     822       2 %
 
Total
  $ 49,736       100 %   $ 47,537       100 %
 
(a)  
The Firm held $33 billion of collateral against derivative receivables as of September 30, 2004, consisting of $25 billion in net cash received under legally enforceable master netting agreements, and $8 billion of other highly liquid collateral. The benefit of the $25 billion is reflected within the $58 billion of derivative receivables MTM. Excluded from the $33 billion of collateral is $10 billion of collateral delivered by clients at the initiation of transactions; this collateral secures exposure that could arise in the existing portfolio of derivatives should the MTM of the client’s transactions move in the Firm’s favor. Also excluded are credit enhancements in the form of letter-of-credit and surety receivables.
 

The Firm actively pursues the use of collateral agreements to mitigate counterparty credit risk in derivatives. The percentage of the Firm’s derivatives transactions subject to collateral agreements increased slightly, to 79% as of September 30, 2004, from 78% at December 31, 2003. The Firm held $33 billion of collateral as of September 30, 2004 (including $25 billion of net cash received under credit support annexes to legally enforceable master netting agreements), compared with $36 billion as of December 31, 2003. The Firm posted $26 billion of collateral as of September 30, 2004, compared with $27 billion at the end of 2003.

Certain 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 $1.3 billion of collateral posted by the Firm as of September 30, 2004. The impact of a six-notch ratings downgrade to JPMorgan Chase Bank (from AA- to BBB) would have been $3.4 billion of additional collateral posted by the Firm as of September 30, 2004. Certain derivative contracts also provide for termination of the contract, generally upon JPMorgan Chase Bank being downgraded, at the then-existing MTM value of the derivative contracts.

Use of credit derivatives

The following table presents the Firm’s notional amounts of credit derivatives protection bought and sold as of September 30, 2004, and December 31, 2003:

Credit derivatives positions

 
                                         
    Portfolio management   Dealer/Client      
    Notional amounts   Notional amounts      
    Protection     Protection     Protection     Protection        
(in millions)   bought (a)     sold     bought     sold     Total  
 
September 30, 2004
  $ 38,382     $ 56     $ 413,286     $ 445,968     $ 897,692  
December 31, 2003 (b)
    37,349       67       264,389       275,888       577,693  
(a)  
Includes $2 billion at both September 30, 2004, and December 31, 2003, of portfolio credit derivatives.
(b)  
Heritage JPMorgan Chase only.
 

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JPMorgan Chase has limited counterparty exposure as a result of credit derivatives transactions. Of the $58 billion of total Derivative receivables at September 30, 2004, approximately $2 billion, or 3%, was associated with credit derivatives, before the benefit of highly liquid collateral. The use of credit 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

In managing its wholesale credit exposure, the Firm purchases single-name and portfolio credit derivatives. As of September 30, 2004, the notional outstanding amount of protection purchased via single-name and portfolio credit derivatives was $36 billion and $2 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.

Use of single-name and portfolio credit derivatives

 
                 
    Notional amount of protection bought
(in millions)   September 30, 2004     December 31, 2003 (a)  
 
Credit derivatives used to manage risk related to:
               
Loans and lending-related commitments
  $ 25,859     $ 22,471  
Derivative receivables
    12,523       14,878  
 
Total
  $ 38,382     $ 37,349  
 
(a)  
Heritage JPMorgan Chase only.
 

The credit derivatives used by JPMorgan Chase for its portfolio management activities do not qualify for hedge accounting under SFAS 133, and therefore, effectiveness testing under SFAS 133 is not performed. These derivatives are reported at fair value, with gains and losses recognized as Trading revenue. The MTM value incorporates both the cost of credit derivative premiums and changes in value due to movement in spreads and credit events, whereas the loans and lending-related commitments being risk managed are accounted for on an accrual basis. Loan interest and fees are generally recognized in net interest income, and impairment is recognized in the Provision for credit losses. This asymmetry in accounting treatment, between loans and lending-related commitments and the credit derivatives utilized in portfolio management activities, causes earnings volatility that is not representative of the true changes in value of the Firm’s overall credit exposure. The MTM treatment of both the Firm’s credit derivatives used for managing credit exposure (“short” credit positions) and the Credit Valuation Adjustment (“CVA”), which reflects the credit quality of derivatives counterparty exposure (“long” credit positions), provides some natural offset.

Portfolio management activity in the third quarter of 2004 resulted in a loss of $31 million in Trading revenue. This activity included $169 million of losses related to credit derivatives used to manage the Firm’s credit exposure. Of this amount, approximately $123 million was associated with credit derivatives used to manage the risk of accrual lending activities, and the remaining amount was associated with credit derivatives used to manage the overall derivatives portfolio. Partially offsetting this loss were gains of $138 million related to the change in the MTM value of the CVA. These results were due to tightening of credit spreads.

Trading revenue from portfolio management in the third quarter of 2003 resulted in losses of $12 million. The losses consisted of $163 million related to credit derivatives used to manage the Firm’s credit exposure; of this amount, $75 million was associated with credit derivatives used to manage the risk of accrual lending activities, and $88 million was associated with credit derivatives used to manage the risk of the overall derivatives portfolio. The losses were due to an overall global tightening of credit spreads. These losses were offset by $151 million in gains resulting from a decrease in the MTM value of the CVA, also the result of spread tightening.

In the first nine months of 2004, Trading revenue from portfolio management activities resulted in $11 million of gains. These gains included $195 million related to the change in MTM value of the CVA, partially offset by $184 million of net losses related to credit derivatives used to manage the Firm’s credit exposure, primarily against the accrual portfolio.

The first nine months of 2003 included $158 million of losses in Trading revenue from portfolio management activities. The losses consisted of $628 million related to credit derivatives used to manage the Firm’s credit exposure; of this amount, $383 million was associated with credit derivatives used to manage the risk of accrual lending activities, and $245 million was associated with credit derivatives used to manage the overall derivatives portfolio. The losses were due to overall global tightening of credit spreads. These losses were offset by $470 million of gains resulting from a decrease in the MTM value of the CVA, also the result of spread tightening.

Dealer client activity

As of September 30, 2004, the total notional amounts of protection purchased and sold by the dealer business were $414 billion and $446 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

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certain derivative positions. Consequently, while there is a mismatch in notional amounts of credit derivatives, in the Firm’s view, the risk positions are largely matched.

Wholesale loan and commitment sales

Wholesale credit exposure is managed through secondary loan and commitment sales that are not associated with loan syndication activity or securitization activity as described in Note 12 of this Form 10-Q. The following table presents this activity:
                                 
    Three Months Ended September 30,   Nine Months Ended September 30, (b)
(in millions)   2004     2003 (a)     2004     2003  
 
Credits sold and loans transferred to loans held for sale:
                               
Nonperforming loans
  $ 69     $ 243     $ 326     $ 451  
Other loans with credit related losses
    51       213       260       376  
Other loans
    1,754       863       4,499       3,198  
 
Total
  $ 1,874     $ 1,319     $ 5,085     $ 4,025  
Impact of sales, transfers to loans held for sale
                               
and valuation adjustments on held for sale:
                               
Charge-offs (recoveries) on loans sold:
                               
Nonperforming loans
  $ 2     $ 5     $ (20 )   $ 47  
Other loans with credit related losses
    6       (11 )     7       (25 )
 
Total charge-offs (recoveries)
    8       (6 )     (13 )     22  
Net (gains) losses on loans sold
    6       13       17       36  
 
Total
  $ 14     $ 7     $ 4     $ 58  
 
(a)  
Heritage JPMorgan Chase only.
(b)  
2004 year-to-date results include three months of the combined Firm’s results and six months of heritage JPMorgan Chase results, while 2003 year-to-date results include heritage JPMorgan Chase only.
 

Lending-related commitments

The contractual amount of wholesale lending-related commitments was $316 billion at September 30, 2004, compared with $211 billion at December 31, 2003. The increase was primarily due to the Merger. In the Firm’s view, the total contractual amount of these instruments is not representative of the Firm’s actual credit risk exposure or funding requirements. In determining the amount of credit risk exposure the Firm has to wholesale lending-related commitments, which is used as the basis for allocating credit risk capital to these instruments, the Firm has established a “loan equivalent” amount for each commitment; this represents the portion of the unused commitment or other contingent exposure that is likely, based on average portfolio historical experience, to become outstanding in the event of a default by an obligor.

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CONSUMER CREDIT PORTFOLIO
 

JPMorgan Chase’s consumer portfolio consists primarily of 1-4 family residential mortgages, credit cards and automobile financings and loans to small businesses. The domestic consumer portfolio reflects the benefit of diversification from both a product and geographical perspective. The primary focus is on servicing the prime consumer credit market.

 
                 
            H-JPMC Only  
(in millions)   September 30, 2004     December 31, 2003  
 
Consumer loans:
               
Consumer real estate
               
Home finance — home equity & other
  $ 67,368     $ 24,179  
Home finance — mortgage
    56,035       50,381  
Auto & education finance
    62,587       43,157  
Small business & other consumer
    15,126       4,204  
Credit card receivables — reported
    60,241       17,426  
 
Total consumer loans — reported
    261,357       139,347  
Credit card securitizations (a)
    71,256       34,856  
 
Total consumer loans — managed
    332,613       174,203  
Consumer lending-related commitments
               
Consumer real estate
    54,859       31,626  
Auto & education finance
    4,707       2,637  
Small business & other consumer
    9,992       5,792  
Credit cards
    523,787       141,143  
 
Total lending-related commitments
    593,345       181,198  
 
Total consumer credit portfolio
  $ 925,958     $ 355,401  
 
(a)  
Represents the portion of JPMorgan Chase’s credit card receivables that have been securitized.
 

Total managed consumer loans as of September 30, 2004 were $333 billion, up from $174 billion at year-end 2003, reflecting the addition of the Bank One consumer credit portfolios.

The following discussion relates to the specific loan and lending-related categories within the consumer portfolio:

Consumer Real Estate Lending: Home finance loans on the balance sheet as of September 30, 2004 were $123 billion. This consisted of $67 billion of home equity and other loans and $56 billion of first mortgages. Home equity and other loans included $4 billion of manufactured housing loans, a product that the Firm chose to stop originating earlier this year. The $123 billion in Home Finance receivables as of September 30, 2004, reflects an increase of $49 billion from year-end 2003 driven by the addition of Bank One’s home equity and mortgage portfolios. Home Finance provides real estate lending to the full spectrum of credit borrowers, including $17 billion in sub-prime credits.

Auto & Education Finance: Auto & Education finance loans increased to $63 billion as of September 30, 2004, up from $43 billion at year-end 2003. The acquisition of the Bank One portfolio was responsible for the increase. The auto and education loan portfolio reflects a high concentration of prime quality credits. Recently the Firm has chosen to de-emphasize vehicle leasing, which as of September 30, 2004, comprised $9 billion of the outstandings. It is anticipated that over time vehicle leases will account for a smaller share of balance sheet receivables and exposure.

Small Business & Other Consumer: Small Business & Other consumer loans increased to $15 billion as of September 30, 2004 compared with 2003 year-end levels of $4 billion. The majority of this portfolio segment is comprised of loans to small businesses, and the increase reflects the acquisition of the Bank One small business portfolio. The small business portfolio reflects highly collateralized loans often with personal loan guarantees.

Credit Cards: JPMorgan Chase analyzes its credit card portfolio on a managed basis, which includes credit card receivables on the Consolidated balance sheet and those that have been securitized. Managed credit card receivables were approximately $131 billion at September 30, 2004, an increase of $79 billion from year-end 2003, reflecting the acquisition of the Bank One portfolio. Managed credit card receivables include reported credit card receivables, receivables sold to investors through securitizations and retained interests.

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Wholesale and consumer nonperforming exposure and net charge-offs

The following table presents a summary of credit-related nonperforming and past due information for the dates indicated:
                                                 
                    Nonperforming   Past due 90 days and
    Nonperforming   as a % of total   over and accruing
    September 30,     December 31,     September 30,     December 31,     September 30,     December 31,  
(in millions, except ratios)   2004     2003(a)     2004     2003(a)     2004     2003(a)  
 
Wholesale loans:
                                               
Loans — U.S.
  $ 1,405     $ 1,057       1.41 %     2.38 %   $ 12     $ 37  
Loans — Non – U.S.
    378       947       1.15       3.05             5  
                     
Total wholesale loans — reported (b)
    1,783       2,004       1.35       2.66       12       42  
Consumer loans
                                               
Consumer real estate
    789       374       0.64       0.50              
Auto & education finance
    211       123       0.34       0.29              
Small business & other consumer
    308       72       2.04       1.71              
Credit card receivables — reported
    9       11       0.01       0.06       834       273  
                     
Total consumer loans — reported
    1,317       580       0.50       0.42       834       273  
Total loans reported
    3,100       2,584       0.79       1.20       846       315  
Derivative receivables
    238       253       0.41       0.30              
Other receivables
          108       NM       100              
Assets acquired in loan satisfaction (c)
    299       216       NM       NM       NA       NA  
                     
Total credit-related assets
    3,637       3,161       0.75       1.04       846       315  
Credit card securitizations (d)
                NM       NM       1,467       879  
                     
Total (e)
  $ 3,637     $ 3,161       0.66       0.93