FORM 10–Q

For the Quarterly Period Ended March 31, 2006		Commission file number 1-5805

JPMORGAN CHASE & CO.

 

Delaware		13-2624428
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
270 Park Avenue, New York, New York		10017
(Address of principal executive offices)		(Zip Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes    o No

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x    Accelerated filer o    Non-accelerated filer o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes    x No

FORM 10–Q
TABLE OF CONTENTS

						Page
Part I – Financial information
Item 1				Consolidated Financial Statements – JPMorgan Chase & Co.:
				Consolidated statements of income (unaudited) for the three months ended March 31, 2006, and March 31, 2005			60
				Consolidated balance sheets (unaudited) at March 31, 2006, and December 31, 2005			61
				Consolidated statements of changes in stockholders’ equity (unaudited) for the three months ended March 31, 2006, and March 31, 2005			62
				Consolidated statements of cash flows (unaudited) for the three months ended March 31, 2006, and March 31, 2005			63
				Notes to consolidated financial statements (unaudited)			64
				Consolidated average balance sheet, interest and rates (unaudited) for the three months ended March 31, 2006, and March 31, 2005			87
				Glossary of Terms and Line of Business Metrics			88
Item 2				Management’s Discussion and Analysis of Financial Condition and Results of Operations:
				Consolidated Financial Highlights			3
				Introduction			4
				Executive Overview			6
				Consolidated Results of Operations			8
				Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures			11
				Business Segment Results			13
				Balance Sheet Analysis			35
				Capital Management			37
				Off-Balance Sheet Arrangements and Contractual Cash Obligations			40
				Risk Management			41
				Supervision and Regulation			57
				Critical Accounting Estimates Used by the Firm			58
				Accounting and Reporting Developments			59
				Forward-looking Statements			92
Item 3				Quantitative and Qualitative Disclosures About Market Risk			93
Item 4				Controls and Procedures			93
Part II – Other information
Item 1				Legal Proceedings			93
Item 1A				Risk Factors			94
Item 2				Unregistered Sales of Equity Securities and Use of Proceeds			94
Item 3				Defaults Upon Senior Securities			95
Item 4				Submission of Matters to a Vote of Security Holders			95
Item 5				Other Information			95
Item 6				Exhibits			95
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32: CERTIFICATION

JPMORGAN CHASE & CO.

(unaudited)
(in millions, except per share, headcount and ratio data)
As of or for the period ended		1Q06				4Q05				3Q05				2Q05				1Q05
Selected income statement data
Noninterest revenue		$	10,176			$	8,925			$	9,613			$	7,742			$	8,422
Net interest income			5,060				4,753				4,852				5,001				5,225
Total net revenue			15,236				13,678				14,465				12,743				13,647
Provision for credit losses			831				1,224				1,245	(f)			587				427
Noninterest expense			9,752				8,535				9,464				10,899				9,937
Income before income tax expense			4,653				3,919				3,756				1,257				3,283
Income tax expense			1,572				1,221				1,229				263				1,019
Net income		$	3,081			$	2,698			$	2,527			$	994			$	2,264
Per common share
Net income per share: Basic		$	0.89			$	0.78			$	0.72			$	0.28			$	0.64
Diluted			0.86				0.76				0.71				0.28				0.63
Cash dividends declared per share			0.34				0.34				0.34				0.34				0.34
Book value per share			31.19				30.71				30.26				29.95				29.78
Common shares outstanding
Average: Basic			3,473				3,472				3,485				3,493				3,518
Diluted			3,571				3,564				3,548				3,548				3,570
Common shares at period-end			3,473				3,487				3,503				3,514				3,525
Selected ratios
Return on common equity (“ROE”)(a)			12	%			10	%			9	%			4	%			9	%
Return on assets (“ROA”)(a)(b)			1.00				0.89				0.84				0.34				0.79
Tier 1 capital ratio			8.5				8.5				8.2				8.2				8.6
Total capital ratio			12.1				12.0				11.3				11.3				11.9
Tier 1 leverage ratio			6.1				6.3				6.2				6.2				6.3
Selected balance sheet data (period-end)
Total assets		$	1,273,282			$	1,198,942			$	1,203,033			$	1,171,283			$	1,178,305
Securities			67,126				47,600				68,697				58,573				75,251
Loans			432,081				419,148				420,504				416,025				402,669
Deposits			584,465				554,991				535,123				534,640				531,379
Long-term debt			112,133				108,357				101,853				101,182				99,329
Common stockholders’ equity			108,337				107,072				105,996				105,246				105,001
Total stockholders’ equity			108,337				107,211				106,135				105,385				105,340
Credit quality metrics
Allowance for credit losses		$	7,659			$	7,490			$	7,615			$	7,233			$	7,423
Nonperforming assets(c)			2,348				2,590				2,839				2,832				2,949
Allowance for loan losses to total loans(d)			1.83	%			1.84	%			1.86	%			1.76	%			1.82	%
Net charge-offs		$	668			$	1,360			$	870			$	773			$	816
Net charge-off rate(a)(d)			0.69	%			1.39	%			0.89	%			0.82	%			0.88	%
Wholesale net charge-off (recovery) rate(a)(d)			(0.06	)			0.07				(0.12	)			(0.16	)			(0.03	)
Managed card net charge-off rate(a)			2.99				6.39				4.70				4.87				4.83
Headcount			170,787				168,847				168,955				168,708				164,381
Share price(e)
High		$	42.43			$	40.56			$	35.95			$	36.50			$	39.69
Low			37.88				32.92				33.31				33.35				34.32
Close			41.64				39.69				33.93				35.32				34.60

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

This Form 10–Q provides management’s discussion and analysis (“MD&A”) of the financial condition and results of operations for JPMorgan Chase & Co. See the Glossary of terms on pages 88–89 for definitions of terms used throughout this Form 10–Q. The MD&A included in this Form 10–Q contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based upon the current beliefs and expectations of JPMorgan Chase’s management and are subject to significant risks and uncertainties. These risks and uncertainties could cause JPMorgan Chase’s results to differ materially from those set forth in such forward-looking statements. See Forward-looking statements on page 92 of this Form 10–Q.

INTRODUCTION
JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”), a financial holding company incorporated under Delaware law in 1968, is a leading global financial services firm and one of the largest banking institutions in the United States, with $1.3 trillion in assets, $108 billion in stockholders’ equity and operations worldwide. The Firm is a leader in investment banking, financial services for consumers and businesses, financial transaction processing, asset and wealth management and private equity. Under the JPMorgan and Chase brands, the Firm serves millions of customers in the United States and many of the world’s most prominent corporate, institutional and government clients.

JPMorgan Chase’s principal bank subsidiaries are JPMorgan Chase Bank, National Association (“JPMorgan Chase Bank”), a national banking association with branches in 17 states; and Chase Bank USA, National Association, a national bank that is the Firm’s credit card issuing bank. JPMorgan Chase’s principal nonbank subsidiary is J.P. Morgan Securities Inc. (“JPMSI”), the Firm’s U.S. investment banking firm.

JPMorgan Chase’s activities are organized, for management reporting purposes, into six business segments, as well as Corporate. The Firm’s wholesale businesses comprise the Investment Bank, Commercial Banking, Treasury & Securities Services and Asset & Wealth Management segments. The Firm’s consumer businesses comprise the Retail Financial Services and Card Services segments. A description of the Firm’s business segments, and the products and services they provide to their respective client bases, follows.

Investment Bank
JPMorgan Chase is one of the world’s leading investment banks, as evidenced by the breadth of the Investment Bank client relationships and product capabilities. The Investment Bank (“IB”) has extensive relationships with corporations, financial institutions, governments and institutional investors worldwide. The Firm provides a full range of investment banking products and services in all major capital markets, including advising on corporate strategy and structure, capital raising in equity and debt markets, sophisticated risk management, and market-making in cash securities and derivative instruments. The IB also commits the Firm’s own capital to proprietary investing and trading activities.

Retail Financial Services
Retail Financial Services (“RFS”) realigned its business reporting segments on January 1, 2006, into Regional Banking, Mortgage Banking and Auto Finance. Regional Banking offers one of the largest branch networks in the United States, covering 17 states with 2,638 branches and 7,400 automated teller machines (“ATMs”). Regional Banking distributes, through its network, a variety of products including checking, savings and time deposit accounts; home equity, residential mortgage, small business banking, and education loans; mutual fund and annuity investments; and on-line banking services. Mortgage Banking is a leading provider of mortgage loan products and is one of the largest originators and servicers of home mortgages. Auto Finance is the largest noncaptive originator of automobile loans, primarily through a network of automotive dealers across the United States. The Firm has announced an agreement to acquire the consumer, small-business and middle-market banking businesses of The Bank of New York Company (“The Bank of New York”) in exchange for certain portions of the Firm’s corporate trust business.

Card Services
Card Services (“CS”) is one of the largest issuers of credit cards in the United States, with more than 112 million cards in circulation. CS offers a wide variety of cards to satisfy the needs of individual consumers, small businesses and partner organizations. The Chase Paymentech Solutions, LLC joint venture is the largest processor of MasterCard^® and Visa^® payments in the world.

Commercial Banking
Commercial Banking (“CB”) serves more than 25,000 clients, including corporations, municipalities, financial institutions and not-for-profit entities, with annual revenues generally ranging from $10 million to $2 billion. While most Middle Market clients are located within the RFS footprint, CB also serves larger corporations, as well as local governments and financial institutions on a national basis. CB is a market leader with superior client penetration across the businesses it serves. Local market presence, coupled with industry expertise and excellent client service and risk management, enables CB to offer superior financial advice. Partnership with other JPMorgan Chase businesses positions CB to deliver broad product capabilities – including lending, treasury services, investment banking, and asset and wealth management – in order to meet its clients’ financial needs.

Treasury & Securities Services
Treasury & Securities Services (“TSS”) is a global leader in providing transaction, investment and information services to support the needs of corporations, issuers and institutional investors worldwide. TSS is one of the largest cash management providers in the world and a leading global custodian. The Treasury Services (“TS”) business provides a variety of cash management products, trade finance and logistics solutions, wholesale card products, and short-term liquidity management tools. TS partners with the CB, Regional Banking and Asset & Wealth Management businesses to serve clients firmwide. As a result, certain TS revenues are included in other segments’ results. As previously announced, TSS reorganized the Investor Services and Institutional Trust Services businesses into a single business called Worldwide Securities Services (“WSS”). The WSS business provides: safekeeping, valuing, clearing and servicing of securities and portfolios for investors and broker-dealers; trustee and agent services; and management of American Depositary Receipt programs. The Firm has announced an agreement to acquire the consumer, small-business and middle-market banking businesses of The Bank of New York in exchange for certain portions of the Firm’s corporate trust business. For a description of the transaction, see Other Business Events below.

Asset & Wealth Management
Asset & Wealth Management (“AWM”) provides investment advice and management for institutions and individuals. With $1.2 trillion of Assets under supervision, AWM is one of the largest asset and wealth managers in the world. AWM serves four distinct client groups through three businesses: institutions through JPMorgan Asset Management; ultra-high-net-worth clients through the Private Bank; high-net-worth clients through Private Client Services; and retail clients through JPMorgan Asset Management. The majority of AWM’s client assets are in actively managed portfolios. AWM has global investment expertise in equities, fixed income, real estate, hedge funds, private equity and liquidity, including both money market instruments and bank deposits. AWM also provides trust and estate services to ultra-high-net-worth and high-net-worth clients and retirement services for corporations and individuals.

OTHER BUSINESS EVENTS

IPO allocation litigation
On April 19, 2006, JPMorgan Securities Inc. (“JPMSI”) entered into a Memorandum of Understanding (the “MOU”) with plaintiffs’ executive committees in the consolidated IPO securities cases and the consolidated IPO antitrust cases. The MOU is an agreement in principle to settle these class action lawsuits for $425 million. The MOU is subject to approval by the plaintiffs in each of the cases and by the district court judges presiding over the respective lawsuits. The settlement would not have a material adverse impact on the Firm’s financial results. See Part II Other Information, Item 1 Legal Proceedings on page 93 of this Form 10–Q for additional information.

Acquisition of the consumer, small-business and middle-market banking businesses of The Bank of New York in exchange for certain portions of the corporate trust business
On April 8, 2006, JPMorgan Chase announced an agreement to acquire The Bank of New York’s consumer, small-business and middle-market banking businesses in exchange for certain portions of the Firm’s corporate trust business plus a cash payment of $150 million. The Bank of New York businesses being acquired are valued at a premium of $2.30 billion; certain portions of the Firm’s corporate trust business being sold are valued at a premium of $2.15 billion. The Firm may also make a future payment to The Bank of New York of up to $50 million depending on the number of new account openings at the Firm’s retail branches. The transaction has been approved by both companies’ boards of directors and is subject to regulatory approvals. It is expected to close in late third quarter or the fourth quarter of 2006.

Acquisition of Kohl’s private label credit card portfolio
On March 5, 2006, JPMorgan Chase entered into an agreement with Kohl’s Corporation (“Kohl’s”) to acquire $1.6 billion of Kohl’s private label credit card receivables and 13 million accounts. The transaction was completed on April 21, 2006. JPMorgan Chase and Kohl’s have also entered into an agreement under which JPMorgan Chase will offer private-label credit cards to both new and existing Kohl’s customers.

Collegiate Funding Services
On March 1, 2006, JPMorgan Chase acquired, for approximately $663 million, Collegiate Funding Services, a leader in education loan servicing and consolidation. This acquisition included $6 billion of education loans and enables the Firm to create a comprehensive education finance business.

Acquisition of certain operations from Paloma Partners
On March 1, 2006, JPMorgan Chase acquired the middle and back office operations of Paloma Partners Management Company (“Paloma”), which is part of a privately-owned investment fund management group based in Greenwich, CT. The parties have also entered into a multi-year contract pursuant to which JPMorgan Chase will provide daily operational services to Paloma. The acquired operations will be combined with JPMorgan Chase’s current hedge fund administration unit, JPMorgan Tranaut.

JPMorgan and Fidelity Brokerage Company
On February 28, 2006, the Firm announced a strategic alliance with Fidelity Brokerage to become the exclusive provider of new issue equity securities and the primary provider of fixed income products to Fidelity’s brokerage clients and retail customers, effectively expanding the Firm’s existing distribution platform.

Sale of insurance underwriting business
On February 7, 2006, JPMorgan Chase announced that it had agreed to sell its life insurance and annuity underwriting businesses to Protective Life Corporation for a cash purchase price of approximately $1.2 billion. The sale, which includes both the heritage Chase insurance business and the life business that Bank One had bought from Zurich Insurance in 2003, is subject to normal regulatory approvals and is expected to close in the third quarter of 2006. JPMorgan Chase anticipates the transaction will have no material impact on earnings.

EXECUTIVE OVERVIEW

This overview of management’s discussion and analysis highlights selected information and may not contain all of the information that is important to readers of this Form 10–Q. For a more complete understanding of events, trends and uncertainties, as well as the liquidity, capital, credit and market risks, and the critical accounting estimates, affecting the Firm and its various lines of business, this Form 10–Q should be read in its entirety.

Business overview
The Firm reported 2006 first-quarter net income of $3.1 billion, or $0.86 per share, compared with net income of $2.3 billion, or $0.63 per share, for the first quarter of 2005. Return on common equity for the quarter was 12% compared with 9% in the prior year. The comparison with the prior year benefited from the absence of a charge of $558 million after-tax, or $0.15 per share, related to settlement of the Firm’s WorldCom litigation, which occurred in the first quarter of 2005. Results for the current quarter included $44 million of after-tax merger charges, or $0.01 per share, compared with $90 million, or $0.03 per share, in the first quarter of 2005.

Net income for the first quarter of 2006 also included incremental expense of $459 million (pre-tax) related to the adoption of Statement of Financial Accounting Standards No. 123 (Revised 2004) (“Share-Based Payment”), as of January 1, 2006, under the modified prospective method. The $459 million of incremental expense was allocated to the business segments as follows: Investment Bank – $256 million; Retail Financial Services – $17 million; Card Services – $4 million; Commercial Banking – $29 million; Treasury & Securities Services – $25 million; Asset & Wealth Management – $71 million; and Corporate – $57 million.

On April 8, 2006, the Firm announced an agreement to acquire The Bank of New York’s consumer, small-business and middle-market banking businesses in exchange for certain portions of the Firm’s corporate trust business plus a cash payment of $150 million. The transaction will add 338 branches, 400 ATMs, and approximately 600,000 households, 100,000 businesses, $15 billion in deposits and $8 billion of loans to the Firm’s New York City/Tri-State franchise. The transaction is subject to regulatory approvals and is expected to close late in the third quarter or during the fourth quarter of 2006.

Global economic and market conditions affected the performance of each of the Firm’s businesses. In the first quarter of 2006, both the global and U.S. economies continued to grow steadily, and the capital market environment remained favorable. First quarter growth in the U.S. economy was boosted by recovery from last fall’s hurricane disruptions, although growth appeared to be moderating as the quarter ended. The U.S. economy experienced a continued rise in interest rates driven by improving global economic prospects, resulting in two quarter-point increases in the federal funds rate, from 4.25% to 4.75%; at the same time the yield curve remained relatively flat. Equity markets, both domestic and international, enjoyed positive returns versus the prior quarter and prior year.

The discussion that follows highlights the performance of each business segment during the first quarter of 2006 with the comparable period in the prior year, unless otherwise noted.

The Investment Bank achieved record quarterly revenues driven by record Equity Markets revenue and strong investment banking fees and Fixed Income Markets revenue, which benefited from strength in global capital markets activity and continuing investments in strategic initiatives. However, net income declined due to an increase in the provision for credit losses and higher compensation expense. Record Equity Markets revenue was driven by record trading and strong commissions across all regions. Fixed Income Markets revenue, although strong, was lower than the prior year due to weaker results in commodities and rates markets, partially offset by stronger results in emerging markets, currencies and credit markets. Investment banking fees were higher than the prior year due to strong growth in advisory fees and record loan syndication revenue. The higher level of provision for credit losses reflected increased loan balances; credit quality remained stable. Expense increased due primarily to higher incentive compensation, reflecting improved performance, and the incremental expense related to the adoption of SFAS 123R.

Retail Financial Services’ net income declined due to lower Mortgage Banking performance and continued spread compression on deposits and home equity loans in Regional Banking. Partially offsetting these lower results were growth in deposit and loan balances. Credit quality remained favorable in all loan portfolios, which led to a decline in the provision for credit losses. Expense increased due to the ongoing investment in retail distribution, partially offset by merger-related expense savings and

other efficiencies. The underlying business drivers benefited from the continuing investment in the retail distribution network and the overall strength of the U.S. economy, both of which contributed to increases in checking accounts, deposits, loans, and improved cross-selling of credit cards, mortgages and investment products. During the quarter the acquisition of Collegiate Funding Services was completed, adding $6 billion of education finance loans and providing a loan servicing capability.

Card Services net income increased, primarily due to lower bankruptcy-related losses following the new bankruptcy legislation that became effective in the fourth quarter of 2005. Net income also benefited from lower credit losses (excluding the impact of the bankruptcy legislation), merger savings and higher managed loan balances, including the acquisition of the Sears Canada credit card business. These benefits were offset partially by narrower loan spreads and higher marketing expense. Both Total net revenue and Noninterest expense were lower due to the restructuring and related deconsolidation of Paymentech in the fourth quarter of 2005.

Commercial Banking net income benefited from higher revenues, primarily offset by higher expense and an increased provision for credit losses, while credit quality remained stable. Revenues increased due to wider spreads and higher volume related to liability balances and increased loan balances, partially offset by narrower loan spreads reflecting continued competitive pressure. Expense increased primarily due to the incremental expense related to the adoption of SFAS 123R.

Treasury & Securities Services net income increased significantly benefiting from higher revenue, partially offset by increased expense. Revenue growth reflected business growth and wider spreads on liability balances, which both benefited from global economic strength and stronger capital market activity. The increase in expense was due to higher compensation expense related to business growth and the incremental expense due to the adoption of SFAS 123R.

Asset & Wealth Management net income benefited from increased revenue, partially offset by higher expense. Revenue growth was driven by net asset inflows, mainly in equity-related and liquidity products, and by asset appreciation, benefiting from strength in global equity markets and improved investment performance. These factors also lead to increased levels of assets under supervision and assets under management. The increase in expense was due to the incremental expense related to the adoption of SFAS 123R and higher performance-based compensation.

Corporate segment net loss improved due to higher revenue and lower expense. The increase in revenue was driven primarily by lower Treasury securities portfolio losses and improved Treasury net interest spread. These benefits were offset partially by lower private equity gains. Expense benefited from the absence of the WorldCom litigation settlement in the first quarter of 2005, lower merger-related costs and increased merger-related savings and other efficiencies. These benefits were partially offset by the incremental expense related to the adoption of SFAS 123R.

During the quarter ended March 31, 2006, approximately $580 million (pre-tax) of merger savings were realized, which is an annualized rate of approximately $2.3 billion. Management estimates that annualized savings will be approximately $2.8 billion by the end of 2006. Merger costs of $71 million were expensed during the first quarter of 2006, bringing the total amount expensed, since the merger announcement, to $2.2 billion. Management continues to estimate remaining merger costs of $800 million to $1.3 billion, which are expected to be expensed during the remainder of 2006 and 2007.

The Firm had, at March 31, 2006, total stockholders’ equity of $108 billion and a Tier 1 capital ratio of 8.5%. The Firm purchased $1.3 billion, or 31.8 million shares, of common stock during the quarter.

Business outlook
The following forward-looking statements are based upon the current beliefs and expectations of JPMorgan Chase’s management and are subject to significant risks and uncertainties. These risks and uncertainties could cause JPMorgan Chase’s results to differ materially from those set forth in such forward-looking statements.

The performance of the Firm’s capital markets and wholesale businesses are affected by overall global economic growth and by financial market movements and activity levels. The Investment Bank enters the second quarter of 2006 with a strong fee pipeline. Market conditions can impact trading results, which are difficult to predict. The Investment Bank remains focused on new product expansion initiatives, which are intended to promote growth and reduce volatility in trading results over time.

In the consumer businesses, the relatively flat yield curve and continuing increase in interest rates has put pressure on deposit and loan spreads. During the first quarter of 2006 the deposit spread compression began to abate.

The Corporate segment includes Private Equity, Treasury and Corporate Other support units. The revenue outlook for the Private Equity business is directly related to the strength of the equity markets and the performance of the underlying portfolio investments. If current market conditions persist, the Firm anticipates continued realization of private equity gains in 2006, but results can be volatile from quarter to quarter. The Firm remains on target for achieving improvement in Treasury net interest income and reduction of the net loss in Corporate Other.

Credit quality overall remains stable across the wholesale and consumer portfolios. However, management continues to anticipate higher credit losses over time. The managed provision for credit losses for Card Services is anticipated to increase in the second quarter of 2006 as compared with the first quarter of 2006, as the benefit of lower bankruptcy-related losses decreases. Excluding the bankruptcy-related impact, the underlying credit quality of the managed credit card portfolio was strong. During the second half of 2006, it is anticipated that the recently implemented FFIEC minimum payment rules will

negatively affect both revenues and net charge-offs in Card Services, estimated by management to be approximately $500 million (split evenly between revenue and charge-offs).

CONSOLIDATED RESULTS OF OPERATIONS
The following section provides a comparative discussion of JPMorgan Chase’s consolidated results of operations on a reported basis. Factors that relate primarily to a single business segment are discussed in more detail within that business segment than they are in this consolidated section. For a discussion of the Critical accounting estimates used by the Firm that affect the Consolidated results of operations, see page 58 of this Form 10–Q and pages 81–83 of the JPMorgan Chase Annual Report on Form 10–K for the year ended December 31, 2005 (“2005 Annual Report”).

The following table presents the components of Total net revenue:

Total net revenue		Three months ended March 31,
(in millions)		2006				2005				Change
Investment banking fees		$	1,169			$	993				18	%
Principal transactions			2,602				2,636				(1	)
Lending & deposit related fees			841				820				3
Asset management, administration and commissions			2,973				2,498				19
Securities gains (losses)			(116	)			(822	)			86
Mortgage fees and related income			241				362				(33	)
Credit card income			1,910				1,734				10
Other income			556				201				177
Noninterest revenue			10,176				8,422				21
Net interest income			5,060				5,225				(3	)
Total net revenue		$	15,236			$	13,647				12	%

Total net revenue for the first quarter of 2006 was up by $1.6 billion, or 12%, from the prior year. The increase was due primarily to lower Treasury security portfolio losses; increased trading revenue (within Principal transactions); higher Asset management, administration, and commissions revenues; and increased Other income, Credit card income, and Investment banking fees. Partially offsetting this growth were lower Private equity gains (within Principal transactions), a decline in Net interest income, and lower Mortgage Banking production and servicing income.

Investment banking fees of $1.2 billion were the highest since 2000, up 18% from the first quarter of 2005. Advisory fees were also the highest since 2000. Underwriting fees were up from the prior year driven by record loan syndication fees offset partially by lower bond underwriting fees. For a further discussion of Investment banking fees, which are primarily recorded in the IB, see the IB segment results on pages 14–16 of this Form 10–Q.

Effective January 1, 2006, Principal transactions is a new caption in the Consolidated income statements that combines Trading revenue (which includes physical commodities carried at the lower of cost or market), primarily in the Investment Bank, and Private equity gains (losses), primarily in the Private Equity business of Corporate. The prior period’s presentation of Trading revenue and Private equity gains (losses) have been reclassified to this new caption. The decline from last year in Principal transactions primarily reflected two large private equity gains that were realized in the prior year’s first quarter. The decline was partially offset by higher trading revenue as a result of record revenues in equity markets, along with strong fixed income markets results in emerging markets, currencies and credit markets. Fixed income trading results from commodities and rate markets were weaker than last year. For a further discussion of Principal transactions, see the IB and Corporate segment results on pages 14–16 and 33–34, respectively, of this Form 10–Q.

Lending & deposit related fees rose as a result of increased fee income on deposit-related products from growth in business volume. For a further discussion of deposit fees, which are partly recorded at RFS, see the RFS segment results on pages 17–22 of this Form 10–Q.

The increases in Asset management, administration and commissions revenue were due to growth in assets under management and custody, reflecting net asset inflows, mainly in equity-related and liquidity products, as well as global market value appreciation, new business, the acquisition of Vastera in the second quarter of 2005 and higher placement and performance fees. Commissions were higher due to increases in brokerage transaction volume across regions, partly offset by the sale of BrownCo. For additional information on these fees and commissions, see the segment discussions for the IB on pages 14–16, TSS on pages 28–29 and AWM on pages 30–32 of this Form 10–Q.

Securities gains (losses) significantly improved, primarily as a result of lower Treasury portfolio losses of $158 million in the first quarter of 2006, compared with losses of $902 million in the prior year period. For a further discussion of Securities gains (losses), which are primarily recorded in the Firm’s Treasury business, see the Corporate segment discussion on pages 33–34 of this Form 10–Q.

Mortgage fees and related income declined, primarily due to lower mortgage servicing and production income. Servicing income results were driven primarily by lower MSR risk management results, partially offset by increased revenue stemming from higher third-party loan servicing volume. Production income decreased, reflecting lower net gains on the sale of mortgages. For a discussion of Mortgage fees and related income, which is recorded primarily in RFS’s Mortgage Banking business, see the Mortgage Banking discussion on page 21 of this Form 10–Q.

Credit card income rose as a result of higher customer charge volume, which favorably affected interchange income, and servicing fees associated with growth in volume of securitized credit card receivables. These were partially offset by an increase in volume-driven payments to partners and higher expenses related to reward programs, as well as the impact of the deconsolidation of Paymentech. For a further discussion of Credit card income, see CS’s segment results on pages 23–25 of this Form 10–Q.

The increase in Other income reflected higher gains from loan workouts and loan sales, increased revenues from automobile operating leases, higher dividend and equity investment income and lower write-downs for loans transferred to held-for-sale. These increases were offset partly by a decrease in the net results of corporate and bank-owned life insurance policies.

Net interest income declined due to narrower spreads on trading assets, wholesale and consumer loans, as well as on consumer deposits. These decreases were offset partially by improvement in Treasury’s net interest spread and in the spreads on wholesale liability balances. In addition, higher balances related to wholesale and consumer loans and higher level of consumer deposits also contributed positively to Net interest income. The Firm’s total average interest-earning assets for the three months ended March 31, 2006, were $957 billion, up 7% from the first quarter of 2005, as a result of an increase in loans and other liquid earning assets, partially offset by a decline resulting from the repositioning of Treasury’s investment portfolio during 2005. The net interest yield on these assets, on a fully taxable-equivalent basis, was 2.17%, a decrease of 22 basis points from the prior year.

Provision for credit losses
The Provision for credit losses was $831 million, $404 million higher than the first quarter of 2005. The higher Provision for credit losses was primarily the result of a wholesale provision of $179 million compared with a benefit of $386 million in the prior year, reflecting loan growth in the Investment Bank. The wholesale loan net recovery rate was 0.06% for the quarter, an improvement from a net recovery rate of 0.03% in the prior year. The total consumer provision was $652 million, $161 million lower than the prior year, primarily due to lower bankruptcy-related net charge-offs in Card Services. For further information regarding the Provision for credit losses, see Credit Risk Management on page 54 of this Form 10–Q.

Noninterest expense
The following table presents the components of Noninterest expense:

		Three months ended March 31,
(in millions)		2006				2005				Change
Compensation expense		$	5,600			$	4,702				19	%
Occupancy expense			602				525				15
Technology and communications expense			874				920				(5	)
Professional & outside services			888				1,074				(17	)
Marketing			519				483				7
Other expense(a)			834				1,705				(51	)
Amortization of intangibles			364				383				(5	)
Merger costs			71				145				(51	)
Total Noninterest expense		$	9,752			$	9,937				(2	)%

Total Noninterest expense was $9.8 billion, down by $185 million, or 2%, from the prior year. The decrease was due primarily to lower Other expense and Professional & outside services, partially offset by an increase in Compensation expense. Excluding in the first quarter of this year both the incremental expense of $459 million from the adoption of SFAS 123R and $71 million of Merger costs, and excluding in the first quarter of last year both the material litigation charge of $900 million primarily related to WorldCom and $145 million of Merger costs, Noninterest expense would have been up by $330 million. The increase was driven by higher performance-based compensation, partially offset by merger savings.

Compensation expense rose as a result of $459 million of incremental expense related to the adoption of SFAS 123R, higher performance-based incentives and additional headcount in connection with investments in businesses. The increase was offset partially by ongoing efficiency improvements and merger-related savings throughout the Firm. For a detailed discussion of the adoption of SFAS 123R and employee stock-based incentives, see Note 6 on pages 68–71 of this Form 10–Q.

Higher Occupancy expense reflected investments in the retail distribution network, partly offset by operating efficiencies.

Professional & outside services were lower due to expense management initiatives, the settlement of several legal matters in 2005 and the Paymentech deconsolidation.

Marketing expense was higher, stemming from an increase in advertising for credit card and retail products.

Other expense was lower due to insurance recoveries relating to certain material litigation and expense management initiatives in 2006 and a material litigation charge of $900 million, primarily related to settlement costs of the WorldCom class action litigation, and a $40 million charge taken by RFS related to the dissolution of an education finance joint venture, both of which occurred in 2005. These items were partially offset by increased expense as a result of growth in business volume, including higher minority interest expense related to Cazenove and Highbridge.

For discussion of Amortization of intangibles and Merger costs, refer to Note 14 and Note 7 on pages 79–81 and 71, respectively, of this Form 10–Q.

Income tax expense
The Firm’s Income before income tax expense, Income tax expense and effective tax rate were as follows for each of the periods indicated:

Three months ended March 31,(in millions, except rate)		2006				2005
Income before income tax expense		$	4,653			$	3,283
Income tax expense			1,572				1,019
Effective tax rate			33.8	%			31.0	%

The increase in the effective tax rate was related to higher reported pre-tax income combined with changes in the proportion of income subject to federal, state and local taxes. Also contributing to the increase were the Merger costs and Litigation reserve charge in the first quarter of 2005, which reflected tax benefits at a 38% marginal tax rate.

The Firm prepares its Consolidated financial statements using accounting principles generally accepted in the United States of America (“U.S. GAAP”); these financial statements appear on pages 60–63 of this Form 10–Q. That presentation, which is referred to as “reported basis,” provides the reader with an understanding of the Firm’s results that can be tracked consistently from year to year and enables a comparison of the Firm’s performance with other companies’ U.S. GAAP financial statements.

In addition to analyzing the Firm’s results on a reported basis, management reviews the Firm’s and the lines’ of business results on a “managed” basis, which is a non-GAAP financial measure. The Firm’s definition of managed basis starts with the reported U.S. GAAP results and includes certain reclassifications that are adjusted to exclude credit card securitizations and present revenue on a fully taxable equivalent (“FTE”) basis. These adjustments do not have any impact on Net income as reported by the lines of business or by the Firm as a whole. Effective January 1, 2006, JPMorgan Chase’s presentation of “operating earnings” that excluded merger costs and material litigation reserve charges and recoveries from reported results has been eliminated. These items had been previously excluded from operating results because they were deemed non-recurring; they are now included in the Corporate business segment’s results. In addition, Trading-related net interest income is no longer reclassified from net interest income to trading revenue.

Card Services’ managed results excludes the impact of credit card securitizations on Total net revenue, the provision for credit losses, net charge-offs and loan receivables. This presentation is provided to facilitate the comparability to competitors. Through securitization, the Firm transforms a portion of its credit card receivables into securities, which are sold to investors. The credit card receivables are removed from the consolidated balance sheets through the transfer of the receivables to a trust, and the sale of undivided interests to investors that entitle the investors to specific cash flows generated from the credit card receivables. The Firm retains the remaining undivided interests as seller’s interests, which are recorded in Loans on the Consolidated balance sheets. A gain or loss on the sale of credit card receivables to investors is recorded in Other income. Securitization also affects the Firm’s Consolidated statements of income as the aggregate amount of interest income, certain fee revenue and recoveries that is in excess of the aggregate amount of interest paid to investors, gross credit losses and other trust expenses related to the securitized receivables are reclassified into credit card income. For a reconciliation of reported to managed basis of Card Services results, see page 25 of this Form 10–Q. For information regarding loans and residual interests sold and securitized, see Note 12 on pages 74–77 of this Form 10–Q. JPMorgan Chase uses the concept of “managed receivables” to evaluate the credit performance and overall financial performance of the underlying credit card loans, both sold and not sold; as the same borrower is continuing to use the credit card for ongoing charges, a borrower’s credit performance will affect both the loan receivables sold under SFAS 140 and those not sold. Thus, in its disclosures regarding managed loan 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. In addition, Card Services operations are funded, managed results are evaluated, and decisions are made about allocating resources such as employees and capital based upon managed financial information.

Total net revenue for each of the business segments and the Firm is presented on a tax-equivalent basis. Accordingly, revenue from tax exempt securities and investments that receive tax credits is presented in the managed results on a basis comparable to taxable securities and investments. This non-GAAP financial measure allows management to assess the comparability of revenues arising from both taxable and tax-exempt sources. The corresponding income tax impact related to these items is recorded within income tax expense.

Management uses certain non-GAAP financial measures at the segment level because it believes these non-GAAP financial measures provide information to investors in understanding the underlying operational performance and trends of the particular business segment and facilitate a comparison of the business segment with the performance of competitors.

The following summary table provides a reconciliation from the Firm’s reported U.S. GAAP results to managed basis:

Three months ended March 31,		2006
		Reported				Credit				Tax-equivalent				Managed
(in millions, except per share and ratio data)		results				card(a)				adjustments				basis
Revenue
Investment banking fees		$	1,169			$	—			$	—			$	1,169
Principal transactions			2,602				—				—				2,602
Lending & deposit related fees			841				—				—				841
Asset management, administration and commissions			2,973				—				—				2,973
Securities gains (losses)			(116	)			—				—				(116	)
Mortgage fees and related income			241				—				—				241
Credit card income			1,910				(1,125	)			—				785
Other income			556				—				146				702
Noninterest revenue			10,176				(1,125	)			146				9,197
Net interest income			5,060				1,574				71				6,705
Total net revenue			15,236				449				217				15,902
Provision for credit losses			831				449				—				1,280
Noninterest expense			9,752				—				—				9,752
Income before income tax expense			4,653				—				217				4,870
Income tax expense			1,572				—				217				1,789
Net income		$	3,081			$	—			$	—			$	3,081
Earnings per share – diluted		$	0.86			$	—			$	—			$	0.86
Return on common equity			12	%			—	%			—	%			12	%
Return on equity less goodwill			20				—				—				20
Return on assets			1.00			NM				NM					0.95
Overhead ratio			64			NM				NM					61
Effective income tax rate			34			NM					100				37

Three months ended March 31,		2005
		Reported				Credit				Tax-equivalent				Managed
(in millions, except per share and ratio data)		results				card(a)				adjustments				basis
Revenue
Investment banking fees		$	993			$	—			$	—			$	993
Principal transactions			2,636				—				—				2,636
Lending & deposit related fees			820				—				—				820
Asset management, administration and commissions			2,498				—				—				2,498
Securities gains (losses)			(822	)			—				—				(822	)
Mortgage fees and related income			362				—				—				362
Credit card income			1,734				(815	)			—				919
Other income			201				—				115				316
Noninterest revenue			8,422				(815	)			115				7,722
Net interest income			5,225				1,732				61				7,018
Total net revenue			13,647				917				176				14,740
Provision for credit losses			427				917				—				1,344
Noninterest expense			9,937				—				—				9,937
Income before income tax expense			3,283				—				176				3,459
Income tax expense			1,019				—				176				1,195
Net income		$	2,264			$	—			$	—			$	2,264
Earnings per share – diluted		$	0.63			$	—			$	—			$	0.63
Return on common equity			9	%			—	%			—	%			9	%
Return on equity less goodwill			15				—				—				15
Return on assets			0.79			NM				NM					0.75
Overhead ratio			73			NM				NM					67
Effective income tax rate			31			NM					100				35

Three months ended March 31,		2006												2005
(in millions)		Reported				Securitized				Managed				Reported				Securitized				Managed
Loans – Period-end		$	432,081			$	69,580			$	501,661			$	402,669			$	67,328			$	469,997
Total assets – average			1,248,357				67,557				1,315,914				1,162,818				67,509				1,230,327

The Firm is managed on a line-of-business basis. The business segment financial results presented reflect the organization of JPMorgan Chase. Currently, there are six major reportable business segments: the Investment Bank, Retail Financial Services, Card Services, Commercial Banking, Treasury & Securities Services and Asset & Wealth Management, as well as a Corporate segment. The segments are based upon the products and services provided, or the type of customer served, and they reflect the manner in which financial information is currently evaluated by management. Results of these lines of business are presented on a managed basis. For a further discussion of Business segment results, see pages 34–35 of JPMorgan Chase’s 2005 Annual Report.

Description of business segment reporting methodology
Results of the business segments are intended to reflect each segment as if it were essentially a stand-alone business. The management reporting process that derives these results generally allocates income and expense using market-based methodologies. For a further discussion of those methodologies, see page 35 of JPMorgan Chase’s 2005 Annual Report. The Firm continues to assess the assumptions, methodologies and reporting reclassifications used for segment reporting, and further refinements may be implemented in future periods.

Business segment financial disclosures
Effective January 1, 2006, JPMorgan Chase modified certain of its financial disclosures to reflect more closely the manner in which the Firm’s business segments are managed and to provide improved comparability with competitors. These financial disclosure revisions are reflected in this Form 10–Q, and the financial information for prior periods has been revised to reflect the disclosure changes as if they had been in effect throughout 2005. A summary of the changes are described below.

Reported versus Operating Basis Changes
The presentation of operating earnings that excluded merger costs and material litigation reserve charges and recoveries from reported results has been eliminated. These items had been excluded previously from operating results because they were deemed nonrecurring; they are now included in the Corporate business segment’s results. In addition, trading-related net interest income is no longer reclassified from Net interest income to trading revenue. As a result of these changes, effective January 1, 2006, management has discontinued reporting on an “operating” basis.

Business Segment Disclosures
RFS has been reorganized into the following business segments: Regional Banking, Mortgage Banking and Auto Finance. For more detailed information on the RFS reorganization, see the RFS business segment discussion on page 17 of this Form 10–Q.

TSS, as previously announced, has been reorganized by combining the Investor Services and Institutional Trust Services businesses into a single business called Worldwide Securities Services. Also, TSS firmwide disclosures have been adjusted to reflect a refined set of TSS products and a revised allocation of liability balances and lending-related revenue related to certain client transfers.

Effective January 1, 2006, various wholesale banking clients, together with the related revenue and expense, are being transferred among CB, the IB and TSS. In the first quarter of 2006, the primary client transfer was corporate mortgage finance from CB to the IB.

CB’s business metrics now include gross investment banking revenue, which reflects revenue recorded in both CB and the IB.

Corporate’s disclosure has been expanded to include Total net revenue and Net income for Treasury and Other Corporate segments.

Certain expenses that are managed by the business segments, but that had been previously recorded in Corporate and allocated to the businesses, are now recorded as direct expenses within the businesses.

Capital allocation changes
Effective January 1, 2006, the Firm refined its methodology for allocating capital to the business segments. As prior periods have not been revised to reflect the new capital allocations, certain business metrics, such as ROE, are not comparable to the current presentation. For a further discussion of the changes, see Capital Management – Line of business equity on page 37 of this Form 10–Q.

Segment results – Managed basis^(a)

The following table summarizes the business segment results for the periods indicated:

Three months ended March 31,		Total net revenue												Noninterest expense												Net income												Return on equity
(in millions, except ratios)		2006				2005				Change				2006				2005				Change				2006				2005				Change				2006				2005
Investment Bank		$	4,699			$	4,187				12	%		$	3,191			$	2,527				26	%		$	850			$	1,328				(36	)%			17	%			27	%
Retail Financial Services			3,763				3,847				(2	)			2,238				2,162				4				881				988				(11	)			26				31
Card Services			3,685				3,779				(2	)			1,243				1,313				(5	)			901				522				73				26				18
Commercial Banking			900				827				9				498				454				10				240				231				4				18				28
Treasury & Securities Services			1,677				1,498				12				1,158				1,067				9				312				254				23				44				54
Asset & Wealth Management			1,584				1,361				16				1,098				934				18				313				276				13				36				47
Corporate			(406	)			(759	)			47				326				1,480				(78	)			(416	)			(1,335	)			69			NM				NM
Total		$	15,902			$	14,740				8	%		$	9,752			$	9,937				(2	)%		$	3,081			$	2,264				36	%			12	%			9	%

For a discussion of the business profile of the IB, see pages 36–38 of JPMorgan Chase’s 2005 Annual Report.

Selected income statement data		Three months ended March 31,
(in millions, except ratios)		2006				2005				Change
Revenue
Investment banking fees		$	1,170			$	985				19	%
Principal transactions			2,375				1,875				27
Lending & deposit related fees			137				157				(13	)
Asset management, administration and commissions			552				409				35
All other income			275				127				117
Noninterest revenue			4,509				3,553				27
Net interest income			190				634				(70	)
Total net revenue(a)			4,699				4,187				12
Provision for credit losses			183				(366	)		NM
Credit reimbursement from TSS(b)			30				38				(21	)
Noninterest expense
Compensation expense			2,256				1,618				39
Noncompensation expense			935				909				3
Total noninterest expense			3,191				2,527				26
Income before income tax expense			1,355				2,064				(34	)
Income tax expense			505				736				(31	)
Net income		$	850			$	1,328				(36	)
Financial ratios
ROE			17	%			27	%
ROA			0.53				0.95
Overhead ratio			68				60
Compensation expense as % of total net revenue(c)			43				39
Revenue by business
Investment banking fees:
Advisory		$	389			$	263				48
Equity underwriting			212				239				(11	)
Debt underwriting			569				483				18
Total investment banking fees			1,170				985				19
Fixed income markets			1,993				2,296				(13	)
Equities markets			1,215				556				119
Credit portfolio			321				350				(8	)
Total net revenue		$	4,699			$	4,187				12
Revenue by region
Americas		$	2,067			$	2,231				(7	)
Europe/Middle East/Africa			2,047				1,535				33
Asia/Pacific			585				421				39
Total net revenue		$	4,699			$	4,187				12

Quarterly results
Net income of $850 million was driven by record quarterly revenues of $4.7 billion. Net income declined 36% compared with the prior year due to an increase in the provision for credit losses related to higher loan balances, incremental expense from the adoption of SFAS 123R and higher performance-based compensation.

Net revenue was a record $4.7 billion, up by $512 million, or 12%, compared with the prior year. Investment banking fees of $1.2 billion were the highest since 2000, up 19% from the prior year. Advisory fees of $389 million, up 48% from last year, were also the highest since 2000. Debt underwriting fees of $569 million were up 18% from the prior year, driven by record loan syndication fees offset partially by lower bond underwriting fees. Equity underwriting fees of $212 million were down 11% from the prior year, reflecting lower market share. Fixed Income Markets revenue of $2.0 billion was down 13% from the prior year due to weaker performance in commodities and rates markets, partially offset by stronger results in emerging markets, currencies and credit markets. Equity Markets produced record revenues of $1.2 billion in the quarter driven by record trading and strong commissions across all regions. Credit Portfolio revenues of $321 million were down 8% from the prior year.

The provision for credit losses was $183 million, as compared with a benefit of $366 million in the prior year. The current quarter’s provision reflects growth in loan balances and stable credit quality.

Noninterest expense was $3.2 billion, up 26% from the prior year. Excluding incremental expense of $256 million from the adoption of SFAS 123R, expenses were up by $408 million, or 16%, from the prior year. The increase was primarily due to higher incentive compensation related to improved performance, and an increase in the compensation expense to total net revenue ratio, as well as continued investments in strategic initiatives.

Selected metrics		Three months ended March 31,
(in millions, except headcount and ratio data)		2006				2005				Change
Selected average balances
Total assets		$	646,220			$	568,222				14	%
Trading assets–debt and equity instruments			252,415				225,367				12
Trading assets–derivatives receivables			49,388				63,574				(22	)
Loans:
Loans retained(a)			53,678				41,233				30
Loans held-for-sale(b)			19,212				7,674				150
Total loans			72,890				48,907				49
Adjusted assets(c)			492,304				445,840				10
Equity			20,000				20,000				—
Headcount			21,705				18,021				20
Credit data and quality statistics
Net charge-offs (recoveries)		$	(21	)		$	(5	)			(320	)
Nonperforming assets:
Nonperforming loans(d)			434				814				(47	)
Other nonperforming assets			50				242				(79	)
Allowance for loan losses			1,117				1,191				(6	)
Allowance for lending related commitments			220				296				(26	)
Net charge-off (recovery) rate(b)			(0.16	)%			(0.05	)%
Allowance for loan losses to average loans(b)			2.08				2.89
Allowance for loan losses to nonperforming loans(d)			305				147
Nonperforming loans to average loans			0.60				1.66
Market risk—average trading and credit portfolio VAR
Trading activities:
Fixed income		$	60			$	57				5
Foreign exchange			20				23				(13	)
Equities			32				18				78
Commodities and other			47				10				370
Diversification(e)			(68	)			(43	)			(58	)
Trading VAR(f)			91				65				40
Credit portfolio VAR(g)			14				13				8
Diversification(e)			(11	)			(8	)			(38	)
Total trading and credit portfolio VAR		$	94			$	70				34

According to Thomson Financial, the Firm was ranked #1 in Global Syndicated Loans, #3 in Global Announced M&A and #2 in Global Long-Term Debt for the first three months of 2006.

According to Dealogic, the Firm was ranked #3 in Investment Banking fees generated during the first three months of 2006.

Three months ended March 31, 2006

Full Year 2005

Market shares and rankings(a)

Market Share

Rankings

Market Share

Rankings

Global debt, equity and equity-related

7

%

#2

6

%

#4

Global syndicated loans

13

#1

16

#1

Global long-term debt

7

#2

6

#4

Global equity and equity-related

5

#9

7

#6

Global announced M&A

31

#3

24

#3

U.S. debt, equity and equity-related

10

#2

8

#4

U.S. syndicated loans

23

#1

28

#1

U.S. long-term debt

14

#1

11

#2

U.S. equity and equity-related

8

#5

9

#5

U.S. announced M&A

19

#6

24

#3

Retail Financial Services (“RFS”) realigned its business reporting segments on January 1, 2006, into Regional Banking, Mortgage Banking and Auto Finance. Regional Banking offers one of the largest branch networks in the United States, covering 17 states with 2,638 branches and 7,400 automated teller machines (“ATMs”). Regional Banking distributes, through its network, a variety of products including checking, savings and time deposit accounts; home equity, residential mortgage, small business banking, and education loans; mutual fund and annuity investments; and on-line banking services. Mortgage Banking is a leading provider of mortgage loan products and is one of the largest originators and servicers of home mortgages. Auto Finance is the largest noncaptive originator of automobile loans, primarily through a network of automotive dealers across the United States.

During the quarter, RFS completed the purchase of Collegiate Funding Services, adding an education loan servicing capability and entry into the Federal Family Education Loan Program consolidation market. RFS also has agreed to sell its life insurance and annuity underwriting businesses to Protective Life Corporation; the sale is expected to close in the third quarter of 2006. Finally, on April 8, 2006, the Firm announced an agreement to acquire The Bank of New York’s consumer and small-business banking businesses; this acquisition will significantly strengthen RFS’s distribution network in the New York City/Tri-State area, adding 338 branches and 400 ATMs.

Selected income statement data		Three months ended March 31,
(in millions, except ratios)		2006				2005				Change
Revenue
Lending & deposit related fees		$	371			$	340				9	%
Asset management, administration and commissions			437				394				11
Securities gains (losses)			(6	)			10			NM
Mortgage fees and related income			236				368				(36	)
Credit card income			115				94				22
Other income			48				(12	)		NM
Noninterest revenue			1,201				1,194				1
Net interest income			2,562				2,653				(3	)
Total net revenue			3,763				3,847				(2	)
Provision for credit losses			85				94				(10	)
Noninterest expense
Compensation expense			920				822				12
Noncompensation expense			1,207				1,215				(1	)
Amortization of intangibles			111				125				(11	)
Total noninterest expense			2,238				2,162				4
Income before income tax expense			1,440				1,591				(9	)
Income tax expense			559				603				(7	)
Net income		$	881			$	988				(11	)
Financial ratios
ROE			26	%			31	%
ROA			1.54				1.78
Overhead ratio			59				56
Overhead ratio excluding core deposit intangibles(a)			57				53

Quarterly results
Net income of $881 million was down by $107 million, or 11%, from the prior year. Current and prior period results included charges to transfer automobile loans to held-for-sale and prior-year results also included a charge for the termination of an Education Finance joint venture and a gain on the sale of a recreational vehicle loan portfolio. Excluding all of these items, net income declined by $131 million or 13%. The decrease reflected weakness in Mortgage Banking and continued spread compression on deposits and loans in Regional Banking, as well as continued investment in the retail distribution network. These declines were offset partially by deposit and loan balance growth in Regional Banking and continued favorable credit quality in all loan portfolios.

Net revenue of $3.8 billion was down by $84 million, or 2%, from the prior year. Net interest income of $2.6 billion declined by $91 million, or 3%, reflecting narrower spreads on deposits and loans in Regional Banking as well as reduced balances in the auto loan and lease portfolios. These decreases were offset partially by increased deposit balances and higher levels of home equity loans. Noninterest revenue of $1.2 billion was up by $7 million, or 1%, driven by higher automobile operating lease income and increased fee income on deposit-related products. These increases were offset by lower Mortgage Banking production and servicing income. Current quarter results also included a $50 million write-down on $1.3 billion of automobile loans transferred to held-for-sale, compared with an $88 million write-down last year on $2.7 billon of auto loans transferred to held-for-sale.

The provision for credit losses totaled $85 million, down by $9 million from the prior year. Credit quality continued to be favorable across all businesses.

Noninterest expense of $2.2 billion was up by $76 million, or 4%, as a result of ongoing investments in the retail distribution network, higher depreciation expense on owned automobiles acquired under operating leases, and incremental expense of $17 million from the adoption of SFAS 123R. These increases were offset in part by operating and merger-related efficiencies and the absence of a $40 million charge related to the dissolution of an Education Finance joint venture.

Selected metrics		Three months ended March 31,
(in millions, except headcount and ratios)		2006				2005				Change
Selected ending balances
Assets		$	235,127			$	224,562				5	%
Loans(a)			202,591				199,215				2
Deposits			200,154				187,225				7
Selected average balances
Assets		$	231,587			$	225,120				3
Loans(b)			198,797				198,494				—
Deposits			194,382				184,336				5
Equity			13,896				13,100				6
Headcount			62,472				59,322				5
Credit data and quality statistics
Net charge-offs		$	121			$	152				(20	)
Nonperforming loans(c)			1,349				1,150				17
Nonperforming assets			1,537				1,351				14
Allowance for loan losses			1,333				1,168				14
Net charge-off rate(b)			0.27	%			0.34	%
Allowance for loan losses to ending loans(a)			0.71				0.64
Allowance for loan losses to nonperforming loans(c)			100				104
Nonperforming loans to total loans			0.67				0.58

REGIONAL BANKING

Selected income statement data		Three months ended March 31,
(in millions, except ratios)		2006				2005				Change
Noninterest revenue		$	820			$	827				(1	)%
Net interest income			2,220				2,210				—
Total Net revenue			3,040				3,037				—
Provision for credit losses			66				65				2
Noninterest expense			1,738				1,705				2
Income before income tax expense			1,236				1,267				(2	)
Net income			757				786				(4	)
ROE			31	%			36	%
ROA			1.95				2.17
Overhead ratio			57				56
Overhead ratio excluding core deposit intangibles(a)			54				52