JPMorgan Chase & Co.
J P MORGAN CHASE & CO (Form: 10-Q, Received: 08/09/2007 06:03:20)
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 June 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.
x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x    Accelerated filer o    Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes    x No
 
Number of shares of common stock outstanding as of July 31, 2007: 3,383,895,701
 

 


 

FORM 10-Q
TABLE OF CONTENTS
             
        Page
Part I – Financial information        
Item 1  
Consolidated Financial Statements – JPMorgan Chase & Co.:
       
   
 
       
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        72  
   
 
       
        111  
   
 
       
        113  
   
 
       
Item 2  
Management’s Discussion and Analysis of Financial Condition and Results of Operations:
       
   
 
       
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Item 3       119  
   
 
       
Item 4       119  
   
 
       
Part II – Other information        
   
 
       
Item 1       119  
   
 
       
Item 1A       120  
   
 
       
Item 2       120  
   
 
       
Item 3       121  
   
 
       
Item 4       121  
   
 
       
Item 5       121  
   
 
       
Item 6       121  
  EX-31.1: CERTIFICATION
  EX-31.2: CERTIFICATION
  EX-32: CERTIFICATIONS
 

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JPMORGAN CHASE & CO.
CONSOLIDATED FINANCIAL HIGHLIGHTS
                                                         
(unaudited)                                              
(in millions, except per share, headcount and ratio data)                                               Six months ended June 30,  
As of or for the period ended,   2Q07     1Q07     4Q06     3Q06     2Q06     2007     2006  
 
Selected income statement data
                                                       
Noninterest revenue (a)
  $ 12,593     $ 12,850     $ 10,501     $ 10,166     $ 9,908     $ 25,443     $ 20,090  
Net interest income
    6,315       6,118       5,692       5,379       5,178       12,433       10,171  
 
Total net revenue
    18,908       18,968       16,193       15,545       15,086       37,876       30,261  
 
Provision for credit losses
    1,529       1,008       1,134       812       493       2,537       1,324  
Noninterest expense
    11,028       10,628       9,885       9,796       9,382       21,656       19,162  
Income tax expense
    2,117       2,545       1,268       1,705       1,727       4,662       3,264  
 
Income from continuing operations
    4,234       4,787       3,906       3,232       3,484       9,021       6,511  
Income from discontinued operations (b)
                620       65       56             110  
 
Net income
  $ 4,234     $ 4,787     $ 4,526     $ 3,297     $ 3,540     $ 9,021     $ 6,621  
 
Per common share
                                                       
Basic earnings per share:
                                                       
Income from continuing operations
  $ 1.24     $ 1.38     $ 1.13     $ 0.93     $ 1.00     $ 2.63     $ 1.87  
Net income
    1.24       1.38       1.31       0.95       1.02       2.63       1.91  
Diluted earnings per share:
                                                       
Income from continuing operations
  $ 1.20     $ 1.34     $ 1.09     $ 0.90     $ 0.98     $ 2.55     $ 1.82  
Net income
    1.20       1.34       1.26       0.92       0.99       2.55       1.85  
Cash dividends declared per share
    0.38       0.34       0.34       0.34       0.34       0.72       0.68  
Book value per share
    35.08       34.45       33.45       32.75       31.89       35.08       31.89  
Common shares outstanding
                                                       
Average: Basic
    3,415       3,456       3,465       3,469       3,474       3,436       3,473  
Diluted
    3,522       3,560       3,579       3,574       3,572       3,541       3,571  
Common shares at period end
    3,399       3,416       3,462       3,468       3,471                  
Share price (c)
                                                       
High
  $ 53.25     $ 51.95     $ 49.00     $ 47.49     $ 46.80     $ 53.25     $ 46.80  
Low
    47.70       45.91       45.51       40.40       39.33       45.91       37.88  
Close
    48.45       48.38       48.30       46.96       42.00                  
Market capitalization
    164,659       165,280       167,199       162,835       145,764                  
Financial ratios
                                                       
Return on common equity (“ROE”): (d)
                                                       
Income from continuing operations
    14 %     17 %     14 %     11 %     13 %     16 %     12 %
Net income
    14       17       16       12       13       16       12  
Return on assets (“ROA”): (d)
                                                       
Income from continuing operations
    1.19       1.41       1.14       0.98       1.05       1.29       1.03  
Net income
    1.19       1.41       1.32       1.00       1.06       1.29       1.03  
Overhead ratio
    58       56       61       63       62       57       63  
Tier 1 capital ratio
    8.4       8.5       8.7       8.6       8.5                  
Total capital ratio
    12.0       11.8       12.3       12.1       12.0                  
Selected balance sheet data (period-end)
                                                       
Total assets
  $     1,458,042     $    1,408,918     $    1,351,520     $    1,338,029     $    1,328,001                  
Loans
    465,037       449,765       483,127       463,544       455,104                  
Deposits
    651,370       626,428       638,788       582,115       593,716                  
Long-term debt
    159,493       143,274       133,421       126,619       125,280                  
Total stockholders’ equity
    119,211       117,704       115,790       113,561       110,684                  
Headcount
    179,664       176,314       174,360       171,589       172,423                  
Credit quality metrics
                                                       
Allowance for credit losses
  $ 8,399     $ 7,853     $ 7,803     $ 7,524     $ 7,500                  
Nonperforming assets (e)
    2,586       2,421       2,341       2,300       2,384                  
Allowance for loan losses to total loans (f)
    1.71 %     1.74 %     1.70 %     1.65 %     1.69 %                
Net charge-offs
  $ 985     $ 903     $ 930     $ 790     $ 654     $ 1,888     $ 1,322  
Net charge-off rate (d)(f)
    0.90 %     0.85 %     0.84 %     0.74 %     0.64 %     0.88 %     0.66 %
Wholesale net charge-off (recovery) rate (d)(f)
    (0.07 )     (0.02 )     0.07       (0.03 )     (0.05 )     (0.04 )     (0.05 )
Managed card net charge-off rate (d)
    3.62       3.57       3.45       3.58       3.28       3.59       3.13  
 
(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 nonperforming wholesale held-for-sale (“HFS”) loans purchased as part of the Investment Bank’s proprietary activities.
(f)  
Excluded from the allowance coverage ratios were end-of-period Loans held-for-sale and loans accounted for at fair value; and excluded from the net charge-off rates were average Loans held-for-sale and loans accounted for at fair value.

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section of the Form 10-Q provides management’s discussion and analysis (“MD&A”) of the financial condition and results of operations for JPMorgan Chase. See the Glossary of terms on pages 113-115 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 118 of this Form 10-Q) and in the JPMorgan Chase Annual Report on Form 10-K for the year ended December 31, 2006, as amended (“2006 Annual Report” or “2006 Form 10-K”), (see Part I, Item 1A: Risk factors and see Forward-looking Statements in the MD&A) to which reference is hereby made.
INTRODUCTION
JPMorgan Chase & Co. (the “Firm”), a financial holding company incorporated under Delaware law in 1968, is a leading global financial services firm and one of the largest banking institutions in the United States of America (“U.S.”), with $1.5 trillion in assets, $119.2 billion in stockholders’ equity and operations worldwide. The Firm is a leader in investment banking, financial services for consumers and businesses, financial transaction processing, asset management and private equity. Under the JPMorgan and Chase brands, the Firm serves millions of customers in the 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 more than 3,000 bank branches, 8,600 ATMs and 270 mortgage offices, and through relationships with more than 15,000 auto dealerships and 4,300 schools and universities. Nearly 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 more than 150 million cards in circulation and $148.0 billion in managed loans, Chase Card Services (“CS”) is one of the nation’s largest credit card issuers. Customers used Chase cards for more than $169.3 billion worth of transactions in the six months ended June 30, 2007.

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Chase offers a wide variety of general-purpose cards to satisfy the needs of individual consumers, small businesses and partner organizations, including cards issued with AARP, Amazon, Continental Airlines, Marriott, Southwest Airlines, Sony, United Airlines, Walt Disney Company and many other well-known brands and organizations. Chase also issues private-label cards with Circuit City, Kohl’s, Sears Canada and BP.
Chase Paymentech Solutions, LLC, a joint venture with JPMorgan Chase and First Data Corporation, is the largest processor of MasterCard and Visa payments in the world, having handled 9.3 billion transactions in the six months ended June 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 revenues ranging from $10 million to $2 billion. Commercial bankers serve clients nationally throughout the RFS footprint and in offices located in other major markets.
Commercial Banking offers its clients industry knowledge, experience, a dedicated service model, comprehensive solutions and local expertise. The Firm’s broad platform positions CB to deliver extensive product capabilities – including lending, treasury services, investment banking and asset management – to meet its clients’ U.S. and international financial needs.
Treasury & Securities Services
Treasury & Securities Services (“TSS”) is a global leader in providing transaction, investment and information services to support the needs of institutional clients worldwide. TSS is one of the largest cash management providers in the world and a leading global custodian. Treasury Services (“TS”) provides a variety of cash management products, trade finance and logistics solutions, wholesale card products, and liquidity management capabilities to small and midsized companies, multinational corporations, financial institutions and government entities. TS partners with the Commercial Banking, Retail Financial Services and Asset Management business segments to serve clients firmwide. As a result, certain TS revenues are included in other segments’ results. Worldwide Securities Services (“WSS”) stores, values, clears and services securities and alternative investments for investors and broker-dealers; and manages Depositary Receipt programs globally.
Asset Management
With assets under supervision of $1.5 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, which comprised of JPMorgan Chase and three other firms, announced it had signed a definitive agreement to purchase SLM Corporation (“Sallie Mae”) for approximately $25 billion. JPMorgan Chase will invest $2.2 billion and will own 24.9% of the company. The transaction requires the approval of Sallie Mae’s stockholders and is subject to regulatory approvals and other closing conditions. If all such approvals are obtained and closing conditions are met, the transaction is expected to close in late 2007.
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 up to five trading floors comprising 72,800 square feet each. The Firm expects the building to open by 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 early 2012.

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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 June 30,   Six months ended June 30,
(in millions, except per share and ratio data)   2007     2006     Change   2007     2006     Change
 
Selected income statement data
                                               
Total net revenue
  $ 18,908     $ 15,086       25 %   $ 37,876     $ 30,261       25 %
Provision for credit losses
    1,529       493       210       2,537       1,324       92  
Total noninterest expense
    11,028       9,382       18       21,656       19,162       13  
Income from continuing operations
    4,234       3,484       22       9,021       6,511       39  
Income from discontinued operations
          56     NM             110     NM  
Net income
    4,234       3,540       20       9,021       6,621       36  
 
                                               
Diluted earnings per share
                                               
Income from continuing operations
  $ 1.20     $ 0.98       22 %   $ 2.55     $ 1.82       40 %
Net income
    1.20       0.99       21       2.55       1.85       38  
Return on common equity
                                               
Income from continuing operations
    14 %     13 %             16 %     12 %        
Net income
    14       13               16       12          
 
Business overview
The Firm reported 2007 second-quarter Net income of $4.2 billion, or $1.20 per share, compared with Net income of $3.5 billion, or $0.99 per share, for the second quarter of 2006. Return on common equity for the quarter was 14% compared with 13% in the prior year.
Net income for the first six months of 2007 was $9.0 billion, or $2.55 per share, compared with $6.6 billion, or $1.85 per share, in the comparable period last year. Return on common equity was 16% for the first six 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.
In the second quarter of 2007, the global economy continued to grow, as solid growth in the industrial economies supported continued progress in the emerging markets economies. Global capital markets activity was strong during the second quarter of 2007, with debt and equity underwriting and merger and acquisition activity surpassing levels from the second quarter of 2006. Both domestic and international equity markets rose, benefiting from favorable economic trends and benign inflation, with the S&P 500 and international indices increasing approximately 5.00% on average during the second quarter of 2007. The Federal Reserve Board held the federal funds rate steady at 5.25%. While long-term interest rates rose in response to indications of improving economic activity, the Treasury yield curve remained moderately inverted. During the second quarter, the U.S. economy rebounded to an approximate 3.40% annualized growth rate, even though high energy prices dampened consumer spending and the ongoing housing contraction continued to weigh on the overall economy. While demand for wholesale loans in the U.S. continued to grow in the second quarter at close to a double-digit pace, U.S. consumer loan growth slowed, and mortgage lending contracted.
The second quarter of 2007 economic environment was a contributing factor to the performance of the Firm and each of its businesses. The overall economic expansion, strong level of capital markets activity and positive performance in equity markets helped to drive new business volume and organic growth within each of the Firm’s wholesale businesses. Weakness in the housing markets, however, led to increased losses in Retail Financial Services resulting in an increase in provision related to the home equity portfolio.
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 .

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Investment Bank net income increased from the prior year driven by strong Total net revenue growth, primarily offset by an increase in Total noninterest expense, as well as an increase in the Provision for credit losses. Investment banking fees were at a record level, driven by record advisory fees, strong debt underwriting fees and record equity underwriting fees. Fixed Income Markets revenue benefited from strong results across most products, partially offset by weaker commodities performance versus a strong prior-year quarter. Equity Markets revenue more than doubled from the prior year, benefiting from strong global derivatives and cash equities trading performance. The increase in the Provision for credit losses was largely related to lending-related commitments, reflecting portfolio activity. The increase in Total noninterest expense was due primarily to higher performance-based compensation expense.
Retail Financial Services net income decreased as declines in Regional Banking and Auto Finance were offset partially by improved results in Mortgage Banking. Total net revenue increased from the prior year due to The Bank of New York transaction, higher mortgage loan originations and increased 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. These benefits were offset partially by the sale of the insurance business in 2006. The Provision for credit losses increased reflecting weak housing prices in select geographic areas and the resulting increase in estimated losses for high loan-to-value home equity loans, especially those originated through the wholesale channel. Total noninterest expense was up from the prior year due to The Bank of New York transaction, the classification of certain loan origination costs as expense due to the adoption of SFAS 159, an increase in loan originations in Mortgage Banking, and investments in retail distribution. These increases were offset partially by the sale of the insurance business.
Card Services net income decreased when compared with the prior year, primarily due to prior-year results benefiting from significantly lower net charge-offs following the change in bankruptcy legislation in the fourth quarter of 2005. Total net revenue was up compared with the prior year. The increase was driven by increased average loans, higher fees and increased interchange income from higher charge volume. These benefits were largely offset by higher volume-driven payments to partners and increased rewards expense; increased cost of funds on higher introductory, transactor and promotional balances; higher charge-offs, which resulted in increased revenue reversals; and the discontinuation of certain billing practices in the quarter (including the elimination of certain over-limit fees and the two-cycle billing method for calculating finance charges). The managed provision for credit losses increased, primarily due to the prior year benefiting from a lower level of net charge-offs, following the change in bankruptcy legislation in the fourth quarter of 2005. Total noninterest expense was down due mainly to lower Marketing expense and lower fraud-related expense, partially offset by higher volume-related expense.
Commercial Banking net income was flat compared with the prior year, as an increase in Total net revenue was offset by a higher Provision for credit losses. Total net revenue increased due to double-digit growth in liability balances and loans, which reflected organic growth and The Bank of New York transaction. In addition, Total net revenue benefited from higher investment banking revenue and deposit-related fees. These increases in Total net revenue were largely offset by the continued shift to narrower-spread liability products and spread compression in the liability and loan portfolios. The Provision for credit losses increased reflecting portfolio activity. Total noninterest expense was flat to the prior year.
Treasury & Securities Services achieved record net income driven by record Total net revenue partially offset by higher Compensation expense. Total net revenue growth was driven by increased product usage by new and existing clients, market appreciation, and seasonally strong activity in securities lending and depositary receipts. These benefits were offset partially by lower foreign exchange revenue, as a result of narrower-market spreads, and by a continued shift to narrower-spread liability products. Total noninterest expense increased due largely to higher Compensation expense related to business and volume growth, as well as investment in new product platforms.
Asset Management net income was a record benefiting from increased Total net revenue, partially offset by higher Compensation expense. Record Total net revenue, principally fees and commissions, benefited largely from increased assets under management and higher performance and placement fees. The Provision for credit losses was a slight benefit in both time periods. Total noninterest expense increased due largely to higher compensation, primarily performance-based, and investments in all business segments.
Corporate segment net income increased primarily from higher private equity gains, lower securities losses and improved Net interest income, partially offset by higher Total noninterest expense. Prior-year results also included Income from discontinued operations. Total net revenue benefited from a higher level of private equity gains, the classification of certain private equity carried interest as Compensation expense, a lower amount of securities losses and improved net interest spread. Total noninterest expense increased due to higher net legal costs, reflecting a lower level of recoveries and higher expense, including settlement costs relating to certain copper antitrust litigation. In addition, Total noninterest expense increased due to the classification of certain private equity carried interest as Compensation expense. These increases were offset partially by lower Compensation expense and business efficiencies.

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Income from discontinued operations was $56 million in the prior year. Discontinued operations (included in the Corporate segment results) includes the income statement activity of selected corporate trust businesses that were sold to The Bank of New York.
During the quarter ended June 30, 2007, approximately $730 million (pretax) of merger savings were realized, which is an annualized rate of approximately $2.9 billion. Merger costs of $64 million were expensed during the second quarter of 2007, bringing the total amount expensed since the merger announcement to $3.6 billion (including capitalized costs).
The managed provision for credit losses was $2.1 billion, up by $1.1 billion, or 101%, from the prior year. The wholesale provision for credit losses was $198 million for the quarter compared with a benefit of $77 million in the prior year. The change was largely related to lending-related commitments, reflecting portfolio activity. Wholesale net recoveries were $29 million in the current quarter, compared with net recoveries of $19 million in the prior year, resulting in net recovery rates of 0.07% and 0.05%, respectively. The total consumer managed provision for credit losses was $1.9 billion, compared with $1.1 billion in the prior year. The prior year benefited from significantly lower credit card net charge-offs, following the change in bankruptcy legislation in the fourth quarter of 2005. The increase from the prior year also reflected additions to the allowance for credit losses and higher charge-offs related to the home equity loan portfolio. The Firm had total nonperforming assets of $2.6 billion at June 30, 2007, up by $202 million, or 8%, from the prior-year level of $2.4 billion.
The Firm had, at June 30, 2007, Total stockholders’ equity of $119.2 billion and a Tier 1 capital ratio of 8.4%. The Firm purchased $1.9 billion, or 36.7 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 third quarter of 2007 should be viewed against the backdrop of the global economy, financial markets activity and the geopolitical environment, all of which are integrally linked.
The Investment Bank entered the third quarter with a strong Investment banking fee pipeline. However, recent market conditions include problems in the mortgage markets, the inability to successfully complete the syndication of certain leverage buyout financings, general widening of credit spreads, reduced liquidity and increased volatility across all markets. The effect of these market conditions has led and could continue to lead to lower trading revenues, reduced levels of client activity, lower realization of the Investment banking fee pipeline and an increase in retained loans resulting from leveraged finance activities. The increase in retained loans is likely to result in an increase in the allowance for loan losses and/or markdowns of loans related to leveraged buyout financing activities. 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; and that private equity results, which are dependent upon the capital markets, could continue to be volatile over time. The performance of each of the Firm’s lines of business will be affected by overall global economic growth, financial market movements (including interest rate movements), the competitive environment and client activity levels in any given time period.
Future economic conditions may also cause the provision for credit losses to increase over time. The wholesale provision for credit losses may be increased over time as a result of portfolio activity and by a trend toward a more normal level of provisioning. The consumer provision for credit losses could be increased as a result of a higher level of net charge-offs in Card Services as losses return to a more normal level following the 2005 fourth quarter change in the bankruptcy law, and as a result of a higher level of losses in Retail Financial Services if housing prices continue to weaken. Given the continued downward pressure on housing prices and the elevated level of unsold houses nationally, management remains cautious with respect to the home equity portfolio. In addition, credit spread widening in the prime and subprime mortgage markets is causing downward valuation pressure on the mortgage loans in the Firm’s mortgage warehouse.
Firmwide, Total noninterest expense is anticipated to reflect investments in each business, recent acquisitions and divestitures, continued merger savings and other operating efficiencies. Management continues to believe that annual merger savings will reach approximately $3.0 billion by the end of 2007 following completion of the last significant conversion activity, which is the wholesale deposit conversion scheduled for the 2007 third quarter. Merger costs of approximately $400 million are expected to be incurred during 2007 (including a modest amount related to The Bank of New York transaction). These additions are expected to bring total cumulative merger costs to $3.8 billion by the end of 2007.

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CONSOLIDATED RESULTS OF OPERATIONS
The following section provides a comparative discussion of JPMorgan Chase’s consolidated results of operations on a reported basis. Factors that relate primarily to a single business segment are discussed in more detail within that business segment than they are in this consolidated section. Total net revenue, Noninterest expense and Income tax expense for prior periods have been revised to reflect the impact of discontinued operations. For a discussion of the Critical accounting estimates used by the Firm that affect the Consolidated results of operations, see page 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 June 30,   Six months ended June 30,
(in millions)   2007     2006     Change   2007     2006     Change
 
Investment banking fees
  $ 1,898     $ 1,370       39 %   $ 3,637     $ 2,539       43 %
Principal transactions
    3,566       2,741       30       8,037       5,450       47  
Lending & deposit related fees
    951       865       10       1,846       1,706       8  
Asset management, administration and commissions
    3,611       2,966       22       6,797       5,840       16  
Securities gains (losses)
    (223 )     (502 )     56       (221 )     (618 )     64  
Mortgage fees and related income
    523       213       146       999       454       120  
Credit card income
    1,714       1,791       (4 )     3,277       3,701       (11 )
Other income
    553       464       19       1,071       1,018       5  
                     
Noninterest revenue
    12,593       9,908       27       25,443       20,090       27  
Net interest income
    6,315       5,178       22       12,433       10,171       22  
                     
Total net revenue
  $ 18,908     $ 15,086       25     $ 37,876     $ 30,261       25  
 
Total net revenue for the second quarter of 2007 was $18.9 billion, up by $3.8 billion, or 25%, from the prior year. This increase was a result of higher Net interest income, very strong private equity gains, higher Asset management, administration and commissions revenue, record Investment banking fees, a lower level of securities losses, and higher Mortgage fees and related income. For the first six months of 2007, Total net revenue was $37.9 billion, up by $7.6 billion, or 25%, from the prior year. The increase was driven primarily by the aforementioned items including the impact of the adoption of SFAS 157 and 159, and was partially offset by lower Credit card income.
Investment banking fees of $1.9 billion in the second quarter and $3.6 billion for the first six months of 2007 were at record levels for the Firm. These results were driven by record advisory and equity underwriting fees as well as strong debt underwriting fees. For a further discussion of Investment banking fees, which are primarily recorded in the IB, see the IB segment results on pages 17-20 of this Form 10-Q.
Principal transactions revenue consists of trading revenue, which includes changes in fair value associated with financial instruments held by the IB for which the SFAS 159 fair value option was elected, and private equity gains. Trading revenue of $2.1 billion in the second quarter of 2007 was flat compared with the same period last year. In the first six months of 2007, trading revenue of $5.3 billion was higher than in the first six months of 2006, reflecting strong performance in most fixed income and equities products. Credit Portfolio increased in the first six months of 2007 compared with the first six months of 2006 as a result of an adjustment to the valuation of the Firm’s derivative liabilities measured at fair value to reflect the credit quality of the Firm, as a part of the adoption of SFAS 157. Private equity gains in the second quarter and first six months of 2007 benefited from a higher level of gains and the classification of certain private equity carried interest as Compensation expense. Also favorably affecting the first six months of 2007 was a fair value adjustment in the first quarter of 2007 on nonpublic 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 40-42, respectively, and Note 5 on pages 83-85 of this Form 10-Q.
Lending & deposit related fees rose from the second quarter and first six 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, see the RFS segment results on pages 21-28 of this Form 10-Q.
Asset management, administration and commissions revenue was higher in the second quarter and first six months of 2007 compared with the prior-year periods, 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 $1.1 trillion at the end of the second quarter of 2007, up 23% 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 increase was higher assets under custody in TSS, driven by market value appreciation and new business, as well as growth in other fees due to a combination of

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increased product usage by existing clients and new business growth. In addition, commissions revenue increased due to higher brokerage transaction volume (primarily included within the Markets revenue of the IB), 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 second quarter and first half of 2007, when compared with the second quarter and first half of 2006, were due primarily to a lower level of securities losses in Treasury’s portfolio repositioning results. 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 40-42 of this Form 10-Q.
Mortgage fees and related income increased in the second quarter and first six months of 2007 compared with the prior-year periods. Growth in production revenue reflected higher gain on sale income primarily attributable to 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. Net mortgage servicing revenue improved due to an increase in third-party loans serviced. 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 decreased from the second quarter and first six months of 2006, primarily due to lower servicing fees earned in connection with securitization activities, which were affected unfavorably by lower interest income earned and higher credit losses incurred. Also contributing to the decrease were increases in volume-driven payments to partners and expenses related to reward programs. These were offset partially by a higher level of fee-based revenue and increased customer charge volume that favorably impacted interchange income. For a further discussion of Credit card income, see CS’s segment results on pages 29-32 of this Form 10-Q.
The increases in Other income from the second quarter and first six months of 2006 reflected higher gains on the sale of loans and leveraged leases, partly as a result of a loss in the first quarter of 2006 related to auto loans transferred to held-for-sale, and increased income from automobile operating leases. These benefits were offset partially 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 revenues from loan workouts.
Net interest income rose from the second quarter and first six months 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; an improvement in Treasury’s net interest spread; an increase in consumer loans; the impact of The Bank of New York transaction; and higher consumer deposits, wholesale liability balances, and loan fees. These increases were offset slightly by narrower spreads on consumer loans as well as deposits, which partly resulted from the continued shift to narrower-spread deposit products; the impact of higher credit card charge-offs which resulted in increased revenue reversals; and the sale of the insurance business. The Firm’s total average interest-earning assets for the second quarter of 2007 were $1.1 trillion, up 9% from the second quarter of 2006. The increase was primarily a result of higher Trading assets - debt instruments, Loans, and Available-for-sale securities partially offset by a decline in Interests in purchased receivables as a result of the restructuring and deconsolidation during the second quarter of 2006 of certain multi-seller conduits that the Firm administered. The net interest yield on these assets, on a fully taxable equivalent basis, was 2.35%, an increase of 28 basis points from the prior year, partly reflecting the adoption of SFAS 159. The Firm’s total average interest earning assets for the first six months of 2007 were $1.1 trillion, up 10% from the first six months of 2006, and were also driven by the aforementioned items. The net interest yield on these assets, on a fully taxable-equivalent basis, was 2.37%, an increase of 24 basis points from the prior year.
                                                 
Provision for credit losses   Three months ended June 30,   Six months ended June 30,
(in millions)   2007     2006     Change   2007     2006     Change
 
Provision for credit losses
  $ 1,529     $ 493       210 %   $ 2,537     $ 1,324       92 %
 

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The Provision for credit losses in the second quarter and first half of 2007 rose from the comparable prior-year periods. The increase in the consumer provision for credit losses in the second quarter of 2007 was due to a $329 million addition to the home equity allowance for loan losses driven by weak housing prices in select geographic areas and the resulting increase in estimated losses for high loan-to-value home equity loans, in particular those originated through the wholesale channel; the absence of prior-year benefits from significantly lower credit card net charge-offs following the change in bankruptcy legislation in the fourth quarter of 2005; and the release in the second quarter of 2006 of $90 million of provision related to Hurricane Katrina in CS. For the first half of 2007 the increase in the consumer Provision for credit losses also reflected higher losses in the subprime mortgage portfolio, partially offset by a reversal in the first quarter of 2007 of a portion of the reserves in RFS related to Hurricane Katrina. The increase in the wholesale provision for credit losses was due primarily to lending-related commitments, reflecting portfolio activity. 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.
Noninterest expense
The following table presents the components of Noninterest expense.
                                                 
    Three months ended June 30,   Six months ended June 30,
(in millions)   2007     2006     Change   2007     2006     Change
 
Compensation expense
  $ 6,309     $ 5,268       20 %   $ 12,543     $ 10,816       16 %
Occupancy expense
    652       553       18       1,292       1,147       13  
Technology, communications and equipment expense
    921       876       5       1,843       1,745       6  
Professional & outside services
    1,259       1,085       16       2,459       2,093       17  
Marketing
    457       526       (13 )     939       1,045       (10 )
Other expense
    1,013       631       61       1,748       1,447       21  
Amortization of intangibles
    353       357       (1 )     706       712       (1 )
Merger costs
    64       86       (26 )     126       157       (20 )
                     
Total noninterest expense
  $ 11,028     $ 9,382       18     $ 21,656     $ 19,162       13  
 
Total noninterest expense for the second quarter of 2007 was $11.0 billion, up by $1.6 billion, or 18%, from the prior year. Expense increased due to higher Compensation expense, primarily incentive-based, and increased net legal costs reflecting a lower level of recoveries and higher expense. Expense growth also was driven by The Bank of New York transaction, acquisitions and investments in all of the businesses. The increase in expense was offset partially by business divestitures and expense efficiencies. For the first six months of 2007, Total noninterest expense was $21.7 billion, up by $2.5 billion, or 13%, from the prior year, driven primarily by the aforementioned items.
The increase in Compensation expense from the second quarter and first half of 2006 was primarily the result of higher performance-based incentives; additional headcount in connection with The Bank of New York transaction, acquisitions and investments in 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. These increases were offset partially by merger-related savings. Also affecting the six month variance is 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 second quarter and first half of 2006 were driven by ongoing investments in the retail distribution network, which included incremental expense from The Bank of New York branches, partially offset by operating expense efficiencies.
The increases in Technology, communications and equipment expense when compared with the second quarter and first six 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 operating expense efficiencies.
Professional & outside services rose from the second quarter and first six months of 2006 reflecting higher brokerage expense and credit card processing costs as a result of growth in transaction volume. Also contributing to the increases were acquisitions and investments in businesses.
Marketing expense was lower when compared with the second quarter and first half of 2006 due to a reduction in credit card marketing.

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Other expense was higher from the second quarter and first six months of 2006 due to increased net legal costs reflecting a lower level of recoveries and higher expense. Also contributing to the increase were the growth in business volume, acquisitions and investments in businesses. These increases were offset partially by the sale of the insurance business in the third quarter of 2006 and lower credit card fraud-related losses.
For a discussion of Amortization of intangibles and Merger costs, refer to Note 17 and Note 10 on pages 100-102 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 June 30,   Six months ended June 30,
(in millions, except rate)   2007     2006     2007     2006  
 
Income from continuing operations before income tax expense
  $ 6,351     $ 5,211     $ 13,683     $ 9,775  
Income tax expense
    2,117       1,727       4,662       3,264  
Effective tax rate
    33.3 %     33.1 %     34.1 %     33.4 %
 
The effective tax rate increased for the second quarter and first half of 2007 compared with the second quarter and first half of 2006 primarily due to higher reported pretax income, combined with changes in the proportion of income subject to federal, state and local taxes.
Income from discontinued operations
Income from discontinued operations was zero in all periods of 2007 compared with $56 million and $110 million in the second quarter and first six months of 2006, respectively. Discontinued operations (included in the Corporate segment results) includes 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 lines’ of business results on a “managed” basis, which is a non-GAAP financial measure. The Firm’s definition of managed basis starts with the reported U.S. GAAP results and includes certain reclassifications that assumes credit card loans securitized by CS remain on the balance sheet and presents revenue on a fully taxable-equivalent (“FTE”) basis. These adjustments do not have any impact on Net income as reported by the lines of business or by the Firm as a whole.
The presentation of CS results on a managed basis assumes that credit card loans that have been securitized and sold in accordance with SFAS 140 still remain on the balance sheet and that the earnings on the securitized loans are classified in the same manner as the earnings on retained loans recorded on the balance sheet. JPMorgan Chase uses the concept of managed basis to evaluate the credit performance and overall financial performance of the entire managed credit card portfolio. Operations are funded and decisions are made about allocating resources, such as employees and capital, based upon managed financial information. In addition, the same underwriting standards and ongoing risk monitoring are used for both loans on the balance sheet and securitized loans. Although securitizations result in the sale of credit card receivables to a trust, JPMorgan Chase retains the ongoing customer relationships, as the customers may continue to use their credit cards; accordingly, the customer’s credit performance will affect both the securitized loans and the loans retained on the balance sheet. JPMorgan Chase believes managed basis information is useful to investors, enabling them to understand both the credit risks associated with the loans reported on the balance sheet and the Firm’s retained interests in securitized loans. For a reconciliation of reported to managed basis of CS results, see Card Services segment results on pages 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 94-98 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 reconciliation from the Firm’s reported U.S. GAAP results to managed basis.
                                 
Three months ended June 30,   2007  
    Reported     Credit       Tax-equivalent     Managed  
(in millions, except per share and ratio data)   results     card (b)     adjustments     basis  
 
Revenue
                               
Investment banking fees
  $ 1,898     $     $     $ 1,898  
Principal transactions
    3,566                   3,566  
Lending & deposit related fees
    951                   951  
Asset management, administration and commissions
    3,611                   3,611  
Securities (losses)
    (223 )                 (223 )
Mortgage fees and related income
    523                   523  
Credit card income
    1,714       (788 )           926  
Other income
    553             199       752  
 
Noninterest revenue
    12,593       (788 )     199       12,004  
Net interest income
    6,315       1,378       122       7,815  
 
Total net revenue
    18,908       590       321       19,819  
Provision for credit losses
    1,529       590             2,119  
Noninterest expense
    11,028                   11,028  
 
Income from continuing operations before income tax expense
    6,351             321       6,672  
Income tax expense
    2,117             321       2,438  
 
Income from continuing operations
    4,234                   4,234  
Income from discontinued operations
                       
 
Net income
  $ 4,234     $     $     $ 4,234  
 
Net income – diluted earnings per share
  $ 1.20     $     $     $ 1.20  
 
Return on common equity (a)
    14 %     %     %     14 %
Return on equity less goodwill (a)
    23                   23  
Return on assets (a)
    1.19     NM     NM       1.13  
Overhead ratio
    58     NM     NM       56  
 
                                 
Three months ended June 30,   2006  
    Reported     Credit       Tax-equivalent     Managed  
(in millions, except per share and ratio data)   results     card (b)     adjustments     basis  
 
Revenue
                               
Investment banking fees
  $ 1,370     $     $     $ 1,370  
Principal transactions
    2,741                   2,741  
Lending & deposit related fees
    865                   865  
Asset management, administration and commissions
    2,966                   2,966  
Securities (losses)
    (502 )                 (502 )
Mortgage fees and related income
    213                   213  
Credit card income
    1,791       (937 )           854  
Other income
    464             170       634  
 
Noninterest revenue
    9,908       (937 )     170       9,141  
Net interest income
    5,178       1,498       47       6,723  
 
Total net revenue
    15,086       561       217       15,864  
Provision for credit losses
    493       561             1,054  
Noninterest expense
    9,382                   9,382  
 
Income from continuing operations before income tax expense
    5,211             217       5,428  
Income tax expense
    1,727             217       1,944  
 
Income from continuing operations
    3,484                   3,484  
Income from discontinued operations
    56                   56  
 
Net income
  $ 3,540     $     $     $ 3,540  
 
Net income – diluted earnings per share
  $ 0.99     $     $     $ 0.99  
 
Return on common equity (a)
    13 %     %     %     13 %
Return on equity less goodwill (a)
    21                   21  
Return on assets (a)
    1.05     NM     NM       1.01  
Overhead ratio
    62     NM     NM       59  
 

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Six months ended June 30,   2007  
    Reported     Credit       Tax-equivalent     Managed  
(in millions, except per share and ratio data)   results     card (b)     adjustments     basis  
 
Revenue
                               
Investment banking fees
  $ 3,637     $     $     $ 3,637  
Principal transactions
    8,037                   8,037  
Lending & deposit related fees
    1,846                   1,846  
Asset management, administration and commissions
    6,797                   6,797  
Securities (losses)
    (221 )                 (221 )
Mortgage fees and related income
    999                   999  
Credit card income
    3,277       (1,534 )           1,743  
Other income
    1,071             309       1,380  
 
Noninterest revenue
    25,443       (1,534 )     309       24,218  
Net interest income
    12,433       2,717       192       15,342  
 
Total net revenue
    37,876       1,183       501       39,560  
Provision for credit losses
    2,537       1,183             3,720  
Noninterest expense
    21,656                   21,656  
 
Income from continuing operations before income tax expense
    13,683             501       14,184  
Income tax expense
    4,662             501       5,163  
 
Income from continuing operations
    9,021                   9,021  
Income from discontinued operations
                       
 
Net income
  $ 9,021     $     $     $ 9,021  
 
Net income – diluted earnings per share
  $ 2.55     $     $     $ 2.55  
 
Return on common equity (a)
    16 %     %     %     16 %
Return on equity less goodwill (a)
    25                   25  
Return on assets (a)
    1.29     NM     NM       1.24  
Overhead ratio
    57     NM     NM       55  
 
                                 
Six months ended June 30,   2006  
    Reported     Credit       Tax-equivalent     Managed  
(in millions, except per share and ratio data)   results     card (b)     adjustments     basis  
 
Revenue
                               
Investment banking fees
  $ 2,539     $     $     $ 2,539  
Principal transactions
    5,450                   5,450  
Lending & deposit related fees
    1,706                   1,706  
Asset management, administration and commissions
    5,840                   5,840  
Securities (losses)
    (618 )                 (618 )
Mortgage fees and related income
    454                   454  
Credit card income
    3,701       (2,062 )           1,639  
Other income
    1,018             316       1,334  
 
Noninterest revenue
    20,090       (2,062 )     316       18,344  
Net interest income
    10,171       3,072       118       13,361  
 
Total net revenue
    30,261       1,010       434       31,705  
Provision for credit losses
    1,324       1,010             2,334  
Noninterest expense
    19,162                   19,162  
 
Income from continuing operations before income tax expense
    9,775             434       10,209  
Income tax expense
    3,264             434       3,698  
 
Income from continuing operations
    6,511                   6,511  
Income from discontinued operations
    110                   110  
 
Net income
  $ 6,621     $     $     $ 6,621  
 
Net income – diluted earnings per share
  $ 1.85     $     $     $ 1.85  
 
Return on common equity (a)
    12 %     %     %     12 %
Return on equity less goodwill (a)
    20                   20  
Return on assets (a)
    1.03     NM     NM       0.98  
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 June 30,   2007     2006  
(in millions)   Reported     Securitized     Managed     Reported     Securitized     Managed  
   
Loans – Period-end
  $ 465,037     $ 67,506     $ 532,543     $ 455,104     $ 66,349     $ 521,453  
Total assets – average
    1,431,986       65,920       1,497,906       1,333,869       66,913       1,400,782  
   
                                                 
Six months ended June 30,   2007     2006  
(in millions)   Reported     Securitized     Managed     Reported     Securitized     Managed  
   
Loans – Period-end
  $ 465,037     $ 67,506     $ 532,543     $ 455,104     $ 66,349     $ 521,453  
Total assets – average
    1,405,597       65,519       1,471,116       1,291,349       67,233       1,358,582  
   
 
BUSINESS SEGMENT RESULTS
 
The Firm is managed on a line-of-business basis. The business segment financial results presented reflect the current organization of JPMorgan Chase. There are six major reportable business segments: the Investment Bank, Retail Financial Services, Card Services, Commercial Banking, Treasury & Securities Services and Asset Management, as well as a Corporate segment. The segments are based upon the products and services provided, or the type of customer served, and they reflect the manner in which financial information is currently evaluated by management. Results of these lines of business are presented on a managed basis. For further discussion of Business segment results, see pages 34-35 of JPMorgan Chase’s 2006 Annual Report.
Description of business segment reporting methodology
Results of the business segments are intended to reflect each segment as if it were essentially a stand-alone business. The management reporting process that derives business segment results allocates income and expense using market-based methodologies. For a further discussion of those methodologies, see Business Segment Results – Description of business segment reporting methodology on page 34 of JPMorgan Chase’s 2006 Annual Report. The Firm continues to assess the assumptions, methodologies and reporting classifications used for segment reporting, and further refinements may be implemented in future periods.
Segment Results — Managed Basis (a)
The following table summarizes the business segment results for the periods indicated.
                                                                                         
                                                                            Return
Three months ended June 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
  $ 5,798     $ 4,329       34 %   $ 3,854     $ 3,091       25 %   $ 1,179     $ 839       41 %     23 %     16 %
Retail Financial Services
    4,357       3,779       15       2,484       2,259       10       785       868       (10 )     20       24  
Card Services
    3,717       3,664       1       1,188       1,249       (5 )     759       875       (13 )     22       25  
Commercial Banking
    1,007       949       6       496       496             284       283             18       21  
Treasury & Securities Services
    1,741       1,588       10       1,149       1,050       9       352       316       11       47       58  
Asset Management
    2,137       1,620       32       1,355       1,081       25       493       343       44       53       39  
Corporate (b)
    1,062       (65 )   NM       502       156       222       382       16     NM     NM     NM  
 
Total
  $     19,819     $    15,864       25 %   $     11,028     $    9,382       18 %   $     4,234     $    3,540       20 %     14 %     13 %
 
                                                                                         
                                                                            Return
Six months ended June 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
  $     12,052     $    9,157       32 %   $     7,685     $    6,411       20 %   $     2,719     $    1,689       61 %     26 %     17 %
Retail Financial Services
    8,463       7,542       12       4,891       4,497       9       1,644       1,749       (6 )     21       25  
Card Services
    7,397       7,349       1       2,429       2,492       (3 )     1,524       1,776       (14 )     22       25  
Commercial Banking
    2,010       1,849       9       981       994       (1 )     588       523       12       19       19  
Treasury & Securities Services
    3,267       3,073       6       2,224       2,098       6       615       578       6       41       49  
Asset Management
    4,041       3,204       26       2,590       2,179       19       918       656       40       49       38  
Corporate (b)
    2,330       (469 )   NM       856       491       74       1,013       (350 )   NM     NM     NM  
 
Total
  $ 39,560     $ 31,705       25 %   $ 21,656     $ 19,162       13 %   $ 9,021     $ 6,621       36 %     16 %     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 $56 million and $110 million for the three and six months ended June 30, 2006, respectively. There was no income from discontinued operations during the first six months of 2007.

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INVESTMENT BANK
 
For a discussion of the business profile of the IB, see pages 36-37 of JPMorgan Chase’s 2006 Annual Report and page 4 of this Form 10-Q.
                                                 
Selected income statement data   Three months ended June 30,   Six months ended June 30,
(in millions, except ratios)   2007     2006     Change   2007     2006   Change
 
Revenue
                                               
Investment banking fees
  $ 1,900     $ 1,368       39 %   $ 3,629     $ 2,538       43 %
Principal transactions (a)
    2,178       2,157       1       5,304       4,637       14  
Lending & deposit related fees
    93       134       (31 )     186       271       (31 )
Asset management, administration and commissions
    643       583       10       1,284       1,159       11  
All other income
    122       3     NM       164       278       (41 )
                     
Noninterest revenue
    4,936       4,245       16       10,567       8,883       19  
Net interest income
    862 (e)     84     NM       1,485 (e)     274       442  
                     
Total net revenue (b)
    5,798       4,329       34       12,052       9,157       32  
 
                                               
Provision for credit losses
    164       (62 )   NM     227       121       88  
Credit reimbursement from TSS (c)
    30       30             60       60        
 
                                               
Noninterest expense
                                               
Compensation expense
    2,589       1,961       32       5,226       4,217       24  
Noncompensation expense
    1,265       1,130       12       2,459       2,194       12  
                     
Total noninterest expense
    3,854       3,091       25       7,685       6,411       20  
                     
Income before income tax expense
    1,810       1,330       36       4,200       2,685       56  
Income tax expense
    631       491       29       1,481       996       49  
                     
Net income
  $ 1,179     $ 839       41     $ 2,719     $ 1,689       61  
                     
 
                                               
Financial ratios
                                               
ROE
    23 %     16 %             26 %     17 %        
ROA
    0.68       0.50               0.81       0.52          
Overhead ratio
    66       71               64       70          
Compensation expense as a % of total net revenue (d)
    45       44               43       43          
                     
 
                                               
Revenue by business
                                               
Investment banking fees:
                                               
Advisory
  $ 560     $ 352       59     $ 1,032     $ 741       39  
Equity underwriting
    509       364       40       902       576       57  
Debt underwriting
    831       652       27       1,695       1,221       39  
                     
Total investment banking fees
    1,900       1,368       39       3,629       2,538       43  
Fixed income markets (a)
    2,445       2,131       15       5,037       4,207       20  
Equity markets (a)
    1,249       580       115       2,788       1,842       51  
Credit portfolio (a)
    204       250       (18 )     598       570       5  
                     
Total net revenue
  $ 5,798     $ 4,329       34     $ 12,052     $ 9,157       32  
                     
 
                                               
Revenue by region
                                               
Americas
  $ 2,655     $ 2,110       26     $ 6,021     $ 4,263       41  
Europe/Middle East/Africa
    2,327       1,796       30       4,578       3,821       20  
Asia/Pacific
    816       423       93       1,453       1,073       35  
                     
Total net revenue
  $ 5,798     $ 4,329       34     $ 12,052     $ 9,157       32  
                     
(a)  
As a result of the adoption on January 1, 2007, of SFAS 157, the 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, primarily due to tax-exempt income from municipal bond investments and income tax credits related to affordable housing investments, of $290 million and $193 million for the quarters ended June 30, 2007 and 2006, respectively, and $442 million and $387 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.

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(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 transaction, causing a shift between Principal transactions revenue and Net interest income in 2007.
Quarterly results
Net income was $1.2 billion, up by $340 million, or 41%, compared with the prior year. The increase reflected strong revenue growth, primarily offset by an increase in Noninterest expense, primarily driven by performance-based compensation, as well as an increase in the provision for credit losses.
Net revenue was $5.8 billion, up by $1.5 billion, or 34%, from the prior year, driven by record investment banking fees and strong markets results. Investment banking fees of $1.9 billion were up 39% from the prior year, driven by record advisory fees, strong debt underwriting fees and record equity underwriting fees. Debt underwriting fees of $831 million were up 27%, driven by record loan syndication fees. Advisory fees of $560 million were up 59%, benefiting from strong performance across all regions. Equity underwriting fees of $509 million were up 40%, reflecting strong performance in Asia and Europe. Fixed Income Markets revenue increased 15% from the prior year, to $2.4 billion, driven by strong results across most products, partially offset by weaker commodities performance versus a strong prior-year quarter. Equity Markets revenue of $1.2 billion more than doubled from the prior year, benefiting from strong global derivatives and cash equities trading performance. Credit Portfolio revenue of $204 million was down 18% due largely to lower gains from loan sales and workouts.
Provision for credit losses was $164 million compared with a benefit of $62 million in the prior year. The increase in the provision for credit losses was primarily due to lending-related commitments, reflecting portfolio activity. Allowance for loan losses to average loans was 1.76% for the current quarter, which was flat compared with the prior year; nonperforming assets were $119 million, down 77% from the prior year.
Noninterest expense was $3.9 billion, up by $763 million, or 25%, from the prior year. This increase was due primarily to higher performance-based compensation expense.
Year-to-date results
Net income was $2.7 billion, up by $1.0 billion, or 61%, compared with the prior year. The increase reflected strong revenue growth, partially offset by an increase in Noninterest expense, primarily driven by performance-based compensation, as well as an increase in the provision for credit losses.
Net revenue was $12.1 billion, up by $2.9 billion, or 32%, from the prior year, driven by record investment banking fees and record markets results. Investment banking fees of $3.6 billion were up 43% from the prior year, driven by record advisory fees, debt underwriting fees, and equity underwriting fees. Debt underwriting fees of $1.7 billion were up 39%, driven by record loan syndication fees and record bond underwriting fees. Advisory fees of $1.0 billion were up 39%, benefiting from strong performance across all regions. Equity underwriting fees of $902 million were up 57% reflecting strong performance across all regions. Fixed Income Markets revenue increased 20% from the prior year, to $5.0 billion, driven by strong results across most products. Equity Markets revenue of $2.8 billion was up 51%, benefiting from strong global derivatives and cash equities trading performance. Credit Portfolio revenue of $598 million was up 5% due largely to the incorporation of an adjustment to the valuation of the Firm’s derivative liabilities measured at fair value that reflects the credit quality of the Firm, in conjunction with SFAS 157, and higher trading revenue from credit portfolio management activities, partially offset by lower gains from loan sales and workouts.
Provision for credit losses was $227 million, up 88% from the prior year. The increase in the provision for credit losses was due primarily to lending-related commitments, reflecting portfolio activity. Allowance for loan losses to average loans was 1.76% for the first half of 2007, which was slightly down compared with the prior year.
Noninterest expense was $7.7 billion, up by $1.3 billion, or 20%, from the prior year. This increase was due primarily to higher performance-based compensation expense.

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Selected metrics   Three months ended June 30,     Six months ended June 30,
(in millions, except headcount and ratio data)   2007     2006     Change   2007     2006     Change
 
Selected average balances
                                               
Total assets
  $     696,230     $    672,056       4 %   $     677,581     $    659,209       3 %
Trading assets-debt and equity instruments (a)
    359,387       268,091       34       347,320       260,296       33  
Trading assets-derivatives receivables
    58,520       55,692       5       57,465       52,557       9  
Loans:
                                               
Loans retained (b)
    60,330       59,026       2       60,102       56,367       7  
Loans held-for-sale (a)
    13,529       19,920       (32 )     13,159       19,568       (33 )
                     
Total loans
    73,859       78,946       (6 )     73,261       75,935       (4 )
Adjusted assets (c)
    603,839       530,057       14       588,016       511,285       15  
Equity
    21,000       21,000             21,000       20,503       2  
 
                                               
Headcount
    25,356       22,914       11       25,356       22,914       11  
Credit data and quality statistics
                                               
Net charge-offs (recoveries)
  $ (16 )   $ (12 )     (33 )   $ (22 )   $ (33 )     33  
Nonperforming assets: (d)
                                               
Nonperforming loans
    72       488       (85 )     72       488       (85 )
Other nonperforming assets
    47       37       27       47       37       27  
Allowance for credit losses:
                                               
Allowance for loan losses
    1,037       1,038             1,037       1,038        
Allowance for lending-related commitments
    487       249       96       487       249       96  
                     
Total Allowance for credit losses
    1,524       1,287       18       1,524       1,287       18  
 
                                               
Net charge-off (recovery) rate (a)(b)
    (0.11 )%     (0.08 )%             (0.08 )%     (0.12 )%        
Allowance for loan losses to average loans (a)(b)
    1.76       1.76               1.76       1.84          
Allowance for loan losses to nonperforming loans (d)
    2,206       248               2,206       248          
Nonperforming loans to average loans
    0.10       0.62               0.10       0.64          
Market risk-average trading and credit portfolio VAR (e)
                                               
By risk type:
                                               
Fixed income
  $ 74     $ 52       42     $ 60     $ 56       7  
Foreign exchange
    20       25       (20 )     19       22       (14 )
Equities
    51       24       113       46       28       64  
Commodities and other
    40       52       (23 )     37       50       (26 )
Less: portfolio diversification (f)
    (73 )     (74 )     1       (65 )     (71 )     8  
                     
Total trading VAR
    112       79       42       97       85       14  
Credit portfolio VAR (g)
    12       14       (14 )     12       14       (14 )
Less: portfolio diversification (f)
    (14 )     (9 )     (56 )     (12 )     (10 )     (20 )
                     
Total trading and credit portfolio VAR
  $ 110     $ 84       31     $ 97     $ 89       9  
                     
(a)  
Loans held-for-sale were excluded from the allowance coverage ratio and Net charge-off rate. As a result of the adoption of SFAS 159 in the first quarter of 2007 Loans held-for-sale of $11.7 billion were reclassified to Trading assets.
(b)  
Loans retained included credit portfolio loans, leveraged leases, bridge loans for underwriting, other accrual loans and certain loans carried at fair value. Average loans carried at fair value were $1.3 billion for the quarter ended June 30, 2007 and $1.1 billion for year-to-date June 30, 2007. Loans carried at fair value were excluded when calculating the allowance coverage ratio and Net charge-off rate.
(c)  
Adjusted assets, a non-GAAP financial measure, equals Total assets minus (1) Securities purchased under resale agreements and Securities borrowed less securities sold, not yet purchased; (2) assets of variable interest entities consolidated under FIN 46R; (3) cash and securities segregated and on deposit for regulatory and other purposes; and (4) goodwill and intangibles. The amount of adjusted assets is presented to assist the reader in comparing the IB’s asset and capital levels to other investment banks in the securities industry. Asset-to-equity leverage ratios are commonly used as one measure to assess a company’s capital adequacy. The IB believes an adjusted asset amount that excludes the assets discussed above, which are considered to have a low risk profile, provides a more meaningful measure of balance sheet leverage in the securities industry.
(d)  
Nonperforming loans included Loans held-for-sale of $25 million and $70 million at June 30, 2007 and 2006, respectively, which were excluded from the allowance coverage ratios. Nonperforming loans excluded distressed HFS loans 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)  
Included VAR on derivative credit and debit valuation adjustments, hedges of the credit valuation adjustment and mark-to-market hedges of the retained loan portfolio, which 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 six 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.
                                 
    Six months ended June 30, 2007   Full Year 2006
Market shares and rankings (a)   Market Share   Rankings   Market Share   Rankings
 
Global debt, equity and equity-related
    8 %     #2       7 %     #2  
Global syndicated loans
    15       #1       14       #1  
Global long-term debt
    7       #2       6       #3  
Global equity and equity-related
    9       #1       7       #6  
Global announced M&A
    27       #4       22       #4  
U.S. debt, equity and equity-related
    10       #2       9       #2  
U.S. syndicated loans
    28       #1       26       #1  
U.S. long-term debt
    12       #2       12       #2  
U.S. equity and equity-related (b)
    11       #3       8       #6  
U.S. announced M&A
    30       #4       27       #4  
 
(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.
                                                 
Selected income statement data   Three months ended June 30,     Six months ended June 30,  
(in millions, except ratios)   2007     2006     Change   2007     2006     Change
 
Revenue
                                               
Lending & deposit related fees
  $ 470     $ 390       21 %   $ 893     $ 761       17 %
Asset management, administration and commissions
    344       366       (6 )     607       803       (24 )
Securities (losses)
          (39 )     NM             (45 )   NM
Mortgage fees and related income (a)
    495       204       143       977       440       122  
Credit card income
    163       129       26       305       244       25  
Other income
    212       163       30       391       211       85  
                     
Noninterest revenue
    1,684       1,213       39       3,173       2,414       31  
Net interest income
    2,673       2,566       4       5,290       5,128       3  
                     
Total net revenue
    4,357       3,779       15       8,463       7,542       12  
 
                                               
Provision for credit losses
    587       100       487       879       185       375  
 
                                               
Noninterest expense
                                               
Compensation expense (a)
    1,104       901       23       2,169       1,821       19  
Noncompensation expense (a)
    1,264       1,246       1       2,488       2,453       1  
Amortization of intangibles
    116       112       4       234       223       5  
                     
Total noninterest expense
    2,484       2,259       10       4,891       4,497       9  
                     
Income before income tax expense
    1,286       1,420       (9 )     2,693       2,860       (6 )
Income tax expense
    501       552       (9 )     1,049       1,111       (6 )
                     
Net income
  $ 785     $ 868       (10 )   $ 1,644     $ 1,749       (6 )
                     
 
                                               
Financial ratios
                                               
ROE
    20 %     24 %             21 %     25 %        
Overhead ratio (a)
    57       60               58       60          
Overhead ratio excluding core deposit intangibles (a)(b)
    54       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 six months ended June 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 the earlier years and a lower overhead ratio in later years; this method would result in an improving overhead ratio over time, all things remaining equal. This non-GAAP ratio excluded Regional Banking’s core deposit intangible amortization expense related to The Bank of New York transaction and the Bank One merger of $115 million and $110 million for the three months ended June 30, 2007 and 2006, respectively, and $231 million and $219 million for the six months ended June 30, 2007 and 2006, respectively.

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Quarterly results
Net income of $785 million was down by $83 million, or 10%, from the prior year, as declines in Regional Banking and Auto Finance were offset partially by improved results in Mortgage Banking.
Net revenue of $4.4 billion was up by $578 million, or 15%, from the prior year. Net interest income of $2.7 billion was up by $107 million, or 4%, due to The Bank of New York transaction and higher deposit balances. These benefits were offset partially by the sale of the insurance business and a continued shift to narrower–spread deposit products. Noninterest revenue of $1.7 billion was up by $471 million, or 39%, benefiting from increased mortgage loan originations; increases in deposit-related fees; increased mortgage loan servicing revenue; and The Bank of New York transaction. Noninterest revenue also benefited from the classification of certain mortgage loan origination costs as expense (loan origination costs previously netted against revenue are currently recorded as expense) due to the adoption of SFAS 159 in the first quarter of 2007. These benefits were offset partially by the sale of the insurance business.
The provision for credit losses was $587 million compared with $100 million in the prior year. The increase in provision reflects weak housing prices in select geographic areas and the resulting increase in estimated losses for high loan-to-value home equity loans, especially those originated through the wholesale channel. Home equity underwriting standards were further tightened during the quarter, and pricing actions were implemented to reflect elevated risks in this segment. The current-quarter provision includes an increase in the allowance for loan losses related to home equity loans of $329 million. Home equity net charge-offs were $98 million (0.44% net charge-off rate) in the current quarter compared with net charge-offs of $30 million (0.16% net charge-off rate) in the prior year.
Noninterest expense of $2.5 billion was up by $225 million, or 10%, due to The Bank of New York transaction, the classification of certain loan origination costs as expense due to the adoption of SFAS 159, an increase in loan originations in Mortgage Banking, and investments in retail distribution. These increases were offset partially by the sale of the insurance business.
Year-to-date results
Net income of $1.6 billion was down by $105 million, or 6%, from the prior year, as declines in Regional Banking and Auto Finance were offset partially by improved results in Mortgage Banking.
Net revenue of $8.5 billion was up by $921 million, or 12%, from the prior year. Net interest income of $5.3 billion was up by $162 million, or 3%, due to The Bank of New York transaction and higher deposit balances. These benefits were offset partially by the sale of the insurance business and a continued shift to narrower–spread deposit products. Noninterest revenue of $3.2 billion was up by $759 million, or 31%, reflecting higher gain on sale income primarily attributable to 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. Noninterest revenue also benefited from increases in deposit-related fees, increased mortgage loan servicing revenue and The Bank of New York transaction. These benefits were offset partially by the sale of the insurance business and a charge resulting from accelerated surrenders of customer annuity contracts.
The provision for credit losses was $879 million compared with $185 million in the prior year. The increase in provision reflects weak housing prices in select geographic areas and the resulting increases in estimated losses for home equity and subprime mortgage loans. The year-to-date provision includes a net increase in the allowance for loan losses of $405 million related to home equity loans and the subprime mortgage portfolio, offset partially by the reversal of a portion of the reserves for Hurricane Katrina. 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 of $4.9 billion was up by $394 million, or 9%, 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 retail distribution 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 June 30,     Six months ended June 30,
(in millions, except headcount and ratio data)   2007     2006     Change   2007     2006     Change
 
Selected ending balances
                                               
Assets
  $   217,421     233,748       (7 )%   $   217,421     233,748       (7 )%
Loans (a)(b)
    190,493       203,928       (7 )     190,493       203,928       (7 )
Deposits
    217,689       198,273       10       217,689       198,273       10  
 
                                               
Selected average balances
                                               
Assets
  $   216,692     234,097       (7 )   $   216,912     232,849       (7 )
Loans (a)(b)
    190,302       201,635       (6 )     190,638       200,224       (5 )
Deposits
    219,171       199,075       10       218,058       196,741       11  
Equity
    16,000       14,300       12       16,000       14,099       13  
 
                                               
Headcount
    68,254       62,450       9       68,254       62,450       9  
 
                                               
Credit data and quality statistics
                                               
Net charge-offs
  $ 270     $ 113       139     $ 455     $ 234       94  
Nonperforming loans (c)
    1,760       1,339       31       1,760       1,339       31  
Nonperforming assets
    2,099       1,520       38       2,099       1,520       38  
Allowance for loan losses
    1,772       1,321       34       1,772       1,321       34  
 
                                               
Net charge-off rate (d)
    0.66 %     0.24 %             0.56 %     0.25 %        
Allowance for loan losses to ending loans (d)
    1.06       0.69               1.06       0.69          
Allowance for loan losses to nonperforming loans (d)
    115       99               115       99          
Nonperforming loans to total loans
    0.92       0.66               0.92       0.66          
 
     
(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 $15.2 billion at June 30, 2007. Average Loans included $13.5 billion and $10.0 billion for the three and six months ended June 30, 2007.
(b)
 
End-of-period Loans included Loans held-for-sale of $8.3 billion and $11.8 billion at June 30, 2007 and 2006, respectively. Average loans include Loans held-for-sale of $11.7 billion and $12.9 billion for the three months ended June 30, 2007 and 2006, and $16.7 billion and $14.6 billion for the six months ended June 30, 2007 and 2006, respectively.
(c)
 
Nonperforming loans included Loans held-for-sale and loans accounted for at fair value under SFAS 159 of $217 million (of which $2 million were classified as Trading assets on the Consolidated balance sheet) and $9 million at June 30, 2007 and 2006, respectively.
(d)
 
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.
REGIONAL BANKING
                                                 
Selected income statement data   Three months ended June 30,     Six months ended June 30,  
(in millions, except ratios)   2007     2006     Change   2007     2006     Change
 
 
                                               
Noninterest revenue
  $ 977     $ 851       15 %   $ 1,770     $ 1,671       6 %
Net interest income
    2,296       2,212       4       4,595       4,432       4  
                     
Total Net revenue
    3,273       3,063       7       6,365       6,103       4  
Provision for credit losses
    494       70     NM     727       136       435  
Noninterest expense
    1,749       1,746             3,478       3,484        
                     
Income before income tax expense
    1,030       1,247       (17 )     2,160       2,483       (13 )
                     
Net income
  $ 629     $ 764       (18 )   $ 1,319     $ 1,521       (13 )
                     
 
                                               
ROE
    21 %     30 %             23 %     31 %        
Overhead ratio
    53       57               55       57          
Overhead ratio excluding core deposit intangibles (a)
    50       53               51       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 the earlier years and a lower overhead ratio in later years; this method would result in an improving overhead ratio over time, all things remaining equal. This non-GAAP ratio excluded Regional Banking’s core deposit intangible amortization expense related to The Bank of New York transaction and the Bank One merger of $115 million and $110 million for the three months ended June 30, 2007 and 2006, respectively, and $231 million and $219 million for the six months ended June 30, 2007 and 2006, respectively.

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Quarterly results
Regional Banking
net income of $629 million was down by $135 million, or 18%, from the prior year. Net revenue of $3.3 billion was up by $210 million, or 7%, benefiting from The Bank of New York transaction, increases in deposit-related fees and growth in deposits. These benefits were offset partially by the sale of the insurance business and a continued shift to narrower–spread deposit products. The provision for credit losses was $494 million compared with $70 million in the prior year. The increase was largely related to the home equity portfolio, as the allowance for loan losses related to this portfolio was increased by $329 million. Home equity net charge-offs increased to $98 million in the current quarter from $30 million in the prior year (see Retail Financial Services discussion of provision for credit losses for further detail). Noninterest expense of $1.7 billion was flat, as increases due to The Bank of New York transaction and investments in retail distribution were offset by the sale of the insurance business.
Year-to-date results
Regional Banking
net income of $1.3 billion was down by $202 million, or 13%, from the prior year. Net revenue of $6.4 billion was up by $262 million, or 4%, benefiting from The Bank of New York transaction, increases in deposit-related fees and growth in deposits. These benefits were offset partially by the sale of the insurance business, a continued shift to narrower–spread deposit products and a charge resulting from accelerated surrenders of customer annuity contracts. The provision for credit losses was $727 million compared with $136 million in the prior year. The increase in provision reflects higher losses on home equity and subprime mortgage loans, offset partially by the reversal of a portion of the reserves for Hurricane Katrina. Noninterest expense of $3.5 billion was flat, as increases due to The Bank of New York transaction and investments in retail distribution were largely offset by the sale of the insurance business.

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Business metrics   Three months ended June 30,     Six months ended June 30,
(in billions, except ratios)   2007     2006     Change   2007     2006     Change
 
 
                                               
Home equity origination volume
  $ 14.6     $ 14.0       4 %   $ 27.3     $ 25.7       6 %
 
                                               
End-of-period loans owned
                                               
Home equity
  $ 91.0     $ 77.8       17     $ 91.0     $ 77.8       17  
Mortgage (a)
    8.8       48.6       (82 )     8.8       48.6       (82 )
Business banking
    14.6       13.0       12       14.6       13.0       12  
Education
    10.2       8.3       23       10.2       8.3       23  
Other loans (b)
    2.5       2.6       (4 )     2.5       2.6       (4 )
                     
Total end-of-period loans
    127.1       150.3       (15 )     127.1       150.3       (15 )
End-of-period deposits
                                               
Checking
  $ 67.3     $ 62.3       8     $ 67.3     $ 62.3       8  
Savings
    97.7       89.1       10       97.7       89.1       10  
Time and other
    41.9       36.5       15       41.9       36.5       15  
                     
Total end-of-period deposits
    206.9       187.9       10       206.9       187.9       10  
 
                                               
Average loans owned
                                               
Home equity
  $ 89.2     $ 76.2       17     $ 87.8     $ 75.2       17  
Mortgage (a)
    8.8       47.1       (81 )     8.8       45.9       (81 )
Business banking
    14.5       13.0       12       14.4       12.8       13  
Education
    10.5       8.7       21       10.8       7.1       52  
Other loans (b)
    2.4       2.6       (8 )     2.7       2.8       (4 )
                     
Total average loans (c)
    125.4       147.6       (15 )     124.5       143.8       (13 )
 
                                               
Average deposits
                                               
Checking
  $ 67.2     $ 62.6       7     $ 67.3     $ 62.8       7  
Savings
    98.4       89.8       10       97.6       89.6       9  
Time and other
    41.7       35.4       18       42.1       33.9       24  
                     
Total average deposits
    207.3       187.8       10       207.0       186.3       11  
Average assets
    137.7       164.6       (16 )     136.8       160.9       (15 )
Average equity
    11.8       10.2       16       11.8       10.0       18  
                     
 
                                               
Credit data and quality statistics
                                               
(in millions, except ratios)
                                               
30+ day delinquency rate (d)(e)
    1.88 %     1.48 %             1.88 %     1.48 %        
Net charge-offs
                                               
Home equity
  $ 98     $ 30       227     $ 166     $ 63       163  
Mortgage
    26       9       189       46       21       119  
Business banking
    30       16       88       55       34       62  
Other loans
    52       13       300       65       20       225  
                     
Total net charge-offs
    206       68       203       332       138       141  
Net charge-off rate
                                               
Home equity
    0.44 %     0.16 %             0.38 %     0.17 %        
Mortgage
    1.19       0.08               1.05       0.09          
Business banking
    0.83       0.49               0.77       0.54          
Other loans
    2.32       0.55               1.39       0.55          
Total net charge-off rate (c)
    0.68       0.19               0.56       0.20          
 
                                               
Nonperforming assets (f)(g)(h)
  $ 1,968     $ 1,349       46     $ 1,968     $ 1,349       46  
 
     
(a)
 
As of January 1, 2007, $19.4 billion of held-for-investment prime mortgage loans were transferred from RFS to Treasury within the Corporate segment for risk management and reporting purposes. Although the loans, together with the responsibility for the investment management of the portfolio, were transferred to Treasury, the transfer has no impact on the financial results of Regional Banking. The balance reported at and for the three and six months ended June 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 $3.9 billion and $1.9 billion for the three months ended June 30, 2007 and 2006, respectively and $4.1 billion and $2.6 billion for the six months ended June 30, 2007 and 2006, respectively. These amounts were excluded when calculating the Net charge-off rate.
(d)
 
Excluded delinquencies related to loans eligible for repurchase as well as loans repurchased from Governmental National Mortgage Association (“GNMA”) pools that are insured by government agencies and government-sponsored enterprises of $879 million and $828 million at June 30, 2007 and 2006, respectively. These amounts are excluded as reimbursement is proceeding normally.
(e)
 
Excluded loans that are 30 days past due and still accruing, which are insured by government agencies under the Federal Family Education Loan Program of $523 million and $416 million at June 30, 2007 and 2006, respectively. These amounts are excluded as reimbursement is proceeding normally.

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(f)
 
Excluded loans that are 90 days past due and still accruing, which are insured by government agencies under the Federal Family Education Loan Program of $200 million and $163 million at June 30, 2007 and 2006, respectively. These amounts are excluded as reimbursement is proceeding normally.
(g)
 
Excluded Nonperforming assets related to loans eligible for repurchase as well as loans repurchased from GNMA pools that are insured by government agencies and government-sponsored enterprises of $1.2 billion and $1.1 billion at June 30, 2007 and 2006, respectively. These amounts are excluded as reimbursement is proceeding normally.
(h)
  Nonperforming loans included Loans held-for-sale and loans accounted for at fair value under SFAS 159 of $217 million (of which $2 million were classified as Trading assets on the Consolidated balance sheet) and $9 million at June 30, 2007 and 2006, respectively.
                                                 
Retail branch business metrics   Three months ended June 30,     Six months ended June 30,
    2007     2006     Change   2007     2006     Change
 
Investment sales volume (in millions)
  $ 5,117     $ 3,692       39 %   $ 9,900     $ 7,245       37 %
 
                                               
Number of:
                                               
Branches
    3,089       2,660       429 #     3,089       2,660       429 #
ATMs
    8,649       7,753       896       8,649       7,753       896  
Personal bankers (a)
    9,025       7,260       1,765       9,025       7,260       1,765  
Sales specialists (a)
    3,915       3,376       539       3,915       3,376       539  
Active online customers (in thousands) (b)
    5,448       4,469       979       5,448       4,469       979  
Checking accounts (in thousands)
    10,356       9,072       1,284       10,356       9,072       1,284  
 
     
(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 three months 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 June 30,     Six months ended June 30,
(in millions, except ratios and where otherwise noted)   2007     2006     Change   2007     2006     Change
 
 
                                               
Production revenue (a)
  $ 463     $ 202       129 %   $ 863     $ 421       105 %
Net mortgage servicing revenue:
                                               
Loan servicing revenue
    615       563       9       1,216       1,123       8  
Changes in MSR asset fair value:
                                               
Due to inputs or assumptions in model (b)
    952       491       94       1,060       1,202       (12 )
Other changes in fair value (c)
    (383 )     (392 )     2       (761 )     (741 )     (3 )
                     
Total changes in MSR asset fair value
    569       99       475       299       461       (35 )
Derivative valuation adjustments and other
    (1,014 )     (546 )     (86 )     (1,141 )     (1,299 )     12  
                     
Total net mortgage servicing revenue
    170       116       47       374       285       31  
                     
Total net revenue
    633       318       99       1,237       706       75  
Noninterest expense (a)
    516       329       57       984       653       51  
                     
Income before income tax expense
    117       (11 )   NM     253       53       377  
                     
Net income
  $ 71     $ (7 )   NM   $ 155     $ 32       384  
                     
 
                                               
ROE
    14 %   NM             16 %     4 %        
 
                                               
Business metrics (in billions)
                                               
Third-party mortgage loans serviced (ending)
  $ 572.4     $ 497.4       15     $ 572.4     $ 497.4       15  
MSR net carrying value (ending)
    9.5       8.2       16       9.5       8.2       16  
Average mortgage loans held-for-sale (d)
    21.3       9.8       117       22.6       11.4       98  
Average assets
    35.6       23.9       49       36.8       25.5       44  
Average equity
    2.0       1.7       18       2.0       1.7       18  
 
                                               
Mortgage origination volume by channel
(in billions)
                                               
Retail
  $ 13.6     $ 10.8       26     $ 24.5     $ 19.9       23  
Wholesale
    12.8       8.7       47       22.7       16.1       41  
Correspondent
    6.4       3.4       88       11.2       7.1       58  
CNT (Negotiated transactions)
    11.3       8.3       36       21.8       17.3       26  
                     
Total (e)
  $ 44.1     $ 31.2       41     $ 80.2     $ 60.4       33  
 
     
(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) in the three and six months ended June 30, 2007.
(b)
 
Represents MSR asset fair value adjustments due to changes in inputs, such as interest rates and volatility, as well as updates to assumptions used in the valuation model.
(c)
 
Includes changes in the MSR value due to modeled servicing portfolio runoff (or time decay).

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(d)
 
Included $13.5 billion and $10.0 billion of prime mortgage loans accounted for at fair value option for the three and six months ended June 30, 2007, respectively. These loans are classified as Trading assets on the Consolidated balance sheets for 2007.
(e)
 
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 the IB’s channels. Prior periods have been restated to conform to this new definition.
Quarterly results
Mortgage Banking
net income was $71 million compared with a net loss of $7 million in the prior year. Net revenue of $633 million was up by $315 million from the prior year. Revenue comprises production revenue and net mortgage servicing revenue. Production revenue was $463 million, up by $261 million, reflecting an increase in 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. Net mortgage servicing revenue, which includes loan servicing revenue, mortgage servicing rights (“MSR”) risk management results and other changes in fair value, was $170 million compared with $116 million in the prior year. Loan servicing revenue of $615 million increased by $52 million on a 15% increase in third-party loans serviced. MSR risk management revenue of negative $62 million declined by $7 million from the prior year. Other changes in fair value of the MSR asset, representing run-off of the asset against the realization of servicing cash flows, were negative $383 million. Noninterest expense was $516 million, up by $187 million, or 57%, reflecting the classification of certain loan origination costs due to the adoption of SFAS 159, and higher compensation expense, reflecting higher loan originations and a greater number of loan officers.
Year-to-date results
Mortgage Banking
net income was $155 million compared with $32 million in the prior year. Net revenue of $1.2 billion was up by $531 million from the prior year. Revenue comprises production revenue and net mortgage servicing revenue. Production revenue was $863 million, up by $442 million, reflecting higher gain on sale income primarily attributable to 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. Net mortgage servicing revenue, which includes loan servicing revenue, MSR risk management results and other changes in fair value, was $374 million compared with $285 million in the prior year. Loan servicing revenue of $1.2 billion increased by $93 million on a 15% increase in third-party loans serviced. MSR risk management revenue of negative $81 million improved by $16 million from the prior year. Other changes in fair value of the MSR asset, representing run-off of the asset against the realization of servicing cash flows, were negative $761 million. Noninterest expense was $984 million, up by $331 million, or 51%, reflecting the classification of certain loan origination costs due to the adoption of SFAS 159, and higher compensation expense, reflecting higher loan originations and a greater number of loan officers.

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AUTO FINANCE
                                                 
Selected income statement data   Three months ended June 30,     Six months ended June 30,
(in millions, except ratios and where otherwise noted)   2007     2006     Change   2007     2006     Change
 
Noninterest revenue
  $ 138     $ 90       53 %   $ 269     $ 134       101 %
Net interest income
    312       308       1       591       599       (1 )
                     
Total net revenue
    450       398       13       860       733       17  
Provision for credit losses
    92       30       207       151       49       208  
Noninterest expense
    219       184       19       429       360       19  
                     
Income before income tax expense
    139       184       (24 )     280       324       (14 )
                     
Net income
  $ 85     $ 111       (23 )   $ 170     $ 196       (13 )
                     
 
                                               
ROE
    15 %     19 %             16 %     16 %        
ROA
    0.79       0.98               0.79       0.85          
 
                                               
Business metrics (in billions)
                                               
Auto origination volume
  $ 5.3     $ 4.5       18     $ 10.5     $ 8.8       19  
End-of-period loans and lease related assets
                                               
Loans outstanding
  $ 40.4     $ 39.4       3     $ 40.4     $ 39.4       3  
Lease financing receivables
    0.8       2.8       (71 )     0.8       2.8       (71 )
Operating lease assets
    1.8       1.3       38       1.8       1.3       38  
                     
Total end-of-period loans and lease related assets
    43.0       43.5       (1 )     43.0       43.5       (1 )
Average loans and lease related assets
                                               
Loans outstanding (a)
  $ 40.1     $ 40.3           $ 39.8     $ 40.7       (2 )
Lease financing receivables
    1.0       3.2       (69 )     1.2       3.6       (67 )
Operating lease assets
    1.7       1.2       42       1.7       1.1       55  
                     
Total average loans and lease related assets
    42.8       44.7       (4 )     42.7       45.4       (6 )
Average assets
    43.4       45.6       (5 )     43.3       46.4       (7 )
Average equity
    2.2       2.4       (8 )     2.2       2.4       (8 )
                     
 
                                               
Credit quality statistics
                                               
30+ day delinquency rate
    1.43 %     1.37 %             1.43 %     1.37 %        
Net charge-offs
                                               
Loans
  $ 62     $ 44       41     $ 120     $ 92       30  
Lease receivables
    1       1             2       4       (50 )
                     
Total net charge-offs
    63       45       40       122       96       27  
Net charge-off rate
                                               
Loans (a)
    0.62 %     0.45 %             0.61 %     0.46 %        
Lease receivables
    0.40       0.13               0.34       0.22          
Total net charge-off rate (a)
    0.61       0.43               0.60       0.44          
Nonperforming assets
  $ 131     $ 171       (23 )   $ 131     $ 171       (23 )
 
     
(a)
 
For the three and six month periods ended June 30, 2006, Average loans included Loans held-for-sale of $1.2 billion and $589 million, respectively. These amounts are excluded when calculating the Net charge-off rate. For the three and six month periods ended June 30, 2007, no Auto loans were classified as held-for-sale.
Quarterly results
Auto Finance
net income of $85 million was down by $26 million, or 23%, compared with the prior year. Net revenue of $450 million was up by $52 million, or 13%, reflecting higher automobile operating lease revenue and wider loan spreads. The provision for credit losses was $92 million, an increase of $62 million, reflecting an increase in estimated losses from low prior-year levels. Noninterest expense of $219 million increased by $35 million, or 19%, driven by increased depreciation expense on owned automobiles subject to operating leases.
Year-to-date results
Auto Finance
net income of $170 million was down by $26 million, or 13%, compared with the prior year. Net revenue of $860 million was up by $127 million, or 17%, 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. These increases were offset partially by a decrease in Auto loans and lease balances. The provision for credit losses was $151 million, an increase of $102 million, reflecting an increase in estimated losses from low prior-year levels. Noninterest expense of $429 million increased by $69 million, or 19%, 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 June 30,     Six months ended June 30,
(in millions, except ratios)   2007     2006     Change   2007     2006     Change
 
Revenue
                                               
Credit card income
  $ 682     $ 653       4 %   $ 1,281     $ 1,254       2 %
All other income
    80       49       63       172       120       43  
                     
Noninterest revenue
    762       702       9       1,453       1,374       6  
Net interest income
    2,955       2,962             5,944       5,975       (1 )
                     
Total net revenue
    3,717       3,664       1       7,397       7,349       1  
 
                                               
Provision for credit losses (a)
    1,331       1,031       29       2,560       2,047       25  
 
                                               
Noninterest expense
                                               
Compensation expense
    251       251             505       510       (1 )
Noncompensation expense
    753       810       (7 )     1,556       1,606       (3 )
Amortization of intangibles
    184       188       (2 )     368       376       (2 )
                     
Total noninterest expense
    1,188       1,249       (5 )     2,429       2,492       (3 )
                     
 
                                               
Income before income tax expense
    1,198       1,384       (13 )     2,408       2,810       (14 )
Income tax expense
    439       509       (14 )     884       1,034       (15 )
                     
Net Income
  $ 759     $ 875       (13 )   $ 1,524     $ 1,776       (14 )
                     
 
                                               
Memo: Net securitization gains (amortization)
  $ 16     $ (6 )   NM   $ 39     $ 2     NM
 
                                               
Financial metrics
                                               
ROE
    22 %     25 %             22 %     25 %        
Overhead ratio
    32       34               33       34          
 
     
(a)
 
Second quarter of 2006 included a $90 million release of a $100 million special provision, originally recorded in the third quarter of 2005, related to Hurricane Katrina.
Quarterly results
Net income of $759 million was down by $116 million, or 13%, 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 $148.0 billion increased by $8.7 billion, or 6%, from the prior year. Average managed loans of $147.4 billion increased by $10.2 billion, or 7%, from the prior year.
Net managed revenue of $3.7 billion was up by $53 million, or 1%, from the prior year. Net interest income of $3.0 billion was flat compared with the prior year. Net interest income was negatively affected 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); higher charge-offs, which resulted in increased revenue reversals; and increased cost of funds on growth in introductory and transactor balances. These decreases in net interest income were offset by increased average loans and higher fees. Noninterest revenue of $762 million was up by $60 million, or 9%, from the prior year. The increase reflects a higher level of fee-based revenue and increased interchange income, benefiting from 4% higher charge volume, primarily offset by higher volume-driven payments to partners and increased rewards expense (both of which are netted against interchange income). Charge volume reflects an approximate 10% growth rate in sales volume offset partially by a lower level of balance transfers, reflecting a more targeted marketing effort.

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The managed provision for credit losses was $1.3 billion, up by $300 million, or 29%, 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, and the release of $90 million of provision related to Hurricane Katrina. Credit quality remained stable with a managed net charge-off rate for the quarter of 3.62%, up from 3.28% in the prior year. The 30-day managed delinquency rate was 3.00%, down from 3.14% in the prior year.
Noninterest expense of $1.2 billion was down by $61 million, or 5%, compared with the prior year, primarily due to lower marketing expense and lower fraud-related expense, partially offset by higher volume-related expense.
Year-to-date results
Net income of $1.5 billion was down by $252 million, or 14%, 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 $148.0 billion increased by $8.7 billion, or 6%, from the prior year, benefiting from organic growth. Average managed loans of $148.4 billion increased by $10.8 billion, or 8%, from the prior year, benefiting from organic growth and loan portfolio acquisitions.
Net managed revenue of $7.4 billion was up by $48 million, or 1%, from the prior year. Net interest income of $5.9 billion was down by $31 million, or 1%, compared with the prior year. Net interest income was negatively impacted by increased cost of funds on growth in introductory, transactor and promotional balances; higher charge-offs, which resulted in increased revenue reversals; and the discontinuation of certain billing practices (including the elimination of certain over-limit fees and the two-cycle method for calculating finance charges). These decreases in net interest income were partially offset by increased average loans and higher fees. Noninterest revenue of $1.5 billion was up by $79 million, or 6%, from the prior year. The increase reflects a higher level of fee-based revenue and increased interchange income, benefiting from 7% higher charge volume, primarily offset by higher volume-driven payments to partners and increased rewards expense (both of which are netted against interchange income). Charge volume reflects an approximate 10% growth rate in sales volume offset partially by a lower level of balance transfers, reflecting a more targeted marketing effort.
The managed provision for credit losses was $2.6 billion, up by $513 million, or 25%, 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 3.59%, up from 3.13% in the prior year. The 30-day managed delinquency rate was 3.00%, down from 3.14% in the prior year.
Noninterest expense of $2.4 billion was down by $63 million, or 3%, compared with the prior year, primarily due to lower marketing expense and lower fraud-related expense, partially offset by higher volume-related expense.

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Selected metrics   Three months ended June 30,     Six months ended June 30,
(in millions, except headcount, ratios and where                                    
otherwise noted)   2007     2006     Change   2007     2006     Change
 
% of average managed outstandings:
                                               
Net interest income
    8.04 %     8.66 %             8.08 %     8.76 %        
Provision for credit losses
    3.62       3.01               3.48       3.00          
Noninterest revenue
    2.07       2.05               1.97       2.01          
Risk adjusted margin (a)
    6.49       7.70               6.57       7.77          
Noninterest expense
    3.23       3.65               3.30       3.65          
Pretax income (ROO)
    3.26       4.05               3.27       4.12          
Net income
    2.06       2.56               2.07       2.60          
 
                                               
Business metrics
                                               
Charge volume (in billions)
  $ 88.0     $ 84.4       4 %   $ 169.3     $ 158.7       7 %
Net accounts opened (in thousands) (b)
    3,706       24,573       (85 )     7,145       27,291       (74 )
Credit cards issued (in thousands)
    150,883       136,685       10       150,883       136,685       10  
Number of registered Internet customers
(in millions)
    24.6       19.1       29       24.6       19.1       29  
Merchant acquiring business (c)
Bank card volume (in billions)
  $ 179.7     $ 166.3       8     $ 343.3     $ 314.0       9  
Total transactions (in millions)
    4,811       4,476       7       9,276       8,606       8  
 
                                               
Selected ending balances
                                               
Loans:
                                               
Loans on balance sheets
  $ 80,495     $ 72,961       10     $ 80,495     $ 72,961       10  
Securitized loans
    67,506       66,349       2       67,506       66,349       2  
                     
Managed loans
  $ 148,001     $ 139,310       6     $ 148,001     $ 139,310       6  
                     
 
                                               
Selected average balances
                                               
Managed assets
  $ 154,406     $ 144,284       7     $ 155,333     $ 145,134       7  
Loans:
                                               
Loans on balance sheets
  $ 79,000     $ 68,185       16     $ 80,458     $ 68,319       18  
Securitized loans
    68,428       69,005       (1 )     67,959       69,287       (2 )
                     
Managed loans
  $ 147,428     $ 137,190       7     $ 148,417     $ 137,606       8  
                     
Equity
  $ 14,100     $ 14,100           $ 14,100     $ 14,100        
 
                                               
Headcount
    18,913       18,753       1       18,913       18,753       1  
 
                                               
Managed credit quality statistics
                                               
Net charge-offs
  $ 1,331     $ 1,121       19     $ 2,645     $ 2,137       24  
Net charge-off rate
    3.62 %     3.28 %             3.59 %     3.13 %        
Managed delinquency ratios
                                               
30+ days
    3.00 %     3.14 %             3.00 %     3.14 %        
90+ days
    1.42       1.52               1.42       1.52          
 
                                               
Allowance for loan losses
  $ 3,096     $ 3,186       (3 )   $ 3,096     $ 3,186       (3 )
Allowance for loan losses to period-end loans
    3.85 %     4.37 %             3.85 %     4.37 %        
 
     
(a)
 
Represents Total net revenue less Provision for credit losses.
(b)
 
Second quarter of 2006 included approximately 21 million accounts from the acquisition of the Kohl’s private label portfolio.
(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 June 30,     Six months ended June 30,
(in millions)   2007     2006     Change   2007     2006     Change
 
Income statement data (a)
                                               
Credit card income
                                               
Reported basis for the period
  $ 1,470     $ 1,590       (8 )%   $ 2,815     $ 3,316       (15 )%
Securitization adjustments
    (788 )     (937 )     16       (1,534 )     (2,062 )     26  
                     
Managed credit card income
  $ 682     $ 653       4     $ 1,281     $ 1,254       2  
                     
 
                                               
Net interest income
                                               
Reported basis for the period
  $ 1,577     $ 1,464       8     $ 3,227     $ 2,903       11  
Securitization adjustments
    1,378       1,498       (8 )     2,717       3,072       (12 )
                     
Managed net interest income
  $ 2,955     $ 2,962           $ 5,944     $ 5,975       (1 )
                     
 
                                               
Total net revenue
                                               
 
                                               
Reported basis for the period
  $ 3,127     $ 3,103       1     $ 6,214     $ 6,339       (2 )
Securitization adjustments
    590       561       5       1,183       1,010       17  
                     
Managed total net revenue
  $ 3,717     $ 3,664       1     $ 7,397     $ 7,349       1  
                     
 
                                               
Provision for credit losses
                                               
 
                                               
Reported basis for the period (b)
  $ 741     $ 470       58     $ 1,377     $ 1,037       33  
Securitization adjustments
    590       561       5       1,183       1,010       17  
                     
Managed provision for credit losses (b)
  $ 1,331     $ 1,031       29     $ 2,560     $ 2,047       25  
                     
Balance sheet – average balances (a)
                                               
Total average assets
                                               
Reported basis for the period
  $ 88,486     $ 77,371       14     $ 89,814     $ 77,901       15  
Securitization adjustments
    65,920       66,913       (1 )     65,519       67,233       (3 )
                     
Managed average assets
  $ 154,406     $ 144,284       7     $ 155,333     $ 145,134       7  
                     
 
                                               
Credit quality statistics (a)
                                               
 
                                               
Net charge-offs
                                               
Reported net charge-offs data for the period
  $ 741     $ 560       32     $ 1,462     $ 1,127       30  
Securitization adjustments
    590       561       5       1,183       1,010       17  
                     
Managed net charge-offs
  $ 1,331     $ 1,121       19     $ 2,645     $ 2,137       24  
 
     
(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 treated 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 excluded the impact of credit card securitizations on Total net revenue, the Provision for credit losses, net charge-offs and loan receivables. Securitization did not change reported net income versus managed earnings; however, it did affect the classification of items on the Consolidated statements of income and Consolidated balance sheets. For further information, see Explanation and reconciliation of the Firm’s use of non-GAAP measures on pages 13 16 of this Form 10-Q.
(b)
 
Second quarter of 2006 included a $90 million release of a $100 million special provision, originally recorded in the third quarter of 2005, related to Hurricane Katrina.

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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.
                                                 
Selected income statement data   Three months ended June 30,     Six months ended June 30,
(in millions, except ratios)   2007     2006     Change   2007     2006     Change
 
Revenue
                                               
Lending & deposit related fees
  $ 158     $ 147       7 %   $ 316     $ 289       9 %
Asset management, administration and commissions
    21       16       31       44       31       42  
All other income (a)
    133       111       20       287       187       53  
                     
Noninterest revenue
    312       274       14       647       507       28  
Net interest income
    695       675       3       1,363       1,342       2  
                     
Total net revenue
    1,007       949       6       2,010       1,849       9  
 
                                               
Provision for credit losses
    45       (12 )   NM     62       (5 )   NM
 
                                               
Noninterest expense
                                               
Compensation expense
    182       179       2       362       376       (4 )
Noncompensation expense
    300       302       (1 )     590       587       1  
Amortization of intangibles
    14       15       (7 )     29       31       (6 )
                     
Total noninterest expense
    496       496             981       994       (1 )
                     
Income before income tax expense
    466       465             967       860       12  
Income tax expense
    182       182             379       337       12  
                     
Net income
  $ 284     $ 283           $ 588     $ 523       12  
                     
 
                                               
Financial ratios
                                               
ROE
    18 %     21 %             19 %     19 %        
Overhead ratio
    49       52               49       54          
 
     
(a)
  IB-related and commercial card revenues are included in All other income.
Quarterly results
Net income of $284 million was flat compared with the prior year, as an increase in net revenue was offset by higher provision for credit losses.
Net revenue was $1.0 billion, up by $58 million, or 6%, from the prior year. Net interest income of $695 million was up by $20 million, or 3%, from the prior year. The increase was 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 liability and loan portfolios. Noninterest revenue of $312 million was up by $38 million, or 14%, from the prior year, primarily due to higher investment banking revenue and increased deposit-related fees.
On a segment basis, Middle Market Banking revenue of $653 million increased by $19 million, or 3%, from the prior year, due to The Bank of New York transaction and growth in investment banking revenue. Mid-Corporate Banking revenue of $197 million increased by $36 million, or 22%, reflecting higher lending, investment banking and treasury services revenue. Real Estate Banking revenue of $109 million decreased by $5 million, or 4%.
Provision for credit losses was $45 million compared with a benefit of $12 million in the prior year. The increase in the allowance for credit losses reflects portfolio activity. The allowance for loan losses to average loans was 2.63% in the current quarter compared with 2.68% in the prior year; nonperforming loans of $135 million decreased by $90 million, or 40%, from the prior year.
Noninterest expense of $496 million was flat compared with the prior year.
Year-to-date results
Net income of $588 million increased by $65 million, or 12%, from the prior year due to higher revenues, partially offset by higher provision for credit losses.
Net revenue of $2.0 billion increased by $161 million, or 9%. Net interest income of $1.4 billion increased by $21 million, or 2%, 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 liability and

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loan portfolios. Noninterest revenue was $647 million, up by $140 million, or 28%, due to higher IB-related revenue, 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 of $1.3 billion increased by $57 million, or 5%, primarily due to growth in investment banking revenue and the Bank of New York transaction. Mid-Corporate Banking revenue of $409 million increased by $111 million, or 37%, reflecting higher investment banking, lending revenue and gains on sales of securities acquired in the satisfaction debt. Real Estate Banking revenue of $211 million decreased by $8 million, or 4%.
Provision for credit losses was $62 million compared to a net recovery of $5 million in the prior year. The increase in the allowance for credit losses reflects portfolio activity. The allowance for loan losses to average loans was 2.67% compared with 2.72% in the prior year.
Noninterest expenses of $981 million decreased by $13 million, or 1%, due to the absence of prior-year expense from the adoption of SFAS 123R primarily offset by expense related to The Bank of New York transaction.
                                                 
Selected metrics   Three months ended June 30,     Six months ended June 30,
(in millions, except ratio and headcount data)   2007     2006     Change   2007     2006     Change
 
Revenue by product:
                                               
Lending
  $ 348     $ 331       5 %   $ 696     $ 650       7 %
Treasury services
    569       566       1       1,125       1,116       1  
Investment banking
    82       66       24       158       106       49  
Other
    8       (14 )   NM     31       (23 )   NM
                     
Total Commercial Banking revenue
  $ 1,007     $ 949       6     $ 2,010     $ 1,849       9  
                     
 
                                               
IB revenues, gross (a)
  $ 236     $ 186       27     $ 467     $ 300       56  
                     
 
                                               
Revenue by business:
                                               
Middle Market Banking
  $ 653     $ 634       3     $ 1,314     $ 1,257       5  
Mid-Corporate Banking
    197       161       22       409       298       37  
Real Estate Banking
    109       114       (4 )     211       219       (4 )
Other
    48       40       20       76       75       1  
                     
Total Commercial Banking revenue
  $ 1,007     $ 949       6     $ 2,010     $ 1,849       9  
                     
 
                                               
Selected average balances
                                               
Total assets
  $ 84,687     $ 56,561       50     $ 83,622     $ 55,671       50  
Loans and leases (b)
    59,812       52,413       14       58,742       51,629       14  
Liability balances (c)
    84,187       72,556       16       82,976       71,664       16  
Equity
    6,300       5,500       15       6,300       5,500       15  
 
                                               
Average loans by business:
                                               
Middle Market Banking
  $ 37,099     $ 32,492       14     $ 36,710     $ 32,178       14  
Mid-Corporate Banking
    11,692       8,269       41       11,183       7,925       41  
Real Estate Banking
    6,894       7,515       (8 )     6,984       7,476       (7 )
Other
    4,127       4,137             3,865       4,050       (5 )
                     
Total Commercial Banking loans
  $ 59,812     $ 52,413       14     $ 58,742     $ 51,629       14  
 
                                               
Headcount
    4,295       4,320       (1 )     4,295       4,320       (1 )
 
                                               
Credit data and quality statistics:
                                               
Net charge-offs (recoveries)
  $ (8 )   $ (3 )     (167 )   $ (9 )   $ (10 )     10  
Nonperforming loans
    135       225       (40 )     135       225       (40 )
Allowance for credit losses:
                                               
Allowance for loan losses
    1,551       1,394       11       1,551       1,394       11  
Allowance for lending-related commitments
    222       157       41       222       157       41  
                     
Total allowance for credit losses
    1,773       1,551       14       1,773       1,551       14  
 
                                               
Net charge-off (recovery) rate (b)
    (0.05 )%     (0.02 )%             (0.03 )%     (0.04 )%        
Allowance for loan losses to average loans (b)
    2.63       2.68               2.67       2.72          
Allowance for loan losses to nonperforming loans
    1,149       620               1,149       620          
Nonperforming loans to average loans
    0.23       0.43               0.23       0.44          
 
     
(a)
  Represents the total revenue related to investment banking products sold to CB clients.
(b)
  Average loans include Loans held-for-sale of $741 million and $334 million for the quarters ended June 30, 2007 and 2006, respectively, and $609 million and $301 million for year-to-date 2007 and 2006, respectively. These amounts are excluded when calculating the Net charge-off (recovery) 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 June 30,     Six months ended June 30,
(in millions, except ratios)   2007     2006     Change   2007     2006     Change
 
Revenue
                                               
Lending & deposit related fees
  $ 219     $ 184       19 %   $ 432     $ 366       18 %
Asset management, administration and commissions
    828       683       21       1,514       1,333       14  
All other income
    184       178       3       309       324       (5 )
                     
Noninterest revenue
    1,231       1,045       18       2,255       2,023       11  
Net interest income
    510       543       (6 )     1,012       1,050       (4 )
                     
Total net revenue
    1,741       1,588       10       3,267       3,073       6  
 
                                               
Provision for credit losses
          4     NM     6           NM
Credit reimbursement to IB (a)
    (30 )     (30 )           (60 )     (60 )      
 
                                               
Noninterest expense
                                               
Compensation expense
    609       537       13       1,167       1,086       7  
Noncompensation expense
    523       493       6       1,025       973       5  
Amortization of intangibles
    17       20       (15 )     32       39       (18 )
                     
Total noninterest expense
    1,149       1,050       9       2,224       2,098       6  
                     
 
                                               
Income before income tax expense
    562       504       12       977       915       7  
Income tax expense
    210       188       12       362       337       7  
                     
 
                                               
Net income
  $ 352     $ 316       11     $ 615     $ 578       6  
                     
Financial ratios
                                               
ROE
    47 %     58 %             41 %     49 %        
Overhead ratio
    66       66               68       68          
Pretax margin ratio (b)
    32       32               30       30          
 
     
(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 $352 million, up by $36 million, or 11%, from the prior year. The increase was driven by record revenue partially offset by higher compensation expense.
Net revenue was a record $1.7 billion, up by $153 million, or 10%, from the prior year. Worldwide Securities Services net revenue of $1.0 billion was up by $135 million, or 15%, driven by increased product usage by new and existing clients, market appreciation, and seasonally strong activity in securities lending and depositary receipts. These benefits were offset partially by lower foreign exchange revenue, as a result of narrower-market spreads. Treasury Services net revenue of $720 million was up by $18 million, or 3%, driven by volume increases in clearing, ACH and commercial cards, partially offset 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 $171 million, or 8%. Treasury Services firmwide net revenue grew to $1.4 billion, up by $36 million, or 3%.
Noninterest expense was $1.1 billion, up by $99 million, or 9%, from the prior year. The increase was due largely to higher compensation expense related to business and volume growth, as well as investment in new product platforms.
Year-to-date results
Net income was $615 million, up by $37 million, or 6% from the prior year. The increase was driven by record revenue from seasonally strong activity in securities lending and depositary receipts, offset by higher compensation expense driven by increased business volumes.
Net revenue was $3.3 billion, up by $194 million, or 6%, from the prior year. Worldwide Securities Services net revenue of $1.9 billion was up by $180 million, or 11%, driven by increased product usage by new and existing clients, market appreciation, and seasonally strong activity in securities lending and depositary receipts. These benefits were offset partially by lower foreign exchange revenue as a result of narrower market spreads. Treasury Services net revenue of $1.4 billion was up by $14 million, or 1%, driven by volume increases in clearing, ACH and cards, partially offset 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 $4.5 billion, up by $230 million, or 5%. Treasury Services firmwide net revenue grew to $2.7 billion, up by $50 million, or 2%.

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Noninterest expense was $2.2 billion, up by $126 million, or 6%. The increase was largely due to higher compensation expense related to business and volume growth as well as investment in new product platforms.
                                                 
Selected metrics   Three months ended June 30,     Six months ended June 30,
(in millions, except headcount, ratio data and                                    
where otherwise noted)   2007     2006     Change   2007     2006     Change
 
Revenue by business
                                               
Treasury Services
  $ 720     $ 702       3 %   $ 1,409     $ 1,395       1 %
Worldwide Securities Services
    1,021       886       15       1,858       1,678       11  
                     
Total net revenue
  $ 1,741     $ 1,588       10     $ 3,267     $ 3,073       6  
 
                                               
Business metrics
                                               
Assets under custody (in billions)
  $ 15,203     $ 11,536       32     $ 15,203     $ 11,536       32  
Number of:
                                               
US$ ACH transactions originated
(in millions)
    972       848       15       1,943       1,686       15  
Total US$ clearing volume
(in thousands)
    27,779       26,506       5       54,619       51,688       6  
International electronic funds transfer volume (in thousands) (a)
    42,068       35,255       19       84,467       68,996       22  
Wholesale check volume (in millions)
    767       904       (15 )     1,538       1,756       (12 )
Wholesale cards issued (in thousands) (b)
    17,535       16,271       8       17,535       16,271       8  
Selected balance sheets (average)
                                               
Total assets
  $ 50,687     $ 31,774       60     $ 48,359     $ 30,509       59  
Loans
    20,195       14,993       35       19,575       13,972       40  
Liability balances (c)
    217,514       194,181       12       214,095       186,201       15  
Equity
    3,000       2,200       36       3,000       2,372       26  
 
                                               
Headcount
    25,206       24,100       5       25,206       24,100       5  
 
                                               
TSS firmwide metrics
                                               
Treasury Services firmwide revenue (d)
  $ 1,354     $ 1,318       3     $ 2,659     $ 2,609       2  
Treasury & Securities Services firmwide revenue (d)
    2,375       2,204       8       4,517       4,287       5  
Treasury Services firmwide overhead ratio (e)
    59 %     56 %             59 %     56 %        
Treasury & Securities Services firmwide overhead ratio (e)
    60       59               61       61          
Treasury Services firmwide liability balances (average) (f)
  $ 189,214     $ 161,866       17     $ 187,930     $ 158,662       18  
Treasury & Securities Services firmwide liability balances (average) (f)
    301,701       265,398       14       297,072       256,910       16  
 
     
(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 the IB for TSS-related FX activity.
                                                 
    Three months ended June 30,     Six months ended June 30,
(in millions)   2007     2006     Change   2007     2006     Change
 
Treasury Services revenue reported in CB
  $ 569     $ 566       1 %   $ 1,125     $ 1,116       1 %
Treasury Services revenue reported in other lines of business
    65       50       30       125       98       28  
 
     
 
 
TSS firmwide FX revenue, which include FX revenue recorded in TSS and FX revenue associated with TSS customers who are FX customers of the IB, was $139 million and $146 million for the quarters ended June 30, 2007 and 2006, respectively, and $251 million and $264 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 the IB for TSS-related FX activity were not included in this ratio.
(f)
 
Firmwide liability balances included TS’ 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 June 30,     Six months ended June 30,
(in millions, except ratios)   2007     2006     Change   2007     2006     Change
 
Revenue
                                               
Asset management, administration and commissions
  $ 1,671     $ 1,279       31 %   $ 3,160     $ 2,501       26 %
All other income
    173       93       86       343       209       64  
                     
Noninterest revenue
    1,844       1,372       34       3,503       2,710       29  
Net interest income
    293       248       18       538       494       9  
                     
Total net revenue
    2,137       1,620       32       4,041       3,204       26  
 
                                               
Provision for credit losses
    (11 )     (7 )     (57 )     (20 )     (14 )     (43 )
 
                                               
Noninterest expense
                                               
Compensation expense
    879       669       31       1,643       1,351       22  
Noncompensation expense
    456       390       17       907       784       16  
Amortization of intangibles
    20       22       (9 )     40       44       (9 )
                     
Total noninterest expense
    1,355       1,081       25       2,590       2,179       19  
                     
Income before income tax expense
    793       546       45       1,471       1,039       42  
Income tax expense
    300       203       48       553       383       44  
                     
Net income
  $ 493     $ 343       44     $ 918     $ 656       40  
                     
 
                                               
Financial ratios
                                               
ROE
    53 %     39 %             49 %     38 %        
Overhead ratio
    63       67               64       68          
Pretax margin ratio (a)
    37       34               36       32          
 
                                               
Selected metrics
                                               
Revenue by client segment
                                               
Private bank
  $ 646     $ 469       38 %   $ 1,206     $ 910       33 %
Institutional
    617       449       37       1,168       884       32  
Retail
    602       446       35       1,129       888       27  
Private client services
    272       256       6       538       522       3  
                     
Total net revenue
  $ 2,137     $ 1,620       32     $ 4,041     $ 3,204       26  
 
     
(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 $493 million, up by $150 million, or 44%, from the prior year. Results benefited from increased revenue, partially offset by higher compensation expense.
Net revenue was a record $2.1 billion, up by $517 million, or 32%, from the prior year. Noninterest revenue, principally fees and commissions, of $1.8 billion was up by $472 million, or 34%. This increase was due largely to increased assets under management and higher performance and placement fees. Net interest income of $293 million was up by $45 million, or 18%, from the prior year, largely due to higher loan and deposit balances.
Private Bank revenue grew 38%, to $646 million, due to higher asset management and placement fees, and higher loan and deposit balances. Institutional revenue grew 37%, to $617 million, due to net asset inflows and performance fees. Retail revenue grew 35%, to $602 million, primarily due to net asset inflows and market appreciation. Private Client Services revenue grew 6%, to $272 million, due to increased revenue from higher assets under management and higher deposit balances.
Provision for credit losses was a benefit of $11 million compared with a benefit of $7 million in the prior year.
Noninterest expense of $1.4 billion was up by $274 million, or 25%, 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 $918 million, up by $262 million, or 40%, from the prior year. Results benefited from increased revenue and absence of prior-year expense from adoption of SFAS 123R, partially offset by higher compensation expense.
Net revenue was a record $4.0 billion, up by $837 million, or 26%, from the prior year. Noninterest revenue, principally fees and commissions, of $3.5 billion was up by $793 million, or 29%. This increase was due largely to increased assets under management and higher performance and placement fees. Net interest income of $538 million was up by $44 million, or 9%, from the prior year, primarily due to higher loan and deposit balances, partially offset by a shift to narrower–spread deposit products.
Private Bank revenue grew 33%, to $1.2 billion, due to higher asset management and placement fees, and higher loan and deposit balances. Institutional revenue grew 32%, to $1.2 billion, due to net asset inflows and performance fees. Retail revenue grew 27%, to $1.1 billion, primarily due to net asset inflows and market appreciation. Private Client Services revenue grew 3%, to $538 million, due to increased revenue from higher assets under management and higher deposit balances, partially offset by a shift to narrower-spread deposit products.
Provision for credit losses was a benefit of $20 million compared with a benefit of $14 million in the prior year.
Noninterest expense of $2.6 billion was up by $411 million, or 19%, from the prior year. The increase was due largely to higher compensation, 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                                    
(in millions, except headcount, ratios and   Three months ended June 30,     Six months ended June 30,
ranking data, and where otherwise noted)   2007     2006     Change   2007     2006     Change
 
Number of:
                                               
Client advisors
    1,582       1,486       6 %     1,582       1,486       6 %
Retirement planning services participants
    1,477,000       1,361,000       9       1,477,000       1,361,000       9  
 
                                               
% of customer assets in 4 & 5 Star Funds (a)
    65 %     56 %     16       65 %     56 %     16  
% of AUM in 1st and 2nd quartiles: (b)
                                               
1 year
    65 %     71 %     (8 )     65 %     71 %     (8 )
3 years
    77 %     75 %     3       77 %     75 %     3  
5 years
    76 %     81 %     (6 )     76 %     81 %     (6 )
 
                                               
Selected balance sheets data (average)
                                               
Total assets
  $ 51,710     $ 43,228       20     $ 48,779     $ 42,126       16  
Loans (c)
    28,695       25,807       11       27,176       25,148       8  
Deposits
    55,981       51,583       9       55,402       49,834       11  
Equity
    3,750       3,500       7       3,750       3,500       7  
 
                                               
Headcount
    14,108       12,786       10       14,108       12,786       10  
 
                                               
Credit data and quality statistics
                                               
Net charge-offs (recoveries)
  $ (5 )   $ (4 )     (25 )   $ (5 )   $ 3     NM
Nonperforming loans
    21       76       (72 )     21       76       (72 )
Allowance for loan losses
    105       117       (10 )     105       117       (10 )
Allowance for lending-related commitments
    7       3       133       7       3       133  
 
                                               
Net charge-off (recovery) rate
    (0.07 )%     (0.06 )%             (0.04 )%     0.02 %        
Allowance for loan losses to average loans
    0.37       0.45               0.39       0.47          
Allowance for loan losses to nonperforming loans
    500       154               500       154          
Nonperforming loans to average loans
    0.07       0.29               0.08       0.30          
 
     
(a)
 
Derived from Morningstar for the United States; Micropal for the United Kingdom, Luxembourg, Hong Kong and Taiwan; and Nomura for Japan.
(b)
 
Quartile rankings sourced from Lipper for the United States and Taiwan; Micropal for the United Kingdom, Luxembourg and Hong Kong; and Nomura for Japan.
(c)
 
As of January 1, 2007, $5.3 billion of held-for-investment prime mortgage loans were transferred from AM to Treasury within the Corporate segment. Although the loans, together with the responsibility for the investment management of the portfolio, were transferred to Treasury, the transfer has no impact on the financial results of AM.

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Assets under supervision
Assets under supervision were $1.5 trillion, up 21%, or $259 billion, from the prior year. Assets under management were $1.1 trillion, up 23%, or $211 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 and alternative products) and the Private Bank segment (primarily in liquidity and alternative products); and from market appreciation. Custody, brokerage, administration and deposit balances were $363 billion, up by $48 billion.
                 
ASSETS UNDER SUPERVISION (a) (in billions)            
As of June 30,   2007     2006  
 
Assets by asset class
               
Liquidity (b)
  $ 333     $ 247  
Fixed income
    190       172  
Equities & balanced
    467       393  
Alternatives
    119       86  
 
Total Assets under management
    1,109       898  
Custody/brokerage/administration/deposits
    363       315  
 
Total Assets under supervision
  $ 1,472     $ 1,213  
 
 
               
Assets by client segment
               
Institutional
  $ 565     $ 484  
Private Bank
    185       143  
Retail
    300       219  
Private Client Services
    59       52  
 
Total Assets under management
  $ 1,109     $ 898  
 
Institutional
  $ 566     $ 486  
Private Bank
    402       331  
Retail
    393       295  
Private Client Services
    111       101  
 
Total Assets under supervision
  $ 1,472     $ 1,213  
 
 
               
Assets by geographic region
               
U.S./Canada
  $ 700     $ 577  
International
    409       321  
 
Total Assets under management
  $ 1,109     $ 898  
 
U.S./Canada
  $ 971     $ 828  
International
    501       385  
 
Total Assets under supervision
  $ 1,472     $ 1,213  
 
 
               
Mutual fund assets by asset class
               
Liquidity
  $ 268     $ 178  
Fixed income
    49       47  
Equity
    235       194  
 
Total mutual fund assets
  $ 552     $ 419  
 
     
(a)
 
Excludes Assets under management of American Century Companies, Inc, in which the Firm has 44% ownership.
(b)
 
In the third quarter of 2006, $19 billion of assets under management were reclassified into liquidity from other asset classes. Prior-period data was not reclassified.
                                 
Assets under management rollforward   Three months ended June 30,     Six months ended June 30,
(in billions)   2007     2006     2007     2006  
 
Beginning balance
  $ 1,053     $ 873     $ 1,013     $ 847  
Flows:
                               
Liquidity
    12       10       19       5  
Fixed income
    6       6       8       6  
Equities, balanced and alternatives
    12       13       22       26  
Market/performance/other impacts
    26       (4 )     47       14  
 
Ending balance
  $ 1,109     $ 898     $ 1,109     $ 898  
 
 
                               
Assets under supervision rollforward
                               
Beginning balance
  $ 1,395     $ 1,197     $ 1,347     $ 1,149  
Net asset flows
    38       33       65       45  
Market/performance/other impacts
    39       (17 )     60       19  
 
Ending balance
  $ 1,472     $ 1,213     $ 1,472     $ 1,213  
 

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CORPORATE
 
For a discussion of the business profile of Corporate, see pages 53–54 of JPMorgan Chase’s 2006 Annual Report.
The transaction with The Bank of New York closed on October 1, 2006. As a result of this transaction, select corporate trust businesses were transferred from TSS to the Corporate segment and are reported in discontinued operations for 2006.
                                                 
Selected income statement data   Three months ended June 30,     Six months ended June 30,
(in millions, except headcount)   2007     2006     Change   2007     2006     Change
 
Revenue
                                               
Principal transactions (a)(b)
  $ 1,372     $ 551       149 %   $ 2,697     $ 750       260 %
Securities gains (losses)
    (227 )     (492 )     54       (235 )     (650 )     64  
All other income (c)
    90       231       (61 )     158       333       (53 )
                     
Noninterest revenue
    1,235       290       326       2,620       433     NM
Net interest income
    (173 )     (355 )     51       (290 )     (902 )     68  
                     
Total net revenue
    1,062       (65 )   NM     2,330       (469 )   NM
 
                                               
Provision for credit losses
    3           NM     6           NM
 
                                               
Noninterest expense
                                               
Compensation expense (b)
    695       770       (10 )     1,471       1,455       1  
Noncompensation expense (d)
    818       336       143       1,374       948       45  
Merger costs
    64       86       (26 )     126       157       (20 )
                     
Subtotal
    1,577       1,192       32       2,971       2,560       16  
Net expenses allocated to other businesses
    (1,075 )     (1,036 )     (4 )     (2,115 )     (2,069 )     (2 )
                     
Total noninterest expense
    502       156       222       856       491       74  
                     
Income (loss) from continuing operations before income tax expense
    557       (221 )   NM     1,468       (960 )   NM
Income tax expense (benefit)
    175       (181 )   NM     455       (500 )   NM
                     
Income (loss) from continuing operations
    382       (40 )   NM     1,013       (460 )   NM
Income from discontinued operations (e)
          56     NM           110     NM
                     
Net income (loss)
  $ 382     $ 16     NM   $ 1,013     $ (350 )   NM
                     
 
                                               
Total net revenue
                                               
Private equity (a) (b)
  $ 1,293     $ 500       159     $ 2,546     $ 704       262  
Treasury and Corporate other
    (231 )     (565 )     59       (216 )     (1,173 )     82  
                     
Total net revenue
  $ 1,062     $ (65 )   NM   $ 2,330     $ (469 )   NM
                     
 
                                               
Net income (loss)
                                               
Private equity (a)
  $ 702     $ 293       140     $ 1,400     $ 396       254  
Treasury and Corporate other
    (280 )     (280 )           (309 )     (759 )     59  
Merger costs
    (40 )     (53 )     25       (78 )     (97 )     20  
                     
Income (loss) from continuing operations
    382       (40 )   NM     1,013       (460 )   NM
Income from discontinued operations (e)
          56     NM           110     NM
                     
Total net income (loss)
  $ 382     $ 16     NM   $ 1,013     $ (350 )   NM
                     
Headcount
    23,532       27,100       (13 )     23,532       27,100       (13 )
 
     
(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 $103 million in the second quarter of 2006 related to the sale of Mastercard shares in its initial public offering.
(d)
 
Included insurance recoveries related to settlement of the Enron and WorldCom class action litigations and for certain other material proceedings of $260 million and $358 million for the quarter and six months ended June 30, 2006, respectively.
(e)
 
On October 1, 2006, the Firm completed the exchange of selected corporate trust businesses, including trustee, paying agent, loan agency and document management services, for the consumer, business banking and middle-market banking businesses of The Bank of New York. The results of operations of these corporate trust businesses were reported as discontinued operations for 2006.
Quarterly results
Net income was $382 million compared with $16 million in the prior year. Results benefited from higher private equity gains, lower securities losses and improved net interest income, partially offset by higher expense. Prior-year results also included Income from discontinued operations of $56 million.
Net revenue was $1.1 billion compared with negative $65 million in the prior year. Private Equity gains were $1.3 billion compared with $549 million in the prior year, benefiting from a higher level of gains and the classification of certain private equity carried interest as compensation expense. Revenue also benefited from a lower amount of securities losses and improved net interest income. Prior-year results also included a gain of $103 million related to the sale of MasterCard shares in its initial public offering.

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Noninterest expense was $502 million, up by $346 million from the prior year. The increase was driven by higher net legal costs, reflecting a lower level of recoveries and higher expense, including settlement costs relating to certain copper antitrust litigation. In addition, expense increased due to the classification of certain private equity carried interest as compensation expense. The increase in Noninterest expense was offset partially by lower compensation expense and business efficiencies.
Year-to-date results
Net income was $1.0 billion compared with a net loss of $350 million. Results benefited from higher private equity gains, improved net interest income and lower securities losses, partially offset by higher expense. Prior-year results also included Income from discontinued operations of $110 million.
Net revenue was $2.3 billion compared with a negative $469 million in the prior year. Private Equity gains were $2.6 billion compared with $786 million in the prior year, benefiting from 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. Revenue also benefited from improved net interest income and a lower amount of securities losses. Prior-year results also included a gain of $103 million related to the sale of Mastercard shares in its initial public offering.
Noninterest expense was $856 million compared with $491 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. The increase in Noninterest expense was offset partially by business efficiencies.
                                                 
Selected income statement and balance sheet data   Three months ended June 30,     Six months ended June 30,  
(in millions)   2007     2006     Change   2007     2006     Change
 
Treasury
                                               
Securities gains (losses) (a)
  $ (227 )   $ (492 )     54 %   $ (235 )   $ (650 )     64 %
Investment securities portfolio (average)
    87,760       63,714       38       87,102       51,917       68  
Investment securities portfolio (ending)
    86,821       61,990       40       86,821       61,990       40  
Mortgage loans (average) (b)
    26,830           NM     26,041           NM
Mortgage loans (ending) (b)
    27,299           NM     27,299           NM
 
                                               
Private equity
                                               
Realized gains
  $ 985     $ 568       73     $ 1,708     $ 775       120  
Unrealized gains (losses)
    290       (25 )   NM     811       (11 )   NM
                     
Total direct investments (c)
    1,275       543       135       2,519       764       230  
Third-party fund investments
    53       6     NM     87       22       295  
                     
Total private equity gains (d)
  $ 1,328     $ 549       142     $ 2,606     $ 786       232  
 
                         
Private equity portfolio information (e)                  
Direct investments   June 30, 2007   December 31, 2006   Change
 
Publicly-held securities
                       
Carrying value
  $ 465     $ 587       (21 )%
Cost
    367       451       (19 )
Quoted public value
    600       831       (28 )
 
                       
Privately-held direct securities
                       
Carrying value
    5,247       4,692       12  
Cost
    5,228       5,795       (10 )
 
                       
Third-party fund investments (f)
                       
Carrying value
    812       802       1  
Cost
    1,067       1,080       (1 )
         
Total private equity portfolio – Carrying value
  $ 6,524     $ 6,081       7  
Total private equity portfolio – Cost
  $ 6,662     $ 7,326       (9 )
 
(a)  
Losses reflected repositioning of the Treasury investment securities portfolio.
(b)  
As of January 1, 2007, $19.4 billion and $5.3 billion of held-for-investment residential mortgage loans were transferred from RFS and AM, respectively, to the Corporate segment for risk management and reporting purposes. Although the loans, together with the responsibility for the investment management of the portfolio, were transferred to Treasury, the transfer has no impact on the financial results of Corporate.
(c)  
Private equity gains include a fair value adjustment related to the adoption of SFAS 157 in the first quarter of 2007. In addition, 2007 includes the classification 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 $742 million and $589 million at June 30, 2007 and December 31, 2006, respectively.

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The carrying value of the private equity portfolio at June 30, 2007, was $6.5 billion, up $443 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 June 30, 2007, up from 8.6% at December 31, 2006.
 
BALANCE SHEET ANALYSIS
 
                 
Selected balance sheet data (in millions)   June 30, 2007     December 31, 2006  
Assets
               
Cash and due from banks
  $ 35,449     $ 40,412  
Deposits with banks
    41,736       13,547  
Federal funds sold and securities purchased under resale agreements
    125,930       140,524  
Securities borrowed
    88,360       73,688  
Trading assets:
               
Debt and equity instruments
    391,508       310,137  
Derivative receivables
    59,038       55,601  
Securities:
               
Available-for-sale
    95,934       91,917  
Held-to-maturity
    50       58  
Loans, net of Allowance for loan losses
    457,404       475,848  
Other receivables
    31,947       27,585  
Goodwill
    45,254       45,186  
Other intangible assets
    16,193       14,852  
All other assets
    69,239       62,165  
 
Total assets
  $ 1,458,042     $ 1,351,520  
 
 
               
Liabilities
               
Deposits
  $ 651,370     $ 638,788  
Federal funds purchased and securities sold under repurchase agreements
    205,961       162,173  
Commercial paper and other borrowed funds
    54,379       36,902  
Trading liabilities:
               
Debt and equity instruments
    93,969       90,488  
Derivative payables
    61,396       57,469  
Long-term debt and trust preferred capital debt securities
    172,163       145,630  
Beneficial interests issued by consolidated variable interest entities
    14,808       16,184  
All other liabilities
    84,785       88,096  
 
Total liabilities
    1,338,831       1,235,730  
Stockholders’ equity
    119,211       115,790  
 
Total liabilities and stockholders’ equity
  $ 1,458,042     $ 1,351,520  
 
Consolidated Balance sheets overview
At June 30, 2007, the Firm’s total assets were $1.5 trillion, an increase of $106.5 billion, or 8%, from December 31, 2006. Total liabilities were $1.3 trillion, an increase of $103.1 billion, or 8%, from December 31, 2006. Stockholders’ equity was $119.2 billion, an increase of $3.4 billion, or 3% 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; and Commercial paper and other borrowed funds
The Firm utilizes Deposits with banks, Federal funds sold and securities purchased under resale agreements, Securities borrowed, Federal funds purchased and securities sold under repurchase agreements and Commercial paper and other borrowed funds as part of its liquidity management activities to manage the Firm’s cash positions and risk-based capital requirements, to maximize liquidity access and minimize funding costs. The net increase from December 31, 2006, in Deposits with banks, Federal funds sold, and Securities borrowed reflected higher levels of funds that were available for short-term investment opportunities. Securities sold under repurchase agreements and Commercial paper and other borrowed funds increased primarily due to higher short-term requirements to fund trading positions and AFS securities inventory levels, as well as growth in demand for Commercial paper. For additional information on the Firm’s Liquidity risk management, see pages 49–51 of this Form 10-Q.

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Trading assets and liabilities – debt and equity instruments
The Firm uses debt and equity trading instruments for both market-making and proprietary risk-taking activities. These instruments consist primarily of fixed income securities (including government and corporate debt), equity securities and convertible cash instruments, loans and physical commodities. The increase in trading assets from December 31, 2006, was due primarily to the generally more favorable capital markets environment, with growth in client-driven market-making activities, particularly for debt securities. In addition, a total of $35.2 billion of loans are now accounted for at fair value under SFAS 159 and classified as trading assets in the Consolidated balance sheets. These are primarily loans warehoused by the IB and certain prime mortgage loans warehoused by RFS for sale or securitization purposes. 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. The increase in derivative receivables from December 31, 2006, was related primarily to higher receivables on equity-related and interest rate derivatives due to the strength of the equities markets, as well as rising interest rates and the decline in the value of the U.S. Dollar, respectively. The increase in derivative receivables was offset partially by lower commodity receivables as a result of termination of contracts and risk management activities. 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. The increase in derivative payables was offset partially by lower commodity payables as a result of the termination of contracts and risk management activities. 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 by $4.0 billion 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 40–42 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, declined by $18.4 billion, or 4%, from December 31, 2006, primarily due to the decline of RFS 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 the 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 and the restructuring during the first quarter of 2007 of a Firm-administered multi-seller conduit, which resulted in the deconsolidation of $3.2 billion of Loans. These decreases were offset partly by an increase in wholesale lending activity, primarily in the IB. 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 $68 million increase in Goodwill primarily resulted from certain acquisitions by TSS and tax-related purchase accounting adjustments associated with the Bank One merger, partially offset by a reduction from the adoption of FIN 48. For additional information related to Goodwill, including the impact of adopting FIN 48, see Note 17 on pages 100–102 and Note 20 on page 104 of this Form 10-Q.
Other intangible assets
The Firm’s Other intangible assets consists of MSRs, purchased credit card relationships, other credit card–related intangibles, core deposit intangibles, and all other intangibles. The $1.3 billion increase in Other intangible assets partly reflects higher MSRs of $2.0 billion, primarily due to MSR additions from loan sales, MSR purchases and an increase in the MSR valuation largely attributable to increased long-term interest rates. 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–related and core deposit intangibles. For additional information on MSRs and other intangible assets, see Note 17 on pages 100–102 of this Form 10-Q.

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Deposits
The Firm’s deposits represent a liability to customers, both retail and wholesale, for funds held on their behalf. Deposits are generally classified by location (U.S. and non-U.S.), whether they are interest or noninterest-bearing, and by type (i.e., demand, money market deposit accounts (“MMDAs”), savings, time or negotiable order of withdrawal (“NOW”) accounts). Deposits provide a stable and consistent source of funding to the Firm. Deposits increased by $12.6 billion, or 2%, from December 31, 2006. These were primarily wholesale deposits driven by net growth in business volumes, in particular, interest-bearing deposits within TSS. 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.
Beneficial interests issued by consolidated variable interest entities (“VIEs”)
Beneficial interests issued by consolidated VIEs declined by $1.4 billion, or 9%, from December 31, 2006, as a result of the restructuring during the first quarter of 2007 of a Firm-administered multi-seller conduit, partially offset by new issuances by an existing consolidated VIE in the second quarter of 2007. 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 99–100 of this Form 10-Q.
Long-term debt and trust preferred capital debt securities
The Firm utilizes Long-term debt and trust preferred capital debt securities as part of its liquidity and capital management activities. Long-term debt and trust preferred capital debt securities increased by $26.5 billion, or 18%, from December 31, 2006, reflecting net new issuances, including client-driven structured notes in the 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 by $3.4 billion, or 3%, from year-end 2006 to $119.2 billion at June 30, 2007. The increase was primarily the result of Net income for the first six months of 2007, net shares issued under the Firm’s employee stock-based compensation plans, and the cumulative effect on Retained earnings of changes in accounting principles of $915 million, offset partially by stock repurchases and the declaration of cash dividends. The $915 million increase in Retained earnings resulting from the adoption of new accounting principles primarily reflected $287 million related to SFAS 157, $199 million related to SFAS 159 and $436 million related to FIN 48 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 104 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 100 of this Form 10-Q.
                 
Line of business equity   Quarterly Averages
(in billions)   2Q07     2Q06  
 
Investment Bank
  $ 21.0     $ 21.0  
Retail Financial Services
    16.0       14.3  
Card Services
    14.1       14.1  
Commercial Banking
    6.3       5.5  
Treasury & Securities Services
    3.0       2.2  
Asset Management
    3.8       3.5  
Corporate
    53.9       48.4  
 
Total common stockholders’ equity
  $ 118.1     $ 109.0  
 
Economic risk capital
JPMorgan Chase assesses its capital adequacy relative to the risks underlying the Firm’s business activities, utilizing internal risk-assessment methodologies. The Firm assigns economic capital primarily based upon four risk factors: credit risk, market risk, operational risk and private equity risk, principally for the Firm’s private equity business.
                 
Economic risk capital   Quarterly Averages
(in billions)   2Q07     2Q06  
 
Credit risk
  $ 23.5     $ 21.2  
Market risk
    9.9       10.2  
Operational risk
    5.6       5.8  
Private equity risk
    3.8       3.2  
 
Economic risk capital
    42.8       40.4  
Goodwill
    45.2       43.5  
Other (a)
    30.1       25.1  
 
Total common stockholders’ equity
  $ 118.1     $ 109.0  
 
(a)  
Reflects additional capital required, in management’s view, to meet its regulatory and debt rating objectives.
Regulatory capital
The Firm’s banking regulator, the Federal Reserve Board (“FRB”), establishes capital requirements, including well-capitalized standards for the consolidated financial holding company. The Office of the Comptroller of the Currency (“OCC”) establishes similar capital requirements and standards for the Firm’s national banks, including JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A.
In 2005, the FRB issued a final rule, which became effective April 11, 2005, that continues the inclusion of trust preferred capital debt securities in Tier 1 capital, subject to stricter quantitative limits and revised qualitative standards, and broadens the definition of restricted core capital elements. The rule provides for a transition period that ends March

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31, 2009. As an internationally active bank holding company, JPMorgan Chase is subject to the rule’s limitation on restricted core capital elements, including trust preferred capital debt securities, to 15% of total core capital elements, net of goodwill less any associated deferred tax liability. At June 30, 2007, JPMorgan Chase’s restricted core capital elements were 15% of total core capital elements.
Tier 1 capital was $85.1 billion at June 30, 2007, compared with $81.1 billion at December 31, 2006, an increase of $4.0 billion. The increase was due primarily to net income of $9.0 billion; net issuances of common stock under the Firm’s employee stock-based compensation plans of $2.4 billion; net issuances of $634 million 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. Partially offsetting these increases were decreases in Stockholders’ equity net of Accumulated other comprehensive income (loss) due to common stock repurchases of $5.9 billion and dividends declared of $2.5 billion. In addition, the change in capital reflects the exclusion of a $289 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 June 30, 2007, and December 31, 2006.
                                                         
                    Risk-     Adjusted     Tier 1   Total   Tier 1
    Tier 1     Total     weighted     average     capital   capital   leverage
(in millions, except ratios)   capital     capital     assets (c)     assets (d)     ratio   ratio   ratio
 
June 30, 2007 (a)
                                                       
JPMorgan Chase & Co.
  $ 85,096     $ 122,276     $ 1,016,031     $ 1,376,727       8.4 %     12.0 %     6.2 %
JPMorgan Chase Bank, N.A.
    71,500       100,798       917,322       1,210,657       7.8       11.0       5.9  
Chase Bank USA, N.A.
    9,444       11,369       68,520       60,961       13.8       16.6       15.5  
 
                                                       
December 31, 2006