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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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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     $ 2,313     $ 1,194  
Purchased held for sale wholesale loans (f)
  $ 355     $ 22       NM       NM     $     $  
Credit derivatives hedges notional (g)
  $ (16 )   $ (123 )     NM       NM       NA       NA  
 
(a)  
Heritage JPMorgan Chase only.
(b)  
Excludes purchased held-for-sale (“HFS”) wholesale loans.
(c)  
At September 30, 2004, and December 31, 2003, includes $50 million and $10 million, respectively, of wholesale assets acquired in loan satisfactions, and $249 million and $206 million, respectively, of consumer assets acquired in loan satisfactions.
(d)  
Represents securitized credit cards. For a further discussion of credit card securitizations, see page 41 of JPMorgan Chase’s 2003 Annual Report.
(e)  
At September 30, 2004, and December 31, 2003, excludes $1.5 billion and $2.3 billion, respectively, of residential mortgage receivables in foreclosure status that are insured by government agencies. These amounts are excluded as reimbursement is proceeding normally.
(f)  
Represents distressed wholesale loans purchased as part of IB’s proprietary investing activities.
(g)  
Represents the notional amount of single-name and portfolio credit derivatives used to manage the credit risk of wholesale credit exposure; these derivatives do not qualify for hedge accounting under SFAS 133.
 

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

                                                                 
                    Average annual                   Average annual
    Charge-offs   net charge-off rate   Charge-offs (a)   net charge-off rate (a)
    Three months ended Sept. 30,   Nine months ended Sept. 30,
(in millions, except ratios)   2004     2003 (b)     2004     2003 (b)     2004     2003     2004     2003  
 
Gross charge-offs
                                                               
Wholesale loans
  $ 80     $ 305                     $ 420     $ 971                  
Consumer (excluding card)
    269       115                       485       347                  
Credit card receivables — reported
    760       298                       1,335       928                  
                                     
Total loans — reported
    1,109       718                       2,240       2,246                  
Credit card securitizations (c)
    1,039       532                       2,106       1,572                  
                                     
Total loans — managed
    2,148       1,250                       4,346       3,818                  
Recoveries
                                                               
Wholesale loans
    104       60                       302       197                  
Consumer (excluding card)
    50       23                       101       70                  
Credit card receivables — reported
    90       21                       136       81                  
                                     
Total loans — reported
    244       104                       539       348                  
Credit card securitizations (c)
    111       61                       219       164                  
                                     
Total loans — managed
    355       165                       758       512                  
 

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                    Average annual                   Average annual
    Charge-offs   net charge-off rate   Charge-offs (a)   net charge-off rate (a)
    Three months ended Sept. 30,   Nine months ended Sept. 30,
(in millions, except ratios)   2004     2003 (b)     2004     2003 (b)     2004     2003     2004     2003  
 
Net charge-offs
 
Wholesale loans (d)
    (24 )     245       (0.08 )%     1.25 %     118       774       0.17 %     1.29 %
Consumer (excluding card) (e)
    219       92       0.47       0.37       384       277       0.38       0.40  
Credit card receivables — reported
    670       277       4.49       6.37       1,199       847       5.12       6.29  
                                     
Total loans — reported (d)(e)
    865       614       0.93       1.27       1,701       1,898       0.89       1.34  
Credit card securitizations (c)
    928       471       5.20       5.57       1,887       1,408       5.41       5.75  
                                     
Total loans — managed
  $ 1,793     $ 1,085       1.62       1.91     $ 3,588     $ 3,306       1.58       1.98  
Credit card managed
  $ 1,598     $ 748       4.88       5.84     $ 3,086     $ 2,255       5.29       5.94  
(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)  
Heritage JPMorgan Chase only.
(c)  
Represents securitized credit cards. For a further discussion of credit card securitizations, see page 41 of JPMorgan Chase’s 2003 Annual Report.
(d)  
Net charge-off rates exclude HFS Wholesale loans in the amount of $7.3 billion and $3.3 billion at September 30, 2004 and December 31, 2003, respectively, and year-to-date average loans HFS of $5.9 billion and $3.8 billion for 2004 and 2003, respectively.
(e)  
Net charge-off rates exclude HFS Consumer loans in the amount of $15.6 billion and $30.2 billion at September 30, 2004 and December 31, 2003, respectively, and year-to-date average loans HFS of $15.1 billion and $26.7 billion for 2004 and 2003, respectively.
 

Total nonperforming assets (excluding purchased held-for-sale wholesale loans) increased from December 31, 2003, primarily due to the Merger. The wholesale portfolio experienced a decrease as a result of gross charge-offs of $420 million taken throughout the year. The decrease in the wholesale portfolio was offset by the increase in the consumer portfolio, which was largely a result of the Merger.

Wholesale net charge-offs improved significantly compared with the same period last year as a result of lower gross charge-offs and higher recoveries. The 2004 nine-month net charge-off rate was 0.17%, compared with 1.29% for the same period last year.

Consumer credit quality trends continue to improve overall, reflecting general economic conditions and reduced consumer bankruptcy filings versus prior year. The managed net charge-off ratio for Card Services declined in the third quarter of 2004 to 4.88% from 5.84% in the prior year. Retail Financial Services net charge-off ratio for the third quarter of 2004 was 0.47% compared with 0.37% in the prior year. The increase versus prior periods reflects higher relative net charge-off rates on acquired heritage Bank One portfolios. Management expects consumer net charge-off rates to remain stable allowing for seasonal patterning.

For a further discussion of the components of the Allowance for credit losses, see Note 11 on pages 72-73 of this Form 10-Q.

Summary of changes in the Allowance for credit losses

                                                 
                            H-JPMC Only
    2004   2003
(in millions)   Wholesale     Consumer     Total     Wholesale     Consumer     Total  
 
Loans:
                                               
Beginning balance at January 1
  $ 2,204     $ 2,319     $ 4,523     $ 2,936     $ 2,414     $ 5,350  
Addition resulting from the merger, July 1
    1,788       1,335       3,123                    
Net charge-offs
    (118 )     (1,583 )     (1,701 )     (774 )     (1,124 )     (1,898 )
Provision for loans losses(a)
    (418 )     2,095       1,677       281       1,154       1,435  
Other
          (129 )     (129 )(d)     9       (143 )     (134 )(d)
 
Ending balance at September 30
  $ 3,456 (b)   $ 4,037 (c)   $ 7,493     $ 2,452     $ 2,301     $ 4,753  
Lending-related commitments:
                                               
Beginning balance at January 1
  $ 320     $ 4     $ 324     $ 363     $     $ 363  
Addition resulting from the merger, July 1
    499       9       508                    
Net charge-offs
                                   
Provision for lending-related commitments(e)
    (290 )           (290 )     (33 )     (1 )     (34 )
Other
          (1 )     (1 )     (3 )     3        
 
Ending balance at September 30
  $ 529     $ 12     $ 541     $ 327     $ 2     $ 329  
(a)  
Includes $560 million related to accounting policy conformity adjustments for the nine months ended September 30, 2004.
(b)  
Includes $498 million, $1.9 billion and $1.1 billion of wholesale asset-specific, wholesale expected loss and wholesale stress components, respectively, at September 30, 2004.
(c)  
Includes $3.1 billion and $878 million of consumer expected loss and consumer stress components, respectively, at September 30, 2004.
(d)  
Primarily represents the transfer of the allowance for accrued fees on reported and securitized credit card loans.
(e)  
Includes $(227) million related to accounting policy conformity adjustments for the nine months ended September 30, 2004.
 

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Provision for credit losses
For a discussion of the Provision for credit losses, see page 8 of this Form 10-Q.

                                 
    Three months ended   Nine months ended (a)
(in millions)   Sept. 30, 2004     Sept. 30, 2003 (a)     Sept. 30, 2004     Sept. 30, 2003  
 
Loans
                               
Investment Bank
  $ (148 )   $ (127 )   $ (405 )   $ 101  
Commercial Banking
    10       21       18       16  
Treasury & Securities Services
          (1 )     4        
Asset & Wealth Management
    1       (7 )     9        
Corporate
    (1 )     (1 )     (110 )     164  
     
Total wholesale
    (138 )     (115 )     (484 )     281  
Retail Financial Services
    239       159       372       450  
Card Services
    734       234       1,229       704  
     
Total consumer
    973       393       1,601       1,154  
Accounting policy conformity(b)
    560             560        
 
Total provision for loan losses
    1,395       278       1,677       1,435  
 
Lending-related commitments
                               
Investment Bank
  $ (3 )   $ (54 )   $ (62 )   $ (41 )
Commercial Banking
    4             2        
Treasury & Securities Services
                      1  
Asset & Wealth Management
                (2 )     (1 )
Corporate
                      8  
     
Total wholesale
    1       (54 )     (62 )     (33 )
Retail Financial Services
          (1 )     (1 )     (1 )
Card Services
                       
     
Total consumer
          (1 )     (1 )     (1 )
Accounting policy conformity
    (227 )           (227 )      
 
Total provision for lending-related commitments
    (226 )     (55 )     (290 )     (34 )
 
Total provision for credit losses
                               
Investment Bank
  $ (151 )   $ (181 )   $ (467 )   $ 60  
Commercial Banking
    14       21       20       16  
Treasury & Securities Services
          (1 )     4       1  
Asset & Wealth Management
    1       (7 )     7       (1 )
Corporate
    (1 )     (1 )     (110 )     172  
     
Total wholesale
    (137 )     (169 )     (546 )     248  
Retail Financial Services
    239       158       371       449  
Card Services
    734       234       1,229       704  
     
Total consumer
    973       392       1,600       1,153  
Accounting policy conformity
    333             333        
 
Total provision for credit losses
    1,169       223       1,387       1,401  
 
Securitized credit losses
    928       471       1,887       1,408  
Accounting policy conformity
    (333 )           (333 )      
 
Managed provision for credit losses
  $ 1,764     $ 694     $ 2,941     $ 2,809  
 
(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 results include heritage JPMorgan Chase only.
(b)  
Reflects an increase of $721 million as a result of the decertification of heritage Bank One seller's interest in credit card securitizations, partially offset by a $161 million decrease in the allowance to conform methodologies during the third quarter of 2004.
 
Managed provision for credit losses, which reflects credit card securitizations, increased primarily due to the Merger.

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Overall: The Allowance for credit losses increased by $3.2 billion from December 31, 2003 to September 30, 2004, primarily driven by the Merger with Bank One. Adjustments required to conform to the combined Firm’s allowance methodology and alignment of accounting practices related to the seller’s interest in credit card securitizations increased the Provision for credit losses by $333 million. See Note 11 on pages 72–73 of this Form 10-Q.

Loans: JPMorgan Chase’s Allowance for loan losses is intended to cover probable credit losses as of September 30, 2004, for which either the asset is not specifically identified or the size of the loss has not been fully determined. The allowance has three components: Asset-specific loss, Expected loss and Stress. As of September 30, 2004, management deemed the allowance to be appropriate (i.e., sufficient to absorb losses that are inherent in the portfolio including those not yet identifiable). The allowance represented 2.01% of loans at September 30, 2004, compared with 2.33% at year-end 2003.

The wholesale component of the allowance was $3.5 billion as of September 30, 2004, an increase from year-end 2003, primarily due to the Merger with Bank One. The wholesale allowance also included $66 million of additional provision required to conform to the combined Firm’s allowance methodology.

The consumer component of the allowance was $4.0 billion as of September 30, 2004, an increase from December 31, 2003, primarily attributable to the Merger and the decertification of the seller’s retained interest in credit card securitizations. Adjustments required to conform to the combined Firm’s allowance methodology included the release of $165 million in Allowance for loan losses within Retail Financial Services ($128 million in Chase Home Finance and $37 million in Chase Auto Finance). The conformance of the methodology within Card Services reduced the Allowance for loan losses by $62 million. Additionally, $128 million in allowance for accrued fees and finance charges were reclassified from the Allowance for loan losses to Loans.

At the time of the Merger, heritage Bank One seller’s interest in credit card securitizations was in a certificated or security form and recorded at fair value. Subsequently, a decision was made to decertificate these assets, which resulted in a reclassification of the seller’s interest from Available-for-sale securities to Loans, at fair value, with no allowance for credit losses. Generally, as the underlying credit card receivables represented by the seller’s interest are paid off, the customers continue to use their credit cards and originate new receivables, which are then recorded as Loans at historical cost. As these new loans age, it is necessary to establish an allowance for credit losses consistent with the Firm’s credit policies. This will occur over a six month period, which represents the average life of credit card receivables. For the three months ended September 30, 2004, $721 million of Allowance for loan losses was established through the provision associated with newly originated receivables related to the seller’s interest, with an additional allowance for loan losses of approximately $700 million expected to be established through the provision in the fourth quarter of 2004.

The Stress component, included in the aforementioned wholesale and consumer components of the allowance, was $2.0 billion at September 30, 2004: $1.1 billion related to the wholesale portfolio and $0.9 billion related to the consumer portfolio. The Stress component represents that portion of the overall allowance attributable to model imprecision and external factors and economic events that have occurred but are not yet reflected in factors used to derive the Expected loss component. See Note 11 on pages 72–73 of this Form 10-Q.

Lending-related commitments: To provide for the risk of loss inherent in the Firm’s process of extending credit, management also computes Specific loss and Expected loss components for wholesale lending-related commitments. These are computed using a methodology similar to that used for the wholesale loan portfolio, modified for expected maturities and probabilities of drawdown. This allowance, which is reported in Other liabilities, was $541 million at September 30, 2004, and reflected a $227 million benefit due to conforming the combined Firm allowance methodology. The allowance was $324 million and $329 million at December 31, 2003 and September 30, 2003, respectively. The Allowance for lending-related commitments increased by $217 million since December 31, 2003, primarily due to the Merger.

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MARKET RISK MANAGEMENT
 

Risk management process
For a discussion of the Firm’s market risk management organization, see pages 66-67 of JPMorgan Chase’s 2003 Annual Report.

Value-at-Risk
JPMorgan Chase’s statistical risk measure, VAR, gauges the potential loss from adverse market moves in an ordinary market environment and provides a consistent cross-business measure of risk profiles and levels of risk diversification. Each business day, the Firm undertakes a comprehensive VAR calculation of its trading activities. However, for certain trading activities, price and/or position data used in the VAR calculation are only updated weekly. For analytical purposes, the Firm also performs a VAR calculation of its nontrading activities, including the private equity business. The Firm calculates VAR using a one-day time horizon and a 99% confidence level. This means the Firm would expect to incur losses greater than that predicted by VAR estimates only once every 100 trading days, or about 2.5 times a year. For the nine months ended September 30, 2004, there were no days on which actual Firmwide market risk–related losses exceeded corporate VAR. For a further discussion of the Firm’s VAR methodology, see pages 67–68 of JPMorgan Chase’s 2003 Annual Report.

The table below shows the IB trading VAR by risk type and credit portfolio VAR. Details of the VAR exposures are discussed in the Trading Risk section below.

 
                                                                 
IB Trading VAR by risk type and Credit Portfolio VAR (a)   Heritage JPMC only
    Nine Months Ended September 30, 2004 (c)           Nine Months Ended September 30, 2003 (b)      
    Average     Minimum     Maximum     At Sept. 30,     Average     Minimum     Maximum     At Sept. 30,  
(in millions)   VAR     VAR     VAR     2004     VAR     VAR     VAR     2003 (b)  
 
By risk type:
                                                               
Fixed income
  $ 76.7     $ 45.3     $ 117.5     $ 73.0     $ 59.5     $ 42.3     $ 104.3     $ 49.1  
Foreign exchange
    17.1       10.2       32.8       11.9       15.7       11.0       30.2       19.9  
Equities
    30.9       19.7       57.8       22.0       10.7       6.7       25.0       13.0  
Commodities and other
    8.6       6.9       12.2       10.2       7.6       4.9       12.6       7.9  
Less: portfolio diversification
    (44.4 )     NM (d)     NM (d)     (38.5 )     (36.5 )     NM (d)     NM (d)     (30.7 )
 
Total Trading VAR
    88.9       51.6       125.2       78.6       57.0       39.8       116.3       59.2  
 
Credit Portfolio VAR (e)
    14.2       10.8       16.6       13.2       18.1       14.8       22.0       19.5  
Less: portfolio diversification
    (8.5 )     NM (d)     NM (d)     (8.2 )     (14.3 )     NM (d)     NM (d)     (14.7 )
 
Total IB Trading and Credit
                                                               
Portfolio VAR
  $ 94.6     $ 55.3     $ 131.6     $ 83.6     $ 60.8     $ 44.8     $ 119.8     $ 64.0  
 
(a)  
Includes all mark-to-market trading activities in the IB, plus available for sale securities held for the IB’s proprietary purposes. Amounts exclude VAR related to the Firm’s private equity business. For a discussion of Private equity risk management, see page 74 of JPMorgan Chase’s 2003 Annual Report.
(b)  
Amounts have been revised to reflect the reclassification of certain mortgage banking positions from the trading portfolio to the nontrading portfolio, reclassification of hedge fund investments, reclassification of Global Treasury positions to portfolios outside the IB, and inclusion of available for sale securities held for the IB’s proprietary purposes.
(c)  
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.
(d)  
Designated as NM because the minimum and maximum may occur on different days for different risk components, and hence it is not meaningful to compute a portfolio diversification effect. In addition, JPMorgan Chase’s average and period-end VARs are less than the sum of the VARs of its market risk components, due to risk offsets resulting from portfolio diversification.
(e)  
Includes VAR on derivative credit valuation adjustments, credit valuation adjustment hedges and mark-to-market loan hedges which are all reported in Trading revenue. This VAR does not include the accrual loan portfolio, which is not marked to market.
 

Trading risk
The largest contributors to the IB trading VAR in the first nine months of 2004 were fixed income risk (which includes credit spread risk) and equity risk. Before portfolio diversification, fixed income risk and equity risk accounted for roughly 58% and 23% of the average IB Trading Portfolio VAR, respectively. The diversification effect, which on average reduced the daily average IB Trading Portfolio VAR by $44.4 million during the first nine months, reflects the fact that the largest losses for different positions and risks do not typically occur at the same time. The risk of a portfolio of positions is therefore usually less than the sum of the risks of the positions themselves. The degree of diversification is determined both by the extent to which different market variables tend to move together, and by the extent to which different businesses have similar positions.

Average IB trading and Credit Portfolio VAR for the first nine months of 2004 rose to $94.6 million compared with $60.8 million for the same period in 2003. Period-end VAR also increased over the same period, to $83.6 million from $64.0 million. In both cases, the increase was driven by a rise in fixed income and equities VAR, primarily due to increased risk positions, greater market volatility and higher correlation between lines of business.

For a complete discussion of the Firm’s Trading Risk, see page 70 of JPMorgan Chase’s 2003 Annual Report.

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VAR backtesting
To evaluate the soundness of its VAR model, the Firm conducts daily backtesting of VAR against actual financial results, based on daily market risk–related gains and losses. Market risk–related gains and losses are defined as the daily change in value of the mark-to-market trading portfolios plus any trading-related net interest income, brokerage commissions, underwriting fees or other revenue. The Firm’s definition of market risk–related gains and losses is consistent with the Federal Reserve Board’s implementation of the Basel Committee’s market risk capital rules.

The histogram below illustrates the daily market risk–related gains and losses for the IB trading businesses for the nine months ended September 30, 2004. The chart shows that the IB posted market risk–related gains on 171 out of 195 days in this period, with 9 days exceeding $100 million. The inset graph looks at those days on which the IB experienced losses and depicts the amount by which VAR exceeded the actual loss on each of those days. Losses were sustained on 24 days, with no loss greater than $50 million, and with no loss exceeding the VAR measure.

(MARKET RIXK RELATED BAR CHARTS)

Stress testing
While VAR reflects the risk of loss due to unlikely events in normal markets, stress testing captures the Firm’s exposure to unlikely but plausible events in abnormal markets. JPMorgan Chase performs a number of different scenario-based stress tests monthly for all the IB’s trading portfolios, including credit derivatives, for a standard set of forward-looking scenarios for large, low probability changes in market variables. Scenarios are derived from either severe historical crises or forward assessment of developing market trends. Scenarios are reviewed and updated to reflect changes in the Firm’s risk profile and economic events. Based on these stress scenarios, the stress test loss (pre-tax) in the IB’s trading portfolio ranged from $226 million to $1.2 billion and $227 million to $895 million for the nine month periods ending September 30, 2004 and 2003, respectively. (The 2004 year-to-date results include three months of the combined Firm’s results and six months of heritage JPMorgan Chase results. In addition, the 2003 amounts have been revised to reflect the reclassification of certain mortgage banking positions from the trading portfolio to the nontrading portfolio, as well as the transfer of Global Treasury positions from the IB to the Corporate business segment.)

For a further discussion of the Firm’s stress testing methodology, see pages 68–69 of the 2003 Annual Report.

Earnings-at-risk results – pre-tax
Interest rate risk exposure in the Firm’s core nontrading business activities (i.e., asset/liability management positions) results from various risks associated with on- and off-balance sheet positions. The Firm conducts simulations of NII for its nontrading activities under a variety of interest rate scenarios, which are consistent with the scenarios used for stress testing. NII earnings-at-risk tests measure the potential change in the Firm’s NII over the next 12 months. These tests highlight exposures to various rate-sensitive

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factors, such as the rates themselves (e.g., the prime lending rate), pricing strategies on deposits and changes in product mix. The tests also take into account forecasted balance sheet changes, such as asset sales and securitizations, as well as prepayment and reinvestment behavior.

Based on immediate parallel shocks, the Firm’s earnings at risk to rising interest rates, versus base case, declined. JPMorgan Chase’s 12-month pretax earnings sensitivity profile as of September 30, 2004 was as follows:

 
                         
    Immediate Change in Rates
(in millions)   +200 bp     +100 bp     -100 bp  
 
September 30, 2004
  $ (291 )   $ (30 )   $ (177 )
 

The decrease in measured risk to rising interest rates reflects management’s decision to position the balance sheet for a period of rising interest rates, which was accomplished by restructuring the Firm’s investment portfolio.

Parallel shocks present a limited view of risk, so a number of alternative scenarios are reviewed internally. These include more gradual and severe interest rate movements as well as non-parallel rate shifts. These scenarios are intended to provide a comprehensive view of JPMorgan Chase’s interest rate risk, and do not necessarily represent management’s view of future market movements.

Other statistical and nonstatistical risk measures
For a discussion of the Firm’s other risk measures, see page 69 of JPMorgan Chase’s 2003 Annual Report.

Capital allocation for market risk
For a discussion of the Firm’s capital allocation for market risk, see page 71 of JPMorgan Chase’s 2003 Annual Report.

Risk monitoring and control
For a discussion of the Firm’s risk monitoring and control process, including limits, qualitative risk assessments, model review, and policies and procedures, see pages 71–72 of JPMorgan Chase’s 2003 Annual Report.

 
OPERATIONAL RISK MANAGEMENT
 

For a discussion of JPMorgan Chase’s operational risk management, refer to pages 72–74 of JPMorgan Chase’s 2003 Annual Report.

 
PRIVATE EQUITY RISK MANAGEMENT
 

For a discussion of JPMorgan Chase’s private equity risk management, refer to page 74 of JPMorgan Chase’s 2003 Annual Report. While the Firm computes VAR on its public equity holdings, the potential loss calculated by VAR may not be indicative of the loss potential for these holdings, due to the fact that most of the positions are subject to sale restrictions and, often, represent significant concentration of ownership. Because VAR assumes that positions can be exited in a normal market, JPMorgan Chase believes that the VAR for public equity holdings does not necessarily represent the true value-at-risk for these holdings. At September 30, 2004, the carrying value of the private equity portfolio was $8.1 billion.

SUPERVISION AND REGULATION

 
SUPERVISION AND REGULATION
 

The following discussion should be read in conjunction with the Supervision and Regulation section on pages 1–5 of JPMorgan Chase’s 2003 Form 10-K.

Dividends
JPMorgan Chase’s bank subsidiaries could pay dividends to their respective bank holding companies, without the approval of their relevant banking regulators, in amounts up to the limitations imposed upon such banks by regulatory restrictions. These limitations, in the aggregate, totaled approximately $6.1 billion at September 30, 2004.

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CRITICAL ACCOUNTING ESTIMATES USED BY THE FIRM

 
CRITICAL ACCOUNTING ESTIMATES USED BY THE FIRM
 

JPMorgan Chase’s accounting policies and use of estimates are integral to understanding its reported results. The Firm’s most complex accounting estimates require management’s judgment to ascertain the valuation of assets and liabilities. The Firm has established detailed policies and control procedures intended to ensure that valuation methods, including any judgments made as part of such methods, are well controlled, independently reviewed and applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The Firm believes its estimates for determining the valuation of its assets and liabilities are appropriate. For a further description of the Firm’s critical accounting estimates involving significant management valuation judgments, see pages 74–77 and the Notes to Consolidated Financial Statements in JPMorgan Chase’s 2003 Annual Report.

Allowance for Credit Losses
JPMorgan Chase’s Allowance for credit losses covers the wholesale and consumer loan portfolios as well as the Firm’s portfolio of wholesale lending-related commitments. The Allowance for loan losses is intended to adjust the value of the Firm’s loan assets for probable credit losses as of the balance sheet date. The Firm’s Allowance for credit losses consists of three components: Asset-specific loss, Expected loss and Stress. For a further discussion of the components of and the methodologies used in establishing the Firm’s Allowance for credit losses, see Note 11 on pages 72–73 of this Form 10-Q.

   Wholesale Loans and Lending Related Commitments
The methodology for calculating both the Allowance for loan losses and the Allowance for lending-related commitments involves significant judgment. First and foremost, it involves the early identification of credits that are deteriorating. Second, it involves management judgment to derive loss factors. Third, it involves management judgment to evaluate certain macroeconomic factors, underwriting standards, and other relevant internal and external factors impacting the credit quality of the current portfolio, exclusive of the assets specifically provided for via a specific allowance.

   The Firm uses a risk rating system to determine the credit quality of its loans. Wholesale loans are reviewed for information affecting the obligor’s ability to fulfill its obligations. In assessing the risk rating of a particular loan, among the factors considered include the obligor’s debt capacity and financial flexibility, the level of the obligor’s earnings, the amount and sources of repayment, the level and nature of contingencies, management strength, and the industry and geography in which the obligor operates. These factors are based on an evaluation of historical information and current information, as well as subjective assessment and interpretation. Emphasizing one factor over another, or considering additional factors that may be relevant in determining the risk rating of a particular loan, but which are not currently an explicit part of the Firm’s methodology, could impact the risk rating assigned by the Firm to that loan.

   Management also applies its judgment to derive loss factors associated with each credit facility. These loss factors are determined by facility structure, collateral and type of obligor. Wherever possible, the Firm uses independent, verifiable data or the Firm’s own historical loss experience in its models for estimating these loss factors. Many factors can affect management’s estimates of Asset-specific loss and Expected loss, including volatility of loss given default, probability of default and rating migrations. Judgment is applied to determine whether the loss given default should be calculated as an average over the entire credit cycle or at a particular point in the credit cycle. The application of different loss given default factors would change the amount of the Allowance for credit losses determined appropriate by the Firm. Similarly, there are judgments as to which external data on probability of default should be used, and when they should be used. Choosing data that are not reflective of the Firm’s specific loan portfolio characteristics could affect loss estimates

   The Stress component represents that portion of the overall allowance attributable to covering model imprecision and external factors and economic events that have occurred but are not yet reflected in factors used to derive the expected loss component. Stress testing provides management with a range of probable loss estimates. For the risk-rated portfolio, a base range is developed by stressing the loss given default and the probability of default factors. There is then an incremental stress on the base range related to certain concentrated and deteriorating industries. Stress level ranges and the determination of the appropriate point within the range are based upon management’s view of uncertainties that relate to current macroeconomic and political conditions, quality of underwriting standards and other relevant internal and external factors impacting credit quality of the current portfolio.

   Consumer Loans
The Expected loss component for consumer credits is generally determined by applying statistical loss factors and other risk indicators to pools of loans by asset type. These expected loss estimates are sensitive to changes in delinquency status, credit bureau scores, the realizable value of collateral, and other risk factors.

   Stress testing the consumer portfolios is accomplished in part by analyzing the historical loss experience for each major product segment. Management analyzes the range of credit loss experienced for each major portfolio segment taking into account economic cycles, portfolio seasoning and underwriting criteria. Management then formulates a stress test range that incorporates relevant risk factors that impact overall credit performance.

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Trading and Available-for-Sale Portfolios
The following table summarizes the Firm’s trading and available-for-sale portfolios by valuation methodology at September 30, 2004:

                                         
    Trading Assets   Trading Liabilities        
    Securities             Securities             AFS  
    purchased (a)     Derivatives (b)     sold (a)     Derivatives (b)     securities  
 
Fair value based on:
                                       
Quoted market prices
    89 %     2 %     97 %     1 %     96 %
Internal models with significant observable market parameters
    8       97       1       98       2  
Internal models with significant unobservable market parameters
    3       1       2       1       2  
 
Total
    100 %     100 %     100 %     100 %     100 %
 
(a)  
Reflected as debt and equity instruments on the Firm’s Consolidated balance sheet.
(b)  
Based on gross mark-to-market valuations of the Firm’s derivatives portfolio prior to netting positions pursuant to FIN 39, as cross-product netting is not relevant to an analysis based upon valuation methodologies.
 

Goodwill Impairment
Under SFAS 142, goodwill must be allocated to reporting units and tested for impairment. The Firm tests goodwill for impairment at least annually or more frequently if events or circumstances, such as adverse changes in the business climate, indicate that there may be justification for conducting an interim test. Impairment testing is performed at the reporting-unit level (which is generally one level below the seven major business segments identified in Note 20 on pages 83–85 of this Form 10-Q). The first part of the test is a comparison, at the reporting unit level, of the fair value of each reporting unit to its carrying amount, including goodwill. If the fair value is less than the carrying value, then the second part of the test is needed to measure the amount of potential goodwill impairment. The implied fair value of the reporting unit goodwill is calculated and compared to the carrying amount of goodwill recorded in the Firm’s financial records. If the carrying value of reporting unit goodwill exceeds the implied fair value of that goodwill, then the Firm would recognize an impairment loss in the amount of the difference, which would be recorded as a charge against Net income.

The fair values of the reporting units are determined using discounted cash flow models based on each reporting unit’s internal forecasts. In addition, analyses using market-based trading and transaction multiples, where available, are used to assess the reasonableness of the valuations derived from the discounted cash flow models.

Goodwill was not impaired as of September 30, 2004 or December 31, 2003, nor was any goodwill written-off during the three months or nine months ended September 30, 2004 and 2003. See Note 14 on pages 79–80 of this Form 10-Q, and Note 16 on page 107 of JPMorgan Chase’s 2003 Annual Report for additional information related to the nature and accounting for goodwill and the carrying values of goodwill by major business segment.

MSRs and certain other retained interests
For a discussion of the most significant assumptions used to value these retained interests, as well as the applicable stress tests for those assumptions, see Notes 13 and 16 on pages 100–103 and 107–109, respectively, of JPMorgan Chase’s 2003 Annual Report.

ACCOUNTING AND REPORTING DEVELOPMENTS

 
ACCOUNTING AND REPORTING DEVELOPMENTS
 

Accounting for certain loans or debt securities acquired in a transfer
In December 2003, the AICPA issued Statement of Position 03-3 (“SOP 03-3”), Accounting for Certain Loans or Debt Securities Acquired in a Transfer. SOP 03-3 provides guidance on the accounting for differences between contractual and expected cash flows from the purchaser’s initial investment in loans or debt securities acquired in a transfer, if those differences are attributable, at least in part, to credit quality. Among other things, SOP 03-3: (1) prohibits the recognition of the excess of contractual cash flows over expected cash flows as an adjustment of yield, loss accrual or valuation allowance at the time of purchase; (2) requires that subsequent increases in expected cash flows be recognized prospectively through an adjustment of yield; and (3) requires that subsequent decreases in expected cash flows be recognized as an impairment. In addition, SOP 03-3 prohibits the creation or carrying-over of a valuation allowance in the initial accounting of all loans within its scope that are acquired in a transfer. SOP 03-3 becomes effective for loans or debt securities acquired in fiscal years beginning after December 15, 2004. The Firm does not believe that the implementation of SOP 03-3 will have a material impact on the Firm’s Consolidated financial statements.

Accounting for interest rate lock commitments (“IRLCs”)
IRLCs associated with mortgages to be held for sale represent commitments to extend credit at specified interest rates. On March 9, 2004, the SEC issued SAB No. 105, which summarizes the views of the SEC staff regarding the application of U.S. GAAP to loan commitments accounted for as derivative instruments. SAB 105 states that the value of the servicing asset should not be

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included in the estimate of fair value of IRLCs. SAB 105 is applicable for all IRLCs accounted for as derivatives and entered into on or after April 1, 2004.

Prior to April 1, 2004, JPMorgan Chase recorded IRLCs at estimated fair value. The fair value of IRLCs included an estimate of the value of the loan servicing right inherent in the underlying loan, net of the estimated costs to close the loan. Effective April 1, 2004, and as a result of SAB 105, the Firm no longer assigns fair value to IRLCs on the date they are entered into, with any initial gain being recognized upon the sale of the resultant loan. Also in connection with SAB 105, the Firm records any changes in the value of the IRLCs, excluding the servicing asset component, due to changes in interest rates after they are locked. Adopting SAB 105 did not have a material impact on the Firm’s 2004 Consolidated financial statements.

Accounting for Postretirement Health Care Plans which Provide Prescription Drug Benefits
In May 2004, the FASB issued FSP FAS106-2, which provides guidance on the accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”); the Act was signed into law on December 8, 2003. Under the Act, a subsidy is available to sponsors of postretirement health care plans whose benefits are actuarially equivalent to Medicare Part D. The Firm has determined that its plans are actuarially equivalent and has reflected the effects of the subsidy in its financial statements and disclosures.

Impairment of available-for-sale and held-to-maturity securities
In September 2004, the FASB issued FSP EITF 03-1-1 which delayed the effective date of EITF Issue 03-1, until the FASB staff addresses additional measurement issues affecting the consensus. EITF 03-1 addresses issues related to other-than-temporary impairment for securities classified as either available-for-sale or held-to-maturity under SFAS 115 (including individual securities and investments in mutual funds) and for investments accounted for under the cost method. A proposed FSP addressing these issues has been issued and is expected to be finalized in late 2004. The Firm is currently evaluating the potential impact of the proposed guidance.

Disclosures about segments of an enterprise
In September 2004, the EITF reached a consensus on Issue 04-10 that operating segments must always have similar economic characteristics and meet a majority of the five characteristics listed in FAS 131 in order to be aggregated. Those characteristics include the nature of the products and services; the nature of the production processes; the type or class of customer; the method used to distribute products or provide services; and the nature of the regulatory environment. EITF 04-10 is applicable for the Firm’s Consolidated financial statements for the year ending December 31, 2004. The Firm is currently assessing the impact on its segment disclosure.

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REPORT OF MANAGEMENT

Management of JPMorgan Chase & Co. (the “Firm”) is responsible for the preparation, integrity and fair presentation of its published financial reports. These reports include consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America, using management’s best judgment and all information available.

Management of the Firm is responsible for establishing and maintaining disclosure controls and procedures to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and forms. In addition to disclosure controls and procedures, management of the Firm is responsible for establishing and maintaining an effective process for internal control over financial reporting, which provides reasonable, but not absolute, assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Firm maintains systems of controls that it believes are reasonably designed to provide management with timely and accurate information about the operations of the Firm. This process is supported by an internal audit function along with the ongoing appraisal of controls by the Audit Committee of the Board of Directors. The Audit Committee, which consists solely of independent directors, meets at least quarterly with the independent registered public accounting firm, internal audit and representatives of management to discuss, among other things, accounting and financial reporting matters. The Firm’s independent registered public accounting firm, the internal audit function and the Audit Committee have free access to each other. Disclosure controls and procedures, internal controls, systems and corporate-wide processes and procedures are continually evaluated and enhanced.

Management of the Firm evaluated its disclosure controls and procedures as of September 30, 2004. Based on this evaluation, the Principal Executive Officer, Principal Operating Officer and Principal Financial Officer each concludes that as of September 30, 2004, the Firm maintained effective disclosure controls and procedures in all material respects, including those to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to management, including the Principal Executive Officer, the Principal Operating Officer and the Principal Financial Officer, as appropriate to allow for timely decisions regarding required disclosure. There has been no change in the Firm’s internal control over financial reporting that occurred during the Firm’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Firm’s internal control over financial reporting.

The Firm is dedicated to maintaining a culture that reflects the highest standards of integrity and ethical conduct when engaging in its business activities. Management of the Firm is responsible for compliance with various federal and state laws and regulations, and the Firm has established procedures that are designed to ensure that management’s policies relating to conduct, ethics and business practices are followed on a uniform basis.

     
  JPMorgan Chase & Co.
 
   
November 9, 2004
   
 
   
  /s/ William B. Harrison, Jr.
   
  William B. Harrison, Jr.
Chairman and Chief Executive Officer
 
   
  /s/ James Dimon
   
  James Dimon
President and Chief Operating Officer
 
   
  /s/ Michael J. Cavanagh
   
  Michael J. Cavanagh
Executive Vice President and
Chief Financial Officer

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CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

JPMORGAN CHASE & CO.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in millions, except per share data)
                                 
    Three months ended
September 30,
  Nine months ended
September 30,
(b)
    2004     2003 (a)     2004     2003  
 
Revenue
                               
Investment banking fees
  $ 879     $ 649     $ 2,464     $ 2,044  
Trading revenue
    408       829       3,001       3,673  
Lending & deposit related fees
    943       456       1,769       1,276  
Asset management, administration and commissions
    2,141       1,518       5,682       4,320  
Securities/private equity gains (losses)
    413       284       1,305       1,287  
Mortgage fees and related income
    277       15       874       774  
Credit card income
    1,782       635       3,018       1,781  
Other income
    210       196       602       340  
 
Subtotal
    7,053       4,582       18,715       15,495  
 
Interest income
    9,493       5,839       20,733       18,268  
Interest expense
    4,041       2,641       9,301       8,485  
 
Net interest income
    5,452       3,198       11,432       9,783  
 
Total net revenue
    12,505       7,780       30,147       25,278  
Provision for credit losses
    1,169       223       1,387       1,401  
Noninterest expense
                               
Compensation expense
    4,050       2,631       10,295       8,879  
Occupancy expense
    604       391       1,475       1,430  
Technology and communications expense
    1,046       719       2,651       2,088  
Professional & outside services
    1,103       703       2,671       2,098  
Marketing
    506       179       907       510  
Other expense
    920       431       1,878       1,233  
Amortization of intangibles
    396       73       554       220  
 
Total noninterest expense before merger costs and litigation reserve charge
    8,625       5,127       20,431       16,458  
Merger costs
    752             842        
Litigation reserve charge
                3,700       100  
 
Total noninterest expense
    9,377       5,127       24,973       16,558  
Income before income tax expense
    1,959       2,430       3,787       7,319  
Income tax expense
    541       802       987       2,464  
 
Net income
  $ 1,418     $ 1,628     $ 2,800     $ 4,855  
 
Net income applicable to common stock
  $ 1,405     $ 1,615     $ 2,761     $ 4,817  
 
Net income per common share
                               
Basic earnings per share
  $ 0.40     $ 0.80     $ 1.09     $ 2.40  
Diluted earnings per share
    0.39       0.78       1.06       2.35  
Average basic shares
    3,513.5       2,012.2       2,533.1       2,006.0  
Average diluted shares
    3,592.0       2,068.2       2,598.5       2,047.0  
Cash dividends per common share
  $ 0.34     $ 0.34     $ 1.02     $ 1.02  
 
(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 Notes to consolidated financial statements (unaudited) are an integral part of these statements.

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CONSOLIDATED BALANCE SHEETS (UNAUDITED)

JPMORGAN CHASE & CO.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions, except share data)
                 
    Sept. 30,     Dec. 31,  
    2004     2003 (a)  
 
Assets
               
Cash and due from banks
  $ 30,815     $ 20,268  
Deposits with banks
    33,082       10,175  
Federal funds sold and securities purchased under resale agreements
    96,031       76,868  
Securities borrowed
    50,546       41,834  
Trading assets (including assets pledged of $95,607 at Sept. 30, 2004, and $81,312 at Dec. 31, 2003)
    272,647       252,871  
Securities:
               
Available-for-sale (including assets pledged of $32,605 at Sept. 30, 2004, and $31,639 at Dec. 31, 2003)
    92,695       60,068  
Held-to-maturity (Fair Value: $129 at Sept. 30, 2004, and $186 at Dec. 31, 2003)
    121       176  
Interests in purchased receivables
    30,479       4,752  
Loans (net of Allowance for loan losses of $7,493 at Sept. 30, 2004, and $4,523 at Dec. 31, 2003)
    386,208       210,243  
Private equity investments
    8,547       7,250  
Accrued interest and accounts receivable
    19,876       12,356  
Premises and equipment
    8,880       6,487  
Goodwill
    42,947       8,511  
Other intangible assets:
               
Mortgage servicing rights
    5,168       4,781  
Purchased credit card relationships
    4,055       1,014  
All other intangibles
    5,945       685  
Other assets
    50,427       52,573  
 
Total assets
  $ 1,138,469     $ 770,912  
 
Liabilities
               
Deposits:
               
U.S.:
               
Noninterest-bearing
  $ 122,054     $ 73,154  
Interest-bearing
    254,611       125,855  
Non-U.S. offices:
               
Noninterest-bearing
    7,259       6,311  
Interest-bearing
    112,530       121,172  
 
Total deposits
    496,454       326,492  
Federal funds purchased and securities sold under repurchase agreements
    167,313       113,466  
Commercial paper
    10,307       14,284  
Other borrowed funds
    9,454       8,925  
Trading liabilities
    131,074       149,448  
Accounts payable, accrued expenses and other liabilities (including the Allowance for lending-related commitments of $541 at Sept. 30, 2004 and $324 at Dec. 31, 2003)
    61,198       43,970  
Beneficial interests issued by consolidated variable interest entities
    45,840       12,295  
Long-term debt
    91,754       48,014  
Junior subordinated deferrable interest debentures held by trusts that issued guaranteed capital debt securities
    11,745       6,768  
Insurance policy and claims reserves
    7,477       1,096  
 
Total liabilities
    1,032,616       724,758  
Commitments and contingencies (see Note 17 of this Form 10-Q)
               
Stockholders’ Equity
               
Preferred stock
    1,009       1,009  
Common stock (authorized 9,000,000,000 shares at Sept. 30, 2004, and 4,500,000,000 shares at Dec. 31, 2003; issued 3,576,131,663 shares at Sept. 30, 2004, and 2,044,436,509 shares at Dec. 31, 2003)
    3,576       2,044  
Capital surplus
    72,183       13,512  
Retained earnings
    29,779       29,681  
Accumulated other comprehensive income (loss)
    (242 )     (30 )
Treasury stock, at cost (12,061,201 shares at Sept. 30, 2004, and 1,816,495 shares at Dec. 31, 2003)
    (452 )     (62 )
 
Total stockholders’ equity
    105,853       46,154  
 
Total liabilities and stockholders’ equity
  $ 1,138,469     $ 770,912  
 
(a)  
Heritage JPMorgan Chase only.
 

The Notes to consolidated financial statements (unaudited) are an integral part of these statements.

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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

JPMORGAN CHASE & CO.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
(in millions, except per share data)
                                                                         
                                            Accumulated                        
                                            Other                     Total  
    Preferred     Common Stock   Capital     Retained     Comprehensive     Treasury Stock   Stockholders’  
    Stock     Shares     Amount     Surplus     Earnings     Income (Loss)     Shares     Amount     Equity  
 
Balance-December 31, 2003 (a)
  $ 1,009       2,044     $ 2,044     $ 13,512     $ 29,681     $ (30 )     2     $ (62 )   $ 46,154  
 
Comprehensive income:
                                                                       
Net income
                                    2,800                               2,800  
Net unrealized gains (losses) on available-for-sale securities, net of taxes
                                            (88 )                     (88 )
Cash flow hedges, net of taxes
                                            (122 )                     (122 )
Foreign currency translation adjustment, net of taxes
                                            (2 )                     (2 )
 
Total comprehensive income
                                    2,800       (212 )                     2,588  
Cash dividends:
                                                                       
Common ($1.02 per share)
                                    (2,663 )                             (2,663 )
Preferred
                                    (39 )                             (39 )
Shares issued in connection with the Merger
            1,469       1,469       55,867                                       57,336  
Shares issued and commitments to issue common stock under employee plans
            63       63       2,804                                       2,867  
Forfeitures to treasury stock under employee plans
                                                    7       (252 )     (252 )
Purchase of treasury stock
                                                    3       (138 )     (138 )
 
Balance-September 30, 2004
  $ 1,009       3,576     $ 3,576     $ 72,183     $ 29,779     $ (242 )     12     $ (452 )   $ 105,853  
 
Balance-December 31, 2002 (a)
  $ 1,009       2,024     $ 2,024     $ 13,222     $ 25,851     $ 1,227       25     $ (1,027 )   $ 42,306  
 
Comprehensive income:
                                                                       
Net income
                                    4,855                               4,855  
Net unrealized gains (losses) on available-for-sale securities, net of taxes
                                            (678 )                     (678 )
Cash flow hedges, net of taxes
                                            (362 )                     (362 )
 
Total comprehensive income
                                    4,855       (1,040 )                     3,815  
Cash dividends:
                                                                       
Common ($1.02 per share)
                                    (2,128 )                             (2,128 )
Preferred
                                    (38 )                             (38 )
Shares issued and commitments to issue common stock under employee plans
            17       17       16                                       33  
Forfeitures to treasury stock under employee plans
                                                    3       (113 )     (113 )
Reissuances from treasury stock
                                                    (26 )     1,082       1,082  
 
Balance-September 30, 2003 (a)
  $ 1,009       2,041     $ 2,041     $ 13,238     $ 28,540     $ 187       2     $ (58 )   $ 44,957  
 
(a)  
Heritage JPMorgan Chase only.
 

The Notes to consolidated financial statements (unaudited) are an integral part of these statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

JPMORGAN CHASE & CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in millions)
                 
    Nine Months Ended September 30, (a)
    2004     2003  
 
Operating Activities
               
Net income
  $ 2,800     $ 4,855  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Provision for credit losses
    1,387       1,401  
Depreciation and amortization
    2,604       2,340  
Deferred tax provision (benefit)
    (684 )     1,051  
Investment securities gains
    (305 )     (1,417 )
Private equity unrealized (gains) losses
    (408 )     88  
Net change in:
               
Trading assets
    (29,795 )     19,519  
Securities borrowed
    (7,934 )     (2,953 )
Accrued interest and accounts receivable
    (858 )     150  
Other assets
    (8,585 )     (25,019 )
Trading liabilities
    (5,293 )     22,450  
Accounts payable, accrued expenses and other liabilities
    5,942       15,332  
Other operating adjustments
    (64 )     385  
 
Net cash (used in) provided by operating activities
    (41,193 )     38,182  
Investing Activities
               
Net change in:
               
Deposits with banks
    (15,598 )     (1,659 )
Federal funds sold and securities purchases under resale agreements
    (7,778 )     (22,943 )
Other change in loans
    (100,866 )     (136,464 )
Held-to-maturity securities:
               
Proceeds
    55       186  
Purchases
           
Available-for-sale securities:
               
Proceeds from maturities
    8,554       8,370  
Proceeds from sales
    108,314       270,332  
Purchases
    (108,530 )     (259,199 )
Loans due to sales and securitizations
    82,463       124,665  
Cash received (used) in business acquisitions
    14,281       (23 )
All other investing activities, net
    515     1,953  
 
Net cash used in investing activities
    (18,590 )     (14,782 )
Financing Activities
               
Net change in:
               
Deposits
    23,178       8,985  
Federal funds purchased and securities sold under repurchase agreements
    46,591       (37,524 )
Commercial paper and other borrowed funds
    (6,226 )     310  
Proceeds from the issuance of long-term debt and capital debt securities
    19,828       11,042  
Repayments of long-term debt and capital debt securities
    (11,580 )     (6,042 )
Net issuance of stock and stock-based awards
    1,444       1,002  
Treasury stock purchased
    (138 )      
Cash dividends paid
    (2,691 )     (2,136 )
All other financing activities, net
          64  
 
Net cash provided by (used in) financing activities
    70,406       (24,299 )
Effect of exchange rate changes on cash and due from banks
    (76 )     266  
 
Net increase (decrease) in cash and due from banks
    10,547       (633 )
Cash and due from banks at December 31, 2003 and 2002
    20,268       19,218  
 
Cash and due from banks at September 30, 2004 and 2003
  $ 30,815     $ 18,585  
 
Cash interest paid
  $ 9,152     $ 8,523  
Cash income taxes paid
    947       983  
 
Note:  
The fair values of noncash assets acquired and liabilities assumed in the Merger with Bank One were $320.9 billion and $277.0 billion, respectively. Approximately 1,469 million shares of common stock, valued at approximately $57.3 billion, were issued in connection with the merger with Bank One.

(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 Notes to consolidated financial statements (unaudited) are an integral part of these statements.

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See Glossary of Terms on pages 88–89 of this Form 10-Q for definitions of terms used throughout the Notes to consolidated financial statements.
 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1—BASIS OF PRESENTATION

The accounting and financial reporting policies of JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”) and its subsidiaries conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and prevailing industry practices for interim reporting. Additionally, where applicable, the policies conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. The unaudited consolidated financial statements prepared in conformity with U.S. GAAP require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expense and the disclosure of contingent assets and liabilities. Actual results could be different from these estimates. In addition, certain amounts in the prior periods have been reclassified to conform to the current presentation. In the opinion of management, all normal recurring adjustments have been included for a fair statement of this interim financial information. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in JPMorgan Chase’s Annual Report on Form 10-K for the year ended December 31, 2003 (“2003 Annual Report”).

As further described in Note 2 of this Form 10-Q, on July 1, 2004, the Firm merged with Bank One Corporation (“Bank One”) and acquired all of its outstanding stock. The merger was accounted for using the purchase method of accounting. Bank One’s results of operations were included in the Firm’s results beginning July 1, 2004.

NOTE 2—BUSINESS CHANGES AND DEVELOPMENTS
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 as of 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 the right to receive 1.32 shares of common stock of JPMorgan Chase; cash payments for fractional shares were approximately $3.1 million. JPMorgan Chase stockholders kept their shares, which remained outstanding and unchanged as shares of JPMorgan Chase following the Merger. The Merger will provide the combined company with a more balanced business mix and greater geographic diversification. The Merger is being accounted for using the purchase method of accounting, which requires that the assets and liabilities of Bank One be fair valued as of July 1, 2004. The purchase price to complete the Merger was $58.5 billion.

Purchase price allocation and goodwill

The purchase price has been allocated to the assets acquired and liabilities assumed using their fair values at the merger date. The computation of the purchase price and the allocation of the purchase price to the net assets of Bank One – based on their respective fair values as of July 1, 2004, and the resulting goodwill – are presented below. The allocation of the purchase price will be modified over the next nine months, as more information is obtained about the fair value of assets acquired and liabilities assumed.

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(in millions, except per share amount)   July 1, 2004          
 
Purchase price
               
Bank One common stock exchanged
    1,113          
Exchange ratio
    1.32          
 
             
JPMorgan Chase common stock issued
    1,469          
Average purchase price per JPMorgan Chase common share (a)
  $ 39.02 (a)        
 
             
 
          $ 57,336  
Fair value of employee stock awards and direct acquisition costs
            1,210  
 
             
Total purchase price
            58,546  
Net assets acquired:
               
Bank One stockholders’ equity
  $ 24,156          
Bank One goodwill and other intangible assets
    (2,754 )        
 
             
Subtotal
    21,402          
Adjustments to reflect assets acquired at fair value:
               
Loans and leases
    (2,261 )        
Private equity investments
    (100 )        
Identified intangibles
    8,789          
Pension plan assets
    (778 )        
Premises and equipment
    (436 )        
Other assets
    (265 )        
Adjustments to reflect liabilities assumed at fair value
               
Deposits
    (373 )        
Deferred income taxes
    947          
Postretirement plan liabilities
    (44 )        
Other liabilities
    (1,142 )        
Long-term debt
    (1,477 )        
 
             
 
            24,262  
 
             
Goodwill resulting from merger
          $ 34,284  
 
(a)  
The value of the Firm’s common stock exchange with Bank One shareholders was based on the average closing prices of the Firm’s common stock for the two days prior to, and the two days following, the announcement of the merger on January 14, 2004.
 

Components of the fair value of acquired, identifiable intangible assets as of July 1, 2004 are as follows:

                         
            Weighted average     Useful life  
(in millions)   Fair value     life (in years)     (in years)  
 
Core deposit intangibles
  $ 3,650       5.1     Up to 10
Purchased credit card relationships
    3,340       4.6     Up to 10
Other credit card-related intangibles
    419       4.6     Up to 10
Other customer relationship intangibles
    870       4.6 - 10.5     Up to 20
Indefinite-lived asset management intangibles
    510     NA     NA  
                 
Total
  $ 8,789                  
 

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Unaudited Pro Forma Condensed Combined Financial Information

The following unaudited pro forma condensed combined financial information presents the results of operations of the Firm had the Merger taken place at January 1, 2003.
                         
    Three months ended     Nine months ended September 30,
(in millions, except per share data)   September 30, 2003     2004     2003  
 
Total revenue before net interest income
  $ 6,719     $ 23,554     $ 21,909  
Net interest income
    5,430       16,037       16,277  
Provision for credit losses
    635       1,570       2,762  
Noninterest expense
    7,947       31,118       24,832  
Income before income taxes
    3,567       6,903       10,592  
Net income
    2,374       4,878       7,002  
Per common share information
                       
Earnings
  $ 0.68     $ 1.38     $ 1.99  
Diluted earnings
    0.66       1.35       1.96  
Average common shares issued and outstanding
    3,483.9       3,508.9       3,498.8  
Average diluted common shares issued and outstanding
    3,551.8       3,590.0       3,549.3  
 

NOTE 3—TRADING ASSETS AND LIABILITIES

For a discussion of the accounting policies related to trading assets and liabilities, see Note 3 on pages 87–88 of JPMorgan Chase’s 2003 Annual Report. The following table presents Trading assets and Trading liabilities for the dates indicated:
                 
            Heritage JPMC only  
    September 30,     December 31,  
(in millions)   2004     2003  
 
Trading assets
               
Debt and equity instruments:
               
U.S. government, federal agencies and municipal securities
  $ 63,241     $ 44,678  
Certificates of deposit, bankers’ acceptances and commercial paper
    7,732       5,765  
Debt securities issued by non-U.S. governments
    45,446       36,243  
Corporate securities and other
    98,433       82,434  
 
Total debt and equity instruments
    214,852       169,120  
 
Derivative receivables: (a)
               
Interest rate
    41,996       60,176  
Foreign exchange
    3,481       9,760  
Equity
    6,446       8,863  
Credit derivatives
    2,386       3,025  
Commodity
    3,486       1,927  
 
Total derivative receivables
    57,795       83,751  
 
Total trading assets
  $ 272,647     $ 252,871  
 
Trading liabilities
               
Debt and equity instruments (b)
  $ 78,767     $ 78,222  
 
Derivative payables: (a)
               
Interest rate
    36,274       49,189  
Foreign exchange
    3,687       10,129  
Equity
    7,588       8,203  
Credit derivatives
    2,293       2,672  
Commodity
    2,465       1,033  
 
Total derivative payables
    52,307       71,226  
 
Total trading liabilities
  $ 131,074     $ 149,448  
 
(a)  
Included in Trading assets and Trading liabilities are the reported receivables (unrealized gains) and payables (unrealized losses) related to derivatives. These amounts include the 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.
(b)  
Primarily represents securities sold, not yet purchased.
 

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NOTE 4—INTEREST INCOME AND INTEREST EXPENSE

Details of Interest income and Interest expense were as follows:
 
                                    
    Three Months Ended September 30,   Nine Months Ended September 30,(b)
(in millions)   2004     2003 (a)     2004     2003  
 
Interest income
                               
Loans
  $ 5,648     $ 2,997     $ 11,029     $ 8,928  
Securities
    1,011       880       2,390       2,826  
Trading assets — debt and equity instruments
    1,990       1,491       5,455       4,935  
Federal funds sold and securities purchased under resale agreements
    474       344       1,095       1,171  
Securities borrowed
    120       72       303       248  
Deposits with banks
    131       24       331       129  
Interests in purchased receivables
    119       31       130       31  
 
Total interest income
    9,493       5,839       20,733       18,268  
Interest expense
                               
Interest-bearing deposits
    1,503       789       3,125       2,807  
Short-term and other liabilities
    1,579       1,437       4,333       4,511  
Long-term debt
    788       369       1,595       1,121  
Beneficial interests issued by consolidated variable interest entities
    171       46       248       46  
 
Total interest expense
    4,041       2,641       9,301       8,485  
Net interest income
    5,452       3,198       11,432       9,783  
Provision for credit losses
    1,169       223       1,387       1,401  
 
Net interest income after provision for credit losses
  $ 4,283     $ 2,975     $ 10,045     $ 8,382  
 
(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.
 

NOTE 5—PENSION AND OTHER POSTRETIREMENT EMPLOYEE BENEFIT PLANS

For a discussion of JPMorgan Chase’s postretirement employee benefit plans, see Note 6 on pages 89–93 of JPMorgan Chase’s 2003 Annual Report. The following table presents the components of net periodic benefit costs reported in the Consolidated statements of income for the U.S. and non-U.S. defined benefit pension and other postretirement benefit plans of the Firm:
                                                 
    Defined benefit pension plans   Other postretirement
    U.S.   Non-U.S.   benefit plans
    Three months ended September 30,
(in millions)   2004(a)     2003(c)     2004     2003(c)     2004(a)(b)     2003(c)  
 
Components of net periodic benefit costs
                                               
Benefits earned during the period
  $ 74     $ 41     $ 4     $ 2     $ 3     $ 4  
Interest cost on benefit obligations
    108       67       21       9       20       19  
Expected return on plan assets
    (195 )     (78 )     (22 )     (10 )     (22 )     (21 )
Amortization of unrecognized amounts:
                                               
Prior service cost
    2       2                          
Net actuarial (gain) loss
    (9 )     15       11       4              
Curtailment loss
                            8        
Settlement loss
                      1              
 
Net periodic benefit costs reported in Compensation expense
  $ (20 )   $ 47     $ 14     $ 6     $ 9     $ 2  
 
                                                 
    Defined benefit pension plans   Other postretirement
    U.S.   Non-U.S.   benefit plans
    Nine months ended September 30, (d)
(in millions)   2004(a)     2003     2004     2003     2004 (a)(b)     2003  
 
Components of net periodic benefit costs
                                               
Benefits earned during the period
  $ 172     $ 116     $ 11     $ 7     $ 12     $ 12  
Interest cost on benefit obligations
    242       182       64       33       58       58  
Expected return on plan assets
    (386 )     (212 )     (66 )     (37 )     (64 )     (63 )
Amortization of unrecognized amounts:
                                               
Prior service cost
    10       5                          
Net actuarial loss
    12       41       33       16              
Curtailment loss
                            8        
Settlement loss
                5       3              
 
Net periodic benefit costs reported in Compensation expense
  $ 50     $ 132     $ 47     $ 22     $ 14     $ 7  
 

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(a)  
For the three and nine months ended September 30, 2004, U.S. pension and other postretirement expense includes a total adjustment of $(56) million and $3 million, respectively, resulting from finalization of 2004 actuarial valuations.
(b)  
The effect of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 resulted in a $35 million reduction in the accumulated Other postretirement benefit obligation. The impact on the Firm’s net periodic benefit costs was immaterial.
(c)  
Heritage JPMorgan Chase only.
(d)  
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. Effective July 1, 2004, the Firm assumed the obligations of heritage Bank One’s postretirement plans. These plans are similar to those of JPMorgan Chase and are expected to be merged into JPMorgan Chase’s postretirement benefit plans in 2005.
 

JPMorgan Chase made a discretionary cash contribution of $1.1 billion to its U.S. defined benefit pension plan on April 1, 2004, funding it to the maximum allowable amount under applicable tax law. This contribution reduced U.S. pension costs by $22 million in the third quarter and $43 million for the nine months ended September 30, 2004. This contribution is expected to reduce U.S. pension costs by an additional $21 million over the remaining three months of 2004.

NOTE 6—EMPLOYEE STOCK-BASED INCENTIVES
Employee stock-based incentives

For a discussion of the accounting policies relating to employee stock-based compensation, see Note 7 on pages 93–95 of JPMorgan Chase’s 2003 Annual Report. The following table presents Net income and basic and diluted earnings per share as reported, and as if all outstanding awards were accounted for at fair value in each period.
                                         
            Three Months Ended September 30,   Nine Months Ended September 30, (b)
(in millions, except per share data)   2004     2003 (a)     2004     2003  
 
Net income as reported   $ 1,418     $ 1,628     $ 2,800     $ 4,855  
Add:   Employee stock-based compensation expense included in reported net income, net of related tax effects     227       133       581       420  
Deduct:
  Employee stock-based compensation expense determined under the fair value method for all awards, net of related tax effects     (265 )     (217 )     (703 )     (704 )
 
Pro forma net income   $ 1,380     $ 1,544     $ 2,678     $ 4,571  
Earnings per share:                                
Basic — as reported
  $ 0.40     $ 0.80     $ 1.09     $ 2.40  
Basic — pro forma
    0.39       0.76       1.04       2.26  
Diluted — as reported
  $ 0.39     $ 0.78     $ 1.06     $ 2.35  
Diluted — pro forma
    0.38       0.74       1.01       2.21  
(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.
 

Deferred compensation plan

JPMorgan Chase has a deferred compensation plan, under which employees that meet certain compensation requirements may elect to defer all or a portion of their cash incentive awards each year on a tax-deferred basis. Amounts deferred are not invested in actual funds but rather are credited with returns as if they were invested in investment choices selected by the employee. Employees may elect to receive distributions following retirement or termination of employment, or in a specified year, subject to a minimum deferral period. Employees also may elect to receive payments in a lump sum or in annual installments. The plan is unfunded. The employees’ cash incentive awards are recorded in Compensation expense in the year they are earned, with the related deferral recorded in Other liabilities. Changes in the value of the employees’ deferred compensation liability accounts are recognized in earnings in the current period. At September 30, 2004, and December 31, 2003, the deferred compensation liability was $4.6 billion (which includes $447 million assumed from Bank One) and $3.7 billion, respectively.

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NOTE 7—MERGER COSTS

A summary by expense category is shown in the following table for the three and nine months ended September 30, 2004. These costs and the related accrued liability have been determined in accordance with a formal plan approved by management, and is being executed currently.
                 
    Three Months Ended September 30,     Nine Months Ended September 30, (a)  
(in millions)   2004     2004  
 
Expense category
               
Compensation
  $ 380     $ 445  
Occupancy
    147       167  
Technology and communications and other
    225       230  
 
Total (b)
  $ 752     $ 842  
 
(a)  
2004 year-to-date results include three months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
(b)  
With the exception of occupancy-related write-offs, all of the costs in the table require the expenditure of cash.
 

In addition to the merger costs reflected in the table above, $1.0 billion of merger costs were accounted for as purchase accounting adjustments and recorded as an increase to goodwill. The table below shows the change in the liability balance related to merger costs.

                 
    Three Months Ended September 30,     Nine Months Ended September 30, (a)  
(in millions)   2004     2004  
 
Liability balance, beginning of period
  $     $  
Recorded as merger costs
    752       842  
Recorded as goodwill
    1,025       1,025  
Liability utilized
    (546 )     (636 )
 
Liability balance, end of period
  $ 1,231     $ 1,231  
 

NOTE 8—SECURITIES AND PRIVATE EQUITY INVESTMENTS

For a discussion of the accounting policies relating to Securities, see Note 9 on pages 96–97 of JPMorgan Chase’s 2003 Annual Report. The following table presents realized gains and losses from available-for-sale (“AFS”) securities:
                                 
    Three Months Ended September 30,   Nine Months Ended September 30, (b)
(in millions)   2004     2003 (a)     2004     2003  
 
Realized gains
  $ 167     $ 576     $ 423     $ 2,000  
Realized losses
    (27 )     (412 )     (118 )     (583 )
 
Net realized securities gains
    140       164       305       1,417  
Private equity gains (losses)
    273       120       1,000       (130 )
 
Total Securities/private equity gains (losses)
  $ 413     $ 284     $ 1,305     $ 1,287  
 
(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 amortized cost and estimated fair value of AFS and held-to-maturity securities were as follows for the dates indicated:
 
                                                                 
                                    Heritage JPMC Only
    At September 30, 2004   At December 31, 2003
            Gross     Gross                     Gross     Gross        
    Amortized     Unrealized     Unrealized             Amortized     Unrealized     Unrealized        
(in millions)   Cost     Gains     Losses     Fair Value     Cost     Gains     Losses     Fair Value  
 
Available-for-sale securities
                                                               
U.S. government and federal agencies/ corporations obligations:
                                                               
Mortgage-backed securities
  $ 46,563     $ 254     $ 840     $ 45,977     $ 32,248     $ 101     $ 417     $ 31,932  
Collateralized mortgage obligations
    399       2             401       1,825       3             1,828  
U.S. treasuries
    12,492       20       180       12,332       11,511       13       168       11,356  
Agency obligations
    1,574       22       15       1,581       106       2             108  
Obligations of state and political subdivisions
    3,116       137       20       3,233       2,841       171       52       2,960  
Debt securities issued by non-U.S. governments
    8,030       36       11       8,055       7,232       47       41       7,238  
Corporate debt securities
    7,193       149       6       7,336       818       23       8       833  
Equity securities
    5,364       34       5       5,393       1,393       24       11       1,406  
Other, primarily asset-backed securities (a)
    8,366       34       13       8,387       2,448       61       102       2,407  
 
Total available for sale securities
  $ 93,097     $ 688     $ 1,090     $ 92,695     $ 60,422     $ 445     $ 799     $ 60,068  
Held-to-maturity securities (b)
                                                               
 
Total held-to-maturity securities
  $ 121     $ 8     $     $ 129     $ 176     $ 10     $     $ 186  
 
(a)  
Includes collateralized mortgage obligations of private issuers, which generally have underlying collateral consisting of obligations of U.S. government and federal agencies and corporations.
(b)  
Consists primarily of mortgage-backed securities.
 

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For a further description of private equity investments, see Note 15 on page 106 of JPMorgan Chase’s 2003 Annual Report. The following table presents the carrying value and cost of the Firm’s private equity investment portfolio for the dates indicated:

                                 
                    H-JPMC Only
    September 30, 2004   December 31, 2003
    Carrying             Carrying        
(in millions)   value     Cost     value     Cost  
 
Total private equity investments
  $ 8,547     $ 10,407     $ 7,250     $ 9,147  
 

NOTE 9—SECURITIES FINANCING ACTIVITIES

For a discussion of the accounting policies relating to Securities Financing Activities, see Note 10 on page 98 of JPMorgan Chase’s 2003 Annual Report. The following table details the components of securities financing activities at each of the dates indicated:
                 
            H-JPMC Only  
    September 30,     December 31,  
(in millions)   2004     2003  
 
Securities purchased under resale agreements
  $ 77,946     $ 62,801  
Securities borrowed
    50,546       41,834  
Securities sold under repurchase agreements
    153,343       103,610  
Securities loaned
    6,171       4,260  
 

Transactions similar to financing activities that do not meet the SFAS 140 definition of a repurchase agreement are accounted for as “buys” and “sells” rather than financing transactions. Notional amounts of transactions accounted for as purchases under SFAS 140 were $15 billion at both September 30, 2004, and December 31, 2003, respectively. Notional amounts of transactions accounted for as sales under SFAS 140 were $17 billion and $8 billion at September 30, 2004, and December 31, 2003, respectively.

JPMorgan Chase pledges certain financial instruments it owns to collateralize repurchase agreements and other securities financings. Pledged securities that can be sold or repledged by the secured party are identified as financial instruments owned (pledged to various parties) on the Consolidated balance sheet. At September 30, 2004, the Firm had received securities as collateral that can be repledged, delivered or otherwise used with a fair value of approximately $255 billion. This collateral was generally obtained under resale or securities borrowing agreements. Of these securities, approximately $242 billion were repledged, delivered or otherwise used, generally as collateral under repurchase agreements, securities lending agreements or to cover short sales.

NOTE 10—LOANS

For a discussion of the accounting policies relating to Loans, see Note 11 on pages 98–99 of JPMorgan Chase’s 2003 Annual Report. The composition of the loan portfolio at each of the dates indicated was as follows:
                 
            H-JPMC Only  
    September 30,     December 31,  
(in millions)   2004     2003  
 
Wholesale loans: (a)
               
Commercial and industrial
  $ 87,566     $ 53,664  
Real estate (b)
    14,295       4,594  
Financial institutions
    21,576       14,615  
Lease financing receivables
    2,912       696  
Other
    5,995       1,850  
 
Total wholesale loans
    132,344       75,419  
Consumer loans: (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 and other consumer
    15,126       4,204  
Credit card receivables
    60,241       17,426  
 
Total consumer loans
    261,357       139,347  
 
Total loans (d)(e)
  $ 393,701     $ 214,766  
 
(a)  
Includes Investment Bank, Commercial Banking, Treasury & Securities Services and Asset & Wealth Management.

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(b)  
Represents credits extended for real estate-related purposes to borrowers who are primarily in the real estate development or investment business and for which the primary repayment is from the sale, lease, management, operations or refinancing of the property.
(c)  
Includes Retail Financial Services and Card Services.
(d)  
Loans are presented net of unearned income of $4.0 billion and $1.3 billion at September 30, 2004, and December 31, 2003, respectively.
(e)  
Includes loans held for sale (principally mortgage-related loans) of $20.1 billion at September 30, 2004, and $20.8 billion at December 31, 2003, respectively. The results of operations for the three months ended September 30, 2004 and 2003, included $(6) million and $638 million, respectively, in net gains (losses) on the sales of loans held for sale. The results of operations for the nine months ended September 30, 2004 and 2003, included $287 million and $1.4 billion, respectively, in net gains on the sales of loans held for sale. The results of operations for the three months ended September 30, 2004 and 2003, included $15 million and $36 million, respectively, in adjustments to record loans held for sale at the lower of cost or market. The results of operations for the nine months ended September 30, 2004 and 2003, included $25 million and $22 million, respectively, in adjustments to record loans held for sale at the lower of cost or market.

 

NOTE 11—ALLOWANCE FOR CREDIT LOSSES

JPMorgan Chase’s Allowance for loan losses covers the wholesale (primarily risk-rated) and consumer (primarily scored) loan portfolios and is intended to cover probable credit losses inherent in the Firm’s loan portfolio. Management also computes an Allowance for wholesale lending-related commitments using a methodology similar to that used for the wholesale loans.

As a result of the Merger, management developed a single methodology for determining the Provision for credit losses for the combined Firm. The effect of conforming methodologies during the third quarter was a decrease in the consumer allowance of $227 million and a net decrease in the wholesale allowance (including both funded loans and lending related commitments) of $161 million. In addition, the Bank One seller’s interest in credit card securitizations was decertificated; this resulted in an increase to the provision for loan losses of $721 million (pre-tax) in the third quarter of 2004. It is anticipated that a similar increase will impact the provision in the fourth quarter of 2004.

The Allowance for loan losses consists of three components: Asset-specific loss, Expected loss and Stress.

The Asset-specific loss component includes provisions for losses on loans considered impaired and measured pursuant to SFAS No. 114. An allowance is established when the discounted cash flows (or collateral value or observable market price) of an impaired loan are lower than the carrying value of that loan. To compute the Asset-specific component of the allowance, larger impaired loans are evaluated individually, and smaller impaired loans are evaluated as a pool using historical loss experience for the respective class of assets.

The Expected loss component covers performing wholesale and consumer loans. Expected losses are the product of probability of default and loss given default. For risk-rated loans (generally wholesale lines of business), these factors are differentiated by risk rating and maturity. For scored loans (generally consumer lines of business), expected loss is primarily determined by applying statistical loss factors and other risk indicators to pools of loans by asset type.

The Stress component represents that portion of the overall allowance attributable to covering model imprecision and external factors and economic events that have occurred but are not yet reflected in factors used to derive the Expected loss component. Stress testing provides management with a range of probable loss estimates. The Stress component of the risk-rated performing loan portfolio is determined by creating stress test ranges using historical experience of both loss given default and probability of default. In addition, incremental stress related to certain concentrated and deteriorating industries is also incorporated. Stress-testing the scored loan portfolios is accomplished in part by analyzing the historical loss experience for each major product segment. Stress level ranges and the determination of the appropriate point within the range are based upon management’s view of uncertainties that relate to current macroeconomic and political conditions, quality of underwriting standards and other relevant internal and external factors impacting credit quality of the current portfolio.

The Allowance for lending-related commitments provides for the risk of loss inherent in the Firm’s process of extending credit. Management also computes Specific loss and Expected loss components for wholesale lending-related commitments. These are computed using a methodology similar to that used for the wholesale loan portfolio, modified for expected maturities and probabilities of drawdown.

JPMorgan Chase’s Risk Management Committee reviews, at least quarterly, the Allowance for credit losses relative to the risk profile of the Firm’s credit portfolio and current economic conditions. In addition, the Audit Committee of the Board of Directors is responsible for reviewing, on a quarterly basis, overall adequacy with respect to the Allowances for credit losses. As of September 30, 2004, JPMorgan Chase deemed the Allowance for credit losses to be appropriate (i.e., sufficient to absorb losses that are inherent in the portfolio including those not yet identifiable).

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The table below summarizes the changes in the Allowance for loan losses:

                 
    Nine months ended September 30, (a)
(in millions)   2004     2003  
 
Allowance for loan losses at January 1
  $ 4,523     $ 5,350  
Addition resulting from the Merger, July 1
    3,123        
Charge-offs
    (2,240 )     (2,246 )
Recoveries
    539       348  
 
Net charge-offs
    (1,701 )     (1,898 )
Provision for loan losses
    1,677       1,435  
Other (b)
    (129 )     (134 )
 
Allowance for loan losses at September 30
  $ 7,493     $ 4,753  
 
(a)  
2004 year-to-date activity includes three months of the combined Firm’s activity and six months of heritage JPMorgan Chase activity, while 2003 year-to-date activity includes heritage JPMorgan Chase only.
(b)  
Primarily represents the transfer of the allowance for accrued interest and fees on reported and securitized credit card loans.
 
The table below summarizes the changes in the Allowance for lending-related commitments:
                 
    Nine months ended September 30, (a)
(in millions)   2004     2003  
 
Allowance for lending-related commitments at January 1
  $ 324     $ 363  
Addition resulting from the Merger, July 1
    508        
Provision for lending-related commitments
    (290 )     (34 )
Other
    (1 )      
 
Allowance for lending-related commitments at September 30
  $ 541     $ 329  
 
(a)  
2004 year-to-date activity includes three months of the combined Firm’s activity and six months of heritage JPMorgan Chase activity, while 2003 year-to-date activity includes heritage JPMorgan Chase only.
 

NOTE 12—LOAN SECURITIZATIONS

For a discussion of loan securitizations and the Firm’s related accounting policies, see Note 13 on pages 100–103 of JPMorgan Chase’s 2003 Annual Report. The Firm securitizes, sells and services various consumer loans such as consumer real estate, credit card and automobile loans, as well as certain wholesale loans (primarily real estate) originated by the Investment Bank. JPMorgan Chase–sponsored securitizations utilize special purpose entities (“SPEs”) as part of the securitization process. These SPEs are structured to meet the definition of a “qualifying” special purpose entity (“QSPE”), as discussed in Note 1 of the JPMorgan Chase 2003 Annual Report; accordingly, the assets and liabilities of securitization-related QSPEs are not reflected in the Firm’s Consolidated balance sheet (except for retained interests, as described below) but are included on the balance sheet of the QSPE purchasing the assets. Assets held by securitization-related QSPEs as of September 30, 2004, and December 31, 2003, were as follows:
                 
            H-JPMC Only  
    September 30,     December 31,  
(in billions)   2004     2003  
 
Credit card receivables
  $ 106.2     $ 42.6  
Residential mortgage receivables
    21.1       21.1  
Wholesale loans
    34.3       33.8  
Automobile loans
    5.6       6.5  
 
Total
  $ 167.2     $ 104.0  
 

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The following table summarizes new securitization transactions that were completed during each of the three and nine months ended September 30, 2004 and 2003; the resulting gains arising from such securitizations; certain cash flows received from such securitizations; and the key economic assumptions used in measuring the retained interests, as of the dates of such sales:

                                                                 
    Three months ended September 30,
    2004   2003 (a)
(in millions)   Mortgage     Credit card     Automobile     Wholesale     Mortgage     Credit card     Automobile     Wholesale  
 
Principal securitized
  $ 1,029     $ 3,050     $     $ 1,732     $ 3,309     $ 1,725     $ 1,500     $ 1,810  
Pre-tax gains (losses)
    (6 )     17             19       103       9       10       48  
Cash flow information:
                                                               
Proceeds from securitizations
    1,026       3,050             1,324       3,388       1,725       1,498       1,494  
Servicing fees collected
    3       22             1       7       22       2        
Other cash flows received
          74                   1       60              
Proceeds from collections reinvested in revolving securitizations
          42,044                         15,225              
Key assumptions (rates per annum):
                                                               
Prepayment rate (b)
          16.7 %           50 %   10.2 - 36.2 % CPR     15.2 %   1.50 % WAC/     50 %
 
                                                  WAM        
Weighted-average life (in years)
          0.5             2.0       2.0 - 3.9       0.6       1.8       0.7 - 2.4  
Expected credit losses
          5.6 %         NA (c)     0.8 - 1.0 %     5.5 %     0.5 %   NA (c)
Discount rate
          12 %           0.7 %     13.0 - 30.0 %     9.3 - 12.0 %     4.1 %     1.7 - 5.0 %
 
 
    Nine months ended September 30, (d)
    2004   2003
(in millions)   Mortgage     Credit card     Automobile     Wholesale     Mortgage     Credit card     Automobile     Wholesale  
 
Principal securitized
  $ 5,551     $ 6,300     $ 1,600     $ 5,500     $ 8,829     $ 5,990     $ 3,510     $ 3,811  
Pre-tax gains (losses)
    54       36       (3 )     92       246       31       13       86  
Cash flow information:
                                                               
Proceeds from securitizations
    5,603       6,300       1,597       5,570       9,053       5,990       3,505       3,208  
Servicing fees collected
    7       35       1       2       11       41       4        
Other cash flows received
          109             12       1       108             3  
Proceeds from collections reinvested in revolving securitizations
          71,234                         42,535              
Key assumptions (rates per annum):
                                                               
Prepayment rate (b)
  23.8 - 25.9 % CPR     15.5 - 16.7 %   1.5 % WAC/     17.0 - 50.0 %   10.2 - 36.2 % CPR     15.0 - 15.2 %   1.5 % WAC/     50 %
 
                  WAM                           WAM        
Weighted-average life (in years)
    2.8 - 3.0       0.5 - 0.6       1.8       2.0 - 4.0       2.0 - 4.0       0.6       1.8       0.7 - 2.5  
Expected credit losses
    1.0 %     5.5 - 5.8 %     0.6 %   NA (c)     0.8 - 1.1 %     5.5 - 5.8 %     0.5 %   NA (c)
Discount rate
    15.0 - 30.0 %     12.0 %     4.1 %     0.6 - 5.0 %     13.0 - 30.0 %     5.4 - 12.0 %     3.9 - 4.1 %     1.0 - 5.0 %
 
(a)  
Heritage JPMorgan Chase only.
(b)  
CPR: constant prepayment rate; WAC/WAM: weighted-average coupon/weighted-average maturity.
(c)  
Expected credit losses for wholesale securitizations are minimal and are incorporated into other assumptions.
(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.
 

In addition, the Firm sold residential mortgage loans totaling $53.1 billion and $89.7 billion during the nine months ended September 30, 2004 and 2003, respectively, primarily as GNMA, FNMA and Freddie Mac mortgage-backed securities; these sales resulted in pre-tax gains of $45 million and $833 million, respectively.

At both September 30, 2004, and December 31, 2003, the Firm had, with respect to its credit card master trusts, $34.4 billion and $7.3 billion, respectively, related to its undivided interest, and $2.3 billion and $1.1 billion, respectively, related to its subordinated interest in accrued interest and fees on the securitized receivables. Credit card securitization trusts require the Firm to maintain a minimum undivided interest of 4% to 7% of the principal receivables in the trusts. The Firm maintained an average undivided interest in its principal receivables in the trusts of approximately 22% and 17% for the nine months ended September 30, 2004 and twelve months ended December 31, 2003, respectively.

The Firm also maintains escrow accounts up to predetermined limits for some of its credit card and automobile securitizations, in the unlikely event of deficiencies in cash flows owed to investors. The amounts available in such escrow accounts are recorded in Other assets and, as of September 30, 2004, amounted to $446 million and $143 million for credit card and automobile securitizations, respectively; as of December 31, 2003, these amounts were $456 million and $137 million for credit card and automobile securitizations, respectively.

The table below summarizes other retained securitization interests, which are primarily subordinated or residual interests and are carried at fair value on the Firm’s Consolidated balance sheets:

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            H-JPMC Only  
    September 30,     December 31,  
(in millions)   2004     2003  
 
Residential mortgage (a)
  $ 461     $ 570  
Credit card (a)
    498       193  
Automobile (a)
    106       151  
Wholesale
    30       34  
 
Total
  $ 1,095     $ 948  
 
(a)  
Pre-tax unrealized gains (losses) recorded in Stockholders’ equity that relate to retained securitization interests totaled $133 million and $155 million for Residential mortgage; $(1) million and $11 million for Credit card; and $10 million and $6 million for Automobile at September 30, 2004, and December 31, 2003, respectively.
 

The table below outlines the key economic assumptions used to determine the fair value of the remaining retained interests at September 30, 2004, and December 31, 2003, respectively; and the sensitivities to those fair values to immediate 10% and 20% adverse changes in those assumptions:

                                 
    September 30, 2004
(in millions)   Mortgage     Credit card     Automobile     Wholesale  
 
Weighted-average life (in years)
    1.0 - 3.4       0.5 - 1.0       1.4       0.2 - 5.3  
Prepayment rate
  15.4 - 33.7 % CPR     8.3 - 16.7 %   1.4 % WAC/WAM   NA(a), 17.0 - 50.0 %
Impact of 10% adverse change
  $ (8 )   $ (35 )   $ (8 )   $ (1 )
Impact of 20% adverse change
    (14 )     (70 )     (15 )     (2 )
Loss assumption
    0.0 - 4.9 %(b)     5.4 - 8.8 %     0.7 %   NA (c)
Impact of 10% adverse change
  $ (22 )   $ (135 )   $ (5 )   $  
Impact of 20% adverse change
    (44 )     (270 )     (10 )      
Discount rate
    13.0 - 30.0 %(d)     4.3 - 12.0 %     5.0 %     1.0 - 23.4 %
Impact of 10% adverse change
  $ (11 )   $ (1 )   $ (1 )   $ (1 )
Impact of 20% adverse change
    (21 )     (3 )     (3 )     (1 )
 
 
    Heritage JPMC Only
    December 31, 2003
(in millions)   Mortgage     Credit card     Automobile     Wholesale  
 
Weighted-average life (in years)
    1.4 - 2.7       0.4 - 1.3       1.5       0.6 - 5.9  
Prepayment rate
  29.0 - 31.7 % CPR     8.1 - 15.1 %   1.5 % WAC/WAM   NA(a), 50.0 %
Impact of 10% adverse change
  $ (17 )   $ (7 )   $ (10 )   $ (1 )
Impact of 20% adverse change
    (31 )     (13 )     (19 )     (2 )
Loss assumption
    0.0 - 4.0 %(b)     5.5 - 8.0 %     0.6 %   NA (c)
Impact of 10% adverse change
  $ (28 )   $ (21 )   $ (6 )   $  
Impact of 20% adverse change
    (57 )     (41 )     (12 )      
Discount rate
    13.0 - 30.0 %(d)     8.3 - 12.0 %     4.4 %     5.0 - 20.9 %
Impact of 10% adverse change
  $ (14 )   $ (1 )   $ (1 )   $ (1 )
Impact of 20% adverse change
    (27 )     (3 )     (2 )     (2 )
 
(a)  
Prepayment risk on certain wholesale retained interests are minimal and are incorporated into other assumptions.
(b)  
Expected credit losses for prime mortgage securitizations are minimal and are incorporated into other assumptions.
(c)  
Expected credit losses for wholesale retained interests are incorporated into other assumptions.
(d)  
The Firm sells certain residual interests from sub-prime mortgage securitizations via Net Interest Margin (“NIM”) securitizations and retains residuals interests in these NIM transactions, which are valued using a 30% discount rate.
 

The sensitivity analysis in the preceding table is hypothetical. Changes in fair value based on a 10% or 20% variation in assumptions generally cannot be extrapolated easily, because the relationship of the change in the assumptions to the change in fair value may not be linear. Also, in this table, the effect that a change in a particular assumption may have on the fair value is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another assumption, which might counteract or magnify the sensitivities.

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The table below presents information about delinquencies, net credit losses and components of reported and securitized financial assets at September 30, 2004, and December 31, 2003:

                                                 
                    Nonaccrual and 90 days      
    Total loans   or more past due   Net loan charge-offs
            Nine months ended
    September 30,     December 31,     September 30,     December 31,     September 30, (b)
(in millions)   2004     2003 (a)     2004     2003 (a)     2004     2003  
 
Consumer real estate
  $ 123,403     $ 74,560     $ 789     $ 374     $ 119     $ 98  
Credit card receivables
    60,241       17,426       843       284       1,199       847  
Auto & education finance
    62,587       43,157       211       123       167       128  
Small business & other consumer
    15,126       4,204       308       72       98       51  
 
Consumer loans
    261,357       139,347       2,151       853       1,583       1,124  
Wholesale loans
    132,344       75,419       1,795       2,046       118       774  
 
Total loans reported
    393,701       214,766       3,946       2,899       1,701       1,898  
 
Securitized loans:
                                               
Residential mortgage (c)
    12,546       15,564       497       594       119       143  
Credit card
    71,256       34,856       1,467       879       1,887       1,408  
Automobile
    5,430       6,315       12       13       18       18  
 
Total consumer loans securitized
    89,232       56,735       1,976       1,486       2,024       1,569  
Wholesale securitized
    1,865       2,108       12       9              
 
Total loans securitized
    91,097       58,843       1,988       1,495       2,024       1,569  
 
Total loans reported and securitized (d)(e)
  $ 484,798     $ 273,609     $ 5,934     $ 4,394     $ 3,725     $ 3,467  
 
(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.
(c)  
Includes $11.2 billion and $13.6 billion of outstanding principal balances on securitized sub-prime 1–4 family residential mortgage loans as of September 30, 2004 and December 31, 2003.
(d)  
Total assets held in securitization-related SPEs were $167.2 billion and $104.0 billion at September 30, 2004, and December 31, 2003, respectively. The $91.1 billion and $58.8 billion of loans securitized at September 30, 2004, and December 31, 2003, respectively, excludes: $40.8 billion and $37.1 billion of securitized loans, in which the Firm’s only continuing involvement is the servicing of the assets; $34.4 billion and $7.3 billion of seller’s interests in credit card master trusts, respectively; and $0.9 billion and $0.8 billion of escrow accounts and other assets, respectively.
(e)  
Represents both loans on the Consolidated balance sheet and loans that have been securitized, but excludes loans for which the Firm’s only continuing involvement is servicing of the assets.
 

NOTE 13—VARIABLE INTEREST ENTITIES
Refer to Note 1 on pages 86–87 and Note 14 on pages 103-106 of JPMorgan Chase’s 2003 Annual Report for a further description of JPMorgan Chase’s policies regarding consolidation of variable interest entities. In December 2003, the FASB issued a revision to FIN 46 (“FIN 46R”) to address various technical corrections and implementation issues that had arisen since the issuance of FIN 46. Effective March 31, 2004, JPMorgan Chase implemented FIN 46R for all variable interest entities (“VIEs”), excluding certain investments made by its private equity business, as discussed further below. Implementation of FIN 46R did not have a material effect on the Firm’s Consolidated financial statements.

The application of FIN 46R involved significant judgments and interpretations by management. The Firm is aware of differing interpretations being developed among accounting professionals and the EITF with regard to analyzing derivatives under FIN 46R. Management’s current interpretation is that derivatives should be evaluated by focusing on an economic analysis of the rights and obligations of a VIE’s assets, liabilities, equity, and other contracts, while considering: the entity’s activities and design; the terms of the derivative contract and the role it has with the entity; and whether the derivative contract creates and/or absorbs variability of the VIE. The Firm will continue to monitor developing interpretations.

JPMorgan Chase’s principal involvement with VIEs occurs in the following business segments:

 
Investment Bank: Utilize VIEs to assist clients in accessing the financial markets in a cost-efficient manner, by providing the structural flexibility to meet their needs pertaining to price, yield and desired risk. There are two broad categories of transactions involving VIEs in the Investment Bank: (1) multi-seller conduits and (2) client intermediation; both are discussed below.
 
 
Treasury & Securities Services: Provides trustee and custodial services to a number of VIEs. These services are similar to those provided to non-VIEs. TSS earns market-based fees for services provided.
 
 
The Firm’s private equity business is involved with entities that may be deemed VIEs. Private equity activities are accounted for in accordance with the Investment Company Audit Guide (“Audit Guide”). The FASB deferred adoption of FIN 46R for non-registered investment companies that apply the Audit Guide until the proposed Statement of Position on the clarification of the scope of the Audit Guide is finalized. The Firm continues to apply this deferral provision; had FIN 46R been applied to VIEs

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subject to this deferral, the impact would have had an insignificant impact on the Firm’s Consolidated financial statements as of September 30, 2004.

Multi-seller conduits
The Firm is an active participant in the asset-backed securities business, where it helps meet customers’ financing needs by providing access to the commercial paper markets through VIEs known as multi-seller conduits. These entities are separate bankruptcy-remote corporations in the business of purchasing interests in, and making loans secured by, receivables pools and other financial assets pursuant to agreements with customers. The entities fund their purchases and loans through the issuance of highly-rated commercial paper. The primary source of repayment of the commercial paper is the cash flow from the pools of assets. Investors in the commercial paper have no recourse to the general assets of the Firm. JPMorgan Chase serves as the administrator and provides contingent liquidity support and limited credit enhancement for several multi-seller conduits.

The commercial paper issued by the conduits is backed by sufficient collateral, credit enhancements and commitments to provide liquidity to support receiving at least a liquidity rating of A-1, P-1 and, in certain cases, F1.

As a means of ensuring timely repayment of the commercial paper, each asset pool financed by the conduits has a minimum 100% deal-specific liquidity facility associated with it. In the unlikely event an asset pool is removed from the conduit, the administrator can draw on the liquidity facility to repay the maturing commercial paper. The liquidity facilities are typically in the form of asset purchase agreements and are generally structured such that the bank liquidity is provided by purchasing, or lending against, a pool of non-defaulted, performing assets.

Program-wide liquidity in the form of revolving and short-term lending commitments is provided by the Firm to these vehicles in the event of short-term disruptions in the commercial paper market.

Deal-specific credit enhancement that supports the commercial paper issued by the conduits is generally structured to cover a multiple of historical losses expected on the pool of assets and is primarily provided by customers (i.e., sellers) or other third parties. The deal-specific credit enhancement is typically in the form of over-collateralization provided by the seller but may also include any combination of the following: recourse to the seller or originator, cash collateral accounts, letters of credit, excess spread, retention of subordinated interests or third-party guarantees. In certain instances, the Firm provides limited credit enhancement in the form of standby letters of credit.

The following table summarizes the Firm’s involvement with Firm-administered multi-seller conduits:

                                                 
    Consolidated   Nonconsolidated   Total
    September 30,     December 31,     September 30,     December 31,     September 30,     December 31,  
(in billions)   2004     2003 (b)     2004     2003 (b)(c)     2004     2003 (b)(c)  
 
Total commercial paper issued by conduits
  $ 34.2     $ 6.3     $ 9.3     $ 5.4     $ 43.5     $ 11.7  
Commitments
                                               
Asset-purchase agreements
  $ 45.9     $ 9.3     $ 15.9     $ 8.7     $ 61.8     $ 18.0  
Program-wide liquidity commitments
    3.0       1.6       2.0       1.0       5.0       2.6  
Limited credit enhancements
    1.1       0.9       1.1       1.0       2.2       1.9  
Maximum exposure to loss (a)
    46.6       9.7       16.4       9.0       63.0       18.7  
 
(a)  
The Firm’s maximum exposure to loss is limited to the amount of drawn commitments (i.e., sellers’ assets held by the multi-seller conduits for which the Firm provides liquidity support) of $40.8 billion at September 30, 2004, and $11.7 billion at December 31, 2003, plus contractual but undrawn commitments of $22.2 billion at September 30, 2004, and $7.0 billion at December 31, 2003. Since the Firm provides credit enhancement and liquidity to these multi-seller conduits, the maximum exposure is not adjusted to exclude exposure absorbed by third-party liquidity providers.
(b)  
Heritage JPMorgan Chase only.
(c)  
In December 2003 and February 2004, two multi-seller conduits were restructured, with each conduit issuing preferred securities acquired by an independent third-party investor; the investor absorbs the majority of the expected losses of the conduit. In determining the primary beneficiary of the restructured conduits, the Firm leveraged an existing rating agency model—an independent market standard—to estimate the size of the expected losses, and it considered the relative rights and obligations of each of the variable interest holders.
 

The Firm views its credit exposure to multi-seller conduit transactions as limited. This is because, for the most part, the Firm is not required to fund under the liquidity facilities if the assets in the VIE are in default. Additionally, the Firm’s obligations under the letters of credit are secondary to the risk of first loss provided by the customer or other third parties—for example, by the overcollateralization of the VIE with the assets sold to it.

Additionally, the Firm is involved with a structured investment vehicle (“SIV”) that funds a diversified portfolio of highly rated assets by issuing commercial paper, medium-term notes and capital. The assets and liabilities of this SIV are included in the Firm’s Consolidated balance sheet at September 30, 2004. Assets held by the SIV at September 30, 2004, were approximately $6.5 billion, of which $6.1 billion was reported in Available-for-sale securities.

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Client intermediation
As a financial intermediary, the Firm is involved in structuring VIE transactions to meet investor and client needs. The Firm intermediates various types of risks (including, for example, fixed income, equity and credit), typically using derivative instruments. In certain circumstances, the Firm also provides liquidity and other support to the VIEs to facilitate the transaction. For a basic description of the types of client intermediation VIEs, see pages 104–105 of JPMorgan Chase’s 2003 Annual Report.

Assets held by certain client intermediation–related VIEs at September 30, 2004, and December 31, 2003, were as follows:

                 
            H-JPMC Only  
    September 30,     December 31,  
(in billions)   2004     2003  
 
Structured wholesale loan vehicles (a)
  $ 3.6     $ 5.3  
Credit-linked note vehicles (b)
    15.7       17.7  
Municipal bond vehicles (c)
    6.7       5.5  
Other client intermediation vehicles (d)
    4.6       5.8  
 
(a)  
JPMorgan Chase was committed to provide liquidity to these VIEs of up to $5.2 billion and $8.0 billion at September 30, 2004, and December 31, 2003, respectively, of which $3.8 billion at September 30, 2004, and $6.3 billion at December 31, 2003, was in the form of asset purchase agreements. The Firm’s maximum exposure to loss to these vehicles at September 30, 2004, and December 31, 2003, was $3.1 billion and $5.5 billion, respectively, which reflects the netting of collateral and other program limits.
(b)  
The fair value of the Firm’s derivative contracts with credit-linked note vehicles was not material at September 30, 2004. Assets of $2.0 billion and $2.1 billion reported in the table above were recorded on the Firm’s Consolidated balance sheet at September 30, 2004, and December 31, 2003, respectively, due to contractual relationships held by the Firm that relate to collateral held by the VIE.
(c)  
For vehicles in which the Firm owns the residual interests, the Firm consolidates the VIE; total amounts consolidated were $2.5 billion at September 30, 2004 and December 31, 2003, and are reported in the table above. In vehicles where third-party investors own the residual interests, the Firm’s exposure is limited. The Firm often serves as remarketing agent for the VIE and provides liquidity to support the remarketing; total liquidity commitments were $2.1 billion and $1.8 billion at September 30, 2004, and December 31, 2003, respectively. The Firm’s maximum credit exposure to all municipal bond vehicles was $4.6 billion and $4.3 billion at September 30, 2004, and December 31, 2003, respectively.
(d)  
The Firm structures, on behalf of clients, other client intermediation vehicles in which it transfers the risks and returns of the assets held by the VIE, typically debt and equity instruments, to clients through derivative contracts. The Firm’s net exposure arising from these intermediation transactions is not significant.
 

Finally, the Firm may enter into transactions with VIEs structured by other parties. These transactions can include, for example, acting as a derivative counterparty, liquidity provider, investor, underwriter, placement agent, trustee or custodian. These transactions are conducted at arm’s length, and individual credit decisions are based upon the analysis of the specific VIE, taking into consideration the quality of the underlying assets. JPMorgan Chase records and reports these positions similarly to any other third-party transaction. These activities do not cause JPMorgan Chase to absorb a majority of the expected losses of the VIEs or receive a majority of the residual returns of the VIE, and they are not considered significant for disclosure purposes.

Consolidated VIE Assets
The following table summarizes the Firm’s total consolidated VIE assets, by classification on the Consolidated balance sheets, as of September 30, 2004, and December 31, 2003:

                 
            H-JPMC Only  
    September 30,     December 31,  
(in billions)   2004     2003  
 
Consolidated VIE assets (a)
               
Investment securities
  $ 10.0     $ 3.8  
Trading assets (b)
    4.3       2.7  
Loans
    3.1       1.1  
Interests in purchased receivables (c)
    30.3       4.7  
Other assets
    0.4       0.1  
 
Total consolidated VIE assets
  $ 48.1     $ 12.4  
 
(a)  
The Firm also holds $3.3 billion of assets, primarily as a seller’s interest, in certain consumer securitizations in a segregated entity, as part of a two-step securitization transaction. This interest is included in the securitization activities disclosed in Note 12 on pages 73–76 of this Form 10-Q.
(b)  
Includes the market value of securities and derivatives.
(c)  
Represents interest in receivables purchased by Firm-administered conduits which have been consolidated in accordance with FIN 46R.
 

The interest-bearing beneficial interest liabilities issued by consolidated VIEs are classified in the line item titled “Beneficial interests issued by consolidated variable interest entities.” The holders of these beneficial interests do not have recourse to the general credit of JPMorgan Chase.

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NOTE 14—GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following:

 
                 
            H-JPMC Only  
    September 30,     December 31,  
(in millions)   2004     2003  
 
Goodwill
  $ 42,947     $ 8,511  
     
     
 
Mortgage servicing rights, net of valuation allowance
    5,168       4,781  
     
     
 
Purchased credit card relationships     4,055       1,014  
     
     
 
                 
All other intangibles:                
Other credit card-related intangibles
  $ 404     $  
Core deposit intangibles
    3,493       8  
All other intangibles
    2,048       677  
 
Total All other intangibles
  $ 5,945     $ 685  
 

Goodwill
As of September 30, 2004, goodwill increased by $34.4 billion compared with December 31, 2003, principally in connection with the Bank One Merger. Goodwill was not impaired at September 30, 2004, or December 31, 2003, nor was any goodwill written off during the three or nine months ended September 30, 2004 or 2003.

Under SFAS 142, goodwill must be allocated to reporting units and tested for impairment. Goodwill by business segment is as follows:

                         
    Goodwill resulting from             H-JPMC Only  
(in millions)   the Merger, July 1, 2004     September 30, 2004     December 31, 2003  
 
Investment Bank
  $ 1,243     $ 3,323     $ 2,084  
Retail Financial Services
    14,652       15,106       446  
Card Services
    12,800       12,800        
Commercial Banking
    2,592       2,650       61  
Treasury & Securities Services
    461       2,006       1,390  
Asset & Wealth Management
    2,536       6,685       4,153  
Corporate (Private Equity)
          377       377  
 
Total Goodwill
  $ 34,284     $ 42,947     $ 8,511  
 

Mortgage servicing rights
For a further description of mortgage servicing rights (“MSRs”) and interest rate risk management of MSRs, see Note 16 on pages 107–109 of JPMorgan Chase’s 2003 Annual Report. The following table summarizes the changes in MSRs during the first nine months of 2004 and 2003:

                 
    Nine months ended September 30, (a)
(in millions)   2004     2003  
 
Balance at January 1
  $ 6,159     $ 4,864  
Other additions
    1,400       2,411  
Addition resulting from the Merger, July 1
    90        
Sales
    (3 )      
Other-than-temporary impairment
    (32 )     (274 )
Amortization
    (974 )     (1,078 )
SFAS 133 hedge valuation adjustments
    (804 )     (502 )
 
Balance at September 30
    5,836       5,421  
Less: valuation allowance
    668       1,414  
 
Balance at September 30, after valuation allowance
  $ 5,168     $ 4,007  
Estimated fair value at September 30
  $ 5,254     $ 4,007  
Weighted-average prepayment speed assumption
    17.7 % CPR     21.2 % CPR
Weighted-average discount rate
    7.55 %     7.64 %
 
(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.
CPR – constant prepayment rate
 

JPMorgan Chase uses a combination of derivatives, AFS securities and trading instruments to manage changes in the fair value of MSRs. The intent is to offset any changes in the fair value of MSRs with changes in the fair value of the related risk management instrument. MSRs decrease in value when interest rates decline. Conversely, securities (such as mortgage-backed securities), principal-only certificates, and derivatives (when the Firm receives fixed-rate interest payments) decrease in value when interest rates increase.

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The valuation allowance represents the extent to which the carrying value of MSRs exceeds its estimated fair value for its applicable SFAS 140 strata. Changes in the valuation allowance are the result of the recognition of impairment or the recovery of previously recognized impairment charges due to changes in market conditions during the period. The changes in the valuation allowance for MSRs were as follows:

                 
    Nine months ended September 30, (a)
(in millions)   2004     2003  
 
Balance at January 1
  $ 1,378     $ 1,634  
Other-than-temporary impairment
    (32 )     (274 )
SFAS 140 impairment (recovery) adjustment
    (678 )     54  
 
Balance at September 30
  $ 668     $ 1,414  
 
(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.
 

Other intangible assets
For the nine months ended September 30, 2004, other intangible assets increased by approximately $8.3 billion, principally, as a result of the Merger. See Note 2 on pages 65–67 of this Form 10-Q for additional information. The increase in intangibles included $510 million of indefinite lived intangibles, which are not amortized, but instead are tested for impairment at least annually. The remainder of the Firm’s other acquired intangible assets are subject to amortization.

The components of credit card relationships, core deposits and other intangible assets were as follows:

                                                 
                            Heritage JPMC Only
    September 30, 2004   December 31, 2003
    Gross     Accumulated     Net Carrying     Gross     Accumulated     Net Carrying  
(in millions)   Amount     Amortization     Value     Amount     Amortization     Value  
 
Purchased credit card relationships
  $ 5,225     $ 1,170     $ 4,055     $ 1,885     $ 871     $ 1,014  
Other credit-card related intangibles
    419       15       404                    
Core deposit intangibles
    3,797       304       3,493       147       139       8  
All other intangibles
    2,405       357 (a)     2,048       946       269       677  
 
                                 
    Three months ended September 30,   Nine months ended September 30, (c)
(in millions)   2004     2003 (b)     2004     2003  
 
Amortization expense
                               
Purchased credit card relationships
  $ 179     $ 64     $ 299     $ 192  
Other credit card-related intangibles
    15             15        
Core deposit intangibles
    164       1       165       5  
All other intangibles
    38       8       75       23  
 
Total amortization expense
  $ 396     $ 73     $ 554     $ 220  
 
(a)  
Includes $13 million of amortization expense related to servicing assets on securitized automobile loans, which is recorded in Asset management, administration and commissions, for the nine months ended September 30, 2004.
(b)  
Heritage JPMorgan Chase only.
(c)  
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.
 

Future amortization expense
The following table presents estimated amortization expense related to credit card relationships, core deposits and All other intangible assets at September 30, 2004:

                                 
    Purchased credit card     Other credit card-     Core deposit     All other  
(in millions)   relationships     related intangibles     intangibles     intangibles  
 
Year ended December 31,
                               
2004 (a)
  $ 177     $ 15     $ 165     $ 41  
2005
    702       59       622       155  
2006
    673       57       531       143  
2007
    604       52       403       126  
2008
    501       48       294       118  
2009
    360       44       239       114  
 
(a)  
Excludes $299 million, $15 million, $165 million and $75 million of amortization expense related to purchased credit card relationships, other credit card-related intangibles, core deposit intangibles and All other intangibles, respectively, recognized during the first nine months of 2004.
 

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NOTE 15—EARNINGS PER SHARE
For a discussion of the computation of basic and diluted earnings per share (“EPS”), see Note 22 on page 112 of JPMorgan Chase’s 2003 Annual Report. The following table presents the calculation of basic and diluted EPS for the three and nine months ended September 30, 2004 and 2003:

                                 
    Three months ended Sept. 30,   Nine months ended Sept. 30, (b)
(in millions, except per share data)   2004     2003 (a)     2004     2003  
 
Basic earnings per share
                               
Net income
  $ 1,418     $ 1,628     $ 2,800     $ 4,855  
Less: preferred stock dividends
    13       13       39       38  
 
Net income applicable to common stock
  $ 1,405     $ 1,615     $ 2,761     $ 4,817  
Weighted-average basic shares outstanding
    3,513.5       2,012.2       2,533.1       2,006.0  
Net income per share
  $ 0.40     $ 0.80     $ 1.09     $ 2.40  
Diluted earnings per share
                               
Net income applicable to common stock
  $ 1,405     $ 1,615     $ 2,761     $ 4,817  
Weighted-average basic shares outstanding
    3,513.5       2,012.2       2,533.1       2,006.0  
Additional shares issuable upon exercise of stock options for dilutive effect
    78.5       56.0       65.4       41.0  
 
Weighted-average diluted shares outstanding
    3,592.0       2,068.2       2,598.5       2,047.0  
Net income per share (c)
  $ 0.39     $ 0.78     $ 1.06     $ 2.35  
 
(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.
(c)  
Options issued under employee benefit plans to purchase 207 million and 320 million shares of common stock were outstanding for the three months ended September 30, 2004 and 2003, respectively, but were not included in the computation of diluted EPS because the options’ exercise prices were greater than the average market price of the common shares.
 

NOTE 16—ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income includes the after-tax change in unrealized gains and losses on AFS securities, cash flow hedging activities and foreign currency translation adjustments (including the impact of related derivatives).

                                 
    Unrealized             Cash     Accumulated other  
    gains (losses)     Translation     flow     comprehensive  
(in millions)   on AFS securities (a)     adjustment     hedges     income (loss)  
 
Nine months ended September 30, 2004
                               
Balance at January 1, 2004
  $ 19     $ (6 )   $ (43 )   $ (30 )
Net change during period (b)
    (88 )(c)     (2 )(d)     (122 )(f)     (212 )
 
Balance at September 30, 2004
  $ (69 )   $ (8 )(e)   $ (165 )   $ (242 )
Nine months ended September 30, 2003 (g)
                               
Balance at January 1, 2003
  $ 731     $ (6 )   $ 502     $ 1,227  
Net change during period
    (678 )(c)     (d)     (362 )(f)     (1,040 )
 
Balance at September 30, 2003
  $ 53     $ (6 )(e)   $ 140     $ 187  
 
(a)  
Represents the after-tax difference between the fair value and amortized cost of the AFS securities portfolio and retained interests in securitizations recorded in Other assets.
(b)  
Includes three months of combined Firm’s activity and six months of heritage JPMorgan Chase activity.
(c)  
The net change for the nine months ended September 30, 2004, is primarily due to increasing rates. The net change for the nine months ended September 30, 2003, was primarily due to increasing rates and the recognition of gains on sales of AFS Securities.
(d)  
At September 30, 2004 and 2003, included $(31) million and $303 million, respectively, of after-tax gains (losses) on foreign currency translation from operations for which the functional currency is other than the U.S. dollar, offset by $29 million and $(303) million, respectively, of after-tax gains (losses) on hedges.
(e)  
Includes after-tax gains and losses on foreign currency translation, including related hedge results from operations for which the functional currency is other than the U.S. dollar.
(f)  
The net change for the nine months ended September 30, 2004, included $36 million of after-tax losses recognized in income and $158 million of after-tax losses representing the net change in derivative fair values that were recorded in comprehensive income. The net change for the nine months ended September 30, 2003, included $479 million of after-tax gains recognized in income and $117 million of after-tax gains representing the net change in derivative fair values that were reported in comprehensive income.
(g)  
Heritage JPMorgan Chase only.
 

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NOTE 17—COMMITMENTS AND CONTINGENCIES

Litigation reserve
At June 30, 2004, JPMorgan Chase recorded a $3.7 billion (pre-tax) addition to the Litigation reserve. While the outcome of litigation is inherently uncertain, the addition reflects management’s assessment of the appropriate reserve level in light of all currently known information. Management reviews litigation reserves periodically, and the reserve may be increased or decreased in the future to reflect further developments. The Firm believes it has meritorious defenses to claims asserted against it and intends to continue to defend itself vigorously, litigating or settling cases, according to management’s judgment as to what is in the best interest of stockholders. For a further discussion of legal proceedings, see Part II, Item 1, Legal Proceedings, of this Form 10-Q.

NOTE 18—ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The majority of JPMorgan Chase’s derivatives are entered into for trading purposes. The Firm also uses derivatives as an end-user to hedge market exposures, modify the interest rate characteristics of related balance sheet instruments or meet longer-term investment objectives. Both trading and end-user derivatives are recorded in trading assets and liabilities. For a further discussion of the Firm’s use of derivative instruments, see pages 58–61 and Note 28 on pages 116–117 of JPMorgan Chase’s 2003 Annual Report.

The following table presents derivative instrument hedging-related activities for the periods indicated:

                                 
    Three months ended September 30,   Nine months ended September 30, (b)
(in millions)   2004     2003 (a)     2004     2003  
 
Fair value hedge ineffective net gains (losses) (c)
  $ (53 )   $ (277 )   $ (282 )   $ 243  
Cash flow hedge ineffective net gains (losses) (c)
    (1 )     (2 )     (2 )     (2 )
 
(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.
(c)  
Includes ineffectiveness and the components of hedging instruments that have been excluded from the assessment of hedge effectiveness.
 

Over the next 12 months, it is expected that $49 million (after-tax) of net losses recorded in Other comprehensive income at September 30, 2004, will be recognized in earnings. The maximum length of time over which forecasted transactions are hedged is 10 years, related to core lending and borrowing activities.

NOTE 19—OFF–BALANCE SHEET LENDING-RELATED FINANCIAL INSTRUMENTS AND GUARANTEES
For a discussion of off–balance sheet lending-related financial instruments and guarantees and the Firm’s related accounting policies, see Note 29 on pages 117–119 of JPMorgan Chase’s 2003 Annual Report.

To provide for the risk of loss inherent in wholesale-related contracts, an Allowance for credit losses on lending-related commitments is maintained. See pages 51–53 of this Form 10-Q for a further discussion on the Allowance for credit losses on lending-related commitments.

The following table summarizes the contractual amounts of off–balance sheet lending-related financial instruments and guarantees and the related allowance for credit losses on lending-related commitments at September 30, 2004, and December 31, 2003:

 

Off–balance sheet lending-related financial instruments

                                 
                    Allowance for
    Contractual amount   lending-related commitments
    September 30,     December 31,     September 30,     December 31,  
(in millions)   2004     2003 (a)     2004     2003 (a)  
 
Consumer-related
  $ 593,345     $ 181,198     $ 12     $ 4  
Wholesale-related:
                               
Other unfunded commitments to extend credit (b)(c)(d)
    217,173       172,369       201       153  
Standby letters of credit and guarantees (b)(e)
    92,356       34,922       325       165  
Other letters of credit (b)
    6,417       4,192       3       2  
 
Total wholesale-related
    315,946       211,483       529       320  
 
Total
  $ 909,291     $ 392,681     $ 541     $ 324  
 
Customers’ securities lent (f)
  $ 187,765     $ 143,143       NA       NA  
 
(a)  
Heritage JPMorgan Chase only.
(b)  
Represents contractual amount net of risk participations totaling $29.4 billion and $16.5 billion at September 30, 2004, and December 31, 2003, respectively.

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(c)  
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.
(d)  
Includes certain asset purchase agreements to the Firm’s administered multi-seller asset-backed commercial paper conduits of $31.0 billion and $11.7 billion at September 30, 2004, and December 31, 2003, respectively; excludes $30.8 billion at September 30, 2004, and $6.3 billion at December 31, 2003, of asset purchase agreements related to the Firm’s administered multi-seller asset-backed commercial paper conduits consolidated in accordance with FIN 46R, as the underlying assets of the conduits are reported in the Firm’s Consolidated balance sheets. It also includes $8.3 billion at September 30, 2004, and $9.2 billion at December 31, 2003, of asset purchase agreements to structured commercial loan vehicles and other third-party entities. The allowance for credit losses on lending-related commitments related to these agreements was insignificant at September 30, 2004, and December 31, 2003.
(e)  
The Firm held collateral relating to $7.7 billion of these arrangements at both September 30, 2004 and December 31, 2003.
(f)  
Collateral held by the Firm in support of these agreements was $192.7 billion at September 30, 2004, and $146.7 billion at December 31, 2003.
 

For a discussion of the off–balance sheet lending arrangements which the Firm considers to be guarantees under FIN 45, see pages 117–118 of JPMorgan Chase’s 2003 Annual Report. The amount of the liability related to guarantees recorded at September 30, 2004, and December 31, 2003, excluding the allowance for credit losses on lending-related commitments and derivative contracts discussed below, was approximately $325 million and $59 million, respectively.

In addition to the contracts noted above, there are certain derivative contracts to which the Firm is a counterparty that meet the characteristics of a guarantee under FIN 45. For a description of the derivatives the Firm considers to be guarantees, see Note 29 on pages 117–119 of JPMorgan Chase’s 2003 Annual Report. These derivatives are recorded on the Consolidated balance sheets at fair value. The total notional values of the derivatives that the Firm deems to be guarantees were $52 billion and $50 billion at September 30, 2004, and December 31, 2003, respectively. The fair values related to these contracts at September 30, 2004, were a derivative receivable of $177 million and a derivative payable of $755 million. The fair values of these contracts at December 31, 2003, were a derivative receivable of $163 million and a derivative payable of $333 million.

NOTE 20—BUSINESS SEGMENTS
JPMorgan Chase is organized into seven major businesses: the Investment Bank, Retail Financial Services, Card Services, Commercial Banking, Treasury & Securities Services, Asset & Wealth Management and Corporate. These businesses are segmented 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. For a definition of operating basis, see the Glossary of Terms on pages 88–89 of this Form 10-Q. For a further discussion concerning JPMorgan Chase’s business segments, see Business Segment Results on pages 11–37 of this Form 10-Q.

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 Investment Bank into Corporate. Treasury & Securities Services 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, 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 now comprised of Home Finance, Auto and Education Finance, Consumer and Small Business Banking and Insurance. Chase Middle Market moved into Commercial Banking, 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, and support units including technology, legal, internal audit, finance, human resources, risk management, real estate management, procurement, executive management and marketing groups.

Segment results, which are presented on an operating basis, reflect revenues on a tax-equivalent basis. The tax-equivalent gross-up for each business segment is based upon the level, type and tax jurisdiction of the earnings and assets within each business segment. The amount of the tax-equivalent gross-up for each business segment is eliminated within the Support Units and Corporate segment and was $(106) million and $(115) million for the three months ended September 30, 2004 and 2003, respectively.

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The following table provides a summary of the Firm’s segment results for the three and nine months ended September 30, 2004 and 2003. Segment results for periods prior to the third quarter of 2004 have been restated to reflect the new business segments and reporting classifications.

                                                                 
            Retail                     Treasury &     Asset     Corporate/        
    Investment     Financial     Card     Commercial     Securities     & Wealth     Reconciling        
(in millions, except ratios)   Bank     Services     Services     Banking     Services     Management     Items (a)     Total  
 
Three months ended September 30, 2004
                                                               
Operating revenue (b)
  $ 2,701     $ 3,800     $ 3,771     $ 833     $ 1,339     $ 1,193     $ (86 )   $ 13,551  
Intersegment revenue (b)
    (111 )     (17 )     7       25       61       21       14        
Income tax expense
    344       501       251       124       44       111       (372 )     1,003  
Operating earnings (loss) (c)
    627       822       421       215       96       197       (219 )     2,159  
Average equity (d)
    20,000       13,050       11,800       3,400       1,900       2,400       51,819       104,369  
Average managed assets
    496,347       227,716       136,753       55,957       24,831       39,882       204,884       1,186,370  
Return on average equity (d) (e)
    12 %     25 %     14 %     25 %     20 %     33 %     NM       8 %
 
                                                                 
            Retail                     Treasury &     Asset     Corporate/        
    Investment     Financial     Card     Commercial     Securities     & Wealth     Reconciling        
(in millions, except ratios)   Bank     Services     Services     Banking     Services     Management     Items (a)     Total  
 
Three months ended September 30, 2003
                                                               
Operating revenue (b)
  $ 2,792     $ 1,529     $ 1,565     $ 341     $ 906     $ 760     $ 358     $ 8,251  
Intersegment revenue (b)
    (66 )     (7 )     (2 )     6       52       20       (3 )      
Income tax expense
    449       104       110       44       53       47       (5 )     802  
Operating earnings (loss) (c)
    693       181       199       63       115       85       292       1,628  
Average equity (d)
    17,949       4,422       3,422       1,050       2,627       5,539       8,122       43,131  
Average managed assets
    434,911       155,247       51,442       16,775       17,564       33,290       105,694       814,923  
Return on average equity (d) (e)
    15 %     16 %     23 %     24 %     17 %     6 %     NM       15 %
 
                                                                 
            Retail                     Treasury &     Asset     Corporate/        
    Investment     Financial     Card     Commercial     Securities     & Wealth     Reconciling        
(in millions, except ratios)   Bank     Services     Services     Banking     Services     Management     Items (a)     Total  
 
Nine months ended September 30, 2004
                                                               
Operating revenue (b)
  $ 9,404     $ 7,246     $ 6,915     $ 1,489     $ 3,444     $ 2,869     $ 785     $ 32,152  
Intersegment revenue (b)
    (287 )     (25 )     9       59       174       67       3        
Income tax expense
    1,324       841       439       223       131       230       (303 )     2,885  
Operating earnings (loss) (c)
    2,288       1,424       759       354       295       418       357       5,895  
Average equity (d)
    16,380       7,764       6,200       1,654       2,761       4,406       26,660       65,825  
Average managed assets
    452,714       171,585       80,211       29,921       21,715       36,765       150,294       943,205  
Return on average equity (d) (e)
    19 %     24 %     16 %     29 %     14 %     13 %     NM       12 %
 
                                                                 
            Retail                     Treasury &     Asset     Corporate/        
    Investment     Financial     Card     Commercial     Securities     & Wealth     Reconciling        
(in millions, except ratios)   Bank     Services     Services     Banking     Services     Management     Items (a)     Total  
 
Nine months ended September 30, 2003
                                                               
Operating revenue (b)
  $ 9,786     $ 5,706     $ 4,529     $ 1,012     $ 2,628     $ 2,125     $ 900     $ 26,686  
Intersegment revenue (b)
    (186 )     (15 )     (5 )     16       131       84       (25 )      
Income tax expense
    1,198       714       283       153       132       107       (123 )     2,464  
Operating earnings (loss) (c)
    1,996       1,242       510       218       299       181       409       4,855  
Average equity (d)
    19,074       4,095       3,453       1,103       2,737       5,521       6,604       42,587  
Average managed assets
    434,717       146,425       51,380       16,658       17,828       33,657       106,458       807,123  
Return on average equity (d) (e)
    14 %     41 %     20 %     26 %     15 %     4 %     NM       15 %
 
(a)  
Corporate/Reconciling Items includes Global Treasury, Private Equity, Support Units and the net effect of management accounting policies.
(b)  
Operating revenue includes Intersegment revenue, which includes intercompany revenue and revenue-sharing agreements, net of intersegment expenses.
(c)  
For the consolidated financial statements, there are no reconciling items between Operating earnings and Net income in 2003.
(d)  
Average common stockholders’ equity at the consolidated level is equivalent to the average equity at the segment level.
(e)  
Based on annualized net income amounts.
 

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The following table provides a reconciliation of the Firm’s operating earnings to net income:

                                 
    Three months ended September 30,   Nine months ended September 30, (b)
(in millions)   2004     2003 (a)     2004     2003  
 
Consolidated operating earnings
  $ 2,159     $ 1,628     $ 5,895     $ 4,855  
Merger costs (c)
    (462 )           (522 )      
Litigation reserve charge (c)
                (2,294 )      
Accounting policy conformity (c)
    (279 )           (279 )      
 
Consolidated net income (loss)
  $ 1,418     $ 1,628     $ 2,800     $ 4,855  
 
(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.
(c)  
Represents the after-tax amounts of the Firm’s Merger costs, Litigation reserve charge and Accounting policy conformity adjustments, which are excluded from the operating basis, as management believes these items are not part of the Firm’s normal daily business operations and, therefore, not indicative of trends, and also that they do not provide meaningful comparisons with other periods.
 

The following table provides a reconciliation of the Firm’s reported revenue to operating revenue:

                                 
    Three months ended September 30,   Nine months ended September 30, (b)
(in millions)   2004     2003 (a)     2004     2003  
 
Reported revenue
  $ 12,505     $ 7,780     $ 30,147     $ 25,278  
Credit card securitizations (c)
    928       471       1,887       1,408  
Accounting policy conformity (d)
    118             118        
 
Operating revenue
  $ 13,551     $ 8,251     $ 32,152     $ 26,686  
 
(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.
(c)  
Represents the impact of credit card securitizations. For securitized receivables, amounts that normally would be reported as Net interest income and as Provision for credit losses are reported as noninterest revenue.
(d)  
Represents the pre-tax amount of the Firm’s accounting policy conformity adjustments, which are excluded from the operating basis, as management believes this item is not part of the Firm’s normal daily business operations and, therefore, not indicative of trends, and that they also do not provide meaningful comparisons with other periods.
 

The following table provides a reconciliation of the Firm’s consolidated average assets to average managed assets:

                                 
    Three months ended September 30,   Nine months ended September 30, (b)
(in millions)   2004     2003 (a)     2004     2003  
 
Average assets
  $ 1,117,335     $ 782,426     $ 897,978     $ 775,122  
Average credit card securitizations
    69,035       32,497       45,227       32,001  
 
Average managed assets
  $ 1,186,370     $ 814,923     $ 943,205     $ 807,123  
 
(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.
 

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CONSOLIDATED AVERAGE BALANCE SHEET, INTEREST AND RATES

JPMORGAN CHASE & CO.
CONSOLIDATED AVERAGE BALANCE SHEET, INTEREST AND RATES
(Taxable-Equivalent Interest and Rates; in millions, except rates)
                                                   
                              Heritage JPMC Only
      Third Quarter 2004   Third Quarter 2003
      Average             Rate     Average             Rate  
      Balance     Interest     (Annualized)     Balance     Interest     (Annualized)  
 
ASSETS
                                               
Deposits with Banks
  $ 34,166     $ 131       1.53 %   $ 10,163     $ 24       0.93 %
Federal Funds Sold and Securities Purchased under Resale Agreements
    102,042       474       1.85       89,865       344       1.52  
Securities Borrowed
    47,087       120       1.01       40,019       72       0.71  
Trading Assets — Debt and Equity Instruments
    170,663       1,991       4.64       138,829       1,492       4.27  
Securities:
Available-for-sale     94,590       1,045       4.39 (a)     74,778       883       4.68 (a)
  Held-to-maturity     130       3       10.02       254       4       6.25  
Interests in purchased receivables
    28,917       119       1.63       11,862       31       1.04  
Loans
    390,753       5,664       5.77       225,646       3,000       5.27  
                     
Total Interest-Earning Assets
    868,348       9,547       4.37       591,416       5,850       3.92  
Allowance for loan losses
    (7,450 )                     (5,077 )                
Cash and Due from Banks
    30,773                       17,017                  
Trading Assets — Derivative Receivables
    59,232                       81,496                  
Other Assets
    166,432                       97,574                  
                     
Total assets
  $ 1,117,335                     $ 782,426                  
 
LIABILITIES
                                               
Interest-Bearing Deposits
  $ 365,104     $ 1,503       1.64     $ 221,539     $ 789       1.41  
Federal Funds Purchased and Securities Sold under Repurchase Agreements
    163,206       626       1.52       148,132       481       1.29  
Commercial Paper
    12,497       47       1.49       13,088       33       1.00  
Other Borrowings (b)
    84,387       906       4.27       72,191       923       5.08  
Beneficial interests issued by consolidated VIEs
    43,308       171       1.58       19,791       46       0.92  
Long-Term Debt
    101,060       788       3.10       48,685       369       3.01  
                     
Total Interest-Bearing Liabilities
    769,562       4,041       2.09       523,426       2,641       2.00  
Noninterest-Bearing Deposits
    120,991                       84,353                  
Trading Liabilities — Derivative Payables
    51,387                       64,800                  
All Other Liabilities, Including the Allowance for Lending-Related Commitments
    70,017                       65,707                  
                     
Total Liabilities
    1,011,957                       738,286                  
 
STOCKHOLDERS’ EQUITY
                                               
Preferred Stock
    1,009                       1,009                  
Common Stockholders’ Equity
    104,369                       43,131                  
                                     
Total Stockholders’ Equity
    105,378                       44,140                  
                                     
Total Liabilities, Preferred Stock of Subsidiary and Stockholders’ Equity
  $ 1,117,335                     $ 782,426                  
 
INTEREST RATE SPREAD
                    2.28 %                     1.92 %
NET INTEREST INCOME AND NET YIELD ON INTEREST-EARNING ASSETS
          $ 5,506       2.52 %           $ 3,209       2.15 %
 
(a)  
For the three months ended September 30, 2004 and 2003, the annualized rate for available-for-sale securities based on amortized cost was 6.41% and 4.63%, respectively.
(b)  
Includes securities sold but not yet purchased.
 

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JPMORGAN CHASE & CO.
CONSOLIDATED AVERAGE BALANCE SHEET, INTEREST AND RATES
(Taxable-Equivalent Interest and Rates; in millions, except rates)

                                                   
                              H-JPMC Only
      Nine months ended September 30, 2004 (a)   Nine months ended September 30, 2003
      Average             Rate     Average             Rate  
      Balance     Interest     (Annualized)     Balance     Interest     (Annualized)  
 
ASSETS
                                               
Deposits with Banks
  $ 27,560     $ 331       1.60 %   $ 9,075     $ 129       1.91 %
Federal Funds Sold and Securities Purchased under Resale Agreements
    90,601       1,095       1.61       84,745       1,171       1.85  
Securities Borrowed
    49,966       303       0.81       40,283       248       0.82  
Trading Assets — Debt and Equity Instruments
    163,559       5,459       4.46       146,278       4,949       4.52  
Securities:
Available-for-sale     74,171       2,440       4.39 (c)     81,686       2,833       4.64 (c)
  Held-to-maturity     191       9       6.46       318       17       7.30  
Interests in purchased receivables
    10,552       130       1.64       3,997       31       1.04  
Loans
    277,428       11,050       5.32       220,529       8,937       5.42  
                     
Total Interest-Earning Assets
    694,028       20,817       4.01       586,911       18,315       4.17  
Allowance for loan losses
    (5,363 )                     (5,299 )                
Cash and Due from Banks
    23,494                       17,512                  
Trading Assets — Derivative Receivables
    57,151                       87,595                  
Other Assets
    128,668                       88,403                  
                     
Total assets
  $ 897,978                     $ 775,122                  
 
LIABILITIES
                                               
Interest-Bearing Deposits
  $ 286,071     $ 3,125       1.46     $ 224,279     $ 2,807       1.67  
Federal Funds Purchased and Securities Sold under Repurchase Agreements
    154,669       1,522       1.31       167,735       1,786       1.42  
Commercial Paper
    13,308       113       1.13       13,419       118       1.17  
Other Borrowings (b)
    81,722       2,698       4.41       68,069       2,607       5.12  
Beneficial interests issued by consolidated VIEs
    20,253       248       1.64       6,671       46       0.92  
Long-Term Debt
    70,663       1,595       3.02       47,978       1,121       3.12  
                     
Total Interest-Bearing Liabilities
    626,686       9,301       1.98       528,151       8,485       2.15  
Noninterest-Bearing Deposits
    93,487                       78,485                  
Trading Liabilities — Derivative Payables
    49,701                       68,347                  
All Other Liabilities, Including the Allowance for Lending-Related Commitments
    61,270                       56,543                  
                     
Total Liabilities
    831,144                       731,526                  
 
STOCKHOLDERS’ EQUITY
                                               
Preferred Stock
    1,009                       1,009                  
Common Stockholders’ Equity
    65,825                       42,587                  
                                     
Total Stockholders’ Equity
    66,834                       43,596                  
                                     
Total Liabilities, Preferred Stock of Subsidiary and Stockholders’ Equity
  $ 897,978                     $ 775,122                  
 
INTEREST RATE SPREAD
                    2.03 %                     2.02 %
NET INTEREST INCOME AND NET YIELD ON INTEREST-EARNING ASSETS
          $ 11,516       2.22 %           $ 9,830       2.24 %
 
(a)  
Includes three months of the combined Firm’s activity and six months of heritage JPMorgan Chase activity.
(b)  
Includes securities sold but not yet purchased.
(c)  
For the nine months ended September 30, 2004 and 2003, the annualized rate for available-for-sale securities based on amortized cost was 4.36% and 4.68%, respectively.
 

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GLOSSARY OF TERMS

AICPA: American Institute of Certified Public Accountants.

Assets under management: Represent assets actively managed by Asset & Wealth Management on behalf of institutional, private banking, private client services and retail clients.

Assets under supervision: Represent assets under management as well as custody, brokerage, administration and deposit accounts.

Average managed assets: Refers to total assets on the Firm’s balance sheet plus credit card receivables that have been securitized.

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

Credit derivatives: Contractual agreements that provide protection against a credit event of one or more referenced credits. The nature of a credit event is established by the protection buyer and protection seller at the inception of a transaction, and such events include bankruptcy, insolvency and failure to meet payment obligations when due. The buyer of the credit derivative pays a periodic fee in return for a payment by the protection seller upon the occurrence, if any, of a credit event.

Credit risk: Risk of loss from obligor or counterparty default.

Criticized: An indication of credit quality based on JPMorgan Chase’s internal risk assessment system. “Criticized” assets generally represent a risk profile similar to a rating of a CCC+/Caa1 or lower, as defined by the independent rating agencies.

EITF: Emerging Issues Task Force.

EITF Issue 03-1: “The Meaning of Other-than-temporary Impairment and Its Application to Certain Investments.”

EITF Issue 04-10: “Applying Paragraph 19 of FASB Statement No. 131, Disclosures About Segments of an Enterprise and Related Information, in Determining Whether to Aggregate Operating Segments that do not Meet the Quantitative Thresholds.”

FASB: Financial Accounting Standards Board.

FASB Staff Position (“FSP”) EITF Issue 03-1-1: “Effective Date of Paragraphs 10–20 of EITF Issue No. 03-1, ‘The Meaning of Other-than-temporary Impairment and Its Application to Certain Investments.’ ”

FIN 39: FASB Interpretation No. 39, “Offsetting of Amounts Related to Certain Contracts.”

FIN 45: FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirement for Guarantees, including Indirect Guarantees of Indebtedness of Others.”

FIN 46R: FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51.”

Foreign exchange contracts: Contracts that provide for the future receipt and delivery of foreign currency at previously agreed-upon terms.

FSP FAS 106-2: “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.”

H-JPMC: Represents heritage JPMorgan Chase, prior to the merger with Bank One Corporation effective July 1, 2004.

Interest rate options: These instruments, including caps and floors, are contracts to modify interest rate risk in exchange for the payment of a premium when the contract is initiated. A writer of interest rate options receives a premium in exchange for bearing the risk of unfavorable changes in interest rates. Conversely, a purchaser of an option pays a premium for the right, but not the obligation, to buy or sell a financial instrument or currency at predetermined terms in the future.

Investment-grade: An indication of credit quality based on JPMorgan Chase’s internal risk assessment system. “Investment-grade” generally represents a risk profile similar to a rating of a BBB-/Baa3 or better, as defined by independent rating agencies.

Liquidity risk: The risk of being unable to fund a portfolio of assets at appropriate maturities and rates, and the risk of being unable to liquidate a position in a timely manner at a reasonable price.

Managed credit card receivables: Refers to credit card receivables on the Firm’s balance sheet plus credit card receivables that have been securitized.

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Mark-to-market exposure: A measure, at a point in time, of the value of a derivative or foreign exchange contract in the open market. When the mark-to-market value is positive, it indicates the counterparty owes JPMorgan Chase and, therefore, creates a repayment risk for the Firm. When the mark-to-market value is negative, JPMorgan Chase owes the counterparty. In this situation, the Firm does not have repayment risk.

Market risk: The potential loss in value of portfolios and financial instruments caused by movements in market variables, such as interest and foreign exchange rates, credit spreads, and equity and commodity prices.

Master netting agreement: An agreement between two counterparties that have multiple derivative contracts with each other that provides for the net settlement of all contracts through a single payment, in a single currency, in the event of default on or termination of any one contract. See FIN 39.

NA: Data is not available for the period presented.

Net yield on interest-earning assets: The average rate for interest-earning assets less the average rate paid for all sources of funds.

NM: Not meaningful.

Operating (Managed) Basis or Operating Earnings: In addition to analyzing the Firm’s results on a reported basis, management looks at 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, the operating basis includes the reclassification of net interest income related to trading activities to Trading revenue. In the case of Card Services, “operating” or “managed” basis excludes the impact of credit card securitizations. These adjustments do not change JPMorgan Chase’s reported net income. 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.

Operational risk: The risk of loss resulting from inadequate or failed processes or systems, human factors or external events.

Overhead ratio: Noninterest expense as a percentage of total net revenue.

SFAS: Statement of Financial Accounting Standards.

SFAS 114: “Accounting by Creditors for Impairment of a Loan.”

SFAS 115: “Accounting for Certain Investments in Debt and Equity Securities.”

SFAS 133: “Accounting for Derivative Instruments and Hedging Activities.”

SFAS 140: “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities—a replacement of FASB Statement No. 125.”

SFAS 142: “Goodwill and Other Intangible Assets.”

Staff Accounting Bulletin (“SAB”) 105: “Application of Accounting Principles to Loan Commitments.”

Statement of Position (“SOP”) 03-3: “Accounting for Certain Loans or Debt Securities Acquired in a Transfer.”

Stress testing: A scenario that measures market risk under unlikely but plausible events in abnormal markets.

Unaudited: The financial statements and information included throughout this document are unaudited and have not been subjected to auditing procedures sufficient to permit an independent certified public accountant to express an opinion.

U.S. GAAP: Accounting principles generally accepted in the United States of America.

Value-at-Risk (“VAR”): A measure of the dollar amount of potential loss from adverse market moves in an ordinary market environment.

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Item 3 Quantitative and Qualitative Disclosures about Market Risk

For a discussion of the quantitative and qualitative disclosures about market risk, see the Market Risk Management section of the MD&A on pages 54-56 of this Form 10-Q.

Item 4 Controls and Procedures

As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of the Firm’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934). See Exhibits 31.1, 31.2 and 31.3 for the Certification statements issued by the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer. Based upon that evaluation, the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective. No significant changes were made in the Firm’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

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Part II – OTHER INFORMATION

Item 1 Legal Proceedings
Enron litigation. JPMorgan Chase is involved in a number of lawsuits and investigations arising out of its banking relationships with Enron Corp. and its subsidiaries (“Enron”). A lawsuit in London by the Firm against Westdeutsche Landesbank Girozentrale (“WLB”) sought to compel payment of $165 million under an Enron-related letter of credit issued by WLB. The trial of that action was conducted in June and July 2004, and on August 3, 2004, the Court issued its decision in favor of JPMorgan Chase and ruled that WLB must pay the letter of credit in full. That order has become final.

Actions involving Enron have been initiated by parties against JPMorgan Chase, its directors and certain of its officers. These lawsuits include a series of purported class actions brought on behalf of shareholders of Enron, including the lead action captioned Newby v. Enron Corp., and a series of purported class actions brought on behalf of Enron employees who participated in various employee stock ownership plans, including the lead action captioned Tittle v. Enron Corp. The consolidated complaint filed in Newby names as defendants, among others, JPMorgan Chase, several other investment banking firms, a number of law firms, Enron’s former accountants and affiliated entities and individuals, and other individual defendants, including present and former officers and directors of Enron; it purports to allege claims against JPMorgan Chase and the other defendants under federal and state securities laws. The Tittle complaint named as defendants, among others, JPMorgan Chase, several other investment banking firms, a law firm, Enron’s former accountants and affiliated entities and individuals, and other individual defendants, including present and former officers and directors of Enron; it purports to allege claims against JPMorgan Chase and certain other defendants under the Racketeer Influenced and Corrupt Organizations Act (“RICO”) and state common law. On December 20, 2002, the Court denied the motion of JPMorgan Chase and other defendants to dismiss the Newby action, and the Newby trial is scheduled to commence in October 2006. On September 30, 2003, Judge Harmon dismissed all claims against JPMorgan Chase in Tittle.

Additional actions include: a purported, consolidated class action lawsuit by JPMorgan Chase stockholders alleging that the Firm issued false and misleading press releases and other public documents relating to Enron in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; putative class actions on behalf of JPMorgan Chase employees who participated in the Firm’s employee stock ownership plans alleging claims under the Employee Retirement Income Security Act (“ERISA”) for alleged breaches of fiduciary duties and negligence by JPMorgan Chase, its directors and named officers; shareholder derivative actions alleging breaches of fiduciary duties and alleged failures to exercise due care and diligence by the Firm’s directors and named officers in the management of JPMorgan Chase; individual and putative class actions in various courts by Enron investors, creditors and holders of participating interests related to syndicated credit facilities; third-party actions brought by defendants in Enron-related cases, alleging federal and state law claims against JPMorgan Chase and many other defendants; investigations by governmental agencies with which the Firm is cooperating; and an adversary proceeding brought by Enron in bankruptcy court seeking damages for alleged aiding and abetting breaches of fiduciary duty by Enron insiders, return of alleged fraudulent conveyances and preferences, and equitable subordination of JPMorgan Chase’s claims in the Enron bankruptcy.

By joint order of the district court handling Newby, Tittle and a number of other Enron-related cases and the bankruptcy court handling Enron’s bankruptcy case, a mediation among various investors and creditor plaintiffs, the Enron bankruptcy estate and a number of financial institution defendants, including JPMorgan Chase, has been initiated before The Honorable William C. Conner, Senior United States District Judge for the Southern District of New York.

On July 28, 2003, the Firm announced that it had reached agreements with the Securities and Exchange Commission (“SEC”), the Federal Reserve Bank of New York (“FRB”), the New York State Banking Department (“NYSBD”) and the New York County District Attorney’s Office (“NYDA”) resolving matters relating to JPMorgan Chase’s involvement with certain transactions involving Enron. In connection with these settlements, JPMorgan Chase has committed to take certain measures to improve controls with respect to structured finance transactions. The agreement with the FRB and NYSBD, a formal written agreement, requires JPMorgan Chase to adopt programs acceptable to the FRB and the NYSBD for enhancing the Firm’s management of credit risk and legal and reputational risk, particularly in relation to its participation in structured finance transactions.

WorldCom litigation. J.P. Morgan Securities Inc. (“JPMSI”) and JPMorgan Chase were named as defendants in more than 50 actions that were filed in U.S. District Courts, in state courts in more than 20 states, and in one arbitral panel beginning in July 2002, arising out of alleged accounting irregularities in the books and records of WorldCom Inc. Plaintiffs in these actions are individual and institutional investors, including state pension funds, who purchased debt securities issued by WorldCom pursuant to public offerings in 1997, 1998, 2000 and 2001. JPMSI acted as an underwriter of the 1998, 2000 and 2001 offerings and was an initial purchaser in the December 2000 private bond offering. In addition to JPMSI, JPMorgan Chase and, in two actions, J.P. Morgan Securities Ltd. (“JPMSL”), in its capacity as one of the underwriters of the international tranche of the 2001 offering, the defendants in various of the actions include other underwriters, certain executives of WorldCom and WorldCom’s auditors. In the actions, plaintiffs allege that defendants knew, or were reckless or negligent in not knowing, that the securities were sold to plaintiffs on the basis of misrepresentations and omissions of material facts concerning the financial condition and business of WorldCom. The complaints against JPMorgan Chase, JPMSI and JPMSL assert claims under federal and state securities laws, under other state statutes and under common law theories of fraud and negligent misrepresentation. A trial date of late February 2005 has been set for the class actions pending in the U.S. District Court for the Southern District of New York.

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Commercial Financial Services litigation. JPMSI (formerly known as Chase Securities Inc.) has been named as a defendant in several actions that were filed in or transferred to the U.S. District and Bankruptcy Courts for the Northern District of Oklahoma or filed in Oklahoma state court beginning in October 1999, arising from the failure of Commercial Financial Services, Inc. (“CFSI”). Plaintiffs in these actions are institutional investors who purchased approximately $2.0 billion (original face amount) of asset-backed securities issued by CFSI. The securities were backed by charged-off credit card receivables. In addition to JPMSI, the defendants in various of the actions are the founders and key executives of CFSI, as well as its auditors and outside counsel. JPMSI is alleged to have been the investment bankers to CFSI and to have acted as an initial purchaser and placement agent in connection with the issuance of certain of the securities. Plaintiffs allege that defendants knew, or were reckless or negligent in not knowing, that the securities were sold to plaintiffs on the basis of misleading misrepresentations and omissions of material facts. The complaints against JPMSI assert claims under the Securities Exchange Act of 1934, under the Oklahoma Securities Act and under common-law theories of fraud and negligent misrepresentation. In the actions against JPMSI, damages in the amount of approximately $1.6 billion, allegedly suffered as a result of defendants’ misrepresentations and omissions, plus punitive damages and interest, are being claimed. CFSI has commenced an action against JPMSI in Oklahoma state court and has asserted claims against JPMSI for professional negligence and breach of fiduciary duty. CFSI alleges that JPMSI failed to detect and prevent its insolvency. CFSI seeks unspecified damages. CFSI also has commenced, in its bankruptcy case, an adversary proceeding against JPMSI and its credit card affiliate, Chase Manhattan Bank USA, N.A., alleging that certain payments, aggregating $78.4 million, made in connection with CFSI’s purchase or securitization of charged-off credit card receivables were constructive fraudulent conveyances, and it seeks to recover such payments and interest. A trial date on the adversary proceeding has been set for April 2005.

IPO allocation litigation. Beginning in May 2001, JPMorgan Chase and certain of its securities subsidiaries were named, along with numerous other firms in the securities industry, as defendants in a large number of putative class action lawsuits filed in the U.S. District Court for the Southern District of New York. These suits purport to challenge alleged improprieties in the allocation of stock in various public offerings, including some offerings for which a JPMorgan Chase entity served as an underwriter. The suits allege violations of securities and antitrust laws arising from alleged material misstatements and omissions in registration statements and prospectuses for the initial public offerings (“IPOs”) and alleged market manipulation with respect to aftermarket transactions in the offered securities. The securities claims allege, among other things, misrepresentation and market manipulation of the aftermarket trading for these offerings by tying allocations of shares in IPOs to undisclosed excessive commissions paid to JPMorgan Chase and to required aftermarket purchase transactions by customers who received allocations of shares in the respective IPOs, as well as allegations of misleading analyst reports. The antitrust claims allege an illegal conspiracy to require customers, in exchange for IPO allocations, to pay undisclosed and excessive commissions and to make aftermarket purchases of the IPO securities at a price higher than the offering price as a precondition to receiving allocations. The securities cases were all assigned to one judge for coordinated pre-trial proceedings, and the antitrust cases were all assigned to another judge. On February 13, 2003, the Court denied the motions of JPMorgan Chase and others to dismiss the securities complaints. On October 13, 2004, the Court granted in part plaintiffs’ motion to certify classes in six “focus” cases in the securities litigation, and the underwriter defendants have petitioned to appeal that decision. On November 3, 2003, the Court granted defendants’ motion to dismiss the antitrust claims relating to the IPO allocation practices, and that decision is on appeal. A separate antitrust claim alleging that JPMSI and the other underwriters conspired to fix their underwriting fees is in discovery.

JPMorgan Chase also has received various subpoenas and informal requests from governmental and other agencies seeking information relating to IPO allocation practices. On February 20, 2003, JPMSI reached a settlement with the National Association of Securities Dealers (“NASD”), pursuant to which the NASD censured JPMSI and fined it $6 million for activities it found to constitute unlawful profit-sharing by Hambrecht & Quist Group in the period immediately prior to and following its acquisition in 2000. In agreeing to the resolution of the charges, JPMSI neither admitted nor denied the NASD’s contentions. In late September 2003, JPMSI and the SEC agreed to resolve matters relating to the SEC’s investigation of JPMSI’s IPO allocation practices during 1999 and 2000. The SEC alleged that JPMSI violated Rule 101 of SEC Regulation M in certain “hot” IPOs by attempting to induce certain customers to place aftermarket orders for IPO shares before the IPO was completed. Also, in the case of one IPO, the SEC alleged that JPMSI violated “just and equitable principles of trade” under NASD Conduct Rule 2110 by persuading at least one customer to accept an allocation of shares in a “cold” IPO in exchange for a promise of an allocation of shares in an upcoming IPO that was expected to be oversubscribed. JPMSI neither admitted nor denied the SEC’s allegations but consented to a judgment (entered October 1, 2003) enjoining JPMSI from future violations of Regulation M and NASD Conduct Rule 2110 and requiring JPMSI to pay a civil penalty of $25 million.

Research analyst conflicts. On December 20, 2002, the Firm reached a settlement agreement in principle with the SEC, the NASD, the New York Stock Exchange (“NYSE”), the New York State Attorney General’s Office and the North American Securities Administrators Association, on behalf of state securities regulators, to resolve their investigations of JPMorgan Chase relating to research analyst independence. Pursuant to the agreement in principle, JPMorgan Chase, without admitting or denying the allegations concerning alleged conflicts, agreed, among other things: (i) to pay $50 million for retrospective relief, (ii) to adopt internal structural and operational reforms that will further augment the steps it has already taken to ensure the integrity of JPMorgan Chase analyst research, (iii) to contribute $25 million spread over five years to provide independent third-party research to clients and (iv) to contribute $5 million towards investor education. Mutually satisfactory settlement documents have been

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negotiated and approved by the SEC, the NYSE, the NASD and the regulatory authorities in all states. On October 31, 2003, the Court entered final judgment pursuant to the settlement with the SEC.

JPMSI has been named as a co-defendant with nine other broker-dealers in two actions involving allegations similar to those at issue in the regulatory investigations: a putative class action filed in federal court in Colorado, seeking an unspecified amount of money damages for alleged violations of federal securities laws; and an action filed in West Virginia state court by West Virginia’s Attorney General, seeking recovery from the defendants in the aggregate of $5,000 for each of what are alleged to be hundreds of thousands of violations of the state’s consumer protection statute. On August 8, 2003, the plaintiffs in the Colorado action dismissed the complaint without prejudice. In West Virginia, the court denied defendants’ motion to dismiss and certified the question for appeal to the West Virginia state court. A motion to disqualify private counsel retained by the Attorney General to prosecute that action is pending.

JPMSI was served by the SEC, NASD and NYSE on or about May 30, 2003, with subpoenas or document requests seeking information regarding certain present and former officers and employees in connection with a follow-up to the regulatory investigations, this time focusing on whether particular individuals properly performed supervisory functions regarding domestic equity research. These regulators have also raised issues regarding JPMSI’s document retention procedures and policies. The Firm has been notified that the regulators intend to pursue a books and records charge against it concerning email that its heritage entities could not retrieve for the period prior to July 2001. The Firm is engaged in negotiations to resolve the investigation without resort to litigation.

National Century Financial Enterprises litigation. JPMorgan Chase, JPMorgan Chase Bank, JPMorgan Partners, Beacon Group, LLC and three current or former Firm employees have been named as defendants in 13 actions filed in or transferred to the United States District Court for the Southern District of Ohio. In seven of these actions Bank One, Bank One, N.A., and Banc One Capital Markets, Inc. are also named as defendants. These actions arose out of the November 2002 bankruptcy of National Century Financial Enterprises, Inc. and various of its affiliates (“NCFE”). Prior to bankruptcy, NCFE provided financing to various healthcare providers through wholly-owned special-purpose vehicles, including NPF VI and NPF XII, which purchased discounted accounts receivable to be paid under third-party insurance programs. NPF VI and NPF XII financed the purchases of such receivables primarily through private placements of notes (“Notes”) to institutional investors and pledged the receivables for, among other things, the repayment of the Notes. JPMorgan Chase Bank is sued in its role as indenture trustee for NPF VI, which issued approximately $1 billion in Notes. Bank One, N.A. is sued in its role as indenture trustee for NPF XII, which issued approximately $2 billion in Notes. The three current or former Firm employees are sued in their roles as former members of NCFE’s board of directors (the “Defendant Employees”). JPMorgan Chase, JPMorgan Partners and Beacon Group, LLC, are claimed to be vicariously liable for the alleged actions of the Defendant Employees. Banc One Capital Markets, Inc. is sued in its role as co-manager for three note offerings made by NPF XII. Other defendants include the founders and key executives of NCFE, its auditors and outside counsel, and rating agencies and placement agents that were involved with the issuance of the Notes. Plaintiffs in these actions include institutional investors who purchased more than $2.7 billion in original face amount of asset-backed securities issued by NCFE. Plaintiffs allege that the trustees violated fiduciary and contractual duties, improperly permitted NCFE and its affiliates to violate the applicable indentures and violated securities laws by (among other things) failing to disclose the true nature of the NCFE arrangements. Plaintiffs further allege that the Defendant Employees controlled the Board and audit committees of the NCFE entities, were fully aware or negligent in not knowing of NCFE’s alleged manipulation of its books and are liable for failing to disclose their purported knowledge of the alleged fraud to the plaintiffs. Plaintiffs also allege that Banc One Capital Markets, Inc. is liable for cooperating in the sale of securities based on false and misleading statements. Motions to dismiss on behalf of the JPMorgan Chase entities, the Bank One entities and the Defendant Employees are currently pending.

Mutual fund Litigation: On June 29, 2004, Banc One Investment Advisors (“BOIA”) entered into a settlement with the New York Attorney General and the SEC related to alleged market timing in the One Group mutual funds. Under the settlement, BOIA paid $10 million in restitution and fee disgorgement plus a civil penalty of $40 million. BOIA also agreed to reduce fees over a 5-year period in the amount of $8 million per year, consented to a cease-and-desist order and a censure, and agreed to undertake certain compliance and mutual fund governance reforms. Additionally, JPMorgan Chase, Bank One, and certain subsidiaries and officers have been named, along with numerous other entities related to the mutual fund industry, as defendants in private party litigation arising out of alleged late trading and market timing in mutual funds. The actions have been filed in or transferred to U.S. District Court in Baltimore, Maryland. Certain plaintiffs allege that BOIA and related entities and officers allowed favored investors to market time and late trade in the One Group mutual funds. These complaints include a purported class action on behalf of One Group shareholders alleging claims under federal securities laws and common law; a purported derivative suit on behalf of the One Group funds under the Investment Company Act, the Investment Advisers Act and common law; and a purported class action on behalf of participants and beneficiaries of the Bank One Corporation 401(k) plan, alleging claims under the Employee Retirement Income Security Act.

On September 29, 2004, certain other plaintiffs in the federal action in Baltimore, Maryland filed amended complaints which included JPMorgan Chase and JPMSI as defendants. The amended complaints allege that JPMorgan Chase and JPMSI, with several co-defendants including Bank of America, Bank of America Securities, Canadian Imperial Commerce Bank, Bear Stearns,

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and CFSB provided financing to Canary Capital which was used to engage in the market timing and late trading. JPMorgan Chase and JPMSI allegedly knowingly financed the market timing and late trading by Canary Capital and Edward Stern, and knowingly created short position equity baskets to allow Canary to profit from trading in a falling market.

Certain JPMorgan Chase subsidiaries have also received various subpoenas and information requests relating to market timing and late trading in mutual funds from various governmental and other agencies, including the SEC, the NASD, the U.S. Department of Labor, the Attorneys General of West Virginia and Vermont, and regulators in the United Kingdom, Luxembourg, Republic of Ireland, Chile and Hong Kong. The Firm is fully cooperating with these investigations.

On September 2, 2004, the NASD advised Bank One Securities Corporation (“BOSC”) that the staff had made a preliminary determination to recommend disciplinary action against BOSC for failure to establish and maintain a supervisory system and written procedures reasonably designed to detect and prevent late trading in mutual fund transactions, resulting in violations of NASD rules and the Securities Exchange Act. BOSC and the NASD have engaged in negotiations to resolve this investigation without resort to litigation.

Bank One Securities Litigation. Bank One and several former officers and directors are defendants in three class actions and one individual action arising out of the mergers between Banc One Corporation (“Banc One”) and First Commerce Corporation (“First Commerce”) and Banc One Corporation and First Chicago NBD Corporation (“FCNBD”). These actions were filed in 2000 and are pending in the United States District Court for the Northern District of Illinois in Chicago under the general caption, In re Bank One Securities Litigation. The cases were filed after Bank One’s earnings announcements in August and November 1999 that lowered Bank One’s earnings expectations for the third and fourth quarter 1999. Following the announcements, Bank One’s stock price had dropped by 37.7% as of November 10, 1999.

Two of these class actions were brought by representatives of FCNBD shareholders and Banc One shareholders, respectively, alleging certain misrepresentations and omissions of material fact made in connection with the merger between FCNBD and Banc One that was completed in October 1998. There is also an individual lawsuit proceeding in connection with that same merger. A third class action was filed by another individual plaintiff representing shareholders of First Commerce alleging certain misrepresentations and omissions of material fact made in connection with the merger between Banc One and First Commerce, which was completed in June 1998. All of these plaintiff groups claim that as a result of various misstatements or omissions regarding payment processing issues at First USA Bank, N.A., a wholly-owned subsidiary of Banc One, and as a result of the use of various accounting practices, the price of Banc One common stock was artificially inflated, causing their shareholders to acquire shares of the Company’s common stock in the merger at an exchange rate that was artificially deflated. The complaints against Bank One and the individual defendants assert claims under federal securities laws. Fact discovery, with limited exceptions, closed in December 2003. The parties are in the middle of expert discovery, which is scheduled to close in March 2005.

In addition to the various cases, proceedings and investigations discussed above, JPMorgan Chase and its subsidiaries are named as defendants in a number of other legal actions and governmental proceedings arising in connection with their respective businesses. Additional actions, investigations or proceedings may be brought from time to time in the future. In view of the inherent difficulty of predicting the outcome of legal matters, particularly where the claimants seek very large or indeterminate damages, or where the cases present novel legal theories, involve a large number of parties, or are in early stages of discovery, the Firm cannot state with confidence what the eventual outcome of these pending matters will be, what the timing of the ultimate resolution of these matters will be or what the eventual loss, fines or penalties related to each pending matter may be. Subject to the foregoing caveat, JPMorgan Chase anticipates, based upon its current knowledge, after consultation with counsel and after taking into account its litigation reserves, that the outcome of the legal actions, proceedings and investigations currently pending against it should not have a material adverse effect on the consolidated financial condition of the Firm, although the outcome of a particular proceeding or the imposition of a particular fine or penalty may be material to JPMorgan Chase’s operating results for a particular period, depending upon, among other factors, the size of the loss or liability and the level of JPMorgan Chase’s income for that period.

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Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

During the third quarter of 2004, shares of common stock of JPMorgan Chase & Co. were issued in transactions exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) thereof. Shares of common stock were issued to retired directors who had deferred receipt of such common stock pursuant to the Deferred Compensation Plan for Non-Employee Directors as follows: July 1, 2004, 1,431 shares. Shares of common stock were issued to retired employees who had deferred receipt of such common shares pursuant to the Corporate Performance Incentive Plan as follows: July 12, 2004, 13,143 shares.

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.

The Firm’s repurchases of equity securities were as follows:

 
                         
                    Dollar value of  
    Total open             remaining authorized  
    market shares     Average price     repurchase program  
    repurchased (a)     paid per share     (in millions)  
 
July 2004
        $     $ 6,000  
August 2004
    137,700       36.77       5,995  
September 2004
    3,360,000       39.54       5,862  
 
                   
Total
    3,497,700     $ 39.15          
 
(a)  
In addition to the open market repurchase program, under the Long-Term Incentive Plan and Stock Option Plan, recipients are given the option of having shares withheld to cover income taxes. Shares of restricted stock withheld under the plans to pay income taxes are treated as share repurchases and were as follows for the quarter ended September 30, 2004: July 2004-725,131 shares at an average price per share of $38.07; August 2004-110,758 shares at an average price per share of $37.03; and September 2004-159,797 shares at an average price per share of $39.43.
 

Item 3 Defaults Upon Senior Securities

           None

Item 4 Submission of Matters to a Vote of Security Holders

           None

Item 5 Other Information

           None

Item 6 Exhibits

         
31.1
    Certification
31.2
    Certification
31.3
    Certification
32
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

           
 
    JPMORGAN CHASE & CO.    
 
    (Registrant)    
 
         
Date: November 9, 2004
         
  By /s/ Joseph L. Sclafani
Joseph L. Sclafani
 
 
       
    Executive Vice President and Controller
[Principal Accounting Officer]
 

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INDEX TO EXHIBITS

SEQUENTIALLY NUMBERED

             
EXHIBIT NO.   EXHIBITS   PAGE AT WHICH LOCATED
 
31.1
  Certification     98  
 
31.2
  Certification     99  
 
31.3
  Certification     100  

The following exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section. In addition, Exhibit No. 32 shall not be deemed incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

             
32
  Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002     101  

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