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, 2007   Commission file number 1-5805
JPMORGAN CHASE & CO.
(Exact name of registrant as specified in its charter)
     
Delaware   13-2624428
(State or other jurisdiction of   (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.
þ 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 þ 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 þ No
 
Number of shares of common stock outstanding as of October 31, 2007: 3,359,043,795
 

 


 

FORM 10-Q
TABLE OF CONTENTS
             
        Page
Part I – Financial information        
Item 1  
Consolidated Financial Statements — JPMorgan Chase & Co.:
       
   
 
       
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        72  
   
 
       
        112  
   
 
       
        114  
   
 
       
Item 2  
Management’s Discussion and Analysis of Financial Condition and Results of Operations:
       
   
 
       
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Item 3       120  
   
 
       
Item 4       120  
   
 
       
Part II – Other information        
   
 
       
Item 1       120  
   
 
       
Item 1A       121  
   
 
       
Item 2       121  
   
 
       
Item 3       122  
   
 
       
Item 4       122  
   
 
       
Item 5       122  
   
 
       
Item 6       122  
 EX-31.1: CERTIFICATION
 EX-31.2: CERTIFICATION
 EX-32: CERTIFICATIONS
 

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JPMORGAN CHASE & CO.
CONSOLIDATED FINANCIAL HIGHLIGHTS
                                                         
(unaudited)                                           Nine months ended  
(in millions, except per share, headcount and ratio data)                                           September 30,  
As of or for the period ended,   3Q07     2Q07     1Q07     4Q06     3Q06     2007     2006  
 
Selected income statement data
                                                       
Noninterest revenue(a)
  $ 8,786     $ 12,593     $ 12,850     $ 10,501     $ 10,166     $ 34,229     $ 30,256  
Net interest income
    7,326       6,315       6,118       5,692       5,379       19,759       15,550  
 
Total net revenue
    16,112       18,908       18,968       16,193       15,545       53,988       45,806  
 
Provision for credit losses
    1,785       1,529       1,008       1,134       812       4,322       2,136  
Noninterest expense
    9,327       11,028       10,628       9,885       9,796       30,983       28,958  
Income tax expense
    1,627       2,117       2,545       1,268       1,705       6,289       4,969  
 
Income from continuing operations
    3,373       4,234       4,787       3,906       3,232       12,394       9,743  
Income from discontinued operations(b)
                      620       65             175  
 
Net income
  $ 3,373     $ 4,234     $ 4,787     $ 4,526     $ 3,297     $ 12,394     $ 9,918  
 
Per common share
                                                       
Basic earnings per share:
                                                       
Income from continuing operations
  $ 1.00     $ 1.24     $ 1.38     $ 1.13     $ 0.93     $ 3.63     $ 2.81  
Net income
    1.00       1.24       1.38       1.31       0.95       3.63       2.86  
Diluted earnings per share:
                                                       
Income from continuing operations
  $ 0.97     $ 1.20     $ 1.34     $ 1.09     $ 0.90     $ 3.52     $ 2.73  
Net income
    0.97       1.20       1.34       1.26       0.92       3.52       2.78  
Cash dividends declared per share
    0.38       0.38       0.34       0.34       0.34       1.10       1.02  
Book value per share
    35.72       35.08       34.45       33.45       32.75                  
Common shares outstanding
                                                       
Average: Basic
    3,376 #     3,415 #     3,456 #     3,465 #     3,469 #     3,416 #     3,472 #
Diluted
    3,478       3,522       3,560       3,579       3,574       3,520       3,572  
Common shares at period end
    3,359       3,399       3,416       3,462       3,468                  
Share price(c)
                                                       
High
  $ 50.48     $ 53.25     $ 51.95     $ 49.00     $ 47.49     $ 53.25     $ 47.49  
Low
    42.16       47.70       45.91       45.51       40.40       42.16       37.88  
Close
    45.82       48.45       48.38       48.30       46.96                  
Market capitalization
    153,901       164,659       165,280       167,199       162,835                  
Financial ratios
                                                       
Return on common equity (“ROE”):(d)
                                                       
Income from continuing operations
    11 %     14 %     17 %     14 %     11 %     14 %     12 %
Net income
    11       14       17       16       12       14       12  
Return on assets (“ROA”):(d)
                                                       
Income from continuing operations
    0.91       1.19       1.41       1.14       0.98       1.16       1.02  
Net income
    0.91       1.19       1.41       1.32       1.00       1.16       1.02  
Overhead ratio
    58       58       56       61       63       57       63  
Tier 1 capital ratio
    8.4       8.4       8.5       8.7       8.6                  
Total capital ratio
    12.5       12.0       11.8       12.3       12.1                  
Selected balance sheet data (period-end)
                                                       
Total assets
  $ 1,479,575     $ 1,458,042     $ 1,408,918     $ 1,351,520     $ 1,338,029                  
Loans
    486,320       465,037       449,765       483,127       463,544                  
Deposits
    678,091       651,370       626,428       638,788       582,115                  
Long-term debt
    173,696       159,493       143,274       133,421       126,619                  
Total stockholders’ equity
    119,978       119,211       117,704       115,790       113,561                  
Headcount
    179,847 #     179,664 #     176,314 #     174,360 #     171,589 #                
Credit quality metrics
                                                       
Allowance for credit losses
  $ 8,971     $ 8,399     $ 7,853     $ 7,803     $ 7,524                  
Nonperforming assets(e)
    3,181       2,586       2,421       2,341       2,300                  
Allowance for loan losses to total loans(f)
    1.76 %     1.71 %     1.74 %     1.70 %     1.65 %                
Net charge-offs
  $ 1,221     $ 985     $ 903     $ 930     $ 790     $ 3,109     $ 2,112  
Net charge-off rate(d)(f)
    1.07 %     0.90 %     0.85 %     0.84 %     0.74 %     0.94 %     0.69 %
Wholesale net charge-off (recovery) rate(d)(f)
  0.19       (0.07 )     (0.02 )     0.07       (0.03 )     0.04       (0.04 )
Managed card net charge-off rate(d)
    3.64       3.62       3.57       3.45       3.58       3.61       3.29  
 
(a)  
The Firm adopted SFAS 157 in the first quarter of 2007. See Note 3 on page 73 of this Form 10-Q for additional information.
(b)  
On October 1, 2006, JPMorgan Chase & Co. completed the exchange of selected corporate trust businesses for the consumer, business banking and middle-market banking businesses of The Bank of New York Company Inc. The results of operations of these corporate trust businesses are reported as discontinued operations for each 2006 period.
(c)  
JPMorgan Chase’s common stock is listed and traded on the New York Stock Exchange, the London Stock Exchange Limited and the Tokyo Stock Exchange. The high, low and closing prices of JPMorgan Chase’s common stock are from The New York Stock Exchange Composite Transaction Tape.
(d)  
Ratios are based upon annualized amounts.
(e)  
Excludes purchased wholesale loans held-for-sale.
(f)  
End-of-period and average Loans at fair value and loans held-for-sale were excluded when calculating the allowance coverage ratios and net charge-off rates, respectively.

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section of the Form 10-Q provides management’s discussion and analysis (“MD&A”) of the financial condition and results of operations for JPMorgan Chase. See the Glossary of terms on pages 114–116 for definitions of terms used throughout this Form 10-Q. The MD&A included in this Form 10-Q contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based upon the current beliefs and expectations of JPMorgan Chase’s management and are subject to significant risks and uncertainties. These risks and uncertainties could cause JPMorgan Chase’s results to differ materially from those set forth in such forward-looking statements. Certain of such risks and uncertainties are described herein (see Forward-looking Statements on page 119 of this Form 10-Q and the JPMorgan Chase Annual Report on Form 10-K for the year ended December 31, 2006, as amended (“2006 Annual Report” or “2006 Form 10-K”), Part I, Item 1A: Risk factors to which reference is hereby made).
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 of America (“U.S.”), with $1.5 trillion in assets, $120.0 billion in stockholders’ equity and operations worldwide. The Firm is a leader in investment banking, financial services for consumers and businesses, financial transaction processing and asset management. Under the JPMorgan and Chase brands, the Firm serves millions of customers in the U.S. and many of the world’s most prominent corporate, institutional and government clients.
JPMorgan Chase’s principal bank subsidiaries are JPMorgan Chase Bank, National Association (“JPMorgan Chase Bank, N.A.”), a national banking association with branches in 17 states; and Chase Bank USA, National Association (“Chase Bank USA, N.A.”), a national bank that is the Firm’s credit card issuing bank. JPMorgan Chase’s principal nonbank subsidiary is J.P. Morgan Securities Inc., the Firm’s U.S. investment banking firm.
JPMorgan Chase’s activities are organized, for management reporting purposes, into six business segments, as well as Corporate. The Firm’s wholesale businesses comprise the Investment Bank, Commercial Banking, Treasury & Securities Services and Asset Management segments. The Firm’s consumer businesses comprise the Retail Financial Services and Card Services segments. A description of the Firm’s business segments, and the products and services they provide to their respective client bases, follows.
Investment Bank
JPMorgan is one of the world’s leading investment banks, with deep client relationships and broad product capabilities. The Investment Bank’s clients are corporations, financial institutions, governments and institutional investors. The Firm offers a full range of investment banking products and services in all major capital markets, including advising on corporate strategy and structure, capital raising in equity and debt markets, sophisticated risk management, market-making in cash securities and derivative instruments, and research. The Investment Bank (“IB”) also commits the Firm’s own capital to proprietary investing and trading activities.
Retail Financial Services
Retail Financial Services (“RFS”), which includes the Regional Banking, Mortgage Banking and Auto Finance reporting segments, helps meet the financial needs of consumers and businesses. RFS provides convenient consumer banking through the nation’s fourth-largest branch network and third-largest ATM network. RFS is a top-five mortgage originator and servicer, the second-largest home equity originator, the largest noncaptive originator of automobile loans and one of the largest student loan originators.
RFS serves customers through 3,096 bank branches, 8,943 ATMs and 280 mortgage offices, and through relationships with more than 15,000 auto dealerships and 4,300 schools and universities. Over 13,000 branch salespeople assist customers, across a 17-state footprint from New York to Arizona, with checking and savings accounts, mortgage, home equity and business loans, investments and insurance. More than 1,200 additional mortgage officers provide home loans throughout the country.
Card Services
With 154 million cards in circulation and $149.1 billion in managed loans, Chase Card Services (“CS”) is one of the nation’s largest credit card issuers. Customers used Chase cards for $259.1 billion worth of transactions in the nine months ended September 30, 2007.
Chase offers a wide variety of general-purpose cards to satisfy the needs of individual consumers, small businesses and partner organizations, including cards issued with AARP, Amazon, Continental Airlines, Marriott, Southwest Airlines, Sony, United Airlines, the Walt Disney Company and many other well-known brands and organizations. Chase also issues private-label cards with Circuit City, Kohl’s, Sears Canada and BP.

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Chase Paymentech Solutions, LLC, a joint venture with JPMorgan Chase and First Data Corporation, is the largest processor of MasterCard and Visa payments in the world, having handled 14.3 billion transactions in the nine months ended September 30, 2007.
Commercial Banking
Commercial Banking (“CB”) serves more than 30,000 clients, including corporations, municipalities, financial institutions and not-for-profit entities. These clients generally have annual revenue ranging from $10 million to $2 billion. Commercial bankers serve clients nationally throughout the RFS footprint and in offices located in other major markets.
Commercial Banking offers its clients industry knowledge, experience, a dedicated service model, comprehensive solutions and local expertise. The Firm’s broad platform positions CB to deliver extensive product capabilities – including lending, treasury services, investment banking and asset management – to meet its clients’ U.S. and international financial needs.
Treasury & Securities Services
Treasury & Securities Services (“TSS”) is a global leader in providing transaction, investment and information services to support the needs of institutional clients worldwide. TSS is one of the largest cash management providers in the world and a leading global custodian. Treasury Services (“TS”) provides a variety of cash management products, trade finance and logistics solutions, wholesale card products, and liquidity management capabilities to small and midsized companies, multinational corporations, financial institutions and government entities. TS partners with the Commercial Banking, Retail Financial Services and Asset Management business segments to serve clients firmwide. As a result, certain TS revenues are included in other segments’ results. Worldwide Securities Services (“WSS”) stores, values, clears and services securities and alternative investments for investors and broker-dealers; and manages Depositary Receipt programs globally.
Asset Management
With assets under supervision of $1.5 trillion, Asset Management (“AM”) is a global leader in investment and wealth management. AM clients include institutions, retail investors and high-net-worth individuals in every major market throughout the world. AM offers global investment management in equities, fixed income, real estate, hedge funds, private equity and liquidity, including both money market instruments and bank deposits. AM also provides trust and estate and banking services to high-net-worth clients, and retirement services for corporations and individuals. The majority of AM’s client assets are in actively managed portfolios.
OTHER BUSINESS EVENTS
Investment in SLM Corporation
On April 16, 2007, an investor group, comprised of JPMorgan Chase Bank, N.A. and three other firms (the “investor group”), announced an Agreement and Plan of Merger (the “merger agreement”) to acquire SLM Corporation (“Sallie Mae”) for $60 per share in cash. On September 26, 2007, the investor group advised Sallie Mae that if the conditions to the closing of the merger agreement were required to be measured at that time, the conditions to closing would not be satisfied because Sallie Mae had suffered a Material Adverse Effect as defined in the merger agreement. On October 2, 2007, the investor group advised Sallie Mae that it would be willing to revise its offer, and proposed a revised purchase price for Sallie Mae, composed of $50 in cash and warrants with a payout of up to an additional $10 per share. That offer was rejected by Sallie Mae and, on October 8, 2007, Sallie Mae filed a lawsuit in Delaware Chancery Court against the investor group. The lawsuit seeks a declaration that, among other things, the investor group repudiated the merger agreement, that no Material Adverse Effect has occurred and that Sallie Mae may terminate the Agreement and collect a $900 million termination fee (the “reverse termination fee”), of which JPMorgan Chase’s portion would be approximately $224 million. On October 15, 2007, the investor group filed an Answer and Counterclaims to Sallie Mae’s lawsuit. In addition, the investor group has waived Sallie Mae’s obligations to comply with certain of its agreements and covenants under the merger agreement, including Sallie Mae’s agreements to refrain from negotiating with other possible buyers, and has waived its right to receive the reverse termination fee from Sallie Mae in the event that another buyer acquires Sallie Mae. A trial date has not yet been set.
Headquarters for the Investment Bank in London and New York
On May 3, 2007, JPMorgan Chase announced plans to build a new investment banking headquarters in London. The building will have more than one million square feet with at least five trading floors of approximately 70,000 useable square feet each. The Firm is expecting the building to open late 2012. On June 14, 2007, JPMorgan Chase announced it will build a new 1.3 million square-foot global investment banking headquarters in the World Trade Center complex in New York City. The Firm expects the building to open by late 2012.
Master Liquidity Enhancement Conduit
On October 15, 2007, JPMorgan Chase and several other financial institutions announced an agreement in principle to create a “master liquidity enhancement conduit” (“M-LEC”) and provide liquidity support for it in order to enhance liquidity in the market for asset-backed commercial paper and medium-term notes issued by structured investment vehicles. The financial institutions are working toward the finalization of the various terms.

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EXECUTIVE OVERVIEW
This overview of management’s discussion and analysis highlights selected information and may not contain all of the information that is important to readers of this Form 10-Q. For a more complete understanding of events, trends and uncertainties, as well as the liquidity, capital, credit and market risks, and the critical accounting estimates, affecting the Firm and its various lines of business, this Form 10-Q should be read in its entirety.
Financial performance of JPMorgan Chase
                                                 
    Three months ended September 30,   Nine months ended September 30,
(in millions, except per share and ratio data)   2007     2006     Change   2007     2006     Change
 
Selected income statement data
                                               
Total net revenue
  $ 16,112     $ 15,545       4 %   $ 53,988     $ 45,806       18 %
Provision for credit losses
    1,785       812       120       4,322       2,136       102  
Total noninterest expense
    9,327       9,796       (5 )     30,983       28,958       7  
Income from continuing operations
    3,373       3,232       4       12,394       9,743       27  
Income from discontinued operations
          65     NM             175     NM  
Net income
    3,373       3,297       2       12,394       9,918       25  
 
                                               
Diluted earnings per share
                                               
Income from continuing operations
  $ 0.97     $ 0.90       8 %   $ 3.52     $ 2.73       29 %
Net income
    0.97       0.92       5       3.52       2.78       27  
Return on common equity
                                               
Income from continuing operations
    11 %     11 %             14 %     12 %        
Net income
    11       12               14       12          
 
Business overview
The Firm reported 2007 third-quarter Net income of $3.4 billion, or $0.97 per share, compared with Net income of $3.3 billion, or $0.92 per share, for the third quarter of 2006. Return on common equity for the quarter was 11% compared with 12% in the prior year.
Net income for the first nine months of 2007 was $12.4 billion, or $3.52 per share, compared with $9.9 billion, or $2.78 per share, in the prior year. Return on common equity was 14% for the first nine months of 2007, compared with 12% for the prior-year period.
In the first quarter of 2007, the Firm adopted SFAS 157 (“Fair Value Measurements”) and SFAS 159 (“Fair Value Option”). For a discussion of SFAS 157 and SFAS 159, see Note 3 on pages 73–80 and Note 4 on pages 80–83 of this Form 10-Q.
The rate of growth in the global economy slowed in the third quarter, but still expanded by approximately 4% annually, while inflation broadly remained well-contained. The industrial economies continued to grow by approximately 2% annually (with the U.S. economy growing at 3.9%). The developing economies continued to grow, although at a slightly slower rate than their recent level of 8% annual growth. Global financial markets were mixed during the quarter, and capital markets activity declined from the historically high levels of the first six months of 2007, as concerns about losses on U.S. subprime mortgage investments triggered a flight to quality in the capital markets and credit markets experienced spread widening and lower levels of liquidity. In spite of these challenges, both U.S. and international equity markets posted gains during the quarter: the S&P 500 and international indices were up, on average, approximately 1% and 5%, respectively. The U.S. Treasury market rallied, with rates dropping approximately 100 basis points during the quarter. In September of 2007, the Federal Reserve Board lowered the federal funds rate from 5.25% to 4.75% in an effort to help offset the adverse effects of the market disruption.
The Firm’s performance benefited from investments in all of its businesses, which has driven organic revenue growth and improved operating margins over time. These benefits were tempered by the capital markets environment, which experienced significantly wider spreads and reduced levels of liquidity in the mortgage and corporate credit markets, resulting in lower earnings in the Investment Bank. In addition, continued weakness in the housing markets led to an increased Provision for credit losses and, as a result, lower earnings in Retail Financial Services. The Firm’s other businesses each posted improved results versus the prior year with Asset Management and Treasury & Securities Services reporting record earnings; Card Services and Commercial Banking growing earnings at a double-digit pace; and Private Equity realizing strong results.
The discussion that follows highlights the current-quarter performance of each business segment compared with the prior-year quarter and discusses results on a managed basis unless otherwise noted. For more information about managed basis, see Explanation and reconciliation of the Firm’s use of non-GAAP financial measures on pages 13–16 of this Form 10-Q .
Investment Bank net income decreased from the prior year, driven by lower net revenue as well as a higher Provision for credit losses, partially offset by lower noninterest expense. Investment banking fees decreased, reflecting lower debt underwriting fees offset partially by record advisory fees. Fixed Income Markets revenue declined due to markdowns on leveraged lending funded loans and unfunded commitments and markdowns on collateralized debt obligation (“CDO”)

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warehouses and unsold positions. In addition, Fixed Income Markets declined due to weak credit-trading performance and significantly lower commodities results, compared with a strong prior-year quarter. These lower results in Fixed Income Markets were offset partially by record revenue in both rates and currencies. Equity Markets revenue decreased from the prior year, as weaker trading results were offset partially by strong client revenue across businesses. The Provision for credit losses was up, driven by an increase in the allowance for credit losses, primarily related to portfolio growth. The decrease in noninterest expense was due primarily to lower performance-based compensation expense.
Retail Financial Services net income decreased from the prior year due to lower results in Regional Banking, primarily related to an increase in the Provision for credit losses. Total net revenue increased due primarily to the absence of a prior-year negative valuation adjustment to the mortgage servicing right (“MSR”) asset, the Bank of New York transaction and higher deposit-related fees. Total net revenue also benefited from the classification of certain mortgage loan origination costs as expense, due to the adoption of SFAS 159, and wider spreads on loans. These benefits were offset partially by markdowns on the mortgage warehouse and pipeline and a continued shift to narrower–spread deposit products. The increase in the Provision for credit losses was due primarily to an increase in the allowance for credit losses related to the home equity portfolio. Total noninterest expense increased due to the Bank of New York transaction; the classification of certain loan origination costs as expense, due to the adoption of SFAS 159; and investments in the retail distribution network.
Card Services net income increased from the prior year, benefiting from higher revenue, partially offset by an increase in the Provision for credit losses. Total net revenue increased, reflecting a higher level of fees, higher average loan balances and increased net interchange income. These benefits were offset partially by the discontinuation of certain billing practices (including the elimination of certain over-limit fees and the two-cycle billing method for calculating finance charges) and a narrower loan spread. The Managed provision for credit losses increased, reflecting a higher level of net charge-offs. Credit quality was stable in the quarter. Total noninterest expense was up slightly, primarily due to higher volume-related expense.
Commercial Banking grew net income over the prior-year period, as an increase in Total net revenue and a decrease in Total noninterest expense were offset partially by a higher Provision for credit losses. Total net revenue increased due to double-digit growth in liability and loan balances, reflecting organic growth and the Bank of New York transaction. These increases were offset partially by a continued shift to narrower-spread liability products and spread compression in the loan and liability portfolios. The increase in Provision for credit losses largely reflected portfolio activity and growth in loan balances. Total noninterest expense decreased, as lower performance-based compensation expense was offset partially by higher volume-related expense.
Treasury & Securities Services achieved record net income, driven by record Total net revenue, partially offset by higher noninterest expense. Total net revenue growth was driven by increased product usage by new and existing clients, market appreciation, growth in electronic volumes and higher liability balances. These benefits were offset partially by spread compression and a continued shift to narrower-spread liability products. Total noninterest expense increased, due primarily to higher expense related to business and volume growth, as well as investment in new product platforms.
Asset Management generated record net income, reflecting record Total net revenue, partially offset by higher noninterest expense. Total net revenue benefited largely from increased assets under management, higher performance and placement fees, increases in deposit and loan balances and wider deposit spreads. The Provision for credit losses increased, reflecting a higher level of recoveries in the prior year. Total noninterest expense increased, due largely to higher compensation, primarily performance-based, and investments in all business segments.
Corporate segment net income increased from the prior year, benefiting from higher Total net revenue and lower noninterest expense. The increase in Total net revenue was driven primarily by higher private equity gains, higher trading-related gains and a gain from the sale of MasterCard shares. Partially offsetting the increased revenue was a narrower net interest spread. Total noninterest expense decreased due to lower compensation expense and continuing business efficiencies.
Income from discontinued operations was $65 million in the third quarter of 2006. Discontinued operations (included in the Corporate segment results) include the income statement activity of selected corporate trust businesses sold to The Bank of New York.
JPMorgan Chase realized approximately $740 million (pretax) of merger savings during the quarter ended September 30, 2007, which is an annualized rate of approximately $2.96 billion. Merger costs of $61 million were expensed during the third quarter of 2007, bringing the total amount expensed since the merger announcement to $3.7 billion (including capitalized costs). In the third quarter of 2007, the Firm successfully completed the in-sourcing of its credit card processing platform and the conversion of the wholesale deposit system. The wholesale deposit conversion was the largest in the Firm’s history, involving approximately $180 billion in customer balances, and was the last significant merger integration event.

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The Managed provision for credit losses was $2.4 billion, up by $944 million, or 67%, from the prior year. The wholesale Provision for credit losses was $351 million, compared with $35 million in the prior year, reflecting an increase in the allowance for credit losses, primarily related to portfolio growth. Wholesale net charge-offs were $82 million, compared with net recoveries of $11 million, resulting in net charge-off rates of 0.19% and recoveries of 0.03%, respectively. The total consumer Managed provision for credit losses was $2.0 billion, compared with $1.4 billion in the prior year, primarily reflecting an increase in the allowance for credit losses related to the home equity portfolio and growth in the subprime mortgage portfolio. Consumer managed net charge-offs were $1.7 billion, compared with $1.4 billion, resulting in managed net charge-off rates of 1.96% and 1.69%, respectively. The Firm had total nonperforming assets of $3.2 billion at September 30, 2007, up by $881 million, or 38%, from the prior-year level of $2.3 billion.
The Firm had, at September 30, 2007, Total stockholders’ equity of $120.0 billion and a Tier 1 capital ratio of 8.4%. The Firm purchased $2.1 billion, or 47.0 million shares, of common stock during the quarter.
Business outlook
The following forward-looking statements are based upon the current beliefs and expectations of JPMorgan Chase’s management and are subject to significant risks and uncertainties. These risks and uncertainties could cause JPMorgan Chase’s results to differ materially from those set forth in such forward-looking statements.
JPMorgan Chase’s outlook for the fourth quarter of 2007 should be viewed against the backdrop of the global economy, financial markets activity (including interest rate movements), the geopolitical environment, the competitive environment and client activity levels. Each of these interlinked factors will affect the performance of the Firm’s lines of business.
The Investment banking fee pipeline was lower at September 30, 2007, than it was at June 30, 2007, due largely to a lower level of debt underwriting activity. In light of current capital market and economic conditions, management remains cautious with regard to the realization of this pipeline. Capital market conditions are still being affected by the disruption in the mortgage market, as well as by overall lower levels of liquidity and wider credit spreads, all of which could potentially lead to reduced levels of client activity, difficulty in syndicating leveraged loans, lower investment banking fees and lower trading revenue. While there have been some successfully completed leveraged finance transactions during the fourth quarter of 2007, the Firm continues to hold a substantial amount of leveraged loans and unfunded commitments as held-for-sale ($40.6 billion as of September 30, 2007). These positions are difficult to hedge effectively and further markdowns could result if market conditions worsen for this asset class. The Firm’s CDO and subprime mortgage warehouse and trading positions could also be negatively affected by market conditions during the fourth quarter of 2007.
Future economic conditions may also cause the Provision for credit losses to increase over time. The consumer Provision for credit losses could increase as a result of a higher level of losses in Retail Financial Services’ home equity loan portfolio and growth in the retained subprime mortgage loan portfolio. Given the potential stress on the consumer from continued downward pressure on housing prices and the elevated inventory of unsold houses nationally, management remains cautious with respect to the home equity portfolio. Management currently expects that quarterly losses related to the home equity portfolio to increase over the next few quarters, to a range of $250 million to $270 million per quarter, or a net charge-off rate of 1.05% to 1.10%. In addition, the consumer provision could increase due to a higher level of net charge-offs in Card Services, as losses continue to return to a more normal level, which could be in the range of 4.00% to 4.50% of managed loans by the end of 2008. The wholesale Provision for credit losses may also increase over time as a result of loan growth, customer activity and changes in underlying credit conditions. In addition, a weaker overall economy may lead to an increase in both the wholesale and consumer provision for credit losses.
Management continues to believe that the net loss in Treasury and Other Corporate on a combined basis will be approximately $50 million to $100 million per quarter over time; and that private equity results, which are dependent upon the capital markets, could continue to be volatile. Firmwide, Total noninterest expense is anticipated to reflect investments in each business, recent acquisitions and divestitures and other operating efficiencies. Management continues to believe that annual merger savings will reach approximately $3.0 billion by the end of 2007. Management currently expects total merger costs (including costs associated with the Bank of New York transaction) will be approximately $3.8 billion, and that all remaining costs will be incurred by the end of 2007.

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CONSOLIDATED RESULTS OF OPERATIONS
The following section provides a comparative discussion of JPMorgan Chase’s consolidated results of operations on a reported basis. Factors that relate primarily to a single business segment are discussed in more detail within that business segment than they are in this consolidated section. For a discussion of the Critical accounting estimates used by the Firm that affect the Consolidated results of operations, see page 66 of this Form 10-Q and pages 83–85 of the JPMorgan Chase 2006 Form 10-K.
Total net revenue
The following table presents the components of Total net revenue.
                                                 
    Three months ended September 30,   Nine months ended September 30,
(in millions)   2007     2006     Change   2007     2006     Change
 
Investment banking fees
  $ 1,336     $ 1,416       (6 )%   $ 4,973     $ 3,955       26 %
Principal transactions
    237       2,737       (91 )     8,274       8,187       1  
Lending & deposit-related fees
    1,026       867       18       2,872       2,573       12  
Asset management, administration and commissions
    3,663       2,842       29       10,460       8,682       20  
Securities gains (losses)
    237       40       493       16       (578 )   NM  
Mortgage fees and related income
    221       62       256       1,220       516       136  
Credit card income
    1,777       1,567       13       5,054       5,268       (4 )
Other income
    289       635       (54 )     1,360       1,653       (18 )
                     
Noninterest revenue
    8,786       10,166       (14 )     34,229       30,256       13  
Net interest income
    7,326       5,379       36       19,759       15,550       27  
                     
Total net revenue
  $ 16,112     $ 15,545       4     $ 53,988     $ 45,806       18  
 
Total net revenue for the third quarter of 2007 was $16.1 billion, up by $567 million, or 4%, from the prior year. This increase was the result of higher Net interest income; record Asset management, administration and commissions revenue; strong private equity gains (included in Principal transactions revenue); and higher Credit card income. These improvements were partly offset by a significant decline in trading revenue within Principal transactions revenue, reflecting markdowns on leveraged lending funded loans and unfunded commitments and lower fixed income trading results. For the first nine months of 2007, Total net revenue was $54.0 billion, up by $8.2 billion, or 18%, from the prior year. The increase was driven by higher Net interest income; very strong private equity gains; record Asset management, administration and commissions revenue; and record Investment banking fees. Lower trading revenue in the 2007 third quarter partially offset these increases.
Investment banking fees in the third quarter of 2007 declined slightly from the comparable period last year, reflecting lower debt underwriting fees offset partially by record advisory fees. In the first nine months of 2007, Investment banking fees were a record for the Firm, reflecting record fees for advisory and debt and equity underwriting. For a further discussion of Investment banking fees, which are primarily recorded in IB, see the IB segment results on pages 17–20 of this Form 10-Q.
Principal transactions revenue consists of trading revenue and private equity gains. In the third quarter of 2007, the Firm recognized a net loss of $548 million from trading activities primarily reflecting markdowns of $1.3 billion (net of fees) on $40.6 billion of leveraged lending funded loans and unfunded commitments, as well as markdowns of $339 million (net of risk management results) on $6.8 billion of CDO warehouses and unsold positions. For the first nine months of 2007, trading revenue was lower by $2.4 billion compared with the same period last year, primarily reflecting markdowns of $1.4 billion (net of fees) on leveraged lending funded loans and unfunded commitments, as well as markdowns of $358 million (net of risk management results) on CDO warehouses and unsold positions. In addition, trading revenue was also impacted by weak credit trading and significantly lower commodities results, compared with a strong prior year, partially offset by record revenue in rates and currencies, and strong equity trading results across all products. IB’s Credit Portfolio results increased from the third quarter of 2006 due to higher trading revenue from risk management activities; in addition, for the first nine months of 2007, IB’s Credit Portfolio benefited from an adjustment to the valuation of the Firm’s derivative liabilities measured at fair value, to reflect the credit quality of the Firm as part of the adoption of SFAS 157. Private equity gains in the third quarter and first nine months of 2007 increased compared with the same periods in 2006, reflecting a higher level of gains and the classification of certain private equity carried interest as Compensation expense. Also favorably affecting the first nine months of 2007 was a fair value adjustment in the first quarter of 2007 on nonpublic private equity investments resulting from the adoption of SFAS 157. For a further discussion of Principal transactions revenue, see the IB and Corporate segment results on pages 17–20 and 40–41, respectively, and Note 5 on pages 83–85 of this Form 10-Q.

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Lending & deposit-related fees rose from the third quarter and first nine months of 2006 as a result of higher deposit-related fees and the Bank of New York transaction. For a further discussion of Lending & deposit-related fees, which are partly recorded in RFS and CB, see the RFS segment results on pages 21–28 and the CB segment results on pages 33–34 of this Form 10-Q.
Asset management, administration and commissions revenue reached record levels in the third quarter and first nine months of 2007, primarily due to an increase in assets under management and higher performance and placement fees in AM. The growth in assets under management, which reached $1.2 trillion at the end of the third quarter of 2007, up 24% from the prior year, was the result of net asset inflows into the Institutional, Retail and Private Bank segments and market appreciation. Also contributing to the rise in Asset management, administration and commissions revenue were higher assets under custody in TSS, driven by new business and market appreciation. In addition, other service fees were higher due to a combination of new clients and increased product usage by existing clients. In addition, commissions revenue increased due to higher brokerage transaction volume (primarily included within Fixed Income and Equity Markets revenue of IB) and higher investment sales volume in RFS; these were partly offset by the sale of the insurance business in the third quarter of 2006, and a charge in the first quarter of 2007 resulting from accelerated surrenders of customer annuities. For additional information on these fees and commissions, see the segment discussions for IB on pages 17–20, RFS on pages 21–28, TSS on pages 35–36, and AM on pages 37–39, of this Form 10-Q.
The favorable variances in Securities gains (losses) for the third quarter and first nine months of 2007 when compared with the same periods in 2006 were primarily the result of a $115 million gain from the sale of MasterCard shares; higher gains from marketable securities received from loan workouts in IB; and improvements in the results of Treasury’s portfolio-repositioning 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 40–41 of this Form 10-Q.
Mortgage fees and related income increased from the third quarter and first nine months of 2006. Net mortgage servicing improved due primarily to the absence of a prior-year negative valuation adjustment of $235 million to the MSR asset and growth in third-party loans serviced. In the quarter-to-quarter comparison, production revenue declined as markdowns of $186 million on the mortgage warehouse and pipeline were offset partially by an increase in mortgage loan originations and the classification of certain loan origination costs as expense (loan origination costs previously netted against revenue commenced being recorded as an expense in the first quarter of 2007 due to the adoption of SFAS 159). For the first nine months of 2007, production revenue was up from the same period in 2006 as a result of increased mortgage loan originations, and the classification of certain loan origination costs as expense (loan origination costs previously netted against revenue are currently recorded as expense due to the adoption of SFAS 159). These increases were offset partially by markdowns of $186 million on the mortgage warehouse and pipeline. Mortgage fees and related income exclude the impact of NII and AFS securities gains and losses related to mortgage activities. 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 rose from the third quarter of 2006 due primarily to an increase in net interchange income, which benefited from higher charge volume; and an increase in servicing fees earned in connection with securitization activities, which were favorably affected by higher net interest income earned on the securitized credit card loans. For the first nine months of 2007, Credit card income decreased due primarily to lower servicing fees earned in connection with securitization activities, which were affected unfavorably by lower net interest income earned and higher net credit losses incurred on the securitized credit card loans. These were partially offset by an increase in net interchange income and a higher level of fee-based revenue. For further discussion of Credit card income, see CS’s segment results on pages 29–32 of this Form 10-Q.
Other income declined from the third quarter and first nine months of 2006. The decrease from the first nine months of 2006 was driven by the absence of a $103 million gain in the second quarter of 2006, related to the sale of MasterCard shares in its initial public offering; and lower net gains on credit card securitizations. These were offset partially by higher gains on the sale of leveraged leases and education loans, increased income from automobile operating leases, and the absence of a loss related to auto loans transferred to the held-for-sale portfolio in the first quarter of 2006.
Net interest income rose from the third quarter of 2006, primarily from the following: higher trading-related Net interest income, due to a shift of Interest expense to Principal transactions revenue (related to certain IB structured notes to which fair value accounting was elected in connection with the adoption of SFAS 159); a higher level of credit card loans and fees; growth in liability and deposit balances, primarily in the wholesale businesses; and the impact of the Bank of New York transaction. These increases were offset partially by compression in Treasury’s net interest spread and a shift to narrower spread liability and deposit products. Net interest income in the first nine months of 2007 rose from the same period of last year, driven by the aforementioned items, with the exception of an improvement in Treasury’s net interest spread. These were offset partially by narrower spreads on credit card loans. The Firm’s total average interest-earning assets for the third quarter of 2007 were $1.1 trillion, up 15% from the third quarter of 2006. The increase was primarily a result of higher Trading assets — debt instruments, Available for sale securities, and Loans. The net interest yield on these

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assets, on a fully-taxable equivalent basis, was 2.57%, an increase of 40 basis points from the prior year, partly reflecting the adoption of SFAS 159. The Firm’s total average interest earning assets for the first nine months of 2007 were $1.1 trillion, up 12% from the first nine months of 2006. The increase was also driven by the aforementioned items, 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 2.44%, an increase of 30 basis points from the prior year.
                                                 
Provision for credit losses   Three months ended September 30,   Nine months ended September 30,
(in millions)   2007     2006     Change   2007     2006     Change
 
Provision for credit losses
  $ 1,785     $ 812       120 %   $ 4,322     $ 2,136       102 %
 
The Provision for credit losses in the third quarter and first nine months of 2007 rose from the comparable prior-year periods. The increase from the third quarter of 2006 in the consumer Provision for credit losses was due to a net $306 million increase in the Allowance for loan losses due to higher estimated losses for home equity loans. The increase from the first nine months of 2006 in the consumer provision was due to: a net increase of $635 million in the Allowance for loan losses resulting from higher estimated losses for home equity loans; an increase in subprime mortgage loan balances; and an increase in credit card net charge-offs. Credit card net charge-offs for the nine months ended September 30, 2006 benefited following the change in bankruptcy legislation in the fourth quarter of 2005. The increase in the wholesale provision from the third quarter of 2006 reflected an increase in the Allowance for credit losses, primarily related to portfolio growth. The increase in the wholesale provision from the first nine months of 2006 primarily reflected an increase in the allowance due to portfolio activity and growth. For a more detailed discussion of the loan portfolio and the Allowance for loan losses, see the segment discussions for RFS on pages 21–28, CS on pages 29–32, and IB on pages 17–20, and Credit risk management on pages 51–62 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)   2007     2006     Change   2007     2006     Change
 
Compensation expense
  $ 4,677     $ 5,390       (13 )%   $ 17,220     $ 16,206       6 %
Occupancy expense
    657       563       17       1,949       1,710       14  
Technology, communications and equipment expense
    950       911       4       2,793       2,656       5  
Professional & outside services
    1,260       1,111       13       3,719       3,204       16  
Marketing
    561       550       2       1,500       1,595       (6 )
Other expense
    812       877       (7 )     2,560       2,324       10  
Amortization of intangibles
    349       346       1       1,055       1,058        
Merger costs
    61       48       27       187       205       (9 )
                     
Total noninterest expense
  $ 9,327     $ 9,796       (5 )   $ 30,983     $ 28,958       7  
 
Total noninterest expense for the third quarter of 2007 was $9.3 billion, down by $469 million, or 5%, from the prior year. Expense decreased due to lower Compensation expense, primarily incentive-based, partially offset by investments across the business segments and acquisitions. For the first nine months of 2007, Total noninterest expense was $31.0 billion, up by $2.0 billion, or 7%, from the prior year, driven by higher Compensation expense, primarily incentive-based, as well as investments across the business segments and acquisitions.
The decrease in Compensation expense from the third quarter of 2006 was primarily the result of lower performance-based incentives, business divestitures and continuing business efficiencies. These declines were offset partially by additional headcount from the Bank of New York transaction, acquisitions and investments in the businesses; the classification of certain private equity carried interest from Principal transactions revenue; and the classification of certain loan origination costs (previously netted against revenue) due to the adoption of SFAS 159. Compensation expense for the first nine months of 2007 increased from the prior-year period, reflecting the aforementioned items, with the exception of performance-based incentives, which were higher in the current year period. These increases were offset partially by the absence of a prior-year expense of $459 million from the adoption of SFAS 123R. For a detailed discussion of the adoption of SFAS 123R see Note 9 on page 88 of this Form 10-Q.
The increases in Occupancy expense from the third quarter and first nine months of 2006 were driven by ongoing investments in the businesses; in particular, the retail distribution network, which includes the incremental expense from The Bank of New York branches. Partially offsetting the increase in Occupancy expense was continuing business efficiencies.

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The increases in Technology, communications and equipment expense, when compared with the third quarter and first nine months of 2006, were due primarily to higher depreciation expense on owned automobiles subject to operating leases, and technology investments to support business growth. These increases were offset partially by continuing business efficiencies.
Professional & outside services rose from the third quarter and first nine months of 2006, reflecting higher brokerage expense and credit card processing costs resulting from growth in transaction volume. Also contributing to the increases were acquisitions and investments in the businesses.
Marketing expense was relatively flat compared with the third quarter of 2006. The decrease from the first nine months of 2006 was due to a reduction in credit card marketing expense.
Other expense decreased from the third quarter of 2006 due to a higher level of legal-related recoveries and lower legal expense, offset partially by business growth and investments in the businesses. For the nine-month period comparison, Other expense was higher due to increased net legal-related costs reflecting a lower level of recoveries and higher expense. Also contributing to the increase were business growth and investments in the businesses offset partially by the sale of the insurance business at the beginning of the third quarter of 2006, lower credit card fraud-related losses and continuing business efficiencies.
For a discussion of Amortization of intangibles and Merger costs, refer to Note 17 and Note 10 on pages 101–103 and 89, 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)   2007     2006     2007     2006  
 
Income from continuing operations before income tax expense
  $ 5,000     $ 4,937     $ 18,683     $ 14,712  
Income tax expense
    1,627       1,705       6,289       4,969  
Effective tax rate
    32.5 %     34.5 %     33.7 %     33.8 %
 
The effective tax rate decrease for the third quarter of 2007 compared with the prior year third quarter was primarily attributable to a favorable resolution of a tax audit.
Income from discontinued operations
Income from discontinued operations was zero in all periods of 2007 compared with $65 million and $175 million in the third quarter and first nine months of 2006, respectively. Discontinued operations (included in the Corporate segment results) include the income statement activity of selected corporate trust businesses that were sold to The Bank of New York on October 1, 2006.

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EXPLANATION AND RECONCILIATION OF THE FIRM’S USE OF NON-GAAP FINANCIAL MEASURES
 
The Firm prepares its Consolidated financial statements using accounting principles generally accepted in the United States of America (“U.S. GAAP”); these financial statements appear on pages 68–71 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 line-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 assume credit card loans securitized by CS remain on the balance sheet 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.
The presentation of CS results on a managed basis assumes that credit card loans that have been securitized and sold in accordance with SFAS 140 still remain on the balance sheet and that the earnings on the securitized loans are classified in the same manner as the earnings on retained loans recorded on the balance sheet. JPMorgan Chase uses the concept of managed basis to evaluate the credit performance and overall financial performance of the entire managed credit card portfolio. Operations are funded and decisions are made about allocating resources, such as employees and capital, based upon managed financial information. In addition, the same underwriting standards and ongoing risk monitoring are used for both loans on the balance sheet and securitized loans. Although securitizations result in the sale of credit card receivables to a trust, JPMorgan Chase retains the ongoing customer relationships, as the customers may continue to use their credit cards; accordingly, the customer’s credit performance will affect both the securitized loans and the loans retained on the balance sheet. JPMorgan Chase believes managed-basis information is useful to investors, enabling them to understand both the credit risks associated with the loans reported on the balance sheet and the Firm’s retained interests in securitized loans. For a reconciliation of reported to managed basis of CS results, see Card Services segment results on pages 29–32 of this Form 10-Q. For information regarding the securitization process, and loans and residual interests sold and securitized, see Note 15 on pages 94–99 of this Form 10-Q.
Total net revenue for each of the business segments and the Firm is presented on an FTE basis. Accordingly, revenue from tax-exempt securities and investments that receive tax credits is presented in the managed results on a basis comparable to taxable securities and investments. This non-GAAP financial measure allows management to assess the comparability of revenues arising from both taxable and tax-exempt sources. The corresponding income tax impact related to these items is recorded within Income tax expense.
Management also uses certain non-GAAP financial measures at the segment level, because it believes these non-GAAP financial measures provide information to investors about the underlying operational performance and trends of the particular business segment and, therefore, facilitate a comparison of the business segment with the performance of its competitors.

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The following summary table provides a reconciliation from the Firm’s reported U.S. GAAP results to managed basis.
                                 
Three months ended September 30,   2007
    Reported   Credit   Tax-equivalent   Managed
(in millions, except per share and ratio data)   results       card(b)   adjustments   basis
 
Revenue
                               
Investment banking fees
  $ 1,336     $     $     $ 1,336  
Principal transactions
    237                   237  
Lending & deposit-related fees
    1,026                   1,026  
Asset management, administration and commissions
    3,663                   3,663  
Securities gains
    237                   237  
Mortgage fees and related income
    221                   221  
Credit card income
    1,777       (836 )           941  
Other income
    289             192       481  
 
Noninterest revenue
    8,786       (836 )     192       8,142  
Net interest income
    7,326       1,414       95       8,835  
 
Total net revenue
    16,112       578       287       16,977  
Provision for credit losses
    1,785       578             2,363  
Noninterest expense
    9,327                   9,327  
 
Income from continuing operations before income tax expense
    5,000             287       5,287  
Income tax expense
    1,627             287       1,914  
 
Income from continuing operations
    3,373                   3,373  
Income from discontinued operations
                       
 
Net income
  $ 3,373     $     $     $ 3,373  
 
Net income – diluted earnings per share
  $ 0.97     $     $     $ 0.97  
 
Return on common equity(a)
    11 %     %     %     11 %
Return on equity less goodwill(a)
    18                   18  
Return on assets(a)
    0.91     NM     NM       0.87  
Overhead ratio
    58     NM     NM       55  
 
                                 
Three months ended September 30,   2006
    Reported   Credit   Tax-equivalent   Managed
(in millions, except per share and ratio data)   results       card(b)   adjustments   basis
 
Revenue
                               
Investment banking fees
  $ 1,416     $     $     $ 1,416  
Principal transactions
    2,737                   2,737  
Lending & deposit-related fees
    867                   867  
Asset management, administration and commissions
    2,842                   2,842  
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
    10,166       (721 )     165       9,610  
Net interest income
    5,379       1,328       57       6,764  
 
Total net revenue
    15,545       607       222       16,374  
Provision for credit losses
    812       607             1,419  
Noninterest expense
    9,796                   9,796  
 
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
    3,232                   3,232  
Income from discontinued operations
    65                   65  
 
Net income
  $ 3,297     $     $     $ 3,297  
 
Net income – diluted earnings per share
  $ 0.92     $     $     $ 0.92  
 
Return on common equity(a)
    11 %     %     %     11 %
Return on equity less goodwill(a)
    19                   19  
Return on assets(a)
    0.98     NM     NM       0.95  
Overhead ratio
    63     NM     NM       60  
 

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Nine months ended September 30,   2007
    Reported   Credit   Tax-equivalent   Managed
(in millions, except per share and ratio data)   results       card(b)   adjustments   basis
 
Revenue
                               
Investment banking fees
  $ 4,973     $     $     $ 4,973  
Principal transactions
    8,274                   8,274  
Lending & deposit-related fees
    2,872                   2,872  
Asset management, administration and commissions
    10,460                   10,460  
Securities gains
    16                   16  
Mortgage fees and related income
    1,220                   1,220  
Credit card income
    5,054       (2,370 )           2,684  
Other income
    1,360             501       1,861  
 
Noninterest revenue
    34,229       (2,370 )     501       32,360  
Net interest income
    19,759       4,131       287       24,177  
 
Total net revenue
    53,988       1,761       788       56,537  
Provision for credit losses
    4,322       1,761             6,083  
Noninterest expense
    30,983                   30,983  
 
Income from continuing operations before income tax expense
    18,683             788       19,471  
Income tax expense
    6,289             788       7,077  
 
Income from continuing operations
    12,394                   12,394  
Income from discontinued operations
                       
 
Net income
  $ 12,394     $     $     $ 12,394  
 
Net income – diluted earnings per share
  $ 3.52     $     $     $ 3.52  
 
Return on common equity(a)
    14 %     %     %     14 %
Return on equity less goodwill(a)
    23                   23  
Return on assets(a)
    1.16     NM     NM       1.11  
Overhead ratio
    57     NM     NM       55  
 
                                 
Nine months ended September 30,   2006
    Reported   Credit   Tax-equivalent   Managed
(in millions, except per share and ratio data)   results       card(b)   adjustments   basis
 
Revenue
                               
Investment banking fees
  $ 3,955     $     $     $ 3,955  
Principal transactions
    8,187                   8,187  
Lending & deposit-related fees
    2,573                   2,573  
Asset management, administration and commissions
    8,682                   8,682  
Securities (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
    30,256       (2,783 )     481       27,954  
Net interest income
    15,550       4,400       175       20,125  
 
Total net revenue
    45,806       1,617       656       48,079  
Provision for credit losses
    2,136       1,617             3,753  
Noninterest expense
    28,958                   28,958  
 
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
    9,743                   9,743  
Income from discontinued operations
    175                   175  
 
Net income
  $ 9,918     $     $     $ 9,918  
 
Net income – diluted earnings per share
  $ 2.78     $     $     $ 2.78  
 
Return on common equity(a)
    12 %     %     %     12 %
Return on equity less goodwill(a)
    20                   20  
Return on assets(a)
    1.02     NM     NM       0.97  
Overhead ratio
    63     NM     NM       60  
 
(a)  
Based upon Income from continuing operations.
(b)  
Credit card securitizations affect CS. See pages 29–32 of this Form 10-Q for further information.

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Three months ended September 30,   2007     2006  
(in millions)   Reported     Securitized     Managed     Reported     Securitized     Managed  
 
Loans – period-end
  $ 486,320     $ 69,643     $ 555,963     $ 463,544     $ 65,245     $ 528,789  
Total assets – average
    1,477,334       66,100       1,543,434       1,309,139       62,971       1,372,110  
 
                                                 
Nine months ended September 30,   2007     2006  
(in millions)   Reported     Securitized     Managed     Reported     Securitized     Managed  
 
Loans – period-end
  $ 486,320     $ 69,643     $ 555,963     $ 463,544     $ 65,245     $ 528,789  
Total assets – average
    1,429,772       65,715       1,495,487       1,297,344       65,797       1,363,141  
 
 
 
BUSINESS SEGMENT RESULTS
 
The Firm is managed on a line-of-business basis. The business-segment financial results reflect the current organization of JPMorgan Chase. There are six major reportable business segments: the Investment Bank, Retail Financial Services, Card Services, Commercial Banking, Treasury & Securities Services and Asset Management, as well as a Corporate segment. The segments are based upon the products and services provided, or the type of customer served, and they reflect the manner in which financial information is currently evaluated by management. Results of these lines of business are presented on a managed basis. For further discussion of Business segment results, see pages 34–35 of JPMorgan Chase’s 2006 Annual Report.
Description of business segment reporting methodology
Results of the business segments are intended to reflect each segment as if it were essentially a stand-alone business. The management reporting process that derives business segment results allocates income and expense using market-based methodologies. For a further discussion of those methodologies, see Business Segment Results – Description of business segment reporting methodology on page 34 of JPMorgan Chase’s 2006 Annual Report. The Firm continues to assess the assumptions, methodologies and reporting classifications used for segment reporting, and further refinements may be implemented in future periods.
Segment Results – Managed Basis(a)
The following table summarizes the business segment results for the periods indicated.
                                                                                         
Three months ended                                                                           Return  
September 30,   Total net revenue     Noninterest expense     Net income (loss)     on equity  
(in millions, except ratios)   2007     2006     Change   2007     2006     Change   2007     2006     Change   2007     2006  
 
Investment Bank
  $ 2,946     $ 4,816       (39 )%   $ 2,378     $ 3,244       (27 )%   $ 296     $ 976       (70 )%     6 %     18 %
Retail Financial Services
    4,201       3,555       18       2,469       2,139       15       639       746       (14 )     16       21  
Card Services
    3,867       3,646       6       1,262       1,253       1       786       711       11       22       20  
Commercial Banking
    1,009       933       8       473       500       (5 )     258       231       12       15       17  
Treasury & Securities Services
    1,748       1,499       17       1,134       1,064       7       360       256       41       48       46  
Asset Management
    2,205       1,636       35       1,366       1,115       23       521       346       51       52       39  
Corporate(b)
    1,001       289       246       245       481       (49 )     513       31     NM     NM     NM  
 
Total
  $ 16,977     $ 16,374       4 %   $ 9,327     $ 9,796       (5 )%   $ 3,373     $ 3,297       2 %     11 %     12 %
 
                                                                                         
Nine months ended                                                                           Return  
September 30,   Total net revenue     Noninterest expense     Net income (loss)     on equity  
(in millions, except ratios)   2007     2006     Change   2007     2006     Change   2007     2006     Change   2007     2006  
 
Investment Bank
  $ 14,998     $ 13,973       7 %   $ 10,063     $ 9,655       4 %   $ 3,015     $ 2,665       13 %     19 %     17 %
Retail Financial Services
    12,664       11,097       14       7,360       6,636       11       2,283       2,495       (8 )     19       24  
Card Services
    11,264       10,995       2       3,691       3,745       (1 )     2,310       2,487       (7 )     22       24  
Commercial Banking
    3,019       2,782       9       1,454       1,494       (3 )     846       754       12       18       18  
Treasury & Securities Services
    5,015       4,572       10       3,358       3,162       6       975       834       17       43       48  
Asset Management
    6,246       4,840       29       3,956       3,294       20       1,439       1,002       44       50       38  
Corporate(b)
    3,331       (180 )   NM       1,101       972       13       1,526       (319 )   NM     NM   NM  
 
Total
  $ 56,537     $ 48,079       18 %   $ 30,983     $ 28,958       7 %   $ 12,394     $ 9,918       25 %     14 %     12 %
 
(a)  
Represents reported results on a tax-equivalent basis and excludes the impact of credit card securitizations.
(b)  
Net income (loss) includes Income from discontinued operations (after-tax) of $65 million and $175 million for the three and nine months ended September 30, 2006, respectively. There was no income from discontinued operations during the first nine months of 2007.

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INVESTMENT BANK
 
For a discussion of the business profile of IB, see pages 36–37 of JPMorgan Chase’s 2006 Annual Report and page 4 of this Form 10-Q.
                                                 
Selected income statement data   Three months ended September 30,   Nine months ended September 30,
(in millions, except ratios)   2007     2006     Change   2007     2006     Change
 
Revenue
                                               
Investment banking fees
  $ 1,330     $ 1,419       (6 )%   $ 4,959     $ 3,957       25 %
Principal transactions(a)
    (848 )     2,548     NM       4,456       7,185       (38 )
Lending & deposit-related fees
    118       127       (7 )     304       398       (24 )
Asset management, administration and commissions
    712       512       39       1,996       1,671       19  
All other income
    (76 )     159     NM       88       437       (80 )
                     
Noninterest revenue
    1,236       4,765       (74 )     11,803       13,648       (14 )
Net interest income
    1,710 (e)     51     NM       3,195 (e)     325     NM  
                     
 
Total net revenue(b)
    2,946       4,816       (39 )     14,998       13,973       7  
Provision for credit losses
    227       7     NM       454       128       255  
Credit reimbursement from TSS(c)
    31       30       3       91       90       1  
 
Noninterest expense
                                               
Compensation expense
    1,178       2,093       (44 )     6,404       6,310       1  
Noncompensation expense
    1,200       1,151       4       3,659       3,345       9  
                     
Total noninterest expense
    2,378       3,244       (27 )     10,063       9,655       4  
                     
Income before income tax expense
    372       1,595       (77 )     4,572       4,280       7  
Income tax expense
    76       619       (88 )     1,557       1,615       (4 )
                     
Net income
  $ 296     $ 976       (70 )   $ 3,015     $ 2,665       13  
                     
 
Financial ratios
                                               
ROE
    6 %     18 %             19 %     17 %        
ROA
    0.17       0.62               0.59       0.55          
Overhead ratio
    81       67               67       69          
Compensation expense as a % of total net revenue(d)
    40       42               43       43          
                     
 
Revenue by business
                                               
Investment banking fees:
                                               
Advisory
  $ 595     $ 436       36     $ 1,627     $ 1,177       38  
Equity underwriting
    267       275       (3 )     1,169       851       37  
Debt underwriting
    468       708       (34 )     2,163       1,929       12  
                     
Total investment banking fees
    1,330       1,419       (6 )     4,959       3,957       25  
Fixed income markets(a)
    687       2,468       (72 )     5,724       6,675       (14 )
Equity markets(a)
    537       658       (18 )     3,325       2,500       33  
Credit portfolio(a)
    392       271       45       990       841       18  
                     
Total net revenue
  $ 2,946     $ 4,816       (39 )   $ 14,998     $ 13,973       7  
                     
 
Revenue by region
                                               
Americas
  $ 1,016     $ 2,803       (64 )   $ 7,037     $ 7,066        
Europe/Middle East/Africa
    1,389       1,714       (19 )     5,967       5,535       8  
Asia/Pacific
    541       299       81       1,994       1,372       45  
                     
Total net revenue
  $ 2,946     $ 4,816       (39 )   $ 14,998     $ 13,973       7  
 
(a)  
As a result of the adoption on January 1, 2007, of SFAS 157, IB recognized a benefit, in the first quarter of 2007, of $166 million in Total net revenue (primarily in Credit Portfolio, but with smaller impacts to Equity Markets and Fixed Income Markets) relating to the incorporation of an adjustment to the valuation of the Firm’s derivative liabilities and other liabilities measured at fair value that reflects the credit quality of the Firm.
(b)  
Total net revenue included tax-equivalent adjustments – due primarily to tax-exempt income from municipal bond investments and income tax credits related to affordable housing investments – of $255 million and $197 million for the quarters ended September 30, 2007 and 2006, respectively, and $697 million and $584 million for year-to-date 2007 and 2006, respectively.
(c)  
Treasury & Securities Services is charged a credit reimbursement related to certain exposures managed within the Investment Bank credit portfolio on behalf of clients shared with TSS.
(d)  
For 2006, the Compensation expense to Total net revenue ratio was adjusted to present this ratio as if SFAS 123R had always been in effect. IB management believes that adjusting the Compensation expense to Total net revenue ratio for the incremental impact of adopting SFAS 123R provides a more meaningful measure of IB’s Compensation expense to Total net revenue ratio for 2006.
(e)  
Net Interest Income for 2007 increased from the prior year due primarily to the adoption of SFAS 159. For certain IB structured notes, all components of earnings are reported in Principal transactions, causing a shift between Principal transactions revenue and Net interest income in 2007.

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Quarterly results
Net income was $296 million, down by $680 million, or 70%, compared with the prior year. The decrease in earnings reflected lower net revenue as well as a higher Provision for credit losses, partially offset by lower noninterest expense.
Net revenue was $2.9 billion, down by $1.9 billion, or 39%, from the prior year. Investment banking fees were $1.3 billion, down by 6% from the prior year, reflecting lower debt underwriting fees offset partially by record advisory fees. Debt underwriting fees were $468 million, down 34%, reflecting lower bond underwriting and loan syndication fees, which were negatively affected by market conditions. Advisory fees were $595 million, up 36%, driven by a strong performance across all regions. Equity underwriting fees were $267 million, down 3%, driven by lower revenue in Europe and Asia, partially offset by strong performance in the Americas in common stock and convertible offerings. Fixed Income Markets revenue was $687 million, down by $1.8 billion, or 72%, from the prior year. The decrease was primarily due to markdowns of $1.3 billion (net of fees) on leveraged lending funded loans and unfunded commitments and markdowns of $339 million (net of risk management results) on CDO warehouses and unsold positions. Fixed Income Markets revenue also decreased due to weak credit trading performance and significantly lower commodities results, compared with a strong prior-year quarter. These lower results were offset partially by record revenue in both rates and currencies. Equity Markets revenue was $537 million, down 18% from the prior year, as weaker trading results were offset partially by strong client revenue across businesses. Fixed Income Markets and Equity Markets had a combined benefit of $454 million from the widening of the Firm’s credit spread on certain structured liabilities, with an impact of $304 million and $150 million, respectively. Credit Portfolio revenue was $392 million, up 45% from the prior year, primarily due to higher trading revenue from risk management activities and gains from loan workouts.
The Provision for credit losses was $227 million, compared with $7 million in the prior year. The provision was up due to an increase in the Allowance for credit losses, primarily related to portfolio growth. Net charge-offs were $67 million, compared with net recoveries of $8 million in the prior year. The Allowance for loan losses to average loans retained was 1.80% for the current quarter, an increase from 1.64% in the prior year. Nonperforming assets were $325 million, compared with $456 million from the prior year.
Noninterest expense was $2.4 billion, down by $866 million, or 27%, from the prior year. The decrease was due primarily to lower performance-based compensation.
Year-to-date results
Net income was $3.0 billion, driven by record year-to-date revenues of $15.0 billion. Compared with the prior year, net income increased by $350 million, or 13%, reflecting record investment banking fees and equity markets revenue, partially offset by weaker fixed income results and increases in noninterest expense and the Provision for credit losses.
Net revenue was $15.0 billion, up by $1.0 billion, or 7%, from the prior year, driven by record investment banking fees and record equity market results. Investment banking fees were $5.0 billion, up 25% from the prior year, driven by record fees across advisory, debt underwriting and equity underwriting. Advisory fees were $1.6 billion, up 38%, benefiting from strong performance across all regions. Debt underwriting fees were $2.2 billion, up 12%, driven by record loan syndication fees and record bond underwriting. Equity underwriting fees were $1.2 billion, up 37%, reflecting strong performance across all regions. Fixed Income Markets revenue decreased by 14% from the prior year, primarily due to markdowns of $1.4 billion (net of fees) on leverage lending funded loans and unfunded commitments and markdowns of $358 million (net of risk management results) on CDO warehouses and unsold positions. Fixed Income Markets revenue also decreased due to weak credit trading and significantly lower commodities results, compared with a strong prior year. These lower results were offset partially by record revenue in rates and currencies. Equity Markets revenue was $3.3 billion, up 33%, benefiting from strong trading results across all products and strong client revenue. Credit Portfolio revenue was $990 million, up 18%, primarily due to higher trading revenue from risk management activities, partially offset by lower gains from loan sales and workouts.
The Provision for credit losses was $454 million, an increase of $326 million from the prior year. The change was due to a net increase of $240 million in the Allowance for credit losses, primarily due to portfolio activity and growth. In addition, there were $45 million of net charge-offs in the current year, compared with $41 million of net recoveries in the prior period. The Allowance for loan losses to average loans was 1.85% for 2007, compared with a ratio of 1.74% in the prior year.
Noninterest expense was $10.1 billion, up by $408 million, or 4%, from the prior year.

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Table of Contents

                                                 
Selected metrics   Three months ended September 30,   Nine months ended September 30,
(in millions, except headcount and ratio data)   2007     2006     Change   2007     2006     Change
 
Selected average balances
                                               
Total assets
  $ 710,665     $ 626,245       13 %   $ 688,730     $ 648,101       6 %
Trading assets – debt and equity instruments(a)
    372,212       283,915       31       355,708       268,256       33  
Trading assets – derivatives receivables
    63,017       53,184       18       59,336       52,769       12  
Loans:
                                               
Loans retained(b)
    61,919       61,623             59,996       58,137       3  
Loans at fair value and loans held-for-sale(a)
    17,315       24,030       (28 )     15,278       21,072       (27 )
                     
Total loans
    79,234       85,653       (7 )     75,274       79,209       (5 )
Adjusted assets(c)
    625,619       539,278       16       600,688       520,718       15  
Equity
    21,000       21,000             21,000       20,670       2  
 
Headcount
    25,691 #     23,447 #     10       25,691 #     23,447 #     10  
Credit data and quality statistics
                                               
Net charge-offs (recoveries)
  $ 67     $ (8 )   NM     $ 45     $ (41 )   NM  
Nonperforming assets:(d)
Nonperforming loans
    265       420       (37 )     265       420       (37 )
Other nonperforming assets
    60       36       67       60       36       67  
Allowance for credit losses:
                                               
Allowance for loan losses
    1,112       1,010       10       1,112       1,010       10  
Allowance for lending-related commitments
    568       292       95       568       292       95  
                     
Total Allowance for credit losses
    1,680       1,302       29       1,680       1,302       29  
 
Net charge-off (recovery) rate(a)(b)
    0.43 %     (0.05 )%             0.10 %     (0.09 )%        
Allowance for loan losses to average loans(a)(b)
    1.80       1.64               1.85       1.74          
Allowance for loan losses to nonperforming loans(d)
    585       253               585       253          
Nonperforming loans to average loans
    0.33       0.49               0.35       0.53          
Market risk – average trading and credit portfolio VAR(e)
                                               
By risk type:
                                               
Fixed income
  $ 98     $ 63       56     $ 72     $ 58       24  
Foreign exchange
    23       24       (4 )     21       23       (9 )
Equities
    35       32       9       43       29       48  
Commodities and other
    28       46       (39 )     34       48       (29 )
Less: portfolio diversification(f)
    (72 )     (82 )     12       (68 )     (74 )     8  
                     
Total trading VAR(g)
    112       83       35       102       84       21  
Credit portfolio VAR(h)
    17       14       21       14       14        
Less: portfolio diversification(f)
    (22 )     (8 )     (175 )     (16 )     (9 )     (78 )
                     
Total trading and credit portfolio VAR
  $ 107     $ 89       20     $ 100     $ 89       12  
 
(a)  
As a result of the adoption of SFAS 159 in the first quarter of 2007, $11.7 billion of loans were reclassified to trading assets. Loans at fair value and loans held-for-sale were excluded when calculating the allowance coverage ratio and Net charge-off rate.
(b)  
Loans retained included credit portfolio loans, leveraged leases and other accrual loans, and excluded loans at fair value.
(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 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 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. IB believed an adjusted asset amount that excluded the assets discussed above, which were considered to have a low risk profile, provided a more meaningful measure of balance sheet leverage in the securities industry.
(d)  
Nonperforming loans included Loans held-for-sale of $75 million and $21 million at September 30, 2007 and 2006, respectively, which were excluded from the allowance coverage ratios. Nonperforming loans excluded distressed loans held-for-sale purchased as part of IB’s proprietary activities and assets classified as trading assets. Loans elected under the fair value option and classified within trading assets are also excluded from Nonperforming loans.
(e)  
For a more complete description of VAR, see pages 62–65 of this Form 10-Q.
(f)  
Average VARs were less than the sum of the VARs of their market risk components, which was due to risk offsets resulting from portfolio diversification. The diversification effect reflected the fact that the risks were not perfectly correlated. The risk of a portfolio of positions is usually less than the sum of the risks of the positions themselves.
(g)  
Trading VAR includes substantially all trading activities in IB. Trading VAR does not include VAR related to the debit valuation adjustments (“DVA”) taken on derivative and structured liabilities to reflect the credit quality of the Firm. See the DVA Sensitivity table on page 64 of this Form 10-Q for further details.
(h)  
Included VAR on derivative credit valuation adjustments, hedges of the credit valuation adjustment and mark-to-market hedges of the retained loan portfolio, which were all reported in Principal Transactions revenue. The VAR did not include the retained loan portfolio.

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According to Thomson Financial, for the first nine months of 2007, the Firm was ranked #1 in Global Equity and Equity-Related; #1 in Global Syndicated Loans; #4 in Global Announced M&A; #2 in Global Debt, Equity and Equity-Related; and #2 in Global Long-term Debt based upon volume.
                                 
    Nine months ended September 30, 2007   Full Year 2006
Market shares and rankings(a)   Market Share   Rankings   Market Share   Rankings
 
Global debt, equity and equity-related
    7 %     #2       7 %     #2  
Global syndicated loans
    14       #1       14       #1  
Global long-term debt
    7       #2       6       #3  
Global equity and equity-related
    9       #1       7       #6  
Global announced M&A
    23       #4       23       #4  
U.S. debt, equity and equity-related
    10       #2       9       #2  
U.S. syndicated loans
    26       #1       26       #1  
U.S. long-term debt
    11       #2       12       #2  
U.S. equity and equity-related(b)
    11       #2       8       #6  
U.S. announced M&A
    26       #5       28       #3  
 
(a)  
Source: Thomson Financial Securities data. Global announced M&A was based upon rank value; all other rankings were based upon proceeds, with full credit to each book manager/equal if joint. Because of joint assignments, market share of all participants will add up to more than 100%.
(b)  
References U.S. domiciled equity and equity-related transactions, per Thomson Financial.

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RETAIL FINANCIAL SERVICES
 
For a discussion of the business profile of RFS, see pages 38–42 of JPMorgan Chase’s 2006 Annual Report and page 4 of this Form 10-Q.
During the first quarter of 2006, RFS completed the purchase of Collegiate Funding Services, which contributed an education loan servicing capability and provided an entry into the Federal Family Education Loan Program consolidation market. On July 1, 2006, RFS sold its life insurance and annuity-underwriting businesses to Protective Life Corporation. On October 1, 2006, JPMorgan Chase completed the Bank of New York transaction, significantly strengthening RFS’s distribution network in the New York tri-state area. See Note 2 on page 73 of this Form 10-Q.
                                                 
Selected income statement data   Three months ended September 30,   Nine months ended September 30,
(in millions, except ratios)   2007     2006     Change   2007     2006     Change
 
Revenue
                                               
Lending & deposit-related fees
  $ 492     $ 406       21 %   $ 1,385     $ 1,167       19 %
Asset management, administration and commissions
    336       326       3       943       1,129       (16 )
Securities (losses)
          (7 )   NM             (52 )   NM  
Mortgage fees and related income(a)
    229       67       242       1,206       507       138  
Credit card income
    167       136       23       472       380       24  
Other income
    296       170       74       687       381       80  
                     
Noninterest revenue
    1,520       1,098       38       4,693       3,512       34  
Net interest income
    2,681       2,457       9       7,971       7,585       5  
                     
Total net revenue
    4,201       3,555       18       12,664       11,097       14  
 
                                               
Provision for credit losses
    680       114       496       1,559       299       421  
 
                                               
Noninterest expense
                                               
Compensation expense(a)
    1,087       886       23       3,256       2,707       20  
Noncompensation expense(a)
    1,265       1,142       11       3,753       3,595       4  
Amortization of intangibles
    117       111       5       351       334       5  
                     
Total noninterest expense
    2,469       2,139       15       7,360       6,636       11  
                     
Income before income tax expense
    1,052       1,302       (19 )     3,745       4,162       (10 )
Income tax expense
    413       556       (26 )     1,462       1,667       (12 )
                     
Net income
  $ 639     $ 746       (14 )   $ 2,283     $ 2,495       (8 )
                     
 
                                               
Financial ratios
                                               
ROE
    16 %     21 %             19 %     24 %        
Overhead ratio(a)
    59       60               58       60          
Overhead ratio excluding core deposit intangibles(a)(b)
    56       57               55       57          
 
     
(a)
 
The Firm adopted SFAS 159 in the first quarter of 2007. As a result, certain loan-origination costs have been classified as expense (previously netted against revenue) for the three and nine months ended September 30, 2007.
(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 earlier years and a lower overhead ratio in later years; this method would result in an improving overhead ratio over time, all things remaining equal. This non-GAAP ratio excluded Regional Banking’s core deposit intangible amortization expense related to the Bank of New York transaction and the Bank One merger of $116 million and $109 million for the three months ended September 30, 2007 and 2006, respectively, and $347 million and $328 million for the nine months ended September 30, 2007 and 2006, respectively.

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Quarterly results
Net income was $639 million, down by $107 million, or 14%, from the prior year, due to lower results in Regional Banking, primarily due to an increase in the Provision for credit losses.
Net revenue was $4.2 billion, up by $646 million, or 18%, from the prior year. Net interest income was $2.7 billion, up by $224 million, or 9%, due to the Bank of New York transaction, wider spreads on loans and higher deposit balances. These benefits were offset partially by a shift to narrower–spread deposit products. Noninterest revenue was $1.5 billion, up by $422 million, or 38%, benefiting from the absence of a prior-year negative valuation adjustment to the MSR asset; increases in deposit-related fees; an increase in mortgage loan originations; a higher level of education loan sales; and increased mortgage loan servicing revenue. Noninterest revenue also benefited from the Bank of New York transaction and the classification of certain mortgage loan origination costs as expense (loan origination costs previously netted against revenue commenced being recorded as an expense in the first quarter of 2007 due to the adoption of SFAS 159). These benefits were offset partially by markdowns on the mortgage warehouse and pipeline.
The Provision for credit losses was $680 million, compared with $114 million in the prior year. The current-quarter provision includes a net increase of $306 million in the Allowance for loan losses related to home equity loans as continued weak housing prices have resulted in an increase in estimated losses for high loan-to-value loans. Home equity net charge-offs were $150 million (0.65% net charge-off rate), compared with $29 million (0.15% net charge-off rate) in the prior year. In addition, the current-quarter provision includes an increase in the Allowance for loan losses, reflecting increased loan balances resulting from the decision to retain rather than sell subprime mortgage loans. Subprime mortgage net charge-offs were $40 million (1.62% net charge-off rate), compared with $13 million (0.36% net charge-off rate) in the prior year.
Noninterest expense was $2.5 billion, up by $330 million, or 15%, due to the Bank of New York transaction, the classification of certain loan origination costs as expense due to the adoption of SFAS 159, investments in the retail distribution network and an increase in loan originations in Mortgage Banking.
Year-to-date results
Net income was $2.3 billion, down by $212 million, or 8%, from the prior year, as lower results in Regional Banking and Auto Finance, primarily due to an increase in the Provision for credit losses, were offset partially by improved results in Mortgage Banking.
Net revenue was $12.7 billion, up by $1.6 billion, or 14%, from the prior year. Net interest income was $8.0 billion, up by $386 million, or 5%, due to the Bank of New York transaction, wider spreads on loans and higher deposit balances. These benefits were offset partially by the sale of the insurance business, a shift to narrower–spread deposit products and a decrease in loan balances. Noninterest revenue was $4.7 billion, up by $1.2 billion, or 34%, benefiting from increases in deposit-related fees; the absence of a prior-year negative valuation adjustment to the MSR asset; an increase in mortgage originations; increased mortgage loan servicing revenue; higher operating lease revenue; and a higher level of education loan sales. Noninterest revenue also benefited from the Bank of New York transaction and the classification of certain mortgage loan origination costs as expense (loan origination costs previously netted against revenue commenced being recorded as an expense in the first quarter of 2007 due to the adoption of SFAS 159). These benefits were offset partially by markdowns on the mortgage warehouse and pipeline and the sale of the insurance business.
The Provision for credit losses was $1.6 billion, compared with $299 million in the prior year. The year-to-date provision includes a net increase of $635 million in the Allowance for loan losses related to home equity loans, as continued weak housing prices have resulted in an increase in estimated losses for high loan-to-value loans. Home equity net charge-offs were $316 million (0.47% net charge-off rate), compared with $92 million (0.16% net charge-off rate) in the prior year. In addition, the year-to-date provision reflects an increase in estimated losses in the subprime mortgage portfolio, as well as increased loan balances resulting from the decision to retain rather than sell subprime mortgage loans. Subprime mortgage net charge-offs were $86 million (1.28% net charge-off rate), compared with $30 million (0.27% net charge-off rate) in the prior year. Home equity and subprime mortgage underwriting standards were tightened during the year-to-date period, and pricing actions were implemented to reflect elevated risks in these segments.
Noninterest expense was $7.4 billion, up by $724 million, or 11%, due to the Bank of New York transaction, the classification of certain loan origination costs as expense due to the adoption of SFAS 159, investments in the retail distribution network and an increase in loan originations in Mortgage Banking. These increases were offset partially by the sale of the insurance business.

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Selected metrics   Three months ended September 30,   Nine months ended September 30,
(in millions, except headcount and ratio data)   2007     2006     Change   2007     2006     Change
 
Selected ending balances
                                               
Assets
  $ 216,754     $ 227,056       (5 )%   $ 216,754     $ 227,056       (5 )%
Loans:
                                               
Loans retained
    172,498       188,549       (9 )     172,498       188,549       (9 )
Loans at fair value and loans held-for-sale(a)
    18,274       17,005       7       18,274       17,005       7  
                     
Total loans
    190,772       205,554       (7 )     190,772       205,554       (7 )
Deposits
    216,135       198,260       9       216,135       198,260       9  
 
                                               
Selected average balances
                                               
Assets
  $ 214,852     $ 225,307       (5 )   $ 216,218     $ 230,307       (6 )
Loans
                               
Loans retained
    168,495       189,313       (11 )     165,479       186,852       (11 )
Loans at fair value and loans held-for-sale(a)
    19,560       13,994       40       24,289       14,411       69  
                     
Total loans
    188,055       203,307       (8 )     189,768       201,263       (6 )
Deposits
    216,904       198,967       9       217,669       197,491       10  
Equity
    16,000       14,300       12       16,000       14,167       13  
 
                                               
Headcount
    68,528 #     61,915 #     11       68,528 #     61,915 #     11  
 
                                               
Credit data and quality statistics
                                               
Net charge-offs
  $ 350     $ 128       173     $ 805     $ 362       122  
Nonperforming loans(b)(d)
    1,991       1,404       42       1,991       1,404       42  
Nonperforming assets
    2,404       1,595       51       2,404       1,595       51  
Allowance for loan losses
    2,105       1,306       61       2,105       1,306       61  
 
                                               
Net charge-off rate(c)
    0.82 %     0.27 %             0.65 %     0.26 %        
Allowance for loan losses to ending loans(c)
    1.22       0.69               1.22       0.69          
Allowance for loan losses to nonperforming loans(c)
    107       95               107       95          
Nonperforming loans to total loans
    1.04       0.68               1.04       0.68          
 
     
(a)
 
Loans included prime mortgage loans originated with the intent to sell, which, for new originations on or after January 1, 2007, were accounted for at fair value under SFAS 159. These loans, classified as Trading assets on the Consolidated balance sheets, totaled $14.4 billion at September 30, 2007. Average Loans included $14.1 billion and $11.4 billion of these loans for the three and nine months ended September 30, 2007, respectively.
(b)
 
Nonperforming loans included Loans held-for-sale and Loans accounted for at fair value under SFAS 159 of $17 million and $24 million at September 30, 2007 and 2006, respectively. Certain of these loans are classified as Trading assets on the Consolidated balance sheet.
(c)
 
Loans held-for-sale and Loans accounted for at fair value under SFAS 159 were excluded when calculating the allowance coverage ratio and the Net charge-off rate.
(d)
 
Excluded Nonperforming assets related to (1) loans eligible for repurchase as well as loans repurchased from GNMA pools that are insured by U.S. government agencies of $1.3 billion and $1.1 billion at September 30, 2007 and 2006, respectively, and (2) education loans that are 90 days past due and still accruing, which are insured by U.S. government agencies under the Federal Family Education Loan Program of $241 million and $189 million at September 30, 2007 and 2006, respectively. These amounts for GNMA and education loans are excluded, as reimbursement is proceeding normally.
REGIONAL BANKING
                                                 
Selected income statement data   Three months ended September 30,   Nine months ended September 30,
(in millions, except ratios)   2007     2006     Change   2007     2006     Change
 
 
                                               
Noninterest revenue
  $ 1,013     $ 855       18 %   $ 2,783     $ 2,526       10 %
Net interest income
    2,325       2,107       10       6,920       6,539       6  
                     
Total Net revenue
    3,338       2,962       13       9,703       9,065       7  
Provision for credit losses
    574       53     NM       1,301       189     NM  
Noninterest expense
    1,760       1,611       9       5,238       5,095       3  
                     
Income before income tax expense
    1,004       1,298       (23 )     3,164       3,781       (16 )
                     
Net income
  $ 611     $ 744       (18 )   $ 1,930     $ 2,265       (15 )
                     
 
                                               
ROE
    21 %     29 %             22 %     30 %        
Overhead ratio
    53       54               54       56          
Overhead ratio excluding core deposit intangibles(a)
    49       51               50       53          
 
(a)
 
Regional Banking uses the overhead ratio excluding the amortization of 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 earlier years and a lower overhead ratio in later years; this method would result in an improving overhead ratio over time, all things remaining equal. This non-GAAP ratio excluded Regional Banking’s core deposit intangible amortization expense related to the Bank of New York transaction and the Bank One merger of $116 million and $109 million for the three months ended September 30, 2007 and 2006, respectively, and $347 million and $328 million for the nine months ended September 30, 2007 and 2006, respectively.

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Quarterly results
Regional Banking net income was $611 million, down by $133 million, or 18%, from the prior year. Net revenue was $3.3 billion, up by $376 million, or 13%, benefiting from the following: the Bank of New York transaction; increases in deposit-related fees; a higher level of education loan sales; growth in deposits and wider loan spreads. These benefits were offset partially by a shift to narrower–spread deposit products. The Provision for credit losses was $574 million, compared with $53 million in the prior year. The increase in provision was due to the home equity and subprime mortgage portfolios (see Retail Financial Services discussion of Provision for credit losses for further detail). Noninterest expense was $1.8 billion, up by $149 million, or 9%, from the prior year due to the Bank of New York transaction and investments in the retail distribution network.
Year-to-date results
Regional Banking net income was $1.9 billion, down by $335 million, or 15%, from the prior year. Net revenue was $9.7 billion, up by $638 million, or 7%, benefiting from the following: the Bank of New York transaction; increases in deposit-related fees; growth in deposits; wider loan spreads; and a higher level of education loan sales. These benefits were offset partially by the sale of the insurance business and a shift to narrower–spread deposit products. The Provision for credit losses was $1.3 billion, compared with $189 million in the prior year. The increase in provision was due to the home equity and subprime mortgage portfolios (see Retail Financial Services discussion of Provision for credit losses for further detail). Noninterest expense was $5.2 billion, up by $143 million, or 3%, from the prior year as the Bank of New York transaction and investments in the retail distribution network were offset partially by the sale of the insurance business.

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Business metrics   Three months ended September 30,   Nine months ended September 30,
(in billions, except ratios)   2007     2006     Change   2007     2006     Change
 
 
                                               
Home equity origination volume
  $ 11.2     $ 13.3       (16 )%   $ 38.5     $ 39.0       (1 )%
End-of-period loans owned
                                               
Home equity
  $ 93.0     $ 80.4       16     $ 93.0     $ 80.4       16  
Mortgage(a)
    12.3       46.6       (74 )     12.3       46.6       (74 )
Business banking
    14.9       13.1       14       14.9       13.1       14  
Education
    10.2       9.4       9       10.2       9.4       9  
Other loans(b)
    2.4       2.2       9       2.4       2.2       9  
                     
Total end-of-period loans
    132.8       151.7       (12 )     132.8       151.7       (12 )
End-of-period deposits
                           
Checking
  $ 64.5     $ 59.8       8     $ 64.5     $ 59.8       8  
Savings
    95.7       86.9       10       95.7       86.9       10  
Time and other
    46.5       41.5       12       46.5       41.5       12  
                     
Total end-of-period deposits
    206.7       188.2       10       206.7       188.2       10  
Average loans owned
                           
Home equity
  $ 91.8     $ 78.8       16     $ 89.1     $ 76.4       17  
Mortgage(a)
    9.9       47.8       (79 )     9.2       46.5       (80 )
Business banking
    14.8       13.0       14       14.5       12.9       12  
Education
    9.8       8.9       10       10.4       7.7       35  
Other loans(b)
    2.4       2.2       9       2.6       2.6        
                     
Total average loans(c)
    128.7       150.7       (15 )     125.8       146.1       (14 )
Average deposits
                           
Checking
  $ 64.9     $ 60.3       8     $ 66.5     $ 61.9       7  
Savings
    97.1       88.1       10       97.4       89.1       9  
Time and other
    43.3       39.0       11       42.5       35.6       19  
                     
Total average deposits
    205.3       187.4       10       206.4       186.6       11  
Average assets
    140.6       159.1       (12 )     138.1       160.3       (14 )
Average equity
    11.8       10.2       16       11.8       10.1       17  
                     
 
                                               
Credit data and quality statistics
                                               
(in millions, except ratios)
                                               
30+ day delinquency rate(d)
    2.39 %     1.57 %             2.39 %     1.57 %        
Net charge-offs
                                               
Home equity
  $ 150     $ 29       417     $ 316     $ 92       243  
Mortgage
    40       14       186       86       35       146  
Business banking
    33       19       74       88       53       66  
Other loans
    23       1       NM       88       21       319  
                     
Total net charge-offs
     246       63       290         578       201       188  
Net charge-off rate
                               
Home equity
    0.65 %     0.15 %             0.47 %     0.16 %        
Mortgage
    1.60       0.12               1.25       0.10          
Business banking
    0.88       0.58               0.81       0.55          
Other loans
    1.01       0.05               1.28       0.36          
Total net charge-off rate(c)
    0.78       0.17               0.63       0.19          
 
                                               
Nonperforming assets(e)
  $ 2,206     $ 1,417       56     $ 2,206     $ 1,417       56  
 
(a)
 
As of January 1, 2007, $19.4 billion of held-for-investment prime mortgage loans were transferred from RFS to Treasury within the Corporate segment for risk management and reporting purposes. The transfer had no impact on the financial results of Regional Banking. Balances reported at and for the three and nine months ended September 30, 2007, primarily reflected subprime mortgage loans owned.
(b)
 
Included commercial loans derived from community development activities and, prior to July 1, 2006, insurance policy loans.
(c)
 
Average loans included Loans held-for-sale of $3.2 billion and $2.5 billion for the three months ended September 30, 2007 and 2006, respectively and $3.8 billion and $2.6 billion for the nine months ended September 30, 2007 and 2006, respectively. These amounts were excluded when calculating the Net charge-off rate.
(d)
 
Excluded loans that are 30 days past due and still accruing, which are insured by U.S. government agencies under the Federal Family Education Loan Program of $590 million and $462 million at September 30, 2007 and 2006, respectively. These amounts are excluded as reimbursement is proceeding normally.
(e)
 
Excluded Nonperforming assets related to education loans that are 90 days past due and still accruing, which are insured by U.S. government agencies under the Federal Family Education Loan Program of $241 million and $189 million at September 30, 2007 and 2006, respectively. These amounts are excluded as reimbursement is proceeding normally.

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Retail branch business metrics   Three months ended September 30,   Nine months ended September 30,
    2007     2006     Change   2007     2006     Change
 
Investment sales volume (in millions)
  $ 4,346     $ 3,536       23 %   $ 14,246     $ 10,781       32 %
 
                                               
Number of:
                                               
Branches
    3,096 #     2,677 #     419 #     3,096 #     2,677 #     419 #
ATMs
    8,943       7,825       1,118       8,943       7,825       1,118  
Personal bankers(a)
    9,503       7,484       2,019       9,503       7,484       2,019  
Sales specialists(a)
    4,025       3,471       554       4,025       3,471       554  
Active online customers (in thousands)(b)
    5,706       4,717       989       5,706       4,717       989  
Checking accounts (in thousands)
    10,644       9,270       1,374       10,644       9,270       1,374  
 
     
(a)
 
Employees acquired as part of the Bank of New York transaction are included beginning June 30, 2007. This transaction was completed on October 1, 2006.
(b)
 
During the quarter ended June 30, 2007, RFS changed the methodology for determining active online customers to include all individual RFS customers with one or more online accounts that have been active within 90 days of period end, including customers who also have online accounts with Card Services. Prior periods have been restated to conform to this new methodology.
MORTGAGE BANKING
                                                 
Selected income statement data   Three months ended September 30,   Nine months ended September 30,
(in millions, except ratios and where otherwise noted)   2007     2006     Change   2007     2006     Change
 
 
                                               
Production revenue(a)
  $ 176     $ 197       (11 )%   $ 1,039     $ 618       68 %
Net mortgage servicing revenue:
                                               
Loan servicing revenue
    629       579       9       1,845       1,702       8  
Changes in MSR asset fair value:
                                               
Due to inputs or assumptions in model
    (810 )     (1,075 )     25       250       127       97  
Other changes in fair value
    (377 )     (327 )     (15 )     (1,138 )     (1,068 )     (7 )
                     
Total changes in MSR asset fair value
    (1,187 )     (1,402 )     15       (888 )     (941 )     6  
Derivative valuation adjustments and other
    788       824       (4 )     (353 )     (475 )     26  
                     
Total net mortgage servicing revenue
    230       1       NM       604       286       111  
                     
Total net revenue
    406       198       105       1,643       904       82  
Noninterest expense(a)
    485       334       45       1,469       987       49  
                     
Income before income tax expense
    (79 )     (136 )     42       174       (83 )   NM  
                     
Net income
  $ (48 )   $ (83 )     42     $ 107     $ (51 )   NM  
                     
 
                                               
ROE
  NM       NM               7 %   NM          
 
                                               
Business metrics (in billions)
Third-party mortgage loans serviced (ending)
  $ 600.0     $ 510.7       17     $ 600.0     $ 510.7       17  
MSR net carrying value (ending)
    9.1       7.4       23       9.1       7.4       23  
Average mortgage loans held-for-sale(b)
    16.4       10.5       56       20.4       11.1       84  
Average assets
    31.4       22.4       40       35.0       24.5       43  
Average equity
    2.0       1.7       18       2.0       1.7       18  
 
                                               
Mortgage origination volume by channel
(in billions)
                                               
Retail
  $ 11.1     $ 10.1       10     $ 35.6     $ 30.0       19  
Wholesale
    9.8       7.7       27       32.5       23.8       37  
Correspondent
    7.2       2.7       167       18.4       9.8       88  
CNT (Negotiated transactions)
    11.1       8.5       31       32.9       25.8       28  
                     
Total(c)
  $ 39.2     $ 29.0       35     $ 119.4     $ 89.4       34  
 
     
(a)
 
The Firm adopted SFAS 159 in the first quarter of 2007. As a result, certain loan origination costs have been classified as expense (previously netted against revenue) for the three and nine months ended September 30, 2007.
(b)
 
Included $14.1 billion and $11.4 billion of prime mortgage loans at fair value for the three and nine months ended September 30, 2007, respectively. These loans are classified as Trading assets on the Consolidated balance sheets for 2007.
(c)
 
During the second quarter of 2007, RFS changed its definition of mortgage originations to include all newly originated mortgage loans sourced through RFS channels, and to exclude all mortgage loan originations sourced through IB channels. Prior periods have been restated to conform to this new definition.

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Quarterly results
Mortgage Banking net loss was $48 million, compared with a net loss of $83 million in the prior year. Net revenue was $406 million, up by $208 million. Net revenue comprises production revenue and net mortgage servicing revenue. Production revenue was $176 million, down by $21 million, as markdowns of $186 million on the mortgage warehouse and pipeline were offset partially by an increase in mortgage loan originations and the classification of certain loan origination costs as expense (loan origination costs previously netted against revenue commenced being recorded as an expense in the first quarter of 2007 due to the adoption of SFAS 159). Net mortgage servicing revenue, which includes loan servicing revenue, MSR risk management results and other changes in fair value, was $230 million, compared with $1 million in the prior year. Loan servicing revenue of $629 million increased by $50 million on growth of 17% in third-party loans serviced. MSR risk management revenue of negative $22 million improved by $229 million, due primarily to the absence of a prior-year negative valuation adjustment of $235 million to the MSR asset. Other changes in fair value of the MSR asset, representing run-off of the asset against the realization of servicing cash flows, were negative $377 million, compared with negative $327 million in the prior year. Noninterest expense was $485 million, up by $151 million, or 45%. The increase reflected the classification of certain loan origination costs due to the adoption of SFAS 159, and higher compensation expense, the result of higher loan originations and a greater number of loan officers.
Year-to-date results
Mortgage Banking net income was $107 million, compared with a net loss of $51 million in the prior year. Net revenue was $1.6 billion, up by $739 million. Net revenue comprises production revenue and net mortgage servicing revenue. Production revenue was $1.0 billion, up by $421 million, due to an increase in mortgage loan originations and the classification of certain loan origination costs as expense (loan origination costs previously netted against revenue commenced being recorded as an expense in the first quarter of 2007 due to the adoption of SFAS 159). These increases were offset partially by markdowns of $186 million on the mortgage warehouse and pipeline, in the third quarter of 2007. Net mortgage servicing revenue, which includes loan servicing revenue, MSR risk management results and other changes in fair value, was $604 million, compared with $286 million in the prior year. Loan servicing revenue of $1.8 billion increased by $143 million on growth of 17% in third-party loans serviced. MSR risk management revenue of negative $103 million improved by $245 million, due primarily to the absence of a prior-year negative valuation adjustment of $235 million to the MSR asset. Other changes in fair value of the MSR asset, representing run-off of the asset against the realization of servicing cash flows, were negative $1.1 billion. Noninterest expense was $1.5 billion, up by $482 million, or 49%. The increase reflected the classification of certain loan origination costs due to the adoption of SFAS 159, and higher compensation expense, the result of higher loan originations and a greater number of loan officers.

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AUTO FINANCE
                                                 
Selected income statement data   Three months ended September 30,   Nine months ended September 30,
(in millions, except ratios and where                                    
otherwise noted)   2007     2006     Change   2007     2006     Change
 
Noninterest revenue
  $ 140     $ 110       27 %   $ 409     $ 244       68 %
Net interest income
    307       285       8       898       884       2  
                     
Total net revenue
    447       395       13       1,307       1,128       16  
Provision for credit losses
    96       61       57       247       110       125  
Noninterest expense
    224       194       15       653       554       18  
                     
Income before income tax expense
    127       140       (9 )     407       464       (12 )
                     
Net income
  $ 76     $ 85       (11 )   $ 246     $ 281       (12 )
                     
 
                                               
ROE
    14 %     14 %             15 %     16 %        
ROA
    0.70       0.77               0.76       0.82          
 
                                               
Business metrics (in billions)
                                               
Auto origination volume
  $ 5.2     $ 5.5       (5 )   $ 15.7     $ 14.3       10  
End-of-period loans and lease related assets
Loans outstanding
  $ 40.3     $ 38.1       6     $ 40.3     $ 38.1       6  
Lease financing receivables
    0.6       2.2       (73 )     0.6       2.2       (73 )
Operating lease assets
    1.8       1.5       20       1.8       1.5       20  
                     
Total end-of-period loans and lease related assets
    42.7       41.8       2       42.7       41.8       2  
Average loans and lease related assets
Loans outstanding(a)
  $ 39.9     $ 38.9       3     $ 39.8     $ 40.1       (1 )
Lease financing receivables
    0.7       2.5       (72 )     1.1       3.2       (66 )
Operating lease assets
    1.8       1.4       29       1.7       1.2       42  
                     
Total average loans and lease related assets
    42.4       42.8       (1 )     42.6       44.5       (4 )
Average assets
    42.9       43.8       (2 )     43.1       45.6       (5 )
Average equity
    2.2       2.4       (8 )     2.2       2.4       (8 )
                     
 
                                               
Credit quality statistics
                                               
30+ day delinquency rate
    1.65 %     1.61 %             1.65 %     1.61 %        
Net charge-offs
Loans
  $ 98     $ 63       56     $ 218     $ 155       41  
Lease receivables
    1       2       (50 )     3       6       (50 )
                     
Total net charge-offs
    99       65       52       221       161       37  
Net charge-off rate
 
                                               
Loans(a)
    0.97 %     0.66 %             0.73 %     0.53 %        
Lease receivables
    0.57       0.32               0.36       0.25          
Total net charge-off rate(a)
    0.97       0.64               0.72       0.51          
Nonperforming assets
  $ 156     $ 174       (10 )   $ 156     $ 174       (10 )
 
(a)  
For the three and nine month periods ended September 30, 2006, Average loans included Loans held-for-sale of $943 million and $709 million, respectively. These amounts are excluded when calculating the Net charge-off rate. For the three and nine month periods ended September 30, 2007, Auto loans classified as held-for-sale were insignificant.
Quarterly results
Auto Finance net income was $76 million, down by $9 million, or 11%, from the prior year. Net revenue was $447 million, up by $52 million, or 13%, reflecting higher automobile operating lease revenue and wider loan spreads. The Provision for credit losses was $96 million, an increase of $35 million, reflecting an increase in estimated losses from low prior-year levels. Noninterest expense of $224 million increased by $30 million, or 15%, driven by increased depreciation expense on owned automobiles subject to operating leases.
Year-to-date results
Auto Finance net income was $246 million, down by $35 million, or 12%, from the prior year. Net revenue was $1.3 billion, up by $179 million, or 16%, reflecting higher automobile operating lease revenue, wider loan spreads and the absence of a prior-year $50 million pretax loss related to auto loans transferred to held-for-sale. The Provision for credit losses was $247 million, an increase of $137 million, reflecting an increase in estimated losses from low prior-year levels. Noninterest expense of $653 million increased by $99 million, or 18%, driven by increased depreciation expense on owned automobiles subject to operating leases.

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CARD SERVICES
 
For a discussion of the business profile of CS, see pages 43–45 of JPMorgan Chase’s 2006 Annual Report and pages 4–5 of this Form 10-Q.
JPMorgan Chase uses the concept of “managed receivables” to evaluate the credit performance of its credit card loans, both loans on the balance sheet and loans that have been securitized. Managed results exclude the impact of credit card securitizations on Total net revenue, the Provision for credit losses, net charge-offs and loan receivables. Securitization does not change reported Net income; however, it does affect the classification of items on the Consolidated statements of income and Consolidated balance sheets. For further information, see Explanation and Reconciliation of the Firm’s Use of non-GAAP Financial Measures on pages 13–16 of this Form 10-Q.
                                                 
Selected income statement data–managed basis   Three months ended September 30,   Nine months ended September 30,
(in millions, except ratios)   2007     2006     Change   2007     2006     Change
 
Revenue
                                               
Credit card income
  $ 692     $ 636       9 %   $ 1,973     $ 1,890       4 %
All other income
    67       126       (47 )     239       246       (3 )
                     
Noninterest revenue
    759       762             2,212       2,136       4  
Net interest income
    3,108       2,884       8       9,052       8,859       2  
                     
Total net revenue
    3,867       3,646       6       11,264       10,995       2  
 
Provision for credit losses
    1,363       1,270       7       3,923       3,317       18  
 
Noninterest expense
                                               
Compensation expense
    256       251       2       761       761        
Noncompensation expense
    827       823             2,383       2,429       (2 )
Amortization of intangibles
    179       179             547       555       (1 )
                     
Total noninterest expense
    1,262       1,253       1       3,691       3,745       (1 )
                     
 
Income before income tax expense
    1,242       1,123       11       3,650       3,933       (7 )
Income tax expense
    456       412       11       1,340       1,446       (7 )
                     
Net Income
  $ 786     $ 711       11     $ 2,310     $ 2,487       (7 )
                     
 
Memo: Net securitization gains (amortization)
  $     $ 48       NM     $ 39     $ 50       (22 )
 
Financial metrics
                                               
ROE
    22 %     20 %             22 %     24 %        
Overhead ratio
    33       34               33       34          
 
Quarterly results
Net income was $786 million, up by $75 million, or 11%, from the prior year. Earnings benefited from higher revenue offset partially by an increase in the Provision for credit losses.
End-of-period managed loans of $149.1 billion increased by $5.2 billion, or 4%, from the prior year. Average managed loans of $148.7 billion increased by $7.0 billion, or 5%, from the prior year. Both end-of-period and average managed loans benefited from organic growth.
Net managed revenue was $3.9 billion, up by $221 million, or 6%, from the prior year. Net interest income was $3.1 billion, up by $224 million, or 8%, from the prior year. The increase in net interest income was driven by an increased level of fees and higher average loan balances. These benefits were offset partially by the discontinuation of certain billing practices (including the elimination of certain over-limit fees and the two-cycle billing method for calculating finance charges) and a narrower loan spread. Noninterest revenue was $759 million, flat compared with the prior year. Increased net interchange income, which benefited from higher charge volume, was offset by lower net securitization gains. Charge volume growth of 3% reflects an approximate 10% growth rate in sales volume, offset primarily by a lower level of balance transfers, the result of a more targeted marketing effort.
The Managed provision for credit losses was $1.4 billion, up by $93 million, or 7%, from the prior year due to a higher level of net charge-offs. Credit quality was stable in the quarter, with a managed net charge-off rate for the quarter of 3.64%, up from 3.58% in the prior year. The 30-day managed delinquency rate was 3.25%, up from 3.17% in the prior year.
Noninterest expense was $1.3 billion, up by $9 million, or 1%, compared with the prior year, primarily due to higher volume-related expense.

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Year-to-date results
Net income was $2.3 billion, down by $177 million, or 7%, from the prior year. Prior-year results benefited from significantly lower net charge-offs following the change in bankruptcy legislation in the fourth quarter of 2005.
End-of-period managed loans of $149.1 billion increased by $5.2 billion, or 4%, from the prior year. Average managed loans of $148.5 billion increased by $9.5 billion, or 7%, from the prior year. Both end-of-period and average managed loans benefited from organic growth.
Net managed revenue was $11.3 billion, up by $269 million, or 2%, from the prior year. Net interest income was $9.1 billion, up by $193 million, or 2%, compared with the prior year. The increase in net interest income was driven by higher average loan balances and an increased level of fees. These benefits were offset partially by a narrower loan spread, the discontinuation of certain billing practices (including the elimination of over-limit fees and the two-cycle method for calculating finance charges) and increased revenue reversals, resulting from a higher level of charge-offs. Noninterest revenue was $2.2 billion, up by $76 million, or 4%, from the prior year. The increase reflects a higher level of fee-based revenue and increased net interchange income, benefiting from 5% higher charge volume. Charge volume reflects an approximate 10% growth rate in sales volume, offset partially by a lower level of balance transfers, the result of a more targeted marketing effort.
The Managed provision for credit losses was $3.9 billion, up by $606 million, or 18%, from the prior year. The prior year benefited from lower net charge-offs, following the change in bankruptcy legislation in the fourth quarter of 2005. The managed net charge-off rate increased to 3.61%, up from 3.29% in the prior year. The 30-day managed delinquency rate was 3.25%, up from 3.17% in the prior year.
Noninterest expense was $3.7 billion, down by $54 million, or 1%, compared with the prior year, primarily due to lower marketing expense and lower fraud-related expense, offset partially by higher volume-related expense.

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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)   2007     2006     Change   2007     2006     Change
 
% of average managed outstandings:
                                               
Net interest income
    8.29 %     8.07 %             8.15 %     8.52 %        
Provision for credit losses
    3.64       3.56               3.53       3.19          
Noninterest revenue
    2.03       2.13               1.99       2.05          
Risk adjusted margin(a)
    6.68       6.65               6.61       7.39          
Noninterest expense
    3.37       3.51               3.32       3.60          
Pretax income (ROO)
    3.31       3.14               3.29       3.78          
Net income
    2.10       1.99               2.08       2.39          
 
                                               
Business metrics
                                               
Charge volume (in billions)
  $ 89.8     $ 87.5       3 %   $ 259.1     $ 246.2       5 %
Net accounts opened (in thousands)(b)
    3,957 #     4,186 #     (5 )     11,102 #     31,477 #     (65 )
Credit cards issued (in thousands)
    153,637       139,513       10       153,637       139,513       10  
Number of registered Internet customers (in millions)
    26.4       20.4       29       26.4       20.4       29  
Merchant acquiring business(c)
Bank card volume (in billions)
  $ 181.4     $ 168.7       8     $ 524.7     $ 482.7       9  
Total transactions (in millions)
    4,990 #     4,597 #     9       14,266 #     13,203 #     8  
 
                                               
Selected ending balances
                                               
Loans:
                                               
Loans on balance sheets
  $ 79,409     $ 78,587       1     $ 79,409     $ 78,587       1  
Securitized loans
    69,643       65,245       7       69,643       65,245       7  
                     
Managed loans
  $ 149,052     $ 143,832       4     $ 149,052     $ 143,832       4  
                     
 
                                               
Selected average balances
                                               
Managed assets
  $ 154,956     $ 148,272       5     $ 155,206     $ 146,192       6  
Loans:
                                               
Loans on balance sheets
  $ 79,993     $ 76,655       4     $ 80,301     $ 71,129       13  
Securitized loans
    68,673       65,061       6       68,200       67,862        
                     
Managed loans
  $ 148,666     $ 141,716       5     $ 148,501     $ 138,991       7  
                     
Equity
  $ 14,100     $ 14,100           $ 14,100     $ 14,100        
 
                                               
Headcount
    18,887 #     18,696 #     1       18,887 #     18,696 #     1  
 
                                               
Managed credit quality statistics
                                               
Net charge-offs
  $ 1,363     $ 1,280       6     $ 4,008     $ 3,417       17  
Net charge-off rate
    3.64 %     3.58 %             3.61 %     3.29 %        
Managed delinquency ratios
                                               
30+ days
    3.25 %     3.17 %             3.25 %     3.17 %        
90+ days
    1.50       1.48               1.50       1.48          
 
                                               
Allowance for loan losses
  $ 3,107     $ 3,176       (2 )   $ 3,107     $ 3,176       (2 )
Allowance for loan losses to period-end loans
    3.91 %     4.04 %             3.91 %     4.04 %        
 
(a)  
Represents Total net revenue less Provision for credit losses.
(b)  
Year-to-date 2006 included approximately 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.

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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)   2007     2006     Change   2007     2006     Change
 
Income statement data(a)
                                               
Credit card income
Reported basis for the period
  $ 1,528     $ 1,357       13 %   $ 4,343     $ 4,673       (7 )%
Securitization adjustments
    (836 )     (721 )     (16 )     (2,370 )     (2,783 )     15  
                     
Managed credit card income
  $ 692     $ 636       9     $ 1,973     $ 1,890       4  
                     
 
                                               
Net interest income
                                               
Reported basis for the period
  $ 1,694     $ 1,556       9     $ 4,921     $ 4,459       10  
Securitization adjustments
    1,414       1,328       6       4,131       4,400       (6 )
                     
Managed net interest income
  $ 3,108     $ 2,884       8     $ 9,052     $ 8,859       2  
                     
 
                                               
Total net revenue
                                               
 
                                               
Reported basis for the period
  $ 3,289     $ 3,039       8     $ 9,503     $ 9,378       1  
Securitization adjustments
    578       607       (5 )     1,761       1,617       9  
                     
Managed total net revenue
  $ 3,867     $ 3,646       6     $ 11,264     $ 10,995       2  
                     
 
                                               
Provision for credit losses
                                               
 
                                               
Reported basis for the period
  $ 785     $ 663       18     $ 2,162     $ 1,700       27  
Securitization adjustments
    578       607       (5 )     1,761       1,617       9  
                     
Managed provision for credit losses
  $ 1,363     $ 1,270       7     $ 3,923     $ 3,317       18  
                     
Balance sheet – average balances(a)
                                               
Total average assets
                                               
Reported basis for the period
  $ 88,856     $ 85,301       4     $ 89,491     $ 80,395       11  
Securitization adjustments
    66,100       62,971       5       65,715       65,797        
                     
Managed average assets
  $ 154,956     $ 148,272       5     $ 155,206     $ 146,192       6  
                     
 
                                               
Credit quality statistics(a)
                                               
 
                                               
Net charge-offs
                                               
Reported net charge-offs data for the period
  $ 785     $ 673       17     $ 2,247     $ 1,800       25  
Securitization adjustments
    578       607       (5 )     1,761       1,617       9  
                     
Managed net charge-offs
  $ 1,363     $ 1,280       6     $ 4,008     $ 3,417       17  
 
(a)  
JPMorgan Chase uses the concept of “managed receivables” to evaluate the credit performance and overall performance of the underlying credit card loans, both sold and not sold; as the same borrower is continuing to use the credit card for ongoing charges, a borrower’s credit performance will affect both the receivables sold under SFAS 140 and those not sold. Thus, in its disclosures regarding managed receivables, JPMorgan Chase treats the sold receivables as if they were still on the balance sheet in order to disclose the credit performance (such as Net charge-off rates) of the entire managed credit card portfolio. Managed results exclude the impact of credit card securitizations on Total net revenue, the Provision for credit losses, net charge-offs and loan receivables. Securitization does not change reported net income versus managed earnings; however, it does affect the classification of items on the Consolidated statements of income and Consolidated balance sheets. For further information, see Explanation and Reconciliation of the Firm’s Use of non-GAAP Financial Measures on pages 1316 of this Form 10-Q.

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COMMERCIAL BANKING
 
For a discussion of the business profile of CB, see pages 46–47 of JPMorgan Chase’s 2006 Annual Report and page 5 of this Form 10-Q.
On October 1, 2006, JPMorgan Chase completed the acquisition of The Bank of New York’s consumer, business banking and middle-market banking businesses adding approximately $2.3 billion in loans and $1.2 billion in deposits to CB.
                                                 
Selected income statement data   Three months ended September 30,   Nine months ended September 30,
(in millions, except ratios)   2007     2006     Change   2007     2006     Change
 
Revenue
                                               
Lending & deposit-related fees
  $ 159     $ 145       10 %   $ 475     $ 434       9 %
Asset management, administration and commissions
    24       16       50       68       47       45  
All other income(a)
    107       95       13       394       282       40  
                     
Noninterest revenue
    290       256       13       937       763       23  
Net interest income
    719       677       6       2,082       2,019       3  
                     
Total net revenue
    1,009       933       8       3,019       2,782       9  
 
                                               
Provision for credit losses
    112       54       107       174       49       255  
 
                                               
Noninterest expense
                                               
Compensation expense
    160       190       (16 )     522       566       (8 )
Noncompensation expense
    300       296       1       890       883       1  
Amortization of intangibles
    13       14       (7 )     42       45       (7 )
                     
Total noninterest expense
    473       500       (5 )     1,454       1,494       (3 )
                     
Income before income tax expense
    424       379       12       1,391       1,239       12  
Income tax expense
    166       148       12       545       485       12  
                     
Net income
  $ 258     $ 231       12     $ 846     $ 754       12  
                     
 
                                               
Financial ratios
                                               
ROE
    15 %     17 %             18 %     18 %        
Overhead ratio
    47       54               48       54          
 
(a)  
IB-related and commercial card revenues are included in All other income.
Quarterly results
Net income was $258 million, up by $27 million, or 12%, from the prior year. The increase was driven by growth in net revenue and lower noninterest expense, offset primarily by a higher Provision for credit losses.
Net revenue was $1.0 billion, up by $76 million, or 8%, from the prior year. Net interest income was $719 million, up by $42 million, or 6%. The increase was driven by double-digit growth in liability and loan balances, reflecting organic growth and the Bank of New York transaction, partially offset by a continued shift to narrower–spread liability products and spread compression in the loan and liability portfolios. Noninterest revenue was $290 million, up by $34 million, or 13%, primarily due to higher deposit-related fees and other income.
Middle Market Banking revenue was $680 million, an increase of $63 million, or 10%, from the prior year, due to the Bank of New York transaction, higher deposit-related fees, and growth in investment banking revenue. Mid-Corporate Banking revenue was $167 million, an increase of $7 million, or 4%. Real Estate Banking revenue was $108 million, a decrease of $11 million, or 9%.
The Provision for credit losses was $112 million, compared with $54 million in the prior year. The current-quarter provision largely reflected portfolio activity and growth in loan balances. The Allowance for loan losses to average loans retained was 2.67% for the current quarter, which decreased from 2.70% in the prior year. Nonperforming loans were $134 million, down 15% from the prior year. The net charge-off rate was 0.13% in the current quarter compared with 0.16% in the prior year.
Noninterest expense was $473 million, down by $27 million, or 5%, from the prior year, as lower performance-based compensation expense was offset partially by higher volume-related expense.
Year-to-date results
Net income was $846 million, an increase of $92 million, or 12%, from the prior year due primarily to growth in net revenue, partially offset by higher Provision for credit losses.
Net revenue of $3.0 billion increased by $237 million, or 9%. Net interest income of $2.1 billion increased by $63 million, or 3%, driven by double-digit growth in liability balances and loans, which reflected organic growth and the Bank of New York transaction, largely offset by the continued shift to narrower–spread liability products and spread compression in the loan and

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liability portfolios. Noninterest revenue was $937 million, up by $174 million, or 23%, due to higher investment banking-related revenues, increased deposit-related fees and gains related to the sale of securities acquired in the satisfaction of debt.
On a segment basis, Middle Market Banking revenue was $2.0 billion, an increase of $120 million, or 6%, primarily due to the Bank of New York transaction, growth in investment banking revenue and higher deposit-related fees. Mid-Corporate Banking revenue was $576 million, an increase of $118 million, or 26%, reflecting higher lending revenue, investment banking revenue, and gains on sales of securities acquired in the satisfaction of debt. Real Estate Banking revenue of $319 million decreased by $19 million, or 6%.
Provision for credit losses was $174 million, compared with $49 million in the prior year. The increase in the Allowance for credit losses reflected portfolio activity and growth in loan balances. The Allowance for loan losses to average loans was 2.75%, compared with 2.76% in the prior year.
Noninterest expense was $1.5 billion, a decrease of $40 million, or 3%, largely due to lower compensation expense driven by the absence of prior-year expense from the adoption of SFAS 123R, partially offset by expense related to the Bank of New York transaction.
                                                 
Selected metrics   Three months ended September 30,   Nine months ended September 30,
(in millions, except ratio and headcount data)   2007     2006     Change   2007     2006     Change
 
Revenue by product:
                                               
Lending
  $ 343     $ 335       2 %   $ 1,039     $ 985       5 %
Treasury services
    594       551       8       1,719       1,667       3  
Investment banking
    64       60       7       222       166       34  
Other
    8       (13 )   NM       39       (36 )   NM  
                     
Total Commercial Banking revenue
  $ 1,009     $ 933       8     $ 3,019     $ 2,782       9  
                     
 
IB revenues, gross(a)
  $ 194     $ 170       14     $ 661     $ 470       41  
                     
 
Revenue by business:
                                               
Middle Market Banking
  $ 680     $ 617       10     $ 1,994     $ 1,874       6  
Mid-Corporate Banking
    167       160       4       576       458       26  
Real Estate Banking
    108       119       (9 )     319       338       (6 )
Other
    54       37       46       130       112       16  
                     
Total Commercial Banking revenue
  $ 1,009     $ 933       8     $ 3,019     $ 2,782       9  
                     
 
Selected average balances
                                               
Total assets
  $ 86,652     $ 57,378       51     $ 84,643     $ 56,246       50  
Loans and leases(b)
    61,272       53,404       15       59,595       52,227       14  
Liability balances(c)
    88,081       72,009       22       84,697       71,781       18  
Equity
    6,700       5,500       22       6,435       5,500       17  
 
Average loans by business:
                                               
Middle Market Banking
  $ 37,617     $ 32,890       14     $ 37,016     $ 32,418       14  
Mid-Corporate Banking
    12,076       8,756       38       11,484       8,205       40  
Real Estate Banking
    7,144       7,564       (6 )     7,038       7,505       (6 )
Other
    4,435       4,194       6       4,057       4,099       (1 )
                     
Total Commercial Banking loans
  $ 61,272     $ 53,404       15     $ 59,595     $ 52,227       14  
 
Headcount
    4,158 #     4,447 #     (6 )     4,158 #     4,447 #     (6 )
 
Credit data and quality statistics:
                                               
 
Net charge-offs
  $ 20     $ 21       (5 )   $ 11     $ 11        
Nonperforming loans
    134       157       (15 )     134       157       (15 )
Allowance for credit losses:
                                               
Allowance for loan losses
    1,623       1,431       13       1,623       1,431       13  
Allowance for lending-related commitments
    236       156       51       236       156       51  
                     
Total allowance for credit losses
    1,859       1,587       17       1,859       1,587       17  
 
                                               
Net charge-off rate(b)
    0.13 %     0.16 %             0.02 %     0.03 %        
Allowance for loan losses to average loans(b)
    2.67       2.70               2.75       2.76          
Allowance for loan losses to nonperforming loans
    1,211       911               1,211       911          
Nonperforming loans to average loans
    0.22       0.29               0.22       0.30          
 
(a)  
Represents the total revenue related to investment banking products sold to CB clients.
(b)  
Average loans include Loans held-for-sale of $433 million and $359 million for the quarters ended September 30, 2007 and 2006, respectively, and $550 million and $321 million for year-to-date 2007 and 2006, respectively. These amounts are excluded when calculating the Net charge-off rate and the allowance coverage ratio.
(c)  
Liability balances included deposits and deposits swept to on-balance sheet liabilities.

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TREASURY & SECURITIES SERVICES
 
For a discussion of the business profile of TSS, see pages 48–49 of JPMorgan Chase’s 2006 Annual Report and page 5 of this Form 10-Q.
                                                 
Selected income statement data   Three months ended September 30,   Nine months ended September 30,
(in millions, except ratios)   2007     2006     Change   2007     2006     Change
 
Revenue
                                               
Lending & deposit-related fees
  $ 244     $ 183       33 %   $ 676     $ 549       23 %
Asset management, administration and commissions
    730       642       14       2,244       1,975       14  
All other income
    171       155       10       480       479        
                     
Noninterest revenue
    1,145       980       17       3,400       3,003       13  
Net interest income
    603       519       16       1,615       1,569       3  
                     
Total net revenue
    1,748       1,499       17       5,015       4,572       10  
 
                                               
Provision for credit losses
    9       1       NM       15       1       NM  
Credit reimbursement to IB(a)
    (31 )     (30 )     (3 )     (91 )     (90 )     (1 )
 
                                               
Noninterest expense
                                               
Compensation expense
    579       557       4       1,746       1,643       6  
Noncompensation expense
    538       489       10       1,563       1,462       7  
Amortization of intangibles
    17       18       (6 )     49       57       (14 )
                     
Total noninterest expense
    1,134       1,064       7       3,358       3,162       6  
                     
 
Income before income tax expense
    574       404       42       1,551       1,319       18  
Income tax expense
    214       148       45       576       485       19  
                     
 
Net income
  $ 360     $ 256       41     $ 975     $ 834       17  
                     
Financial ratios
                                               
ROE
    48 %     46 %             43 %     48 %        
Overhead ratio
    65       71               67       69          
Pretax margin ratio(b)
    33       27               31       29          
 
(a)  
TSS was charged a credit reimbursement related to certain exposures managed within the IB credit portfolio on behalf of clients shared with TSS. For a further discussion, see Credit reimbursement on page 35 of JPMorgan Chase’s 2006 Annual Report.
(b)  
Pretax margin represents Income before income tax expense divided by Total net revenue, which is a measure of pretax performance and another basis by which management evaluates its performance and that of its competitors.
Quarterly results
Net income was a record $360 million, up by $104 million, or 41%, from the prior year, driven by record revenue offset partially by higher noninterest expense.
Net revenue was $1.7 billion, up by $249 million, or 17%, from the prior year. Worldwide Securities Services net revenue of $968 million was up by $166 million, or 21%. The growth was driven by increased product usage by new and existing clients and market appreciation, partially offset by spread compression and a shift to narrower-spread liability products. Treasury Services net revenue of $780 million was up by $83 million, or 12%, driven by growth in electronic volumes and higher liability balances. These benefits were offset partially by a continued shift to narrower-spread liability products. TSS firmwide net revenue, which includes Treasury Services net revenue recorded in other lines of business, grew to $2.4 billion, up by $308 million, or 15%. Treasury Services firmwide net revenue grew to $1.4 billion, up by $142 million, or 11%.
Noninterest expense was $1.1 billion, up by $70 million, or 7%, from the prior year. The increase was due to higher expense related to business and volume growth, as well as investment in new product platforms.
Year-to-date results
Net income was $975 million, up by $141 million, or 17%, from the prior year. The increase was driven by record revenue, partially offset by higher noninterest expense.
Net revenue was $5.0 billion, up by $443 million, or 10%, from the prior year. Worldwide Securities Services net revenue was $2.8 billion, up by $346 million, or 14%, driven by increased product usage by new and existing clients and market appreciation, partially offset by spread compression and a shift to narrower-spread liability products. Treasury Services net revenue was $2.2 billion, up by $97 million, or 5%, driven by growth in electronic volumes and higher liability balances. These benefits were offset partially by a continued shift to narrower-spread liability products. TSS firmwide net revenues, which includes Treasury Services net revenue recorded in other lines of business, grew to $6.9 billion, up by $538 million, or 8%. Treasury Services firmwide net revenue grew to $4.1 billion, up by $192 million, or 5%.

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Noninterest expense was $3.4 billion, up by $196 million, or 6%. The increase was due to higher expense related to business and volume growth as well as investment in new product platforms.
                                                 
Selected metrics   Three months ended September 30,   Nine months ended September 30,
(in millions, except headcount, ratio data and where                                    
otherwise noted)   2007     2006     Change   2007     2006     Change
 
Revenue by business
                                               
Treasury Services
  $ 780     $ 697       12 %   $ 2,189     $ 2,092       5 %
Worldwide Securities Services
    968       802       21       2,826       2,480       14  
                     
Total net revenue
  $ 1,748     $ 1,499       17     $ 5,015     $ 4,572       10  
 
                                               
Business metrics
                                               
Assets under custody (in billions)
  $ 15,614     $ 12,873       21     $ 15,614     $ 12,873       21  
Number of:
                                               
US$ ACH transactions originated (in millions)
    943 #     886 #     6       2,886 #     2,572 #     12  
Total US$ clearing volume (in thousands)
    28,031       26,252       7       82,650       77,940       6  
International electronic funds transfer volume (in thousands)(a)
    41,415       35,322       17       125,882       104,318       21  
Wholesale check volume (in millions)
    731       860       (15 )     2,269       2,616       (13 )
Wholesale cards issued (in thousands)(b)
    18,108       16,662       9       18,108       16,662       9  
Selected balance sheets (average)
                                               
Total assets
  $ 55,688     $ 30,558       82     $ 50,829     $ 30,526       67  
Loans
    20,602       15,231       35       19,921       14,396       38  
Liability balances(c)
    236,381       192,518       23       221,606       188,330       18  
Equity
    3,000       2,200       36       3,000       2,314       30  
 
                                               
Headcount
    25,209 #     24,575 #     3       25,209 #     24,575 #     3  
 
                                               
TSS firmwide metrics
                                               
Treasury Services firmwide revenue(d)
  $ 1,442     $ 1,300       11     $ 4,101     $ 3,909       5  
Treasury & Securities Services firmwide revenue(d)
    2,410       2,102       15       6,927       6,389       8  
Treasury Services firmwide overhead ratio(e)
    54 %     57 %             57 %     56 %        
Treasury & Securities Services firmwide overhead ratio(e)
    59       63               60       61          
Treasury Services firmwide liability balances (average)(f)
  $ 201,671     $ 162,326       24     $ 192,560     $ 159,897       20  
Treasury & Securities Services firmwide liability balances (average)(f)
    324,462       264,527       23       306,302       259,477       18  
 
(a)  
International electronic funds transfer includes non-US$ ACH and clearing volume.
(b)  
Wholesale cards issued included domestic commercial card, stored value card, prepaid card, and government electronic benefit card products.
(c)  
Liability balances included 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 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 included TS revenue recorded in the CB, Regional Banking and AM lines of business (see below) and excluded FX revenues recorded in IB for TSS-related FX activity.
                                                 
    Three months ended September 30,   Nine months ended September 30,
(in millions)   2007     2006     Change   2007     2006     Change
 
Treasury Services revenue reported in CB
  $ 592     $ 551       7 %   $ 1,717     $ 1,667       3 %
Treasury Services revenue reported in other lines of business
    70       52       35       195       150       30  
 
TSS firmwide FX revenue, which includes FX revenue recorded in TSS and FX revenue associated with TSS customers who are FX customers of IB, was $144 million and $85 million for the quarters ended September 30, 2007 and 2006, respectively, and $395 million and $349 million year-to-date 2007 and 2006, respectively.
(e)  
Overhead ratios have been calculated based upon firmwide revenues and TSS and TS expenses, respectively, including those allocated to certain other lines of business. FX revenues and expenses recorded in IB for TSS-related FX activity were not included in this ratio.
(f)  
Firmwide liability balances included TS’s liability balances recorded in certain other lines of business. Liability balances associated with TS customers who were also customers of the CB line of business were not included in TS liability balances.

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ASSET MANAGEMENT
 
For a discussion of the business profile of AM, see pages 50–52 of JPMorgan Chase’s 2006 Annual Report and page 5 of this Form 10-Q.
                                                 
Selected income statement data   Three months ended September 30,   Nine months ended September 30,
(in millions, except ratios)   2007     2006     Change   2007     2006     Change
 
Revenue
                                               
Asset management, administration and commissions
  $ 1,760     $ 1,285       37 %   $ 4,920     $ 3,786       30 %
All other income
    152       120       27       495       329       50  
                     
Noninterest revenue
    1,912       1,405       36       5,415       4,115       32  
Net interest income
    293       231       27       831       725       15  
                     
Total net revenue
    2,205       1,636       35       6,246       4,840       29  
 
Provision for credit losses
    3       (28 )   NM       (17 )     (42 )     60  
 
Noninterest expense
                                               
Compensation expense
    848       676       25       2,491       2,027       23  
Noncompensation expense
    498       417       19       1,405       1,201       17  
Amortization of intangibles
    20       22       (9 )     60       66       (9 )
                     
Total noninterest expense
    1,366       1,115       23       3,956       3,294       20  
                     
Income before income tax expense
    836       549       52       2,307       1,588       45  
Income tax expense
    315       203       55       868       586       48  
                     
Net income
  $ 521     $ 346       51     $ 1,439     $ 1,002       44  
                     
 
Financial ratios
                                               
ROE
    52 %     39 %             50 %     38 %        
Overhead ratio
    62       68               63       68          
Pretax margin ratio(a)
    38       34               37       33          
 
Selected metrics
Revenue by client segment
                                               
Private bank
  $ 686     $ 469       46 %   $ 1,892     $ 1,379       37 %
Retail
    639       456       40       1,768       1,344       32  
Institutional
    603       464       30       1,771       1,348       31  
Private client services
    277       247       12       815       769       6  
                     
Total net revenue
  $ 2,205     $ 1,636       35     $ 6,246     $ 4,840       29  
 
(a)  
Pretax margin represents Income before income tax expense divided by Total net revenue, which is a measure of pretax performance and another basis by which management evaluates its performance and that of its competitors.
Quarterly results
Net income was a record $521 million, up by $175 million, or 51%, from the prior year. Results benefited from record net revenue offset partially by higher noninterest expense.
Net revenue was $2.2 billion, up by $569 million, or 35%, from the prior year. Noninterest revenue, primarily fees and commissions, was $1.9 billion, up by $507 million, or 36%. This result was due largely to increased assets under management and higher performance and placement fees. Net interest income was $293 million, up by $62 million, or 27%, from the prior year, largely due to higher deposit and loan balances and wider deposit spreads.
Private Bank revenue grew 46%, to $686 million, due to higher asset management and placement fees, increased loan and deposit balances, and wider deposit spreads. Retail revenue grew 40%, to $639 million, primarily due to market appreciation and net asset inflows. Institutional revenue grew 30%, to $603 million, due to net asset inflows and performance fees. Private Client Services revenue grew 12%, to $277 million, due to increased revenue from higher assets under management and higher deposit balances.
The Provision for credit losses was $3 million, compared with a benefit of $28 million in the prior year, reflecting a higher level of recoveries in the prior year.
Noninterest expense was $1.4 billion, up by $251 million, or 23%, from the prior year. The increase was due largely to higher compensation, primarily performance-based, and investments in all business segments.

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Year-to-date results
Net income was a record $1.4 billion, up by $437 million, or 44%, from the prior year. Results benefited from record net revenue, partially offset by higher noninterest expense.
Net revenue was $6.2 billion, up by $1.4 billion, or 29%, from the prior year. Noninterest revenue, primarily fees and commissions, was $5.4 billion, up by $1.3 billion, or 32%. This result was due largely to increased assets under management and higher performance and placement fees. Net interest income was $831 million, up by $106 million, or 15%, largely due to higher deposit and loan balances and slightly wider deposit spreads.
Private Bank revenue grew 37%, to $1.9 billion, due to higher asset management and placement fees, increased loan and deposit balances, and wider deposit spreads. Retail revenue grew 32%, to $1.8 billion, primarily due to market appreciation and net asset inflows. Institutional revenue grew 31%, to $1.8 billion, due to net asset inflows and performance fees. Private Client Services revenue grew 6%, to $815 million, due to increased revenue from higher assets under management and higher deposit balances, partially offset by a shift to narrower-spread deposit products.
The Provision for credit losses was a benefit of $17 million, compared with a benefit of $42 million in the prior year.
Noninterest expense was $4.0 billion, up by $662 million, or 20%, from the prior year. The increase was due largely to higher compensation expense, primarily performance-based, investments in all business segments, and increased minority-interest expense related to Highbridge Capital Management. These factors were partially offset by the absence of prior-year expense from the adoption of SFAS 123R.
                                                 
Business metrics   Three months ended September 30,   Nine months ended September 30,
(in millions, except headcount, ratios and ranking                                    
data, and where otherwise noted)   2007     2006     Change   2007     2006     Change
 
Number of:
                                               
Client advisors
    1,680 #     1,489 #     13 %     1,680 #     1,489 #     13 %
Retirement planning services participants
    1,495,000       1,372,000       9       1,495,000       1,372,000       9  
 
                                               
% of customer assets in 4 & 5 Star Funds(a)
    55 %     58 %     (5 )     55 %     58 %     (5 )
% of AUM in 1st and 2nd quartiles:(b)
                                               
1 year
    47 %     79 %     (41 )     47 %     79 %     (41 )
3 years
    73 %     75 %     (3 )     73 %     75 %     (3 )
5 years
    76 %     80 %     (5 )     76 %     80 %     (5 )
 
                                               
Selected balance sheets data (average)
                                               
Total assets
  $ 53,879     $ 43,524       24     $ 50,498     $ 42,597       19  
Loans(c)
    30,928       26,770       16       28,440       25,695       11  
Deposits
    59,907       51,395       17       56,920       50,360       13  
Equity
    4,000       3,500       14       3,834       3,500       10  
 
                                               
Headcount
    14,510 #     12,761 #     14       14,510 #     12,761 #     14  
 
                                               
Credit data and quality statistics
                                               
Net charge-offs (recoveries)
  $ (5 )   $ (24 )     79     $ (10 )   $ (21 )     52  
Nonperforming loans
    28       57       (51 )     28       57       (51 )
Allowance for loan losses
    115       112       3       115       112       3  
Allowance for lending-related commitments
    6       4       50       6       4       50  
 
                                               
Net charge-off (recovery) rate
    (0.06 )%     (0.36 )%             (0.05 )%     (0.11 )%        
Allowance for loan losses to average loans
    0.37       0.42               0.40       0.44          
Allowance for loan losses to nonperforming loans
    411        196               411       196          
Nonperforming loans to average loans
    0.09       0.21               0.10       0.22          
 
(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)  
Held-for-investment prime mortgage loans transferred from AM to Treasury within the Corporate segment during the three and nine months ended September 30, 2007, were $1.2 billion and $6.5 billion, respectively. There were no loans transferred during 2006. Although the loans, together with the responsibility for the investment management of the portfolio, were transferred to Treasury, the transfer has no material impact on the financial results of AM.

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Assets under supervision
Assets under supervision were $1.5 trillion, up 22%, or $274 billion, from the prior year. Assets under management were $1.2 trillion, up 24%, or $228 billion, from the prior year. The increase was the result of net asset inflows into the Institutional segment, primarily in liquidity and alternative products; the Retail segment, primarily fixed income, equity and alternative products; the Private Bank segment, primarily in liquidity and alternative products; and from market appreciation. Custody, brokerage, administration and deposit balances were $376 billion, up by $46 billion.
                 
ASSETS UNDER SUPERVISION(a) (in billions)            
As of September 30,   2007     2006  
 
Assets by asset class
               
Liquidity
  $ 368     $ 281  
Fixed income
    195       171  
Equities & balanced
    481       392  
Alternatives
    119       91  
 
Total Assets under management
    1,163       935  
Custody/brokerage/administration/deposits
    376       330  
 
Total Assets under supervision
  $ 1,539     $ 1,265  
 
 
               
Assets by client segment
               
Institutional
  $ 603     $ 503  
Private Bank
    196       150  
Retail
    304       228  
Private Client Services
    60       54  
 
Total Assets under management
  $ 1,163     $ 935  
 
Institutional
  $ 604     $ 505  
Private Bank
    423       347  
Retail
    399       309  
Private Client Services
    113       104  
 
Total Assets under supervision
  $ 1,539     $ 1,265  
 
 
               
Assets by geographic region
               
U.S./Canada
  $ 745     $ 596  
International
    418       339  
 
Total Assets under management
  $ 1,163     $ 935  
 
U.S./Canada
  $ 1,022     $ 855  
International
    517       410  
 
Total Assets under supervision
  $ 1,539     $ 1,265  
 
 
               
Mutual fund assets by asset class
               
Liquidity
  $ 308     $ 221  
Fixed income
    46       45  
Equity
    235       184  
 
Total mutual fund assets
  $ 589     $ 450  
 
(a)  
Excludes Assets under management of American Century Companies, Inc, in which the Firm has 44% ownership.
                                 
Assets under management rollforward   Three months ended September 30,   Nine months ended September 30,
(in billions)   2007     2006     2007     2006  
 
Beginning balance
  $ 1,109     $ 898     $ 1,013     $ 847  
Flows:
                               
Liquidity
    33       15       52       20  
Fixed income
    (2 )     4       6       10  
Equities, balanced and alternatives
    2       3       24       29  
Market/performance/other impacts
    21       15       68       29  
 
Ending balance
  $ 1,163     $ 935     $ 1,163     $ 935  
 
Assets under supervision rollforward
                               
Beginning balance
  $ 1,472     $ 1,213     $ 1,347     $ 1,149  
Net asset flows
    41       26       106       71  
Market/performance/other impacts
    26       26       86       45  
 
Ending balance
  $ 1,539     $ 1,265     $ 1,539     $ 1,265  
 

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CORPORATE
 
For a discussion of the business profile of Corporate, see pages 53–54 of JPMorgan Chase’s 2006 Annual Report.
The transaction with The Bank of New York closed on October 1, 2006. As a result of this transaction, select corporate trust businesses were transferred from TSS to the Corporate segment and are reported in discontinued operations for 2006. See Note 2 on page 73 of this Form 10-Q.
                                                 
Selected income statement data   Three months ended September 30,   Nine months ended September 30,
(in millions, except headcount)   2007     2006     Change   2007     2006     Change
 
Revenue
                                               
Principal transactions(a)(b)
  $ 1,082     $ 195       455 %   $ 3,779     $ 945       300 %
Securities gains (losses)(c)
    128       24       433       (107 )     (626 )     83  
All other income(d)
    70       125       (44 )     228       458       (50 )
                     
Noninterest revenue
    1,280       344       272       3,900       777       402  
Net interest income (expense)
    (279 )     (55 )     (407 )     (569 )     (957 )     41  
                     
Total net revenue
    1,001       289       246       3,331       (180 )   NM  
 
                                               
Provision for credit losses
    (31 )     1       NM       (25 )     1       NM  
 
                                               
Noninterest expense
                                               
Compensation expense(b)
    569       737       (23 )     2,040       2,192       (7 )
Noncompensation expense(e)
    674       731       (8 )     2,048       1,679       22  
Merger costs
    61       48       27       187       205       (9 )
                     
Subtotal
    1,304       1,516       (14 )     4,275       4,076       5  
Net expenses allocated to other businesses
    (1,059 )     (1,035 )     (2 )     (3,174 )     (3,104 )     (2 )
                     
Total noninterest expense
    245       481       (49 )     1,101       972       13  
                     
Income (loss) from continuing operations before income tax expense
    787       (193 )     NM       2,255       (1,153 )     NM    
Income tax expense (benefit)
    274       (159 )     NM       729       (659 )   NM  
                     
Income (loss) from continuing operations
    513       (34 )   NM       1,526       (494 )   NM  
Income from discontinued operations(f)
          65       NM             175       NM  
                     
 
Net income (loss)
  $ 513     $ 31       NM     $ 1,526     $ (319 )   NM  
                     
Total net revenue
                                               
Private equity(a)(b)
  $ 733     $ 188       290     $ 3,279     $ 892       268  
Treasury and Corporate other(c)
    268       101       165       52       (1,072 )   NM  
                     
Total net revenue
  $ 1,001     $ 289       246     $ 3,331     $ (180 )   NM  
                     
 
Net income (loss)
                                               
Private equity(a)
  $ 409     $ 95       331     $ 1,809     $ 491       268  
Treasury and Corporate other(c)
    142       (99 )   NM       (167 )     (858 )     81  
Merger costs
    (38 )     (30 )     (27 )     (116 )     (127 )     9  
                     
Income (loss) from continuing operations
    513       (34 )   NM       1,526       (494 )   NM  
Income from discontinued operations(f)
          65       NM             175       NM  
                     
Total net income (loss)
  $ 513     $ 31       NM     $ 1,526     $ (319 )   NM  
                     
Headcount
    22,864 #     25,748 #     (11 )     22,864 #     25,748 #     (11 )
 
(a)  
The Firm adopted SFAS 157 in the first quarter of 2007. See Note 3 on pages 73–80 of this Form 10-Q for additional information.
(b)  
2007 included the classification of certain private equity carried interest from Net revenue to Compensation expense.
(c)  
Included a gain of $115 million in the third quarter of 2007 related to the sale of MasterCard shares.
(d)  
The nine months ended September 30, 2006, included a gain of $103 million related to the sale of Mastercard shares in its initial public offering, which occurred during the second quarter of 2006.
(e)  
Included insurance recoveries related to settlement of the Enron and WorldCom class action litigations and for certain other material proceedings of $17 million and $375 million for the quarter and nine months ended September 30, 2006, respectively.
(f)  
On October 1, 2006, the Firm completed the exchange of selected corporate trust businesses, including trustee, paying agent, loan agency and document-management services, for the consumer, business banking and middle-market banking businesses of The Bank of New York. The results of operations of these corporate trust businesses were reported as discontinued operations for 2006.
Quarterly results
Net income was $513 million, compared with $31 million in the prior year, benefiting from increased net revenue and lower noninterest expense. Prior-year results also included net income from discontinued operations of $65 million.
Net revenue was $1.0 billion, compared with $289 million in the prior year. The increase was driven by Private Equity gains of $766 million, compared with $226 million, reflecting a higher level of gains and the classification of certain private equity carried interest as compensation expense. Net revenue also increased due to higher trading-related gains and a $115 million gain from the sale of MasterCard shares. The increase in revenue was offset partially by a narrower net interest spread.

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Noninterest expense was $245 million, down by $236 million from the prior year. The decrease was driven by lower compensation expense and continuing business efficiencies. Partially offsetting the benefit of lower expense was the impact of the classification of certain private equity carried interest as compensation expense.
Year-to-date results
Net income was $1.5 billion, compared with net loss of $319 million in the prior year, benefiting from increased net revenue, partially offset by higher expense. Prior-year results also included net income from discontinued operations of $175 million.
Net revenue was $3.3 billion, compared with a negative $180 million in the prior year. The increase was driven by Private Equity gains of $3.4 billion, compared with $1.0 billion, reflecting a higher level of gains, the classification of certain private equity carried interest as compensation expense and a fair value adjustment on nonpublic investments resulting from the adoption of SFAS 157. Net revenue also increased due to a $115 million gain from the sale of MasterCard shares, lower securities losses and improved net interest income. Prior-year results included a $103 million gain related to the MasterCard initial public offering.
Noninterest expense was $1.1 billion, compared with $972 million in the prior year. The increase was driven by higher net legal costs, reflecting a lower level of recoveries and higher expense. In addition, expense increased due to the classification of certain private equity carried interest as compensation expense offset partially by business efficiencies.
                                                 
Selected income statement and balance sheet data   Three months ended September 30,   Nine months ended September 30,
(in millions)   2007     2006     Change   2007     2006     Change
 
Treasury
                                               
Securities gains (losses)(a)
  $ 126     $ 24       425 %   $ (109 )   $ (626 )     83 %
Investment securities portfolio (average)
    85,470       68,619       25       86,552       57,545       50  
Investment securities portfolio (ending)
    86,495       77,116       12       86,495       77,116       12  
Mortgage loans (average)(b)
    29,854             NM       27,326             NM  
Mortgage loans (ending)(b)
    32,804             NM       32,804             NM  
 
                                               
Private equity
                                               
Realized gains
  $ 504     $ 194       160     $ 2,212     $ 969       128  
Unrealized gains (losses)
    227       4       NM       1,038       (7 )   NM  
                     
Total direct investments(c)
    731       198       269       3,250       962       238  
Third-party fund investments
    35       28       25       122       50       144  
                     
Total private equity gains(d)
  $ 766     $ 226       239     $ 3,372     $ 1,012       233  
 
                         
Private equity portfolio information(e)                  
Direct investments   September 30, 2007   December 31, 2006   Change
 
Publicly-held securities
                       
Carrying value
  $ 409     $ 587       (30 )%
Cost
    291       451       (35 )
Quoted public value
    560       831       (33 )
 
                       
Privately-held direct securities
                       
Carrying value
    5,336       4,692       14  
Cost
    5,003       5,795       (14 )
 
                       
Third-party fund investments(f)
                       
Carrying value
    839       802       5  
Cost
    1,078       1,080        
         
Total private equity portfolio – Carrying value
  $ 6,584     $ 6,081       8  
Total private equity portfolio – Cost
  $ 6,372     $ 7,326       (13 )
 
(a)  
Losses reflected repositioning of the Treasury investment securities portfolio.
(b)  
Held-for-investment prime mortgage loans were transferred from RFS and AM. The transfer has no material impact on the financial results of Corporate.
(c)  
Private equity gains include a fair value adjustment related to the adoption of SFAS 157 in the first quarter of 2007. In addition, 2007 includes the reclassification of certain private equity carried interest from Net revenue to Compensation expense.
(d)  
Included in Principal transactions revenue.
(e)  
For more information on the Firm’s policies regarding the valuation of the private equity portfolio, see Note 5 on pages 83–85 of this Form 10-Q.
(f)  
Unfunded commitments to third-party equity funds were $883 million and $589 million at September 30, 2007 and December 31, 2006, respectively.
The carrying value of the private equity portfolio at September 30, 2007, was $6.6 billion, up $503 million from December 31, 2006. The portfolio increase was due primarily to favorable valuation adjustments on nonpublic investments and new investments, partially offset by sales activity. The portfolio represented 8.8% of the Firm’s stockholders’ equity less goodwill at September 30, 2007, up from 8.6% at December 31, 2006.

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BALANCE SHEET ANALYSIS
 
                 
Selected balance sheet data (in millions)   September 30, 2007   December 31, 2006
 
Assets
               
Cash and due from banks
  $ 32,766     $ 40,412  
Deposits with banks
    26,714       13,547  
Federal funds sold and securities purchased under resale agreements
    135,589       140,524  
Securities borrowed
    84,697       73,688  
Trading assets:
               
Debt and equity instruments
    389,119       310,137  
Derivative receivables
    64,592       55,601  
Securities:
               
Available-for-sale
    97,659       91,917  
Held-to-maturity
    47       58  
Loans, net of Allowance for loan losses
    478,207       475,848  
Other receivables
    36,411       27,585  
Goodwill
    45,335       45,186  
Other intangible assets
    15,500       14,852  
All other assets
    72,939       62,165  
 
Total assets
  $ 1,479,575     $ 1,351,520  
 
 
Liabilities
               
Deposits
  $ 678,091     $ 638,788  
Federal funds purchased and securities sold under repurchase agreements
    178,767       162,173  
Commercial paper and other borrowed funds
    65,132       36,902  
Trading liabilities:
               
Debt and equity instruments
    80,748       90,488  
Derivative payables
    68,426       57,469  
Long-term debt and trust preferred capital debt securities
    188,626       145,630  
Beneficial interests issued by consolidated variable interest entities
    13,283       16,184  
All other liabilities
    86,524       88,096  
 
Total liabilities
    1,359,597       1,235,730  
Stockholders’ equity
    119,978       115,790  
 
Total liabilities and stockholders’ equity
  $ 1,479,575     $ 1,351,520  
 
Consolidated balance sheets overview
At September 30, 2007, the Firm’s total assets were $1.5 trillion, an increase of $128.1 billion, or 9%, from December 31, 2006. Total liabilities were $1.4 trillion, an increase of $123.9 billion, or 10%, from December 31, 2006. Stockholders’ equity was $120.0 billion, an increase of $4.2 billion, or 4%, from December 31, 2006. The following is a discussion of the significant changes in balance sheet items from December 31, 2006.
Deposits with banks; Federal funds sold and securities purchased under resale agreements; Securities borrowed; Federal funds purchased and securities sold under repurchase agreements
The Firm utilizes Deposits with banks, Federal funds sold and securities purchased under resale agreements, Securities borrowed, and Federal funds purchased and securities sold under repurchase agreements as part of its liquidity management activities to manage the Firm’s cash positions and risk-based capital requirements, and to support the Firm’s trading activities, including its risk management activities. In particular, Federal funds purchased and securities sold under repurchase agreements are used to maximize liquidity access and minimize funding costs. The increases from December 31, 2006, in Deposits with banks and Securities borrowed reflected higher levels of funds that were available for short-term investment opportunities and a higher volume of securities needed for trading purposes, respectively. Securities sold under repurchase agreements increased primarily due to higher short-term requirements to fund trading positions. For additional information on the Firm’s Liquidity risk management, see pages 49–51 of this Form 10-Q.
Trading assets and liabilities – debt and equity instruments
The Firm uses debt and equity trading instruments for both market-making and proprietary risk-taking activities. These instruments consist primarily of fixed income securities, including government and corporate debt; equity, including convertible securities; loans; and physical commodities. The increase in trading assets from December 31, 2006, was due primarily to the more active capital markets environment, with growth in client-driven market-making activities, particularly for debt securities. In addition, a total of $31.0 billion of loans are now accounted for at fair value under SFAS 159 and classified as trading assets in the Consolidated balance sheet at September 30, 2007. The trading assets accounted for under SFAS 159 are primarily certain prime mortgage loans warehoused by RFS for sale or securitization purposes, and loans warehoused by IB. The decrease in trading liabilities reflects a lower volume of short positions on debt instruments, due to

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the difficult fixed income market environment that occurred during the third quarter of 2007. For additional information, refer to Note 4 and Note 5 on pages 80–83 and 83–85, respectively, of this Form 10-Q.
Trading assets and liabilities – derivative receivables and payables
The Firm utilizes various interest rate, foreign exchange, equity, credit and commodity derivatives for market-making, proprietary risk-taking and risk-management purposes. Derivative receivables increased $9.0 billion from December 31, 2006, primarily due to higher equity, credit derivative and foreign exchange receivables as a result of higher equity market levels, widening credit spreads and the decline in the U.S. dollar, respectively. The increase in derivative payables from December 31, 2006, was due primarily to higher payables on equity-related and foreign exchange derivatives due to the strength of the equities markets and the decline in the value of the U.S. Dollar, respectively. For additional information, refer to Derivative contracts and Note 5 on pages 56–58 and 83–85, respectively, of this Form 10-Q.
Securities
Almost all of the Firm’s securities portfolios are classified as AFS and are used primarily to manage the Firm’s exposure to interest rate movements. The AFS portfolio increased from December 31, 2006, primarily due to net purchases of securities by Treasury associated with managing the Firm’s exposure to interest rates. For additional information related to securities, refer to the Corporate segment discussion and to Note 11 on pages 40–41 and 89–90, respectively, of this Form 10-Q.
Loans
The Firm provides loans to customers of all sizes, from large corporate and institutional clients to individual consumers. The Firm manages the risk/reward relationship of each portfolio and discourages the retention of loan assets that do not generate a positive return above the cost of risk-adjusted capital. Loans, net of the Allowance for loan losses, rose slightly from December 31, 2006, primarily due to: business growth in wholesale lending activity, mainly in IB and CB; organic growth in the Home Equity portfolio; and the decision during the current quarter to retain rather than sell subprime mortgage loans. These increases were partly offset by a decline in consumer loans as certain prime mortgage loans originated after January 1, 2007, are classified as Trading assets and accounted for at fair value under SFAS 159. In addition, certain loans warehoused in IB were transferred to Trading assets on January 1, 2007, as part of the adoption of SFAS 159. Also contributing to the decrease were typical seasonal declines in credit card receivables, partially offset by organic growth. For a more detailed discussion of the loan portfolio and the Allowance for loan losses, refer to Credit risk management on pages 51–62 of this Form 10-Q.
Goodwill
Goodwill arises from business combinations and represents the excess of the cost of an acquired entity over the net fair value amounts assigned to assets acquired and liabilities assumed. The increase in Goodwill primarily resulted from certain acquisitions by TSS and CS, and currency-translation adjustments on the Sears Canada credit card acquisition. These factors were partially offset by a reduction in Goodwill from the adoption of FIN 48, as well as adjustments for tax-related purchase accounting adjustments associated with the Bank One merger. For additional information see Notes 17 and 20 on pages 101 and 105, respectively, of this Form 10-Q.
Other intangible assets
The Firm’s other intangible assets consist of MSRs, purchased credit card relationships, other credit card–related intangibles, core deposit intangibles, and all other intangibles. The increase in Other intangible assets reflects higher MSRs of $1.6 billion primarily due to MSR additions from loan sales and MSR purchases. Partially offsetting these increases were other changes in the fair value of MSRs, related primarily to modeled mortgage servicing portfolio runoff (or time decay), and the amortization of intangibles, in particular, credit card business-related intangibles and core deposit intangibles. For additional information on MSRs and other intangible assets, see Note 17 on pages 101–103 of this Form 10-Q.
Deposits
The Firm’s deposits represent a liability to customers, both retail and wholesale, for funds held on their behalf. Deposits are generally classified by location (U.S. and non-U.S.), whether they are interest or noninterest-bearing, and by type (i.e., demand, money market deposit accounts (“MMDAs”), savings, time, negotiable order of withdrawal (“NOW”) accounts). Deposits help provide a stable and consistent source of funding for the Firm. Deposits increased from December 31, 2006, primarily reflecting wholesale deposits driven by net growth in business volumes, particularly, interest-bearing deposits within TSS and AM. For more information on deposits, refer to the RFS, TSS, and AM segment discussions and the Liquidity risk management discussion on pages 21–28, 35–36, 37–39, and 49–51, respectively, of this Form 10-Q. For more information on wholesale liability balances, including deposits, refer to the CB and TSS segment discussions on pages 33–34 and 35–36, respectively, of this Form 10-Q.

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Commercial paper and other borrowed funds
The Firm utilizes Commercial paper and other borrowed funds as part of its liquidity management activities to cover short-term funding needs, as well as in connection with TSS’s cash management product in which clients’ excess funds, primarily in TSS, CB and RFS, are transferred into commercial paper overnight sweep accounts. The increases in Commercial paper and other borrowed funds were due primarily to growth in the volume of liability balances in sweep accounts, higher short-term requirements to fund trading positions and AFS securities inventory levels, and the Firm’s ongoing efforts to further build liquidity by increasing the amounts held of liquid securities and overnight investments that may be readily converted to cash. For additional information on the Firm’s Liquidity risk management, see pages 49–51 of this Form 10-Q.
Beneficial interests issued by consolidated variable interest entities (“VIEs”)
Beneficial interests issued by consolidated VIEs declined from December 31, 2006, primarily as a result of the restructuring during the first quarter of 2007 of a Firm-administered multi-seller conduit. For additional information related to multi-seller conduits, refer to Off-balance sheet arrangements and contractual cash obligations on pages 47–48 and Note 16 on pages 100–101 of this Form 10-Q.
Long-term debt and trust preferred capital debt securities
The Firm utilizes Long-term debt and trust preferred capital debt securities as part of its longer-term liquidity and capital management activities. Long-term debt and trust preferred capital debt securities increased from December 31, 2006, reflecting net new issuances, including client-driven structured notes in IB. For additional information on the Firm’s long-term debt activities, see the Liquidity risk management discussion on pages 49–51 of this Form 10-Q.
Stockholders’ equity
Total stockholders’ equity increased from year-end 2006 to $120.0 billion at September 30, 2007. The increase was primarily the result of Net income for the first nine months of 2007, net shares issued under the Firm’s employee stock-based compensation plans, and the cumulative effect on Retained earnings of changes in accounting principles of $915 million. These were offset partially by stock repurchases and the declaration of cash dividends. The $915 million increase in Retained earnings resulting from the adoption of new accounting principles primarily reflected $287 million related to SFAS 157, $199 million related to SFAS 159 and $436 million related to FIN 48 in the first quarter of 2007. For a further discussion of capital, see the Capital management section that follows; for a further discussion of the accounting changes, see Accounting and Reporting Developments on pages 66–67, Note 3 on pages 73–80, Note 4 on pages 80–83 and Note 20 on page 105 of this Form 10-Q.

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CAPITAL MANAGEMENT
 
The following discussion of JPMorgan Chase’s capital management highlights developments since December 31, 2006, and should be read in conjunction with Capital Management, on pages 57–59 of JPMorgan Chase’s 2006 Annual Report.
The Firm’s capital management framework is intended to ensure that there is capital sufficient to support the underlying risks of the Firm’s business activities, as measured by economic risk capital, and to maintain “well-capitalized” status under regulatory requirements. In addition, the Firm holds capital above these requirements in amounts deemed appropriate to achieve management’s regulatory and debt rating objectives. The process of assigning equity to the lines of business is integrated into the Firm’s capital framework and is overseen by the Asset-Liability Committee (“ALCO”).
Line of business equity
Equity for a line of business represents the amount of capital the Firm believes the business would require if it were operating independently, incorporating sufficient capital to address economic risk measures, regulatory capital requirements and capital levels for similarly rated peers. Return on equity is measured and internal targets for expected returns are established as a key measure of a business segment’s performance. The Firm may revise its equity capital-allocation methodology in the future.
In accordance with SFAS 142, the lines of business perform the required Goodwill impairment testing. For a further discussion of Goodwill and impairment testing, see Critical accounting estimates and Note 16 on pages 85 and 121, respectively, of JPMorgan Chase’s 2006 Annual Report, and Note 17 on page 101 of this Form 10-Q.
                 
Line of business equity   Quarterly Averages  
(in billions)   3Q07     3Q06  
 
Investment Bank
  $ 21.0     $ 21.0  
Retail Financial Services
    16.0       14.3  
Card Services
    14.1       14.1  
Commercial Banking
    6.7       5.5  
Treasury & Securities Services
    3.0       2.2  
Asset Management
    4.0       3.5  
Corporate
    54.2       51.2  
 
Total common stockholders’ equity
  $ 119.0     $ 111.8  
 
Economic risk capital
JPMorgan Chase assesses its capital adequacy relative to the risks underlying the Firm’s business activities, utilizing internal risk-assessment methodologies. The Firm assigns economic capital primarily based upon four risk factors: credit risk, market risk, operational risk and, principally for the Firm’s Private Equity business, private equity risk.
                 
Economic risk capital   Quarterly Averages  
(in billions)   3Q07     3Q06  
 
Credit risk
  $ 24.8     $ 22.3  
Market risk
    9.7       9.6  
Operational risk
    5.6       5.7  
Private equity risk
    3.7       3.3  
 
Economic risk capital
    43.8       40.9  
Goodwill
    45.3       43.4  
Other(a)
    29.9       27.5  
 
Total common stockholders’ equity
  $ 119.0     $ 111.8  
 
(a)  
Reflects additional capital required, in management’s view, to meet its regulatory and debt rating objectives.
Regulatory capital
The Firm’s banking regulator, the Federal Reserve Board (“FRB”), establishes capital requirements, including well-capitalized standards for the consolidated financial holding company. The Office of the Comptroller of the Currency (“OCC”) establishes similar capital requirements and standards for the Firm’s national banks, including JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A.

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Tier 1 capital was $86.1 billion at September 30, 2007, compared with $81.1 billion at December 31, 2006, an increase of $5.0 billion. The increase was due primarily to net income of $12.4 billion; net issuances of common stock under the Firm’s employee stock-based compensation plans of $3.0 billion; net issuances of $1.6 billion of qualifying trust preferred capital debt securities; and the effects of the adoption of new accounting principles reflecting increases of $287 million for SFAS 157, $199 million for SFAS 159 and $436 million for FIN 48. These increases were partially offset by decreases in Stockholders’ equity net of Accumulated other comprehensive income (loss) due to common stock repurchases of $8.0 billion and dividends declared of $3.8 billion. In addition, the change in capital reflects the exclusion of a $651 million valuation adjustment to certain liabilities pursuant to SFAS 157 to reflect the credit quality of the Firm. Additional information regarding the Firm’s capital ratios and the federal regulatory capital standards to which it is subject is presented in Note 26 on pages 129–130 of JPMorgan Chase’s 2006 Annual Report.
The following table presents the risk-based capital ratios for JPMorgan Chase and its significant banking subsidiaries at September 30, 2007, and December 31, 2006.
                                                         
                    Risk-     Adjusted     Tier 1     Total     Tier 1  
    Tier 1             weighted     average     capital     capital     leverage  
(in millions, except ratios)   capital     Total capital     assets(c)     assets(d)     ratio     ratio     ratio  
 
September 30, 2007(a)
                                                       
JPMorgan Chase & Co.
  $ 86,096     $ 128,543     $ 1,028,551     $ 1,423,171       8.4 %     12.5 %     6.0 %
JPMorgan Chase Bank, N.A.
    75,539       108,306       920,447       1,211,591       8.2       11.8       6.2  
Chase Bank USA, N.A.
    9,499       10,807       71,484       61,285       13.3       15.1       15.5  
 
                                                       
December 31, 2006(a)
                                                       
JPMorgan Chase & Co.
  $ 81,055     $ 115,265     $ 935,909     $ 1,308,699       8.7 %     12.3 %     6.2 %
JPMorgan Chase Bank, N.A.
    68,726       96,103       840,057       1,157,449       8.2       11.4       5.9  
Chase Bank USA, N.A.
    9,242       11,506       77,638       66,202       11.9       14.8       14.0  
 
                                                       
Well-capitalized ratios(b)
                                    6.0 %     10.0 %     5.0 %(e)
Minimum capital ratios(b)
                                    4.0       8.0       3.0 (f)
 
(a)  
Asset and capital amounts for JPMorgan Chase’s banking subsidiaries reflect intercompany transactions, whereas the respective amounts for JPMorgan Chase reflect the elimination of intercompany transactions.
(b)  
As defined by the regulations issued by the FRB, OCC and FDIC.
(c)  
Includes off–balance sheet risk-weighted assets in the amounts of $345.4 billion, $329.3 billion and $14.2 billion, respectively, at September 30, 2007, and $305.3 billion, $290.1 billion and $12.7 billion, respectively, at December 31, 2006, for JPMorgan Chase and its significant banking subsidiaries.
(d)  
Average adjusted assets for purposes of calculating the leverage ratio include total average assets adjusted for unrealized gains/losses on securities, less deductions for disallowed goodwill and other intangible assets, investments in certain subsidiaries and the total adjusted carrying value of nonfinancial equity investments that are subject to deductions from Tier 1 capital.
(e)  
Represents requirements for banking subsidiaries pursuant to regulations issued under the Federal Deposit Insurance Corporation Improvement Act. There is no Tier 1 leverage component in the definition of a well-capitalized bank holding company.
(f)  
The minimum Tier 1 leverage ratio for bank holding companies and banks is 3% or 4% depending on factors specified in regulations issued by the FRB and OCC.
Dividends
The Firm’s common stock dividend policy reflects JPMorgan Chase’s earnings outlook, desired dividend payout ratios, need to maintain an adequate capital level and alternative investment opportunities. The Firm continues to target a dividend payout ratio of approximately 30–40% of Net income over time. On September 18, 2007, the Board of Directors declared a quarterly dividend of $0.38 per share on the outstanding shares of the corporation’s common stock, payable on October 31, 2007, to stockholders of record at the close of business on October 5, 2007. On April 17, 2007, the Board of Directors increased the quarterly dividend $0.04 per share, or 12%, to $0.38 per share effective with the dividend that was paid on July 31, 2007.

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Stock repurchases
During the quarter and nine months ended September 30, 2007, under the respective stock repurchase programs then in effect, the Firm repurchased a total of 47.0 million and 164.6 million shares for $2.1 billion and $8.0 billion at an average price per share of $45.42 and $48.67, respectively. During the quarter 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 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.
On April 17, 2007, the Board of Directors authorized the repurchase of up to $10.0 billion of the Firm’s common shares. The new authorization commenced April 19, 2007, and replaced the Firm’s previous $8.0 billion repurchase program. The new $10.0 billion authorization will be utilized at management’s discretion, and the timing of purchases and the exact number of shares purchased will depend on market conditions and alternative investment opportunities. The new repurchase program does not include specific price targets or timetables; may be executed through open market purchases, privately negotiated transactions or utilizing Rule 10b5-1 programs; and may be suspended at any time. For additional information regarding repurchases of the Firm’s equity securities, see Part II, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds, on pages 121–122 of this Form 10-Q.
 
OFF–BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS
 
Special-purpose entities
JPMorgan Chase is involved with several types of off–balance sheet arrangements, including special purpose entities (“SPEs”), lines of credit and loan commitments. The principal uses of SPEs are to obtain sources of liquidity for JPMorgan Chase and its clients by securitizing financial assets, and to create other investment products for clients. These arrangements are an important part of the financial markets, providing market liquidity by facilitating investors’ access to specific portfolios of assets and risks. For example, SPEs are integral to the markets for mortgage-backed securities, commercial paper and other asset-backed securities.
JPMorgan Chase is involved with SPEs in three broad categories: loan securitizations, multi-seller conduits and client intermediation. Capital is held, as deemed appropriate, against all SPE-related transactions and related exposures, such as derivative transactions and lending-related commitments. For further discussion of SPEs and the Firm’s accounting for these types of exposures, see Note 1 on pages 72–73 of this Form 10-Q and Note 14 on pages 114–118 and Note 15 on pages 118–120 of JPMorgan Chase’s 2006 Annual Report.
For certain liquidity commitments to SPEs, the Firm could be required to provide funding if the short-term credit rating of JPMorgan Chase Bank, N.A., were downgraded below specific levels, primarily P-1, A-1 and F1 for Moody’s, Standard & Poor’s and Fitch, respectively. The amounts of these liquidity commitments were $96.9 billion and $74.4 billion at September 30, 2007, and December 31, 2006, respectively. These liquidity commitments are generally included in the Firm’s other unfunded commitments to extend credit and asset purchase agreements, as shown in the table on the following page. Alternatively, if JPMorgan Chase Bank, N.A. were downgraded, the Firm could be replaced by another liquidity provider in lieu of providing funding under the liquidity commitment, or, in certain circumstances, could facilitate the sale or refinancing of the assets in the SPE in order to provide liquidity. For further information, refer to Note 15 on pages 118–120 of JPMorgan Chase’s 2006 Annual Report.
The Firm also has exposure to certain SPEs arising from derivative transactions; these transactions are recorded at fair value on the Firm’s Consolidated balance sheets with changes in fair value (i.e., mark-to-market (“MTM”) gains and losses) recorded in Principal transactions revenue. Such MTM gains and losses are not included in the revenue amounts reported in the following table.
The following table summarizes certain revenue information related to consolidated and nonconsolidated VIEs with which the Firm has significant involvement, and qualifying SPEs (“QSPEs”). The revenue reported in the table below primarily represents servicing and credit fee income.
Revenue from VIEs and QSPEs
                                                 
    Three months ended September 30,     Nine months ended September 30,  
(in millions)   VIEs     QSPEs     Total     VIEs     QSPEs     Total  
 
2007
  $ 56     $ 865     $ 921     $ 158     $ 2,552     $ 2,710  
2006
  $ 55     $ 788     $ 843     $ 162     $ 2,366     $ 2,528  
 

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Off–balance sheet lending-related financial instruments and guarantees
JPMorgan Chase utilizes lending-related financial instruments (e.g., commitments and guarantees) to meet the financing needs of its customers. The contractual amount of these financial instruments represents the maximum possible credit risk should the counterparty draw down the commitment or the Firm be required to fulfill its obligation under the guarantee, and the counterparty subsequently fail to perform according to the terms of the contract. Most of these commitments and guarantees expire without a default occurring or without being drawn. As a result, the total contractual amount of these instruments is not, in the Firm’s view, representative of its actual future credit exposure or funding requirements. Further, certain commitments, primarily related to consumer financings, are cancelable, upon notice, at the option of the Firm. For further discussion of lending-related commitments and guarantees and the Firm’s accounting for them, see Credit risk management on pages 64–76 and Note 29 on pages 132–134 of JPMorgan Chase’s 2006 Annual Report.
The following table presents off–balance sheet lending-related financial instruments and guarantees for the periods indicated.
                                                 
                                            Dec. 31,  
    September 30, 2007     2006  
By remaining maturity           1-<3     3-5                    
(in millions)   < 1 year     years     years     > 5 years     Total     Total  
 
Lending-related
                                               
Consumer(a)
  $ 726,405     $ 3,272     $ 3,344     $ 68,667     $ 801,688     $ 747,535  
Wholesale:
                                               
Unfunded commitments to extend credit(b)(c)(d)
    109,348       67,478       66,535       18,514       261,875       229,204  
Asset purchase agreements(e)
    30,301       44,765       14,466       3,868       93,400       67,529  
Standby letters of credit and guarantees(c)(f)(g)
    27,071       23,770       47,496       8,466       106,803       89,132  
Other letters of credit(c)
    4,828       1,099       126       14       6,067       5,559  
 
Total wholesale
    171,548       137,112       128,623       30,862       468,145       391,424  
 
Total lending-related
  $ 897,953     $ 140,384     $ 131,967     $ 99,529     $ 1,269,833     $ 1,138,959  
 
Other guarantees
                                               
Securities lending guarantees(h)
  $ 384,462     $     $     $     $ 384,462     $ 318,095  
Derivatives qualifying as guarantees(i)
    25,802       10,472       27,553       24,608       88,435       71,531  
 
(a)  
Includes Credit card lending-related commitments of $700.2 billion at September 30, 2007, and $657.1 billion at December 31, 2006, that represent the total available credit to the Firm’s cardholders. The Firm has not experienced, and does not anticipate, that all of its cardholders will utilize their entire available lines of credit at the same time. The Firm can reduce or cancel a credit card commitment by providing the cardholder prior notice or, in some cases, without notice as permitted by law.
(b)  
Includes unused advised lines of credit totaling $39.2 billion at September 30, 2007, and $39.0 billion at December 31, 2006, which are not legally binding. In regulatory filings with the FRB, unused advised lines are not reportable.
(c)  
Represents contractual amount net of risk participations totaling $25.6 billion at September 30, 2007, and $32.8 billion at December 31, 2006.
(d)  
Excludes firmwide unfunded commitments to private third-party equity funds of $936 million and $686 million at September 30, 2007, and December 31, 2006, respectively.
(e)  
The maturity is based upon the underlying assets in the SPE, which are primarily asset purchase agreements to the Firm’s administered multi-seller asset-backed commercial paper conduits. It also includes $1.4 billion of asset purchase agreements to other third-party entities at September 30, 2007, and December 31, 2006.
(f)  
JPMorgan Chase held collateral relating to $15.4 billion and $13.5 billion of these arrangements at September 30, 2007, and December 31, 2006, respectively.
(g)  
Includes unused commitments to issue standby letters of credit of $59.1 billion and $45.7 billion at September 30, 2007, and December 31, 2006, respectively.
(h)  
Collateral held by the Firm in support of securities lending indemnification agreements was $387.4 billion at September 30, 2007, and $317.9 billion at December 31, 2006.
(i)  
Represents notional amounts of derivatives qualifying as guarantees. For further discussion of guarantees, see Note 29 on pages 132–134 of JPMorgan Chase’s 2006 Annual Report.
 
RISK MANAGEMENT
 
Risk is an inherent part of JPMorgan Chase’s business activities. The Firm’s risk management framework and governance structure are intended to provide comprehensive controls and ongoing management of the major risks inherent in its business activities. In addition, this framework recognizes the diversity among the Firm’s core businesses, which helps reduce the impact of volatility in any particular area on the Firm’s operating results as a whole. There are eight major risk types identified in the business activities of the Firm: liquidity risk, credit risk, market risk, interest rate risk, operational risk, legal and reputation risk, fiduciary risk and private equity risk.
For further discussion of these risks see pages 61–82 of JPMorgan Chase’s 2006 Annual Report.

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LIQUIDITY RISK MANAGEMENT
 
The following discussion of JPMorgan Chase’s liquidity management framework highlights developments since December 31, 2006, and should be read in conjunction with pages 62–63 of JPMorgan Chase’s 2006 Annual Report.
Liquidity risk arises from the general funding needs of the Firm’s activities and in the management of its assets and liabilities. JPMorgan Chase’s liquidity management framework is intended to maximize liquidity access and minimize funding costs. Through active liquidity management, the Firm seeks to preserve stable, reliable and cost-effective sources of funding. This access enables the Firm to replace maturing obligations when due and fund assets at appropriate maturities and rates. To accomplish this, management uses a variety of methods to mitigate liquidity and related risks, taking into consideration market conditions, prevailing interest rates, liquidity needs and the desired maturity profile of liabilities, among other factors.
Funding
Sources of funds
As of September 30, 2007, the Firm’s liquidity position remained strong based upon its liquidity metrics. JPMorgan Chase’s long-dated funding, including core liabilities, exceeded illiquid assets, and the Firm believes its obligations can be met even if access to funding is impaired.
Consistent with its liquidity management policy, the Firm has raised funds at the Parent company level in excess of its obligations and those of its nonbank subsidiaries that mature over the next 12 months.
The diversity of the Firm’s funding sources enhances financial flexibility and limits dependence on any one source, thereby minimizing the cost of funds. The deposits held by the RFS, CB, TSS and AM lines of business are generally a consistent source of funding for JPMorgan Chase Bank, N.A. As of September 30, 2007, total deposits for the Firm were $678.1 billion. A significant portion of the Firm’s deposits are retail deposits, which are less sensitive to interest rate changes and therefore are considered more stable than market-based wholesale deposits. The Firm also benefits from stable wholesale liability balances originated by RFS, CB, TSS and AM through the normal course of business. Such liability balances include deposits that are swept to on–balance sheet liabilities (e.g., commercial paper, Federal funds purchased and securities sold under repurchase agreements). These liability balances are also a stable and consistent source of funding due to the nature of the businesses from which they are generated. For further discussions of deposit and liability balance trends, see the discussion of the results for the Firm’s business segments and the Balance Sheet Analysis on pages 17–39 and 42–44, respectively, of this Form 10-Q.
Additional sources of unsecured funds include a variety of short- and long-term instruments, including federal funds purchased, commercial paper, bank notes, long-term debt and trust preferred capital debt securities. This funding is managed centrally, using regional expertise and local market access, to ensure active participation by the Firm in the global financial markets while maintaining consistent global pricing. These markets serve as cost-effective and diversified sources of funds and are critical components of the Firm’s liquidity management. Decisions concerning the timing and tenor of accessing these markets are based upon relative costs, general market conditions, prospective views of balance sheet growth and a targeted liquidity profile.
Funding flexibility is also provided by the Firm’s ability to access secured funding from the repurchase and asset securitization markets. These markets are evaluated on an ongoing basis to achieve an appropriate balance of secured and unsecured funding. The ability to securitize loans, and the associated gains on those securitizations, are principally dependent upon the credit quality and yields of the assets securitized and are generally not dependent upon the credit ratings of the issuing entity. Transactions between the Firm and its securitization structures are reflected in JPMorgan Chase’s consolidated financial statements and notes to the consolidated financial statements. These relationships include retained interests in securitization trusts, liquidity facilities and derivative transactions. For further details, see Off–balance sheet arrangements and contractual cash obligations, Note 15 and Note 23 on pages 47–48, 94–99 and 106–107, respectively, of this Form 10-Q.
Issuance
During the third quarter and first nine months of 2007, JPMorgan Chase issued $24.2 billion and $77.1 billion, respectively, of long-term debt and trust preferred capital debt securities. These issuances included IB structured notes, the issuances of which are generally client-driven and not for funding or capital management purposes as the proceeds are generally used to fund securities which mitigate risk associated with structured note exposures. The issuances of long-term debt and trust preferred capital debt securities were offset partially by $10.0 billion and $40.4 billion, respectively, of debt and trust preferred securities that matured or were redeemed during the third quarter and first nine months of 2007, including IB structured notes. The increase in long-term debt and trust preferred capital securities was used primarily to fund certain illiquid assets held by the Parent company and to build liquidity. During the third quarter and first nine months of 2007, Commercial paper increased $8.9 billion and $15.1 billion, respectively, and Other borrowed funds increased $1.9 billion and $13.1 billion, respectively.

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The growth in both Commercial paper and Other borrowed funds was used to further build liquidity by increasing the amounts held of liquid securities and overnight investments that may be readily converted to cash. In addition, during the third quarter and first nine months of 2007, the Firm securitized $3.8 billion and $27.7 billion, respectively, of residential mortgage loans; $3.5 billion and $14.2 billion, respectively, of credit card loans; and $1.2 billion of education loans in the third quarter of 2007. The Firm did not securitize any auto loans during the nine months ended September 30, 2007. For further discussion of loan securitizations, see Note 15 on pages 94–99 of this Form 10-Q.
In connection with the issuance of certain of its trust preferred capital debt securities, the Firm has entered into Replacement Capital Covenants (“RCCs”) granting certain rights to the holders of “covered debt,” as defined in the RCCs, that prohibit the repayment, redemption or purchase of the trust preferred capital debt securities except, with limited exceptions, to the extent that JPMorgan Chase has received specified amounts of proceeds from the sale of certain qualifying securities. Currently the Firm’s covered debt is its 5.875% Junior Subordinated Deferrable Interest Debentures, Series O, due in 2035. For more information regarding these covenants, reference is made to the respective RCCs entered into by the Firm in connection with the issuances of such trust preferred capital debt securities, which are filed with the Securities and Exchange Commission under cover of Forms 8-K.
Cash Flows
Cash and due from banks decreased $7.6 billion in the first nine months of 2007 compared with a decrease of $391 million in the first nine months of 2006. A discussion of the significant changes in Cash and due from banks during the nine months ended September 30, 2007 and 2006, follows:
Cash Flows from Operating Activities
For the nine months ended September 30, 2007 and 2006, net cash used in operating activities was $81.3 billion and $35.1 billion, respectively. JPMorgan Chase’s operating assets and liabilities support the Firm’s capital markets and lending activities, including the origination or purchase of loans held-for-sale. The amount and timing of cash flows related to the Firm’s operating activities may vary significantly in the normal course of business as a result of the level of client-driven activities, market conditions and trading strategies. Management believes cash flows from operations, available cash balances and short- and long-term borrowings will be sufficient to fund the Firm’s operating liquidity needs.
Cash Flows from Investing Activities
The Firm’s investing activities are primarily transactions involving loans initially designated as held-for-investment, other receivables, and AFS investment securities. For the nine months ended September 30, 2007, net cash of $41.3 billion was used in investing activities, primarily for purchases of investment securities in Treasury’s AFS portfolio to manage the Firm’s exposure to interest rates; net additions to the wholesale and consumer (primarily home equity) loans held-for-investment; and to increase Deposits with banks as a result of the availability of cash for short-term investment opportunities. These uses of cash were partially offset by cash proceeds received from: sales and maturities of AFS securities; credit card, residential mortgage, education and wholesale loan sales and securitization activities; and the typical seasonal decline in consumer credit card receivables as customer payments exceeded new loans generated from customer charges.
For the nine months ended September 30, 2006, net cash of $105.6 billion was used in investing activities. Net cash was invested to fund: purchases of Treasury’s AFS securities in connection with repositioning the portfolio in response to changes in interest rates; net additions to the retained wholesale loan portfolio, mainly resulting from capital markets activity in IB (including leveraged financings associated with mergers and acquisitions and syndications activities); net additions in retail home equity loans; the acquisition in the second quarter of a private-label credit card portfolio; and the acquisition of Collegiate Funding Services, a leader in education loan servicing and consolidation, on March 1, 2006. These uses of cash were partially offset by cash proceeds provided from: sales and maturities of AFS securities; credit card, residential mortgage, auto and wholesale loan sales and securitization activities; the net decline in auto loans and leases, which was caused partially by the de-emphasis of vehicle leasing and the sale of the insurance business on July 1, 2006.
Cash Flows from Financing Activities
The Firm’s financing activities are primarily transactions involving customer deposits and its debt, common stock and preferred stock. In the first nine months of 2007, net cash provided by financing activities was $114.7 billion due to: a net increase in wholesale deposits from growth in business volumes, in particular, interest-bearing deposits at TSS and AM; net issuances of Long-term debt and trust preferred capital debt securities to fund certain liquid assets held by the Parent company and to build liquidity; growth in Commercial paper issuances and Other borrowed funds to further build liquidity; and an increase in securities sold under repurchase agreements in connection with the funding of trading and AFS securities positions. Cash was used to repurchase common stock and to pay dividends.

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In the first nine months of 2006, net cash provided by financing activities was $140.1 billion due to: net cash received from growth in deposits reflecting, on the retail side, new account acquisitions and the ongoing expansion of the retail branch distribution network, and on the wholesale side, higher business volumes; increases in securities sold under repurchase agreements to fund trading positions and higher levels of AFS securities positions; and net issuances of Long-term debt and trust preferred capital debt securities. The net cash provided was partially offset by cash used for common stock repurchases and the payment of cash dividends on common and preferred stock.
Credit ratings
The credit ratings of JPMorgan Chase’s parent holding company and each of its significant banking subsidiaries as of September 30, 2007, were as follows.
                         
    Short-term debt   Senior long-term debt
    Moody’s   S&P   Fitch   Moody’s   S&P   Fitch
 
JPMorgan Chase & Co.
  P-1   A-1+   F1+   Aa2   AA-   AA-
JPMorgan Chase Bank, N.A.
  P-1   A-1+   F1+   Aaa   AA   AA-
Chase Bank USA, N.A.
  P-1   A-1+   F1+   Aaa   AA   AA-
 
On March 2, 2007, Moody’s raised senior long-term debt ratings on JPMorgan Chase & Co. and the operating bank subsidiaries to Aa2 and Aaa, respectively, from Aa3 and Aa2, respectively. The cost and availability of unsecured financing are influenced by credit ratings. A reduction in these ratings could have an adverse effect on the Firm’s access to liquidity sources, increase the cost of funds, trigger additional collateral requirements and decrease the number of investors and counterparties willing to lend. Critical factors in maintaining high credit ratings include a stable and diverse earnings stream, strong capital ratios, strong credit quality and risk management controls, diverse funding sources and disciplined liquidity monitoring procedures.
If the Firm’s ratings were downgraded by one notch, the Firm estimates the incremental cost of funds and the potential loss of funding to be negligible. Additionally, the Firm estimates the additional funding requirements for VIEs and other third-party commitments associated with a one notch downgrade would not be material. 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 47 and Ratings profile of derivative receivables MTM on pages 56–57 of this Form 10-Q.
 
CREDIT RISK MANAGEMENT
 
The following discussion of JPMorgan Chase’s credit portfolio as of September 30, 2007, highlights developments since December 31, 2006. This section should be read in conjunction with pages 64–76 and page 83, and Notes 12, 13, 29, and 30 of JPMorgan Chase’s 2006 Annual Report, and Notes 13, 14, and 23 on pages 91–94 and 106–107, respectively, of this Form 10-Q.
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 13–16 of this Form 10-Q.
 
CREDIT PORTFOLIO
 
The following table presents JPMorgan Chase’s credit portfolio as of September 30, 2007, and December 31, 2006. Total credit exposure at September 30, 2007, increased by $145.8 billion from December 31, 2006, reflecting an increase of $99.7 billion and $46.1 billion in the wholesale and consumer credit portfolios, respectively. During the first nine months of 2007 lending-related commitments increased $130.9 billion ($76.7 billion and $54.2 billion in the wholesale and consumer portfolios, respectively), derivatives increased $9.0 billion and managed loans increased $5.9 billion ($14.0 billion increase in wholesale partially offset by an $8.1 billion decrease in consumer). RFS loans accounted for at lower of cost or fair value declined, as prime mortgage loans originated with the intent to sell after January 1, 2007, are classified as Trading assets and accounted for at fair value under SFAS 159. In addition, certain loans warehoused in IB were transferred to Trading assets on January 1, 2007, as part of the adoption of SFAS 159. Also effective January 1, 2007, $24.7 billion of prime mortgages held-for-investment purposes were transferred from RFS ($19.4 billion) and AM ($5.3 billion) to the Corporate sector for risk management purposes. While this transfer had no impact on the RFS, AM or Corporate financial results, the AM prime mortgages that were transferred are now reported in consumer mortgage loans.

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In the table below, reported loans include loans accounted for at fair value and loans held-for-sale, which are carried at the lower of cost or fair value with changes in value recorded in Noninterest revenue. However, these loans accounted for at fair value and loans held-for-sale are excluded from the average loan balances used for the net charge-off rate calculations.
                                 
    Credit exposure     Nonperforming assets(i)  
    September 30,     December 31,     September 30,     December 31,  
(in millions, except ratios)   2007     2006     2007     2006  
 
Total credit portfolio
                               
Loans – reported(a)(b)
  $ 486,320     $ 483,127     $ 2,662 (j)   $ 2,077 (j)
Loans – securitized(c)
    69,643       66,950              
 
Total managed loans(d)
    555,963       550,077       2,662       2,077  
Derivative receivables
    64,592       55,601       34       36  
 
Total managed credit-related assets
    620,555       605,678       2,696       2,113  
Lending-related commitments(e)
    1,269,833       1,138,959     NA     NA  
Assets acquired in loan satisfactions
  NA     NA       485       228  
 
Total credit portfolio
  $ 1,890,388     $ 1,744,637     $ 3,181     $ 2,341  
 
Net credit derivative hedges notional(f)
  $ (62,075 )   $ (50,733 )   $     $ (16 )
Collateral held against derivatives(g)
    (7,423 )     (6,591 )   NA     NA  
Memo:
                               
Total loans at fair value and loans held-for-sale
    24,491       55,251       75       120  
Nonperforming – purchased(h)
          251     NA     NA  
 
                                                                 
    Three months ended September 30,     Nine months ended September 30,  
                    Average annual net                     Average annual net  
(in millions, except ratios)   Net charge-offs     charge-off rate     Net charge-offs     charge-off rate  
 
 
    2007       2006       2007       2006       2007       2006       2007       2006  
     
Total credit portfolio
                                                               
Loans – reported
  $ 1,221     $ 790       1.07 %     0.74 %   $ 3,109     $ 2,112       0.94 %     0.69 %
Loans – securitized(c)
    578       607       3.34       3.70       1,761       1,617       3.45       3.19  
 
Total managed loans
  $ 1,799     $ 1,397       1.37 %     1.13 %   $ 4,870     $ 3,729       1.28 %     1.05 %
 
(a)  
Loans (other than those for which the SFAS 159 fair value option has been elected) are presented net of unearned income and net deferred loan fees of $1.0 billion and $1.3 billion at September 30, 2007, and December 31, 2006, respectively.
(b)  
Includes loans at fair value and loans held-for-sale of $6.1 billion and $18.4 billion, respectively, at September 30, 2007 and loans held-for-sale of $55.2 billion at December 31, 2006.
(c)  
Represents securitized credit card receivables. For a further discussion of credit card securitizations, see Card Services on pages 29–32 of this Form 10-Q.
(d)  
Loans past due 90 days and over and accruing includes credit card receivables – reported of $1.3 billion at both September 30, 2007, and December 31, 2006, and related credit card securitizations of $935 million and $962 million at September 30, 2007, and December 31, 2006, respectively.
(e)  
Includes wholesale unused advised lines of credit totaling $39.2 billion and $39.0 billion at September 30, 2007, and December 31, 2006, respectively, which are not legally binding. In regulatory filings with the Federal Reserve Board, unused advised lines are not reportable. Credit card lending-related commitments of $700.2 billion and $657.1 billion at September 30, 2007, and December 31, 2006, respectively, represent the total available credit to its cardholders. The Firm has not experienced, and does not anticipate, that all of its cardholders will utilize their entire available lines of credit at the same time. The Firm can reduce or cancel a credit card commitment by providing the cardholder prior notice or, in some cases, without notice as permitted by law.
(f)  
Represents the net notional amount of protection purchased and sold of single-name and portfolio credit derivatives used to manage the credit exposures; these derivatives do not qualify for hedge accounting under SFAS 133. Includes $22.7 billion at both September 30, 2007, and December 31, 2006, which represents the notional amount of structured portfolio protection; the Firm retains a minimal first risk of loss on this portfolio.
(g)  
Represents other liquid securities collateral held by the Firm.
(h)  
Represents distressed held-for-sale wholesale loans purchased as part of IB’s proprietary activities, which are excluded from nonperforming assets. During the first quarter of 2007, the Firm elected the fair value option of accounting for this portfolio of nonperforming loans. These loans are classified as Trading assets at September 30, 2007.
(i)  
Includes nonperforming loans held-for-sale of $75 million and $120 million as of September 30, 2007, and December 31, 2006, respectively.
(j)  
Excludes nonperforming assets related to (1) loans eligible for repurchase as well as loans repurchased from GNMA pools that are insured by U.S. government agencies of $1.3 billion and $1.2 billion September 30, 2007, and December 31, 2006, respectively, and (2) education loans that are 90 days past due and still accruing, which are insured by U.S. government agencies under the Federal Family Education Loan Program, of $241 million and $219 million as of September 30, 2007, and December 31, 2006, respectively. These amounts for GNMA and education loans are excluded, as reimbursement is proceeding normally.

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WHOLESALE CREDIT PORTFOLIO
 
As of September 30, 2007, wholesale exposure (IB, CB, TSS and AM) had increased by $99.7 billion, or 16%, from December 31, 2006, primarily due to a $76.7 billion increase in lending-related commitments and a $14.0 billion increase in loans. The increase in overall lending activity was partly due to growth in leveraged lending funded and unfunded exposures, mainly in IB. Partly offsetting these increases was the first quarter transfer of $11.7 billion of loans warehoused in IB to Trading assets upon the adoption of SFAS 159. Derivative receivables increased $9.0 billion primarily due to higher receivables on equity-related and credit derivatives.
                                 
    Credit exposure     Nonperforming assets(g)  
    September 30,     December 31,     September 30,     December 31,  
(in millions, except ratios)   2007     2006     2007     2006  
 
Loans – reported(a)(b)
  $ 197,728     $ 183,742     $ 427     $ 391  
Derivative receivables
    64,592       55,601       34       36  
 
Total wholesale credit-related assets
    262,320       239,343       461       427  
Lending-related commitments(c)
    468,145       391,424     NA     NA  
Assets acquired in loan satisfactions
  NA     NA       28       3  
 
Total wholesale credit exposure
  $ 730,465     $ 630,767     $ 489     $ 430  
 
Net credit derivative hedges notional(d)
  $ (62,075 )   $ (50,733 )   $     $ (16 )
Collateral held against derivatives(e)
    (7,423 )     (6,591 )   NA