FORM 10-Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2007
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, 2007: 3,416,114,978
 

 


 

FORM 10-Q
TABLE OF CONTENTS
             
        Page
Part I – Financial information        
   
 
       
Item 1          
   
 
       
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Item 4       113  
   
 
       
Part II – Other information        
   
 
       
Item 1       113  
   
 
       
Item 1A       114  
   
 
       
Item 2       114  
   
 
       
Item 3       115  
   
 
       
Item 4       115  
   
 
       
Item 5       115  
   
 
       
Item 6       115  
   
 
       
 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 three months ended,   1Q07     4Q06     3Q06     2Q06     1Q06  
 
Selected income statement data
                                       
Noninterest revenue(a)
  12,850     10,501     10,166     9,908     10,182  
Net interest income
    6,118       5,692       5,379       5,178       4,993  
 
Total net revenue
    18,968       16,193       15,545       15,086       15,175  
 
Provision for credit losses
    1,008       1,134       812       493       831  
Noninterest expense
    10,628       9,885       9,796       9,382       9,780  
Income tax expense
    2,545       1,268       1,705       1,727       1,537  
 
Income from continuing operations
    4,787       3,906       3,232       3,484       3,027  
Income from discontinued operations(b)
          620       65       56       54  
 
Net income
  4,787     4,526     3,297     3,540     3,081  
 
Per common share
                                       
Basic earnings per share:
                                       
Income from continuing operations
  1.38     1.13     0.93     1.00     0.87  
Net income
    1.38       1.31       0.95       1.02       0.89  
Diluted earnings per share:
                                       
Income from continuing operations
  1.34     1.09     0.90     0.98     0.85  
Net income
    1.34       1.26       0.92       0.99       0.86  
Cash dividends declared per share
    0.34       0.34       0.34       0.34       0.34  
Book value per share
    34.45       33.45       32.75       31.89       31.19  
Common shares outstanding
                                       
Average:  Basic
    3,456       3,465       3,469       3,474       3,473  
Diluted
    3,560       3,579       3,574       3,572       3,571  
Common shares at period-end
    3,416       3,462       3,468       3,471       3,473  
Share price(c)
                                       
High
  51.95     49.00     47.49     46.80     42.43  
Low
    45.91       45.51       40.40       39.33       37.88  
Close
    48.38       48.30       46.96       42.00       41.64  
Market capitalization
    165,280       167,199       162,835       145,764       144,614  
Financial ratios(d)
                                       
Return on common equity (“ROE”):
                                       
Income from continuing operations
    17 %     14 %     11 %     13 %     11 %
Net income
    17       16       12       13       12  
Return on assets (“ROA”):
                                       
Income from continuing operations
    1.41       1.14       0.98       1.05       0.98  
Net income
    1.41       1.32       1.00       1.06       1.00  
Tier 1 capital ratio
    8.5       8.7       8.6       8.5       8.5  
Total capital ratio
    11.8       12.3       12.1       12.0       12.1  
Overhead ratio
    56       61       63       62       64  
Selected balance sheet data (period-end)
                                       
Total assets
  1,408,918     1,351,520     1,338,029     1,328,001     1,273,282  
Loans
    449,765       483,127       463,544       455,104       432,081  
Deposits
    626,428       638,788       582,115       593,716       584,465  
Long-term debt
    143,274       133,421       126,619       125,280       112,133  
Total stockholders’ equity
    117,704       115,790       113,561       110,684       108,337  
Headcount
    176,314       174,360       171,589       172,423       170,787  
Credit quality metrics
                                       
Allowance for credit losses
  7,853     7,803     7,524     7,500     7,659  
Nonperforming assets(e)
    2,421       2,341       2,300       2,384       2,348  
Allowance for loan losses to total loans(f)
    1.74 %     1.70 %     1.65 %     1.69 %     1.83 %
Net charge-offs
  903     930     790     654     668  
Net charge-off rate(d)(f)
    0.85 %     0.84 %     0.74 %     0.64 %     0.69 %
Wholesale net charge-off (recovery) rate(d)(f)
    (0.02 )     0.07       (0.03 )     (0.05 )     (0.06 )
Managed card net charge-off rate(d)
    3.57       3.45       3.58       3.28       2.99  
 
(a)  
On January 1, 2007, the Firm adopted SFAS 157 and recognized a benefit of $166 million, in the current quarter, as a result of incorporating an adjustment to the Firm’s valuation of derivative liabilities and other liabilities measured at fair value to reflect the credit quality of the Firm. The adoption also resulted in a benefit of $464 million related to valuation adjustments to nonpublic private equity investments.
(b)  
On October 1, 2006, JPMorgan Chase & Co. completed the exchange of selected corporate trust businesses for the consumer, business banking and middle-market banking businesses of The Bank of New York Company Inc. The results of operations of these corporate trust businesses are reported as discontinued operations for each 2006 period.
(c)  
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.
(d)  
Quarterly ratios are based upon annualized amounts.
(e)  
Excludes nonperforming wholesale held-for-sale (“HFS”) loans purchased as part of the Investment Bank’s proprietary activities.
(f)  
Excluded from the allowance coverage ratios were end-of-period loans held-for-sale and loans accounted for at fair value; and excluded from the net charge-off rates were average loans held-for-sale and loans accounted for at fair value.

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section of the Form 10-Q provides management’s discussion and analysis (“MD&A”) of the financial condition and results of operations for JPMorgan Chase. See the Glossary of terms on pages 107–109 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. Certain of such risks and uncertainties are described herein (see Forward-looking Statements on page 112 of this Form 10-Q) and in the JPMorgan Chase Annual Report on Form 10-K for the year ended December 31, 2006 as amended by the Form 8-K filed on May 10, 2007 (“2006 Annual Report” or “2006 Form 10-K”), in Part I, Item 1A: Risk factors and in Forward-looking Statements in the MD&A of the 2006 Form 10-K, to which reference is hereby made.
INTRODUCTION
JPMorgan Chase & Co. (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 $1.4 trillion in assets, $117.7 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 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, N.A.”), a national banking association with branches in 17 states; and Chase Bank USA, National Association (“Chase Bank USA, N.A.”), a national bank that is the Firm’s credit card issuing bank. JPMorgan Chase’s principal nonbank subsidiary is J.P. Morgan Securities Inc., 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 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 is one of the world’s leading investment banks, with deep client relationships and broad product capabilities. The Investment Bank’s clients are corporations, financial institutions, governments and institutional investors. The Firm offers 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, market-making in cash securities and derivative instruments, and research. The Investment Bank (“IB”) also commits the Firm’s own capital to proprietary investing and trading activities.
Retail Financial Services
Retail Financial Services (“RFS”), which includes the Regional Banking, Mortgage Banking and Auto Finance reporting segments, helps meet the financial needs of consumers and businesses. RFS provides convenient consumer banking through the nation’s fourth-largest branch network and third-largest ATM network. RFS is a top-five mortgage originator and servicer, the second-largest home equity originator, the largest noncaptive originator of automobile loans and one of the largest student loan originators.
RFS serves customers through more than 3,000 bank branches, 8,500 ATMs and 270 mortgage offices, and through relationships with more than 15,000 auto dealerships and 4,300 schools and universities. More than 11,000 branch salespeople assist customers, across a 17-state footprint from New York to Arizona, with checking and savings accounts, mortgage, home equity and business loans, investments and insurance. Over 1,200 additional mortgage officers provide home loans throughout the country.
Card Services
With more than 152 million cards in circulation and $146.6 billion in managed loans, Chase Card Services (“CS”) is one of the nation’s largest credit card issuers. Customers used Chase cards for more than $81.3 billion worth of transactions in the three months ended March 31, 2007.

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Chase offers a wide variety of general-purpose cards to satisfy the needs of individual consumers, small businesses and partner organizations, including cards issued with AARP, Amazon, Continental Airlines, Marriott, Southwest Airlines, Sony, United Airlines, Walt Disney Company and many other well-known brands and organizations. Chase also issues private-label cards with Circuit City, Kohl’s, Sears Canada and BP.
Chase Paymentech Solutions, LLC, a joint venture with JPMorgan Chase and First Data Corporation, is the largest processor of MasterCard and Visa payments in the world, having handled 4.5 billion transactions in the three months ended March 31, 2007.
Commercial Banking
Commercial Banking (“CB”) serves more than 30,000 clients, including corporations, municipalities, financial institutions and not-for-profit entities. These clients generally have annual revenues ranging from $10 million to $2 billion. Commercial bankers serve clients nationally throughout the RFS footprint and in offices located in other major markets.
Commercial Banking offers its clients industry knowledge, experience, a dedicated service model, comprehensive solutions and local expertise. The Firm’s broad platform positions CB to deliver extensive product capabilities – including lending, treasury services, investment banking and asset management – to meet its clients’ U.S. and international financial needs.
Treasury & Securities Services
Treasury & Securities Services (“TSS”) is a global leader in providing transaction, investment and information services to support the needs of institutional clients worldwide. TSS is one of the largest cash management providers in the world and a leading global custodian. Treasury Services (“TS”) provides a variety of cash management products, trade finance and logistics solutions, wholesale card products, and liquidity management capabilities to small and midsized companies, multinational corporations, financial institutions and government entities. TS partners with the Commercial Banking, Retail Financial Services and Asset Management business segments to serve clients firmwide. As a result, certain TS revenues are included in other segments’ results. Worldwide Securities Services (“WSS”) stores, values, clears and services securities and alternative investments for investors and broker-dealers; and manages Depositary Receipt programs globally.
Asset Management
With assets under supervision of $1.4 trillion, Asset Management (“AM”) is a global leader in investment and wealth management. AM clients include institutions, retail investors and high-net-worth individuals in every major market throughout the world. AM offers global investment management in equities, fixed income, real estate, hedge funds, private equity and liquidity, including both money market instruments and bank deposits. AM also provides trust and estate and banking services to high-net-worth clients, and retirement services for corporations and individuals. The majority of AM’s client assets are in actively managed portfolios.
OTHER BUSINESS EVENTS
Investment in SLM Corporation
On April 16, 2007, an investor group, comprising JPMorgan Chase and three other firms, announced that they had signed a definitive agreement to purchase SLM Corporation (“Sallie Mae”) for approximately $25 billion. JPMorgan Chase will invest $2.2 billion and will own 24.9% of the company. The transaction requires the approval of Sallie Mae’s stockholders and is subject to regulatory approvals. It is expected to close in late 2007.

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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.
Financial performance of JPMorgan Chase
                         
Three months ended March 31,                  
(in millions, except per share and ratio data)   2007     2006     Change
 
Selected income statement data Net revenue
  $ 18,968     $ 15,175       25 %
Provision for credit losses
    1,008       831       21  
Noninterest expense
    10,628       9,780       9  
Income from continuing operations
    4,787       3,027       58  
Income from discontinued operations
          54     NM  
Net income
    4,787       3,081       55  
 
                       
Diluted earnings per share
                       
Income from continuing operations
  $ 1.34     $ 0.85       58 %
Net income
    1.34       0.86       56  
Return on common equity (“ROE”)
                       
Income from continuing operations
    17 %     11 %        
Net income
    17       12          
 
Business overview
The Firm reported 2007 first-quarter net income of $4.8 billion, or $1.34 per share, compared with net income of $3.1 billion, or $0.86 per share, for the first quarter of 2006. Return on common equity for the quarter was 17% compared with 12% in the prior year. Income from continuing operations was $4.8 billion, or $1.34 per share, in the current quarter compared with $3.0 billion, or $0.85 per share, for the first quarter of 2006. The Firm’s adoption of SFAS 157 (“Fair Value Measurements”) resulted in a benefit to the current quarter’s earnings of $391 million (after-tax), or $0.11 per share; this benefit consisted of $103 million (after-tax) related to adjustments to the valuation of liabilities to incorporate the impact of the Firm’s credit quality (recorded in the Investment Bank) and $288 million (after-tax) related to the valuation of nonpublic private equity investments (recorded in the Corporate segment). For a discussion of SFAS 157 and SFAS 159, see Note 3 and Note 4 on pages 71–80 of this Form 10-Q.
In the first quarter of 2007, the Firm successfully completed the systems conversion and rebranding for 339 former Bank of New York branches. The Firm’s customers throughout the U.S. now have access to over 3,000 branches and 8,500 ATMs in 17 states, all of which are on common computer systems.
In the first quarter of 2007, the global economy continued to expand at a rate of approximately 5%, which supported continued strong growth in the emerging market economies. During the first quarter, the European economy slowed slightly with an estimated growth rate of 2.8%, Japan experienced steady growth of 2.8% and emerging Asian economies expanded at a rate of approximately 8.6%. U.S. economic growth slowed to a rate of approximately 1.3%, reflecting a solid gain in consumer spending, which was supported by equity market appreciation, low unemployment and wage growth. These benefits were offset partially by a continued slower pace of new home construction, weakness in government spending and a slower rate of capital spending by businesses. The Federal Reserve Board held the federal funds rate steady at 5.25% and the yield curve remained moderately inverted. Equity markets, both domestic and international, reflected positive performance, with the S&P 500 up 3% on average and international indices increasing 5% on average during the first quarter of 2007. Global capital markets activity was strong during the first quarter of 2007, with debt and equity underwriting and merger and acquisition activity surpassing levels from the first quarter of 2006. Demand for wholesale loans in the U.S. was up approximately 6%, while U.S. consumer loans grew an estimated 7% during the first quarter of 2007.
The first quarter of 2007 economic environment was a contributing factor to the performance of the Firm and each of its businesses. The overall economic expansion, strong level of capital markets activity and positive performance in equity markets helped to drive new business volume and organic growth within each of the Firm’s businesses while also contributing to the generally favorable credit environment. However, the interest rate and competitive environments negatively affected both wholesale and consumer loan and deposit spreads.

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The discussion that follows highlights the current-quarter performance of each business segment compared with the prior-year quarter, and discusses results on a managed basis unless otherwise noted. For more information about managed basis, see Explanation and reconciliation of the Firm’s use of non-GAAP financial measures on pages 14–15 of this Form 10-Q.
Investment Bank achieved record net income driven by record revenue and a lower provision for credit losses, partially offset by higher noninterest expense. Investment banking fees were at a record level, benefiting from record debt and record equity underwriting fees as well as strong advisory fees. Record Fixed Income Markets revenue benefited from improved results in commodities (compared with a weak prior-year quarter), and strength in credit and rate markets, partially offset by lower results in currencies. Record Equity Markets revenue benefited from particularly strong performance in Europe and strong derivatives performance across regions. The Provision for credit losses decreased compared with the prior year as the prior-year provision reflected growth in the loan portfolio. The increase in expense was due primarily to higher performance-based compensation, partially offset by the absence of prior-year expense from the adoption of SFAS 123R.
Retail Financial Services net income decreased from the prior year due to a decline in Regional Banking results, largely offset by improved performance in Mortgage Banking. Revenue was up from the prior year driven by higher gain-on-sale income and the reclassification of certain loan origination costs to expense (previously netted against revenue) due to the adoption of SFAS 159 in Mortgage Banking, The Bank of New York transaction, higher home equity loans and deposit balances, increases in deposit-related fees and the absence of a prior-year loss related to auto loans transferred to held-for-sale. These benefits were offset partially by the sale of the insurance business, lower prime and subprime mortgage balances, and a charge resulting from accelerated surrenders of customer annuity contracts. The provision for credit losses was up from the prior year due primarily to higher losses in the subprime mortgages portfolio and, to a lesser extent, increased provision in the home equity portfolio related to weaker housing prices. These increases were offset partially by the reversal of a portion of the reserves related to Hurricane Katrina. Noninterest expense was up from the prior year primarily due to The Bank of New York transaction, the reclassification of certain loan origination costs due to the adoption of SFAS 159, investments in the retail distribution network and higher depreciation expense on owned automobiles subject to operating leases. These increases were offset partially by the sale of the insurance business.
Card Services net income decreased when compared with the prior year, primarily due to prior-year results benefiting from significantly lower net charge-offs related to decreased bankruptcy losses. Net managed revenue was flat compared with the prior year benefiting from higher average managed loan balances, increased fees and increased interchange income from higher charge volume. These benefits were largely offset by higher charge-offs, which resulted in increased revenue reversals; higher cost of funds on balance growth in promotional, introductory and transactor loan balances; and higher volume-driven payments to partners and increased rewards expense. The managed provision for credit losses was up due to the prior year benefiting from a lower level of net charge-offs, reflecting a reduction in bankruptcy losses following the change in bankruptcy legislation in the fourth quarter of 2005. This was partially offset by a reduction in the allowance for credit losses primarily relating to the strength in the underlying credit quality of the loan portfolio. Noninterest expense was flat due primarily to lower marketing expense and fraud-related losses, offset by higher expense related to recent acquisitions and increased customer activity.
Commercial Banking net income was a record, up from the prior year driven by higher net revenue. Revenue increased due to higher liability balances and loan volumes, which reflected organic growth and The Bank of New York transaction, as well as higher investment banking revenue and gains related to the sale of securities acquired in the satisfaction of debt. These benefits were offset partially by the continued shift to narrower-spread liability products and loan spread compression. Expense decreased due to the absence of prior-year expense from the adoption of SFAS 123R, largely offset by expense related to The Bank of New York transaction.
Treasury & Securities Services net income was flat compared with the prior year as higher revenue was offset by increased expense. Revenue benefited from increased product usage by existing clients, new business growth, higher liability balances and market appreciation, all of which was offset largely by price compression across Treasury Services products, a continued shift to narrower-spread liability products and lower foreign exchange revenue. The increase in expense was due to higher compensation expense related to growth in headcount supporting increased client volume and investment in new product platforms, partially offset by the absence of prior-year expense related to the adoption of SFAS 123R.

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Asset Management achieved record net income driven by increased revenue and the absence of prior-year expense related to the adoption of SFAS 123R, offset primarily by higher compensation expense. Revenue benefited from increased fees and commissions largely due to increased assets under management and higher performance fees. Expense increased due to higher compensation and increased minority interest expense related to Highbridge Capital Management, partially offset by the absence of prior-year expense related to the adoption of SFAS 123R.
Corporate segment net income increased primarily from higher private equity gains and improved net interest income. Private equity gains benefited from a higher level of realized gains and a fair value adjustment on nonpublic investments resulting from the adoption of SFAS 157 as well as the reclassification of certain private equity carried interest from revenue to compensation expense. Treasury benefited from an increase in net interest income driven by improved net interest spread and the absence of securities losses in the prior year. Expense increased compared with the prior year driven by the reclassification of certain private equity carried interest to compensation expense and lower recoveries related to certain material litigation, offset primarily by business efficiencies and the absence of prior-year expense from the adoption of SFAS 123R.
Net income from discontinued operations was zero in the current quarter compared with $54 million in the prior year. Discontinued operations (included in the Corporate segment results) include the related balance sheet and income statement activity of selected corporate trust businesses that were sold to The Bank of New York on October 1, 2006.
During the quarter ended March 31, 2007, approximately $720 million (pretax) of merger savings was realized, which is an annualized rate of approximately $2.9 billion. Merger costs of $62 million were expensed during the first quarter of 2007 bringing the total amount expensed since the merger announcement to $3.5 billion (including capitalized costs).
The managed provision for credit losses was $1.6 billion, up by $321 million, or 25%, from the prior year. The wholesale provision for credit losses was $77 million for the quarter compared with a provision of $179 million in the prior year. The prior-year provision reflected growth in the loan portfolio. Wholesale net recoveries were $6 million in the current quarter compared with net recoveries of $20 million in the prior year, resulting in net recovery rates of 0.02% and 0.06%, respectively. The total consumer managed provision for credit losses was $1.5 billion compared with $1.1 billion in the prior year. The prior year benefited from a lower level of credit card net charge-offs, which reflected a low level of bankruptcy losses following the change in bankruptcy legislation in the fourth quarter of 2005. The increase from last year also reflects higher charge-offs and additions to the allowance for credit losses related to the subprime mortgage and home equity loan portfolios, partially offset by a reduction in the allowance for credit losses in Card Services. The Firm had total nonperforming assets of $2.4 billion at March 31, 2007, up by $73 million, or 3%, from the prior-year level of $2.3 billion.
The Firm had, at March 31, 2007, total stockholders’ equity of $117.7 billion and a Tier 1 capital ratio of 8.5%. The Firm purchased $4.0 billion, or 80.9 million shares, of common stock during the quarter. On April 17, 2007, the Board of Directors declared a quarterly dividend of $0.38 per share on the outstanding shares of the Firm’s common stock, an increase of $0.04 per share, or 12%. The dividend is payable on July 31, 2007, to stockholders of record at the close of business on July 6, 2007. On April 17, 2007, the Board of Directors also authorized a new $10.0 billion common stock repurchase program, which replaces the Firm’s previous $8.0 billion repurchase program authorized on March 21, 2006. There was $816 million of remaining authorization under the $8.0 billion repurchase program.

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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.
JPMorgan Chase’s outlook for the second quarter of 2007 should be viewed against the backdrop of the global economy, financial markets activity and the geopolitical environment, all of which are integrally linked. While the Firm considers outcomes for, and has contingency plans to respond to, stress environments, the current basic outlook is predicated on the interest rate movements implied in the forward rate curve for U.S. Treasury securities, the continuation of favorable U.S. and international equity markets and continued expansion of the global economy.
The Investment Bank enters the second quarter of 2007 with a strong investment bank fee pipeline. In the Corporate segment, 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, but results can be volatile from quarter to quarter. Management continues to believe that the net loss in Treasury and Other Corporate, on a combined basis, will be approximately $50 million to $100 million per quarter. The performance of each of the Firm’s lines of business will be affected by overall global economic growth, by financial market movements, including interest rates movements, by the competitive environment and by client activity levels in any given time period.
The Provision for credit losses is anticipated to be higher, primarily driven by a trend toward a more normal level of provisioning for credit losses in both the wholesale and consumer businesses. The consumer Provision for credit losses is anticipated to increase as the Firm experiences a higher level of net charge-offs in Card Services as bankruptcy filings continue to increase from the significantly lower than normal levels experienced in 2006 related to the change in bankruptcy law in 2005. The provision for credit losses was increased for both the subprime mortgage portfolio and, to a lesser extent, the home equity portfolio during the first quarter of 2007, and management remains cautious with respect to the real estate lending portfolio given continued downward pressure on housing prices and the elevated level of unsold homes nationally.
Firmwide expense is anticipated to reflect investments in each business, recent acquisitions, continued merger savings and other operating efficiencies. Annual Merger savings are expected to reach approximately $3.0 billion by the end of 2007, upon the completion of the last significant conversion activity, which is the wholesale deposit conversion scheduled for the second half of 2007. Merger costs of approximately $400 million are expected to be incurred during 2007 (including a modest amount related to The Bank of New York transaction). These additions are expected to bring total cumulative merger costs to $3.8 billion by the end of 2007.

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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. Total net revenue, Noninterest expense and Income tax expense reflect the impact of discontinued operations. For a discussion of the Critical accounting estimates used by the Firm that affect the Consolidated results of operations, see page 64 of this Form 10-Q and pages 83–85 of the JPMorgan Chase Annual Report on Form 10-K for the year ended December 31, 2006. Effective January 1, 2007, certain transaction costs previously reported within Principal transactions and Asset management, administration and commission revenues have now been classified and are reported in Professional and outside services expense. Reclassified amounts for 2006, 2005 and 2004 are set forth in the Firm’s Annual Report on Form 10-K for the year ended December 31, 2006, as amended by the Firm’s Form 8-K filed May 10, 2007 (“2006 Annual Report”).
The following table presents the components of Total net revenue.
                         
Total net revenue                  
Three months ended March 31,                  
(in millions)   2007     2006     Change
 
Investment banking fees
  $ 1,739     $ 1,169       49 %
Principal transactions(a)
    4,471       2,709       65  
Lending & deposit related fees
    895       841       6  
Asset management, administration and commissions(a)
    3,186       2,874       11  
Securities gains (losses)
    2       (116 )   NM  
Mortgage fees and related income
    476       241       98  
Credit card income
    1,563       1,910       (18 )
Other income
    518       554       (6 )
         
Noninterest revenue
    12,850       10,182       26  
Net interest income
    6,118       4,993       23  
         
Total net revenue
  $ 18,968     $ 15,175       25 %
 
(a)  
Certain transaction costs, previously reported within Revenue, have been reclassified to Noninterest expense. Revenue and Noninterest expense have been reclassified for all periods presented. The reclassification did not affect Income from continuing operations or Net income.
Total Net revenue
Total net revenue for the first quarter of 2007 was $19.0 billion, up by $3.8 billion, or 25%, from the prior year. The increase was due to higher Principal transactions revenue, reflecting very strong private equity gains (including the impact of the adoption of SFAS 157) and record Fixed Income and record Equity markets revenue, higher Net interest income, record Investment banking fees, increased Asset management, administration and commissions revenue, and higher Mortgage fees and related income (including the impact of the adoption of SFAS 159). These improvements were partially offset by lower Credit card income.
Investment banking fees of $1.7 billion in the first quarter 2007 was a record for the Firm. This result was driven by record debt and record equity underwriting as well as strong advisory fees. For a further discussion of Investment banking fees, which are primarily recorded in the IB, see the IB segment results on pages 17–20 of this Form 10-Q.
Principal transactions revenue consists of trading revenue, changes in fair value associated with financial instruments held by the IB for which the SFAS 159 fair value option was elected and private equity gains. Trading revenue of $3.1 billion in the first quarter of 2007 was a record for the Firm, driven primarily by strong fixed income and equities performance. Credit Portfolio revenue was up, driven largely by an adjustment to the valuation of the Firm’s derivative liabilities and other liabilities measured at fair value to reflect the credit quality of the Firm, as a part of the adoption of SFAS 157, and higher trading revenue from credit portfolio management activities. Private equity gains were very strong, benefiting from a higher level of realized gains, a fair value adjustment to nonpublic investments of $464 million resulting from the adoption of SFAS 157, and the reclassification of certain private equity carried interest to Compensation expense. For a further discussion of Principal transactions revenue, see the IB and Corporate segment results on pages 17–20 and 37–39, respectively, and Note 5 on pages 80–82 of this Form 10-Q.
Lending & deposit related fees rose from the first quarter of 2006 as a result of higher deposit-related fees, which in part, resulted from The Bank of New York transaction. For a further discussion of Lending & deposit related fees, which are primarily recorded in RFS see the RFS segment results on pages 21–27 of this Form 10-Q.
The increase in Asset management, administration and commissions revenue compared with the first quarter of 2006 was primarily due to increased assets under management and higher performance fees. Assets under management in AM was $1.1 trillion at the end of the first quarter of 2007, up 21%, or $180 billion, from the prior year; this growth was primarily

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the result of net asset inflows in the institutional and retail segments, and market appreciation. Also contributing to the increase was higher assets under custody in TSS driven by market value appreciation and new business, as well as growth in other fees due to a combination of increased product usage by existing clients and new business growth. In addition, commissions increased due to higher brokerage transaction volume, partly offset by the sale of the insurance business in the third quarter of 2006, and a charge resulting from accelerated surrenders of customer annuity contracts. For additional information on these fees and commissions, see the segment discussions for AM on pages 34–36, TSS on pages 32–33, and RFS on pages 21–27, of this Form 10-Q.
The favorable variance in Securities gains (losses) when compared with the first quarter of 2006 primarily reflects the absence of $158 million of securities losses in the prior year from repositioning of the Treasury investment securities portfolio. For a further discussion of Securities gains (losses), which are mostly recorded in the Firm’s Treasury business, see the Corporate segment discussion on pages 37–39 of this Form 10-Q.
Mortgage fees and related income increased in comparison with the first quarter of 2006 due to increased production revenue reflecting higher gain-on-sale income and the reclassification of certain loan origination costs to expense (previously netted against revenue) due to the adoption of SFAS 159. Net mortgage servicing revenue improved reflecting an increase in third-party loans serviced. 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 pages 25–26 and Note 6 on page 83 of this Form 10-Q.
Credit card income decreased $347 million, or 18%, from the prior year primarily from lower servicing fees earned in connection with securitization activities, which were unfavorably affected by higher net credit losses incurred on securitized credit card loans, an increase in interest paid to investors in securitized loans, and a decrease in average securitized loans from the prior year. Also, contributing to the decrease were increases in volume-driven payments to partners and increased expenses related to rewards programs. These were offset partially by higher customer charge volume that favorably impacted interchange income and an increase in fee-based product revenue.
The decrease in Other income from the first quarter of 2006 reflected lower gains from loan workouts, partially offset by higher results on corporate and bank-owned life insurance policies and the absence of a prior-year $50 million loss related to auto loans transferred to held-for-sale.
Net interest income rose from the first quarter of last year as a result of improved trading-related Net interest income, primarily from the impact of a shift of Interest expense to Principal transactions revenue related to certain IB structured notes to which the fair value option was elected in connection with the adoption of SFAS 159; an improvement in Treasury’s net interest spread; higher average credit card balances, which included a private-label credit card portfolio acquisition by CS; higher home equity loans; the impact of The Bank of New York transaction; and higher wholesale liability balances and consumer deposits. These increases were offset partially by narrower spreads on consumer and wholesale loans; increased credit card-related interest reversals in the current quarter associated with higher charge-offs; a shift to narrower spread deposit products; and the impact of RFS’s sale of the insurance business. The Firm’s total average interest-earning assets for the first quarter of 2007 were $1.1 trillion, up 12% from the first quarter of 2006, primarily as a result of an increase in Trading assets – debt instruments, Loans, and Available-for-sale securities, partially offset by a decline in Interests in purchased receivables as a result of the restructuring and deconsolidation during the second quarter of 2006 of certain multi-seller conduits that the Firm administered. The net interest yield on these assets, on a fully taxable-equivalent basis, was 2.39%, an increase of 20 basis points from the prior year, partly reflecting the shift of Interest expense to Principal transactions revenue related to certain IB structured notes to which the fair value option was elected in connection with the adoption of SFAS 159.
                         
Provision for credit losses                  
Three months ended March 31,                  
(in millions)   2007     2006     Change
 
Provision for credit losses
  $ 1,008     $ 831       21 %
 
Provision for credit losses
The Provision for credit losses in the first quarter of 2007 increased by $177 million from 2006 due to a $279 million increase in the consumer Provision for credit losses, partly offset by a $102 million decrease in the wholesale Provision for credit losses. The increase in the consumer provision was driven by the following: in RFS, higher losses in the subprime mortgage portfolio and, to a lesser extent, a provision increase against the home equity portfolio related to weaker housing prices; and in CS, the prior-year quarter benefited from lower net charge-offs, which reflected a reduction in bankruptcy-related losses following the change in bankruptcy legislation in the fourth quarter of 2005. The current quarter benefited from an $85 million reduction in the allowance for credit losses, primarily related to strength in the underlying credit quality of the credit card portfolio, and by the reversal of a portion of the reserves in RFS related to

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Hurricane Katrina. The decrease in the wholesale provision was largely the result of a higher provision in the prior year due to growth in the loan portfolio. For a more detailed discussion of the loan portfolio and the Allowance for loan losses, refer to Credit risk management on pages 48–60 of this Form 10-Q.
Noninterest expense
The following table presents the components of Noninterest expense.
                         
Three months ended March 31,                  
(in millions)   2007     2006     Change
 
Compensation expense
  $ 6,234     $ 5,548       12 %
Occupancy expense
    640       594       8  
Technology, communications and equipment expense
    922       869       6  
Professional & outside services(a)
    1,200       1,008       19  
Marketing
    482       519       (7 )
Other expense
    735       816       (10 )
Amortization of intangibles
    353       355       (1 )
Merger costs
    62       71       (13 )
         
Total Noninterest expense
  $ 10,628     $ 9,780       9  
 
(a)  
Certain transaction costs, previously reported within Revenue, have been reclassified to Noninterest expense. Revenue and Noninterest expense have been reclassified for all periods presented. The reclassification did not affect Income from continuing operations or Net income.
Noninterest expense
Total Noninterest expense for the first quarter of 2007 was $10.6 billion, up by $848 million, or 9%, from the prior year. The increase was driven by higher Compensation expense, primarily from performance-based incentives. In addition, expense growth was also driven by acquisitions and investments in businesses, as well as lower insurance recoveries related to certain material litigation. The increase in expense was offset partially by the absence of a prior-year expense from the adoption of SFAS 123R, as well as business divestitures and operating expense efficiencies.
The increase in Compensation expense from the first quarter of 2006 was primarily the result of higher performance-based incentives, additional headcount in connection with acquisitions and investments in businesses, the reclassification of certain private equity carried interest from Principal transactions revenue, as well as the reclassification of certain loan origination costs (previously netted against revenue) due to the adoption of SFAS 159. These increases were partially offset by the absence of a prior-year expense of $459 million from the adoption of SFAS 123R, business divestitures and expense efficiencies throughout the Firm. For a detailed discussion of the adoption of SFAS 159 and SFAS 123R see Note 4 on pages 77–80 and Note 9 on page 85, respectively, of this Form 10-Q.
The increase in Occupancy expense from the first quarter of 2006 was driven by ongoing investments in the retail distribution network, which included incremental expense from The Bank of New York transaction.
The increase in Technology, communications and equipment expense, when compared with the first quarter of 2006, was due primarily to higher depreciation expense on owned automobiles subject to operating leases and technology investments to support business growth, partially offset by operating expense efficiencies.
Professional & outside services expense increased from the first quarter of 2006 due primarily to higher brokerage expense and credit card processing costs as a result of growth in transaction volume. Also contributing to the increase was acquisitions and investments in businesses.
Marketing expense was lower when compared with the first quarter of 2006, reflecting lower expenditures for credit card campaigns.
Other expense declined compared with the first quarter of 2006 due to the sale of the insurance business in the third quarter of 2006, lower charges related to litigation, and lower credit card fraud-related losses. These items were partially offset by lower insurance recoveries pertaining to certain litigation matters, and growth in business volume, acquisitions and investments in businesses.
For a discussion of Amortization of intangibles and Merger costs, refer to Note 17 and Note 10 on pages 96–98 and 85, respectively, of the Form 10-Q.

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Income tax expense
The Firm’s Income from continuing operations 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)   2007     2006  
 
Income from continuing operations before income tax expense
  $ 7,332     $ 4,564  
Income tax expense
    2,545       1,537  
Effective tax rate
    34.7 %     33.7 %
 
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.
Income from discontinued operations
Net income from discontinued operations was zero in the current quarter compared with $54 million in the prior year. Discontinued operations (included in the Corporate segment results) include the related balance sheet and income statement activity of selected corporate trust businesses that were sold to The Bank of New York on October 1, 2006.

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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 66–69 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 assumes credit card loans securitized by CS remain on the balance sheet and presents 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.
The presentation of CS results on a managed basis assumes that credit card loans that have been securitized and sold in accordance with SFAS 140 still remain on the balance sheet and that the earnings on the securitized loans are classified in the same manner as the earnings on retained loans recorded on the balance sheet. JPMorgan Chase uses the concept of managed basis to evaluate the credit performance and overall financial performance of the entire managed credit card portfolio. Operations are funded and decisions are made about allocating resources, such as employees and capital, based upon managed financial information. In addition, the same underwriting standards and ongoing risk monitoring are used for both loans on the balance sheet and securitized loans. Although securitizations result in the sale of credit card receivables to a trust, JPMorgan Chase retains the ongoing customer relationships, as the customers may continue to use their credit cards; accordingly, the customer’s credit performance will affect both the securitized loans and the loans retained on the balance sheet. JPMorgan Chase believes managed basis information is useful to investors, enabling them to understand both the credit risks associated with the loans reported on the balance sheet and the Firm’s retained interests in securitized loans. For a reconciliation of reported to managed basis of CS results, see Card Services segment results on pages 27–29 of this Form 10-Q. For information regarding the securitization process, and loans and residual interests sold and securitized, see Note 15 on pages 90–94 of this Form 10-Q.
Total net revenue for each of the business segments and the Firm is presented on an FTE 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 also uses certain non-GAAP financial measures at the segment level because it believes these non-GAAP financial measures provide information to investors about the underlying operational performance and trends of the particular business segment and therefore facilitate a comparison of the business segment with the performance of its 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,   2007
    Reported   Credit   Tax-equivalent   Managed
(in millions, except per share and ratio data)   results   card(b)   adjustments   basis
 
Revenue
                               
Investment banking fees
  $ 1,739     $     $     $ 1,739  
Principal transactions
    4,471                   4,471  
Lending & deposit related fees
    895                   895  
Asset management, administration and commissions
    3,186                   3,186  
Securities gains
    2                   2  
Mortgage fees and related income
    476                   476  
Credit card income
    1,563       (746 )           817  
Other income
    518             110       628  
 
Noninterest revenue
    12,850       (746 )     110       12,214  
Net interest income
    6,118       1,339       70       7,527  
 
Total net revenue
    18,968       593       180       19,741  
Provision for credit losses
    1,008       593             1,601  
Noninterest expense
    10,628                   10,628  
 
Income from continuing operations before income tax expense
    7,332             180       7,512  
Income tax expense
    2,545             180       2,725  
 
Income from continuing operations
    4,787                   4,787  
Income from discontinued operations
                       
 
Net income
  $ 4,787     $     $     $ 4,787  
 
Net income – diluted earnings per share
  $ 1.34     $     $     $ 1.34  
 
Return on common equity(a)
    17 %     %     %     17 %
Return on equity less goodwill(a)
    27                   27  
Return on assets(a)
    1.41     NM     NM       1.34  
Overhead ratio
    56     NM     NM       54  
 
                                 
Three months ended March 31,   2006  
    Reported   Credit   Tax-equivalent   Managed
(in millions, except per share and ratio data)   results   card(b)   adjustments   basis
 
Revenue
                               
Investment banking fees
  $ 1,169     $     $     $ 1,169  
Principal transactions
    2,709                   2,709  
Lending & deposit related fees
    841                   841  
Asset management, administration and commissions
    2,874                   2,874  
Securities (losses)
    (116 )                 (116 )
Mortgage fees and related income
    241                   241  
Credit card income
    1,910       (1,125 )           785  
Other income
    554             146       700  
 
Noninterest revenue
    10,182       (1,125 )     146       9,203  
Net interest income
    4,993       1,574       71       6,638  
 
Total net revenue
    15,175       449       217       15,841  
Provision for credit losses
    831       449             1,280  
Noninterest expense
    9,780                   9,780  
 
Income from continuing operations before income tax expense
    4,564             217       4,781  
Income tax expense
    1,537             217       1,754  
 
Income from continuing operations
    3,027                   3,027  
Income from discontinued operations
    54                   54  
 
Net income
  $ 3,081     $     $     $ 3,081  
 
Net income – diluted earnings per share
  $ 0.86     $     $     $ 0.86  
 
Return on common equity(a)
    11 %     %     %     11 %
Return on equity less goodwill(a)
    19                   19  
Return on assets(a)
    0.98     NM     NM       0.95  
Overhead ratio
    64     NM     NM       62  
 
(a)  
Based upon Income from continuing operations.
(b)  
Credit card securitizations affect CS. See pages 27–29 of this Form 10-Q for further information.
                                                 
Three months ended March 31,   2007     2006  
(in millions)   Reported     Securitized     Managed     Reported     Securitized     Managed  
 
Loans – Period-end
  $ 449,765     $ 68,403     $ 518,168     $ 432,081     $ 69,580     $ 501,661  
Total assets – average
    1,378,915       65,114       1,444,029       1,248,357       67,557       1,315,914  
 

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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 current organization of JPMorgan Chase. There are six major reportable business segments: the Investment Bank, Retail Financial Services, Card Services, Commercial Banking, Treasury & Securities Services and Asset 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 further discussion of Business segment results, see pages 34–35 of JPMorgan Chase’s 2006 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 business segment results allocates income and expense using market-based methodologies. For a further discussion of those methodologies, see Business Segment Results – Description of business segment reporting methodology on page 34 of JPMorgan Chase’s 2006 Annual Report. The Firm continues to assess the assumptions, methodologies and reporting classifications used for segment reporting, and further refinements may be implemented in future periods.
Segment Results — Managed Basis(a)
The following table summarizes the business segment results for the periods indicated.
                                                                                         
                                                                            Return  
Three months ended March 31,   Total net revenue     Noninterest expense     Net income (loss)     on equity  
(in millions, except ratios)   2007     2006     Change   2007     2006     Change   2007     2006     Change   2007     2006  
 
Investment Bank
  $ 6,254     $ 4,828       30 %   $ 3,831     $ 3,320       15 %   $ 1,540     $ 850       81 %     30 %     17 %
Retail Financial Services
    4,106       3,763       9       2,407       2,238       8       859       881       (2 )     22       26  
Card Services
    3,680       3,685             1,241       1,243             765       901       (15 )     22       26  
Commercial Banking
    1,003       900       11       485       498       (3 )     304       240       27       20       18  
Treasury & Securities Services
    1,526       1,485       3       1,075       1,048       3       263       262             36       42  
Asset Management
    1,904       1,584       20       1,235       1,098       12       425       313       36       46       36  
Corporate(b)
    1,268       (404 )   NM       354       335       6       631       (366 )   NM     NM   NM  
 
Total
  $ 19,741     $ 15,841       25 %   $ 10,628     $ 9,780       9 %   $ 4,787     $ 3,081       55 %     17 %     12 %
 
(a)  
Represents reported results on a tax-equivalent basis and excludes the impact of credit card securitizations.
(b)  
Net income (loss) includes Income from discontinued operations (after-tax) of $54 million for the quarter ended March 31, 2006.

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INVESTMENT BANK
 
For a discussion of the business profile of the IB, see pages 36–37 of JPMorgan Chase’s 2006 Annual Report.
                         
Selected income statement data                  
Three months ended March 31,                  
(in millions, except ratios)   2007     2006     Change
 
Revenue
                       
Investment banking fees
  $ 1,729     $ 1,170       48 %
Principal transactions(a)(b)
    3,126       2,480       26  
Lending & deposit related fees
    93       137       (32 )
Asset management, administration and commissions(b)
    641       576       11  
All other income
    42       275       (85 )
         
Noninterest revenue
    5,631       4,638       21  
Net interest income
    623 (f)     190       228  
         
Total net revenue(c)
    6,254       4,828       30  
 
                       
Provision for credit losses
    63       183       (66 )
Credit reimbursement from TSS(d)
    30       30        
 
                       
Noninterest expense
                       
Compensation expense
    2,637       2,256       17  
Noncompensation expense(b)
    1,194       1,064       12  
         
 
                       
Total noninterest expense
    3,831       3,320       15  
         
Income before income tax expense
    2,390       1,355       76  
Income tax expense
    850       505       68  
         
Net income
  $ 1,540     $ 850       81  
         
 
                       
Financial ratios
                       
ROE
    30 %     17 %        
ROA
    0.95       0.53          
Overhead ratio
    61       69          
Compensation expense as a % of total net revenue(e)
    42       41          
         
 
                       
Revenue by business
                       
Investment banking fees:
                       
Advisory
  $ 472     $ 389       21  
Equity underwriting
    393       212       85  
Debt underwriting
    864       569       52  
         
Total investment banking fees
    1,729       1,170       48  
Fixed income markets(a)(b)
    2,592       2,076       25  
Equity markets(a)(b)
    1,539       1,262       22  
Credit portfolio(a)
    394       320       23  
         
Total net revenue
  $ 6,254     $ 4,828       30  
         
 
                       
Revenue by region
                       
Americas
  $ 3,366     $ 2,153       56  
Europe/Middle East/Africa
    2,251       2,025       11  
Asia/Pacific
    637       650       (2 )
         
Total net revenue
  $ 6,254     $ 4,828       30  
 
(a)  
As a result of the adoption on January 1, 2007, of SFAS 157, the IB recognized a benefit, in the current quarter, of $166 million in Total net revenue (primarily in Credit Portfolio, but with smaller impacts to Equity Markets and Fixed Income Markets) relating to the incorporation of an adjustment to the valuation of the Firm’s derivative liabilities and other liabilities measured at fair value that reflects the credit quality of the Firm.
(b)  
Certain transaction costs, previously reported within Revenue, have been reclassified to Noninterest expense. Revenue and Noninterest expense have been reclassified for all periods presented.
(c)  
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 $152 million and $194 million for the quarters ended March 31, 2007 and 2006, respectively.
(d)  
Treasury & Securities Services is charged a credit reimbursement related to certain exposures managed within the Investment Bank credit portfolio on behalf of clients shared with TSS.

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(e)  
For the quarter ended March 31, 2006, the 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 for the incremental impact of adopting SFAS 123R provides a more meaningful measure of IB’s Compensation expense to Total net revenue ratio for 2006.
(f)  
Net Interest Income for the quarter ended March 31, 2007, increased from the prior year due primarily to the adoption of SFAS 159. For certain IB structured notes elected, all components of earnings are reported in Principal transaction; causing a shift between Principal transactions and Net interest income in the first quarter of 2007.
Quarterly results
Net income was a record $1.5 billion, up by $690 million, or 81%, compared with the prior year. Earnings growth reflected record revenue and a lower provision for credit losses, partially offset by higher noninterest expense.
Net revenue was a record $6.3 billion, up 30% from the prior year, driven by record investment banking fees and record markets results. Investment banking fees of $1.7 billion were up 48% from the prior year driven by record debt and record equity underwriting as well as strong advisory fees. Debt underwriting fees of $864 million were up 52% driven by record bond underwriting fees and strong loan syndication fees, which benefited from both leveraged and high grade issuance. Advisory fees of $472 million were up 21%, with particular strength in the Americas. Equity underwriting fees of $393 million were up 85%, reflecting strength in common stock and convertible offerings in the Americas and Europe. Record Fixed Income Markets revenue of $2.6 billion was up 25% from the prior year, benefiting from improved results in commodities (compared with a weak prior-year quarter) as well as strength in credit and rate markets, partially offset by lower results in currencies. Record Equity Markets revenue of $1.5 billion increased 22%, benefiting from particularly strong performance in Europe as well as strong derivatives performance across regions. Credit Portfolio revenue of $394 million was up 23%, due to the incorporation of an adjustment to the valuation of the firm’s derivative liabilities measured at fair value that reflects the credit quality of the firm, in conjunction with SFAS 157 (“Fair Value Measurements”), and higher trading revenue from credit portfolio management activities, partially offset by lower gains from loan workouts.
Provision for credit losses was $63 million compared with $183 million in the prior year. The prior-year provision reflected growth in the loan portfolio.
Noninterest expense was $3.8 billion, up by $511 million, or 15%, from the prior year. This increase was due to higher compensation expense, primarily performance-based, partially offset by the absence of expense from the adoption of SFAS 123R in the prior-year quarter.

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Selected metrics                  
Three months ended March 31,                  
(in millions, except headcount and ratio data)   2007     2006     Change
 
Selected average balances
                       
Total assets
  $ 658,724     $ 646,220       2 %
Trading assets–debt and equity instruments(a)
    335,118       252,415       33  
Trading assets–derivatives receivables
    56,398       49,388       14  
Loans:
                       
Loans retained(b)
    59,873       53,678       12  
Loans held-for-sale(a)
    12,784       19,212       (33 )
         
Total loans
    72,657       72,890        
Adjusted assets(c)
    572,017       492,304       16  
Equity
    21,000       20,000       5  
 
                       
Headcount
    23,892       21,705       10  
 
                       
         
Credit data and quality statistics
                       
Net charge-offs (recoveries)
  $ (6 )   $ (21 )     71  
Nonperforming assets:
                       
Nonperforming loans(d)
    92       434       (79 )
Other nonperforming assets
    36       50       (28 )
Allowance for loan losses
    1,037       1,117       (7 )
Allowance for lending related commitments
    310       220       41  
 
                       
Net charge-off (recovery) rate(a)(b)
    (0.04 )%     (0.16 )%        
Allowance for loan losses to average loans(a)(b)
    1.76       2.08          
Allowance for loan losses to nonperforming loans(d)
    1,178       305          
Nonperforming loans to average loans
    0.13       0.60          
Market risk–average trading and credit portfolio VAR(e)
                       
By risk type:
                       
Fixed income
  $ 45     $ 60       (25 )
Foreign exchange
    19       20       (5 )
Equities
    42       32       31  
Commodities and other
    34       47       (28 )
Less: portfolio diversification(f)
    (58 )     (68 )     15  
         
Total trading VAR
    82       91       (10 )
Credit portfolio VAR(g)
    13       14       (7 )
Less: portfolio diversification(f)
    (12 )     (11 )     (9 )
         
Total trading and credit portfolio VAR
  $ 83     $ 94       (12 )
 
(a)  
Loans held-for-sale are excluded from the allowance coverage ratio and Net charge-off rate. Loans held-for-sale for the quarter ended March 31, 2007, reflect the impact of reclassifying $11.7 billion of Loans held-for-sale to Trading assets as a result of the adoption of SFAS 159 effective January 1, 2007.
(b)  
Loans retained include credit portfolio loans, leveraged leases, bridge loans for underwriting, other accrual loans and certain loans carried at fair value. Average loans carried at fair value were $900 million for the quarter ended March 31, 2007. This amount is excluded from Total loans for the allowance coverage ratio and Net charge-off rate.
(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 that excludes the assets discussed above, which are 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 $4 million and $68 million at March 31, 2007, and March 31, 2006, respectively, which are excluded from the allowance coverage ratios. Nonperforming loans exclude distressed HFS loans purchased as part of IB’s proprietary activities. During the first quarter of 2007, the Firm elected the fair value option of accounting for this portfolio of nonperforming loans. These loans are classified as Trading assets at March 31, 2007.
(e)  
Average 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.
(f)  
For a more complete description of VAR, see page 60 of this Form 10-Q.
(g)  
Includes VAR on derivative credit and debit valuation adjustments, hedges of the credit valuation adjustment and mark-to-market hedges of the retained loan portfolio, which are all reported in Principal Transactions. The VAR does not include the retained loan portfolio.

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According to Thomson Financial, in the first quarter of 2007, the Firm was ranked #1 in Global Equity and Equity-Related; #1 in Global Syndicated Loans; #2 in Global Announced M&A; #2 in Global Debt, Equity and Equity-Related; and #2 in Global Long-term Debt based upon volume.
                                 
    Three months ended March 31, 2007   Full Year 2006
Market shares and rankings(a)   Market Share   Rankings   Market Share   Rankings
 
Global debt, equity and equity-related
    8 %     #2       7 %     #2  
Global syndicated loans
    15       #1       14       #1  
Global long-term debt
    8       #2       6       #3  
Global equity and equity-related
    13       #1       7       #6  
Global announced M&A
    23       #2       22       #4  
U.S. debt, equity and equity-related
    11       #2       9       #3  
U.S. syndicated loans
    27       #1       26       #1  
U.S. long-term debt
    12       #2       12       #2  
U.S. equity and equity-related(b)
    19       #1       8       #6  
U.S. announced M&A
    39       #2       28       #4  
 
(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%.
(b)  
References U.S domiciled equity and equity-related transactions, per Thomson Financial.

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RETAIL FINANCIAL SERVICES
 
For a discussion of the business profile of RFS, see pages 38–42 of JPMorgan Chase’s 2006 Annual Report.
During the first quarter of 2006, RFS completed the purchase of Collegiate Funding Services, which contributed an education loan servicing capability and provided an entry into the Federal Family Education Loan Program consolidation market. On July 1, 2006, RFS sold its life insurance and annuity underwriting businesses to Protective Life Corporation. On October 1, 2006, JPMorgan Chase completed The Bank of New York transaction, significantly strengthening RFS’s distribution network in the New York Tri-state area.
                         
Selected income statement data                  
Three months ended March 31,                  
(in millions, except ratios)   2007     2006     Change
 
Revenue
                       
Lending & deposit related fees
  $ 423     $ 371       14 %
Asset management, administration and commissions
    263       437       (40 )
Securities gains (losses)
          (6 )   NM  
Mortgage fees and related income(a)
    482       236       104  
Credit card income
    142       115       23  
Other income
    179       48       273  
         
Noninterest revenue
    1,489       1,201       24  
Net interest income
    2,617       2,562       2  
         
Total net revenue
    4,106       3,763       9  
 
                       
Provision for credit losses
    292       85       244  
 
                       
Noninterest expense
                       
Compensation expense(a)
    1,065       920       16  
Noncompensation expense(a)
    1,224       1,207       1  
Amortization of intangibles
    118       111       6  
         
Total noninterest expense
    2,407       2,238       8  
         
Income before income tax expense
    1,407       1,440       (2 )
Income tax expense
    548       559       (2 )
         
Net income
  $ 859     $ 881       (2 )
         
 
                       
Financial ratios
                       
ROE
    22 %     26 %        
Overhead ratio(a)
    59       59          
Overhead ratio excluding core deposit intangibles(a)(b)
    56       57          
 
(a)  
As a result of the adoption of SFAS 159, certain loan origination costs have been reclassified to expense (previously netted against revenue) in the quarter ended March 31, 2007, resulting in increases in Mortgage fees and related income, Noninterest expense and the Overhead ratios.
(b)  
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 method 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 of New York transaction and the Bank One merger of $116 million and $109 million for the quarters ended March 31, 2007 and 2006, respectively.

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Quarterly results
Net income of $859 million was down by $22 million, or 2%, from the prior year.
Net revenue of $4.1 billion was up by $343 million, or 9%, from the prior year. Net interest income of $2.6 billion was up 2% due to The Bank of New York transaction, higher home equity loans and deposit balances in Regional Banking, and wider loan spreads in Auto Finance. These benefits were offset partially by lower prime and subprime mortgage balances, the sale of the insurance business, lower auto loan and lease balances, and narrower spreads on deposits. Noninterest revenue of $1.5 billion was up by $288 million, or 24%. Results benefited from higher gain-on-sale income and the reclassification of certain loan origination costs to expense (previously netted against revenue) due to the adoption of SFAS 159 in Mortgage Banking; increases in deposit—related fee revenue; the absence of a prior-year loss related to auto loans transferred to held-for-sale; The Bank of New York transaction; and higher automobile operating lease revenue. These benefits were offset partially by the sale of the insurance business, and a charge resulting from accelerated surrenders of customer annuity contracts.
The provision for credit losses of $292 million was up by $207 million from the prior year. This increase was due to higher losses in the subprime mortgage portfolio and, to a lesser extent, increased provision in the home equity portfolio related to weaker housing prices. These increases were offset partially by the reversal of a portion of the reserves related to Hurricane Katrina. The Firm’s exposure to subprime mortgages is deemed manageable, with current quarter outstandings of $9.0 billion and net charge-offs of $20 million (0.92% net charge-off rate), compared with $15.1 billion of loans and net charge-offs of $9 million (0.26% net charge-off rate) in the prior-year quarter. Since the Firm’s current expectations are for continued poor loss experience in subprime mortgages and that weaker home prices are expected to continue to affect losses in the home equity portfolio, underwriting standards were tightened during the quarter.
Noninterest expense of $2.4 billion was up by $169 million, or 8%, primarily due to The Bank of New York transaction, the reclassification of certain loan origination costs due to the adoption of SFAS 159, investments in the retail distribution network and higher depreciation expense on owned automobiles subject to operating leases. These increases were offset partially by the sale of the insurance business.
                         
Selected metrics                  
Three months ended March 31,                  
(in millions, except headcount and ratios)   2007     2006     Change
 
Selected ending balances
                       
Assets
  $ 212,997     $ 235,127       (9 )%
Loans(a)(b)
    188,468       202,591       (7 )
Deposits
    221,840       200,154       11  
 
                       
Selected average balances
                       
Assets
  $ 217,135     $ 231,587       (6 )
Loans(a)(b)
    190,979       198,797       (4 )
Deposits
    216,933       194,382       12  
Equity
    16,000       13,896       15  
 
                       
Headcount
    67,247       62,472       8  
 
                       
Credit data and quality statistics
                       
Net charge-offs
  $ 185     $ 121       53  
Nonperforming loans(c)
    1,655       1,349       23  
Nonperforming assets
    1,910       1,537       24  
Allowance for loan losses
    1,453       1,333       9  
 
                       
Net charge-off rate(d)
    0.46 %     0.27 %        
Allowance for loan losses to ending loans(d)
    0.89       0.71          
Allowance for loan losses to nonperforming loans(d)
    94       100          
Nonperforming loans to total loans
    0.88       0.67          
 
(a)  
For the quarter ended March 31, 2007, end-of-period and average loans include $11.6 billion and $6.5 billion, respectively, of prime mortgage loans originated with the intent to sell, which are accounted for at fair value under SFAS 159 and classified as Trading assets in the Consolidated balance sheets.
(b)  
End-of-period Loans include Loans held-for-sale of $13.4 billion and $14.3 billion at March 31, 2007 and 2006, respectively. Average loans include Loans held-for-sale of $21.7 billion and $16.4 billion for the quarters ended March 31, 2007 and 2006, respectively.
(c)  
Nonperforming loans include Loans held-for-sale of $112 million and $16 million at March 31, 2007 and 2006, respectively.
(d)  
The net charge-off rate and the allowance coverage ratios do not include amounts related to Loans held-for-sale or Loans accounted for at fair value under SFAS 159.

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REGIONAL BANKING
                         
Selected income statement data                  
Three months ended March 31,                  
(in millions, except ratios)   2007     2006     Change
 
 
                       
Noninterest revenue
  $ 793     $ 820       (3 )%
Net interest income
    2,299       2,220       4  
         
Total Net revenue
    3,092       3,040       2  
Provision for credit losses
    233       66       253  
Noninterest expense
    1,729       1,738       (1 )
         
Income before income tax expense
    1,130       1,236       (9 )
         
Net income
  $ 690     $ 757       (9 )
         
 
                       
ROE
    24 %     31 %        
Overhead ratio
    56       57          
Overhead ratio excluding core deposit intangibles(a)
    52       54          
 
(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 inclusion 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 of New York transaction and the Bank One merger of $116 million and $109 million for the quarters ended March 31, 2007 and 2006, respectively.
Quarterly results
Regional Banking net income of $690 million was down by $67 million, or 9%, from the prior year. Net revenue of $3.1 billion was up by $52 million, or 2%. Results benefited from The Bank of New York transaction; growth in home equity loans and deposits; and increases in deposit-related fees. These revenue benefits were offset partially by the sale of the insurance business, a continued shift to narrower-spread deposit products, and a charge resulting from accelerated surrenders of customer annuity contracts. The provision for credit losses was $233 million, up by $167 million, primarily related to higher losses in the subprime mortgage portfolio and to a lesser extent increased provision in the home equity portfolio related to weaker housing prices. These increases were offset partially by the reversal of a portion of the reserves related to Hurricane Katrina. Noninterest expense of $1.7 billion was flat, as increases due to The Bank of New York transaction and investments in the retail distribution network were offset by the sale of the insurance business.

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Business metrics                  
Three months ended March 31,                  
(in billions, except ratios)   2007     2006     Change
 
 
                       
Home equity origination volume
  $ 12.7     $ 11.7       9 %
 
                       
End-of-period loans owned
                       
Home equity
  $ 87.7     $ 75.3       16  
Mortgage(a)
    9.2       47.0       (80 )
Business banking
    14.3       12.8       12  
Education
    11.1       9.5       17  
Other loans(b)
    2.7       2.7        
         
Total end of period loans
    125.0       147.3       (15 )
End-of-period deposits
                       
Checking
  $ 69.3     $ 64.9       7  
Savings
    100.1       91.0       10  
Time and other
    42.2       34.2       23  
         
Total end of period deposits
    211.6       190.1       11  
 
                       
Average loans owned
                       
Home equity
  $ 86.3     $ 74.1       16  
Mortgage(a)
    8.9       44.6       (80 )
Business banking
    14.3       12.8       12  
Education
    11.0       5.4       104  
Other loans(b)
    3.0       3.0        
         
Total average loans(c)
    123.5       139.9       (12 )
 
                       
Average deposits
                       
Checking
  $ 67.3     $ 63.0       7  
Savings
    96.7       89.3       8  
Time and other
    42.5       32.4       31  
         
Total average deposits
    206.5       184.7       12  
Average assets
    135.9       157.1       (13 )
Average equity
    11.8       9.8       20  
         
 
                       
Credit data and quality statistics
                       
30+ day delinquency rate(d)(e)
    1.93 %     1.36 %        
Net charge-offs
Home equity
  $ 68     $ 33       106  
Mortgage
    20       12       67  
Business banking
    25       18       39  
Other loans
    13       7       86  
         
Total net charge-offs
    126       70       80  
Net charge-off rate
Home equity
    0.32 %     0.18 %        
Mortgage
    0.91       0.11          
Business banking
    0.71       0.57          
Other loans
    0.55       0.56          
Total net charge-off rate(c)
    0.43       0.21          
 
                       
Nonperforming assets(f)(g)(h)
  $ 1,770     $ 1,339       32  
 
(a)  
As of January 1, 2007, $19.4 billion of held-for-investment prime mortgage loans were transferred from RFS to Treasury within the Corporate segment for risk management and reporting purposes. Although the loans, together with the responsibility for the investment management of the portfolio, were transferred to Treasury, the transfer has no impact on the financial results of Regional Banking. The balance reported at and for the quarter ended March 31, 2007, reflect primarily subprime mortgage loans owned.
(b)  
Includes commercial loans derived from community development activities and, prior to July 1, 2006, insurance policy loans.
(c)  
Average loans include loans held-for-sale of $4.4 billion and $3.3 billion for the quarters ended March 31, 2007 and 2006, respectively. These amounts are not included in the Net charge-off rate.
(d)  
Excludes delinquencies related to loans eligible for repurchase as well as loans repurchased from Governmental National Mortgage Association (“GNMA”) pools that are insured by government agencies and government-sponsored enterprises of $975 million and $942 million at March 31, 2007 and 2006, respectively. These amounts are excluded as reimbursement is proceeding normally.
(e)  
Excludes loans that are 30 days past due and still accruing, which are insured by government agencies under the Federal Family Education Loan Program of $519 million and $370 million at March 31, 2007 and 2006, respectively. These amounts are excluded as reimbursement is proceeding normally.

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(f)  
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 $178 million and $156 million for the quarters ended March 31, 2007 and 2006, respectively. These amounts are excluded as reimbursement is proceeding normally.
(g)  
Excludes Nonperforming assets related to loans eligible for repurchase as well as loans repurchased from GNMA pools that are insured by government agencies and government-sponsored enterprises of $1.3 billion and $1.1 billion at March 31, 2007 and 2006, respectively. These amounts are excluded as reimbursement is proceeding normally.
(h)  
Includes Nonperforming loans held-for-sale related to mortgage banking activities of $79 million and $16 million at March 31, 2007 and 2006, respectively.
                         
Retail branch business metrics                  
Three months ended March 31,                  
(in millions, except where otherwise noted)   2007     2006     Change
 
 
                       
Investment sales volume
  $ 4,783     $ 3,553       35 %
 
                       
Number of:
                       
Branches
    3,071       2,638       433 #
ATMs
    8,560       7,400       1,160  
Personal bankers(a)
    7,846       7,019       827  
Sales specialists(a)
    3,712       3,318       394  
Active online customers (in thousands)(b)
    6,172       5,030       1,142  
Checking accounts (in thousands)
    10,136       8,936       1,200  
 
(a)  
Excludes employees acquired as part of The Bank of New York transaction. Mapping of the existing Bank of New York acquired employee base into Chase employment categories is expected to be completed during 2007.
(b)  
Includes Mortgage Banking and Auto Finance online customers.
MORTGAGE BANKING
                         
Selected income statement data                  
Three months ended March 31,                  
(in millions, except ratios and where otherwise noted)   2007     2006     Change
 
 
                       
Production revenue(a)
  $ 400     $ 219       83 %
Net mortgage servicing revenue:
                       
Servicing revenue
    601       560       7  
Changes in MSR asset fair value:
                       
Due to inputs or assumptions in model(b)
    108       711       (85 )
Other changes in fair value(c)
    (378 )     (349 )     (8 )
Derivative valuation adjustments and other
    (127 )     (753 )     83  
         
Total net mortgage servicing revenue
    204       169       21  
         
Total net revenue
    604       388       56  
Noninterest expense(a)
    468       324       44  
         
Income before income tax expense
    136       64       113  
         
Net income
  $ 84     $ 39       115  
         
 
                       
ROE
    17 %     9 %        
 
                       
Business metrics (in billions)
                       
Third-party mortgage loans serviced (ending)
  $ 546.1     $ 484.1       13  
MSR net carrying value (ending)
    7.9       7.5       5  
Average mortgage loans held-for-sale(d)
    23.8       13.0       83  
Average assets
    38.0       27.1       40  
Average equity
    2.0       1.7       18  
 
                       
Mortgage origination volume by channel (in billions)
                       
Retail
  $ 10.9     $ 9.1       20  
Wholesale
    10.0       7.4       35  
Correspondent (including negotiated transactions)
    13.2       11.7       13  
         
Total
  $ 34.1     $ 28.2       21  
 
(a)  
As a result of the adoption of SFAS 159, certain loan origination costs have been reclassified to expense (previously netted against revenue) in the quarter ended March 31, 2007.
(b)  
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.
(c)  
Includes changes in the MSR value due to servicing portfolio runoff (or time decay).
(d)  
Includes $6.5 billion of prime mortgage loans for which the fair value option was elected under SFAS 159. These loans are classified as Trading assets on the Consolidated balance sheets for the quarter ended March 31, 2007.

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Quarterly results
Mortgage Banking net income was $84 million compared with $39 million in the prior year. Net revenue of $604 million was up by $216 million, or 56%, from the prior year. Revenue comprises production revenue and net mortgage servicing revenue. Production revenue was $400 million, up by $181 million, reflecting higher gain-on-sale income and the reclassification of certain loan origination costs to expense (previously netted against revenue) due to the adoption of SFAS 159. Net mortgage servicing revenue, which includes loan servicing revenue, MSR risk management results and other changes in fair value, was $204 million compared with $169 million in the prior year. Loan servicing revenue of $601 million increased by $41 million on a 13% increase in third-party loans serviced. MSR risk management revenue of negative $19 million improved by $23 million from the prior year. Other changes in fair value of the MSR asset, representing run-off of the asset against the realization of servicing cash flows, were negative $378 million. Noninterest expense was $468 million, up by $144 million, or 44%, reflecting the reclassification of certain loan origination costs due to the adoption SFAS 159 and higher compensation expense reflecting higher loan originations and a greater number of loan officers.
AUTO FINANCE
                         
Selected income statement data                  
Three months ended March 31,                  
(in millions, except ratios and where otherwise noted)   2007     2006     Change
 
Noninterest revenue
  $ 131     $ 44       198 %
Net interest income
    279       291       (4 )
         
Total net revenue
    410       335       22  
Provision for credit losses
    59       19       211  
Noninterest expense
    210       176       19  
         
Income before income tax expense
    141       140       1  
         
Net income
  $ 85     $ 85        
         
 
                       
ROE
    16 %     14 %        
ROA
    0.80       0.73          
 
                       
Business metrics (in billions)
                       
Auto origination volume
  $ 5.2     $ 4.3       21  
End-of-period loans and lease related assets
                       
Loans outstanding
  $ 39.7     $ 41.0       (3 )
Lease financing receivables
    1.2       3.6       (67 )
Operating lease assets
    1.7       1.1       55  
         
Total end-of-period loans and lease related assets
    42.6       45.7       (7 )
Average loans and lease related assets
                       
Loans outstanding
  $ 39.4     $ 41.2       (4 )
Lease financing receivables
    1.5       4.0       (63 )
Operating lease assets
    1.6       1.0       60  
         
Total average loans and lease related assets
    42.5       46.2       (8 )
Average assets
    43.2       47.3       (9 )
Average equity
    2.2       2.4       (8 )
         
Credit quality statistics
                       
30+ day delinquency rate
    1.33 %     1.39 %        
Net charge-offs
                       
Loans
  $ 58     $ 48       21  
Lease receivables
    1       3       (67 )
         
Total net charge-offs
    59       51       16  
Net charge-off rate
                       
Loans
    0.60 %     0.47 %        
Lease receivables
    0.27       0.30          
Total net charge-off rate
    0.59       0.46          
Nonperforming assets
  $ 140     $ 198       (29 )
 

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Quarterly results
Auto Finance net income of $85 million was flat compared with the prior year. Net revenue of $410 million was up by $75 million, or 22%, reflecting the absence of a prior-year $50 million pretax loss related to auto loans transferred to held-for-sale, higher automobile operating lease revenue, and wider loan spreads on lower loan and direct finance lease balances. The provision for credit losses was $59 million, an increase of $40 million from the prior year, primarily reflecting a reduction of the allowance for credit losses in the prior year. Noninterest expense of $210 million increased by $34 million, or 19%, driven by increased depreciation expense on owned automobiles subject to operating leases.
 
CARD SERVICES
 
For a discussion of the business profile of CS, see pages 43–45 of JPMorgan Chase’s 2006 Annual Report.
JPMorgan Chase uses the concept of “managed receivables” to evaluate the credit performance of its credit card loans, both loans on the balance sheet and loans that have been securitized. 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 and Consolidated balance sheets. For further information, see Explanation and reconciliation of the Firm’s use of non-GAAP financial measures on pages 14–15 of this Form 10-Q.
                         
Selected income statement data – managed basis                  
Three months ended March 31,                  
(in millions, except ratios)   2007     2006     Change
 
Revenue
                       
Credit card income
  $ 599     $ 601       %
All other income
    92       71       30  
         
Noninterest revenue
    691       672       3  
Net interest income
    2,989       3,013       (1 )
         
Total net revenue
    3,680       3,685        
 
                       
Provision for credit losses
    1,229       1,016       21  
 
                       
Noninterest expense
                       
Compensation expense
    254       259       (2 )
Noncompensation expense
    803       796       1  
Amortization of intangibles
    184       188       (2 )
         
Total noninterest expense
    1,241       1,243        
         
 
                       
Income before income tax expense
    1,210       1,426       (15 )
Income tax expense
    445       525       (15 )
         
Net income
  $ 765     $ 901       (15 )
         
 
                       
Memo: Net securitization gains
  $ 23     $ 8       188  
 
                       
Financial metrics
                       
ROE
    22 %     26 %        
Overhead ratio
    34       34          
 
Quarterly results
Net income of $765 million was down by $136 million, or 15%, from the prior year. Prior-year results benefited from significantly lower net charge-offs following the change in bankruptcy legislation in the fourth quarter of 2005.
End-of-period managed loans of $146.6 billion increased by $12.3 billion, or 9%, from the prior year. Average managed loans of $149.4 billion increased by $11.4 billion, or 8%, from the prior year. The current quarter included $2.0 billion of average and $1.9 billion of end-of-period managed loans acquired with the Kohl’s private-label portfolio in the second quarter of 2006.
Net managed revenue was $3.7 billion, flat as compared with the prior year. Net interest income of $3.0 billion was down by $24 million, or 1%, from the prior year. The decrease was driven by higher charge-offs, which resulted in increased revenue reversals in the current quarter and higher cost of funds on balance growth in promotional, introductory and transactor loan balances. These declines were partially offset by higher average managed loan balances and increased fees. Noninterest revenue of $691 million was up by $19 million, or 3%, from the prior year.

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Interchange income increased, benefiting from 9% higher charge volume, but was more than offset by higher volume-driven payments to partners and increased rewards expense (both of which are netted against interchange income). An additional factor impacting noninterest revenue was an increase in fee-based product revenue.
The managed provision for credit losses was $1.2 billion, up by $213 million, or 21%, from the prior year. The prior-year quarter benefited from lower net charge-offs, which reflected a reduction in bankruptcy-related losses following the change in bankruptcy legislation in the fourth quarter of 2005. The current quarter benefited from an $85 million reduction in the allowance for credit losses, primarily related to strength in the underlying credit quality of the loan portfolio. The managed net charge-off rate for the quarter was 3.57%, up from 2.99% in the prior year. The 30-day managed delinquency rate was 3.07%, down from 3.10% in the prior year.
Noninterest expense of $1.2 billion was flat compared with the prior year, primarily due to lower marketing expense and lower fraud-related losses, offset by higher expense related to recent acquisitions and increased customer activity.
                         
Selected metrics                  
Three months ended March 31,                  
(in millions, except headcount, ratios                  
   and where otherwise noted)   2007     2006     Change
 
% of average managed outstandings:
                       
Net interest income
    8.11 %     8.85 %        
Provision for credit losses
    3.34       2.99          
Noninterest revenue
    1.88       1.97          
Risk adjusted margin(a)
    6.65       7.84          
Noninterest expense
    3.37       3.65          
Pretax income (ROO)
    3.28       4.19          
Net income
    2.08       2.65          
 
                       
Business metrics
                       
Charge volume (in billions)
  $ 81.3     $ 74.3       9 %
Net accounts opened (in thousands)
    3,439       2,718       27  
Credit cards issued (in thousands)
    152,097       112,446       35  
Number of registered Internet customers (in millions)
    24.3       15.9       53  
Merchant acquiring business(b)
                       
Bank card volume (in billions)
  $ 163.6     $ 147.7       11  
Total transactions (in millions)
    4,465       4,130       8  
 
                       
Selected ending balances
                       
Loans:
                       
Loans on balance sheets
  $ 78,173     $ 64,691       21  
Securitized loans
    68,403       69,580       (2 )
         
Managed loans
  $ 146,576     $ 134,271       9  
         
 
                       
Selected average balances
                       
Managed assets
  $ 156,271     $ 145,994       7  
Loans:
                       
Loans on balance sheets
  $ 81,932     $ 68,455       20  
Securitized loans
    67,485       69,571       (3 )
         
Managed loans
  $ 149,417     $ 138,026       8  
         
Equity
    14,100       14,100        
 
                       
Headcount
    18,749       18,801        
 
                       
Managed credit quality statistics
                       
Net charge-offs
  $ 1,314     $ 1,016       29  
Net charge-off rate
    3.57 %     2.99 %        
Managed delinquency ratios
                       
30+ days
    3.07 %     3.10 %        
90+ days
    1.52       1.39          
 
                       
Allowance for loan losses
  $ 3,092     $ 3,274       (6 )
Allowance for loan losses to period-end loans
    3.96 %     5.06 %        
 
(a)  
Represents Total net revenue less Provision for credit losses.
(b)  
Represents 100% of the merchant acquiring business.

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Reconciliation from reported basis to managed basis
The financial information presented below reconciles reported basis and managed basis to disclose the effect of securitizations.
                         
Three months ended March 31,                  
(in millions)   2007     2006     Change
 
Income statement data(a)
                       
Credit card income
                       
Reported basis for the period
  $ 1,345     $ 1,726       (22 )%
Securitization adjustments
    (746 )     (1,125 )     34  
         
Managed credit card income
  $ 599     $ 601        
         
 
                       
Net interest income
                       
 
                       
Reported basis for the period
  $ 1,650     $ 1,439       15  
Securitization adjustments
    1,339       1,574       (15 )
         
Managed net interest income
  $ 2,989     $ 3,013       (1 )
         
 
                       
Total net revenue
                       
 
                       
Reported basis for the period
  $ 3,087     $ 3,236       (5 )
Securitization adjustments
    593       449       32  
         
Managed total net revenue
  $ 3,680     $ 3,685        
         
 
                       
Provision for credit losses
                       
 
                       
Reported basis for the period
  $ 636     $ 567       12  
Securitization adjustments
    593       449       32  
         
Managed provision for credit losses
  $ 1,229     $ 1,016       21  
         
 
                       
Balance sheet – average balances(a)
                       
Total average assets
                       
Reported basis for the period
  $ 91,157     $ 78,437       16  
Securitization adjustments
    65,114       67,557       (4 )
         
Managed average assets
  $ 156,271     $ 145,994       7  
         
 
                       
Credit quality statistics(a)
                       
 
                       
Net charge-offs
                       
Reported net charge-offs data for the period
  $ 721     $ 567       27  
Securitization adjustments
    593       449       32  
         
Managed net charge-offs
  $ 1,314     $ 1,016       29  
 
(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 and Consolidated balance sheets. For further information, see Explanation and reconciliation of the Firm’s use of non-GAAP measures on pages 1415 of this Form 10-Q.

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COMMERCIAL BANKING
 
For a discussion of the business profile of CB, see pages 46–47 of JPMorgan Chase’s 2006 Annual Report.
On October 1, 2006, JPMorgan Chase completed the acquisition of The Bank of New York’s consumer, business banking and middle-market banking businesses adding approximately $2.3 billion in loans and $1.2 billion in deposits.
                         
Selected income statement data                  
Three months ended March 31,                  
(in millions, except ratios)   2007     2006     Change
 
Revenue
                       
Lending & deposit related fees
  $ 158     $ 142       11 %
Asset management, administration and commissions
    23       15       53  
All other income(a)
    154       76       103  
         
Noninterest revenue
    335       233       44  
Net interest income
    668       667        
         
Total net revenue
    1,003       900       11  
 
                       
Provision for credit losses
    17       7       143  
 
                       
Noninterest expense
                       
Compensation expense
    180       197       (9 )
Noncompensation expense
    290       285       2  
Amortization of intangibles
    15       16       (6 )
         
Total noninterest expense
    485       498       (3 )
         
Income before income tax expense
    501       395       27  
Income tax expense
    197       155       27  
         
Net income
  $ 304     $ 240       27  
         
 
                       
Financial ratios
                       
ROE
    20 %     18 %        
Overhead ratio
    48       55          
 
(a)  
IB-related and commercial card revenues are included in All other income.
Quarterly results
Net income was a record $304 million, up by $64 million, or 27%, from the prior year, driven by higher net revenue.
Net revenue was $1.0 billion, up by $103 million, or 11%, from the prior year. Net interest income of $668 million was flat. The benefit of higher liability balances and loan volumes, which reflected organic growth and The Bank of New York transaction, were offset largely by the continued shift to narrower–spread liability products and loan-spread compression. Noninterest revenue of $335 million was up by $102 million, or 44%, primarily due to higher investment banking revenue as well as gains related to the sale of securities acquired in the satisfaction of debt.
On a segment basis, Middle Market Banking revenue of $661 million increased by $38 million, or 6%, from the prior year due to growth across all product areas and The Bank of New York transaction. Mid-Corporate Banking revenue of $212 million increased by $75 million, or 55%, reflecting higher investment banking revenue and a gain on the sale of securities acquired in the satisfaction of debt. Real Estate revenue of $102 million decreased by $3 million, or 3%.
Provision for credit losses was $17 million compared with $7 million in the prior year.
Noninterest expense was $485 million, down by $13 million, or 3%, from the prior year due to the absence of prior-year expense from the adoption of SFAS 123R primarily offset by expense related to The Bank of New York transaction.

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Selected metrics                  
Three months ended March 31,                  
(in millions, except ratio and headcount data)   2007     2006     Change
 
Revenue by product:
                       
Lending
  $ 348     $ 319       9 %
Treasury services
    556       550       1  
Investment banking
    76       40       90  
Other
    23       (9 )   NM  
         
Total Commercial Banking revenue
  $ 1,003     $ 900       11  
         
 
                       
IB revenues, gross(a)
  $ 231     $ 114       103  
         
 
                       
Revenue by business:
                       
Middle Market Banking
  $ 661     $ 623       6  
Mid-Corporate Banking
    212       137       55  
Real Estate Banking
    102       105       (3 )
Other
    28       35       (20 )
         
Total Commercial Banking revenue
  $ 1,003     $ 900       11  
         
 
                       
Selected average balances
                       
Total assets
  $ 82,545     $ 54,771       51  
Loans and leases(b)
    57,660       50,836       13  
Liability balances(c)
    81,752       70,763       16  
Equity
    6,300       5,500       15  
 
                       
Average loans by business:
                       
Middle Market Banking
  $ 36,317     $ 31,861       14  
Mid-Corporate Banking
    10,669       7,577       41  
Real Estate Banking
    7,074       7,436       (5 )
Other
    3,600       3,962       (9 )
         
Total Commercial Banking loans
  $ 57,660     $ 50,836       13  
 
                       
Headcount
    4,281       4,310       (1 )
 
                       
Credit data and quality statistics:
                       
Net charge-offs (recoveries)
  $ (1 )   $ (7 )     86  
Nonperforming loans
    141       202       (30 )
Allowance for loan losses
    1,531       1,415       8  
Allowance for lending-related commitments
    187       145       29  
 
                       
Net charge-off (recovery) rate(b)
    (0.01 )%     (0.06 )%        
Allowance for loan losses to average loans(b)
    2.68       2.80          
Allowance for loan losses to nonperforming loans
    1,086       700          
 
                       
Nonperforming loans to average loans
    0.24       0.40          
 
(a)  
Represents the total revenue related to investment banking products sold to CB clients.
(b)  
Average loans include Loans held-for-sale of $475 million and $268 million for the quarters ended March 31, 2007 and 2006, respectively. These amounts are not included in the net charge-off (recovery) rate or allowance coverage ratios.
(c)  
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 pages 48–49 of JPMorgan Chase’s 2006 Annual Report.
                         
Selected income statement data                  
Three months ended March 31,                  
(in millions, except ratios)   2007     2006     Change
 
Revenue
                       
Lending & deposit related fees
  $ 213     $ 182       17 %
Asset management, administration and commissions
    686       650       6  
All other income
    125       146       (14 )
         
Noninterest revenue
    1,024       978       5  
Net interest income
    502       507       (1 )
         
Total net revenue
    1,526       1,485       3  
 
                       
Provision for credit losses
    6       (4 )   NM  
Credit reimbursement to IB(a)
    (30 )     (30 )      
 
                       
Noninterest expense
                       
Compensation expense
    558       549       2  
Noncompensation expense
    502       480       5  
Amortization of intangibles
    15       19       (21 )
         
Total noninterest expense
    1,075       1,048       3  
         
 
                       
Income before income tax expense
    415       411       1  
Income tax expense
    152       149       2  
         
 
                       
Net income
  $ 263     $ 262        
         
Financial ratios
                       
ROE
    36 %     42 %        
Overhead ratio
    70       71          
Pretax margin ratio(b)
    27       28          
 
(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 2006 Annual Report.
(b)  
Pretax margin represents Income before income tax expense divided by Total net revenue, which is a measure of pretax performance and another basis by which management evaluates its performance and that of its competitors.
Quarterly results
Net income was $263 million, flat compared with the prior year. Earnings benefited from increased revenue and the absence of prior-year expense from the adoption of SFAS 123R, but these items were offset by higher compensation expense and investment in new product platforms.
Net revenue was $1.5 billion, up by $41 million, or 3%, from the prior year. Worldwide Securities Services net revenue of $837 million was up by $45 million, or 6%, driven by increased product usage by existing clients and new business growth, as well as market appreciation. These benefits were partially offset by lower foreign exchange revenue as a result of narrower market spreads. Treasury Services net revenue of $689 million was down by $4 million, or 1%, driven by a continued shift to narrower–spread liability products and price compression across all products, primarily offset by an increase in average liability balances from new and existing clients. TSS firmwide net revenue, which includes Treasury Services net revenue recorded in other lines of business, grew to $2.1 billion, up by $59 million, or 3%. Treasury Services firmwide net revenue grew to $1.3 billion, up by $14 million, or 1%.
Provision for credit losses was $6 million compared with a benefit of $4 million in the prior year.
Noninterest expense was $1.1 billion, up by $27 million, or 3%. The increase was due largely to higher compensation expense related to growth in headcount supporting increased client volume and investment in new product platforms, partially offset by the absence of prior-year expense from the adoption of SFAS 123R.

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Selected metrics                  
Three months ended March 31,                  
(in millions, except headcount, ratio data and where otherwise noted)   2007     2006     Change
 
Revenue by business
                       
Treasury Services
  $ 689     $ 693       (1 )%
Worldwide Securities Services
    837       792       6  
         
Total net revenue
  $ 1,526     $ 1,485       3  
 
                       
Business metrics
                       
Assets under custody (in billions)
  $ 14,661     $ 11,179       31  
Number of:
                       
US$ ACH transactions originated (in millions)
    971       838       16  
Total US$ clearing volume (in thousands)
    26,840       25,182       7  
International electronic funds transfer volume (in thousands)(a)
    42,399       33,741       26  
Wholesale check volume (in millions)
    771       852       (10 )
Wholesale cards issued (in thousands)(b)
    17,146       16,977       1  
Selected balance sheets (average)
                       
Total assets
  $ 46,005     $ 29,230       57  
Loans
    18,948       12,940       46  
Liability balances(c)
    210,639       178,133       18  
Equity
    3,000       2,545       18  
 
                       
Headcount
    24,875       23,598       5  
 
                       
TSS firmwide metrics
                       
Treasury Services firmwide revenue(d)
  $ 1,305     $ 1,291       1  
Treasury & Securities Services firmwide revenue(d)
    2,142       2,083       3  
Treasury Services firmwide overhead ratio(e)
    59 %     56 %        
Treasury & Securities Services firmwide overhead ratio(e)
    63       62          
Treasury Services firmwide liability balances (average)(f)
  $ 186,631     $ 155,422       20  
Treasury & Securities Services firmwide liability balances (average)(f)
    292,391       248,328       18  
 
(a)  
International electronic funds transfer includes non-US$ ACH and clearing volume.
(b)  
Wholesale cards issued include domestic commercial card, stored value card, prepaid card, and government electronic benefit card products.
(c)  
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.
(d)  
Firmwide revenue includes TS revenue recorded in the CB, Regional Banking and AM lines of business (see below) and excludes FX revenues recorded in the IB for TSS-related FX activity.
                         
Three months ended March 31,                  
(in millions)   2007     2006     Change
 
Treasury Services revenue reported in CB
  $ 556     $ 550       1 %
Treasury Services revenue reported in other lines of business
    60       48       25  
 
TSS firmwide FX revenue, which include FX revenue recorded in TSS and FX revenue associated with TSS customers who are FX customers of the IB, was $112 million and $118 million for the quarters ended March 31, 2007 and 2006, respectively.
(e)  
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.
(f)  
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.

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ASSET MANAGEMENT
 
For a discussion of the business profile of AM, see pages 50–52 of JPMorgan Chase’s 2006 Annual Report.
                         
Selected income statement data                  
Three months ended March 31,                  
(in millions, except ratios)   2007     2006     Change
 
Revenue
                       
Asset management, administration and commissions
  $ 1,489     $ 1,222       22 %
All other income
    170       116       47  
         
Noninterest revenue
    1,659       1,338       24  
Net interest income
    245       246        
         
Total net revenue
    1,904       1,584       20  
 
                       
Provision for credit losses
    (9 )     (7 )     (29 )
 
                       
Noninterest expense
                       
Compensation expense
    764       682       12  
Noncompensation expense
    451       394       14  
Amortization of intangibles
    20       22       (9 )
         
Total noninterest expense
    1,235       1,098       12  
         
Income before income tax expense
    678       493       38  
Income tax expense
    253       180       41  
         
Net income
  $ 425     $ 313       36  
         
 
                       
Financial ratios
                       
ROE
    46 %     36 %        
Overhead ratio
    65       69          
Pretax margin ratio(a)
    36       31          
 
                       
Selected metrics
                       
Revenue by client segment
                       
Private bank
  $ 560     $ 441       27 %
Institutional
    551       435       27  
Retail
    527       442       19  
Private client services
    266       266        
         
Total net revenue
  $ 1,904     $ 1,584       20  
 
(a)  
Pretax margin represents Income before income tax expense divided by Total net revenue, which is a measure of pretax performance and another basis by which management evaluates its performance and that of its competitors.
Quarterly results
Net income was a record $425 million, up by $112 million, or 36%, from the prior year. Improved results were due to increased revenue and the absence of prior-year expense from the adoption of SFAS 123R, partially offset by higher compensation expense.
Net revenue of $1.9 billion was up by $320 million, or 20%, from the prior year. Noninterest revenue, principally fees and commissions, of $1.7 billion was up by $321 million, or 24%. This increase was due largely to increased assets under management and higher performance fees. Net interest income of $245 million was flat from the prior year, primarily due to a shift to narrower–spread deposit products offset by higher deposit and loan balances.
Private Bank revenue grew 27%, to $560 million, due to higher asset management and placement fees and higher deposit balances, partially offset by narrower spreads on deposits. Institutional revenue grew 27%, to $551 million, due to net asset inflows and performance fees. Retail revenue grew 19%, to $527 million, primarily due to net asset inflows and market appreciation. Private Client Services revenue of $266 million was flat compared with the prior year, as increased revenue from higher assets under management was offset by narrower spreads on deposits and loans.

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Provision for credit losses was a benefit of $9 million compared with a benefit of $7 million in the prior year.
Noninterest expense of $1.2 billion was up by $137 million, or 12%, from the prior year. The increase was due to higher compensation and increased minority interest expense related to Highbridge Capital Management, partially offset by the absence of prior-year expense from the adoption of SFAS 123R.
                         
Business metrics                  
Three months ended March 31,                  
(in millions, except headcount, ratios and ranking data, and where otherwise noted)   2007     2006     Change
 
Number of:
                       
Client advisors
    1,533       1,499       2 %
Retirement planning services participants
    1,423,000       1,327,000       7  
 
                       
% of customer assets in 4 & 5 Star Funds(a)
    61 %     54 %     13  
% of AUM in 1st and 2nd quartiles:(b)
                       
1 year
    76 %     72 %     6  
3 years
    76 %     75 %     1  
5 years
    81 %     75 %     8  
 
                       
Selected balance sheets data (average)
                       
Total assets
  $ 45,816     $ 41,012       12  
Loans(c)
    25,640       24,482       5  
Deposits
    54,816       48,066       14  
Equity
    3,750       3,500       7  
 
                       
Headcount
    13,568       12,511       8  
 
                       
Credit data and quality
                       
statistics
                       
Net charge-offs
  $     $ 7     NM
Nonperforming loans
    34       79       (57 )
Allowance for loan losses
    114       119       (4 )
Allowance for lending-related commitments
    5       3       67  
 
                       
Net charge-off rate
    %     0.12 %        
Allowance for loan losses to average loans
    0.44       0.49          
Allowance for loan losses to nonperforming loans
    335       151          
Nonperforming loans to average loans
    0.13       0.32          
 
(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)  
As of January 1, 2007, $5.3 billion of held-for-investment prime mortgage loans were transferred from AM to Treasury within the Corporate segment. Although the loans, together with the responsibility for the investment management of the portfolio, were transferred to Treasury, the transfer has no impact on the financial results of AM.
Assets under supervision
Assets under supervision were $1.4 trillion, up 17%, or $198 billion, from the prior year. Assets under management were $1.1 trillion, up 21%, or $180 billion, from the prior year. The increase was the result of net asset inflows in the institutional segment, primarily in liquidity and alternative products; retail flows, primarily in equity-related products; and market appreciation. Custody, brokerage, administration and deposit balances were $342 billion, up by $18 billion.

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ASSETS UNDER SUPERVISION(a) (in billions)            
As of March 31,   2007     2006  
 
Assets by asset class
               
Liquidity(b)
  $ 318     $ 236  
Fixed income
    180       166  
Equities & balanced
    446       397  
Alternatives
    109       74  
 
Total Assets under management
    1,053       873  
Custody/brokerage/administration/deposits
    342       324  
 
Total Assets under supervision
  $ 1,395     $ 1,197  
 
 
               
Assets by client segment
               
Institutional(c)
  $ 550     $ 468  
Private Bank
    170       137  
Retail(c)
    274       214  
Private Client Services
    59       54  
 
Total Assets under management
  $ 1,053     $ 873  
 
Institutional(c)
  $ 551     $ 471  
Private Bank
    374       332  
Retail(c)
    361       291  
Private Client Services
    109       103  
 
Total Assets under supervision
  $ 1,395     $ 1,197  
 
 
               
Assets by geographic region
               
U.S./Canada
  $ 664     $ 564  
International
    389       309  
 
Total Assets under management
  $ 1,053     $ 873  
 
U.S./Canada
  $ 929     $ 822  
International
    466       375  
 
Total Assets under supervision
  $ 1,395     $ 1,197  
 
 
               
Mutual fund assets by asset class
               
Liquidity
  $ 257     $ 167  
Fixed income
    48       48  
Equity
    219       189  
 
Total mutual fund assets
  $ 524     $ 404  
 
(a)  
Excludes Assets under management of American Century Companies, Inc, in which the Firm has 44% ownership.
(b)  
Third quarter of 2006 data reflects the reclassification of $19 billion of assets under management into liquidity from other asset classes. Prior-period data was not reclassified.
(c)  
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 to be consistent with the revenue by client segment reporting.
                 
Assets under management rollforward            
Three months ended March 31,   2007     2006  
 
Beginning balance
  $ 1,013     $ 847  
Flows:
               
Liquidity
    7       (5 )
Fixed income
    2        
Equities, balanced and alternatives
    10       13  
Market/performance/other impacts
    21       18  
 
Ending balance
  $ 1,053     $ 873  
 
 
               
Assets under supervision rollforward
               
Beginning balance
  $ 1,347     $ 1,149  
Net asset flows
    27       12  
Market/performance/other impacts
    21       36  
 
Ending balance
  $ 1,395     $ 1,197  
 

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CORPORATE
 
For a discussion of the business profile of Corporate, see pages 53–54 of JPMorgan Chase’s 2006 Annual Report.
The transaction with The Bank of New York closed on October 1, 2006. As a result of this transaction, select corporate trust businesses were transferred from TSS to the Corporate segment and are reported in discontinued operations for 2006.
                         
Selected income statement data                  
Three months ended March 31,                  
(in millions, except headcount)   2007     2006     Change
 
Revenue
                       
Principal transactions(a)(b)(c)
  $ 1,325     $ 199     NM  
Securities gains (losses)
    (8 )     (158 )     95 %
All other income
    68       102       (33 )
         
Noninterest revenue
    1,385       143     NM  
Net interest income
    (117 )     (547 )     79  
         
Total net revenue
    1,268       (404 )   NM  
 
                       
Provision for credit losses
    3           NM  
 
                       
Noninterest expense
                       
Compensation expense(b)
    776       685       13  
Noncompensation expense(c)(d)
    556       612       (9 )
Merger costs
    62       71       (13 )
         
Subtotal
    1,394       1,368       2  
Net expenses allocated to other businesses
    (1,040 )     (1,033 )     (1 )
         
Total noninterest expense
    354       335       6  
         
Income (loss) from continuing operations before income tax expense
    911       (739 )   NM  
Income tax expense (benefit)
    280       (319 )   NM  
         
Income (loss) from continuing operations
    631       (420 )   NM  
Income from discontinued operations(e)
          54     NM  
         
Net income (loss)
  $ 631     $ (366 )   NM  
         
 
                       
Total net revenue
                       
Private equity(a) (b)
  $ 1,253     $ 204     NM  
Treasury and Corporate other(c)
    15       (608 )   NM  
         
Total net revenue
  $ 1,268     $ (404 )   NM  
         
 
                       
Net income (loss)
                       
Private equity(a)
  $ 698     $ 103     NM  
Treasury and Corporate other
    (29 )     (479 )     94  
Merger costs
    (38 )     (44 )     14  
         
Income (loss) from continuing operations
    631       (420 )   NM  
Income from discontinued operations(e)
          54     NM  
         
Total net income (loss)
  $ 631     $ (366 )   NM  
         
Headcount
    23,702       27,390       (13 )
 
(a)  
As a result of the adoption on January 1, 2007, of SFAS 157, Corporate recognized a benefit of $464 million in Net revenue, in the current quarter, relating to valuation adjustments on nonpublic private equity investments.
(b)  
The first quarter of 2007 includes the reclassification of certain private equity carried interest from Net revenue to Compensation expense.
(c)  
Certain transaction costs that were previously reported in Net revenue have been reclassified to Noninterest expense. Revenue and Noninterest expense have been reclassified for all periods presented.
(d)  
Includes insurance recoveries related to settlement of the Enron and WorldCom class action litigations and for certain other material proceedings of $98 million for the quarter ended March 31, 2006.
(e)  
On October 1, 2006, the Firm completed the exchange of selected corporate trust businesses, including trustee, paying agent, loan agency and document management services, for the consumer, business banking and middle-market banking businesses of The Bank of New York. The results of operations of these corporate trust businesses are reported as discontinued operations for 2006.

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Quarterly results
Net income was $631 million compared with a net loss of $366 million in the prior year. Results benefited from higher private equity gains and improved Net interest income.
Net revenue was $1.3 billion compared with negative $404 million in the prior year. The improvement was driven by the Private Equity and Treasury segments. Private equity gains were $1.3 billion compared with $237 million, benefiting from a higher level of realized gains, a fair value adjustment on nonpublic investments of $464 million resulting from the adoption of SFAS 157, and the reclassification of certain private equity carried interest to compensation expense. Treasury’s results benefited from a $380 million increase in Net interest income due to improved net interest spread, as well as the absence of $158 million of securities losses in the prior year.
Noninterest expense was $354 million, up from $335 million in the prior year, reflecting the reclassification of certain private equity carried interest to Compensation expense and lower recoveries related to certain material litigation, primarily offset by business efficiencies and the absence of prior-year expense from the adoption of SFAS 123R.
Discontinued operations include the related balance sheet and income statement activity of selected corporate trust businesses sold to The Bank of New York on October 1, 2006. Prior to the second quarter of 2006, these corporate trust businesses were reported in Treasury & Securities Services. Net income from discontinued operations was $54 million in the prior year.
                         
Selected income statement and balance sheet data                  
Three months ended March 31,                  
(in millions)   2007     2006     Change
 
Treasury
                       
Securities gains (losses)(a)
  $ (8 )   $ (158 )     95 %
Investment securities portfolio (average)
    86,436       39,989       116  
Investment securities portfolio (ending)
    88,681       46,093       92  
Mortgage loans (average)(b)
    25,244           NM
Mortgage loans (ending)(b)
    26,499           NM
 
                       
Private equity
                       
Private equity gains (losses)
                       
Realized gains
  $ 723     $ 207       249  
Write-ups / (write-downs)(c)
    648       10     NM
Mark-to-market gains (losses)
    (127 )     4     NM
         
Total direct investments
    1,244       221       463  
Third-party fund investments
    34       16       113  
         
Total private equity gains(d)
  $ 1,278     $ 237       439  
 
                         
Private equity portfolio information(e)            
Direct investments   March 31, 2007   December 31, 2006   Change
 
Publicly-held securities
                       
Carrying value
  $ 389     $ 587       (34 )%
Cost
    366       451       (19 )
Quoted public value
    493       831       (41 )
 
                       
Privately-held direct securities
                       
Carrying value
    5,294       4,692       13  
Cost
    5,574       5,795       (4 )
 
                       
Third-party fund investments
                       
Carrying value
    744       802       (7 )
Cost
    1,026       1,080       (5 )
         
Total private equity portfolio – Carrying value
  $ 6,427     $ 6,081       6  
Total private equity portfolio – Cost
  $ 6,966     $ 7,326       (5 )
 
(a)  
Losses in the first quarter of 2006 reflect repositioning of the Treasury investment securities portfolio. First quarter and second quarter 2006 exclude gains/losses on securities used to manage risk associated with mortgage servicing rights.
(b)  
As of January 1, 2007, $19.4 billion and $5.3 billion of held-for-investment residential mortgage loans were transferred from RFS and AM, respectively, to the Corporate segment for risk management and reporting purposes. Although the loans, together with the responsibility for the investment management of the portfolio, were transferred to Treasury, the transfer has no impact on the financial results of Corporate.
(c)  
Private equity gains in the first quarter of 2007 include a fair value adjustment of $464 million related to the adoption of SFAS 157. In addition, the first quarter of 2007 includes the reclassification of certain private equity carried interest from net revenue to compensation expense.
(d)  
Included in Principal transactions.
(e)  
For more information on the Firm’s policies regarding the valuation of the private equity portfolio, see Note 5 on pages 80—82 of this Form 10-Q.

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The carrying value of the private equity portfolio at March 31, 2007, was $6.4 billion, up $346 million from December 31, 2006. The portfolio increase was primarily due to a favorable adjustment on nonpublic investments and new investments, partially offset by sales activity. The portfolio represented 8.8% of the Firm’s stockholders’ equity less goodwill at March 31, 2007, up from 8.6% at December 31, 2006.
 
BALANCE SHEET ANALYSIS
 
                 
Selected balance sheet data (in millions)   March 31, 2007     December 31, 2006  
 
Assets
               
Cash and due from banks
  $ 31,836     $ 40,412  
Deposits with banks
    30,973       13,547  
Federal funds sold and securities purchased under resale agreements
    144,306       140,524  
Securities borrowed
    84,800       73,688  
Trading assets:
               
Debt and equity instruments
    373,684       310,137  
Derivative receivables
    49,647       55,601  
Securities:
               
Available-for-sale
    96,975       91,917  
Held-to-maturity
    54       58  
Loans, net of Allowance for loan losses
    442,465       475,848  
Other receivables
    28,149       27,585  
Goodwill
    45,063       45,186  
Other intangible assets
    14,900       14,852  
All other assets
    66,066       62,165  
 
Total assets
  $ 1,408,918     $ 1,351,520  
 
 
               
Liabilities
               
Deposits
  $ 626,428     $ 638,788  
Federal funds purchased and securities sold under repurchase agreements
    218,917       162,173  
Commercial paper and other borrowed funds
    45,225       36,902  
Trading liabilities:
               
Debt and equity instruments
    94,309       90,488  
Derivative payables
    50,316       57,469  
Long-term debt and trust preferred capital debt securities
    155,307       145,630  
Beneficial interests issued by consolidated VIEs
    13,109       16,184  
All other liabilities
    87,603       88,096  
 
Total liabilities
    1,291,214       1,235,730  
Stockholders’ equity
    117,704       115,790  
 
Total liabilities and stockholders’ equity
  $ 1,408,918     $ 1,351,520  
 
Consolidated balance sheets overview
At March 31, 2007, the Firm’s total assets were $1.4 trillion, an increase of $57.4 billion, or 4%, from December 31, 2006. Total liabilities were $1.3 trillion, an increase of $55.5 billion, or 4%, from December 31, 2006. Stockholders’ equity was $117.7 billion, an increase of $1.9 billion, or 2%, from December 31, 2006. The following is a discussion of the significant changes in balance sheet items during the first quarter of 2007.
Deposits with banks; Federal funds sold and securities purchased under resale agreements; Securities borrowed; Federal funds purchased and securities sold under repurchase agreements; and Commercial paper and other borrowed funds
The Firm utilizes Deposits with banks, Federal funds sold and securities purchased under resale agreements, Securities borrowed, Federal funds purchased and securities sold under repurchase agreements and Commercial paper and other borrowed funds as part of its liquidity management activities, in order to manage the Firm’s cash positions and risk-based capital requirements, to maximize liquidity access and to minimize funding costs. In the first quarter of 2007, Deposits with banks, Securities purchased under resale agreements and Securities borrowed increased in connection with higher levels of funds that were available for short-term investment opportunities. Securities sold under repurchase agreements and Commercial paper increased primarily due to short-term requirements to fund trading positions and AFS securities inventory levels, as well as a result of growth in the demand for Commercial paper. For additional information on the Firm’s Liquidity risk management, see pages 46–48 of this Form 10-Q.

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Trading assets and liabilities – debt and equity instruments
The Firm uses debt and equity trading instruments for both market-making and proprietary risk-taking activities. These instruments consist primarily of fixed income securities (including government and corporate debt), equity securities, convertible cash instruments, loans and physical commodities. The increase in trading assets over December 31, 2006, was due primarily to the more favorable capital markets environment, with growth in client-driven market-making activities. In addition, an aggregate $23.3 billion of loans warehoused by the IB and prime mortgage loans warehoused by RFS are now accounted for at fair value under SFAS 159 and classified as trading assets in the consolidated balance sheets. For additional information, refer to Note 5 on pages 80–82 and Note 4 on pages 77–80 of this Form 10-Q.
Trading assets and liabilities – derivative receivables and payables
The Firm utilizes various interest rate, foreign exchange, equity, credit and commodity derivatives for market-making, proprietary risk-taking and risk-management purposes. The changes in derivative receivables and payables from December 31, 2006 were primarily due to the decline in the U.S. Dollar and rising interest rates. For additional information, refer to Derivative contracts and Note 5 on pages 54–56 and 80–82, respectively, of this Form 10-Q.
Securities
The Firm’s securities portfolio, almost all of which is classified as AFS, is used primarily to manage the Firm’s exposure to interest rate movements. The AFS portfolio increased by $5.1 billion from December 31, 2006, primarily due to net purchases in the Treasury investment securities portfolio related to managing the Firm’s exposure to interest rates. For additional information related to securities, refer to the Corporate segment discussion and to Note 11 on pages 37–39 and 86, respectively, of this Form 10-Q.
Loans
The Firm provides loans to customers of all sizes, from large corporate clients to individual consumers. The Firm manages the risk/reward relationship of each portfolio and discourages the retention of loan assets that do not generate a positive return above the cost of risk-adjusted capital. Loans, net of the Allowance for loan losses, declined $33.4 billion, or 7%, from December 31, 2006, as an aggregate $23.3 billion of loans warehoused by the IB and prime mortgage loans warehoused by RFS are now accounted for at fair value under SFAS 159 and classified as trading assets in the consolidated balance sheets. Also contributing to the decrease was the seasonal pattern of higher customer payments on credit card receivables and the restructuring during the first quarter of 2007 of a Firm-administered multi-seller conduit, which resulted in the deconsolidation of $3.2 billion of Loans. For a more detailed discussion of the loan portfolio and the Allowance for loan losses, refer to Credit risk management on pages 48–60 of this Form 10-Q.
Goodwill
Goodwill arises from business combinations and represents the excess of the cost of an acquired entity over the net fair value amounts assigned to assets acquired and liabilities assumed. The $123 million decline in Goodwill was primarily due to the adoption of FIN 48, which resulted in a $113 million reduction. For additional information, see Note 17 on pages 96–98 and Note 20 on page 100 of this Form 10-Q.
Other intangible assets
The Firm’s other intangible assets consist of mortgage servicing rights (“MSRs”), purchased credit card relationships, other credit card–related intangibles, core deposit intangibles and all other intangibles. The $48 million increase in Other intangible assets partly reflects higher MSRs of $391 million, primarily due to additional MSRs generated from loan sales and securitizations. Partially offsetting the increase in MSRs was the amortization of intangibles, in particular, credit card-related and core deposit intangibles. For additional information on MSRs and other intangible assets, see Note 17 on pages 96–98 of this Form 10-Q.

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Deposits
The Firm’s deposits represent a liability to customers, both retail and wholesale, for funds held on their behalf. Deposits are generally classified by location (U.S. and non-U.S.), whether they are interest- or noninterest-bearing, and by type (i.e., demand, money market deposit accounts (“MMDAs”), savings, time and negotiable order of withdrawal (“NOW”) accounts). Deposits help provide a stable and consistent source of funding to the Firm. Deposits declined by $12.4 billion, or 2%, from December 31, 2006. Wholesale deposits were lower partly reflecting a seasonal decline in demand deposit balances relative to the end of 2006. This decline was partly offset by growth in retail deposits as a result of new account acquisitions, the ongoing expansion of the retail branch distribution network, and seasonal tax-related increases in client balances. For more information on deposits, refer to the RFS and AM segment discussions and the Liquidity risk management discussion on pages 21–27, 34–36 and 46–48, respectively, of this Form 10-Q. For more information on wholesale liability balances, including deposits, refer to the CB and TSS segment discussions on pages 30–31 and 32–33, respectively, of this Form 10-Q.
Beneficial interests issued by consolidated VIEs
Beneficial interests issued by consolidated VIEs declined $3.1 billion, or 19%, from December 2006, primarily as a result of the restructuring during the first quarter of 2007 of a Firm-administered multi-seller conduit. For additional information related to multi-seller conduits, refer to Off–balance sheet arrangements and contractual cash obligations on pages 44–45 and Note 16 on pages 95–96 of this Form 10-Q.
Long-term debt and trust preferred capital debt securities
The Firm utilizes Long-term debt and trust preferred capital debt securities as part of its liquidity and capital management activities. Long-term debt and trust preferred capital debt securities increased by $9.7 billion, or 7%, from December 31, 2006, reflecting net new issuances, including client-driven structured notes. For additional information on the Firm’s long-term debt activities, see the Liquidity risk management discussion on pages 46–48 of this Form 10-Q.
Stockholders’ equity
Total stockholders’ equity increased by $1.9 billion, or 2%, from year-end 2006 to $117.7 billion at March 31, 2007. The increase was primarily the result of Net income for the first three months of 2007, net shares issued under the Firm’s employee stock-based compensation plans, and the cumulative effect on Retained earnings of changes in accounting principles of $915 million, offset partially by stock repurchases and the declaration of cash dividends. The $915 million increase in Retained earnings resulting from the adoption of new accounting principles primarily reflected $287 million related to SFAS 157, $199 million related to SFAS 159 and $436 million related to FIN 48. For a further discussion of capital, see the Capital management section that follows; for a further discussion of the accounting changes see Accounting and Reporting Developments on page 65, Note 3 on pages 71–77, Note 4 on pages 77–80 and Note 20 on page 100 of this Form 10-Q.
 
CAPITAL MANAGEMENT
 
The following discussion of JPMorgan Chase’s capital management highlights developments since December 31, 2006, and should be read in conjunction with Capital Management, on pages 57–59 of JPMorgan Chase’s 2006 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 and is overseen by the Asset-Liability Committee (“ALCO”).
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. The Firm may revise its equity capital-allocation methodology in the future.
In accordance with SFAS 142, the lines of business perform the required goodwill impairment testing. For a further discussion of Goodwill and impairment testing, see Critical accounting estimates and Note 16 on pages 85 and 121, respectively, of JPMorgan Chase’s 2006 Annual Report, and Note 17 on page 96 of this Form 10-Q.

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Line of business equity   Quarterly Averages
(in billions)   1Q07     1Q06  
 
Investment Bank
  $ 21.0     $ 20.0  
Retail Financial Services
    16.0       13.9  
Card Services
    14.1       14.1  
Commercial Banking
    6.3       5.5  
Treasury & Securities Services
    3.0       2.5  
Asset Management
    3.8       3.5  
Corporate
    52.0       47.7  
 
Total common stockholders’ equity
  $ 116.2     $ 107.2  
 
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 primarily based upon four risk factors: credit risk, market risk, operational risk and private equity risk, principally for the Firm’s private equity business.
                 
Economic risk capital   Quarterly Averages
(in billions)   1Q07     1Q06  
 
Credit risk
  $ 23.0     $ 21.7  
Market risk
    9.4       10.0  
Operational risk
    5.6       5.7  
Private equity risk
    3.6       3.6  
 
Economic risk capital
    41.6       41.0  
Goodwill
    45.1       43.4  
Other(a)
    29.5       22.8  
 
Total common stockholders’ equity
  $ 116.2     $ 107.2  
 
(a)  
Reflects additional capital required, in management’s view, to meet its regulatory and debt rating objectives.
Regulatory capital
The Firm’s 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, N.A. and Chase Bank USA, N.A.
In 2005, the FRB issued a final rule, which became effective April 11, 2005, that continues the inclusion of trust preferred capital debt 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 capital debt securities, to 15% of total core capital elements, net of goodwill less any associated deferred tax liability. At March 31, 2007, JPMorgan Chase’s restricted core capital elements were 14.5% of total core capital elements.
Tier 1 capital was $82.5 billion at March 31, 2007, compared with $81.1 billion at December 31, 2006, an increase of $1.5 billion. The increase was due primarily to net income of $4.8 billion, net issuances of common stock under the Firm’s employee stock-based compensation plans of $1.3 billion and the effects of the adoption of new accounting principles reflecting increases of $287 million for SFAS 157, $199 million for SFAS 159 and $436 million for FIN 48. Partially offsetting these increases were changes in stockholders’ equity net of Accumulated other comprehensive income (loss) due to common share repurchases of $4.0 billion and dividends declared of $1.2 billion. In addition, the change in capital reflects the exclusion of a $258 million valuation adjustment to certain liabilities pursuant to SFAS 157 to reflect the credit quality of the Firm. Additional information regarding the Firm’s capital ratios and the federal regulatory capital standards to which it is subject is presented in Note 26 on pages 129–130 of JPMorgan Chase’s 2006 Annual Report.

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The following table presents the risk-based capital ratios for JPMorgan Chase and its significant banking subsidiaries at March 31, 2007, and December 31, 2006.
                                                         
                    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, 2007(a)
                                                       
JPMorgan Chase & Co.
  $ 82,538     $ 115,142     $ 972,813     $ 1,324,145       8.5%       11.8%       6.2%  
JPMorgan Chase Bank, N.A.
    70,474       97,826       877,312       1,166,785       8.0          11.2          6.0     
Chase Bank USA, N.A.
    9,342       11,275       69,508       63,966       13.4          16.2          14.6     
 
                                                       
December 31, 2006(a)
                                                       
JPMorgan Chase & Co.
  $ 81,055     $ 115,265     $ 935,909     $ 1,308,699       8.7%       12.3%       6.2%  
JPMorgan Chase Bank, N.A.
    68,726       96,103       840,057       1,157,449       8.2          11.4          5.9     
Chase Bank USA, N.A.
    9,242       11,506       77,638       66,202       11.9          14.8          14.0     
 
                                                       
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, OCC and FDIC.
(c)  
Includes off-balance sheet risk-weighted assets in the amounts of $324.3 billion, $311.0 billion and $12.2 billion, respectively, at March 31, 2007, and $305.3 billion, $290.1 billion and $12.7 billion, respectively, at December 31, 2006, for JPMorgan Chase and its significant banking subsidiaries.
(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 certain subsidiaries and the total adjusted carrying value of nonfinancial equity investments that are subject to deductions from Tier 1 capital.
(e)  
Represents requirements for banking 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.
Dividends
The Firm’s common stock dividend policy reflects JPMorgan Chase’s earnings outlook, desired dividend payout ratios, need to maintain an adequate capital level and alternative investment opportunities. The Firm continues to target a dividend payout ratio of approximately 30–40% of Net income over time. On March 20, 2007, the Firm declared a quarterly common stock dividend of $0.34 per share, payable on April, 30, 2007, to shareholders of record at the close of business on April 5, 2007. On April 17, 2007, the Board of Directors declared a quarterly dividend of $0.38 per share on the outstanding shares of the corporation’s common stock, an increase of $0.04 per share, or 12%; that dividend is payable on July 31, 2007, to stockholders of record at the close of business on July 6, 2007.
Stock repurchases
During the quarter ended March 31, 2007, the Firm repurchased a total of 80.9 million shares for $4.0 billion at an average price per share of $49.45 under the March 21, 2006, $8.0 billion stock repurchase program. During the first quarter of 2006, under the respective stock repurchase programs then in effect, the Firm repurchased 31.8 million shares for $1.3 billion at an average price per share of $40.54.
On April 17, 2007, the Board of Directors authorized the repurchase of up to $10.0 billion of the Firm’s common shares. The new authorization commenced April 19, 2007, and replaced the Firm’s previous $8.0 billion repurchase program. Repurchase authorization under the prior $8.0 billion program that remained unused as of April 19, 2007 was $816 million. This amount will not carry over to the new $10.0 billion program. The new $10.0 billion authorization will be utilized at management’s discretion, and the timing of purchases and the exact number of shares purchased will depend on market conditions and alternative investment opportunities. The new repurchase program does not include specific price targets or timetables; may be executed through open market purchases, privately negotiated transactions or utilizing Rule 10b5-1 programs; and may be suspended at any time. 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 114–115 of this Form 10-Q.

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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 further discussion of SPEs and the Firm’s accounting for these types of exposures, see Note 1 on pages 70-71 of this Form 10-Q, and Note 14 on pages 114–118 and Note 15 on pages 118–120 of JPMorgan Chase’s 2006 Annual Report.
For certain liquidity commitments to SPEs, the Firm could be required to provide funding if the short-term credit rating of JPMorgan Chase Bank, N.A. were downgraded below specific levels, primarily P-1, A-1 and F1 for Moody’s, Standard & Poor’s and Fitch, respectively. The amounts of these liquidity commitments were $79.8 billion and $74.4 billion at March 31, 2007 and December 31, 2006, respectively. These liquidity commitments are generally included in the Firm’s other unfunded commitments to extend credit and asset purchase agreements, as shown in the table on the following page. Alternatively, if JPMorgan Chase Bank, N.A. 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. For further information, refer to Note 15 on pages 118–120 of JPMorgan Chase’s 2006 Annual Report.
The Firm also has exposure to certain SPEs arising from derivative transactions; these transactions are recorded at fair value on the Firm’s Consolidated balance sheets with changes in fair value (i.e., mark-to-market (“MTM”) gains and losses) recorded in Principal transactions. Such MTM gains and losses are not included in the revenue amounts reported in the following table.
The following table summarizes certain revenue information related to consolidated and nonconsolidated variable interest entities (“VIEs”) with which the Firm has significant involvement, and qualifying SPEs (“QSPEs”). The revenue reported in the table below primarily represents servicing and credit fee income.
Revenue from VIEs and QSPEs
Three months ended March 31,                  
(in millions)   VIEs     QSPEs     Total  
 
2007
  $ 47     $ 846     $ 893  
2006
    54       793       847  
 
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 be required to fulfill its obligation under the guarantee, and the counterparty subsequently fail 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 further discussion of lending-related commitments and guarantees and the Firm’s accounting for them, see Credit risk management on pages 64–76 and Note 29 on pages 132–134 of JPMorgan Chase’s 2006 Annual Report.

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The following table presents off–balance sheet lending-related financial instruments and guarantees for the periods indicated.
                                                 
                                            Dec. 31,
    March 31, 2007     2006
By remaining maturity           1-<3     3-5                    
(in millions)   < 1 year     years     years     > 5 years     Total     Total  
 
Lending-related
                                               
Consumer(a)
  $ 696,994     $ 3,833     $ 3,525     $ 65,023     $ 769,375     $ 747,535  
Wholesale:
                                               
Unfunded commitments to extend credit(b)(c)(d)
    96,874       56,340       69,552       18,466       241,232       229,204  
Asset purchase agreements(e)
    22,485       38,540       9,777       2,503       73,305       67,529  
Standby letters of credit and guarantees(c)(f)(g)
    27,739       21,560       37,245       6,345       92,889       89,132  
Other letters of credit(c)
    4,206       588       157       5       4,956       5,559  
 
Total wholesale
    151,304       117,028       116,731       27,319       412,382       391,424  
 
Total lending-related
  $ 848,298     $ 120,861     $ 120,256     $ 92,342     $ 1,181,757     $ 1,138,959  
 
Other guarantees
                                               
Securities lending guarantees(h)
  $ 378,833     $     $     $     $ 378,833     $ 318,095  
Derivatives qualifying as guarantees(i)
    16,020       15,639       18,638       22,294       72,591       71,531  
 
(a)  
Includes Credit card lending-related commitments of $673.9 billion at March 31, 2007, and $657.1 billion at December 31, 2006, that 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 utilize their entire available lines of credit at the same 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 $40.3 billion at March 31, 2007, and $39.0 billion at December 31, 2006, 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 $32.5 billion at March 31, 2007, and $32.8 billion at December 31, 2006.
(d)  
Excludes Firmwide unfunded commitments to private third-party equity funds of $712 million and $686 million at March 31, 2007, and December 31, 2006, respectively.
(e)  
The maturity is based upon the underlying assets in the SPE, which are primarily multi-seller asset-backed commercial paper conduits. It includes $1.4 billion of asset purchase agreements to other third-party entities at both March 31, 2007, and December 31, 2006.
(f)  
JPMorgan Chase held collateral relating to $13.9 billion and $13.5 billion of these arrangements at March 31, 2007, and December 31, 2006, respectively.
(g)  
Includes unused commitments to issue standby letters of credit of $48.6 billion and $45.7 billion at March 31, 2007, and December 31, 2006, respectively.
(h)  
Collateral held by the Firm in support of securities lending indemnification agreements was $381.0 billion at March 31, 2007, and $317.9 billion at December 31, 2006, respectively.
(i)  
Represents notional amounts of derivatives qualifying as guarantees. For further discussion of guarantees, see Note 29 on pages 132–134 of JPMorgan Chase’s 2006 Annual Report.
 
RISK MANAGEMENT
 
Risk is an inherent part of JPMorgan Chase’s business activities. The Firm’s risk management framework and governance structure are 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 further discussion of these risks see pages 61–82 of JPMorgan Chase’s 2006 Annual Report.

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LIQUIDITY RISK MANAGEMENT
 
The following discussion of JPMorgan Chase’s liquidity management framework highlights developments since December 31, 2006, and should be read in conjunction with pages 62–63 of JPMorgan Chase’s 2006 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 access enables the Firm to replace maturing obligations when due and fund assets at appropriate maturities and rates. To accomplish this, management uses a variety of measures to mitigate liquidity and related risks, taking into consideration market conditions, prevailing interest rates, liquidity needs and the desired maturity profile of liabilities, among other factors.
Funding
Sources of funds
As of March 31, 2007, the Firm’s liquidity position remained strong based upon its liquidity metrics. JPMorgan Chase’s long-dated funding, including core liabilities, exceeded illiquid assets, and the Firm believes its obligations can be met even if access to funding is impaired.
Consistent with its liquidity management policy, the Firm has raised funds at the parent holding company level sufficient to cover its obligations and those of its nonbank subsidiaries that mature over the next 12 months.
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, TSS and AM lines of business are generally a consistent source of funding for JPMorgan Chase Bank, N.A. As of March 31, 2007, total deposits for the Firm were $626.4 billion. A significant portion of the Firm’s deposits are retail deposits, which are less sensitive to interest rate changes and therefore are considered more stable than market-based (i.e., wholesale) liability balances. The Firm also benefits from substantial liability balances originated by RFS, CB, TSS and AM through the normal course of business. Liability balances include deposits and deposits that are swept to on–balance sheet liabilities (e.g., commercial paper, Federal funds purchased and securities sold under repurchase agreements). These franchise-generated liability balances are also a stable and consistent source of funding due to the nature of the businesses from which they are generated. For further discussions of deposit and liability balance trends, see the discussion of results for the Firm’s business segments and the Balance Sheet Analysis on pages 17-36 and 39–41, 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, long-term debt, and trust preferred capital debt securities. This funding is managed centrally, using regional expertise and local market access, to ensure active participation by the Firm in the global financial markets while maintaining consistent global pricing. These markets serve as cost-effective and diversified sources of funds and are critical components 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 repurchase 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 and notes to the 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 15 and 23 on pages 44–45, 90–94 and 101–102, respectively, of this Form 10-Q.

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Issuance
During the first quarter of 2007, JPMorgan Chase issued approximately $23.2 billion of long-term debt and trust preferred capital debt securities. These issuances included structured notes, the issuances of which are generally client-driven and not issued for funding or capital management purposes. Long-term debt and trust preferred capital debt securities issuances were partially offset by $14.9 billion that matured or were redeemed, including structured notes. In addition, during the first quarter of 2007, the Firm securitized $13.0 billion of residential mortgage loans and $5.8 billion of credit card loans. The Firm did not securitize any RFS auto loans during the first quarter of 2007. For further discussion of loan securitizations, see Note 15 on pages 90–94 of this Form 10-Q.
In connection with the issuance of certain of its trust preferred capital debt securities, the Firm has entered into Replacement Capital Covenants (“RCCs”) granting certain rights to the holder of “covered debt,” as defined in the RCCs, that prohibit the repayment, redemption or purchase of the trust preferred capital debt securities except, with limited exceptions, to the extent that JPMorgan Chase has received specified amounts of proceeds from the sale of certain qualifying securities. Currently the Firm’s covered debt is its 5.875% Junior Subordinated Deferrable Interest Debentures, Series O, due in 2035. For more information regarding these covenants, see the Forms 8-K filed by the Firm on August 17, 2006, September 28, 2006, and February 2, 2007.
Cash Flows
Cash and due from banks decreased $8.6 billion during the first quarter of 2007, compared with an increase of $233 million during the first quarter of 2006. A discussion of the significant changes in Cash and due from banks during the first quarters of 2007 and 2006 follows.
Cash Flows from Operating Activities
For the quarters ended March 31, 2007 and 2006, net cash used in operating activities was $51.5 billion and $19.1 billion, respectively. JPMorgan Chase’s operating assets and liabilities vary significantly in the normal course of business due to the amount and timing of cash flows. In both 2007 and 2006, net cash was used in operating activities to support the Firm’s capital markets and lending activities, as well as to support loans originated or purchased with an initial intent to sell. Management believes cash flows from operations, available cash balances and short- and long-term borrowings will be sufficient to fund the Firm’s operating liquidity needs.
Cash Flows from Investing Activities
The Firm’s investing activities primarily include originating loans to be held to maturity, other receivables, and the available-for-sale investment portfolio. For the quarter ended March 31, 2007, net cash of $11.8 billion was used in investing activities, primarily for purchases of investment securities in Treasury’s AFS portfolio to manage the Firm’s exposure to interest rates; and to increase Deposits with banks as a result of the availability of excess funds for short-term investment opportunities. Partially offsetting these uses of cash were proceeds from sales and maturities of AFS securities, credit card and residential mortgage sales and securitization activities, and the seasonal decline in consumer credit card receivables.
For the quarter ended March 31, 2006, net cash of $34.5 billion was used in investing activities. Net cash was invested to fund purchases of Treasury’s AFS securities in connection with repositioning the portfolio in response to changes in interest rates, and net additions to the retained wholesale loan portfolio, mainly resulting from capital markets activity in the IB. These uses of cash were partially offset by cash proceeds provided from sales and maturities of AFS securities, credit card and residential mortgage sales and securitization activities, and the decline in credit card loans, reflecting the seasonal pattern and higher-than-normal customer payment rates.
Cash Flows from Financing Activities
The Firm’s financing activities primarily include the issuance of debt and receipt of customer deposits. JPMorgan Chase pays quarterly dividends on its common stock and has an ongoing stock repurchase program. In the first quarter of 2007, net cash provided by financing activities was $54.7 billion due to increases in securities sold under repurchase agreements in connection with the funding of trading and AFS securities positions; net new issuances of Long-term debt and trust preferred capital debt securities; and growth in retail deposits, reflecting new account acquisitions, the ongoing expansion of the retail branch distribution network and seasonal tax-related increases. Cash was used to meet seasonally higher withdrawals by wholesale demand deposit customers, repurchases of common stock and the payment of cash dividends.
In the first quarter 2006, net cash provided by financing activities was $53.8 billion due to: growth in deposits reflecting, on the retail side, new account acquisitions and the ongoing expansion of the branch distribution network, and on the wholesale side, higher business volumes; increases in securities sold under repurchase agreements in connection with short-term investment opportunities; and net new issuances of Long-term debt and trust preferred capital debt securities. The net cash provided was partially offset by common stock repurchases and the payment of cash dividends.

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Credit ratings
The credit ratings of JPMorgan Chase’s parent holding company and each of its significant banking subsidiaries as of March 31, 2007, were as follows.
                         
    Short-term debt   Senior long-term debt
    Moody’s   S&P   Fitch   Moody’s   S&P   Fitch
 
JPMorgan Chase & Co.
JPMorgan Chase Bank, N.A.
Chase Bank USA, N.A.
  P-1
P-1
P-1
  A-1+
A-1+
A-1+
  F1+
F1+
F1+
  Aa2
Aaa
Aaa
  AA-
AA
AA
  AA-
AA-
AA-
 
On February 14, 2007, S&P raised the senior long-term debt ratings on JPMorgan Chase & Co. and the operating bank subsidiaries to AA– and AA, respectively, from A+ and AA–, respectively. S&P also raised the short-term debt rating of JPMorgan Chase & Co. to A-1+ from A-1. Similarly, on February 16, 2007, Fitch raised the senior long-term debt rating on JPMorgan Chase & Co. and the operating bank subsidiaries to AA– from A+. Fitch also raised the short-term debt rating of JPMorgan Chase & Co. to F1+ from F1. Finally, on March 2, 2007, Moody’s raised the senior long-term debt ratings on JPMorgan Chase & Co. and the operating bank subsidiaries to Aa2 and Aaa, respectively, from Aa3 and Aa2, respectively. The cost and availability of unsecured financing are influenced by credit ratings. A reduction in these ratings could have an adverse effect on 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 disciplined 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 page 44 and Ratings profile of derivative receivables MTM on pages 54-55, of this Form 10-Q.
 
CREDIT RISK MANAGEMENT
 
The following discussion of JPMorgan Chase’s credit portfolio as of March 31, 2007, highlights developments since December 31, 2006. This section should be read in conjunction with pages 64–76 and page 83, and Notes 12, 13, 29, and 30 of JPMorgan Chase’s 2006 Annual Report.
The Firm assesses its consumer credit exposure on a managed basis, which includes credit card receivables that have been securitized. For a reconciliation of the Provision for credit losses on a reported basis to managed basis, see pages 14–15 of this Form 10-Q.
 
CREDIT PORTFOLIO
 
The following table presents JPMorgan Chase’s credit portfolio as of March 31, 2007, and December 31, 2006. Total credit exposure at March 31, 2007, increased by $4.9 billion from December 31, 2006, reflecting an increase of $5.5 billion in the consumer credit portfolios, partially offset by a decrease of $544 million in the wholesale credit portfolio. During the first quarter of 2007, Loans were affected by two events. First, as a result of the adoption of SFAS 159, $23.3 billion of loans that would have previously been classified as Loans held-for-sale are now classified as Trading assets ($11.7 billion in the wholesale portfolio and $11.6 billion in the consumer portfolio) and, as a result, such loans are no longer included in Loans at March 31, 2007. Second, effective January 1, 2007, $24.7 billion of prime mortgages held for investment purposes were transferred from RFS ($19.4 billion) and AM ($5.3 billion) to the Corporate sector for risk management purposes. While this transfer had no impact on the RFS, AM or Corporate financial results, the AM prime mortgages that were transferred are now reported in consumer mortgage loans.

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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 Noninterest revenue. However, these HFS loans are excluded from the average loan balances used for the net charge-off rate calculations.
                                 
    Credit exposure     Nonperforming assets(i)  
    March 31,     December 31,     March 31,     December 31,  
(in millions, except ratios)   2007     2006     2007     2006  
 
Total credit portfolio
                               
Loans – reported(a)(b)
  $   449,765     $ 483,127     $ 2,116 (j)   $ 2,077 (j)
Loans – securitized(c)
    68,403       66,950              
 
Total managed loans(d)
    518,168       550,077       2,116       2,077  
Derivative receivables
    49,647       55,601       36       36  
 
Total managed credit-related assets
    567,815       605,678       2,152       2,113  
Lending-related commitments(e)
    1,181,757       1,138,959     NA     NA  
Assets acquired in loan satisfactions
  NA     NA       269       228  
 
Total credit portfolio
  $   1,749,572     $ 1,744,637     $ 2,421     $ 2,341  
 
Net credit derivative hedges notional(f)
  $   (51,443 )   $ (50,733 )   $ (16 )   $ (16 )
Collateral held against derivatives(g)
    (5,713 )     (6,591 )   NA     NA  
Held-for-sale
                               
Total average HFS loans (three months ended)
    34,984       45,775       120       64  
Nonperforming – purchased(h)
          251     NA     NA  
 
                                 
                    Average annual  
Three months ended March 31,   Net charge-offs     net charge-off rate  
(in millions, except ratios)   2007     2006     2007     2006  
 
Total credit portfolio
                               
Loans – reported
  $   903     $ 668       0.85 %     0.69 %
Loans – securitized(c)
    593       449       3.56       2.62  
 
Total managed loans
  $   1,496     $ 1,117       1.22 %     0.98 %
 
(a)  
Loans are presented net of unearned income and net deferred loan fees of $2.0 billion and $2.3 billion at March 31, 2007, and December 31, 2006, respectively.
(b)  
Includes $900 million of loans for which the Firm has elected the fair value option of accounting during the first quarter of 2007.
(c)  
Represents securitized credit card receivables. For a further discussion of credit card securitizations, see Card Services on pages 27–29 of this Form 10-Q.
(d)  
Past-due 90 days and over and accruing includes credit card receivables of $1.3 billion at both March 31, 2007, and December 31, 2006, and related credit card securitizations of $958 million and $962 million at March 31, 2007, and December 31, 2006, respectively.
(e)  
Includes wholesale unused advised lines of credit totaling $40.3 billion and $39.0 billion at March 31, 2007, and December 31, 2006, 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 $673.9 billion and $657.1 billion at March 31, 2007, and December 31, 2006, respectively, represent the total available credit to its cardholders. The Firm has not experienced, and does not anticipate, that all of its cardholders will utilize their entire available lines of credit at the same 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 exposures; these derivatives do not qualify for hedge accounting under SFAS 133. March 31, 2007, and December 31, 2006, both include $23 billion, which represents the notional amount for structured portfolio protection; the Firm retains the first risk of loss on this portfolio.
(g)  
Represents other liquid securities collateral held by the Firm as of March 31, 2007, and December 31, 2006, respectively.
(h)  
Represents distressed HFS loans purchased as part of the IB’s proprietary activities, which are excluded from nonperforming assets. During the first quarter of 2007, the Firm elected the fair value option of accounting for this portfolio of nonperforming loans. These loans are classified as Trading assets at March 31, 2007.
(i)  
Includes nonperforming HFS loans of $116 million and $120 million as of March 31, 2007, and December 31, 2006, respectively.
(j)  
Excludes nonperforming assets related to (1) loans eligible for repurchase as well as loans repurchased from GNMA pools that are insured by U.S. government agencies and U.S. government-sponsored enterprises of $1.3 billion and $1.2 billion at March 31, 2007, and December 31, 2006, respectively, and (2) 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 $178 million and $219 million as of March 31, 2007, and December 31, 2006, respectively. These amounts for GNMA and education loans are excluded, as reimbursement is proceeding normally.

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WHOLESALE CREDIT PORTFOLIO
 
As of March 31, 2007, wholesale exposure (IB, CB, TSS and AM) decreased by $544 million from December 31, 2006, due to a decrease in loans of $15.5 billion, reflecting $11.7 billion of loans reclassified to Trading assets as a result of the adoption of SFAS 159 and $5.3 billion of prime mortgage loans transferred from AM to the Corporate sector for risk management purposes. Derivative receivables decreased by $6.0 billion primarily as a result of the decline in the U.S. Dollar and rising interest rates. These decreases were almost completely offset by an increase in lending-related commitments of $21.0 billion mainly due to lending activity in the IB.
                                 
    Credit exposure   Nonperforming assets(f)
    March 31,   December 31,   March 31,   December 31,
(in millions, except ratios)   2007   2006   2007   2006
 
Loans – reported(a)
  $   168,194     $   183,742     $   267       $ 391  
Derivative receivables
    49,647       55,601       36       36  
 
Total wholesale credit-related assets
    217,841       239,343       303       427  
Lending-related commitments(b)
    412,382       391,424     NA     NA  
Assets acquired in loan satisfactions
  NA     NA       2       3  
 
Total wholesale credit exposure
  $   630,223     $   630,767     $   305       $ 430  
 
Net credit derivative hedges notional(c)
  $   (51,443 )   $   (50,733 )   $   (16 )     $ (16 )
Collateral held against derivatives(d)
    (5,713 )     (6,591 )   NA     NA  
 
                               
Held-for-sale
                               
Total average HFS loans (three months ended)
    13,259       24,547       5       11  
Nonperforming – purchased(e)
          251     NA     NA  
 
(a)  
Excludes $11.7 billion of wholesale loans reclassified to Trading assets as a result of the adoption of SFAS 159 effective January 1, 2007. Includes loans greater or equal to 90 days past due that continue to accrue interest. The principal balance of these loans totaled $30 million and $29 million at March 31, 2007, and December 31, 2006, respectively. Also, see Note 4 on pages 77–80 and Note 13 on pages 87–89, respectively, of this Form 10-Q.
(b)  
Includes unused advised lines of credit totaling $40.3 billion and $39.0 billion at March 31, 2007, and December 31, 2006, respectively, which are not legally binding. In regulatory filings with the Federal Reserve Board, unused advised lines are not reportable.
(c)  
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. Includes $23 billion, which represents the notional amount for structured portfolio protection; the Firm retains the first risk of loss on this portfolio.
(d)  
Represents other liquid securities collateral held by the Firm as of March 31, 2007, and December 31, 2006, respectively.
(e)  
Represents distressed HFS loans purchased as part of IB’s proprietary activities, which are excluded from nonperforming assets. During the first quarter of 2007, the Firm elected the fair value option of accounting for this portfolio of nonperforming loans. These loans are classified as Trading assets at March 31, 2007.
(f)  
Includes nonperforming HFS loans of $4 million at March 31, 2007, and December 31, 2006.

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Net charge-offs/recoveries            
Wholesale            
Three months ended March 31,            
(in millions, except ratios)   2007     2006  
 
Loans – reported
Net recoveries
  $ 6     $ 20  
Average annual net recovery rate(a)
    0.02 %     0.06 %
 
(a)  
Excludes average loans HFS of $13.3 billion and $19.5 billion for the quarters ended March 31, 2007 and 2006, respectively.
Net recoveries do not include gains from sales of nonperforming loans that were sold from the credit portfolio (as shown in the following table). There were no gains from these sales during the first quarter of 2007, compared with gains of $20 million in the first quarter of 2006. Gains would be reflected in Noninterest revenue.
                 
Nonperforming loan activity            
Wholesale            
Three months ended March 31,            
(in millions, except ratios)   2007     2006  
 
Beginning balance
  $ 391     $ 992  
Additions
    134       57  
 
Reductions:
               
Paydowns and other
    (225 )     (152 )
Charge-offs
    (17 )     (39 )
Returned to performing
    (16 )     (69 )
Sales
          (52 )
 
Total reductions
    (258 )     (312 )
 
Net additions (reductions)
    (124 )     (255 )
Ending balance
  $ 267     $ 737  
 
The following table presents summaries of the maturity and ratings profiles of the wholesale portfolio as of March 31, 2007, and December 31, 2006. The ratings scale is based upon the Firm’s internal risk ratings and is presented on an S&P-equivalent basis. The primary driver of the decrease in the investment-grade loans was due to the transfer of $5.3 billion of prime mortgages from AM to the Corporate sector. These loans are now part of the consumer portfolio.
                                                                 
Wholesale exposure        
    Maturity profile(c)   Ratings profile
                                    Investment-   Noninvestment-    
                                    grade (“IG”)   grade    
At March 31, 2007                                                            
(in billions, except                                                           Total %
ratios)   <1 year   1–5 years   > 5 years   Total   AAA to BBB-   BB+ & below   Total   of IG
     
Loans
    45 %     42 %     13 %     100 %   $   95     $   58     $   153       62 %
Derivative receivables
    12       35       53       100       42       8       50       84  
Lending-related commitments
    37       57       6       100       350       62       412       85  
     
Total excluding HFS
    37 %     51 %     12 %     100 %   $   487     $   128     $   615       79 %
Loans held-for-sale(a)
                                                    15          
     
Total exposure
                                                  $   630          
     
Net credit derivative hedges notional(b)
    39 %     50 %     11 %     100 %   $   (45 )   $   (6 )   $   (51 )     88 %
     

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    Maturity profile(c)   Ratings profile
                                    Investment-   Noninvestment-            
                                    grade (“IG”)   grade            
At December 31, 2006                                                            
(in billions, except                                                           Total %
ratios)   <1 year   1–5 years   > 5 years   Total   AAA to BBB-   BB+ & below   Total   of IG
     
Loans
    44 %     41 %     15 %     100 %   $   104     $   57     $   161       65 %
Derivative receivables
    16       34       50       100       49       7       56       88  
Lending-related commitments
    36       58       6       100       338       53       391       86  
     
Total excluding HFS
    37 %     51 %     12 %     100 %   $   491     $   117     $   608       81 %
Loans held-for-sale(a)
                                                    23          
     
Total exposure
                                                  $   631          
     
Net credit derivative hedges notional(b)
    16 %     75 %     9 %     100 %   $   (45 )   $   (6 )   $   (51 )     88 %
     
(a)  
HFS loans relate primarily to syndication loans and loans transferred from the retained portfolio. During the first quarter of 2007 the Firm elected the fair value option of accounting for loans related to securitization activities, and these loans are classified as Trading assets.
(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 70 of JPMorgan Chase’s 2006 Annual Report for further discussion of Average exposure.
Wholesale credit exposure – selected industry concentration
The Firm continues to focus on the management and diversification of its industry concentrations, with particular attention paid to industries with actual or potential credit concerns. At March 31, 2007, the top 10 industries were the same as those at December 31, 2006. The increases in Asset managers and Oil and gas were due to lending-related activities. Below is a summary of the Top 10 industry concentrations as of March 31, 2007, and December 31, 2006.
                                 
    March 31, 2007   December 31, 2006
Top 10 industries(a)   Credit   % of   Credit   % of
(in millions, except ratios)   exposure(c)   portfolio   exposure(c)   portfolio
 
Banks and finance companies
  $ 59,836       10 %   $ 61,792       10 %
Real estate
    31,503       5       32,102       5  
Healthcare
    29,219       5       28,998       5  
Asset managers
    28,872       5       24,570       4  
Consumer products
    27,362       4       27,114       4  
Utilities
    27,329       4       24,938       4  
State and municipal governments
    26,840       4       27,485       5  
Retail and consumer services
    23,632       4       22,122       4  
Securities firms and exchanges
    22,445       4       23,127       4  
Oil and gas
    22,234       4       18,544       3  
All other
    316,271       51       317,468       52  
 
Total excluding HFS
  $ 615,543       100 %   $ 608,260       100 %
Held-for-sale(b)
    14,680               22,507          
 
Total exposure
  $ 630,223             $ 630,767          
 
(a)  
Rankings are based upon exposure at March 31, 2007.
(b)  
HFS loans relate primarily to syndication loans and loans transferred from the retained portfolio. During the first quarter of 2007 the Firm elected the fair value option of accounting for loans related to securitization activities; these loans are classified as Trading assets at March 31, 2007.
(c)  
Credit exposure is net of risk participations and excludes the benefit of credit derivative hedges and collateral held against Derivative receivables or Loans.

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Wholesale criticized exposure
Exposures deemed criticized generally represent a ratings profile similar to a rating of CCC+/Caa1 and lower, as defined by Standard & Poor’s/Moody’s. The total criticized component of the portfolio remained flat at $5.7 billion when compared with year-end 2006.
Wholesale criticized exposure – industry concentrations
                                 
    March 31, 2007   December 31, 2006
Top 10 industries(a)       % of       % of
(in millions, except ratios)   Amount   portfolio   Amount   portfolio
 
Automotive
Media
  $
1,372
720

 
26
13
%
  $ 1,442
392
      29
8
%
Consumer products
    456       8       383       7  
Real estate
    334       6       243       5  
Agriculture/paper manufacturing
    255       5       239       5  
Business services
    247       5       222       4  
Retail and consumer services
    168       3       278       5  
Machinery & equipment manufacturing
    166       3       106       2  
Building materials/construction
    145       3       113       2  
Airlines
    130       2       131       3  
All other
    1,387       26       1,477       30  
 
Total excluding HFS
  $ 5,380       100 %   $ 5,026       100 %
Held-for-sale(b)
    323               624          
 
Total
  $ 5,703             $ 5,650          
 
(a)  
Rankings are based upon exposure at March 31, 2007.
(b)  
HFS loans relate primarily to syndication loans and loans transferred from the retained portfolio. During the first quarter of 2007 the Firm elected the fair value option of accounting for loans related to securitization activities; these loans are classified as Trading assets at March 31, 2007. HFS loans exclude 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 further discussion of these contracts, see Note 22 on page 101 of this Form 10-Q, and Derivative contracts on pages 69–72 of JPMorgan Chase’s 2006 Annual Report.
The following table summarizes the aggregate notional amounts and the net derivative receivables MTM for the periods presented.
Notional amounts and derivative receivables marked-to-market (“MTM”)
                                 
    Notional amounts(b)   Derivative receivables MTM
(in billions)   March 31, 2007     December 31, 2006     March 31, 2007   December 31, 2006
 
Interest rate
  $ 54,177     $ 50,201     $ 24     $ 29  
Foreign exchange
    2,714       2,520       3       4  
Equity
    801       809       7       6  
Credit derivatives
    5,618       4,619       7       6  
Commodity
    449       507       9       11  
 
Total, net of cash collateral(a)
  $ 63,759     $ 58,656       50       56  
Liquid securities collateral held against derivative receivables
  NA     NA       (6 )     (7 )
 
Total, net of all collateral
  NA     NA     $ 44     $ 49  
 
(a)  
Collateral is only applicable to Derivative receivables MTM amounts.
(b)  
Represents the gross sum of long and short third-party notional derivative contracts, excluding written options and foreign exchange spot contracts.
The amount of Derivative receivables reported on the Consolidated balance sheets of $50 billion and $56 billion at March 31, 2007, and December 31, 2006, respectively, is the amount of the mark-to-market (“MTM”) or fair value of the derivative contracts after giving effect to legally enforceable master netting agreements and cash collateral held by the Firm and represents the cost to the Firm to replace the contracts at current market rates should the counterparty default. However, in management’s view, the appropriate measure of current credit risk should also reflect additional liquid securities held as collateral by the Firm of $5.7 billion and $6.6 billion at March 31, 2007, and December 31, 2006, respectively, resulting in total exposure, net of all collateral, of $44 billion and $49 billion at March 31, 2007, and December 31, 2006, respectively.
The Firm also holds additional collateral delivered by clients at the initiation of transactions, but this collateral does not reduce the credit risk of the Derivative receivables in the table above. This additional collateral secures potential exposure that could arise in the derivatives portfolio should the MTM of the client’s transactions move in the Firm’s favor. As of March 31, 2007, and December 31, 2006, the Firm held $12 billion of this additional collateral. The derivative receivables MTM, net of all collateral, also does not include other credit enhancements in the forms of letters of credit and surety receivables.
The following table summarizes the ratings profile of the Firm’s derivative receivables MTM, net of other liquid securities collateral, for the dates indicated.
Ratings profile of derivative receivables MTM
                                 
    March 31, 2007   December 31, 2006
Rating equivalent                
(in millions, except ratios)   Net MTM     % of Net MTM   Net MTM     % of Net MTM
 
AAA to AA-
  $ 25,095       57 %   $ 28,150       58 %
A+ to A-
    5,807       13       7,588       15  
BBB+ to BBB-
    7,102       16       8,044       16  
BB+ to B-
    5,801       13       5,150       11  
CCC+ and below
    129       1       78        
 
Total
  $ 43,934       100 %   $ 49,010       100 %
 
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 78% as of March 31, 2007, from 80% at December 31, 2006.

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The Firm posted $27 billion of collateral at both March 31, 2007, and December 31, 2006. 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, 2007, the impact of a single-notch ratings downgrade to JPMorgan Chase Bank, N.A., from its rating of AA to AA- at March 31, 2007, would have required $143 million of additional collateral to be posted by the Firm; the impact of a six-notch ratings downgrade (from AA to BBB) would have required $2.6 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, 2007, and December 31, 2006.
                                         
Credit derivatives positions            
    Notional amount        
    Credit portfolio     Dealer/client        
    Protection     Protection     Protection     Protection        
(in billions)   purchased(a)     sold     purchased     sold     Total  
 
March 31, 2007
  $ 52     $ 1     $ 2,757     $ 2,808     $ 5,618  
December 31, 2006
    52       1       2,277       2,289       4,619  
 
(a)  
Included $23 billion at both March 31, 2007, and December 31, 2006, that represented the notional amount for structured portfolio protection; the Firm retains the first risk of loss on this portfolio.
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 $49.6 billion of total Derivative receivables MTM at March 31, 2007, $6.5 billion, or 13%, was associated with credit derivatives, before the benefit of liquid securities collateral.
Dealer/client
At March 31, 2007, the total notional amount of protection purchased and sold in the dealer/client business increased $1 trillion from year-end 2006 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.
Credit portfolio management activities
                 
Use of single-name and portfolio credit derivatives      
    Notional amount of protection purchased  
(in millions)   March 31, 2007     December 31, 2006  
 
Credit derivatives used to manage:
               
Loans and lending-related commitments
  $ 41,540     $ 40,755  
Derivative receivables
    10,487       11,229  
 
Total(a)
  $ 52,027     $ 51,984  
 
(a)  
Included $23 billion at both March 31, 2007, and December 31, 2006, that represented the notional amount for structured portfolio protection; the Firm retains the first risk of loss on this portfolio.
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 revenue. 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

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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 MTM related to the credit valuation adjustment (“CVA”), which reflects the credit quality of derivatives counterparty exposure, are included in the table below. These results can vary from year to year due to market conditions that impact specific positions in the portfolio.
                 
Three months ended March 31,            
(in millions)   2007     2006  
 
Hedges of lending-related commitments(a)
  $ (9 )   $ (82 )
CVA and hedges of CVA(a)
    7       23  
 
Net gains (losses)(b)
  $ (2 )   $ (59 )
 
(a)  
These hedges do not qualify for hedge accounting under SFAS 133.
(b)  
Excludes gains of $146 million (primarily related to the adoption on January 1, 2007, of SFAS 157, which incorporated an adjustment to the valuation of the Firm’s derivative liabilities) and losses of $6 million for the quarters ended March 31, 2007 and 2006, 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 quarter of 2007 and 2006, the Firm sold $1.6 billion and $665 million of loans and commitments, respectively, recognizing losses of $6 million and gains of $20 million, respectively. The gains (losses) reflect sales of nonperforming loans as discussed on page 51 of this Form 10-Q. These activities are not related to the Firm’s securitization activities, which are undertaken for liquidity and balance sheet management purposes. For further discussion of securitization activity, see Liquidity Risk Management and Note 15 on pages 46–48, and 90–94, respectively, of this Form 10-Q.
Lending-related commitments
The contractual amount of wholesale lending-related commitments was $412.4 billion at March 31, 2007, compared with $391.4 billion at December 31, 2006. See page 50 of this Form 10-Q for an explanation of the increase in exposure. 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 $223.1 billion and $212.3 billion as of March 31, 2007, and December 31, 2006, respectively.
Emerging markets country exposure
The Firm has a comprehensive internal process for measuring and managing exposures and risk in emerging markets countries – defined as those countries potentially vulnerable to sovereign events. As of March 31, 2007, based upon its internal methodology, the Firm’s exposure to any individual emerging-markets country was not significant, in that total exposure to any such country did not exceed 0.75% of the Firm’s total assets. In evaluating and managing its exposures to emerging markets countries, the Firm takes into consideration all credit-related lending, trading, and investment activities, whether cross-border or locally funded. Exposure amounts are then 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 credit risk. For information regarding the Firm’s cross-border exposure based upon guidelines of the Federal Financial Institutions Examination Council (“FFIEC”), see Part 1, Item 1, “Loan portfolio, Cross-border outstandings,” on page 155, of the Firm’s 2006 Annual Report.
 
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 business banking loans, and reflects the benefit of diversification from both a product and a geographic perspective. The primary focus is serving the prime consumer credit market. RFS offers Home Equity lines of credit and Mortgage loans with interest-only payment options to predominantly prime borrowers; there are no products in the real estate portfolios that result in negative amortization. The Firm actively manages its consumer credit operation. Ongoing efforts include continual review and enhancement of credit underwriting criteria and refinement of pricing and risk management models.

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The following table presents managed consumer credit–related information for the dates indicated.
                                 
    Credit exposure   Nonperforming assets(e)
(in millions, except ratios)   March 31, 2007   December 31, 2006   March 31, 2007   December 31, 2006
 
Home equity
  $ 87,741     $ 85,730     $   459     $ 454  
Mortgage
    46,574       59,668       960       769  
Auto loans and leases(a)
    40,937       41,009       95       132  
Credit card – reported(b)
    78,173       85,881       9       9  
All other loans
    28,146       27,097       326       322  
 
Total consumer loans – reported
    281,571       299,385       1,849 (f)     1,686 (f)
Credit card – securitizations(b)(c)
    68,403       66,950              
 
Total consumer loans – managed(b)
    349,974       366,335       1,849       1,686  
Assets acquired in loan satisfactions
  NA     NA       255       225  
 
Total consumer related assets – managed
    349,974       366,335       2,104       1,911  
Consumer lending–related commitments:
                               
Home equity
    73,393       69,559     NA     NA  
Mortgage
    7,322       6,618     NA     NA  
Auto loans and leases
    8,285       7,874     NA     NA  
Credit card(d)
    673,896       657,109     NA     NA  
All other loans
    6,479       6,375     NA     NA  
 
Total lending-related commitments
    769,375       747,535     NA     NA  
 
Total consumer credit portfolio
  $ 1,119,349     $ 1,113,870     $   2,104     $ 1,911  
 
Total average HFS loans (three months ended)
  $ 21,725     $ 21,228     $   115     $ 53  
Memo: Credit card – managed
    146,576       152,831       9       9  
 
         
Three months ended March 31,   Net charge-offs   Average annual net charge-off rate(g)
(in millions, except ratios)   2007     2006     2007     2006  
 
Home equity
  $ 68     $ 33       0.32 %     0.18 %
Mortgage
    23       12       0.25       0.11  
Auto loans and leases(a)
    59       51       0.59       0.46  
Credit card – reported
    721       567       3.57       3.36  
All other loans
    38       25       0.64       0.57  
 
Total consumer loans – reported
    909       688       1.37       1.11  
Credit card – securitizations(c)
    593       449       3.56       2.62  
 
Total consumer loans – managed
  $ 1,502     $ 1,137       1.81 %     1.44 %
 
Memo: Credit card – managed
  $ 1,314     $ 1,016       3.57 %     2.99 %
 
(a)  
Excludes operating lease-related assets of $1.7 billion and $1.6 billion for March 31, 2007, and December 31, 2006, respectively.
(b)  
Past-due loans 90 days and over and accruing includes credit card receivables of $1.3 billion at both March 31, 2007, and December 31, 2006, and related credit card securitizations of $958 million and $962 million for March 31, 2007, and December 31, 2006, respectively.
(c)  
Represents securitized credit card receivables. For a further discussion of credit card securitizations, see CS on pages 27–29 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 utilize their entire available lines of credit at the same 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 $112 million and $116 million at March 31, 2007, and December 31, 2006, respectively.
(f)  
Excludes nonperforming assets related to (1) loans eligible for repurchase as well as loans repurchased from GNMA pools that are insured by U.S. government agencies and U.S. government-sponsored enterprises of $1.3 billion and $1.2 billion for March 31, 2007, and December 31, 2006, respectively, and (2) education loans that are 90 days past due and still accruing, which are insured by U.S. government agencies under the Federal Family Education Loan Program of $178 million and $219 million as of March 31, 2007 and December 31, 2006, respectively. These amounts for GNMA and education loans are excluded, as reimbursement is proceeding normally .
(g)  
Net charge-off rates exclude average loans HFS of $21.7 billion and $16.4 billion for the quarters ended March 31, 2007 and 2006, respectively.

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Total managed consumer loans as of March 31, 2007, were $350.0 billion, down from $366.3 billion at year-end 2006, reflecting the classification of a portion of mortgage loans as Trading Assets as a result of adopting SFAS 159, and the seasonal decrease of credit card loans, partially offset by organic growth in home equity loans. Consumer lending-related commitments increased by 3%, to $769.4 billion at March 31, 2007, primarily reflecting growth in credit cards and home equity lines of credit.
The Firm regularly evaluates market conditions and overall economic returns and makes an initial determination of whether new originations will be held-for-investment or sold within the foreseeable future. The Firm also periodically evaluates the overall economic returns of its held-for-investment loan portfolio under prevailing market conditions to determine whether to retain or sell loans in the portfolio. When it is determined that a loan that was previously classified as held-for-investment will be sold it is transferred to held-for-sale.
The following discussion relates to the specific loan and lending-related categories within the consumer portfolio.
Home equity: Home equity loans at March 31, 2007, were $87.7 billion, an increase of $2.0 billion from year-end 2006. Change in the portfolio from December 31, 2006, reflected organic growth. The Provision for credit losses increased as weaker housing prices caused an increase in the estimate of loss severities in the portfolio.
Mortgage: Substantially all of the Firm’s prime and low documentation mortgages, both fixed-rate and adjustable-rate, are originated with the intent to sell, although some of the prime adjustable rate products are originated into the held-for-investment portfolio. As a result, products in the portfolio consist primarily of adjustable rate products. Subprime mortgages are either originated with the intent to sell or hold-for-investment, depending upon market conditions. All mortgages, irrespective of whether they are originated with the intent to sell or hold-for-investment, are underwritten to the same standards applicable to the respective type of mortgage.
Mortgage loans that are held-for-investment or held-for-sale at March 31, 2007 were $46.6 billion, reflecting a $13.1 billion decrease from the prior year end, primarily due to the change in classification to Trading assets for prime mortgages originated with the intent to sell and elected to be fair valued under SFAS 159. As of March 31, 2007, over 70% of the outstanding mortgage loans on the Consolidated balance sheet related to the prime market segment. As a result, the Firm deems its exposure to subprime mortgages manageable. The provision for credit losses related to subprime mortgages was increased this quarter and underwriting standards were tightened.
Auto loans and leases: As of March 31, 2007, Auto loans and leases of $40.9 billion were flat to year-end 2006. Vehicle finance leasing, which comprised $1.2 billion of outstanding loans as of March 31, 2007, was down from $1.7 billion at year-end 2006. The Auto loan portfolio reflects a high concentration of prime and near-prime quality credits.
Credit card: JPMorgan Chase analyzes its credit card portfolio on a managed basis, which includes credit card receivables on the Consolidated balance sheets and those receivables sold to investors through securitization. Managed credit card receivables were $146.6 billion at March 31, 2007, a decrease of $6.3 billion from year-end 2006, reflecting the typical seasonal decrease of outstanding loans.
The managed credit card net charge-off rate increased to 3.57% for the first quarter of 2007, from 2.99% in the first quarter of 2006. This increase was due primarily to lower bankruptcy-related net charge-offs in 2006. The 30-day delinquency rates decreased slightly to 3.07% at March 31, 2007, from 3.10% at March 31, 2006, reflecting continued strength in underlying credit quality. The managed credit card portfolio continues to reflect a well-seasoned portfolio that has good U.S. geographic diversification.
All other loans: All other loans primarily include Business Banking loans (which are highly collateralized loans, often with personal loan guarantees), Education loans and Community Development loans. As of March 31, 2007, Other loans increased to $28.1 billion compared with $27.1 billion at year-end 2006. This increase is due primarily to organic growth in Education and Business banking loans.

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ALLOWANCE FOR CREDIT LOSSES
 
For a further discussion of the components of the allowance for credit losses, see Critical accounting estimates used by the Firm on page 83 and Note 13 on pages 113–114 of JPMorgan Chase’s 2006 Annual Report. At March 31, 2007, management deemed the allowance for credit losses to be appropriate (i.e., 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,   2007   2006
(in millions)   Wholesale   Consumer   Total   Wholesale   Consumer   Total
 
Loans:
                                               
Beginning balance at January 1,
  $ 2,711     $ 4,568     $ 7,279     $ 2,453     $ 4,637     $ 7,090  
Cumulative effect of changes in accounting principles(a)
    (56 )           (56 )                  
 
Beginning balance at January 1, adjusted
    2,655       4,568       7,223       2,453       4,637       7,090  
Gross charge-offs
    (17 )     (1,088 )     (1,105 )     (39 )     (843 )     (882 )
Gross recoveries
    23       179       202       59       155       214  
 
Net (charge-offs) recoveries
    6       (909 )     (903 )     20       (688 )     (668 )
Provision for loan losses
    48       931       979       195       652       847  
Other
    (16) (b)     17 (b)     1             6       6  
 
Ending balance at March 31
  $ 2,693 (c)   $ 4,607 (d)   $ 7,300     $ 2,668 (c)   $ 4,607 (d)   $ 7,275  
 
Components:
                                               
Asset specific
  $ 54     $     $ 54     $ 118     $     $ 118  
Formula-based
    2,639       4,607       7,246       2,550       4,607       7,157  
 
Total Allowance for loan losses
  $ 2,693     $ 4,607     $ 7,300     $ 2,668     $ 4,607     $ 7,275  
 
Lending-related commitments:
                                               
Beginning balance at January 1,
  $ 499     $ 25     $ 524     $ 385     $ 15     $ 400  
Provision for lending-related commitments
    29             29       (16 )           (16 )
 
Ending balance at March 31
  $ 528     $ 25     $ 553     $ 369     $ 15     $ 384  
 
Components:
                                               
Asset specific
  $ 40     $     $ 40     $ 49     $     $ 49  
Formula-based
    488       25       513       320       15       335  
 
Total allowance for lending-related commitments
  $ 528     $ 25     $ 553     $ 369     $ 15     $ 384  
 
(a)  
Reflects the affect of the adoption of SFAS 159 at January 1, 2007. For a further discussion of SFAS 159, see Note 4 on pages 77–80 of this Form 10-Q.
(b)  
Primarily related to the transfer of allowance between wholesale and consumer in conjunction with prime mortgages transferred to the Corporate sector.
(c)  
The ratio of the wholesale allowance for loan losses to total wholesale loans was 1.76% and 1.84%, excluding wholesale HFS loans and loans accounted for at fair value at March 31, 2007 and 2006, respectively.
(d)  
The ratio of the consumer allowance for loan losses to total consumer loans was 1.72% and 1.82%, excluding consumer HFS loans and loans accounted for at fair value at March 31, 2007 and 2006, respectively.
The allowance for credit losses at March 31, 2007, was relatively unchanged compared with December 31, 2006. Excluding held-for-sale loans and loans carried at fair value, the Allowance for loan losses represented 1.74% of loans at March 31, 2007, compared with 1.70% at December 31, 2006. The increase in coverage was due to a lower loan balance.
To provide for the risk of loss inherent in the Firm’s process of extending credit, management computes an asset-specific component and a formula-based component for wholesale lending-related commitments. These components are computed using a methodology similar to that used for the wholesale loan portfolio, modified for expected maturities and probabilities of drawdown. This allowance, which is reported in Accounts payable, accrued expenses and other liabilities, was $553 million and $524 million at March 31, 2007, and December 31, 2006, respectively. The increase reflected increased lending-related commitments, primarily due to IB activity.

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Provision for credit losses
For a discussion of the reported Provision for credit losses, see page 11 of this Form 10-Q. The managed provision for credit losses was $1.6 billion, up by $321 million, or 25%, from the prior year. The wholesale provision for credit losses was $77 million for the quarter compared with a provision of $179 million in the prior year. The prior-year provision reflected growth in the loan portfolio. The total consumer managed provision for credit losses was $1.5 billion in the current quarter compared with $1.1 billion in the prior year. The prior year benefited from a lower level of credit card net charge-offs, which reflected a low level of bankruptcy losses following the change in bankruptcy legislation in the fourth quarter of 2005. The increase from the prior year also reflects higher charge-offs and additions to the allowance for credit losses related to the subprime mortgage and home equity loan portfolios.
                                                 
                    Provision for    
                    lending-related   Total provision for
    Provision for loan losses   commitments   credit losses
Three months ended March 31, (in millions)   2007   2006   2007   2006   2007   2006
 
Investment Bank
  $ 35     $ 189     $ 28     $ (6 )   $ 63     $ 183  
Commercial Banking
    17       16             (9 )     17       7  
Treasury & Securities Services
    4       (4 )     2             6       (4 )
Asset Management
    (8 )     (6 )     (1 )     (1 )     (9 )     (7 )
 
Total Wholesale
    48       195       29       (16 )     77       179  
Retail Financial Services
    292       85                   292       85  
Card Services
    636       567                   636       567  
Corporate(a)
    3                         3        
 
Total Consumer
    931       652                   931       652  
 
Total provision for credit losses
    979       847       29       (16 )     1,008       831  
Credit card securitizations
    593       449                   593       449  
 
Total managed provision for credit losses
  $ 1,572     $ 1,296     $ 29     $ (16 )   $ 1,601     $ 1,280  
 
(a)  
Includes amounts related to held-for-investment prime mortgages transferred from RFS and AM to the Corporate segment.
 
MARKET RISK MANAGEMENT
 
For discussion of the Firm’s market risk management organization, see pages 77–80 of JPMorgan Chase’s 2006 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 risks. VAR for nontrading risk measures the amount of potential change in the fair values of the exposures related to these risks; however, for such risks, VAR is not a measure of reported revenue since nontrading activities are generally not marked to market through Net income.
To calculate VAR, the Firm uses historical simulation, which measures risk across instruments and portfolios in a consistent and comparable way. This approach assumes that historical changes in market values are representative of future changes. The simulation is based upon data for the previous twelve months. 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 two to three times a year. For a further discussion of the Firm’s VAR methodology, see Market Risk management – Value-at-risk, on pages 77–80 of JPMorgan Chase’s 2006 Annual Report.

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IB trading and credit portfolio VAR
IB trading VAR by risk type and credit portfolio VAR
                                                                 
Three months ended March 31,   2007   2006   At March 31,
(in millions)   Avg   Min   Max   Avg   Min   Max   2007   2006
         
By risk type:
                                                               
Fixed income
  $ 45     $ 25     $ 68     $ 60     $ 47     $ 94     $ 65     $ 47  
Foreign exchange
    19       9       38       20       15       30       19       19  
Equities
    42       31       58       32       22       39       43       23  
Commodities and other
    34       25       47       47       22       68       36       52  
Less: portfolio diversification
    (58 )(c)   NM (d)   NM (d)     (68 )(c)   NM (d)   NM (d)     (64 )(c)     (61 )(c)
     
Trading VAR(a)
  $ 82     $ 50     $ 111     $ 91     $ 76     $ 109     $ 99     $ 80  
Credit portfolio VAR(b)
    13       12       15       14       13       16       14       14  
Less: portfolio diversification
    (12 )(c)   NM (d)   NM (d)     (11 )(c)   NM (d)   NM (d)     (16 )(c)     (10 )(c)
     
Total trading and credit portfolio VAR
  $ 83     $ 50     $ 113     $ 94     $ 75     $ 113     $ 97     $ 84  
 
(a)  
Trading VAR includes substantially all trading activities in the IB. Trading VAR does not include VAR related to the MSR portfolio or VAR related to other corporate functions, such as Treasury and Private Equity. For a discussion of MSRs and the corporate functions, see Note 17 on pages 96–97, Note 3 on page 74 and Corporate on pages 37–39 of this Form 10-Q.
(b)  
Includes VAR on derivative credit and debit valuation adjustments, hedges of the credit valuation adjustment and mark-to-market hedges of the retained loan portfolio, which are all reported in Principal transactions revenue. For a discussion of credit and debit valuation adjustments, see Note 3 on pages 71-77 of this Form 10-Q. This VAR does not include the retained loan portfolio.
(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.
The IB’s average Total trading and credit portfolio VAR for the first quarter of 2007 was $83 million compared with $94 million in the first quarter of 2006. The change in fixed income, equities and commodities VAR components resulted from changes in positions which also led to a decrease in portfolio diversification for trading VAR. Average trading VAR diversification decreased to $58 million, or 41% of the sum of the components, from $68 million, or 43% of the sum of the components. In general, over the course of the year VAR exposures can vary significantly as positions change, market volatility fluctuates and diversification benefits change.
VAR backtesting
To evaluate the soundness of its VAR model, the Firm conducts daily back-testing of VAR against daily IB market risk-related revenue, which is defined as the change in value of Principal transactions revenue less Private Equity gains/losses 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 IB trading businesses for the quarter ended March 31, 2007. The chart shows that IB posted market risk-related gains on 61 out of 65 days in this period, with 11 days exceeding $100 million. The inset graph looks at those days on which IB experienced losses and depicts the amount by which VAR exceeded the actual loss on each of those days. Losses were sustained on 4 days, with no loss greater than $50 million, and with no loss exceeding the VAR measure.

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(BAR CHART)
Economic value stress testing
While VAR reflects the risk of loss due to adverse changes 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 at least once a month using multiple scenarios that assume credit spreads widen significantly, equity prices decline and interest rates rise in the major currencies. Additional scenarios focus on the risks predominant in individual business segments and include scenarios that focus on the potential for adverse moves in complex portfolios. Periodically, scenarios are reviewed and updated to reflect changes in the Firm’s risk profile and economic events. Along with VAR, stress testing is important in measuring and controlling risk. Stress testing enhances the understanding of the Firm’s risk profile and loss potential, and stress losses are monitored against limits. Stress testing is also utilized in one-off approvals and cross-business risk measurement, as well as an input to economic capital allocation. Stress-test results, trends and explanations are provided each month to the Firm’s senior management and to the lines of business to help them better measure and manage risks and to understand event risk-sensitive positions.
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. 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.

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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 pretax earnings sensitivity profiles as of March 31, 2007, and December 31, 2006, were as follows.
                                 
    Immediate change in rates  
(in millions)   +200bp     +100bp     -100bp     -200bp  
 
March 31, 2007
  $ (294 )   $ (87 )   $ (58 )   $ (227 )
December 31, 2006
    (101 )     28       (21 )     (182 )
 
The primary change in earnings-at-risk from December 31, 2006, reflects a higher level of AFS securities and other positioning. The Firm is exposed to both rising and falling rates. The Firm’s risk to rising rates is largely the result of increased funding costs. In contrast, the exposure to falling rates is the result of higher anticipated levels of loan and securities prepayments.
 
PRIVATE EQUITY RISK MANAGEMENT
 
For a discussion of Private Equity Risk Management, see page 81 of JPMorgan Chase’s 2006 Annual Report. At March 31, 2007, the carrying value of the Private Equity portfolio was $6.4 billion, of which $389 million represented positions traded in the public markets.
 
OPERATIONAL RISK MANAGEMENT
 
For a discussion of JPMorgan Chase’s operational risk management, refer to page 81 of JPMorgan Chase’s 2006 Annual Report.
 
REPUTATION AND FIDUCIARY RISK MANAGEMENT
 
For a discussion of the Firm’s Reputation and Fiduciary Risk Management, see page 82 of JPMorgan Chase’s 2006 Annual Report.
 
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 2006 Annual Report.
Dividends
At March 31, 2007, JPMorgan Chase’s bank subsidiaries could pay, in the aggregate, $15.3 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.
Allowance for credit losses
JPMorgan Chase’s allowance for credit losses covers the retained 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 13 on pages 113–114 of JPMorgan Chase’s 2006 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 83 of JPMorgan Chase’s 2006 Annual Report; for amounts recorded as of March 31, 2007 and 2006, see allowance for credit losses on page 59 and Note 14 on page 90 of this Form 10-Q.
As noted on page 83 of the JPMorgan Chase’s 2006 Annual Report, the Firm’s wholesale allowance is sensitive to the risk rating assigned to a loan. Assuming a one-notch downgrade in the Firm’s internal risk ratings for its entire Wholesale portfolio, the Allowance for loan losses for the Wholesale portfolio would increase by approximately $1.2 billion as of March 31, 2007. This sensitivity analysis is hypothetical. In the Firm’s view, the likelihood of a one-notch downgrade for all wholesale loans within a short timeframe is remote. The purpose of this analysis is to provide an indication of the impact of risk ratings on the estimate of the allowance for loan losses for wholesale loans. It is not intended to imply management’s expectation of future deterioration in risk ratings. Given the process the Firm follows in determining the risk ratings of its loans, management believes the risk ratings currently assigned to wholesale loans are appropriate.
Fair value of financial instruments, MSRs and commodities inventory
A portion of JPMorgan Chase’s assets and liabilities are carried at fair value, including trading assets and liabilities, AFS securities, Private equity investments, MSRs, structured liabilities and certain loans. Certain held-for-sale loans and physical commodities are carried at the lower of cost or fair value. At March 31, 2007, $564.4 billion of the Firm’s assets and $219.4 billion of liabilities were recorded at fair value.
On January 1, 2007, the Firm chose early adoption of SFAS 157 and SFAS 159. For further information, see Accounting and Reporting Developments on page 65, and Notes 3 and 4 on pages 71–80 of this Form 10-Q.
Goodwill impairment
For a description of the significant valuation judgments associated with goodwill impairment, see Goodwill impairment on page 85 of JPMorgan Chase’s 2006 Annual Report .

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ACCOUNTING AND REPORTING DEVELOPMENTS
 
Accounting for uncertainty in income taxes
In July 2006, the FASB issued FIN 48, which clarifies the accounting for uncertainty in income taxes recognized under SFAS 109. FIN 48 addresses the recognition and measurement of tax positions taken or expected to be taken, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, and disclosure. The Firm adopted and applied FIN 48 under the transition provisions to all of its income tax positions at the required effective date of January 1, 2007, resulting in a $436 million cumulative effect increase to Retained earnings, a reduction in Goodwill of $113 million and a $549 million decrease in the liability for income taxes. For additional information related to the Firm’s adoption of FIN 48, see Note 20 on page 100 of this Form 10-Q.
Changes in timing of cash flows related to income taxes generated by a leveraged lease
In July 2006, the FASB issued FSP FAS 13-2. FSP FAS 13-2 requires the recalculation of returns on leveraged leases if there is a change or projected change in the timing of cash flows relating to income taxes generated by a leveraged lease. The Firm adopted FSP FAS 13-2 at the required effective date of January 1, 2007. Implementation of FSP FAS 13-2 did not have a significant impact on the Firm’s financial position and results of operations.
Fair value measurements – adoption of SFAS 157
In September 2006, the FASB issued SFAS 157, which is effective for fiscal years beginning after November 15, 2007, with early adoption permitted. SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about assets and liabilities measured at fair value. The new standard provides a consistent definition of fair value which focuses on exit price and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. The standard also establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. SFAS 157 nullifies the guidance in EITF 02-3 which required deferral of profit at inception of a derivative transaction in the absence of observable data supporting the valuation technique. The standard also eliminates large position discounts for financial instruments quoted in active markets and requires consideration of JPMorgan Chase’s own credit quality when valuing liabilities.
JPMorgan Chase chose early adoption for SFAS 157 effective January 1, 2007, and recorded a cumulative effect increase to Retained earnings of $287 million primarily related to the release of profit previously deferred in accordance with EITF 02-3. In order to determine the amount of this transition adjustment and to confirm that JPMorgan Chase’s valuation policies are consistent with exit price as prescribed by SFAS 157, JPMorgan Chase reviewed its derivative valuations using all available evidence including recent transactions in the marketplace, indicative pricing services and the results of back-testing similar types of transactions. In addition, as a result of the adoption of SFAS 157, JPMorgan Chase recognized $391 million of additional Net income in the 2007 first quarter, comprised of a $103 million benefit relating to the incorporation of an adjustment to the valuation of JPMorgan Chase’s derivative liabilities and other liabilities measured at fair value that reflects the credit quality of JPMorgan Chase, and a $288 million benefit relating to the valuation of nonpublic private equity investments. The adoption of SFAS 157 primarily affected the IB and the Private Equity business within Corporate. For additional information related to the Firm’s adoption of SFAS 157, see Note 3 on page 71–77 of this Form 10-Q.
Fair value option for financial assets and financial liabilities – adoption of SFAS 159
In February 2007, the FASB issued SFAS 159, which is effective for fiscal years beginning after November 15, 2007, with early adoption permitted. SFAS 159 provides the option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments, and written loan commitments. Under SFAS 159, fair value is used for both the initial and subsequent measurement of the designated assets, liabilities and commitments, with the changes in fair value recognized in Net income. JPMorgan Chase chose early adoption for SFAS 159 effective January 1, 2007, and as a result, recorded a cumulative effect increase to Retained earnings of $199 million. For additional information related to the Firm’s adoption of SFAS 159, see Note 4 on page 77–80 of this Form 10-Q.

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JPMORGAN CHASE & CO.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
                 
Three months ended March 31,            
(in millions, except per share data)   2007     2006  
 
Revenue
               
Investment banking fees
  $ 1,739     $ 1,169  
Principal transactions
    4,471       2,709  
Lending & deposit related fees
    895       841  
Asset management, administration and commissions
    3,186       2,874  
Securities gains (losses)
    2       (116 )
Mortgage fees and related income
    476       241  
Credit card income
    1,563       1,910  
Other income
    518       554  
 
Noninterest revenue
    12,850       10,182  
 
 
               
Interest income
    16,636       13,236  
Interest expense
    10,518       8,243  
 
Net interest income
    6,118       4,993  
 
Total net revenue
    18,968       15,175  
 
 
               
Provision for credit losses
    1,008       831  
 
               
Noninterest expense
               
Compensation expense
    6,234       5,548  
Occupancy expense
    640       594  
Technology, communications and equipment expense
    922       869  
Professional & outside services
    1,200       1,008  
Marketing
    482       519  
Other expense
    735       816  
Amortization of intangibles
    353       355  
Merger costs
    62       71  
 
Total noninterest expense
    10,628       9,780  
 
 
               
Income from continuing operations before income tax expense
    7,332       4,564  
Income tax expense
    2,545       1,537  
 
Income from continuing operations
    4,787       3,027  
Income from discontinued operations
          54  
 
Net income
  $ 4,787     $ 3,081  
 
Net income applicable to common stock
  $ 4,787     $ 3,077  
 
 
               
Per common share data
               
Basic earnings per share
               
Income from continuing operations
  $ 1.38     $ 0.87  
Net income
    1.38       0.89  
 
               
Diluted earnings per share
               
Income from continuing operations
  $ 1.34     $ 0.85  
Net income
    1.34       0.86  
 
               
Average basic shares
    3,456.4       3,472.7  
Average diluted shares
    3,559.5       3,570.8  
 
               
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)
                 
    March 31,     December 31,  
(in millions, except share data)   2007     2006  
 
Assets
               
Cash and due from banks
  $ 31,836     $ 40,412  
Deposits with banks
    30,973       13,547  
Federal funds sold and securities purchased under resale agreements (included $15,836 at fair value
at March 31, 2007)
    144,306       140,524  
Securities borrowed
    84,800       73,688  
Trading assets (included assets pledged of $93,180 at March 31, 2007, and $82,474 at December 31, 2006)
    423,331       365,738  
Securities:
               
Available-for-sale (included assets pledged of $58,269 at March 31, 2007, and $39,571 at December 31, 2006)
    96,975       91,917  
Held-to-maturity (fair value: $56 at March 31, 2007, and $60 at December 31, 2006)
    54       58  
                 
Loans (included $965 accounted for at fair value at March 31, 2007)
    449,765       483,127  
Allowance for loan losses
    (7,300 )     (7,279 )
 
Loans, net of Allowance for loan losses
    442,465       475,848  
 
               
Private equity investments (included $6,701 at fair value at March 31, 2007)
    6,788       6,359  
Accrued interest and accounts receivable
    23,663       22,891  
Premises and equipment
    8,728       8,735  
Goodwill
    45,063       45,186  
Other intangible assets:
               
Mortgage servicing rights
    7,937       7,546  
Purchased credit card relationships
    2,758       2,935  
All other intangibles
    4,205       4,371  
Other assets (included $12,675 at fair value at March 31, 2007)
    55,036       51,765  
 
Total assets
  $ 1,408,918     $ 1,351,520  
 
Liabilities
               
Deposits:
               
U.S. offices:
               
Noninterest-bearing
  $ 123,942     $ 132,781  
Interest-bearing (included $1,402 at fair value at March 31, 2007)
    342,368       337,812  
Non-U.S. offices:
               
Noninterest-bearing
    8,104       7,662  
Interest-bearing (included $3,981 at fair value at March 31, 2007)
    152,014       160,533  
 
Total deposits
    626,428       638,788  
Federal funds purchased and securities sold under repurchase agreements (included $6,537
at fair value at March 31, 2007)
    218,917       162,173  
Commercial paper
    25,354       18,849  
Other borrowed funds (included $7,445 at fair value at March 31, 2007)
    19,871       18,053  
Trading liabilities
    144,625       147,957  
Accounts payable, accrued expenses and other liabilities (included the Allowance for lending-related
commitments of $553 at March 31, 2007, and $524 at December 31, 2006)
    87,603       88,096  
Beneficial interests issued by consolidated VIEs (included $2,354 at fair value at March 31, 2007)
    13,109       16,184  
Long-term debt (included $53,012 at fair value at March 31, 2007, and $25,370 at December 31, 2006)
    143,274       133,421  
Junior subordinated deferrable interest debentures held by trusts that issued guaranteed capital debt securities
    12,033       12,209  
 
Total liabilities
    1,291,214       1,235,730  
 
Commitments and contingencies (see Note 21 of this Form 10-Q)
               
Stockholders’ equity
               
Common stock ($1 par value; authorized 9,000,000,000 shares at March 31, 2007 and December 31, 2006; issued 3,657,776,566 shares and 3,657,786,282 shares at March 31, 2007, and December 31, 2006, respectively)
    3,658       3,658  
Capital surplus
    77,760       77,807  
Retained earnings
    48,105       43,600  
Accumulated other comprehensive income (loss)
    (1,482 )     (1,557 )
Treasury stock, at cost (241,485,038 shares at March 31, 2007, and 196,102,381 shares at December 31, 2006)
    (10,337 )     (7,718 )
 
Total stockholders’ equity
    117,704       115,790  
 
Total liabilities and stockholders’ equity
  $ 1,408,918     $ 1,351,520  
 
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
AND COMPREHENSIVE INCOME (UNAUDITED)
                 
Three months ended March 31,            
(in millions, except per share data)   2007     2006  
 
Preferred stock
               
Balance at beginning of the year
  $     $ 139  
Redemption of preferred stock
          (139 )
 
Balance at end of period
           
 
                 
Common stock
               
Balance at beginning of year
    3,658       3,618  
Issuance of common stock
          27  
 
Balance at end of period
    3,658       3,645  
 
                 
Capital surplus
               
Balance at beginning of year
    77,807       74,994  
Shares issued and commitments to issue common stock for employee
stock-based compensation awards and related tax effects
    (47 )     1,159  
 
Balance at end of period
    77,760       76,153  
 
                 
Retained earnings
               
Balance at beginning of year
    43,600       33,848  
Cumulative effect of change in accounting principles
    915       172  
 
Balance at beginning of year, adjusted
    44,515       34,020  
Net income
    4,787       3,081  
Cash dividends declared:
               
Preferred stock
          (4 )
Common stock ($0.34 per share each period)
    (1,197 )     (1,205 )
 
Balance at end of period
    48,105       35,892  
 
                 
Accumulated other comprehensive income (loss)
               
Balance at beginning of year
    (1,557 )     (626 )
Cumulative effect of change in accounting principles
    (1 )      
 
Balance at beginning of year, adjusted
    (1,558 )     (626 )
Other comprehensive income (loss)
    76       (391 )
 
Balance at end of period
    (1,482 )     (1,017 )
 
                 
Treasury stock, at cost
               
Balance at beginning of year
    (7,718 )     (4,762 )
Purchase of treasury stock
    (4,002 )     (1,291 )
Reissuance from treasury stock
    1,512        
Share repurchases related to employee stock-based compensation awards
    (129 )     (283 )
 
Balance at end of period
    (10,337 )     (6,336 )
 
Total stockholders’ equity
  $ 117,704     $ 108,337  
 
                 
Comprehensive income
               
Net income
  $ 4,787     $ 3,081  
Other comprehensive income (loss)
    76       (391 )
 
Comprehensive income
  $ 4,863     $ 2,690  
 
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)
                 
Three months ended March 31,            
(in millions)   2007     2006  
 
Operating activities
               
Net income
  $ 4,787     $ 3,081  
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
               
Provision for credit losses
    1,008       831  
Depreciation and amortization
    523       482  
Amortization of intangibles
    353       355  
Deferred tax expense
    1,054       554  
Investment securities (gains) losses
    (2 )     116  
Private equity unrealized gains
    (650 )     (84 )
Stock-based compensation
    511       839  
Originations and purchases of loans held-for-sale
    (29,250 )     (26,733 )
Proceeds from sales and securitizations of loans held-for-sale
    31,090       25,760  
Net change in:
               
Trading assets
    (42,056 )     (9,330 )
Securities borrowed
    (11,112 )     (18,676 )
Accrued interest and accounts receivable
    (772 )     848  
Other assets
    (3,912 )     (2,459 )
Trading liabilities
    (3,070 )     11,383  
Accounts payable, accrued expenses and other liabilities
    (181 )     (6,330 )
Other operating adjustments
    161       222  
 
Net cash used in operating activities
    (51,518 )     (19,141 )
 
Investing activities
               
Net change in:
               
Deposits with banks
    (17,426 )     11,405  
Federal funds sold and securities purchased under resale agreements
    (3,803 )     (19,774 )
Held-to-maturity securities:
               
Proceeds
    4       5  
Available-for-sale securities:
               
Proceeds from maturities
    7,791       6,456  
Proceeds from sales
    14,829       30,369  
Purchases
    (28,038 )     (56,931 )
Proceeds from sales and securitization of loans held-for-investment
    14,195       7,537  
Other changes in loans, net
    1,649       (13,778 )
Net cash used in business acquisitions
          (663 )
All other investing activities, net
    (1,047 )     873  
 
Net cash used in investing activities
    (11,846 )     (34,501 )
 
Financing activities
               
Net change in:
               
Deposits
    (14,612 )     25,483  
Federal funds purchased and securities sold under repurchase agreements
    56,764       25,081  
Commercial paper and other borrowed funds
    8,319       943  
Proceeds from the issuance of long-term debt and trust preferred capital debt securities
    23,231       12,354  
Repayments of long-term debt and trust preferred capital debt securities
    (14,880 )     (9,316 )
Net proceeds from the issuance of stock and stock-related awards
    658       393  
Excess tax benefits related to stock-based compensation
    216       135  
Redemption of preferred stock
          (139 )
Treasury stock purchased
    (4,002 )     (1,291 )
Cash dividends paid
    (1,207 )     (1,215 )
All other financing activities, net
    256       1,393  
 
Net cash provided by financing activities
    54,743       53,821  
 
Effect of exchange rate changes on cash and due from banks
    45       54  
Net (decrease) increase in cash and due from banks
    (8,576 )     233  
Cash and due from banks at the beginning of the year
    40,412       36,670  
 
Cash and due from banks at the end of the period
  $ 31,836     $ 36,903  
 
Cash interest paid
  $ 10,699     $ 8,395  
Cash income taxes paid
    1,596       234  
 
The Notes to consolidated financial statements (unaudited) are an integral part of these statements.

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See Glossary of Terms on pages 107–109 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, asset management and private equity. For a discussion of the Firm’s business segment information, see Note 25 on pages 103–105 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”). 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 and related notes thereto included in JPMorgan Chase’s Annual Report on Form 10-K for the year ended December 31, 2006, as amended by the Form 8-K filed on May 10, 2007 (the “2006 Annual Report”).
Certain amounts in the prior periods have been reclassified to conform to the current presentation.
Consolidation
The consolidated financial statements include the accounts of JPMorgan Chase and other entities in which the Firm has a controlling financial interest. All material intercompany balances and transactions have been eliminated.
The most usual condition for a controlling financial interest is the ownership of a majority of the voting interests of the entity. However, a controlling financial interest also may be deemed to exist with respect to entities, such as special purpose entities (“SPEs”), through arrangements that do not involve controlling voting interests.
SPEs are an important part of the financial markets, providing market liquidity by facilitating investors’ access to specific portfolios of assets and risks. For example, they are critical to the functioning of the mortgage- and asset-backed securities and commercial paper markets. SPEs may be organized as trusts, partnerships or corporations and are typically set up for a single, discrete purpose. SPEs are not typically operating entities and usually have a limited life and no employees. The basic SPE structure involves a company selling assets to the SPE. The SPE funds the purchase of those assets by issuing securities to investors. The legal documents that govern the transaction describe how the cash earned on the assets must be allocated to the SPE’s investors and other parties that have rights to those cash flows. SPEs can be structured to be bankruptcy-remote, thereby insulating investors from the impact of the creditors of other entities, including the seller of the assets.
There are two different accounting frameworks applicable to SPEs: the qualifying SPE (“QSPE”) framework under SFAS 140; and the variable interest entity (“VIE”) framework under FIN 46R. The applicable framework depends on the nature of the entity and the Firm’s relation to that entity. The QSPE framework is applicable when an entity transfers (sells) financial assets to an SPE meeting certain criteria defined in SFAS 140. These criteria are designed to ensure that the activities of the entity are essentially predetermined at the inception of the vehicle and that the transferor of the financial assets cannot exercise control over the entity and the assets therein. Entities meeting these criteria are not consolidated by the transferor or other counterparties as long as they do not have the unilateral ability to liquidate or to cause the entity no longer to meet the QSPE criteria. The Firm primarily follows the QSPE model for securitizations of its residential and commercial mortgages, credit card loans and automobile loans. For further details, see Not