FORM 10-Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10–Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
     
For the Quarterly Period Ended September 30, 2006
  Commission file number 1-5805
JPMORGAN CHASE & CO.
(Exact name of registrant as specified in its charter)
     
Delaware   13-2624428
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   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 October 31, 2006: 3,468,957,731
 

 


 

FORM 10–Q
TABLE OF CONTENTS
             
          Page  
   
 
       
Part I – Financial information        
   
 
       
Item 1  
Consolidated Financial Statements – JPMorgan Chase & Co.:
       
   
 
       
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Item 2  
Management’s Discussion and Analysis of Financial Condition and Results of Operations:
       
   
 
       
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Item 3       105  
   
 
       
Item 4       105  
   
 
       
Part II – Other information        
   
 
       
Item 1       105  
   
 
       
Item 1A       106  
   
 
       
Item 2       106  
   
 
       
Item 3       107  
   
 
       
Item 4       107  
   
 
       
Item 5       107  
   
 
       
Item 6       107  
 EX-31.1: CERTIFICATION
 EX-31.2: CERTIFICATION
 EX-32: CERTIFICATIONS
 

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JPMORGAN CHASE & CO.
CONSOLIDATED FINANCIAL HIGHLIGHTS
                                                         
(unaudited)      
(in millions, except per share, headcount and ratio data)   Nine months ended September 30,
As of or for the period ended   3Q06     2Q06     1Q06     4Q05     3Q05     2006     2005  
 
Selected income statement data
                                                       
Noninterest revenue
  $ 10,021     $ 9,762     $ 10,050     $ 8,804     $ 9,482     $ 29,833     $ 25,389  
Net interest income
    5,379       5,178       4,993       4,678       4,783       15,550       14,877  
 
Total net revenue
    15,400       14,940       15,043       13,482       14,265       45,383       40,266  
Provision for credit losses
    812       493       831       1,224       1,245       2,136       2,259  
Noninterest expense
    9,651       9,236       9,648       8,430       9,359       28,535       29,996  
 
Income from continuing operations before income tax expense
    4,937       5,211       4,564       3,828       3,661       14,712       8,011  
Income tax expense
    1,705       1,727       1,537       1,186       1,192       4,969       2,399  
 
Income from continuing operations (after-tax)
    3,232       3,484       3,027       2,642       2,469       9,743       5,612  
Income from discontinued operations (after-tax)(a)
    65       56       54       56       58       175       173  
 
Net income
  $ 3,297     $ 3,540     $ 3,081     $ 2,698     $ 2,527     $ 9,918     $ 5,785  
 
 
                                                       
Per common share
                                                       
Basic earnings per share
                                                       
Income from continuing operations
  $ 0.93     $ 1.00     $ 0.87     $ 0.76     $ 0.71     $ 2.81     $ 1.60  
Net income
    0.95       1.02       0.89       0.78       0.72       2.86       1.65  
 
                                                       
Diluted earnings per share
                                                       
Income from continuing operations
  $ 0.90     $ 0.98     $ 0.85     $ 0.74     $ 0.70     $ 2.73     $ 1.58  
Net income
    0.92       0.99       0.86       0.76       0.71       2.78       1.62  
Cash dividends declared per share
    0.34       0.34       0.34       0.34       0.34       1.02       1.02  
Book value per share
    32.75       31.89       31.19       30.71       30.26       32.75       30.26  
 
                                                       
Common shares outstanding
                                                       
Average: Basic
    3,469       3,474       3,473       3,472       3,485       3,472       3,498  
Diluted
    3,574       3,572       3,571       3,564       3,548       3,572       3,555  
Common shares at period-end
    3,468       3,471       3,473       3,487       3,503                  
 
                                                       
Selected ratios
                                                       
Return on common equity (“ROE”)(b)
    12 %     13 %     12 %     10 %     9 %     12 %     7 %
Return on assets (“ROA”)(b)(c)
    1.00       1.06       1.00       0.89       0.84       1.02       0.66  
Tier 1 capital ratio
    8.6       8.5       8.5       8.5       8.2                  
Total capital ratio
    12.1       12.0       12.1       12.0       11.3                  
Tier 1 leverage ratio
    6.3       5.8       6.1       6.3       6.2                  
 
                                                       
Selected balance sheet data (period-end)
                                                       
Total assets
  $ 1,338,029     $ 1,328,001     $ 1,273,282     $ 1,198,942     $ 1,203,033                  
Securities
    86,548       78,022       67,126       47,600       68,697                  
Loans
    463,544       455,104       432,081       419,148       420,504                  
Deposits(d)
    582,115       593,716       584,465       554,991       535,123                  
Long-term debt
    126,619       125,280       112,133       108,357       101,853                  
Common stockholders’ equity
    113,561       110,684       108,337       107,072       105,996                  
Total stockholders’ equity
    113,561       110,684       108,337       107,211       106,135                  
 
                                                       
Credit quality metrics
                                                       
Allowance for credit losses
  $ 7,524     $ 7,500     $ 7,659     $ 7,490     $ 7,615     $ 7,524     $ 7,615  
Nonperforming assets(e)
    2,300       2,384       2,348       2,590       2,839       2,300       2,839  
Allowance for loan losses to total loans(f)
    1.65 %     1.69 %     1.83 %     1.84 %     1.86 %     1.65 %     1.86 %
Net charge-offs
  $ 790     $ 654     $ 668     $ 1,360     $ 870     $ 2,112     $ 2,459  
Net charge-off rate(b)(f)
    0.74 %     0.64 %     0.69 %     1.39 %     0.89 %     0.69 %     0.87 %
Wholesale net charge-off (recovery) rate(b)(f)
    (0.03 )     (0.05 )     (0.06 )     0.07       (0.12 )     (0.04 )     (0.10 )
Managed card net charge-off rate(b)
    3.58       3.28       2.99       6.39       4.70       3.29       4.80  
 
                                                       
Headcount
    171,589       172,423       170,787       168,847       168,955                  
 
                                                       
Share price(g)
                                                       
High
  $ 47.49     $ 46.80     $ 42.43     $ 40.56     $ 35.95     $ 47.49     $ 39.69  
Low
    40.40       39.33       37.88       32.92       33.31       37.88       33.31  
Close
    46.96       42.00       41.64       39.69       33.93       46.96       33.93  
 
(a)  
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, small-business and middle-market banking businesses of The Bank of New York. The results of operations of these corporate trust businesses are being reported as discontinued operations for each of the periods presented.
 
(b)  
Based upon annualized amounts.
 
(c)  
 Represents Net income divided by Total average assets.
 
(d)  
Excludes deposits of $24.0 billion and $26.5 billion at September 30, 2006 and June 30, 2006, respectively, which have been reclassified to Liabilities of discontinued operations held-for-sale.
 
(e)  
Excludes 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 excluded from the net charge-off rates were average loans held-for-sale.
 
(g)  
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.

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 10-Q provides management’s discussion and analysis (“MD&A”) of the financial condition and results of operations for JPMorgan Chase & Co. See the Glossary of terms on pages 100–102 for definitions of terms used throughout this Form 10-Q. The MD&A included in this Form 10-Q contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based upon the current beliefs and expectations of JPMorgan Chase’s management and are subject to significant risks and uncertainties. These risks and uncertainties could cause JPMorgan Chase’s results to differ materially from those set forth in such forward-looking statements. See Forward-looking statements on page 104 and Part II, Item 1A: Risk Factors on page 106, of this Form 10-Q.
References to the “2005 Annual Report” in this Form 10-Q are to the Firm’s Annual Report on Form 10–K for the year ended December 31, 2005, as amended by the Form 10-K/A filed on August 3, 2006, and as further amended by the Form 8-K filed on September 18, 2006.
INTRODUCTION
JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”), a financial holding company incorporated under Delaware law in 1968, is a leading global financial services firm and one of the largest banking institutions in the United States, with $1.3 trillion in assets, $114 billion in stockholders’ equity and operations worldwide. The Firm is a leader in investment banking, financial services for consumers and businesses, financial transaction processing, asset and wealth management and private equity. Under the JPMorgan and Chase brands, the Firm serves millions of customers in the United States and many of the world’s most prominent corporate, institutional and government clients.
JPMorgan Chase’s principal bank subsidiaries are JPMorgan Chase Bank, National Association (“JPMorgan Chase Bank”), a national banking association with branches in 17 states; and Chase Bank USA, National Association, a national bank that is the Firm’s credit card issuing bank. JPMorgan Chase’s principal nonbank subsidiary is J.P. Morgan Securities Inc. (“JPMSI”), the Firm’s U.S. investment banking firm.
JPMorgan Chase’s activities are organized, for management reporting purposes, into six business segments, as well as Corporate. The Firm’s wholesale businesses comprise the Investment Bank, Commercial Banking, Treasury & Securities Services and Asset & Wealth Management segments. The Firm’s consumer businesses comprise the Retail Financial Services and Card Services segments. A description of the Firm’s business segments, and the products and services they provide to their respective client bases, follows.
Investment Bank
JPMorgan Chase is one of the world’s leading investment banks, as evidenced by the breadth of the Investment Bank (“IB”) client relationships and product capabilities. The IB has extensive relationships with corporations, financial institutions, governments and institutional investors worldwide. The Firm provides a full range of investment banking products and services in all major capital markets, including advising on corporate strategy and structure, capital raising in equity and debt markets, sophisticated risk management, and market-making in cash securities and derivative instruments. The IB also commits the Firm’s own capital to proprietary investing and trading activities.
Retail Financial Services
Retail Financial Services (“RFS”) realigned its business reporting segments on January 1, 2006, into Regional Banking, Mortgage Banking and Auto Finance. On October 1, 2006, JPMorgan Chase acquired The Bank of New York Company, Inc.’s (“The Bank of New York”) consumer banking business, expanding the Regional Banking branch network, which is one of the largest in the United States, to include 3,016 branches and 8,240 automated teller machines (“ATMs”) covering 17 states. Regional Banking distributes, through its network, a variety of products including checking, savings and time deposit accounts; home equity, residential mortgage, small business banking and education loans; mutual fund and annuity investments; and on-line banking services. Mortgage Banking is a leading provider of mortgage loan products and is one of the largest originators and servicers of home mortgages. Auto Finance is one of the largest noncaptive originators of automobile loans, primarily through a network of automotive dealers across the United States.
Card Services
Card Services (“CS”) is one of the largest issuers of credit cards in the United States, with more than 139 million cards in circulation. CS offers a wide variety of general purpose and private label cards to satisfy the needs of individual consumers, small businesses and partner organizations. The Chase Paymentech Solutions, LLC joint venture is the largest processor of MasterCard® and Visa® payments in the world.

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Commercial Banking
Commercial Banking (“CB”) has more than 25,000 clients, including corporations, municipalities, financial institutions and not-for-profit entities, with annual revenues generally ranging from $10 million to $2 billion. While most Middle Market clients are located within the RFS footprint, CB also serves larger corporations, as well as local governments and financial institutions, on a national basis. CB serves its clients through its local market presence, offering industry expertise, a dedicated client service team and risk management capabilities. Partnerships with other JPMorgan Chase businesses position CB to deliver broad product capabilities – including lending, treasury services, investment banking, and asset and wealth management – in order to meet its clients’ financial needs. The October 1, 2006, acquisition of The Bank of New York’s middle-market banking business added approximately 2,000 clients, $2.5 billion of loans and $1.3 billion in deposits.
Treasury & Securities Services
Treasury & Securities Services (“TSS”) is a global leader in providing transaction, investment and information services to support the needs of corporations, issuers and institutional investors worldwide. TSS is one of the largest cash management providers in the world and a leading global custodian. The Treasury Services (“TS”) business provides a variety of cash management products, trade finance and logistics solutions, wholesale card products, and short-term liquidity management tools. TS partners with the CB, Regional Banking and Asset & Wealth Management businesses to serve clients firmwide. As a result, certain TS revenues are included in other segments’ results. The Worldwide Securities Services (“WSS”) business provides safekeeping, valuing, clearing and servicing of securities and portfolios for investors and broker-dealers and management of American Depositary Receipts (“ADRs”) programs. 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, small-business and middle-market banking businesses of The Bank of New York. These corporate trust businesses, which were previously reported in TSS, have been deemed discontinued operations. The related balance sheet, income statement and assets under custody activity have been transferred to the Corporate segment for all periods presented.
Asset & Wealth Management
Asset & Wealth Management (“AWM”) provides investment advice and management for institutions and individuals. With $1.3 trillion of Assets under supervision, AWM is one of the largest asset and wealth managers in the world. AWM serves four distinct client groups through three businesses: institutions through JPMorgan Asset Management; ultra-high-net-worth clients through the Private Bank; high-net-worth clients through Private Client Services; and retail clients through JPMorgan Asset Management. The majority of AWM’s client assets are in actively managed portfolios. AWM has global investment expertise in equities, fixed income, real estate, hedge funds, private equity and liquidity, including both money market instruments and bank deposits. AWM also provides trust and estate services to ultra-high-net-worth and high-net-worth clients and retirement services for corporations and individuals.
OTHER BUSINESS EVENTS
Acquisition of the consumer, small-business and middle-market banking businesses of The Bank of New York in exchange for selected corporate trust businesses, including trustee, paying agent, loan agency and document management services
On October 1, 2006, JPMorgan Chase completed the acquisition of The Bank of New York’s consumer, small-business and middle-market banking businesses in exchange for selected corporate trust businesses plus a cash payment of $150 million. The Bank of New York businesses acquired were valued at a premium of $2.30 billion; the Firm’s corporate trust businesses that were transferred (i.e., trustee, paying agent, loan agency and document management services) were valued at a premium of $2.15 billion. The Firm also may make a future payment to The Bank of New York of up to $50 million depending on certain new account openings. Reflected in the Firm’s fourth quarter 2006 earnings will be an after-tax gain of approximately $650 million relating to this transaction.
Sale of insurance underwriting business
On July 3, 2006, JPMorgan Chase completed the sale of its life insurance and annuity underwriting businesses to Protective Life Corporation for cash proceeds of approximately $1.2 billion that was comprised of $900 million of cash received from Protective Life Corporation and approximately $300 million of pre-closing dividends from the sold entities. The after-tax impact of this transaction was negligible. The sale included both the heritage Chase insurance business and the insurance business that Bank One had bought from Zurich Insurance in 2003.

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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. In the discussion below, information is presented on a managed basis. For more information about managed basis, see Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures on pages 12–15 of this Form 10-Q.
Business overview
The Firm reported 2006 third-quarter net income of $3.3 billion, or $0.92 per share, compared with net income of $2.5 billion, or $0.71 per share, for the third quarter of 2005. Return on common equity for the quarter was 12% compared with 9% in the prior year. The comparison with the prior year benefited from the absence of a special provision for credit losses related to Hurricane Katrina of $248 million after-tax, or $0.07 per share. Results for the current quarter included $30 million of merger charges after-tax, or $0.01 per share, compared with $137 million, or $0.04 per share, in the third quarter of 2005.
Net income for the first nine months of 2006 was $9.9 billion, or $2.78 per share, compared with $5.8 billion, or $1.62 per share, in the prior year. Return on common equity was 12% for the first nine months of 2006 compared with 7% for the prior-year period. Current year-to-date results included insurance recoveries related to certain material litigation of $233 million after-tax, or $0.07 per share, incremental expense of $415 million after-tax, or $0.11 per share, related to the adoption of SFAS 123R; and merger costs of $127 million after-tax, or $0.03 per share. Prior-year results included a litigation reserve charge of $1.7 billion after-tax, or $0.48 per share, a special provision for credit losses related to Hurricane Katrina of $248 million after-tax, or $0.07 per share, and merger costs of $400 million after-tax, or $0.11 per share.
During the quarter, the Firm completed the Tri-State consumer conversion, which linked the Firm’s more than 2,600 branches in 17 states on a common systems platform. In addition, 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, small-business and middle-market banking businesses of The Bank of New York, adding $13 billion in deposits, $7.9 billion in loans, 339 branches and more than 400 ATMs.
Global economic and market conditions affected the performance of each of the Firm’s businesses. In the third quarter of 2006, the global economy continued to expand at a strong pace with some variance by region. The European economy continued to grow at a solid pace while growth in Asia and Japan slowed. The U.S. economy continued to slow, and was led by a decline in home construction. The Federal Reserve, after two years of raising interest rates, held the benchmark federal funds rate at 5.25%, anticipating slower U.S. economic growth and lower inflation. The yield curve inverted further, with long-term interest rates falling below the federal funds rate. Global equity markets benefited from the continuing economic expansion with market indices higher versus the prior year, but relatively flat compared with the prior quarter.
The discussion that follows highlights the performance of each business segment during the third quarter of 2006 with the comparable period in the prior year, unless otherwise noted.
Investment Bank net income was driven by record third-quarter revenue. Compared with the prior year, net income decreased as higher compensation expense and an increased provision for credit losses were offset largely by higher revenue. Revenue benefited from continued investments in key business initiatives, increased market share and global capital markets activity. Investment banking fees were at a record level, benefiting from record debt underwriting fees and strong advisory fees. Fixed Income Markets were down slightly from the prior year’s record level. Equity Markets results were also lower from a strong prior-year quarter. The provision for credit losses increased from the prior year’s benefit reflecting portfolio activity and stable credit quality. The increase in expense was due primarily to higher performance-based compensation including the impact of a higher ratio of compensation expense to revenue, and incremental expense related to SFAS 123R.
Retail Financial Services net income increased from the prior year, benefiting from a lower provision for credit losses and improved performance in Regional Banking and Auto Finance, partially offset by lower results in Mortgage Banking. Revenue was down slightly reflecting lower results in Mortgage Banking; the sale of the insurance business; narrower spreads on loans; and narrower spreads on deposits caused by a shift in the deposit mix reflecting the current interest rate and competitive environments. These factors were offset partially by increases in deposit and loan and lease balances, as well as higher fee income in Regional Banking. Also benefiting revenue this quarter was the absence of a prior-year net loss in Auto Finance associated with the transfer of $1.5 billion of loans to held-for-sale and the acquisition of Collegiate Funding Services. The provision for credit losses declined due to the absence of a special provision in the prior year for Hurricane Katrina. Expense decreased due to the sale of the insurance business and merger-related and other operating efficiencies, partially offset by ongoing investment in retail distribution, the acquisition of Collegiate Funding Services and higher depreciation expense on owned automobiles subject to operating leases. Continuing investment in the retail distribution network and the overall strength of the U.S. economy contributed to increases in the number of checking accounts, and average deposit and loan balances, as well as to improved cross-selling of credit cards and mortgages.

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Card Services net income increased primarily due to lower credit losses benefiting from a significantly lower level of bankruptcy filings. The current interest rate and competitive environments have contributed to a decrease in managed revenue (excluding the impact of the deconsolidation of Paymentech). Additional factors negatively affecting revenue were: attrition of higher spread balances as a result of higher payment rates; the higher cost of funds on balance growth in promotional, introductory, and transactor loan balances; and higher volume-driven payments to partners. These decreases were offset partially by an increase in average managed loan balances, which benefited from recent portfolio acquisitions, and higher interchange income resulting from higher charge volume. The provision for credit losses benefited from lower bankruptcy-related losses, strong underlying credit quality and the absence, when compared to the prior year, of a special provision related to Hurricane Katrina. Total noninterest expense (excluding the impact of the deconsolidation of Paymentech) increased driven by recent acquisitions and higher marketing spending, partially offset by benefits from merger savings.
Commercial Banking net income was down, primarily due to a higher provision for credit losses. Revenue increased due to higher liability balances and loan volumes, reflecting increased sales efforts and U.S. economic growth. This benefit was offset largely by narrower loan spreads and a shift to lower-margin liability products. The increase in the provision for credit losses reflected growth in the loan portfolio and stable credit quality. Expense increased due largely to higher compensation expense and increased expense related to higher client usage of Treasury Services products.
Treasury & Securities Services net income was up from the prior year benefiting primarily from higher revenue. Revenue growth reflected wider spreads on higher average liability balances, business growth, increased product usage by clients and an increase in assets under custody, all of which benefited from global economic growth and capital markets activity. The increase in expense was due to increased client activity, business growth and investment in new product platforms.
Asset & Wealth Management generated strong net income growth compared with the prior year. Revenue growth was driven by increased assets under management, driven by strong net asset inflows and strength in global equity markets, and higher performance fees. Provision for credit losses was a benefit, reflecting a higher level of recoveries. The increase in expense was due primarily to higher performance-based compensation.
The Corporate segment reported a significantly lower net loss (excluding the impact of discontinued operations, as discussed further below). Revenue benefited from improved Treasury net interest spread and a higher level of available-for-sale securities. These benefits were offset partially by lower private equity gains. Expense decreased due to lower merger-related costs.
During the quarter ended September 30, 2006, approximately $655 million (pretax) of merger savings were realized, which is an annualized rate of approximately $2.6 billion. Management estimates that annualized merger savings will be approximately $2.8 billion by the end of 2006. Merger costs of $48 million were expensed during the third quarter of 2006, bringing the total amount expensed since the merger announcement to $3.3 billion (including capitalized costs). Management currently expects total merger costs to be approximately $4.0 billion. The balance of the merger costs are expected to be incurred by the end of 2007.
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, small-business and middle-market banking businesses of The Bank of New York. These corporate trust businesses, which were previously reported in TSS, have been deemed discontinued operations. The related balance sheet and income statement activity is reflected in the Corporate segment for all periods presented. During the current quarter, these businesses produced $65 million in net income compared with net income of $58 million in the prior year.
Managed credit costs for the Firm were $1.4 billion compared with $2.1 billion in the prior year. The decrease was due primarily to the absence this year of a special provision of $400 million related to Hurricane Katrina and releases of allowance for credit losses in the wholesale businesses, both in the third quarter of 2005, and lower bankruptcy-related filings in CS in the third quarter of 2006. Wholesale credit costs were $35 million compared with a benefit of $99 million in the prior year. The increase reflected loan growth and portfolio activity while credit quality remained stable. Managed consumer credit costs were $1.4 billion compared with $2.2 billion in the prior year. The reduction from the prior year reflected the impact in 2005 of special provisions related to Hurricane Katrina and higher bankruptcy-related filings.
The Firm had, at September 30, 2006, total stockholders’ equity of $113.6 billion and a Tier 1 capital ratio of 8.6%. The Firm purchased $900 million, or 20 million shares, of common stock during the quarter and $2.9 billion, or 69.5 million shares, of common stock during the first nine months of 2006.

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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.
The performance of the Firm’s capital markets and wholesale businesses are affected by overall global economic growth and by financial market movements and activity levels. The Investment Bank enters the fourth quarter of 2006 with a strong fee pipeline and remains focused on continuing to build out new products and capabilities. However, results will be dependent upon market conditions in any given quarter.
In Retail Financial Services, the current interest rate and competitive environments are expected to continue in the fourth quarter, resulting in potential modest net interest margin compression. In Card Services, net interest margin and balances are also expected to experience continued pressure from the interest rate and competitive environments, as well as from high customer payment rates.
The Corporate segment includes Private Equity, Treasury, Corporate Other support units and discontinued operations. 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 believes that Treasury net interest income will approximate zero over time, but there will be volatility from quarter to quarter, and that Corporate Other, excluding one-time items, will have a net loss in the fourth quarter of 2006 that will be relatively consistent with the third-quarter 2006 level.
Overall credit quality remains stable across the wholesale and consumer portfolios. However, management does not expect the favorable credit environment to continue indefinitely and, therefore, anticipates higher credit losses over time.

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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 for prior periods have been revised to 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 67 of this Form 10-Q and pages 81–83 of the JPMorgan Chase 2005 Annual Report.
The following table presents the components of Total net revenue:
                                                 
Total net revenue   Three months ended September 30,   Nine months ended September 30,
(in millions)   2006     2005     Change     2006     2005     Change  
 
Investment banking fees
  $ 1,416     $ 989       43 %   $ 3,955     $ 2,943       34 %
Principal transactions
    2,636       2,886       (9 )     7,866       6,246       26  
Lending & deposit related fees
    867       865             2,573       2,536       1  
Asset management, administration and commissions
    2,798       2,500       12       8,580       7,286       18  
Securities gains (losses)
    40       (44 )   NM       (578 )     (796 )     27  
Mortgage fees and related income
    62       201       (69 )     516       899       (43 )
Credit card income
    1,567       1,855       (16 )     5,268       5,352       (2 )
Other income
    635       230       176       1,653       923       79  
             
Noninterest revenue
    10,021       9,482       6       29,833       25,389       18  
Net interest income
    5,379       4,783       12       15,550       14,877       5  
             
Total net revenue
  $ 15,400     $ 14,265       8 %   $ 45,383     $ 40,266       13 %
 
Total net revenue for the third quarter of 2006 was $15.4 billion, up by $1.1 billion, or 8%, from the prior year. The increase was due to record Investment banking fees, higher Other income, increased Asset management, administration, and commissions revenue, and higher Net interest income. Offsetting this growth was lower Credit card income; decreased Principal transactions revenue, partly from a decline in Private equity gains; and lower Mortgage Banking results. For the first nine months of 2006, Total net revenue was $45.4 billion, up by $5.1 billion, or 13%, from the prior year. The increase was driven primarily by the aforementioned items, except for Principal transactions, which were higher as a result of stronger trading performance.
Investment banking fees of $1.4 billion in the third quarter and $4.0 billion for the first nine months of 2006 were record levels for the Firm. The results were driven by record debt underwriting, and strong advisory and equity underwriting 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 10-Q.
Principal transactions revenue consists of realized and unrealized gains and losses from trading activities, including physical commodities inventories that are accounted for at the lower of cost or fair value, as well as Private equity gains. Trading revenue in the third quarter of 2006 declined slightly from last year’s record level. Private equity gains were lower, reflecting large realized gains recognized last year. In the first nine months of 2006, Principal transactions increased over the same period of last year due to stronger trading performance in Equities and Fixed Income, partially offset by lower private equity gains. For a further discussion of Principal transactions, see the IB and Corporate segment results on pages 17–20 and 41–43 , respectively, of this 10-Q.
Lending & deposit related fees rose slightly in comparison with the 2005 third-quarter and year-to-date periods as a result of higher fee income on deposit-related products from business growth in RFS. For a further discussion of Lending & deposit related fees, which are partly recorded in RFS, see the RFS segment results on pages 21–28 of this Form 10-Q.
The increase in Asset management, administration and commissions for the third quarter and first nine months of 2006 were due to increased assets under management and higher performance and placement fees. The growth in assets under management reflected net asset inflows in the retail segment, mainly in equity-related products, institutional flows in liquidity products, and market appreciation. Also contributing to the increase for both periods was an increase in assets under custody driven by market value appreciation and new business; and growth in ADRs, global clearing, and securities lending, which were driven by increased product usage by existing clients and new business. In addition, commissions rose due to higher brokerage transaction volume across regions, partly offset by the sale of the insurance business and BrownCo. For additional information on these fees and commissions, see the segment discussions for the IB on pages 17–20, TSS on pages 34–37 and AWM on pages 37–40, of this Form 10-Q.
The favorable variance in Securities gains (losses) for all periods primarily reflects the results of portfolio repositioning in connection with the Firm’s asset/liability management activities. 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 41–43 of this Form 10-Q.

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Mortgage fees and related income declined in comparison with the third quarter and nine months ended September 30, 2005, reflecting a reduction in the value of the MSR asset, partly offset by increased loan servicing revenue on higher third-party loans serviced. For the quarterly comparison, production revenue declined primarily resulting from lower mortgage originations; and for the year-to-date comparison, productions revenue rose as a result of wider margins. 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 26–27 of this Form 10-Q.
Credit card income decreased from the third quarter of 2005, primarily from higher volume-driven payments to partners, including Kohl’s, and increased rewards expense, partially offset by increased interchange income related to higher charge volume. On a year-to-date basis, Credit card income decreased due to the aforementioned items. These were offset partially by higher servicing fees, which benefited from lower credit losses incurred on securitized credit card loans, as well as an increase in charge volume. Credit card income also was negatively impacted by the deconsolidation of Paymentech. For a further discussion of Credit card income, see CS’s segment results on pages 28–31 of this Form 10-Q.
The increase in Other income compared with the third quarter of 2005 was due to higher equity investment income, in particular, from a merchant processing joint venture; and increased income from automobile operating leases. For the first nine months of 2006, Other income increased as a result of the aforementioned items as well as a gain of $103 million on the sale of MasterCard shares in its initial public offering.
Net interest income rose from the third quarter and first nine months of 2005 largely due to improvement in Treasury’s net interest spread, increases in consumer loans, wholesale liability balances, consumer deposits and available-for-sale securities. These increases were offset partially by narrower spreads on trading-related assets, consumer loans, including credit cards, and consumer deposits due to a shift in the deposit mix. The Firm’s total average interest-earning assets for the third quarter of 2006 were $992 billion, up 10% from the third quarter of 2005, primarily as a result of an increase in loans, available-for-sale securities and other liquid earning assets, 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 2.17%, an increase of four basis points from the prior year. The Firm’s total average interest-earning assets, for the nine months ended September 30, 2006, were $981 billion, up 10% from 2005 as a result of the aforementioned items, except that available-for-sale securities declined slightly. The net interest yield on these assets, on a fully taxable-equivalent basis, was 2.14%, a decrease of 12 basis points from the prior year. For a further discussion of Net interest income, see the Business Segment Results section on pages 15–43 of this Form 10-Q.
Provision for credit losses
The Provision for credit losses in the third quarter and first nine months of 2006 declined from the respective periods of last year, primarily due to the absence of a special provision of $400 million related to Hurricane Katrina and a decrease in CS reflecting lower bankruptcy-related losses, partly offset by higher contractual net charge offs. The wholesale provision for credit losses increased from both periods of 2005. The current year reflected stable credit quality, loan growth and portfolio activity. The prior year provision was driven by improvement in credit quality reflected in reductions in criticized exposure and nonperforming loans. The total net charge-off rate was 0.74% for the third quarter of 2006 compared with 0.89% in the prior year. The net charge-off rate for the first nine months of 2006 was 0.69% compared with 0.87% for the same period in 2005. The improvements were due primarily to lower bankruptcies in CS. For a more detailed discussion of the loan portfolio and the Allowance for loan losses, refer to Credit risk management on pages 52–63 of this Form 10-Q.
Noninterest expense
The following table presents the components of Noninterest expense:
                                                 
    Three months ended September 30,   Nine months ended September 30,
(in millions)   2006     2005     Change     2006     2005     Change  
 
Compensation expense
  $ 5,390     $ 4,954       9 %   $ 16,206     $ 13,828       17 %
Occupancy expense
    563       542       4       1,710       1,632       5  
Technology, communications and equipment expense
    911       892       2       2,656       2,698       (2 )
Professional & outside services
    966       1,001       (3 )     2,781       3,177       (12 )
Marketing
    550       512       7       1,595       1,532       4  
Other expense(a)
    877       864       2       2,324       5,360       (57 )
Amortization of intangibles
    346       373       (7 )     1,058       1,124       (6 )
Merger costs
    48       221       (78 )     205       645       (68 )
             
Total Noninterest expense
  $ 9,651     $ 9,359       3 %   $ 28,535     $ 29,996       (5 )%
 
(a)  
Includes litigation reserve charges of $2,772 million in the first nine months of 2005 related to the settlement of the Enron and WorldCom class action litigations and for certain other material legal proceedings. In the third quarter and first nine months of 2006, insurance recoveries relating to certain material litigation of $17 million and $375 million, respectively, were recorded.

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Total Noninterest expense for the third quarter of 2006 was $9.7 billion, up by $292 million, or 3%, from the prior year. Excluding in the current quarter incremental expense of $104 million related to SFAS 123R, $48 million of Merger costs, and $17 million of insurance recoveries relating to certain material litigation; and excluding from the prior year $221 million of Merger costs, Total Noninterest expense would have been up by $378 million. The increase was driven by higher performance-based compensation and acquisitions, partially offset by the deconsolidation of Paymentech and the sale of the insurance business. For the first nine months of the year, Noninterest expense of $28.5 billion declined by $1.5 billion, or 5%. Excluding in the current year-to-date, incremental expense of $669 million related to SFAS 123R, $375 million of insurance recoveries relating to certain material litigation, and $205 million of Merger costs; and excluding in the prior year-to-date period material litigation charges of $2.8 billion and $645 million of Merger costs, Total Noninterest expense would have been up by $1.5 billion. The increase was driven primarily by higher performance-based compensation, acquisitions, and investments in businesses. Partially offsetting this increase were the deconsolidation of Paymentech, the sale of the insurance business, merger-related savings and other operating efficiencies.
The increases in Compensation expense from the third quarter and first nine months of 2005 were primarily a result of higher performance-based incentives, SFAS 123R incremental expense of $104 million and $669 million for the three- and nine-months ended September 30, 2006, respectively, and additional headcount in connection with growth in business volume and investments in the businesses. These increases were partially offset by merger-related savings and other operating efficiencies throughout the Firm. For a detailed discussion of the adoption of SFAS 123R and employee stock-based incentives see Note 7 on pages 77–80 of this Form 10-Q.
The increases in Occupancy expense from the third quarter and first nine months of 2005 were due to ongoing investment in the retail distribution network, partially offset by merger-related savings and other operating efficiencies.
The increase in Technology, communications and equipment expense from the third quarter 2005 was due primarily to higher depreciation expense on owned automobiles subject to operating leases and increased technology investments to support business growth. The decline in expense for the first nine months of 2006 was due primarily to merger-related savings and other operating efficiencies, partially offset by higher depreciation expense on owned automobiles subject to operating leases, and increased technology investments to support business growth.
Professional & outside services decreased from the third quarter and first nine months of 2005 due to merger-related savings and other operating efficiencies, the settlement of several legal matters in 2005 and the Paymentech deconsolidation.
Marketing expense was higher when compared with the third quarter and first nine months of 2005, reflecting the costs of campaigns for credit cards and other consumer products.
Other expense increased slightly from the third quarter of 2005 due to the impact of growth in business volume and investments in the businesses, partially offset by the sale of the insurance business. On a year-to-date basis, Other expense was lower due to significant litigation-related charges of $2.8 billion in 2005, associated with the settlement of the Enron and WorldCom class action litigations and certain other material legal proceedings. In addition, in the first nine months of 2006, the Firm recognized insurance recoveries of $375 million pertaining to certain material litigation matters. Also contributing to the decline from the prior year were charges of $93 million in connection with the termination of a client contract in TSS in the second quarter of 2005, and in RFS, the sale of the insurance business in the current quarter. These items were offset partially by higher charges related to other litigation, and the impact of growth in business volume and investments in the businesses.
For discussion of Amortization of intangibles and Merger costs, refer to Note 15 and Note 8 on pages 88–90 and 80, respectively, of this Form 10-Q.
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 September 30, Nine months ended September 30,
(in millions, except rate)   2006   2005   2006   2005
 
Income from continuing operations before income tax expense
  $ 4,937     $ 3,661     $ 14,712     $ 8,011  
Income tax expense
    1,705       1,192       4,969       2,399  
Effective tax rate
    34.5 %     32.6 %     33.8 %     29.9 %
 
The increase in the effective tax rate for the third quarter and first nine months of 2006, as compared with prior-year periods, was primarily the result of higher reported pretax income combined with changes in the proportion of income subject to federal, state and local taxes. Also contributing to the increase in the effective tax rate were the litigation charges in 2005 and lower Merger costs, reflecting a tax benefit at a 38% marginal tax rate. As a result of an audit settlement, approximately $260 million of tax benefits will be recorded in the fourth quarter of 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 69 – 72 of this Form 10-Q. That presentation, which is referred to as “reported basis,” provides the reader with an understanding of the Firm’s results that can be tracked consistently from year to year and enables a comparison of the Firm’s performance with other companies’ U.S. GAAP financial statements.
In addition to analyzing the Firm’s results on a reported basis, management reviews the Firm’s and the lines’ of business results on a “managed” basis, which is a non-GAAP financial measure. The Firm’s definition of managed basis starts with the reported U.S. GAAP results and includes certain reclassifications that are adjusted to exclude credit card securitizations and present revenue on a fully taxable equivalent (“FTE”) basis. These adjustments do not have any impact on Net income as reported by the lines of business or by the Firm as a whole. Effective January 1, 2006, JPMorgan Chase’s presentation of “operating earnings” that excluded merger costs and material litigation reserve charges and recoveries from reported results has been eliminated. These items had been previously excluded from operating results because they were deemed nonrecurring; they are now included in the Corporate segment’s results. In addition, trading-related net interest income is no longer reclassified from Net interest income to Principal transactions.
The presentation of CS’ results on a managed basis assumes that loans that have been securitized in accordance with SFAS 140 still remain on the balance sheet and that the earnings on the securitized loans should be classified in the same manner as the earnings on retained loans recorded on the balance sheet. JPMorgan Chase uses the managed basis to evaluate the credit performance and overall financial performance of CS’ entire managed credit card portfolio as 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 retained loans on the balance sheet. JPMorgan Chase believes managed basis information is useful to investors to enable them to understand the credit risks within the loans reported on the balance sheet as well as the Firm’s retained interests in the securitizations. For a reconciliation of reported to managed basis of CS’ results, see page 31 of this Form 10-Q. For information regarding the securitization process, see Note 1 on page 91 of JPMorgan Chase’s 2005 Annual Report. For information regarding loans and residual interests sold and securitized, see Note 13 on pages 83 – 86 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 uses certain non-GAAP financial measures at the segment level because it believes these non-GAAP financial measures provide information to investors in understanding the underlying operational performance and trends of the particular business segment and facilitate a comparison of the business segment with the performance of competitors.

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The following summary table provides a reconciliation from the Firm’s reported U.S. GAAP results to managed basis:
                                 
Three months ended September 30, 2006
    Reported   Credit   Tax-equivalent   Managed
(in millions, except per share and ratio data)   results   card(c)   adjustments   basis
 
Revenue
                               
Investment banking fees
  $ 1,416     $     $     $ 1,416  
Principal transactions
    2,636                   2,636  
Lending & deposit related fees
    867                   867  
Asset management, administration and commissions
    2,798                   2,798  
Securities gains
    40                   40  
Mortgage fees and related income
    62                   62  
Credit card income
    1,567       (721 )           846  
Other income
    635             165       800  
 
Noninterest revenue
    10,021       (721 )     165       9,465  
Net interest income
    5,379       1,328       57       6,764  
 
Total net revenue
    15,400       607       222       16,229  
Provision for credit losses
    812       607             1,419  
Noninterest expense
    9,651                   9,651  
 
Income from continuing operations before income tax expense
    4,937             222       5,159  
Income tax expense
    1,705             222       1,927  
 
Income from continuing operations (after-tax)
    3,232                   3,232  
Income from discontinued operations (after-tax)
    65                   65  
 
Net income
  $ 3,297     $     $     $ 3,297  
 
Net income – diluted earnings per share
  $ 0.92     $     $     $ 0.92  
 
Return on common equity
    12 %     %     %     12 %
Return on equity less goodwill(a)
    19                   19  
 
Return on assets(b)
    1.00     NM     NM       0.95  
 
Overhead ratio
    63     NM     NM       59  
 
                                 
Three months ended September 30, 2005
    Reported   Credit   Tax-equivalent   Managed
(in millions, except per share and ratio data)   results   card(c)   adjustments   basis
 
Revenue
                               
Investment banking fees
  $ 989     $     $     $ 989  
Principal transactions
    2,886                   2,886  
Lending & deposit related fees
    865                   865  
Asset management, administration and commissions
    2,500                   2,500  
Securities gains (losses)
    (44 )                 (44 )
Mortgage fees and related income
    201                   201  
Credit card income
    1,855       (733 )           1,122  
Other income
    230             155       385  
 
Noninterest revenue
    9,482       (733 )     155       8,904  
Net interest income
    4,783       1,600       67       6,450  
 
Total net revenue
    14,265       867       222       15,354  
Provision for credit losses
    1,245       867             2,112  
Noninterest expense
    9,359                   9,359  
 
Income from continuing operations before income tax expense
    3,661             222       3,883  
Income tax expense
    1,192             222       1,414  
 
Income from continuing operations (after-tax)
    2,469                   2,469  
Income from discontinued operations (after-tax)
    58                   58  
 
Net income
  $ 2,527     $     $     $ 2,527  
 
Net income – diluted earnings per share
  $ 0.71     $     $     $ 0.71  
 
Return on common equity
    9 %     %     %     9 %
Return on equity less goodwill(a)
    16                   16  
 
Return on assets(b)
    0.84     NM     NM       0.79  
 
Overhead ratio
    66     NM     NM       61  
 

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Nine months ended September 30, 2006
    Reported   Credit   Tax-equivalent   Managed
(in millions, except per share and ratio data)   results   card(c)   adjustments   basis
 
Revenue
                               
Investment banking fees
  $ 3,955     $     $     $ 3,955  
Principal transactions
    7,866                   7,866  
Lending & deposit related fees
    2,573                   2,573  
Asset management, administration and commissions
    8,580                   8,580  
Securities gains (losses)
    (578 )                 (578 )
Mortgage fees and related income
    516                   516  
Credit card income
    5,268       (2,783 )           2,485  
Other income
    1,653             481       2,134  
 
Noninterest revenue
    29,833       (2,783 )     481       27,531  
Net interest income
    15,550       4,400       175       20,125  
 
Total net revenue
    45,383       1,617       656       47,656  
Provision for credit losses
    2,136       1,617             3,753  
Noninterest expense
    28,535                   28,535  
 
Income from continuing operations before income tax expense
    14,712             656       15,368  
Income tax expense
    4,969             656       5,625  
 
Income from continuing operations (after-tax)
    9,743                   9,743  
Income from discontinued operations (after-tax)
    175                   175  
 
Net income
  $ 9,918     $     $     $ 9,918  
 
Net income – diluted earnings per share
  $ 2.78     $     $     $ 2.78  
 
Return on common equity
    12 %     %     %     12 %
Return on equity less goodwill(a)
    20                   20  
 
Return on assets(b)
    1.02     NM     NM       0.97  
 
Overhead ratio
    63     NM     NM       60  
 
                                 
Nine months ended September 30, 2005
    Reported   Credit   Tax-equivalent   Managed
(in millions, except per share and ratio data)   results   card(c)   adjustments   basis
 
Revenue
                               
Investment banking fees
  $ 2,943     $     $     $ 2,943  
Principal transactions
    6,246                   6,246  
Lending & deposit related fees
    2,536                   2,536  
Asset management, administration and commissions
    7,286                   7,286  
Securities gains (losses)
    (796 )                 (796 )
Mortgage fees and related income
    899                   899  
Credit card income
    5,352       (2,276 )           3,076  
Other income
    923             413       1,336  
 
Noninterest revenue
    25,389       (2,276 )     413       23,526  
Net interest income
    14,877       4,990       212       20,079  
 
Total net revenue
    40,266       2,714       625       43,605  
Provision for credit losses
    2,259       2,714             4,973  
Noninterest expense
    29,996                   29,996  
 
Income from continuing operations before income tax expense
    8,011             625       8,636  
Income tax expense
    2,399             625       3,024  
 
Income from continuing operations (after-tax)
    5,612                   5,612  
Income from discontinued operations (after-tax)
    173                   173  
 
Net income
  $ 5,785     $     $     $ 5,785  
 
Net income – diluted earnings per share
  $ 1.62     $     $     $ 1.62  
 
Return on common equity
    7 %     %     %     7 %
Return on equity less goodwill(a)
    12                   12  
 
Return on assets(b)
    0.66     NM     NM       0.62  
 
Overhead ratio
    74     NM     NM       69  
 
(a)  
Represents net income applicable to common stock divided by total average common equity (net of goodwill). The Firm uses Return on equity less goodwill, a non-GAAP financial measure, to evaluate the operating performance of the Firm and to facilitate comparisons to competitors.
 
(b)  
Return on assets on reported results represents Net income (annualized) divided by Total average assets. Return on assets on a managed basis represents Net income (annualized) divided by Total average managed assets, which includes average securitized credit card receivables.
 
(c)  
The impact of credit card securitizations affects CS. See pages 28 – 31 of this Form 10-Q for further information.

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Three months ended September 30,   2006   2005
(in millions)   Reported   Securitized   Managed   Reported   Securitized   Managed
 
Loans – Period-end
  $ 463,544     $ 65,245     $ 528,789     $ 420,504     $ 69,095     $ 489,599  
Total assets – average
    1,309,139       62,971       1,372,110       1,196,045       67,021       1,263,066  
 
                                                 
Nine months ended September 30,   2006   2005
(in millions)   Reported   Securitized   Managed   Reported   Securitized   Managed
 
Loans – Period-end
  $ 463,544     $ 65,245     $ 528,789     $ 420,504     $ 69,095     $ 489,599  
Total assets – average
    1,297,344       65,797       1,363,141       1,178,420       66,917       1,245,337  
 
 
 
BUSINESS SEGMENT RESULTS
 
The Firm is managed on a line-of-business basis. The business segment financial results presented reflect the organization of JPMorgan Chase. Currently, there are six major reportable business segments: the Investment Bank, Retail Financial Services, Card Services, Commercial Banking, Treasury & Securities Services and Asset & Wealth Management, as well as a Corporate segment. The segments are based upon the products and services provided, or the type of customer served, and they reflect the manner in which financial information is currently evaluated by management. Results of these lines of business are presented on a managed basis. For a further discussion of Business segment results, see pages 34 – 35 of JPMorgan Chase’s 2005 Annual Report.
Description of business segment reporting methodology
Results of the business segments are intended to reflect each segment as if it were essentially a stand-alone business. The management reporting process that derives these results generally allocates income and expense using market-based methodologies. For a further discussion of those methodologies, see page 35 of JPMorgan Chase’s 2005 Annual Report. The Firm continues to assess the assumptions, methodologies and reporting reclassifications used for segment reporting, and further refinements may be implemented in future periods.
Business segment financial disclosures
Effective January 1, 2006, JPMorgan Chase modified certain of its financial disclosures to reflect more closely the manner in which the Firm’s business segments are managed and to provide improved comparability with competitors. These financial disclosure revisions are reflected in this Form 10-Q, and the financial information for prior periods has been revised to reflect the disclosure changes as if they had been in effect throughout 2005. A summary of the changes are described below.
Reported versus Operating Basis Changes
The presentation of operating earnings that excluded merger costs and material litigation reserve charges and recoveries from reported results has been eliminated. These items had been excluded previously from operating results because they were deemed nonrecurring; they are now included in the Corporate business segment’s results. In addition, trading-related net interest income is no longer reclassified from Net interest income to Principal transactions. As a result of these changes, effective January 1, 2006, management has discontinued reporting on an “operating” basis.
Business Segment Disclosures
RFS has been reorganized into the following business segments: Regional Banking, Mortgage Banking and Auto Finance. For more detailed information on the RFS reorganization, see the RFS business segment discussion on page 21 of this Form 10-Q.
TSS firmwide disclosures have been adjusted to reflect a refined set of TSS products and a revised allocation of liability balances and lending-related revenue related to certain client transfers.
Various wholesale banking clients, together with the related revenue and expense, have been transferred among CB, the IB and TSS. In the first quarter of 2006, the primary client transfer was corporate mortgage finance from CB to the IB.
CB’s business metrics now include gross investment banking revenue, which reflects revenue recorded in both CB and the IB.
Corporate’s disclosure has been expanded to include Total net revenue and Net income for Treasury and Other Corporate segments.
Certain expenses that are managed by the business segments, but that had been previously recorded in Corporate and allocated to the businesses, are now recorded as direct expenses within the businesses.
Capital allocation changes
Effective January 1, 2006, the Firm refined its methodology for allocating capital to the business segments. As prior periods have not been revised to reflect the new capital allocations, certain business metrics, such as ROE, are not comparable to the current presentation. For a further discussion of the changes, see Capital Management – Line of business equity on pages 46 – 47 of this Form 10-Q.
Discontinued operations
As a result of the transaction with The Bank of New York, selected corporate trust businesses have been transferred from TSS to the Corporate segment and reported in discontinued operations for all periods reported.

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Segment Results – Managed Basis
The following table summarizes the business segment results for the periods indicated.
                                                                                         
Three months ended                
September 30, Total net revenue Noninterest expense Net income (loss) Return on equity
(in millions, except ratios)   2006   2005   Change   2006   2005   Change   2006   2005   Change   2006   2005
 
Investment Bank
  $ 4,673     $ 4,471       5 %   $ 3,101     $ 2,877       8 %   $ 976     $ 1,068       (9 )%     18 %     21 %
Retail Financial Services
    3,555       3,590       (1 )     2,139       2,156       (1 )     746       656       14       21       19  
Card Services
    3,646       3,980       (8 )     1,253       1,286       (3 )     711       541       31       20       18  
Commercial Banking
    933       877       6       500       458       9       231       284       (19 )     17       33  
Treasury & Securities Services
    1,499       1,380       9       1,064       999       7       256       222       15       46       58  
Asset & Wealth Management
    1,636       1,449       13       1,115       976       14       346       315       10       39       52  
Corporate(a)
    287       (393 )   NM       479       607       (21 )     31       (559 )   NM     NM     NM
 
Total(a)
  $ 16,229     $ 15,354       6 %   $ 9,651     $ 9,359       3 %   $ 3,297     $ 2,527       30 %     12 %     9 %
 
                                                                                         
Nine months ended                
September 30, Total net revenue Noninterest expense Net income (loss) Return on equity
(in millions, except ratios)   2006   2005   Change   2006   2005   Change   2006   2005   Change   2006   2005
 
Investment Bank
  $ 13,556     $ 11,418       19 %   $ 9,238     $ 7,585       22 %   $ 2,665     $ 3,007       (11 )%     17 %     20 %
Retail Financial Services
    11,097       11,236       (1 )     6,636       6,444       3       2,495       2,624       (5 )     24       26  
Card Services
    10,995       11,645       (6 )     3,745       3,982       (6 )     2,487       1,605       55       24       18  
Commercial Banking
    2,782       2,572       8       1,494       1,381       8       754       672       12       18       26  
Treasury & Securities Services
    4,572       4,103       11       3,162       3,053       4       834       609       37       48       53  
Asset & Wealth Management
    4,840       4,153       17       3,294       2,827       17       1,002       874       15       38       49  
Corporate(a)
    (186 )     (1,522 )     88       966       4,724       (80 )     (319 )     (3,606 )     91     NM     NM
 
Total(a)
  $ 47,656     $ 43,605       9 %   $ 28,535     $ 29,996       (5 )%   $ 9,918     $ 5,785       71 %     12 %     7 %
 
(a)  
Net income includes Income from discontinued operations (after-tax) of $65 million and $58 million for the three months ended September 30, 2006 and 2005, respectively, and $175 million and $173 million for the nine months ended September 30, 2006 and 2005, respectively.

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INVESTMENT BANK
 
For a discussion of the business profile of the IB, see pages 36–38 of JPMorgan Chase’s 2005 Annual Report.
                                                 
Selected income statement data   Three months ended September 30,     Nine months ended September 30,  
(in millions, except ratios)   2006     2005     Change     2006     2005     Change  
 
Revenue
                                               
Investment banking fees
  $ 1,419     $ 985       44 %   $ 3,957     $ 2,935       35 %
Principal transactions
    2,449       2,594       (6 )     6,869       4,896       40  
Lending & deposit related fees
    127       148       (14 )     398       451       (12 )
Asset management, administration and commissions
    468       445       5       1,570       1,267       24  
All other income
    159       40       298       437       419       4  
                     
Noninterest revenue
    4,622       4,212       10       13,231       9,968       33  
Net interest income
    51       259       (80 )     325       1,450       (78 )
                     
Total net revenue(a)
    4,673       4,471       5       13,556       11,418       19  
 
                                               
Provision for credit losses
    7       (46 )     NM       128       (755 )     NM  
Credit reimbursement from TSS(b)
    30       38       (21 )     90       114       (21 )
 
                                               
Noninterest expense
                                               
Compensation expense
    2,093       1,885       11       6,310       4,696       34  
Noncompensation expense
    1,008       992       2       2,928       2,889       1  
                     
Total noninterest expense
    3,101       2,877       8       9,238       7,585       22  
                     
Income before income tax expense
    1,595       1,678       (5 )     4,280       4,702       (9 )
Income tax expense
    619       610       1       1,615       1,695       (5 )
                     
Net income
  $ 976     $ 1,068       (9 )   $ 2,665     $ 3,007       (11 )
                     
 
                                               
Financial ratios
                                               
ROE
    18 %     21 %             17 %     20 %        
ROA
    0.62       0.69               0.55       0.68          
Overhead ratio
    66       64               68       66          
Compensation expense as % of total net revenue(c)
    44       42               44       41          
                     
 
                                               
Revenue by business
                                               
Investment banking fees:
                                               
Advisory
  $ 436     $ 300       45     $ 1,177     $ 922       28  
Equity underwriting
    275       210       31       851       553       54  
Debt underwriting
    708       475       49       1,929       1,460       32  
                     
Total investment banking fees
    1,419       985       44       3,957       2,935       35  
Fixed income markets
    2,370       2,441       (3 )     6,400       6,165       4  
Equity markets
    612       713       (14 )     2,355       1,341       76  
Credit portfolio
    272       332       (18 )     844       977       (14 )
                     
Total net revenue
  $ 4,673     $ 4,471       5     $ 13,556     $ 11,418       19  
                     
 
                                               
Revenue by region
                                               
Americas
  $ 2,700     $ 2,700           $ 6,777     $ 6,774        
Europe/Middle East/Africa
    1,678       1,272       32       5,472       3,361       63  
Asia/Pacific
    295       499       (41 )     1,307       1,283       2  
                     
Total net revenue
  $ 4,673     $ 4,471       5     $ 13,556     $ 11,418       19  
 
(a)  
Total net revenue includes tax-equivalent adjustments, primarily due to tax-exempt income from municipal bond investments and income tax credits related to affordable housing investments, of $197 million and $200 million for the quarters ended September 30, 2006 and 2005, respectively, and $584 million and $561 million year-to-date 2006 and 2005, respectively.
 
(b)  
TSS is charged a credit reimbursement related to certain exposures managed within the IB credit portfolio on behalf of clients shared with TSS.
 
(c)  
Beginning in the quarter ended March 31, 2006, Compensation expense to Total net revenue ratio is adjusted to present this ratio as if SFAS 123R had always been in effect. IB management believes that adjusting the Compensation expense to Total net revenue ratio for the incremental impact of adopting SFAS 123R provides a more meaningful measure of IB’s Compensation expense to Total net revenue ratio.

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Quarterly results
Net income of $976 million was driven by record third-quarter revenues. Compared with the prior year, net income decreased by $92 million, or 9%, reflecting higher compensation expense and a higher provision for credit losses, largely offset by increased revenue.
Net revenue of $4.7 billion, the second highest level ever posted, was up 5% from the prior year. Investment banking fees of $1.4 billion were a record, up 44% from the prior year, driven by record debt underwriting and strong advisory fees, which were the highest since 2000. Advisory fees of $436 million were up 45% over the prior year driven by strong performance in the Americas and Europe. Debt underwriting fees of $708 million were up 49% from the prior year driven by record loan syndication fees and strong bond underwriting fees, with strength in the Americas and Europe. Equity underwriting fees of $275 million were up 31% from the prior year driven by improved market share. Fixed Income Markets revenue of $2.4 billion was down 3% from the prior year’s record level. The current quarter included very strong results in commodities. Equity Markets revenue of $612 million decreased 14%, reflecting lower trading results compared with a strong prior-year quarter, partially offset by strength in commissions. Credit Portfolio revenue of $272 million was down 18%, primarily reflecting lower gains from loan workouts and loan sales.
Provision for credit losses was $7 million for the quarter compared with a benefit of $46 million in the prior year. The increase reflects portfolio activity and stable credit quality.
Noninterest expense was $3.1 billion, up by $224 million, or 8%, from the prior year. This increase was due primarily to higher performance-based compensation, including the impact of an increase in the ratio of compensation expense to total net revenue and incremental expense related to SFAS 123R.
Return on equity was 18% on $21.0 billion of allocated capital.
Year-to-date results
Net income of $2.7 billion was driven by record year-to-date revenues of $13.6 billion. Compared with the prior year, net income decreased by $342 million, or 11%, reflecting higher performance-based compensation expense and a higher provision for credit losses compared to a benefit in the prior year.
Net revenue of $13.6 billion was up $2.1 billion, or 19%, from the prior year. Investment banking fees of $4.0 billion were a record, up 35% from the prior year driven by record debt and equity underwriting and strong advisory fees, which were the highest since 2000. Advisory fees of $1.2 billion were up 28% over the prior year driven by strong performance in the Americas. Debt underwriting fees of $1.9 billion were up 32% from the prior year driven by record performance in both loan syndications and bond underwriting. Equity underwriting fees of $851 million were up 54% from the prior year driven by improved market share. Fixed Income Markets revenue of $6.4 billion was also a record, up 4% from the prior year driven by strength in emerging markets, securitized products and currencies. Record Equity Markets revenue of $2.4 billion increased 76%, reflecting strength in both trading results and commissions. Credit Portfolio revenue of $844 million was down 14%, primarily reflecting lower results from credit risk management activities.
Provision for credit losses was $128 million year-to-date compared with a benefit of $755 million in the prior period. The current year-to-date provision reflects stable credit quality and portfolio activity. The prior-year’s benefit reflected improvement in credit quality due to declining criticized loans, including nonperforming loans, as well as a higher level of recoveries.
Noninterest expense of $9.2 billion was up by $1.7 billion, or 22%, from the prior year. This increase was due primarily to higher performance-based compensation, including the impact of an increase in the ratio of compensation expense to total net revenue and incremental expense related to SFAS 123R.
Return on equity was 17% on $20.7 billion of allocated capital.
                                                 
Selected metrics   Three months ended September 30,     Nine months ended September 30,  
(in millions, except headcount                                        
and ratio data)   2006     2005     Change     2006     2005     Change  
 
Selected average balances
                                               
Total assets
  $ 626,245     $ 617,717       1 %   $ 648,101     $ 593,557       9 %
Trading assets–debt and equity instruments
    283,915       234,722       21       268,256       231,057       16  
Trading assets–derivatives receivables
    53,184       52,399       1       52,769       57,429       (8 )
Loans:
                                               
Loans retained(a)
    61,623       47,411       30       58,137       43,591       33  
Loans held-for-sale(b)
    24,030       12,747       89       21,072       10,538       100  
                     
Total loans
    85,653       60,158       42       79,209       54,129       46  
Adjusted assets(c)
    539,278       462,056       17       520,718       453,990       15  
Equity
    21,000       20,000       5       20,670       20,000       3  
 
                                               
Headcount
    23,447       19,558       20       23,447       19,558       20  
 

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Credit data and quality statistics
                                               
Net charge-offs (recoveries)
  $ (8 )   $ (69 )     88     $ (41 )   $ (121 )     66  
Nonperforming assets:
                                               
Nonperforming loans(d)
    420       702       (40 )     420       702       (40 )
Other nonperforming assets
    36       232       (84 )     36       232       (84 )
Allowance for loan losses
    1,010       1,002       1       1,010       1,002       1  
Allowance for lending related commitments
    292       211       38       292       211       38  
 
                                               
Net charge-off (recovery) rate(b)
    (0.05 )%     (0.58 )%             (0.09 )%     (0.37 )%        
Allowance for loan losses to average loans(b)
    1.64       2.11               1.74       2.30          
Allowance for loan losses to nonperforming loans(d)
    253       168               253       168          
Nonperforming loans to average loans
    0.49       1.17               0.53       1.30          
Market risk–average trading and credit portfolio VAR
                                               
By risk type:
                                               
Fixed income
  $ 63     $ 57       11     $ 58     $ 66       (12 )
Foreign exchange
    24       24             23       23        
Equities
    32       41       (22 )     29       35       (17 )
Commodities and other
    46       24       92       48       16       200  
Less: portfolio diversification(e)
    (82 )     (62 )     (32 )     (74 )     (56 )     (32 )
                     
Trading VAR(f)
    83       84       (1 )     84       84        
Credit portfolio VAR(g)
    14       15       (7 )     14       14        
Less: portfolio diversification(e)
    (8 )     (13 )     38       (9 )     (12 )     25  
                     
Total trading and credit portfolio VAR
  $ 89     $ 86       3     $ 89     $ 86       3  
 
(a)  
Loans retained include Credit Portfolio, Conduit loans, leveraged leases, bridge loans for underwriting and other accrual loans.
 
(b)  
Loans held-for-sale, which include loan syndications, and warehouse loans held as part of the IB’s mortgage-backed, asset-backed and other securitization businesses, are excluded from Total loans for the allowance coverage ratio and net charge-off rate.
 
(c)  
Adjusted assets, a non-GAAP financial measure, equals total assets minus (1) securities purchased under resale agreements and securities borrowed less securities sold, not yet purchased; (2) assets of variable interest entities (VIEs) consolidated under FIN 46R; (3) cash and securities segregated and on deposit for regulatory and other purposes; and (4) goodwill and intangibles. The amount of adjusted assets is presented to assist the reader in comparing the IB’s asset and capital levels to other investment banks in the securities industry. Asset-to-equity leverage ratios are commonly used as one measure to assess a company’s capital adequacy. The IB believes an adjusted asset amount, which excludes certain assets considered to have a low risk profile, provides a more meaningful measure of balance sheet leverage in the securities industry.
 
(d)  
Nonperforming loans include loans held-for-sale of $21 million and $106 million as of September 30, 2006 and 2005, respectively, which are excluded from the allowance coverage ratios. Nonperforming loans exclude distressed HFS loans purchased as part of IB’s proprietary activities.
 
(e)  
Average VARs are less than the sum of the VARs of its market risk components due to risk offsets resulting from portfolio diversification. The diversification effect reflects the fact that the risks are not perfectly correlated. The risk of a portfolio of positions is therefore usually less than the sum of the risks of the positions themselves.
 
(f)  
Includes substantially all trading activities; however, particular risk parameters of certain products are not fully captured, for example, correlation risk.
 
(g)  
Includes VAR on derivative credit valuation adjustments, credit valuation adjustment hedges and mark-to-market hedges of the accrual loan portfolio, which are all reported in Principal transactions. This VAR does not include the accrual loan portfolio, which is not marked to market.

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According to Thomson Financial, the Firm was ranked #1 in Global Syndicated Loans, #2 in Global Long-Term Debt, #2 in Global Debt, Equity and Equity-Related, #3 in Global Announced M&A and #2 in U.S. Announced M&A, year-to-date September 30, 2006, based on volume. In addition, according to Dealogic, the Firm was ranked #1 in Investment Banking Fees year-to-date September 30, 2006.
                                 
    Nine months ended September 30, 2006   Full Year 2005
Market shares and rankings(a)   Market Share   Rankings   Market Share   Rankings
 
Global debt, equity and equity-related
    7 %     #2       7 %     #2  
Global syndicated loans
    15       #1       15       #1  
Global long-term debt
    7       #2       6       #4  
Global equity and equity-related
    8       #5       7       #6  
Global announced M&A
    26       #3       23       #3  
U.S. debt, equity and equity-related
    9       #2       8       #3  
U.S. syndicated loans
    27       #1       28       #1  
U.S. long-term debt
    12       #2       11       #2  
U.S. equity and equity-related
    8       #5       9       #6  
U.S. announced M&A
    28       #2       26       #3  
 
(a)  
Source: Thomson Financial Securities data. Global announced M&A is based upon rank value; all other rankings are based upon proceeds, with full credit to each book manager/equal if joint. Because of joint assignments, market share of all participants will add up to more than 100%.

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RETAIL FINANCIAL SERVICES
 
Retail Financial Services realigned its business reporting segments on January 1, 2006, into Regional Banking, Mortgage Banking and Auto Finance. On October 1, 2006, JPMorgan Chase acquired The Bank of New York’s consumer banking business, expanding the Regional Banking branch network, which is one of the largest in the United States, to include 3,016 branches and 8,240 ATMs covering 17 states. Regional Banking distributes, through its network, a variety of products including checking, savings and time deposit accounts; home equity, residential mortgage, small business banking, and education loans; mutual fund and annuity investments; and on-line banking services. Mortgage Banking is a leading provider of mortgage loan products and is one of the largest originators and servicers of home mortgages. Auto Finance is one of the largest noncaptive originators of automobile loans, primarily through a network of automotive dealers across the United States.
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 3, 2006, RFS sold its life insurance and annuity underwriting businesses to Protective Life Corporation.
                                                 
Selected income statement data   Three months ended September 30,     Nine months ended September 30,  
(in millions, except ratios)   2006     2005     Change     2006     2005     Change  
 
Revenue
                                               
Lending & deposit related fees
  $ 406     $ 380       7 %   $ 1,167     $ 1,078       8 %
Asset management, administration and commissions
    326       370       (12 )     1,129       1,133        
Securities gains (losses)
    (7 )           NM       (52 )     10       NM  
Mortgage fees and related income
    67       212       (68 )     507       921       (45 )
Credit card income
    136       109       25       380       308       23  
Other income
    170       7       NM       381       63       NM  
                     
Noninterest revenue
    1,098       1,078       2       3,512       3,513        
Net interest income
    2,457       2,512       (2 )     7,585       7,723       (2 )
                     
Total net revenue
    3,555       3,590       (1 )     11,097       11,236       (1 )
 
                                               
Provision for credit losses(a)
    114       378       (70 )     299       566       (47 )
 
                                               
Noninterest expense
                                               
Compensation expense
    886       842       5       2,707       2,484       9  
Noncompensation expense
    1,142       1,189       (4 )     3,595       3,585        
Amortization of intangibles
    111       125       (11 )     334       375       (11 )
                     
Total noninterest expense
    2,139       2,156       (1 )     6,636       6,444       3  
                     
Income before income tax expense
    1,302       1,056       23       4,162       4,226       (2 )
Income tax expense
    556       400       39       1,667       1,602       4  
                     
Net income
  $ 746     $ 656       14     $ 2,495     $ 2,624       (5 )
                     
 
                                               
Financial ratios
                                               
ROE
    21 %     19 %             24 %     26 %        
ROA
    1.31       1.14               1.45       1.55          
Overhead ratio
    60       60               60       57          
Overhead ratio excluding core deposit intangibles(b)
    57       57               57       54          
 
(a)  
Third quarter 2005 includes a $250 million special provision related to Hurricane Katrina allocated as follows: $230 million in Regional Banking and $20 million in Auto Finance; within Regional Banking, $140 million was for real estate and $90 million was for Business Banking.
 
(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 would result in an improving overhead ratio over time, all things remaining equal. This non-GAAP ratio excludes Regional Banking’s core deposit intangible amortization expense related to the Bank One merger of $109 million and $124 million for the quarters ended September 30, 2006 and 2005, respectively, and $328 million and $372 million year-to-date 2006 and 2005, respectively.

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Quarterly results
Net income of $746 million was up by $90 million, or 14%, from the prior year. Excluding the prior-year impact of the $155 million (after-tax) special provision for credit losses related to Hurricane Katrina, net income would have been down by $65 million, or 8%. The decrease reflected a decline in Mortgage Banking results, partially offset by improved results in Regional Banking and Auto Finance.
Net revenue of $3.6 billion was down by $35 million, or 1%, from the prior year. Net interest income of $2.5 billion was down 2% due to the sale of the insurance business during the quarter, lower auto loan and lease balances, narrower spreads on loans and deposits in Regional Banking and decreased revenue in Mortgage Banking. These declines were offset partially by the benefit of higher deposit and loan balances in Regional Banking. Noninterest revenue of $1.1 billion was up by $20 million, or 2%, driven by increases in deposit-related fees and credit card sales. Also contributing to the increase was the absence of a prior-year net loss in Auto Finance associated with the transfer of $1.5 billion of loans to held-for-sale, higher automobile operating lease revenue and the acquisition of Collegiate Funding Services in the first quarter of 2006. These increases were largely offset by lower net mortgage servicing revenue and by the sale of the insurance business.
The provision for credit losses of $114 million was down by $264 million from the prior year, which included a $250 million special provision for credit losses related to Hurricane Katrina.
Noninterest expense of $2.1 billion was down slightly, benefiting from the sale of the insurance business during the quarter and merger-related and other operating efficiencies. These decreases were offset partially by the acquisition of Collegiate Funding Services in the first quarter of 2006, investments in the retail distribution network and higher depreciation expense on owned automobiles subject to operating leases.
Year-to-date results
Net income of $2.5 billion was down by $129 million, or 5%, from the prior year. Excluding the prior-year impact of the $155 million (after-tax) special provision for credit losses related to Hurricane Katrina, net income would have been down by $284 million, or 10%. The decrease reflected a decline in Mortgage Banking results, partially offset by improved results in Auto Finance.
Net revenue of $11.1 billion was down by $139 million, or 1%, from the prior year. Net interest income of $7.6 billion was down 2% due to the sale of the insurance business during the quarter, narrower spreads on loans and deposits in Regional Banking, lower auto loan and lease balances, and decreased revenue in Mortgage Banking. These declines were offset partially by the benefit of higher deposit and loan balances in Regional Banking. Noninterest revenue of $3.5 billion was flat. This result was driven by increases in deposit-related fees and credit card sales and higher automobile operating lease revenue, as well as the absence of a prior-year net loss in Auto Finance associated with the transfer of $1.5 billion of loans to held-for-sale and the acquisition of Collegiate Funding Services in the first quarter of 2006. These increases were offset by lower net mortgage servicing revenue and the sale of the insurance business.
The provision for credit losses of $299 million was down by $267 million from the prior-year provision, which included a $250 million special provision for credit losses related to Hurricane Katrina.
Noninterest expense of $6.6 billion was up by $192 million, or 3%, as the acquisition of Collegiate Funding Services in the first quarter of 2006, investments in the retail distribution network and higher depreciation expense on owned automobiles subject to operating leases were offset partially by the sale of the insurance business during the quarter and merger-related and other operating efficiencies.

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Selected metrics   Three months ended September 30,     Nine months ended September 30,  
(in millions, except headcount                                        
and ratios)   2006     2005     Change     2006     2005     Change  
 
Selected ending balances
                                               
Assets
  $ 227,056     $ 230,698       (2 )%   $ 227,056     $ 230,698       (2 )%
Loans(a)
    205,554       200,434       3       205,554       200,434       3  
Deposits
    198,260       187,621       6       198,260       187,621       6  
 
                                               
Selected average balances
                                               
Assets
  $ 225,307     $ 227,875       (1 )   $ 230,307     $ 226,200       2  
Loans(b)
    203,307       199,057       2       201,263       198,421       1  
Deposits
    198,967       187,216       6       197,491       186,035       6  
Equity
    14,300       13,475       6       14,167       13,276       7  
 
                                               
Headcount
    61,915       60,375       3       61,915       60,375       3  
 
                                               
Credit data and quality statistics
                                               
Net charge-offs
  $ 128     $ 144       (11 )   $ 362     $ 410       (12 )
Nonperforming loans(c)
    1,404       1,203       17       1,404       1,203       17  
Nonperforming assets
    1,595       1,387       15       1,595       1,387       15  
Allowance for loan losses
    1,306       1,375       (5 )     1,306       1,375       (5 )
 
                                               
Net charge-off rate(b)
    0.27 %     0.31 %             0.26 %     0.30 %        
Allowance for loan losses to ending loans(a)
    0.69       0.75               0.69       0.75          
Allowance for loan losses to nonperforming loans(c)
    95       115               95       115          
Nonperforming loans to total loans
    0.68       0.60               0.68       0.60          
 
(a)  
Includes loans held-for-sale of $17,005 million and $17,695 million at September 30, 2006 and 2005, respectively. These amounts are not included in the allowance coverage ratios.
 
(b)  
Average loans include loans held-for-sale of $13,994 million and $15,707 million for the quarters ended September 30, 2006 and 2005, respectively, and $14,411 million and $15,395 million for year-to-date 2006 and 2005, respectively. These amounts are not included in the net charge-off rate.
 
(c)  
Nonperforming loans include loans held-for-sale of $24 million and $10 million at September 30, 2006 and 2005, respectively. These amounts are not included in the allowance coverage ratios.
REGIONAL BANKING
                                                 
Selected income statement data   Three months ended September 30,     Nine months ended September 30,  
(in millions, except ratios)   2006     2005     Change     2006     2005     Change  
 
Noninterest revenue
  $ 855     $ 789       8 %   $ 2,526     $ 2,437       4 %
Net interest income
    2,107       2,089       1       6,539       6,430       2  
                     
Total Net revenue
    2,962       2,878       3       9,065       8,867       2  
Provision for credit losses
    53       297       (82 )     189       425       (56 )
Noninterest expense
    1,611       1,673       (4 )     5,095       5,039       1  
                     
Income before income tax expense
    1,298       908       43       3,781       3,403       11  
                     
Net income
  $ 744     $ 563       32     $ 2,265     $ 2,111       7  
                     
 
                                               
ROE
    29 %     24 %             30 %     31 %        
ROA
    1.86       1.46               1.89       1.88          
Overhead ratio
    54       58               56       57          
Overhead ratio excluding core deposit intangibles(a)
    51       54               53       53          
 
(a)  
Regional Banking uses the overhead ratio (excluding the amortization of core deposit intangibles (“CDI”)), a non-GAAP financial measure, to evaluate the underlying expense trends of the business. Including CDI amortization expense in the overhead ratio calculation results in a higher overhead ratio in the earlier years and a lower overhead ratio in later years; this would result in an improving overhead ratio over time, all things remaining equal. This non-GAAP ratio excludes Regional Banking’s core deposit intangible amortization expense related to the Bank One merger of $109 million and $124 million for the quarters ended September 30, 2006 and 2005, respectively, and $328 million and $372 million year-to-date September 30, 2006 and 2005, respectively.

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Quarterly results
Regional Banking net income of $744 million was up by $181 million from the prior year. Excluding the prior-year impact of a $143 million (after-tax) special provision for credit losses related to Hurricane Katrina, net income would have been up by $38 million, or 5%. Results also reflected the sale of the insurance business during the current quarter. Net revenue of $3.0 billion was up by $84 million, or 3%, benefiting from growth in deposits and home equity loans, increases in deposit-related fees and credit card sales, and the acquisition of Collegiate Funding Services in the first quarter of 2006. These benefits were offset partially by the sale of the insurance business, narrower spreads on loans and narrower spreads on deposits caused by a shift in the deposit mix. The provision for credit losses decreased by $244 million, primarily the result of a $230 million special provision in the prior year related to Hurricane Katrina. Expenses of $1.6 billion were down by $62 million, or 4%, from the prior year. The decrease was due to the sale of the insurance business, merger savings and operating efficiencies, primarily offset by investments in the retail distribution network and the acquisition of Collegiate Funding Services.
Year-to-date results
Regional Banking net income of $2.3 billion was up by $154 million from the prior year. Excluding the prior-year impact of a $143 million (after-tax) special provision for credit losses related to Hurricane Katrina, net income would have been flat. Results also reflected the sale of the insurance business during the current quarter. Net revenue of $9.1 billion was up by $198 million, or 2%, benefiting from growth in deposits and home equity loans, increases in deposit-related fees and credit card sales, and the acquisition of Collegiate Funding Services in the first quarter of 2006. These benefits were offset partially by the sale of the insurance business, narrower spreads on loans, and narrower spreads on deposits caused by a shift in the deposit mix. The provision for credit losses decreased by $236 million, primarily the result of a $230 million special provision in the prior year related to Hurricane Katrina. Expenses of $5.1 billion were up by $56 million, or 1%, from the prior year. The increase was due to investments in the retail distribution network and the acquisition of Collegiate Funding Services, partially offset by the sale of the insurance business, merger savings and operating efficiencies.
                                                 
Business metrics   Three months ended September 30,     Nine months ended September 30,  
(in billions, except ratios)   2006     2005     Change     2006     2005     Change  
 
Home equity origination volume
  $ 13.3     $ 14.3       (7 )%   $ 39.0     $ 42.0       (7 )%
End-of-period loans owned
Home equity
  $ 80.4     $ 72.5       11     $ 80.4     $ 72.5       11  
Mortgage
    46.6       47.0       (1 )     46.6       47.0       (1 )
Business banking
    13.1       12.7       3       13.1       12.7       3  
Education
    9.4       2.9       224       9.4       2.9       224  
Other loans(a)
    2.2       2.9       (24 )     2.2       2.9       (24 )
                     
Total end of period loans
    151.7       138.0       10       151.7       138.0       10  
End-of-period deposits
Checking
  $ 59.8     $ 62.3       (4 )   $ 59.8     $ 62.3       (4 )
Savings
    86.9       86.9             86.9       86.9        
Time and other
    41.5       27.0       54       41.5       27.0       54  
                     
Total end of period deposits
    188.2       176.2       7       188.2       176.2       7  
Average loans owned
Home equity
  $ 78.8     $ 71.7       10     $ 76.4     $ 69.0       11  
Mortgage
    47.8       46.6       3       46.5       45.3       3  
Business banking
    13.0       12.5       4       12.9       12.5       3  
Education
    8.9       2.2       305       7.7       2.8       175  
Other loans(a)
    2.2       2.6       (15 )     2.6       3.3       (21 )
                     
Total average loans(b)
    150.7       135.6       11       146.1       132.9       10  
Average deposits
Checking
  $ 60.3     $ 61.0       (1 )   $ 61.9     $ 61.7        
Savings
    88.1       87.1       1       89.1       87.4       2  
Time and other
    39.0       26.3       48       35.6       25.4       40  
                     
Total average deposits
    187.4       174.4       7       186.6       174.5       7  
Average assets
    159.1       152.9       4       160.3       150.0       7  
Average equity
    10.2       9.2       11       10.1       9.0       12  
                     

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Credit data and quality statistics
                                               
30+ day delinquency rate(c)(d)
    1.57 %     1.45 %             1.57 %     1.45 %        
Net charge-offs
Home equity
  $ 29     $ 32       (9 )   $ 92     $ 99       (7 )
Mortgage
    14       6       133       35       20       75  
Business banking
    19       25       (24 )     53       69       (23 )
Other loans
    1       11       (91 )     21       22       (5 )
                     
Total net charge-offs
    63       74       (15 )     201       210       (4 )
Net charge-off rate
Home equity
    0.15 %     0.18 %             0.16 %     0.19 %        
Mortgage
    0.12       0.05               0.10       0.06          
Business banking
    0.58       0.79               0.55       0.74          
Other loans(b)
    0.05       1.68               0.36       0.92          
Total net charge-off rate(b)
    0.17       0.22               0.19       0.22          
Nonperforming assets(e)(f)(g)
  $ 1,421     $ 1,141       25     $ 1,421     $ 1,141       25  
 
(a)  
Includes commercial loans derived from community development activities and, prior to July 3, 2006, insurance policy loans.
 
(b)  
Average loans include loans held-for-sale of $2.5 billion and $2.2 billion for the quarters ended September 30, 2006 and 2005, respectively, and $2.6 billion and $2.9 billion year-to-date September 30, 2006 and 2005, respectively. These amounts are not included in the net charge-off rate.
 
(c)  
Excludes delinquencies related to loans eligible for repurchase as well as loans repurchased from GNMA pools that are insured by government agencies of $0.9 billion and $0.8 billion at September 30, 2006 and 2005, respectively. These amounts are excluded as reimbursement is proceeding normally.
 
(d)  
Excludes delinquencies that are insured by government agencies under the Federal Family Education Loan Program of $0.5 billion at September 30, 2006. Delinquencies were insignificant at September 30, 2005. These amounts are excluded as reimbursement is proceeding normally.
 
(e)  
Excludes nonperforming assets related to loans eligible for repurchase as well as loans repurchased from GNMA pools that are insured by government agencies of $1.1 billion and $1.0 billion at September 30, 2006 and 2005, respectively. These amounts are excluded as reimbursement is proceeding normally.
 
(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 $0.2 billion at September 30, 2006. The Education loans past due 90 days were insignificant at September 30, 2005. These amounts are excluded as reimbursement is proceeding normally.
 
(g)  
Includes nonperforming loans held-for-sale related to mortgage banking activities of $3 million and $10 million at September 30, 2006 and 2005, respectively.
                                                 
Retail branch business metrics   Three months ended September 30,     Nine months ended September 30,  
(in millions, except where otherwise noted)   2006     2005     Change     2006     2005     Change  
 
Investment sales volume
  $ 3,536     $ 2,745       29 %   $ 10,781     $ 8,522       27 %
 
                                               
Number of:
                                               
Branches
    2,677       2,549       128 #     2,677       2,549       128 #
ATMs
    7,825       7,136       689       7,825       7,136       689  
Personal bankers
    7,484       6,719       765       7,484       6,719       765  
Sales specialists
    3,471       3,117       354       3,471       3,117       354  
Active online customers (in thousands)
    5,340       4,099       1,241       5,340       4,099       1,241  
Checking accounts (in thousands)
    9,270       8,702       568       9,270       8,702       568  
 

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MORTGAGE BANKING
                                                 
Selected income statement data   Three months ended September 30,     Nine months ended September 30,  
(in millions, except ratios and where                                        
otherwise noted)   2006     2005     Change     2006     2005     Change  
 
Production revenue
  $ 197     $ 229       (14 )%   $ 618     $ 610       1 %
Net mortgage servicing revenue:
                                               
Servicing revenue
    579       533       9       1,702       1,569       8  
Changes in MSR asset fair value:
                                               
Due to inputs or assumptions in model(a)
    (1,075 )     767       NM       127       613       (79 )
Other changes in fair value(b)
    (327 )     (323 )     (1 )     (1,068 )     (986 )     (8 )
Derivative valuation adjustments and other
    824       (814 )     NM       (475 )     (390 )     (22 )
                     
Total net mortgage servicing revenue
    1       163       (99 )     286       806       (65 )
                     
Total net revenue
    198       392       (49 )     904       1,416       (36 )
Noninterest expense
    334       309       8       987       914       8  
                     
Income (loss) before income tax expense
    (136 )     83       NM       (83 )     502       NM  
                     
Net income (loss)
  $ (83 )   $ 53       NM     $ (51 )   $ 316       NM  
                     
ROE
    NM       13 %             NM       26 %        
ROA
    NM       0.89               NM       1.94          
 
                                               
Business metrics (in billions)
                                               
Third-party mortgage loans serviced (ending)
  $ 510.7     $ 450.3       13     $ 510.7     $ 450.3       13  
MSR net carrying value (ending)
    7.4       6.1       21       7.4       6.1       21  
Average mortgage loans held-for-sale
    10.5       13.5       (22 )     11.1       11.8       (6 )
Average assets
    22.4       23.7       (5 )     24.5       21.8       12  
Average equity
    1.7       1.6       6       1.7       1.6       6  
 
                                               
Mortgage origination volume by channel (in billions)
                                               
Retail
  $ 10.1     $ 13.9       (27 )   $ 30.0     $ 35.6       (16 )
Wholesale
    7.7       10.1       (24 )     23.8       26.0       (8 )
Correspondent (including negotiated transactions) (c)
    10.6       15.3       (31 )     34.3       35.5       (3 )
                     
Total
  $ 28.4     $ 39.3       (28 )   $ 88.1     $ 97.1       (9 )
 
(a)  
Represents MSR asset fair value adjustments due to changes in inputs, such as interest rates and volatility, as well as updates to assumptions used in the valuation model.
 
(b)  
Includes changes in the MSR value due to servicing portfolio runoff (or time decay). Effective January 1, 2006, the Firm implemented SFAS 156, adopting fair value for the MSR asset. For the period ending September 30, 2005, this amount represents MSR asset amortization expense calculated in accordance with SFAS 140.
 
(c)  
Excludes purchased correspondent bulk servicing. Prior periods have been restated to conform to current methodologies.
Quarterly results
Mortgage Banking net loss was $83 million compared with net income of $53 million in the prior year. Net revenue was $198 million, down by $194 million. Revenue comprises production revenue and net mortgage servicing revenue. Production revenue was $197 million, down by $32 million, reflecting a 28% decrease in mortgage originations, partially offset by wider margins. Net mortgage servicing revenue, which includes loan servicing revenue, MSR risk management results and other changes in fair value, was $1 million compared with $163 million in the prior year. Loan servicing revenue of $579 million increased by $46 million on a 13% increase in third-party loans serviced. MSR risk management revenue of negative $251 million was down by $204 million from the prior year, reflecting a $235 million negative valuation adjustment to the MSR asset due to changes and refinements to inputs and assumptions used in the MSR valuation model. Other changes in fair value of the MSR asset, representing runoff of the asset against the realization of servicing cash flows, were negative $327 million. Noninterest expense was $334 million, up by $25 million, or 8%.
Year-to-date results
Mortgage Banking net loss was $51 million compared with net income of $316 million in the prior year. Net revenue was $904 million, down by $512 million from the prior year. Revenue comprises production revenue and net mortgage servicing revenue. Production revenue was $618 million, up by $8 million, as wider margins were offset partially by a 9% decrease in mortgage originations. Net mortgage servicing revenue, which includes loan servicing revenue, MSR risk management results and other changes in fair value, was $286 million compared with $806 million in the prior year. Loan servicing revenue of

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$1.7 billion increased by $133 million on a 13% increase in third-party loans serviced. MSR risk management revenue of negative $348 million was down by $571 million from the prior year, reflecting positive risk management results in the prior year and a $235 million negative valuation adjustment to the MSR asset due to changes and refinements to inputs and assumptions used in the MSR valuation model. Other changes in fair value of the MSR asset, representing runoff of the asset against the realization of servicing cash flows, were negative $1.1 billion. Noninterest expense was $987 million, up by $73 million, or 8%.
AUTO FINANCE
                                                 
Selected income statement data   Three months ended September 30,     Nine months ended September 30,  
(in millions, except ratios and where                                        
otherwise noted)   2006     2005     Change     2006     2005     Change  
 
Noninterest revenue
  $ 110     $ 14       NM     $ 244     $ 11       NM  
Net interest income
    285       306       (7 )%     884       942       (6 )%
                     
Total net revenue
    395       320       23       1,128       953       18  
Provision for credit losses
    61       81       (25 )     110       141       (22 )
Noninterest expense
    194       174       11       554       491       13  
                     
Income before income tax expense
    140       65       115       464       321       45  
                     
Net income
  $ 85     $ 40       113     $ 281     $ 197       43  
                     
 
                                               
ROE
    14 %     6 %             16 %     10 %        
ROA
    0.77       0.31               0.82       0.48          
 
                                               
Business metrics (in billions)
                                               
Auto origination volume
  $ 5.5     $ 5.1       8     $ 14.3     $ 14.0       2  
End-of-period loans and lease related assets
Loans outstanding
  $ 38.1     $ 43.3       (12 )   $ 38.1     $ 43.3       (12 )
Lease financing receivables
    2.2       5.1       (57 )     2.2       5.1       (57 )
Operating lease assets
    1.5       0.7       114       1.5       0.7       114  
                     
Total end-of-period loans and lease related assets
    41.8       49.1       (15 )     41.8       49.1       (15 )
Average loans and lease related assets
Loans outstanding(a)
  $ 38.9     $ 43.7       (11 )   $ 40.1     $ 46.5       (14 )
Lease financing receivables
    2.5       5.6       (55 )     3.2       6.6       (52 )
Operating lease assets
    1.4       0.6       133       1.2       0.4       200  
                     
Total average loans and lease related assets
    42.8       49.9       (14 )     44.5       53.5       (17 )
Average assets
    43.8       51.3       (15 )     45.6       54.5       (16 )
Average equity
    2.4       2.7       (11 )     2.4       2.7       (11 )
                     
 
                                               
Credit quality statistics
                                               
30+ day delinquency rate
    1.61 %     1.60 %             1.61 %     1.60 %        
Net charge-offs
Loans
  $ 63     $ 66       (5 )   $ 155     $ 185       (16 )
Lease receivables
    2       4       (50 )     6       15       (60 )
                     
Total net charge-offs
    65       70       (7 )     161       200       (20 )
Net charge-off rate
Loans(a)
    0.66 %     0.60 %             0.53 %     0.54 %        
Lease receivables
    0.32       0.28               0.25       0.30          
Total net charge-off rate(a)
    0.64       0.56               0.51       0.51          
Nonperforming assets
  $ 174     $ 246       (29 )   $ 174     $ 246       (29 )
 
(a)  
Average loans include loans held-for-sale of $0.9 billion for the quarter ended September 30, 2006, and $0.7 billion for both year-to-date 2006 and 2005. Average loans held-for-sale for the quarter ended September 30, 2005, were insignificant. These amounts are not included in the net charge-off rate.
Quarterly results
Auto Finance net income of $85 million was up by $45 million from the prior year. Net revenue of $395 million was up by $75 million, or 23%, reflecting the absence of a prior-year write-down of $48 million associated with the transfer of $1.5 billion of loans 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 of $61 million decreased by $20 million due to a special provision in the prior year related to Hurricane Katrina. Noninterest expense of $194 million increased by $20 million, or 11%, driven by increased depreciation expense on owned automobiles subject to operating leases.

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Year-to-date results
Auto Finance net income of $281 million was up by $84 million from the prior year. Net revenue of $1.1 billion was up by $175 million, or 18%, reflecting the absence of a prior-year write-down of $48 million associated with the transfer of $1.5 billion of loans 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 of $110 million decreased by $31 million due to a special provision in the prior year related to Hurricane Katrina. Noninterest expense of $554 million increased by $63 million, or 13%, driven by increased depreciation expense on owned automobiles subject to operating leases, partially offset by operating efficiencies on a 2% increase in origination volumes.
 
CARD SERVICES
 
For a discussion of the business profile of CS, see pages 45–46 of JPMorgan Chase’s 2005 Annual Report.
JPMorgan Chase uses the concept of “managed receivables” to evaluate the credit performance of its credit card loans, both loans on the balance sheet and loans that have been securitized. For further information, see Explanation and reconciliation of the Firm’s use of non-GAAP financial measures on pages 12–15 of this Form 10-Q. Managed results exclude the impact of credit card securitizations on Total net revenue, the Provision for credit losses, net charge-offs and loan receivables. Securitization does not change reported Net income; however, it does affect the classification of items on the Consolidated statements of income and Consolidated balance sheets.
                                                 
Selected income statement data –            
  managed basis   Three months ended September 30,     Nine months ended September 30,  
(in millions, except ratios)   2006     2005     Change     2006     2005     Change  
 
Revenue
                                               
Credit card income
  $ 636     $ 950       (33 )%   $ 1,890     $ 2,579       (27 )%
All other income
    126       60       110       246       113       118  
                     
Noninterest revenue
    762       1,010       (25 )     2,136       2,692       (21 )
Net interest income
    2,884       2,970       (3 )     8,859       8,953       (1 )
                     
Total net revenue(a)
    3,646       3,980       (8 )     10,995       11,645       (6 )
 
                                               
Provision for credit losses(b)
    1,270       1,833       (31 )     3,317       5,110       (35 )
 
                                               
Noninterest expense
                                               
Compensation expense
    251       284       (12 )     761       860       (12 )
Noncompensation expense
    823       813       1       2,429       2,556       (5 )
Amortization of intangibles
    179       189       (5 )     555       566       (2 )
                     
Total noninterest expense(a)
    1,253       1,286       (3 )     3,745       3,982       (6 )
                     
 
                                               
Income before income tax expense(a)
    1,123       861       30       3,933       2,553       54  
Income tax expense
    412       320       29       1,446       948       53  
                     
Net income
  $ 711     $ 541       31     $ 2,487     $ 1,605       55  
                     
 
                                               
Memo: Net securitization gains
  $ 48     $ 25       92     $ 50     $ 28       79  
 
                                               
Financial metrics
                                               
ROE
    20 %     18 %             24 %     18 %        
Overhead ratio
    34       32               34       34          
 
(a)  
As a result of the integration of Chase Merchant Services and Paymentech merchant processing businesses into a joint venture, beginning in the fourth quarter of 2005, Total net revenue, Total noninterest expense and Income before income tax expense have been reduced to reflect the deconsolidation of Paymentech. There is no impact to Net income.
 
(b)  
Third quarter of 2005 includes a $100 million special provision related to Hurricane Katrina, of which $90 million was released in the second quarter of 2006.
To illustrate underlying business trends, the following discussion of CS’ performance assumes for all relevant 2005 periods that the deconsolidation of Paymentech had occurred as of the beginning of the year. The effect of the deconsolidation would have reduced Total net revenue, primarily in Noninterest revenue, and Total noninterest expense, but would not have any impact on Net income for such periods. For a reconciliation of CS’ managed basis to an adjusted basis to disclose the effect of the deconsolidation of Paymentech, see page 31 of this Form 10-Q.

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Quarterly results
Net income of $711 million was up by $170 million, or 31%, from the prior year. Results were driven by a lower provision for credit losses due to significantly lower bankruptcy filings and the absence of an increase in the allowance for credit losses of $124 million (after-tax) in the prior year.
End-of-period managed loans of $143.8 billion increased by $6.3 billion, or 5%, from the prior year. Average managed loans of $141.7 billion increased by $3.9 billion, or 3%, from the prior year. The current quarter included average and end-of-period managed loans of $2.1 billion from the acquisition of the Sears Canada credit card business (acquired in the fourth quarter of 2005), as well as $1.6 billion of average managed loans and $1.7 billion of end-of-period managed loans from the acquisition of the Kohl’s private label portfolio (acquired in the second quarter of 2006). Compared with the prior year, both average managed and end-of-period managed loans continued to be affected negatively by higher customer payment rates. Management believes that contributing to the higher payment rates are the new minimum payment rules and a higher proportion of customers in rewards-based programs.
Net managed revenue was $3.6 billion, down by $183 million, or 5%, from the prior year. Net interest income of $2.9 billion was down by $80 million, or 3%. The decrease in net interest income was driven by attrition of mature, higher spread balances as a result of higher payment rates. Also contributing to the reduction was higher cost of funds on balance growth in promotional, introductory and transactor loan balances, which increased due to continued investment in marketing. These decreases were offset partially by an increase in average managed loan balances due to acquisitions. Noninterest revenue of $762 million was down by $103 million, or 12%, due to higher volume-driven payments to partners, including Kohl’s, and increased rewards expense, partially offset by increased interchange income related to a 15% increase in charge volume.
The managed provision for credit losses was $1.3 billion, down by $563 million, or 31%, from the prior year. This benefit was due to a decrease in net charge-offs of $353 million, reflecting the continued low level of bankruptcy losses, partially offset by increased contractual net charge-offs. The provision also benefited from the lack of an increase in the allowance for credit losses of $200 million related to Hurricane Katrina and higher bankruptcy filings in the prior year. The managed net charge-off rate for the quarter was 3.58%, down from 4.70% in the prior year. The 30-day managed delinquency rate was 3.17%, down from 3.39% in the prior year.
Noninterest expense of $1.3 billion was up by $101 million, or 9%, from the prior year due to the acquisitions of the Sears Canada credit card business and Kohl’s private label portfolio as well as higher marketing spending, partially offset by merger savings.
Year-to-date results
Net income of $2.5 billion was up by $882 million, or 55%, from the prior year. Results were driven by a lower provision for credit losses due to significantly lower bankruptcy filings.
End-of-period managed loans of $143.8 billion increased by $6.3 billion, or 5%, from the prior year. Average managed loans of $139.0 billion increased by $3.4 billion, or 3%, from the prior year. The current period included $2.1 billion of average and end-of-period loans from the acquisition of the Sears Canada credit card business (acquired in the fourth quarter of 2005), as well as approximately $900 million of average loans and $1.7 billion of end-of-period loans from the acquisition, in the second quarter of 2006, of the Kohl’s private label portfolio. Compared with the prior year, both average managed and end-of-period managed loans were negatively affected by higher customer payment rates. Management believes that contributing to the higher payment rates are the new minimum payment rules and a higher proportion of customers in rewards-based programs.
Total net revenue of $11.0 billion was down $215 million, or 2%, from the prior year. Net interest income of $8.9 billion was down $81 million, or 1%, from the prior year. The decrease in net interest income was driven by attrition of mature, higher spread balances as a result of higher payment rates. Also contributing to the reduction was higher cost of funds on balance growth in promotional, introductory and transactor loan balances, which increased due to continued investment in marketing. These decreases were offset partially by an increase in average managed loan balances due to acquisitions and lower revenue reversals due to lower bankruptcies. Noninterest revenue of $2.1 billion was down by $134 million, or 6%, due to higher volume-driven payments to partners, including Kohl’s, and increased rewards expense, partially offset by increased interchange income related to an 11% increase in charge volume.
The managed provision for credit losses was $3.3 billion, down by $1.8 billion, or 35%, from the prior year. The benefit was due to a decrease in net charge-offs of $1.4 billion, reflecting the continued low level of bankruptcy losses. The provision also benefited from a reduction in the allowance for credit losses in the current year compared with an increase in the allowance for credit losses in the prior year. The managed net charge-off rate decreased to 3.29%, down from 4.80% in the prior year. The 30-day managed delinquency rate was 3.17%, down from 3.39% in the prior year.
Noninterest expense of $3.7 billion was up $152 million, or 4%. The acquisition of the Sears Canada credit card business and Kohl’s private label portfolio, increased marketing spending and higher fraud-related losses were offset partially by merger savings and other efficiencies.

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Selected metrics   Three months ended September 30,     Nine months ended September 30,  
(in millions, except headcount, ratios                                        
  and where otherwise noted)   2006     2005     Change     2006     2005     Change  
 
% of average managed outstandings:
                                               
Net interest income
    8.07 %     8.55 %             8.52 %     8.83 %        
Provision for credit losses
    3.56       5.28               3.19       5.04          
Noninterest revenue
    2.13       2.91               2.05       2.66          
Risk adjusted margin(a)
    6.65       6.18               7.39       6.45          
Noninterest expense
    3.51       3.70               3.60       3.93          
Pretax income (ROO)
    3.14       2.48               3.78       2.52          
Net income
    1.99       1.56               2.39       1.58          
 
                                               
Business metrics
                                               
Charge volume (in billions)
  $ 87.5     $ 76.4       15 %   $ 246.2     $ 222.3       11 %
Net accounts opened (in thousands)(b)
    4,186       3,022       39       31,477       8,555       268  
Credit cards issued (in thousands)
    139,513       98,236       42       139,513       98,236       42  
Number of registered Internet customers (in millions)
    20.4       14.6       40       20.4       14.6       40  
Merchant acquiring business(c)
                                               
Bank card volume (in billions)
  $ 168.7     $ 143.4       18     $ 482.7     $ 409.7       18  
Total transactions (in millions)(d)
    4,597       3,921       17       13,203       11,184       18  
 
                                               
Selected ending balances
                                               
Loans:
                                               
Loans on balance sheets
  $ 78,587     $ 68,479       15     $ 78,587     $ 68,479       15  
Securitized loans
    65,245       69,095       (6 )     65,245       69,095       (6 )
                     
Managed loans
  $ 143,832     $ 137,574       5     $ 143,832     $ 137,574       5  
                     
 
                                               
Selected average balances
                                               
Managed assets
  $ 148,272     $ 144,225       3     $ 146,192     $ 141,180       4  
Loans:
                                               
Loans on balance sheets
  $ 76,655     $ 68,877       11     $ 71,129     $ 66,759       7  
Securitized loans
    65,061       68,933       (6 )     67,862       68,791       (1 )
                     
Managed loans
  $ 141,716     $ 137,810       3     $ 138,991     $ 135,550       3  
                     
Equity
    14,100       11,800       19       14,100       11,800       19  
 
                                               
Headcount
    18,696       19,463       (4 )     18,696       19,463       (4 )
 
                                               
Credit quality statistics
                                               
Net charge-offs
  $ 1,280     $ 1,633       (22 )   $ 3,417     $ 4,864       (30 )
Net charge-off rate
    3.58 %     4.70 %             3.29 %     4.80 %        
Delinquency ratios
                                               
30+ days
    3.17 %     3.39 %             3.17 %     3.39 %        
90+ days
    1.48       1.55               1.48       1.55          
 
                                               
Allowance for loan losses
  $ 3,176     $ 3,255       (2 )   $ 3,176     $ 3,255       (2 )
Allowance for loan losses to period-end loans
    4.04 %     4.75 %             4.04 %     4.75 %        
 
(a)  
Represents Total net revenue less Provision for credit losses.
 
(b)  
Year-to-date 2006 includes 21 million accounts from the acquisition of the Kohl’s private label portfolio in the second quarter of 2006.
 
(c)  
Represents 100% of the merchant acquiring business.
 
(d)  
Periods prior to the fourth quarter of 2005 have been restated to conform methodologies following the integration of Chase Merchant Services and Paymentech merchant processing businesses.

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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 September 30,     Nine months ended September 30,  
(in millions)   2006     2005     Change     2006     2005     Change  
 
Income statement data(a)
                                               
Credit card income
                                               
Reported data for the period
  $ 1,357     $ 1,683       (19 )%   $ 4,673     $ 4,855       (4 )%
Securitization adjustments
    (721 )     (733 )     2       (2,783 )     (2,276 )     (22 )
                     
Managed credit card income
  $ 636     $ 950       (33 )   $ 1,890     $ 2,579       (27 )
                     
 
                                               
Net interest income
                                               
Reported data for the period
  $ 1,556     $ 1,370       14     $ 4,459     $ 3,963       13  
Securitization adjustments
    1,328       1,600       (17 )     4,400       4,990       (12 )
                     
Managed net interest income
  $ 2,884     $ 2,970       (3 )   $ 8,859     $ 8,953       (1 )
                     
 
                                               
Total net revenue
                                               
Reported data for the period
  $ 3,039     $ 3,113       (2 )   $ 9,378     $ 8,931       5  
Securitization adjustments
    607       867       (30 )     1,617       2,714       (40 )
                     
Managed total net revenue
  $ 3,646     $ 3,980       (8 )   $ 10,995     $ 11,645       (6 )
                     
 
                                               
Provision for credit losses
                                               
Reported data for the period(b)
  $ 663     $ 966       (31 )   $ 1,700     $ 2,396       (29 )
Securitization adjustments
    607       867       (30 )     1,617       2,714       (40 )
                     
Managed provision for credit losses(b)
  $ 1,270     $ 1,833       (31 )   $ 3,317     $ 5,110       (35 )
                     
 
                                               
Balance sheet – average balances(a)
                                               
 
                                               
Total average assets
                                               
Reported data for the period
  $ 85,301     $ 77,204       10     $ 80,395     $ 74,263       8  
Securitization adjustments
    62,971       67,021       (6 )     65,797       66,917       (2 )
                     
Managed average assets
  $ 148,272     $ 144,225       3     $ 146,192     $ 141,180       4  
                     
 
                                               
Credit quality statistics(a)
                                               
 
                                               
Net charge-offs
                                               
Reported net charge-offs data for the period
  $ 673     $ 766       (12 )   $ 1,800     $ 2,150       (16 )
Securitization adjustments
    607       867       (30 )     1,617       2,714       (40 )
                     
Managed net charge-offs
  $ 1,280     $ 1,633       (22 )   $ 3,417     $ 4,864       (30 )
 
(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.
 
(b)  
Third quarter of 2005 includes a $100 million special provision related to Hurricane Katrina, of which $90 million was released in the second quarter of 2006.
Reconciliation of Card Services’ managed results to adjusted results as if Paymentech had not been consolidated
The financial information presented below is presented to illustrate the underlying trends of how CS’ results may have appeared had Paymentech been deconsolidated prior to the earliest date indicated.
                                                 
    Three months ended September 30,     Nine months ended September 30,  
(in millions)   2006     2005     Change     2006     2005     Change  
 
Noninterest revenue
                                               
Managed Noninterest revenue
  $ 762     $ 1,010       (25 )%   $ 2,136     $ 2,692       (21 )%
Adjustment for Paymentech
          (145 )     NM             (422 )     NM  
                     
Adjusted Noninterest revenue
  $ 762     $ 865       (12 )   $ 2,136     $ 2,270       (6 )
                     
 
                                               
Total net revenue
                                               
Managed Total net revenue
  $ 3,646     $ 3,980       (8 )   $ 10,995     $ 11,645       (6 )
Adjustment for Paymentech
          (151 )     NM             (435 )     NM  
                     
Adjusted Total net revenue
  $ 3,646     $ 3,829       (5 )   $ 10,995     $ 11,210       (2 )
                     
 
                                               
Noninterest expense
                                               
Managed Total noninterest expense
  $ 1,253     $ 1,286       (3 )   $ 3,745     $ 3,982       (6 )
Adjustment for Paymentech
          (134 )     NM             (389 )     NM  
                     
Adjusted Total noninterest expense
  $ 1,253     $ 1,152       9     $ 3,745     $ 3,593       4  
 

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COMMERCIAL BANKING
 
For a discussion of the business profile of CB, see page 5 of this Form 10-Q. For additional information on the transfers of various wholesale banking clients among CB, the IB and TSS, see page 15 of this Form 10-Q.
The October 1, 2006 acquisition of The Bank of New York’s middle-market banking business added approximately 2,000 clients, $2.5 billion of loans and $1.3 billion in deposits.
                                                 
Selected income statement data   Three months ended September 30,     Nine months ended September 30,  
(in millions, except ratios)   2006     2005     Change     2006     2005     Change  
 
Revenue
                                               
Lending & deposit related fees
  $ 145     $ 145       %   $ 434     $ 429       1 %
Asset management, administration and commissions
    16       15       7       47       43       9  
All other income(a)
    95       94       1       282       261       8  
                     
Noninterest revenue
    256       254       1       763       733       4  
Net interest income
    677       623       9       2,019       1,839       10  
                     
Total net revenue
    933       877       6       2,782       2,572       8  
 
                                               
Provision for credit losses(b)
    54       (46 )     NM       49       90       (46 )
 
                                               
Noninterest expense
                                               
Compensation expense
    190       164       16       566       484       17  
Noncompensation expense
    296       279       6       883       848       4  
Amortization of intangibles
    14       15       (7 )     45       49       (8 )
                     
Total noninterest expense
    500       458       9       1,494       1,381       8  
                     
Income before income tax expense
    379       465       (18 )     1,239       1,101       13  
Income tax expense
    148       181       (18 )     485       429       13  
                     
Net income
  $ 231     $ 284       (19 )   $ 754     $ 672       12  
                     
 
                                               
Financial ratios
                                               
ROE
    17 %     33 %             18 %     26 %        
ROA
    1.60       2.17               1.79       1.74          
Overhead ratio
    54       52               54       54          
 
(a)  
IB-related and commercial card revenues are included in All other income.
 
(b)  
Third quarter of 2005 includes a $35 million special provision related to Hurricane Katrina.
Quarterly results
Net income was $231 million, down by $53 million, or 19%, from the prior year. The decrease was driven primarily by a higher provision for credit losses.
Net revenue was $933 million, up by $56 million, or 6%, from the prior year. Net interest income was $677 million, up by $54 million, or 9%, due to higher liability balances and loan volumes, largely offset by narrower loan spreads and a shift to lower margin liability products. Noninterest revenue of $256 million was up by $2 million, or 1%.
Each business within CB grew revenue over the prior year, primarily driven by increased Treasury Services revenue and lending revenue. Compared with the prior year, Middle Market Banking revenue of $617 million increased by $28 million, or 5%. Mid-Corporate Banking revenue of $160 million increased by $19 million, or 13%, and Real Estate revenue of $119 million increased by $5 million, or 4%.
Provision for credit losses was $54 million reflecting stable credit quality and growth in the loan portfolio. The provision for credit losses was a benefit of $46 million in the prior year, which included a release of the allowance for credit losses that was offset partially by a special provision related to Hurricane Katrina.
Noninterest expense was $500 million, up by $42 million, or 9%, from the prior year, largely due to higher compensation expense and increased expense related to higher client usage of Treasury Services products.

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Year-to-date results
Earnings of $754 million increased by $82 million, or 12%, from the prior year due to higher revenues and lower provision for credit losses, partially offset by higher expenses.
Net revenues of $2.8 billion increased 8%, or $210 million. Net interest income increased to $2 billion, primarily driven by higher liability balances and loan volumes, partially offset by lower loan spreads. Noninterest revenue was $763 million, up $30 million, or 4%, due to higher commercial card and IB-related revenues.
Each business within CB grew revenue over the prior year, primarily driven by increased Treasury Services revenue and lending revenue. Compared with the prior year, Middle Market Banking revenue of $1.9 billion increased by $124 million, or 7%. Mid-Corporate Banking revenue of $458 million increased by $55 million, or 14%, and Real Estate revenue of $338 million increased by $26 million, or 8%.
Provision for credit losses was $49 million, down from $90 million in the prior year. The provision for credit losses in the prior year was primarily related to refinements in the data used to estimate the allowance for credit losses and a $35 million provision for Hurricane Katrina.
Noninterest expenses of $1.5 billion increased by $113 million, or 8%, from last year, primarily related to incremental compensation expense related to SFAS 123R and increased expense resulting from higher client usage of Treasury Services products.
                                                 
Selected metrics   Three months ended September 30,     Nine months ended September 30,  
(in millions, except ratio and                                        
headcount data)   2006     2005     Change     2006     2005     Change  
 
Revenue by product:
                                               
Lending
  $ 335     $ 302       11 %   $ 985     $ 905       9 %
Treasury Services
    551       517       7       1,667       1,516       10  
Investment banking
    60       50       20       166       150       11  
Other
    (13 )     8       NM       (36 )     1       NM  
                     
Total Commercial Banking revenue
    933       877       6       2,782       2,572       8  
                     
 
                                               
IB revenues, gross(a)
  $ 170     $ 145       17     $ 470     $ 402       17  
                     
 
                                               
Revenue by business:
                                               
Middle Market Banking
  $ 617     $ 589       5     $ 1,874     $ 1,750       7  
Mid-Corporate Banking
    160       141       13       458       403       14  
Real Estate
    119       114       4       338       312       8  
Other
    37       33       12       112       107       5  
                     
Total Commercial Banking revenue
  $ 933     $ 877       6     $ 2,782     $ 2,572       8  
                     
 
                                               
Selected average balances
                                               
Total assets
  $ 57,378     $ 51,988       10     $ 56,246     $ 51,735       9  
Loans and leases(b)
    53,404       47,999       11       52,227       47,468       10  
Liability balances(c)
    72,009       64,772       11       71,781       65,098       10  
Equity
    5,500       3,400       62       5,500       3,400       62  
 
                                               
Average loans by business:
                                               
Middle Market Banking
  $ 32,890     $ 31,402       5     $ 32,418     $ 30,917       5  
Mid-Corporate Banking
    8,756       6,434       36       8,205       6,163       33  
Real Estate
    7,564       6,623       14       7,505       6,760       11  
Other
    4,194       3,540       18       4,099       3,628       13  
                     
Total Commercial Banking loans
    53,404       47,999       11       52,227       47,468       10  
                     
 
                                               
Headcount
    4,447       4,441             4,447       4,441        
 

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Credit data and quality statistics:
                                               
Net charge-offs
  $ 21     $ 6       250     $ 11     $ 5       120  
Nonperforming loans
    157       369       (57 )     157       369       (57 )
Allowance for loan losses
    1,431       1,423       1       1,431       1,423       1  
Allowance for lending-related commitments
    156       161       (3 )     156       161       (3 )
 
                                               
Net charge-off rate(b)
    0.16 %     0.05 %             0.03 %     0.01 %        
Allowance for loan losses to average loans(b)
    2.70       2.98               2.76       3.02          
Allowance for loan losses to nonperforming loans
    911       386               911       386          
Nonperforming loans to average loans
    0.29       0.77               0.30       0.78          
 
(a)  
Represents the revenue related to investment banking products sold to CB clients.
 
(b)  
Average loans include loans held-for-sale of $359 million and $298 million for the three months ended September 30, 2006 and 2005, respectively, and $321 million and $307 million for the nine months ended September 30, 2006 and 2005, respectively. These amounts are not included in the net charge-off rate or allowance coverage ratios.
 
(c)  
Liability balances include deposits and deposits that are swept to on-balance sheet liabilities.
 
TREASURY & SECURITIES SERVICES
 
For a discussion of the business profile of TSS, see page 5 of this Form 10-Q. In 2006, various wholesale banking clients, and the related revenue and expense, have been transferred among CB, IB and TSS. As a result, prior period amounts have been reclassified to conform to the current year presentation. TSS firmwide disclosures have also been adjusted to reflect a refined set of TSS products and a revised split of liability balances and lending-related revenue related to the client transfers described on page 15 of this Form 10-Q.
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, small business and middle market banking businesses of The Bank of New York. These corporate trust businesses, which were previously reported in TSS, have been deemed discontinued operations. The related balance sheet and income statement activity were transferred to the Corporate segment commencing with the second quarter of 2006, and periods prior to the second quarter of 2006 have been revised to reflect this transfer.
                                                 
Selected income statement data   Three months ended September 30,     Nine months ended September 30,  
(in millions, except ratios)   2006     2005     Change     2006     2005     Change  
 
Revenue
                                               
Lending & deposit related fees
  $ 183     $ 179       2 %   $ 549     $ 547       %
Asset management, administration and commissions
    642       605       6       1,975       1,780       11  
All other income
    155       127       22       479       385       24  
                     
Noninterest revenue
    980       911       8       3,003       2,712       11  
Net interest income
    519       469       11       1,569       1,391       13  
                     
Total net revenue
    1,499       1,380       9       4,572       4,103       11  
 
                                               
Provision for credit losses
    1       (1 )     NM       1       (2 )     NM  
Credit reimbursement to IB(a)
    (30 )     (38 )     21       (90 )     (114 )     21  
 
                                               
Noninterest expense
                                               
Compensation expense
    557       487       14       1,643       1,420       16  
Noncompensation expense
    489       493       (1 )     1,462       1,572       (7 )
Amortization of intangibles
    18       19       (5 )     57       61       (7 )
                     
Total noninterest expense
    1,064       999       7       3,162       3,053       4  
                     
 
                                               
Income before income tax expense
    404       344       17       1,319       938       41  
Income tax expense
    148       122       21       485       329       47  
                     
 
                                               
Net income
  $ 256     $ 222       15     $ 834     $ 609       37  
                     
Financial ratios
                                               
ROE
    46 %     58 %             48 %     53 %        
Overhead ratio
    71       72               69       74          
Pretax margin ratio(b)
    27       25               29       23          
 

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(a)  
TSS is charged a credit reimbursement related to certain exposures managed within the IB credit portfolio on behalf of clients shared with TSS. For a further discussion, see Credit reimbursement on page 35 of JPMorgan Chase’s 2005 Annual Report.
 
(b)  
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 $256 million, up by $34 million, or 15%, from the prior year. Earnings benefited from higher revenue due to wider spreads on higher average liability balances and growth in client volumes.
Net revenue was $1.5 billion, up by $119 million, or 9%, from the prior year. Noninterest revenue was $980 million, up by $69 million, or 8%. The improvement was due largely to an increase in assets under custody to $12.9 trillion, which was driven by market value appreciation and new business. Also contributing to the improvement was growth in ADRs, global clearing and securities lending, all of which were driven by a combination of increased product usage by existing clients and new business. Net interest income was $519 million, up by $50 million, or 11%, due to wider spreads on a 22% increase in average liability balances.
Treasury Services net revenue of $697 million was up by $27 million, or 4%, from the prior year. Worldwide Securities Services net revenue of $802 million was up by $92 million, or 13%. TSS firmwide net revenue, which includes Treasury Services net revenue recorded in other lines of business, grew to $2.1 billion, up by $160 million, or 8%. Treasury Services firmwide net revenue grew to $1.3 billion, up by $68 million, or 6%.
Noninterest expense was $1.1 billion, up by $65 million, or 7%. The increase was due to higher compensation expense related to growth in headcount supporting increased client activity, business growth and investment in new product platforms.
Year-to-date results
Net income was $834 million, up by $225 million, or 37%, from the prior year. Earnings benefited from higher revenue due to wider spreads on higher average liability balances, fee income and the absence of prior year charges of $58 million (after-tax) related to the termination of a client contract.
Net revenue was $4.6 billion, up by $469 million, or 11%. Noninterest revenue was $3.0 billion, up by $291 million, or 11%. The improvement was due primarily to an increase in assets under custody to $12.9 trillion, which was driven by market value appreciation and new business. Also contributing to the improvement was growth in securities lending, foreign exchange and ADRs, all of which were driven by a combination of increased product usage by existing clients and new business. Net interest income was $1.6 billion, up by $178 million, or 13%, primarily resulting from wider spreads on a 24% increase in average liability balances.
Treasury Services net revenue of $2.1 billion was up 4%. Worldwide Securities Services net revenue of $2.5 billion grew by $386 million, or 18%. TSS firmwide net revenue, which includes Treasury Services net revenue recorded in other lines of business, grew to $6.4 billion, up by $638 million, or 11%. Treasury Services firmwide net revenue grew to $3.9 billion, up by $252 million, or 7%.
Noninterest expense was $3.2 billion, up $109 million, or 4%. The increase was due to higher compensation expense related to growth in headcount supporting increased client activity, business growth, investment in new product platforms and incremental expense related to SFAS 123R, partially offset by the absence of prior-year charges of $93 million related to the termination of a client contract.

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Selected metrics   Three months ended September 30,     Nine months ended September 30,  
(in millions, except headcount, ratio                                        
data and where otherwise noted)   2006     2005     Change     2006     2005     Change  
 
Revenue by business
                                               
Treasury Services
  $ 697     $ 670       4 %   $ 2,092     $ 2,009       4 %
Worldwide Securities Services
    802       710       13       2,480       2,094       18  
                     
Total net revenue
  $ 1,499     $ 1,380       9     $ 4,572     $ 4,103       11  
 
                                               
Business metrics
                                               
Assets under custody (in billions)
  $ 12,873     $ 10,448       23     $ 12,873     $ 10,448       23  
Number of:
                                               
US$ ACH transactions originated (in millions)
    886       753       18       2,572       2,179       18  
Total US$ clearing volume (in thousands)
    26,252       24,906       5       77,940       70,811       10  
International electronic funds transfer volume (in thousands)(a)
    35,322       22,723       55       104,318       59,896       74  
Wholesale check volume (in millions)
    860       928       (7 )     2,616       2,859       (8 )
Wholesale cards issued (in thousands)(b)
    16,662       12,810       30       16,662       12,810       30  
Selected balance sheets (average)
                                               
Total assets
  $ 30,558     $ 27,679       10     $ 30,526     $ 27,846       10  
Loans
    15,231       12,160       25       14,396       11,851       21  
Liability balances(c)
    192,518       157,493       22       188,330       152,289       24  
Equity
    2,200       1,525       44       2,314       1,525       52  
 
                                               
Headcount
    24,575       21,878       12       24,575       21,878       12  
 
                                               
TSS firmwide metrics
                                               
Treasury Services firmwide revenue(d)
  $ 1,300     $ 1,232       6     $ 3,909     $ 3,657       7  
Treasury & Securities Services firmwide revenue(d)
    2,102       1,942       8       6,389       5,751       11  
Treasury Services firmwide overhead ratio(e)
    57 %     59 %             56 %     58 %        
Treasury & Securities Services firmwide overhead ratio(e)
    63       64               61       66          
Treasury Services firmwide liability balances (average)(f)
  $ 162,326     $ 140,079       16     $ 159,897     $ 137,325       16  
Treasury & Securities Services firmwide liability balances (average)(f)
    264,527       222,264       19       259,477       217,387       19  
 
(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 AWM lines of business (see below) and exclude FX revenues recorded in the IB for TSS-related FX activity. 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 $85 million for the quarter ended September 30, 2006, and $349 million for the nine months ended September 30, 2006.
 
(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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    Three months ended September 30,     Nine months ended September 30,  
(in millions)   2006     2005     Change     2006     2005     Change  
 
Treasury Services revenue reported in CB
  $ 551     $ 517       7 %   $ 1,667     $ 1,516       10 %
Treasury Services revenue reported in other lines of business
    52       45       16       150       132       14  
 
 
ASSET & WEALTH MANAGEMENT
 
For a discussion of the business profile of AWM, see pages 51–52 of JPMorgan Chase’s 2005 Annual Report.
                                                 
Selected income statement data   Three months ended September 30,     Nine months ended September 30,  
(in millions, except ratios)   2006     2005     Change     2006     2005     Change  
 
Revenue
                                               
Asset management, administration and commissions
  $ 1,285     $ 1,065       21 %   $ 3,786     $ 3,034       25 %
All other income
    120       117       3       329       296       11  
                     
Noninterest revenue
    1,405       1,182       19       4,115       3,330       24  
Net interest income
    231       267       (13 )     725       823       (12 )
                     
Total net revenue
    1,636       1,449       13       4,840       4,153       17  
 
                                               
Provision for credit losses(a)
    (28 )     (19 )     (47 )     (42 )     (46 )     9  
 
                                               
Noninterest expense
                                               
Compensation expense
    676       554       22       2,027       1,601       27  
Noncompensation expense
    417       397       5       1,201       1,151       4  
Amortization of intangibles
    22       25       (12 )     66       75       (12 )
                     
Total noninterest expense
    1,115       976       14       3,294       2,827       17  
                     
Income before income tax expense
    549       492       12       1,588       1,372       16  
Income tax expense
    203       177       15       586       498       18  
                     
Net income
  $ 346     $ 315       10     $ 1,002     $ 874       15  
                     
 
                                               
Financial ratios
                                               
ROE
    39 %     52 %             38 %     49 %        
Overhead ratio
    68       67               68       68          
Pretax margin ratio(b)
    34       34               33       33          
 
(a)  
Third quarter of 2005 includes a $3 million special provision related to Hurricane Katrina.
 
(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 $346 million, up by $31 million, or 10%, from the prior year. Performance was driven by increased revenue offset primarily by higher compensation expense.
Net revenue was $1.6 billion, up by $187 million, or 13%, from the prior year. Noninterest revenue, principally fees and commissions, of $1.4 billion was up by $223 million, or 19%. This increase was due largely to increased assets under management and higher performance fees. Net interest income was $231 million, down by $36 million, or 13%, from the prior year, primarily due to narrower deposit spreads, reflecting a shift in the deposit mix, and the sale of BrownCo in the fourth quarter of 2005, partially offset by higher loan and deposit balances.
Private Bank client segment revenue grew 11% from the prior year, to $469 million, due to increased placement activity, higher asset management fees and higher deposit balances, partially offset by narrower deposit spreads. Institutional client segment revenue grew 30%, to $464 million, due to net asset inflows and higher performance fees. Retail client segment revenue grew 10%, to $456 million, primarily due to net asset inflows, partially offset by the sale of BrownCo. Private Client Services client segment revenue decreased 3%, to $247 million, due to narrower deposit and loan spreads, partially offset by higher deposit and loan balances.

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Provision for credit losses was a benefit of $28 million compared with a benefit of $19 million in the prior year. The increased benefit reflects a higher level of recoveries.
Noninterest expense of $1.1 billion was up by $139 million, or 14%, from the prior year. The increase was due to higher compensation, including incremental expense related to SFAS 123R, as well as minority interest related to Highbridge Capital Management, partially offset by the sale of BrownCo.
Year-to-date results
Net income was $1.0 billion, up by $128 million, or 15%, from the prior year. Performance was driven by increased revenue offset partially by higher compensation expense.
Net revenue was $4.8 billion, up by $687 million, or 17%, from the prior year. Noninterest revenue, principally fees and commissions, of $4.1 billion was up by $785 million, or 24%. This increase was due largely to increased assets under management and higher performance and placement fees. Net interest income was $725 million, down by $98 million, or 12%, from the prior year, primarily due to narrower deposit spreads, reflecting a shift in the deposit mix, and the sale of BrownCo in the fourth quarter of 2005, partially offset by higher deposit and loan balances.
Private Bank client segment revenue grew 10% from the prior year, to $1.4 billion, due to increased placement activity, higher asset management fees and higher deposit balances, partially offset by narrower deposit spreads. Institutional client segment revenue grew 36%, to $1.3 billion, due to net asset inflows and higher performance fees. Retail client segment revenue grew 20%, to $1.3 billion, primarily due to net asset inflows, partially offset by the sale of BrownCo. Private Client Services client segment revenue decreased 2%, to $769 million, due to narrower deposit and loan spreads, partially offset by higher deposit and loan balances.
Provision for credit losses was a benefit of $42 million compared with a benefit of $46 million in the prior year. The current-year benefit reflects a higher level of recoveries, whereas the prior-year benefit relates to refinements in the data used to estimate the allowance for credit losses.
Noninterest expense of $3.3 billion was up by $467 million, or 17%, from the prior year. The increase was due to higher compensation, and increased salaries and benefits related to business growth, including incremental expense related to SFAS 123R, as well as minority interest related to Highbridge Capital Management, partially offset by the sale of BrownCo.

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Selected metrics            
(in millions, except headcount, ratios            
and ranking data, and where
  Three months ended September 30,     Nine months ended September 30,  
otherwise noted)
  2006     2005     Change     2006     2005     Change  
 
Revenue by client segment
                                               
Private bank
  $ 469     $ 421       11 %   $ 1,379     $ 1,252       10 %
Institutional
    464       358       30       1,348       993       36  
Retail
    456       415       10       1,344       1,124       20  
Private client services
    247       255       (3 )     769       784       (2 )
                     
Total net revenue
  $ 1,636     $ 1,449       13     $ 4,840     $ 4,153       17  
 
                                               
Business metrics
                                               
Number of:
                                               
Client advisors
    1,489       1,461       2       1,489       1,461       2  
Retirement planning services participants
    1,372,000       1,293,000       6       1,372,000       1,293,000       6  
 
                                               
% of customer assets in 4 & 5 Star Funds(a)
    58 %     44 %     32       58 %     44 %     32  
% of AUM in 1st and 2nd quartiles:(b)
                                               
1 year
    79 %     62 %     27       79 %     62 %     27  
3 years
    75 %     72 %     4       75 %     72 %     4  
5 years
    80 %     72 %     11       80 %     72 %     11  
 
                                               
Selected balance sheets data (average)
                                               
Total assets
  $ 43,524     $ 42,427       3     $ 42,597     $ 41,391       3  
Loans(c)
    26,770       26,850             25,695       26,595       (3 )
Deposits(c)(d)
    51,395       41,453       24       50,360       41,421       22  
Equity
    3,500       2,400       46       3,500       2,400       46  
 
                                               
Headcount
    12,761       12,531       2       12,761       12,531       2  
 
                                               
Credit data and quality statistics
                                               
Net charge-offs (recoveries)
  $ (24 )   $ 23       NM     $ (21 )   $ 15       NM  
Nonperforming loans
    57       118       (52 )     57       118       (52 )
Allowance for loan losses
    112       148       (24 )     112       148       (24 )
Allowance for lending-related commitments
    4       6       (33 )     4       6       (33 )
 
                                               
Net charge-off (recovery) rate
    (0.36 )%     0.34 %             (0.11 )%     0.08 %        
Allowance for loan losses to average loans
    0.42       0.55               0.44       0.56          
Allowance for loan losses to nonperforming loans
    196       125               196       125          
Nonperforming loans to average loans
    0.21       0.44               0.22       0.44          
 
(a)  
Derived from Morningstar for the United States; Micropal for the United Kingdom, Luxembourg, Hong Kong and Taiwan; and Nomura for Japan.
 
(b)  
Quartile rankings sourced from Lipper for the United States and Taiwan; Micropal for the United Kingdom, Luxembourg and Hong Kong; and Nomura for Japan.
 
(c)  
The sale of BrownCo, which occurred on November 30, 2005, included $3.0 billion in both loans and deposits.
 
(d)  
Reflects the transfer in 2005 of certain consumer deposits from RFS to AWM.
Assets under supervision
Assets under supervision were $1.3 trillion, up 10%, or $112 billion, from the prior year, net of a $33 billion reduction due to the sale of BrownCo. Assets under management were $935 billion, up 13%, or $107 billion, from the prior year. The increase was the result of net asset inflows in the retail segment from third-party distribution, primarily in equity-related products, institutional flows in liquidity products and market appreciation. Custody, brokerage, administration and deposit balances were $330 billion, up by $5 billion, net of a $33 billion reduction from the sale of BrownCo.

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ASSETS UNDER SUPERVISION (in billions)            
As of September 30,   2006     2005  
 
Assets by asset class
               
Liquidity(a)
  $ 281     $ 239  
Fixed income
    171       166  
Equities & balanced
    392       351  
Alternatives
    91       72  
 
Total Assets under management
    935       828  
Custody/brokerage/administration/deposits
    330       325  
 
Total Assets under supervision
  $ 1,265     $ 1,153  
 
 
               
Assets by client segment
               
Institutional(b)
  $ 503     $ 479  
Private Bank
    150       142  
Retail(b)
    228       155  
Private Client Services
    54       52  
 
Total Assets under management
  $ 935     $ 828  
 
Institutional(b)
  $ 505     $ 483  
Private Bank
    347       309  
Retail(b)
    309       261  
Private Client Services
    104       100  
 
Total Assets under supervision
  $ 1,265     $ 1,153  
 
 
               
Assets by geographic region
               
U.S./Canada
  $ 596     $ 548  
International
    339       280  
 
Total Assets under management
  $ 935     $ 828  
 
U.S./Canada
  $ 855     $ 815  
International
    410       338  
 
Total Assets under supervision
  $ 1,265     $ 1,153  
 
 
               
Mutual fund assets by asset class
               
Liquidity
  $ 221     $ 188  
Fixed income
    45       39  
Equity
    184       137  
 
Total mutual fund assets
  $ 450     $ 364  
 
(a)  
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.
 
(b)  
During the first quarter of 2006, assets under management of $22 billion from Retirement planning services has been reclassified from the Institutional client segment to the Retail client segment in order to be consistent with the revenue by client segment reporting.
                                 
    Three months ended     Nine months ended  
    September 30     September 30  
Assets under management rollforward   2006     2005     2006     2005  
 
Beginning balance
  $ 898     $ 783     $ 847     $ 791  
Flows:
                               
Liquidity
    15       19       20       8  
Fixed income
    4       (4 )     10       (2 )
Equities, balanced and alternatives
    3       4       29       13  
Market/performance/other impacts
    15       26       29       18  
 
Ending balance
  $ 935     $ 828     $ 935     $ 828  
 
 
                               
Assets under supervision rollforward
                               
Beginning balance
  $ 1,213     $ 1,093     $ 1,149     $ 1,106  
Net asset flows
    26       28       71       34  
Market/performance/other impacts
    26       32       45       13  
 
Ending balance
  $ 1,265     $ 1,153     $ 1,265     $ 1,153  
 

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CORPORATE
 
For a discussion of the business profile of Corporate, see pages 53–54 of JPMorgan Chase’s 2005 Annual Report. For additional information regarding enhanced disclosures related to the Corporate segment, refer to page 15 of this Form 10-Q.
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 all periods presented.
                                                 
Selected income statement data   Three months ended September 30,     Nine months ended September 30,  
(in millions)   2006     2005     Change     2006     2005     Change  
 
Revenue
                                               
Principal transactions
  $ 193     $ 262       (26 )%   $ 939     $ 1,294       (27 )%
Securities gains (losses)
    24       (43 )     NM       (626 )     (938 )     33  
All other income
    125       38       229       458       222       106  
                     
Noninterest revenue
    342       257       33       771       578       33  
Net interest income
    (55 )     (650 )     92       (957 )     (2,100 )     54  
                     
Total net revenue
    287       (393 )     NM       (186 )     (1,522 )     88  
 
                                               
Provision for credit losses(a)
    1       13       (92 )     1       10       (90 )
 
                                               
Noninterest expense
                                               
Compensation expense
    737       738             2,192       2,283       (4 )
Noncompensation expense(b)
    729       776       (6 )     1,673       5,198       (68 )
Merger costs
    48       221       (78 )     205       645       (68 )
                     
Subtotal
    1,514       1,735       (13 )     4,070       8,126       (50 )
Net expenses allocated to other businesses
    (1,035 )     (1,128 )     8       (3,104 )     (3,402 )     9  
                     
Total noninterest expense
    479       607       (21 )     966       4,724       (80 )
                     
Income (loss) from continuing operations before income tax expense
    (193 )     (1,013 )     81       (1,153 )     (6,256 )     82  
Income tax expense (benefit)
    (159 )     (396 )     60       (659 )     (2,477 )     73  
                     
Income (loss) from continuing operations
    (34 )     (617 )     94       (494 )     (3,779 )     87  
Income from discontinued operations (after-tax)(c)
    65       58       12       175       173       1  
                     
Net income (loss)
  $ 31     $ (559 )     NM     $ (319 )   $ (3,606 )     91  
 
(a)  
Third quarter of 2005 includes a $12 million special provision related to Hurricane Katrina.
 
(b)  
Includes litigation reserve charges of $2,772 million year-to-date 2005 related to the settlement of the Enron and WorldCom class action litigations and for certain other material legal proceedings. In the third quarter and the first nine months of 2006, insurance recoveries related to certain material litigation of $17 million and $375 million, respectively, were recorded.
 
(c)  
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, small business and middle market banking businesses of The Bank of New York. The results of operations of these corporate trust businesses are being reported as discontinued operations for each of the periods presented.

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Quarterly results
Net income was $31 million compared with a net loss of $559 million in the prior year. In comparison with the prior year, Private Equity earnings were $95 million, down from $141 million; Treasury net income was $70 million compared with a net loss of $301 million; Other Corporate net loss was $199 million compared with a net loss of $457 million; and earnings from Discontinued Operations were $65 million compared with $58 million.
Net revenue was $287 million compared with negative $393 million in the prior year. Net interest income was negative $55 million compared with negative $650 million in the prior year. Treasury was the primary driver of the improvement, with net interest income of $149 million compared with negative $415 million, primarily benefiting from an improvement in Treasury’s net interest spread and an increase in available-for-sale securities. Noninterest revenue was $342 million compared with $257 million, reflecting $24 million of security gains in Treasury compared with security losses of $43 million. These benefits were offset partially by lower Private Equity gains of $226 million compared with gains of $313 million.
Noninterest expense was $479 million, down by $128 million from $607 million in the prior year. Insurance recoveries relating to certain material litigation were $17 million in the current period. Merger costs of $48 million were incurred in the current quarter and $221 million in the prior year.
Year-to-date results
Operating loss was $319 million compared with a net loss of $3.6 billion. In comparison with the prior year, Private Equity earnings were $491 million, down from $700 million; Treasury net loss was $549 million compared with a net loss of $1.5 billion; and the net loss in Other Corporate was $436 million compared with a net loss of $3.0 billion.
Net revenue was negative $186 million compared with a negative $1.5 billion in the prior year. Net interest income was a negative $1.0 billion compared with negative $2.1 billion. Treasury was the primary driver of the improvement, with net interest income of negative $236 million compared with negative $1.3 billion, benefiting primarily from an improvement in Treasury’s net interest spread and an increase in available-for-sale securities. Noninterest revenue was $771 million compared with $578 million, reflecting $626 million in security losses in Treasury compared with security losses of $939 million in the prior year; lower Private Equity gains of $1.0 billion compared with gains of $1.4 billion in the prior year; and a gain of $103 million related to the sale of MasterCard shares in its initial public offering in the current year.
Noninterest expense was $1.0 billion, down by $3.7 billion from $4.7 billion. Insurance recoveries relating to certain material litigation were $375 million in the current year, while the prior-year results included a material litigation charge of $2.8 billion. Merger costs were $205 million compared with $645 million in the prior year. Excluding all of these items, noninterest expense would have been down by $171 million compared with the prior year, reflecting merger-related savings and other operating efficiencies.

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Selected metrics   Three months ended September 30,     Nine months ended September 30,  
(in millions)   2006     2005     Change     2006     2005     Change  
 
Total net revenue
                                               
Private equity
  $ 188     $ 272       (31 )%   $ 892     $ 1,271       (30 )%
Treasury
    185       (489 )     NM       (843 )     (2,294 )     63  
Corporate other
    (86 )     (176 )     51       (235 )     (499 )     53  
                     
Total net revenue
  $ 287     $ (393 )     NM     $ (186 )   $ (1,522 )     88  
                     
 
                                               
Net income (loss)
                                               
Private equity
  $ 95     $ 141       (33 )   $ 491     $ 700       (30 )
Treasury
    70       (301 )     NM       (549 )     (1,454 )     62  
Corporate other(a)
    (169 )     (320 )     47       (309 )     (2,625 )     88  
Merger costs
    (30 )     (137 )     78       (127 )     (400 )     68  
                     
Income (loss) from continuing operations
    (34 )     (617 )     94       (494 )     (3,779 )     87  
Income from discontinued operations (after-tax)
    65       58       12       175       173       1  
                     
Total net income (loss)
  $ 31     $ (559 )     NM     $ (319 )   $ (3,606 )     91  
                     
Headcount
    25,748       30,709       (16 )     25,748       30,709       (16 )
 
(a)  
See footnotes (a) and (b) on page 41 of this Form 10-Q.
                                                 
Selected income statement            
and balance sheet data
  Three months ended September 30,     Nine months ended September 30,  
(in millions)   2006     2005     Change     2006     2005     Change  
 
Treasury
                                               
Securities gains (losses)(a)
  $ 24     $ (43 )     NM     $ (626 )   $ (939 )     33 %
Investment portfolio (average)
    68,619       39,351       74 %     57,545       49,453       16  
Investment portfolio (ending)
    77,116       42,754       80       77,116       42,754       80  
 
                                               
Private equity
                                               
Private equity gains (losses)
                                               
Realized gains
  $ 194     $ 430       (55 )   $ 969     $ 1,618       (40 )
Write-ups / (write-downs)
    (21 )     (71 )     70       (85 )     2       NM  
Mark-to-market gains (losses)
    25       (64 )     NM       78       (306 )     NM  
                     
Total direct investments
    198       295       (33 )     962       1,314       (27 )
Third-party fund investments
    28       18       56       50       88       (43 )
                     
Total private equity gains(b)
  $ 226     $ 313       (28 )   $ 1,012     $ 1,402       (28 )
 
                                     
Private equity portfolio information                  
Direct investments September 30, 2006   December 31, 2005   Change  
 
Publicly-held securities
                                   
Carrying value
    $ 696         $ 479           45 %  
Cost
      539           403           34    
Quoted public value
      1,022           683           50    
 
                                   
Privately-held direct securities
                                   
Carrying value
      4,241           5,028           (16 )  
Cost
      5,482           6,463           (15 )  
 
                                   
Third-party fund investments
                                   
Carrying value
      682           669           2    
Cost
      1,000           1,003              
               
Total private equity portfolio – Carrying value
    $ 5,619         $ 6,176           (9 )  
Total private equity portfolio – Cost
    $ 7,021         $ 7,869           (11 )  
 
(a)  
Gains/losses reflect repositioning of the Treasury investment securities portfolio. Excludes gains/losses on securities used to manage risk associated with MSRs.
 
(b)  
Included in Principal transactions.
The carrying value of the private equity portfolio at September 30, 2006, was $5.6 billion, down $557 million from December 31, 2005. The portfolio decline was primarily due to sales activity. The portfolio represented 8.0% of the Firm’s stockholders’ equity less goodwill at September 30, 2006, down from 9.7% at December 31, 2005.

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BALANCE SHEET ANALYSIS
 
                 
Selected balance sheet data (in millions) September 30, 2006   December 31, 2005  
 
Assets
               
Cash and due from banks
  $ 36,279     $ 36,670  
Deposits with banks
    17,130       21,661  
Federal funds sold and securities purchased under resale agreements
    156,194       133,981  
Securities borrowed
    89,222       74,604  
Trading assets:
               
Debt and equity instruments
    289,891       248,590  
Derivative receivables
    58,265       49,787  
Securities:
               
Available-for-sale
    86,485       47,523  
Held-to-maturity
    63       77  
Interests in purchased receivables
          29,740  
Loans, net of Allowance for loan losses
    456,488       412,058  
Other receivables
    27,693       27,643  
Goodwill
    43,372       43,621  
Other intangible assets
    14,438       14,559  
All other assets
    61,124       58,428  
Assets of discontinued operations held-for-sale (a)
    1,385        
 
Total assets
  $ 1,338,029     $ 1,198,942  
 
 
               
Liabilities
               
Deposits
  $ 582,115     $ 554,991  
Federal funds purchased and securities sold under repurchase agreements
    188,395       125,925  
Commercial paper and other borrowed funds
    34,387       24,342  
Trading liabilities:
               
Debt and equity instruments
    106,784       94,157  
Derivative payables
    58,462       51,773  
Long-term debt and capital debt securities
    139,928       119,886  
Beneficial interests issued by consolidated VIEs
    16,254       42,197  
All other liabilities
    73,585       78,460  
Liabilities of discontinued operations held-for-sale (a)
    24,558        
 
Total liabilities
    1,224,468       1,091,731  
Stockholders’ equity
    113,561       107,211  
 
Total liabilities and stockholders’ equity
  $ 1,338,029     $ 1,198,942  
 
(a)  
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, small business and middle market banking businesses of The Bank of New York. As a result of this transaction, assets and liabilities of this business were reclassified and reported as discontinued operations for the period ended September 30, 2006. JPMorgan Chase has not reclassified any Assets or Liabilities of discontinued operations held-for-sale at December 31, 2005.
Balance sheet overview
At September 30, 2006, the Firm’s total assets were $1.3 trillion, an increase of $139 billion, or 12%, from December 31, 2005. Growth was primarily in Trading assets–debt and equity instruments, Loans, AFS securities, Federal funds sold and securities purchased under resale agreements and Securities borrowed, partly offset by a decline in Interests in purchased receivables due to the deconsolidation of certain multi-seller conduits in the second quarter of 2006.
At September 30, 2006, the Firm’s total liabilities were $1.2 trillion, an increase of $133 billion, or 12%, from December 31, 2005. Growth was primarily in Federal funds purchased and securities sold under repurchase agreements, Deposits, Long-term debt and capital debt securities, Trading liabilities–debt and equity instruments, Commercial paper and other borrowed funds, partly offset by a decline in Beneficial interests issued by consolidated VIEs as a result of the aforementioned deconsolidation.

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Federal funds sold and securities purchased under resale agreements and Securities borrowed, as well as Federal funds purchased and securities sold under repurchase agreements, Commercial paper and Other borrowed funds
The Firm utilizes Federal funds sold and securities purchased under resale agreements and Securities borrowed, and Federal funds purchased and securities sold under repurchase agreements and Commercial paper and other borrowed funds as part of its liquidity management framework, in order to manage the Firm’s cash positions and risk-based capital requirements, as well as to maximize liquidity access and minimize funding costs. For additional information on the Firm’s Liquidity risk management, see pages 51–52 of this Form 10-Q.
Trading assets and liabilities – debt and equity instruments
The Firm’s debt and equity trading instruments consist primarily of fixed income securities (including government and corporate debt), equity securities and convertible cash instruments, as well as physical commodities used for both market-making and proprietary risk-taking activities. The increases in trading assets and liabilities over December 31, 2005, were due primarily to the more favorable capital markets environment, with growth in client-driven market-making activities across interest rate, credit and equity markets. For additional information, refer to Note 4 on page 75 of this Form 10-Q.
Trading assets and liabilities – derivative receivables and payables
The Firm uses various interest rate, foreign exchange, equity, credit and commodity derivatives for market-making, proprietary risk-taking and risk-management purposes. The increases in derivative receivables and payables from December 31, 2005, primarily reflected an increase in exchange-traded commodity products. For additional information, refer to Credit risk management and Note 4 on pages 52–63 and 75, respectively, of this Form 10-Q.
Securities
The AFS portfolio increased by $39 billion from the 2005 year end, primarily due to net purchases in the Treasury investment securities portfolio. For additional information related to securities, refer to the Corporate segment discussion and to Note 9 on pages 41–43 and 80–81, respectively, of this Form 10-Q.
Interests in purchased receivables and Beneficial interests issued by consolidated VIEs
Interests in purchased receivables and Beneficial interests issued by consolidated VIEs declined from December 2005, as a result of the restructuring during the second quarter of 2006 of $33 billion of multi-seller conduits the Firm administers. The restructuring resulted in the deconsolidation of $29 billion of Interests in purchased receivables, $3 billion of Loans and $1 billion of AFS securities. This decline was offset partially by the addition of $5 billion of third-party beneficial interests in a student loan trust VIE resulting from the acquisition of Collegiate Funding Services. For additional information related to multi-seller conduits, refer to Off–balance sheet arrangements and contractual cash obligations on pages 49–50 and Note 14 on pages 86–87 of this Form 10-Q.
Loans
The $44 billion increase in loans was due primarily to an increase of $29 billion in the wholesale portfolio, mainly in the IB, reflecting an increase in capital markets activity, including financings associated with acquisitions and syndications. The $15 billion increase in consumer loans was due largely to an increase of $7 billion in CS, reflecting a reduction in credit card securitization activity as well as the Kohl’s private label credit card acquisition in the second quarter of 2006, an increase of $7 billion in home equity loans, and an increase of $6 billion in education loans from the acquisition of Collegiate Funding Services in the first quarter of 2006. These increases were offset partially by a decline of $6 billion in auto loans and leases. For a more detailed discussion of the loan portfolio and the Allowance for loan losses, refer to Credit risk management on pages 52–63 of this Form 10-Q.
Goodwill
The $249 million decrease in Goodwill primarily resulted from the transfer of $402 million of goodwill to Assets of discontinued operations held-for-sale related to selected corporate trust businesses as a result of the transaction with The Bank of New York, from purchase accounting adjustments related to the November 2005 acquisition of the Sears Canada credit card business and from the sale of the insurance business. These decreases were offset partially by goodwill related to the acquisition of Collegiate Funding Services. For additional information, see Notes 3 and 15 on pages 74 and 88–90 of this Form 10-Q.

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Other intangible assets
The $121 million decrease in Other intangible assets primarily reflects declines from amortization and the transfer of $436 million of the selected corporate trust businesses’ other intangibles to Assets of discontinued operations held-for-sale as a result of the transaction with The Bank of New York. Partially offsetting the decrease were higher MSRs due to growth in the servicing portfolio and higher fair value due to the implementation of SFAS 156, and to a lesser extent, purchase accounting adjustments related to the Sears Canada credit card business. For additional information, see Notes 3 and 15 on pages 74 and 88–90 of this Form 10-Q.
Assets of discontinued operations held-for-sale and Liabilities of discontinued operations held-for-sale
The increase from December 31, 2005, reflects the October 1, 2006, acquisition of The Bank of New York’s consumer, small-business and middle-market banking businesses in exchange for selected corporate trust businesses of JPMorgan Chase. Assets of discontinued operations primarily include goodwill, other intangibles and other assets. Liabilities of discontinued operations primarily include deposits and other liabilities. For more information, refer to the TSS segment discussion on pages 34–37 and Note 3 on page 74 of this Form 10-Q.
Deposits
Deposits increased by 5% from December 31, 2005. Growth in retail deposits reflected new account acquisitions and the ongoing expansion of the retail branch distribution network. Wholesale deposits were higher driven by growth in business volumes. Partially offsetting the growth in deposits was the transfer of $24 billion of deposits to Liabilities of discontinued operations held-for-sale related to the transaction with The Bank of New York. For more information on deposits, refer to the RFS segment discussion and the Liquidity risk management discussion on pages 21–28 and 51–52, respectively, of this Form 10-Q. For more information on liability balances, refer to the CB and TSS segment discussions on pages 32–34 and 34–37, respectively, of this Form 10-Q.
Long-term debt and capital debt securities
Long-term debt and capital debt securities increased by $20 billion, or 17%, from December 31, 2005, primarily due to net new issuances of long-term debt offset partially by redemption of capital debt securities. Consistent with its liquidity management policy, the Firm has raised funds at the parent holding company sufficient to cover its obligations and those of its nonbank subsidiaries that mature over the next 12 months. For additional information on the Firm’s long-term debt activity, see the Liquidity risk management discussion on pages 51–52 of this Form 10-Q.
Stockholders’ equity
Total stockholders’ equity increased by $6 billion from year-end 2005 to $114 billion at September 30, 2006. The increase was largely the result of net income for the first nine months of 2006 and common stock issued under employee plans. This increase was offset partially by the payment of cash dividends and stock repurchases. For a further discussion of capital, see the Capital management section that follows.
 
CAPITAL MANAGEMENT
 
The following discussion of JPMorgan Chase’s Capital Management highlights developments since December 31, 2005, and should be read in conjunction with pages 56–58 of JPMorgan Chase’s 2005 Annual Report.
The Firm’s capital management framework is intended to ensure that there is capital sufficient to support the underlying risks of the Firm’s business activities, as measured by economic risk capital, and to maintain “well-capitalized” status under regulatory requirements. In addition, the Firm holds capital above these requirements in amounts deemed appropriate to achieve management’s regulatory and debt-rating objectives. The process of assigning equity to the lines of business is integrated into the Firm’s capital framework.
Line of business equity
Equity for a line of business represents the amount the Firm believes the business would require if it were operating independently, incorporating sufficient capital to address economic risk measures, regulatory capital requirements and capital levels for similarly rated peers. Return on equity is measured and internal targets for expected returns are established as a key measure of a business segment’s performance.
Effective January 1, 2006, the Firm refined its methodology for allocating capital to the lines of business. As a result of this refinement, RFS, CS, CB, TSS and AWM had higher amounts of capital allocated to them commencing in the first quarter of 2006. The revised methodology considers for each line of business, among other things, goodwill associated with such line of business’ acquisitions since the Merger. In management’s view, the revised methodology assigns responsibility to the lines of business to generate returns on the amount of capital supporting acquisition-related goodwill. As part of this refinement in the capital allocation methodology, the Firm assigned to the Corporate segment an amount of equity capital equal to the then-current book value of goodwill from and prior to the Merger. As prior periods have not been revised to reflect the new capital allocations, capital allocated to the respective lines of business for 2006 is not comparable to prior periods; and certain

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business metrics, such as ROE, are not comparable to the current presentation. The Firm may revise its equity capital-allocation methodology again in the future.
In accordance with SFAS 142, the lines of business will continue to perform the required goodwill impairment testing. For a further discussion of goodwill and impairment testing, see Critical accounting estimates on pages 81–83 of JPMorgan Chase’s 2005 Annual Report, and Note 15 on pages 88–90 of this Form 10-Q.
                 
(in billions)   Quarterly Averages  
Line of business equity   3Q06     3Q05  
 
Investment Bank
  $ 21.0     $ 20.0  
Retail Financial Services
    14.3       13.5  
Card Services
    14.1       11.8  
Commercial Banking
    5.5       3.4  
Treasury & Securities Services
    2.2       1.5  
Asset & Wealth Management
    3.5       2.4  
Corporate
    51.2       52.9  
 
Total common stockholders’ equity
  $ 111.8     $ 105.5  
 
Economic risk capital
JPMorgan Chase assesses its capital adequacy relative to the risks underlying the Firm’s business activities, utilizing internal risk-assessment methodologies. The Firm assigns economic capital based primarily upon four risk factors: credit risk, market risk and operational risk for each business; in addition, the Firm assigns capital based on private equity risk to the Corporate segment in connection with the segment’s private equity business.
                 
(in billions)   Quarterly Averages  
Economic risk capital   3Q06     3Q05  
 
Credit risk
  $ 22.3     $ 22.2  
Market risk
    9.6       10.3  
Operational risk
    5.7       5.5  
Private equity risk
    3.3       3.7  
 
Economic risk capital
    40.9       41.7  
Goodwill
    43.4       43.5  
Other(a)
    27.5       20.3  
 
Total common stockholders’ equity
  $ 111.8     $ 105.5  
 
(a)  
Additional capital required to meet internal regulatory and debt rating objectives.
Regulatory capital
The Firm’s federal banking regulator, the Federal Reserve Board (“FRB”), establishes capital requirements, including well-capitalized standards for the consolidated financial holding company. The Office of the Comptroller of the Currency (“OCC”) establishes similar capital requirements and standards for the Firm’s national banks, including JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A.
In the first quarter of 2006, the federal banking regulatory agencies issued a final rule that makes permanent an interim rule issued in 2000 that provides regulatory capital relief for certain cash-collateralized securities-borrowed transactions. The final rule, which became effective February 22, 2006, also broadens the types of transactions qualifying for regulatory capital relief under the interim rule. Adoption of the rule did not have a material effect on the Firm’s capital ratios.
On March 1, 2005, the FRB issued a final rule, which became effective April 11, 2005, that continues the inclusion of trust preferred securities in Tier 1 capital, subject to stricter quantitative limits and revised qualitative standards, and broadens the definition of restricted core capital elements. The rule provides for a five-year transition period. As an internationally active bank holding company, JPMorgan Chase is subject to the rule’s limitation on restricted core capital elements, including trust preferred securities, to 15% of total core capital elements, net of goodwill less any associated deferred tax liability. At September 30, 2006, JPMorgan Chase’s restricted core capital elements were 16.4% of total core capital elements. JPMorgan Chase expects to be in compliance with the 15% limit by the March 31, 2009, implementation date.

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The following table presents the risk-based capital ratios for JPMorgan Chase and its significant banking subsidiaries at September 30, 2006, and December 31, 2005:
                                                         
                    Risk-   Adjusted   Tier 1   Total   Tier 1
    Tier 1   Total   weighted   average   capital   capital   leverage
(in millions, except ratios)   capital   capital   assets(c)   assets(d)   ratio   ratio   ratio
 
September 30, 2006
                                                       
JPMorgan Chase & Co.(a)
  $ 79,830     $ 111,670     $ 926,455     $ 1,257,364       8.6 %     12.1 %     6.3 %
JPMorgan Chase Bank, N.A.
    66,439       91,263       832,127       1,111,285       8.0       11.0       6.0  
Chase Bank USA, N.A.
    9,818       11,992       68,839       64,275       14.3       17.4       15.3  
 
                                                       
December 31, 2005
                                                       
JPMorgan Chase & Co.(a)
  $ 72,474     $ 102,437     $ 850,643     $ 1,152,546       8.5 %     12.0 %     6.3 %
JPMorgan Chase Bank, N.A.
    61,050       84,227       750,397       995,095       8.1       11.2       6.1  
Chase Bank USA, N.A.
    8,608       10,941       72,229       59,882       11.9       15.2       14.4  
 
                                                       
Well-capitalized ratios(b)
                                    6.0 %     10.0 %     5.0 %(e)
Minimum capital ratios(b)
                                    4.0       8.0       3.0 (f)
 
(a)  
Asset and capital amounts for JPMorgan Chase’s banking subsidiaries reflect intercompany transactions, whereas the respective amounts for JPMorgan Chase reflect the elimination of intercompany transactions.
 
(b)  
As defined by the regulations issued by the FRB, OCC and FDIC.
 
(c)  
Includes off–balance sheet risk-weighted assets in the amounts of $316.2 billion, $301.0 billion and $10.6 billion, respectively, at September 30, 2006, and $279.2 billion, $260.0 billion and $15.5 billion, respectively, at December 31, 2005 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 subsidiaries and the total adjusted carrying value of nonfinancial equity investments that are subject to deductions from Tier 1 capital.
 
(e)  
Represents requirements for bank subsidiaries pursuant to regulations issued under the Federal Deposit Insurance Corporation Improvement Act. There is no Tier 1 leverage component in the definition of a well-capitalized bank holding company.
 
(f)  
The minimum Tier 1 leverage ratio for bank holding companies and banks is 3% or 4% depending on factors specified in regulations issued by the FRB and OCC.
Tier 1 capital was $79.8 billion at September 30, 2006, compared with $72.5 billion at December 31, 2005, an increase of $7.4 billion. The increase was due primarily to net income of $9.9 billion, net issuances of common stock under employee plans of $2.9 billion and $2.0 billion of additional qualifying trust preferred securities. Offsetting these increases were changes in equity net of other comprehensive income due to dividends declared of $3.7 billion, common share repurchases of $2.9 billion, the redemption of preferred stock of $139 million and a $666 million reduction in qualifying minority interests. Additional information regarding the Firm’s capital ratios and the federal regulatory capital standards to which it is subject is presented in Note 24 on pages 121–122 of JPMorgan Chase’s 2005 Annual Report.
Dividends
The Firm’s common stock dividend policy reflects JPMorgan Chase’s earnings outlook, desired payout ratios, need to maintain an adequate capital level and alternative investment opportunities. In the third quarter of 2006, JPMorgan Chase declared a quarterly cash dividend on its common stock of $0.34 per share, payable October 31, 2006, to stockholders of record at the close of business on October 6, 2006. The Firm continues to target a dividend payout ratio of approximately 30–40% of net income over time.
Stock repurchases
On March 21, 2006, the Board of Directors approved a stock repurchase program which authorizes the repurchase of up to $8 billion of the Firm’s common shares. The amount authorized includes shares to be repurchased to offset issuances under the Firm’s employee stock-based plans. The actual amount of shares repurchased is subject to various factors, including: market conditions; legal considerations affecting the amount and timing of repurchase activity; the Firm’s capital position (taking into account goodwill and intangibles); internal capital generation; and alternative potential investment opportunities. The repurchase program does not include specific price targets or timetables; may be executed through open market purchases or privately negotiated transactions, or utilizing Rule 10b5-1 programs; and may be suspended at any time.
For the three and nine months ended September 30, 2006, under the respective stock repurchase programs then in effect, the Firm repurchased a total of 20.0 million shares and 69.5 million shares for $900 million and $2.9 billion at an average price per share of $44.88 and $42.22, respectively. Of the $2.9 billion of shares repurchased in the first nine months of 2006, $1.1 billion was repurchased during the first quarter under the original $6 billion stock repurchase program, and $1.8 billion was repurchased in the first nine months of 2006 under the new $8 billion stock repurchase program. For the three and nine months ended September 30, 2005, under the original $6 billion stock repurchase program then in effect, the Firm repurchased 14.4 million shares and 67.2 million shares for $500 million and $2.4 billion at an average price per share of $34.61 and $35.84, respectively. As of September 30, 2006, $6.2 billion of authorized repurchase capacity remained under the new stock repurchase program.
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 106–107 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, use of SPEs is integral to the markets for mortgage-backed securities, commercial paper and other asset-backed securities.
JPMorgan Chase is involved with SPEs in three broad categories: loan securitizations, multi-seller conduits and client intermediation. Capital is held, as deemed appropriate, against all SPE-related transactions and related exposures, such as derivative transactions and lending-related commitments. For a further discussion of SPEs and the Firm’s accounting for these types of exposures, see Note 1 on page 91, Note 13 on pages 108–111 and Note 14 on pages 111–113 of JPMorgan Chase’s 2005 Annual Report.
For certain liquidity commitments to SPEs, the Firm could be required to provide funding if the 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 amount of these liquidity commitments was $73.9 billion and $71.3 billion at September 30, 2006, and December 31, 2005, respectively. Alternatively, if JPMorgan Chase Bank were downgraded, the Firm could be replaced by another liquidity provider in lieu of providing funding under the liquidity commitment, or, in certain circumstances, could facilitate the sale or refinancing of the assets in the SPE in order to provide liquidity.
Of its $73.9 billion in liquidity commitments to SPEs at September 30, 2006, $73.8 billion was included in the Firm’s other unfunded commitments to extend credit and asset purchase agreements, included in the table on the following page. Of the $71.3 billion of liquidity commitments to SPEs at December 31, 2005, $38.9 billion was included in the Firm’s other unfunded commitments to extend credit and asset purchase agreements. As a result of the Firm’s consolidation of multi-seller conduits in accordance with FIN 46R, $0.1 billion of these commitments are excluded from the table at September 30, 2006, compared with $32.4 billion at December 31, 2005, as the underlying assets of the SPEs have been included on the Firm’s Consolidated balance sheets. The decrease from year-end is due to the deconsolidation during the 2006 second quarter of several multi-seller conduits administered by the Firm. For further information, refer to Note 14 on pages 86–87 of this Form 10-Q.
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 table below.
The following table summarizes certain revenue information related to consolidated and nonconsolidated variable interest entities (“VIEs”) with which the Firm has significant involvement, and to qualifying SPEs (“QSPEs”). The revenue reported in the table below primarily represents servicing and credit fee income. For a further discussion of VIEs and QSPEs, see Note 1, Note 13 and Note 14, on pages 91, 108–111 and 111–113, respectively, of JPMorgan Chase’s 2005 Annual Report.
Revenue from VIEs and QSPEs
                                                 
    Three months ended September 30,     Nine months ended September 30,  
(in millions)   VIEs     QSPEs     Total     VIEs     QSPEs     Total  
 
2006
  $ 55     $ 788     $ 843     $ 162     $ 2,366     $ 2,528  
2005(a)
    57       738       795       167       2,194       2,361  
 
(a)  
Prior period results have been restated to reflect current methodology.
Off-balance sheet lending-related financial instruments and guarantees
JPMorgan Chase utilizes lending-related financial instruments (e.g., commitments and guarantees) to meet the financing needs of its customers. The contractual amount of these financial instruments represents the maximum possible credit risk should the counterparty draw down the commitment or the Firm fulfill its obligation under the guarantee, and the counterparty subsequently fails to perform according to the terms of the contract. Most of these commitments and guarantees expire without a default occurring or without being drawn. As a result, the total contractual amount of these instruments is not, in the Firm’s view, representative of its actual future credit exposure or funding requirements. Further, certain commitments, primarily related to consumer financings, are cancelable upon notice at the option of the Firm. For a further discussion of lending-related commitments and guarantees and the Firm’s accounting for them, see Credit risk management on pages 63–72 and Note 27 on pages 124–125 of JPMorgan Chase’s 2005 Annual Report.

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The following table presents off–balance sheet lending-related financial instruments and guarantees for the periods indicated:
                                                 
    September 30, 2006     Dec. 31,
2005
 
By remaining maturity           1-<3     3-5                        
(in millions)   < 1 year     years     years     > 5 years     Total     Total  
 
Lending-related
                                               
Consumer(a)
  $ 658,880     $ 3,742     $ 3,648     $ 58,615     $ 724,885     $ 655,596  
Wholesale:
                                               
Other unfunded commitments to extend credit(b)(c)(d)
    88,525       47,053       61,801       15,686       213,065       208,469  
Asset purchase agreements(e)
    23,078       34,081       7,573       1,556       66,288       31,095  
Standby letters of credit and guarantees(c)(f)(g)
    26,936       19,481       37,341       5,659       89,417       77,199  
Other letters of credit(c)
    4,562       839       232       14       5,647       4,346  
 
Total wholesale
    143,101       101,454       106,947       22,915       374,417       321,109  
 
Total lending-related
  $ 801,981     $ 105,196     $ 110,595     $ 81,530     $ 1,099,302     $ 976,705  
 
Other guarantees
                                               
Securities lending guarantees(h)
  $ 317,575     $     $     $     $ 317,575     $ 244,316  
Derivatives qualifying as guarantees(i)
    13,909       6,697       24,453       23,191       68,250       61,759  
 
(a)  
Includes Credit card lending-related commitments of $638 billion at September 30, 2006, and $579 billion at December 31, 2005, which represent the total available credit to the Firm’s cardholders. The Firm has not experienced, and does not anticipate, that all of its cardholders will 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 $35.4 billion at September 30, 2006, and $28.3 billion at December 31, 2005, which are not legally binding. In regulatory filings with the FRB, unused advised lines are not reportable.
 
(c)  
Represents contractual amount net of risk participations totaling $37.8 billion at September 30, 2006, and $29.3 billion at December 31, 2005.
 
(d)  
Excludes unfunded commitments to private third-party equity funds of $654 million and $242 million at September 30, 2006, and December 31, 2005, respectively.
 
(e)  
Represents asset purchase agreements with the Firm’s administered multi-seller asset-backed commercial paper conduits, which excludes $0.1 billion and $32.4 billion at September 30, 2006, and December 31, 2005, respectively, related to conduits that were consolidated in accordance with FIN 46R, as the underlying assets of the conduits are reported in the Firm’s Consolidated balance sheets. It also includes $1.2 billion and $1.3 billion of asset purchase agreements to other third-party entities at September 30, 2006, and December 31, 2005, respectively. Certain of the Firm’s administered multi-seller conduits were deconsolidated as of June 2006; the assets deconsolidated were approximately $33 billion.
 
(f)  
JPMorgan Chase held collateral relating to $12.3 billion and $9.0 billion of these arrangements at September 30, 2006, and December 31, 2005, respectively.
 
(g)  
Includes unused commitments to issue standby letters of credit of $46.4 billion and $37.5 billion at September 30, 2006, and December 31, 2005, respectively.
 
(h)  
Collateral held by the Firm in support of securities lending indemnification agreements was $316 billion at September 30, 2006, and $245 billion at December 31, 2005, respectively.
 
(i)  
Represents notional amounts of derivatives qualifying as guarantees. For a further discussion of guarantees, see Note 27 on pages 124–125 of JPMorgan Chase’s 2005 Annual Report.
 
RISK MANAGEMENT
 
Risk is an inherent part of JPMorgan Chase’s business activities. The Firm’s risk management framework and governance structure 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 reputational risk, fiduciary risk and private equity risk.
For a further discussion of these risks see pages 60–80 of JPMorgan Chase’s 2005 Annual Report.

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LIQUIDITY RISK MANAGEMENT
 
The following discussion of JPMorgan Chase’s liquidity management framework highlights developments since December 31, 2005, and should be read in conjunction with pages 61–62 of JPMorgan Chase’s 2005 Annual Report.
Liquidity risk arises from the general funding needs of the Firm’s activities and in the management of its assets and liabilities. JPMorgan Chase’s liquidity management framework is intended to maximize liquidity access and minimize funding costs. Through active liquidity management, the Firm seeks to preserve stable, reliable and cost-effective sources of funding. This enables the Firm to replace maturing obligations when due and fund assets at appropriate maturities and rates. To accomplish this task, management uses a variety of liquidity risk measures that take into consideration market conditions, prevailing interest rates, liquidity needs and the desired maturity profile of liabilities.
Funding
Sources of funds
Consistent with its liquidity management policy, the Firm has raised funds at the parent holding company sufficient to cover its obligations and those of its nonbank subsidiaries that mature over the next 12 months. Long-term funding needs for the parent holding company over the next several quarters are expected to be consistent with prior periods.
As of September 30, 2006, the Firm’s liquidity position remained strong based upon its liquidity metrics. JPMorgan Chase’s long-dated funding, including core deposits, exceeds illiquid assets, and the Firm believes its obligations can be met even if access to funding is impaired.
The diversity of the Firm’s funding sources enhances financial flexibility and limits dependence on any one source, thereby minimizing the cost of funds. The deposits held by the RFS, CB, TSS and AWM lines of business are a stable and consistent source of funding for JPMorgan Chase Bank. As of September 30, 2006, total deposits for the Firm were $582 billion, which represented 62% of the Firm’s funding liabilities. A significant portion of the Firm’s retail deposits are “core” deposits, which are less sensitive to interest rate changes and therefore are considered more stable than market-based deposits. Core deposits include all U.S. deposits insured by the FDIC, up to the legal limit of $100,000 per depositor. Throughout the first nine months of 2006, core bank deposits remained at approximately the same level as at the 2005 year-end. In addition to core retail deposits, the Firm benefits from substantial, geographically diverse corporate liability balances originated by TSS and CB through the normal course of business. These franchise-generated core liability balances are also a stable and consistent source of funding due to the nature of the businesses from which they are generated. For a further discussion of deposit and liability balance trends, see Business Segment Results and Balance Sheet Analysis on pages 15–16 and 44–46, 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 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 a cost-effective and diversified source of funds and are a critical component of the Firm’s liquidity management. Decisions concerning the timing and tenor of accessing these markets are based upon relative costs, general market conditions, prospective views of balance sheet growth and a targeted liquidity profile.
Finally, funding flexibility is provided by the Firm’s ability to access the 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; 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 13 and 20 on pages 49–50, 83–86 and 92–93, respectively, of this Form 10-Q.

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Issuance
During the third quarter of 2006, JPMorgan Chase issued approximately $11.2 billion of long-term debt and capital debt securities. These issuances were offset partially by $8.5 billion of long-term debt and capital debt securities that matured or were redeemed. During the third quarter of 2006, the Firm securitized approximately $4.2 billion of residential mortgage loans and approximately $1.1 billion of credit card loans, resulting in pretax gains on securitizations of $7 million and $7 million, respectively. In addition, the Firm securitized approximately $1.2 billion of automobile loans resulting in a small loss.
During the first nine months of 2006, JPMorgan Chase issued approximately $43.4 billion of long-term debt and capital debt securities. These issuances were offset partially by $25.2 billion of long-term debt and capital debt securities that matured or were redeemed. During the first nine months of 2006, the Firm securitized approximately $11.3 billion of residential mortgage loans and $6.8 billion of credit card loans, resulting in pretax gains on securitizations of $8 million and $45 million, respectively. In addition, the Firm securitized approximately $2.4 billion of automobile loans resulting in a small gain. For a further discussion of loan securitizations, see Note 13 on pages 83–86 of this Form 10-Q.
In connection with the issuance of certain of its capital debt securities, the Firm has entered into Replacement Capital Covenants (“RCCs”) granting certain rights to the holders of “covered debt,” as defined in the RCCs. Currently the Firm’s covered debt is its 5.875% Junior Subordinated Deferrable Interest Debentures, Series O, due 2035. For more information regarding these covenants, see Forms 8-K filed by the Firm on August 17, 2006 and September 28, 2006.
Credit ratings
The credit ratings of JPMorgan Chase’s parent holding company and each of its significant banking subsidiaries were, as of September 30, 2006, as follows:
                                                 
    Short-term debt     Senior long-term debt  
    Moody’s     S&P     Fitch     Moody’s     S&P     Fitch  
 
JPMorgan Chase & Co.
    P-1       A-1       F1     Aa3   A+     A+  
JPMorgan Chase Bank, National Association
    P-1       A-1+       F1+     Aa2   AA-     A+  
Chase Bank USA, National Association
    P-1       A-1+       F1+     Aa2   AA-     A+  
 
The cost and availability of unsecured financing are influenced by credit ratings. A reduction in these ratings could adversely affect the Firm’s access to liquidity sources, increase the cost of funds, trigger additional collateral requirements and decrease the number of investors and counterparties willing to lend. Critical factors in maintaining high credit ratings include a stable and diverse earnings stream, strong capital ratios, strong credit quality and risk management controls, diverse funding sources and strong liquidity monitoring procedures.
If the Firm’s ratings were downgraded by one notch, the Firm estimates the incremental cost of funds and the potential loss of funding to be negligible. Additionally, the Firm estimates the additional funding requirements for VIEs and other third-party commitments would not be material. In the current environment, the Firm believes a downgrade is unlikely. For additional information on the impact of a credit ratings downgrade on the funding requirements for VIEs, and on derivatives and collateral agreements, see Special-purpose entities on page 49 and Ratings profile of derivative receivables MTM on page 57, of this Form 10-Q.
 
CREDIT RISK MANAGEMENT
 
The following discussion of JPMorgan Chase’s credit portfolio as of September 30, 2006, highlights developments since December 31, 2005, and should be read in conjunction with pages 63–74 and page 81, and Notes 11, 12, 27, and 28 of JPMorgan Chase’s 2005 Annual Report.
The Firm assesses its consumer credit exposure on a managed basis, which includes credit card receivables that have been securitized. For a reconciliation of the Provision for credit losses on a reported basis to managed basis, see pages 12–15 of this Form 10-Q.

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CREDIT PORTFOLIO
 
The following table presents JPMorgan Chase’s credit portfolio as of September 30, 2006, and December 31, 2005. Total credit exposure at September 30, 2006, increased by $140 billion from December 31, 2005, reflecting an increase of $61 billion and $79 billion in the wholesale and consumer credit portfolios, respectively, as described in the following pages. In the table below, reported loans include all HFS loans, which are carried at the lower of cost or fair value with changes in value recorded in Other income. However, these HFS loans are excluded from the average loan balances used for the net charge-off rate calculations.
                                 
    Credit exposure     Nonperforming assets(j)  
    September 30,     December 31,     September 30,     December 31,  
(in millions, except ratios)   2006     2005     2006     2005  
 
Total credit portfolio
                               
Loans – reported(a)
  $ 463,544     $ 419,148     $ 2,070 (k)   $ 2,343 (k)
Loans – securitized(b)
    65,245       70,527              
 
Total managed loans(c)
    528,789       489,675       2,070       2,343  
Derivative receivables(d)
    58,265       49,787       35       50  
Interests in purchased receivables(e)
          29,740              
 
Total managed credit-related assets
    587,054       569,202       2,105       2,393  
Lending-related commitments(f)
    1,099,302       976,705       NA       NA  
Assets acquired in loan satisfactions
    NA       NA       195       197  
 
Total credit portfolio
  $ 1,686,356     $ 1,545,907     $ 2,300     $ 2,590  
 
Net credit derivative hedges notional(g)
  $ (37,757 )   $ (29,882 )   $ (18 )   $ (17 )
Collateral held against derivatives(h)
    (5,637 )     (6,000 )     NA       NA  
Held-for-sale
                               
Total average HFS loans
    38,383       32,086       NA       NA  
Nonperforming – purchased(i)
    273       341       NA       NA  
 
                                                                 
    Three months ended September 30,     Nine months ended September 30,  
                    Average annual                     Average annual  
    Net charge-offs     net charge-off rate(m)     Net charge-offs     net charge-off rate(m)  
(in millions, except ratios)   2006     2005     2006     2005     2006     2005     2006     2005  
 
Total credit portfolio(l)
                                                               
Loans – reported
  $ 790     $ 870       0.74 %     0.89 %   $ 2,112     $ 2,459       0.69 %     0.87 %
Loans – securitized(b)
    607       867       3.70       4.99       1,617       2,714       3.19       5.27  
 
Total managed loans
  $ 1,397     $ 1,737       1.13 %     1.51 %   $ 3,729     $ 5,173       1.05 %     1.54 %
 
(a)  
Loans are presented net of unearned income of $2.4 billion and $3.0 billion at September 30, 2006, and December 31, 2005, respectively.
 
(b)  
Represents securitized credit card receivables. For a further discussion of credit card securitizations, see CS on pages 28–31 of this Form 10-Q.
 
(c)  
Past-due 90 days and over and accruing includes credit card receivables of $1.2 billion and $1.1 billion at September 30, 2006, and December 31, 2005, and related credit card securitizations of $950 million and $730 million at September 30, 2006, and December 31, 2005, respectively.
 
(d)  
Reflects net cash received under credit support annexes to legally enforceable master netting agreements of $24 billion and $27 billion as of September 30, 2006, and December 31, 2005, respectively.
 
(e)  
As a result of restructuring certain multi-seller conduits the Firm administers, JPMorgan Chase deconsolidated $29 billion of Interests in purchased receivables, $3 billion of Loans and $1 billion of Securities, and recorded $33 billion of lending-related commitments during the second quarter of 2006.
 
(f)  
Includes wholesale unused advised lines of credit totaling $35.4 billion and $28.3 billion at September 30, 2006, and December 31, 2005, respectively, which are not legally binding. In regulatory filings with the Federal Reserve Board, unused advised lines are not reportable. Credit card lending-related commitments of $638 billion and $579 billion at September 30, 2006, and December 31, 2005, respectively, represent the total available credit to its cardholders. The Firm has not experienced, and does not anticipate, that all of its cardholders will 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.
 
(g)  
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.
 
(h)  
Represents other liquid securities collateral held by the Firm as of September 30, 2006, and December 31, 2005, respectively.
 
(i)  
Represents distressed HFS wholesale loans purchased as part of IB’s proprietary activities, which are excluded from nonperforming assets.
 
(j)  
Includes nonperforming HFS loans of $45 million and $136 million as of September 30, 2006, and December 31, 2005, respectively.
 
(k)  
Excludes nonperforming assets related to (i) loans eligible for repurchase as well as loans repurchased from GNMA pools that are insured by government agencies of $1.1 billion for both September 30, 2006, and December 31, 2005, respectively, and (ii) education loans that are

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90 days past due and still accruing, which are insured by government agencies under the Federal Family Education Loan Program, of $0.2 billion at September 30, 2006. These amounts for GNMA and education loans are excluded, as reimbursement is proceeding norm