10-Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
     
For the Quarterly Period Ended March 31, 2006   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.
x Yes    o No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x    Accelerated filer o    Non-accelerated filer o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes    x No
 
Number of shares of common stock outstanding as of April 30, 2006: 3,474,553,532
 

 


 

FORM 10–Q
TABLE OF CONTENTS
                 
            Page
Part I – Financial information
       
 
       
Item 1  
Consolidated Financial Statements – JPMorgan Chase & Co.:
       
       
 
       
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Item 3       93  
       
 
       
Item 4       93  
       
 
       
Part II – Other information
       
 
       
Item 1       93  
       
 
       
Item 1A       94  
       
 
       
Item 2       94  
       
 
       
Item 3       95  
       
 
       
Item 4       95  
       
 
       
Item 5       95  
       
 
       
Item 6       95  
       
 
       
 
 EX-31.1: CERTIFICATION
 EX-31.2: CERTIFICATION
 EX-32: CERTIFICATION

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JPMORGAN CHASE & CO.
CONSOLIDATED FINANCIAL HIGHLIGHTS
                                         
(unaudited)                                        
(in millions, except per share, headcount and ratio data)
As of or for the period ended   1Q06     4Q05     3Q05     2Q05     1Q05  
 
Selected income statement data
                                       
Noninterest revenue
  $ 10,176     $ 8,925     $ 9,613     $ 7,742     $ 8,422  
Net interest income
    5,060       4,753       4,852       5,001       5,225  
 
Total net revenue
    15,236       13,678       14,465       12,743       13,647  
Provision for credit losses
    831       1,224       1,245 (f)     587       427  
Noninterest expense
    9,752       8,535       9,464       10,899       9,937  
 
Income before income tax expense
    4,653       3,919       3,756       1,257       3,283  
Income tax expense
    1,572       1,221       1,229       263       1,019  
 
Net income
  $ 3,081     $ 2,698     $ 2,527     $ 994     $ 2,264  
 
 
                                       
Per common share
                                       
Net income per share: Basic
  $ 0.89     $ 0.78     $ 0.72     $ 0.28     $ 0.64  
Diluted
    0.86       0.76       0.71       0.28       0.63  
Cash dividends declared per share
    0.34       0.34       0.34       0.34       0.34  
Book value per share
    31.19       30.71       30.26       29.95       29.78  
 
                                       
Common shares outstanding
                                       
Average: Basic
    3,473       3,472       3,485       3,493       3,518  
Diluted
    3,571       3,564       3,548       3,548       3,570  
Common shares at period-end
    3,473       3,487       3,503       3,514       3,525  
 
                                       
Selected ratios
                                       
Return on common equity (“ROE”)(a)
    12 %     10 %     9 %     4 %     9 %
Return on assets (“ROA”)(a)(b)
    1.00       0.89       0.84       0.34       0.79  
Tier 1 capital ratio
    8.5       8.5       8.2       8.2       8.6  
Total capital ratio
    12.1       12.0       11.3       11.3       11.9  
Tier 1 leverage ratio
    6.1       6.3       6.2       6.2       6.3  
 
                                       
Selected balance sheet data (period-end)
                                       
Total assets
  $ 1,273,282     $ 1,198,942     $ 1,203,033     $ 1,171,283     $ 1,178,305  
Securities
    67,126       47,600       68,697       58,573       75,251  
Loans
    432,081       419,148       420,504       416,025       402,669  
Deposits
    584,465       554,991       535,123       534,640       531,379  
Long-term debt
    112,133       108,357       101,853       101,182       99,329  
Common stockholders’ equity
    108,337       107,072       105,996       105,246       105,001  
Total stockholders’ equity
    108,337       107,211       106,135       105,385       105,340  
 
                                       
Credit quality metrics
                                       
Allowance for credit losses
  $ 7,659     $ 7,490     $ 7,615     $ 7,233     $ 7,423  
Nonperforming assets(c)
    2,348       2,590       2,839       2,832       2,949  
Allowance for loan losses to total loans(d)
    1.83 %     1.84 %     1.86 %     1.76 %     1.82 %
Net charge-offs
  $ 668     $ 1,360     $ 870     $ 773     $ 816  
Net charge-off rate(a)(d)
    0.69 %     1.39 %     0.89 %     0.82 %     0.88 %
Wholesale net charge-off (recovery) rate(a)(d)
    (0.06 )     0.07       (0.12 )     (0.16 )     (0.03 )
Managed card net charge-off rate(a)
    2.99       6.39       4.70       4.87       4.83  
 
                                       
Headcount
    170,787       168,847       168,955       168,708       164,381  
 
                                       
Share price(e)
                                       
High
  $ 42.43     $ 40.56     $ 35.95     $ 36.50     $ 39.69  
Low
    37.88       32.92       33.31       33.35       34.32  
Close
    41.64       39.69       33.93       35.32       34.60  
 
     
(a)  
Based upon annualized amounts.
 
(b)  
Represents Net income divided by Total average assets.
 
(c)  
Excludes wholesale held-for-sale (“HFS”) loans purchased as part of the Investment Bank’s proprietary activities.
 
(d)  
Excluded from the allowance coverage ratios were end-of-period loans held-for-sale; and excluded from the net charge-off rates were average loans held-for-sale.
 
(e)  
JPMorgan Chase’s common stock is listed and traded on the New York Stock Exchange, the London Stock Exchange Limited and the Tokyo Stock Exchange. The high, low and closing prices of JPMorgan Chase’s common stock are from The New York Stock Exchange Composite Transaction Tape.
 
(f)  
Third-quarter 2005 includes a $400 million special provision related to Hurricane Katrina.

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 10–Q provides management’s discussion and analysis (“MD&A”) of the financial condition and results of operations for JPMorgan Chase & Co. See the Glossary of terms on pages 88–89 for definitions of terms used throughout this Form 10–Q. The MD&A 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 JPMorgan Chase’s management and are subject to significant risks and uncertainties. These risks and uncertainties could cause JPMorgan Chase’s results to differ materially from those set forth in such forward-looking statements. See Forward-looking statements on page 92 of this Form 10–Q.
INTRODUCTION
JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”), a financial holding company incorporated under Delaware law in 1968, is a leading global financial services firm and one of the largest banking institutions in the United States, with $1.3 trillion in assets, $108 billion in stockholders’ equity and operations worldwide. The Firm is a leader in investment banking, financial services for consumers and businesses, financial transaction processing, asset and wealth management and private equity. Under the JPMorgan and Chase brands, the Firm serves millions of customers in the United States and many of the world’s most prominent corporate, institutional and government clients.
JPMorgan Chase’s principal bank subsidiaries are JPMorgan Chase Bank, National Association (“JPMorgan Chase Bank”), a national banking association with branches in 17 states; and Chase Bank USA, National Association, a national bank that is the Firm’s credit card issuing bank. JPMorgan Chase’s principal nonbank subsidiary is J.P. Morgan Securities Inc. (“JPMSI”), the Firm’s U.S. investment banking firm.
JPMorgan Chase’s activities are organized, for management reporting purposes, into six business segments, as well as Corporate. The Firm’s wholesale businesses comprise the Investment Bank, Commercial Banking, Treasury & Securities Services and Asset & Wealth Management segments. The Firm’s consumer businesses comprise the Retail Financial Services and Card Services segments. A description of the Firm’s business segments, and the products and services they provide to their respective client bases, follows.
Investment Bank
JPMorgan Chase is one of the world’s leading investment banks, as evidenced by the breadth of the Investment Bank client relationships and product capabilities. The Investment Bank (“IB”) has extensive relationships with corporations, financial institutions, governments and institutional investors worldwide. The Firm provides a full range of investment banking products and services in all major capital markets, including advising on corporate strategy and structure, capital raising in equity and debt markets, sophisticated risk management, and market-making in cash securities and derivative instruments. The IB also commits the Firm’s own capital to proprietary investing and trading activities.
Retail Financial Services
Retail Financial Services (“RFS”) realigned its business reporting segments on January 1, 2006, into Regional Banking, Mortgage Banking and Auto Finance. Regional Banking offers one of the largest branch networks in the United States, covering 17 states with 2,638 branches and 7,400 automated teller machines (“ATMs”). Regional Banking distributes, through its network, a variety of products including checking, savings and time deposit accounts; home equity, residential mortgage, small business banking, and education loans; mutual fund and annuity investments; and on-line banking services. Mortgage Banking is a leading provider of mortgage loan products and is one of the largest originators and servicers of home mortgages. Auto Finance is the largest noncaptive originator of automobile loans, primarily through a network of automotive dealers across the United States. The Firm has announced an agreement to acquire the consumer, small-business and middle-market banking businesses of The Bank of New York Company (“The Bank of New York”) in exchange for certain portions of the Firm’s corporate trust business.
Card Services
Card Services (“CS”) is one of the largest issuers of credit cards in the United States, with more than 112 million cards in circulation. CS offers a wide variety of cards to satisfy the needs of individual consumers, small businesses and partner organizations. The Chase Paymentech Solutions, LLC joint venture is the largest processor of MasterCard® and Visa® payments in the world.
Commercial Banking
Commercial Banking (“CB”) serves more than 25,000 clients, including corporations, municipalities, financial institutions and not-for-profit entities, with annual revenues generally ranging from $10 million to $2 billion. While most Middle Market clients are located within the RFS footprint, CB also serves larger corporations, as well as local governments and financial institutions on a national basis. CB is a market leader with superior client penetration across the businesses it serves. Local market presence, coupled with industry expertise and excellent client service and risk management, enables CB to offer superior financial advice. Partnership with other JPMorgan Chase businesses positions CB to deliver broad product capabilities – including lending, treasury services, investment banking, and asset and wealth management – in order to meet its clients’ financial needs.

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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 corporations, issuers and institutional investors worldwide. TSS is one of the largest cash management providers in the world and a leading global custodian. The Treasury Services (“TS”) business provides a variety of cash management products, trade finance and logistics solutions, wholesale card products, and short-term liquidity management tools. TS partners with the CB, Regional Banking and Asset & Wealth Management businesses to serve clients firmwide. As a result, certain TS revenues are included in other segments’ results. As previously announced, TSS reorganized the Investor Services and Institutional Trust Services businesses into a single business called Worldwide Securities Services (“WSS”). The WSS business provides: safekeeping, valuing, clearing and servicing of securities and portfolios for investors and broker-dealers; trustee and agent services; and management of American Depositary Receipt programs. The Firm has announced an agreement to acquire the consumer, small-business and middle-market banking businesses of The Bank of New York in exchange for certain portions of the Firm’s corporate trust business. For a description of the transaction, see Other Business Events below.
Asset & Wealth Management
Asset & Wealth Management (“AWM”) provides investment advice and management for institutions and individuals. With $1.2 trillion of Assets under supervision, AWM is one of the largest asset and wealth managers in the world. AWM serves four distinct client groups through three businesses: institutions through JPMorgan Asset Management; ultra-high-net-worth clients through the Private Bank; high-net-worth clients through Private Client Services; and retail clients through JPMorgan Asset Management. The majority of AWM’s client assets are in actively managed portfolios. AWM has global investment expertise in equities, fixed income, real estate, hedge funds, private equity and liquidity, including both money market instruments and bank deposits. AWM also provides trust and estate services to ultra-high-net-worth and high-net-worth clients and retirement services for corporations and individuals.
OTHER BUSINESS EVENTS
IPO allocation litigation
On April 19, 2006, JPMorgan Securities Inc. (“JPMSI”) entered into a Memorandum of Understanding (the “MOU”) with plaintiffs’ executive committees in the consolidated IPO securities cases and the consolidated IPO antitrust cases. The MOU is an agreement in principle to settle these class action lawsuits for $425 million. The MOU is subject to approval by the plaintiffs in each of the cases and by the district court judges presiding over the respective lawsuits. The settlement would not have a material adverse impact on the Firm’s financial results. See Part II Other Information, Item 1 Legal Proceedings on page 93 of this Form 10–Q for additional information.
Acquisition of the consumer, small-business and middle-market banking businesses of The Bank of New York in exchange for certain portions of the corporate trust business
On April 8, 2006, JPMorgan Chase announced an agreement to acquire The Bank of New York’s consumer, small-business and middle-market banking businesses in exchange for certain portions of the Firm’s corporate trust business plus a cash payment of $150 million. The Bank of New York businesses being acquired are valued at a premium of $2.30 billion; certain portions of the Firm’s corporate trust business being sold are valued at a premium of $2.15 billion. The Firm may also make a future payment to The Bank of New York of up to $50 million depending on the number of new account openings at the Firm’s retail branches. The transaction has been approved by both companies’ boards of directors and is subject to regulatory approvals. It is expected to close in late third quarter or the fourth quarter of 2006.
Acquisition of Kohl’s private label credit card portfolio
On March 5, 2006, JPMorgan Chase entered into an agreement with Kohl’s Corporation (“Kohl’s”) to acquire $1.6 billion of Kohl’s private label credit card receivables and 13 million accounts. The transaction was completed on April 21, 2006. JPMorgan Chase and Kohl’s have also entered into an agreement under which JPMorgan Chase will offer private-label credit cards to both new and existing Kohl’s customers.
Collegiate Funding Services
On March 1, 2006, JPMorgan Chase acquired, for approximately $663 million, Collegiate Funding Services, a leader in education loan servicing and consolidation. This acquisition included $6 billion of education loans and enables the Firm to create a comprehensive education finance business.
Acquisition of certain operations from Paloma Partners
On March 1, 2006, JPMorgan Chase acquired the middle and back office operations of Paloma Partners Management Company (“Paloma”), which is part of a privately-owned investment fund management group based in Greenwich, CT. The parties have also entered into a multi-year contract pursuant to which JPMorgan Chase will provide daily operational services to Paloma. The acquired operations will be combined with JPMorgan Chase’s current hedge fund administration unit, JPMorgan Tranaut.

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JPMorgan and Fidelity Brokerage Company
On February 28, 2006, the Firm announced a strategic alliance with Fidelity Brokerage to become the exclusive provider of new issue equity securities and the primary provider of fixed income products to Fidelity’s brokerage clients and retail customers, effectively expanding the Firm’s existing distribution platform.
Sale of insurance underwriting business
On February 7, 2006, JPMorgan Chase announced that it had agreed to sell its life insurance and annuity underwriting businesses to Protective Life Corporation for a cash purchase price of approximately $1.2 billion. The sale, which includes both the heritage Chase insurance business and the life business that Bank One had bought from Zurich Insurance in 2003, is subject to normal regulatory approvals and is expected to close in the third quarter of 2006. JPMorgan Chase anticipates the transaction will have no material impact on earnings.
EXECUTIVE OVERVIEW
This overview of management’s discussion and analysis highlights selected information and may not contain all of the information that is important to readers of this Form 10–Q. For a more complete understanding of events, trends and uncertainties, as well as the liquidity, capital, credit and market risks, and the critical accounting estimates, affecting the Firm and its various lines of business, this Form 10–Q should be read in its entirety.
Business overview
The Firm reported 2006 first-quarter net income of $3.1 billion, or $0.86 per share, compared with net income of $2.3 billion, or $0.63 per share, for the first quarter of 2005. Return on common equity for the quarter was 12% compared with 9% in the prior year. The comparison with the prior year benefited from the absence of a charge of $558 million after-tax, or $0.15 per share, related to settlement of the Firm’s WorldCom litigation, which occurred in the first quarter of 2005. Results for the current quarter included $44 million of after-tax merger charges, or $0.01 per share, compared with $90 million, or $0.03 per share, in the first quarter of 2005.
Net income for the first quarter of 2006 also included incremental expense of $459 million (pre-tax) related to the adoption of Statement of Financial Accounting Standards No. 123 (Revised 2004) (“Share-Based Payment”), as of January 1, 2006, under the modified prospective method. The $459 million of incremental expense was allocated to the business segments as follows: Investment Bank – $256 million; Retail Financial Services – $17 million; Card Services – $4 million; Commercial Banking – $29 million; Treasury & Securities Services – $25 million; Asset & Wealth Management – $71 million; and Corporate – $57 million.
On April 8, 2006, the Firm announced an agreement to acquire The Bank of New York’s consumer, small-business and middle-market banking businesses in exchange for certain portions of the Firm’s corporate trust business plus a cash payment of $150 million. The transaction will add 338 branches, 400 ATMs, and approximately 600,000 households, 100,000 businesses, $15 billion in deposits and $8 billion of loans to the Firm’s New York City/Tri-State franchise. The transaction is subject to regulatory approvals and is expected to close late in the third quarter or during the fourth quarter of 2006.
Global economic and market conditions affected the performance of each of the Firm’s businesses. In the first quarter of 2006, both the global and U.S. economies continued to grow steadily, and the capital market environment remained favorable. First quarter growth in the U.S. economy was boosted by recovery from last fall’s hurricane disruptions, although growth appeared to be moderating as the quarter ended. The U.S. economy experienced a continued rise in interest rates driven by improving global economic prospects, resulting in two quarter-point increases in the federal funds rate, from 4.25% to 4.75%; at the same time the yield curve remained relatively flat. Equity markets, both domestic and international, enjoyed positive returns versus the prior quarter and prior year.
The discussion that follows highlights the performance of each business segment during the first quarter of 2006 with the comparable period in the prior year, unless otherwise noted.
The Investment Bank achieved record quarterly revenues driven by record Equity Markets revenue and strong investment banking fees and Fixed Income Markets revenue, which benefited from strength in global capital markets activity and continuing investments in strategic initiatives. However, net income declined due to an increase in the provision for credit losses and higher compensation expense. Record Equity Markets revenue was driven by record trading and strong commissions across all regions. Fixed Income Markets revenue, although strong, was lower than the prior year due to weaker results in commodities and rates markets, partially offset by stronger results in emerging markets, currencies and credit markets. Investment banking fees were higher than the prior year due to strong growth in advisory fees and record loan syndication revenue. The higher level of provision for credit losses reflected increased loan balances; credit quality remained stable. Expense increased due primarily to higher incentive compensation, reflecting improved performance, and the incremental expense related to the adoption of SFAS 123R.
Retail Financial Services’ net income declined due to lower Mortgage Banking performance and continued spread compression on deposits and home equity loans in Regional Banking. Partially offsetting these lower results were growth in deposit and loan balances. Credit quality remained favorable in all loan portfolios, which led to a decline in the provision for credit losses. Expense increased due to the ongoing investment in retail distribution, partially offset by merger-related expense savings and

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other efficiencies. The underlying business drivers benefited from the continuing investment in the retail distribution network and the overall strength of the U.S. economy, both of which contributed to increases in checking accounts, deposits, loans, and improved cross-selling of credit cards, mortgages and investment products. During the quarter the acquisition of Collegiate Funding Services was completed, adding $6 billion of education finance loans and providing a loan servicing capability.
Card Services net income increased, primarily due to lower bankruptcy-related losses following the new bankruptcy legislation that became effective in the fourth quarter of 2005. Net income also benefited from lower credit losses (excluding the impact of the bankruptcy legislation), merger savings and higher managed loan balances, including the acquisition of the Sears Canada credit card business. These benefits were offset partially by narrower loan spreads and higher marketing expense. Both Total net revenue and Noninterest expense were lower due to the restructuring and related deconsolidation of Paymentech in the fourth quarter of 2005.
Commercial Banking net income benefited from higher revenues, primarily offset by higher expense and an increased provision for credit losses, while credit quality remained stable. Revenues increased due to wider spreads and higher volume related to liability balances and increased loan balances, partially offset by narrower loan spreads reflecting continued competitive pressure. Expense increased primarily due to the incremental expense related to the adoption of SFAS 123R.
Treasury & Securities Services net income increased significantly benefiting from higher revenue, partially offset by increased expense. Revenue growth reflected business growth and wider spreads on liability balances, which both benefited from global economic strength and stronger capital market activity. The increase in expense was due to higher compensation expense related to business growth and the incremental expense due to the adoption of SFAS 123R.
Asset & Wealth Management net income benefited from increased revenue, partially offset by higher expense. Revenue growth was driven by net asset inflows, mainly in equity-related and liquidity products, and by asset appreciation, benefiting from strength in global equity markets and improved investment performance. These factors also lead to increased levels of assets under supervision and assets under management. The increase in expense was due to the incremental expense related to the adoption of SFAS 123R and higher performance-based compensation.
Corporate segment net loss improved due to higher revenue and lower expense. The increase in revenue was driven primarily by lower Treasury securities portfolio losses and improved Treasury net interest spread. These benefits were offset partially by lower private equity gains. Expense benefited from the absence of the WorldCom litigation settlement in the first quarter of 2005, lower merger-related costs and increased merger-related savings and other efficiencies. These benefits were partially offset by the incremental expense related to the adoption of SFAS 123R.
During the quarter ended March 31, 2006, approximately $580 million (pre-tax) of merger savings were realized, which is an annualized rate of approximately $2.3 billion. Management estimates that annualized savings will be approximately $2.8 billion by the end of 2006. Merger costs of $71 million were expensed during the first quarter of 2006, bringing the total amount expensed, since the merger announcement, to $2.2 billion. Management continues to estimate remaining merger costs of $800 million to $1.3 billion, which are expected to be expensed during the remainder of 2006 and 2007.
The Firm had, at March 31, 2006, total stockholders’ equity of $108 billion and a Tier 1 capital ratio of 8.5%. The Firm purchased $1.3 billion, or 31.8 million shares, of common stock during the quarter.
Business outlook
The following forward-looking statements are based upon the current beliefs and expectations of JPMorgan Chase’s management and are subject to significant risks and uncertainties. These risks and uncertainties could cause JPMorgan Chase’s results to differ materially from those set forth in such forward-looking statements.
The performance of the Firm’s capital markets and wholesale businesses are affected by overall global economic growth and by financial market movements and activity levels. The Investment Bank enters the second quarter of 2006 with a strong fee pipeline. Market conditions can impact trading results, which are difficult to predict. The Investment Bank remains focused on new product expansion initiatives, which are intended to promote growth and reduce volatility in trading results over time.
In the consumer businesses, the relatively flat yield curve and continuing increase in interest rates has put pressure on deposit and loan spreads. During the first quarter of 2006 the deposit spread compression began to abate.
The Corporate segment includes Private Equity, Treasury and Corporate Other support units. The revenue outlook for the Private Equity business is directly related to the strength of the equity markets and the performance of the underlying portfolio investments. If current market conditions persist, the Firm anticipates continued realization of private equity gains in 2006, but results can be volatile from quarter to quarter. The Firm remains on target for achieving improvement in Treasury net interest income and reduction of the net loss in Corporate Other.
Credit quality overall remains stable across the wholesale and consumer portfolios. However, management continues to anticipate higher credit losses over time. The managed provision for credit losses for Card Services is anticipated to increase in the second quarter of 2006 as compared with the first quarter of 2006, as the benefit of lower bankruptcy-related losses decreases. Excluding the bankruptcy-related impact, the underlying credit quality of the managed credit card portfolio was strong. During the second half of 2006, it is anticipated that the recently implemented FFIEC minimum payment rules will

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negatively affect both revenues and net charge-offs in Card Services, estimated by management to be approximately $500 million (split evenly between revenue and charge-offs).
CONSOLIDATED RESULTS OF OPERATIONS
The following section provides a comparative discussion of JPMorgan Chase’s consolidated results of operations on a reported basis. Factors that relate primarily to a single business segment are discussed in more detail within that business segment than they are in this consolidated section. For a discussion of the Critical accounting estimates used by the Firm that affect the Consolidated results of operations, see page 58 of this Form 10–Q and pages 81–83 of the JPMorgan Chase Annual Report on Form 10–K for the year ended December 31, 2005 (“2005 Annual Report”).
The following table presents the components of Total net revenue:
                         
Total net revenue   Three months ended March 31,
(in millions)   2006     2005     Change  
 
Investment banking fees
  $ 1,169     $ 993       18 %
Principal transactions
    2,602       2,636       (1 )
Lending & deposit related fees
    841       820       3  
Asset management, administration and commissions
    2,973       2,498       19  
Securities gains (losses)
    (116 )     (822 )     86  
Mortgage fees and related income
    241       362       (33 )
Credit card income
    1,910       1,734       10  
Other income
    556       201       177  
         
Noninterest revenue
    10,176       8,422       21  
Net interest income
    5,060       5,225       (3 )
         
Total net revenue
  $ 15,236     $ 13,647       12 %
 
Total net revenue for the first quarter of 2006 was up by $1.6 billion, or 12%, from the prior year. The increase was due primarily to lower Treasury security portfolio losses; increased trading revenue (within Principal transactions); higher Asset management, administration, and commissions revenues; and increased Other income, Credit card income, and Investment banking fees. Partially offsetting this growth were lower Private equity gains (within Principal transactions), a decline in Net interest income, and lower Mortgage Banking production and servicing income.
Investment banking fees of $1.2 billion were the highest since 2000, up 18% from the first quarter of 2005. Advisory fees were also the highest since 2000. Underwriting fees were up from the prior year driven by record loan syndication fees offset partially by lower bond underwriting fees. For a further discussion of Investment banking fees, which are primarily recorded in the IB, see the IB segment results on pages 14–16 of this Form 10–Q.
Effective January 1, 2006, Principal transactions is a new caption in the Consolidated income statements that combines Trading revenue (which includes physical commodities carried at the lower of cost or market), primarily in the Investment Bank, and Private equity gains (losses), primarily in the Private Equity business of Corporate. The prior period’s presentation of Trading revenue and Private equity gains (losses) have been reclassified to this new caption. The decline from last year in Principal transactions primarily reflected two large private equity gains that were realized in the prior year’s first quarter. The decline was partially offset by higher trading revenue as a result of record revenues in equity markets, along with strong fixed income markets results in emerging markets, currencies and credit markets. Fixed income trading results from commodities and rate markets were weaker than last year. For a further discussion of Principal transactions, see the IB and Corporate segment results on pages 14–16 and 33–34, respectively, of this Form 10–Q.
Lending & deposit related fees rose as a result of increased fee income on deposit-related products from growth in business volume. For a further discussion of deposit fees, which are partly recorded at RFS, see the RFS segment results on pages 17–22 of this Form 10–Q.
The increases in Asset management, administration and commissions revenue were due to growth in assets under management and custody, reflecting net asset inflows, mainly in equity-related and liquidity products, as well as global market value appreciation, new business, the acquisition of Vastera in the second quarter of 2005 and higher placement and performance fees. Commissions were higher due to increases in brokerage transaction volume across regions, partly offset by the sale of BrownCo. For additional information on these fees and commissions, see the segment discussions for the IB on pages 14–16, TSS on pages 28–29 and AWM on pages 30–32 of this Form 10–Q.
Securities gains (losses) significantly improved, primarily as a result of lower Treasury portfolio losses of $158 million in the first quarter of 2006, compared with losses of $902 million in the prior year period. For a further discussion of Securities gains (losses), which are primarily recorded in the Firm’s Treasury business, see the Corporate segment discussion on pages 33–34 of this Form 10–Q.

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Mortgage fees and related income declined, primarily due to lower mortgage servicing and production income. Servicing income results were driven primarily by lower MSR risk management results, partially offset by increased revenue stemming from higher third-party loan servicing volume. Production income decreased, reflecting lower net gains on the sale of mortgages. For a discussion of Mortgage fees and related income, which is recorded primarily in RFS’s Mortgage Banking business, see the Mortgage Banking discussion on page 21 of this Form 10–Q.
Credit card income rose as a result of higher customer charge volume, which favorably affected interchange income, and servicing fees associated with growth in volume of securitized credit card receivables. These were partially offset by an increase in volume-driven payments to partners and higher expenses related to reward programs, as well as the impact of the deconsolidation of Paymentech. For a further discussion of Credit card income, see CS’s segment results on pages 23–25 of this Form 10–Q.
The increase in Other income reflected higher gains from loan workouts and loan sales, increased revenues from automobile operating leases, higher dividend and equity investment income and lower write-downs for loans transferred to held-for-sale. These increases were offset partly by a decrease in the net results of corporate and bank-owned life insurance policies.
Net interest income declined due to narrower spreads on trading assets, wholesale and consumer loans, as well as on consumer deposits. These decreases were offset partially by improvement in Treasury’s net interest spread and in the spreads on wholesale liability balances. In addition, higher balances related to wholesale and consumer loans and higher level of consumer deposits also contributed positively to Net interest income. The Firm’s total average interest-earning assets for the three months ended March 31, 2006, were $957 billion, up 7% from the first quarter of 2005, as a result of an increase in loans and other liquid earning assets, partially offset by a decline resulting from the repositioning of Treasury’s investment portfolio during 2005. The net interest yield on these assets, on a fully taxable-equivalent basis, was 2.17%, a decrease of 22 basis points from the prior year.
Provision for credit losses
The Provision for credit losses was $831 million, $404 million higher than the first quarter of 2005. The higher Provision for credit losses was primarily the result of a wholesale provision of $179 million compared with a benefit of $386 million in the prior year, reflecting loan growth in the Investment Bank. The wholesale loan net recovery rate was 0.06% for the quarter, an improvement from a net recovery rate of 0.03% in the prior year. The total consumer provision was $652 million, $161 million lower than the prior year, primarily due to lower bankruptcy-related net charge-offs in Card Services. For further information regarding the Provision for credit losses, see Credit Risk Management on page 54 of this Form 10–Q.
Noninterest expense
The following table presents the components of Noninterest expense:
                         
    Three months ended March 31,
(in millions)   2006     2005     Change
 
Compensation expense
  $ 5,600     $ 4,702       19 %
Occupancy expense
    602       525       15  
Technology and communications expense
    874       920       (5 )
Professional & outside services
    888       1,074       (17 )
Marketing
    519       483       7  
Other expense(a)
    834       1,705       (51 )
Amortization of intangibles
    364       383       (5 )
Merger costs
    71       145       (51 )
 
Total Noninterest expense
  $ 9,752     $ 9,937       (2 )%
 
     
(a)  
Includes insurance recovery relating to certain material litigation of $98 million recorded in the first quarter of 2006. In the first quarter of 2005, a litigation reserve charge of $900 million, relating to the settlement of WorldCom class action, was recorded.
Total Noninterest expense was $9.8 billion, down by $185 million, or 2%, from the prior year. The decrease was due primarily to lower Other expense and Professional & outside services, partially offset by an increase in Compensation expense. Excluding in the first quarter of this year both the incremental expense of $459 million from the adoption of SFAS 123R and $71 million of Merger costs, and excluding in the first quarter of last year both the material litigation charge of $900 million primarily related to WorldCom and $145 million of Merger costs, Noninterest expense would have been up by $330 million. The increase was driven by higher performance-based compensation, partially offset by merger savings.

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Compensation expense rose as a result of $459 million of incremental expense related to the adoption of SFAS 123R, higher performance-based incentives and additional headcount in connection with investments in businesses. The increase was offset partially by ongoing efficiency improvements and merger-related savings throughout the Firm. For a detailed discussion of the adoption of SFAS 123R and employee stock-based incentives, see Note 6 on pages 68–71 of this Form 10–Q.
Higher Occupancy expense reflected investments in the retail distribution network, partly offset by operating efficiencies.
Professional & outside services were lower due to expense management initiatives, the settlement of several legal matters in 2005 and the Paymentech deconsolidation.
Marketing expense was higher, stemming from an increase in advertising for credit card and retail products.
Other expense was lower due to insurance recoveries relating to certain material litigation and expense management initiatives in 2006 and a material litigation charge of $900 million, primarily related to settlement costs of the WorldCom class action litigation, and a $40 million charge taken by RFS related to the dissolution of an education finance joint venture, both of which occurred in 2005. These items were partially offset by increased expense as a result of growth in business volume, including higher minority interest expense related to Cazenove and Highbridge.
For discussion of Amortization of intangibles and Merger costs, refer to Note 14 and Note 7 on pages 79–81 and 71, respectively, of this Form 10–Q.
Income tax expense
The Firm’s Income before income tax expense, Income tax expense and effective tax rate were as follows for each of the periods indicated:
                 
Three months ended March 31,(in millions, except rate)   2006     2005  
 
Income before income tax expense
  $ 4,653     $ 3,283  
Income tax expense
    1,572       1,019  
Effective tax rate
    33.8 %     31.0 %
 
The increase in the effective tax rate was related to higher reported pre-tax income combined with changes in the proportion of income subject to federal, state and local taxes. Also contributing to the increase were the Merger costs and Litigation reserve charge in the first quarter of 2005, which reflected tax benefits at a 38% marginal tax rate.

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EXPLANATION AND RECONCILIATION OF THE FIRM’S USE OF NON-GAAP FINANCIAL MEASURES
 
The Firm prepares its Consolidated financial statements using accounting principles generally accepted in the United States of America (“U.S. GAAP”); these financial statements appear on pages 60–63 of this Form 10–Q. That presentation, which is referred to as “reported basis,” provides the reader with an understanding of the Firm’s results that can be tracked consistently from year to year and enables a comparison of the Firm’s performance with other companies’ U.S. GAAP financial statements.
In addition to analyzing the Firm’s results on a reported basis, management reviews the Firm’s and the lines’ of business results on a “managed” basis, which is a non-GAAP financial measure. The Firm’s definition of managed basis starts with the reported U.S. GAAP results and includes certain reclassifications that are adjusted to exclude credit card securitizations and present revenue on a fully taxable equivalent (“FTE”) basis. These adjustments do not have any impact on Net income as reported by the lines of business or by the Firm as a whole. Effective January 1, 2006, JPMorgan Chase’s presentation of “operating earnings” that excluded merger costs and material litigation reserve charges and recoveries from reported results has been eliminated. These items had been previously excluded from operating results because they were deemed non-recurring; they are now included in the Corporate business segment’s results. In addition, Trading-related net interest income is no longer reclassified from net interest income to trading revenue.
Card Services’ managed results excludes the impact of credit card securitizations on Total net revenue, the provision for credit losses, net charge-offs and loan receivables. This presentation is provided to facilitate the comparability to competitors. Through securitization, the Firm transforms a portion of its credit card receivables into securities, which are sold to investors. The credit card receivables are removed from the consolidated balance sheets through the transfer of the 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 interests, which are recorded in Loans on the Consolidated balance sheets. A gain or loss on the sale of credit card receivables to investors is recorded in Other income. Securitization also affects the Firm’s Consolidated statements of income as the aggregate amount of interest income, certain fee revenue and recoveries that is in excess of the aggregate amount of interest paid to investors, gross credit losses and other trust expenses related to the securitized receivables are reclassified into credit card income. For a reconciliation of reported to managed basis of Card Services results, see page 25 of this Form 10–Q. For information regarding loans and residual interests sold and securitized, see Note 12 on pages 74–77 of this Form 10–Q. JPMorgan Chase uses the concept of “managed receivables” to evaluate the credit performance and overall financial performance of the underlying credit card loans, both sold and not sold; as the same borrower is continuing to use the credit card for ongoing charges, a borrower’s credit performance will affect both the loan receivables sold under SFAS 140 and those not sold. Thus, in its disclosures regarding managed loan receivables, JPMorgan Chase treats the sold receivables as if they were still on the balance sheet in order to disclose the credit performance (such as net charge-off rates) of the entire managed credit card portfolio. In addition, Card Services operations are funded, managed results are evaluated, and decisions are made about allocating resources such as employees and capital based upon managed financial information.
Total net revenue for each of the business segments and the Firm is presented on a tax-equivalent basis. Accordingly, revenue from tax exempt securities and investments that receive tax credits is presented in the managed results on a basis comparable to taxable securities and investments. This non-GAAP financial measure allows management to assess the comparability of revenues arising from both taxable and tax-exempt sources. The corresponding income tax impact related to these items is recorded within income tax expense.
Management uses certain non-GAAP financial measures at the segment level because it believes these non-GAAP financial measures provide information to investors in understanding the underlying operational performance and trends of the particular business segment and facilitate a comparison of the business segment with the performance of competitors.

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The following summary table provides a reconciliation from the Firm’s reported U.S. GAAP results to managed basis:
                                 
Three months ended March 31,   2006
    Reported   Credit   Tax-equivalent   Managed
(in millions, except per share and ratio data)   results   card(a)   adjustments   basis
 
Revenue
                               
Investment banking fees
  $ 1,169     $     $     $ 1,169  
Principal transactions
    2,602                   2,602  
Lending & deposit related fees
    841                   841  
Asset management, administration and commissions
    2,973                   2,973  
Securities gains (losses)
    (116 )                 (116 )
Mortgage fees and related income
    241                   241  
Credit card income
    1,910       (1,125 )           785  
Other income
    556             146       702  
 
Noninterest revenue
    10,176       (1,125 )     146       9,197  
Net interest income
    5,060       1,574       71       6,705  
 
Total net revenue
    15,236       449       217       15,902  
Provision for credit losses
    831       449             1,280  
Noninterest expense
    9,752                   9,752  
 
Income before income tax expense
    4,653             217       4,870  
Income tax expense
    1,572             217       1,789  
 
Net income
  $ 3,081     $     $     $ 3,081  
 
Earnings per share – diluted
  $ 0.86     $     $     $ 0.86  
 
Return on common equity
    12 %     %     %     12 %
Return on equity less goodwill
    20                   20  
 
Return on assets
    1.00     NM     NM       0.95  
 
Overhead ratio
    64     NM     NM       61  
 
Effective income tax rate
    34     NM       100       37  
 
                                 
Three months ended March 31,   2005
    Reported   Credit   Tax-equivalent   Managed
(in millions, except per share and ratio data)   results   card(a)   adjustments   basis
 
Revenue
                               
Investment banking fees
  $ 993     $     $     $ 993  
Principal transactions
    2,636                   2,636  
Lending & deposit related fees
    820                   820  
Asset management, administration and commissions
    2,498                   2,498  
Securities gains (losses)
    (822 )                 (822 )
Mortgage fees and related income
    362                   362  
Credit card income
    1,734       (815 )           919  
Other income
    201             115       316  
 
Noninterest revenue
    8,422       (815 )     115       7,722  
Net interest income
    5,225       1,732       61       7,018  
 
Total net revenue
    13,647       917       176       14,740  
Provision for credit losses
    427       917             1,344  
Noninterest expense
    9,937                   9,937  
 
Income before income tax expense
    3,283             176       3,459  
Income tax expense
    1,019             176       1,195  
 
Net income
  $ 2,264     $     $     $ 2,264  
 
Earnings per share – diluted
  $ 0.63     $     $     $ 0.63  
 
Return on common equity
    9 %     %     %     9 %
Return on equity less goodwill
    15                   15  
 
Return on assets
    0.79     NM     NM       0.75  
 
Overhead ratio
    73     NM     NM       67  
 
Effective income tax rate
    31     NM       100       35  
 
     
(a)  
The impact of credit card securitizations affects Card Services. See pages 2325 of this Form 10–Q for further information.
                                                 
Three months ended March 31,   2006     2005  
(in millions)   Reported     Securitized     Managed     Reported     Securitized     Managed  
 
Loans – Period-end
  $ 432,081     $ 69,580     $ 501,661     $ 402,669     $ 67,328     $ 469,997  
Total assets – average
    1,248,357       67,557       1,315,914       1,162,818       67,509       1,230,327  
 

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BUSINESS SEGMENT RESULTS
 
The Firm is managed on a line-of-business basis. The business segment financial results presented reflect the organization of JPMorgan Chase. Currently, there are six major reportable business segments: the Investment Bank, Retail Financial Services, Card Services, Commercial Banking, Treasury & Securities Services and Asset & Wealth Management, as well as a Corporate segment. The segments are based upon the products and services provided, or the type of customer served, and they reflect the manner in which financial information is currently evaluated by management. Results of these lines of business are presented on a managed basis. For a further discussion of Business segment results, see pages 34–35 of JPMorgan Chase’s 2005 Annual Report.
Description of business segment reporting methodology
Results of the business segments are intended to reflect each segment as if it were essentially a stand-alone business. The management reporting process that derives these results generally allocates income and expense using market-based methodologies. For a further discussion of those methodologies, see page 35 of JPMorgan Chase’s 2005 Annual Report. The Firm continues to assess the assumptions, methodologies and reporting reclassifications used for segment reporting, and further refinements may be implemented in future periods.
Business segment financial disclosures
Effective January 1, 2006, JPMorgan Chase modified certain of its financial disclosures to reflect more closely the manner in which the Firm’s business segments are managed and to provide improved comparability with competitors. These financial disclosure revisions are reflected in this Form 10–Q, and the financial information for prior periods has been revised to reflect the disclosure changes as if they had been in effect throughout 2005. A summary of the changes are described below.
Reported versus Operating Basis Changes
The presentation of operating earnings that excluded merger costs and material litigation reserve charges and recoveries from reported results has been eliminated. These items had been excluded previously from operating results because they were deemed nonrecurring; they are now included in the Corporate business segment’s results. In addition, trading-related net interest income is no longer reclassified from Net interest income to trading revenue. As a result of these changes, effective January 1, 2006, management has discontinued reporting on an “operating” basis.
Business Segment Disclosures
RFS has been reorganized into the following business segments: Regional Banking, Mortgage Banking and Auto Finance. For more detailed information on the RFS reorganization, see the RFS business segment discussion on page 17 of this Form 10–Q.
TSS, as previously announced, has been reorganized by combining the Investor Services and Institutional Trust Services businesses into a single business called Worldwide Securities Services. Also, TSS firmwide disclosures have been adjusted to reflect a refined set of TSS products and a revised allocation of liability balances and lending-related revenue related to certain client transfers.
Effective January 1, 2006, various wholesale banking clients, together with the related revenue and expense, are being transferred among CB, the IB and TSS. In the first quarter of 2006, the primary client transfer was corporate mortgage finance from CB to the IB.
CB’s business metrics now include gross investment banking revenue, which reflects revenue recorded in both CB and the IB.
Corporate’s disclosure has been expanded to include Total net revenue and Net income for Treasury and Other Corporate segments.
Certain expenses that are managed by the business segments, but that had been previously recorded in Corporate and allocated to the businesses, are now recorded as direct expenses within the businesses.
Capital allocation changes
Effective January 1, 2006, the Firm refined its methodology for allocating capital to the business segments. As prior periods have not been revised to reflect the new capital allocations, certain business metrics, such as ROE, are not comparable to the current presentation. For a further discussion of the changes, see Capital Management – Line of business equity on page 37 of this Form 10–Q.
Segment results – Managed basis(a)
The following table summarizes the business segment results for the periods indicated:
                                                                                         
Three months ended March 31,   Total net revenue   Noninterest expense   Net income   Return on equity
(in millions, except ratios)   2006   2005   Change   2006   2005   Change   2006   2005   Change   2006   2005
 
Investment Bank
  $ 4,699     $ 4,187       12 %   $ 3,191     $ 2,527       26 %   $ 850     $ 1,328       (36 )%     17 %     27 %
Retail Financial Services
    3,763       3,847       (2 )     2,238       2,162       4       881       988       (11 )     26       31  
Card Services
    3,685       3,779       (2 )     1,243       1,313       (5 )     901       522       73       26       18  
Commercial Banking
    900       827       9       498       454       10       240       231       4       18       28  
Treasury & Securities Services
    1,677       1,498       12       1,158       1,067       9       312       254       23       44       54  
Asset & Wealth Management
    1,584       1,361       16       1,098       934       18       313       276       13       36       47  
Corporate
    (406 )     (759 )     47       326       1,480       (78 )     (416 )     (1,335 )     69     NM     NM  
 
Total
  $ 15,902     $ 14,740       8 %   $ 9,752     $ 9,937       (2 )%   $ 3,081     $ 2,264       36 %     12 %     9 %
 
     
(a)  
Represents reported results on a tax-equivalent basis and excludes the impact of credit card securitizations.

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INVESTMENT BANK
 
For a discussion of the business profile of the IB, see pages 36–38 of JPMorgan Chase’s 2005 Annual Report.
                         
Selected income statement data   Three months ended March 31,
(in millions, except ratios)   2006     2005     Change  
 
Revenue
                       
Investment banking fees
  $ 1,170     $ 985       19 %
Principal transactions
    2,375       1,875       27  
Lending & deposit related fees
    137       157       (13 )
Asset management, administration and commissions
    552       409       35  
All other income
    275       127       117  
         
Noninterest revenue
    4,509       3,553       27  
Net interest income
    190       634       (70 )
         
Total net revenue(a)
    4,699       4,187       12  
 
                       
Provision for credit losses
    183       (366 )   NM  
Credit reimbursement from TSS(b)
    30       38       (21 )
 
                       
Noninterest expense
                       
Compensation expense
    2,256       1,618       39  
Noncompensation expense
    935       909       3  
         
Total noninterest expense
    3,191       2,527       26  
         
Income before income tax expense
    1,355       2,064       (34 )
Income tax expense
    505       736       (31 )
         
Net income
  $ 850     $ 1,328       (36 )
         
 
                       
Financial ratios
                       
ROE
    17 %     27 %        
ROA
    0.53       0.95          
Overhead ratio
    68       60          
Compensation expense as % of total net revenue(c)
    43       39          
         
 
                       
Revenue by business
                       
Investment banking fees:
                       
Advisory
  $ 389     $ 263       48  
Equity underwriting
    212       239       (11 )
Debt underwriting
    569       483       18  
         
Total investment banking fees
    1,170       985       19  
Fixed income markets
    1,993       2,296       (13 )
Equities markets
    1,215       556       119  
Credit portfolio
    321       350       (8 )
         
Total net revenue
  $ 4,699     $ 4,187       12  
         
 
                       
Revenue by region
                       
Americas
  $ 2,067     $ 2,231       (7 )
Europe/Middle East/Africa
    2,047       1,535       33  
Asia/Pacific
    585       421       39  
         
Total net revenue
  $ 4,699     $ 4,187       12  
 
     
(a)  
Total net revenue includes tax-equivalent adjustments, primarily due to tax-exempt income from municipal bond investments and income tax credits related to affordable housing investments, of $194 million and $155 million for the quarters ended March 31, 2006 and 2005, respectively.
 
(b)  
TSS is charged a credit reimbursement related to certain exposures managed within the IB credit portfolio on behalf of clients shared with TSS.
 
(c)  
For the three months ended March 31, 2006, Compensation expense to Total net revenue ratio is adjusted to present this ratio as if SFAS 123R had always been in effect. IB management believes that adjusting the Compensation expense to Total net revenue ratio in the first quarter of 2006 for the incremental impact of adopting SFAS 123R provides a more meaningful measure of IB’s Compensation expense to Total net revenue ratio for the quarter.

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Quarterly results
Net income of $850 million was driven by record quarterly revenues of $4.7 billion. Net income declined 36% compared with the prior year due to an increase in the provision for credit losses related to higher loan balances, incremental expense from the adoption of SFAS 123R and higher performance-based compensation.
Net revenue was a record $4.7 billion, up by $512 million, or 12%, compared with the prior year. Investment banking fees of $1.2 billion were the highest since 2000, up 19% from the prior year. Advisory fees of $389 million, up 48% from last year, were also the highest since 2000. Debt underwriting fees of $569 million were up 18% from the prior year, driven by record loan syndication fees offset partially by lower bond underwriting fees. Equity underwriting fees of $212 million were down 11% from the prior year, reflecting lower market share. Fixed Income Markets revenue of $2.0 billion was down 13% from the prior year due to weaker performance in commodities and rates markets, partially offset by stronger results in emerging markets, currencies and credit markets. Equity Markets produced record revenues of $1.2 billion in the quarter driven by record trading and strong commissions across all regions. Credit Portfolio revenues of $321 million were down 8% from the prior year.
The provision for credit losses was $183 million, as compared with a benefit of $366 million in the prior year. The current quarter’s provision reflects growth in loan balances and stable credit quality.
Noninterest expense was $3.2 billion, up 26% from the prior year. Excluding incremental expense of $256 million from the adoption of SFAS 123R, expenses were up by $408 million, or 16%, from the prior year. The increase was primarily due to higher incentive compensation related to improved performance, and an increase in the compensation expense to total net revenue ratio, as well as continued investments in strategic initiatives.
                         
Selected metrics   Three months ended March 31,
(in millions, except headcount and ratio data)   2006     2005     Change  
 
Selected average balances
                       
 
               
Total assets
  $ 646,220     $ 568,222       14 %
Trading assets–debt and equity instruments
    252,415       225,367       12  
Trading assets–derivatives receivables
    49,388       63,574       (22 )
Loans:
                       
Loans retained(a)
    53,678       41,233       30  
Loans held-for-sale(b)
    19,212       7,674       150  
         
Total loans
    72,890       48,907       49  
Adjusted assets(c)
    492,304       445,840       10  
Equity
    20,000       20,000        
 
                       
Headcount
    21,705       18,021       20  
 
                       
Credit data and quality statistics
                       
Net charge-offs (recoveries)
  $ (21 )   $ (5 )     (320 )
Nonperforming assets:
                       
Nonperforming loans(d)
    434       814       (47 )
Other nonperforming assets
    50       242       (79 )
Allowance for loan losses
    1,117       1,191       (6 )
Allowance for lending related commitments
    220       296       (26 )
 
                       
Net charge-off (recovery) rate(b)
    (0.16 )%     (0.05 )%        
Allowance for loan losses to average loans(b)
    2.08       2.89          
Allowance for loan losses to nonperforming loans(d)
    305       147          
Nonperforming loans to average loans
    0.60       1.66          
Market risk—average trading and credit portfolio VAR
                       
Trading activities:
                       
Fixed income
  $ 60     $ 57       5  
Foreign exchange
    20       23       (13 )
Equities
    32       18       78  
Commodities and other
    47       10       370  
Diversification(e)
    (68 )     (43 )     (58 )
         
Trading VAR(f)
    91       65       40  
Credit portfolio VAR(g)
    14       13       8  
Diversification(e)
    (11 )     (8 )     (38 )
         
Total trading and credit portfolio VAR
  $ 94     $ 70       34  
 
     
(a)  
Loans retained include Credit Portfolio, Conduit loans, leverage leases, bridge loans for underwriting and other accrual loans.
 
(b)  
Loans held-for-sale, which include warehouse loans held as part of the IB’s mortgage-backed, asset-backed and other securitization businesses, are excluded from Total loans for the allowance coverage ratio and net charge-off rate.

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(c)  
Adjusted assets, a non-GAAP financial measure, equals total assets minus (1) securities purchased under resale agreements and securities borrowed less securities sold, not yet purchased; (2) assets of variable interest entities (VIEs) consolidated under FIN 46R; (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.
 
(d)  
Nonperforming loans include loans held-for-sale of $68 million and $2 million as of March 31, 2006 and 2005, respectively. These amounts are not included in the allowance coverage ratios.
 
(e)  
Average VARs are less than the sum of the VARs of its market risk components due to risk offsets resulting from portfolio diversification. The diversification effect reflects the fact that the risks are not perfectly correlated. The risk of a portfolio of positions is therefore usually less than the sum of the risks of the positions themselves
 
(f)  
Includes substantially all trading activities; however, particular risk parameters of certain products are not fully captured, for example, correlation risk.
 
(g)  
Includes VAR on derivative credit valuation adjustments, credit valuation adjustment hedges and mark-to-market hedges of the accrual loan portfolio, which are all reported in Principal transactions. This VAR does not include the accrual loan portfolio, which is not marked to market.
According to Thomson Financial, the Firm was ranked #1 in Global Syndicated Loans, #3 in Global Announced M&A and #2 in Global Long-Term Debt for the first three months of 2006.
According to Dealogic, the Firm was ranked #3 in Investment Banking fees generated during the first three months of 2006.
                                 
    Three months ended March 31, 2006   Full Year 2005
Market shares and rankings(a)   Market Share   Rankings   Market Share   Rankings
 
Global debt, equity and equity-related
    7 %     #2       6 %     #4  
Global syndicated loans
    13       #1       16       #1  
Global long-term debt
    7       #2       6       #4  
Global equity and equity-related
    5       #9       7       #6  
Global announced M&A
    31       #3       24       #3  
U.S. debt, equity and equity-related
    10       #2       8       #4  
U.S. syndicated loans
    23       #1       28       #1  
U.S. long-term debt
    14       #1       11       #2  
U.S. equity and equity-related
    8       #5       9       #5  
U.S. announced M&A
    19       #6       24       #3  
 
     
(a)  
Source: Thomson Financial Securities data. Global announced M&A is based upon rank value; all other rankings are based upon proceeds, with full credit to each book manager/equal if joint. Because of joint assignments, market share of all participants will add up to more than 100%.

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RETAIL FINANCIAL SERVICES
 
Retail Financial Services (“RFS”) realigned its business reporting segments on January 1, 2006, into Regional Banking, Mortgage Banking and Auto Finance. Regional Banking offers one of the largest branch networks in the United States, covering 17 states with 2,638 branches and 7,400 automated teller machines (“ATMs”). Regional Banking distributes, through its network, a variety of products including checking, savings and time deposit accounts; home equity, residential mortgage, small business banking, and education loans; mutual fund and annuity investments; and on-line banking services. Mortgage Banking is a leading provider of mortgage loan products and is one of the largest originators and servicers of home mortgages. Auto Finance is the largest noncaptive originator of automobile loans, primarily through a network of automotive dealers across the United States.
During the quarter, RFS completed the purchase of Collegiate Funding Services, adding an education loan servicing capability and entry into the Federal Family Education Loan Program consolidation market. RFS also has agreed to sell its life insurance and annuity underwriting businesses to Protective Life Corporation; the sale is expected to close in the third quarter of 2006. Finally, on April 8, 2006, the Firm announced an agreement to acquire The Bank of New York’s consumer and small-business banking businesses; this acquisition will significantly strengthen RFS’s distribution network in the New York City/Tri-State area, adding 338 branches and 400 ATMs.
                         
Selected income statement data   Three months ended March 31,
(in millions, except ratios)   2006     2005     Change  
 
Revenue
                       
Lending & deposit related fees
  $ 371     $ 340       9 %
Asset management, administration and commissions
    437       394       11  
Securities gains (losses)
    (6 )     10     NM  
Mortgage fees and related income
    236       368       (36 )
Credit card income
    115       94       22  
Other income
    48       (12 )   NM  
         
Noninterest revenue
    1,201       1,194       1  
Net interest income
    2,562       2,653       (3 )
         
 
                       
Total net revenue
    3,763       3,847       (2 )
 
                       
Provision for credit losses
    85       94       (10 )
 
                       
Noninterest expense
                       
Compensation expense
    920       822       12  
Noncompensation expense
    1,207       1,215       (1 )
Amortization of intangibles
    111       125       (11 )
         
Total noninterest expense
    2,238       2,162       4  
Income before income tax expense
    1,440       1,591       (9 )
Income tax expense
    559       603       (7 )
         
Net income
  $ 881     $ 988       (11 )
         
 
                       
Financial ratios
                       
ROE
    26 %     31 %        
ROA
    1.54       1.78          
Overhead ratio
    59       56          
Overhead ratio excluding core deposit intangibles(a)
    57       53          
 
     
(a)  
Retail Financial Services uses the overhead ratio (excluding the amortization of core deposit intangibles (“CDI”)), a non-GAAP financial measure, to evaluate the underlying expense trends of the business. Including CDI amortization expense in the overhead ratio calculation results in a higher overhead ratio in the earlier years and a lower overhead ratio in later years; this would result in an improving overhead ratio over time, all things remaining equal. This non-GAAP ratio excludes Regional Banking’s core deposit intangible amortization expense related to the Bank One merger of $109 million and $124 million for the quarters ended March 31, 2006 and 2005, respectively.

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Quarterly results
Net income of $881 million was down by $107 million, or 11%, from the prior year. Current and prior period results included charges to transfer automobile loans to held-for-sale and prior-year results also included a charge for the termination of an Education Finance joint venture and a gain on the sale of a recreational vehicle loan portfolio. Excluding all of these items, net income declined by $131 million or 13%. The decrease reflected weakness in Mortgage Banking and continued spread compression on deposits and loans in Regional Banking, as well as continued investment in the retail distribution network. These declines were offset partially by deposit and loan balance growth in Regional Banking and continued favorable credit quality in all loan portfolios.
Net revenue of $3.8 billion was down by $84 million, or 2%, from the prior year. Net interest income of $2.6 billion declined by $91 million, or 3%, reflecting narrower spreads on deposits and loans in Regional Banking as well as reduced balances in the auto loan and lease portfolios. These decreases were offset partially by increased deposit balances and higher levels of home equity loans. Noninterest revenue of $1.2 billion was up by $7 million, or 1%, driven by higher automobile operating lease income and increased fee income on deposit-related products. These increases were offset by lower Mortgage Banking production and servicing income. Current quarter results also included a $50 million write-down on $1.3 billion of automobile loans transferred to held-for-sale, compared with an $88 million write-down last year on $2.7 billon of auto loans transferred to held-for-sale.
The provision for credit losses totaled $85 million, down by $9 million from the prior year. Credit quality continued to be favorable across all businesses.
Noninterest expense of $2.2 billion was up by $76 million, or 4%, as a result of ongoing investments in the retail distribution network, higher depreciation expense on owned automobiles acquired under operating leases, and incremental expense of $17 million from the adoption of SFAS 123R. These increases were offset in part by operating and merger-related efficiencies and the absence of a $40 million charge related to the dissolution of an Education Finance joint venture.
                         
Selected metrics   Three months ended March 31,
(in millions, except headcount and ratios)   2006     2005     Change
 
Selected ending balances
                       
Assets
  $ 235,127     $ 224,562       5 %
Loans(a)
    202,591       199,215       2  
Deposits
    200,154       187,225       7  
 
                       
Selected average balances
                       
Assets
  $ 231,587     $ 225,120       3  
Loans(b)
    198,797       198,494        
Deposits
    194,382       184,336       5  
Equity
    13,896       13,100       6  
 
                       
Headcount
    62,472       59,322       5  
 
                       
Credit data and quality statistics
                       
Net charge-offs
  $ 121     $ 152       (20 )
Nonperforming loans(c)
    1,349       1,150       17  
Nonperforming assets
    1,537       1,351       14  
Allowance for loan losses
    1,333       1,168       14  
 
                       
Net charge-off rate(b)
    0.27 %     0.34 %        
Allowance for loan losses to ending loans(a)
    0.71       0.64          
Allowance for loan losses to nonperforming loans(c)
    100       104          
Nonperforming loans to total loans
    0.67       0.58          
 
     
(a)  
Includes loans held-for-sale of $14,343 million and $16,532 million for the three months ended March 31, 2006 and 2005, respectively. These amounts are not included in the allowance coverage ratios.
 
(b)  
Average loans include loans held-for-sale of $16,362 million and $15,861 million for the three months ended March 31, 2006 and 2005, respectively. These amounts are not included in the net charge-off rate.
 
(c)  
Nonperforming loans include loans held-for-sale of $16 million and $31 million at March 31, 2006 and 2005, respectively. These amounts are not included in the allowance coverage ratios.

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

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Business metrics   Three months ended March 31,
(in billions, except ratios)   2006     2005     Change
 
 
                       
Home equity origination volume
  $ 11.7     $ 11.9       (2 )%
End of period loans owned
                       
Home equity
  $ 75.3     $ 67.7       11  
Mortgage
    47.0       46.6       1  
Business banking
    12.8       12.7       1  
Education
    9.5       4.3       121  
Other loans(a)
    2.7       2.9       (7 )
         
Total end of period loans
    147.3       134.2       10  
End of period deposits
                       
Checking
    64.9       62.6       4  
Savings
    91.0       88.3       3  
Time and other
    34.2       25.0       37  
         
Total end of period deposits
    190.1       175.9       8  
Average loans owned
                       
Home equity
  $ 74.1     $ 66.2       12  
Mortgage
    44.6       43.4       3  
Business banking
    12.8       12.5       2  
Education
    5.4       4.6       17  
Other loans(a)
    3.0       3.4       (12 )
         
Total average loans(b)
    139.9       130.1       8  
Average deposits
                       
Checking
    63.0       61.7       2  
Savings
    89.3       87.8       2  
Time and other
    32.4       24.6       32  
         
Total average deposits
    184.7       174.1       6  
Average assets
    157.1       146.9       7  
Average equity
    9.8       8.8       11  
         
Credit data and quality statistics
                       
30+ day delinquency rate(c)(d)
    1.36 %     1.34 %        
Net charge-offs
                       
Home equity
  $ 33     $ 35       (6 )
Mortgage
    12       6       100  
Business banking
    18       19       (5 )
Other loans(e)
    7       9       (22 )
         
Total net charge-offs
    70       69       1  
Net charge-off rate
                       
Home equity
    0.18 %     0.21 %        
Mortgage
    0.11       0.06          
Business banking
    0.57       0.62          
Other loans(b)(e)
    0.56       1.04          
Total net charge-off rate(b)(e)
    0.21       0.22          
 
                       
Nonperforming assets(f)(g)(h)
  $ 1,339     $ 1,136       18  
 
     
(a)  
Includes commercial loans derived from community development activities and insurance policy loans.
 
(b)  
Average loans include loans held-for-sale of $3.3 billion and $4.5 billion for the three months ended March 31, 2006 and 2005, respectively.
 
(c)  
Excludes delinquencies related to loans eligible for repurchase as well as loans repurchased from GNMA pools that are insured by government agencies of $0.9 billion and $0.7 billion at March 31, 2006 and 2005, respectively. These amounts are excluded as reimbursement is proceeding normally.
 
(d)  
Excludes delinquencies that are insured by government agencies under the Federal Family Education Loan Program of $0.4 billion at March 31, 2006. Delinquencies were insignificant at March 31, 2005. These amounts are excluded as reimbursement is proceeding normally.
 
(e)  
Includes insignificant amounts of Education net charge-offs.
 
(f)  
Excludes nonperforming assets related to loans eligible for repurchase as well as loans repurchased from GNMA pools that are insured by government agencies of $1.1 billion at both March 31, 2006 and 2005. These amounts are excluded as reimbursement is proceeding normally.
 
(g)  
Excludes loans that are 90 days past due and still accruing, which are insured by government agencies under the Federal Family Education Loan Program of $0.2 billion at March 31, 2006. The Education loans past due 90 days were insignificant at March 31, 2005. These amounts are excluded as reimbursement is proceeding normally.
 
(h)  
Includes nonperforming loans held-for-sale related to mortgage banking activities of $16 million and $31 million at March 31, 2006 and 2005, respectively.

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Retail branch business metrics   Three months ended March 31,
(in millions, except ratios and where otherwise noted)   2006     2005     Change
 
 
                       
Investment sales volume
  $ 3,553     $ 2,870       24 %
 
                       
Number of:
                       
Branches
    2,638       2,517       121 #
ATMs
    7,400       6,687       713  
Personal bankers
    7,019       5,798       1,221  
Sales specialists
    3,318       2,846       472  
Active online customers (in thousands)
    5,030       3,671       1,359  
Checking accounts (in thousands)
    8,936       8,287       649  
 
MORTGAGE BANKING
                         
Selected income statement data   Three months ended March 31,
(in millions, except ratios and where otherwise noted)   2006     2005     Change
 
 
                       
Production income
  $ 219     $ 237       (8 )%
Mortgage servicing income:
                       
Servicing revenue
    560       519       8  
Changes in MSR asset fair value:
                       
Due to inputs or assumptions in model(a)
    711       548       30  
Other changes in fair value(b)
    (349 )     (339 )     (3 )
Derivative valuation adjustments and other
    (753 )     (445 )     (69 )
         
Total mortgage servicing income
    169       283       (40 )
         
Total net revenue
    388       520       (25 )
Noninterest expense
    324       299       8  
Income before income tax expense
    64       221       (71 )
Net income
    39       139       (72 )
 
                       
ROE
    9 %     35 %        
ROA
    0.58       2.71          
 
                       
Business metrics (in billions)
                       
Third party mortgage loans serviced (ending)
  $ 484.1     $ 435.5       11  
MSR net carrying value (ending)
    7.5       5.7       32  
Average mortgage loans held-for-sale
    13.0       11.4       14  
Average assets
    27.1       20.8       30  
Average equity
    1.7       1.6       6  
 
                       
Mortgage origination volume by channel (in billions)
                       
Retail
  $ 9.1     $ 10.0       (9 )
Wholesale
    7.4       7.2       3  
Correspondent (including negotiated transactions)
    12.4       9.5       31  
         
Total
    28.9       26.7       8  
 
     
(a)  
Represents MSR asset fair value adjustments due to changes in inputs, such as interest rates and volatility, as well as updates to assumptions used in the valuation model.
 
(b)  
Includes changes in the MSR value due to servicing portfolio runoff (or time decay). Effective January 1, 2006, the Firm implemented SFAS 156, adopting fair value accounting for the MSR asset. For the period ending March 31, 2005, this amount represents MSR asset amortization expense calculated in accordance with SFAS 140.
Quarterly results
Mortgage Banking net income was $39 million, down from net income of $139 million in the prior year. Production revenue decreased, reflecting lower gain-on-sale margins on higher mortgage originations. Servicing income of $169 million was down from $283 million in the prior year. The results were primarily driven by lower MSR risk management results, partially offset by increased servicing revenue due to increased levels of third-party loans serviced. Noninterest expense was $324 million, up by $25 million, reflecting increased mortgage originations.

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AUTO FINANCE
                         
Selected income statement data   Three months ended March 31,
(in millions, except ratios and where otherwise noted)   2006     2005     Change
 
 
                       
Noninterest revenue
  $ 44     $ (35 )   NM  
Net interest income
    291       325       (10 )%
         
Total net revenue
    335       290       16  
Provision for credit losses
    19       29       (34 )
Noninterest expense
    176       158       11  
         
Income before income tax expense
    140       103       36  
         
Net income
    85       63       35  
 
                       
ROE
    14 %     9 %        
ROA
    0.73       0.45          
 
                       
Business metrics (in billions)
                       
Auto origination volume
  $ 4.3     $ 4.8       (10 )
End-of-period loans and lease related assets
                       
Loans outstanding
  $ 41.0     $ 48.4       (15 )
Lease financing receivables
    3.6       7.0       (49 )
Operating lease assets
    1.1       0.2       450  
         
Total end-of-period loans and lease related assets
    45.7       55.6       (18 )
Average loans and lease related assets
                       
Loans outstanding(a)
  $ 41.2     $ 48.8       (16 )
Lease financing receivables
    4.0       7.6       (47 )
Operating lease assets
    1.0       0.1     NM  
         
Total average loans and lease related assets
    46.2       56.5       (18 )
Average assets
    47.3       57.4       (18 )
Average equity
    2.4       2.7       (11 )
         
 
                       
Credit quality statistics
                       
30+ day delinquency rate
    1.39 %     1.37 %        
Net charge-offs
                       
Loans
  $ 48     $ 74       (35 )
Lease receivables
    3       9       (67 )
         
Total net charge-offs
    51       83       (39 )
Net charge-off rate
                       
Loans(a)
    0.47 %     0.61 %        
Lease receivables
    0.30       0.48          
Total net charge-off rate(a)
    0.46       0.60          
Nonperforming assets
  $ 198     $ 215       (8 )
 
     
(a)  
Average loans held-for-sale were insignificant for the quarters ended March 31, 2006 and 2005.
Quarterly results
Auto Finance net income of $85 million was up by $22 million, or 35%, from the prior year. Current-period results included a net $45 million loss related to auto loans transferred to held-for-sale. Prior-year results included a net $78 million loss associated with auto loans transferred to held-for-sale and a $34 million net benefit from the sale of a recreational vehicle loan portfolio. Excluding these items, the benefit of wider loan spreads and lower credit costs offset the decline in loan and lease balances. After adjusting for the impact of increased depreciation expense on owned automobiles subject to operating leases, expenses declined reflecting lower production volumes and operating efficiencies.

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CARD SERVICES
 
For a discussion of the business profile of CS, see pages 45–46 of JPMorgan Chase’s 2005 Annual Report.
JPMorgan Chase uses the concept of “managed receivables” to evaluate the credit performance of its credit card loans, both sold and not sold. For further information, see Explanation and reconciliation of the Firm’s use of non-GAAP financial measures on pages 11–12 of this Form 10–Q. Managed results exclude the impact of credit card securitizations on Total net revenue, the Provision for credit losses, net charge-offs and loan receivables. Securitization does not change reported Net income; however, it does affect the classification of items on the Consolidated statements of income.
                         
Selected income statement data-managed basis   Three months ended March 31,
(in millions, except ratios)   2006     2005     Change
 
Revenue
                       
Credit card income
  $ 601     $ 761       (21 )%
All other income
    71       11     NM  
         
Noninterest revenue
    672       772       (13 )
Net interest income
    3,013       3,007        
         
Total net revenue(a)
    3,685       3,779       (2 )
 
                       
Provision for credit losses
    1,016       1,636       (38 )
 
                       
Noninterest expense
                       
Compensation expense
    259       285       (9 )
Noncompensation expense
    796       839       (5 )
Amortization of intangibles
    188       189       (1 )
         
Total noninterest expense(a)
    1,243       1,313       (5 )
         
 
                       
Income before income tax expense(a)
    1,426       830       72  
Income tax expense
    525       308       70  
         
Net income
  $ 901     $ 522       73  
         
 
                       
Memo: Net securitization gains (amortization)
  $ 8     $ (12 )   NM  
Financial metrics
                       
ROE
    26 %     18 %        
Overhead ratio
    34       35          
 
     
(a)  
As a result of the integration of Chase Merchant Services and Paymentech merchant processing businesses into a joint venture, beginning in the fourth quarter of 2005, Total net revenue, Total noninterest expense and Income before income tax expense have been reduced to reflect the deconsolidation of Paymentech. There is no impact to Net income.
Quarterly results
Net income of $901 million was up by $379 million, or 73%, from the prior year. The results for the quarter reflected a pre-tax benefit of $550 million, which is based on an estimate by management of the impact of lower bankruptcies following the new bankruptcy legislation that became effective in the fourth-quarter of 2005. Results were also driven by lower credit losses (excluding the impact from the bankruptcy legislation), merger savings and higher loan balances, including the acquisition of the Sears Canada credit card business. These benefits were offset partially by narrower spreads on loans and higher marketing expense.
Net revenue was $3.7 billion, down by $94 million, or 2%, from the prior year. After adjusting the prior-year results for the impact of the deconsolidation of Paymentech, revenue was up 1%. Net interest income was $3.0 billion, flat to the prior year. Higher loan balances, including the acquisition of the Sears Canada credit card business, and increased revenues due to the decline in bankruptcy-related revenue reversals, were offset by narrower loan spreads. Net interest income to average managed receivables was 8.85% down from 9.13% in the prior year, but up from 8.14% in the prior quarter. Noninterest revenue of $672 million was down by $100 million, or 13%. After adjusting the prior-year results for the impact of the deconsolidation of Paymentech, noninterest revenue was up 5% due to higher charge volume, resulting in increased interchange income, partially offset by higher volume-driven payments to partners and higher expense related to reward programs.
Average managed loans of $138.0 billion increased by $4.4 billion, or 3%, from the prior year, but decreased $0.9 billion from the prior quarter. The current quarter included an average of $2.2 billion, and the prior quarter included an average of $1.2 billion, of loans from the Sears Canada acquisition. End-of-period managed loans of $134.3 billion increased by $0.9 billion, or 1%, from the prior year (including $2.0 billion of loans from the Sears Canada acquisition) and decreased by $8.0 billion from the prior quarter. The decline from the prior quarter was caused by higher-than-normal customer payment rates, which management believes may be partially related to the recently implemented new minimum payment rules.

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The provision for credit losses was $1.0 billion, down by $620 million, or 38%, from the prior year. This decrease was due primarily to lower bankruptcy-related net charge-offs, which based upon an estimate by management, had an impact of $475 million. The managed net charge-off rate for the quarter decreased to 2.99%, down from 4.83% in the prior year and 6.39% in the prior quarter. The 30-day managed delinquency rate was 3.10%, down from 3.54% in the prior year, and up from 2.79% in the prior quarter. These credit statistics reflect the impact of the new bankruptcy legislation. In addition, management believes the underlying credit quality of the managed loan portfolio remains strong.
Noninterest expense of $1.2 billion decreased by $70 million, or 5%. After adjusting the prior year’s results for the impact of the deconsolidation of Paymentech, expenses were up 5%. The increase was due to increased marketing activity, higher fraud-related losses and the acquisition of the Sears Canada credit card business, largely offset by merger savings.
                         
Selected metrics   Three months ended March 31,
(in millions, except headcount, ratios                  
and where otherwise noted)   2006     2005     Change
 
% of average managed outstandings:
                       
Net interest income
    8.85 %     9.13 %        
Provision for credit losses
    2.99       4.97          
Noninterest revenue
    1.97       2.34          
Risk adjusted margin(a)
    7.84       6.51          
Noninterest expense
    3.65       3.99          
Pre-tax income (ROO)
    4.19       2.52          
Net income
    2.65       1.58          
 
                       
Business metrics
                       
Charge volume (in billions)
  $ 74.3     $ 70.3       6 %
Net accounts opened (in thousands)
    2,718       2,744       (1 )
Credit cards issued (in thousands)
    112,446       94,367       19  
Number of registered Internet customers (in millions)
    15.9       10.9       46  
Merchant acquiring business(b)
                       
Bank card volume (in billions)
  $ 147.7     $ 125.1       18  
Total transactions (in millions)(c)
    4,130       3,459       19  
 
                       
Selected ending balances
                       
Loans:
                       
Loans on balance sheets
  $ 64,691     $ 66,053       (2 )
Securitized loans
    69,580       67,328       3  
         
Managed loans
  $ 134,271     $ 133,381       1  
         
 
                       
Selected average balances
                       
Managed assets
  $ 145,994     $ 138,512       5  
Loans:
                       
Loans on balance sheets
  $ 68,455     $ 64,218       7  
Securitized loans
    69,571       69,370        
         
Managed loans
  $ 138,026     $ 133,588       3  
         
Equity
    14,100       11,800       19  
 
                       
Headcount
    18,801       20,137       (7 )
 
                       
Credit quality statistics
                       
Net charge-offs
  $ 1,016     $ 1,590       (36 )
Managed net charge-off rate
    2.99 %     4.83 %        
 
                       
Delinquency ratios
                       
30+ days
    3.10 %     3.54 %        
90+ days
    1.39       1.71          
 
                       
Allowance for loan losses
  $ 3,274     $ 3,040       8  
Allowance for loan losses to period-end loans
    5.06 %     4.60 %        
 
     
(a)  
Represents Total net revenue less Provision for credit losses.
 
(b)  
Represents 100% of the merchant acquiring business.
 
(c)  
Periods prior to the fourth quarter of 2005 have been restated to conform methodologies following the integration of Chase Merchant Services and Paymentech merchant processing businesses.

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The financial information presented below reconciles reported basis and managed basis to disclose the effect of securitizations.
                         
    Three months ended March 31,
(in millions)   2006     2005     Change
 
Income statement data(a)
                       
Credit card income
                       
Reported data for the period
  $ 1,726     $ 1,576       10 %
Securitization adjustments
    (1,125 )     (815 )     (38 )
         
Managed credit card income
  $ 601     $ 761       (21 )
         
 
                       
Net interest income
                       
Reported data for the period
  $ 1,439     $ 1,275       13  
Securitization adjustments
    1,574       1,732       (9 )
         
Managed net interest income
  $ 3,013     $ 3,007        
         
 
                       
Total net revenue
                       
Reported data for the period
  $ 3,236     $ 2,862       13  
Securitization adjustments
    449       917       (51 )
         
Managed total net revenue
  $ 3,685     $ 3,779       (2 )
         
 
                       
Provision for credit losses
                       
Reported data for the period
  $ 567     $ 719       (21 )
Securitization adjustments
    449       917       (51 )
         
Managed provision for credit losses
  $ 1,016     $ 1,636       (38 )
         
 
                       
Balance sheet – average balances(a)
                       
Total average assets
                       
Reported data for the period
  $ 78,437     $ 71,003       10  
Securitization adjustments
    67,557       67,509        
         
Managed average assets
  $ 145,994     $ 138,512       5  
         
 
                       
Credit quality statistics(a)
                       
Net charge-offs
                       
Reported net charge-offs data for the period
  $ 567     $ 673       (16 )
Securitization adjustments
    449       917       (51 )
         
Managed net charge-offs
  $ 1,016     $ 1,590       (36 )
 
     
(a)  
JPMorgan Chase uses the concept of “managed receivables” to evaluate the credit performance and overall performance of the underlying credit card loans, both sold and not sold; as the same borrower is continuing to use the credit card for ongoing charges, a borrower’s credit performance will affect both the receivables sold under SFAS 140 and those not sold. Thus, in its disclosures regarding managed receivables, JPMorgan Chase treats the sold receivables as if they were still on the balance sheet in order to disclose the credit performance (such as net charge-off rates) of the entire managed credit card portfolio. Managed results exclude the impact of credit card securitizations on Total net revenue, the Provision for credit losses, net charge-offs and loan receivables. Securitization does not change reported net income versus managed earnings; however, it does affect the classification of items on the Consolidated statements of income.

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COMMERCIAL BANKING
 
For a discussion of the business profile of CB, see page 4 of this Form 10–Q. As previously announced, various wholesale banking clients, and the related income and balance sheet items, have been transferred between Commercial Banking, the Investment Bank and Treasury & Securities Services. As a result, prior period amounts have been reclassified to conform to the current year presentation. For additional information on these transfers, see page 13 of this Form 10–Q.
The agreement to acquire The Bank of New York’s middle-market banking business will add approximately 2,000 clients, $2.9 billion of loans and $1.6 billion in deposits.
                         
Selected income statement data   Three months ended March 31,
(in millions, except ratios)   2006     2005     Change
 
Revenue
                       
Lending & deposit related fees
  $ 142     $ 142       %
Asset management, administration and commissions
    15       14       7  
All other income(a)
    76       71       7  
         
Noninterest revenue
    233       227       3  
Net interest income
    667       600       11  
         
Total net revenue
    900       827       9  
 
                       
Provision for credit losses
    7       (6 )   NM  
 
                       
Noninterest expense
                       
Compensation expense
    197       161       22  
Noncompensation expense
    285       276       3  
Amortization of intangibles
    16       17       (6 )
         
Total noninterest expense
    498       454       10  
         
Income before income tax expense
    395       379       4  
Income tax expense
    155       148       5  
         
Net income
  $ 240     $ 231       4  
         
 
                       
Financial ratios
                       
ROE
    18 %     28 %        
ROA
    1.78       1.83          
Overhead ratio
    55       55          
 
     
(a)  
IB-related and commercial card revenues are included in All other income.
Quarterly results
Net income was $240 million, up by $9 million, or 4%, from the prior year. The increase from the prior year was the result of growth in net interest income offset partially by incremental expense from the adoption of SFAS 123R and an increase in provision for credit losses.
Net revenue was $900 million, up by $73 million, or 9%, from the prior year. Net interest income was $667 million, up by $67 million, or 11%, due to wider spreads and higher volumes related to liability balances and increased loan balances, partially offset by narrower loan spreads reflecting continuing competitive pressure. Noninterest revenue was $233 million, up by $6 million, or 3%, from the prior year.
Each business within Commercial Banking grew revenue over the prior year. Middle Market Banking revenue was $623 million, an increase of $53 million, or 9%, primarily due to higher treasury services and investment banking revenue. Mid-Corporate Banking and Real Estate revenues increased 11% and 7%, respectively, due primarily to an increase in treasury services revenue.
Provision for credit losses was $7 million, compared with a net benefit of $6 million in the prior year.
Noninterest expense was $498 million, up by $44 million, or 10%, from the prior year. The increase was due primarily to incremental expense of $29 million from the adoption of SFAS 123R.

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Selected metrics   Three months ended March 31,
(in millions, except ratio and headcount data)   2006     2005     Change
 
Revenue by product:
                       
Lending
  $ 319     $ 292       9 %
Treasury services
    550       497       11  
Investment banking
    40       39       3  
Other
    (9 )     (1 )   NM  
         
Total Commercial Banking revenue
    900       827       9  
         
 
                       
IB revenues, gross
  $ 114     $ 107       7  
         
 
                       
Revenue by business:
                       
Middle Market Banking
  $ 623     $ 570       9  
Mid-Corporate Banking
    137       123       11  
Real Estate
    105       98       7  
Other
    35       36       (3 )
         
Total Commercial Banking revenue
    900       827       9  
         
Selected average balances
                       
Total assets
  $ 54,771     $ 51,135       7  
Loans and leases
    50,836       46,599       9  
Liability balances(a)
    70,763       65,380       8  
Equity
    5,500       3,400       62  
 
                       
Average loans by business:
                       
Middle market banking
  $ 31,861     $ 30,243       5  
Mid-corporate banking
    7,577       5,799       31  
Real estate
    7,436       6,937       7  
Other
    3,962       3,620       9  
         
Total Commercial Banking loans
    50,836       46,599       9  
         
 
                       
Headcount
    4,310       4,464       (3 )
 
                       
Credit data and quality statistics:
                       
Net charge-offs
  $ (7 )   $ 2     NM  
Nonperforming loans
    202       433       (53 )
Allowance for loan losses
    1,415       1,312       8  
Allowance for lending-related commitments
    145       170       (15 )
 
                       
Net charge-off (recovery) rate
    (0.06 )%     0.02 %        
Allowance for loan losses to average loans
    2.78       2.82          
Allowance for loan losses to nonperforming loans
    700       303          
Nonperforming loans to average loans
    0.40       0.93          
 
     
(a)  
Liability balances include deposits and deposits swept to on-balance sheet liabilities.

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TREASURY & SECURITIES SERVICES
 
For a discussion of the business profile of TSS, see page 5 of this Form 10–Q. TSS, as previously announced, reorganized by combining the Investor Services and Institutional Trust Services businesses into a single business called WSS. In 2006, various wholesale banking clients, and the related revenue and expense, have been transferred among CB, IB and TSS. As a result, prior period amounts have been reclassified to conform to the current year presentation. TSS firmwide disclosures have also been adjusted to reflect a refined set of TSS products and a revised split of liability balances and lending-related revenue related to the client transfers described on page 13 of this Form 10–Q.
                         
Selected income statement data   Three months ended March 31,
(in millions, except ratios)   2006     2005     Change
 
Revenue
                       
Lending & deposit related fees
  $ 182     $ 170       7 %
Asset management, administration and commissions
    774       692       12  
All other income
    149       121       23  
         
Noninterest revenue
    1,105       983       12  
Net interest income
    572       515       11  
         
Total net revenue
    1,677       1,498       12  
 
                       
Provision for credit losses
    (4 )     (3 )     (33 )
Credit reimbursement to IB(a)
    (30 )     (38 )     21  
 
                       
Noninterest expense
                       
Compensation expense
    601       504       19  
Noncompensation expense
    529       534       (1 )
Amortization of intangibles
    28       29       (3 )
         
Total noninterest expense
    1,158       1,067       9  
 
                       
Income before income tax expense
    493       396       24  
Income tax expense
    181       142       27  
         
 
                       
Net income
  $ 312     $ 254       23  
         
Financial ratios
                       
ROE
    44 %     54 %        
Overhead ratio
    69       71          
Pre-tax margin ratio(b)
    29       26          
 
     
(a)  
TSS is charged a credit reimbursement related to certain exposures managed within the IB credit portfolio on behalf of clients shared with TSS. For a further discussion, see Credit reimbursement on page 35 of JPMorgan Chase’s 2005 Annual Report.
 
(b)  
Pre-tax margin represents Income before income tax expense divided by Total net revenue, which is a comprehensive measure of pre-tax performance and is another basis by which TSS management evaluates its performance and that of its competitors. Pre-tax margin is an effective measure of TSS’ earnings, after all operating costs are taken into consideration.
Quarterly results
Net income was a record $312 million, up by $58 million, or 23%. Earnings benefited from higher revenues due to business growth and wider spreads on average liability balances, partially offset by higher compensation expense resulting from business growth and incremental expense from the adoption of SFAS 123R.
Net revenue of $1.7 billion was up by $179 million, or 12%. Noninterest revenue was $1.1 billion, up by $122 million, or 12%. The improvement was due to an increase in assets under custody to $11.7 trillion, which was driven by market value appreciation and new business. Also contributing to the improvement was the acquisition of Vastera and growth in Fund Services, foreign exchange and wholesale card, all of which were driven by a combination of increased usage by existing clients and new business. Net interest income was $572 million, up by $57 million, primarily resulting from wider spreads on higher average liability balances, which increased 22% to $196 billion.
TS net revenue of $693 million grew by $59 million, or 9%. WSS net revenue of $984 million grew by $120 million, or 14%. TSS firmwide net revenue, which includes Treasury Services net revenue recorded in other lines of business, grew to $2.3 billion, up $237 million, or 12%. Treasury Services firmwide net revenue grew to $1.3 billion, up $117 million, or 10%.
Credit reimbursement to the IB was $30 million, a decrease of $8 million. TSS is charged a credit reimbursement related to certain exposures managed within the Investment Bank credit portfolio on behalf of clients shared with TSS.
Noninterest expense was $1.2 billion, up by $91 million, or 9%. The increase was due to higher compensation expense related to business growth, incremental expense of $25 million from the adoption of SFAS 123R, and the acquisition of Vastera.

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The Firm has announced the exchange of a portion of the corporate trust business for the consumer, small-business and middle-market banking businesses of The Bank of New York. For a description of the transaction, see Other Business Events on page 5 of this Form 10–Q.
                         
Selected metrics   Three months ended March 31,
(in millions, except headcount, ratio data and where                
otherwise noted)   2006     2005     Change
 
Revenue by business
                       
Treasury Services
  $ 693     $ 634       9 %
Worldwide Securities Services
    984       864       14  
         
Total net revenue
  $ 1,677     $ 1,498       12  
 
                       
Business metrics
                       
Assets under custody (in billions)(a)
  $ 11,737     $ 10,154       16  
Corporate trust securities under administration (in billions)(b)
    7,040       6,745       4  
Number of:
                       
US$ ACH transactions originated (in millions)
    838       699       20  
Total US$ clearing volume (in thousands)
    25,182       21,705       16  
International electronic funds transfer volume (in thousands)(c)
    33,741       17,159       97  
Wholesale check volume (in millions)
    852       940       (9 )
Wholesale cards issued (in thousands)(d)
    16,977       11,834       43  
Selected balance sheets (average)
                       
Total assets
  $ 30,131     $ 29,534       2  
Loans
    13,137       12,021       9  
Liability balances(e)
    196,255       160,906       22  
Equity
    2,900       1,900       53  
 
                       
Headcount
    25,924       23,076       12  
 
                       
TSS firmwide metrics
                       
Treasury Services firmwide revenue(f)
  $ 1,291     $ 1,174       10  
Treasury & Securities Services firmwide revenue(f)
    2,275       2,038       12  
Treasury Services firmwide overhead ratio(g)
    56 %     59 %        
Treasury & Securities Services firmwide overhead ratio(g)
    62       64          
Treasury Services firmwide liability balances (average)(h)
  $ 155,422     $ 133,770       16  
Treasury & Securities Services firmwide liability balances (average)(h)
    266,450       226,286       18  
 
     
(a)  
At September 30, 2005, approximately $130 billion of Trust-related assets under custody (“AUC”) were included in the total amount. Approximately 5% of total AUC are trust related.
 
(b)  
Corporate trust securities under administration include debt held in trust on behalf of third parties and debt serviced as agent.
 
(c)  
International electronic funds transfer includes non-US$ ACH and clearing volume.
 
(d)  
Wholesale cards issued include domestic commercial card, stored value card, prepaid card, and government electronic benefit card products.
 
(e)  
Liability balances include deposits and deposits swept to on-balance sheet liabilities.
TSS firmwide metrics
TSS firmwide metrics include certain TSS product revenues and liability balances reported in other lines of business for customers who are also customers of those lines of business. In order to capture the firmwide impact of Treasury Services (“TS”) and TSS products and revenues, management reviews firmwide metrics such as liability balances, revenues and overhead ratios in assessing financial performance for TSS. Firmwide metrics are necessary in order to understand the aggregate TSS business. Prior periods have been restated to reflect the impact of the client transfers described on page 13 of this Form 10–Q.
  (f)  
Firmwide revenue includes TS revenue recorded in the Commercial Banking (“CB”), Regional Banking and Asset & Wealth Management lines of business (see below) and excludes FX revenues recorded in the Investment Bank (“IB”) for TSS-related FX activity. TSS firmwide FX revenue, which includes FX revenue recorded in TSS and FX revenue associated with TSS customers who are FX customers of the IB, was $118 million for the three months ended March 31, 2006.
 
  (g)  
Overhead ratios have been calculated based upon firmwide revenues and TSS and TS expenses, respectively, including those allocated to certain other lines of business. FX revenues and expenses recorded in the IB for TSS-related FX activity are not included in this ratio.
 
  (h)  
Firmwide liability balances include TS liability balances recorded in certain other lines of business. Liability balances associated with TS customers who are also customers of the CB line of business are not included in TS liability balances.
                         
    Three months ended March 31,  
(in millions)   2006     2005     Change
 
Treasury Services revenue reported in CB
  $ 550     $ 497       11 %
Treasury Services revenue reported in other lines of business
    48       43       12  
 

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ASSET & WEALTH MANAGEMENT
 
For a discussion of the business profile of AWM, see pages 51–52 of JPMorgan Chase’s 2005 Annual Report.
                         
Selected income statement data   Three months ended March 31,
(in millions, except ratios)   2006     2005     Change
 
Revenue
                       
Asset management, administration and commissions
  $ 1,222     $ 975       25 %
All other income
    116       104       12  
         
Noninterest revenue
    1,338       1,079       24  
Net interest income
    246       282       (13 )
         
Total net revenue
    1,584       1,361       16  
 
                       
Provision for credit losses
    (7 )     (7 )      
 
                       
Noninterest expense
                       
Compensation expense
    682       538       27  
Noncompensation expense
    394       371       6  
Amortization of intangibles
    22       25       (12 )
         
Total noninterest expense
    1,098       934       18  
         
Income before income tax expense
    493       434       14  
Income tax expense
    180       158       14  
         
Net income
  $ 313     $ 276       13  
         
 
                       
Financial ratios
                       
ROE
    36 %     47 %        
Overhead ratio
    69       69          
Pre-tax margin ratio(a)
    31       32          
 
(a)  
Pre-tax margin represents Income before income tax expense divided by Total net revenue, which is a comprehensive measure of pre-tax performance and is another basis by which AWM management evaluates its performance and that of its competitors. Pre-tax margin is an effective measure of AWM’s earnings, after all costs are taken into consideration.
Quarterly results
Net income was $313 million, up by $37 million, or 13%, from the prior year. Performance was driven by increased revenues offset partially by a higher compensation expense related to incremental expense from the adoption of SFAS 123R and higher performance-based compensation.
Net revenue was $1.6 billion, up by $223 million, or 16%, from the prior year. Noninterest revenue, principally fees and commissions, of $1.3 billion was up by $259 million, or 24%. This increase was due primarily to net asset inflows, mainly in equity-related and liquidity products; global equity market appreciation; and higher placement and performance fees. Net interest income was $246 million, down by $36 million, or 13%, from the prior year, primarily due to narrower deposit spreads and the sale of BrownCo in the fourth-quarter of 2005, partially offset by higher deposit balances.
Retail client segment revenue grew 28%, to $442 million, primarily due to net asset inflows, partially offset by the sale of BrownCo. Private Bank client segment revenue grew 5% from the prior year to $441 million, due to increased placement activity and management fees, and higher deposit balances, partially offset by narrower deposit spreads. Institutional client segment revenue grew 35%, to $435 million, due to net asset inflows and higher performance fees. Private Client Services client segment revenue decreased 2%, to $266 million, due to narrower deposit and loan spreads, partially offset by higher deposit and loan balances.
Provision for credit losses was a $7 million benefit, flat from the prior year.
Noninterest expense of $1.1 billion was up by $164 million, or 18%, from the prior year. This increase was due to incremental expense of $71 million from the adoption of SFAS 123R, and higher performance-based compensation, partially offset by the sale of BrownCo.

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Selected metrics   Three months ended March 31,
(in millions, except headcount and ranking                  
data, and where otherwise noted)   2006     2005     Change  
 
Revenue by client segment
                       
Retail
  $ 442     $ 346       28 %
Private bank
    441       422       5  
Institutional
    435       322       35  
Private client services
    266       271       (2 )
         
Total net revenue
  $ 1,584     $ 1,361       16  
 
                       
Business metrics
                       
Number of:
                       
Client advisors
    1,439       1,390       4  
Retirement planning services participants
    1,327,000       1,181,000       12  
 
                       
% of customer assets in 4 & 5 Star Funds(a)
    54 %     48 %     13  
% of AUM in 1st and 2nd quartiles:(b)
                       
1 year
    72 %     71 %     1  
3 years
    75 %     73 %     3  
5 years
    75 %     71 %     6  
 
                       
Selected balance sheets data (average)
                       
Total assets
  $ 41,012     $ 39,716       3  
Loans(c)
    24,482       26,357       (7 )
Deposits(c)(d)
    48,066       42,043       14  
Equity
    3,500       2,400       46  
 
                       
Headcount
    12,511       12,378       1  
 
                       
Credit data and quality statistics
                       
Net charge-offs (recoveries)
  $ 7     $ (6 )   NM
Nonperforming loans
    79       78       1  
Allowance for loan losses
    119       214       (44 )
Allowance for lending-related commitments
    3       5       (40 )
 
                       
Net charge-off (recovery) rate
    0.12 %     (0.09 )%        
Allowance for loan losses to average loans
    0.49       0.81          
Allowance for loan losses to nonperforming loans
    151       274          
Nonperforming loans to average loans
    0.32       0.30          
 
(a)  
Derived from Morningstar for the United States; Micropal for the United Kingdom, Luxembourg, Hong Kong and Taiwan; and Nomura for Japan.
 
(b)  
Quartile rankings sourced from Lipper for the United States and Taiwan; Micropal for the United Kingdom, Luxembourg and Hong Kong; and Nomura for Japan.
 
(c)  
The sale of BrownCo, which occurred on November 30, 2005, included $3.0 billion in both loans and deposits.
 
(d)  
Reflects the transfer in 2005 of certain consumer deposits from Retail Financial Services to Asset & Wealth Management.
Assets under supervision
Assets under supervision were $1.2 trillion, up 10%, or $105 billion, from the prior year, including a $33 billion reduction due to the sale of BrownCo. Assets under management were $873 billion, up 11%, or $83 billion, from the prior year. The increase was primarily the result of market appreciation and net asset inflows driven by retail flows from third-party distribution, primarily in equity-related products, and institutional flows in liquidity products. Custody, brokerage, administration and deposit balances were $324 billion, up $22 billion, after reflecting a $33 billion reduction from the sale of BrownCo.

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ASSETS UNDER SUPERVISION (in billions)            
As of March 31,   2006     2005  
 
Assets by asset class
               
Liquidity
  $ 236     $ 228  
Fixed income
    166       171  
Equities & balanced
    397       326  
Alternatives
    74       65  
 
Total Assets under management
    873       790  
Custody/brokerage/administration/deposits
    324       302  
 
Total Assets under supervision
  $ 1,197     $ 1,092  
 
 
               
Assets by client segment
               
Institutional(a)
  $ 468     $ 462  
Private Bank
    137       138  
Retail(a)
    214       138  
Private Client Services
    54       52  
 
Total Assets under management
  $ 873     $ 790  
 
Institutional(a)
  $ 471     $ 467  
Private Bank
    332       299  
Retail(a)
    291       232  
Private Client Services
    103       94  
 
Total Assets under supervision
  $ 1,197     $ 1,092  
 
 
               
Assets by geographic region
               
U.S./Canada
  $ 564     $ 550  
International
    309       240  
 
Total Assets under management
  $ 873     $ 790  
 
U.S./Canada
  $ 822     $ 792  
International
    375       300  
 
Total Assets under supervision
  $ 1,197     $ 1,092  
 
 
               
Mutual fund assets by asset class
               
Liquidity
  $ 167     $ 175  
Fixed income
    48       45  
Equity
    189       106  
 
Total mutual fund assets
  $ 404     $ 326  
 
 
               
Assets under management rollforward
               
Beginning balance, January 1
  $ 847     $ 791  
Flows:
               
Liquidity
    (5 )     (6 )
Fixed income
          4  
Equities, balanced and alternatives
    13       1  
Market/performance/other impacts
    18        
 
Ending balance
  $ 873     $ 790  
 
Assets under supervision rollforward
               
Beginning balance, January 1
  $ 1,149     $ 1,106  
Net asset flows
    12       6  
Market/performance/other impacts
    36       (20 )
 
Ending balance
  $ 1,197     $ 1,092  
 
(a)  
During the first quarter of 2006, assets under management of $22 billion from Retirement planning services has been reclassified from the Institutional client segment to the Retail client segment in order to be consistent with the revenue by client segment reporting.

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CORPORATE
 
For a discussion of the business profile of Corporate, see pages 53–54 of JPMorgan Chase’s 2005 Annual Report. For additional information regarding enhanced disclosures related to the Corporate segment, refer to page 13 of this Form 10–Q.
                         
Selected income statement data   Three months ended March 31,
(in millions)   2006     2005     Change  
 
Revenue
                       
Principal transactions
  $ 196     $ 743       (74 )%
Securities (losses)
    (158 )     (902 )     82  
All other income
    101       73       38  
         
Noninterest revenue
    139       (86 )     NM  
Net interest income
    (545 )     (673 )     19  
         
Total net revenue
    (406 )     (759 )     47  
 
                       
Provision for credit losses
          (4 )     NM  
 
                       
Noninterest expense
                       
Compensation expense
    685       774       (11 )
Noncompensation expense(a)
    608       1,703       (64 )
Merger costs
    71       145       (51 )
         
Subtotal
    1,364       2,622       (48 )
Net expenses allocated to other businesses
    (1,038 )     (1,142 )     9  
         
Total noninterest expense
    326       1,480       (78 )
         
 
                       
Income before income tax expense
    (732 )     (2,235 )     67  
Income tax expense (benefit)
    (316 )     (900 )     65  
         
Net income (loss)
  $ (416 )   $ (1,335 )     69  
 
(a)  
Includes litigation reserve charges of $900 million in the first quarter of 2005 relating to the settlement of WorldCom class action litigation. In the first quarter of 2006, insurance recoveries relating to certain material litigation of $98 million were recorded.
Quarterly results
Net loss was $416 million compared with a net loss of $1.3 billion in the prior year. In comparison to the prior year, Private Equity earnings were $103 million, down from $437 million; Treasury net loss was $270 million compared with a net loss of $828 million; and the net loss in Other Corporate was $249 million compared with a net loss of $944 million.
Net revenue was negative $406 million compared with negative $759 million in the prior year. Net interest income was negative $545 million compared with negative $673 million in the prior year. Treasury was the primary driver of the improvement, with net interest income of negative $278 million compared with negative $409 million in the prior year. The benefit was due primarily to an improvement in Treasury’s net interest spread, offset partially by a reduction in the level of the available-for-sale securities portfolio. Noninterest revenue was $139 million compared with negative $86 million, reflecting lower Treasury securities portfolio losses of $158 million compared with losses of $902 million in the prior year. This increase was offset partially by lower Private Equity gains of $237 million compared with gains of $789 million in the prior year.
Noninterest expense was $326 million, down $1.2 billion from $1.5 billion in the prior year. Excluding in the current quarter, $71 million of merger costs and incremental expense of $57 million from the adoption of SFAS 123R, and excluding in the prior year a material litigation charge of $900 million, primarily related to WorldCom, and $145 million of merger costs, noninterest expense would have been down $237 million. The decrease in expense was due to merger-related savings and other efficiencies.

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Selected metrics   Three months ended March 31,
(in millions)   2006     2005     Change  
 
Net revenue
                       
Private equity
  $ 204     $ 744       (73 )%
Treasury
    (464 )     (1,344 )     65  
Corporate other
    (146 )     (159 )     8  
         
Total net revenue
  $ (406 )   $ (759 )     47  
 
 
                       
Net income (loss)
                       
Private equity
  $ 103     $ 437       (76 )
Treasury
    (270 )     (828 )     67  
Corporate other(a)
    (205 )     (854 )     76  
Merger costs
    (44 )     (90 )     51  
         
Total net income (loss)
  $ (416 )   $ (1,335 )     69  
 
(a)  
See Footnote (a) on page 33.
                         
Selected income statement and balance sheet data   Three months ended March 31,
(in millions)   2006     2005     Change  
 
Treasury
                       
Securities (losses)(a)
  $ (158 )   $ (902 )     82 %
Investment portfolio (average)
    39,989       65,646       (39 )
Investment portfolio (ending)
    46,093       46,943       (2 )
 
                       
Private equity
                       
Private equity gains (losses)
                       
Realized gains
  $ 207     $ 633       (67 )
Write-ups / (write-downs)
    10       206       (95 )
Mark-to-market gains (losses)
    4       (89 )   NM
         
Total direct investments
    221       750       (71 )
Third-party fund investments
    16       39       (59 )
         
Total private equity gains(b)
  $ 237     $ 789       (70 )
 
                         
Private equity portfolio information                  
Direct investments   March 31, 2006     December 31, 2005     Change
 
Publicly – held securities
                       
Carrying value
  $ 501     $ 479       5 %
Cost
    395       403       (2 )
Quoted public value
    677       683       (1 )
 
                       
Privately – held direct securities
                       
Carrying value
    5,077       5,028       1  
Cost
    6,501       6,463       1  
 
                       
Third-party fund investments
                       
Carrying value
    675       669       1  
Cost
    1,000       1,003        
         
Total private equity portfolio – Carrying value
  $ 6,253     $ 6,176       1  
Total private equity portfolio – Cost
  $ 7,896     $ 7,869        
 
(a)  
Losses in the first quarters of 2006 and 2005 reflect repositioning of the Treasury investment securities portfolio. Excludes gains/losses on securities used to manage risk associated with MSRs.
 
(b)  
Included in Principal transactions.
The carrying value of the private equity portfolio at March 31, 2006, stands at $6.3 billion, down $936 million from March 31, 2005. The portfolio decline was primarily due to sales activity.

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BALANCE SHEET ANALYSIS
 
                 
Selected balance sheet data (in millions)   March 31, 2006     December 31, 2005  
 
Assets
               
Cash and due from banks
  $ 36,903     $ 36,670  
Deposits with banks
    10,545       21,661  
Federal funds sold and securities purchased under resale agreements
    153,755       133,981  
Securities borrowed
    93,280       74,604  
Trading assets:
               
Debt and equity instruments
    259,275       248,590  
Derivative receivables
    52,750       49,787  
Securities:
               
Available-for-sale
    67,054       47,523  
Held-to-maturity
    72       77  
Loans, net of allowance for loan losses
    424,806       412,058  
Other receivables
    26,537       27,643  
Goodwill and other intangible assets
    59,513       58,180  
All other assets
    88,792       88,168  
 
Total assets
  $ 1,273,282     $ 1,198,942  
 
 
               
Liabilities
               
Deposits
  $ 584,465     $ 554,991  
Federal funds purchased and securities sold under repurchase agreements
    151,006       125,925  
Commercial paper and other borrowed funds
    30,333       24,342  
Trading liabilities:
               
Debt and equity instruments
    104,160       94,157  
Derivative payables
    55,938       51,773  
Long-term debt and capital debt securities
    123,113       119,886  
Beneficial interests issued by consolidated VIEs
    42,237       42,197  
All other liabilities
    73,693       78,460  
 
Total liabilities
    1,164,945       1,091,731  
Stockholders’ equity
    108,337       107,211  
 
Total liabilities and stockholders’ equity
  $ 1,273,282     $ 1,198,942  
 
Balance sheet overview
At March 31, 2006, the Firm’s total assets were $1.3 trillion, an increase of $74.3 billion, or 6%, from December 31, 2005. Growth was primarily in Federal funds sold and securities purchased under resale agreements, Securities borrowed, AFS securities, Trading assets – debt and equity instruments, and Loans.
At March 31, 2006, the Firm’s total liabilities were $1.2 trillion, an increase of $73.2 billion, or 7%, from December 31, 2005. Growth was primarily in Federal funds purchased and securities sold under repurchase agreements, interest-bearing U.S. and Non-U.S. deposits, and debt and equity trading liabilities.

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Federal funds sold and securities purchased under resale agreements and Federal funds purchased and securities sold under repurchase agreements
During the first quarter of 2006, the Firm’s liability growth outpaced growth on the asset side of the balance sheet resulting in an increase in short-term investments, specifically Federal funds sold and securities purchased under resale agreements.
Trading assets and liabilities – debt and equity instruments
The Firm’s debt and equity trading instruments consist primarily of fixed income securities (including government and corporate debt) and equity and convertible cash instruments used for both market-making and proprietary risk-taking activities. The increase over December 31, 2005, was due primarily to growth in client-driven market-making activities across interest rate, credit and equity markets. For additional information, refer to Note 3 on page 66 of this Form 10–Q.
Trading assets and liabilities – derivative receivables and payables
The Firm uses various interest rate, foreign exchange, equity, credit and commodity derivatives for market-making, proprietary risk-taking and risk-management purposes. The increase from December 31, 2005, was due primarily to increased interest rate, equity and commodity trading activity and rising commodity prices. For additional information, refer to Credit risk management and Note 3 on pages 43–54 and 66, respectively, of this Form 10–Q.
Securities
The AFS portfolio increased by $19.5 billion from 2005 year-end, primarily due to purchases in the Treasury investment securities portfolio. For additional information related to securities, refer to the Corporate segment discussion and to Note 8 on pages 33–34 and 72, respectively, of this Form 10–Q.
Loans
The $12.9 billion increase in gross loans was due primarily to an increase of $14.7 billion in the wholesale portfolio, mainly in the IB, reflecting an increase in capital markets activity, including leveraged financings and syndications and higher balances of loans held-for-sale. The $1.8 billion decrease in consumer loans was primarily due to a decline of $7.0 billion in the credit card portfolio, partially offset by an increase of $6.0 billion in education loans. The decrease in the credit card portfolio was primarily due to the seasonal pattern and higher-than-normal customer payment rates of credit card receivables. The increase in education loans was the result of the purchase of Collegiate Funding Services. Management believes the higher-than-normal customer payment rates in Card Services may partially be related to the recently implemented new minimum payment rules. For a more detailed discussion of the loan portfolio and the Allowance for loan losses, refer to Credit risk management on pages 43–54 of this Form 10–Q.
Goodwill and Other intangible assets
The $1.3 billion increase in Goodwill and Other intangible assets primarily resulted from higher MSRs due to growth in the servicing portfolio and an overall increase in the MSR valuation from improved market conditions, as well as the acquisition of Collegiate Funding Services. Partially offsetting the increase were declines from the amortization of purchased credit card relationships and core deposit intangibles. For additional information, see Note 14 on pages 79–81 of this Form 10–Q.
Deposits
Deposits increased by 5% from December 31, 2005. Retail deposits increased, reflecting growth from new account acquisitions and the ongoing expansion of the retail branch distribution network. Wholesale deposits were higher driven by growth in business volumes. For more information on deposits, refer to the RFS segment discussion and the Liquidity risk management discussion on pages 17–22 and 42–43, respectively, of this Form 10–Q. For more information on liability balances, refer to the CB and TSS segment discussions on pages 26–27 and 28–29, respectively, of this Form 10–Q.
Long-term debt and capital debt securities
Long-term debt and capital debt securities increased by $3.2 billion, or 3%, from December 31, 2005, primarily due to net new issuances of long-term debt offset partially by a redemption of capital debt securities. The Firm took advantage of narrow credit spreads globally to satisfy long-term debt and capital debt securities needs in the first quarter of 2006. Consistent with its liquidity management policy, the Firm has raised funds at the parent holding company sufficient to cover its obligations and those of its nonbank subsidiaries that mature over the next 12 months. Large investor cash positions and increased foreign investor participation in the corporate markets allowed JPMorgan Chase to diversify further its funding sources across the global markets while lengthening maturities at historically attractive costs. For additional information on the Firm’s long-term debt activity, see the Liquidity risk management discussion on pages 42–43 of this Form 10–Q.
Stockholders’ equity
Total stockholders’ equity increased by $1.1 billion from year-end 2005 to $108.3 billion at March 31, 2006. The increase was the result of net income for the first three months of 2006, common stock issued under employee plans and the beneficial effect of changes in accounting principles. This increase was offset partially by payment of cash dividends, stock repurchases, the redemption of $139 million of preferred stock and net unrealized losses in Accumulated other comprehensive income. For a further discussion of capital, see the Capital management section that follows.

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CAPITAL MANAGEMENT
 
The following discussion of JPMorgan Chase’s Capital Management highlights developments since December 31, 2005, and should be read in conjunction with pages 56–58 of JPMorgan Chase’s 2005 Annual Report.
The Firm’s capital management framework is intended to ensure that there is capital sufficient to support the underlying risks of the Firm’s business activities, as measured by economic risk capital and to maintain “well-capitalized” status under regulatory requirements. In addition, the Firm holds capital above these requirements in amounts deemed appropriate to achieve management’s regulatory and debt-rating objectives. The process of assigning equity to the lines of business is integrated into the Firm’s capital framework.
Line of business equity
Equity for a line of business represents the amount the Firm believes the business would require if it were operating independently, incorporating sufficient capital to address economic risk measures, regulatory capital requirements and capital levels for similarly rated peers. Return on equity is measured and internal targets for expected returns are established as a key measure of a business segment’s performance.
Effective January 1, 2006, the Firm refined its methodology for allocating capital to the lines of business. As a result of this refinement, Retail Financial Services, Card Services, Commercial Banking, Treasury & Securities Services and Asset & Wealth Management have higher amounts of capital allocated to them, commencing in the first quarter of 2006, while the amount of capital allocated to the Investment Bank has remained unchanged. The revised methodology considers for each line of business, among other things, goodwill associated with such line of business’ acquisitions since the Merger. In management’s view, the revised methodology assigns responsibility to the lines of business to generate returns on the amount of capital supporting acquisition-related goodwill. As part of this refinement in the capital allocation methodology, the Firm assigned to the Corporate segment an amount of equity capital equal to the then-current book value of goodwill from and prior to the Merger. As prior periods have not been revised to reflect the new capital allocations, capital allocated to the respective lines of business for 2006 is not comparable to prior periods and certain business metrics, such as ROE, are not comparable to the current presentation. The Firm may revise its equity capital allocation methodology again in the future. In accordance with SFAS 142, the lines of business will continue to perform the required goodwill impairment testing. For a further discussion of goodwill and impairment testing, see Critical accounting estimates and Note 15 on pages 81–83 and 114–116, respectively, of JPMorgan Chase’s 2005 Annual Report.
                 
(in billions)   Quarterly Averages
Line of business equity   1Q06     1Q05  
 
Investment Bank
  $ 20.0     $ 20.0  
Retail Financial Services
    13.9       13.1  
Card Services
    14.1       11.8  
Commercial Banking
    5.5       3.4  
Treasury & Securities Services
    2.9       1.9  
Asset & Wealth Management
    3.5       2.4  
Corporate
    47.3       52.7  
 
Total common stockholders’ equity
  $ 107.2     $ 105.3  
 

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Economic risk capital
JPMorgan Chase assesses its capital adequacy relative to the risks underlying the Firm’s business activities, utilizing internal risk-assessment methodologies. The Firm assigns economic capital based primarily upon four risk factors: credit risk, market risk and operational risk for each business; in addition, the Firm assigns capital based on private equity risk to the Corporate segment in connection with the segment’s private equity business.
                 
(in billions)   Quarterly Averages
Economic risk capital   1Q06     1Q05  
 
Credit risk
  $ 21.7     $ 23.1  
Market risk
    10.0       8.7  
Operational risk
    5.7       5.3  
Private equity risk
    3.6       4.1  
 
Economic risk capital
    41.0       41.2  
Goodwill
    43.8       43.3  
Other(a)
    22.4       20.8  
 
Total common stockholders’ equity
  $ 107.2     $ 105.3  
 
(a)  
Additional capital required to meet internal regulatory and debt rating objectives.
Regulatory capital
The Firm’s federal banking regulator, the Federal Reserve Board (“FRB”), establishes capital requirements, including well-capitalized standards for the consolidated financial holding company. The Office of the Comptroller of the Currency (“OCC”) establishes similar capital requirements and standards for the Firm’s national banks, including JPMorgan Chase Bank and Chase Bank USA, National Association.
In the first quarter of 2006, the federal banking regulatory agencies issued a final rule that makes permanent an interim rule issued in 2000 that provides regulatory capital relief for certain cash-collateralized securities borrowed transactions. The final rule, which became effective February 22, 2006, also broadens the types of transactions qualifying for regulatory capital relief under the interim rule. Adoption of the rule did not have a material effect on the Firm’s capital ratios.
On March 1, 2005, the FRB issued a final rule, which became effective April 11, 2005, that continues the inclusion of trust preferred securities in Tier 1 capital, subject to stricter quantitative limits and revised qualitative standards, and broadens the definition of restricted core capital elements. The rule provides for a five-year transition period. As an internationally active bank holding company, JPMorgan Chase is subject to the rule’s limitation on restricted core capital elements, including trust preferred securities, to 15% of total core capital elements, net of goodwill less any associated deferred tax liability. At March 31, 2006, JPMorgan Chase’s restricted core capital elements were 15.7% of total core capital elements. JPMorgan Chase expects to be in compliance with the 15% limit by the March 31, 2009, implementation date.

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The following table presents the risk-based capital ratios for JPMorgan Chase and its significant banking subsidiaries at March 31, 2006, and December 31, 2005:
                                                         
                    Risk-     Adjusted     Tier 1     Total     Tier 1  
    Tier 1     Total     weighted     average     capital     capital     leverage  
(in millions, except ratios)   capital     capital     assets(c)     assets(d)     ratio     ratio     ratio  
 
March 31, 2006
                                                       
JPMorgan Chase & Co.(a)
  $ 73,085     $ 103,800     $ 858,080     $ 1,195,231       8.5 %     12.1 %     6.1 %
JPMorgan Chase Bank, N.A.
    62,001       85,228       769,012       1,046,442       8.1       11.1       5.9  
Chase Bank USA, N.A.
    9,196       11,280       60,940       58,440       15.1       18.5       15.7  
 
                                                       
December 31, 2005
                                                       
JPMorgan Chase & Co.(a)
  $ 72,474     $ 102,437     $ 850,643     $ 1,152,546       8.5 %     12.0 %     6.3 %
JPMorgan Chase Bank, N.A.
    61,050       84,227       750,397       995,095       8.1       11.2       6.1  
Chase Bank USA, N.A.
    8,608       10,941       72,229       59,882       11.9       15.2       14.4  
 
                                                       
Well-capitalized ratios(b)
                                    6.0 %     10.0 %     5.0 %(e)
Minimum capital ratios(b)
                                    4.0       8.0       3.0 (f)
 
(a)  
Asset 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)  
As defined by the regulations issued by the FRB, FDIC and OCC.
 
(c)  
Includes off–balance sheet risk-weighted assets in the amounts of $280.3 billion, $267.1 billion and $9.8 billion, respectively, at March 31, 2006, and $279.2 billion, $260.0 billion and $15.5 billion, respectively, at December 31, 2005.
 
(d)  
Average adjusted assets for purposes of calculating the leverage ratio include total average assets adjusted for unrealized gains/losses on securities, less deductions for disallowed goodwill and other intangible assets, investments in subsidiaries and the total adjusted carrying value of nonfinancial equity investments that are subject to deductions from Tier 1 capital.
 
(e)  
Represents requirements for bank subsidiaries pursuant to regulations issued under the Federal Deposit Insurance Corporation Improvement Act. There is no Tier 1 leverage component in the definition of a well-capitalized bank holding company.
 
(f)  
The minimum Tier 1 leverage ratio for bank holding companies and banks is 3% or 4% depending on factors specified in regulations issued by the FRB and OCC.
Tier 1 capital was $73.1 billion at March 31, 2006, compared with $72.5 billion at December 31, 2005, an increase of $611 million. The increase was due primarily to net income of $3.1 billion and net issuances of common stock under employee plans of $903 million. Offsetting these increases were changes in equity net of other comprehensive income due to dividends declared of $1.2 billion and redemptions of preferred stock and common share repurchases totaling $1.4 billion, as well as the redemption of qualifying trust preferred securities and an increase in the deduction for goodwill and other nonqualifying intangibles. Additional information regarding the Firm’s capital ratios and the federal regulatory capital standards to which it is subject is presented in Note 24 on pages 121–122 of JPMorgan Chase’s 2005 Annual Report.
Dividends
The Firm’s common stock dividend policy reflects JPMorgan Chase’s earnings outlook, desired payout ratios, need to maintain an adequate capital level and alternative investment opportunities. In the first quarter of 2006, JPMorgan Chase declared a quarterly cash dividend on its common stock of $0.34 per share, payable April 30, 2006, to stockholders of record at the close of business April 6, 2006. The Firm continues to target a dividend payout ratio of 30-40% of net income over time.
Stock repurchases
On March 21, 2006, the Board of Directors approved a stock repurchase program which authorizes the repurchase of up to $8 billion of the Firm’s common shares. The new stock repurchase program replaces the Firm’s previous repurchase authorization. The amount authorized includes shares to be repurchased to offset issuances under the Firm’s employee stock-based plans. The actual amount of shares repurchased will be subject to various factors, including market conditions; legal considerations affecting the amount and timing of repurchase activity; the Firm’s capital position (taking into account goodwill and intangibles); internal capital generation; and alternative potential investment opportunities. The repurchase program does not include specific price targets or time tables; may be executed through open market purchases or privately negotiated transactions or utilizing Rule 10b5-1 programs; and may be suspended at any time.
During the first quarter of 2006, under the stock repurchase programs then in effect, the Firm repurchased a total of 31.8 million shares for $1.3 billion at an average price per share of $40.54. Of the $1.3 billion of shares repurchased in the first quarter of 2006, $1.1 billion was repurchased under the original $6 billion stock repurchase program, and $143 million was repurchased under the new $8 billion stock repurchase program. During the first quarter of 2005, under the original $6 billion stock repurchase program, the Firm repurchased 36.0 million shares for $1.3 billion at an average price per share of $36.57. As of March 31, 2006, $7.9 billion of authorized repurchase capacity remained under the new stock repurchase program.

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For additional information regarding repurchases of the Firm’s equity securities, see Part II, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds, on pages 94–95 of this Form 10–Q.
 
OFF–BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS
 
Special-purpose entities
JPMorgan Chase is involved with several types of off–balance sheet arrangements, including special purpose entities (“SPEs”), lines of credit and loan commitments. The principal uses of SPEs are to obtain sources of liquidity for JPMorgan Chase and its clients by securitizing financial assets, and to create other investment products for clients. These arrangements are an important part of the financial markets, providing market liquidity by facilitating investors’ access to specific portfolios of assets and risks. For example, SPEs are integral to the markets for mortgage-backed securities, commercial paper and other asset-backed securities.
JPMorgan Chase is involved with SPEs in three broad categories: loan securitizations, multi-seller conduits and client intermediation. Capital is held, as deemed appropriate, against all SPE-related transactions and related exposures, such as derivative transactions and lending-related commitments. For a further discussion of SPEs and the Firm’s accounting for them, see Note 1 on page 91, Note 13 on pages 108–111 and Note 14 on pages 111–113 of JPMorgan Chase’s 2005 Annual Report.
For certain liquidity commitments to SPEs, the Firm could be required to provide funding if the credit rating of JPMorgan Chase Bank were downgraded below specific levels, primarily P-1, A-1 and F1 for Moody’s, Standard & Poor’s and Fitch, respectively. The amount of these liquidity commitments was $73.8 billion and $71.3 billion at March 31, 2006, and December 31, 2005, respectively. Alternatively, if JPMorgan Chase Bank were downgraded, the Firm could be replaced by another liquidity provider in lieu of providing funding under the liquidity commitment, or, in certain circumstances, could facilitate the sale or refinancing of the assets in the SPE in order to provide liquidity.
Of its $73.8 billion in liquidity commitments to SPEs at March 31, 2006, $42.6 billion was included in the Firm’s other unfunded commitments to extend credit and asset purchase agreements, included in the following table. Of the $71.3 billion of liquidity commitments to SPEs at December 31, 2005, $38.9 billion was included in the Firm’s other unfunded commitments to extend credit and asset purchase agreements. As a result of the Firm’s consolidation of multi-seller conduits in accordance with FIN 46R, $31.2 billion of these commitments are excluded from the table at March 31, 2006, compared with $32.4 billion at December 31, 2005, as the underlying assets of the SPEs have been included on the Firm’s Consolidated balance sheets.
The Firm also has exposure to certain SPEs arising from derivative transactions; these transactions are recorded at fair value on the Firm’s Consolidated balance sheets with changes in fair value (i.e., MTM gains and losses) recorded in Trading revenue. Such MTM gains and losses are not included in the revenue amounts reported in the table below.
The following table summarizes certain revenue information related to consolidated and nonconsolidated variable interest entities (“VIEs”) with which the Firm has significant involvement, and to qualifying SPEs (“QSPEs”). The revenue reported in the table below primarily represents servicing and credit fee income. For a further discussion of VIEs and QSPEs, see Note 1, Note 13 and Note 14, on pages 91, 108–111 and 111–113, respectively, of JPMorgan Chase’s 2005 Annual Report.
Revenue from VIEs and QSPEs
                         
    Three months ended March 31,
(in millions)   VIEs     QSPEs     Total  
 
2006
  $ 54     $ 793     $ 847  
2005(a)
    57       743       800  
 
(a) Prior period results have been restated to reflect current methodology.

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Off–balance sheet lending-related financial instruments and guarantees
JPMorgan Chase utilizes lending-related financial instruments (e.g., commitments and guarantees) to meet the financing needs of its customers. The contractual amount of these financial instruments represents the maximum possible credit risk should the counterparty draw down the commitment or the Firm fulfill its obligation under the guarantee, and the counterparty subsequently fails to perform according to the terms of the contract. Most of these commitments and guarantees expire without a default occurring or without being drawn. As a result, the total contractual amount of these instruments is not, in the Firm’s view, representative of its actual future credit exposure or funding requirements. Further, certain commitments, primarily related to consumer financings, are cancelable upon notice at the option of the Firm. For a further discussion of lending-related commitments and guarantees and the Firm’s accounting for them, see Credit risk management on pages 63–72 and Note 27 on pages 124–125 of JPMorgan Chase’s 2005 Annual Report.
The following table presents off–balance sheet lending-related financial instruments and guarantees for the periods indicated:
                                                 
                                            Dec. 31,  
    March 31, 2006   2005
By remaining maturity   Under     1-3     3-5     Over              
(in millions)   1 year     years     years     5 years     Total     Total  
 
Lending-related
                                               
Consumer(a)
  $ 608,498     $ 4,012     $ 3,776     $ 53,116     $ 669,402     $ 655,596  
Wholesale:
                                               
Other unfunded commitments to extend credit(b)(c)
    77,324       45,981       62,109       15,772       201,186       208,469  
Asset purchase agreements(d)
    14,072       13,943       5,804       1,002       34,821       31,095  
Standby letters of credit and guarantees(c)(e)
    27,176       18,992       31,028       5,417       82,613       77,199  
Other letters of credit(c)
    3,288       368       294       5       3,955       4,346  
 
Total wholesale
    121,860       79,284       99,235       22,196       322,575       321,109  
 
Total lending-related
  $ 730,358     $ 83,296     $ 103,011     $ 75,312     $ 991,977     $ 976,705  
 
Other guarantees
                                               
Securities lending guarantees(f)
  $ 283,111     $     $     $     $ 283,111     $ 244,316  
Derivatives qualifying as guarantees(g)
    28,889       13,537       3,330       19,180       64,936       61,759  
 
(a)  
Includes Credit card lending-related commitments of $589 billion at March 31, 2006, and $579 billion at December 31, 2005, which represent the total available credit to the Firm’s cardholders. The Firm has not experienced, and does not anticipate, that all of its cardholders will exercise their entire available lines of credit at the same point in time. The Firm can reduce or cancel a credit card commitment by providing the cardholder prior notice or, in some cases, without notice as permitted by law.
 
(b)  
Includes unused advised lines of credit totaling $28.4 billion at March 31, 2006, and $28.3 billion at December 31, 2005, which are not legally binding. In regulatory filings with the FRB, unused advised lines are not reportable.
 
(c)  
Represents contractual amount net of risk participations totaling $36.8 billion at March 31, 2006, and $29.3 billion at December 31, 2005.
 
(d)  
The maturity is based upon the weighted average life of the underlying assets in the SPE, primarily multi-seller asset-backed commercial paper conduits.
 
(e)  
Includes unused commitments to issue standby letters of credit of $39.8 billion at March 31, 2006, and $37.5 billion at December 31, 2005.
 
(f)  
Collateral held by the Firm in support of securities lending indemnification agreements was $283 billion at March 31, 2006, and $245 billion at December 31, 2005.
 
(g)  
Represents notional amounts of derivative guarantees. For a further discussion of guarantees, see Note 27 on pages 124–125 of JPMorgan Chase’s 2005 Annual Report.
 
RISK MANAGEMENT
 
Risk is an inherent part of JPMorgan Chase’s business activities. The Firm’s risk management framework and governance structure is intended to provide comprehensive controls and ongoing management of the major risks inherent in its business activities. In addition, this framework recognizes the diversity among the Firm’s core businesses, which helps reduce the impact of volatility in any particular area on the Firm’s operating results as a whole. There are eight major risk types identified in the business activities of the Firm: liquidity risk, credit risk, market risk, interest rate risk, operational risk, legal and reputation risk, fiduciary risk and private equity risk.
For a further discussion of these risks see pages 60–80 of JPMorgan Chase’s 2005 Annual Report.

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LIQUIDITY RISK MANAGEMENT
 
The following discussion of JPMorgan Chase’s liquidity management framework highlights developments since December 31, 2005, and should be read in conjunction with pages 61–62 of JPMorgan Chase’s 2005 Annual Report.
Liquidity risk arises from the general funding needs of the Firm’s activities and in the management of its assets and liabilities. JPMorgan Chase’s liquidity management framework is intended to maximize liquidity access and minimize funding costs. Through active liquidity management, the Firm seeks to preserve stable, reliable and cost-effective sources of funding. This enables the Firm to replace maturing obligations when due and fund assets at appropriate maturities and rates. To accomplish this task, management uses a variety of liquidity risk measures that take into consideration market conditions, prevailing interest rates, liquidity needs and the desired maturity profile of liabilities.
Funding
Sources of funds
Consistent with its liquidity management policy, the Firm has raised funds at the parent holding company sufficient to cover its obligations and those of its nonbank subsidiaries that mature over the next 12 months. Long-term funding needs for the parent holding company over the next several quarters are expected to be consistent with prior periods.
As of March 31, 2006, the Firm’s liquidity position remained strong based upon its liquidity metrics. JPMorgan Chase’s long-dated funding, including core deposits, exceeds illiquid assets, and the Firm believes its obligations can be met even if access to funding is impaired.
The diversity of the Firm’s funding sources enhances financial flexibility and limits dependence on any one source, thereby minimizing the cost of funds. The deposits held by the RFS, CB and TSS lines of business are a stable and consistent source of funding for JPMorgan Chase Bank. As of March 31, 2006, total deposits for the Firm were $584 billion, which represented 66% of the Firm’s funding liabilities. A significant portion of the Firm’s retail deposits are “core” deposits, which are less sensitive to interest rate changes and therefore are considered more stable than market-based deposits. Core deposits include all U.S. deposits insured by the FDIC, up to the legal limit of $100,000 per depositor. Throughout the first quarter of 2006, core bank deposits remained at approximately the same level as at the 2005 year-end. In addition to core retail deposits, the Firm benefits from substantial, geographically diverse corporate liability balances originated by TSS and CB through the normal course of business. These franchise-generated core liability balances are also a stable and consistent source of funding due to the nature of the businesses from which they are generated. For a further discussion of deposit and liability balance trends, see Business Segment Results and Balance Sheet Analysis on pages 13 and 35–36, respectively, of this Form 10–Q.
Additional sources of funds include a variety of both short- and long-term instruments, including federal funds purchased, commercial paper, bank notes, medium- and long-term debt, and capital debt securities. This funding is managed centrally, using regional expertise and local market access, to ensure active participation in the global financial markets while maintaining consistent global pricing. These markets serve as a cost-effective and diversified source of funds and are a critical component of the Firm’s liquidity management. Decisions concerning the timing and tenor of accessing these markets are based upon relative costs, general market conditions, prospective views of balance sheet growth and a targeted liquidity profile.
Finally, funding flexibility is provided by the Firm’s ability to access the repo and asset securitization markets. These markets are evaluated on an ongoing basis to achieve an appropriate balance of secured and unsecured funding. The ability to securitize loans, and the associated gains on those securitizations, are principally dependent upon the credit quality and yields of the assets securitized and are generally not dependent upon the credit ratings of the issuing entity. Transactions between the Firm and its securitization structures are reflected in JPMorgan Chase’s consolidated financial statements; these relationships include retained interests in securitization trusts, liquidity facilities and derivative transactions. For further details, see Off–balance sheet arrangements and contractual cash obligations and Notes 12 and 19 on pages 40–41, 74–77 and 83–84, respectively, of this Form 10–Q.

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Issuance
Corporate credit spreads tightened modestly in the first quarter of 2006 across most industries and sectors. On an historical basis, credit spreads remain near historic tight levels as corporate profits are generally healthy and investor demand remains strong. JPMorgan Chase’s credit spreads performed in line with peer spreads.
During the first quarter of 2006, JPMorgan Chase issued approximately $12.4 billion of long-term debt and capital debt securities. These issuances were offset partially by $9.3 billion of long-term debt and capital debt securities that matured or were redeemed and by the Firm’s redemption of $139 million of preferred stock. In addition, during the first quarter of 2006 the Firm securitized approximately $3.2 billion of residential mortgage loans and approximately $4.5 billion of credit card loans, resulting in pre-tax gains on securitizations of $89 million and $30 million, respectively. The Firm did not securitize any automobile loans during the first quarter of 2006. For a further discussion of loan securitizations, see Note 12 on pages 74–77 of this Form 10–Q.
Credit ratings
The credit ratings of JPMorgan Chase’s parent holding company and each of its significant banking subsidiaries were, as of March 31, 2006, 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, N.A.
  P-1   A-1+   F1+   Aa2   AA-   A+
Chase Bank USA, N.A.
  P-1   A-1+   F1+   Aa2   AA-   A+
 
The cost and availability of unsecured financing are influenced by credit ratings. A reduction in these ratings could adversely affect the Firm’s access to liquidity sources, increase the cost of funds, trigger additional collateral requirements and decrease the number of investors and counterparties willing to lend. Critical factors in maintaining high credit ratings include a stable and diverse earnings stream, strong capital ratios, strong credit quality and risk management controls, diverse funding sources and strong liquidity monitoring procedures.
If the Firm’s ratings were downgraded by one notch, the Firm estimates the incremental cost of funds and the potential loss of funding to be negligible. Additionally, the Firm estimates the additional funding requirements for VIEs and other third-party commitments would not be material. In the current environment, the Firm believes a downgrade is unlikely. For additional information on the impact of a credit ratings downgrade on the funding requirements for VIEs, and on derivatives and collateral agreements, see Special-purpose entities on pages 40–41 and Ratings profile of derivative receivables mark-to-market (“MTM”) on page 48, of this Form 10–Q.
 
CREDIT RISK MANAGEMENT
 
The following discussion of JPMorgan Chase’s credit portfolio as of March 31, 2006, highlights developments since December 31, 2005, and should be read in conjunction with pages 63–74 and page 81, and Notes 11,12, 27, and 28 of JPMorgan Chase’s 2005 Annual Report.
The Firm assesses its consumer credit exposure on a managed basis, which includes credit card securitizations. For a reconciliation of the Provision for credit losses on a reported basis to managed basis, see pages 11–12 of this Form 10–Q.

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CREDIT PORTFOLIO
 
The following table presents JPMorgan Chase’s credit portfolio as of March 31, 2006, and December 31, 2005. Total credit exposure at March 31, 2006, increased by $29.5 billion from December 31, 2005, reflecting an increase of $18.4 billion and $11.1 billion in the wholesale and consumer credit portfolios, respectively. In the table below, reported loans include all HFS loans, which are carried at the lower of cost or fair value with changes in value recorded in Other income. However, these HFS loans are excluded from the average loan balances used for the net charge-off rate calculations.
                                                                 
                                    Three months ended March 31,
                    Nonperforming                     Average annual  
    Credit exposure   assets(h)   Net charge-offs   net charge-off rate(j)
    Mar. 31,   Dec. 31,   Mar. 31,   Dec. 31,                          
(in millions, except ratios)   2006   2005   2006   2005   2006   2005   2006   2005
 
Total credit portfolio
                                                               
Loans – reported(a)
  $ 432,081     $ 419,148     $ 2,098 (i)   $ 2,343 (i)   $ 668     $ 816       0.69 %     0.88 %
Loans – securitized(b)
    69,580       70,527                   449       917       2.62       5.36  
 
Total managed loans(c)
    501,661       489,675       2,098       2,343       1,117       1,733       0.98       1.58  
Derivative receivables(d)
    52,750       49,787       49       50     NA   NA   NA   NA
Interests in purchased receivables
    29,029       29,740                 NA   NA   NA   NA
 
Total managed credit-related assets
    583,440       569,202       2,147       2,393       1,117       1,733       0.98       1.58  
Lending-related commitments(e)
    991,977       976,705     NA   NA   NA   NA   NA   NA
Assets acquired in loan satisfactions
  NA   NA     201       197     NA   NA   NA   NA
 
Total credit portfolio
  $ 1,575,417     $ 1,545,907     $ 2,348     $ 2,590     $ 1,117     $ 1,733       0.98 %     1.58 %
 
Credit derivative hedges notional(f)
  $ (29,286 )   $ (29,882 )   $ (18 )   $ (17 )   NA   NA   NA   NA
Collateral held against derivatives
    (6,101 )     (6,000 )   NA   NA   NA   NA   NA   NA
Held-for-sale
                                                               
Total average HFS loans
    35,842       32,086     NA   NA   NA   NA   NA   NA
Nonperforming – purchased(g)
    340       341     NA   NA   NA   NA   NA   NA
 
(a)  
Loans are presented net of unearned income of $2.7 billion and $3.0 billion at March 31, 2006, and December 31, 2005, respectively.
 
(b)  
Represents securitized credit card receivables. For a further discussion of credit card securitizations, see Card Services on pages 23–25 of this Form 10–Q.
 
(c)  
Past-due 90 days and over and accruing includes credit card receivables of $956 million and $1.1 billion, and related credit card securitizations of $913 million and $730 million at March 31, 2006, and December 31, 2005, respectively.
 
(d)  
Reflects net cash received under credit support annexes to legally enforceable master netting agreements of $23 billion and $27 billion as of March 31, 2006, and December 31, 2005, respectively.
 
(e)  
Includes wholesale unused advised lines of credit totaling $28.4 billion and $28.3 billion at March 31, 2006, and December 31, 2005, respectively, which are not legally binding. In regulatory filings with the Federal Reserve Board, unused advised lines are not reportable. Credit card lending-related commitments of $589 billion and $579 billion at March 31, 2006, and December 31, 2005, respectively, represent the total available credit to its cardholders. The Firm has not experienced, and does not anticipate, that all of its cardholders will exercise their entire available lines of credit at the same point in time. The Firm can reduce or cancel a credit card commitment by providing the cardholder prior notice or, in some cases, without notice as permitted by law.
 
(f)  
Represents the net notional amount of protection purchased and sold of single-name and portfolio credit derivatives used to manage the credit risk of credit exposures; these derivatives do not qualify for hedge accounting under SFAS 133.
 
(g)  
Represents distressed HFS wholesale loans purchased as part of IB’s proprietary activities, which are excluded from nonperforming assets.
 
(h)  
Includes nonperforming HFS loans of $84 million and $136 million as of March 31, 2006, and December 31, 2005, respectively.
 
(i)  
Excludes nonperforming assets related to (i) loans eligible for repurchase as well as loans repurchased from GNMA pools that are insured by government agencies of $1.1 billion for both March 31, 2006, and December 31, 2005, and (ii) education loans that are 90 days past due and still accruing, which are insured by government agencies under the Federal Family Education Loan Program of $0.2 billion at March 31, 2006. These amounts for GNMA and education loans are excluded, as reimbursement is proceeding normally.
 
(j)  
Net charge-off rates exclude average loans HFS of $36 billion and $24 billion for the quarter ended March 31, 2006 and 2005, respectively.

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WHOLESALE CREDIT PORTFOLIO
 
As of March 31, 2006, wholesale exposure (IB, CB, TSS and AWM) increased by $18.4 billion from December 31, 2005, due primarily to $14.7 billion in loan growth. As described on page 36 of this Form 10–Q, the increase in Loans was primarily in the IB, reflecting an increase in capital markets activity, including leveraged financings and syndications and higher balances of loans held-for-sale.
                                                                 
                                    Three months ended March 31,
                                                    Average annual net
                    Nonperforming   Net charge-offs/   charge-off/(recovery)
    Credit exposure   assets(f)   (recoveries)   rate(h)
    Mar. 31,   Dec. 31,   Mar. 31,   Dec. 31,                        
(in millions, except ratios)   2006   2005   2006   2005   2006   2005   2006   2005
 
Loans – reported(a)
  $ 164,799     $ 150,111     $ 737     $ 992     $ (20 )   $ (9 )     (0.06 )%     (0.03 )%
Derivative receivables(b)
    52,750       49,787       49       50     NA   NA   NA   NA
Interests in purchased receivables
    29,029       29,740                 NA   NA   NA   NA
 
Total wholesale credit-related assets
    246,578       229,638       786       1,042       (20 )     (9 )     (0.06 )     (0.03 )
Lending-related commitments(c)
    322,575       321,109     NA   NA   NA   NA   NA   NA
Assets acquired in loan satisfactions
  NA   NA     13       17     NA   NA   NA   NA
 
Total wholesale credit exposure
  $ 569,153     $ 550,747     $ 799     $ 1,059     $ (20) (g)   $ (9 )(g)     (0.06 )%     (0.03 )%
 
Credit derivative hedges notional(d)
  $ (29,286 )   $ (29,882 )   $ (18 )   $ (17 )   NA   NA   NA   NA
Collateral held against derivatives
    (6,101 )     (6,000 )   NA   NA   NA   NA   NA   NA
Held-for-sale
                                                               
Total average HFS loans
    19,480       15,581     NA   NA   NA   NA   NA   NA
Nonperforming – purchased(e)
    340       341     NA   NA   NA   NA   NA   NA
 
(a)  
Past-due 90 days and over and accruing include loans of $64 million and $50 million at March 31, 2006, and December 31, 2005, respectively.
 
(b)  
Reflects net cash received under credit support annexes to legally enforceable master netting agreements of $23 billion and $27 billion as of March 31, 2006, and December 31, 2005, respectively.
 
(c)  
Includes unused advised lines of credit totaling $28.4 billion and $28.3 billion at March 31, 2006, and December 31, 2005, respectively, which are not legally binding. In regulatory filings with the Federal Reserve Board, unused advised lines are not reportable.
 
(d)  
Represents the net notional amount of protection purchased and sold of single-name and portfolio credit derivatives used to manage the credit risk of credit exposures; these derivatives do not qualify for hedge accounting under SFAS 133.
 
(e)  
Represents distressed HFS loans purchased as part of IB’s proprietary activities, which are excluded from nonperforming assets.
 
(f)  
Includes nonperforming HFS loans of $68 million and $109 million as of March 31, 2006, and December 31, 2005, respectively.
 
(g)  
Excludes $20 million and $8 million in the first quarter of 2006 and the first quarter of 2005, respectively, in gains on sales of nonperforming loans. For a further discussion, see the discussion below.
 
(h)  
Net charge-off rates exclude average loans HFS of $20 billion and $8 billion for the quarter ended March 31, 2006 and 2005, respectively.
Net charge-offs/recoveries
Wholesale net recoveries were $20 million compared with net recoveries of $9 million in the prior year, primarily due to lower gross charge-offs. The net recovery rate was 0.06% compared with a net recovery rate of 0.03% for the prior year. These net recoveries do not include $20 million of gains from sales of nonperforming loans that were sold from the credit portfolio during the first quarter of 2006. This compares with $8 million of gains from nonperforming loans sold from the credit portfolio in the same period in the prior year. When it is determined that a loan will be sold, it is transferred into a held-for-sale account. HFS loans are accounted for at lower of cost or fair value, with changes in value recorded in Other income.

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Below are summaries of the maturity and ratings profiles of the wholesale portfolio as of March 31, 2006, and December 31, 2005. The ratings scale is based upon the Firm’s internal risk ratings and is presented on an S&P-equivalent basis.
Wholesale exposure
                                                                 
    Maturity profile(c)   Ratings profile              
                                    Investment-   Noninvestment-              
                                    grade ("IG")(d)   grade(d)              
At March 31, 2006           1-5   >5                                   Total %
(in billions, except ratios)   <1 year(d)   years(d)   years(d)   Total   AAA to BBB-   BB+ & below   Total   of IG(d)
 
Loans
    44 %     42 %     14 %     100 %   $ 95     $ 50     $ 145       66 %
Derivative receivables
    12       37       51       100       46       7       53       87  
Interests in purchased receivables
    48       50       2       100       29             29       100  
Lending-related commitments
    38       55       7       100       275       47       322       85  
 
Total excluding HFS
    34 %     54 %     12 %     100 %   $ 445     $ 104       549       81 %
Held-for-sale(a)
                                                    20          
 
Total exposure
                                                  $ 569          
 
Credit derivative hedges notional(b)
    16 %     72 %     12 %     100 %   $ (26 )   $ (3 )   $ (29 )     90 %
 
                                                                 
    Maturity profile(c)   Ratings profile              
                                    Investment-   Noninvestment-              
                                    grade ("IG")(d)   grade(d)              
At December 31, 2005           1-5   >5                                   Total %
(in billions, except ratios)   <1 year(d)   years(d)   years(d)   Total   AAA to BBB-   BB+ & below   Total   of IG(d)
 
Loans
    43 %     44 %     13 %     100 %   $ 87     $ 45     $ 132       66 %
Derivative receivables
    2       42       56       100       42       8       50       84  
Interests in purchased receivables
    41       57       2       100       30             30       100  
Lending-related commitments
    36       57       7       100       273       48       321       85  
 
Total excluding HFS
    35 %     52 %     13 %     100 %   $ 432     $ 101       533       81 %
Held-for-sale(a)
                                                    18          
 
Total exposure
                                                  $ 551          
 
Credit derivative hedges notional(b)
    15 %     74 %     11 %     100 %   $ (27 )   $ (3 )   $ (30 )     90 %
 
(a)  
HFS loans relate primarily to securitization and syndication activities.
 
(b)  
Ratings are based upon the underlying referenced assets.
 
(c)  
The maturity profile of 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 68 of JPMorgan Chase’s 2005 Annual Report for a further discussion of Average exposure.
 
(d)  
Excludes HFS loans.

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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. As of March 31, 2006, the top 10 industry exposure remained predominantly unchanged compared with December 31, 2005, with the exception of exposures to Securities firms and exchanges, which increased primarily as a result of changes in derivatives exposures. Below is a summary of the Top 10 industry concentrations as of March 31, 2006, and December 31, 2005.
                                 
    March 31, 2006   December 31, 2005
Top 10 industries(a)   Credit     % of   Credit     % of
(in millions, except ratios)   exposure(c)     portfolio   exposure(c)     portfolio
 
Banks and finance companies
  $ 52,535       10 %   $ 50,924       10 %
Real estate
    29,511       5       29,974       5  
Consumer products
    26,635       5       25,678       5  
State and municipal governments
    26,177       5       25,328       5  
Healthcare
    24,871       5       25,435       5  
Securities firms and exchanges
    24,176       4       17,094       3  
Utilities
    22,513       4       20,482       4  
Retail and consumer services
    20,090       4       19,920       4  
Asset managers
    19,105       3       17,358       3  
Oil and gas
    18,106       3       18,200       3  
All other
    285,539       52       282,802       53  
 
Total excluding HFS
  $ 549,258       100 %   $ 533,195       100 %
Held-for-sale(b)
    19,895               17,552          
 
Total exposure
  $ 569,153             $ 550,747          
 
(a)  
Based upon March 31, 2006, determination of Top 10 industries.
 
(b)  
HFS loans primarily relate to securitization and syndication activities.
 
(c)  
Credit exposure is net of risk participations and excludes the benefit of credit derivative hedges and collateral held against derivative receivables or loans. At March 31, 2006, and December 31, 2005, collateral held against derivative receivables excludes $23 billion and $27 billion, respectively, of cash collateral as a result of the Firm electing to report the fair value of derivative assets and liabilities net of cash received and paid, respectively, under legally enforceable master netting agreements.
Wholesale criticized exposure
Exposures deemed criticized generally represent a ratings profile similar to a rating of CCC+/Caa1 and lower, as defined by Standard & Poor’s/Moody’s. At March 31, 2006, the top 10 criticized industries exposure remained predominantly unchanged compared with December 31, 2005, with Healthcare moving into the top 10, replacing Airlines.
The criticized component of the portfolio decreased to $5.1 billion (excluding HFS loans) at March 31, 2006, from $5.2 billion at year-end 2005, reflecting stable credit quality. Wholesale nonperforming assets (excluding purchased held-for-sale wholesale loans) decreased by $260 million to $799 million at March 31, 2006, from $1.1 billion at December 31, 2005, due primarily to loan sales, repayments and gross charge-offs.
Wholesale criticized exposure – industry concentrations
                                 
    March 31, 2006   December 31, 2005
Top 10 industries(a)           % of           % of
(in millions, except ratios)   Amount     portfolio   Amount     portfolio
 
Media
  $ 679       13 %   $ 684       13 %
Automotive
    560       11       643       12  
Consumer products
    511       10       590       11  
Telecom services
    419       8       430       8  
Real estate
    392       8       276       5  
Retail and consumer services
    273       5       288       6  
Utilities
    257       5       295       6  
Machinery and equipment manufacturing
    249       5       290       6  
Healthcare
    235       5       243       5  
Building materials/construction
    227       5       266       5  
All other
    1,254       25       1,167       23  
 
Total excluding HFS
  $ 5,056       100 %   $ 5,172       100 %
Held-for-sale(b)
    652               1,069          
 
Total
  $ 5,708             $ 6,241          
 
(a)  
Based upon March 31, 2006, determination of Top 10 industries.
 
(b)  
HFS loans primarily relate to securitization and syndication activities; excludes purchased nonperforming HFS loans.

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Derivative contracts
In the normal course of business, the Firm uses derivative instruments to meet the needs of customers; to generate revenues through trading activities; to manage exposure to fluctuations in interest rates, currencies and other markets; and to manage the Firm’s credit exposure. For a further discussion of derivative contracts, see Note 18 on page 83 of this Form 10–Q, and pages 67–70 of JPMorgan Chase’s 2005 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”)
                                 
(in billions)   Notional amounts(a)   Derivative receivables MTM
    March 31, 2006     December 31, 2005     March 31, 2006     December 31, 2005  
 
Interest rate
  $ 41,429     $ 38,493     $ 31     $ 30  
Foreign exchange
    2,334       2,136       2       3  
Equity
    531       458       7       6  
Credit derivatives
    2,848       2,241       4       4  
Commodity
    331       265       9       7  
 
Total
  $ 47,473     $ 43,593       53       50  
Collateral held against derivative receivables
  NA     NA       (6 )     (6 )
 
Exposure net total of collateral
  NA     NA     $ 47 (b)   $ 44 (c)
 
(a)  
The notional amounts represent the gross sum of long and short third-party notional derivative contracts, excluding written options and foreign exchange spot contracts.
 
(b)  
The Firm held $29 billion of collateral against derivative receivables as of March 31, 2006, consisting of $23 billion in net cash received under credit support annexes to legally enforceable master netting agreements, and $6 billion of other liquid securities collateral. The benefit of the $23 billion is reflected within the $53 billion of derivative receivables MTM. Excluded from the $29 billion of collateral is $10 billion of collateral delivered by clients at the initiation of transactions; this collateral secures exposure that could arise in the derivatives portfolio should the MTM of the client’s transactions move in the Firm’s favor. Also excluded are credit enhancements in the form of letters of credit and surety receivables.
 
(c)  
The Firm held $33 billion of collateral against derivative receivables as of December 31, 2005, consisting of $27 billion in net cash received under credit support annexes to legally enforceable master netting agreements, and $6 billion of other liquid securities collateral. The benefit of the $27 billion is reflected within the $50 billion of derivative receivables MTM. Excluded from the $33 billion of collateral is $10 billion of collateral delivered by clients at the initiation of transactions; this collateral secures exposure that could arise in the derivatives portfolio should the MTM of the client’s transactions move in the Firm’s favor. Also excluded are credit enhancements in the form of letters of credit and surety receivables.
The MTM of derivative receivables contracts represents the cost to replace the contracts at current market rates should the counterparty default. When JPMorgan Chase has more than one transaction outstanding with a counterparty, and a legally enforceable master netting agreement exists with that counterparty, the netted MTM exposure, less collateral held, represents, in the Firm’s view, the appropriate measure of current credit risk.
The following table summarizes the ratings profile of the Firm’s Derivative receivables MTM, net of cash and other liquid securities collateral for the dates indicated:
Ratings profile of derivative receivables MTM
                                 
    March 31, 2006   December 31, 2005
Rating equivalent   Exposure net   % of exposure   Exposure net   % of exposure
(in millions)   of collateral(b)   net of collateral   of collateral(c)   net of collateral
 
AAA to AA-
  $ 20,513       44 %   $ 20,735       48 %
A+ to A-(a)
    12,454       27       8,074       18  
BBB+ to BBB-
    8,557       18       8,243       19  
BB+ to B-
    5,030       11       6,580       15  
CCC+ and below
    95             155        
 
Total
  $ 46,649       100 %   $ 43,787       100 %
 
(a)  
Increase from December 31, 2005, primarily related to customers in the Securities firms and exchanges industry.
 
(b)  
See footnote (b) above.
 
(c)  
See footnote (c) above.

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

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Credit portfolio management activities
The credit derivatives used by JPMorgan Chase for credit 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 in Principal transactions. The MTM value incorporates both the cost of credit derivative premiums and changes in value due to movement in spreads and credit events; in contrast, the loans and lending-related commitments being risk-managed are accounted for on an accrual basis. Loan interest and fees are generally recognized in Net interest income, and impairment is recognized in the Provision for credit losses. This asymmetry in accounting treatment, between loans and lending-related commitments and the credit derivatives utilized in credit portfolio management activities, causes earnings volatility that is not representative, in the Firm’s view, of the true changes in value of the Firm’s overall credit exposure. The MTM related to the Firm’s credit derivatives used for managing credit exposure, as well as the mark related to the CVA, which reflects the credit quality of derivatives counterparty exposure, are included in the table below:
                 
For the quarter ended March 31,            
(in millions)   2006     2005  
 
CVA and hedges of CVA(a)
  $ 23     $ 21  
Hedges of lending-related commitments(a)
    (82 )     33  
 
Net gains (losses)(b)
  $ (59 )   $ 54  
 
(a)  
These hedges do not qualify for hedge accounting under SFAS 133.
 
(b)  
Excludes $6 million and $22 million at March 31, 2006 and 2005, respectively, of other Principal transaction revenues that are not associated with hedging activities.
The Firm also actively manages wholesale credit exposure through loan and commitment sales. During the first quarters of 2006 and 2005, the Firm sold $665 million and $944 million of loans and commitments, respectively, recognizing gains of $20 million and $11 million, respectively. These activities are not related to the Firm’s securitization activities, which are undertaken for liquidity and balance sheet management purposes. For a further discussion of securitization activity, see Note 12 on pages 74–77 of this Form 10–Q.
Lending-related commitments
The contractual amount of wholesale lending-related commitments was $323 billion at March 31, 2006, compared with $321 billion at December 31, 2005. In the Firm’s view, the total contractual amount of these instruments is not representative of the Firm’s actual credit risk exposure or funding requirements. In determining the amount of credit risk exposure the Firm has to wholesale lending-related commitments, which is used as the basis for allocating credit risk capital to these instruments, the Firm has established a “loan-equivalent” amount for each commitment; this amount represents the portion of the unused commitment or other contingent exposure that is expected, based upon average portfolio historical experience, to become outstanding in the event of a default by an obligor. The loan equivalent amount of the Firm’s lending-related commitments was $178 billion as of both March 31, 2006, and December 31, 2005.
Country exposure
The Firm has a comprehensive process for measuring and managing exposures and risk in emerging markets countries – defined as those countries potentially vulnerable to sovereign events. Exposures to a country include all credit-related lending, trading, and investment activities, whether cross-border or locally funded. Exposure amounts are adjusted for credit enhancements (e.g., guarantees and letters of credit) provided by third parties located outside the country, if the enhancements fully cover the country risk as well as the business risk. As of March 31, 2006, the Firm’s exposure to any individual emerging markets country was not material.

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CONSUMER CREDIT PORTFOLIO
 
JPMorgan Chase’s consumer portfolio consists primarily of residential mortgages, home equity loans, credit cards, auto loans and leases, education loans and loans to small businesses. The domestic consumer portfolio reflects the benefit of diversification from both a product and a geographical perspective. The primary focus is on serving the prime consumer credit market.
The following table presents managed consumer credit–related information for the dates indicated:
                                                                 
                                    Three months ended March 31,
                    Nonperforming                   Average annual net
    Credit exposure   assets(e)   Net charge-offs   charge-off rate(g)
    Mar. 31,     Dec. 31,     Mar. 31,     Dec. 31,                          
(in millions, except ratios)   2006     2005     2006     2005     2006     2005     2006     2005  
 
Retail Financial Services
                                                               
Home Equity
  $ 75,241     $ 73,866     $ 451     $ 422     $ 33     $ 35       0.18 %     0.21 %
Mortgage
    57,690       58,959       451       442       12       6       0.11       0.06  
Auto loans and leases(a)
    44,600       46,081       157       193       51       83       0.46       0.60  
All other loans
    25,060       18,393       290       281       25       28       0.57       0.71  
Card Services – reported(b)
    64,691       71,738       12       13       567       673       3.36       4.25  
 
Total consumer loans – reported
    267,282       269,037       1,361 (f)     1,351 (f)     688       825       1.11       1.36  
Card Services – securitizations(b)(c)
    69,580       70,527                   449       917       2.62       5.36  
 
Total consumer loans – managed(b)
    336,862       339,564       1,361       1,351       1,137       1,742       1.44       2.23  
Assets acquired in loan satisfactions
  NA     NA       188       180     NA     NA     NA     NA  
 
Total consumer related assets – managed
    336,862       339,564       1,549       1,531       1,137       1,742       1.44       2.23  
Consumer lending–related commitments:
                                                               
Home equity
    61,474       58,281     NA     NA     NA     NA     NA     NA  
Mortgage
    6,885       5,944     NA     NA     NA     NA     NA     NA  
Auto loans and leases
    6,060       5,665     NA     NA     NA     NA     NA     NA  
All other loans
    6,222       6,385     NA     NA     NA     NA     NA     NA  
Card Services(d)
    588,761       579,321     NA     NA     NA     NA     NA     NA  
 
Total lending-related commitments
    669,402       655,596     NA     NA     NA     NA     NA     NA  
 
Total consumer credit portfolio
  $ 1,006,264     $ 995,160     $ 1,549     $ 1,531     $ 1,137     $ 1,742       1.44 %     2.23 %
 
Total end-of-period HFS loans
  $ 14,343     $ 16,598     NA     NA     NA     NA     NA     NA  
Total average HFS loans
    16,362       16,505     NA     NA     NA     NA     NA     NA  
Memo: Credit card – managed
    134,271       142,265     $ 12     $ 13     $ 1,016     $ 1,590       2.99 %     4.83 %
 
(a)  
Excludes operating lease-related assets of $1.1 billion and $858 million for March 31, 2006, and December 31, 2005, respectively.
 
(b)  
Past-due loans 90 days and over and accruing includes credit card receivables of $956 million and $1.1 billion, and related credit card securitizations of $913 million and $730 million at March 31, 2006, and December 31, 2005, respectively.
 
(c)  
Represents securitized credit card receivables. For a further discussion of credit card securitizations, see Card Services on pages 23–25 of this Form 10–Q.
 
(d)  
The credit card lending–related commitments represent the total available credit to the Firm’s cardholders. The Firm has not experienced, and does not anticipate, that all of its cardholders will exercise their entire available lines of credit at the same point in time. The Firm can reduce or cancel a credit card commitment by providing the cardholder prior notice or, in some cases, without notice as permitted by law.
 
(e)  
Includes nonperforming HFS loans of $16 million and $27 million at March 31, 2006, and December 31, 2005, respectively.
 
(f)  
Excludes nonperforming assets related to (i) loans eligible for repurchase as well as loans repurchased from GNMA pools that are insured by government agencies of $1.1 billion for each of March 31, 2006, and December 31, 2005, and (ii) education loans that are 90 days past due and still accruing, which are insured by government agencies under the Federal Family Education Loan Program of $0.2 billion at March 31, 2006. These amounts for GNMA and education loans are excluded, as reimbursement is proceeding normally.
 
(g)  
Net charge-off rates exclude average loans HFS of $16 billion for both quarters ended March 31, 2006 and 2005.

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Consumer credit quality trends reflect continued underlying credit quality. Total managed consumer loans as of March 31, 2006, were $337 billion, down from $340 billion at year-end 2005, reflecting the seasonal pattern and higher-than-normal customer payment rates of credit card receivables, partially offset by an increase in education loans as a result of the purchase of Collegiate Funding Services. Consumer lending-related commitments increased by 2%, to $669 billion at March 31, 2006, reflecting a general increase across most Retail Financial Services and Card Services portfolios. The following discussion relates to the specific loan and lending-related categories within the consumer portfolio:
Retail Financial Services
Loan balances for Retail Financial Services were $203 billion at March 31, 2006, an increase of $5 billion from December 31, 2005. The increase was driven primarily by the $6 billion increase in education loans as a result of the acquisition of Collegiate Funding Services on March 1, 2006. The net charge-off rate for the first quarter of 2006 was 0.27%, a decrease from 0.34% in the first quarter of 2005. The decrease reflected the benefits of stable credit trends in most consumer lending portfolios and the sale of the recreational vehicle loan portfolio in the first quarter of 2005.
The Firm proactively manages its retail credit operation. Ongoing efforts include continual review and enhancement of credit underwriting criteria and refinement of pricing and risk management models.
Home Equity: Home Equity loans on the balance sheet at March 31, 2006, were $75 billion, an increase of $1 billion from year-end 2005. The portfolio reflects a high concentration of prime quality credits. There are no products in the Home Equity portfolio that result in negative amortization.
Mortgage: Mortgage loans on the balance sheet at March 31, 2006, were $58 billion, a decrease of $1 billion from year-end 2005. Credit metrics were affected by the decision in early 2005 to retain, rather than securitize, subprime mortgage loans. Mortgage loans include some interest-only payment options to predominantly prime borrowers. There are no products in the mortgage portfolio that result in negative amortization.
Auto loans and leases: As of March 31, 2006, Auto loans and leases were $45 billion, a decrease of $1 billion from year-end 2005. The decrease in outstanding loans was caused partially by the de-emphasis of vehicle leasing, which comprised $4 billion of outstanding loans as of March 31, 2006. It is anticipated that over time vehicle leases will account for a smaller share of balance sheet receivables and exposure. The Auto loans and leases portfolio reflects a high concentration of prime quality credits.
All other loans: As of March 31, 2006, other consumer loans were $25 billion, an increase of $7 billion from year-end 2005, primarily due to an increase in Education loans as a result of the acquisition of the Collegiate Funding Services education loan portfolio. Other loans also include small business banking loans (which are highly collateralized loans, often with personal loan guarantees) and community development loans.
Card Services
JPMorgan Chase analyzes its credit card portfolio on a managed basis, which includes credit card receivables on the consolidated balance sheet and those receivables sold to investors through securitization. Managed credit card receivables were $134 billion at March 31, 2006, a decrease of $8 billion from year-end 2005, reflecting the normal seasonal pattern and higher-than-normal customer payment rates, which management believes may partially be related to the recently implemented new minimum payment rules.
The managed credit card net charge-off rate decreased to 2.99% in the first quarter of 2006 from 4.83% in the first quarter of 2005. This decrease was due primarily to lower bankruptcy-related net charge-offs, which based upon an estimate by management, was lower by $475 million following the accelerated bankruptcy filings in the fourth quarter of 2005. The 30-day delinquency rate increased to 3.10% on March 31, 2006 from 2.79% on December 31, 2005, primarily driven by accelerated loss recognition of delinquent accounts on December 31, 2005 following the significant 2005 fourth-quarter increase in bankruptcy filings. The managed credit card portfolio continues to reflect a well-seasoned portfolio that has good U.S. geographic diversification.

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ALLOWANCE FOR CREDIT LOSSES
 
For further discussion of the components of the Allowance for credit losses, see Critical accounting estimates used by the Firm on page 81 and Note 12 on pages 107–108 of JPMorgan Chase’s 2005 Annual Report. At March 31, 2006, management deemed the allowance for credit losses to be sufficient to absorb losses that are inherent in the portfolio, including losses that are not specifically identified or for which the size of the loss has not yet been fully determined.
Summary of changes in the allowance for credit losses
                                                 
Three months ended March 31,   2006   2005
(in millions)   Wholesale     Consumer     Total     Wholesale     Consumer     Total  
 
Loans:
                                               
Beginning balance at January 1,
  $ 2,453     $ 4,637     $ 7,090     $ 3,098     $ 4,222     $ 7,320  
Gross charge-offs
    (39 )     (843 )     (882 )     (61 )     (972 )     (1,033 )
Gross recoveries
    59       155       214       70       147       217  
 
Net (charge-offs) recoveries
    20       (688 )     (668 )     9       (825 )     (816 )
Provision for loan losses
    195       652       847       (380 )     811       431  
Other
          6       6                    
 
Ending balance
  $ 2,668 (a)   $ 4,607 (b)   $ 7,275     $ 2,727 (a)   $ 4,208 (b)   $ 6,935  
 
Components:
                                               
Asset specific
  $ 118     $     $ 118     $ 385     $     $ 385  
Statistical component
    1,713       3,288       5,001       1,448       3,113       4,561  
Adjustment to statistical component
    837       1,319       2,156       894       1,095       1,989  
 
Total Allowance for loan losses
  $ 2,668     $ 4,607     $ 7,275     $ 2,727     $ 4,208     $ 6,935  
 
Lending-related commitments:
                                               
Beginning balance at January 1,
  $ 385     $ 15     $ 400     $ 480     $ 12     $ 492  
Provision for lending-related commitments
    (16 )           (16 )     (6 )     2       (4 )
 
Ending balance
  $ 369     $ 15     $ 384 (c)   $ 474     $ 14     $ 488 (d)
 
(a)  
The ratio of the wholesale allowance for loan losses to total wholesale loans was 1.84% and 2.06%, excluding wholesale HFS loans of $19.9 billion and $5.3 billion at March 31, 2006 and 2005, respectively.
 
(b)  
The ratio of the consumer allowance for loan losses to total consumer loans was 1.82% and 1.69%, excluding consumer HFS loans of $14.3 billion and $16.5 billion at March 31, 2006 and 2005, respectively.
 
(c)  
Includes $49 million of asset-specific and $335 million of formula-based allowance at March 31, 2006. The formula-based allowance for lending-related commitments is based upon statistical calculation. There is no adjustment to the statistical calculation for lending-related commitments.
 
(d)  
Includes $144 million of asset-specific and $344 million of formula-based allowance at March 31, 2005. The formula-based allowance for lending-related commitments is based upon a statistical calculation. There is no adjustment to the statistical calculation for lending-related commitments.

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Excluding held-for-sale loans, the total allowance for loan losses represented 1.83% of total loans at March 31, 2006, compared with 1.84% at December 31, 2005. The wholesale component of the allowance increased to $2.7 billion as of March 31, 2006, from $2.5 billion at year-end 2005, primarily due to loan growth in the Investment Bank. The consumer allowance remained relatively unchanged from year-end 2005.
To provide for the risk of loss inherent in the Firm’s process of extending credit, management also computes an asset-specific component and a formula-based component for lending–related commitments. These components are computed using a methodology similar to that used for the wholesale loan portfolio, but modified for expected maturities and probabilities of drawdown. This allowance, which is reported in Other liabilities, was $384 million and $400 million at March 31, 2006, and December 31, 2005, respectively.
Provision for credit losses
For a discussion of the reported Provision for credit losses, see page 9 of this Form 10–Q. The managed provision for credit losses includes credit card securitizations. For the three months ended March 31, 2006, securitized credit card losses were lower compared with the prior year, primarily as a result of lower bankruptcy-related charge-offs in Card Services.
                                                 
                    Provision for    
                    lending-related   Total provision for
    Provision for loan losses   commitments   credit losses
Three months ended March 31, (in millions)   2006     2005     2006     2005     2006     2005  
 
Investment Bank
  $ 189     $ (356 )   $ (6 )   $ (10 )   $ 183     $ (366 )
Commercial Banking
    16       (8 )     (9 )     2       7       (6 )
Treasury & Securities Services
    (4 )     (5 )           2       (4 )     (3 )
Asset & Wealth Management
    (6 )     (7 )     (1 )           (7 )     (7 )
Corporate
          (4 )                       (4 )
 
Total Wholesale
    195       (380 )     (16 )     (6 )     179       (386 )
Retail Financial Services
    85       92             2       85       94  
Card Services
    567       719                   567       719  
 
Total Consumer
    652       811             2       652       813  
 
Total provision for credit losses
    847       431       (16 )     (4 )     831       427  
Credit card securitizations
    449       917                   449       917  
 
Total managed provision for credit losses
  $ 1,296     $ 1,348     $ (16 )   $ (4 )   $ 1,280     $ 1,344  
 

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MARKET RISK MANAGEMENT
 
For a discussion of the Firm’s market risk management organization, see pages 75–78 of JPMorgan Chase’s 2005 Annual Report.
Value-at-risk (“VAR”)
JPMorgan Chase’s primary statistical risk measure, VAR, estimates 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 diversification. VAR is used for comparing risks across businesses, monitoring limits, one-off approvals, and as an input to economic capital calculations. VAR provides risk transparency in a normal trading environment. Each business day the Firm undertakes a comprehensive VAR calculation that includes both its trading and its nontrading activities. VAR for nontrading activities measures the amount of potential change in the fair values of the exposures related to these activities; however, for such activities, VAR is not a measure of reported revenue since nontrading activities are generally not marked to market through earnings. The Firm calculates VAR using a one-day time horizon and an expected tail-loss methodology, which approximates a 99% confidence level. This means the Firm would expect to incur losses greater than that predicted by VAR estimates only once in every 100 trading days, or about 2.5 times a year. For a further discussion of the Firm’s VAR methodology, see pages 75–77 of JPMorgan Chase’s Annual Report.
Trading VAR
IB trading VAR by risk type and credit portfolio VAR
                                                                 
    2006   2005
Three months ended March 31,   Average     Minimum     Maximum     At     Average     Minimum     Maximum     At  
(in millions)   VAR     VAR     VAR     March 31, 2006     VAR     VAR     VAR     March 31, 2005  
 
By risk type:
                                                               
Fixed income
  $ 60     $ 47     $ 94     $ 47     $ 57     $ 46     $ 72     $ 72  
Foreign exchange
    20       15       30       19       23       17       30       21  
Equities
    32       22       39       23       18       15       21       18  
Commodities and other
    47       22       68       52       10       7       17       10  
Less: portfolio diversification
    (68) (c)   NM (d)   NM (d)     (61) (c)     (43 )(c)   NM (d)   NM (d)     (48 )(c)
 
Trading VAR(a)
  $ 91     $ 76     $ 109     $ 80     $ 65     $ 53     $ 78     $ 73  
 
Credit portfolio VAR(b)
    14       13       16       14       13       12       16       13  
Less: portfolio diversification
    (11) (c)   NM (d)   NM (d)     (10) (c)     (8 )(c)   NM (d)   NM (d)     (6 )(c)
 
Total trading and credit portfolio VAR
  $ 94     $ 75     $ 113     $ 84     $ 70     $ 57     $ 83     $ 80  
 
(a)  
Trading VAR excludes VAR related to the Firm’s private equity business and certain exposures used to manage MSRs. For a discussion of Private equity risk management and MSRs, see page 57 and Note 14 on page 80 of this Form 10–Q, respectively. Trading VAR includes substantially all trading activities in the IB; however, particular risk parameters of certain products are not fully captured, for example, correlation risk.
 
(b)  
Includes VAR on derivative credit valuation adjustments, credit valuation adjustment hedges and mark-to-market hedges of the accrual loan portfolio, which are all reported in Principal transactions. This VAR does not include the accrual loan portfolio, which is not marked to market.
 
(c)  
Average and period-end VARs are less than the sum of the VARs of its market risk components, which is due to risk offsets resulting from portfolio diversification. The diversification effect reflects the fact that the risks are not perfectly correlated. The risk of a portfolio of positions is therefore usually less than the sum of the risks of the positions themselves.
 
(d)  
Designated as not meaningful (“NM”) because the minimum and maximum may occur on different days for different risk components, and hence it is not meaningful to compute a portfolio diversification effect.
IB’s average total trading and credit portfolio VAR increased during the first quarter of 2006 to $94 million compared with $70 million for the same period in 2005. The increase was driven by higher VAR for commodities and equities, which also contributed to increased portfolio diversification. Total Trading VAR diversification increased to $68 million, or 43% of the sum of the components, from $43 million, or 40% of the sum of the components. In general, over the course of the year, VAR exposures can vary significantly as trading positions change, market volatility fluctuates and diversification benefits change.

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VAR backtesting
To evaluate the soundness of its VAR model, the Firm conducts daily backtesting of VAR against daily financial results based upon market risk-related revenue. Market risk-related revenue is defined as the 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 following histogram illustrates the daily market risk-related gains and losses for the IB trading businesses for the three months ended March 31, 2006. The chart shows that the IB posted market risk-related gains on 57 out of 65 days in this period, with 4 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 8 days, with only one day with a loss greater than $50 million, and with no loss exceeding the VAR measure.
(BAR CHART)
Economic value stress testing
While VAR reflects the risk of loss due to unlikely events in normal markets, stress testing captures the Firm’s exposure to unlikely but plausible events in abnormal markets. The Firm conducts economic-value stress tests for both its trading and its nontrading activities using multiple scenarios for both types of activities. Periodically, scenarios are reviewed and updated to reflect changes in the Firm’s risk profile and economic events. Stress testing is as important as VAR in measuring and controlling risk. Stress testing enhances the understanding of the Firm’s risk profile and loss potential, and is used for monitoring limits, one-off approvals and cross-business risk measurement, as well as an input to economic capital allocation.
Based upon the Firm’s stress scenarios, the stress test loss (pre-tax) in the IB’s trading portfolio ranged from $848 million to $1.3 billion, and from $469 million to $745 million, for the three months ended March 31, 2006, and March 31, 2005, respectively.

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Earnings-at-risk stress testing
The VAR and stress-test measures described above illustrate the total economic sensitivity of the Firm’s balance sheet to changes in market variables. The effect of interest rate exposure on reported Net income also is critical. Interest rate risk exposure in the Firm’s core nontrading business activities (i.e., asset/liability management positions) results from on– and off–balance sheet positions. The Firm conducts simulations of changes in NII from its nontrading activities under a variety of interest rate scenarios, which are consistent with the scenarios used for economic-value stress testing. Earnings-at-risk tests measure the potential change in the Firm’s Net interest income over the next 12 months and highlight exposures to various rate-sensitive factors, such as the rates themselves (e.g., the prime lending rate), pricing strategies on deposits, optionality and changes in product mix. The tests include forecasted balance sheet changes, such as asset sales and securitizations, as well as prepayment and reinvestment behavior.
Earnings-at-risk also can result from changes in the slope of the yield curve, because the Firm has the ability to lend at fixed rates and borrow at variable or short-term fixed rates. Based upon these scenarios, the Firm’s earnings would be affected negatively by a sudden and unanticipated increase in short-term rates without a corresponding increase in long-term rates. Conversely, higher long-term rates generally are beneficial to earnings, particularly when the increase is not accompanied by rising short-term rates.
Immediate changes in interest rates present a limited view of risk, and so a number of alternative scenarios also are reviewed. These scenarios include the implied forward curve, nonparallel rate shifts and severe interest rate shocks on selected key rates. These scenarios are intended to provide a comprehensive view of JPMorgan Chase’s earnings-at-risk over a wide range of outcomes.
JPMorgan Chase’s 12-month pre-tax earnings sensitivity profile as of March 31, 2006, and December 31, 2005, were as follows:
                         
    Immediate change in rates
(in millions)   +200bp     +100bp     -100bp  
 
March 31, 2006
  $ (626 )   $ (272 )   $ 152  
December 31, 2005
    265       172       (162 )
 
The primary change in earnings-at-risk from December 31, 2005, reflects a higher level of AFS securities and other Treasury repositioning. The Firm’s risk to rising and falling interest rates is due primarily to corresponding increases and decreases in short-term funding costs.
 
OPERATIONAL RISK MANAGEMENT
 
For a discussion of JPMorgan Chase’s operational risk management, refer to page 79 of JPMorgan Chase’s 2005 Annual Report.
 
REPUTATION AND FIDUCIARY RISK MANAGEMENT
 
For a discussion of the Firm’s Reputation and Fiduciary Risk Management, see page 80 of JPMorgan Chase’s 2005 Annual Report.
 
PRIVATE EQUITY RISK MANAGEMENT
 
For a discussion of Private Equity Risk Management, see page 80 of JPMorgan Chase’s 2005 Annual Report. At March 31, 2006, the carrying value of the private equity portfolios of the JPMorgan Partners and ONE Equity Partners businesses was $6.3 billion, of which $501 million represented positions traded in the public market.
 
SUPERVISION AND REGULATION
 
The following discussion should be read in conjunction with the Supervision and Regulation section on pages 1-4 of JPMorgan Chase’s 2005 Form 10–K.
Dividends
At March 31, 2006, JPMorgan Chase’s bank subsidiaries could pay, in the aggregate, $9.1 billion in dividends to their respective bank holding companies without prior approval of their relevant banking regulators.

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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 81–83 and the Notes to consolidated financial statements in JPMorgan Chase’s 2005 Annual Report.
Allowance for credit losses
JPMorgan Chase’s allowance for credit losses covers the wholesale and consumer loan portfolios as well as the Firm’s portfolio of wholesale lending-related commitments. The Allowance for loan losses is intended to adjust the value of the Firm’s loan assets for probable credit losses as of the balance sheet date. For a further discussion of the methodologies used in establishing the Firm’s allowance for credit losses, see Note 12 on pages 107–108 of JPMorgan Chase’s 2005 Annual Report. The methodology for calculating the Allowance for loan losses and the Allowance for lending-related commitments involves significant judgment. For a further description of these judgments, see Allowance for credit losses on page 81 of JPMorgan Chase’s 2005 Annual Report; for amounts recorded as of March 31, 2006 and 2005, see allowance for credit losses on page 53, and Note 11 on page 74 of this Form 10–Q.
Fair value of financial instruments
A portion of JPMorgan Chase’s assets and liabilities are carried at fair value, including trading assets and liabilities, AFS securities, private equity investments and mortgage servicing rights. Held-for-sale loans and physical commodities are carried at the lower of cost or market. At March 31, 2006, approximately $427 billion of the Firm’s assets were recorded at fair value.
Trading and available-for-sale portfolios
The following table summarizes the Firm’s trading and available-for-sale portfolios by valuation methodology at March 31, 2006:
                                         
    Trading assets   Trading liabilities      
    Securities           Securities           AFS
    purchased(a)   Derivatives(b)   sold(a)   Derivatives(b)   securities
 
Fair value based upon:
                                       
Quoted market prices
    94 %     1 %     99 %     2 %     94 %
Internal models with significant observable market parameters
    4       96       1       96       4  
Internal models with significant unobservable market parameters
    2       3             2       2  
 
Total
    100 %     100 %     100 %     100 %     100 %
 
(a)  
Reflected as debt and equity instruments on the Firm’s Consolidated balance sheets.
 
(b)  
Based upon 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.

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ACCOUNTING AND REPORTING DEVELOPMENTS
 
Accounting for Share-Based Payments
In December 2004, the FASB issued SFAS 123R, which revises SFAS 123 and supersedes APB 25. In March 2005, the Securities and Exchange Commission (“SEC”) issued SAB 107, which provides interpretive guidance on SFAS 123R. Accounting and reporting under SFAS 123R is generally similar to the SFAS 123 approach. The Firm adopted SFAS 123R on January 1, 2006, under the modified prospective method. For additional information related to SFAS 123R, see Note 6 on pages 68–71 of this Form 10–Q.
Accounting for Certain Hybrid Financial Instruments – an Amendment of FASB Statements No. 133 and 140
In February 2006, the FASB issued SFAS 155, which applies to certain “hybrid financial instruments,” which are instruments that contain embedded derivatives. The new standard establishes a requirement to evaluate beneficial interests in securitized financial assets to determine if the interests represent freestanding derivatives or are hybrid financial instruments containing embedded derivatives requiring bifurcation. It also permits an election for fair value remeasurement of any hybrid financial instrument containing an embedded derivative that otherwise would require bifurcation under SFAS 133. The Firm adopted this standard effective January 1, 2006. For additional information related to SFAS 155, see Note 1 on page 64 of this Form 10–Q.
Accounting for Servicing of Financial Assets
In the first quarter of 2006, the FASB issued SFAS 156, which is effective as of the beginning of the first fiscal year beginning after September 15, 2006, with early adoption permitted. JPMorgan Chase has elected to adopt the standard effective January 1, 2006. The standard permits an entity a one-time irrevocable election to adopt fair value accounting for a class of servicing assets. The Firm has defined MSRs as one class of servicing assets for this election. For additional information related to the Firm’s adoption of SFAS 156 with respect to MSRs, see Note 14 on page 80 of this Form 10-Q.
Accounting for Variable Interest Entities
In April 2006, the FASB issued FSP FIN 46(R)-6, which requires an analysis of the design of a VIE in determining the variability to be considered in the application of FIN 46(R). The guidance in this FSP will be applied prospectively as of July 1, 2006 to all entities with which the Firm first becomes involved after such date and to all entities previously required to be analyzed under FIN 46(R) when a reconsideration event occurs after such date. The Firm expects to arrive at similar consolidation conclusions under the FSP as those reached currently under FIN 46(R).

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JPMORGAN CHASE & CO.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in millions, except per share data)
                 
    Three months ended March 31,
    2006     2005  
 
Revenue
               
Investment banking fees
  $ 1,169     $ 993  
Principal transactions
    2,602       2,636  
Lending & deposit related fees
    841       820  
Asset management, administration and commissions
    2,973       2,498  
Securities gains (losses)
    (116 )     (822 )
Mortgage fees and related income
    241       362  
Credit card income
    1,910       1,734  
Other income
    556       201  
 
Noninterest revenue
    10,176       8,422  
 
 
               
Interest income
    13,301       10,632  
Interest expense
    8,241       5,407  
 
Net interest income
    5,060       5,225  
 
Total net revenue
    15,236       13,647  
 
 
               
Provision for credit losses
    831       427  
 
               
Noninterest expense
               
Compensation expense
    5,600       4,702  
Occupancy expense
    602       525  
Technology and communications expense
    874       920  
Professional & outside services
    888       1,074  
Marketing
    519       483  
Other expense
    834       1,705  
Amortization of intangibles
    364       383  
Merger costs
    71       145  
 
Total noninterest expense
    9,752       9,937  
 
 
               
Income before income tax expense
    4,653       3,283  
Income tax expense
    1,572       1,019  
 
Net income
  $ 3,081     $ 2,264  
 
Net income applicable to common stock
  $ 3,077     $ 2,259  
 
 
               
Net income per common share
               
Basic earnings per share
  $ 0.89     $ 0.64  
Diluted earnings per share
    0.86       0.63  
 
               
Average basic shares
    3,472.7       3,517.5  
Average diluted shares
    3,570.8       3,569.8  
 
               
Cash dividends per common share
  $ 0.34     $ 0.34  
 
The Notes to consolidated financial statements (unaudited) are an integral part of these statements.

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JPMORGAN CHASE & CO.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions, except share data)
                 
    March 31,     December 31,  
    2006     2005  
 
Assets
               
Cash and due from banks
  $ 36,903     $ 36,670  
Deposits with banks
    10,545       21,661  
Federal funds sold and securities purchased under resale agreements
    153,755       133,981  
Securities borrowed
    93,280       74,604  
Trading assets (including assets pledged of $86,839 at March 31, 2006, and $79,657 at December 31, 2005)
    312,025       298,377  
Securities:
               
Available-for-sale (including assets pledged of $40,445 at March 31, 2006, and $17,614 at December 31, 2005)
    67,054       47,523  
Held-to-maturity (fair value: $74 at March 31, 2006, and $80 at December 31, 2005)
    72       77  
Interests in purchased receivables
    29,029       29,740  
 
               
Loans
    432,081       419,148  
Allowance for loan losses
    (7,275 )     (7,090 )
 
Loans, net of Allowance for loan losses
    424,806       412,058  
 
               
Private equity investments
    6,499       6,374  
Accrued interest and accounts receivable
    21,657       22,421  
Premises and equipment
    8,985       9,081  
Goodwill
    43,899       43,621  
Other intangible assets:
               
Mortgage servicing rights
    7,539       6,452  
Purchased credit card relationships
    3,243       3,275  
All other intangibles
    4,832       4,832  
Other assets
    49,159       48,195  
 
Total assets
  $ 1,273,282     $ 1,198,942  
 
Liabilities
               
Deposits:
               
U.S. offices:
               
Noninterest-bearing
  $ 128,982     $ 135,599  
Interest-bearing
    309,779       287,774  
Non-U.S. offices:
               
Noninterest-bearing
    6,591       7,476  
Interest-bearing
    139,113       124,142  
 
Total deposits
    584,465       554,991  
 
               
Federal funds purchased and securities sold under repurchase agreements
    151,006       125,925  
Commercial paper
    15,933       13,863  
Other borrowed funds
    14,400       10,479  
Trading liabilities
    160,098       145,930  
Accounts payable, accrued expenses and other liabilities (including the Allowance for lending-related commitments of $384 at March 31, 2006, and $400 at December 31, 2005)
    73,693       78,460  
Beneficial interests issued by consolidated VIEs
    42,237       42,197  
Long-term debt (including structured notes accounted for at fair value of $8.4 billion at March 31, 2006)
    112,133       108,357  
Junior subordinated deferrable interest debentures held by trusts that issued guaranteed capital debt securities
    10,980       11,529  
 
Total liabilities
    1,164,945       1,091,731  
 
Commitments and contingencies (see Note 17 of this Form 10–Q)
               
Stockholders’ equity
               
Preferred stock
          139  
Common stock ($1 par value; authorized 9,000,000,000 shares; issued 3,644,744,120 shares and 3,618,189,597 shares at March 31, 2006, and December 31, 2005, respectively)
    3,645       3,618  
Capital surplus
    76,153       74,994  
Retained earnings
    35,892       33,848  
Accumulated other comprehensive income (loss)
    (1,017 )     (626 )
Treasury stock, at cost (171,793,672 shares at March 31, 2006, and 131,500,350 shares at December 31, 2005)
    (6,336 )     (4,762 )
 
Total stockholders’ equity
    108,337       107,211  
 
Total liabilities and stockholders’ equity
  $ 1,273,282     $ 1,198,942  
 
The Notes to consolidated financial statements (unaudited) are an integral part of these statements.

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JPMORGAN CHASE & CO.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
(in millions, except per share data)
                 
    Three months ended March 31,  
    2006     2005  
 
Preferred stock
               
Balance at beginning of the year
  $ 139     $ 339  
Redemption of preferred stock
    (139 )      
 
Balance at end of period
          339  
 
 
               
Common stock
               
Balance at beginning of year
    3,618       3,585  
Issuance of common stock
    27       13  
 
Balance at end of period
    3,645       3,598  
 
 
               
Capital surplus
               
Balance at beginning of year
    74,994       72,801  
Issuance of common stock and commitments to issue common stock for employee stock-based awards and related tax effects
    1,159       593  
 
Balance at end of period
    76,153       73,394  
 
 
               
Retained earnings
               
Balance at beginning of year
    33,848       30,209  
Cumulative effect of change in accounting principles
    172        
 
Balance at beginning of year, adjusted
    34,020       30,209  
Net income
    3,081       2,264  
Cash dividends declared:
               
Preferred stock
    (4 )     (5 )
Common stock ($0.34 per share each period)
    (1,205 )     (1,215 )
 
Balance at end of period
    35,892       31,253  
 
 
               
Accumulated other comprehensive income (loss)
               
Balance at beginning of year
    (626 )     (208 )
Other comprehensive income (loss)
    (391 )     (415 )
 
Balance at end of period
    (1,017 )     (623 )
 
 
               
Treasury stock, at cost
               
Balance at beginning of year
    (4,762 )     (1,073 )
Purchase of treasury stock
    (1,291 )     (1,316 )
Share repurchases related to employee stock-based awards
    (283 )     (232 )
 
Balance at end of period
    (6,336 )     (2,621 )
 
Total stockholders’ equity at end of period
  $ 108,337     $ 105,340  
 
 
               
Comprehensive income
               
Net income
  $ 3,081     $ 2,264  
Other comprehensive income (loss)
    (391 )     (415 )
 
Comprehensive income
  $ 2,690     $ 1,849  
 
The Notes to consolidated financial statements (unaudited) are an integral part of these statements.

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JPMORGAN CHASE & CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in millions)
                 
    Three months ended March 31,  
    2006     2005  
 
Operating activities
               
Net income
  $ 3,081     $ 2,264  
Adjustments to reconcile net income to net cash (used in) operating activities:
               
Provision for credit losses
    831       427  
Depreciation and amortization
    837       1,165  
Deferred tax provision
    554       462  
Investment securities (gains) losses
    116       822  
Private equity unrealized (gains) losses
    (84 )     (201 )
Stock-based compensation
    839       381  
Net change in:
               
Trading assets
    (9,330 )     545  
Securities borrowed
    (18,676 )     (5,746 )
Accrued interest and accounts receivable
    848       338  
Other assets
    (2,459 )     (6,974 )
Trading liabilities
    11,383       (472 )
Accounts payable, accrued expenses and other liabilities
    (6,330 )     (4,730 )
Other operating adjustments
    222       184  
 
Net cash (used in) operating activities
    (18,168 )     (11,535 )
 
               
Investing activities
               
Net change in:
               
Deposits with banks
    11,405       7,465  
Federal funds sold and securities purchased under resale agreements
    (19,774 )     (31,239 )
Other change in loans
    (40,394 )     (22,732 )
Held-to-maturity securities:
               
Proceeds
    5       9  
Available-for-sale securities:
               
Proceeds from maturities
    6,456       8,703  
Proceeds from sales
    30,369       28,232  
Purchases
    (56,931 )     (19,543 )
Proceeds due to the sale and securitization of loans
    33,180       21,373  
Net cash (used) received in business acquisitions
    (663 )     (304 )
All other investing activities, net
    873       1,374  
 
Net cash (used in) investing activities
    (35,474 )     (6,662 )
 
               
Financing activities
               
Net change in:
               
Deposits
    25,483       6,377  
Federal funds purchased and securities sold under repurchase agreements
    25,081       9,275  
Commercial paper and other borrowed funds
    943       1,543  
Proceeds from the issuance of long-term debt and capital debt securities
    12,354       15,796  
Repayments of long-term debt and capital debt securities
    (9,316 )     (9,903 )
Net issuance of stock and stock-based awards
    393       190  
Excess tax benefits related to stock-based compensation
    135        
Redemption of preferred stock
    (139 )      
Treasury stock purchased
    (1,291 )     (1,316 )
Cash dividends paid
    (1,215 )     (1,227 )
All other financing activities, net
    1,393       8  
 
Net cash provided by financing activities
    53,821       20,743  
 
Effect of exchange rate changes on cash and due from banks
    54       (121 )
Net increase in cash and due from banks
    233       2,425  
Cash and due from banks at the beginning of the year
    36,670       35,168  
 
Cash and due from banks at the end of the period
  $ 36,903     $ 37,593  
 
Cash interest paid
  $ 8,395     $ 5,191  
Cash income taxes paid
    234       1,187  
 
The Notes to consolidated financial statements (unaudited) are an integral part of these statements.

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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
JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”), a financial holding company incorporated under Delaware law in 1968, is a leading global financial services firm and one of the largest banking institutions in the United States, with operations worldwide. The Firm is a leader in investment banking, financial services for consumers and businesses, financial transaction processing, investment management, private banking and private equity. For a discussion of the Firm’s business segment information, see Note 20 on pages 84–86 of this Form 10–Q.
The accounting and financial reporting policies of JPMorgan Chase and its subsidiaries conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and prevailing industry practices. Additionally, where applicable, the policies conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. The unaudited consolidated financial statements prepared in conformity with U.S. GAAP require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and disclosures of contingent assets and liabilities. Actual results could be different from these estimates. In the opinion of management, all normal recurring adjustments have been included for a fair statement of this interim financial information. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in JPMorgan Chase’s Annual Report on Form 10–K for the year ended December 31, 2005 (“2005 Annual Report”).
Certain amounts in the prior periods have been reclassified to conform to the current presentation.
Accounting for certain hybrid financial instruments
SFAS 155 applies to certain “hybrid financial instruments” which are instruments that contain embedded derivatives. The standard establishes a requirement to evaluate beneficial interests in securitized financial assets to determine if the interests represent freestanding derivatives or are hybrid financial instruments containing embedded derivatives requiring bifurcation. SFAS 155 also permits an election for fair value measurement of any hybrid financial instrument containing an embedded derivative that otherwise would require bifurcation under SFAS 133. The fair value election can be applied to existing instruments on an instrument-by-instrument basis at the date of adoption and can be applied to new instruments on a prospective basis.
The Firm adopted SFAS 155 effective January 1, 2006. The Firm has elected to fair value all instruments issued, acquired or modified after December 31, 2005, that are required to be bifurcated under SFAS 133/149 and SFAS 155. In addition, the Firm elected to fair value certain structured notes existing as of December 31, 2005, resulting in a $22 million cumulative effect increase to Retained earnings. The cumulative effect adjustment includes gross unrealized gains of $29 million and gross unrealized losses of $7 million.
The substantial majority of the structured notes to which the fair value election has been applied are classified in Long-term debt on the Consolidated balance sheets. The change in fair value associated with structured notes is classified within Principal transactions on the Consolidated statements of income.
NOTE 2 – BUSINESS CHANGES AND DEVELOPMENTS
Acquisition of the consumer, small-business and middle-market banking businesses of The Bank of New York in exchange for the corporate trust business
On April 8, 2006, JPMorgan Chase announced an agreement to acquire The Bank of New York’s consumer, small-business and middle-market banking businesses in exchange for the Firm’s corporate trust business plus a cash payment of $150 million. The Bank of New York businesses being acquired are valued at a premium of $2.30 billion; the Firm’s corporate trust business being sold is valued at a premium of $2.15 billion. The Firm may also make a future payment to The Bank of New York of up to $50 million depending on the number of new account openings at the Firm’s retail business. The transaction has been approved by both companies’ boards of directors and is subject to regulatory approvals. It is expected to close in late third quarter or the fourth quarter of 2006.
Acquisition of Kohl’s private label credit card portfolio
On March 5, 2006, JPMorgan Chase entered into an agreement with Kohl’s Corporation (“Kohl’s”) to acquire $1.6 billion of Kohl’s private label credit card receivables and 13 million accounts. The transaction was completed on April 21, 2006. JPMorgan Chase and Kohl’s have also entered into an agreement under which JPMorgan Chase will offer private label credit cards to both new and existing Kohl’s customers.

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Collegiate Funding Services
On March 1, 2006, JPMorgan Chase acquired, for approximately $663 million, Collegiate Funding Services, a leader in education loan servicing and consolidation. This acquisition included $6 billion of education loans and enables the Firm to create a comprehensive education finance business.
Acquisition of certain operations from Paloma Partners
On March 1, 2006, JPMorgan Chase acquired the middle and back office operations of Paloma Partners Management Company (“Paloma”), which is part of a privately-owned investment fund management group based in Greenwich, CT. The parties have also entered into a multi-year contract pursuant to which JPMorgan Chase will provide daily operational services to Paloma. The acquired operations will be combined with JPMorgan Chase’s current hedge fund administration unit, JPMorgan Tranaut.
JPMorgan and Fidelity Brokerage Company
On February 28, 2006, the Firm announced a strategic alliance with Fidelity Brokerage to become the exclusive provider of new issue equity securities and the primary provider of fixed income products to Fidelity’s brokerage clients and retail customers, effectively expanding the Firm’s existing distribution platform.
Sale of insurance underwriting business
On February 7, 2006, JPMorgan Chase announced that it had agreed to sell its life insurance and annuity underwriting businesses to Protective Life Corporation for a cash purchase price of approximately $1.2 billion. The sale, which includes both the heritage Chase insurance business and the life business that Bank One had bought from Zurich Insurance in 2003, is subject to normal regulatory approvals and is expected to close in the third quarter of 2006. JPMorgan Chase anticipates the transaction will have no material impact on earnings.
NOTE 3—PRINCIPAL TRANSACTIONS
Principal transactions is a new caption, effective January 1, 2006, in the Consolidated income statements. Principal transactions revenue consists of realized and unrealized gains and losses from trading activities including physical commodities inventories that are accounted for at the lower of cost or market, primarily in the Investment Bank, and Private equity gains (losses), primarily in the private equity business of Corporate. The prior period presentation of Trading revenue and Private equity gains (losses) have been reclassified to this new caption. The following table presents Principal transactions revenue:
                 
    Three months ended March 31,  
(in millions)   2006     2005  
 
Trading revenue
  $ 2,343     $ 1,859  
Private equity gains (losses)
    259       777  
 
Principal transactions
  $ 2,602     $ 2,636  
 
For a discussion of the accounting policies related to Trading assets and Trading liabilities and Private equity investments, see Notes 3 and 9 on pages 94 and 103–105, respectively, of JPMorgan Chase’s 2005 Annual Report.

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Trading assets and liabilities
The following table presents the fair value of Trading assets and Trading liabilities for the dates indicated:
                 
    March 31,     December 31,  
(in millions)   2006     2005  
 
Trading assets
               
Debt and equity instruments:
               
U.S. government and federal agency obligations
  $ 16,018     $ 16,283  
U.S. government-sponsored enterprise obligations
    18,175       24,172  
Obligations of state and political subdivisions
    7,650       9,887  
Certificates of deposit, bankers’ acceptances and commercial paper
    9,169       5,652  
Debt securities issued by non-U.S. governments
    53,049       48,671  
Corporate securities and other
    155,214       143,925  
 
Total debt and equity instruments
    259,275       248,590  
 
Derivative receivables: (a)
               
Interest rate
    31,328       30,416  
Foreign exchange
    2,179       2,855  
Equity
    6,813       5,575  
Credit derivatives
    3,881       3,464  
Commodity
    8,549       7,477  
 
Total derivative receivables
    52,750       49,787  
 
Total trading assets
  $ 312,025     $ 298,377  
 
Trading liabilities
               
Debt and equity instruments(b)
  $ 104,160     $ 94,157  
 
Derivative payables:(a)
               
Interest rate
    28,095       28,488  
Foreign exchange
    3,265       3,453  
Equity
    14,656       11,539  
Credit derivatives
    2,904       2,445  
Commodity
    7,018       5,848  
 
Total derivative payables
    55,938       51,773  
 
Total trading liabilities
  $ 160,098     $ 145,930  
 
     
(a)  
Included in Trading assets and Trading liabilities are the reported receivables (unrealized gains) and payables (unrealized losses) related to derivatives. These amounts include the derivative assets and liabilities net of cash received and paid of $22.7 billion and $17.5 billion at March 31, 2006, and $26.7 billion and $18.9 billion at December 31, 2005, respectively, under legally enforceable master netting agreements.
 
(b)  
Primarily represents securities sold, not yet purchased.
The following table presents the carrying value and cost of the Private Equity investment portfolio for the dates indicated:
                                 
    March 31, 2006     December 31, 2005  
(in millions)   Carrying value     Cost     Carrying value     Cost  
 
Total private equity investments
  $ 6,499     $ 8,104     $ 6,374     $ 8,036  
 

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NOTE 4 – INTEREST INCOME AND INTEREST EXPENSE
Details of Interest income and Interest expense were as follows:
                 
    Three months ended March 31,  
(in millions)   2006     2005  
 
Interest income
               
Loans
  $ 7,497     $ 6,034  
Securities
    748       1,078  
Trading assets
    2,550       2,232  
Federal funds sold and securities purchased under resale agreements
    1,543       727  
Securities borrowed
    385       221  
Deposits with banks
    247       154  
Interests in purchased receivables
    331       186  
 
Total interest income
    13,301       10,632  
Interest expense