Edgar Filing: J P MORGAN CHASE & CO

FORM 1O-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934


For the Quarter Ended March 31, 2004		Commission file number 1-5805


J.P. MORGAN CHASE & CO.
(Exact name of registrant as specified in its charter)

Delaware		13-2624428
(State or other jurisdiction of		(IRS 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.

Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes [X] No [ ]



Common Stock, $1 Par Value		2,082,430,974

Number of shares outstanding of each of the issuer’s classes of common stock on April 30, 2004.

FORM 10-Q

TABLE OF CONTENTS


		Page
Part I – Financial information

Item 1	Consolidated Financial Statements – J.P. Morgan Chase & Co.:

	Consolidated statements of income (unaudited) for the three months ended March 31, 2004 and March 31, 2003		3

	Consolidated balance sheets (unaudited) at March 31, 2004 and December 31, 2003		4

	Consolidated statements of changes in stockholders’ equity (unaudited) for the three months ended March 31, 2004 and March 31, 2003		5

	Consolidated statements of cash flows (unaudited) for the three months ended March 31, 2004 and March 31, 2003		6

	Notes to consolidated financial statements (unaudited)		7-23

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		24-73

	Glossary of Terms		74

	Important Factors That May Affect Future Results		76

Item 3	Quantitative and Qualitative Disclosures About Market Risk		76

Item 4	Controls and Procedures		76

Part II – Other information

Item 1	Legal Proceedings		77-79

Item 2	Changes in Securities and Use of Proceeds		79

Item 6	Exhibits and Reports on Form 8-K		80
BY-LAWS
CERTIFICATION
CERTIFICATION
CERTIFICATION

The Management’s Discussion and Analysis 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 J.P. Morgan Chase & Co.’s management and are subject to significant risks and uncertainties. These risks and uncertainties could cause J.P. Morgan Chase & Co.’s results to differ materially from those set forth in such forward-looking statements. Such risks and uncertainties are described herein and in J.P. Morgan Chase & Co.’s Annual Report on Form 10-K for the year-ended December 31, 2003, filed with the Securities and Exchange Commission and available at the Securities and Exchange Commission’s internet site (www.sec.gov), to which reference is hereby made.

J.P. Morgan Chase & Co. has filed a Registration Statement on Form S-4 with the SEC containing the definitive joint proxy statement/prospectus regarding the proposed merger between J.P. Morgan Chase & Co. and Bank One Corporation. Stockholders are urged to read the definitive joint proxy statement/prospectus because it contains important information. Stockholders may obtain a free copy of the definitive joint proxy statement/prospectus, as well as other filings containing information about J.P. Morgan Chase & Co. and Bank One Corporation, without charge, at the SEC’s Internet site (http://www.sec.gov). Copies of the definitive joint proxy statement/prospectus and the filings with the SEC incorporated by reference in the definitive joint proxy statement/prospectus can also be obtained, without charge, by directing a request to J.P. Morgan Chase & Co., 270 Park Avenue, New York, New York 10017, Attention: Office of the Secretary (212-270-4040), or to Bank One Corporation, 1 Bank One Plaza, Suite 0738, Chicago, Illinois 60670, Attention: Investor Relations (312-336-3013). The respective directors and executive officers of JPMorgan Chase and Bank One and other persons may be deemed to be participants in the solicitation of proxies in respect of the proposed merger. Information regarding JP Morgan Chase’s and Bank One’s directors and executive officers and a description of their direct and indirect interests, by security holdings or otherwise, is available in the definitive joint proxy statement/prospectus contained in the above-referenced Registration Statement on Form S-4.

Part I
Item 1

J.P. MORGAN CHASE & CO.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in millions, except per share data)


	Three months ended
	March 31,
	2004		2003

Noninterest revenue
Investment banking fees	$	692	$	616
Trading revenue		1,720		1,298
Fees and commissions		2,933		2,488
Private equity gains (losses)		306		(221	)
Securities gains		126		485
Mortgage fees and related income		244		433
Other revenue		126		92

Total noninterest revenue		6,147		5,191

Interest income		5,478		6,263
Interest expense		2,648		3,048

Net interest income		2,830		3,215

Revenue before provision for credit losses		8,977		8,406
Provision for credit losses		15		743

Total net revenue		8,962		7,663

Noninterest expense
Compensation expense		3,370		3,174
Occupancy expense		431		496
Technology and communications expense		819		637
Other expense		1,439		1,234

Total noninterest expense		6,059		5,541

Income before income tax expense		2,903		2,122
Income tax expense		973		722

Net income	$	1,930	$	1,400

Net income applicable to common stock	$	1,917	$	1,387

Average common shares outstanding
Basic		2,032		2,000
Diluted		2,093		2,022
Net income per common share
Basic	$	0.94	$	0.69
Diluted		0.92		0.69
Cash dividends per common share		0.34		0.34

The Notes to consolidated financial statements (unaudited) are an integral part of these statements.

Part I
Item 1 (continued)

J.P. MORGAN CHASE & CO.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions, except share data)


	March 31,			December 31,
	2004			2003

Assets
Cash and due from banks	$	19,419		$	20,268
Deposits with banks		35,600			10,175
Federal funds sold and securities purchased under resale agreements		79,414			76,868
Securities borrowed		49,881			41,834
Trading assets (including assets pledged of $109,668 at March 31, 2004, and $81,312 at December 31, 2003)		247,983			252,871
Securities:
Available-for-sale (including assets pledged of $28,489 at March 31, 2004, and $31,639 at December 31, 2003)		70,590			60,068
Held-to-maturity (Fair Value: $168 at March 31, 2004, and $186 at December 31, 2003)		157			176
Loans (net of Allowance for loan losses of $4,120 at March 31, 2004, and $4,523 at December 31, 2003)		213,510			214,995
Private equity investments		7,097			7,250
Accrued interest and accounts receivable		13,250			12,356
Premises and equipment		6,418			6,487
Goodwill		8,730			8,511
Other intangible assets		5,955			6,480
Other assets		43,074			52,573

Total assets	$	801,078		$	770,912

Liabilities
Deposits:
U.S.:
Noninterest-bearing	$	79,560		$	73,154
Interest-bearing		142,755			125,855
Non-U.S.:
Noninterest-bearing		7,868			6,311
Interest-bearing		106,703			121,172

Total deposits		336,886			326,492
Federal funds purchased and securities sold under repurchase agreements		148,526			113,466
Commercial paper		14,972			14,284
Other borrowed funds		10,414			8,925
Trading liabilities		134,186			149,448
Accounts payable, accrued expenses and other liabilities (including the Allowance for lending-related commitments of $297 at March 31, 2004, and $324 at December 31, 2003)		43,656			45,066
Beneficial interests issued by consolidated variable interest entities		7,543			12,295
Long-term debt		50,062			48,014
Junior subordinated deferrable interest debentures held by trusts that issued guaranteed capital debt securities		6,732			6,768

Total liabilities		752,977			724,758

Commitments and contingencies (see Note 18 of this Form 10-Q)

Stockholders’ equity
Preferred stock		1,009			1,009
Common stock (authorized 4,500,000,000 shares, issued 2,088,072,350 shares at March 31, 2004, and 2,044,436,509 shares at December 31, 2003)		2,088			2,044
Capital surplus		14,193			13,512
Retained earnings		30,878			29,681
Accumulated other comprehensive income (loss)		177			(30	)
Treasury stock, at cost (6,386,039 shares at March 31, 2004, and 1,816,495 shares at December 31, 2003)		(244	)		(62	)

Total stockholders’ equity		48,101			46,154

Total liabilities and stockholders’ equity	$	801,078		$	770,912

The Notes to consolidated financial statements (unaudited) are an integral part of these statements.

Part I
Item 1 (continued)

J.P. MORGAN CHASE & CO.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
(in millions, except per share data)


	Three months ended March 31,
	2004			2003

Preferred stock
Balance at beginning of year and end of period	$	1,009		$	1,009

Common stock
Balance at beginning of year		2,044			2,024
Issuance of common stock		44			8

Balance at end of period		2,088			2,032

Capital surplus
Balance at beginning of year		13,512			13,222
Shares issued and commitments to issue common stock for employee stock-based awards and related tax effects		681			(745	)

Balance at end of period		14,193			12,477

Retained earnings
Balance at beginning of year		29,681			25,851
Net income		1,930			1,400
Cash dividends declared:
Preferred stock		(13	)		(13	)
Common stock ($0.34 per share each period)		(720	)		(700	)

Balance at end of period		30,878			26,538

Accumulated other comprehensive income (loss)
Balance at beginning of year		(30	)		1,227
Other comprehensive income (loss)		207			(114	)

Balance at end of period		177			1,113

Treasury stock, at cost
Balance at beginning of year		(62	)		(1,027	)
Reissuance from treasury stock		—			1,021
Forfeitures to treasury stock		(182	)		(79	)

Balance at end of period		(244	)		(85	)

Total stockholders’ equity	$	48,101		$	43,084

Comprehensive income
Net income	$	1,930		$	1,400
Other comprehensive income (loss)		207			(114	)

Comprehensive income	$	2,137		$	1,286

The Notes to consolidated financial statements (unaudited) are an integral part of these statements.

Part I
Item 1 (continued)

J.P. MORGAN CHASE & CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in millions)


		Three months ended March 31,
		2004			2003

Operating activities
Net income		$	1,930		$	1,400
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for credit losses			15			743
Depreciation and amortization			762			777
Deferred tax provision			796			359
Investment securities gains (net)			(126	)		(485	)
Private equity unrealized (gains) losses			(159	)		217
Net change in:
Trading assets			5,090			15,010
Securities borrowed			(8,047	)		(5,045	)
Accrued interest and accounts receivable			(894	)		1,175
Other assets			9,357			(299	)
Trading liabilities			(15,296	)		(4,005	)
Accounts payable, accrued expenses and other liabilities			(1,667	)		8,150
Other, net			(120	)		(159	)

Net cash (used in) provided by operating activities			(8,359	)		17,838

Investing activities
Net change in:
Deposits with banks			(25,425	)		2,046
Federal funds sold and securities purchased under resale agreements			(2,546	)		(3,955	)
Loans due to sales			20,305			27,097
Loans due to securitizations			7,775			4,335
Other loans, net			(31,385	)		(34,187	)
Other, net			(543	)		1,561
Held-to-maturity securities:	Proceeds		19			63
	Purchases		—			—
Available-for-sale securities:	Proceeds from maturities		2,060			2,268
	Proceeds from sales		50,709			92,912
	Purchases		(62,899	)		(97,507	)
Cash used in business acquisitions			(24	)		(10	)
Proceeds from divestitures of nonstrategic businesses and assets			—			49

Net cash (used in) investing activities			(41,954	)		(5,328	)

Financing Activities
Net change in:
U.S. deposits			23,306			(1,167	)
Non-U.S. deposits			(12,912	)		(2,919	)
Federal funds purchased and securities sold under repurchase agreements			35,060			(9,262	)
Commercial paper and other borrowed funds			1,954			1,350
Other, net			15			181
Proceeds from the issuance of long-term debt and capital securities			4,943			6,636
Repayments of long-term debt and capital securities			(2,805	)		(3,873	)
Net issuance of stock and stock-based awards			543			205
Cash dividends paid			(720	)		(696	)

Net cash provided by (used in) financing activities			49,384			(9,545	)

Effect of exchange rate changes on cash and due from banks			80			46
Net (decrease) increase in cash and due from banks			(849	)		3,011
Cash and due from banks at December 31, 2003 and 2002			20,268			19,218

Cash and due from banks at March 31, 2004 and 2003		$	19,419		$	22,229
Cash interest paid		$	2,619		$	3,197
Cash income taxes paid (refunds)		$	325		$	(247	)

The Notes to consolidated financial statements (unaudited) are an integral part of these statements.

Part I
Item 1 (continued)

See Glossary of Terms on pages 74–75 of this Form 10-Q for definition of terms used throughout the Notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1 – BASIS OF PRESENTATION

The accounting and financial reporting policies of J.P. Morgan Chase & Co. (“JPMorgan Chase” or the “Firm”) and its subsidiaries conform to accounting principles generally accepted in the United States of America (“GAAP”) and prevailing industry practices for interim reporting. Additionally, where applicable, the policies conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. The unaudited consolidated financial statements prepared in conformity with GAAP require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expense and the disclosure of contingent assets and liabilities. Actual results could be different from these estimates. In addition, certain amounts in the prior periods have been reclassified to conform to the current presentation. In the opinion of management, all normal recurring adjustments have been included for a fair statement of this interim financial information. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in JPMorgan Chase’s Annual Report on Form 10-K for the year ended December 31, 2003 (“2003 Annual Report”).

NOTE 2 – BUSINESS CHANGES AND DEVELOPMENTS

Agreement to merge with Bank One Corporation

On January 14, 2004, JPMorgan Chase and Bank One Corporation (“Bank One”) announced an agreement to merge. The merger agreement, which has been approved by the boards of directors of both companies, provides for a stock-for-stock merger in which 1.32 shares of JPMorgan Chase common stock will be exchanged, on a tax-free basis, for each share of Bank One common stock; cash will be paid for fractional shares. JPMorgan Chase stockholders will keep their shares, which remain outstanding and unchanged as shares of JPMorgan Chase following the merger. The merger will be accounted for using the purchase method of accounting.

The merger, which is expected to be completed by mid-2004, is subject to approval by the stockholders of both institutions as well as U.S. federal and state and non-U.S. regulatory authorities. JPMorgan Chase and Bank One have scheduled their stockholder meetings on May 25, 2004 to vote on the proposed merger. For further information, see the Registration Statement on Form S-4 filed by JPMorgan Chase with the Securities and Exchange Commission, containing the definitive joint proxy statement/prospectus regarding the proposed merger.

NOTE 3 – TRADING ASSETS AND LIABILITIES

For a discussion of the accounting policies related to trading assets and liabilities, see Note 3 on pages 87–88 of JPMorgan Chase’s 2003 Annual Report. The following table presents Trading assets and Trading liabilities for the dates indicated:


	March 31,		December 31,
(in millions)	2004		2003

Trading assets
Debt and equity instruments:
U.S. government, federal agencies and municipal securities	$	69,293	$	62,381
Certificates of deposit, bankers’ acceptances and commercial paper		3,767		5,233
Debt securities issued by non-U.S. governments		24,925		22,654
Corporate securities and other		91,564		78,852

Total debt and equity instruments	$	189,549	$	169,120


Derivative receivables:
Interest rate	$	41,713	$	60,176
Foreign exchange		5,206		9,760
Equity		6,584		8,863
Credit derivatives		3,447		3,025
Commodity		1,484		1,927

Total derivative receivables^(a)	$	58,434	$	83,751

Total trading assets	$	247,983	$	252,871

Part I
Item 1 (continued)


Trading liabilities
Debt and equity instruments^(b)	$	80,303	$	78,222

Derivative payables:
Interest rate	$	36,852	$	49,189
Foreign exchange		5,648		10,129
Equity		6,845		8,203
Credit derivatives		3,565		2,672
Commodity		973		1,033

Total derivative payables^(a)	$	53,883	$	71,226

Total trading liabilities	$	134,186	$	149,448

(a)		Included in Trading assets and Trading liabilities are the reported receivables (unrealized gains) and payables (unrealized losses) related to derivatives. These amounts include the effect of legally enforceable master netting agreements. Effective January 1, 2004, the Firm elected to net cash paid and received under credit support annexes to legally enforceable master netting agreements.
(b)		Primarily represents securities sold, not yet purchased.

NOTE 4 – INTEREST INCOME AND INTEREST EXPENSE

Details of Interest income and Interest expense were as follows:


	Three months ended March 31,
(in millions)	2004		2003

Interest income
Loans	$	2,530	$	2,830
Securities		661		955
Trading assets		1,799		1,844
Federal funds sold and securities purchased under resale agreements		307		474
Securities borrowed		94		97
Deposits with banks		87		63

Total interest income		5,478		6,263

Interest expense
Deposits		814		1,068
Short-term and other liabilities		1,392		1,614
Long-term debt		403		366
Beneficial interests issued by consolidated variable interest entities		39		—

Total interest expense		2,648		3,048

Net interest income		2,830		3,215
Provision for credit losses		15		743

Net interest income after provision for credit losses	$	2,815	$	2,472

Part I
Item 1 (continued)

NOTE 5 – POSTRETIREMENT EMPLOYEE BENEFIT PLANS

For a discussion of JPMorgan Chase’s postretirement employee benefit plans, see Note 6 on pages 89–93 of JPMorgan Chase’s 2003 Annual Report.

The following table presents the components of net periodic benefit costs reported in the Consolidated statement of income for the Firm’s U.S. and non-U.S. defined benefit pension and postretirement benefit plans:


	Defined benefit pension plans												Postretirement
	U.S.						Non-U.S.						benefit plans^(a)
	Three months ended March 31,
(in millions)	2004			2003			2004			2003			2004			2003

Components of net periodic benefit costs
Benefits earned during the period	$	49		$	46		$	5		$	4		$	5		$	4
Interest cost on benefit obligations		67			67			22			19			19			19
Expected return on plan assets		(85	)		(78	)		(22	)		(21	)		(21	)		(21	)
Amortization of unrecognized amounts:
Prior service cost		4			2			—			—			—			—
Net actuarial loss		8			15			14			9			—			—
Settlement loss		—			—			6			2			—			—

Net periodic benefit costs reported in Compensation expense	$	43	^(b)	$	52		$	25	^(c)	$	13		$	3		$	2

(a)		Includes net periodic postretirement benefit costs of $0.3 million and $0.4 million for the three months ended March 31, 2004 and 2003, respectively, for the U.K. plan.
(b)		Decrease in net periodic benefit costs related to an increased return on assets resulting from changes in actuarial assumptions.
(c)		Increase in net periodic benefit costs related to a true-up adjustment for the U.K. plan, booked in the first quarter of 2003.

JPMorgan Chase made a cash contribution of $1.1 billion to its U.S. defined benefit pension plan on April 1, 2004, funding it to the maximum allowable amount under applicable tax law. This contribution is expected to reduce U.S. pension and other postretirement benefit expenses by approximately $64 million over the remaining nine months of 2004.

NOTE 6 – EMPLOYEE INCENTIVES

Employee stock-based incentives

For a discussion of the accounting policies relating to employee stock-based compensation, see Note 7 on pages 93–95 of JPMorgan Chase’s 2003 Annual Report.

Employee pre-tax stock-based Compensation expense recognized in reported earnings totaled $297 million and $249 million for the three months ended March 31, 2004 and 2003, respectively. The higher expense for the three months ended March 31, 2004, resulted from employee stock-based awards granted in 2004, including stock options and stock appreciation rights settled in stock, that are accounted for under SFAS 123, partially offset by the vesting of prior-year restricted stock awards and forfeitures.

The following table presents Net income and basic and diluted earnings per share as reported, and as if all outstanding awards were accounted for at fair value in each period. The lower expense from applying SFAS 123 in the three months ended March 31, 2004, compared with the three months ended March 31, 2003 resulted from the vesting of stock option awards in 2003 that were granted prior to the adoption of SFAS 123 as of January 1, 2003.


		Three months ended March 31,
(in millions, except per share data)		2004			2003

Net income as reported		$	1,930		$	1,400
Add:	Employee stock-based compensation expense originally included in reported
	net income, net of tax		178			150
Deduct:	Employee stock-based compensation expense determined under the fair value
	method for all awards, net of tax		(222	)		(263	)

Pro forma Net income		$	1,886		$	1,287


Earnings Per Share:
Basic	As reported	$	0.94		$	0.69
	Pro forma		0.92			0.64
Diluted	As reported		0.92			0.69
	Pro forma		0.89			0.63

Part I
Item 1 (continued)

Deferred compensation plan

JPMorgan Chase has a deferred compensation plan, under which employees that meet certain compensation requirements may elect to defer all or a portion of their cash incentive awards each year on a tax-deferred basis. Amounts deferred are not invested in actual funds but rather are credited with returns as if they were invested in investment choices selected by the employee. Employees may elect to receive distributions following retirement or termination of employment, or in a specified year, subject to a minimum deferral period. Employees also may elect to receive payments in a lump sum or in annual installments. The plan is unfunded. The employees’ cash incentive awards are recorded in Compensation expense in the year they are earned, with the related deferral recorded in Other liabilities. Changes in the value of the employees’ deferred compensation liability accounts are recognized in earnings in the current period. At March 31, 2004, and December 31, 2003, the deferred compensation liability was $3.9 billion and $3.7 billion, respectively.

NOTE 7 – SECURITIES

For a discussion of the accounting policies relating to Securities, see Note 9 on pages 96–97 of JPMorgan Chase’s 2003 Annual Report. The following table presents realized gains and losses from available-for-sale (“AFS”) securities:


	Three months ended March 31,
(in millions)	2004			2003

Realized gains	$	187		$	616
Realized losses		(61	)		(131	)

Net realized gains	$	126		$	485

The amortized cost and estimated fair value of AFS and HTM securities were as follows for the dates indicated:


(in millions)	March 31, 2004								December 31, 2003
			Gross		Gross						Gross		Gross
	Amortized		unrealized		unrealized		Fair		Amortized		unrealized		unrealized		Fair
Available-for-sale securities	cost		gains		losses		value		cost		gains		losses		value

U.S. government and federal agencies/ corporations obligations:
Mortgage-backed securities	$	37,086	$	131	$	296	$	36,921	$	32,248	$	101	$	417	$	31,932
Collateralized mortgage obligations		1,200		2		—		1,202		1,825		3		—		1,828
U.S. treasuries		17,686		105		71		17,720		11,617		15		168		11,464
Obligations of state and political subdivisions		3,008		148		3		3,153		2,841		171		52		2,960
Debt securities issued by non-U.S. governments		7,188		18		11		7,195		7,232		47		41		7,238
Corporate debt securities		868		32		5		895		818		23		8		833
Equity securities		1,444		17		4		1,457		1,393		24		11		1,406
Other, primarily asset-backed securities^(a)		2,067		9		29		2,047		2,448		61		102		2,407

Total available-for-sale securities	$	70,547	$	462	$	419	$	70,590	$	60,422	$	445	$	799	$	60,068

Held-to-maturity securities^(b)
Total held-to-maturity securities	$	157	$	11	$	—	$	168	$	176	$	10	$	—	$	186

(a)		Includes collateralized mortgage obligations of private issuers, which generally have underlying collateral consisting of obligations of U.S. government and federal agencies and corporations.
(b)		Consists primarily of mortgage-backed securities.

NOTE 8 – SECURITIES FINANCING ACTIVITIES

For a discussion of the accounting policies relating to Securities Financing Activities, see Note 10 on page 98 of JPMorgan Chase’s 2003 Annual Report. The following table details the components of securities financing activities at each of the dates indicated:


	March 31,		December 31,
(in millions)	2004		2003

Securities purchased under resale agreements	$	56,809	$	62,801
Securities borrowed		49,881		41,834

Securities sold under repurchase agreements	$	140,340	$	105,409
Securities loaned		767		2,461

Part I
Item 1 (continued)

Transactions similar to financing activities that do not meet the SFAS 140 definition of a repurchase agreement are accounted for as “buys” and “sells” rather than financing transactions. Notional amounts of transactions accounted for as purchases under SFAS 140 were $13 billion and $15 billion at March 31, 2004, and December 31, 2003, respectively. Notional amounts of transactions accounted for as sales under SFAS 140 were $7 billion and $8 billion at March 31, 2004, and December 31, 2003, respectively.

JPMorgan Chase pledges certain financial instruments it owns to collateralize repurchase agreements and other securities financings. Pledged securities that can be sold or repledged by the secured party are identified as financial instruments owned (pledged to various parties) on the Consolidated balance sheet. At March 31, 2004, the Firm had received securities as collateral that can be repledged, delivered or otherwise used with a fair value of approximately $208 billion. This collateral was generally obtained under resale or securities borrowing agreements. Of these securities, approximately $196 billion were repledged, delivered or otherwise used, generally as collateral under repurchase agreements, securities lending agreements or to cover short sales.

NOTE 9 – LOANS

For a discussion of the accounting policies relating to Loans, see Note 11 on pages 98–99 of JPMorgan Chase’s 2003 Annual Report.

The composition of the loan portfolio at each of the dates indicated was as follows:


(in millions)	March 31, 2004		December 31, 2003

Commercial loans:
Commercial and industrial	$	63,692	$	68,249
Commercial real estate:
Commercial mortgage		2,674		3,182
Construction		1,051		668
Financial institutions		11,171		10,293
Non-U.S. governments		627		705

Total commercial loans^(a)		79,215		83,097

Consumer loans:
1–4 family residential mortgages:
First liens		54,284		54,460
Home equity loans		21,617		19,252
Credit card		15,975		16,793
Automobile financings		39,118		38,695
Other consumer		7,421		7,221

Total consumer loans		138,415		136,421

Total loans^(b)(c)	$	217,630	$	219,518

(a)		Includes $1.7 billion and $5.8 billion of loans held by VIEs consolidated under FIN 46 at March 31, 2004, and December 31, 2003, respectively.
(b)		Loans are presented net of unearned income of $1.07 billion and $1.29 billion at March 31, 2004, and December 31, 2003, respectively.
(c)		Includes loans held for sale (principally mortgage-related loans) of $19.6 billion at March 31, 2004, and $20.8 billion at December 31, 2003, respectively. The results of operations for the three months ended March 31, 2004 and 2003, included $164 million and $345 million, respectively, in net gains on the sales of loans held for sale. The results of operations for the three months ended March 31, 2004 and 2003, included $(0.4) million and $(20) million, respectively, in adjustments to record loans held for sale at the lower of cost or market.

NOTE 10 – ALLOWANCE FOR CREDIT LOSSES

For a discussion of accounting policies relating to the Allowance for Credit Losses, see Note 12 on page 100 of JPMorgan Chase’s 2003 Annual Report. For a discussion of the Allowance for credit losses, see the Credit risk management section on pages 54–66 of this Form 10-Q.

The table below summarizes the changes in the Allowance for Loan Losses:


(in millions)	2004			2003

Allowance for loan losses at January 1	$	4,523		$	5,350
Provision for loan losses		42			670
Charge-offs		(574	)		(799	)
Recoveries		130			129

Net charge-offs		(444	)		(670	)
Transfer to Other Assets^(a)		—			(138	)
Other		(1	)		3

Allowance for loan losses at March 31	$	4,120		$	5,215

(a)

Represents the transfer of the allowance for accrued fees on securitized credit card loans at March 31, 2003.

Part I
Item 1 (continued)

The table below summarizes the changes in the Allowance for lending-related commitments:



(in millions)	2004			2003

Allowance for lending-related commitments at January 1	$	324		$	363
Provision for lending-related commitments		(27	)		73
Other		—			—

Allowance for lending-related commitments at March 31	$	297		$	436

NOTE 11 – LOAN SECURITIZATIONS

For a discussion of loan securitizations and the Firm’s related accounting policies, see Note 13 on pages 100–103 of JPMorgan Chase’s 2003 Annual Report. The Firm securitizes, sells and services various consumer loans originated by Chase Financial Services (residential mortgage, credit card and automobile loans), as well as certain commercial loans (primarily real estate) originated by the Investment Bank. JPMorgan Chase–sponsored securitizations utilize SPEs as part of the securitization process. These SPEs are structured to meet the definition of a QSPE (as discussed in Note 1 of the JPMorgan Chase 2003 Annual Report); accordingly, the assets and liabilities of securitization-related QSPEs are not reflected in the Firm’s Consolidated balance sheet (except for retained interests, as described below) but are included on the balance sheet of the QSPE purchasing the assets. Assets held by securitization-related QSPEs as of March 31, 2004, and December 31, 2003, were as follows:



(in billions)	March 31, 2004		December 31, 2003

Credit card receivables	$	42.2	$	42.6
Residential mortgage receivables		22.5		21.1
Commercial loans		35.5		33.8
Automobile loans		7.3		6.5

Total	$	107.5	$	104.0

The following table summarizes new securitization transactions that were completed during each of the three months ended March 31, 2004 and 2003; the resulting gains arising from such securitizations; certain cash flows received from such securitizations; and the key economic assumptions used in measuring the retained interests, as of the dates of such sales:


Three months ended	March 31, 2004									March 31, 2003
($in millions)	Mortgage		Credit card		Automobile			Commercial		Mortgage		Credit card		Automobile			Commercial

Principal Securitized	$	2,715	$	1,500	$	1,600		$	1,960	$	1,776	$	1,500	$	—		$	1,059
Pre-tax gains (losses)		48		10		(3	)		35		49		10		—			17
Cash flow information:
Proceeds from securitizations	$	2,523	$	1,500	$	1,597		$	2,044	$	1,832	$	1,500	$	—		$	1,081
Servicing fees collected		1		2		1			1		1		6		—			—
Other cash flows received		—		6		—			3		—		16		—			3
Proceeds from collections reinvested in revolving securitizations		—		14,693		—			—		—		13,539		—			—

Key assumptions (rates per annum):
Prepayment rate^(a)	25.9% CPR			15.5%		1.5%		17.0-50.0%		25.5% CPR			15.0%		—	%		50.0%
						WAC/WAM								WAC/WAM

Weighted-average life (in years)		2.8		0.6		1.8		2.9-4.0		2.9-4.0			0.6		—		0.9-2.2
Expected credit losses		1.0%		5.8%		0.6%			NA^(b)		1.0%		5.5%		—	%		NA^(b)
Discount rate	15.0-30.0%			12.0%		4.1%		0.6-5.0%		15.0-30.0%			5.4%		—	%	1.0-5.0%

(a)		CPR: constant prepayment rate; WAC/WAM: weighted-average coupon/weighted-average maturity.
(b)		Expected credit losses for commercial securitizations are minimal and are incorporated into other assumptions.

In addition, the Firm sold residential mortgage loans totaling $18 billion and $23 billion during the three months ended March 31, 2004 and 2003, respectively, primarily as GNMA, FNMA and Freddie Mac mortgage-backed securities; these sales resulted in pre-tax gains of $49 million and $227 million, respectively.

At both March 31, 2004, and December 31, 2003, the Firm had, with respect to its credit card master trusts, $7.3 billion related to its undivided interest, and $1.0 billion and $1.1 billion, respectively, related to its subordinated interest in accrued interest and fees on the securitized receivables. Credit card securitization trusts require the Firm to maintain a minimum undivided interest of 7% of the

Part I
Item 1 (continued)

average principal receivables in the trusts. The Firm maintained an average undivided interest in its credit card securitization trusts of approximately 18% and 17% for the three months ended March 31, 2004 and twelve months ended December 31, 2003, respectively.

The Firm also maintains escrow accounts up to predetermined limits for some of its credit card and automobile securitizations, in the unlikely event of deficiencies in cash flows owed to investors. The amounts available in such escrow accounts are recorded in Other assets and, as of March 31, 2004, amounted to $447 million and $159 million for credit card and automobile securitizations, respectively; as of December 31, 2003, these amounts were $456 million and $137 million for credit card and automobile securitizations, respectively.

The table below summarizes other retained securitization interests, which are primarily subordinated or residual interests and are carried at fair value on the Firm’s Consolidated balance sheets:


(in millions)	March 31, 2004		December 31, 2003

Loans
Residential mortgage^(a)	$	544	$	570
Credit card^(a)		172		193
Automobile^(a)		171		151
Commercial		26		34

Total	$	913	$	948

(a)

Pre-tax unrealized gains (losses) recorded in Stockholders’ equity that relate to retained securitization interests totaled $146 million and $155 million for Residential mortgage; $11 million and $11 million for Credit cards; and $11 million and $6 million for Automobile at March 31, 2004, and December 31, 2003, respectively.

The table below outlines the key economic assumptions used to determine the fair value of the remaining retained interests at March 31, 2004, and December 31, 2003, respectively; and the sensitivities to those fair values to immediate 10% and 20% adverse changes in those assumptions:


March 31, 2004 (in millions)	Mortgage			Credit Card			Automobile			Commercial

Weighted-average life	1.3-2.9 years			5-15 months			1.5 years			0.6-6.0 years

Prepayment rate	27.4-30.5% CPR				8.1-15.3	%	1.5% WAC/WAM			NA^(a), 50.0%
Impact of 10% adverse change	$	(17	)	$	(7	)	$	(8	)	$	(1	)
Impact of 20% adverse change		(31	)		(13	)		(17	)		(3	)

Loss assumption		0.0-4.7	%^(b)		5.5-8.0	%		0.7	%	NA^(c)
Impact of 10% adverse change	$	(28	)	$	(22	)	$	(5	)	$	—
Impact of 20% adverse change		(54	)		(44	)		(10	)		—
Discount rate		13.0-30.0	%^(d)		7.7-12.0	%		4.4	%		5.0-22.2	%
Impact of 10% adverse change	$	(14	)	$	(1	)	$	(1	)	$	(1	)
Impact of 20% adverse change		(27	)		(2	)		(2	)		(2	)


December 31, 2003 (in millions)	Mortgage			Credit Card			Automobile			Commercial

Weighted-average life	1.4-2.7 years			5-15 months			1.5 years			0.6-5.9 years

Prepayment rate	29.0-31.7% CPR				8.1-15.1	%	1.5% WAC/WAM			NA^(a), 50.0%
Impact of 10% adverse change	$	(17	)	$	(7	)	$	(10	)	$	(1	)
Impact of 20% adverse change		(31	)		(13	)		(19	)		(2	)

Loss assumption		0.0-4.0	%^(b)		5.5-8.0	%		0.6	%	NA^(c)
Impact of 10% adverse change	$	(28	)	$	(21	)	$	(6	)	$	—
Impact of 20% adverse change		(57	)		(41	)		(12	)		—
Discount rate		13.0-30.0	%^(d)		8.3-12.0	%		4.4	%		5.0-20.9	%
Impact of 10% adverse change	$	(14	)	$	(1	)	$	(1	)	$	(1	)
Impact of 20% adverse change		(27	)		(3	)		(2	)		(2	)

(a)		Prepayment risk on certain commercial retained interests are minimal and are incorporated into other assumptions.
(b)		Expected credit losses for prime mortgage securitizations are minimal and are incorporated into other assumptions.
(c)		Expected credit losses for commercial retained interests are incorporated into other assumptions.
(d)		The Firm sells certain residual interests from sub-prime mortgage securitizations via Net Interest Margin (“NIM”) securitizations and retains residuals interests in these NIM transactions, which are valued using a 30% discount rate.

Part I
Item 1 (continued)

The sensitivity analysis in the preceding table is hypothetical. Changes in fair value based on a 10% or 20% variation in assumptions generally cannot be extrapolated easily, because the relationship of the change in the assumptions to the change in fair value may not be linear. Also, in this table, the effect that a change in a particular assumption may have on the fair value is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another assumption, which might counteract or magnify the sensitivities.

The table below presents information about delinquencies, net credit losses and components of reported and securitized financial assets at March 31, 2004, and December 31, 2003:


					Loans 90 days or
Type of Loan	Total Loans				more past due				Net loan charge-offs
	March 31,		Dec. 31,		March 31,		Dec. 31,		Three months ended March 31,
(in millions)	2004		2003		2004		2003		2004		2003

Residential mortgage	$	75,901	$	73,712	$	344	$	349	$	5	$	7
Credit card		15,975		16,793		240		259		257		275
Automobile financings		39,118		38,695		107		119		40		46
Other consumer^(a)		7,421		7,221		77		87		40		50

Consumer loans		138,415		136,421		768		814		342		378
Commercial loans		79,215		83,097		1,897		2,085		102		292

Total loans reported		217,630		219,518		2,665		2,899		444		670

Securitized loans:
Residential mortgage^(b)		15,033		15,564		579		594		40		47
Credit card		34,478		34,856		854		879		473		457
Automobile		7,124		6,315		12		13		7		6

Total consumer loans securitized		56,635		56,735		1,445		1,486		520		510
Commercial securitized		2,268		2,108		—		9		—		—

Total loans securitized		58,903		58,843		1,445		1,495		520		510

Total loans reported and securitized^(c)(d)	$	276,533	$	278,361	$	4,110	$	4,394	$	964	$	1,180

(a)		Consists of manufactured housing loans, installment loans (direct and indirect types of consumer finance), student loans, unsecured revolving lines of credit and non-U.S. consumer loans.
(b)		Includes $13.5 billion of outstanding principal balances on securitized sub-prime 1-4 family residential mortgage loans as of March 31, 2004.
(c)		Represents both loans on the Consolidated balance sheet and loans that have been securitized, but excludes loans for which the Firm’s only continuing involvement is servicing of the assets.
(d)		Total assets held in securitization-related SPEs were $107.5 and $104.0 billion at March 31, 2004, and December 31, 2003, respectively. The $58.9 and $58.8 billion of loans securitized at March 31, 2004, and December 31, 2003, respectively, excludes: $40.7 and $37.1 billion, respectively, of securitized loans, in which the Firm’s only continuing involvement is the servicing of the assets; $7.3 and $7.3 billion, respectively, of seller’s interests in credit card master trusts; and $0.6 and $0.8 billion, respectively, of escrow accounts and other assets.

NOTE 12 – VARIABLE INTEREST ENTITIES
Refer to Note 1 on pages 86-87 and Note 14 on pages 103-106 of JPMorgan Chase’s 2003 Annual Report for a further description of JPMorgan Chase’s involvement with variable interest entities (“VIEs”) and the Firm’s policy on consolidation relating to these entities.

In December 2003, the FASB issued a revision to FIN 46 (“FIN 46R”) to address various technical corrections and implementation issues that have arisen since the issuance of FIN 46. Effective March 31, 2004, JPMorgan Chase implemented FIN 46R for all VIEs, excluding certain investments made by its private equity business. The FASB permitted nonregistered investment companies, such as JPMP, to defer consolidation of VIEs with which they are involved until the proposed Statement of Position on the clarification of the scope of the Investment Company Audit Guide is finalized. Following issuance of the Statement of Position, the FASB indicated it would consider further modification to FIN 46R, to provide an exception for companies that qualify to apply the revised Audit Guide. The Firm applied this deferral provision and did not consolidate $2.6 billion of additional assets in potential VIEs with which JPMP is involved as of March 31, 2004. Implementation of FIN 46R did not have a material effect on the Firm’s Consolidated financial statements.

The application of FIN 46R involves significant judgment and interpretations by management. The Firm is aware of various interpretations being developed among accounting professionals with regard to analyzing derivatives under FIN 46R. It is management’s current interpretation that derivatives should be evaluated by focusing on an economic analysis of the rights and obligations of a VIE’s assets, liabilities, equity and other contracts, while considering: the entity’s activities and design; the terms of

Part I
Item 1 (continued)

the derivative contract and the role it has with the entity; the role, if any, that the Firm has in establishing the entity; the expectations of the variable interest holders; and whether the derivative contract creates and/or absorbs variability. The Firm will assess evolving interpretations of FIN 46R and any potential new guidance issued by the FASB on this issue. Additional guidance and interpretations may affect the Firm’s current application of FIN 46R to its activities in future periods.

VIEs are primarily utilized by the Firm’s Investment Bank (“IB”) business segment to assist clients in accessing the financial markets in a cost-efficient manner, and to tailor products for investors as a financial intermediary. There are two broad categories of transactions involving VIEs with which the IB is involved: multi-seller conduits and client intermediation.

Multi-seller conduits
JPMorgan Chase serves as the administrator and provides contingent liquidity support and limited credit enhancement for several commercial paper conduits. The commercial paper issued by the conduits is backed by sufficient collateral, credit enhancements and commitments to provide liquidity to support receiving at least an A-1, P-1 and, in certain cases, F1 rating.

The following table provides a summary of the multi-seller conduits in which the Firm acts as administrator, as well as the Firm’s total commitments and maximum exposure to loss related to these multi-seller conduits:


	Consolidated				Nonconsolidated				Total
	March 31,		December 31,		March 31,		December 31,		March 31,		December 31,
(in billions)		2004		2003		2004		2003		2004		2003

Total commercial paper issued by conduits	$	1.2	$	6.3	$	9.8	$	5.4	$	11.0	$	11.7

Commitments
Asset-purchase agreements^(a)	$	1.3	$	9.3	$	15.8	$	8.7	$	17.1	$	18.0
Program-wide liquidity commitments^(b)		—		1.6		2.4		1.0		2.4		2.6
Limited credit enhancements^(c)		—		0.9		1.7		1.0		1.7		1.9
Maximum exposure to loss^(d)		1.3		9.7		16.4		9.0		17.7		18.7

(a)		Asset-purchase agreements are the primary source of liquidity support for the conduits.
(b)		Program-wide liquidity is provided by the Firm to these vehicles in the event of short-term disruptions in the commercial paper market.
(c)		The Firm provides limited credit enhancement, primarily through the issuance of letters of credit.
(d)		The Firm’s maximum exposure to loss is limited to the amount of drawn commitments (i.e., sellers’ assets held by the multi-seller conduit) of $10.8 billion at March 31, 2004, and $11.7 billion at December 31, 2003, plus contractual but undrawn commitments of $6.9 billion at March 31, 2004, and $7.0 billion at December 31, 2003. Since the Firm provides credit enhancement and liquidity to these multi-seller conduits, the maximum exposure is not adjusted to exclude exposure absorbed by third party liquidity providers.

The Firm views its credit exposure to multi-seller conduit transactions as limited. This is because, for the most part, the Firm is not required to fund under the liquidity facilities if the assets in the VIE are in default. Additionally, the Firm’s obligations under the letters of credit are secondary to the risk of first loss provided by the client or other third parties – for example, by the overcollateralization of the VIE with the assets sold to it.

JPMorgan Chase consolidated these asset-backed commercial paper conduits at July 1, 2003, in accordance with FIN 46 and recorded the assets and liabilities of the conduits on its Consolidated balance sheet. In December 2003 and February 2004, two of the multi-seller conduits were restructured with each conduit issuing preferred securities acquired by an independent third-party investor, who absorbs the majority of the expected losses of the conduit. In determining the primary beneficiary of the restructured conduits, the Firm leveraged an existing rating agency model that is an independent market standard to size the expected losses and considered the relative rights and obligations of each of the variable interest holders. As a result of the restructuring, JPMorgan Chase deconsolidated $5.4 billion of one vehicle’s assets and liabilities as of December 31, 2003, and an additional $5.2 billion of another vehicle’s assets and liabilities as of March 31, 2004. As of March 31, 2004, the remaining conduit consolidated on the Firm’s balance sheet included $1.2 billion of assets recorded in Available-for-sale securities. As of December 31, 2003, the conduits consolidated on the Firm’s balance sheet included $4.8 billion of assets recorded in loans, and $1.5 billion of assets recorded in Available-for-sale securities.

Client intermediation
As a financial intermediary, the Firm is involved in structuring VIE transactions to meet investor and client needs. Assets held by certain client intermediation-related VIEs at March 31, 2004, and December 31, 2003, were as follows:


(in billions)	March 31, 2004		December 31, 2003

Structured commercial loan vehicles^(a)	$	5.2	$	5.3
Credit-linked note vehicles^(b)		18.2		17.7
Municipal bond vehicles^(c)		6.0		5.5
Other client intermediation vehicles^(d)		5.7		5.8

Part I
Item 1 (continued)

(a)		JPMorgan Chase was committed to provide liquidity to these VIEs of up to $7.7 billion and $8.0 billion at March 31, 2004, and December 31, 2003, respectively, of which $6.3 billion at March 31, 2004, and December 31, 2003, was in the form of asset purchase agreements. The Firm’s maximum exposure to loss to these vehicles at March 31, 2004, and December 31, 2003, was $4.7 billion and $5.5 billion, respectively, which reflects the netting of collateral and other program limits.
(b)		The fair value of the Firm’s derivative contracts with credit-linked note vehicles was not material at March 31, 2004. Assets of $1.8 billion and $2.1 billion reported in the table above were recorded on the Firm’s Consolidated balance sheet at March 31, 2004, and December 31, 2003, respectively, due to contractual relationships held by the Firm that relate to collateral held by the VIE.
(c)		For vehicles in which the Firm owns the residual interests, the Firm consolidates the VIE; total amounts consolidated were $2.5 billion at both March 31, 2004, and December 31, 2003, and are reported in the table above. In vehicles where third-party investors own the residual interests, the Firm’s exposure is limited. The Firm often serves as remarketing agent for the VIE and provides liquidity to support the remarketing; total liquidity commitments were $2.0 billion and $1.8 billion at March 31, 2004, and December 31, 2003, respectively. The Firm’s maximum credit exposure to all municipal bond vehicles was $4.5 billion and $4.3 billion at March 31, 2004, and December 31, 2003, respectively.
(d)		The Firm structures, on behalf of clients, other client intermediation vehicles in which it transfers the risks and returns of the assets held by the VIE, typically debt and equity instruments, to clients through derivative contracts. The Firm’s net exposure arising from these intermediation transactions is not significant.

Finally, the Firm may enter into transactions with VIEs structured by other parties; refer to Note 14 on pages 103-106 of JPMorgan Chase’s 2003 Annual Report for a further description of the Firm’s involvement with these VIEs.

The following table summarizes the Firm’s total consolidated VIE assets, by classification on the Consolidated balance sheet, as of March 31, 2004, and December 31, 2003:


(in billions)	March 31, 2004		December 31, 2003

Consolidated VIE assets^(a)
Loans^(b)	$	1.7	$	5.8
Investment securities		3.5		3.8
Trading assets^(c)		2.7		2.7
Other assets		0.1		0.1

Total consolidated assets	$	8.0	$	12.4

(a)		The Firm also holds $3.2 billion of assets, primarily as a seller’s interest, in certain consumer securitizations in a segregated entity, as part of a two-step securitization transaction. This interest is included in the securitization activities disclosed in Note 11 on pages 12-14 of this Form 10-Q.
(b)		The December 31, 2003, loan balance primarily relates to the consolidated multi-seller asset-backed commercial paper conduits. Due to the restructuring of certain multi-seller conduits, the Firm no longer consolidates loan assets related to those vehicles (see discussion above).
(c)		Includes the market value of securities and derivatives.

The interest-bearing beneficial interest liabilities issued by consolidated VIEs are classified in the line item titled “Beneficial interests issued by consolidated variable interest entities.” The holders of these beneficial interests do not have recourse to the general credit of JPMorgan Chase.

NOTE 13 – PRIVATE EQUITY INVESTMENTS
For a further description of private equity investments, see Note 15 on page 106 of JPMorgan Chase’s 2003 Annual Report. The following table presents the carrying value and cost of the Firm’s private equity investment portfolio, primarily related to JPMorgan Partners, for the dates indicated:

(in millions)

March 31, 2004

December 31, 2003

Carrying

Carrying

Value

Cost

Value

Cost

Total investment portfolio

7,097

8,859

7,250

9,147

The following table presents the Firm’s private equity gains (losses), primarily related to JPMorgan Partners, for the periods indicated:


	Three months ended March 31,
(in millions)	2004		2003

Realized gains (losses)	$	147	$	(4	)
Unrealized gains (losses)		159		(217	)

Total private equity gains (losses)	$	306	$	(221	)

Part I
Item 1 (continued)

NOTE 14 – GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following:


(in millions)	March 31, 2004		December 31, 2003

Goodwill	$	8,730	$	8,511

Other intangible assets:
Mortgage servicing rights	$	4,189	$	4,781
Purchased credit card relationships		953		1,014
All other intangibles		813		685

Total other intangible assets	$	5,955	$	6,480

Goodwill
As of March 31, 2004, goodwill increased by $219 million compared with December 31, 2003, principally in connection with acquisitions by the Institutional Trust Services and Treasury Services businesses. Goodwill was not impaired at March 31, 2004, or December 31, 2003, nor was any goodwill written off during the three months ended March 31, 2004 or 2003.

Goodwill by business segment is as follows:


(in millions)	March 31, 2004		December 31, 2003

Investment Bank	$	2,085	$	2,084
Treasury & Securities Services		1,605		1,390
Investment Management & Private Banking		4,156		4,153
JPMorgan Partners		377		377
Chase Financial Services		507		507

Total goodwill	$	8,730	$	8,511

Mortgage servicing rights
For a further description of mortgage servicing rights (“MSRs”) and interest rate risk management of MSRs, see Note 16 on pages 107-109 of JPMorgan Chase’s 2003 Annual Report. The following table summarizes the changes in MSRs during the first three months of 2004 and 2003:


	Three months ended March 31,
(in millions)	2004			2003

Balance at January 1	$	6,159		$	4,864
Additions		368			679
Other-than-temporary impairment		(17	)		—
Amortization		(340	)		(369	)
SFAS 133 hedge valuation adjustments		(586	)		(175	)

Balance at March 31		5,584			4,999
Less: valuation allowance		1,395			1,764

Balance at March 31, after valuation allowance	$	4,189		$	3,235

Estimated fair value at March 31	$	4,189		$	3,235

Weighted-average prepayment speed assumption	25.21		%CPR	27.86		%CPR
Weighted-average discount rate		7.23	%		7.62	%

CPR – constant prepayment rate

JPMorgan Chase uses a combination of derivatives and AFS securities to manage changes in the market value of MSRs. The intent is to offset any changes in the market value of MSRs with changes in the market value of the related risk management instrument. MSRs decrease in value when interest rates decline. Conversely, AFS securities (such as mortgage backed securities), principal-only certificates, and derivatives increase in value when interest rates decline. See pages 45-46 for more information on Chase Home Finance’s hedging results.

The valuation allowance represents the extent to which the carrying value of MSRs exceeds its estimated fair value. Changes in the valuation allowance are the result of the recognition of impairment or the recovery of previously recognized impairment charges due to changes in market conditions during the period. The changes in the valuation allowance for MSRs were as follows:

Part I
Item 1 (continued)


	Three months ended March 31,
(in millions)	2004			2003

Balance at January 1	$	1,378		$	1,634
Other-than-temporary impairment		(17	)		—
SFAS 140 impairment (recovery) adjustment		34			130

Balance at March 31	$	1,395		$	1,764

Purchased credit card relationships and other intangible assets
There were no purchased credit card relationship intangibles added during the three months ended March 31, 2004. For the three months ended March 31, 2004, other intangibles increased by $150 million, principally in connection with acquisitions by the Institutional Trust Services and Treasury Services businesses and acquisitions of investment management contracts. All of the Firm’s acquired intangible assets are subject to amortization.

The components of other intangible assets were as follows:


														Three months ended
(in millions)	March 31, 2004							December 31, 2003						March 31,
	Gross		Accumulated			Net Carrying		Gross		Accumulated		Net Carrying		2004		2003
	Amount		Amortization			Value		Amount		Amortization		Value		Amortization Expense
Purchased credit card relationships	$	1,885	$	932		$	953	$	1,885	$	871	$	1,014	$	61	$	64
All other intangibles		1,243		430	^(a)		813		1,093		408		685		18		10

Total amortization expense														$	79	$	74

(a)

Includes $4 million of amortization expense related to servicing assets on securitized automobile loans, which is recorded in Fees and commissions, for the three months ended March 31, 2004.

Future amortization expense
The following table presents estimated amortization expense related to Purchased credit card relationships and All other intangible assets at March 31, 2004:


(in millions)	Purchased credit		All other
Year ended December 31,	card relationships		intangible assets

2004^(a)	$	182	$	69
2005		235		82
2006		222		76
2007		187		64
2008		117		60
2009		9		59

(a)

Excludes $61 million and $18 million of amortization expense related to Purchased credit card relationships and All other intangible assets, respectively, recognized during the first three months of 2004.

Part I
Item 1 (continued)

NOTE 15 – EARNINGS PER SHARE
For a discussion of the computation of basic and diluted earnings per share (“EPS”), see Note 22 on page 112 of JPMorgan Chase’s 2003 Annual Report. The following table presents the calculation of basic and diluted EPS for the three months ended March 31, 2004 and 2003:


	Three months ended
(in millions, except per share amounts)	March 31, 2004		March 31, 2003

Basic earnings per share
Net income	$	1,930	$	1,400
Less: preferred stock dividends		13		13

Net income applicable to common stock	$	1,917	$	1,387

Weighted-average basic shares outstanding		2,032.3		1,999.8
Net income per share	$	0.94	$	0.69

Diluted earnings per share
Net income applicable to common stock	$	1,917	$	1,387

Weighted-average basic shares outstanding		2,032.3		1,999.8
Additional shares issuable upon exercise of stock options for dilutive effect		60.4		22.1

Weighted-average diluted shares outstanding		2,092.7		2,021.9
Net income per share^(a)	$	0.92	$	0.69

(a)

Options issued under employee benefit plans to purchase 200 million and 400 million shares of common stock were outstanding for the three months ended March 31, 2004 and 2003, respectively, but were not included in the computation of diluted EPS because the options’ exercise prices were greater than the average market price of the common shares.

NOTE 16 – ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income is composed of Net income and Other comprehensive income (“OCI”), which includes the after-tax change in unrealized gains and losses on AFS securities, cash flow hedging activities and foreign currency translation adjustments (including the impact of related derivatives).


	Unrealized						Cash			Accumulated other
(in millions)	gains (losses)			Translation			flow			comprehensive
Three months ended March 31, 2004	on AFS securities^(a)			adjustments			hedges			income (loss)

Balance December 31, 2003	$	19		$	(6	)	$	(43	)	$	(30	)
Net change during period		228	^(b)		—	^(c)		(21)	^(e)		207

Balance March 31, 2004	$	247		$	(6)	^(d)	$	(64	)	$	177

Three months ended March 31, 2003
Balance December 31, 2002	$	731		$	(6	)	$	502		$	1,227
Net change during period		(65	)^(b)		—	^(c)		(49	)^(e)		(114	)

Balance March 31, 2003	$	666		$	(6	)^(d)	$	453		$	1,113

(a)		Represents the after-tax difference between the fair value and amortized cost of the AFS securities portfolio and retained interests in securitizations recorded in Other assets.
(b)		The net change for the three months ended March 31, 2004, is primarily due to declining interest rates. The net change for the three months ended March 31, 2003, is primarily due to sales of AFS Securities.
(c)		At March 31, 2004 and 2003, included $7 million and $53 million, respectively, of after-tax gains on foreign currency translation from operations for which the functional currency is other than the U.S. dollar, offset by $7 million and $53 million, respectively, of after-tax losses on hedges.
(d)		Includes after-tax gains and losses on foreign currency translation, including related hedge results from operations for which the functional currency is other than the U.S. dollar.
(e)		The net change for the three months ended March 31, 2004, included $67 million of after-tax losses recognized in income and $88 million of after-tax losses representing the net change in derivative fair values that were recorded in comprehensive income. The net change for the three months ended March 31, 2003, included $197 million of after-tax gains recognized in income and $148 million of after-tax gains representing the net change in derivative fair values that were reported in comprehensive income.

Part I
Item 1 (continued)

NOTE 17 – CAPITAL
For a discussion of the calculation of risk-based capital ratios, see Note 26 on pages 114-115 of JPMorgan Chase’s 2003 Annual Report.

The following table presents the risk-based capital ratios for JPMorgan Chase and its significant banking subsidiaries. At March 31, 2004, the Firm and each of its depository institutions, including those listed in the table below, were “well-capitalized” as defined by banking regulators.


							Significant Banking Subsidiaries
													Chase Manhattan
(in millions, except ratios)	JPMorgan Chase & Co.^(a)						JPMorgan Chase Bank^(a)						Bank USA, N.A.^(a)
	March 31,			December 31,			March 31,			December 31,			March 31,			December 31,
	2004			2003			2004			2003			2004			2003

Tier 1 capital	$	44,686		$	43,167		$	35,179		$	34,972		$	5,141		$	4,950
Total capital		60,898			59,816			44,935			45,290			7,148			6,939
Risk-weighted assets^(b)		534,971			507,456			459,059			434,218			49,792			48,030
Adjusted average assets		758,260			765,910			611,137			628,076			37,206			34,565

Tier 1 capital ratio		8.4	%		8.5	%		7.7	%		8.1	%		10.3	%		10.3	%
Total capital ratio		11.4			11.8			9.8			10.4			14.4			14.4
Tier 1 leverage ratio		5.9			5.6			5.8			5.6			13.8			14.3

(a)		Assets and capital amounts for JPMorgan Chase’s banking subsidiaries reflect intercompany transactions, whereas the respective amounts for JPMorgan Chase reflect the elimination of intercompany transactions.
(b)		Includes off-balance sheet risk-weighted assets in the amounts of $181.2 billion, $158.6 billion and $13.2 billion, respectively, at March 31, 2004.

The following table shows the components of the Firm’s Tier 1 and total capital, as of the dates indicated:


	March 31,		December 31,
(in millions)	2004		2003

Tier 1 capital
Common stockholders’ equity	$	46,909	$	45,168
Nonredeemable preferred stock		1,009		1,009
Minority interest^(a)		6,930		6,882
Less:Goodwill and investments in certain subsidiaries		8,730		8,511
Nonqualifying intangible assets and other		1,432		1,381

Tier 1 capital	$	44,686	$	43,167

Tier 2 capital
Long-term debt and other instruments qualifying as Tier 2	$	12,109	$	12,128
Qualifying allowance for credit losses		4,350		4,777
Less: Investment in certain subsidiaries		247		256

Tier 2 capital	$	16,212	$	16,649

Total qualifying capital	$	60,898	$	59,816

(a)

Minority interest primarily includes trust preferred stocks of certain business trusts.

NOTE 18 – COMMITMENTS AND CONTINGENCIES
For a discussion of legal proceedings, including a discussion of the legal reserve established for Enron and other material litigation, see Part II, Item 1, Legal Proceedings, of this Form 10-Q.

NOTE 19 – ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The majority of JPMorgan Chase’s derivatives are entered into for trading purposes. The Firm also uses derivatives as an end-user to hedge market exposures, modify the interest rate characteristics of related balance sheet instruments or meet longer-term investment objectives. Both trading and end-user derivatives are recorded in trading assets and liabilities. For a further discussion of the Firm’s use of derivative instruments, see pages 58-61 and Note 28 on pages 116-117 of JPMorgan Chase’s 2003 Annual Report.

Part I
Item 1 (continued)

The following table presents derivative instrument hedging-related activities for the periods indicated:


	Three months ended March 31,
(in millions)	2004			2003

Fair value hedge ineffective net gains (losses)^(a)	$	(51	)	$	268
Cash flow hedge ineffective net gains (losses)^(a)		(1	)		—

(a)

Includes ineffectiveness and the components of hedging instruments that have been excluded from the assessment of hedge effectiveness.

Over the next 12 months, it is expected that $77 million (after-tax) of net gains recorded in Other comprehensive income at March 31, 2004, will be recognized in earnings. The maximum length of time over which forecasted transactions are hedged is 10 years, related to core lending and borrowing activities.

NOTE 20 – OFF-BALANCE SHEET LENDING-RELATED FINANCIAL INSTRUMENTS AND GUARANTEES
For a discussion of off-balance sheet lending-related financial instruments and guarantees and the Firm’s related accounting policies, see Note 29 on pages 117-119 of JPMorgan Chase’s 2003 Annual Report.

To provide for the risk of loss inherent in commercial-related contracts, an allowance for credit losses on lending-related commitments is maintained. See pages 65-66 of this Form 10-Q for a further discussion on the allowance for credit losses on lending-related commitments.

The following table summarizes the contractual amounts relating to off-balance sheet lending-related financial instruments and guarantees and the related allowance for credit losses on lending-related commitments at March 31, 2004, and December 31, 2003:


Off-balance sheet lending-related financial instruments
					Allowance for
	Contractual amount				lending-related commitments
	March 31,		December 31,		March 31,		December 31,
(in millions)	2004		2003		2004		2003

Consumer-related	$	189,218	$	176,923	NA		NA
Commercial-related:
Other unfunded commitments to extend credit^(a)(b)(c)		175,145		176,222	$	206	$	155
Standby letters of credit and guarantees^(a)(d)		38,858		35,332		90		167
Other letters of credit^(a)		4,284		4,204		1		2

Total commercial-related		218,287		215,758		297		324

Total	$	407,505	$	392,681	$	297	$	324

Customers’ securities lent^(e)	$	172,762	$	143,143	NA		NA

(a)		Net of risk participations totaling $16.8 billion and $16.5 billion at March 31, 2004, and December 31, 2003, respectively.
(b)		Includes unused advised lines of credit totaling $20 billion at March 31, 2004, and $19 billion at December 31, 2003, which are not legally binding. In regulatory filings with the Federal Reserve Board, unused advised lines are not reportable.
(c)		Includes certain asset purchase agreements to multi-seller asset-backed commercial paper conduits of $15.9 billion and $11.7 billion at March 31, 2004, and December 31, 2003, respectively; excludes $1.2 billion at March 31, 2004, and $6.3 billion at December 31, 2003, of asset purchase agreements related to multi-seller asset-backed commercial paper conduits consolidated in accordance with FIN 46, as the underlying assets of the conduits are reported in the Firm’s Consolidated balance sheet. It also includes $8.5 billion at March 31, 2004, and $9.2 billion at December 31, 2003, of asset purchase agreements to structured commercial loan vehicles and other third-party entities. The allowance for credit losses on lending-related commitments related to these agreements was insignificant at March 31, 2004, and December 31, 2003.
(d)		Collateral held by the Firm against these agreements was $8 billion at March 31, 2004, and $7.7 billion at December 31, 2003.
(e)		Collateral held by the Firm in support of these agreements was $177.2 billion at March 31, 2004, and $146.7 billion at December 31, 2003.

For a discussion of the off-balance sheet lending arrangements which the Firm considers to be guarantees under FIN 45, see pages 117-118 of JPMorgan Chase’s 2003 Annual Report. The amount of the liability related to guarantees recorded at March 31, 2004, excluding the allowance for credit losses on lending-related commitments and derivative contracts discussed below, was approximately $101 million.

In addition to the contracts noted above, there are certain derivative contracts to which the Firm is a counterparty that meet the characteristics of a guarantee under FIN 45. For a description of the derivatives the Firm considers to be guarantees, see Note 29 on pages 117-119 of JPMorgan Chase’s 2003 Annual Report. These derivatives are recorded on the Consolidated balance sheets at fair value. The total notional values of the derivatives that the Firm deems to be guarantees were $54 billion and $50 billion at March 31, 2004, and December 31, 2003, respectively. The fair values related to these contracts at March 31, 2004, were a derivative

Part I
Item 1 (continued)

receivable of $180 million and a derivative payable of $466 million. The fair values of these contracts at December 31, 2003, were a derivative receivable of $163 million and a derivative payable of $333 million.

NOTE 21 – FAIR VALUE OF FINANCIAL INSTRUMENTS
Refer to Note 31 on pages 120-123 of JPMorgan Chase’s 2003 Annual Report for a full description of fair value methodologies by product. For those financial instruments that are not recorded on the Consolidated balance sheet at fair value, fair value is based on quoted market prices, where available. If listed prices or quotes are not available, fair value is based on internally developed models that primarily use market-based or independent information as inputs. For commercial loans and lending-related commitments, fair value is determined based on the cost of credit derivatives. This cost is adjusted to account for the differences in recovery rates between bonds (on which the cost of credit derivatives is based) and loans; and for loan equivalents, which represents the portion of an unused commitment likely to become outstanding in the event an obligor defaults. For consumer loans, fair value is based on discounted cash flows. The fair value of loans in the held-for-sale and trading portfolios is generally based on observable market prices and prices of similar instruments. Fair value of consumer commitments is based on the primary market prices to originate new commitments.

These methods may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, the use of different methodologies to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

The following table presents the financial assets and liabilities valued under SFAS 107:


(in billions)	March 31, 2004							December 31, 2003
	Carrying		Estimated		Appreciation/			Carrying		Estimated		Appreciation/
	Value		Fair Value		(Depreciation)			Value		Fair Value		(Depreciation)

Total financial assets	$	780.7	$	784.0	$	3.3		$	750.7	$	754.0	$	3.3

Total financial liabilities^(a)	$	748.7	$	751.1		(2.4	)	$	723.6	$	726.0		(2.4	)

Estimated fair value in excess of carrying value					$	0.9						$	0.9

(a)

Includes the allowance for lending-related commitments of $297 million at March 31, 2004, and $324 million at December 31, 2003. The fair value of the Firm’s lending-related commitments approximates these balances.

NOTE 22 – SEGMENT INFORMATION
JPMorgan Chase is organized into five major businesses: the Investment Bank, Treasury & Securities Services, Investment Management & Private Banking, JPMorgan Partners and Chase Financial Services. These businesses are segmented based on 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 an “operating” basis. For a definition of operating basis, see the Glossary of Terms on pages 74-75 of this Form 10-Q. For a further discussion concerning JPMorgan Chase’s business segments, see Segment Results on pages 32-50 of this Form 10-Q.

Segment results, which are presented on an operating basis, reflect revenues on a tax-equivalent basis. The tax-equivalent gross-up for each business segment is based upon the level, type and tax jurisdiction of the earnings and assets within each business segment. The amount of the tax-equivalent gross-up for each business segment is eliminated within the Support Units and Corporate segment and was $(111) million and $(65) million for the three months ended March 31, 2004 and 2003, respectively.

JPMorgan Chase uses shareholder value added (“SVA”), a non-GAAP financial measure, as its principal measure of segment profitability. See Segment Results on pages 27-28 and Note 34 on pages 126-127 of JPMorgan Chase’s 2003 Annual Report for a further discussion of performance measurements and policies for cost-of-capital allocation. The table below provides a summary of the Firm’s segment results for the three months ended March 31, 2004 and 2003:

Part I
Item 1 (continued)


							Investment
				Treasury &			Management						Chase			Corporate/
(in millions, except ratios)	Investment			Securities			& Private			JPMorgan			Financial			Reconciling
Three months ended	Bank			Services			Banking			Partners			Services			Items^(a)			Total

March 31, 2004
Operating revenue^(b)	$	3,979		$	1,106		$	824		$	249		$	3,414		$	(122	)	$	9,450
Intersegment revenue^(b)		(64	)		50			23			—			7			(16	)		—
Operating earnings^(c)		1,110			119			115			115			427			44			1,930
Average common equity^(d)		15,973			3,196			5,468			4,899			9,472			6,810			45,818
Average managed assets		513,983			19,757			35,259			7,780			207,575			20,321			804,675
Shareholder value added		628			22			(50	)		(69	)		141			(122	)		550
Return on average allocated capital^(e)		28	%		15	%		8	%		9	%		18	%		NM			17	%

March 31, 2003
Operating revenue^(b)	$	4,010		$	926		$	641		$	(287	)	$	3,692		$	(119	)	$	8,863
Intersegment revenue^(b)		(41	)		34			20			1			1			(15	)		—
Operating earnings^(c)		897			112			27			(223	)		648			(61	)		1,400
Average common equity^(d)		20,871			2,773			5,483			5,985			8,489			(1,743	)		41,858
Average managed assets		525,773			17,508			33,634			9,428			202,404			21,325			810,072
Shareholder value added		273			29			(137	)		(446	)		394			35			148
Return on average allocated capital^(e)		17	%		16	%		2	%		NM			31	%		NM			13	%

(a)		Corporate/Reconciling Items includes Support Units and Corporate and the net effect of management accounting policies.
(b)		Operating revenue includes Intersegment revenue, which includes intercompany revenue and revenue-sharing agreements, net of intersegment expenses. Transactions between business segments are primarily conducted at fair value.
(c)		For the consolidated financial statements, there are no reconciling items between operating earnings and Net income.
(d)		Average common equity at the consolidated level is equivalent to the average allocated capital at the segment level in the segments results disclosure on pages 32–50 of this Form 10-Q.
(e)		Based on annualized amounts.

The following table provides a reconciliation of the Firm’s reported revenue to operating revenue:


	Three months ended March 31,
(in millions)	2004		2003

Reported revenue	$	8,977	$	8,406
Credit card securitizations^(a)		473		457

Operating revenue	$	9,450	$	8,863

(a)

Represents the impact of credit card securitizations. For securitized receivables, amounts that normally would be reported as Net interest income and as Provision for credit losses are reported as noninterest revenue.

The following table provides a reconciliation of the Firm’s consolidated operating earnings to SVA:


	Three months ended March 31,
(in millions)	2004		2003

Shareholder value added
Operating earnings	$	1,930	$	1,400
Less: preferred dividends		13		13

Earnings applicable to common stock		1,917		1,387
Less: cost of capital		1,367		1,239

Total Shareholder value added	$	550	$	148

The following table provides a reconciliation of the Firm’s consolidated average assets to average managed assets:


	Three months ended March 31,
(in millions)	2004		2003

Average assets	$	771,318	$	778,238
Average credit card securitizations		33,357		31,834

Average managed assets	$	804,675	$	810,072

Part I
Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

J.P. Morgan Chase & Co. (“JPMorgan Chase” or the “Firm”) is a leading global financial services firm with assets of $801 billion and operations in more than 50 countries. The Firm is a leader in investment banking, financial services for consumers and businesses, financial transaction processing, investment management, private banking and private equity. JPMorgan Chase serves more than 30 million consumers nationwide and many of the world’s most prominent corporate, institutional and government clients. The Firm’s wholesale businesses are known globally as “JPMorgan,” and its national consumer and middle market businesses are known as “Chase.” The wholesale businesses comprise four segments: the Investment Bank (“IB”), Treasury & Securities Services (“TSS”), Investment Management & Private Banking (“IMPB”) and JPMorgan Partners (“JPMP”). IB provides a full range of investment banking and commercial banking products and services, including advising on corporate strategy and structure, capital raising, risk management, and market-making in cash securities and derivative instruments in all major capital markets. The three businesses within TSS provide debt servicing, securities custody and related functions, and treasury and cash management services to corporations, financial institutions and governments. The IMPB business provides investment management services to institutional investors, high-net-worth individuals and retail customers and also provides personalized advice and solutions to wealthy individuals and families. JPMP, the Firm’s private equity business, provides equity and mezzanine capital financing to private companies. The Firm’s national consumer and middle market businesses, which provide lending and full-service banking to consumers and small and middle market businesses, comprise Chase Financial Services (“CFS”).

OVERVIEW


Financial Performance of JPMorgan Chase										First quarter change
(in millions, except per share and ratio data)	1Q 2004			4Q 2003			1Q 2003			4Q 2003			1Q 2003

Revenue	$	8,977		$	8,068		$	8,406			11	%		7	%
Noninterest expense		6,059			5,220			5,541			16			9
Provision for credit losses		15			139			743			(89	)		(98	)
Net income		1,930			1,864			1,400			4			38
Net income per share – diluted		0.92			0.89			0.69			3			33
Average common equity		45,818			44,177			41,858			4			9
Return on average common equity (“ROCE”)		17	%		17	%		13	%		—	bp		400	bp
Common dividend payout ratio		38			38			50			—			(1,200	)
Effective income tax rate		34			31			34			300			—
Overhead ratio		67			65			66			200			100

Tier 1 capital ratio		8.4	%		8.5	%		8.4	%		(10)	bp		—	bp
Total capital ratio		11.4			11.8			12.2			(40	)		(80	)
Tier 1 leverage ratio		5.9			5.6			5.0			30			90

The momentum in global economic growth seen in 2003 carried into the first quarter of 2004, while business optimism continued to build, supported by attractive financial conditions, ongoing strong productivity and unprecedented recovery in corporate profits. Nevertheless, financial markets were volatile in the first quarter, reflecting uncertainty about the U.S. employment outlook and the actions the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) might take on interest rates. Investors entered 2004 braced for rising interest rates, but with hiring slack, the economy far below potential and inflation benign, a market consensus developed in the quarter that the Federal Reserve Board’s policy would remain on hold for most of the year.

These factors created a favorable capital markets environment for JPMorgan Chase, which contributed to earnings growth in the Firm’s IB and IMPB segments to their highest levels in over three years, and provided opportunities for JPMP to realize gains. The strength in capital markets-related businesses more than offset an earnings decline at CFS, which reflected the slowdown in the mortgage refinancing market. As a result of improved credit quality in the commercial portfolio and ongoing portfolio management activities utilizing credit derivatives and loan sales, the Firm improved its credit risk profile.

Net income for JPMorgan Chase of $1.9 billion, or $0.92 per share, was the highest quarterly result since the December 2000 merger of The Chase Manhattan Corporation and J.P. Morgan & Co. Incorporated.

Part I
Item 2 (continued)

Total revenue of $9.0 billion grew by 7% over the first quarter of 2003 and 11% over the fourth quarter. IB trading revenues benefited from favorable fixed income market and currency conditions: corporate credit spreads remained narrow, bond yields declined and the dollar continued to weaken against most major currencies. Equity market values rose and equity issuance increased, adding to the strength in trading and contributing to the increase in private equity gains at JPMP and in fees and commissions at IB, IMPB and TSS. Countering these favorable market conditions was a decline in Global Treasury’s revenues (securities gains and net interest income) and in mortgage origination volumes across the industry. At Chase Home Finance (“CHF”), total mortgage originations declined by 39% compared with the first quarter of 2003.

Total expenses of $6.1 billion increased by 9% year-over-year and 16% over the fourth quarter level. The fourth quarter of 2003 had an unusually low base of expenses due to an adjustment to incentive accruals, which reduced compensation costs to reflect full-year incentives. Incentive accruals were higher relative to prior periods because of higher revenues. The largest expense increases compared with the first quarter of 2003 were in CHF, within CFS, and TSS. As a result of the unprecedented refinancing boom during 2003, CHF increased staff throughout the year to keep pace with volumes; expenses remained comparable to fourth quarter 2003 levels. Management expects expenses in both CHF and TSS to moderate in future quarters to reflect the reduction in business volumes at CHF, and the realization of synergies from acquisitions at TSS.

The first quarter of 2004 Provision for credit losses of $15 million declined significantly from both comparable periods and was $429 million lower than net charge-offs in the quarter. Most of the reduction in the allowance for credit losses was due to improvement in the quality of the commercial portfolio. During the first quarter of 2004, the Firm’s commercial nonperforming loans declined by 45% and criticized exposure levels declined by 49% compared with the first quarter of 2003. At the same time, the consumer portfolio had lower delinquencies and net charge-offs versus both comparable periods. As improvements in the quality of the commercial portfolio taper off and demand for commercial loans picks up, reductions in the allowance for credit losses should moderate and credit costs could increase from the first quarter 2004 level.

The Firm’s capital position at March 31, 2004, was strong. Tier 1 capital of $44.7 billion increased by 16% from the first quarter and 4% from the fourth quarter of 2003 as retained earnings increased. A rise in risk-weighted assets (as defined by banking regulators) resulted in a Tier 1 ratio that was flat compared with the year-ago level and lower than the year-end ratio. The regulatory weightings do not distinguish between the risk ratings of credit exposure. At the same time, the Firm’s internal measure of risk in the businesses, the amount of allocated capital, declined by 11% from the first quarter and 2% from the fourth quarter of 2003, as IB reduced credit risk and JPMP reduced private equity investments.

The table below shows JPMorgan Chase’s segment results. These results reflect the manner in which the Firm’s financial information is currently evaluated by management and are presented on an operating basis. For a discussion of the Firm’s Segment results, including more information about operating results, see pages 32–50 of this Form 10-Q. Prior-period segment results have been adjusted to reflect the alignment of management accounting policies or changes in organizational structure among businesses.



Segment results – Operating basis																		Return on average
	Operating revenue									Operating earnings								allocated capital
				First quarter change								First quarter change									First quarter change
(in millions, except ratios)	1Q 2004			4Q 2003			1Q 2003			1Q 2004		4Q 2003			1Q 2003			1Q 2004			4Q 2003			1Q 2003

Investment Bank	$	3,979			31	%		(1	)%	$	1,110		29	%		24	%		28	%		800	bp		1,100	bp
Treasury & Securities Services		1,106			3			19			119		(17	)		6			15			(600	)		(100	)
Investment Management & Private Banking		824			—			29			115		15			326			8			100			600
JPMorgan Partners		249			137			NM			115		400			NM			9			800			NM
Chase Financial Services		3,414			(5	)		(8	)		427		(24	)		(34	)		18			(700	)		(1,300	)
Support Units and Corporate		(122	)		1			(3	)		44		(75	)		NM			NM			NM			NM

JPMorgan Chase	$	9,450			11			7		$	1,930		4			38			17			—			400

IB reported operating earnings of $1.1 billion for the first quarter of 2004, its best performance in three years, up 24% and 29% from the first and fourth quarters of 2003, respectively. The low–interest rate environment, volatility in credit markets, and improvement in equity markets produced increased client and portfolio management revenue in fixed income and equities. This coupled with negative credit costs (i.e., a benefit to income) drove results.

TSS operating earnings of $119 million for the quarter were up 6% compared with the first quarter of 2003 and down 17% compared with the fourth quarter of 2003; the fourth quarter result included a $41 million pre-tax gain on the sale of a nonstrategic business. Acquisitions in Institutional Trust Services and Treasury Services drove revenue and expense growth in TSS. Higher global equity values resulted in increased fees in Investor Services, as pricing is tied to asset levels. Average deposits for TSS were up 33% from

Part I
Item 2 (continued)

the first quarter of 2003, though spreads on deposits were low given the low level of interest rates. At 15%, Return on average allocated capital for TSS was negatively affected by goodwill from acquisitions.

IMPB increased operating earnings and assets under supervision in the first quarter of 2004 compared with the year-ago and prior quarters, aided by increased equity market valuations in client portfolios and increased brokerage activity. Net inflows in the quarter were at their highest levels in more than two years; strong inflows from the retail segment were coupled with net positive institutional inflows for the first time in more than a year, a reflection of improved investment performance.

JPMP performance improved significantly, with a positive $526 million increase in private equity gains from the first quarter of 2003. Net gains on direct private equity investments, at $304 million, benefited from higher sales ($302 million in realized gains) and liquidity events such as initial public offerings and much lower negative net valuation adjustments ($23 million) of companies in the portfolio.

CFS operating earnings declined by $221 million from the first quarter of 2003, 92% of which was due to the decline in earnings at CHF. Strong production results in many of the businesses – including increased purchase volume at Chase Cardmember Services, deposit growth at Chase Regional Banking and Chase Middle Market, and higher home equity originations at CHF – were more than offset by deposit spread compression, weak automobile leasing results and higher severance and related costs.

Business outlook

Toward the end of the first quarter, U.S. economic data began showing a gradual strengthening in hiring and improvement in business conditions. Management expects higher interest rates some time in the second half of 2004. Rising interest rates may negatively affect the Firm’s Home Finance and Global Treasury results compared with 2003. However, rising rates may be indicative of robust economic growth, which is beneficial for many other businesses in the Firm. IB had a stronger pipeline for fees than in December or March of last year. In addition, client trading activity is independent of the direction of rate moves (although trading revenues in future quarters may be lower, as the first quarter is usually seasonally strong). IMPB, Investor Services and JPMP are expected to benefit from rising equity markets. Loan demand should increase as the economy continues to improve and corporations increase investments. The level of deposits may decline as rates rise (although the interest rate spread could widen). Commercial net charge-off ratios may be lower, but credit costs may rise as the reduction in the Allowance for credit losses slows. Consumer loan losses may decline, but the interest rate spread on consumer loans may narrow.

Business events

Agreement to merge with Bank One Corporation

On January 14, 2004, JPMorgan Chase and Bank One Corporation (“Bank One”) announced an agreement to merge. The merger agreement, which has been approved by the boards of directors of both companies, provides for a stock-for-stock merger in which 1.32 shares of JPMorgan Chase common stock will be exchanged, on a tax-free basis, for each share of Bank One common stock; cash will be paid for fractional shares. JPMorgan Chase stockholders will keep their shares, which will remain outstanding and unchanged as shares of JPMorgan Chase following the merger. The merger will be accounted for using the purchase method of accounting. The purchase price to complete the proposed merger is approximately $58 billion.

The merged company, headquartered in New York, will be known as J.P. Morgan Chase & Co. and will have combined assets of $1.1 trillion, a strong capital base, 2,300 branches in 17 states and top-tier positions in retail banking and lending, credit cards, investment banking, asset management, private banking, treasury and securities services, middle markets and private equity. It is expected that cost savings of approximately $2.2 billion (pre-tax) will be achieved by 2007. Merger-related costs are expected to be approximately $3 billion (pre-tax).

Immediately following the announcement of the agreement to merge, integration planning was initiated. To date, detailed integration plans have been developed, with more than 2,000 milestones centrally monitored; decisions have been made on most of the technology platforms that will be used by the combined firm. For further information concerning the merger, see Note 2 on page 7 of this Form 10-Q.

Part I
Item 2 (continued)

RESULTS OF OPERATIONS

The following section provides a discussion of JPMorgan Chase’s results of operations on a reported basis.


Revenue								First quarter change
(in millions)	1Q 2004		4Q 2003		1Q 2003			4Q 2003			1Q 2003

Investment banking fees	$	692	$	846	$	616			(18	)%		12	%
Trading revenue		1,720		754		1,298			128			33
Fees and commissions		2,933		2,871		2,488			2			18
Private equity gains (losses)		306		163		(221	)		88			NM
Securities gains		126		29		485			334			(74	)
Mortgage fees and related income		244		140		433			74			(44	)
Other revenue		126		254		92			(50	)		37
Net interest income		2,830		3,011		3,215			(6	)		(12	)

Total revenue	$	8,977	$	8,068	$	8,406			11			7

Investment banking fees

For a discussion of Investment banking fees, which are primarily recorded in IB, see IB segment results on pages 34–37 of this Form 10-Q.

Trading revenue

For a discussion of Trading revenue, which is primarily recorded in IB, see the IB segment results on pages 34–37 of this Form 10-Q.

Fees and commissions

The table below provides the significant components of fees and commissions:



							First quarter change
(in millions)	1Q 2004		4Q 2003		1Q 2003		4Q 2003			1Q 2003

Investment management and service fees	$	668	$	618	$	545		8	%		23	%
Custody and institutional trust service fees		442		431		358		3			23
Credit card fees		734		825		692		(11	)		6
Brokerage commissions		401		316		259		27			55
Lending-related service fees		139		172		124		(19	)		12
Deposit service fees		274		279		285		(2	)		(4	)
Other fees		275		230		225		20			22

Total	$	2,933	$	2,871	$	2,488		2			18

The increases from both periods for Investment management and service fees and Custody and institutional trust service fees were primarily due to higher equity valuations of Assets under supervision (which includes assets under custody); organic growth in the businesses including net inflows of assets under supervision; and to the acquisitions of the Bank One corporate trust business in November 2003 (which contributed $22 million) and JPMorgan Retirement Plan Services (“RPS”) in June 2003 (which contributed $21 million). Credit card fees rose by 6% from the first quarter of 2003, reflecting higher servicing fees on the $1.5 billion growth in average securitized credit card receivables; higher fees earned from the retained credit card portfolio as a result of the more robust customer purchase volume; and the favorable impact of changes in the pricing of several card products and services. The decline in Credit card fees from the immediately preceding quarter reflected the seasonal decrease in purchase volume.

Brokerage commissions increases from both periods were driven by the higher activity levels in the global equities market. Lending-related service fees were up from the first quarter of 2003 as a result of the growth in business volume, including a $3.3 billion, or 85%, growth in the automobile loan servicing portfolio. The decline in Lending-related service fees from the prior quarter was principally attributable to a lower volume of standby letters of credit negotiated in the quarter. The decrease in Deposit service fees compared with the first quarter of 2003 reflected higher balances maintained by institutional customers in their deposit accounts, which reduced fees in lieu of compensating balances or balance deficiency fees. The increase in Other fees was largely due to the acquisition of the Electronic Financial Services (“EFS”) business from Citigroup in January 2004, which contributed $55 million.

For additional information on Fees and commissions, see the segment discussions of IMPB for investment management fees on pages 38–40, TSS for custody and securities processing fees on pages 37–38, and CFS for consumer-related fees on pages 43–49 of this Form 10-Q.

Part I
Item 2 (continued)

Private equity gains (losses)

For a discussion of the factors that fueled the improvement in the Firm’s private equity investment results, which are primarily recorded in JPMP, see the JPMP segment discussion on pages 41–42 of this Form 10-Q.

Securities gains

Securities gains decreased by 74% from the first quarter of 2003 due to substantial gains realized last year as rates declined. Most of the gains were realized by Global Treasury in connection with its management of the Firm’s interest rate risk exposure. CHF uses AFS securities to manage the economic risk of changes in the value of mortgage servicing rights (“MSRs”). In the 2004 first quarter, CHF realized a loss of $4 million on its investment securities portfolio, compared with gains of $96 million and $13 million in the 2003 first and fourth quarters, respectively.

Mortgage fees and related income

Mortgage fees and related income decreased by 44% from the first quarter of 2003 principally due to lower mortgage originations. Originations were down 39% from the same quarter of last year. The increase of 74% from the prior linked quarter reflected better origination margins and higher mortgage applications, as rates decreased from the fourth quarter. For a further discussion of total mortgage-related revenues, see the segment discussion for CHF on pages 45–46.

Other revenue

Other revenue rose 37% when compared with the 2003 first quarter, primarily the result of higher gains on credit card and commercial mortgage loan securitizations. Net gains related to credit card securitizations (consisting of new and revolving securitizations) was $39 million, up $26 million from the first quarter of the prior year; the gain on commercial mortgage loan securitizations was $28 million, up $10 million from the 2003 first quarter. In addition, the 2003 first quarter included the recognition of certain nonoperating charges at American Century Companies, Inc. (“American Century”) that reduced equity income. The decline of 50% from the 2003 fourth quarter was attributable to gains of $106 million (versus $24 million in the first quarter of 2004) from sales of securities acquired in loan satisfactions; a gain of $41 million from the sale of a nonstrategic business in TSS; and a gain of $20 million from the sale of a building in Geneva.

Net interest income

The declines of 6% from the fourth quarter and 12% from the first quarter of last year were the result of a lower volume of commercial loans and lower volumes and lower spreads on available-for-sale investment securities. The decrease in commercial loans in IB was driven by softer demand and the Firm’s strategic initiative to improve its credit risk profile; the reduction in available-for-sale investment securities reflected sales in 2003 in anticipation of higher interest rates. Also contributing to the declines was the compression in the overall spread on interest earning assets, including trading assets. Deposits at Chase Regional Banking, Chase Middle Market and TSS realized lower NII from compressed spreads despite an increase in volume.

On an aggregate basis, the Firm’s total average interest-earning assets for the first quarter of 2004 were $601 billion, relatively stable in comparison with the $598 billion recorded in the first quarter of last year. The net interest yield on these assets, on a fully taxable-equivalent basis, was 1.90% in the 2004 first quarter, 29 basis points lower than in the same period last year.

NONINTEREST EXPENSE

The following table presents the components of Noninterest expense:



Noninterest Expense							First quarter change
(in millions)	1Q 2004		4Q 2003		1Q 2003		4Q 2003			1Q 2003

Compensation expense	$	3,370	$	2,577	$	3,174		31	%		6	%
Occupancy expense		431		482		496		(11	)		(13	)
Technology and communications expense		819		756		637		8			29
Other expense		1,439		1,405		1,234		2			17

Total noninterest expense	$	6,059	$	5,220	$	5,541		16			9

Compensation expense

The increase from the 2003 first quarter was attributable to salary raises and higher employee benefit costs including social security–related taxes. The 31% rise from the 2003 fourth quarter was largely due to higher performance-related incentive accruals, principally in IB. The increase was partially offset by the transfer, beginning April 1, 2003, of approximately 2,800 employees to IBM in connection with a technology infrastructure outsourcing agreement; the related expenses of these employees, recognized in the prior year in Compensation expense, were approximately $70 million. See Note 5 on page 9 for a discussion of the impact on 2004 expenses of a $1.1 billion contribution to the plan in April 2004. In addition, severance-related costs of $103 million were recognized in the first quarter of 2004, compared with $76 million in the first quarter of 2003 and $102 million in the fourth quarter of 2003.

Part I
Item 2 (continued)

The Firm had 93,285 full-time equivalent employees at March 31, 2004, compared with 93,878 at March 31, 2003, and 93,453 at December 31, 2003. The reduction in the number of employees in staff areas was mitigated by increases in growing businesses.

Occupancy expense

The declines in Occupancy from both periods were primarily driven by charges for unoccupied excess real estate of $78 million in the first quarter of 2003 and $71 million in the fourth quarter of 2003. Partially offsetting the decline from the fourth quarter was the recognition of slightly higher property taxes and other building administration costs.

Technology and communications expense

The increase in Technology and communications expense from the first quarter of last year was primarily due to the shift to this category of expenses as a result of the aforementioned IBM outsourcing agreement; last year approximately $70 million of these expenses were recognized in Compensation expense, and $45 million of these expenses were recognized in Other expense. (The IBM agreement was implemented in April 2003.) The increase was also affected by higher amortization of capitalized software development costs, as well as higher market data and IBM-related expenses, the latter items associated with the growing requirements of several business segments. The increase from the fourth quarter also reflected growth in business volume.

Other expense

The following table presents the components of other expense:



							First quarter change
(in millions)	1Q 2004		4Q 2003		1Q 2003		4Q 2003			1Q 2003

Professional services	$	372	$	394	$	325		(6	)%		14	%
Outside services		376		311		272		21			38
Marketing		199		200		164		(1	)		21
Travel and entertainment		118		128		89		(8	)		33
Amortization of intangibles		79		74		74		7			7
All other		295		298		310		(1	)		(5	)

Total other expense	$	1,439	$	1,405	$	1,234		(2	)		17

For Professional services, the increase from last year’s first quarter was associated with higher counsel fees, related to growth in securities underwriting transactions; whereas the decrease from the 2003 fourth quarter reflected lower litigation-related legal expenses. The increase in Outside services from both the first and fourth quarters of 2003 was primarily attributable to greater utilization of third-party vendors for processing activities in TSS and CFS. The expense increase at TSS was affected by the acquisition of a business in the first quarter of 2004, which contributed $26 million. The increase in Marketing from the first quarter of 2003 reflects higher direct marketing campaigns in credit card and advertising by Regional Banking.

Provision for credit losses

The 2004 first quarter Provision for credit losses was $15 million compared with $743 million in the 2003 first quarter and was down $124 million from the 2003 fourth quarter, reflecting improvement in the quality of the commercial loan portfolio. The decline from the first quarter of 2003 was also due to a higher volume of credit card securitizations. For further information on the Provision for credit losses and the Firm’s management of credit risk, see the discussions of net charge-offs associated with the commercial and consumer loan portfolios and the Allowance for credit losses, on pages 64–66 of this Form 10-Q.

Income tax expense

Income tax expense was $973 million in the first quarter of 2004, compared with $722 million in the first quarter and $845 million in the fourth quarter of 2003. The effective tax rates were 33.5% for the first quarter of 2004, 34.0% for the first quarter of 2003 and 31.2% for the fourth quarter of 2003. The differences in the tax rates were primarily reflective of the changes in the proportion of income subject to federal, state and local taxes.

Part I
Item 2 (continued)

EXPLANATION AND RECONCILATION OF THE FIRM’S USE OF NON-GAAP FINANCIAL MEASURES

The Firm prepares its Consolidated financial statements using GAAP. The Consolidated financial statements prepared in accordance with GAAP appear on pages 3–6 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 consistently tracked from year to year and enables a comparison of the Firm’s performance with other companies’ GAAP financial statements.

In addition to analyzing the Firm’s results on a reported basis, management reviews the line-of-business results on an “operating basis,” which is a non-GAAP financial measure. The definition of operating basis starts with the reported GAAP results. In the case of IB, operating basis includes in Trading revenue the NII related to trading activities. Trading activities generate revenues which are recorded for GAAP purposes in two line items on the income statement: trading revenues, which include the mark-to-market gains or losses on trading positions; and net interest income, which includes the interest income or expense related to those positions. Combining both the trading revenues and related net interest income enables management to evaluate IB’s trading activities by considering all revenue related to these activities and facilitates operating comparisons to other competitors. For a further discussion of Trading-related revenue, see IB on page 34–37 of this Form 10-Q. In the case of Chase Cardmember Services, operating or managed basis excludes the impact of credit card securitizations on revenue, the provision for credit losses, net charge-offs and receivables. JPMorgan Chase uses the concept of “managed receivables” to evaluate the credit 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 impact both the receivables sold under SFAS 140 and those not sold. Thus, in its disclosures regarding managed receivables, JPMorgan Chase treats the sold receivables as if they were still on the balance sheet in order to disclose the credit performance (such as net charge-off rates) of the entire managed credit card portfolio. The operating basis for all other lines of business is the same as reported basis. For a further discussion of credit card securitizations, see Chase Cardmember Services on pages 46–47 of this Form 10-Q.

Part I
Item 2 (continued)

The following summary table provides a reconciliation from the Firm’s reported to operating results:

Reconciliation from reported to operating basis


Consolidated income statement										First quarter change
(in millions)	1Q 2004			4Q 2003			1Q 2003			4Q 2003			1Q 2003

Reported
Revenue:
Investment banking fees	$	692		$	846		$	616			(18	)%		12	%
Trading revenue		1,720			754			1,298			128			33
Fees and commissions		2,933			2,871			2,488			2			18
Private equity gains (losses)		306			163			(221	)		88			NM
Securities gains		126			29			485			334			(74	)
Mortgage fees and related income		244			140			433			74			(44	)
Other revenue		126			254			92			(50	)		37
Net interest income		2,830			3,011			3,215			(6	)		(12	)

Total revenue		8,977			8,068			8,406			11			7
Noninterest expense		6,059			5,220			5,541			16			9

Operating margin		2,918			2,848			2,865			2			2
Provision for credit losses		15			139			743			(89	)		(98	)

Income before income tax expense		2,903			2,709			2,122			7			37
Income tax expense		973			845			722			15			35

Net income	$	1,930		$	1,864		$	1,400			4			38


Reconciling items^(a)
Revenue:
Trading-related revenue^(b)	$	576		$	518		$	683			11	%		(16	)%
Fees and commissions^(c)		(149	)		(184	)		(169	)		19			12
Other revenue		(39	)		(29	)		(4	)		(34	)		NM
Net interest income:
Trading-related^(b)		(576	)		(518	)		(683	)		(11	)		16
Credit card securitizations^(c)		661			675			630			(2	)		5

Total net interest income		85			157			(53	)		(46	)		NM
Total revenue		473			462			457			2			4
Noninterest expense		—			—			—			—			—
Operating margin		473			462			457			2			4
Securitized credit losses^(c)		473			462			457			2			4

Income before income tax expense		—			—			—			—			—
Income tax expense		—			—			—			—			—
Net income	$	—		$	—		$	—			NM			NM


Operating results
Revenue:
Investment banking fees	$	692		$	846		$	616			(18	)%		12	%
Trading-related revenue (including trading NII)		2,296			1,272			1,981			81			16
Fees and commissions		2,784			2,687			2,319			4			20
Private equity gains (losses)		306			163			(221	)		88			NM
Securities gains		126			29			485			334			(74	)
Mortgage fees and related income		244			140			433			74			(44	)
Other revenue		87			225			88			(61	)		(1	)
Net interest income (excluding trading NII)		2,915			3,168			3,162			(8	)		(8	)

Total operating revenue		9,450			8,530			8,863			11			7
Noninterest expense		6,059			5,220			5,541			16			9

Operating margin		3,391			3,310			3,322			2			2
Credit costs		488			601			1,200			(19	)		(59	)

Income before income tax expense		2,903			2,709			2,122			7			37
Income tax expense		973			845			722			15			35

Operating earnings	$	1,930		$	1,864		$	1,400			4			38

Part I
Item 2 (continued)

(a)		Represents only those line items in the Consolidated income statement affected by the reclassification of trading-related net interest income and the impact of credit card securitizations.
(b)		The reclassification of trading-related net interest income from Net interest income to Trading revenue primarily affects the Investment Bank segment results. See pages 34–37 of this Form 10-Q for further information.
(c)		The impact of credit card securitizations affects Chase Cardmember Services. See pages 46–47 of this Form 10-Q for further information.

Management uses the SVA framework as its primary measure of profitability for the Firm and each of its business segments. To derive SVA, the Firm applies a cost of capital to each business segment. The capital elements and resultant capital charges provide the businesses and investors with a financial framework by which to evaluate the trade-off between the use of capital by each business unit versus its return to shareholders. JPMorgan Chase varies the amount of capital attributed to lines of business based on its estimate of the economic risk capital required by the line of business as a result of the credit, market, operational and business risk for each particular line of business and private equity risk for JPMorgan Partners. JPMorgan Chase believes this risk-adjusted approach to economic capital compensates for differing levels of risk across businesses, and therefore a constant 12% cost of capital can be applied across businesses with differing levels of risk. The cost of capital for JPMorgan Partners is 15%, because JPMorgan Chase believes that the business risk for JPMP is so sufficiently differentiated that, even after risk-adjustment, a higher cost of capital is warranted. Capital charges are an integral part of the SVA measurement for each business. Under the Firm’s model, average common equity is either underallocated or overallocated to the business segments, as compared with the Firm’s total common stockholders’ equity. The revenue and SVA impact of this over/under allocation is reported under Support Units and Corporate. See segment results on pages 27–28 of JPMorgan Chase’s 2003 Annual Report for a further discussion of SVA, and the Glossary of Terms on pages 74–75 of this Form 10-Q for a definition of SVA.

The following table provides a reconciliation of the Firm’s operating earnings to SVA on a consolidated basis:


							First quarter change
(in millions)	1Q 2004		4Q 2003		1Q 2003		4Q 2003			1Q 2003

Shareholder value added
Operating earnings	$	1,930	$	1,864	$	1,400		4	%		38	%
Less: preferred dividends		13		13		13		—			—

Earnings applicable to common stock		1,917		1,851		1,387		4			38
Less: cost of capital		1,367		1,337		1,239		2			10

Total Shareholder value added	$	550	$	514	$	148		7			272

In addition, management uses certain non-GAAP financial measures at the segment level. Management believes these non-GAAP financial measures provide information to investors in understanding the underlying operational performance and performance trends of the particular business segment and facilitate a comparison with the performance of competitors. These include Total return revenue in IB, Tangible shareholder value added and Tangible allocated capital in IMPB, and managed receivables and managed assets in Chase Cardmember Services. For a discussion of these line of business–specific non-GAAP financial measures, see the respective segment disclosures in segment results on pages 32–50 of this Form 10-Q.

Management measures its exposure to derivative receivables and commercial lending–related commitments on an “economic credit exposure” basis. See Credit risk management in this Form 10-Q on pages 54–62.

The following table provides a reconciliation of the Firm’s average assets to average managed assets, a non-GAAP financial measure on a consolidated basis:


							First quarter change
(in millions)	1Q 2004		4Q 2003		1Q 2003		4Q 2003			1Q 2003

Average assets	$	771,318	$	778,519	$	778,238		(1	)%		(1	)%
Average credit card securitizations		33,357		33,445		31,834		—			5

Average managed assets	$	804,675	$	811,964	$	810,072		(1	)		(1	)

SEGMENT RESULTS

JPMorgan Chase’s lines of business are segmented based on the products and services provided or the type of customer serviced and reflect the manner in which financial information is currently evaluated by the Firm’s management. Revenues and expenses directly associated with each segment are included in determining that segment’s results. Management accounting and other policies exist to allocate those remaining expenses that are not directly incurred by the segments.

The segment results also reflect revenue- and expense-sharing agreements between certain lines of business. Revenue and expenses attributed to shared activities are recognized in each line of business, and any double counting is eliminated at the segment level.

Part I
Item 2 (continued)

These arrangements promote cross-selling and management of shared client expenses. They also ensure that the contributions of both businesses are fully recognized. Prior-period segment results have been adjusted to reflect alignment of management accounting policies or changes in organizational structure among businesses. Restatements of segment results may occur in the future. See Note 22 on pages 22–23 of this Form 10-Q for further information about JPMorgan Chase’s five business segments.

Contribution of businesses for the first quarter of 2004

(OPERATED REVENUES PIE CHART)

(OPERATED EARNINGS PIE CHART)

As of March 31, 2004, the overhead ratio for each business segment was: IB, 59%; TSS, 83%; IMPB, 77%; and CFS, 59%. Overhead ratios provide comparability for a particular segment with its respective competitors; they do not necessarily provide comparability among the business segments themselves, as each business segment has its own particular revenue and expense structure.

Part I
Item 2(continued)

INVESTMENT BANK

For a discussion of the business profile of the IB, see pages 29-31 of JPMorgan Chase’s 2003 Annual Report. The following table sets forth selected IB financial data:


Selected financial data										First quarter change
(in millions, except ratios and employees)	1Q 2004			4Q 2003			1Q 2003			4Q 2003			1Q 2003

Revenue
Investment banking fees	$	682		$	834		$	620			(18	)%		10	%
Trading-related revenue^(a)		2,270			1,207			1,931			88			18
Net interest income		374			463			690			(19	)		(46	)
Fees and commissions		485			437			378			11			28
Securities gains		129			13			383		NM				(66	)
All other revenue		39			92			8			(58	)		388


Total operating revenue		3,979			3,046			4,010			31			(1	)


Expense
Compensation expense		1,401			827			1,312			69			7
Noncompensation expense		943			944			871			—			8
Severance and related costs		18			67			105			(73	)		(83	)

Total operating expense		2,362			1,838			2,288			29			3
Operating margin		1,617			1,208			1,722			34			(6	)
Credit costs		(188	)		(241	)		245			22		NM
Corporate credit allocation		2			(5	)		(12	)	NM			NM

Income before income tax expense		1,807			1,444			1,465			25			23
Income tax expense		697			582			568			20			23

Operating earnings	$	1,110		$	862		$	897			29			24



Shareholder value added
Operating earnings	$	1,110		$	862		$	897			29			24
Less: Preferred dividends		5			5			6			—			(17	)

Earnings applicable to common stock		1,105			857			891			29			24
Less: cost of capital		477			513			618			(7	)		(23	)

Total shareholder value added	$	628		$	344		$	273			83			130


Average allocated capital	$	15,973		$	16,966		$	20,871			(6	)		(23	)
Average assets		513,983			511,342			525,773			1			(2	)
Return on average allocated capital		28	%		20	%		17	%	800		bp	1,100		bp
Overhead ratio		59			60			57			(100	)		200
Compensation expense as % of operating revenue^(b)		35			27			33			800			200
Full-time equivalent employees		14,810			14,567			14,398			2	%		3	%


Business revenue
Investment banking fees
Equity underwriting	$	177		$	254		$	107			(30	)%		65	%
Debt underwriting		358			423			353			(15	)		1

Total underwriting		535			677			460			(21	)		16
Advisory		147			157			160			(6	)		(8	)

Total investment banking fees		682			834			620			(18	)		10

Capital markets and lending
Fixed income		2,065			1,368			1,966			51			5
Equities		673			341			431			97			56
Credit portfolio		347			360			394			(4	)		(12	)

Total capital markets and lending		3,085			2,069			2,791			49			11


Total revenue (excluding Global Treasury)		3,767			2,903			3,411			30			10
Global Treasury		212			143			599			48			(65	)

Total revenue	$	3,979		$	3,046		$	4,010			31			(1	)

Memo
Global Treasury
Total revenue	$	212		$	143		$	599			48			(65	)
Total-return adjustments		(229	)		79			(64	)	NM				(258	)

Total-return revenue^(c)	$	(17	)	$	222		$	535		NM			NM

Part I
Item 2(continued)

(a)		Includes net interest income of $576 million, $513 million and $683 million for the three months ended March 31, 2004, December 31, 2003, and March 31, 2003, respectively.
(b)		Excludes severance and related costs.
(c)		Total return revenue (“TRR”), a non-GAAP financial measure, represents revenue plus the change in unrealized gains or losses on investment securities and hedges (included in Other comprehensive income) and internally transfer-priced assets and liabilities. TRR is a supplemental performance measure used by management to analyze performance of Global Treasury on an economic basis. Management believes the TRR measure is meaningful, because it measures all positions on a mark-to-market basis, thereby reflecting the true economic value of positions in the portfolio. This performance measure is consistent with the manner in which the portfolio is managed, as it removes the timing differences that result from applying the various GAAP accounting policies.

IB operating earnings were $1.1 billion in the first quarter, compared with $897 million in the first quarter of 2003 and $862 million in the fourth quarter of 2003. Earnings performance was driven by higher equity and fixed income capital markets results including record trading revenues compared with the first and fourth quarters of 2003. A significant improvement in commercial credit quality, offset in part by the anticipated reduction in Global Treasury, also contributed to the increase over the first quarter of 2003. Return on average allocated capital was 28% for the quarter, compared with 17% and 20% for the first and fourth quarters of 2003, respectively.

Operating revenues of $4.0 billion were 1% lower than in the first quarter of 2003 and up 31% from the fourth quarter of 2003. Investment banking fees were $682 million, up 10% from the 2003 first quarter on higher equity and bond underwriting fees, which were driven by increased market volumes, and partially offset by lower loan syndication and advisory fees. These fees were down 18% from a strong 2003 fourth quarter, due primarily to lower equity underwriting, loan syndication and advisory fees. The decline in equity underwriting compared with the fourth quarter of 2003 reflected lower market volumes of rights issues in Europe; the decline in loan syndication fees reflected lower volumes in new commercial loan syndications. According to Thomson Financial, the Firm maintained its No. 1 ranking in global syndicated loans and No. 2 ranking in global investment-grade bonds. For the first quarter of 2004 compared with full-year 2003, the Investment Bank increased its ranking in global announced M&A to No. 3 from No. 5, while its ranking in U.S. equity and equity-related declined to No. 7 from No. 4. However, in U.S. initial public offerings, the Firm improved its ranking from No. 14 for full-year 2003 to No. 4.

Composition of Capital Markets & Lending Revenue and Global Treasury:


	Trading-related revenue			Fees and commissions		Securities gains		NII and other			Total revenue

(in millions)
First quarter 2004

Fixed income	$	1,877		$	82	$	10	$	96		$	2,065
Equities		333			325		—		15			673
Credit portfolio		56			78		—		213			347

Capital markets & lending revenue		2,266			485		10		324			3,085
Global Treasury		4			—		119		89			212


Total	$	2,270		$	485	$	129	$	413		$	3,297


Fourth quarter 2003

Fixed income	$	1,154		$	71	$	3	$	140		$	1,368
Equities		94			258		—		(11	)		341
Credit portfolio		(50	)		108		1		301			360

Capital markets & lending revenue		1,198			437		4		430			2,069
Global Treasury		9			—		9		125			143


Total	$	1,207		$	437	$	13	$	555		$	2,212

Part I
Item 2(continued)


	Trading-related revenue			Fees and commissions		Securities gains		NII and other		Total revenue

(in millions)
First quarter 2003

Fixed income	$	1,735		$	102	$	6	$	123	$	1,966
Equities		199			200		6		26		431
Credit portfolio		(13	)		76		—		331		394

Capital markets & lending revenue		1,921			378		12		480		2,791
Global Treasury		10			—		371		218		599


Total	$	1,931		$	378	$	383	$	698	$	3,390

IB’s capital markets and lending activities include fixed income and equities revenue and revenue from the Firm’s credit portfolio, which includes corporate lending and credit risk management activities. The capital markets and lending revenue includes both client (i.e., market-making) revenue and portfolio management revenue; the latter reflects net gains or losses, exclusive of client revenue, generated from managing residual risks in the portfolios, as well as gains or losses related to proprietary risk-taking activities to capture market opportunities. IB evaluates its capital markets activities by considering all revenue related to these activities, including Trading-related revenue, Fees and commissions, Securities gains, lending-related NII and other revenue.

Capital markets and lending revenue (excluding Global Treasury) for the quarter was $3.1 billion, up 11% and 49% from the first and fourth quarters of 2003, respectively, due to substantial gains in equities as well as continued strong performance in fixed income. Equity capital markets revenue of $673 million increased substantially, up 56% and 97% over the first and fourth quarters of 2003, respectively. Results were driven by higher trading revenue in both equity derivatives and convertibles, reflecting higher client revenues in derivatives and increased portfolio management in an upward-moving market environment. Higher brokerage fees and commissions within the equity cash business were driven by higher market volumes. Fixed income revenue of $2.1 billion increased by 5% from the first quarter and 51% from the fourth quarter of 2003, driven by increased trading revenues. The increases in trading revenue reflected strength in both client and portfolio management activities, driven by the continued favorable interest rate environment. Client-related trading revenues were up in both the credit markets and interest rates businesses. In particular, foreign exchange posted record results, driven by increased volumes in foreign exchange options. Credit Portfolio revenue of $347 million was down 12% and 4% from the first and fourth quarters of 2003, respectively, driven primarily by lower loan volume and a continued decline in credit risk capital, resulting in lower NII for the period. The lower NII was partially offset by an increase in Trading revenue due to spread widening on credit derivatives that are used to manage risk in the loan portfolio. For additional information, see the Credit risk management discussion on credit derivatives on pages 61–62 of this Form 10-Q.

Global Treasury’s operating revenue was $212 million, down 65% from the first quarter of 2003 and up 48% from the fourth quarter of 2003. The decrease from the year-ago quarter reflected lower levels of NII, driven by lower coupon reinvestment rates compared with the prior year. Securities gains decreased by 68% from the first quarter of 2003 due to substantial realized gains last year in the Firm’s AFS investment securities portfolio. The increase in securities gains from the fourth quarter of 2003 was attributable to the higher volume of sales in connection with Global Treasury’s repositioning activities to manage, in part, the Asset/liability exposure of the Firm. Global Treasury is managed on a total-return revenue basis, which includes revenue plus the change in unrealized gains or losses on investment securities and risk management activities (included in Other comprehensive income) and internally transfer-priced assets and liabilities. Global Treasury’s total-return revenue was negative $17 million for the first quarter of 2004, down from $535 million in the first quarter and $222 million in the fourth quarter of 2003. The decline was driven by spread widening on mortgage-backed securities, which are used to help manage the Firm’s overall interest rate exposure. Global Treasury’s activities complement, and offer a strategic balance and diversification benefit to, the Firm’s trading and fee-based activities. For a reconciliation of Global Treasury’s total revenue to total-return revenue, see page 34 of this Form 10-Q.

Operating expense of $2.4 billion was up 3% from the first quarter and 29% from the fourth quarter of 2003. The increase from the year-ago quarter was attributable to higher compensation expenses, as a result of salary increases, higher employer taxes on a higher level of restricted stock vestings, and increased travel and entertainment and legal costs. The increase over the prior quarter was largely due to higher compensation expenses, reflecting higher incentives on stronger business performance. Partially offsetting these increases were lower severance and related costs. The overhead ratio for the first quarter of 2004 was 59%, an increase of 200 basis points over the first quarter of 2003, driven by the expense increases mentioned above.

Credit costs were negative $188 million for the quarter, compared with credit costs of $245 million for the first quarter of 2003 and negative $241 million for the fourth quarter of 2003. The reduction in credit costs from the prior-year quarter was primarily attributable to a reduction in the allowance for credit losses as credit quality improved. For additional information, see Credit risk management on pages 64–66 of this Form 10-Q.

Part I
Item 2(continued)

Outlook: IB is expected to continue to benefit from the improved economic environment. IB fees and client trading activity are largely independent of the direction of interest rate moves, although trading revenue in subsequent quarters may be lower as the first quarter is usually seasonally strong. Commercial credit costs may rise, reflecting an increase in demand for loans and lower recoveries.


	First quarter				Full-year
Market Share/Rankings^(a)	2004				2003

Global syndicated loans		14	%	# 1		17	%	# 1
Global investment-grade bonds		8		# 2		8		# 2
Global equity & equity-related		5		# 8		8		# 4
U.S. equity & equity-related		6		# 7		11		# 4
Global announced M&A^(b)		34		# 3		15		# 5

(a)		Derived from Thomson Financial Securities Data, which reflect subsequent updates to prior-period information. Global announced M&A is based on rank value; all other rankings are based on 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)		First quarter 2004 ranking and market share reflect the announced merger between JPMorgan Chase and Bank One Corporation. Excluding this transaction, the market share would have been 25%, and the ranking would have been No. 4.

TREASURY & SECURITIES SERVICES

For a discussion of the profiles for each business within TSS, see pages 32–33 of JPMorgan Chase’s 2003 Annual Report. The following table sets forth selected financial data of TSS:


Selected financial data										First quarter change
(in millions, except ratios and employees)	1Q 2004			4Q 2003			1Q 2003			4Q 2003			1Q 2003

Revenue
Fees and commissions	$	745		$	676		$	598			10	%		25	%
Net interest income		313			304			290			3			8
All other revenue		48			91			38			(47	)		26

Total operating revenue		1,106			1,071			926			3			19
Expense
Compensation expense		343			320			312			7			10
Noncompensation expense		571			503			449			14			27
Severance and related costs		7			23			4			(70	)		75

Total operating expense		921			846			765			9			20
Operating margin		185			225			161			(18	)		15
Credit costs		1			—			1		NM				—
Corporate credit allocation		(2	)		5			12		NM			NM

Operating income before income tax expense		182			230			172			(21	)		6
Income tax expense		63			86			60			(27	)		5

Operating earnings	$	119		$	144		$	112			(17	)		6


Shareholder value added
Operating earnings	$	119		$	144		$	112			(17	)%		6	%
Less: Preferred dividends		1			1			1			—			—

Earnings applicable to common stock		118			143			111			(17	)		6
Less: cost of capital		96			82			82			17			17

Shareholder value added	$	22		$	61		$	29			(64	)		(24	)


Average allocated capital	$	3,196		$	2,734		$	2,773			17			15
Average assets		19,757			20,525			17,508			(4	)		13
Average deposits		98,951			89,647			74,524			10			33
Return on average allocated capital		15	%		21	%		16	%	(600		)bp	(100		)bp
Overhead ratio		83			79			83			400			—
Assets under custody (in billions)	$	8,001		$	7,597		$	6,269			5	%		28	%
Full-time equivalent employees		14,738			14,518			14,201			2			4


Revenue by business
Treasury Services	$	535		$	485		$	474			10	%		13	%
Investor Services		399			381			341			5			17
Institutional Trust Services^(a)		258			252			199			2			30
Other^(a)(b)		(86	)		(47	)		(88	)		(83	)		2

Total Treasury & Securities Services	$	1,106		$	1,071		$	926			3			19

Part I
Item 2(continued)

(a)		Includes a portion of the $41 million gain on the sale of a nonstrategic business in the fourth quarter of 2003: $1 million in Institutional Trust Services and $40 million in Other.
(b)		Includes the elimination of revenues related to shared activities with Chase Middle Market.

TSS reported operating earnings of $119 million, a 6% increase from the first quarter of 2003 and a 17% decrease from the fourth quarter of 2003. Return on average allocated capital for the quarter was 15%, compared with 16% for the first quarter and 21% for the fourth quarter of 2003.

Operating revenue was $1.1 billion in the first quarter of 2004, an increase of 19% and 3% from the first and fourth quarters of 2003, respectively. Fees and commissions were up 25% and 10% from the first and fourth quarters of 2003, respectively, primarily driven by the acquisition of Citigroup’s Electronic Financial Services business by Treasury Services, and by Institutional Trust Services’ acquisitions of Bank One’s corporate trust business and of Financial Computer Software, L.P. In addition, Fees and commissions were higher due to increased debt and equity market appreciation, coupled with increased organic growth (i.e., new business and volume growth of existing clients) at Investor Services and Institutional Trust Services. Excluding the acquisitions, Fees and commissions would have increased by 11% from the first quarter of 2003. Net interest income increased by 8% and 3% from the first and fourth quarters of 2003, respectively, due to higher U.S. and non-U.S. deposits, partially offset by lower interest rate spreads on deposits, attributable to the low–interest rate environment. All other revenue was 26% higher than in the first quarter of 2003, primarily driven by higher foreign exchange revenue, which is the result of increased transaction volume at Investor Services. All other revenue was 47% lower than in the fourth quarter of 2003, which included a $41 million gain on the sale of a nonstrategic business.

Operating expense increased by 20% and 9% from the first and fourth quarters of 2003, respectively. Compensation expense was up 10% and 7% from the first and fourth quarters of 2003, respectively, primarily driven by the aforementioned acquisitions, coupled with staff increases to support the new business and volume growth, as well as higher incentives. Noncompensation expense was up 27% and 14% from the first and fourth quarters of 2003, reflecting the impact of the aforementioned acquisitions, higher professional services for strategic investments and technology projects, and increased costs to support new business and higher volumes. Severance costs were up $3 million from the first quarter of 2003 and down $12 million from the fourth quarter of 2003. In addition, fourth quarter 2003 severance and related costs included $4 million in charges to provide for losses on subletting unoccupied excess real estate. The first quarter 2004 overhead ratio was 83%, compared with 83% and 79% for the first and fourth quarters of 2003, respectively. The increase from the fourth quarter was the result of the aforementioned gain on the sale of a nonstrategic business recorded in the fourth quarter of 2003. Excluding the gain on the aforementioned sale, the fourth quarter 2003 overhead ratio would have been 82%.

Assets under custody of $8.0 trillion in the first quarter of 2004 were 28% and 5% higher than in the first and fourth quarter of 2003, respectively, due to increases in the debt and equity markets as well as new business and organic growth.

Outlook: Management anticipates improving overhead ratios for TSS over the balance of the year, as the expense synergies from the acquisitions by Treasury Services and Institutional Trust Services materialize and as revenues in Investor Services benefit from improving equity markets.

INVESTMENT MANAGEMENT & PRIVATE BANKING

For a discussion of the business profile of IMPB, see pages 34-35 of JPMorgan Chase’s 2003 Annual Report. The following table reflects selected financial data of IMPB:


Selected financial data							First quarter change
(in millions, except ratios and employees)	1Q 2004		4Q 2003		1Q 2003		4Q 2003			1Q 2003

Revenue
Fees and commissions	$	657	$	617	$	510		6	%		29	%
Net interest income		117		118		116		(1	)		1
All other revenue		50		87		15		(43	)		233

Total operating revenue		824		822		641		—			29
Expense
Compensation expense		321		299		283		7			13
Noncompensation expense		314		317		296		(1	)		6
Severance and related costs		1		19		7		(95	)		(86	)

Total operating expense		636		635		586		—			9
Operating margin		188		187		55		1			242
Credit costs		10		36		6		(72	)		67

Operating income before income tax expense		178		151		49		18			263
Income tax expense		63		51		22		24			186

Operating earnings	$	115	$	100	$	27		15			326

Part I
Item 2(continued)


Shareholder value added
Operating earnings	$	115		$	100		$	27			15	%		326	%
Less: preferred dividends		2			2			2			—			—

Earnings applicable to common stock		113			98			25			15			352
Less: cost of tangible allocated capital		36			37			37			(3	)		(3	)

Tangible shareholder value added^(a)		77			61			(12	)		26		NM
Less: cost of goodwill capital		127			129			125			(2	)		2

Total shareholder value added	$	(50	)	$	(68	)	$	(137	)		26			64


Average tangible allocated capital	$	1,316		$	1,318		$	1,338			—			(2	)
Average goodwill capital		4,152			4,148			4,145			—			—
Average allocated capital		5,468			5,466			5,483			—			—
Average assets		35,259			34,108			33,634			3			5
Return on tangible allocated capital^(a)		36	%		30	%		8	%	600		bp	2,800		bp
Return on average allocated capital		8			7			2			100			600
Overhead ratio		77			77			91			—			(1,400	)
Full-time equivalent employees		7,922			7,853			7,647			1	%		4	%

(a)

The Firm uses return on tangible allocated capital and tangible SVA, non-GAAP financial measures, as two of several measures to evaluate the economics of the IMPB business segment. Return on tangible allocated capital and tangible SVA measure return on an economic capital basis (that is, on a basis that takes into account the operational, business, credit and other risks to which this business is exposed, including the level of assets) but excludes the capital allocated for goodwill. The Firm utilizes these measures to facilitate operating comparisons of IMPB to other competitors.

IMPB reported operating earnings of $115 million in the first quarter of 2004, an increase of 326% from the first quarter and 15% from the fourth quarter of 2003. Return on average allocated capital for the first quarter of 2004 was 8%, compared with 2% in the first quarter of 2003 and 7% in the fourth quarter of 2003. Return on tangible allocated capital was 36%, compared with 8% in the first quarter of 2003 and 30% in the fourth quarter of 2003. For further information on tangible allocated capital, see footnote (a) in the table above.

Operating revenue was $824 million, 29% higher than in the first quarter of 2003 and flat to the fourth quarter of 2003. Global equity markets continued to improve during the first quarter of 2004 (as exemplified by the S&P 500 index, which rose by 33% since the first quarter of 2003, and the MSCI World index, which rose by 41%). The increase from the prior-year quarter in Fees and commissions primarily reflected global equity market appreciation; the impact of the acquisition of American Century Retirement Plan Services Inc., renamed JPMorgan Retirement Plan Services (“RPS”), in June 2003; and increased brokerage activity. Higher earnings from the Firm’s investment in American Century, in addition to the impact of accounting for the RPS joint venture prior to the acquisition, drove the increase in All other revenue. Additionally, Other revenue for the first quarter of 2003 included a gain on the sale of a Brazilian investment management business, offset by charges incurred at American Century. The increase in Fees and commissions from the prior quarter reflected global equity market appreciation and AUS net inflows, offset by a decline in All other revenue associated with real estate gains recorded in the fourth quarter of 2003.

Operating expense of $636 million was 9% higher compared with the first quarter of 2003 and flat compared with the fourth quarter of 2003. The increase from the year-ago quarter reflected the impact of the acquisition of RPS on compensation and noncompensation expense, as well as higher compensation expense reflecting strong earnings and increased marketing expense; these were offset by real estate and software write-offs taken in the first quarter of 2003. The increase from the prior quarter reflected higher compensation and marketing expense, offset by real estate and software write-offs taken in the fourth quarter of 2003. Credit costs were $10 million, up from $6 million in the prior-year quarter and down from $36 million in the prior quarter, reflecting provisions taken in the fourth quarter of 2003 and the first quarter of 2004.

The overhead ratio for the quarter ending March 31, 2004, was 77%, a decrease from 91% for the quarter ended March 31, 2003, and flat compared with the fourth quarter of 2003. The decrease reflected improved operating leverage, as the beneficial impact of higher market valuations on revenues outpaced growth in expenses.

Part I
Item 2(continued)


Assets under supervision^(a)									First quarter change
	March 31,		December 31,			March 31,			December 31,			March 31,
(in billions)	2004		2003			2003			2003			2003

Asset class
Liquidity	$	164	$	160		$	144			3	%		14	%
Fixed income		144		144			144			—			—
Equities and other		276		255			207			8			33

Assets under management		584		559			495			4			18
Custody/brokerage/administration/deposits		213		199			127			7			68

Total assets under supervision	$	797	$	758		$	622			5			28


Client segment
Retail
Assets under management	$	112	$	101		$	72			11			56
Custody/brokerage/administration/deposits		78		71			17			10			359

Assets under supervision		190		172			89			10			113
Private Bank
Assets under management		141		138			125			2			13
Custody/brokerage/administration/deposits		135		128			110			5			23

Assets under supervision		276		266			235			4			17
Institutional
Assets under management		331		320			298			3			11

Total assets under supervision	$	797	$	758		$	622			5			28


Geographic region
Americas
Assets under management	$	370	$	360		$	350			3			6
Custody/brokerage/administration/deposits		183		170			99			8			85

Assets under supervision		553		530			449			4			23
Europe, Middle East & Africa and Asia/Pacific
Assets under management		214		199			145			8			48
Custody/brokerage/administration/deposits		30		29			28			3			7

Assets under supervision		244		228			173			7			41

Total assets under supervision	$	797	$	758		$	622			5			28


Assets under supervision rollforward:
Beginning balance	$	758	$	720		$	644			5			18
Net asset flows		14		(2	)		(8	)	NM			NM
Market/other impact^(b)		25		40			(14	)		(38	)	NM

Ending balance	$	797	$	758		$	622			5			28

(a)		Excludes AUM of American Century.
(b)		Other includes the acquisition of RPS in the second quarter of 2003.

Total Assets under supervision at March 31, 2004, of $797 billion were 28% higher than at March 31, 2003, and up 5% from December 31, 2003. Assets under supervision increased from the first quarter of 2003, reflecting market appreciation and, to a lesser extent, the acquisition of RPS and AUS net inflows. The increase from the fourth quarter of 2003 reflected market appreciation and AUS net inflows. Not reflected in Assets under management is the Firm’s 44% equity interest in American Century, whose Assets under management were $90 billion at quarter-end, compared with $71 billion as of the first quarter of 2003 and $87 billion as of the fourth quarter of 2003.

Outlook: IMPB is expected to benefit from improving equity markets, which should result in new inflows while increasing the value of assets under supervision.

Part I
Item 2(continued)

JPMORGAN PARTNERS

For a discussion of the business profile of JPMP, see pages 36–37 of JPMorgan Chase’s 2003 Annual Report. The following table sets forth selected financial data of JPMorgan Partners:



Selected financial data										First quarter change
(in millions, except employees)	1Q 2004			4Q 2003			1Q 2003			4Q 2003			1Q 2003

Revenue
Direct investments
Realized gains	$	302		$	202		$	46			50	%	NM
Write-ups / (write-downs / write-offs)		(23	)		(52	)		(176	)		56			87	%
MTM gains (losses)^(a)		25			48			(6	)		(48	)	NM

Total direct investments		304			198			(136	)		54		NM
Private third-party fund investments		(8	)		(39	)		(94	)		79			91

Total private equity gains (losses)		296			159			(230	)		86		NM
Net interest income (loss)		(59	)		(65	)		(71	)		9			17
Fees and other revenue		12			11			14			9			(14	)

Total operating revenue		249			105			(287	)		137		NM

Expense
Compensation expense		38			33			34			15			12
Noncompensation expense		32			38			29			(16	)		10

Total operating expense		70			71			63			(1	)		11

Operating income (loss) before income tax expense		179			34			(350	)		426		NM
Income tax expense (benefit)		64			11			(127	)		482		NM

Operating earnings (loss)	$	115		$	23		$	(223	)		400		NM


Shareholder value added
Operating earnings (loss)	$	115		$	23		$	(223	)		400		NM
Less: Preferred dividends		2			2			2			—			—

Earnings (loss) applicable to common stock		113			21			(225	)		438		NM
Less: cost of capital		182			210			221			(13	)		(18	)

Shareholder value added	$	(69	)	$	(189	)	$	(446	)		63			85


Average allocated capital	$	4,899		$	5,541		$	5,985			(12	)		(18	)
Average assets		7,780			8,199			9,428			(5	)		(17	)
Return on average allocated capital		9	%		1	%	NM			800		bp	NM
Full-time equivalent employees		302			316			342			(4	)%		(12	)%

(a)

Includes mark-to-market gains (losses) and reversals of mark-to-market gains (losses) due to public securities sales.

JPMP reported operating earnings of $115 million for the 2004 first quarter, compared with an operating loss of $223 million in the first quarter of 2003 and operating earnings of $23 million in the fourth quarter of 2003.

Total private equity gains in the first quarter were $296 million, compared with losses of $230 million in the first quarter of 2003 and gains of $159 million in the fourth quarter of 2003. During the first quarter, JPMP’s direct private equity investments recorded net gains of $304 million, compared with a net loss of $136 million in the first quarter of 2003 and a net gain of $198 million in the fourth quarter of 2003. JPMP’s direct private equity results included $302 million in realized gains, mark-to-market gains of $25 million on direct public investments, and net write-downs and write-offs of $23 million taken on direct private investment positions. Limited partner interests in third-party funds resulted in net losses of $8 million, compared with net losses of $94 million and $39 million in the first and fourth quarters of 2003, respectively. First quarter results include a significant realized gain attributable to a private sale completed in the Consumer Retail & Services sector. Overall, JPMP’s performance benefited from active public and private capital markets during the period, which generated opportunities for liquidity events and value recognition through sales, recapitalizations and initial public offerings.

Part I
Item 2(continued)

JPMP investment portfolio

The carrying value of the JPMP private equity portfolio at March 31, 2004, was $6.8 billion, a 6% decrease from December 31, 2003, and a 16% decrease from March 31, 2003. JPMP has exited selected investments that are not central to its portfolio strategy, with the goal to reduce, over time, JPMP’s private equity portfolio to approximately 10%, as adjusted, of the Firm’s common stockholders’ equity. As of March 31, 2004, the portfolio has been reduced to approximately 14%.

The private equity business is highly cyclical, and JPMP’s results are subject to significant volatility associated with the public equity markets, availability of high-yield financing for leveraged buyout transactions and investor appetite for private equity. With improving economic conditions, JPMP may have increased opportunities to exit profitably direct investments as well as make new investments that are anticipated to generate high returns.

JPMP invested $162 million in direct private equity for the Firm’s account during the first quarter of 2004, primarily in buyouts in the Consumer Retail & Services sector.

The following table presents the carrying value and cost of the JPMP investment portfolio for the dates indicated:


	March 31, 2004					December 31, 2003					March 31, 2003
	Carrying					Carrying					Carrying
(in millions)	Value			Cost		Value			Cost		Value			Cost

Public securities (46 companies)^(a)(b)	$	697		$	520	$	643		$	451	$	478		$	624
Private direct securities (791 companies)^(b)		5,177			6,562		5,508			6,960		5,912			7,439
Private third-party fund investments (234 funds)^(b)(c)		961			1,512		1,099			1,736		1,780			2,360

Total investment portfolio	$	6,835		$	8,594	$	7,250		$	9,147	$	8,170		$	10,423

% of portfolio to the Firm’s common equity		15	%				16	%				19	%

% of portfolio to the Firm’s common equity – as adjusted^(d)		14	%				15	%				20	%

(a)		The quoted public value was $1.1 billion at March 31, 2004, $994 million at December 31, 2003, and $685 million at March 31, 2003.
(b)		Represents the number of companies and funds at March 31, 2004.
(c)		Unfunded commitments to private equity funds were $1.2 billion at March 31, 2004, $1.3 billion at December 31, 2003, and $1.8 billion at March 31, 2003.
(d)		For purposes of calculating this ratio, the carrying value excludes the post-December 31, 2002 impact of public MTM valuation adjustments, and the Firm’s common equity excludes SFAS 115 equity balances. The market appreciation or depreciation (i.e., MTM) of public securities since December 31, 2002, has been eliminated, because it would cause the numerator of the ratio to increase or decrease without there having been any additional acquisition or disposition of investments by JPMP. The SFAS 115 equity adjustment has been eliminated because it would cause the amount of JPMorgan Chase’s stockholders’ equity to increase or decrease as a result of changes in the value of the Firm’s AFS securities and thus cause the denominator of the ratio to increase or decrease as a result of changes in the carrying values of securities that have no relation to JPMP’s business. Making these adjustments allows JPMP to track, on a consistent basis, its progress in reducing the carrying values of its investments so that they do not constitute more than 10% of JPMorgan Chase’s total common stockholders’ equity.

Outlook: JPMP’s performance is expected to improve as a result of improving equity markets and higher merger activity.

Part I
Item 2 (continued)

CHASE FINANCIAL SERVICES

For a description of CFS and a discussion of the profiles for each of its businesses, see pages 38–43 of JPMorgan Chase’s 2003 Annual Report. For information regarding loans and residual interests sold and securitized, see Note 11 on pages 12–14 of this Form 10-Q. The following table reflects selected financial data of CFS:


Selected financial data										First quarter change
(in millions, except ratios and employees)	1Q 2004			4Q 2003			1Q 2003			4Q 2003			1Q 2003

Revenue
Net interest income	$	2,245		$	2,447		$	2,300			(8	)%		(2	)%
Fees and commissions		876			948			825			(8	)		6
Securities gains		—			18			102		NM			NM
Mortgage fees and related income		241			137			432			76			(44	)
All other revenue		52			59			33			(12	)		58

Total operating revenue		3,414			3,609			3,692			(5	)		(8	)
Expense
Compensation expense		766			698			720			10			6
Noncompensation expense		1,170			1,114			1,064			5			10
Severance and related costs		63			53			14			19			350

Total operating expense		1,999			1,865			1,798			7			11
Operating margin		1,415			1,744			1,894			(19	)		(25	)
Credit costs		748			855			877			(13	)		(15	)

Operating income before income tax expense		667			889			1,017			(25	)		(34	)
Income tax expense		240			330			369			(27	)		(35	)

Operating earnings	$	427		$	559		$	648			(24	)		(34	)


Shareholder value added
Operating earnings	$	427		$	559		$	648			(24	)%		(34	)%
Less: preferred dividends		3			3			3			—			—

Earnings applicable to common stock		424			556			645			(24	)		(34	)
Less: cost of capital		283			271			251			4			13

Total shareholder value added	$	141		$	285		$	394			(51	)		(64	)

Reconciliation of Average reported assets to Average managed assets
Average reported assets	$	174,218		$	184,215		$	170,570			(5	)		2
Average credit card securitization		33,357			33,445			31,834			—			5

Average managed assets	$	207,575		$	217,660		$	202,404			(5	)		3

Reconciliation of Average reported loans to Average managed loans
Average reported loans	$	153,416		$	158,923		$	142,209			(3	)		8
Average credit card securitization		33,357			33,445			31,834			—			5

Average managed loans	$	186,773		$	192,368		$	174,043			(3	)		7

Average allocated capital	$	9,472		$	8,972		$	8,489			6			12
Average deposits		111,228			108,703			105,972			2			5
Return on average allocated capital		18	%		25	%		31	%	(700		)bp	(1,300		)bp
Overhead ratio		59			52			49			700			1,000
Full-time equivalent employees		45,306			46,111			44,264			(2	)%		2	%

CFS reported first quarter 2004 operating earnings of $427 million, a decrease of 34% and 24% from the first and fourth quarters of 2003, respectively. Return on average allocated capital for the first quarter was 18%, compared with 31% for the first quarter and 25% for the fourth quarter of 2003. Average allocated capital increased by 12% from the first quarter of 2003 and 6% from the fourth quarter of 2003, primarily due to an increase in market risk capital that is associated with the MSR risk management activities of Chase Home Finance.

Operating revenue was $3.4 billion, a decrease of 8% and 5% from the first and fourth quarters of 2003, respectively. The national consumer credit businesses, which includes Chase Home Finance, Chase Cardmember Services and Chase Auto Finance, contributed 74% of first quarter 2004 operating revenue. The declines in revenue were primarily driven by the anticipated slowdown in the mortgage refinance business, as well as the continued negative impact of the low–interest rate environment on the deposit businesses. Net interest income of $2.2 billion was down 2% and 8% from the first and fourth quarters of 2003, respectively, primarily due to lower interest on a lower level of AFS securities used to manage the interest rate risk associated with MSRs and lower spreads as a result of low interest rates. Fees and commissions increased by 6% from the first quarter of 2003, driven by higher credit card interchange fees due to higher consumer purchases, and decreased by 8% from the fourth quarter of 2003 due to seasonally lower

Part I
Item 2 (continued)

credit card revenue. Securities gains declined from the first and fourth quarters of 2003, primarily due to fewer securities sales associated with MSR risk management activities. Mortgage fees and related income of $241 million decreased from $432 million in the first quarter of 2003 and increased from $137 million in the fourth quarter of 2003. First quarter 2004 mortgage originations were lower when compared with both the first and fourth quarters of 2003, due to the decline in the mortgage refinance market. First quarter 2004 MSR hedging revenue improved over the fourth quarter of 2003.

Operating expense of $2.0 billion was up 11% and 7% compared with the first and fourth quarters of 2003, respectively. Compensation expense increased from both the first and fourth quarters of 2003. The increase from the year-ago quarter was primarily due to higher home equity production, as well as increases in the sales force for home equity and other higher-margin distribution channels. The increase in compensation expense from the fourth quarter was primarily due to higher salaries, benefits and incentives. Noncompensation expense increased from the prior periods primarily due to higher marketing costs, professional services and volume-related expenses. Severance and related costs increased from the prior periods due to restructuring in various lines of businesses, particularly in Chase Regional Banking; costs incurred to move certain credit card facilities to a lower-cost location; and, to a lesser extent, severance related to the anticipated merger with Bank One. CFS’s overhead ratio was 59%, compared with 49% for the first quarter of 2003 and 52% for the fourth quarter of 2003, reflecting a decline in revenue and the higher level of expenses. Savings generated by Six Sigma and other productivity efforts continued to partially offset the growth in expenses.

Credit costs of $748 million were down 15% from the first quarter and 13% from the fourth quarter of 2003. The declines reflected lower net charge-offs of 5% and 3% compared with the first and fourth quarters of 2003, respectively, and a reduction in the allowance for loan losses, reflecting improved credit quality. Delinquency rates in the consumer loan portfolios decreased compared with the first and fourth quarters of 2003.

The following table sets forth certain key financial performance measures of the businesses within CFS:


(in millions)										First quarter change
Operating revenue	1Q 2004			4Q 2003			1Q 2003			4Q 2003			1Q 2003

Home Finance^(a)	$	813		$	867		$	1,148			(6	)%		(29	)%
Cardmember Services		1,562			1,620			1,461			(4	)		7
Auto Finance		166			207			198			(20	)		(16	)
Regional Banking		635			653			630			(3	)		1
Middle Market		343			359			362			(4	)		(5	)
Other consumer services^(b)		(105	)		(97	)		(107	)		(8	)		2

Total operating revenue	$	3,414		$	3,609		$	3,692			(5	)		(8	)

Operating expense
Home Finance	$	478		$	484		$	382			(1	)		25
Cardmember Services		605			561			539			8			12
Auto Finance		81			77			68			5			19
Regional Banking		635			645			576			(2	)		10
Middle Market		219			211			216			4			1
Other consumer services^(b)		(19	)		(113	)		17			83		NM

Total operating expense	$	1,999		$	1,865		$	1,798			7			11

Credit costs
Home Finance	$	(9	)	$	13		$	107		NM			NM
Cardmember Services		706			792			695			(11	)		2
Auto Finance		36			41			68			(12	)		(47	)
Regional Banking		28			18			8			56			250
Middle Market		(13	)		(9	)		(1	)		(44	)	NM
Other consumer services^(b)		—			—			—		NM			NM

Total credit costs	$	748		$	855		$	877			(13	)		(15	)

Operating earnings (losses)
Home Finance	$	221		$	237		$	424			(7	)		(48	)
Cardmember Services		162			172			146			(6	)		11
Auto Finance		30			53			37			(43	)		(19	)
Regional Banking		(15	)		(5	)		27			(200	)	NM
Middle Market		80			92			87			(13	)		(8	)
Other consumer services^(b)		(51	)		10			(73	)	NM				30

Total operating earnings	$	427		$	559		$	648			(24	)		(34	)

(a)		Includes Mortgage fees and related income, Net interest income and Securities gains.
(b)		Includes the elimination of revenues and expenses related to the shared activities with Treasury Services, and support services.

Part I
Item 2 (continued)

Outlook: CHF revenues and operating earnings are expected to decline for the remainder of the year as higher interest rates are likely to depress mortgage originations; however, management expects expenses at CHF to moderate in future quarters to reflect the reduced origination volume. CFS’ credit quality in consumer lending is expected to remain stable for the next several quarters.

Chase Home Finance

The following table sets forth key revenue components of Chase Home Finance’s business:


(in millions)										First quarter change
Revenue	1Q 2004			4Q 2003			1Q 2003			4Q 2003			1Q 2003

Home Finance:
Operating revenue (excluding MSR hedging revenue)	$	820		$	950		$	1,062			(14	)%		(23	)%
MSR hedging revenue:
MSR valuation adjustments^(a)		(685	)		229			(473	)	NM				(45	)
Hedging gains (losses)^(b)		678			(312	)		559		NM				21

Total MSR hedging revenue		(7	)		(83	)		86			92		NM

Total revenue^(c)	$	813		$	867		$	1,148			(6	)		(29	)

(a)		See MSR valuation adjustment table on page 46 of this Form 10-Q.
(b)		Hedging gains (losses) includes SFAS 133 qualifying hedges of $546 million, $(465) million and $386 million for the first quarter of 2004, fourth quarter of 2003 and first quarter of 2003, respectively.
(c)		Includes Mortgage fees and related income, Net interest income and Securities gains.

After a record performance in 2003, Chase Home Finance (“CHF”) reported operating earnings of $221 million, a decrease of 48% and 7% from the first and fourth quarters of 2003, respectively. For the first quarter of 2004, total revenue of $813 million decreased by 29% and 6% from the first and fourth quarters of 2003, respectively. During the first quarter, CHF operating revenue declined by 23% and 14% from the first and fourth quarters of 2003, respectively, as higher interest rates and a smaller refinance market lowered mortgage originations and margins. As described below, MSR hedging revenue declined relative to the first quarter of 2003 but increased by 92% relative to the fourth quarter of 2003.

CHF manages and measures its results from two key perspectives: its operating businesses (Production, Servicing and Portfolio Lending) and revenue generated through managing the interest rate risk associated with MSRs. The following table reconciles management’s perspective on CHF’s results to the reported GAAP line items shown on the Consolidated statement of income and in the related Notes to consolidated financial statements:


	Operating basis revenue
	Operating						MSR hedging									Reported
(in millions)	1Q 2004		4Q 2003		1Q 2003		1Q 2004			4Q 2003			1Q 2003			1Q 2004			4Q 2003		1Q 2003

Net interest income	$	539	$	634	$	485	$	38		$	80		$	134		$	577		$	714	$	619
Securities gains		—		—		—		(4	)		13			96			(4	)		13		96
Mortgage fees and related income		281		316		577		(41	)		(176	)		(144	)		240			140		433

Total	$	820	$	950	$	1,062	$	(7	)	$	(83	)	$	86		$	813		$	867	$	1,148

On an operating basis, Net interest income of $539 million declined from the fourth quarter of 2003, as CHF’s average loans declined. Offsetting the decline and driving the increase in Net interest income over the first quarter of 2003 was an increase in home equity balances, driven by origination growth of 60% over the first quarter of 2003. Home equity originations were down 8% compared with the fourth quarter of 2003, although applications were up 36%. Mortgage fees and related income were down compared with the first and fourth quarters of 2003, driven by lower origination volume of $38 billion versus $62 billion and $51 billion, respectively, in the first and fourth quarters of 2003. The declines reflect the smaller refinance market and price competition. Increases in servicing revenues of 7% and 14% over the first and fourth quarters of 2003, respectively, partially offset the decline in production revenue. Servicing balances as of March 31, 2004, were $475 billion, an increase of 10% from March 31, 2003, and 1% from December 31, 2003, the result of lower prepayments.

In its risk management activities, CHF uses a combination of derivatives and AFS securities to manage changes in the market value of MSRs. The intent is to offset any changes in the market value of MSRs with changes in the market value of the related risk management instrument. During the first quarter of 2004, negative MSR valuation adjustments of $685 million were partially offset by $678 million of aggregate derivative gains and net interest earned on AFS securities. Unrealized losses on AFS securities were $71 million at March 31, 2004, and $144 million at December 31, 2003. The decline in the Net interest income and Securities gains components of MSR revenue from the first and fourth quarters of 2003 is primarily due to a lower level of AFS securities used to

Part I
Item 2 (continued)

manage the interest rate risk associated with MSRs. The improvement in the Mortgage fees and related income component of MSR revenue from the first and fourth quarters of 2003 reflects the mix of instruments used to manage the interest rate risk associated with MSRs at any point in time and the impact of market conditions on those instruments rather than a particular trend. For a further discussion of the most significant assumptions used to value MSRs, please see “MSRs and certain other retained interests” in the Critical Accounting Estimates used by the Firm section and in Notes 13 and 16 on pages 100–103 and 107–109 of JPMorgan Chase’s 2003 Annual Report.

The following table reconciles the amounts shown as MSR valuation adjustments of CHF’s business:


MSR Valuation Adjustments	Three months ended March 31,
(in millions)	2004			2003

Reported amounts:
SFAS 133 hedge valuation adjustments	$	(586	)	$	(175	)
SFAS 140 impairment (recovery) adjustments		(34	)		(130	)
Purchased servicing acquisition losses^(a)		(9	)		(44	)
Management accounting adjustments^(b)		(56	)		(124	)

MSR valuation adjustments	$	(685	)	$	(473	)

(a)		Reflects valuation adjustments on purchased servicing, through the settlement date, that are included in MSR additions in the table in Note 14 on pages 17–18 of this Form 10-Q.
(b)		Reflects management accounting adjustments to properly attribute MSR hedging revenue between CHF’s operating business and management of the mortgage servicing asset.

Operating expense of $478 million increased by 25% from the first quarter of 2003 and decreased by 1% from the fourth quarter of 2003. The increase compared with the year-ago quarter was due to higher home equity production, as well as increases in the sales force for home equity and other higher-margin distribution channels. In the first two months of the first quarter of 2004, application volumes dropped dramatically but then rebounded in March; expenses, however, remained stable throughout the quarter. Higher expenses coupled with lower operating revenues increased CHF’s overhead ratio to 59%, as compared with 33% in the first quarter of 2003. Lower operating revenues drove the increase in CHF’s overhead ratio as compared with 56% in the fourth quarter of 2003.

Credit costs of negative $9 million decreased from both the first and fourth quarters of 2003. The decline from the prior-year quarter was primarily a result of weakness in the manufactured housing market in the beginning of 2003. The decrease from the fourth quarter of 2003 was due to a lower overall level of both actual and expected net charge-offs, which drove a reduction in the allowance for loan losses. Credit quality remained strong as the net charge-off rate for the first quarter of 2004 was 0.16%, down from 0.20% and 0.19% in the first and fourth quarters of 2003, respectively.

Chase Cardmember Services

Operating earnings at Chase Cardmember Services (“CCS”) of $162 million increased by 11% from the first quarter of 2003 and decreased by 6% from the fourth quarter of 2003. The increase from the first quarter of last year was driven by higher revenue, partly offset by higher marketing and severance-related costs. The decrease from the fourth quarter of last year was attributable to seasonally lower purchase volume and higher marketing and severance-related costs, partly offset by lower credit costs.

CCS’s operating results exclude the impact of credit card securitizations on revenue, the provision for credit losses, net charge-offs and receivables. Securitization does not change CCS’s reported net income versus operating earnings; however, it does affect the classification of items on the Consolidated statement of income. The financial information presented below reconciles reported basis and managed basis to disclose the effect of securitizations.


	1Q 2004						4Q 2003						1Q 2003
			Effect of						Effect of						Effect of
(in millions)	Reported		securitization		Operating		Reported		securitization		Operating		Reported		securitization		Operating

Revenue	$	1,089	$	473	$	1,562	$	1,158	$	462	$	1,620	$	1,004	$	457	$	1,461
Expense		605		—		605		561		—		561		539		—		539
Credit costs		233		473		706		330		462		792		238		457		695
Operating earnings		162		—		162		172		—		172		146		—		146

Average loans	$	18,216	$	33,357	$	51,573	$	17,610	$	33,445	$	51,055	$	19,024	$	31,834	$	50,858
Average assets		18,524		33,357		51,881		18,171		33,445		51,616		19,763		31,834		51,597

Part I
Item 2 (continued)

Operating revenue was $1.6 billion, up 7% from the first quarter of 2003 and down 4% from the fourth quarter of 2003. The increase in revenue from last year reflected growth in both net interest and noninterest revenue. Net interest revenue increased by 5%, reflecting lower funding costs and growth in average managed loans. Average managed loans increased by 1% from a year ago, due partly to lower balance transfer volume and to higher payment rates, which reflected high consumer liquidity. Consumer liquidity remained high because of increased use of home equity products as well as lower tax rates. As a consequence, the volume of purchases increased during the quarter, and the rate of payments was high. Noninterest revenue increased by 10%, reflecting higher interchange fees primarily due to 15% growth in purchase volume. The increase in purchase volume also reflects the continued strategic shift in the portfolio towards higher-volume, rewards-based products, as well as organic growth. CCS added more than one million new accounts in the first quarter, the sixth consecutive quarter of account additions at this level. The decline in revenue from the fourth quarter of 2003 was due to seasonally higher fourth quarter consumer purchases associated with the holiday season.

Operating expense of $605 million increased by 12% from the first quarter and 8% from the fourth quarter of 2003. The increase in expenses from both periods primarily reflected higher marketing expenses and higher severance and related costs, including expenses related to moving certain operations to lower cost locations. The overhead ratio increased to 39% from 37% and 35% in the first and fourth quarters of 2003, respectively. The increase in the overhead ratio from the first quarter of last year was primarily attributed to increased marketing costs to attract and retain customers. The increase from the fourth quarter of last year primarily reflects lower seasonal revenue as well as increased marketing costs.

Credit costs increased by 2% from the first quarter of 2003 and declined by 11% from the fourth quarter of 2003. Credit quality improved, with the managed net charge-off rate declining to 5.80% in the first quarter of 2004 from 5.95% in the first quarter of 2003. The decline in credit costs from the fourth quarter reflected a decrease in the allowance for loan losses. The managed net charge-off rate increased from 5.76% in the fourth quarter of 2003, due primarily to seasonality associated with higher delinquencies in the second half of last year. The 30+ day delinquency rate improved from first and fourth quarter levels.

Chase Auto Finance

Results at Chase Auto Finance (“CAF”) consist of the Auto Finance and Education Finance businesses. CAF’s operating earnings of $30 million decreased by 19% from the first quarter and 43% from the fourth quarter of 2003. The decrease in operating earnings was driven primarily by a $40 million write-off of prepaid premiums for residual risk insurance, which resulted in a reduction of leasing revenue recognized during the current quarter, and higher operating expenses, partially offset by lower credit costs. The write-off was a result of a review in which it was determined that there was an accelerated pace of lease payments and terminations. CAF’s operating revenue declined by 16% from the first quarter and 20% from the fourth quarter of 2003, due to the reduction in leasing revenue mentioned above and lower portfolio spreads, partially mitigated by higher average loans outstanding. Despite an extremely competitive marketing environment, CAF’s auto origination volume increased by 24% compared with the fourth quarter of 2003, and market share remained stable to year-end 2003 at 6.1%.

Operating expense of $81 million was up 19% from the first quarter and 5% from the fourth quarter of 2003. The increase from the year-ago quarter was driven by higher compensation expense, due to volume growth and corresponding increases in staff, and higher performance-based incentives. The increase from the fourth quarter of 2003 was driven primarily by continued portfolio growth, higher compensation expense and slightly higher technology costs. The overhead ratio increased to 49% in the first quarter, up from 34% and 37% in the first and fourth quarters of 2003, respectively, primarily due to the reduction in leasing revenue and higher expenses.

Credit costs of $36 million decreased by 47% from the first quarter and 12% from the fourth quarter of 2003, due to lower net charge-offs and a lower allowance for loan losses as a result of improved credit quality. The net charge-off rate was 0.36% in the first quarter of 2004, down from 0.48% in the first quarter and 0.39% in the fourth quarter of 2003. The 30+ day delinquency rate decreased to 1.10% in the first quarter of 2004, from 1.27% in the first quarter and 1.46% in the fourth quarter of 2003. The 30+ day delinquency rate was the lowest since June 30, 2002.

Chase Regional Banking

Chase Regional Banking (“CRB”) reported an operating loss of $15 million in the first quarter, down from operating earnings of $27 million in the first quarter of 2003 and an operating loss of $5 million in the fourth quarter of 2003. The decrease from the year-ago quarter primarily resulted from higher expense and credit costs, partially offset by slightly higher revenue. The decrease from the fourth quarter of 2003 was primarily due to lower revenue and higher credit costs, partially offset by lower expense.

Operating revenue of $635 million increased by 1% from the first quarter of 2003 and decreased by 3% from the fourth quarter of 2003. Despite lower spreads, growth in average deposits of 10% from the first quarter of 2003 resulted in Net interest income being up slightly. The decline in revenue from the fourth quarter of 2003 was due to narrower spreads and lower noninterest revenue

Part I
Item 2 (continued)

related to seasonal declines in deposit service fees, and lower debit card and investment revenues. Average deposits increased by 4% from the fourth quarter of 2003.

Operating expense was up 10% from the comparable 2003 period and down 2% from the fourth quarter of 2003. The increase from the prior-year quarter reflected higher severance and related costs primarily due to restructuring, and higher compensation costs. The decrease from the fourth quarter of 2003 was primarily related to the timing of marketing and professional services expenses. The overhead ratio for the quarter was 100%, up from 91% and 99% in the first and fourth quarters of 2003, respectively. The increase from the first quarter of 2003 was due to higher expenses, while the increase from the fourth quarter was due to lower revenue.

Credit costs of $28 million were up from $8 million and $18 million, respectively, in the first and fourth quarters of 2003. The increase from the prior-year quarter was the result of a higher allowance for loan losses. The increase from the fourth quarter of 2003 was due to a higher allowance for loan losses, partially offset by lower net charge-offs.

As of March 31, 2004, CRB’s deposit mix was 18% demand, 14% interest checking, 47% savings, 11% money market and 10% time (CDs). At March 31, 2003, the deposit mix was 18% demand, 14% interest checking, 46% savings, 9% money market and 13% time (CDs). As of March 31, 2004, core deposits (total deposits less time deposits) grew by 13% from March 31, 2003, and 4% from December 31, 2003.

Chase Middle Market

Chase Middle Market (“CMM”) operating earnings of $80 million were down 8% from the first quarter and 13% from the fourth quarter of 2003. The decrease from both periods was primarily attributable to lower revenues, partially offset by improved credit quality.

Operating revenue of $343 million decreased by 5% from the first quarter and 4% from the fourth quarter of 2003. The decrease from the year-ago quarter was primarily due to lower Net interest income, driven by a 4% decrease in average loans and narrower loan and deposit spreads, partially offset by an 11% increase in average deposits. The decrease from the fourth quarter was due to lower Net interest income, reflecting narrower loan and deposit spreads, partially offset by a 2% increase in average loans and a 9% increase in average deposits.

Operating expenses of $219 million in the quarter were up 1% from the first quarter and 4% from the fourth quarter of 2003. The increase from the first quarter of 2003 was driven by higher performance-based incentives, partially offset by lower severance and related costs. The increase from the fourth quarter was driven by higher incentives and higher severance and related costs. The overhead ratio for the quarter was 64%, up from 60% and 59% in the first and fourth quarters of 2003, respectively, due to the decline in revenue and increase in expenses.

Lower net charge-offs and a reduction in the allowance for loan losses compared with the first and fourth quarters of 2003 resulted in credit costs of negative $13 million.

Part I
Item 2 (continued)

CHASE FINANCIAL SERVICES
QUARTERLY BUSINESS-RELATED METRICS


										First quarter change
(in billions, except ratios and where otherwise noted)	1Q 2004			4Q 2003			1Q 2003			4Q 2003			1Q 2003

Chase Home Finance
Origination volume by channel:
Retail, wholesale and correspondent	$	30.1		$	37.0		$	40.8			(19	)%		(26	)%
Correspondent negotiated transactions		7.7			14.0			21.2			(45	)		(64	)

Total		37.8			51.0			62.0			(26	)		(39	)
Origination volume by product:
First mortgage	$	31.1		$	43.7		$	57.8			(29	)		(46	)
Home equity		6.7			7.3			4.2			(8	)		60

Total		37.8			51.0			62.0			(26	)		(39	)
Loans serviced		475			470			432			1			10
End-of-period outstandings		75.0			73.7			67.3			2			11
Total average loans owned		72.1			79.4			64.4			(9	)		12
Number of customers (in millions)		4.1			4.1			4.0			—			2
MSR carrying value		4.2			4.8			3.2			(13	)		31
30+ day delinquency rate		1.32	%		1.81	%		2.31	%	(49		)bp	(99		)bp
Net charge-off ratio		0.16			0.19			0.20			(3	)		(4	)
Overhead ratio		59			56			33			300			2,600

Chase Cardmember Services – Reported Basis
Average outstandings	$	17.2		$	16.6		$	19.0			4	%		(9	)%
30+ day delinquency		3.18	%		3.34	%		3.41	%	(16		)bp	(23		)bp
Net charge-off ratio		6.33			6.68			6.17			(35	)		16
Overhead ratio		56			48			54			800			200

Chase Cardmember Services–Managed Basis
End-of-period outstandings	$	51.0		$	52.3		$	50.6			(2	)%		1	%
Average outstandings		51.6			51.1			50.9			1			1
Total volume^(a)		22.0			23.9			20.7			(8	)		6
New accounts (in millions)		1.0			1.0			1.1			—			(9	)
Active accounts (in millions)		16.5			16.5			16.5			—			—
Total accounts (in millions)		30.8			30.8			29.8			—			3
Credit cards issued		35.4			35.3			33.9			—			4
30+ day delinquency rate		4.43	%		4.68	%		4.59	%	(25		)bp	(16		)bp
Net charge-off ratio		5.80			5.76			5.95			4			(15	)
Overhead ratio		39			35			37			400			200

Chase Auto Finance
Loan and lease receivables	$	44.0		$	43.2		$	41.1			2	%		7	%
Average loan and lease receivables		44.3			43.5			39.6			2			12
Automobile origination volume		6.8			5.5			7.4			24			(8	)
Automobile market share (year-to-date)		6.1	%		6.1	%		6.7	%	—		bp	(60		)bp
30+ day delinquency rate		1.10			1.46			1.27			(36	)		(17	)
Net charge-off ratio		0.36			0.39			0.48			(3	)		(12	)
Overhead ratio		49			37			34			1,200			1,500

Chase Regional Banking
Total average deposits	$	79.9		$	77.1		$	72.6			4	%		10	%
Total client assets^(b)		118.4			111.1			105.3			7			12
Number of branches/banking centers		532			529			527			1			1
Number of ATMs		1,718			1,730			1,870			(1	)		(8	)
Overhead ratio		100	%		99	%		91	%	100		bp	900		bp

Chase Middle Market
Total average loans	$	13.8		$	13.5		$	14.4			2	%		(4	)%
Total average deposits		31.6			28.9			28.4			9			11
Nonperforming average loans as a % of total average loans		0.91	%		1.00	%		1.41	%	(9		)bp	(50		)bp
Net charge-off ratio		(0.03	)		0.16			0.75			(19	)		(78	)
Overhead ratio		64			59			60			500			400

(a)		Sum of total customer purchases, cash advances and balance transfers.
(b)		Deposits, money market funds and/or investment assets (including annuities).

Part I
Item 2 (continued)

SUPPORT UNITS AND CORPORATE


										First quarter change
(in millions, except employees)	1Q 2004			4Q 2003			1Q 2003			4Q 2003			1Q 2003

Operating revenue	$	(122	)	$	(123	)	$	(119	)		1	%		(3	)%
Operating expense		71			(35	)		41		NM				73
Credit costs		(83	)		(49	)		71			(69	)	NM

Pre-tax loss		(110	)		(39	)		(231	)		(182	)		52
Income tax benefit		(154	)		(215	)		(170	)		28			9

Operating earnings (loss)	$	44		$	176		$	(61	)		(75	)	NM

Average allocated capital	$	6,810		$	4,498		$	(1,743	)		51		NM
Average assets		20,321			20,130			21,325			1			(5	)
Shareholder value added		(122	)		81			35		NM			NM
Full-time equivalent employees		10,207			10,088			13,026			1			(22	)

The Support Units and Corporate sector includes technology, legal, audit, finance, human resources, risk management, real estate management, procurement, executive management and marketing groups within Corporate. For a further discussion of the business profiles of these Support Units as well as a description of Corporate, see page 44 of JPMorgan Chase’s 2003 Annual Report.

Support Units and Corporate reflects the application of the Firm’s management accounting policies at the corporate level. These policies allocate the costs associated with technology, operational and staff support services to the business segments, with the intent to recover all expenditures associated with these services. Other items are retained within Support Units and Corporate based on policy decisions, such as the over/under allocation of average allocated capital, the residual component of credit costs and taxes. Business segment revenues are reported on a tax-equivalent basis, with the offset reflected in Support Units and Corporate; see Note 22 on pages 22–23 of this Form 10-Q.

For the first quarter of 2004, Support Units and Corporate reported operating earnings of $44 million, compared with an operating loss of $61 million in the first quarter of 2003 and operating earnings of $176 million in the fourth quarter of 2003. Operating earnings in the first quarter of 2004 were driven primarily by higher capital and lower credit costs.

In allocating the allowance (and provision) for credit losses, each business is responsible for its credit costs. Although the Support Units and Corporate sector has no traditional credit assets, the residual component of the allowance, which is available for losses in any business segment, is maintained at the corporate level. For a further discussion of the residual component, see Summary of changes in the Allowance for credit losses on pages 65–66 of this Form 10-Q.

Average allocated capital was $8.6 billion higher than in the first quarter of 2003 and $2.3 billion higher than in the fourth quarter, reflecting a reduction in credit risk capital allocated to the business segments and an increase in common stockholders’ equity.

The Firm’s operating expenses reflected a shift of $115 million from Compensation and Other expense to Technology and communications expense due to the technology infrastructure outsourcing that took effect on April 1, 2003. For additional disclosure, see Results of operations on page 28–29 of this Form 10-Q.

RISK AND CAPITAL MANAGEMENT

JPMorgan Chase is in the business of managing risk to create shareholder value. The major risks to which the Firm is exposed are credit, market, operational, business, fiduciary, liquidity and private equity risk. For a discussion of these risks and definitions of terms associated with managing these risks, see pages 45–74 and the Glossary of terms in JPMorgan Chase’s 2003 Annual Report.

Part I
Item 2 (continued)

CAPITAL AND LIQUIDITY MANAGEMENT

CAPITAL MANAGEMENT

The following discussion of JPMorgan Chase’s capital management focuses primarily on developments since December 31, 2003, and should be read in conjunction with pages 46–47 and Note 26 of JPMorgan Chase’s 2003 Annual Report.


Available versus required capital	Quarterly Averages
(in billions)	1Q 2004			1Q 2003

Common stockholders’ equity	$	45.8		$	41.9
Economic risk capital:
Credit risk		9.5			15.1
Market risk		5.6			4.2
Operational risk		3.4			3.5
Business risk		1.7			1.7
Private equity risk		4.6			5.4

Economic risk capital		24.8			29.9
Goodwill / Intangibles		9.5			8.9
Asset capital tax		3.9			4.0

Capital against nonrisk factors		13.4			12.9

Total capital allocated to business activities		38.2			42.8

Diversification effect		(5.3	)		(5.0	)

Total required internal capital	$	32.9		$	37.8

Firm capital in excess of required capital	$	12.9		$	4.1

Economic risk capital:

JPMorgan Chase assesses capital adequacy utilizing internal risk assessment methodologies. The Firm assigns economic capital based primarily on five risk factors: credit risk, market risk, operational risk and business risk for each business, and private equity risk, principally for JPMP. The methodologies quantify these risks and assign capital accordingly. These methodologies are discussed in the risk management sections of JPMorgan Chase’s 2003 Annual Report.

Capital also is assessed against business units for certain nonrisk factors. Businesses are assessed capital equal to 100% of any goodwill and 50% for certain other intangibles generated through acquisitions. Additionally, the Firm assesses an “asset capital tax” against managed assets and some off–balance sheet instruments. These assessments recognize that certain minimum regulatory capital ratios must be maintained by the Firm. JPMorgan Chase also estimates the portfolio effect on required economic capital, based on correlations of risk across risk categories. This estimated diversification benefit leads to a reduction in required economic capital for the Firm.

The Firm’s capital in excess of that which is internally required as of March 31, 2004, increased by $8.8 billion over March 31, 2003. The change was primarily due to an increase in average common stockholders’ equity of $3.9 billion, a $5.6 billion reduction in credit risk capital and a $0.8 billion reduction in private equity capital, partially offset by a $1.4 billion increase in market risk capital. The decrease in credit risk capital from the prior year was primarily due to a reduction in commercial exposures and improvement in the credit quality of the commercial portfolio. Private equity risk decreased primarily as a result of the reduction in JPMP’s private equity portfolio. Market risk capital increased, due to growth in the MSR portfolio in CHF as well as higher average trading VAR in IB.

Regulatory capital

JPMorgan Chase’s risk-based capital ratios at March 31, 2004, were well in excess of minimum regulatory guidelines. At March 31, 2004, Tier 1 and Total capital ratios were 8.4% and 11.4%, respectively, and the Tier 1 leverage ratio was 5.9%. At March 31, 2004, the total capitalization of JPMorgan Chase (the sum of Tier 1 and Tier 2 capital) was $60.9 billion, an increase of $1.1 billion from December 31, 2003. This increase was principally driven by a $1.5 billion increase in Tier 1 capital, reflecting $1.2 billion in retained earnings (net income less common and preferred dividends) generated during the period and net stock issuance of $0.5 billion related to employee benefit plans, partially offset by a decrease in the allowance for credit losses component of Tier 2 capital.

Part I
Item 2 (continued)

During 2003, the Firm adopted FIN 46 and, as a result, deconsolidated the trusts that issue trust preferred securities. If banking regulators were to exclude these securities from Tier 1 capital, it could significantly reduce the Tier 1 capital ratio of the Firm. On July 2, 2003, the Federal Reserve Board issued a supervisory letter instructing banks and bank holding companies to continue to include trust preferred securities in Tier 1 capital. Based on the terms of this letter and in consultation with the Federal Reserve Board, the Firm continues to include its trust preferred securities in Tier 1 capital.

Stock repurchase

The Firm did not repurchase any shares of its common stock during the first quarter of 2004 or all of 2003. At the time the Firm and Bank One announced their proposed merger, managements at the two firms announced their intention to repurchase shares in an aggregate amount of approximately $3.5 billion annually in 2004, 2005 and 2006 (in addition to shares repurchased to provide common stock required for both firms’ respective dividend-reinvestment and employee equity-based plans). The aforementioned repurchase program was made based on both firms’ respective managements’ determinations that, based upon market conditions, current business plans and expectations for the combined company, stock repurchases present an attractive use of excess capital. The actual amount of shares repurchased will be subject to the discretion of the combined company’s Board of Directors considering factors which include: market conditions; legal considerations; the combined company’s capital position (taking into account purchase accounting adjustments); internal capital generation; and alternative potential investment opportunities over that time frame.

Dividends

In the first quarter of 2004, JPMorgan Chase declared a quarterly cash dividend on its common stock of $0.34 per share, payable April 30, 2004, to stockholders of record at the close of business April 6, 2004.

LIQUIDITY MANAGEMENT

The following discussion of JPMorgan Chase’s liquidity management focuses primarily on developments since December 31, 2003, and should be read in conjunction with pages 47–48 of JPMorgan Chase’s 2003 Annual Report. In managing liquidity, management considers a variety of liquidity risk measures as well as market conditions, prevailing interest rates, liquidity needs and the desired maturity profile of its liabilities.

Consistent with its liquidity management policy, the Firm has raised funds at the holding company sufficient to cover maturing obligations over the next 12 months. Long-term funding needs for the parent holding company over the next several quarters are expected to be consistent with prior periods. The Firm manages its liquidity through a combination of short- and long-term sources of funds to support its balance sheet and its businesses. Under the Firm’s liquidity risk management framework, the Firm maintains sufficient levels of long-term liquidity through a combination of long-term debt, preferred stock, common equity and core deposits to support the less liquid assets on its balance sheet. The Firm’s primary source of short-term funds, excluding unsecured borrowings, includes more than $40 billion of securities available for repurchase agreements and approximately $30 billion of credit card, automobile and mortgage loans available for securitization.

Credit ratings

The credit ratings of JPMorgan Chase’s parent holding company and JPMorgan Chase Bank as of April 30, 2004, were as follows:


	JPMorgan Chase		JPMorgan Chase Bank
	Short-term debt	Senior long-term debt	Short-term debt	Senior long-term debt
Moody’s	P-1	A1	P-1	Aa3
S&P	A-1	A+	A-1+	AA-
Fitch	F1	A+	F1	A+

Upon the announcement of the proposed merger with Bank One, Moody’s and Fitch placed the ratings of the Firm under review for possible upgrade, while S&P affirmed the Firm’s ratings.

The cost and availability of unsecured financing are influenced by credit ratings. A reduction in these ratings could adversely impact the Firm’s access to liquidity sources, increase the cost of funds, trigger additional collateral requirements and decrease the number of investors and counterparties willing to lend. If the Firm’s ratings were downgraded by one notch, the Firm estimates that the incremental cost of funds to be in the range of 5 basis points to 30 basis points, reflecting a range of terms from three to five years, and the potential loss of funding to be negligible. Additionally, the Firm estimates the additional funding requirements for SPE and

Part I
Item 2 (continued)

other third-party commitments to be relatively modest. In the current environment, the Firm believes the likelihood of a downgrade is remote. For additional information on the impact of a credit ratings downgrade on funding requirements for SPEs, and on derivatives and collateral agreements, see Off-balance Sheet Arrangements below and page 61, respectively, of this Form 10-Q.

Balance sheet

The Firm’s total assets increased by $30.2 billion from December 31, 2003, to $801.1 billion at March 31, 2004, largely due to an increase in deposits placed with banks and investment securities. Debt and equity trading assets were also higher due to growth in IB business activities. Commercial loans declined by $3.9 billion, mostly as a result of the deconsolidation of a Firm-sponsored asset-backed commercial paper conduit which had been previously consolidated on the Firm’s balance sheet under the guidance of FIN 46. Consumer loans increased by $2.0 billion, led by increases in home equity loans. Credit card loans declined modestly due to seasonal factors and lower volumes; loan volumes in the quarter were affected by increased securitization activity, partially offset by strong purchase volumes. Automobile loans increased slightly, helped by higher origination volumes over the fourth quarter of last year. Effective January 1, 2004, the Firm elected to net cash paid and received under credit-support annexes to legally enforceable master netting agreements; thereby reducing Derivative receivables by $28.7 billion and Derivative payables by $19.7 billion. The Firm’s liabilities also increased in an amount consistent with the above asset growth, through a combination of continued growth in deposits, which contributed to the growth in investment securities, and higher securities sold under repurchase agreements.

Issuance

During the three months ended March 31, 2004, JPMorgan Chase issued approximately $4.9 billion of long-term debt; during the same period, $2.8 billion of long-term debt matured or was redeemed. In addition, the Firm securitized approximately $2.7 billion of residential mortgage loans, $1.5 billion of credit card loans and $1.6 billion of automobile loans, resulting in pre-tax gains (losses) on securitizations of $48 million, $10 million and $(3) million, respectively. For a further discussion of loan securitizations, see Note 11 of this Form 10-Q and Note 13 on pages 100–103 of JPMorgan Chase’s 2003 Annual Report.

Off–balance Sheet Arrangements

Special-purpose entities (“SPEs”), special-purpose vehicles (“SPVs”) or variable-interest entities (“VIEs”), are an important part of the financial markets, providing market liquidity by facilitating investors’ access to specific portfolios of assets and risks. JPMorgan Chase is involved with SPEs in three broad categories of transactions: loan securitizations (through “qualifying” SPEs), multi-seller conduits, and client intermediation. Capital is held, as appropriate, against all SPE-related transactions and related exposures such as derivative transactions and lending-related commitments. For a further discussion of SPEs and the Firm’s accounting for SPEs, see Notes 11 and 12 of this Form 10-Q and Note 1 on pages 86–87, Note 13 on pages 100–103 and Note 14 on pages 103–106 of JPMorgan Chase’s 2003 Annual Report.

For certain liquidity commitments to SPEs, the Firm could be required to provide funding if the credit rating of JPMorgan Chase Bank were downgraded below specific levels, primarily P-1, A-1 and F1 for Moody’s, Standard & Poor’s and Fitch, respectively. The amount of these liquidity commitments was $32.3 billion at March 31, 2004. If JPMorgan Chase Bank were required to provide funding under these commitments, the Firm could be replaced as liquidity provider. Additionally, with respect to the multi-seller conduits and structured commercial loan vehicles for which JPMorgan Chase Bank has extended liquidity commitments, the Bank could facilitate the sale or refinancing of the assets in the SPE in order to provide liquidity.

Of its $32.3 billion in liquidity commitments to SPEs, $31.1 billion is included in the Firm’s total Other unfunded commitments to extend credit, included in the table on the following page. As a result of the consolidation of multi-seller conduits in accordance with FIN 46, $1.2 billion of these commitments are excluded from the table, as the underlying assets of the SPE have been included on the Firm’s Consolidated balance sheet.

The following table summarizes certain revenue information related to VIEs with which the Firm has significant involvement, and qualifying SPEs:

Quarter ended March 31, 2004

“Qualifying”

(in millions)

VIEs^(a)

SPEs

Total

Revenue

$265

288

(a)

Includes all VIE-related revenue (i.e., revenue associated with consolidated and nonconsolidated VIEs).

The revenue reported in the table above primarily represents servicing and custodial fee income. The Firm also has exposure to certain VIE vehicles arising from derivative transactions with VIEs; these transactions are recorded at fair value on the Firm’s Consolidated balance sheet with changes in fair value (i.e., mark-to-market gains and losses) recorded in Trading revenue. Such MTM gains and losses are not included in the revenue amounts reported in the table above.

Part I
Item 2 (continued)

The following table summarizes JPMorgan Chase’s off–balance sheet lending-related financial instruments by remaining maturity at March 31, 2004:


Off–balance sheet lending-related financial instruments
	Under		1–3		4–5		After
(in millions)	1 year		years		years		5 years		Total

Consumer-related	$	161,060	$	480	$	666	$	27,012	$	189,218
Commercial-related:
Other unfunded commitments to extend credit^(a)(b)		95,487		50,960		25,081		3,617		175,145
Standby letters of credit and guarantees^(a)		18,141		13,370		5,783		1,564		38,858
Other letters of credit^(a)		1,632		457		2,164		31		4,284

Total commercial-related		115,260		64,787		33,028		5,212		218,287

Total lending-related commitments	$	276,320	$	65,267	$	33,694	$	32,224	$	407,505


(a)		Net of risk participations totaling $17 billion at March 31, 2004.
(b)		Includes unused advised lines of credit totaling $20 billion at March 31, 2004, which are not legally binding. In regulatory filings with the Federal Reserve Board, unused advised lines are not reportable.

CREDIT RISK MANAGEMENT

The following discussion of JPMorgan Chase’s credit portfolio as of March 31, 2004, focuses primarily on developments since December 31, 2003, and should be read in conjunction with pages 51–65, pages 74–77 and Notes 11, 12, 29 and 30 of JPMorgan Chase’s 2003 Annual Report.

The Firm assesses its consumer credit exposure on a managed basis, including credit card securitizations. For a reconciliation of credit costs on an operating, or managed, basis to reported results, see pages 30–32 of this Form 10-Q.

The Firm allocates credit risk capital to the lines of business based upon its assessment of “economic credit exposure,” a non-GAAP financial measure that, in the Firm’s view, represents actual future credit exposure. The principal difference between The Firm’s credit exposure on a reported basis and its economic view of credit exposure relates to the way the Firm views its credit exposure to derivative receivables and lending-related commitments. For further information, refer to pages 60 and 62 of this Form 10-Q.

Part I
Item 2 (continued)