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ANNUAL REPORT 2004

As of or for the year ended December 31,

(in millions, except per share, ratio and headcount data) 2004 2003

Reported basis

(a)

Total net revenue $ 43,097 $ 33,384

Net income 4,466 6,719

Net income per share:

Basic 1.59 3.32

Diluted 1.55 3.24

Return on common equity 6% 16%

Headcount 160,968 96,367

Pro forma combined-operating basis

Total net revenue $ 57,280 $ 55,697

Earnings 10,289 9,330

Diluted earnings per share 2.85 2.61

Return on common equity 10% 9%

(a) Results are presented in accordance with accounting principles generally accepted in the United States

of America. 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only.

Financial highlights

The financial information provided on pages 1-15 is presented on a pro forma combined-

operating basis. The unaudited pro forma combined historical results represent how the financial

information of JPMorgan Chase & Co. and Bank One Corporation may have appeared on a

combined basis had the two companies been merged as of the earliest date indicated. Additional

information, including reconciliation of the pro forma numbers to GAAP, can be found on

Form 8-K/A furnished to the Securities and Exchange Commission on January 19, 2005. For a

description of operating basis, including management's reasons for its use of such measures, see

page 25 of this Annual Report.

Dear fellow shareholder,

On January , , we shared with you our plan to unite Bank One

and JPMorgan Chase with the goal of creating the best ﬁnancial services

company in the world. Throughout the year, we have worked hard to

execute one of the largest mergers in ﬁnancial services history. As expected,

the process has been challenging and rewarding. On a pro forma combined

basis for the full year, net operating income was $. billion with a %

return on equity (

ROE) or a % ROE less goodwill. While these results

are not yet what we want them to be, we believe the progress we have made

during the past year will ultimately be reﬂected in our performance.

In this, our ﬁrst letter to you as a combined company, we will review our 

merger milestones, our business performance and our priorities going forward.

After reading this letter, we hope you will believe, as we do, that we are doing

all of the right things to win in the long run. Today, we are more conﬁdent

than ever in our ability to build a great company.

Right: Bill Harrison

Chairman and

Chief Executive Ofﬁcer

Left:

Jamie Dimon

President and

Chief Operating Ofﬁcer

I.  MERGER MILESTONES

We have made substantial progress in merging our businesses. Since combining the holding companies

on July , , we have:

• Achieved merger-related cost saves of $ million and decreased headcount by ,, or %,

thereby staying on target to achieve a total expense reduction of $ billion by .

• Merged the lead banks, broker/dealers and credit card banks.

• Made all the key technology decisions, including the selection of our national deposit platform,

general ledger, customer identiﬁcation system and credit card processing system.

• Created a disciplined operating structure consisting of common reporting, risk management,

talent management, monthly business reviews and performance-based compensation.

• Identiﬁed our top , leaders and brought them together with our senior management team

to learn about the new ﬁrm’s potential and plan for its future.

II. REVIEW OF  BUSINESS PERFORMANCE

Most of our businesses performed adequately in . However, the full advantages that will come

from an increased number of distribution channels, coordinated branding and marketing efforts, and

the efﬁciencies of scale are yet to be realized. For our customers, the added value of broader, more

complete and higher-quality products and services will be substantial.

Below is a brief review by line of business. For more detail, please refer to management’s discussion

and analysis later in this report. To make meaningful comparisons in this letter, we will be discussing

our results on a pro forma combined basis.

The Investment Bank reported net operating earnings of $. billion with an ROE of %. A signiﬁ-

cant highlight for the year was the performance of our underwriting and advisory businesses.

Already the leader in many league categories, including syndicated loans and interest rate and credit

derivatives, we moved from th place to th in initial public offerings and ranked nd in global

announced M&A, having advised on seven of the  largest global M&A deals. Our ﬁxed income

business, however, experienced a % drop in revenues. Overall, we should have done considerably

better in an economic cycle that produced healthier credit results than anticipated. Over time, we

are aiming for a % ROE through economic cycles. That means striving for a % return in the

good times and, we hope, no less than a % return in the bad. In , we will seek to maintain

our global leadership positions by investing in infrastructure and business growth.

Retail Financial Services reported operating earnings of $. billion with an ROE of %. These

earnings reﬂect a % increase in consumer and small business banking that helped offset weak

performance in home ﬁnance. In home ﬁnance, we were challenged by an industry downturn in

mortgage originations driven largely by a dramatic drop-off of reﬁnancing activity due to rising

interest rates. Now that the era of historically low interest rates appears to be over, we are focused

on running this business far more efﬁciently. Goals for  include transitioning the Bank One

branded business to the Chase brand, investing in our distribution network and creating a culture

focused on productivity and sales.

Card Services reported operating earnings of $. billion and an

ROE of %. Card Services made

outstanding progress toward meeting its merger targets, reducing headcount by ,, or %, and is

on track to meet its target of $ million in expense saves. In addition to completing the conversion

of the heritage Chase card portfolio to our new processing platform in , our drive toward market

leadership will come from organic growth, economies of scale, superior customer service and an

increased focus on innovation.

Commercial Banking reported operating earnings of $ million and an ROE of %. The merger

between Bank One and JPMorgan Chase presents a tremendous opportunity for us to meet the

growing treasury, asset and wealth management, and investment banking needs of our more than

, middle market, corporate banking and real estate clients. In , we will take signiﬁcant

steps toward realizing that opportunity.

Asset &Wealth Management reported operating earnings of $ million and an ROE of %.

Improved equity markets and an emphasis on operating efﬁciencies helped us grow ROE from % in

. In , we will focus on improving investment performance and add new bankers and ofﬁcers

to gather additional assets and grow our base of ultra high net worth and high net worth clients.

Treasury & Securities Services reported operating earnings of $ million and an ROE of %.

These earnings understate the business’ importance, however, because much of our treasury services

revenue is included in other business segment results. In , Treasury & Securities Services delivered

double-digit revenue growth while also completing the ﬁrst phase of integrating international

operations in  countries. In , our goal will be to merge technology systems and leverage the

broader set of product capabilities achieved through the merger.

III. OUR PRIORITIES

DEVELOP AND MAINTAIN STRONG FINANCIAL DISCIPLINE. Financial discipline is the bedrock

upon which great companies are built. Great companies prevail through both good and bad economic

times and consistently deliver solid performance relative to competitors. Our goal is to become one

of those companies. Financial discipline requires:

Superior ﬁnancial reporting and management information systems. In , we created a new internal

and external ﬁnancial reporting architecture with high-quality and transparent accounting policies

that cover capital allocation, revenue sharing, expense allocation and funds-transfer pricing. We then

worked with our line of business leaders and their respective chief ﬁnancial ofﬁcers to develop

comprehensive ﬁnancial and operating metrics to use in building their businesses. Today, thousands

of proﬁt-and-loss statements – including one for each of our , branches, for example – help us

allocate capital appropriately and drive performance. We strive to use one set of numbers inside and

outside the company to bring consistency and clarity to how we view and measure performance.

While we are satisﬁed with the progress we have made to date, the real beneﬁt will come over time

as our management teams increasingly use these tools.

A fortress balance sheet. A fortress balance sheet requires a thorough understanding and management

of our assets and liabilities; the use of conservative, appropriate accounting; tight ﬁnancial controls;

strong loan loss reserves; and a commitment to solid credit ratings. We want a balance sheet of

unquestioned strength.

With a fortress balance sheet, we can withstand – perhaps even beneﬁt from – difﬁcult times and be

deliberate in our capital allocation decisions. Last year, we paid dividends of $. per share and

spent $ million to repurchase stock while making key investments in our business and ended the

year with a strong Tier  capital ratio of .%.

Accountability for performance. Financial reports alone won’t sufﬁce. They are simply tools. Financial

discipline also requires those in charge to have a deep understanding of their businesses and of what

drives proﬁtability and growth. Each month, the management team from each line of business meets

with us to discuss ﬁnancial performance, revenue growth, risk management, competitive threats,

productivity, innovation, key initiatives and talent management.

In the beginning, these meetings were somewhat painful for most of us. Too often, they ended with

more questions than answers. Many managers were asked to dive more deeply into the numbers and

be more tough-minded about the reasons why certain initiatives were not on target. Although they

aren’t yet where they should be, our meetings are becoming more open, candid and focused.

In addition to placing more accountability for performance within each line of business, each business

needs to increasingly give its ﬁeld managers the clear and appropriate authority they need to be

more accountable and responsive to customers and local market conditions.

Identifying, pricing and managing risk. All of our businesses must be properly paid for assuming

risk. All forms of risk – interest, credit, market, liquidity, operational, technology and business –

must be categorized, valued, measured and dynamically managed in the constantly changing economic

and business environment. While we continue to set risk policy and manage overall risk centrally,

we have established line of business risk committees that are accountable for risk performance with-

in the business. By working directly with the businesses, we are creating an informed risk culture

that responds more quickly to business and economic changes and strives to avoid surprises.

CUT WASTE AND IMPROVE EFFICIENCY THROUGH OUTSTANDING SYSTEMS AND OPERATIONS

A ﬁnancial services company cannot win unless it is a low-cost provider. This requires eliminating

waste and creating the most effective systems and most efﬁcient operations in the business. We are well

on our way. For example:

• We have completed the credit card industry’s largest-ever systems conversion, moving % of

our Visa and MasterCard cardmember base to a faster, more ﬂexible and cost-effective processing

system; the remaining % will be converted in , at which point all  million credit cards

will be serviced through a single technology platform.

• Already the leader in U.S. dollar funds transfers, we will ﬁnish our clearing systems integration

in the second quarter of . When we are done, our team will have invested , develop-

ment hours on the project designed to ensure that the , transactions that move an average

of $. trillion every day are executed ﬂawlessly.

• Within the Investment Bank, we are creating a global technology platform for institutional

credit risk management as well as credit trading and derivatives processing.

• We will move the Texas banking franchise onto our common deposit platform in . In ,

we will complete our bank franchise integration with the conversion of New York, New Jersey

and Connecticut, providing all customers with full access to banking services across state lines.

• We are consolidating operations centers, refreshing the networks of our  major processing

centers and  large business hubs, expanding strategic data centers, signiﬁcantly reducing the

number of required software applications and centralizing our global help desks to provide

consistent infrastructure.

• We believe that to assume more control of our destiny we must assume more control of our tech-

nology. On January , , we welcomed , previously outsourced technologists to the ﬁrm.

Together, we will strive to build the best, most efﬁcient systems and operations in our industry.

By year-end , we hope to have completed nearly  conversions and reduced our total

number of systems by approximately %. It is an undertaking that will require more than . million

“people hours” and at least . million hours of systems testing. When the process is complete, most

of our systems will be on single and upgraded platforms. This will give us a distinct edge in provid-

ing our customers with products and services that are competitively superior in quality,

innovation and price. During the next two years, our systems conversions will be one of our most

difﬁcult challenges, but we will do whatever it takes to get them right.

INVEST FOR GROWTH. Business cannot grow simply by improving efﬁciency. Growth requires a

laser-like focus on execution, a consistent management of risk, a competitive product set and out-

standing customer service. We are not interested in growth simply for the sake of growth. We are

looking for “good growth”; i.e., good products that meet customer needs and can be proﬁtable over

a sustained period of time.

Although we currently hold leadership positions in virtually every business we are in, there is room

to grow in all of them. We intend to build these businesses by investing in organic growth and ﬁlling

strategic gaps through acquisitions and partnerships.

Investing in organic growth. We will not grow short-term revenue at the expense of long-term success.

For us, smart growth means doing a lot of little things right. Some key examples for  include:

• Extending our reach in consumer banking by adding more than , sales people,  branches,

and , ATMs to our -state retail bank network;

• Aggressively funding new business development in the Investment Bank, with a special focus on

the energy sector and mortgage-backed securities business, as well as investing in ﬁxed income

and foreign exchange prime brokerage;

• Intensifying our marketing of Card Services by bringing the Chase brand to a broader customer

base; maximizing our partnerships with many of the nation’s best-known brands; innovating

continuously; and expanding product breadth;

• Increasing our Private Bank’s ultra high net worth client base by entering eight new markets

globally and building our Private Client Services’ client base by expanding our presence in the

large and rapidly growing high net worth market in the northeast United States.

Filling the gaps through acquisitions and partnerships. In addition to fueling organic growth, we will

pursue strategic acquisitions and partnerships to ﬁll gaps in capabilities, geographies, product offerings

and services. Although we are not prepared to make any large moves at this time, we will not pass up

smaller acquisitions of strategic value. For example, we entered into two important partnerships and

made one acquisition:

• In February , JPMorgan and Cazenove Group formed JPMorgan Cazenove, a joint venture

that will be one of the United Kingdom’s foremost investment banks. This venture is a major step

toward strengthening our global position.

• In December , we formed a strategic partnership with and acquired a majority interest in

Highbridge Capital Management, a hedge fund with $ billion of assets under management and

an extraordinary consistency of returns. Highbridge’s talent, longevity and track record will be a

tremendous addition to our investment offerings for institutional and high net worth clients.

• In January , JPMorgan Chase acquired Electronic Financial Services, a leading provider of

government-issued beneﬁts payments and pre paid stored value cards used by state and federal

government agencies and private institutions. This acquisition further advanced our leadership

position in wholesale electronic payment services and immediately positioned us as a leader in the

public sector segment.

BUILD GREAT BRANDS. Shortly after the merger was announced, we began formulating our brand

strategy. At ﬁrst, we thought we simply needed to decide whether to market our consumer products

under the name of Bank One or Chase. Our research, however, produced intriguing results. Both

Chase and Bank One tested well, but the research revealed that each has very different strengths.

The Chase brand is associated with “a tradition of trust” that could extend to a broader array of

products and services, such as insurance, retirement products and investments. The Bank One

brand, however, is viewed as having “momentum.”

Beginning in March , you will see the emergence of a new Chase brand that combines the best

of both: the trustworthiness of Chase with the energy of Bank One. Chase will be used to market

products and services offered by Commercial Banking, Card Services and Retail Financial Services.

The re-energized brand will be introduced with a nationwide marketing campaign focusing initially

on the Chase family of credit cards.

By the end of , our consumer business will be spending more than $ billion annually in support

of one brand: Chase. We intend to make Chase the best brand in the consumer ﬁnancial services

industry. We are on track to have all of our more than , bank branches operating under the

Chase brand by the end of the third quarter .

Our research also reafﬁrmed the power of the JPMorgan brand, which is associated with a long

history of unsurpassed client service, high performance standards, integrity and commitment to

relationships. The Investment Bank, our international services and Asset & Wealth Management

businesses – which include investment management, the Private Bank and Private Client Services –

will now be marketed solely under the JPMorgan brand.

CREATE A WINNING CULTURE. Over the course of our careers, we have completed many major

mergers. They are always difﬁcult. Mergers are about change, and change is hard. Our past experiences,

however, have made us appreciate the enormous progress that the people of Bank One and JPMorgan

Chase have achieved this year.

Since we announced the merger, a lot has been written about how the cultures of Bank One and

JPMorgan Chase would interact and which one would survive. Today, a new culture is emerging

that reﬂects the best of both ﬁrms. Every day, we are getting better, and the effects are taking hold.

We are becoming more candid and open in the way we communicate and more disciplined in the

way we run the ﬁrm. People are working together to tackle issues, and managers are leading their

teams with a deeper understanding of the underlying dynamics of their businesses. There is greater

buy-in for the vision, more passion about growing the business and a heightened sense of urgency.

A winning culture requires great leaders. In , we identiﬁed our top , leaders from through-

out the businesses and around the world. But that is just the beginning. In , we will conduct

in-depth talent reviews in all lines of business to identify our high-potential individuals and create

development plans for all of them. Our LeadershipMorganChase program provides a unique

forum for our senior managers to come together to learn more about our vision and plan for the

ﬁrm and to develop the skills they need to become great managers and leaders. Our goal is to

provide our people with everything they need to play an instrumental role in the future growth

and success of this ﬁrm.

We are also working to create a more inclusive work environment by requiring our managers to

be accountable for building diverse teams. As part of our effort to improve diversity at the executive

level, we are now devoting much more attention to career planning and development for high-

potential employees from under-represented groups.

BUILD A GREAT COMPANY. Our ﬁrm has been built on a reputation of trust that spans more than

two centuries and represents the coming together of more than  companies. Today, we stand on

the shoulders of those who came before us. We honor this legacy by committing ourselves to the

integrity and customer service that have long distinguished our ﬁrm. We intend to earn this reputa-

tion every day by doing the right thing, not necessarily the most expedient thing.

Our Board of Directors shares this commitment and is helping us accomplish it. We expect a lot

from our Board, and they expect a lot from us. We appreciate their support and value their guidance.

We also would like to express special appreciation to the Directors who have retired since the merger

was announced: Riley P. Bechtel; Frank A. Bennack, Jr.; John H. Bryan; M. Anthony Burns; Dr.

Maureen A. Fay; John R. Hall; Helene L. Kaplan; John W. Rogers, Jr.; and Frederick P. Stratton, Jr.

A great company gives its employees the opportunity to share in the success they have helped create.

Two-thirds of our employees own our stock. They think like owners because they are. To help ensure

that our senior management team always acts in the long-term best interests of the ﬁrm, we are

required to hold % of the stock awarded.

A great company gives back to the community it serves. Our predecessor ﬁrms have long and distin-

guished traditions of active community involvement. Lending to build and rebuild communities,

philanthropic giving and employee volunteerism are traditions that are very much alive today at

JPMorgan Chase. In , more than , JPMorgan Chase employees around the world dedicated

, hours to , volunteer community service projects.

In , we made an $ billion, -year public commitment to provide loans and investments that

will beneﬁt the credit and capital needs of minority and lower-income households and communities.

In , we achieved the ﬁrst $ billion of that commitment.

Additionally, we contributed more than $ million to thousands of not-for-proﬁt organizations

around the world. To help ensure we are meeting the speciﬁc needs of these communities, most of

our philanthropic decisions are made locally. One of these community projects – our ON_DEC

program in Brooklyn – received the  “Ron Brown Award for Corporate Leadership,” the only

presidential award honoring companies for achievement in employee and community relations.

IN CLOSING, the past few years were transformative for both Bank One and JPMorgan Chase. In

facing tough challenges we each have emerged better, stronger and healthier. Together, we are now

equipped and determined to become the best ﬁnancial institution in the world.

We asked a great deal of our employees during the past year, and they delivered. But we still have an

enormous amount of work ahead. The coming year will be a crucial one for us. The potential is

tremendous. We promise to do everything in our power to seize the opportunity and deliver on it

for our customers, for our shareholders, for our employees and for all of the communities we serve

throughout the United States and around the world.

Sincerely,

James Dimon

President and Chief Operating Ofﬁcer

William B. Harrison, Jr.

Chairman and Chief Executive Ofﬁcer

March , 

Investment Bank

(In millions, except ratios) 2004 2003

Total net revenue $13,506 $14,254

Operating earnings 3,654 3,929

Return on common equity 18% 17%

81% 77%

Our businesses

We are one of the world’s leading

investment banks with deep client

relationships and product capabilities,

serving 8,000 clients in more than 100

countries. Our clients are corporations,

ﬁnancial institutions, governments and

institutional investors worldwide. Our

broad client franchise is one of many

features that differentiates us from our

investment banking peers.

We provide a complete platform to our

clients, including advising on corporate

strategy and structure, equity and debt

capital raising, sophisticated risk manage-

ment, research, and market-making in

cash securities and derivative instruments

around the world. We also participate in

proprietary investing and trading.

2005 execution focus

•Focus on the client; exceed

expectations with each interaction.

• Deliver our full product base to clients;

leverage partnerships with Commercial

Banking’s Middle Market segment,

Treasury & Securities Services and Chase

Home Finance.

•Focus on generating higher returns

relative to our risk taking.

• Invest in growth businesses, including

Energy and Commodities, Fixed Income

and Foreign Exchange Prime Brokerage,

Equities and Mortgage-Backed Securities.

• Maintain a talented, entrepreneurial and

inclusive workforce.

• Streamline decision making, be nimble

and efﬁcient, and concentrate on foster-

ing efﬁcient processes and procedures.

2004 accomplishments

• Grew Investment banking fees by 12%.

• Increased share of initial public offerings

in the global markets by U.S. issuers to

9% from 1% – up to #4 from #16 in 2003.

• Pioneered a new hybrid offering:

the credit equity target redemption note

structure is the ﬁrst product to integrate

interest rate, credit and equity derivatives.

• Advised on seven of the 10 largest deals

in announced global M&A and grew

share to 26%, up from 16% in 2003.

• Developed signiﬁcant economies of scale

in derivatives technology and analytics,

thereby achieving low-cost producer status.

• Strengthened our position in Europe by

creating JPMorgan Cazenove, a joint

venture that will provide investment

banking services to clients in the United

Kingdom and Ireland.

Investment Bank

• Structured Products Award for Innovation of the Year – JPMorgan credit equity target redemption note

(

Risk

magazine, January 2005)

• #1 Interest Rate Options, Interest Rate Swaps, Equity Derivatives and Credit Derivatives

(

Risk

End User Rankings, May 2004)

• #1 U.S. M&A (announced); #1 Global and U.S. Syndicated Loans; #1 Asia Paciﬁc Equity Convertibles; #2 Global

M&A (announced); #2 Europe Middle East Africa M&A (number of deals); #2 Europe Middle East Africa

Equity Convertibles; #2 U.S. Investment Grade Bonds; and #3 Global Debt, Equity and Equity-Related Securities

Investment Bank highlights

Pro forma*

* All information is on a pro forma combined-operating basis. See inside front cover for details.

Retail Financial Services

(In millions, except ratios) 2004 2003

Total net revenue $15,076 $14,770

Operating earnings 3,279 2,633

Return on common equity 25% 21%

Retail Financial Services

Our businesses

Retail Financial Services helps meet the

ﬁnancial needs of consumers and small

businesses through more than 2,500 bank

branches and 225 mortgage ofﬁces as well

as through relationships with over 15,000

auto dealerships, 2,500 schools and univer-

sities, and 2,100 insurance agencies.

More than 5,000 personal bankers, 2,500

mortgage loan ofﬁcers, 1,300 investment

representatives and 1,000 small business

bankers work with customers to provide

checking and savings accounts, mortgage

and home equity loans, small business loans,

credit cards, investments and insurance.

We are the fourth-largest mortgage

originator, the second-largest home equity

originator, the largest bank originator of

automobile loans and a top provider of

loans for college students.

2005 execution focus

• Add more than 150 branches, 1,000

employees in new branches, 1,000 sales-

people throughout our branch network

and 1,000 ATMs to serve customers better.

• Continue to open new checking accounts

and to build on these and existing rela-

tionships to include sales of investments,

credit cards, and home equity and small

business loans.

• Integrate mortgage lenders into

bank branches to serve 9 million

branch customers.

• Achieve incremental merger savings, free-

ing capital for investment in new branches,

branch and ATM refurbishment, salesforce,

marketing and technology.

• Begin to convert Bank One branches to

Chase brand on a state-by-state basis,

heightening local market visibility, gen-

erating new customers and expanding

current relationships.

2004 accomplishments

• Increased consumer and small business

banking relationships, resulting in a 9%

increase in average core deposits and a

7% increase in checking accounts.

• Rolled out proﬁt-and-loss statements as

well as a consistent sales incentive pro-

gram throughout the branch network.

• Implemented an integrated Small

Business Banking model, aligning prod-

ucts, services and incentives with the

branch network.

• Originated $146 billion of mortgages

and grew mortgage servicing portfolio

by 9% to $562.0 billion.

• Grew auto and education loans by 7%

to $53.9 billion.

• Increased investment sales volume by

7% to $10.9 billion.

• Added 106 bank branches, bringing the total to 2,508 in one of the largest U.S. branch

networks and added 325 ATMs, bringing the total to 6,650 in the second-largest

U.S. ATM network

• Grew checking accounts by 563,000, bringing the total to 8.2 million accounts

• Increased home equity originations by 23% to $52 billion

Retail Financial Services highlights

Pro forma*

* All information is on a pro forma combined-operating basis. See inside front cover for details.

Card Services

(In millions, except ratios) 2004 2003

Total net revenue $15,001 $13,968

Operating earnings 1,681 1,368

Return on common equity 14% 12%

Card Services

Our businesses

With 94 million cards in circulation and

more than $135 billion in managed loans,

Chase Card Services is the largest issuer

of general-purpose credit cards in the

United States and the largest merchant

acquirer in the country. Our customers

used our cards for over $282 billion worth

of charge volume in 2004.

Chase offers a wide variety of cards

to satisfy the individual needs of

consumers and small businesses, including

cards issued for AARP, Amazon.com,

Continental Airlines, Marriott, Southwest

Airlines, Starbucks, United Airlines,

Universal Studios, Walt Disney Company

and a range of other well-known brands

and organizations.

2005 execution focus

• Drive proﬁtable growth in new

customer acquisitions by leveraging

best-in-class processes as well as our

substantial credit card partnerships

and by investing in new capabilities.

• Grow existing customer base proﬁtably

by keeping and activating more cus-

tomers and increasing sales volume and

fee-based revenue programs.

• Drive down operating cost per active

account to industry-leading levels.

• Invest in marketing and technology

initiatives designed to position the

Chase brand for long-term growth.

• Complete card conversion by moving

heritage Chase portfolio to new

processing system.

2004 accomplishments

• Made quick merger integration decisions

and took action by selecting the best

people, practices and processes.

• Acquired 17.8 million net new Visa,

MasterCard and private label accounts.

• Completed the industry’s largest-ever

systems conversion, moving millions

of accounts in the heritage Bank One

portfolio to a more ﬂexible and cost-

effective processing system.

• Increased merchant processing volume

to $489 billion.

• Acquired the Circuit City portfolio, giving

us a platform that will allow us to issue

private label cards.

• 94 million credit cards issued; over $282 billion in 2004 charge volume

• Largest general-purpose credit card issuer and merchant acquirer in the U.S.

• More than 850 credit card partnerships with well-known brands

Card Services highlights

Pro forma*

* All information is on a pro forma combined-operating basis. See inside front cover for details.

Commercial

Banking

Our businesses

Commercial Banking 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.

A local market presence and a strong

customer service model coupled with a

focus on risk management provide a

solid infrastructure for Commercial

Banking to offer the complete product

set of JPMorgan Chase, including lending,

treasury services, investment banking

and investment management.

Commercial Banking’s clients beneﬁt

greatly from our extensive retail banking

branch network and often use the capa-

bilities of JPMorgan Chase exclusively

to meet their ﬁnancial services needs.

Commercial Banking

(In millions, except ratios) 2004 2003

Total net revenue $3,417 $3,397

Operating earnings 992 832

Return on common equity 29% 20%

2004 accomplishments

• Engaged more than 4,500 employees

across 22 states to communicate a

consistent and timely message to

clients regarding the merger and

beneﬁts to them.

• Delivered $1 billion of earnings

and a 29% ROE through disciplined

ﬁnancial management.

• Grew deposits 16% to $66 billion.

• Launched a client coverage initiative to

more effectively provide ﬁnancial solu-

tions to the companies in our markets.

• Began the integration of systems and

products to enhance our ability to offer

a full range of ﬁnancial services.

• Businesses include Middle Market Banking, Corporate Banking, Commercial Real Estate Banking,

Business Credit and Equipment Leasing

• Commercial Banking operates in 10 of the top 15 major metropolitan areas in the U.S.

• Leading commercial bank in the U.S., with $50 billion in average loans and $66 billion in

average deposits

Commercial Banking highlights

2005 execution focus

• Demonstrate commitment to our

clients through all stages of their

growth with our industry expertise

and extensive geographic reach.

• Provide consistent coverage to

our clients offering them the best

in local service.

• Accelerate business development

through focused product and client

coverage in the markets we serve.

• Continue integrating the systems

and services to deliver the full range

of capabilities more efﬁciently to

our customers.

Pro forma*

* All information is on a pro forma combined-operating basis. See inside front cover for details.

Treasury & Securities Services

(In millions, except ratios) 2004 2003

Total net revenue $5,400 $4,772

Operating earnings 437 454

Return on common equity 23% 24%

Tr easury & Securities Services

Our businesses

Treasury & Securities Services is a global

leader in providing transaction, invest-

ment and information services to support

the needs of chief ﬁnancial ofﬁcers, treas-

urers, issuers and institutional investors

worldwide through its three businesses –

Treasury Services, Investor Services and

Institutional Trust Services.

Treasury Services is a leading provider of

cash management, trade and treasury serv-

ices, processing an average of $1.8 trillion

in U.S. dollar funds transfers daily. Investor

Services is one of the top three custodians

in the world, with $9.1 trillion in total

assets under custody. Institutional Trust

Services is the world’s largest debt trustee

and American Depositary Receipt bank

(based on market capitalization under man-

agement), servicing $6.7 trillion in debt.

2005 execution focus

• Leverage broad product capabilities

from the merger to provide innovative

solutions to clients.

• Expand in high-potential market

segments and regions.

• Cross sell with business partners across

JPMorgan Chase.

• Achieve market differentiation by deliv-

ering competitively superior customer

service and product innovation.

• Continue to focus on cost efﬁciencies to

fund investments in the business.

• Make strategic acquisitions to increase

scale in traditional product areas,

extend product lines and expand geo-

graphic reach.

2004 accomplishments

• Delivered double-digit revenue growth.

• Created the world’s largest cash

management provider as a result of

the merger.

• Executed the ﬁrst phase of the merger

successfully, which included integrating

international operations in 36 countries.

• Increased assets under custody by 20%.

• Grew volume of Automated Clearing

House (ACH) originations by 30%.

• Increased corporate trust securities

under administration by 6%.

• Acquired two companies that expanded

product depth and geographic reach:

Tranaut, a recognized best-in-class hedge

fund administrator; and TASC, the largest

third-party asset administration service

provider in South Africa.

• #1 U.S. Dollar Treasury Clearing and Commercial Payments; #1 ACH Originations,

CHIPS and Fedwire

• #2 Global Custody; “Best Global Custodian Overall”

(Global Investor)

• #1 Trustee U.S. Corporate Debt; #1 Global Trustee Collateralized Debt Obligations

Treasury & Securities Services highlights

Pro forma*

* All information is on a pro forma combined-operating basis. See inside front cover for details.

Asset & Wealth Management

Our businesses

Asset & Wealth Management provides

investment and wealth management serv-

ices to investors and their advisors. With

combined assets under supervision in

excess of $1 trillion, we are one of the

largest asset and wealth managers in the

world. We manage our clients’ assets

through four key business segments:

Institutional, Retail, Private Bank and

Private Client Services.

JPMorgan Asset Management provides

investment management for our

institutional and retail clients through a

broad range of separate accounts and

funds. Our retail clients, who seek retire-

ment and brokerage services, also are serv-

iced through JPMorgan Retirement Plan

Services and BrownCo. Our ultra high net

worth and high net worth clients receive

integrated wealth management services

from JPMorgan Private Bank and JPMorgan

Private Client Services, respectively.

Asset & Wealth Management

(In millions, except ratios) 2004 2003

Total net revenue $4,901 $4,275

Operating earnings 879 629

Return on common equity 37% 25%

2005 execution focus

• Meet client demand for absolute return

by expanding our investment capabili-

ties in alternative investment products.

• Continue to integrate our intellectual

capital with the global resources

required to deliver strong, consistent

investment performance across our

broad range of investment strategies.

• Continue to expand the geographic

footprint of our wealth management

businesses by investing in eight new

Private Banking markets globally and

building the Private Client Services

markets in the northeastern U.S.

• Build our Retail franchise by expanding

our third-party distribution, 401(k) and

brokerage platforms.

2004 accomplishments

• Achieved strong earnings growth

driven by asset inﬂows and improved

markets globally.

• Surpassed $100 billion in European

retail client assets, including mandates

for diverse funds, sub-advisory and

liquidity strategies.

• Delivered strong, consistent performance

across a broad range of investment

strategies. More than 90% of JPMorgan

Asset Management’s U.S. large-cap

research-driven equity strategies and

95% of our broad market ﬁxed income

strategies outperformed industry bench-

marks for 2004 and 2003.

• Produced record asset inﬂows for

JPMorgan Private Bank.

•Formed a strategic partnership with

and acquired a majority interest in

Highbridge Capital Management, a

$7 billion hedge fund ﬁrm with extra-

ordinary consistency of returns

and experienced business leadership.

• $1 trillion in assets under supervision; over $40 billion in alternative assets under management

•2 million retail clients, plus institutional and high net worth clients

• #1 U.S. Private Bank; #2 Global Money Market Asset Manager; #2 Offshore Fund Manager;

#3 Global Private Bank; #3 U.S. Active Asset Manager; #5 U.S. Mutual Fund Company

Asset & Wealth Management highlights

Pro forma*

* All information is on a pro forma combined-operating basis. See inside front cover for details.

Corporate

Our businesses

The Corporate Sector is composed of

the Private Equity business, Treasury,

and corporate staff and other centrally

managed expenses. The Private Equity

business invests in leveraged buyouts,

growth equity and venture capital for the

Firm and third parties around the world.

Treasury manages structural interest rate

risk and the Firm’s investment portfolio.

The corporate staff areas support the lines

of business to deliver superior ﬁnancial

services to businesses and consumers

around the world.

The support areas include: Central

Technology and Operations; Internal Audit;

Executive Ofﬁce; Finance; General

Services; Human Resources; Marketing &

Communications; Ofﬁce of the General

Counsel; Real Estate and Business

Services; Risk Management; and Strategy

and Development.

2005 execution focus

• Reduce the Firm’s overall exposure

to Private Equity while continuing

to invest in Private Equity as a

strategic business.

• Invest in corporate technology initia-

tives: expand the strategic data centers;

enhance the infrastructure that supports

risk and ﬁnance activities; integrate the

technology that supports human

resources activities; refresh 11 major

processing centers and 22 corporate

business hubs; consolidate global help

desks and provide consistent infrastruc-

ture; and consolidate operating centers.

• Advance technology initiatives within

Card Services, Investment Bank and

Treasury & Securities Services.

2004 accomplishments

• Generated strong Private Equity results

while reducing the book value of the

Private Equity portfolio to $7.5 billion

at year-end 2004, from $9.6 billion at

year-end 2003.

• Repositioned the Treasury investment

portfolio in expectation of rising

interest rates.

• Repurchased $738 million of common

stock.

• Implemented ﬁnancial reporting

architecture.

•Finalized brand strategy.

• Began the insourcing of technology

activities.

• Eliminated duplicate activities that

resulted from the merger and reduced

related headcount.

• Conformed our human resources and

beneﬁts policies.

All information is on a pro forma combined-operating basis. See inside front cover for details.

Community Partnership

Our businesses

Central to our history and culture is the

principle of working to improve the com-

munities we serve. In 2004, JPMorgan

Chase contributed over $140 million to

thousands of not-for-proﬁt organizations

around the world and provided more than

$3.0 billion just in community develop-

ment lending and investing for housing

and economic development in low- and

moderate-income communities. As part of

our global volunteer initiative, 27,500

employees, retirees, friends and family

members participated in 1,900 volunteer

projects. We also work to preserve the

environment through policies and initia-

tives that are guided by our Ofﬁce of

Environmental Affairs.

We have experienced ﬁrsthand the bene-

ﬁts gained with a corporate culture that’s

actively inclusive, where colleagues are

recognized based on their talent and

skills and where diversity is used as a

competitive advantage to beneﬁt from the

broadest possible pool of employee talent,

experiences and perspectives.

These capabilities and programs support

our interaction with communities and

with each other and guide our efforts to

be a responsible corporate citizen.

2005 execution focus

• Continue to work with thousands of not-

for-proﬁts across the United States and

in global markets to make an impact in

three primary areas of need: community

asset development, youth education and

community life.

• Strengthen our partnerships with the

communities by evaluating and address-

ing their needs based on our complete

lending, investing, philanthropic and

sponsorship capabilities.

• Continue to drive accountability for

diversity through business metrics across

the organization.

• Develop and implement a comprehensive

environmental policy to promote environ-

mentally responsible ways to conduct our

internal and external business activities.

• Made an $800 billion, 10-year public commitment to provide loans and investments that will

beneﬁt the credit and capital needs of minority and lower-income households and communities

• Earned “The Ron Brown Award for Corporate Leadership,” a U.S. presidential award that

recognizes companies for outstanding achievement in employee and community relations, for our

ON_DEC program which bridges the “digital divide” at one inner city middle school in New York

• Provided more than $5 million in corporate and employee donations to help with the Indian Ocean

tsunami disaster relief efforts to several not-for-proﬁt organizations, including, but not limited to,

the International Red Cross, UNICEF and numerous Asia-based organizations

2004 accomplishments

• Achieved more than $68.0 billion in the

ﬁrst year of our $800 billion, 10-year

public commitment.

• Contributed over $140 million to not-for-

proﬁts, including $18 million directed by

employees through our matching gift

and volunteer grants programs.

• Enriched communities with sponsorships

and events focused on arts, culture and

sports, including the JPMorgan Chase

Corporate Challenge that raised more

than $375,000 for local not-for-proﬁt

organizations globally.

• Relaunched the Corporate Diversity

Council, chaired by Bill Harrison. The

Council sets the overall vision for diversity

within JPMorgan Chase and seeks to

create a more inclusive workplace for all.

• Established the Ofﬁce of Environmental

Affairs and allocated dedicated resources

to increase the company’s focus on envi-

ronmental issues related to the company.

Community Partnership highlights

Board of Directors

Hans W. Becherer

1,4

Retired Chairman and

Chief Executive Ofﬁcer

Deere & Company

(Equipment manufacturer)

John H. Biggs

1,3

Former Chairman and

Chief Executive Ofﬁcer

Teachers Insurance

and Annuity Association-

College Retirement

Equities Fund (TIAA-CREF)

(Pension fund)

Lawrence A. Bossidy

4,5

Retired Chairman

Honeywell International Inc.

(Technology and manufacturing)

Stephen B. Burke

2,3

President

Comcast Cable Communications,

Inc.

(Cable television)

James S. Crown

4,5

President

Henry Crown and Company

(Diversiﬁed investments)

James Dimon

President and

Chief Operating Ofﬁcer

Ellen V. Futter

4,5

President and Trustee

American Museum of

Natural History

(Museum)

William H. Gray, III

2,4

Retired President and

Chief Executive Ofﬁcer

The College Fund/UNCF

(Educational assistance)

William B. Harrison, Jr.

Chairman and

Chief Executive Ofﬁcer

Laban P. Jackson, Jr.

1,3

Chairman and

Chief Executive Ofﬁcer

Clear Creek Properties, Inc.

(Real estate development)

John W. Kessler

2,4

Owner

John W. Kessler Company

and Chairman

The New Albany Company

(Real estate development)

Robert I. Lipp

4,5

Executive Chairman of

the Board

The St. Paul Travelers

Companies, Inc.

(Insurance)

Richard A. Manoogian

1,4

Chairman and

Chief Executive Ofﬁcer

Masco Corporation

(Diversiﬁed manufacturer)

David C. Novak

2,3

Chairman and

Chief Executive Ofﬁcer

Yum! Brands, Inc.

(Franchised restaurants)

Lee R. Raymond

2,3

Chairman of the Board and

Chief Executive Ofﬁcer

Exxon Mobil Corporation

(Oil and gas)

John R. Stafford

2,3

Retired Chairman of

the Board

Wyeth

(Pharmaceuticals)

Anthony J. Horan

Secretary

Mark I. Kleinman

Treasury

William J. Moran

Audit

Joseph L. Sclafani

Controller

William B. Harrison, Jr.*

Chairman and

Chief Executive Ofﬁcer

James Dimon*

President and

Chief Operating Ofﬁcer

Austin A. Adams*

Technology & Operations

Paul Bateman

Asset Management

Steven D. Black*

Investment Bank

Philip F. Bleser

Commercial Banking

Douglas L. Braunstein

Investment Bank

William I. Campbell*

Card Services

Michael J. Cavanagh*

Finance

Michael K. Clark

Institutional Trust &

Investor Services

John R. Corrie

Investment Bank

David A. Coulter

West Coast Region

William M. Daley

Midwest Region

Klaus Diederichs

Investment Bank

Ina R. Drew*

Chief Investment Ofﬁcer

Patrik L. Edsparr

Investment Bank

John J. Farrell*

Human Resources

Walter A. Gubert

Europe, Middle East and Africa

Joan Guggenheimer*

Legal & Compliance

Carlos M. Hernandez

Investment Bank

Frederick W. Hill

Marketing & Communications

Lorraine E. Hricik

Treasury Services

Fawzi Kyriakos-Saad

Investment Bank

Rick Lazio

Government Affairs

James B. Lee, Jr.

Investment Bank

Steve MacLellan

Private Client Services

Samuel Todd Maclin*

Commercial Banking

Jay Mandelbaum*

Strategy

Donald H. McCree, III

Risk Management

William H. McDavid*

Legal & Compliance

Heidi Miller*

Treasury & Securities Services

R. Ralph Parks

Asia Paciﬁc

Scott Powell

Home Finance

David W. Puth

Investment Bank

Charles W. Scharf*

Retail Financial Services

Richard J. Srednicki

Card Services

James E. Staley*

Asset & Wealth Management

Jeffrey C. Walker

Private Equity

Don M. Wilson III*

Risk Management

Thomas L. Wind

Home Finance

William T. Winters*

Investment Bank

Executive Committee

Other corporate officers

Member of:

1. Audit Committee

2. Compensation & Management

Development Committee

3. Corporate Governance &

Nominating Committee

4. Public Responsibility Committee

5. Risk Policy Committee

(*denotes member of Operating Committee)

This page has been amended since the Annual Report was printed and presents the Executive Committee of the Firm as of March 30, 2005.

JPMorgan Chase & Co. / 2004 Annual Report 17

Table of contents

Financial:

Management’s discussion and analysis:

18 Introduction

20 Executive overview

22 Consolidated results of operations

25 Explanation and reconciliation of the Firm’s

use of non-GAAP financial measures

28 Business segment results

49 Balance sheet analysis

50 Capital management

52 Off

–

balance sheet arrangements and

contractual cash obligations

54 Risk management

55 Liquidity risk management

57 Credit risk management

70 Market risk management

75 Operational risk management

76 Reputation and fiduciary risk management

76 Private equity risk management

77 Critical accounting estimates used by the Firm

80 Nonexchange-traded commodity contracts at fair value

80 Accounting and reporting developments

Audited financial statements:

82 Management’s report on internal control

over financial reporting

83 Report of independent registered public accounting firm

84 Consolidated financial statements

88 Notes to consolidated financial statements

Supplementary information:

129 Selected quarterly financial data

130 Five-year summary of consolidated financial highlights

131 Glossary of terms

Corporate:

132 Community Advisory Board

134 Regional Advisory Board

134 National Advisory Board

135 JPMorgan Chase International Council

136 Governance

137 Corporate data and shareholder information

Management’s discussion and analysis

JPMorgan Chase & Co..

18 JPMorgan Chase & Co. / 2004 Annual Report

home mortgages. Consumer & Small Business Banking offers one of the

largest branch networks in the United States, covering 17 states with 2,508

branches and 6,650 automated teller machines. Auto & Education Finance is

the largest bank originator of automobile loans as well as a top provider of

loans for college students. Through its Insurance operations, the Firm sells and

underwrites an extensive range of financial protection products and investment

alternatives, including life insurance, annuities and debt protection products.

Card Services

Card Services (“CS”) is the largest issuer of general purpose credit cards in the

United States, with approximately 94 million cards in circulation, and is the largest

merchant acquirer. CS offers a wide variety of products to satisfy the needs of its

cardmembers, including cards issued on behalf of many well-known partners,

such as major airlines, hotels, universities, retailers and other financial institutions.

Commercial Banking

Commercial Banking (“CB”) serves more than 25,000 corporations, munici-

palities, financial institutions and not-for-profit entities, with annual revenues

generally ranging from $10 million to $2 billion. A local market presence and

a strong customer service model, coupled with a focus on risk management,

provide a solid infrastructure for CB to provide the Firm’s complete product

set – lending, treasury services, investment banking and investment manage-

ment – for both corporate clients and their executives. CB’s clients benefit

greatly from the Firm’s extensive branch network and often use the Firm

exclusively to meet their financial services 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 the largest cash manage-

ment provider in the world and one of the top three global custodians. The

Treasury Services business provides clients with a broad range of capabilities,

including U.S. dollar and multi-currency clearing, ACH, trade, and short-term

liquidity and working capital tools. The Investor Services business provides a

wide range of capabilities, including custody, funds services, securities lend-

ing, and performance measurement and execution products. The Institutional

Trust Services business provides trustee, depository and administrative services

for debt and equity issuers. Treasury Services partners with the Commercial

Banking, Consumer & Small Business Banking and Asset & Wealth

Management segments to serve clients firmwide. As a result, certain Treasury

Services revenues are included in other segments’ results.

Asset & Wealth Management

Asset & Wealth Management (“AWM”) provides investment management to

retail and institutional investors, financial intermediaries and high-net-worth

families and individuals globally. For retail investors, AWM provides invest-

ment management products and services, including a global mutual fund

franchise, retirement plan administration, and consultation and brokerage

Introduction

JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”), a financial hold-

ing 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 $1.2 trillion in assets, $106 billion in stockholders’ equity

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 90 million customers, including consumers

nationwide and many of the world’s most prominent wholesale clients.

JPMorgan Chase’s principal bank subsidiaries are JPMorgan Chase Bank,

National Association (“JPMorgan Chase Bank”), a national banking associa-

tion with branches in 17 states; and Chase Bank USA, National Association, a

national bank headquartered in Delaware that is the Firm’s credit card issuing

bank. JPMorgan Chase’s principal nonbank subsidiary is J.P. Morgan Securities

Inc. (“JPMSI”), its U.S. investment banking firm.

The headquarters for JPMorgan Chase is in New York City. The retail banking

business, which includes the consumer banking, small business banking and

consumer lending activities with the exception of credit card, is headquar-

tered in Chicago. Chicago also serves as the headquarters for the commercial

banking business.

JPMorgan Chase’s activities are organized, for management reporting purpos-

es, into six business segments, as well as Corporate. The Firm’s wholesale

businesses are comprised of the Investment Bank, Commercial Banking,

Treasury & Securities Services, and Asset & Wealth Management. The Firm’s

consumer businesses are comprised of Retail Financial Services and Card

Services. 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 its client relationships and product capabilities. The

Investment Bank (“IB”) has extensive relationships with corporations, finan-

cial institutions, governments and institutional investors worldwide. The Firm

provides a full range of investment banking products and services, including

advising on corporate strategy and structure, capital raising in equity and debt

markets, sophisticated risk management, and market-making in cash securi-

ties and derivative instruments in all major capital markets. The IB also com-

mits the Firm’s own capital to proprietary investing and trading activities.

Retail Financial Services

Retail Financial Services (“RFS”) includes Home Finance, Consumer & Small

Business Banking, Auto & Education Finance and Insurance. Through this

group of businesses, the Firm provides consumers and small businesses with

a broad range of financial products and services including deposits, invest-

ments, loans and insurance. Home Finance is a leading provider of consumer

real estate loan products and is one of the largest originators and servicers of

This section of the Annual Report provides management’s discussion

and analysis (“MD&A”) of the financial condition and results of opera-

tions for JPMorgan Chase. See the Glossary of terms on page 131 for

a definition of terms used throughout this Annual Report. The MD&A

included in this Annual Report 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. Such risks and uncertainties are

described herein and in Part I, Item 1: Business, Important factors that

may affect future results, in the JPMorgan Chase Annual Report on

Form 10-K for the year ended December 31, 2004, filed with the

Securities and Exchange Commission and available at the Commission’s

website (www.sec.gov), to which reference is hereby made.

JPMorgan Chase & Co. / 2004 Annual Report 19

services. AWM delivers investment management to institutional investors

across all asset classes. The Private bank and Private client services businesses

provide integrated wealth management services to ultra-high-net-worth and

high-net-worth clients, respectively.

Merger with Bank One Corporation

Effective July 1, 2004, Bank One Corporation (“Bank One”) merged with and

into JPMorgan Chase (the “Merger”), pursuant to an Agreement and Plan of

Merger dated January 14, 2004. As a result of the Merger, each outstanding

share of common stock of Bank One was converted in a stock-for-stock

exchange into 1.32 shares of common stock of JPMorgan Chase. The Merger

was accounted for using the purchase method of accounting. The purchase

price to complete the Merger was $58.5 billion. Key objectives of the Merger

were to provide the Firm with a more balanced business mix and greater

geographic diversification.

Bank One’s results of operations were included in the Firm’s results beginning

July 1, 2004. Therefore, the results of operations for the 12 months ended

December 31, 2004, reflect six months of operations of the combined Firm and

six months of heritage JPMorgan Chase; the results of operations for all other

periods prior to 2004 reflect only the operations of heritage JPMorgan Chase.

It is expected that cost savings of approximately $3.0 billion (pre-tax) will be

achieved by the end of 2007; approximately two-thirds of the savings are

anticipated to be realized by the end of 2005. Total 2004 Merger savings

were approximately $400 million. Merger costs to combine the operations of

JPMorgan Chase and Bank One are expected to range from approximately

$4.0 billion to $4.5 billion (pre-tax). Of these costs, approximately $1.0 billion,

specifically related to Bank One, were accounted for as purchase accounting

adjustments and were recorded as an increase to goodwill in 2004. Of the

approximately $3.0 billion to $3.5 billion in remaining Merger-related costs,

$1.4 billion (pre-tax) were incurred in 2004 and have been charged to

income, $1.4 billion (pre-tax) are expected to be incurred in 2005, and the

remaining costs are expected to be incurred in 2006. These estimated Merger-

related charges will result from actions taken with respect to both JPMorgan

Chase’s and Bank One’s operations, facilities and employees. The charges will

be recorded based on the nature and timing of these integration actions.

As part of the Merger, certain accounting policies and practices were

conformed, which resulted in $976 million (pre-tax) of charges in 2004. The

significant components of the conformity charges were comprised of a $1.4

billion (pre-tax) charge related to the decertification of the seller’s interest in

credit card securitizations, and the benefit of a $584 million reduction in the

allowance for credit losses as a result of conforming the wholesale and con-

sumer credit provision methodologies.

Other business events

Electronic Financial Services

On January 5, 2004, JPMorgan Chase acquired Electronic Financial Services

(“EFS”), a leading provider of government-issued benefits payments and pre-

paid stored value cards used by state and federal government agencies and

private institutions. The acquisition further strengthened JPMorgan Chase’s

position as a leading provider of wholesale payment services.

Cazenove

On November 5, 2004, JPMorgan Chase and Cazenove Group plc (“Cazenove”)

announced an agreement to combine Cazenove’s investment banking busi-

ness and JPMorgan Chase’s United Kingdom-based investment banking busi-

ness into a new entity to be jointly owned. The partnership will provide

investment banking services in the United Kingdom and Ireland. The transac-

tion closed on February 28, 2005, and the new company is called JPMorgan

Cazenove Holdings.

Highbridge

On December 13, 2004, JPMorgan Chase formed a strategic partnership

with and acquired a majority interest in Highbridge Capital Management

(“Highbridge”), a New York-based multi-strategy hedge fund manager, with

seven discrete strategy groups and more than $7 billion of assets under

management. Highbridge has offices in New York, London and Hong Kong.

Including Highbridge, JPMorgan Chase now manages more than $40 billion

of absolute-return products (e.g., hedge funds, private equity and real

estate investments).

Vastera

On January 7, 2005, JPMorgan Chase agreed to acquire Vastera, a provider of

global trade management solutions, for approximately $129 million. Vastera’s

business will be combined with the Logistics and Trade Services businesses

of TSS’s Treasury Services unit. The transaction is expected to close in the first

half of 2005. Vastera automates trade management processes associated

with the physical movement of goods internationally; the acquisition will

enable Treasury Services to offer management of information and processes

in support of physical goods movement, together with financial settlement.

Management’s discussion and analysis

JPMorgan Chase & Co.

20 JPMorgan Chase & Co. / 2004 Annual Report

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 Annual Report. This overview

discusses the economic or industry-wide factors that affected

JPMorgan Chase, the factors that drove business performance,

and the factors that management monitors in setting policy. For

a more complete understanding of trends, events, commitments,

uncertainties, liquidity, capital resources and critical accounting

estimates, this entire Annual Report should be read carefully.

Financial performance of JPMorgan Chase

As of or for the year ended December 31,

(a)

(in millions, except per share and ratio data) 2004 2003 Change

Total net revenue $ 43,097 $ 33,384 29%

Provision for credit losses 2,544 1,540 65

Noninterest expense 34,359 21,816 57

Net income 4,466 6,719 (34)

Net income per share – diluted 1.55 3.24 (52)

Average common equity 75,641 42,988 76

Return on average common equity (“ROCE”) 6% 16% (1,000)bp

Loans $ 402,114 $ 214,766 87%

Total assets 1,157,248 770,912 50

Deposits 521,456 326,492 60

Tier 1 capital ratio 8.7% 8.5% 20bp

Total capital ratio 12.2 11.8 40

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only.

Business overview

The Firm’s results in 2004 were affected by many factors, but the most signifi-

cant of these were the Merger, the litigation charge taken in the second

quarter of the year and global economic growth.

The Firm reported 2004 net income of $4.5 billion, or $1.55 per share,

compared with net income of $6.7 billion, or $3.24 per share, for 2003.

The return on common equity was 6%, compared with 16% in 2003. Results

included $3.7 billion in after-tax charges, or $1.31 per share, comprised of:

Merger costs of $846 million; charges to conform accounting policies as a

result of the Merger of $605 million; and a charge of $2.3 billion to increase

litigation reserves. Excluding these charges, operating earnings would have

been $8.2 billion, or $2.86 per share, and return on common equity would

have been 11%. Operating earnings represent business results without the

merger-related costs and the significant litigation charges.

During the course of the year, the Firm developed a comprehensive plan of

Merger integration and began to execute on the plan. Significant milestones

during the year included: branding decisions for all businesses; merger of the

holding companies, lead banks and credit card banks; conversion of the Bank

One credit card portfolio to a new processing platform; announcement of

insourcing of major technology operations; and consolidation and standardi-

zation of human resource policies and benefit plans. As part of the Merger,

the Firm announced that it had targeted reducing operating expenses by

$3.0 billion (pre-tax) by the end of 2007. In order to accomplish the cost

reductions, the Firm announced that it expects to incur Merger costs of

approximately $4.0 billion to $4.5 billion and reduce its workforce by approx-

imately 12,000 over the same time period.

In 2004, both the U.S. and global economies continued to strengthen overall,

even though momentum slowed during the second half of the year due to

rising oil prices. Gross domestic product increased by 3.9% globally and 4.4%

in the U.S., both up from 2003. The U.S. economy experienced rising short-

term interest rates, driven by Federal Reserve Board (“FRB”) actions during the

course of the year. The federal funds rate increased from 1.00% to 2.25% dur-

ing the year and the yield curve flattened, as long-term interest rates were rel-

atively stable. Equity markets, both domestic and international, enjoyed strong

results, with the S&P 500 up 9% and international indices increasing in similar

fashion. Capital markets activity during 2004 was healthy, debt underwriting

was consistent with the strong levels experienced in 2003, and equity under-

writing enjoyed strong and consistent activity during the year. The U.S. consumer

sector showed continued strength buoyed by the overall economic strength,

despite slowing mortgage origination and refinance activity. Retail sales were

up over the prior year, and bankruptcy filings were down significantly from 2003.

On an operating basis, net income in each of the Firm’s lines of business was

affected primarily by the Merger. The discussion that follows highlights other

factors which affected operating results in each business.

Despite the relatively beneficial capital markets environment, results for the

Investment Bank were under pressure during the year. This was primarily due

to a decline in trading revenue related to lower fixed income trading, driven

by weaker portfolio management results, and a reduction in net interest

income, stemming primarily from lower loan balances. This was partially offset

by increased investment banking fees, the result of continued strength in debt

underwriting, and higher advisory fees. The Investment Bank benefited from a

reduction in the allowance for credit losses, primarily due to the improved

credit quality of the loan portfolio, as evidenced by the significant drop in

nonperforming loans and, to a lesser extent, recoveries of previously charged-

off loans. Expenses rose, primarily due to higher compensation expenses.

Retail Financial Services benefited from better spreads earned on deposits

and growth in retained residential mortgage and home equity loan balances.

Mortgage fees and related income was also up, reflecting higher mortgage

servicing revenue, partially offset by significantly lower prime mortgage pro-

duction income related to the slower mortgage origination activity. The

Provision for credit losses benefited from improved credit quality in nearly all

portfolios and a reduction in the allowance for credit losses related to the

sale of a $4 billion manufactured home loan portfolio. Higher compensation

expenses were due to continued expansion of the branch office network,

including 130 new locations (106 net additional branches) opened during

2004 for the combined Firm, and expansion of the sales force, partially offset

by ongoing efficiency improvements.

Card Services revenue benefited from higher loan balances and customer

charge volume, which increased net interest income and higher net inter-

change income, respectively. Expenses increased due to higher marketing

spending and higher volume-based processing expenses.

Commercial Banking revenues benefited from strong deposit growth and

higher investment banking fees. These benefits were partially offset by lower

service charges on deposits, which often decline when interest rates rise.

Credit quality continued to improve, resulting in lower net charge-offs and

nonperforming loans.

JPMorgan Chase & Co. / 2004 Annual Report 21

Treasury & Securities Services revenues benefited from strong growth in assets

under custody and average deposits, along with deposit spreads, which

improved due to the relatively low interest rate environment for deposits.

These benefits were offset by lower service charges on deposits, which often

decline when interest rates rise. Revenues and expenses also were affected by

acquisitions, divestitures and growth in business volume. Expenses also increased

due to software impairment charges, and legal and technology-related expenses.

Asset & Wealth Management results were positively affected by the strength of

global equity markets, an improved product mix, better investment performance

and net asset inflows. Results also benefited from deposit and loan growth.

The Corporate segment performance was negatively affected by a reposition-

ing of the investment securities portfolio and tighter spreads. This was partially

offset by improved Private Equity results due to an improved climate for

investment sales.

The Firm’s balance sheet was likewise significantly affected by the Merger. Aside

from the Merger, the Firm took a number of actions during the year to strength-

en the balance sheet. Notably, the Treasury investment portfolio was reposi-

tioned to reduce exposure to rising interest rates; auto leasing was de-empha-

sized, and lease receivables were reduced by 16% to $8 billion; the $4 billion

manufactured home loan portfolio was sold; the $2 billion recreational vehicle

portfolio was sold subsequent to year-end; a significant portion of third-party

private equity investments have been sold; and the Firm increased its litigation

reserves. The Firm’s capital base was also significantly enhanced following the

Merger. As of year-end, total stockholders’ equity was $106 billion, and the Tier

1 capital ratio was 8.7%. The capital position allowed the Firm to begin repur-

chasing common stock during the second half of the year, with more than $700

million, or 19.3 million common shares, repurchased during the year.

2005 business outlook

JPMorgan Chase’s outlook for 2005 should be viewed against the backdrop

of the global economy, financial markets and the geopolitical environment,

all of which are integrally linked together. While the Firm considers outcomes

for, and has contingency plans to respond to, stress environments, its basic

outlook for 2005 is predicated on the interest rate movements implied in the

forward rate curve for U.S. Treasuries, the continuation of the favorable U.S. and

international equity markets and continued expansion of the global economy.

The performance of the Firm’s capital markets businesses is highly correlated

to overall global economic growth. The Investment Bank enters 2005 with a

strong pipeline for advisory and underwriting business, and it continues to

focus on growing its client-driven trading business. Compared with 2004, the

Investment Bank expects a reduction in credit portfolio revenues, as both net

interest income on loans and gains from workouts are likely to decrease.

Financial market movements and activity levels also affect Asset & Wealth

Management and Treasury & Securities Services. Asset & Wealth Management

anticipates revenue growth, driven by net inflows to Assets under supervision

and by the Highbridge acquisition, as well as deposit and loan growth.

Treasury & Securities Services anticipates modest revenue growth, due to

wider spreads on deposits, as well as increased business volume and activity

in the custody, trade, commercial card, American Depositary Receipt and

Collateralized Debt Obligation businesses. Commercial Banking anticipates

that net revenues will benefit from growth in treasury services and investment

banking fees, offset by margin compression on loans.

The business outlook varies for the respective consumer businesses. Card

Services anticipates modest growth in consumer spending and in card out-

standings. For RFS, Home Finance earnings are likely to weaken given a mar-

ket-driven decline in mortgage originations, neutralizing the expected earnings

increase in Consumer & Small Business Banking. The drop in revenue at Home

Finance should be mitigated by ongoing efforts to bring expenses in line with

lower expected origination volumes. Growth is expected to continue in

Consumer & Small Business Banking, with increases in core deposits and asso-

ciated revenue partially offset by ongoing investments in the branch distribu-

tion network. New branch openings should continue at a pace consistent with

or slightly above those of 2004. At the heritage Chase branches, expanded

hours and realigned compensation plans that tie incentives to branch perform-

ance are expected to provide improvements in productivity and incremental

net revenue growth. Earnings in Auto & Education Finance are expected to

remain under pressure, given the current competitive operating environment.

Across all RFS businesses, credit quality trends remain stable, with a slight

increase in credit costs likely in 2005.

The Corporate sector includes Private Equity, Treasury and the corporate sup-

port units. The revenue outlook for the Private Equity business is directly relat-

ed to the strength of equity market conditions in 2005. If current market con-

ditions persist, the Firm anticipates continued realization of private equity

gains; the Firm is not anticipating investment securities gains from the

Treasury portfolio in 2005.

The Provision for credit losses in 2005 is anticipated to be higher than in

2004, driven primarily by a return to a more normal level of provisioning for

credit losses in the wholesale businesses over time. The consumer Provision

for credit losses in 2005 should reflect increased balances, with generally sta-

ble credit quality. The Firm plans to implement higher minimum-payment

requirements in the Card Services business in the third quarter of 2005; it is

anticipated that this will increase delinquency and net charge-off rates, but

the magnitude of the impact is currently being assessed.

The Firm’s 2005 expenses should reflect the realization of $1.5 billion in

merger savings. These savings are expected to be offset by a projected

$1.1 billion of incremental spending related to firmwide technology

infrastructure, distribution enhancement, and product improvement and

expansion in Retail Financial Services, the Investment Bank and Asset &

Wealth Management. In addition, expenses will increase as a result of recent

acquisitions, such as Highbridge and Cazenove.

Management will seek to continue to strengthen the Firm’s balance sheet

through rigorous financial and risk discipline. Any capital generated in excess

of the Firm’s capital targets, and beyond that required to support anticipated

modest growth in assets and the underlying risks of the Firm’s businesses,

including litigation risk, will create capital flexibility in 2005 with respect to

common stock repurchases and further investments in the Firm’s businesses.

Management’s discussion and analysis

JPMorgan Chase & Co.

22 JPMorgan Chase & Co. / 2004 Annual Report

Consolidated results of operations

The following section provides a comparative discussion of

JPMorgan Chase’s consolidated results of operations on a reported

basis for the three-year period ended December 31, 2004. Factors

that are primarily related 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 pages 77–79 of this Annual Report.

Revenue

Year ended December 31,

(a)

(in millions) 2004 2003 2002

Investment banking fees $ 3,537 $ 2,890 $ 2,763

Trading revenue 3,612 4,427 2,675

Lending & deposit related fees 2,672 1,727 1,674

Asset management, administration

and commissions 7,967 5,906 5,754

Securities/private equity gains 1,874 1,479 817

Mortgage fees and related income 1,004 923 988

Credit card income 4,840 2,466 2,307

Other income 830 601 458

Noninterest revenue 26,336 20,419 17,436

Net interest income 16,761 12,965 12,178

Total net revenue $ 43,097 $ 33,384 $ 29,614

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

2004 compared with 2003

Total net revenues, at $43.1 billion, rose by $9.7 billion or 29%, primarily due

to the Merger, which affected every category of Total net revenue. Additional

factors contributing to the revenue growth were higher consumer demand for

credit products and higher credit card charge volume, as well as strong retail

and wholesale deposit growth. Investment banking revenues increased as a

result of growth in global market volumes and market share gains. Revenue

also benefited from acquisitions and growth in assets under custody, under

management and under supervision, the result of global equity market

appreciation and net asset inflows. Private equity gains were higher due to an

improved climate for investment sales. The discussion that follows highlights

factors other than the Merger that affected the 2004 versus 2003 comparison.

The increase in Investment banking fees was driven by significant gains in

underwriting and advisory activities as a result of increased global market

volumes and market share gains. Trading revenue declined by 18%, primarily

due to lower portfolio management results in fixed income and equities. For a

further discussion of Investment banking fees and Trading revenue, which are

primarily recorded in the IB, see the IB segment results on pages 30–32 of

this Annual Report.

Lending & deposit related fees were up from 2003 due to the Merger. The

rise was partially offset by lower service charges on deposits, as clients paid

for services with deposits, versus fees, due to rising interest rates. Throughout

2004, deposit balances grew in response to rising interest rates.

The increase in Asset management, administration and commissions was also

driven by the full-year impact of other acquisitions – such as EFS in January

2004, Bank One’s Corporate Trust business in November 2003 and JPMorgan

Retirement Plan Services in June 2003 – as well as the effect of global equity

market appreciation, net asset inflows and a better product mix. In addition,

a more active market for trading activities in 2004 resulted in higher broker-

age commissions. For additional information on these fees and commissions,

see the segment discussions for AWM on pages 45–46, TSS on pages 43–44

and RFS on pages 33–38 of this Annual Report.

Securities/private equity gains for 2004 rose from the prior year, primarily

fueled by the improvement in the Firm’s private equity investment results. This

was offset by lower securities gains on the Treasury investment portfolio as a

result of lower volumes of securities sold, and lower gains realized on sales

due to higher interest rates; additionally, RFS’s Home Finance business report-

ed losses in 2004 on available-for-sale (“AFS”) securities, as compared with

gains in 2003. For a further discussion of securities gains, see the RFS and

Corporate segment discussions on pages 33–38 and 47–48, respectively, of

this Annual Report. For a further discussion of Private equity gains, which are

primarily recorded in the Firm’s Private Equity business, see the Corporate

segment discussion on pages 47–48 of this Annual Report.

Mortgage fees and related income rose as a result of higher servicing revenue;

this improvement was partially offset by lower mortgage servicing rights

(“MSRs”) asset risk management results and prime mortgage production rev-

enue, and lower gains from sales and securitizations of subprime loans as a

result of management’s decision in 2004 to retain these loans. Mortgage fees

and related income excludes the impact of NII and securities gains related to

home mortgage activities. For a discussion of Mortgage fees and related

income, which is primarily recorded in RFS’s Home Finance business, see the

Home Finance discussion on pages 34–36 of this Annual Report.

Credit card income increased from 2003 as a result of higher customer charge

volume, which resulted in increased interchange income, and higher credit

card servicing fees associated with the increase of $19.4 billion in average

securitized loans. The increases were partially offset by higher volume-driven

payments to partners and rewards expense. For a further discussion of Credit

card income, see CS’s segment results on pages 39–40 of this Annual Report.

The increase in Other income from 2003 reflected gains on leveraged lease

transactions and higher net results from corporate and bank-owned life insur-

ance policies. These positive factors in 2004 were partially offset by gains on

sales of several nonstrategic businesses and real estate properties in 2003.

Net interest income rose from 2003 as growth in volumes of consumer loans

and deposits, as well as wider spreads on deposits, contributed to higher net

interest income. These were partially offset by lower wholesale loan balances

in the IB and tighter spreads on loans, investment securities and trading

assets stemming from the rise in interest rates. The Firm’s total average inter-

est-earning assets for 2004 were $744.1 billion, up $154.2 billion from

2003. Growth was also driven by higher levels of consumer loans. The net

interest yield on these assets, on a fully taxable-equivalent basis, was 2.27%

in 2004, an increase of 6 basis points from the prior year.

2003 compared with 2002

Total revenue for 2003 was $33.4 billion, up 13% from 2002. All businesses

benefited from improved economic conditions in 2003. In particular, the

low–interest rate environment drove robust fixed income markets and an

unprecedented mortgage refinancing boom, which drove the growth in revenue.

JPMorgan Chase & Co. / 2004 Annual Report 23

Investment banking fees increased by $127 million, primarily due to growth

in IB’s equity underwriting, which was up 49%, reflecting increases in market

share and underwriting volumes. This increase was partially offset by lower

advisory fees reflecting depressed levels of M&A activity. Trading revenue was

up $1.8 billion, or 65%, primarily due to strong client and portfolio manage-

ment revenue growth in fixed income and equity markets as a result of the

low–interest rate environment, improvement in equity markets and volatility

in credit markets. For a further discussion of Investment banking fees and

Trading revenue, which are primarily recorded in the Investment Bank, see the

IB segment results on pages 30-32 of this Annual Report.

Lending & deposit related fees rose, the result of higher fees on standby letters

of credit, due to growth in transaction volume, and higher service charges on

deposits. These charges were driven by an increase in the payment of services

with fees, versus deposits, due to lower interest rates.

The increase in Asset management, administration and commissions was attrib-

utable to a more favorable environment for debt and equity activities, resulting

in higher fees for the custody, institutional trust, brokerage and other processing-

related businesses. Fees for investment management activities also increased

as a result of acquisitions in AWM, but these increases were partially offset by

institutional net fund outflows, which resulted in lower average assets under

management.

Securities/private equity gains increased to $1.5 billion from $817 million in

2002, reflecting significant improvement in private equity gains. These gains

were partially offset by lower gains realized from the sale of securities in

Treasury and of AFS securities in RFS’s Home Finance business, driven by

increasing interest rates beginning in the third quarter of 2003. For a further

discussion of private equity gains (losses), see the Corporate segment discus-

sion on pages 47–48 of this Annual Report.

Mortgage fees and related income declined by 7% in 2003, primarily due to

a decline in revenue associated with risk management of the MSR asset,

mortgage pipeline and mortgage warehouse; these were partially offset by

higher fees from origination and sales activity and other fees derived from

volume and market-share growth. For a discussion of Mortgage fees and

related income, which is primarily recorded in RFS’s Home Finance business,

see the Home Finance discussion on pages 34–36 of this Annual Report.

Credit card income rose as a result of higher credit card servicing fees

associated with the $6.7 billion growth in average securitized credit card

receivables. For a further discussion of Credit card income, see CS’s segment

results on pages 39–40 of this Annual Report.

Other income rose, primarily from $200 million in gains on sales of securities

acquired in loan workouts (compared with $26 million in 2002), as well

as gains on the sale of several nonstrategic businesses and real estate

properties; these were partly offset by lower net results from corporate and

bank-owned life insurance policies. In addition, 2002 included $73 million of

write-downs for several Latin American investments.

The increase in Net interest income reflected the positive impact of lower

interest rates on consumer loan originations, such as mortgages and auto-

mobile loans and leases and related funding costs. Net interest income was

partially reduced by a lower volume of wholesale loans and lower spreads

on investment securities. The Firm’s total average interest-earning assets in

2003 were $590 billion, up 6% from the prior year. The net interest yield on

these assets, on a fully taxable-equivalent basis, was 2.21%, the same as in

the prior year.

Provision for credit losses

2004 compared with 2003

The Provision for credit losses of $2.5 billion was up $1.0 billion, or 65%, com-

pared with the prior year. The impact of the Merger, and of accounting policy con-

formity charges of $858 million, were partially offset by releases in the allowance

for credit losses related to the wholesale loan portfolio, primarily due to improved

credit quality in the IB. Wholesale nonperforming loans decreased by 21% even

after the inclusion of Bank One’s loan portfolio. RFS’s Provision for credit losses

benefited from a reduction in the allowance for credit losses related to the sale

of the $4 billion manufactured home loan portfolio and continued positive credit

quality trends in the home and auto finance businesses. The provision related to

the credit card portfolio grew by $919 million, principally due to the Merger. For

further information about the Provision for credit losses and the Firm’s manage-

ment of credit risk, see the Credit risk management discussion on pages 57–69

of this Annual Report.

2003 compared with 2002

The 2003 Provision for credit losses was $2.8 billion lower than in 2002,

primarily reflecting continued improvement in the quality of the wholesale

loan portfolio and a higher volume of credit card securitizations.

Noninterest expense

Year ended December 31,

(a)

(in millions) 2004 2003 2002

Compensation expense $ 14,506 $ 11,387 $ 10,693

Occupancy expense 2,084 1,912 1,606

Technology and communications expense 3,702 2,844 2,554

Professional & outside services 3,862 2,875 2,587

Marketing 1,335 710 689

Other expense 2,859 1,694 1,802

Amortization of intangibles 946 294 323

Total noninterest expense

before merger costs and

litigation reserve charge 29,294 21,716 20,254

Merger costs 1,365 — 1,210

Litigation reserve charge 3,700 100 1,300

Total noninterest expense $ 34,359 $ 21,816 $ 22,764

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

2004 compared with 2003

Noninterest expense was $34.4 billion in 2004, up $12.5 billion, or 57%, pri-

marily due to the Merger. Excluding $1.4 billion of Merger costs, and litiga-

tion reserve charges, Noninterest expenses would have been $29.3 billion, up

35%. In addition to the Merger and litigation charges, expenses increased

due to reinvestment in the lines of business, partially offset by merger-related

savings throughout the Firm. Each category of Noninterest expense was affect-

ed by the Merger. The discussion that follows highlights other factors which

affected the 2004 versus 2003 comparison.

Compensation expense was up from 2003, primarily due to strategic invest-

ments in the IB and continuing expansion in RFS. These factors were partially

offset by ongoing efficiency improvements and merger-related savings

throughout the Firm, and a reduction in pension costs. The decline in pension

costs was mainly attributable to the increase in the expected return on plan

assets from a discretionary $1.1 billion contribution to the Firm’s pension

Management’s discussion and analysis

JPMorgan Chase & Co.

24 JPMorgan Chase & Co. / 2004 Annual Report

safety measures. Also contributing to the increase were charges for unoccupied

excess real estate of $270 million; this compared with $120 million in 2002.

Technology and communications expense increased primarily due to a shift in

expenses: costs that were previously associated with Compensation and

Other expenses shifted, upon the commencement of the IBM outsourcing

agreement, to Technology and communications expense. Also contributing to

the increase were higher costs related to software amortization. For a further

discussion of the IBM outsourcing agreement, see Corporate on page 47 of

this Annual Report.

Professional & outside services rose, reflecting greater utilization of third-

party vendors for processing activities and higher legal costs associated with

various litigation and business-related matters.

Higher Marketing expense was driven by more robust campaigns for the

Home Finance business.

The decrease in Other expense was due partly to expense management initia-

tives, such as reduced allowances to expatriates and recruitment costs.

There were no Merger costs in 2003. In 2002, merger and restructuring costs

of $1.2 billion were for programs announced prior to January 1, 2002.

The Firm added $100 million to the Enron-related litigation reserve in 2003 to

supplement a $1.3 billion reserve initially recorded in 2002. The 2002 reserve

was established to cover Enron-related matters, as well as certain other mate-

rial litigation, proceedings and investigations in which the Firm is involved.

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:

Year ended December 31,

(a)

(in millions, except rate) 2004 2003 2002

Income before income tax expense $ 6,194 $10,028 $2,519

Income tax expense 1,728 3,309 856

Effective tax rate 27.9% 33.0% 34.0%

(a) 2004 results include six months of the combined Firm’s results and six months of

heritage JPMorgan Chase results. All other periods reflect the results of heritage

JPMorgan Chase only.

2004 compared with 2003

The reduction in the effective tax rate for 2004, as compared with 2003, was

the result of various factors, including lower reported pre-tax income, a higher

level of business tax credits, and changes in the proportion of income subject

to federal, state and local taxes, partially offset by purchase accounting

adjustments related to leveraged lease transactions. The Merger costs and

accounting policy conformity adjustments recorded in 2004, and the

Litigation reserve charge recorded in the second quarter of 2004, reflected a

tax benefit at a 38% marginal tax rate, contributing to the reduction in the

effective tax rate compared with 2003.

2003 compared with 2002

The effective tax rate decline was principally attributable to changes in the

proportion of income subject to state and local taxes.

plan in April 2004, partially offset by changes in actuarial assumptions for

2004 compared with 2003. For a detailed discussion of pension and other

postretirement benefit costs, see Note 6 on pages 92–95 of this Annual Report.

The increase in Occupancy expense was partly offset by lower charges for

excess real estate, which were $103 million in 2004, compared with $270

million in 2003.

Technology and communications expense was higher than in the prior year as

a result of higher costs associated with greater use of outside vendors, prima-

rily IBM, to support the global infrastructure requirements of the Firm. After

the Merger, JPMorgan Chase decided to terminate its outsourcing agreement

with IBM, effective December 31, 2004. For a further discussion regarding

the IBM outsourcing agreement, see the Corporate segment discussion on

page 47 of this Annual Report.

Professional & outside services rose due to higher legal costs associated with

pending litigation matters, as well as outside services stemming from recent

acquisitions, primarily EFS, and growth in business at TSS and CS.

Marketing expense rose as CS initiated a more robust marketing campaign

during 2004.

Other expense was up due to software impairment write-offs of $224 million,

primarily in TSS and Corporate, compared with $60 million in 2003; higher

accruals for non-Enron-related litigation cases; and the impact of growth in

business volume. These were partly offset by a $57 million settlement related

to the Enron surety bond litigation.

For a discussion of Amortization of intangibles and Merger costs, refer to

Note 15 and Note 8 on pages 109–111 and 98, respectively.

In June of 2004, JPMorgan Chase recorded a $3.7 billion (pre-tax) addition to

the Litigation reserve. While the outcome of litigation is inherently uncertain,

the addition reflected management’s assessment of the appropriate reserve

level in light of all then-known information. By comparison, 2003 included a

charge of $100 million for Enron-related litigation.

2003 compared with 2002

Total Noninterest expense was $21.8 billion, down 4% from the prior year.

In 2002, the Firm recorded $1.3 billion of charges, principally for Enron-

related litigation, and $1.2 billion for merger and restructuring costs related

to programs announced prior to January 1, 2002. Excluding these costs,

expenses rose by 8% in 2003, reflecting higher performance-related incen-

tives, increased costs related to stock-based compensation and pension and

other postretirement expenses; and higher occupancy expenses. The Firm

began expensing stock options in 2003.

The increase in Compensation expense principally reflected higher perform-

ance-related incentives, as well as higher pension and other postretirement

benefit costs, primarily as a result of changes in actuarial assumptions. The

increase pertaining to incentives included $266 million as a result of adopting

SFAS 123, and $120 million from the reversal in 2002 of previously accrued

expenses for certain forfeitable key employee stock awards. Total compensa-

tion expenses declined as a result of the transfer, beginning April 1, 2003, of

2,800 employees to IBM in connection with the aforementioned technology

outsourcing agreement.

The increase in Occupancy expense reflected costs of additional leased space

in midtown Manhattan and in the South and Southwest regions of the United

States, higher real estate taxes in New York City and the cost of enhanced

JPMorgan Chase & Co. / 2004 Annual Report 25

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 84–87 of this Annual Report. 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’ U.S. GAAP financial statements.

In addition to analyzing the Firm’s results on a reported basis, management

reviews line-of-business results on an “operating basis,” which is a non-

GAAP financial measure. The definition of operating basis starts with the

reported U.S. GAAP results. In the case of the IB, operating basis noninterest

revenue includes, in Trading revenue, net interest income related to trading

activities. Trading activities generate revenues, which are recorded for U.S.

GAAP purposes in two line items on the income statement: Trading revenue,

which includes 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 revenue and related net interest

income enables management to evaluate the IB’s trading activities, by consid-

ering all revenue related to these activities, and facilitates operating compar-

isons to other competitors. The following table reclassifies the Firm’s trading-

related Net interest income to Trading revenue.

Trading-related Net interest income reclassification

Year ended December 31,

(a)

(in millions) 2004 2003 2002

Net interest income – reported $ 16,761 $ 12,965 $ 12,178

Trading-related NII (1,950) (2,129) (1,880)

Net interest income – adjusted $ 14,811 $ 10,836 $ 10,298

Trading revenue – reported

(b)

$ 3,612 $ 4,427 $ 2,675

Trading-related NII 1,950 2,129 1,880

Trading revenue – adjusted

(b)

$ 5,562 $ 6,556 $ 4,555

(a) 2004 results include six months of the combined Firm’s results and six months of

heritage JPMorgan Chase results. All other periods reflect the results of heritage

JPMorgan Chase only.

(b) Reflects Trading revenue at the Firm level. The majority of Trading revenue is recorded in

the Investment Bank.

In addition, segment results 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. Operating revenue for the Investment Bank includes tax-equivalent

adjustments for income tax credits primarily related to affordable housing

investments as well as tax-exempt income from municipal bond investments.

Information prior to the Merger has not been restated to conform with this

new presentation. The amount of the tax-equivalent gross-up for each busi-

ness segment is eliminated within the Corporate segment. For a further dis-

cussion of trading-related revenue and tax-equivalent adjustments made to

operating revenue, see the IB on pages 30–32 of this Annual Report.

In the case of Card Services, operating or managed basis excludes the impact

of credit card securitizations on revenue, the Provision for credit losses, net

charge-offs and loan receivables. 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 bal-

ance sheet through the transfer of principal credit card 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 sheet. 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 income statement by reclas-

sifying as credit card income, interest income, certain fee revenue, and recov-

eries in excess of interest paid to the investors, gross credit losses and other

trust expenses related to the securitized receivables. For a reconciliation of

reported to managed basis of Card Services results, see page 40 of this

Annual Report. For information regarding loans and residual interests sold

and securitized, see Note 13 on pages 103–106 of this Annual Report.

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 fund-

ed, operating results are evaluated and decisions about allocating resources

such as employees and capital are based on managed financial information.

Finally, operating basis excludes Merger costs, the Litigation reserve charge

and accounting policy conformity adjustments related to the Merger, as man-

agement believes these items are not part of the Firm’s normal daily business

operations (and, therefore, are not indicative of trends) and do not provide

meaningful comparisons with other periods.

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

trends of the particular business segment and facilitate a comparison of the

business segment with the performance of competitors.

Explanation and reconciliation of the Firm’s use of non-GAAP financial measures

Management’s discussion and analysis

JPMorgan Chase & Co.

26 JPMorgan Chase & Co. / 2004 Annual Report

Year ended December 31,

(e)

2004 2003

(in millions) Reported Securitized Managed Reported Securitized Managed

Loans – Period-end $ 402,114 $ 70,795 $ 472,909 $ 214,766 $ 34,856 $ 249,622

Total assets – average 962,556 51,084 1,013,640 775,978 32,365 808,343

(e) 2004 results include six months of the combined Firm’s results and six months of heritage JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

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

(Table continues on next page)

Year ended December 31,

(a)

2004 2003

(in millions, except Reported Credit Special Operating Reported Credit Special Operating

per share and ratio data) results card

(b)

items basis results card

(b)

items basis

Revenue

Investment banking fees $ 3,537 $ — $ — $ 3,537 $ 2,890 $ — $ — $ 2,890

Trading revenue

(c)

5,562 — — 5,562 6,556 — — 6,556

Lending & deposit

related fees 2,672 — — 2,672 1,727 — — 1,727

Asset management,

administration and

commissions 7,967 — — 7,967 5,906 — — 5,906

Securities/private

equity gains 1,874 — — 1,874 1,479 — — 1,479

Mortgage fees and

related income 1,004 — — 1,004 923——923

Credit card income 4,840 (2,267) — 2,573 2,466 (1,379) — 1,087

Other income 830 (86) 118

(1)

862 601 (71) — 530

Noninterest revenue

(c)

28,286 (2,353) 118 26,051 22,548 (1,450) — 21,098

Net interest income

(c)

14,811 5,251 — 20,062 10,836 3,320 — 14,156

Total net revenue 43,097 2,898 118 46,113 33,384 1,870 — 35,254

Provision for credit losses 2,544 2,898 (858)

(2)

4,584 1,540 1,870 — 3,410

Noninterest expense

Merger costs 1,365 — (1,365)

(3)

— ————

Litigation reserve charge 3,700 — (3,700)

(4)

— 100——100

All other noninterest

expense 29,294 — — 29,294 21,716 — — 21,716

Total noninterest

expense 34,359 — (5,065) 29,294 21,816 — — 21,816

Income before income

tax expense 6,194 — 6,041 12,235 10,028 — — 10,028

Income tax expense 1,728 — 2,296

(6)

4,024 3,309 — — 3,309

Net income $ 4,466 $ — $ 3,745 $ 8,211 $ 6,719 $ — $ — $ 6,719

Earnings per

share – diluted $ 1.55 $ — $ 1.31 $ 2.86 $ 3.24 $ — $ — $ 3.24

Return on

common equity 6% — 5% 11% 16% — — 16%

Return on

equity – goodwill

(d)

9— 7 16 19——19

Return on assets 0.46 NM NM 0.81 0.87 NM NM 0.83

Overhead ratio 80% NM NM 64% 65% NM NM 62%

(a) 2004 results include six months of the combined Firm’s results and six months of heritage JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

(b) The impact of credit card securitizations affects CS. See pages 39–40 of this Annual Report for further information.

(c) Includes the reclassification of trading-related Net interest income to Trading revenue. See page 25 of this Annual Report for further information.

(d) Net income applicable to common stock/Total average common equity (net of goodwill). The Firm uses return on equity less goodwill, a non-GAAP financial measure, to evaluate the operating per-

formance of the Firm. The Firm utilizes this measure to facilitate operating comparisons to other competitors.

JPMorgan Chase & Co. / 2004 Annual Report 27

2002

Reported Securitized Managed

$ 216,364 $ 30,722 $ 247,086

733,357 26,519 759,876

Special Items

The reconciliation of the Firm’s reported results to operating results in the

accompanying table sets forth the impact of several special items incurred

by the Firm in 2002 and 2004. These special items are excluded from

Operating earnings, as management believes these items are not part of

the Firm’s normal daily business operations and, therefore, are not indica-

tive of trends and do not provide meaningful comparisons with other

periods. These items include Merger costs, significant litigation charges,

charges to conform accounting policies and other items, each of which is

described below:

(1) Other income in 2004 reflects $118 million of other accounting policy

conformity adjustments.

(2) The Provision for credit losses in 2004 reflects $858 million of

accounting policy conformity adjustments, consisting of a $1.4 billion

charge related to the decertification of the seller’s interest in credit

card securitizations, partially offset by a benefit of $584 million relat-

ed to conforming wholesale and consumer credit provision method-

ologies for the combined Firm.

(3) Merger costs of $1.4 billion in 2004 reflect costs associated with the

Merger; the $1.2 billion of charges in 2002 reflect merger and

restructuring costs associated with programs announced prior to

January 1, 2002.

(4) Significant litigation charges of $3.7 billion and $1.3 billion were

taken in 2004 and 2002, respectively.

(5) All Other noninterest expense in 2002 reflects a $98 million charge

for excess real estate capacity related to facilities in the West Coast

region of the United States.

(6) Income tax expense in 2004 and 2002 of $2.3 billion and $887 mil-

lion, respectively, represents the tax effect of the above items.

Formula Definitions for Non-GAAP Metrics

The table below reflects the formulas used to calculate both the following

GAAP and non-GAAP measures:

Return on common equity

Reported Net income* / Average common equity

Operating Operating earnings* / Average common equity

Return on equity - goodwill

Reported Net income* / Average common equity less goodwill

Operating Operating earnings* / Average common equity less goodwill

Return on assets

Reported Net income / Average assets

Operating Operating earnings / Average managed assets

Overhead ratio

Reported Total noninterest expense / Total net revenue

Operating Total noninterest expense / Total net revenue

* Represents earnings applicable to common stock

(Table continued from previous page)

2002

Reported Credit Special Operating

results card

(b)

items basis

$ 2,763 $ — $ — $ 2,763

4,555 — — 4,555

1,674 — — 1,674

5,754 — — 5,754

817 — — 817

988 — — 988

2,307 (1,341) — 966

458 (36) — 422

19,316 (1,377) — 17,939

10,298 2,816 — 13,114

29,614 1,439 — 31,053

4,331 1,439 — 5,770

1,210 — (1,210)

(3)

—

1,300 — (1,300)

(4)

—

20,254 — (98)

(5)

20,156

22,764 — (2,608) 20,156

2,519 — 2,608 5,127

856 — 887

(6)

1,743

$ 1,663 $ — $ 1,721 $ 3,384

$ 0.80 $ — $ 0.86 $ 1.66

4% — 4% 8%

5—510

0.23 NM NM 0.45

77% NM NM 65%

Management’s discussion and analysis

JPMorgan Chase & Co.

28 JPMorgan Chase & Co. / 2004 Annual Report

Business segment results

The Firm is managed on a line-of-business basis. The business segment finan-

cial results presented reflect the current organization of JPMorgan Chase.

There are six major reportable business segments: the Investment Bank, Retail

Financial Services, Card Services, Commercial Banking, Treasury & Securities

Services and Asset & Wealth Management, as well as a Corporate segment.

The segments are 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.

Segment results – Operating basis

(a)(b)

(Table continues on next page)

Year ended December 31, Total net revenue Noninterest expense

(in millions, except ratios) 2004 2003 Change 2004 2003 Change

Investment Bank $ 12,605 $ 12,684 (1)% $ 8,696 $ 8,302 5%

Retail Financial Services 10,791 7,428 45 6,825 4,471 53

Card Services 10,745 6,144 75 3,883 2,178 78

Commercial Banking 2,374 1,352 76 1,343 822 63

Treasury & Securities Services 4,857 3,608 35 4,113 3,028 36

Asset & Wealth Management 4,179 2,970 41 3,133 2,486 26

Corporate 562 1,068 (47) 1,301 529 146

Total $ 46,113 $ 35,254 31% $ 29,294 $ 21,816 34%

(a) Represents the reported results excluding the impact of credit card securitizations and, in 2004, Merger costs, the significant litigation reserve charges and accounting policy conformity adjustments

related to the Merger.

(b) 2004 results include six months of the combined Firm’s results and six months of heritage JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only.

(c) As a result of the Merger, new capital allocation methodologies were implemented during the third quarter of 2004. The capital allocated to each line of business considers several factors: stand-

alone peer comparables, economic risk measures and regulatory capital requirements. In addition, effective with the third quarter of 2004, goodwill, as well as the associated capital, is only allocated

to the Corporate line of business. Prior periods have not been revised to reflect these new methodologies and are not comparable to the presentation beginning in the third quarter of 2004.

In connection with the Merger, business segment reporting was realigned to

reflect the new business structure of the combined Firm. Treasury was trans-

ferred from the IB into Corporate. The segment formerly known as Chase

Financial Services had been comprised of Chase Home Finance, Chase

Cardmember Services, Chase Auto Finance, Chase Regional Banking and

Chase Middle Market; as a result of the Merger, this segment is now called

Retail Financial Services and is comprised of Home Finance, Auto & Education

Finance, Consumer & Small Business Banking and Insurance. Chase Middle

Market moved into Commercial Banking, and Chase Cardmember Services is

now its own segment called Card Services. TSS remains unchanged.

Investment Management & Private Banking has been renamed Asset &

Wealth Management. JPMorgan Partners, which formerly was a stand-alone

business segment, was moved into Corporate. Corporate is currently com-

prised of Private Equity (JPMorgan Partners and ONE Equity Partners),

Treasury, as well as corporate support areas, which include Central Technology

and Operations, Internal Audit, Executive Office, Finance, General Services,

Human Resources, Marketing & Communications, Office of the General

Counsel, Real Estate and Business Services, Risk Management and Strategy

and Development.

Segment results for periods prior to July 1, 2004, reflect heritage JPMorgan

Chase–only results and have been restated to reflect the current business

segment organization and reporting classifications.

JPMorgan

Partners

Asset &

Wealth

Management

Businesses:

• Treasury Services

• Investor Services

• Institutional Trust

Services

JPMorgan Chase

Treasury &

Securities

Services

Businesses:

• Middle Market

Banking

• Corporate Banking

• Commercial Real

Estate

• Business Credit

• Equipment Leasing

Commercial

Banking

■ JPMorgan is the brand name.

■ Chase is the brand name.

Product types:

• Investment banking:

- Advisory

- Debt and equity

underwriting

• Market-making

and trading:

- Fixed income

- Equities

- Credit

• Corporate lending

Investment

Bank

Retail

Financial

Services

Card

Services

Businesses:

• Investment

Management

- Institutional

- Retail

• Private Banking

• Private Client

Services

Businesses:

• Credit Card

• Merchant Acquiring

Businesses:

• Home Finance

• Consumer & Small

Business Banking

• Auto & Education

Finance

• Insurance

JPMorgan Chase & Co. / 2004 Annual Report 29

firms were aligned to provide consistency across the business segments. In

addition, expenses related to certain corporate functions, technology and

operations ceased to be allocated to the business segments and are retained

in Corporate. These retained expenses include parent company costs that would

not be incurred if the segments were stand-alone businesses; adjustments to

align certain corporate staff, technology and operations allocations with market

prices; and other one-time items not aligned with the business segments.

Capital allocation

Each business segment is allocated capital by taking into consideration stand-

alone peer comparisons, economic risk measures and regulatory capital

requirements. The amount of capital assigned to each business is referred to

as equity. Effective with the third quarter of 2004, new methodologies were

implemented to calculate the amount of capital allocated to each segment.

As part of the new methodology, goodwill, as well as the associated capital,

is allocated solely to Corporate. Although U.S. GAAP requires the allocation of

goodwill to the business segments for impairment testing (see Note 15 on

page 109 of this Annual Report), the Firm has elected not to include goodwill

or the related capital in each of the business segments for management

reporting purposes. See the Capital management section on page 50 of this

Annual Report for a discussion of the equity framework.

Credit reimbursement

TSS reimburses the IB for credit portfolio exposures the IB manages on behalf

of clients the segments share. At the time of the Merger, the reimbursement

methodology was revised to be based on pre-tax earnings, net of the cost of

capital related to those exposures. Prior to the Merger, the credit reimburse-

ment was based on pre-tax earnings, plus the allocated capital associated

with the shared clients.

Tax-equivalent adjustments

Segment results reflect revenues on a tax-equivalent basis for segment

reporting purposes. Refer to page 25 of this Annual Report for additional

details.

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 allocates income and expense using market-based

methodologies. At the time of the Merger, several of the allocation method-

ologies were revised, as noted below. The changes became effective

July 1, 2004. As prior periods have not been revised to reflect these new

methodologies, they are not comparable to the presentation of periods begin-

ning with the third quarter of 2004. Further, the Firm intends to continue to

assess the assumptions, methodologies and reporting reclassifications used

for segment reporting, and it is anticipated that further refinements may be

implemented in future periods.

Revenue sharing

When business segments join efforts to sell products and services to the

Firm’s clients, the participating business segments agree to share revenues

from those transactions. These revenue sharing agreements were revised on

the Merger date to provide consistency across the lines of businesses.

Funds transfer pricing

Funds transfer pricing (“FTP”) is used to allocate interest income and interest

expense to each line of business and also serves to transfer interest rate risk

to Corporate. While business segments may periodically retain interest rate

exposures related to customer pricing or other business-specific risks, the bal-

ance of the Firm’s overall interest rate risk exposure is included and managed

in Corporate. In the third quarter of 2004, FTP was revised to conform the

policies of the combined firms.

Expense allocation

Where business segments use services provided by support units within the

Firm, the costs of those support units are allocated to the business segments.

Those expenses are allocated based on their actual cost, or the lower of actual

cost or market cost, as well as upon usage of the services provided. Effective

with the third quarter of 2004, the cost allocation methodologies of the heritage

Segment results – Operating basis

(a)(b)

(Table continued from previous page)

Year ended December 31, Operating earnings Return on common equity – goodwill

(c)

(in millions, except ratios) 2004 2003 Change 2004 2003

Investment Bank $ 2,948 $ 2,805 5% 17% 15%

Retail Financial Services 2,199 1,547 42 24 37

Card Services 1,274 683 87 17 20

Commercial Banking 608 307 98 29 29

Treasury & Securities Services 440 422 4 17 15

Asset & Wealth Management 681 287 137 17 5

Corporate 61 668 (91) NM NM

Total $ 8,211 $ 6,719 22% 16% 19%

Management’s discussion and analysis

JPMorgan Chase & Co.

30 JPMorgan Chase & Co. / 2004 Annual Report

revenue was $1.9 billion, $2.1 billion and $1.9 billion for 2004, 2003 and 2002, respectively.

from municipal bond investments, and income tax credits related to affordable housing invest-

ments of $274 million, $117 million and $112 million for 2004, 2003, and 2002, respectively.

(d) TSS is charged a credit reimbursement related to certain exposures managed within the

IB credit portfolio on behalf of clients shared with TSS. For a further discussion, see Credit

reimbursement on page 29 of this Annual Report.

2004 compared with 2003

In 2004, Operating earnings of $2.9 billion were up 5% from the prior year.

Increases in Investment banking fees, a reduction in the Provision for credit

losses and the impact of the Merger were partially offset by decreases in

trading revenues and net interest income. Return on equity was 17%.

Total net revenue of $12.6 billion was relatively flat from the prior year,

primarily due to lower Fixed income markets revenues and total Credit

portfolio revenues, offset by increases in Investment banking fees and the

impact of the Merger. The decline in revenue from Fixed income markets was

driven by weaker portfolio management trading results, mainly in the interest

rate markets business. Total credit portfolio revenues were down due to lower

net interest income and lending fees, primarily driven by lower loan balances;

these were partially offset by higher trading revenue due to more severe credit

spread tightening in 2003 relative to 2004. Investment banking fees increased

by 24% over the prior year, driven by significant gains in advisory and debt

underwriting. The advisory gains were a result of increased global market

volumes and market share, while the higher underwriting fees were due to

stronger client activity.

The Provision for credit losses was a benefit of $640 million, compared with

a benefit of $181 million in 2003. The improvement in the provision was the

result of a $633 million decline in net charge-offs, partially offset by lower

reductions in the allowance for credit losses in 2004 relative to 2003. For

additional information, see Credit risk management on pages 57–69 of this

Annual Report.

For the year ended December 31, 2004, Noninterest expense was up 5% from

the prior year. The increase from 2003 was driven by higher Compensation

expense, including strategic investments and the impact of the Merger.

2003 compared with 2002

Operating earnings of $2.8 billion were up significantly over 2002. The increase in

earnings was driven by a significant decline in the Provision for credit losses,

coupled with strong growth in fixed income and equity markets revenues.

Total net revenue was $12.7 billion, an increase of $2.0 billion from the prior

year. The low interest rate environment, improvement in equity markets and

volatility in credit markets produced increased client and portfolio management

revenue in fixed income and equities. Market share gains in equity underwrit-

ing contributed to the increase in Investment banking fees over 2002.

The Provision for credit losses was a benefit of $181 million in 2003, com-

pared with a cost of $2.4 billion in 2002, reflecting improvement in the over-

all credit quality of the wholesale portfolio and the restructuring of several

nonperforming wholesale loans.

Noninterest expense increased by 6% from 2002, reflecting higher incentives

related to improved financial performance and the impact of expensing stock

options. Noncompensation expenses were up 10% from the prior year due to

increases in technology and occupancy costs.

Investment Bank

JPMorgan Chase is one of the world’s leading investment

banks, as evidenced by the breadth of its client relationships

and product capabilities. The Investment Bank has extensive

relationships with corporations, financial institutions, govern-

ments and institutional investors worldwide. The Firm provides

a full range of investment banking products and services,

including advising on corporate strategy and structure, capital

raising in equity and debt markets, sophisticated risk manage-

ment, and market-making in cash securities and derivative

instruments in all major capital markets. The Investment Bank

also commits the Firm’s own capital to proprietary investing

and trading activities.

As a result of the Merger, the Treasury business has been transferred to

the Corporate sector, and prior periods have been restated to reflect the

reorganization.

Selected income statement data

Year ended December 31,

(a)

(in millions, except ratios) 2004 2003 2002

Revenue

Investment banking fees:

Advisory $ 938 $ 640 $ 743

Equity underwriting 781 699 470

Debt underwriting 1,853 1,532 1,494

Total investment banking fees 3,572 2,871 2,707

Trading-related revenue:

(b)

Fixed income and other 5,008 6,016 4,607

Equities 427 556 20

Credit portfolio 6 (186) (143)

Total trading-related revenue 5,441 6,386 4,484

Lending & deposit related fees 539 440 394

Asset management, administration

and commissions 1,400 1,217 1,244

Other income 328 103 (125)

Noninterest revenue 11,280 11,017 8,704

Net interest income

(b)

1,325 1,667 1,978

Total net revenue

(c)

12,605 12,684 10,682

Provision for credit losses (640) (181) 2,392

Credit reimbursement from (to) TSS

(d)

90 (36) (82)

Noninterest expense

Compensation expense 4,893 4,462 4,298

Noncompensation expense 3,803 3,840 3,500

Total noninterest expense 8,696 8,302 7,798

Operating earnings before

income tax expense 4,639 4,527 410

Income tax expense (benefit) 1,691 1,722 (3)

Operating earnings $ 2,948 $ 2,805 $ 413

Financial ratios

ROE 17% 15% 2%

ROA 0.62 0.64 0.10

Overhead ratio 69 65 73

Compensation expense as

% of total net revenue 39 35 40

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results.All other periods reflect the results of heritage JPMorgan Chase only.

(b) Trading revenue, on a reported basis, excludes the impact of Net interest income related to

IB’s trading activities; this income is recorded in Net interest income. However, in this presen-

tation, to assess the profitability of IB’s trading business, the Firm combines these revenues

for segment reporting purposes. The amount reclassified from Net interest income to Trading

The amount of adjusted assets is presented to assist the reader in comparing the IB’s asset

and capital levels to other investment banks in the securities industry. Asset-to-equity lever-

age ratios are commonly used as one measure to assess a company’s capital adequacy. The

IB believes an adjusted asset amount, which excludes certain assets considered to have a

low risk profile, provides a more meaningful measure of balance sheet leverage in the securi-

ties industry. See Capital management on pages 50–52 of this Annual Report for a discus-

sion of the Firm’s overall capital adequacy and capital management.

(d) Nonperforming loans include loans held for sale of $2 million, $30 million and $16 million

as of December 31, 2004, 2003 and 2002, respectively. These amounts are not included in

the allowance coverage ratios.

(e) Nonperforming loans exclude loans held for sale of $351 million, $22 million and

$2 million as of December 31, 2004, 2003, and 2002, respectively, that were purchased

as part of the IB’s proprietary investing activities.

(f) Includes all mark-to-market trading activities, plus available-for-sale securities held for

IB investing purposes.

(g) Includes VAR on derivative credit valuation adjustments, credit valuation adjustment hedges

and mark-to-market loan hedges, which are reported in Trading revenue. This VAR does not

include the accrual loan portfolio, which is not marked to market.

NA-Data for 2002 is not available on a comparable basis.

According to Thomson Financial, in 2004, the Firm improved its ranking in

U.S. announced M&A from #8 to #1, and Global announced M&A from #4

to #2, while increasing its market share significantly. The Firm’s U.S. initial

public offerings ranking improved from #16 to #4, with the Firm moving to

#6 from #4 in the U.S. Equity & Equity-related category. The Firm maintained

its #1 ranking in U.S. syndicated loans, with a 32% market share, and its #3

position in Global Debt, Equity and Equity-related.

Market shares and rankings

(a)

2004 2003 2002

Market Market Market

December 31,

Share Rankings Share Rankings Share Rankings

Global debt, equity and

equity-related 7% # 3 8% # 3 8% #3

Global syndicated loans 20 # 1 20 # 1 26 #1

Global long-term debt 7# 2 8# 2 8 #2

Global equity and equity-related 6# 6 8# 4 4 #8

Global announced M&A 26 # 2 16 # 4 14 #5

U.S. debt, equity and equity-related 8# 5 9# 3 10 #2

U.S. syndicated loans 32 # 1 35 # 1 39 #1

U.S. long-term debt 12 # 2 10 # 3 13 #2

U.S. equity and equity-related 8# 611 # 4 6 #6

U.S. announced M&A 33 # 1 13 # 8 14 #7

(a) Sourced from Thomson Financial Securities data. 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%. Market share and rankings are presented on a

combined basis for all periods presented, reflecting the merger of JPMorgan Chase

and Bank One.

JPMorgan Chase & Co. / 2004 Annual Report 31

Selected metrics

Year ended December 31,

(a)

(in millions, except headcount and ratios) 2004 2003 2002

Revenue by business

Investment banking fees $ 3,572 $ 2,871 $ 2,707

Fixed income markets 6,314 6,987 5,450

Equities markets 1,491 1,406 1,018

Credit portfolio 1,228 1,420 1,507

Total net revenue $ 12,605 $ 12,684 $ 10,682

Revenue by region

Americas $ 6,870 $ 7,250 $ 6,360

Europe/Middle East/Africa 4,082 4,331 3,215

Asia/Pacific 1,653 1,103 1,107

Total net revenue $ 12,605 $ 12,684 $ 10,682

Selected balance sheet (average)

Total assets $ 473,121 $ 436,488 $ 429,866

Trading assets–debt and

equity instruments 173,086 156,408 134,191

Trading assets–derivatives receivables 58,735 83,361 70,831

Loans

(b)

42,618 45,037 55,998

Adjusted assets

(c)

393,646 370,776 359,324

Equity 17,290 18,350 19,134

Headcount 17,478 14,691 15,012

Credit data and quality statistics

Net charge-offs $47$ 680 $ 1,627

Nonperforming assets:

Nonperforming loans

(d)(e)

954 1,708 3,328

Other nonperforming assets 242 370 408

Allowance for loan losses 1,547 1,055 1,878

Allowance for lending related commitments 305 242 324

Net charge-off rate

(b)

0.13% 1.65% 3.15%

Allowance for loan losses to average loans

(b)

4.27 2.56 3.64

Allowance for loan losses to

nonperforming loans

(d)

163 63 57

Nonperforming loans to average loans 2.24 3.79 5.94

Market risk–average trading and

credit portfolio VAR

Trading activities:

Fixed income

(f)

$74$61 NA

Foreign exchange 17 17 NA

Equities 28 18 NA

Commodities and other 9 8NA

Diversification (43) (39) NA

Total trading VAR 85 65 NA

Credit portfolio VAR

(g)

14 18 NA

Diversification (9) (14) NA

Total trading and

credit portfolio VAR $90$69 NA

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

(b) The year-to-date average loans held for sale are $6.4 billion, $3.8 billion and $4.3 billion

for 2004, 2003 and 2002, respectively. These amounts are not included in the allowance

coverage ratios and net charge-off rates. The 2002 net charge-offs and net charge-off rate

exclude charge-offs of $212 million taken on lending-related commitments.

agreements and securities borrowed less securities sold, not yet purchased; (2) assets of

variable interest entities (VIEs) consolidated under FIN 46R; (3) cash and securities segre-

gated and on deposit for regulatory and other purposes; and (4) goodwill and intangibles.

Management’s discussion and analysis

JPMorgan Chase & Co.

32 JPMorgan Chase & Co. / 2004 Annual Report

Composition of revenue

Asset

Year ended Trading- Lending & management,

December 31,

(a)

Investment related deposit administration Other Total net

(in millions) banking fees revenue related fees and commissions income NII revenue

2004

Investment banking fees $ 3,572 $ — $

—

$ — $ — $ — $ 3,572

Fixed income markets — 5,008 191 287 304 524 6,314

Equities markets — 427 — 1,076 (95) 83 1,491

Credit portfolio — 6 348 37 119 718 1,228

Total $ 3,572 $ 5,441 $ 539 $ 1,400 $ 328 $ 1,325 $ 12,605

2003

Investment banking fees $ 2,871 $ — $ — $ — $ — $ — $ 2,871

Fixed income markets — 6,016 107 331 84 449 6,987

Equities markets — 556 — 851 (85) 84 1,406

Credit portfolio — (186) 333 35 104 1,134 1,420

Total $ 2,871 $ 6,386 $ 440 $ 1,217 $ 103 $ 1,667 $ 12,684

2002

Investment banking fees $ 2,707 $ — $ — $ — $ — $ — $ 2,707

Fixed income markets — 4,607 75 295 (20) 493 5,450

Equities markets — 20 — 911 (53) 140 1,018

Credit portfolio — (143) 319 38 (52) 1,345 1,507

Total $ 2,707 $ 4,484 $ 394 $ 1,244 $ (125) $ 1,978 $ 10,682

(a) 2004 results include six months of the combined Firm’s results and six months of heritage JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

IB’s revenues are comprised of the following:

Investment banking fees includes advisory, equity underwriting, bond underwriting and loan syndication fees.

Fixed income markets includes client and portfolio management revenue related to both market-making and proprietary risk-taking across global fixed income

markets, including government and corporate debt, foreign exchange, interest rate and commodities markets.

Equities markets includes client and portfolio management revenue related to market-making and proprietary risk-taking across global equity products,

including cash instruments, derivatives and convertibles.

Credit portfolio revenue includes Net interest income, fees and loan sale activity for IB’s credit portfolio. Credit portfolio revenue also includes gains or losses

on securities received as part of a loan restructuring, and changes in the credit valuation adjustment (“CVA”), which is the component of the fair value of a

derivative that reflects the credit quality of the counterparty. See page 63 of the Credit risk management section of this Annual Report for a further discussion

of the CVA. Credit portfolio revenue also includes the results of risk management related to the Firm’s lending and derivative activities. See pages 64–65 of the

Credit risk management section of this Annual Report for a further discussion on credit derivatives.

JPMorgan Chase & Co. / 2004 Annual Report 33

Retail Financial Services

RFS includes Home Finance, Consumer & Small Business Banking,

Auto & Education Finance and Insurance. Through this group of

businesses, the Firm provides consumers and small businesses

with a broad range of financial products and services including

deposits, investments, loans and insurance. Home Finance is a

leading provider of consumer real estate loan products and is

one of the largest originators and servicers of home mortgages.

Consumer & Small Business Banking offers one of the largest

branch networks in the United States, covering 17 states with

2,508 branches and 6,650 automated teller machines (“ATMs”).

Auto & Education Finance is the largest bank originator of

automobile loans as well as a top provider of loans for college

students. Through its Insurance operations, the Firm sells and

underwrites an extensive range of financial protection products

and investment alternatives, including life insurance, annuities

and debt protection products.

Selected income statement data

Year ended December 31,

(a)

(in millions, except ratios) 2004 2003 2002

Revenue

Lending & deposit related fees $ 1,013 $ 486 $ 509

Asset management, administration

and commissions 849 357 368

Securities/private equity gains (losses) (83) 381 493

Mortgage fees and related income 1,037 905 982

Credit card income 230 107 91

Other income 31 (28) 82

Noninterest revenue 3,077 2,208 2,525

Net interest income 7,714 5,220 3,823

Total net revenue 10,791 7,428 6,348

Provision for credit losses 449 521 334

Noninterest expense

Compensation expense 2,621 1,695 1,496

Noncompensation expense 3,937 2,773 2,234

Amortization of intangibles 267 33

Total noninterest expense 6,825 4,471 3,733

Operating earnings before

income tax expense 3,517 2,436 2,281

Income tax expense 1,318 889 849

Operating earnings $ 2,199 $ 1,547 $1,432

Financial ratios

ROE 24% 37% 37%

ROA 1.18 1.05 1.25

Overhead ratio 63 60 59

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

2004 compared with 2003

Operating earnings were $2.2 billion, up from $1.5 billion a year ago.

The increase was largely due to the Merger. Excluding the benefit of the

Merger, earnings declined as lower MSR risk management results and reduced

prime mortgage production revenue offset the benefits of growth in loan bal-

ances, wider spreads on deposit products and improvement in credit costs.

Total net revenue increased to $10.8 billion, up 45% from the prior year. Net

interest income increased by 48% to $7.7 billion, primarily due to the Merger,

growth in retained loan balances and wider spreads on deposit products.

Noninterest revenue increased to $3.1 billion, up 39%, due to the Merger

and higher mortgage servicing income. Both components of total revenue

included declines associated with risk managing the MSR asset and lower

prime mortgage originations.

The Provision for credit losses was down 14% to $449 million, despite the

influence of the Merger. The effect of the Merger was offset by a reduction in

the allowance for loan losses, resulting from the sale of the manufactured

home loan portfolio, and continued positive credit quality trends in the con-

sumer lending businesses.

Noninterest expense totaled $6.8 billion, up 53% from the prior year, primarily

due to the Merger and continued investments to expand the branch network.

Partially offsetting the increase were merger-related expense savings in all

businesses.

2003 compared with 2002

Total net revenue was $7.4 billion in 2003, an increase of 17% over 2002.

Net interest income increased by 37% to $5.2 billion, reflecting the positive

impact of the low interest rate environment on consumer loan originations,

particularly in Home Finance, and on spreads earned on retained loans.

The Provision for credit losses of $521 million increased by 56% compared

with the prior year due to continued growth in the retained loan portfolios.

Credit quality remained stable in 2003, as charge-offs decreased slightly, to

$381 million.

Noninterest expense rose 20% to $4.5 billion. The increase reflected higher

business volumes and compensation costs.

Management’s discussion and analysis

JPMorgan Chase & Co.

34 JPMorgan Chase & Co. / 2004 Annual Report

Selected income statement data by business

Year ended December 31,

(a)

(in millions) 2004 2003 2002

Prime production and servicing

Production $ 728 $ 1,339 $ 1,052

Servicing:

Mortgage servicing revenue,

net of amortization 651 453 486

MSR risk management results 113 784 670

Total net revenue 1,492 2,576 2,208

Noninterest expense 1,115 1,124 921

Operating earnings 240 918 821

Consumer real estate lending

Total net revenue 2,376 1,473 712

Provision for credit losses 74 240 191

Noninterest expense 922 606 417

Operating earnings 881 414 81

Total Home Finance

Total net revenue 3,868 4,049 2,920

Provision for credit losses 74 240 191

Noninterest expense 2,037 1,730 1,338

Operating earnings 1,121 1,332 902

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results.All other periods reflect the results of heritage JPMorgan Chase only.

2004 compared with 2003

Operating earnings in the Prime Production & Servicing segment dropped to

$240 million from $918 million in the prior year. Results reflected a decrease

in prime mortgage production revenue, to $728 million from $1.3 billion, due

to a decline in mortgage originations. Operating earnings were also impacted

by a drop in MSR risk management revenue, to $113 million from $784 million

in the prior year. Results in 2004 included realized losses of $89 million on the

sale of AFS securities associated with risk management of the MSR asset,

compared with securities gains of $359 million in the prior year. Noninterest

expense was relatively flat at $1.1 billion.

Selected metrics

Year ended December 31,

(a)

(in millions, except headcount and ratios) 2004 2003 2002

Selected balance sheet (ending)

Total assets $ 226,560 $ 139,316 NA

Loans

(b)

202,473 121,921 NA

Core deposits

(c)

157,256 75,850 NA

Total deposits 182,765 86,162 NA

Selected balance sheet (average)

Total assets $ 185,928 $ 147,435 $114,248

Loans

(d)

162,768 120,750 93,125

Core deposits

(c)

121,121 80,116 68,551

Total deposits 137,796 89,793 79,348

Equity 9,092 4,220 3,907

Headcount 59,632 32,278 29,096

Credit data and quality statistics

Net charge-offs

(e)

$ 990 $ 381 $ 382

Nonperforming loans

(f)

1,161 569 554

Nonperforming assets 1,385 775 730

Allowance for loan losses 1,228 1,094 955

Net charge-off rate 0.67% 0.40% 0.48%

Allowance for loan losses to

ending loans

(b)

0.67 1.04 NA

Allowance for loan losses to

nonperforming loans

(f)

107 209 181

Nonperforming loans to total loans 0.57 0.47 NA

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

(b) End-of-period loans include loans held for sale of $18,022 million, $17,105 million and

$19,948 million at December 31, 2004, 2003 and 2002, respectively. Those amounts are

not included in the allowance coverage ratios.

(d) Average loans include loans held for sale of $14,736 million, $25,293 million and $13,500

million for 2004, 2003 and 2002, respectively. These amounts are not included in the net

charge-off rate.

(e) Includes $406 million of charge-offs related to the manufactured home loan portfolio in the

fourth quarter of 2004.

(f) Nonperforming loans include loans held for sale of $13 million, $45 million and $25 million

at December 31, 2004, 2003 and 2002, respectively. These amounts are not included in the

allowance coverage ratios.

NA – Data for 2002 is not available on a comparable basis.

Home Finance

Home Finance is comprised of two key business segments: Prime Production &

Servicing and Consumer Real Estate Lending. The Prime Production & Servicing

segment includes the operating results associated with the origination, sale

and servicing of prime mortgages. Consumer Real Estate Lending reflects the

operating results of consumer loans that are secured by real estate, retained by

the Firm and held in the portfolio. This portfolio includes prime and subprime

first mortgages, home equity lines and loans, and manufactured home loans.

The Firm stopped originating manufactured home loans early in 2004 and sold

substantially all of its remaining portfolio at the end of the year.

JPMorgan Chase & Co. / 2004 Annual Report 35

Operating earnings for the Consumer Real Estate Lending segment more than

doubled to $881 million from $414 million in the prior year. The increase was

largely due to the addition of the Bank One home equity lending business but

also reflected growth in retained loan balances and a $95 million net benefit

associated with the sale of the $4 billion manufactured home loan portfolio;

partially offsetting these increases were lower subprime mortgage securitiza-

tion gains. These factors contributed to total net revenue rising 61% to

$2.4 billion. The provision for credit losses, at $74 million, decreased by

69% from a year ago. This was the result of an $87 million reduction in the

allowance for loan losses associated with the manufactured home loan port-

folio sale, improved credit quality and lower delinquencies, partially offset by

the Merger. Noninterest expense totaled $922 million, up 52% from the year-

ago period, largely due to the Merger.

2003 compared with 2002

Home Finance achieved record financial performance in 2003, as operating

earnings of $1.3 billion increased by 48% from 2002.

Total net revenue of $4.0 billion increased by 39% over 2002, given record

production revenue, improved margins and higher home equity revenue.

The provision for credit losses of $240 million for 2003 increased by 26%

over 2002, primarily due to higher retained loan balances. Credit quality con-

tinued to be strong relative to 2002, as evidenced by a lower net charge-off

ratio and reduced delinquencies.

Noninterest expense of $1.7 billion increased by 29% from 2002, primarily

a result of growth in origination volume. The increase in expenses was also a

result of higher performance-related incentives and strategic investments

made to further expand certain distribution channels. These were partially

offset by production-related expense reduction efforts initiated in the fourth

quarter of 2003.

Selected metrics

Year ended December 31,

(a)

(in millions, except ratios and

where otherwise noted) 2004 2003 2002

Origination volume by channel (in billions)

Retail $ 74.2 $ 90.8 $ 56.3

Wholesale 48.5 65.6 36.2

Correspondent 22.8 44.5 20.6

Correspondent negotiated transactions 41.5 83.3 42.6

Total 187.0 284.2 155.7

Origination volume by business (in billions)

Mortgage $ 144.6 $ 259.5 $ 141.8

Home equity 42.4 24.7 13.9

Total 187.0 284.2 155.7

Business metrics (in billions)

Loans serviced (ending) $ 562.0 $ 470.0 $ 426.0

MSR net carrying value (ending) 5.1 4.8 3.2

End of period loans owned

Mortgage loans held for sale 14.2 15.9 18.8

Mortgage loans retained 42.6 34.5 26.9

Home equity and other loans 67.9 24.1 18.5

Total end of period loans owned 124.7 74.5 64.2

Average loans owned

Mortgage loans held for sale 12.1 23.5 12.0

Mortgage loans retained 40.7 32.0 27.7

Home equity and other loans 47.0 19.4 17.2

Total average loans owned 99.8 74.9 56.9

Overhead ratio 53% 43% 46%

Credit quality statistics

30+ day delinquency rate 1.27% 1.81% 3.07%

Net charge-offs

Mortgage $19 $26 $50

Home equity and other loans

(b)

554 109 93

Total net charge-offs 573 135 143

Net charge-off rate

Mortgage 0.05% 0.08% 0.18%

Home equity and other loans 1.18 0.56 0.53

Total net charge-off rate

(c)

0.65 0.26 0.32

Nonperforming assets $ 844 $ 546 $ 518

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

(b) Includes $406 million of charge-offs related to the manufactured home loan portfolio in the

fourth quarter of 2004.

Home Finance’s origination channels are comprised of the following:

Retail – A mortgage banker employed by the Firm directly contacts borrowers who are buying or refinancing a home through a branch office, through the

Internet or by phone. Borrowers are frequently referred to a mortgage banker by real estate brokers, home builders or other third parties.

Wholesale – A third-party mortgage broker refers loans to a mortgage banker at the Firm. Brokers are independent loan originators that specialize in finding

and counseling borrowers but do not provide funding for loans.

Correspondent – Banks, thrifts, other mortgage banks and other financial institutions sell closed loans to the Firm.

Correspondent negotiated transactions (“CNT”) – Mid- to large-sized mortgage lenders, banks and bank-owned mortgage companies sell servicing to

the Firm on an as-originated basis. These transactions supplement traditional production channels and provide growth opportunities in the servicing portfolio in

stable and rising-rate periods.

Management’s discussion and analysis

JPMorgan Chase & Co.

36 JPMorgan Chase & Co. / 2004 Annual Report

The following table details the MSR risk management results in the Home

Finance business:

MSR risk management results

Year ended December 31,

(a)

(in millions) 2004 2003 2002

Reported amounts:

MSR valuation adjustments

(b)

$ (248) $ (253) $ (4,040)

Derivative valuation adjustments

and other risk management

gains (losses)

(c)

361 1,037 4,710

MSR risk management results $ 113 $ 784 $ 670

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results.All other periods reflect the results of heritage JPMorgan Chase only.

(b) Excludes subprime loan MSR activity of $(2) million and $(13) million in 2004 and 2002,

respectively. There was no subprime loan MSR activity in 2003.

and not designated as a SFAS 133 hedge, and securities classified as both trading and

available-for-sale.

Home Finance uses a combination of derivatives, AFS securities and trading

securities to manage changes in the fair value of the MSR asset. These risk

management activities are intended to protect the economic value of the

MSR asset by providing offsetting changes in the fair value of related risk

management instruments. The type and amount of hedging instruments used

in this risk management activity change over time as market conditions and

approach dictate.

During 2004, negative MSR valuation adjustments of $248 million were more

than offset by $361 million of aggregate risk management gains, including

net interest earned on AFS securities. In 2003, negative MSR valuation adjust-

ments of $253 million were more than offset by $1.0 billion of aggregate risk

management gains, including net interest earned on AFS securities. Unrealized

gains/(losses) on AFS securities were $(3) million, $(144) million and $377 mil-

lion at December 31, 2004, 2003 and 2002, respectively. For a further discussion

of MSRs, see Critical accounting estimates on page 79 and Note 15 on pages

109–111 of this Annual Report.

Consumer & Small Business Banking

Consumer & Small Business Banking offers a full array of financial services

through a branch network spanning 17 states as well as through the Internet.

Product offerings include checking and savings accounts, mutual funds and

annuities, credit cards, mortgages and home equity loans, and loans for small

business customers (generally with annual sales less than $10 million). This

segment also includes community development loans.

Selected income statement data

Year ended December 31,

(a)

(in millions) 2004 2003 2002

Total net revenue $ 5,385 $ 2,422 $ 2,648

Provision for credit losses 165 76 (31)

Noninterest expense 3,981 2,358 2,055

Operating earnings 760 (4) 361

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

2004 compared with 2003

Operating earnings totaled $760 million, up from a loss of $4 million in the

prior-year period. The increase was largely due to the Merger but also reflected

wider spreads on deposits and lower expenses. These benefits were partially

offset by a higher Provision for credit losses.

Total net revenue was $5.4 billion, compared with $2.4 billion in the prior

year. While the increase is primarily attributable to the Merger, total net

revenue also benefited from wider spreads on deposits.

The Provision for credit losses increased to $165 million from $76 million in

the prior year. The increase was in part due to the Merger but also reflected an

increase in the Allowance for credit losses to cover high-risk portfolio segments.

The increase in noninterest expense to $4.0 billion was largely attributable to

the Merger. Incremental expense from investments in the branch distribution

network was also a contributing factor.

2003 compared with 2002

Total net revenue of $2.4 billion decreased by 9% compared with 2002.

Net interest income declined by 10% to $1.6 billion, primarily due to the

low–interest rate environment. Noninterest revenue decreased by 5% to

$828 million given lower deposit fee income, decreased debit card fees and

one-time gains in 2002.

Noninterest expense of $2.4 billion increased by 15% from 2002. The increase

was largely due to investments in technology within the branch network and

higher compensation expenses related to increased staff levels.

The Provision for credit losses of $76 million increased by $107 million

compared with 2002. This reflected a reduction in the allowance for loan

losses in 2002.

The table below reconciles management’s disclosure of Home Finance’s revenue into the reported U.S. GAAP line items shown on the Consolidated statement of

income and in the related Notes to Consolidated financial statements:

Year ended December 31,

(a)

Prime production and servicing Consumer real estate lending Total revenue

(in millions) 2004 2003 2002 2004 2003 2002 2004 2003 2002

Net interest income $ 700 $ 1,556 $ 727 $ 2,245 $ 1,226 $ 712 $2,945 $ 2,782 $ 1,439

Securities / private equity gains (losses) (89) 359 498 — —— (89) 359 498

Mortgage fees and related income

(b)

881 661 983 131 247 — 1,012 908 983

Total $ 1,492 $ 2,576 $ 2,208 $ 2,376 $1,473 $ 712 $ 3,868 $ 4,049 $ 2,920

(a) 2004 results include six months of the combined Firm’s results and six months of heritage JPMorgan Chase results.All other periods reflect the results of heritage JPMorgan Chase only.

(b) Includes activity reported elsewhere as Other income.

JPMorgan Chase & Co. / 2004 Annual Report 37

Selected metrics

Year ended December 31,

(a)

(in millions, except ratios and

where otherwise noted) 2004 2003 2002

Business metrics (in billions)

End-of-period balances

Small business loans $ 12.5 $ 2.2 NA

Consumer and other loans

(b)

2.2 2.0 NA

Total loans 14.7 4.2 NA

Core deposits

(c)

146.7 66.4 NA

Total deposits 172.2 76.7 NA

Average balances

Small business loans $ 7.3 $ 2.1 $ 1.9

Consumer and other loans

(b)

2.1 2.0 2.6

Total loans 9.4 4.1 4.5

Core deposits

(c)

110.0 64.8 57.9

Total deposits 126.6 74.4 68.7

Number of:

Branches 2,508 561 560

ATMs 6,650 1,931 1,876

Personal bankers 5,324 1,820 1,587

Personal checking accounts (in thousands) 7,286 1,984 2,037

Business checking accounts (in thousands) 894 347 345

Online customers (in thousands) 6,587 NA NA

Debit cards issued (in thousands) 8,392 2,380 2,352

Overhead ratio 74% 97% 78%

Retail brokerage business metrics

Investment sales volume $7,324 $ 3,579 NA

Number of dedicated investment sales

representatives 1,364 349 291

Credit quality statistics

Net charge-offs

Small business $77 $35 $24

Consumer and other loans 77 40 51

Total net charge-offs 154 75 75

Net charge-off rate

Small business 1.05% 1.67% 1.26%

Consumer and other loans 3.67 2.00 1.96

Total net charge-off rate 1.64 1.83 1.67

Nonperforming assets $ 299 $72 $94

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

(b) Primarily community development loans.

NA-Data is not available on a comparable basis.

Auto & Education Finance

Auto & Education Finance provides automobile loans and leases to consumers

and loans to commercial clients, primarily through a national network of

automotive dealers. The segment also offers loans to students via colleges

and universities across the United States.

Selected income statement data

Year ended December 31,

(a)

(in millions) 2004 2003 2002

Total net revenue $ 1,145 $ 842 $ 683

Provision for credit losses 210 205 174

Noninterest expense 490 291 247

Operating earnings 270 206 166

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

2004 compared with 2003

Operating earnings totaled $270 million, up 31% from the prior year. While

the increase was reflective of the Merger, performance for the year was mod-

erated by narrower spreads and reduced origination volumes arising from a

competitive operating environment.

Total net revenue increased by 36% to $1.1 billion from the prior year. This

increase reflected the Merger but included a decline in net interest income,

given the competitive operating environment in 2004 and incremental

charges associated with the Firm’s lease residual exposure.

The Provision for credit losses totaled $210 million, up 2% from the prior

year. The increase was due to the Merger but was largely offset by a lower

provision for credit losses, reflecting favorable credit trends.

Noninterest expense increased by 68% to $490 million, largely due to

the Merger.

The following is a brief description of selected business metrics within Consumer & Small Business Banking.

• Personal bankers – Retail branch office personnel who acquire, retain and expand new and existing customer relationships by assessing customer needs

and recommending and selling appropriate banking products and services.

• Investment sales representatives – Licensed retail branch sales personnel, assigned to support several branches, who assist with the sale of investment

products including college planning accounts, mutual funds, annuities and retirement accounts.

Management’s discussion and analysis

JPMorgan Chase & Co.

38 JPMorgan Chase & Co. / 2004 Annual Report

2003 compared with 2002

In 2003, operating earnings were $206 million, 24% higher than in 2002.

Total net revenue grew by 23% to $842 million. Net interest income grew by

33% in comparison to 2002, driven by higher average loans and leases out-

standing and wider spreads.

The Provision for credit losses increased by 18% to $205 million, primarily

reflecting a 32% increase in average loan and lease receivables. Credit quality

continued to be strong relative to 2002, as evidenced by a lower net charge-

off ratio and a reduced delinquency rate.

Noninterest expense of $291 million increased by 18% compared with 2002.

The increase in expenses was driven by higher origination volume and higher

performance-based incentives.

Selected metrics

Year ended December 31,

(a)

(in millions, except ratios and

where otherwise noted) 2004 2003 2002

Business metrics (in billions)

End of period loans and lease receivables

Loans receivables $ 54.6 $ 33.7 $ 28.0

Lease receivables 8.0 9.5 9.4

Total end-of-period loans and lease

receivables 62.6 43.2 37.4

Average loans and lease receivables

Loans outstanding (average)

(b)

$ 44.3 $ 32.0 $ 23.3

Lease receivables (average) 9.0 9.7 8.4

Total average loans and lease

receivables

(b)

53.3 41.7 31.7

Overhead ratio 43% 35% 36%

Credit quality statistics

30+ day delinquency rate 1.55% 1.42% 1.49%

Net charge-offs

Loans $ 219 $ 130 $ 126

Lease receivables 44 41 38

Total net charge-offs 263 171 164

Net charge off rate

Loans

(b)

0.52% 0.43% 0.58%

Lease receivables 0.49 0.42 0.45

Total net charge-off rate

(b)

0.52 0.43 0.54

Nonperforming assets $ 242 $ 157 $ 118

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

(b) Average loans include loans held for sale of $2.3 billion, $1.8 billion and $1.5 billion for,

2004, 2003 and 2002, respectively. These are not included in the net charge-off rate.

Insurance

Insurance is a provider of financial protection products and services, including

life insurance, annuities and debt protection. Products and services are distrib-

uted through both internal lines of business and external markets.

Selected income statement data

Year ended December 31,

(a)

(in millions) 2004 2003 2002

Total net revenue $393 $115 $ 97

Noninterest expense 317 92 93

Operating earnings 48 13 3

Memo: Consolidated gross

insurance-related revenue

(b)

1,191 611 536

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

(b) Includes revenue reported in the results of other businesses.

2004 compared with 2003

Insurance operating earnings totaled $48 million on total net revenue of

$393 million in 2004. The increases in total net revenue and noninterest

expense over the prior year were almost entirely due to the Merger.

2003 compared with 2002

Operating earnings in 2003 reflected a 19% increase in Total net revenue,

while expenses were essentially flat.

Selected metrics

Year ended December 31,

(a)

(in millions, except

where otherwise noted) 2004 2003 2002

Business metrics – ending balances

Invested assets $ 7,368 $ 1,559 $ 919

Policy loans 397 ——

Insurance policy and claims reserves 7,279 1,096 535

Term premiums – first year annualized 28 ——

Proprietary annuity sales 208 548 490

Number of policies in force – direct/assumed

(in thousands) 2,611 631 NA

Insurance in force – direct/assumed $ 277,827 $ 31,992 NA

Insurance in force – retained 80,691 31,992 NA

A.M. Best rating A AA

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results.All other periods reflect the results of heritage JPMorgan Chase only.

NA-Data for 2002 is not available on a comparable basis.

The following is a brief description of selected business metrics within Insurance.

• Proprietary annuity sales represent annuity contracts marketed through and issued by subsidiaries of the Firm.

• Insurance in force – direct/assumed includes the aggregate face amount of insurance policies directly underwritten and assumed

through reinsurance.

• Insurance in force – retained includes the aggregate face amounts of insurance policies directly underwritten and assumed through

reinsurance, after reduction for face amounts ceded to reinsurers.

JPMorgan Chase & Co. / 2004 Annual Report 39

Card Services

Card Services is the largest issuer of general purpose credit

cards in the United States, with approximately 94 million cards

in circulation, and is the largest merchant acquirer. CS offers a

wide variety of products to satisfy the needs of its cardmembers,

including cards issued on behalf of many well-known partners,

such as major airlines, hotels, universities, retailers and other

financial institutions.

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 affect both the receivables

sold under SFAS 140 and those not sold. Thus, in its disclosures regarding

managed receivables, JPMorgan Chase treats the sold receivables as if they

were still on the balance sheet in order to disclose the credit performance

(such as net charge-off rates) of the entire managed credit card portfolio.

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 reported net income versus operating earnings; however, it

does affect the classification of items on the Consolidated statements of income.

Selected income statement data – managed basis

Year ended December 31,

(a)

(in millions, except ratios) 2004 2003 2002

Revenue

Asset management,

administration and commissions $75 $ 108 $ 126

Credit card income 2,179 930 826

Other income 117 54 31

Noninterest revenue 2,371 1,092 983

Net interest income 8,374 5,052 4,930

Total net revenue 10,745 6,144 5,913

Provision for credit losses 4,851 2,904 2,751

Noninterest expense

Compensation expense 893 582 523

Noncompensation expense 2,485 1,336 1,320

Amortization of intangibles 505 260 286

Total noninterest expense 3,883 2,178 2,129

Operating earnings before

income tax expense 2,011 1,062 1,033

Income tax expense 737 379 369

Operating earnings $ 1,274 $ 683 $ 664

Financial metrics

ROE 17% 20% 19%

Overhead ratio 36 35 36

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

2004 compared with 2003

Operating earnings of $1.3 billion increased by $591 million compared with

the prior year, primarily due to the Merger. In addition, earnings benefited

from higher loan balances and charge volume, partially offset by a higher

provision for credit losses and higher expenses.

Total net revenue of $10.7 billion increased by $4.6 billion. Net interest

income of $8.4 billion increased by $3.3 billion, primarily due to the Merger

and higher loan balances. Noninterest revenue of $2.4 billion increased by

$1.3 billion, primarily due to the Merger and higher charge volume, which

generated increased interchange income. This was partially offset by higher

volume-driven payments to partners, reflecting the sharing of income and

increased rewards expense.

The Provision for credit losses of $4.9 billion increased by $1.9 billion, prima-

rily due to the Merger and growth in credit card receivables. Credit ratios

remained strong, benefiting from reduced contractual and bankruptcy

charge-offs. The net charge-off ratio was 5.27%. The 30-day delinquency

ratio was 3.70%.

Noninterest expense of $3.9 billion increased by $1.7 billion, primarily related

to the Merger. In addition, expenses increased due to higher marketing

expenses and volume-based processing expenses, partially offset by lower

compensation expenses.

2003 compared with 2002

Operating earnings of $683 million increased by $19 million or 3% compared

with the prior year. Earnings benefited from higher revenue, partially offset by

a higher provision for credit losses and expenses.

Total net revenue of $6.1 billion increased by 4%. Net interest income of

$5.1 billion increased by 2% due to higher spread and loan balances.

Noninterest revenue of $1.1 billion increased by 11% due to higher charge

volume, which generated increased interchange income. This was partially

offset by higher rewards expense.

The Provision for credit losses was $2.9 billion, an increase of 6%, primarily

due to the higher provision for credit losses and higher losses due to loan

growth. Conservative risk management and rigorous collection practices

contributed to stable credit quality.

Noninterest expense was $2.2 billion, an increase of 2%, due to volume-

based processing expenses, partially offset by disciplined expense management.

Management’s discussion and analysis

JPMorgan Chase & Co.

40 JPMorgan Chase & Co. / 2004 Annual Report

Selected metrics

Year ended December 31,

(a)

(in millions, except headcount, ratios

and where otherwise noted) 2004 2003 2002

Memo: Net securitization

gains (amortization) $ (8) $1$16

% of average managed outstandings:

Net interest income 9.16% 9.95% 10.08%

Provision for credit losses 5.31 5.72 5.62

Noninterest revenue 2.59 2.15 2.01

Risk adjusted margin

(b)

6.45 6.38 6.46

Noninterest expense 4.25 4.29 4.35

Pre-tax income 2.20 2.09 2.11

Operating earnings 1.39 1.35 1.36

Business metrics

Charge volume (in billions) $ 193.6 $ 88.2 $ 79.0

Net accounts opened (in thousands) 7,523 4,177 3,680

Credit cards issued (in thousands) 94,285 35,103 33,488

Number of registered

internet customers (in millions) 13.6 3.7 2.2

Merchant acquiring business

Bank card volume (in billions) $ 396.2 $ 261.2 $ 226.1

Total transactions (in millions) 12,066 7,154 6,509

Selected ending balances

Loans:

Loans on balance sheet $ 64,575 $ 17,426 $ 20,101

Securitized loans 70,795 34,856 30,722

Managed loans $135,370 $ 52,282 $ 50,823

Selected average balances

Managed assets $ 94,741 $ 51,406 $ 49,648

Loans:

Loans on balance sheet $ 38,842 $ 17,604 $ 22,410

Securitized loans 52,590 33,169 26,519

Managed loans $ 91,432 $ 50,773 $ 48,929

Equity 7,608 3,440 3,444

Headcount 19,598 10,612 10,885

Credit quality statistics – managed

Net charge-offs $ 4,821 $ 2,996 $ 2,887

Net charge-off rate 5.27% 5.90% 5.90%

Delinquency ratios – managed

30+ days 3.70% 4.68% 4.69%

90+ days 1.72 2.19 2.16

Allowance for loan losses $ 2,994 $ 1,225 $ 1,459

Allowance for loan losses to

period-end loans 4.64% 7.03% 7.26%

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

(b) Represents Total net revenue less Provision for credit losses.

The financial information presented below reconciles reported basis and man-

aged basis to disclose the effect of securitizations.

Year ended December 31,

(a)

(in millions) 2004 2003 2002

Income statement data

Credit card income

Reported data for the period $ 4,446 $ 2,309 $ 2,167

Securitization adjustments (2,267) (1,379) (1,341)

Managed credit card income $ 2,179 $ 930 $ 826

Other income

Reported data for the period $ 203 $ 125 $ 67

Securitization adjustments (86) (71) (36)

Managed other income $ 117 $54 $31

Net interest income

Reported data for the period $ 3,123 $ 1,732 $ 2,114

Securitization adjustments 5,251 3,320 2,816

Managed net interest income $ 8,374 $ 5,052 $ 4,930

Total net revenue

(b)

Reported data for the period $ 7,847 $ 4,274 $ 4,474

Securitization adjustments 2,898 1,870 1,439

Managed total net revenue $ 10,745 $ 6,144 $ 5,913

Provision for credit losses

Reported data for the period $ 1,953 $ 1,034 $ 1,312

Securitization adjustments 2,898 1,870 1,439

Managed provision for credit losses $ 4,851 $ 2,904 $ 2,751

Balance sheet – average balances

Total average assets

Reported data for the period $ 43,657 $ 19,041 $ 23,129

Securitization adjustments 51,084 32,365 26,519

Managed average assets $ 94,741 $ 51,406 $ 49,648

Credit quality statistics

Net charge-offs

Reported net charge-offs data

for the period $ 1,923 $ 1,126 $ 1,448

Securitization adjustments 2,898 1,870 1,439

Managed net charge-offs $ 4,821 $ 2,996 $ 2,887

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

(b) Includes Credit card income, Other income and Net interest income.

The following is a brief description of selected business metrics within Card Services.

• Charge volume – Represents the dollar amount of cardmember purchases, balance transfers and cash advance activity.

• Net accounts opened – Includes originations, purchases and sales.

• Merchant acquiring business – Represents an entity that processes payments for merchants. JPMorgan Chase is a majority owner of

Paymentech, Inc. and a 50% owner of Chase Merchant Services.

• Bank card volume – Represents the dollar amount of transactions processed for the merchants.

• Total transactions – Represents the number of transactions and authorizations processed for the merchants.

JPMorgan Chase & Co. / 2004 Annual Report 41

Commercial Banking

Commercial Banking serves more than 25,000 corporations,

municipalities, financial institutions and not-for-profit entities,

with annual revenues generally ranging from $10 million to

$2 billion. A local market presence and a strong customer service

model, coupled with a focus on risk management, provide a

solid infrastructure for Commercial Banking to provide the Firm’s

complete product set – lending, treasury services, investment

banking and investment management – for both corporate

clients and their executives. Commercial Banking’s clients benefit

greatly from the Firm’s extensive branch network and often

use the Firm exclusively to meet their financial services needs.

Commercial Banking operates in 10 of the top 15 major U.S. metropolitan

areas. Within this network, Commercial Banking is divided into three cus-

tomer coverage segments. General coverage for corporate clients is done by

Middle Market Banking, which generally covers clients up to $500 million,

and Corporate Banking, which generally covers clients over $500 million.

Corporate Banking typically focuses on clients that have broader investment

banking needs. The third segment, Commercial Real Estate, serves investors in

and developers of for-sale housing, multifamily rental, retail, office and indus-

trial properties. In addition to these three customer groupings, Commercial

Banking offers several products to the Firm’s entire customer base. Chase

Business Credit is a leading national provider of highly structured asset-based

financing, syndications and collateral analysis. Chase Equipment Leasing

finances a variety of equipment types and offers vendor programs for leading

capital and technology equipment manufacturers. Given this structure,

Commercial Banking manages a customer base and loan portfolio that is

highly diversified across a broad range of industries and geographic locations.

Commercial Banking was known prior to the Merger as Chase Middle Market

and was a business within the former Chase Financial Services.

Selected income statement data

Year ended December 31,

(a)

(in millions, except ratios) 2004 2003 2002

Revenue

Lending & deposit related fees $ 441 $ 301 $ 285

Asset management, administration

and commissions 32 19 16

Other income

(b)

209 73 65

Noninterest revenue 682 393 366

Net interest income 1,692 959 999

Total net revenue 2,374 1,352 1,365

Provision for credit losses 41 672

Noninterest expense

Compensation expense 465 285 237

Noncompensation expense 843 534 565

Amortization of intangibles 35 37

Total noninterest expense 1,343 822 809

Operating earnings before income

tax expense 990 524 484

Income tax expense 382 217 201

Operating earnings $ 608 $ 307 $ 283

Financial ratios

ROE 29% 29% 24%

ROA 1.67 1.87 1.77

Overhead ratio 57 61 59

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

(b) IB-related and commercial card revenues are included in Other income.

2004 compared with 2003

Operating earnings were $608 million, an increase of 98%, primarily due

to the Merger.

Total net revenue was $2.4 billion, an increase of 76%, primarily due to the

Merger. In addition to the overall increase related to the Merger, Net interest

income of $1.7 billion was positively affected by higher deposit balances, par-

tially offset by lower lending-related revenue. Noninterest revenue of $682

million was positively affected by higher investment banking fees and higher

gains on the sale of loans and securities acquired in satisfaction of debt, par-

tially offset by lower service charges on deposits, which often decline as inter-

est rates rise.

The Provision for credit losses was $41 million, an increase of $35 million, pri-

marily due to the Merger. Excluding the impact of the Merger, the provision was

higher in 2004. Lower net charge-offs in 2004 were partially offset by lower

reductions in the Allowance for credit losses in 2004 relative to 2003.

Noninterest expense was $1.3 billion, an increase of $521 million, or 63%,

primarily related to the Merger.

Management’s discussion and analysis

JPMorgan Chase & Co.

42 JPMorgan Chase & Co. / 2004 Annual Report

2003 compared with 2002

Operating earnings were $307 million, an increase of 8% compared with 2002.

Total net revenue of $1.4 billion decreased by 1% compared with 2002.

Net interest income of $1.0 billion decreased by 4% compared with the prior

year, primarily due to lower deposit and loan spreads, partially offset by higher

deposit and loan balances. Noninterest revenue was $393 million, an increase

of 7%, primarily reflecting higher service charges on deposits and investment

banking fees.

The Provision for credit losses was $6 million, a decrease of $66 million,

which resulted from a larger reduction in the Allowance for credit losses and

lower net charge-offs in 2003, reflecting an improvement in credit quality.

Noninterest expense was $822 million, an increase of 2% compared with 2002.

The increase was the result of higher severance costs and performance-based

incentives, partially offset by a decrease in other expenses.

Selected metrics

Year ended December 31,

(a)

(in millions, except headcount and ratios) 2004 2003 2002

Revenue by product:

Lending $ 764 $ 396 $ 414

Treasury services 1,467 896 925

Investment banking 120 66 51

Other 23 (6) (25)

Total Commercial Banking revenue 2,374 1,352 1,365

Selected balance sheet (average)

Total assets $ 36,435 $ 16,460 $ 15,973

Loans and leases 32,417 14,049 13,642

Deposits 51,620 32,880 29,403

Equity 2,093 1,059 1,199

Headcount 4,555 1,730 1,807

Credit data and quality statistics:

Net charge-offs $61$ 76 $ 107

Nonperforming loans 527 123 198

Allowance for loan losses 1,322 122 182

Allowance for lending-related commitments

(b)

169 26 —

Net charge-off rate 0.19% 0.54% 0.78%

Allowance for loan losses to average loans 4.08 0.87 1.33

Allowance for loan losses to

nonperforming loans 251 99 92

Nonperforming loans to average loans 1.63 0.88 1.45

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results.All other periods reflect the results of heritage JPMorgan Chase only.

(b) In 2002, the Allowance for lending-related commitments was allocated to the IB. Had the

amount been allocated to CB, the allowance would have been $24 million.

Commercial Banking revenues are comprised of the following:

Lending incorporates a variety of financing alternatives, such as term loans, revolving lines of credit and asset-based structures and leases, which are often secured

by receivables, inventory, equipment or real estate.

Treasury services incorporates a broad range of products and services to help clients manage short-term liquidity through deposits and sweeps, and longer-

term investment needs through money market accounts, certificates of deposit and mutual funds; manage working capital through lockbox, global trade, global

clearing and commercial card products; and have ready access to information to manage their business through on-line reporting tools.

Investment banking products provide clients with more sophisticated capital-raising alternatives, through loan syndications, investment-grade debt, asset-

backed securities, private placements, high-yield bonds and equity underwriting, and balance sheet and risk management tools through foreign exchange, deriv-

atives, M&A and advisory services.

JPMorgan Chase & Co. / 2004 Annual Report 43

Treasury & Securities Services

Treasury & Securities Services is a global leader in providing

transaction, investment and information services to support the

needs of corporations, issuers and institutional investors world-

wide. TSS is the largest cash management provider in the world

and one of the top three global custodians. The Treasury Services

business provides clients with a broad range of capabilities,

including U.S. dollar and multi-currency clearing, ACH, trade, and

short-term liquidity and working capital tools. The Investor

Services business provides a wide range of capabilities, includ-

ing custody, funds services, securities lending, and performance

measurement and execution products. The Institutional Trust

Services business provides trustee, depository and administra-

tive services for debt and equity issuers. Treasury Services part-

ners with the Commercial Banking, Consumer & Small Business

Banking and Asset & Wealth Management segments to serve

clients firmwide. As a result, certain Treasury Services revenues

are included in other segments’ results.

Selected income statement data

Year ending December 31,

(a)

(in millions, except ratios) 2004 2003 2002

Revenue

Lending & deposit related fees $ 647 $ 470 $ 445

Asset management, administration

and commissions 2,445 1,903 1,800

Other income 382 288 328

Noninterest revenue 3,474 2,661 2,573

Net interest income 1,383 947 962

Total net revenue 4,857 3,608 3,535

Provision for credit losses 7 13

Credit reimbursement (to) from IB

(b)

(90) 36 82

Noninterest expense

Compensation expense 1,629 1,257 1,131

Noncompensation expense 2,391 1,745 1,616

Amortization of intangibles 93 26 24

Total noninterest expense 4,113 3,028 2,771

Operating earnings before income

tax expense 647 615 843

Income tax expense 207 193 294

Operating earnings $ 440 $ 422 $ 549

Financial ratios

ROE 17% 15% 20%

Overhead ratio 85 84 78

Memo

Treasury Services firmwide overhead ratios

(c)

62 62 62

Treasury & Securities Services

firmwide overhead ratio

(c)

74 76 72

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

(b) TSS is charged a credit reimbursement related to certain exposures managed within the IB

credit portfolio on behalf of clients shared with TSS. For a further discussion, see Credit

reimbursement on page 29 of this Annual Report.

described in footnote (b) on page 44 of this Annual Report and TSS or TS expenses, respec-

tively, including those allocated to certain other lines of business.

2004 compared with 2003

Operating earnings for the year were $440 million, an increase of $18 million,

or 4%. Results in 2004 include an after-tax gain of $10 million on the sale of

an Investor Services business. Prior-year results include an after-tax gain of

$22 million on the sale of an Institutional Trust Services business. Excluding

these one-time gains, operating earnings increased by $30 million, or 8%.

Both net revenue and Noninterest expense increased primarily as a result of

the Merger, the acquisition of Bank One’s Corporate Trust business in

November 2003 and the acquisition of EFS in January 2004.

TSS net revenue improved by 35% to $4.9 billion. This revenue growth

reflected the benefit of the Merger and the acquisitions noted above and

improved product revenues across TSS. Net interest income grew to

$1.4 billion from $947 million as a result of average deposit balance growth

of 44%, to $128 billion, a change in the corporate deposit pricing method-

ology in 2004 and wider deposit spreads. Growth in fees and commissions

was driven by a 20% increase in assets under custody to $9.1 trillion as well

as new business growth in trade, commercial card, global equity products,

securities lending, fund services, clearing and ACH. Partially offsetting these

improvements were lower service charges on deposits, which often decline as

interest rates rise, and a soft municipal bond market.

Treasury Services (“TS”) net revenue grew to $2.0 billion, Investor Services

(“IS”) to $1.7 billion and Institutional Trust Services (“ITS”) to $1.2 billion.

TSS firmwide net revenue grew 41% to $6.5 billion. TSS firmwide net rev-

enues include Treasury Services net revenues recorded in other lines of business.

Credit reimbursement to the Investment Bank was $90 million, compared

with a credit from the Investment Bank of $36 million in the prior year, princi-

pally due to the Merger and a change in methodology. TSS is charged a credit

reimbursement related to certain exposures managed within the Investment

Bank credit portfolio on behalf of clients shared with TSS.

Noninterest expense totaled $4.1 billion, up from $3.0 billion, reflecting the

Merger and the acquisitions noted above, $155 million of software impair-

ment charges, upfront transition expenses related to on-boarding new cus-

tody and fund accounting clients, and legal and technology-related expenses.

On January 7, 2005, JPMorgan Chase agreed to acquire Vastera, a provider

of global trade management solutions, for a total transaction value of approx-

imately $129 million. Vastera’s business will be combined with the Logistics

and Trade Services businesses of the Treasury Services unit. The transaction is

expected to close in the first half of 2005.

2003 compared with 2002

TSS operating earnings decreased by 23% from 2002 while delivering a

return on allocated capital of 15%. A 9% increase in Noninterest expense

and a lower credit reimbursement contributed to the lower earnings.

Total net revenue increased by 2%, with growth at ITS of 11%. ITS revenue

growth was the result of debt product lines, increased volume in asset servic-

ing, a pre-tax gain of $36 million on the sale of an Institutional Trust Services

business in 2003, and the result of acquisitions which generated $29 million of

new revenue in 2003. TS’s revenue rose by 8% on higher trade and commer-

cial payment card revenue and increased balance-related earnings, including

Management’s discussion and analysis

JPMorgan Chase & Co.

44 JPMorgan Chase & Co. / 2004 Annual Report

higher balance-deficiency fees resulting from the lower interest rate environ-

ment. IS’s revenue contracted by 7%, the result of lower NII due to lower

interest rates, lower foreign exchange and securities lending revenue, and a

pre-tax gain of $50 million on the sale of the Firm’s interest in a non-U.S.

securities clearing firm in 2002.

Noninterest expense increased by 9%, attributable to higher severance,

the impact of acquisitions, the cost associated with expensing of options,

increased pension costs and charges to provide for losses on subletting

unoccupied excess real estate.

TSS was assigned a credit reimbursement of pre-tax earnings and the

associated capital related to certain credit exposures managed within IB’s

credit portfolio on behalf of clients shared with TSS. For 2003, the impact to

TSS was to increase pre-tax operating earnings by $36 million and average

allocated capital by $712 million.

Selected metrics

Year ending December 31,

(a)

(in millions, except headcount and where

otherwise noted) 2004 2003 2002

Revenue by business

Treasury Services

(b)

$ 1,994 $ 1,200 $ 1,111

Investor Services 1,709 1,448 1,561

Institutional Trust Services 1,154 960 863

Total net revenue $ 4,857 $ 3,608 $ 3,535

Memo

Treasury Services firmwide revenue

(b)

$ 3,665 $ 2,214 $ 2,125

Treasury & Securities Services

firmwide revenue

(b)

6,528 4,622 4,549

Business metrics

Assets under custody (in billions) $ 9,137 $ 7,597 $ 6,336

Corporate trust securities

under administration (in billions)

(c)

6,676 6,127 NA

Selected balance sheet (average)

Total assets $ 23,430 $ 18,379 $ 17,239

Loans 7,849 6,009 5,972

Deposits

U.S. deposits 82,928 54,116 32,698

Non-U.S. deposits 45,022 34,518 34,919

Total deposits 127,950 88,634 67,617

Equity 2,544 2,738 2,700

Memo

Treasury Services firmwide deposits

(d)

$ 99,587 $ 65,194 $ 41,508

Treasury & Securities Services

firmwide deposits

(d)

175,327 119,245 88,865

Headcount 22,612 15,145 14,810

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

(b) TSS and Treasury Services firmwide revenues include TS revenues recorded in certain other

lines of business. Revenue associated with Treasury Services customers who are also customers

of the Commercial Banking, Consumer & Small Business Banking and Asset & Wealth

Management lines of business are reported in these other lines of business and are

excluded from Treasury Services, as follows:

(in millions) 2004 2003 2002

Treasury Services revenue reported in

Commercial Banking $ 1,467 $ 896 $ 925

Treasury Services revenue reported in

other lines of business 204 118 89

Note: Foreign exchange revenues are apportioned between TSS and the IB, and only TSS’s

share is included in TSS firmwide revenue.

parties and debt serviced as agent.

(d) TSS and TS firmwide deposits include TS’s deposits recorded in certain other lines of

business. Deposits associated with Treasury Services customers who are also customers

of the Commercial Banking line of business are reported in that line of business and are

excluded from Treasury Services.

NA-Data for 2002 is not available on a comparable basis.

Treasury & Securities Services firmwide metrics include certain TSS

product revenues and deposits reported in other lines of business for

customers who are also customers of those lines of business. In order

to capture the firmwide impact of TS and TSS products and revenues,

management reviews firmwide metrics such as firmwide deposits,

firmwide revenue and firmwide overhead ratios in assessing financial

performance for TSS. Firmwide metrics are necessary in order to under-

stand the aggregate TSS business.

JPMorgan Chase & Co. / 2004 Annual Report 45

Asset & Wealth Management

Asset & Wealth Management provides investment management

to retail and institutional investors, financial intermediaries

and high-net-worth families and individuals globally. For retail

investors, AWM provides investment management products and

services, including a global mutual fund franchise, retirement

plan administration, and consultation and brokerage services.

AWM delivers investment management to institutional investors

across all asset classes. The Private bank and Private client serv-

ices businesses provide integrated wealth management services

to ultra-high-net-worth and high-net-worth clients, respectively.

Selected income statement data

Year ended December 31,

(a)

(in millions, except ratios) 2004 2003 2002

Revenue

Lending & deposit related fees $28 $19 $21

Asset management, administration

and commissions 3,140 2,258 2,228

Other income 215 205 216

Noninterest revenue 3,383 2,482 2,465

Net interest income 796 488 467

Total net revenue 4,179 2,970 2,932

Provision for credit losses (14) 35 85

Noninterest expense

Compensation expense 1,579 1,213 1,141

Noncompensation expense 1,502 1,265 1,261

Amortization of intangibles 52 86

Total noninterest expense 3,133 2,486 2,408

Operating earnings before

income tax expense 1,060 449 439

Income tax expense 379 162 161

Operating earnings $ 681 $ 287 $ 278

Financial ratios

ROE 17% 5% 5%

Overhead ratio 75 84 82

Pre-tax margin ratio

(b)

25 15 15

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

(b) Pre-tax margin represents Operating earnings before income taxes / Total net revenue, which is

a comprehensive measure of pre-tax performance and is another basis by which AWM manage-

ment evaluates its performance and that of its competitors. Pre-tax margin is an effective meas-

ure of AWM’s earnings, after all costs are taken into consideration.

2004 compared with 2003

Operating earnings were $681 million, up 137% from the prior year, due

largely to the Merger but also driven by increased revenue and a decrease in

the Provision for credit losses; these were partially offset by higher

Compensation expense.

Total net revenue was $4.2 billion, up 41%, primarily due to the Merger.

Additionally, fees and commissions increased due to global equity market

appreciation, net asset inflows and the acquisition of JPMorgan Retirement

Plan Services (“RPS”) in the second quarter of 2003. Fees and commissions

also increased due to an improved product mix, with an increased percentage

of assets in higher-yielding products. Net interest income increased due to

deposit and loan growth.

The Provision for credit losses was a benefit of $14 million, a decrease of

$49 million, due to an improvement in credit quality.

Noninterest expense was $3.1 billion, up 26%, due to the Merger as well as

increased Compensation expense and the impact of increased technology and

marketing initiatives.

2003 compared with 2002

Operating earnings were $287 million, up 3% from the prior year, reflecting

an improved credit portfolio, the benefit of slightly higher revenues. During

the second quarter of 2003, the Firm acquired American Century Retirement

Plan Services Inc., a provider of defined contribution recordkeeping services,

as part of its strategy to grow its U.S. retail investment management business.

The business was renamed JPMorgan Retirement Plan Services (“RPS”).

Total net revenue was $3.0 billion, up 1% from the prior year. The increase

in fees and commissions reflected the acquisition of RPS and increased aver-

age equity market valuations in client portfolios, partly offset by institutional

net outflows. Net interest income increased due to higher brokerage account

balances and spreads. The decline in Other income primarily reflected non-

recurring items in 2002.

The Provision for credit losses decreased by 59%, due to an improvement in

credit quality and recoveries.

Noninterest expense was $2.5 billion, up $78 million from 2002, reflecting

the acquisition of RPS, higher Compensation expense, and real estate and

software write-offs, partly offset by the continued impact of expense-

management programs.

Selected metrics

Year ended December 31,

(a)

(in millions, except headcount and ratios) 2004 2003 2002

Revenue by client segment

Private bank $ 1,554 $ 1,437 $ 1,467

Retail 1,081 732 695

Institutional 994 723 688

Private client services 550 78 82

Total net revenue $ 4,179 $ 2,970 $ 2,932

Business metrics

Number of:

Client advisors 1,226 615 673

Brown Co. average daily trades 29,901 27,150 24,584

Retirement Plan Services

participants 918,000 756,000 —

Star rankings

(b)

% of customer assets in funds

ranked 4 or better 48% 48% NA

% of customer assets in funds

ranked 3 or better 81 69 NA

Selected balance sheet (average)

Total assets $ 37,751 $ 33,780 $ 35,813

Loans 21,545 16,678 18,926

Deposits 32,039 20,249 19,329

Equity 3,902 5,507 5,649

Headcount 12,287 8,520 8,546

Management’s discussion and analysis

JPMorgan Chase & Co.

46 JPMorgan Chase & Co. / 2004 Annual Report

Year ended December 31,

(a)

(in millions, except ratios) 2004 2003 2002

Credit data and quality statistics

Net charge-offs $72 $ 9 $ 112

Nonperforming loans 79 173 139

Allowance for loan losses 216 130 97

Allowance for lending-related commitments 5 4—

Net charge-off rate 0.33% 0.05% 0.59%

Allowance for loan losses to average loans 1.00 0.78 0.51

Allowance for loan losses to nonperforming

loans 273 75 70

Nonperforming loans to average loans 0.37 1.04 0.73

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results.All other periods reflect the results of heritage JPMorgan Chase only.

(b) Derived from Morningstar for the United States; Micropal for the United Kingdom,

Luxembourg, Hong Kong and Taiwan; and Nomura for Japan.

NA-Data for 2002 is not available on a comparable basis.

Assets under supervision

2004 compared with 2003

Assets under supervision (“AUS”) at December 31, 2004 were $1.3 trillion, up

66% from 2003, and Assets under management (“AUM”) were $791 billion,

up 41% from the prior year. The increases were primarily the result of the

Merger, as well as market appreciation, net asset inflows and the acquisition of

a majority interest in Highbridge Capital Management. The Firm also has a 43%

interest in American Century Companies, Inc., whose AUM totaled $98 billion

and $87 billion at December 31, 2004 and 2003, respectively. Custody, broker-

age, administration, and deposits were $478 billion, up 135%, primarily due to

the Merger, as well as market appreciation and net inflows across all products.

2003 compared with 2002

AUS at December 31, 2003, totaled $764 billion, up 19% from the prior year-

end. AUM totaled $561 billion, up 9%, and custody, brokerage, administra-

tion and deposit accounts were $203 billion, up 54%. The increase in AUM

was driven by higher equity market valuations in client portfolios, partly offset

by institutional net outflows. Custody, brokerage, administration and deposits

grew by $70 billion, driven by the acquisition of RPS ($41 billion), higher equity

market valuations in client portfolios and net inflows from Private bank clients.

The diversification of AUS across product classes, client segments and geographic

regions helped to mitigate the impact of market volatility on revenue. The Firm

also had a 44% interest in American Century Companies, Inc., whose AUM

totaled $87 billion and $72 billion at December 31, 2003 and 2002, respectively.

Assets under supervision

(a)(b)

(in billions) 2004 2003

Asset class

Liquidity $ 232 $ 156

Fixed income 171 118

Equities, balanced and other 388 287

Assets under management 791 561

Custody/brokerage/administration/deposits 478 203

Total Assets under supervision $ 1,269 $ 764

Client segment

Private bank

Assets under management $ 139 $ 138

Custody/brokerage/administration/deposits 165 128

Assets under supervision 304 266

Retail

Assets under management 133 93

Custody/brokerage/administration/deposits 88 71

Assets under supervision 221 164

Institutional

Assets under management 466 322

Custody/brokerage/administration/deposits 184 —

Assets under supervision 650 322

Private client services

Assets under management 53 8

Custody/brokerage/administration/deposits 41 4

Assets under supervision 94 12

Total Assets under supervision $ 1,269 $ 764

Geographic region

Americas

Assets under management $ 562 $ 365

Custody/brokerage/administration/deposits 444 168

Assets under supervision 1,006 533

International

Assets under management 229 196

Custody/brokerage/administration/deposits 34 35

Assets under supervision 263 231

Total Assets under supervision $ 1,269 $ 764

Memo:

Mutual fund assets:

Liquidity $ 183 $ 103

Fixed income 41 27

Equity, balanced and other 104 83

Total mutual funds assets $ 328 $ 213

Assets under supervision rollforward

(b)

Beginning balance $ 764 $ 642

Net asset flows 25 (16)

Acquisitions

(c)

383 41

Market/other impact 97 97

Ending balance $ 1,269 $ 764

(a) Excludes Assets under management of American Century.

(b) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only.

tion of a majority interest in Highbridge Capital Management ($7 billion) in the fourth quar-

ter of 2004 and the acquisition of RPS in the second quarter of 2003.

AWM’s client segments are comprised of the following:

The Private bank addresses every facet of wealth management for

ultra-high-net-worth individuals and families worldwide, including invest-

ment management, capital markets and risk management, tax and estate

planning, banking, capital raising and specialty wealth advisory services.

Retail provides more than 2 million customers worldwide with investment

management, retirement planning and administration, and brokerage

services through third-party and direct distribution channels.

Institutional serves more than 3,000 large and mid-size corporate and

public institutions, endowments and foundations, and governments globally.

AWM offers institutions comprehensive global investment services,

including investment management across asset classes, pension analytics,

asset-liability management, active risk budgeting and overlay strategies.

Private client services offers high-net-worth individuals, families

and business owners comprehensive wealth management solutions

that include financial planning, personal trust, investment and banking

products and services.

JPMorgan Chase & Co. / 2004 Annual Report 47

Corporate

The Corporate sector is comprised of Private Equity, Treasury,

and corporate staff and other centrally managed expenses.

Private Equity includes JPMorgan Partners and ONE Equity

Partners businesses. Treasury manages the structural interest

rate risk and investment portfolio for the Firm. The corporate

staff areas include Central Technology and Operations, Internal

Audit, Executive Office, Finance, General Services, Human

Resources, Marketing & Communications, Office of the General

Counsel, Real Estate and Business Services, Risk Management,

and Strategy and Development. Other centrally managed

expenses include items such as the Firm’s occupancy and pen-

sion expense, net of allocations to the business.

Selected income statement data

Year ended December 31,

(a)

(in millions) 2004 2003 2002

Revenue

Securities /private equity gains $ 1,786 $ 1,031 $ 334

Other income (2) 214 (11)

Noninterest revenue 1,784 1,245 323

Net interest income (1,222) (177) (45)

Total net revenue 562 1,068 278

Provision for credit losses (110) 124 133

Noninterest expense

Compensation expense 2,426 1,893 1,867

Noncompensation expense 4,088 3,216 2,711

Net expenses allocated to other businesses (5,213) (4,580) (4,070)

Total noninterest expense 1,301 529 508

Operating earnings before income

tax expense (629) 415 (363)

Income tax expense (benefit) (690) (253) (128)

Operating earnings $61 $ 668 $ (235)

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

2004 compared with 2003

Operating earnings were $61 million, down from earnings of $668 million in

the prior year.

Noninterest revenue was $1.8 billion, up 43% from the prior year. The pri-

mary component of noninterest revenue is Securities/private equity gains,

which totaled $1.8 billion, up 73% from the prior year. The increase was a

result of net gains in the Private Equity portfolio of $1.4 billion in 2004, com-

pared with $27 million in net gains in 2003. Partially offsetting these gains

were lower investment securities gains in Treasury.

Net interest income was a negative $1.2 billion, compared with a negative

$177 million in the prior year. The decline was driven primarily by actions and

policies adopted in conjunction with the Merger.

Noninterest expense of $1.3 billion was up $772 million from the prior year

due to the Merger. The Merger resulted in higher gross compensation and

noncompensation expenses, which were partially offset by higher allocation

of these expenses to the businesses. Incremental allocations to the businesses

were lower than the gross expense increase due to certain policies adopted in

conjunction with the Merger. These policies retain overhead costs that would

not be incurred by the lines of business if operated on a stand-alone basis, as

well as costs in excess of the market price for services provided by the corpo-

rate staff and technology and operations areas.

On September 15, 2004, JPMorgan Chase and IBM announced the Firm’s plans

to reintegrate the portions of its technology infrastructure – including data

centers, help desks, distributed computing, data networks and voice networks

– that were previously outsourced to IBM. In January 2005, approximately

3,100 employees and 800 contract employees were transferred to the Firm.

2003 compared with 2002

For 2003, Corporate had operating earnings of $668 million, compared

with an operating loss of $235 million in 2002, driven primarily by higher

gains in the Private Equity portfolio and income tax benefits not allocated to

the business segments.

Selected metrics

Year ended December 31,

(a)

(in millions, except headcount) 2004 2003 2002

Selected average balance sheet

Short-term investments

(b)

$ 14,590 $ 4,076 $ 7,691

Investment portfolio

(c)

63,475 63,506 61,816

Goodwill

(d)

21,773 293 1,166

Total assets 162,234 104,395 97,089

Headcount 24,806 13,391 16,960

Treasury

Securities gains (losses)

(e)

$ 347 $ 999 $ 1,073

Investment portfolio (average) 57,776 56,299 54,197

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

(b) Represents Federal funds sold, Securities borrowed, Trading assets – debt and equity instru-

ments and Trading assets – derivative receivables.

(d) As of July 1, 2004, the Firm changed the allocation methodology of goodwill to retain all

goodwill in Corporate.

(e) Excludes gains/losses on securities used to manage risk associated with MSRs.

Management’s discussion and analysis

JPMorgan Chase & Co.

48 JPMorgan Chase & Co. / 2004 Annual Report

Selected income statement and

balance sheet data – Private equity

Year ended December 31,

(a)

(in millions) 2004 2003 2002

Private equity gains (losses)

Direct investments

Realized gains $ 1,423 $ 535 $ 452

Write-ups / write-downs (192) (404) (825)

Mark-to-market gains (losses) 164 215 (210)

Total direct investments 1,395 346 (583)

Third-party fund investments 34 (319) (150)

Total private equity gains (losses) 1,429 27 (733)

Other income 53 47 59

Net interest income (271) (264) (302)

Total net revenue 1,211 (190) (976)

Total noninterest expense 288 268 296

Operating earnings (loss) before income

tax expense 923 (458) (1,272)

Income tax expense (benefit) 321 (168) (466)

Operating earnings (losses) $ 602 $ (290) $ (806)

Private equity portfolio information

(b)

Direct investments

Public securities

Carrying value $ 1,170 $ 643 $ 520

Cost 744 451 663

Quoted public value 1,758 994 761

Private direct securities

Carrying value 5,686 5,508 5,865

Cost 7,178 6,960 7,316

Third-party fund investments

(c)

Carrying value 641 1,099 1,843

Cost 1,042 1,736 2,333

Total private equity portfolio

Carrying value $ 7,497 $ 7,250 $ 8,228

Cost $ 8,964 $ 9,147 $10,312

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

(b) For further information on the Firm’s policies regarding the valuation of the private equity

portfolio, see Note 9 on pages 98–100 of this Annual Report.

and $2.0 billion at December 31, 2004, 2003 and 2002, respectively.

2004 compared with 2003

Private Equity’s operating earnings for the year totaled $602 million, com-

pared with a loss of $290 million in 2003. This improvement reflected a

$1.4 billion increase in total private equity gains. In 2004, markets improved

for investment sales, resulting in $1.4 billion of realized gains on direct

investments, compared with $535 million in 2003. Net write-downs on direct

investments were $192 million in 2004, compared with $404 million in 2003,

as valuations continued to stabilize amid positive market conditions.

The carrying value of the Private Equity portfolio at December 31, 2004,

was $7.5 billion, an increase of $247 million from December 31, 2003. The

increase was primarily the result of the Merger. Otherwise, the portfolio

declined as a result of sales of investments, consistent with management’s

intention to reduce over time the capital committed to private equity. Sales

of third-party fund investments resulted in a decrease in carrying value of

$458 million, to $641 million at December 31, 2004, compared with

$1.1 billion at December 31, 2003.

2003 compared with 2002

The private equity portfolio recognized negative Total net revenue of

$190 million and operating losses of $290 million in 2003. Opportunities

to realize value through sales, recapitalizations and initial public offerings

(“IPOs”) of investments, although limited, improved during the year as the

M&A and IPO markets started to recover.

Private equity gains totaled $27 million in 2003, compared with losses of

$733 million in 2002. Private equity recognized gains of $346 million on

direct investments and losses of $319 million on sales and writedowns of

private third-party fund investments.

JPMorgan Chase & Co. / 2004 Annual Report 49

Balance sheet analysis

Selected balance sheet data

December 31, (in millions) 2004 2003

(a)

Assets

Trading assets – debt and equity instruments $ 222,832 $ 169,120

Trading assets – derivative receivables 65,982 83,751

Securities:

Available-for-sale 94,402 60,068

Held-to-maturity 110 176

Loans, net of allowance 394,794 210,243

Goodwill and other intangible assets 57,887 14,991

All other assets 321,241 232,563

Total assets $ 1,157,248 $ 770,912

Liabilities

Deposits $ 521,456 $ 326,492

Trading liabilities –

debt and equity instruments 87,942 78,222

Trading liabilities – derivative payables 63,265 71,226

Long-term debt 95,422 48,014

All other liabilities 283,510 200,804

Total liabilities 1,051,595 724,758

Stockholders’ equity 105,653 46,154

Total liabilities and stockholders’ equity $ 1,157,248 $ 770,912

(a) Heritage JPMorgan Chase only.

Balance sheet overview

At December 31, 2004, the Firm’s total assets were $1.2 trillion, an increase

of $386 billion, or 50%, from the prior year, primarily as a result of the

Merger. Merger-related growth in assets was primarily in: Available-for-sale

securities; interests in purchased receivables related to Bank One’s conduit

business; wholesale and consumer loans; and goodwill and other intangibles,

which was primarily the result of the purchase accounting impact of the

Merger. Nonmerger-related growth was primarily due to the IB’s increased

trading activity, which is reflected in securities purchased under resale agree-

ments and securities borrowed, as well as trading assets.

At December 31, 2004, the Firm’s total liabilities were $1.1 trillion, an

increase of $327 billion, or 45%, from the prior year, again primarily as a

result of the Merger. Merger-related growth in liabilities was primarily in

interest-bearing U.S. deposits, long-term debt, trust preferred securities and

beneficial interests issued by consolidated variable interest entities.

Nonmerger-related growth in liabilities was primarily driven by increases in

noninterest-bearing U.S. deposits and the IB’s trading activity, which is

reflected in securities sold under repurchase agreements, partially offset by

reductions in federal funds purchased.

Trading assets – debt and equity instruments

The Firm’s debt and equity trading assets consist primarily of fixed income

(including government and corporate debt) and cash equity and convertible

instruments used for both market-making and proprietary risk-taking

activities. The increase over 2003 was primarily due to growth in client-driven

market-making activities across interest rate, credit and equity markets, as

well as an increase in proprietary trading activities.

Trading assets and liabilities – derivative receivables and payables

The Firm uses various interest rate, foreign exchange, equity, credit and com-

modity derivatives for market-making, proprietary risk-taking and risk manage-

ment purposes. The decline from 2003 was primarily due to the Firm’s election,

effective January 1, 2004, to report the fair value of derivative assets and liabili-

ties net of cash received and paid, respectively, under legally enforceable master

netting agreements. For additional information, refer to Credit risk management

and Note 3 on pages 57–69 and 90–91, respectively, of this Annual Report.

Securities

AFS securities include fixed income (e.g., U.S. Government agency and asset-

backed securities, as well as non-U.S. government and corporate debt) and

equity instruments. The Firm uses AFS securities primarily to manage interest

rate risk. The AFS portfolio grew by $34.3 billion from the 2003 year-end pri-

marily due to the Merger. Partially offsetting the increase were net sales in

the Treasury portfolio since the second quarter of 2004. In anticipation of the

Merger, both heritage firms reduced the level of their AFS securities to reposi-

tion the combined firm. For additional information related to securities, refer

to Note 9 on pages 98–100 of this Annual Report.

Loans

Loans, net of allowance, were $394.8 billion at December 31, 2004, an

increase of 88% from the prior year, primarily due to the Merger. Also contribut-

ing to the increase was growth in both the RFS and CS loan portfolios, partially

offset by lower wholesale loans in the IB. For a more detailed discussion of the

loan portfolio and allowance for credit losses, refer to Credit risk management

on pages 57–69 of this Annual Report.

Goodwill and other intangible assets

The $42.9 billion increase in Goodwill and other intangible assets from the prior

year was primarily the result of the Merger and, to a lesser extent, the Firm’s

other acquisitions, such as EFS and the majority stake in Highbridge. For addition-

al information, see Note 15 on pages 109–111 of this Annual Report.

Deposits

Deposits are a key source of funding. The stability of this funding source is

affected by such factors as returns available to customers on alternative invest-

ments, the quality of customer service levels and competitive forces. Deposits

increased by 60% from December 31, 2003, primarily the result of the Merger

and growth in deposits in TSS. For more information, refer to the TSS segment

discussion and the Liquidity risk management discussion on pages 43–44 and

55–56, respectively, of this Annual Report.

Long-term debt

Long-term debt increased by 99% from the prior year, primarily due to the

Merger and net new debt issuances. For additional information on the Firm’s

long-term debt activity, see the Liquidity risk management discussion on

pages 55–56 of this Annual Report.

Stockholders’ equity

Total stockholders’ equity increased by 129% to $105.7 billion, primarily

as a result of the Merger. For a further discussion of capital, see Capital

management on pages 50–52 of this Annual Report.

Management’s discussion and analysis

JPMorgan Chase & Co.

50 JPMorgan Chase & Co. / 2004 Annual Report

Capital management

The Firm’s capital management framework is intended to ensure that there is

capital sufficient to support the underlying risks of the Firm’s business activi-

ties, measured by economic risk capital, and to maintain “well-capitalized”

status under regulatory requirements. In addition, the Firm holds capital

above these requirements in amounts deemed appropriate to achieve man-

agement’s debt rating objectives. The Firm’s capital framework is integrated

into the process of assigning equity to the lines of business. The Firm may

refine its methodology for assigning equity to the lines of business as the

merger integration process continues.

Line of business equity

The Firm’s framework for allocating capital is based on the following objectives:

• Integrate firmwide capital management activities with capital management

activities within each of the lines of business.

• Measure performance in each business segment consistently across

all lines of business.

• Provide comparability with peer firms for each of the lines of business.

Equity for a line of business represents the amount the Firm believes the

business would require if it were operating independently, incorporating suf-

ficient capital to address economic risk measures, regulatory capital require-

ments, and capital levels for similarly rated peers. Return on equity is meas-

ured and internal targets for expected returns are established as a primary

measure of a business segment’s performance.

For performance management purposes, the Firm does not allocate goodwill to

the lines of business because it believes that the accounting-driven allocation of

goodwill could distort assessment of relative returns. In management’s view,

this approach fosters better comparison of line of business returns with other

internal business segments, as well as with peers. The Firm assigns an amount

of equity capital equal to the then current book value of its goodwill to the

Corporate segment. The return on invested capital related to the Firm’s goodwill

assets is managed within this segment. In accordance with SFAS 142, the Firm

allocates goodwill to the lines of business based on the underlying fair values of

the businesses and then performs the required impairment testing. For a further

discussion of goodwill and impairment testing, see Critical accounting estimates

and Note 15 on pages 77–79 and 109–111 respectively, of this Annual Report.

This integrated approach to assigning equity to the lines of business is a

new methodology resulting from the Merger. Therefore, current year line of

business equity is not comparable to equity assigned to the lines of business

in prior years. The increase in average common equity in the table below for

2004 was primarily attributable to the Merger.

(in billions) Yearly Average

Line of business equity

(a)

2004 2003

Investment Bank $ 17.3 $ 18.4

Retail Financial Services 9.1 4.2

Card Services 7.6 3.4

Commercial Banking 2.1 1.1

Treasury & Securities Services 2.5 2.7

Asset & Wealth Management 3.9 5.5

Corporate

(b)

33.1 7.7

Total common stockholders’ equity $ 75.6 $ 43.0

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only.

(b) 2004 includes $25.9 billion of equity to offset goodwill and $7.2 billion of equity primarily

related to Treasury, Private Equity and the Corporate Pension Plan.

Economic risk capital

JPMorgan Chase assesses its capital adequacy relative to the underlying risks

of the Firm’s business activities, utilizing internal risk-assessment methodolo-

gies. 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 the Firm’s private equity business.

(in billions) Yearly Average

Economic risk capital

(a)

2004 2003

Credit risk $ 16.5 $ 13.1

Market risk 7.5 4.5

Operational risk 4.5 3.5

Business risk 1.9 1.7

Private equity risk 4.5 5.4

Economic risk capital 34.9 28.2

Goodwill 25.9 8.1

Other

(b)

14.8 6.7

Total common stockholders’ equity $ 75.6 $ 43.0

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only.

(b) Additional capital required to meet internal regulatory/debt rating objectives.

Credit risk capital

Credit risk capital is estimated separately for the wholesale businesses

(Investment Bank, Commercial Banking, Asset & Wealth Management and

Treasury & Securities Services) and consumer businesses (Retail Financial

Services and Card Services).

Credit risk capital for the overall wholesale credit portfolio is defined in terms

of unexpected credit losses, from both defaults and declines in market value

due to credit deterioration, measured over a one-year period at a confidence

level consistent with the level of capitalization necessary to achieve a targeted

‘AA’ solvency standard. Unexpected losses are in excess of those for which

provisions for credit losses are maintained. In addition to maturity and corre-

lations, capital allocation is differentiated by several principal drivers of credit

risk: exposure at default (or loan equivalent amount), likelihood of default,

loss severity, and market credit spread.

• Loan equivalent amount for counterparty exposures in an over-the-counter

derivative transaction is represented by the expected positive exposure

based on potential movements of underlying market rates. Loan equiva-

lents for unused revolving credit facilities represent the portion of an

unused commitment likely, based on the Firm’s average portfolio historical

experience, to become outstanding in the event an obligor defaults.

• Default likelihood is closely aligned with current market conditions for all

publicly traded names or investment banking clients, yielding a forward-

looking measure of credit risk. This facilitates more active risk management

by utilizing the growing market in credit derivatives and secondary market

loan sales. For privately-held firms in the commercial banking portfolio, default

likelihood is based on longer term averages over an entire credit cycle.

• Loss severity of exposure is based on the Firm’s average historical

experience during workouts, with adjustments to account for collateral

or subordination.

• Market credit spreads are used in the evaluation of changes in exposure

value due to credit deterioration.

JPMorgan Chase & Co. / 2004 Annual Report 51

Credit risk capital for the consumer portfolio is intended to represent a capital

level sufficient to support an ‘AA’ rating, and its allocation is based on product

and other relevant risk segmentation. Actual segment level default and severity

experience are used to estimate unexpected losses for a one-year horizon at a

confidence level equivalent to the ‘AA’ solvency standard. Statistical results for cer-

tain segments or portfolios are adjusted upward to ensure that capital is consis-

tent with external benchmarks, including subordination levels on market transac-

tions and capital held at representative monoline competitors, where appropriate.

Market risk capital

The Firm allocates market risk capital guided by the principle that capital should

reflect the extent to which risks are present in businesses. Daily VAR, monthly

stress-test results and other factors determine appropriate capital charges for

major business segments. See Market risk management on pages 70–74 of

this Annual Report for more information about these market risk measures.

The Firm allocates market risk capital to each business segment according to

a formula that weights that segment’s VAR and stress test exposures.

Operational risk capital

Capital is allocated to the lines of business for operational risk using a risk-based

capital allocation methodology which estimates operational risk on a bottoms-up

basis. The operational risk capital model is based on actual losses and potential

scenario-based stress losses, with adjustments to the capital calculation to reflect

changes in the quality of the control environment and with a potential offset for

the use of risk-transfer products. The Firm believes the model is consistent with

the new Basel II Framework and expects to propose it eventually for qualification

under the advanced measurement approach for operational risk.

Business risk capital

Business risk is defined as the risk associated with volatility in the Firm’s

earnings due to factors not captured by other parts of its economic-capital

framework. Such volatility can arise from ineffective design or execution of

business strategies, volatile economic or financial market activity, changing

client expectations and demands, and restructuring to adjust for changes in

the competitive environment. For business risk, capital is allocated to each

business based on historical revenue volatility and measures of fixed and vari-

able expenses. Earnings volatility arising from other risk factors, such as credit,

market, or operational risk, is excluded from the measurement of business risk

capital, as those factors are captured under their respective risk capital models.

Private equity risk capital

Capital is allocated to publicly- and privately-held securities and third party

fund investments and commitments in the Private Equity portfolio to cover

the potential loss associated with a decline in equity markets and related

asset devaluations. In addition to negative market fluctuations, potential loss-

es in private equity investment portfolios can be magnified by liquidity risk.

The capital allocation for the Private Equity portfolio is based upon measure-

ment of the loss experience suffered by the Firm and other market partici-

pants over a prolonged period of adverse equity market conditions.

Regulatory capital

The Firm’s federal banking regulator, the FRB, establishes capital require-

ments, including well-capitalized standards for the consolidated financial

holding company. The Office of the Comptroller of the Currency (“OCC”)

establishes similar capital requirements and standards for the Firm’s national

banks, including JPMorgan Chase Bank, National Association (“JPMorgan

Chase Bank”) and Chase Bank USA, National Association.

On March 1, 2005, the FRB issued a final rule that continues the inclusion

of trust preferred securities in Tier 1 capital, subject to stricter quantitative

limits. The rule provides for a five-year transition period. The Firm is cur-

rently assessing the impact of the final rule. The effective date of the final

rule is dependent on the date of publication in the Federal Register.

On July 20, 2004, the federal banking regulatory agencies issued a final rule

that excludes assets of asset-backed commercial paper programs that are

consolidated as a result of FIN 46R from risk-weighted assets for purposes

of computing Tier 1 and Total risk-based capital ratios. The final rule also

requires that capital be held against short-term liquidity facilities supporting

asset-backed commercial paper programs. The final rule became effective

September 30, 2004. Adoption of the rule did not have a material effect on

the capital ratios of the Firm. In addition, under the final rule, both short- and

long-term liquidity facilities will be subject to certain asset quality tests effec-

tive September 30, 2005.

The following tables show that JPMorgan Chase maintained a well-capital-

ized position based on Tier 1 and Total capital ratios at December 31, 2004

and 2003.

Capital ratios

Well-

capitalized

December 31, 2004 2003

(a)

ratios

Tier 1 capital ratio 8.7% 8.5% 6.0%

Total capital ratio 12.2 11.8 10.0

Tier 1 leverage ratio 6.2 5.6 NA

Total stockholders’ equity to assets 9.1 6.0 NA

(a) Heritage JPMorgan Chase only.

Risk-based capital components and assets

December 31, (in millions) 2004 2003

(a)

Total Tier 1 capital $ 68,621 $ 43,167

Total Tier 2 capital 28,186 16,649

Total capital $ 96,807 $ 59,816

Risk-weighted assets $ 791,373 $ 507,456

Total adjusted average assets 1,102,456 765,910

(a) Heritage JPMorgan Chase only.

Tier 1 capital was $68.6 billion at December 31, 2004, compared with $43.2

billion at December 31, 2003, an increase of $25.4 billion. The increase was

due to an increase in common stockholders’ equity of $60.2 billion, primarily

driven by stock issued in connection with the Merger of $57.3 billion and net

income of $4.5 billion; these were partially offset by dividends paid of $3.9

billion and common share repurchases of $738 million. The Merger added

Tier 1 components such as $3.0 billion of additional qualifying trust preferred

securities and $493 million of minority interests in consolidated subsidiaries;

Tier 1 deductions resulting from the Merger included $34.1 billion of merger-

related goodwill, and $3.4 billion of nonqualifying intangibles.

Additional information regarding the Firm’s capital ratios and the associated com-

ponents and assets, and a more detailed discussion of federal regulatory capital

standards are presented in Note 24 on pages 116–117 of this Annual Report.

Off–balance sheet arrangements and contractual cash obligations

Management’s discussion and analysis

JPMorgan Chase & Co.

52 JPMorgan Chase & Co. / 2004 Annual Report

Special-purpose entities

JPMorgan Chase is involved with several types of off-balance sheet arrange-

ments including special purpose entities (“SPEs”), lines of credit and loan

commitments. The principal uses of SPEs are to obtain sources of liquidity for

JPMorgan Chase and its clients by securitizing their financial assets, and to

create other investment products for clients. These arrangements are an

important part of the financial markets, providing market liquidity by facilitat-

ing investors’ access to specific portfolios of assets and risks. For example,

SPEs are integral to the markets for mortgage-backed securities, commercial

paper, and other asset-backed securities.

The basic SPE structure involves a company selling assets to the SPE. The SPE

funds the purchase of those assets by issuing securities to investors. To insu-

late investors from creditors of other entities, including the seller of assets,

SPEs are often structured to be bankruptcy-remote.

JPMorgan Chase is involved with SPEs in three broad categories of transac-

tions: loan securitizations, multi-seller conduits and client intermediation.

Capital is held, as appropriate, against all SPE-related transactions and relat-

ed exposures, such as derivative transactions and lending-related commit-

ments. For a further discussion of SPEs and the Firm’s accounting for them,

see Note 1 on page 88, Note 13 on pages 103–106 and Note 14 on pages

106–109 of this Annual Report.

The Firm has no commitments to issue its own stock to support any SPE

transaction, and its policies require that transactions with SPEs be conducted

at arm’s length and reflect market pricing. Consistent with this policy, no

JPMorgan Chase employee is permitted to invest in SPEs with which the Firm

is involved where such investment would violate the Firm’s Worldwide Rules

of Conduct. These rules prohibit employees from self-dealing and prohibit

employees from acting on behalf of the Firm in transactions with which they

or their family have any significant financial interest.

For certain liquidity commitments to SPEs, the Firm could be required to pro-

vide 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 $79.4

billion and $34.0 billion at December 31, 2004 and 2003, respectively.

Alternatively, if JPMorgan Chase Bank were downgraded, the Firm could be

replaced by another liquidity provider in lieu of funding under the liquidity

commitment, or, in certain circumstances, could facilitate the sale or refinanc-

ing of the assets in the SPE in order to provide liquidity.

Of its $79.4 billion in liquidity commitments to SPEs at December 31, 2004,

$47.7 billion is included in the Firm’s total other unfunded commitments to

extend credit, included in the table below (compared with $27.7 billion at

December 31, 2003). As a result of the Firm’s consolidation of multi-seller

conduits in accordance with FIN 46R, $31.7 billion of these commitments are

excluded from the table (compared with $6.3 billion at December 31, 2003),

as the underlying assets of the SPEs have been included on the Firm’s

Consolidated balance sheets.

The revenue reported in the table below primarily represents servicing and

custodial fee income. The Firm also has exposure to certain SPEs arising from

derivative transactions; these transactions are recorded at fair value on the

Firm’s Consolidated balance sheets with changes in fair value (i.e., MTM

gains and losses) recorded in Trading revenue. Such MTM gains and losses

are not included in the revenue amounts reported in the table below.

Basel II

The Basel Committee on Banking Supervision published the new Basel II

Framework in 2004 in an effort to update the original international bank

capital accord (“Basel I”), in effect since 1988. The goal of the Basel II

Framework is to improve the consistency of capital requirements internation-

ally, make regulatory capital more risk sensitive, and promote enhanced risk

management practices among large, internationally active banking organizations.

JPMorgan Chase supports the overall objectives of the Basel II Framework.

U.S. banking regulators are in the process of incorporating the Basel II

Framework into the existing risk-based capital requirements. JPMorgan Chase

will be required to implement advanced measurement techniques employing

its internal estimates of certain key risk drivers to derive capital requirements.

Prior to implementation of the new Basel II Framework, JPMorgan Chase will

be required to demonstrate to the FRB that its internal criteria meet the rele-

vant supervisory standards. The Basel II Framework will be fully effective in

January 2008. JPMorgan Chase expects to implement the Basel II Framework

within this timeframe.

JPMorgan Chase is currently analyzing local Basel II requirements in major

jurisdictions outside the U.S. where it operates. Based on the results of this

analysis, different approaches may be implemented in various jurisdictions.

Dividends

The Firm’s common stock dividend policy reflects its earnings outlook, desired

payout ratios, the need to maintain an adequate capital level and alternative

investment opportunities. In 2004, JPMorgan Chase declared a quarterly cash

dividend on its common stock of $0.34 per share. The Firm anticipates a divi-

dend payout ratio in 2005 of 30-40% of operating earnings.

Stock repurchases

On July 20, 2004, the Board of Directors approved an initial stock repurchase

program in the aggregate amount of $6.0 billion. This amount includes shares

to be repurchased to offset issuances under the Firm’s employee equity-based

plans. The actual amount of shares repurchased will be subject to various fac-

tors, including market conditions; legal considerations affecting the amount

and timing of repurchase activity; the Firm’s capital position (taking into

account purchase accounting adjustments); internal capital generation; and

alternative potential investment opportunities. During 2004, under the stock

repurchase program, the Firm repurchased 19.3 million shares for $738 mil-

lion at an average price per share of $38.27. The Firm did not repurchase any

shares of its common stock during 2003.

JPMorgan Chase & Co. / 2004 Annual Report 53

The following table summarizes certain revenue information related to

variable interest entities (“VIEs”) with which the Firm has significant involve-

ment, and qualifying SPEs (“QSPEs”). For a further discussion of VIEs and

QSPEs, see Note 1 on page 88 of this Annual Report.

Revenue from VIEs and QSPEs

Year ended December 31,

(a)

(in millions) VIEs

(b)

QSPEs Total

2004 $154 $1,438 $1,592

2003 79 979 1,058

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only.

(b) Includes VIE-related revenue (i.e., revenue associated with consolidated and significant

nonconsolidated VIEs).

Contractual cash obligations

In the normal course of business, the Firm enters into various contractual

obligations that may require future cash payments. The accompanying table

summarizes JPMorgan Chase’s off–balance sheet lending-related financial

instruments and significant contractual cash obligations, by remaining maturity,

at December 31, 2004. For a discussion regarding Long-term debt and trust

preferred capital securities, see Note 17 on pages 112–113 of this Annual

Report. For a discussion regarding operating leases, see Note 25 on page 117

of this Annual Report.

Contractual purchases include commitments for future cash expenditures, pri-

marily related to services. Capital expenditures primarily represent future cash

payments for real estate–related obligations and equipment. Contractual pur-

chases and capital expenditures at December 31, 2004, reflect the minimum

contractual obligation under legally enforceable contracts with contract terms

that are both fixed and determinable. Excluded from the following table are

a number of obligations to be settled in cash, primarily in under one year.

These obligations are reflected on the Firm’s Consolidated balance sheets

and include Federal funds purchased and securities sold under repurchase

agreements; Other borrowed funds; purchases of Debt and equity instruments

that settle within standard market timeframes (e.g., regular-way); Derivative

payables that do not require physical delivery of the underlying instrument;

and certain purchases of instruments that resulted in settlement failures.

Off–balance sheet lending-related financial instruments

By remaining maturity at December 31, 2004 Under 1–3 3–5 After

(in millions) 1 year years years 5 years Total

Consumer $552,748 $ 3,603 $ 2,799 $ 42,046 $ 601,196

Wholesale:

Other unfunded commitments to extend credit

(a)(b)

114,555 57,183 48,987 4,427 225,152

Standby letters of credit and guarantees

(a)

22,785 30,805 21,387 3,107 78,084

Other letters of credit

(a)

4,631 1,297 190 45 6,163

Total wholesale 141,971 89,285 70,564 7,579 309,399

Total lending-related commitments $694,719 $ 92,888 $ 73,363 $ 49,625 $910,595

Contractual cash obligations

By remaining maturity at December 31, 2004 (in millions)

Certificates of deposit of $100,000 and over $ 38,946 $ 7,941 $ 1,176 $ 1,221 $ 49,284

Long-term debt 15,833 30,890 23,527 25,172 95,422

Trust preferred capital securities — — — 10,296 10,296

FIN 46R long-term beneficial interests

(c)

3,072 708 203 2,410 6,393

Operating leases

(d)

1,060 1,878 1,614 5,301 9,853

Contractual purchases and capital expenditures 1,791 518 252 181 2,742

Obligations under affinity and co-brand programs 868 2,442 1,086 6 4,402

Other liabilities

(e)

968 1,567 1,885 6,546 10,966

Total $ 62,538 $ 45,944 $ 29,743 $ 51,133 $ 189,358

(a) Represents contractual amount net of risk participations totaling $26 billion at December 31, 2004.

(b) Includes unused advised lines of credit totaling $23 billion at December 31, 2004, which are not legally binding. In regulatory filings with the FRB, unused advised lines are not reportable.

(c) Included on the Consolidated balance sheets in Beneficial interests issued by consolidated variable interest entities.

(d) Excludes benefit of noncancelable sublease rentals of $689 million at December 31, 2004.

(e) Includes deferred annuity contracts and expected funding for pension and other postretirement benefits for 2005. Funding requirements for pension and postretirement benefits after 2005 are

excluded due to the significant variability in the assumptions required to project the timing of future cash payments.

Management’s discussion and analysis

JPMorgan Chase & Co.

54 JPMorgan Chase & Co. / 2004 Annual Report

Risk management

Risk is an inherent part of JPMorgan Chase’s business activities. The Firm’s

risk management framework and governance structure is intended to provide

comprehensive controls and ongoing management of its major risks. In addi-

tion, this framework recognizes the diversity among the Firm’s core business-

es, which helps reduce the impact of volatility in any particular area on its

operating results as a whole.

The Firm’s ability to properly identify, measure, monitor and report risk is

critical to its soundness and profitability.

• Risk identification: The Firm identifies risk by dynamically assessing

the potential impact of internal and external factors on transactions and

positions. Business and risk professionals develop appropriate mitigation

strategies for the identified risks.

• Risk measurement: The Firm measures risk using a variety of method-

ologies, including calculating probable loss, unexpected loss and value-at-

risk, and by conducting stress tests and making comparisons to external

benchmarks. Measurement models and related assumptions are routinely

reviewed to ensure that the Firm’s risk estimates are reasonable and reflec-

tive of underlying positions.

• Risk monitoring/Control: The Firm establishes risk management policies

and procedures. These policies contain approved limits by customer, prod-

uct and business that are monitored on a daily, weekly and monthly basis

as appropriate.

• Risk reporting: Risk reporting covers all lines of business and is provided

to management on a daily, weekly and monthly basis as appropriate.

Risk governance

The Firm’s risk governance structure is built upon the premise that each line

of business is responsible for managing the risks inherent in its business

activity. There are seven major risk types identified in the business activities

of the Firm: liquidity risk, credit risk, market risk, operational risk, legal and

reputation risk, fiduciary risk and principal risk. As part of the risk manage-

ment structure, each line of business has a Risk Committee responsible for

decisions relating to risk strategy, policies and control. Where appropriate,

the Risk Committees escalate risk issues to the Firm’s Operating Committee,

comprised of senior officers of the Firm, or to the Risk Working Group, a sub-

group of the Operating Committee.

In addition to the Risk Committees, there is an Asset & Liability Committee

(“ALCO”), which oversees structural interest rate and liquidity risk as well

as the Firm’s funds transfer pricing policy, through which lines of business

transfer market-hedgable interest rate risk to Treasury. Treasury also has

responsibility for decisions relating to its risk strategy, policies and control.

There is also an Investment Committee, which reviews key aspects of the

Firm’s global M&A activities that are undertaken for its own account and

that fall outside the scope of established private equity and other principal

finance activities.

Operating Committee

(OC)

Asset & Liability Committee

(ALCO)

Commercial

Banking

Risk Committee

Investment Committee

Investment Bank

Risk Committee &

Executive IB

Risk Committee

Retail Financial

Services Risk &

Credit Policy

Committee

Card Services

Risk Committee

Treasury &

Securities Services

Risk Committee

Asset & Wealth

Management

Risk Committee

Risk Management

Wholesale

Credit Risk

Consumer

Credit Risk

Market

Risk

Fiduciary

Risk

Principal

Risk

Technology &

Operations

Risk

Management

Services

Operational

Risk

Overlaying risk management within the lines of business is the corporate

function of Risk Management which, under the direction of the Chief Risk

Officer reporting to the President and Chief Operating Officer, provides an

independent firmwide function for control and management of risk. Within

Risk Management are those units responsible for credit risk, market risk,

operational risk, fiduciary risk, principal risk, and risk technology and opera-

tions, as well as Risk Management Services, which is responsible for credit

risk policy and methodology, risk reporting and risk education.

JPMorgan Chase & Co. / 2004 Annual Report 55

The Board of Directors exercises oversight of risk management as a whole and

through the Board’s Audit Committee and the Risk Policy Committee. The Audit

Committee is responsible for oversight of guidelines and policies to govern the

process by which risk assessment and management is undertaken. In addition,

the Audit Committee reviews with management the system of internal con-

trols and financial reporting that is relied upon to provide reasonable assur-

ance of compliance with the Firm’s operational risk management processes.

The Risk Policy Committee is responsible for oversight of management’s

responsibilities to assess and manage the Firm’s credit risk, market risk, inter-

est rate risk, investment risk and liquidity risk, and is also responsible for

review of the Firm’s fiduciary and asset management activities. Both commit-

tees are responsible for oversight of reputational risk. The Chief Risk Officer

and other management report on the risks of the Firm to the Board of Directors,

particularly through the Board’s Audit Committee and Risk Policy Committee.

The major risk types identified by the Firm are discussed in the following

sections.

Liquidity risk management

Liquidity risk arises from the general funding needs of the Firm’s activities and

in the management of its assets and liabilities. JPMorgan Chase’s liquidity

management framework is intended to maximize liquidity access and mini-

mize funding costs. Through active liquidity management, the Firm seeks to

preserve stable, reliable and cost-effective sources of funding. This enables the

Firm to replace maturing obligations when due and fund assets at appropri-

ate maturities and rates in all market environments. To accomplish this, man-

agement uses a variety of liquidity risk measures that take into consideration

market conditions, prevailing interest rates, liquidity needs and the desired

maturity profile of liabilities.

Risk identification and measurement

Treasury is responsible for setting the Firm’s liquidity strategy and targets,

understanding the Firm’s on- and off-balance sheet liquidity obligations, pro-

viding policy guidance, overseeing policy adherence, and maintaining contin-

gency planning and stress testing. In addition, it identifies and measures

internal and external liquidity warning signals, such as the unusual widening

of spreads, to permit early detection of liquidity issues.

The Firm’s three primary measures of liquidity are:

• Holding company short-term position: Measures the parent holding

company’s ability to repay all obligations with a maturity less than one

year at a time when the ability of the Firm’s banks to pay dividends to

the parent holding company is constrained.

• Cash capital surplus: Measures the Firm’s ability to fund assets on a

fully collateralized basis, assuming access to unsecured funding is lost.

• Basic surplus: Measures JPMorgan Chase Bank’s ability to sustain a

90-day stress event that is specific to the Firm where no new funding

can be raised to meet obligations as they come due.

All three primary liquidity measures are managed to provide sufficient surplus

in the Firm’s liquidity position.

Risk monitoring and reporting

Treasury is responsible for measuring, monitoring, reporting and managing

the liquidity profile of the Firm through both normal and stress periods.

Treasury analyzes reports to monitor the diversity and maturity structure of the

Firm’s sources of funding, and to assess downgrade impact scenarios, contin-

gent funding needs, and overall collateral availability and pledging status.

A contingency funding plan is in place, intended to help the Firm manage

through periods when access to funding is temporarily impaired. A down-

grade analysis considers the potential impact of a one- and two-notch

downgrade at both the parent and bank level, and calculates the estimated

loss of funding as well as the increase in annual funding costs in both scenar-

ios. A trigger-risk funding analysis considers the impact of a bank downgrade

below A-1/P-1, including the funding requirements that would be required if

such an event were to occur. These liquidity analytics rely on management’s

judgment about JPMorgan Chase’s ability to liquidate assets or use them as

collateral for borrowings and take into account credit risk management’s his-

torical data on the funding of loan commitments (e.g., commercial paper

back-up facilities), liquidity commitments to SPEs, commitments with rating

triggers and collateral posting requirements. For a further discussion of SPEs

and other off–balance sheet arrangements, see Off–balance sheet arrange-

ments and contractual cash obligations on pages 52–53, as well as Note 1,

Note 13, Note 14 and Note 27 on pages 88, 103–106, 106–109, and

119–120, respectively, of this Annual Report.

Funding

Sources of funds

The diversity of the Firm’s funding sources enhances financial flexibility and

limits dependence on any one source, thereby minimizing the cost of funds.

A major source of liquidity for JPMorgan Chase Bank is provided by its large

core deposit base. Core deposits include all U.S. deposits insured by the FDIC,

up to the legal limit of $100,000 per depositor. In 2004, core bank deposits

grew approximately 116% from 2003 year-end levels, primarily the result of

the Merger, as well as growth within RFS and TSS. In addition to core deposits,

the Firm benefits from substantial, stable deposit balances originated by TSS,

Commercial Banking and the IB through the normal course of their businesses.

Additional funding flexibility is provided by the Firm’s ability to access the

repurchase and asset securitization markets. At December 31, 2004, $72 bil-

lion of securities were available for repurchase agreements, and $36 billion of

credit card, automobile and mortgage loans were available for securitizations.

These alternatives are evaluated on an ongoing basis to achieve an appropri-

ate balance of secured and unsecured funding. The ability to securitize loans,

and the associated gains on those securitizations, are principally dependent

on the credit quality and yields of the assets securitized and are generally not

dependent on the credit ratings of the issuing entity. Transactions between

the Firm and its securitization structures are reflected in JPMorgan Chase’s

consolidated financial statements; these relationships include retained inter-

ests in securitization trusts, liquidity facilities and derivative transactions.

For further details, see Notes 13 and 14 on pages 103–106 and 106–109,

respectively, of this Annual Report.

Credit ratings

The credit ratings of JPMorgan Chase’s parent holding company and each of its significant banking subsidiaries, as of December 31, 2004, were as follows:

Short-term debt Senior long-term debt

Moody’s S&P Fitch Moody’s S&P Fitch

JPMorgan Chase & Co. P-1 A-1 F1 Aa3 A+ A+

JPMorgan Chase Bank, N.A. P-1 A-1+ F1+ Aa2 AA- A+

Chase Bank USA, N.A. P-1 A-1+ F1+ Aa2 AA- A+

Management’s discussion and analysis

JPMorgan Chase & Co.

56 JPMorgan Chase & Co. / 2004 Annual Report

The Firm is an active participant in the global financial markets. These markets

serve as a cost-effective source of funds and are a critical component of the

Firm’s liquidity management. Decisions concerning the timing and tenor of

accessing these markets are based on relative costs, general market conditions,

prospective views of balance sheet growth and a targeted liquidity profile.

Issuance

Corporate credit spreads narrowed in 2004 across most industries and sec-

tors, reflecting the market perception that credit risks were improving, as the

number of downgrades declined, corporate balance sheet cash positions

increased, and corporate profits exceeded expectations. JPMorgan Chase’s

credit spreads performed in line with peer spreads in 2004. The Firm took

advantage of narrowing credit spreads globally by opportunistically issuing

long-term debt and capital securities throughout the year. Consistent with its

liquidity management policy, the Firm has raised funds at the parent holding

company sufficient to cover maturing obligations over the next 12 months

and to support the less liquid assets on its balance sheet. High investor cash

positions and increased foreign investor participation in the corporate markets

allowed JPMorgan Chase to diversify further its funding across the global

markets while decreasing funding costs and lengthening maturities.

During 2004, JPMorgan Chase issued approximately $25.3 billion of long-

term debt and capital securities. These issuances were partially offset by

$16.0 billion of long-term debt and capital securities that matured or were

redeemed, and the Firm’s redemption of $670 million of preferred stock. In

addition, in 2004 the Firm securitized approximately $6.5 billion of residential

mortgage loans, $8.9 billion of credit card loans and $1.6 billion of automo-

bile loans, resulting in pre-tax gains (losses) on securitizations of $47 million,

$52 million and $(3) million, respectively. For a further discussion of loan

securitizations, see Note 13 on pages 103–106 of this Annual Report.

The Firm’s principal insurance subsidiaries had the following financial strength

ratings as of December 31, 2004:

Moody’s S&P A.M. Best

Chase Insurance Life and Annuity Company A2 A+ A

Chase Insurance Life Company A2 A+ A

In connection with the Merger, Moody’s upgraded the ratings of the Firm by

one notch, moving the parent holding company’s senior long-term debt rating

to Aa3 and JPMorgan Chase Bank’s senior long-term debt rating to Aa2; and

changed its outlook to stable. Also at that time, Fitch affirmed its ratings and

changed its outlook to positive, while S&P affirmed all its ratings and kept its

outlook stable.

The cost and availability of unsecured financing are influenced by credit rat-

ings. A reduction in these ratings could adversely affect the Firm’s access to

liquidity sources, increase the cost of funds, trigger additional collateral

requirements and decrease the number of investors and counterparties willing

to lend. Critical factors in maintaining high credit ratings include a stable and

diverse earnings stream; strong capital ratios; strong credit quality and risk

management controls; diverse funding sources; and strong liquidity monitor-

ing procedures.

If the Firm’s ratings were downgraded by one notch, the Firm estimates the

incremental cost of funds and the potential loss of funding to be negligible.

Additionally, the Firm estimates the additional funding requirements for VIEs

and other third-party commitments would not be material. In the current

environment, the Firm believes a downgrade is unlikely. For additional infor-

mation on the impact of a credit ratings downgrade on funding requirements

for VIEs, and on derivatives and collateral agreements, see Off–balance Sheet

Arrangements on pages 52–53 and Ratings profile of derivative receivables

mark-to-market (“MTM”) on page 64, of this Annual Report.

JPMorgan Chase & Co. / 2004 Annual Report 57

Credit risk management

Credit risk is the risk of loss from obligor or counterparty default. The Firm

provides credit to customers of all sizes, from large corporate clients to loans

for the individual consumer. Management manages the risk/reward relation-

ship of each portfolio, discouraging the retention of loan assets that do not

generate a positive return above the cost of risk-adjusted capital. The Firm’s

business strategy for its large corporate wholesale loan portfolio remains pri-

marily one of origination for distribution; the majority of the Firm’s wholesale

Credit risk organization

Consumer

Wholesale

Oversees risk management

Chief Risk Officer &

Deputy Risk Officer

Consumer

Credit Risk Management

Credit Risk

Management

Credit

Portfolio Group

Risk Management

Services

• Manages risk in credit positions

from traditional lending and deriva-

tive trading activities, through the

purchase or sale of credit derivative

hedges, other market instruments

and secondary market loan sales

• Manages derivatives collateral risk

• Approves all credit exposure;

authority varies based on aggregate

size of client’s credit exposure and

the size, maturity and risk level

of transaction

• Assigns risk ratings

• Collaborates with client

executives to monitor credit

quality via periodic reviews of

client documentation, financial

data and industry trends

• In terms of workouts and restruc-

turings, the Special Credits Group

manages criticized wholesale

exposures

• Formulates credit policies, limits

and guidelines

• Addresses credit risk methodolo-

gies, including counterparty risk

and credit risk capital allocation

• Prepares reports used for

monitoring, decision-making

and external reporting

• Prepares Allowance for credit

losses for appropriateness review

by LOBs and senior management

• Establishes a comprehensive

Consumer Risk Policy Framework

for Retail Financial Services and

Card Services

• Assigns and manages credit

authorities to all consumer

senior risk officers

• Formulates credit policies and limits;

prepares allowance for credit losses

for appropriateness review by LOBs

and senior management

• Monitors consumer credit risk

performance across all portfolio

segments, in order to ensure an

appropriate risk/return relationship

consistent with the Firm’s risk

profile

• Ensures appropriate credit

risk–based capital management

for consumer businesses

• Monitors economic trends

to manage emerging risk in

consumer portfolio

loan originations (primarily to IB clients) continue to be distributed into the

marketplace, with residual holds by the Firm averaging less than 10%. With

regard to the prime consumer credit market, the Firm focuses on creating a

portfolio that is diversified from both a product and a geographical perspective.

The Firm’s credit risk management governance structure consists of the pri-

mary functions as described in the organizational chart below.

Management’s discussion and analysis

JPMorgan Chase & Co.

58 JPMorgan Chase & Co. / 2004 Annual Report

In 2004, the Firm continued to enhance its risk management discipline,

managing wholesale single-name and industry concentration through its

threshold and limit structure and using credit derivatives and loan sales in

its portfolio management activity. The Firm manages wholesale exposure

concentrations by obligor, risk rating, industry and geography. In addition,

the Firm continued to make progress under its multi-year initiative to

reengineer specific components of the credit risk infrastructure. The goal is

to enhance the Firm’s ability to provide immediate and accurate risk and

exposure information; actively manage credit risk in the retained portfolio;

support client relationships; more quickly manage the allocation of economic

capital; and comply with Basel II initiatives.

In 2004, the Firm continued to grow its consumer loan portfolio, focusing

on businesses providing the most appropriate risk/reward relationship while

keeping within the Firm’s desired risk tolerance. During the past year, the

Firm also completed a strategic review of all consumer lending portfolio

segments. This action resulted in the sale of the $4 billion manufactured

home loan portfolio, de-emphasizing vehicle leasing and, subsequent to

year-end 2004, the sale of a $2 billion recreational vehicle portfolio.

Continued growth in the core consumer lending product set (residential real

estate, auto and education finance, credit cards and small business) reflected

a focus on the prime credit quality segment of the market.

Risk identification

The Firm is exposed to credit risk through its lending (e.g., loans and lending-

related commitments), derivatives trading and capital markets activities.

Credit risk also arises due to country or sovereign exposure, as well as

indirectly through the issuance of guarantees.

Risk measurement

To measure credit risk, the Firm employs several methodologies for estimating

the likelihood of obligor or counterparty default. Losses generated by con-

sumer loans are more predictable than wholesale losses but are subject to

cyclical and seasonal factors. Although the frequency of loss is higher on con-

sumer loans than on wholesale loans, the severity of loss is typically lower

and more manageable. As a result of these differences, methodologies vary

depending on certain factors, including type of asset (e.g., consumer install-

ment versus wholesale loan), risk measurement parameters (e.g., delinquency

status and credit bureau score versus wholesale risk rating) and risk manage-

ment and collection processes (e.g., retail collection center versus centrally

managed workout groups).

Credit risk measurement is based on the amount of exposure should the

obligor or the counterparty default, and the loss severity given a default event.

Based on these factors and related market-based inputs, the Firm estimates

both probable and unexpected losses for the wholesale and consumer portfo-

lios. Probable losses, reflected in the Provision for credit losses, are statistically-

based estimates of credit losses over time, anticipated as a result of obligor

or counterparty default. However, probable losses are not the sole indicators

of risk. If losses were entirely predictable, the probable loss rate could be

factored into pricing and covered as a normal and recurring cost of doing

business. Unexpected losses, reflected in the allocation of credit risk capital,

represent the potential volatility of actual losses relative to the probable level

of losses (refer to Capital management on pages 50–51 of this Annual Report

for a further discussion of the credit risk capital methodology). Risk measure-

ment for the wholesale portfolio is primarily based on risk-rated exposure;

and for the consumer portfolio it is based on credit-scored exposure.

Risk-rated exposure

For portfolios that are risk-rated, probable and unexpected loss calculations

are based on estimates of probability of default and loss given default.

Probability of default is expected default calculated on an obligor basis. Loss

given default is an estimate of losses that are based on collateral and struc-

tural support for each credit facility. Calculations and assumptions are based

on management information systems and methodologies under continual

review. Risk ratings are assigned and reviewed on an ongoing basis by Credit

Risk Management and revised, if needed, to reflect the borrowers’ current

risk profile and the related collateral and structural position.

Credit-scored exposure

For credit-scored portfolios (generally Retail Financial Services and Card

Services), probable loss is based on a statistical analysis of inherent

losses over discrete periods of time. Probable losses are estimated using

sophisticated portfolio modeling, credit scoring and decision-support tools

to project credit risks and establish underwriting standards. In addition,

common measures of credit quality derived from historical loss experience

are used to predict consumer losses. Other risk characteristics evaluated

include recent loss experience in the portfolios, changes in origination

sources, portfolio seasoning, loss severity and underlying credit practices,

including charge-off policies. These analyses are applied to the Firm’s

current portfolios in order to forecast delinquencies and severity of losses,

which determine the amount of probable losses. These factors and analyses

are updated on a quarterly basis.

Risk monitoring

The Firm has developed policies and practices that are designed to preserve

the independence and integrity of decision-making and ensure credit risks

are accurately assessed, properly approved, continually monitored and actively

managed at both the transaction and portfolio levels. The policy framework

establishes credit approval authorities, credit limits, risk-rating methodologies,

portfolio-review parameters and problem-loan management. Wholesale credit

risk is continually monitored on both an aggregate portfolio level and on an

individual customer basis. For consumer credit risk, the key focus items are

trends and concentrations at the portfolio level, where potential problems

can be remedied through changes in underwriting policies and portfolio

guidelines. Consumer Credit Risk Management monitors trends against

business expectations and industry benchmarks.

In order to meet its credit risk management objectives, the Firm seeks to

maintain a risk profile that is diverse in terms of borrower, product type,

industry and geographic concentration. Additional diversification of the Firm’s

exposure is accomplished through syndication of credits, participations, loan

sales, securitizations, credit derivatives and other risk-reduction techniques.

Risk reporting

To enable monitoring of credit risk and decision-making, aggregate credit

exposure, credit metric forecasts, hold-limit exceptions and risk profile changes

are reported to senior credit risk management regularly. Detailed portfolio

reporting of industry, customer and geographic concentrations occurs monthly,

and the appropriateness of the allowance for credit losses is reviewed by sen-

ior management on a quarterly basis. Through the risk governance structure,

credit risk trends and limit exceptions are regularly provided to, and discussed

with, the Operating Committee.

JPMorgan Chase & Co. / 2004 Annual Report 59

Credit portfolio

The following table presents JPMorgan Chase’s credit portfolio as of December 31, 2004 and 2003. Total wholesale credit exposure increased by $167 billion, and

total consumer exposure increased by $584 billion, at year-end 2004 from year-end 2003. This increase in total exposure (including $71 billion of securitized credit

cards) was primarily the result of the Merger.

Wholesale and consumer credit portfolio

As of or for the year ended Nonperforming Average annual

December 31,

(a)

Credit exposure assets

(t)(u)

Net charge-offs net charge-off rate

(in millions, except ratios)

2004 2003 2004 2003 2004 2003 2004 2003

Wholesale

(b)(c)(d)

Loans – reported

(e)

$ 135,067 $ 75,419 $ 1,574 $ 2,004 $ 186 $ 765 0.19% 0.97%

Derivative receivables

(f)(g)

65,982 83,751 241 253 NA NA NA NA

Interests in purchased receivables 31,722 4,752 — — NA NA NA NA

Other receivables — 108 — 108 NA NA NA NA

Total wholesale credit-related assets

(e)

232,771 164,030 1,815 2,365 186 765 0.19 0.97

Lending-related commitments

(h)(i)

309,399 211,483 NA NA NA NA NA NA

Total wholesale credit exposure

(e)(j)

$ 542,170 $ 375,513 $ 1,815 $ 2,365 $ 186 $ 765 0.19% 0.97%

Consumer

(c)(k)(l)

Loans – reported

(m)

$ 267,047 $ 139,347 $ 1,169 $ 580 $ 2,913 $ 1,507 1.56% 1.33%

Loans – securitized

(m)(n)

70,795 34,856 — — 2,898 1,870 5.51 5.64

Total managed consumer loans

(m)

$ 337,842 $ 174,203 $ 1,169 $ 580 $ 5,811 $ 3,377 2.43% 2.31%

Lending-related commitments 601,196 181,198 NA NA NA NA NA NA

Total consumer credit exposure

(o)

$ 939,038 $ 355,401 $ 1,169 $ 580 $ 5,811 $ 3,377 2.43% 2.31%

Total credit portfolio

Loans – reported $ 402,114 $ 214,766 $ 2,743 $ 2,584 $ 3,099 $ 2,272 1.08% 1.19%

Loans – securitized

(n)

70,795 34,856 — — 2,898 1,870 5.51 5.64

Total managed loans 472,909 249,622 2,743 2,584 5,997 4,142 1.76 1.84

Derivative receivables

(f)(g)

65,982 83,751 241 253 NA NA NA NA

Interests in purchased receivables 31,722 4,752 — — NA NA NA NA

Other receivables — 108 — 108 NA NA NA NA

Total managed credit-related assets 570,613 338,233 2,984 2,945 5,997 4,142 1.76 1.84

Wholesale lending-related commitments

(h)(i)

309,399 211,483 NA NA NA NA NA NA

Consumer lending-related commitments 601,196 181,198 NA NA NA NA NA NA

Assets acquired in loan satisfactions

(p)

NA NA 247 216 NA NA NA NA

Total credit portfolio

(q)

$ 1,481,208 $ 730,914 $ 3,231 $ 3,161 $ 5,997 $ 4,142 1.76% 1.84%

Purchased held-for-sale wholesale loans

(r)

$ 351 $22$ 351 $22 NA NA NA NA

Credit derivative hedges notional

(s)

(37,200) (37,282) (15) (123) NA NA NA NA

Collateral held against derivatives (9,301) (36,214) NA NA NA NA NA NA

(a) 2004 results include six months of the combined Firm’s results and six months of heritage JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only.

(b) Includes Investment Bank, Commercial Banking, Treasury & Securities Services and Asset & Wealth Management.

(d) Net charge-off rates exclude year-to-date average wholesale loans HFS of $6.4 billion and $3.8 billion for 2004 and 2003, respectively.

(e) Wholesale loans past-due 90 days and over and accruing were $8 million and $42 million at December 31, 2004 and 2003, respectively.

(f) The 2004 amount includes the effect of legally enforceable master netting agreements. Effective January 1, 2004, the Firm elected to report the fair value of derivative assets and liabilities net of cash

received and paid, respectively, under legally enforceable master netting agreements. As of December 31, 2004, derivative receivables were $98 billion before netting of $32 billion of cash collateral held.

(g) The Firm also views its credit exposure on an economic basis. For derivative receivables, economic credit exposure is the three-year averages of a measure known as Average exposure (which is the expected

MTM value of derivative receivables at future time periods, including the benefit of collateral). Average exposure was $38 billion and $34 billion at December 31, 2004 and December 31, 2003, respectively.

See pages 62–64 of this Annual Report for a further discussion of the Firm’s derivative receivables.

(h) The Firm also views its credit exposure on an economic basis. For lending-related commitments, economic credit exposure is represented by a “loan equivalent,” which is the portion of the unused commit-

ments or other contingent exposure that is expected, based on average portfolio historical experience, to become outstanding in the event of a default by the obligor. Loan equivalents were $162 billion and

$104 billion at December 31, 2004 and 2003, respectively. See page 65 of this Annual Report for a further discussion of this measure.

(i) Includes unused advised lines of credit totaling $23 billion and $19 billion at December 31, 2004 and 2003, respectively, which are not legally binding. In regulatory filings with the FRB, unused advised

lines are not reportable.

(j) Represents Total wholesale loans, Derivative receivables, Interests in purchased receivables, Other receivables and Wholesale lending–related commitments.

(k) Net charge-off rates exclude year-to-date average HFS consumer loans (excluding Card) in the amount of $14.7 billion and $25.3 billion for 2004 and 2003, respectively.

(l) Includes Retail Financial Services and Card Services.

(m) Past-due loans 90 days and over and accruing includes credit card receivables of $998 million and $273 million, and related credit card securitizations of $1.3 billion and $879 million, at December 31,

2004 and 2003, respectively.

(n) Represents securitized credit cards. For a further discussion of credit card securitizations, see Card Services on pages 39–40 of this Annual Report.

(o) Represents Total consumer loans, Credit card securitizations and Consumer lending–related commitments.

(p) At December 31, 2004 and 2003, includes $23 million and $10 million, respectively, of wholesale assets acquired in loan satisfactions, and $224 million and $206 million, respectively, of consumer assets

acquired in loan satisfactions.

(q) At December 31, 2004 and 2003, excludes $1.5 billion and $2.3 billion, respectively, of residential mortgage receivables in foreclosure status that are insured by government agencies. These amounts are

excluded as reimbursement is proceeding normally.

(r) Represents distressed wholesale loans purchased as part of IB’s proprietary investing activities.

(s) Represents the notional amount of single-name and portfolio credit derivatives used to manage the credit risk of wholesale credit exposure; these derivatives do not qualify for hedge accounting under SFAS 133.

(t) Excludes purchased held-for-sale (“HFS”) wholesale loans.

(u) Nonperforming assets include wholesale HFS loans of $2 million and $30 million for 2004 and 2003, respectively, and consumer HFS loans of $13 million and $45 million for 2004 and 2003, respectively.

HFS loans are carried at the lower of cost or market, and declines in value are recorded in Other income.

NA – Not applicable.

Management’s discussion and analysis

JPMorgan Chase & Co.

60 JPMorgan Chase & Co. / 2004 Annual Report

Wholesale credit portfolio

The increase in total wholesale exposure was almost entirely due to the

Merger. Derivative receivables declined by $18 billion, primarily because, effec-

tive January 1, 2004, the Firm elected to report the fair value of derivative

assets and liabilities net of cash received and paid, respectively, under legally

enforceable master netting agreements. Loans, lending-related commitments

and interests in purchased receivables increased by $60 billion, $98 billion

and $27 billion, respectively, primarily as a result of the Merger.

Below are summaries of the maturity and ratings profiles of the wholesale

portfolio as of December 31, 2004 and 2003. The ratings scale is based on

the Firm’s internal risk ratings and is presented on an S&P-equivalent basis.

Wholesale exposure

Maturity profile

(a)

Ratings profile

Investment-grade (“IG”) Noninvestment-grade

At December 31, 2004 AAA A+ BBB+ BB+ CCC+ Total %

(in billions, except ratios) <1 year 1–5 years > 5 years Total to AA- to A- to BBB- to B- & below Total of IG

Loans 43% 43% 14% 100% $ 31 $ 20 $ 36 $ 43 $ 5 $ 135 64%

Derivative receivables

(b)

19 39 42 100 34 12 11 9 — 66 86

Interests in purchased

receivables 37 61 2 100 3 24 5 — — 32 100

Lending-related

commitments

(b)(c)

46 52 2 100 124 68 74 40 3 309 86

Total exposure

(d)

42% 49% 9% 100% $ 192 $ 124 $ 126 $ 92 $ 8 $ 542 82%

Credit derivative hedges

notional

(e)

18% 77% 5% 100% $ (11) $ (11) $ (13) $ (2) $ — $ (37) 95%

Maturity profile

(a)

Ratings profile

Investment-grade (“IG”) Noninvestment-grade

At December 31, 2003

(f)

AAA A+ BBB+ BB+ CCC+ Total %

(in billions, except ratios) <1 year 1–5 years > 5 years Total to AA- to A- to BBB- to B- & below Total of IG

Loans 50% 35% 15% 100% $ 14 $ 13 $ 20 $ 22 $ 6 $ 75 63%

Derivative receivables

(b)

20 41 39 100 47 15 12 9 1 84 88

Interests in purchased

receivables 27 71 2 100 5 — — — — 5 100

Lending-related

commitments

(b)(c)

52 45 3 100 79 57 48 26 2 212 87

Total exposure

(d)

44% 43% 13% 100% $145 $ 85 $ 80 $ 57 $ 9 $ 376 83%

Credit derivative hedges

notional

(e)

16% 74% 10% 100% $ (10) $(12) $ (12) $ (2) $ (1) $ (37) 92%

(a) The maturity profile of loans and lending-related commitments is based upon the remaining contractual maturity. The maturity profile of derivative receivables is based upon the maturity profile of

Average exposure. See page 63 of this Annual Report for a further discussion of Average exposure.

(b) Based on economic credit exposure, the total percentage of Investment grade for derivative receivables was 92% and 91% as of December 31, 2004 and 2003, respectively, and for lending-related

commitments was 85% and 88% as of December 31, 2004 and 2003, respectively. See footnotes (g) and (h) on page 59 of this Annual Report for a further discussion of economic credit exposure.

(c) Based on economic credit exposure, the maturity profile for the <1 year, 1–5 years and >5 years categories would have been 31%, 65% and 4%, respectively, as of December 31, 2004, and 38%,

58% and 4%, respectively, as of December 31, 2003. See footnote (h) on page 59 of this Annual Report for a further discussion of economic credit exposure.

(d) Based on economic credit exposure, the maturity profile for <1 year, 1–5 years and >5 years categories would have been 35%, 54% and 11%, respectively, as of December 31, 2004, and 36%,

46% and 18%, respectively, as of December 31, 2003. See footnotes (g) and (h) on page 59 of this Annual Report for a further discussion of economic credit exposure.

(e) Ratings are based on the underlying referenced assets.

(f) Heritage JPMorgan Chase only.

As of December 31, 2004, the wholesale exposure ratings profile remained

relatively stable compared with December 31, 2003.

Wholesale credit exposure – selected industry concentration

The Firm actively manages the size and diversification of its industry concen-

trations, with particular attention paid to industries with actual or potential

credit concerns. Following the Merger, the Firm commenced a thorough

review of industry definitions and assignments in each of the heritage firm’s

portfolios. As a result of this review, the Firm’s industry structure was modi-

fied, resulting in two new industry groups within the top-10 industry concen-

trations at December 31, 2004: Banks and finance companies (consists of the

industries termed Commercial banks and Finance companies and lessors at

year-end 2003) and Retail and consumer services (previously separate indus-

tries at December 31, 2003). The Merger resulted in increases in nearly every

top 10 industry concentration. Exposures to Banks and finance companies

and Asset managers declined, primarily as a result of the Firm’s election to

report fair value of derivative assets and liabilities net of cash received and

paid, respectively, under legally enforceable master netting agreements, which

affected derivative receivables. A significant portion of the Firm’s derivatives

portfolio is transacted with customers in these industries.

JPMorgan Chase & Co. / 2004 Annual Report 61

Collateral

Noninvestment-grade

(d)

Net Credit held against

As of December 31, 2004 Credit Investment Criticized Criticized charge-offs derivative derivative

(in millions, except ratios) exposure

(c)

grade Noncriticized performing nonperforming (recoveries) hedges

(e)

receivables

(c)

Top 10 industries

(a)

Banks and finance companies $ 56,184 90% $ 5,419 $ 132 $ 55 $ 6 $ (11,695) $ (3,464)

Real estate 28,230 64 9,264 609 156 9 (800) (45)

Healthcare 22,003 79 4,381 204 45 1 (741) (13)

Retail and consumer services 21,732 76 4,871 285 108 — (1,767) (42)

Consumer products 21,427 68 6,382 408 71 85 (1,189) (50)

Utilities 21,262 85 2,339 504 386 63 (2,247) (27)

Asset managers 20,389 79 4,225 111 4 (15) (80) (655)

State and municipal governments 19,794 97 599 13 1 — (394) (18)

Securities firms and exchanges 18,176 87 2,278 4 13 1 (1,398) (2,068)

Media 15,314 64 4,937 198 311 (5) (1,600) (45)

All other 297,659 83 47,261 4,001 665 41 (15,289) (2,874)

Total $ 542,170 82% $ 91,956 $ 6,469 $ 1,815 $ 186 $ (37,200) $ (9,301)

Collateral

Noninvestment-grade

(d)

Net Credit held against

As of December 31, 2003

(b)

Credit Investment Criticized Criticized charge-offs derivative derivative

(in millions, except ratios) exposure

(c)

grade Noncriticized performing nonperforming (recoveries) hedges

(e)

receivables

(c)

Top 10 industries

(a)

Banks and finance companies $ 62,652 96% $ 2,633 $ 107 $ 23 $ 15 $ (12,538) $ (24,822)

Real estate 14,544 70 4,058 232 49 29 (718) (182)

Healthcare 11,332 86 1,403 139 44 12 (467) (35)

Retail and consumer services 14,451 73 3,615 224 83 64 (1,637) (17)

Consumer products 13,774 71 3,628 313 103 6 (1,104) (122)

Utilities 15,296 82 1,714 415 583 129 (1,960) (176)

Asset managers 21,794 82 3,899 76 13 14 (245) (1,133)

State and municipal governments 14,354 100 36 14 1 — (405) (12)

Securities firms and exchanges 15,599 83 2,582 9 13 4 (1,369) (4,168)

Media 14,075 65 3,285 1,307 358 151 (1,678) (186)

All other 177,642 80 30,002 3,652 1,095 341 (15,161) (5,361)

Total $ 375,513 83% $ 56,855 $ 6,488 $ 2,365 $ 765 $ (37,282) $ (36,214)

(a) Based on December 31, 2004, determination of Top 10 industries.

(b) Heritage JPMorgan Chase only.

(c) Credit exposure is net of risk participations and excludes the benefit of credit derivative hedges and collateral held against derivative receivables or loans. For 2004, collateral held against derivative

receivables excludes $32 billion of cash collateral as a result of the Firm electing to report the fair value of derivative assets and liabilities net of cash received and paid, respectively, under legally

enforceable master netting agreements.

(d) Excludes purchased nonaccrual loans held for sale of $351 million and $22 million at December 31, 2004 and 2003, respectively.

(e) Represents notional amounts only; these credit derivatives do not qualify for hedge accounting under SFAS 133.

Selected industry discussion

Presented below is a discussion of several industries to which the Firm has

significant exposure and which it continues to monitor because of actual or

potential credit concerns.

• Banks and finance companies: This industry group, primarily consisting

of exposure to commercial banks, is the largest segment of the Firm’s

wholesale credit portfolio. Credit quality is high, as 90% of the exposure

in this category is rated investment-grade.

• Real estate: Wholesale real estate grew considerably as a result of the

Merger. The resulting exposure is diversified by transaction type, borrower

base, geography and property type. In 2004, the portfolio continued to

benefit from disciplined underwriting, low interest rates, high liquidity

and increased capital demand.

• All other: All other at December 31, 2004, included $298 billion of credit

exposure to 21 industry segments. Exposures related to SPEs and high-net-

worth individuals totaled 45% of this category. SPEs provide secured

financing (generally backed by receivables, loans or bonds on a bankruptcy-

remote, non-recourse or limited-recourse basis) originated by companies in

a diverse group of industries that are not highly correlated. The remaining

All other exposure is well diversified across other industries, none of which

comprises more than 3% of total exposure.

Wholesale criticized exposure

Exposures deemed criticized generally represent a ratings profile similar to a

rating of CCC+/Caa1 and lower, as defined by Standard & Poor’s/Moody’s.

Despite the Merger, the criticized component of the portfolio decreased to

$8.3 billion at December 31, 2004, from $8.9 billion at year-end 2003. The

portfolio continued to experience improvement due to debt repayments and

Management’s discussion and analysis

JPMorgan Chase & Co.

62 JPMorgan Chase & Co. / 2004 Annual Report

Notional amounts and derivative receivables marked to market (“MTM”)

Notional amounts

(a)

Derivative receivables MTM

As of December 31,

(in billions) 2004 2003

(b)

2004 2003

(b)

Interest rate $ 37,022 $ 31,252 $46 $60

Foreign exchange 1,886 1,545 8 10

Equity 434 328 6 9

Credit derivatives 1,071 578 3 3

Commodity 101 61 3 2

Total 40,514 33,764 66 84

Collateral held against derivative receivables NA NA (9)

(c)

(36)

Exposure net of collateral NA NA $57 $48

(a) The notional amounts represent the gross sum of long and short third-party notional derivative contracts, excluding written options and foreign exchange spot contracts.

(b) Heritage JPMorgan Chase only.

(c) The Firm held $41 billion of collateral against derivative receivables as of December 31, 2004, consisting of $32 billion in net cash received under credit support annexes to legally enforceable master

netting agreements, and $9 billion of other highly liquid collateral. The benefit of the $32 billion is reflected within the $66 billion of derivative receivables MTM. Excluded from the $41 billion of col-

lateral is $10 billion of collateral delivered by clients at the initiation of transactions; this collateral secures exposure that could arise in the existing portfolio of derivatives should the MTM of the

client’s transactions move in the Firm’s favor. Also excluded are credit enhancements in the form of letter-of-credit and surety receivables.

facility upgrades as a result of client recapitalizations; additional security and

collateral taken in refinancings; client upgrades from improved financial per-

formance; gross charge-offs; and a lack of migration of new exposures into

the portfolio.

Criticized exposure – industry concentrations

As of December 31, 2004 (in millions)

Utilities $ 890 10.7%

Real estate 765 9.2

Media 509 6.1

Chemicals/plastics 488 5.9

Consumer products 479 5.8

Machinery and equipment manufacturing 459 5.6

Airlines 450 5.4

Business services 444 5.4

Metals/mining 438 5.3

Building materials/construction 430 5.2

All other 2,932 35.4

Total $ 8,284 100%

Wholesale nonperforming assets (excluding purchased held-for-sale wholesale

loans) decreased from December 31, 2003, as a result of gross charge-offs of

$543 million taken during 2004. Wholesale net charge-offs improved signifi-

cantly compared with 2003, as a result of lower gross charge-offs and slightly

higher recoveries. The 2004 wholesale net charge-off rate was 0.19%, com-

pared with 0.97% in 2003.

Although future charge-offs in the wholesale portfolio and overall credit quali-

ty are subject to uncertainties, which may cause actual results to differ from

historic performance, the Firm anticipates that the wholesale provision for

credit losses will be higher in 2005 than it was in 2004, as the provision for

credit losses moves to more normal levels over time.

Derivative contracts

In the normal course of business, the Firm utilizes derivative instruments to

meet the needs of customers, to generate revenues through trading activities,

to manage exposure to fluctuations in interest rates, currencies and other

markets and to manage its own credit risk. The Firm uses the same credit risk

management procedures as those used for traditional lending to assess and

approve potential credit exposures when entering into derivative transactions.

The following table summarizes the aggregate notional amounts and the

reported derivative receivables (i.e., the MTM or fair value of the derivative

contracts after taking into account the effects of legally enforceable master

netting agreements) at each of the dates indicated:

JPMorgan Chase & Co. / 2004 Annual Report 63

The $41 trillion of notional principal of the Firm’s derivative contracts out-

standing at December 31, 2004, significantly exceeds the possible credit loss-

es that could arise from such transactions. For most derivative transactions,

the notional principal amount does not change hands; it is simply used as a

reference to calculate payments. The appropriate measure of current credit

risk is, in the Firm’s view, the MTM value of the contract, which represents

the cost to replace the contracts at current market rates should the counter-

party default. When JPMorgan Chase has more than one transaction out-

standing with a counterparty, and a legally enforceable master netting agree-

ment exists with that counterparty, the netted MTM exposure, less collateral

held, represents, in the Firm’s view, the appropriate measure of current credit

risk. At December 31, 2004, the MTM value of derivative receivables (after

taking into account the effects of legally enforceable master netting agree-

ments and the impact of net cash received under credit support annexes to

such legally enforceable master netting agreements) was $66 billion. Further,

after taking into account $9 billion of other highly liquid collateral held by the

Firm, the net current MTM credit exposure was $57 billion.

While useful as a current view of credit exposure, the net MTM value of the

derivative receivables does not capture the potential future variability of that

credit exposure. To capture the potential future variability of credit exposure,

the Firm calculates, on a client-by-client basis, three measures of potential

derivatives-related credit loss: Peak, Derivative Risk Equivalent (“DRE”) and

Average exposure (“AVG”). These measures all incorporate netting and collat-

eral benefits, where applicable.

Peak exposure to a counterparty is an extreme measure of exposure calculat-

ed at a 97.5% confidence level. However, the total potential future credit risk

embedded in the Firm’s derivatives portfolio is not the simple sum of all Peak

client credit risks. This is because, at the portfolio level, credit risk is reduced

by the fact that when offsetting transactions are done with separate counter-

parties, only one of the two trades can generate a credit loss, even if both

counterparties were to default simultaneously. The Firm refers to this effect

as market diversification, and the Market-Diversified Peak (“MDP”) measure

is a portfolio aggregation of counterparty Peak measures, representing the

maximum losses at the 97.5% confidence level that would occur if all coun-

terparties defaulted under any one given market scenario and timeframe.

Derivative Risk Equivalent exposure is a measure that expresses the riskiness

of derivative exposure on a basis intended to be equivalent to the riskiness of

loan exposures. This is done by equating the unexpected loss in a derivative

counterparty exposure (which takes into consideration both the loss volatility

and the credit rating of the counterparty) with the unexpected loss in a loan

exposure (which takes into consideration only the credit rating of the counter-

party). DRE is a less extreme measure of potential credit loss than Peak

and is the primary measure used by the Firm for credit approval of derivative

transactions.

Finally, Average exposure is a measure of the expected MTM value of the

Firm’s derivative receivables at future time periods, including the benefit of

collateral. AVG exposure over the total life of the derivative contract is used

as the primary metric for pricing purposes and is used to calculate credit capi-

tal and the Credit Valuation Adjustment (“CVA”), as described further below.

The chart below shows the exposure profiles to derivatives over the next 10

years as calculated by the MDP, DRE and AVG metrics. All three measures

generally show declining exposure after the first year, if no new trades were

added to the portfolio.

The MTM value of the Firm’s derivative receivables incorporates an adjust-

ment, the CVA, to reflect the credit quality of counterparties. The CVA is

based on the Firm’s AVG to a counterparty, and on the counterparty’s credit

spread in the credit derivatives market. The primary components of changes in

CVA are credit spreads, new deal activity or unwinds, and changes in the

underlying market environment. The Firm believes that active risk manage-

ment is essential to controlling the dynamic credit risk in the derivatives port-

folio. The Firm risk manages its exposure to changes in CVA by entering into

credit derivative transactions, as well as interest rate, foreign exchange, equity

and commodity derivatives transactions. The MTM value of the Firm’s deriva-

tive payables does not incorporate a valuation adjustment to reflect

JPMorgan Chase’s credit quality.

$10

$20

$30

$40

$50

$60

$70

1 year

2 years

5 years

10 year

MDP

AVGAVG

DREDRE

Exposure profile of derivatives measures

December 31, 2004

(in billions)

$52

(a)

(a) Excludes $5 billion from the $57 billion of reported derivative receivables MTM net of collateral.

The exclusion reflects risk mitigation for exchange traded deals and equity option calls.

Management’s discussion and analysis

JPMorgan Chase & Co.

64 JPMorgan Chase & Co. / 2004 Annual Report

The Firm actively pursues the use of collateral agreements to mitigate coun-

terparty credit risk in derivatives. The percentage of the Firm’s derivatives

transactions subject to collateral agreements increased slightly, to 79% as of

December 31, 2004, from 78% at December 31, 2003. The Firm held $41 bil-

lion of collateral as of December 31, 2004 (including $32 billion of net cash

received under credit support annexes to legally enforceable master netting

agreements), compared with $36 billion as of December 31, 2003. The Firm

posted $31 billion of collateral as of December 31, 2004, compared with

$27 billion at the end of 2003.

Certain derivative and collateral agreements include provisions that require

the counterparty and/or the Firm, upon specified downgrades in their respec-

tive credit ratings, to post collateral for the benefit of the other party. As of

December 31, 2004, the impact of a single-notch ratings downgrade to

JPMorgan Chase Bank, from its current rating of AA- to A+, would have been

an additional $1.5 billion of collateral posted by the Firm; the impact of a six-

notch ratings downgrade (from AA- to BBB-) would have been $3.9 billion of

additional collateral. Certain derivative contracts also provide for termination

of the contract, generally upon a downgrade of either the Firm or the coun-

terparty, at the then-existing MTM value of the derivative contracts.

Use of credit derivatives

The following table presents the Firm’s notional amounts of credit derivatives

protection bought and sold by the respective businesses as of December 31,

2004 and 2003:

Credit derivatives positions

Notional amount

Portfolio management Dealer/client

December 31, Protection Protection Protection Protection

(in millions) bought

(b)

sold bought sold Total

2004 $ 37,237 $ 37 $ 501,266 $ 532,335 $1,070,875

2003

(a)

37,349 67 264,389 275,888 577,693

(a) Heritage JPMorgan Chase only.

(b) Includes $2 billion at both December 31, 2004 and 2003, of portfolio credit derivatives.

JPMorgan Chase has limited counterparty exposure as a result of credit deriv-

atives transactions. Of the $66 billion of total Derivative receivables at

December 31, 2004, approximately $3 billion, or 5%, was associated with

credit derivatives, before the benefit of highly liquid collateral. The use of

credit derivatives to manage exposures by the Credit Portfolio Group does not

reduce the reported level of assets on the balance sheet or the level of

reported off–balance sheet commitments.

Credit portfolio management activity

In managing its wholesale credit exposure, the Firm purchases single-name

and portfolio credit derivatives. As of December 31, 2004, the notional out-

standing amount of protection bought via single-name and portfolio credit

derivatives was $35 billion and $2 billion, respectively. The Firm also diversi-

fies its exposures by providing (i.e., selling) credit protection, which increases

exposure to industries or clients where the Firm has little or no client-related

exposure. This activity is not material to the Firm’s overall credit exposure.

Use of single-name and portfolio credit derivatives

December 31, Notional amount of protection bought

(in millions) 2004 2003

(a)

Credit derivative hedges of:

Loans and lending-related commitments $ 25,002 $ 22,471

Derivative receivables 12,235 14,878

Total $ 37,237 $ 37,349

(a) Heritage JPMorgan Chase only.

The credit derivatives used by JPMorgan Chase for its portfolio management

activities do not qualify for hedge accounting under SFAS 133, and therefore,

effectiveness testing under SFAS 133 is not performed. These derivatives are

reported at fair value, with gains and losses recognized as Trading revenue.

The MTM value incorporates both the cost of credit derivative premiums and

changes in value due to movement in spreads and credit events, whereas the

loans and lending-related commitments being risk managed are accounted

for on an accrual basis. Loan interest and fees are generally recognized in Net

interest income, and impairment is recognized in the Provision for credit losses.

This asymmetry in accounting treatment, between loans and lending-related

commitments and the credit derivatives utilized in portfolio management

The following table summarizes the ratings profile of the Firm’s Consolidated balance sheet Derivative receivables MTM, net of cash and other highly liquid collateral,

for the dates indicated:

Ratings profile of derivative receivables MTM

Rating equivalent 2004 2003

(b)

December 31, Exposure net % of exposure Exposure net % of exposure

(in millions) of collateral

(a)

net of collateral of collateral net of collateral

AAA to AA- $ 30,384 53% $ 24,697 52%

A+ to A- 9,109 16 7,677 16

BBB+ to BBB- 9,522 17 7,564 16

BB+ to B- 7,271 13 6,777 14

CCC+ and below 395 1 822 2

Total $ 56,681 100% $ 47,537 100%

(a) The Firm held $41 billion of collateral against derivative receivables as of December 31, 2004, consisting of $32 billion in net cash received under credit support annexes to legally enforceable mas-

ter netting agreements, and $9 billion of other highly liquid collateral. The benefit of the $32 billion is reflected within the $66 billion of derivative receivables MTM. Excluded from the $41 billion of

collateral is $10 billion of collateral delivered by clients at the initiation of transactions; this collateral secures exposure that could arise in the existing portfolio of derivatives should the MTM of the

client’s transactions move in the Firm’s favor. Also excluded are credit enhancements in the form of letter-of-credit and surety receivables.

(b) Heritage JPMorgan Chase only.

JPMorgan Chase & Co. / 2004 Annual Report 65

activities, causes earnings volatility that is not representative of the true

changes in value of the Firm’s overall credit exposure. The MTM treatment of

both the Firm’s credit derivatives used for managing credit exposure (“short”

credit positions) and the CVA, which reflects the credit quality of derivatives

counterparty exposure (“long” credit positions), provides some natural offset.

In 2004, there were $44 million of losses in Trading revenue from credit port-

folio management activities. The losses consisted of $297 million related to

credit derivatives used to manage the Firm’s credit exposure; of this amount,

$234 million was associated with credit derivatives used to manage accrual

lending activities, and $63 million with credit derivatives used to manage the

derivatives portfolio. The losses were largely due to the ongoing cost of buy-

ing credit protection and some additional impact due to the global tightening

of credit spreads. These losses were partially offset by $253 million of gains

from a decrease in the MTM value of the CVA, a result of the same factors.

The 2003 credit portfolio management activity resulted in $191 million of

losses included in Trading revenue. These losses included $746 million related

to credit derivatives that were used to risk manage the Firm’s credit exposure;

approximately $504 million of this amount was associated with credit deriva-

tives used to manage accrual lending activities, and the remainder was prima-

rily related to credit derivatives used to manage the credit risk of MTM deriva-

tive receivables. The losses were generally driven by an overall global tighten-

ing of credit spreads. The $746 million loss was partially offset by $555 mil-

lion of trading revenue gains, primarily related to the decrease in the MTM

value of the CVA due to credit spread tightening.

The Firm also actively manages its wholesale credit exposure through loan

and commitment sales. During 2004 and 2003, the Firm sold $5.9 billion and

$5.2 billion of loans and commitments, respectively, resulting in losses of $8

million and $54 million, respectively, in connection with the management of

its wholesale credit exposure. These activities are not related to the Firm’s

securitization activities, which are undertaken for liquidity and balance sheet

management purposes. For a further discussion of securitization activity, see

Note 13 on pages 103–106 of this Annual Report.

Dealer/client activity

As of December 31, 2004, the total notional amounts of protection pur-

chased and sold by the dealer business were $501 billion and $532 billion,

respectively. The mismatch between these notional amounts is attributable to

the Firm selling protection on large, diversified, predominantly investment-

grade portfolios (including the most senior tranches) and then risk managing

these positions by buying protection on the more subordinated tranches of

the same portfolios. In addition, the Firm may use securities to risk manage

certain derivative positions. Consequently, while there is a mismatch in

notional amounts of credit derivatives, in the Firm’s view, the risk positions

are largely matched.

Lending-related commitments

The contractual amount of wholesale lending-related commitments was

$309 billion at December 31, 2004, compared with $211 billion at

December 31, 2003. The increase was primarily due to the Merger. In the

Firm’s view, the total contractual amount of these instruments is not repre-

sentative of the Firm’s actual credit risk exposure or funding requirements.

In determining the amount of credit risk exposure the Firm has to wholesale

lending-related commitments, which is used as the basis for allocating credit

risk capital to these instruments, the Firm has established a “loan-equivalent”

amount for each commitment; this represents the portion of the unused

commitment or other contingent exposure that is expected, based on average

portfolio historical experience, to become outstanding in the event of a

default by an obligor. The amount of the loan equivalents as of December 31,

2004 and 2003, was $162 billion and $104 billion, respectively.

Country exposure

The Firm has a comprehensive process for measuring and managing its expo-

sures and risk in emerging markets countries – defined as those countries

potentially vulnerable to sovereign events. Exposures to a country include all

credit-related lending, trading, and investment activities, whether cross-border

or locally funded. Exposure amounts are adjusted for credit enhancements

(e.g. guarantees and letters of credit) provided by third parties located outside

the country, if the enhancements fully cover the country risk, as well as the

business risk. As of December 31, 2004, the Firm's exposure to any individual

country was not material. In addition to monitoring country exposures, the

Firm uses stress tests to measure and manage the risk of extreme loss

associated with sovereign crises.

Management’s discussion and analysis

JPMorgan Chase & Co.

66 JPMorgan Chase & Co. / 2004 Annual Report

Consumer credit portfolio

JPMorgan Chase’s consumer portfolio consists primarily of residential mort-

gages and home equity loans, credit cards, auto and education financings and

loans to small businesses. The domestic consumer portfolio reflects the

benefit of diversification from both a product and a geographical perspective.

The primary focus is on serving the prime consumer credit market.

The following table presents managed consumer credit–related information for the dates indicated:

Consumer portfolio

As of or for the year ended

Credit-related Nonperforming Average annual

December 31,

exposure assets Net charge-offs net charge-off rate

(e)

(in millions, except ratios)

2004 2003

(d)

2004 2003

(d)

2004 2003

(d)

2004 2003

(d)

Consumer real estate

Home finance – home equity and other

(a)

$ 67,837 $ 24,179 $ 416 $ 125 $ 554 $ 109 1.18% 0.56%

Home finance – mortgage 56,816 50,381 257 249 19 26 0.05 0.08

Total Home finance

(a)

124,653 74,560 673 374 573 135 0.65 0.26

Auto & education finance 62,712 43,157 193 123 263 171 0.52 0.43

Consumer & small business and other 15,107 4,204 295 72 154 75 1.64 1.83

Credit card receivables – reported

(b)

64,575 17,426 8 11 1,923 1,126 4.95 6.40

Total consumer loans – reported 267,047 139,347 1,169 580 2,913 1,507 1.56 1.33

Credit card securitizations

(b)(c)

70,795 34,856 — — 2,898 1,870 5.51 5.64

Total consumer loans – managed

(b)

337,842 174,203 1,169 580 5,811 3,377 2.43 2.31

Assets acquired in loan satisfactions NA NA 224 206 NA NA NA NA

Total consumer related

assets – managed 337,842 174,203 1,393 786 5,811 3,377 2.43 2.31

Consumer lending–related commitments:

Home finance 53,223 31,626 NA NA NA NA NA NA

Auto & education finance 5,193 2,637 NA NA NA NA NA NA

Consumer & small business and other 10,312 5,792 NA NA NA NA NA NA

Credit cards 532,468 141,143 NA NA NA NA NA NA

Total lending-related commitments 601,196 181,198 NA NA NA NA NA NA

Total consumer credit portfolio $ 939,038 $ 355,401 $1,393 $ 786 $5,811 $ 3,377 2.43% 2.31%

(a) Includes $406 million of charge-offs related to the manufactured home loan portfolio in the fourth quarter of 2004.

(b) Past-due loans 90 days and over and accruing includes credit card receivables of $998 million and $273 million, and related credit card securitizations of $1.3 billion and $879 million at

December 31, 2004 and 2003, respectively.

(c) Represents securitized credit cards. For a further discussion of credit card securitizations, see Card Services on page 39 of this Annual Report.

(d) Heritage JPMorgan Chase only.

(e) Net charge-off rates exclude average loans HFS in the amount of $14.7 billion and $25.3 billion for 2004 and 2003, respectively.

NA – Not applicable.

JPMorgan Chase & Co. / 2004 Annual Report 67

Total managed consumer loans as of December 31, 2004, were $338 billion,

up from $174 billion at year-end 2003, reflecting the addition of the Bank

One consumer credit portfolios. Consumer lending–related commitments

increased by 232% to $601 billion at December 31, 2004, reflecting the

impact of the Merger. The following discussion relates to the specific loan and

lending-related categories within the consumer portfolio:

Retail Financial Services

Average RFS loan balances for 2004 were $163 billion. New loans originated

in 2004 reflect higher credit quality, consistent with management’s focus on

the prime credit market segment. The net charge-off rate for retail loans in 2004

was 0.67%, an increase of 27 basis points from 2003. This increase was pri-

marily attributable to the Merger and to $406 million of charge-offs in the

fourth quarter of 2004, which were associated with the sale of the $4 billion

manufactured home loan portfolio.

Future RFS charge-offs and credit quality are subject to uncertainties which

may cause actual results to differ from current anticipated performance,

including the direction and level of loan delinquencies, changes in consumer

behavior, bankruptcy trends, portfolio seasoning, interest rate movements and

portfolio mix, among other factors.

The Firm proactively manages its retail credit operation. Ongoing efforts

include continual review and enhancement of credit underwriting criteria and

refinement of pricing and risk management models.

Home Finance: Home finance loans on the balance sheet as of December

31, 2004, were $125 billion. This consisted of $68 billion of home equity and

other loans and $57 billion of mortgages, including mortgage loans held-for-

sale. Home equity and other loans previously included manufactured home

loans, a product the Firm stopped originating at mid-year 2004; the Firm sold

substantially all of its manufactured home loan portfolio at the end of 2004.

The $125 billion in Home Finance receivables as of December 31, 2004,

reflects an increase of $50 billion from year-end 2003, driven by the addition

of Bank One’s home equity and mortgage portfolios. Home Finance provides

real estate lending to the full spectrum of credit borrowers, which included

$7 billion in sub-prime credits at December 31, 2004. The geographic distri-

bution of outstanding consumer real estate loans is well diversified.

Consumer real estate loan portfolio by geographic location

December 31, 2004 2003

(a)

(in billions) Outstanding % Outstanding %

Top 10 U.S. States

California $ 22.8 18% $ 17.3 23%

New York 18.4 15 16.3 22

Illinois 8.0 6 1.9 3

Texas 7.9 6 4.5 6

Florida 7.1 6 4.7 6

Ohio 6.1 5 0.7 1

Arizona 5.2 4 1.0 1

Michigan 5.2 4 1.2 2

New Jersey 4.5 4 3.1 4

Colorado 3.2 3 1.5 2

Total Top 10 88.4 71 52.2 70

Other 36.3 29 22.4 30

Total $ 124.7 100% $ 74.6 100%

(a) Heritage JPMorgan Chase only.

Auto & Education Finance: As of December 31, 2004, Auto & education

finance loans increased to $63 billion, up from $43 billion at year-end 2003.

The acquisition of the Bank One portfolio was responsible for the increase.

The Auto & education loan portfolio reflects a high concentration of prime

quality credits. During the past year, the Firm completed a strategic review

of all consumer lending portfolio segments. This review resulted in the Firm

choosing to de-emphasize vehicle leasing, which, as of December 31, 2004,

comprised $8 billion of outstandings. It is anticipated that over time vehicle

leases will account for a smaller share of balance sheet receivables and expo-

sure. The strategic review also resulted in the sale of a $2 billion recreational

vehicle portfolio in early 2005.

Consumer & Small Business/Insurance: As of December 31, 2004,

Small business & other consumer loans increased to $15 billion compared

with 2003 year-end levels of $4 billion. This portfolio segment is primarily

comprised of loans to small businesses, and the increase reflects the acquisi-

tion of the Bank One small business portfolio. The portfolio reflects highly

collateralized loans, often with personal loan guarantees.

Card Services

JPMorgan Chase analyzes its credit card portfolio on a managed basis, which

includes credit card receivables on the consolidated balance sheet and those

receivables sold to investors through securitization. Managed credit card

receivables were $135 billion at December 31, 2004, an increase of $83 billion

from year-end 2003, reflecting the acquisition of the Bank One portfolio.

Consumer credit quality trends continue to improve overall, reflecting general

economic conditions and reduced consumer bankruptcy filings versus the

prior year. The decrease in the managed credit card net charge-off rate, to

5.27% in 2004 from 5.90% in 2003, reflected the impact of the Merger, as

well as management’s continued emphasis on prudent credit risk manage-

ment, including disciplined underwriting and account management practices

targeted to the prime and super-prime credit sectors. Credit Risk Management

tools used to manage the level and volatility of losses for credit card accounts

have been continually updated, and, where appropriate, these tools were

adjusted to reduce credit risk. The managed credit card portfolio continues to

reflect a well-seasoned portfolio that has good U.S. geographic diversification.

Future charge-offs in the credit card portfolio and overall credit quality are

subject to uncertainties, which may cause actual results to differ from historic

performance. This could include the direction and level of loan delinquencies,

changes in consumer behavior, bankruptcy trends, portfolio seasoning, inter-

est rate movements and portfolio mix, among other factors. While current

economic and credit data suggest that consumer credit quality will not signifi-

cantly deteriorate, significant deterioration in the general economy could

materially change these expectations.

Management’s discussion and analysis

JPMorgan Chase & Co.

68 JPMorgan Chase & Co. / 2004 Annual Report

Overall: The Allowance for credit losses increased by $3.0 billion from

December 31, 2003, to December 31, 2004, primarily driven by the Merger.

Adjustments required to conform to the combined Firm’s allowance method-

ology, and alignment of accounting practices related to the seller’s interest in

credit card securitizations, resulted in a net increase in the Provision for credit

losses of $858 million. See Note 12 on pages 102–103 of this Annual Report.

Loans: The allowance has two components: asset-specific and formula-

based. As of December 31, 2004, management deemed the allowance to be

appropriate. Excluding loans held for sale, the allowance represented 1.94%

of loans at December 31, 2004, compared with 2.33% at year-end 2003.

The wholesale component of the allowance was $3.1 billion as of December

31, 2004, an increase from year-end 2003, primarily due to the Merger. The

wholesale allowance also reflected a reduction of $103 million in the provi-

sion as a result of conforming the combined Firm’s allowance methodology.

The consumer component of the allowance was $4.2 billion as of December

31, 2004, an increase from December 31, 2003, primarily attributable to

the Merger and the decertification of Bank One’s seller’s retained interest in

credit card securitizations. Adjustments required to conform to the combined

Firm’s allowance methodology included a reduction of $192 million in the

Allowance for loan losses within RFS. Conforming the methodology within

Card Services reduced the Allowance for loan losses by $62 million.

Allowance for credit losses

JPMorgan Chase’s allowance for credit losses is intended to cover probable

credit losses, including losses where the asset is not specifically identified or the

size of the loss has not been fully determined. At least quarterly, the allowance

for credit losses is reviewed by the Chief Risk Officer and the Deputy Chief

Risk Officer of the Firm and is discussed with a risk subgroup of the

Operating Committee, relative to the risk profile of the Firm’s credit portfolio

and current economic conditions. The allowance is adjusted based on that

review if, in management’s judgment, changes are warranted. The allowance

includes an asset-specific component and a formula-based component, the lat-

ter of which consists of a statistical calculation and adjustments to the statis-

tical calculation. For further discussion of the components of the Allowance for

credit losses, see Critical accounting estimates used by the Firm on page 77

and Note 12 on pages 102–103 of this Annual Report. At December 31, 2004,

management deemed the allowance for credit losses to be sufficient to absorb

losses that are inherent in the portfolio, including losses that are not specifically

identified or for which the size of the loss has not yet been fully determined.

Summary of changes in the allowance for credit losses

For the year ended

December 31,

(a)

2004 2003

(in millions) Wholesale Consumer Total Wholesale Consumer Total

Loans:

Beginning balance $ 2,204 $ 2,319 $ 4,523 $ 2,936 $ 2,414 $ 5,350

Addition allowance resulting

from the Merger, July 1, 2004 1,788 1,335 3,123 ———

Gross charge-offs (543) (3,262)

(c)

(3,805) (1,113) (1,705) (2,818)

Gross recoveries 357 349 706 348 198 546

Net charge-offs (186) (2,913) (3,099) (765) (1,507) (2,272)

Provision for loan losses:

Provision excluding accounting policy conformity (605) 2,403 1,798 25 1,554 1,579

Accounting policy conformity (103) 1,188

(d)

1,085 ———

Total Provision for loan losses (708) 3,591 2,883 25 1,554 1,579

Other — (110) (110)

(f)

8 (142) (134)

(f)

Ending balance $ 3,098

(b)

$ 4,222

(e)

$ 7,320 $ 2,204 $ 2,319 $ 4,523

Lending-related commitments:

Beginning balance $ 320 $ 4 $ 324 $ 363 $ — $ 363

Addition allowance resulting

from the Merger, July 1, 2004 499 9 508 ———

Net charge-offs ——————

Provision for lending-related commitments:

Provision excluding accounting policy conformity (111) (1) (112) (40) 1 (39)

Accounting policy conformity (227) — (227) ———

Total Provision for lending-related commitments (338) (1) (339) (40) 1 (39)

Other (1) — (1) (3) 3 —

Ending balance $ 480 $ 12 $ 492

(g)

$ 320 $ 4 $ 324

(a) 2004 results include six months of the combined Firm’s results and six months of heritage JPMorgan Chase. 2003 reflects the results of heritage JPMorgan Chase only.

(b) Includes $469 million of asset-specific loss and approximately $2.6 billion of formula-based loss. Included within the formula-based loss is $1.6 billion related to a statistical calculation and adjust-

ments to the statistical calculation of $990 million.

(c) Includes $406 million of charge-offs related to the sale of the $4 billion manufactured home loan portfolio in the fourth quarter of 2004.

(d) Consists of an increase of approximately $1.4 billion as a result of the decertification of heritage Bank One seller’s interest in credit card securitizations, partially offset by a reduction of $254 million

to conform provision methodologies.

(e) Includes $3.2 billion and $1.0 billion of consumer statistical and adjustments to statistical components, respectively, at December 31, 2004.

(f) Primarily represents the transfer of the allowance for accrued fees on reported credit card loans.

(g) Includes $130 million of asset-specific loss and $362 million of formula-based loss. Note: The formula-based loss for lending-related commitments is based on statistical calculation. There is no

adjustment to the statistical calculation for lending-related commitments.

JPMorgan Chase & Co. / 2004 Annual Report 69

Provision for credit losses

For a discussion of the reported Provision for credit losses, see page 23 of this Annual Report. The managed provision for credit losses, which reflects credit card

securitizations, increased primarily due to the Merger.

For the year ended Provision for

December 31,

(a)

Provision for loan losses lending-related commitments Total provision for credit losses

(in millions) 2004 2003 2004 2003 2004 2003

Investment Bank $ (525) $ (135) $ (115) $ (46) $ (640) $ (181)

Commercial Banking 35 8 6 (2) 41 6

Treasury & Securities Services 7 — — 1 7 1

Asset & Wealth Management (12) 36 (2) (1) (14) 35

Corporate (110) 116 — 8 (110) 124

Total Wholesale (605) 25 (111) (40) (716) (15)

Retail Financial Services 450 520 (1) 1 449 521

Card Services 1,953 1,034 — — 1,953 1,034

Total Consumer 2,403 1,554 (1) 1 2,402 1,555

Accounting policy conformity

(b)

1,085 — (227) — 858 —

Total provision for credit losses 2,883 1,579 (339) (39) 2,544 1,540

Add: Securitized credit losses 2,898 1,870 — — 2,898 1,870

Less: Accounting policy conformity (1,085) — 227 — (858) —

Total managed provision for credit losses $ 4,696 $ 3,449 $ (112) $ (39) $ 4,584 $ 3,410

(a) 2004 results include six months of the combined Firm’s results and six months of heritage JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only.

(b) The provision for loan losses includes an increase of approximately $1.4 billion as a result of the decertification of heritage Bank One’s seller’s interest in credit card securitizations, partially offset by

a reduction of $357 million to conform provision methodologies. The provision for lending-related commitments reflects a reduction of $227 million to conform provision methodologies in the

wholesale portfolio.

Additionally, in Card Services, $128 million in allowance for accrued fees and

finance charges was reclassified from the Allowance for loan losses to Loans.

At the time of the Merger, Bank One’s seller’s interest in credit card securiti-

zations was in a certificated or security form and recorded at fair value.

Subsequently, a decision was made to decertificate these assets, which resulted

in a reclassification of the seller’s interest from Available-for-sale securities to

Loans, at fair value, with no allowance for credit losses. Generally, as the

underlying credit card receivables represented by the seller’s interest were paid

off, customers continued to use their credit cards and originate new receivables,

which were then recorded as Loans at historical cost. As these new loans

aged, it was necessary to establish an Allowance for credit losses consistent

with the Firm’s credit policies. During the second half of 2004, approximately

$1.4 billion of the Allowance for loan losses was established through the pro-

vision associated with newly originated receivables related to the seller’s interest.

Lending-related commitments: To provide for the risk of loss inherent in

the Firm’s process of extending credit, management also computes an asset-

specific component and a formula-based component for wholesale lending–

related commitments. These are computed using a methodology similar to

that used for the wholesale loan portfolio, modified for expected maturities

and probabilities of drawdown. This allowance, which is reported in Other

liabilities, was $492 million at December 31, 2004, and reflected the impact

of the Merger, partially offset by a $227 million benefit as a result of con-

forming the combined Firm’s allowance methodology. The allowance was

$324 million at December 31, 2003.

Management’s discussion and analysis

JPMorgan Chase & Co.

70 JPMorgan Chase & Co. / 2004 Annual Report

Market risk management

Market risk represents the potential loss in value of portfolios and financial

instruments caused by adverse movements in market variables, such as interest

and foreign exchange rates, credit spreads, and equity and commodity prices.

Market risk management

Market Risk Management (“MRM”) is a function independent of the business-

es that identifies, measures, monitors, and controls market risk. It seeks to

facilitate efficient risk/return decisions and to reduce volatility in operating

performance. It strives to make the Firm’s market risk profile transparent to

senior management, the Board of Directors and regulators.

The chart below depicts the MRM organizational structure and describes

the responsibilities of the groups within MRM.

Chief Risk Officer &

Deputy Risk Officer

• Oversees risk management

Market Risk Management

• Chief Market Risk Officer

Business Unit Coverage Groups

• Measures, monitors and controls market risk for

business segments

• Defines and approves limit structures

• Monitors business adherence to limits

• Performs stress testing

• Approves market risk component of new products

• Conducts qualitative risk assessments

Policy, Reporting and Analysis

• Develops policies that control market risk

management process

• Aggregates, interprets and distributes market

risk-related information throughout the Firm

• Reports and monitors business adherence to limits

• Interfaces with regulators and investment community

There are also groups that report to the Chief Financial Officer with some

responsibility for market risk-related activities. For example, within the Finance

area, the valuation control functions are responsible for ensuring the accuracy

of the valuations of positions that expose the Firm to market risk.

Risk identification and classification

MRM works in partnership with the business segments to identify market

risks throughout the Firm, and to refine and monitor market risk policies and

procedures. All business segments are responsible for comprehensive identifi-

cation and verification of market risks within their units. Risk-taking business-

es have Middle Office functions that act independently from trading person-

nel and are responsible for verifying risk exposures that the business takes. In

addition to providing independent oversight for market risk arising from the

business segments, MRM is also responsible for identifying exposures which

may not be large within individual business segments, but which may be

large for the Firm in aggregate. Weekly meetings are held between MRM and

the heads of risk-taking businesses, to discuss and decide on risk exposures

in the context of the market environment and client flows.

Positions that expose the Firm to market risk are classified into two categories:

trading and nontrading risk. Trading risk includes positions that are held for

trading purposes as a principal or as part of a business whose main business

strategy is to trade or make markets. Unrealized gains and losses in these

positions are generally reported in trading revenue. Nontrading risk includes

securities held for longer term investment, and securities and derivatives used

to manage the Firm’s asset/liability exposures. In most cases, unrealized gains

and losses in these positions are accounted for at fair value, with the

gains and losses reported in Net income or Other comprehensive income.

Trading risk

Fixed income: Fixed income risk (which includes credit spread risk) involves

the potential decline in Net income or financial condition due to adverse

changes in market interest rates, which may result in changes to NII, securi-

ties valuations, and other interest-sensitive revenues and expenses.

Foreign exchange, equities, commodities and other: These risks

involve the potential decline in Net income to the Firm due to adverse

changes in foreign exchange, equities or commodities markets, whether due

to proprietary positions taken by the Firm, or due to a decrease in the level of

client activity. Other risks include passive long-term investments in numerous

hedge funds that may have exposure to fixed income, foreign exchange, equity

and commodity risk within their portfolio risk structures.

Nontrading risk

The execution of the Firm’s core business strategies, the delivery of products

and services to its customers, and the discretionary positions the Firm under-

takes to risk-manage structural exposures give rise to interest rate risk in the

nontrading activities of the Firm.

JPMorgan Chase & Co. / 2004 Annual Report 71

This exposure can result from a variety of factors, including differences in the

timing among the maturity or re-pricing of assets, liabilities and off–balance

sheet instruments. Changes in the level and shape of market interest rate

curves may also create interest rate risk, since the re-pricing characteristics of

the Firm’s assets do not necessarily match those of its liabilities. The Firm is

also exposed to basis risk, which is the difference in re-pricing characteristics

of two floating rate indices, such as the prime rate and 3-month LIBOR. In

addition, some of the Firm’s products have embedded optionality that impact

pricing and balance levels.

The Firm manages interest rate exposure related to its assets and liabilities on

a consolidated, corporate-wide basis. Business units transfer their interest rate

risk to Treasury through a transfer-pricing system, which takes into account

the elements of interest rate exposure that can be risk managed in financial

markets. These elements include asset and liability balances and contractual

rates of interest, contractual principal payment schedules, expected prepay-

ment experience, interest rate reset dates and maturities, rate indices used for

re-pricing, and any interest rate ceilings or floors for adjustable rate products.

All transfer-pricing assumptions are reviewed by Treasury.

The Firm’s mortgage banking activities also give rise to complex interest rate

risks. The interest rate exposure from the Firm’s mortgage banking activities is

a result of option and basis risks. Option risk arises primarily from prepayment

options embedded in mortgages and changes in the probability of newly-

originated mortgage commitments actually closing. Basis risk results from

different relative movements between mortgage rates and other interest

rates. These risks are managed through programs specific to the different

mortgage banking activities. Potential impairment in the fair value of mort-

gage servicing rights (“MSRs”) and increased amortization levels of MSRs are

managed via a risk management program that attempts to offset changes in

the fair value of MSRs with changes in the fair value of derivatives and invest-

ment securities. A similar approach is used to manage the interest rate risk

associated with the Firm’s mortgage origination business.

Risk measurement

Tools used to measure risk

Because no single measure can reflect all aspects of market risk, the Firm

uses several measures, both statistical and nonstatistical, including:

• Statistical risk measures

- Value-at-Risk (“VAR”)

- Risk identification for large exposures (“RIFLE”)

• Nonstatistical risk measures

- Economic value stress tests

- Earnings-at-risk stress tests

- Other measures of position size and sensitivity to market moves

Value-at-risk

JPMorgan Chase’s statistical risk measure, VAR, gauges the potential loss

from adverse market moves in an ordinary market environment and provides

a consistent cross-business measure of risk profiles and levels of risk diversifi-

cation. VAR is used to compare risks across businesses, to monitor limits and

to allocate economic capital to the business segments. VAR provides risk

transparency in a normal trading environment.

Each business day the Firm undertakes a comprehensive VAR calculation

that includes both its trading and its nontrading activities. VAR for nontrading

activities measures the amount of potential change in economic value;

however, VAR for such activities is not a measure of reported revenue since

nontrading activities are generally not marked to market through earnings.

JPMorgan Chase’s VAR calculation is highly granular, comprising more than

2.1 million positions and 240,000 pricing series (e.g., securities prices, inter-

est rates, foreign exchange rates). For a substantial portion of its exposure,

the Firm has implemented full-revaluation VAR, which, management believes,

generates the most accurate results.

To calculate VAR, the Firm uses historical simulation, which measures risk

across instruments and portfolios in a consistent, comparable way. This

approach assumes that historical changes in market values are representative

of future changes. The simulation is based on data for the previous 12 months.

The Firm calculates VAR using a one-day time horizon and a 99% confidence

level. This means the Firm would expect to incur losses greater than that

predicted by VAR estimates only once in every 100 trading days, or about

2.5 times a year.

All statistical models involve a degree of uncertainty, depending on the

assumptions they employ. The Firm prefers historical simulation, because it

involves fewer assumptions about the distribution of portfolio losses than

parameter-based methodologies. In addition, the Firm regularly assesses the

quality of the market data, since their accuracy is critical to computing VAR.

Nevertheless, because VAR is based on historical market data, it may not

accurately reflect future risk during environments in which market volatility

is changing. In addition, the VAR measure on any particular day may not be

indicative of future risk levels, since positions and market conditions may

both change over time.

While VAR is a valuable tool for evaluating relative risks and aggregating risks

across businesses, it only measures the potential volatility of daily revenues.

Profitability and risk levels over longer time periods – a fiscal quarter or a

year – may be only loosely related to the average value of VAR over those

periods for several reasons. First, while VAR measures potential fluctuations

around average daily revenue, the average itself could reflect significant gains

or losses; for example, from client revenues that accompany risk-taking activi-

ties. Second, large trading revenues may result from positions taken over

longer periods of time. For example, a business may maintain an exposure to

rising or falling interest rates over a period of weeks or months. If the market

exhibits a long-term trend over that time, the business could experience large

gains or losses, even though revenue volatility on each individual day may

have been small.

Management’s discussion and analysis

JPMorgan Chase & Co.

72 JPMorgan Chase & Co. / 2004 Annual Report

Trading VAR

IB trading VAR by risk type and credit portfolio VAR

(a)

2004 2003

(e)

As of or for the year ended Average Minimum Maximum At Average Minimum Maximum At

December 31, (in millions)

(b)

VAR VAR VAR December 31, VAR VAR VAR December 31,

By risk type:

Fixed income $ 74.4 $ 45.3 $117.5 $ 57.3 $ 61.4 $ 42.3 $ 104.3 $ 79.9

Foreign exchange 17.3 10.2 32.8 28.4 16.8 11.0 30.2 23.5

Equities 28.2 15.2 57.8 19.8 18.2 6.7 51.6 45.6

Commodities and other 8.7 6.5 17.9 8.4 7.7 4.9 12.6 8.7

Less: portfolio diversification (43.6) NM

(d)

(41.8) (39.4) NM

(d)

(61.7)

Total trading VAR $ 85.0 $ 51.6 $125.2 $ 72.1 $ 64.7 $ 39.8 $ 116.3 $ 96.0

Credit portfolio VAR

(c)

14.0 10.8 16.6 15.0 17.8 12.8 22.0 13.2

Less: portfolio diversification (8.5) NM

(d)

(9.4) (13.2) NM

(d)

(8.1)

Total trading and credit

portfolio VAR $ 90.5 $ 55.3 $131.6 $ 77.7 $ 69.3 $ 44.8 $ 119.8 $ 101.1

(a) Includes all mark-to-market trading activities in the IB, plus available for sale securities held for the IB’s proprietary purposes. Amounts exclude VAR related to the Firm’s private equity business.

For a discussion of Private equity risk management, see page 76 of this Annual Report.

(b) 2004 results include six months of the combined Firm’s results and six months of heritage JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only.

(c) Includes VAR on derivative credit valuation adjustments, credit valuation adjustment hedges and mark-to-market loan hedges which are all reported in Trading revenue. This VAR does not include the

accrual loan portfolio, which is not marked to market.

(d) Designated as NM because the minimum and maximum may occur on different days for different risk components, and hence it is not meaningful to compute a portfolio diversification effect.

In addition, JPMorgan Chase’s average and period-end VARs are less than the sum of the VARs of its market risk components, due to risk offsets resulting from portfolio diversification.

(e) Amounts have been revised to reflect the reclassification of hedge fund investments, reclassification of Treasury positions to portfolios outside the IB, and the inclusion of available for sale securities

held for the IB’s proprietary purposes.

The largest contributors to the IB trading VAR in 2004 was fixed income risk.

Before portfolio diversification, fixed income risk accounted for roughly 58%

of the average IB Trading Portfolio VAR. The diversification effect, which on

average reduced the daily average IB Trading Portfolio VAR by $43.6 million

in 2004, reflects the fact that the largest losses for different positions and

risks do not typically occur at the same time. The risk of a portfolio of posi-

tions is therefore usually less than the sum of the risks of the positions them-

selves. The degree of diversification is determined both by the extent to which

different market variables tend to move together and by the extent to which

different businesses have similar positions.

Average IB trading and Credit Portfolio VAR during 2004 rose to $90.5 mil-

lion, compared with $69.3 million for the same period in 2003. Period-end

VAR decreased over the same period, to $77.7 million from $101.1 million.

The decrease was driven by a decline in fixed income and equities VAR, pri-

marily due to decreased risk positions and lower market volatility. In general,

over the course of a year, VAR exposures can vary significantly as trading

positions change and market volatility fluctuates.

VAR backtesting

To evaluate the soundness of its VAR model, the Firm conducts daily backtest-

ing of VAR against actual financial results, based on daily market risk-related

revenue. Market risk-related revenue is defined as the daily change in value

of the mark-to-market trading portfolios plus any trading-related net interest

income, brokerage commissions, underwriting fees or other revenue. The

Firm’s definition of market risk-related revenue is consistent with the FRB’s

implementation of the Basel Committee’s market risk capital rules. The his-

togram below illustrates the daily market risk-related gains and losses for the

IB trading businesses for the year ended December 31, 2004. The chart shows

that the IB posted market risk-related gains on 224 out of 261 days in this

period, with 12 days exceeding $100 million. The inset graph looks at those

days on which the IB experienced losses and depicts the amount by which

VAR exceeded the actual loss on each of those days. Losses were sustained

on 37 days, with no loss greater than $50 million, and with no loss exceeding

the VAR measure.

JPMorgan Chase & Co. / 2004 Annual Report 73

Economic value stress testing

While VAR reflects the risk of loss due to unlikely events in normal markets,

stress testing captures the Firm’s exposure to unlikely but plausible events in

abnormal markets. Stress testing is equally important as VAR in measuring

and controlling risk. Stress testing enhances the understanding of the Firm’s

risk profile and loss potential and is used for monitoring limits, cross-business

risk measurement and economic capital allocation.

Economic-value stress tests measure the potential change in the value of the

Firm’s portfolios. Applying economic-value stress tests helps the Firm under-

stand how the economic value of its balance sheet (i.e., not the amounts

reported under U.S. GAAP) would change under certain scenarios. The Firm

conducts economic-value stress tests for both its trading and its nontrading

activities, using the same scenarios for both.

The Firm stress tests its portfolios at least once a month using multiple sce-

narios. Several macroeconomic event-related scenarios are evaluated across

the Firm, with shocks to roughly 10,000 market prices specified for each sce-

nario. Additional scenarios focus on the risks predominant in individual busi-

ness segments, and include scenarios that focus on the potential for adverse

moves in complex portfolios.

Scenarios are derived from either severe historical crises or forward assess-

ment of developing market trends. They are continually reviewed and updated

to reflect changes in the Firm’s risk profile and economic events. Stress-test

results, trends and explanations are provided each month to the Firm’s execu-

tive management and to the lines of business to help them better measure

and manage risks to understand event risk–sensitive positions.

The Firm’s stress-test methodology assumes that, during an actual stress

event, no management action would be taken to change the risk profile of

portfolios. This captures the decreased liquidity that often occurs with abnor-

mal markets and results, in the Firm’s view, in a conservative stress-test result.

Based on the Firm’s stress scenarios, the stress test loss (pre-tax) in the IB’s

trading portfolio ranged from $202 million to $1.2 billion, and $227 million

to $895 million for the years ended December 31, 2004 and 2003, respec-

tively. (The 2004 results include six months of the combined Firm’s results and

six months of heritage JPMorgan Chase results. In addition, the 2003

amounts have been revised to reflect the transfer of Treasury positions from

the IB to the Corporate business segment.)

It is important to note that VAR results cannot be directly correlated to stress-

test loss results for three reasons. First, stress-test losses are calculated at

varying dates each month, while VAR is performed daily and reported for the

period-end date. Second, VAR and stress tests are two distinct risk measure-

ments yielding very different loss potentials. Thus, although the same trading

portfolios are used for both tests, VAR is based on a distribution of one-day

historical losses measured over the most recent one year; in contrast, stress

testing subjects the portfolio to more extreme, larger moves over a longer

time horizon (e.g., 2–3 weeks). Third, as VAR and stress tests are distinct risk

measurements, the impact of portfolio diversification can vary greatly. For

VAR, markets can change in patterns over a one-year time horizon, moving

from highly correlated to less so; in stress testing, the focus is on a single

event and the associated correlations in an extreme market situation. As a

result, while VAR over a given time horizon can be lowered by a diversifica-

tion benefit in the portfolio, this benefit would not necessarily manifest itself

in stress-test scenarios, which assume large, coherent moves across all markets.

(40)

(

)

(

)

(

)

(

)

(

)

(

)

(

)

Daily IB market risk-related gains and losses

Number of trading days

Average daily revenue: $37.1 million

$ in millions

> <

100

$ in millions

Number of trading days

Daily IB VAR less market risk-related losses

> <

100

110

> <

120

The graph below depicts the number of days on which the IB’s market risk-related gains

and losses fell within particular ranges. The inset graph to the right looks at those days on

which the IB experienced losses and depicts the amount by which VAR exceeded the

actual loss on each of those days.

Management’s discussion and analysis

JPMorgan Chase & Co.

74 JPMorgan Chase & Co. / 2004 Annual Report

RIFLE

In addition to VAR, JPMorgan Chase employs the Risk Identification for Large

Exposures (“RIFLE”) methodology as another statistical risk measure. The Firm

requires that all market risk–taking businesses self-assess their risks to

unusual and specific events. Individuals who manage risk positions, particularly

complex positions, identify potential worst-case losses that could arise from

an unusual or specific event, such as a potential tax change, and estimate the

probabilities of such losses. Through the Firm’s RIFLE system, this information

is then directed to the appropriate level of management, thereby permitting

the Firm to identify further earnings vulnerabilities not adequately covered by

VAR and stress testing.

Nonstatistical risk measures

Nonstatistical risk measures other than stress testing include net open posi-

tions, basis point values, option sensitivities, position concentrations and posi-

tion turnover. These measures provide additional information on an expo-

sure’s size and the direction in which it is moving. Nonstatistical measures are

used for monitoring limits, one-off approvals and tactical control.

Earnings-at-risk stress testing

The VAR and stress-test measures described above illustrate the total eco-

nomic sensitivity of the Firm’s balance sheet to changes in market variables.

The effect of interest rate exposure on reported Net income is also critical.

Interest rate risk exposure in the Firm’s core nontrading business activities

(i.e., asset/liability management positions) results from on- and off-balance

sheet positions. The Firm conducts simulations of NII for its nontrading activi-

ties under a variety of interest rate scenarios, which are consistent with the

scenarios used for economic-value stress testing. Earnings-at-risk tests meas-

ure the potential change in the Firm’s Net interest income over the next 12

months. These tests highlight exposures to various rate-sensitive factors, such

as the rates themselves (e.g., the prime lending rate), pricing strategies on

deposits, optionality and changes in product mix. The tests included forecast-

ed balance sheet changes, such as asset sales and securitizations, as well as

prepayment and reinvestment behavior.

JPMorgan Chase’s 12-month pre-tax earnings sensitivity profiles as of

December 31, 2004, were as follows:

Immediate change in rates

(in millions) +200bp +100bp -100bp

December 31, 2004 $ (557) $ (164) $ (180)

The Firm is exposed to both rising and falling rates. The Firm’s risk to rising

rates is largely the result of increased funding costs. In contrast, the exposure to

falling rates is the result of potential compression in deposit spreads, coupled

with higher anticipated levels of loan prepayments.

Immediate changes in interest rates present a limited view of risk, and so a

number of alternative scenarios are also reviewed. These scenarios include the

implied forward curve, nonparallel rate shifts and severe interest rate shocks

on selected key rates. These scenarios are intended to provide a comprehensive

view of JPMorgan Chase’s earnings-at-risk over a wide range of outcomes.

Earnings-at-risk can also result from changes in the slope of the yield curve,

because the Firm has the ability to lend at fixed rates and borrow at variable

or short-term fixed rates. Based on these scenarios, the Firm’s earnings would

be negatively affected by a sudden and unanticipated increase in short-term

rates without a corresponding increase in long-term rates. Conversely, higher

long-term rates are generally beneficial to earnings, particularly when the

increase is not accompanied by rising short-term rates.

Risk monitoring and control

Limits

Market risk is primarily controlled through a series of limits. The sizes of the

limits reflect the Firm’s risk appetite after extensive analysis of the market

environment and business strategy. The analysis examines factors such as

market volatility, product liquidity, business track record, and management

experience and depth.

The Firm maintains different levels of limits. Corporate-level limits encompass

VAR calculations and stress-test loss advisories. Similarly, business segment

levels include limits based on VAR calculations and nonstatistical measure-

ments, and P&L loss advisories. Businesses are responsible for adhering to

established limits, against which exposures are monitored and reported daily.

Exceeded limits are reported immediately to senior management, and the

affected business unit must take appropriate action to reduce trading posi-

tions. If the business cannot do this within an acceptable timeframe, senior

management is consulted on the appropriate action.

MRM regularly reviews and updates risk limits, and the Firm’s Operating

Committee reviews and approves risk limits at least twice a year. MRM fur-

ther controls the Firm’s exposure by specifically designating approved finan-

cial instruments for each business unit.

Qualitative review

MRM also performs periodic reviews of both businesses and products with

exposure to market risk in order to assess the ability of the businesses to con-

trol market risk. The businesses’ management strategies, market conditions,

product details and effectiveness of risk controls are reviewed. Specific recom-

mendations for improvements are made to management.

Model review

Many of the Firm’s financial instruments cannot be valued based on quoted

market prices but are instead valued using pricing models. Such models are

used for management of risk positions, such as reporting risk against limits, as

well as for valuation. A model review group, independent of the lines of busi-

ness units and MRM, reviews the models the Firm uses, and assesses model

appropriateness and consistency across businesses. The model reviews consider

a number of issues: appropriateness of the model, assessing the extent to

which it accurately reflects the characteristics of the transaction and captures

its significant risks; independence and reliability of data sources; appropriate-

ness and adequacy of numerical algorithms; and sensitivity to input parame-

ters or other assumptions which cannot be priced from the market.

Reviews are conducted for new or changed models, as well as previously

accepted models, and they assess whether there have been any material

changes to the accepted models; whether there have been any changes in

the product or market that may impact the model’s validity; and whether

there are theoretical or competitive developments that may require reassess-

ment of the model’s adequacy. For a summary of valuations based on models,

see Critical accounting estimates used by the Firm on pages 77–79 of this

Annual Report.

Risk reporting

Value-at-risk, nonstatistical exposures and dollar trading loss limit exceptions

are reported daily for each trading and nontrading business. Market risk expo-

sure trends, value-at-risk trends, profit and loss changes, and portfolio con-

centrations are reported weekly to business management and monthly to

senior management. In addition, the results of comprehensive, monthly stress

tests are presented to business and senior management.

JPMorgan Chase & Co. / 2004 Annual Report 75

Operational risk management

Operational risk is the risk of loss resulting from inadequate or failed processes

or systems, human factors, or external events.

Overview

Operational risk is inherent in each of the Firm’s businesses and support

activities. Operational risk can manifest itself in various ways, including errors,

business interruptions, inappropriate behavior of employees and vendors that

do not perform in accordance with outsourcing arrangements. These events

can potentially result in financial losses and other damage to the Firm, includ-

ing reputational harm.

To monitor and control operational risk, the Firm maintains a system of com-

prehensive policies and a control framework designed to provide a sound and

well-controlled operational environment. The goal is to keep operational risk

at appropriate levels, in light of the Firm’s financial strength, the characteris-

tics of its businesses, the markets in which it operates, and the competitive

and regulatory environment to which it is subject. Notwithstanding these con-

trol measures, the Firm incurs operational losses.

The Firm’s approach to operational risk management is intended to mitigate

such losses by supplementing the traditional control-based approach to oper-

ational risk with risk measures, tools and disciplines that are risk-specific,

consistently applied and utilized firmwide. Key themes are transparency of

information, escalation of key issues and accountability for issue resolution.

Risk identification and measurement

Risk identification is the recognition of the operational risk events that man-

agement believes may give rise to operational losses.

In 2004, JPMorgan Chase redesigned the underlying architecture of its

firmwide self-assessment process, and began implementing the process

throughout the heritage Bank One business units. The goal of the self-assess-

ment process is for each business to identify the key operational risks specific

to its environment and assess the degree to which it maintains appropriate

controls. Action plans are developed for control issues identified, and busi-

nesses are held accountable for tracking and resolving these issues on a time-

ly basis.

All businesses were required to perform semiannual self-assessments in

2004, which were completed by the businesses through the use of software

applications developed by the Firm. Going forward, the Firm will utilize the

self-assessment process as a dynamic risk management tool.

Risk monitoring

The Firm has a process for monitoring operational risk-event data, permitting

analysis of errors and losses as well as trends. Such analysis, performed both

at a line-of-business level and by risk event type, enables identification of the

causes associated with risk events faced by the businesses. Where available,

the internal data can be supplemented with external data for comparative

analysis with industry patterns. The data reported will enable the Firm to

back-test against self-assessment results.

Risk reporting and analysis

Operational risk management reports provide timely and accurate information

to the lines of business and senior management, including information about

actual operational loss levels and self-assessment results. The purpose of

these reports is to enable management to maintain operational risk at appro-

priate levels within each line of business, to escalate issues and to provide

consistent data aggregation across the Firm’s business and support areas.

During 2004, the Firm implemented Phoenix, a new internally-designed oper-

ational risk architecture model. Phoenix integrates the individual components

of the operational risk management framework into a unified, web-based

tool. When fully implemented, Phoenix will enable the Firm to enhance its

reporting and analysis of operational risk data, leading to improved risk man-

agement and financial performance. Phoenix will also facilitate the ability of

businesses to leverage existing processes to comply with risk management-

related regulatory requirements thereby leading to increased efficiencies in

the Firm’s management of operational risk.

For purposes of reporting and analysis, the Firm categorizes operational risk

events as follows:

• Client service and selection

• Business practices

• Fraud, theft and malice

• Execution, delivery and process management

• Employee disputes

• Disasters and public safety

• Technology and infrastructure failures

Audit alignment

Internal Audit utilizes a risk-based program of audit coverage to provide an

independent assessment of the design and effectiveness of key controls over

the Firm’s operations, regulatory compliance and reporting. Internal Audit

partners with business management and members of the control community

in providing guidance on the operational risk framework, and reviews the

effectiveness and accuracy of the business self-assessment process as part of

its business unit audits.

A firm’s success depends not only on its prudent management of liquidity,

credit, market, operational and business risks, but equally on the maintenance

among many constituents – clients, investors, regulators, as well as the gener-

al public – of a reputation for business practices of the highest quality.

Attention to reputation has always been a key aspect of the Firm’s practices,

and maintenance of reputation is the responsibility of everyone at the Firm.

JPMorgan Chase bolsters this individual responsibility in many ways: through

the Code of Conduct, training, policies and oversight functions that approve

transactions. These oversight functions include a Conflicts Office, which exam-

ines wholesale transactions with the potential to create conflicts of interest or

role for the Firm.

Policy review office

The Firm has an additional structure to address certain transactions with

clients, especially complex derivatives and structured finance transactions,

that have the potential to adversely affect its reputation. This structure rein-

forces the Firm’s procedures for examining transactions in terms of appropri-

ateness, ethical issues and reputational risk, and it intensifies the Firm’s

scrutiny of the purpose and effect of its transactions from the client’s point of

view, with the goal that these transactions not be used to mislead investors

or others. The structure operates at three levels: as part of every business’s

transaction approval process; through review by regional Policy Review

Committees; and through oversight by the Policy Review Office.

Primary responsibility for adherence to the policies and procedures designed

to address reputation risk lies with the business units conducting the transac-

tions in question. The Firm’s transaction approval process requires review and

sign-off from, among others, internal legal/compliance, conflicts, tax and

accounting groups. Transactions involving an SPE established by the Firm

receive particular scrutiny to ensure that every such entity is properly

approved, documented, monitored and controlled.

Business units are also required to submit to regional Policy Review Committees

proposed transactions that may heighten reputation risk – particularly a

Management’s discussion and analysis

JPMorgan Chase & Co.

76 JPMorgan Chase & Co. / 2004 Annual Report

client’s motivation and its intended financial disclosure of the transaction. The

committees approve, reject or require further clarification on or changes to

the transactions. The members of these committees are senior representatives

of the business and support units in the region. The committees may escalate

transaction review to the Policy Review Office.

The Policy Review Office is the most senior approval level for client transac-

tions involving reputation risk issues. The mandate of the Office is to opine

on specific transactions brought by the Regional Committees and consider

changes in policies or practices relating to reputation risk. The head of the

office consults with the Firm’s most senior executives on specific topics and

provides regular updates. Aside from governance and guidance on specific

transactions, the objective of the policy review process is to reinforce a

culture, through a “case study” approach, that ensures that all employees,

regardless of seniority, understand the basic principles of reputation risk

control and can recognize and address issues as they arise.

Fiduciary risk management

The Firm maintains risk management committees within each of its lines of

business that include in their mandate the oversight of legal, reputational and

fiduciary-related risks in their businesses that may produce significant losses

or reputational damage. The Fiduciary Risk Management function works with

the line-of-business risk committees to ensure that businesses providing

investment or risk management products or services perform at the appropri-

ate standard relative to their relationship with a client, whether it be fiduciary

or non-fiduciary in nature. Of particular focus are the policies and practices

that address a business’ responsibilities to a client including client suitability

determination, disclosure obligations, disclosure communications and

performance expectations with respect to the investment and risk manage-

ment products or services being provided by the Firm. In this way, the line-of-

business risk committees, together with the Fiduciary Risk Management func-

tion, provide oversight of the Firm’s efforts to monitor, measure and control

the risks that may arise in the delivery of such products or services to clients,

as well as those stemming from the Firm’s responsibilities undertaken on

behalf of employees.

Private equity risk management

Risk management

The Firm’s private equity business employs processes for risk measurement

and control of private equity risk that are similar to those used for other busi-

nesses within the Firm. The processes are coordinated with the Firm’s overall

approach to market and concentration risk. Private equity risk is initially moni-

tored through the use of industry and geographic limits. Additionally, to man-

age the pace of new investments, a ceiling on the amount of annual private

equity investment activity has been established. At December 31, 2004, the

carrying value of the private equity portfolio was $7.5 billion.

Private Equity’s publicly-held securities create a significant exposure to general

declines in the equity markets. Initially to gauge that risk, VAR and stress-test

exposures are calculated in the same way as they are for the Firm’s trading

and nontrading portfolios. However, because VAR assumes that positions

can be exited in a normal market, JPMorgan Chase believes that the VAR

for publicly-held securities does not necessarily represent the true value-at-risk

for these holdings nor is it indicative of the loss potential for these holdings,

due to the fact that most of the positions are subject to sale restrictions and,

often, represent significant concentration of ownership. Accordingly, Private

Equity management undertakes frequent reviews of its publicly-held securities

investments as part of a disciplined approach to sales and risk management

issues. Risk management programs are limited but are considered when practi-

cal and as circumstances dictate. Over time, the Firm may change the nature

and type of Private equity risk management programs it enters into.

Reputation and fiduciary risk management

JPMorgan Chase & Co. / 2004 Annual Report 77

JPMorgan Chase’s accounting policies and use of estimates are integral to

understanding its reported results. The Firm’s most complex accounting esti-

mates require management’s judgment to ascertain the valuation of assets

and liabilities. The Firm has established detailed policies and control proce-

dures intended to ensure that valuation methods, including any judgments

made as part of such methods, are well controlled, independently reviewed

and applied consistently from period to period. In addition, the policies and

procedures are intended to ensure that the process for changing methodolo-

gies occurs in an appropriate manner. The Firm believes its estimates for

determining the valuation of its assets and liabilities are appropriate. The fol-

lowing is a brief description of the Firm’s critical accounting estimates involv-

ing significant valuation judgments.

Allowance for credit losses

JPMorgan Chase’s Allowance for credit losses covers the wholesale and con-

sumer loan portfolios as well as the Firm’s portfolio of wholesale lending-

related commitments. The Allowance for loan losses is intended to adjust the

value of the Firm’s loan assets for probable credit losses as of the balance

sheet date. For a further discussion of the methodologies used in establishing

the Firm’s Allowance for credit losses, see Note 12 on pages 102–103 of this

Annual Report.

Wholesale loans and lending-related commitments

The methodology for calculating both the Allowance for loan losses and the

Allowance for lending-related commitments involves significant judgment.

First and foremost, it involves the early identification of credits that are deteri-

orating. Second, it involves management judgment to derive loss factors.

Third, it involves management judgment to evaluate certain macroeconomic

factors, underwriting standards, and other relevant internal and external fac-

tors affecting the credit quality of the current portfolio and to refine loss fac-

tors to better reflect these conditions.

The Firm uses a risk rating system to determine the credit quality of its whole-

sale loans. Wholesale loans are reviewed for information affecting the oblig-

or’s ability to fulfill its obligations. In assessing the risk rating of a particular

loan, among the factors considered include the obligor’s debt capacity and

financial flexibility, the level of the obligor’s earnings, the amount and sources

for repayment, the level and nature of contingencies, management strength,

and the industry and geography in which the obligor operates. These factors

are based on an evaluation of historical and current information, and involve

subjective assessment and interpretation. Emphasizing one factor over anoth-

er, or considering additional factors that may be relevant in determining the

risk rating of a particular loan, but which are not currently an explicit part of

the Firm’s methodology, could impact the risk rating assigned by the Firm to

that loan.

Management applies its judgment to derive loss factors associated with each

credit facility. These loss factors are determined by facility structure, collateral

and type of obligor. Wherever possible, the Firm uses independent, verifiable

data or the Firm’s own historical loss experience in its models for estimating

these loss factors. Many factors can affect management’s estimates of loss,

including volatility of loss given default, probability of default and rating

migrations. Judgment is applied to determine whether the loss given default

should be calculated as an average over the entire credit cycle or at a particu-

lar point in the credit cycle. The application of different loss given default fac-

tors would change the amount of the Allowance for credit losses determined

appropriate by the Firm. Similarly, there are judgments as to which external

data on probability of default should be used, and when they should be used.

Choosing data that are not reflective of the Firm’s specific loan portfolio char-

acteristics could affect loss estimates.

Management also applies its judgment to adjust the loss factors derived

taking into consideration model imprecision, external factors and economic

events that have occurred but are not yet reflected in the loss factors. The

resultant adjustments to the statistical calculation of losses on the performing

portfolio are determined by creating estimated ranges using historical experi-

ence of both loss given default and probability of default. Factors related to

concentrated and deteriorating industries are also incorporated where rele-

vant. The estimated ranges and the determination of the appropriate point

within the range are based upon management’s view of uncertainties that

relate to current macroeconomic and political conditions, quality of underwrit-

ing standards and other relevant internal and external factors affecting the

credit quality of the current portfolio. The adjustment to the statistical calcula-

tion for the wholesale loan portfolio for the period ended December 31,

2004, was $990 million, the maximum amount within the range, based on

management’s assessment of current economic conditions.

Consumer loans

For scored loans (generally consumer lines of business), loss is primarily deter-

mined by applying statistical loss factors and other risk indicators to pools of

loans by asset type. These loss estimates are sensitive to changes in delin-

quency status, credit bureau scores, the realizable value of collateral, and

other risk factors.

Adjustments to the statistical calculation are accomplished in part by analyzing

the historical loss experience for each major product segment. Management

analyzes the range of credit loss experienced for each major portfolio segment

taking into account economic cycles, portfolio seasoning, and underwriting

criteria and then formulates a range that incorporates relevant risk factors

that impact overall credit performance. The recorded adjustment to the statis-

tical calculation for the period ended December 31, 2004 was $1.0 billion,

based on management’s assessment of current economic conditions.

Fair value of financial instruments

A portion of JPMorgan Chase’s assets and liabilities are carried at fair value,

including trading assets and liabilities, AFS securities and private equity invest-

ments. Held-for-sale loans and mortgage servicing rights (“MSRs”) are carried

at the lower of fair value or cost. At December 31, 2004, approximately $417

billion of the Firm’s assets were recorded at fair value.

The fair value of a financial instrument is defined as the amount at which

the instrument could be exchanged in a current transaction between willing

parties, other than in a forced or liquidation sale. The majority of the Firm’s

assets reported at fair value are based on quoted market prices or on inter-

nally developed models that utilize independently sourced market parameters,

including interest rate yield curves, option volatilities and currency rates.

The degree of management judgment involved in determining the fair value

of a financial instrument is dependent upon the availability of quoted market

prices or observable market parameters. For financial instruments that are

actively traded and have quoted market prices or parameters readily available,

Critical accounting estimates used by the Firm

Management’s discussion and analysis

JPMorgan Chase & Co.

78 JPMorgan Chase & Co. / 2004 Annual Report

there is little to no subjectivity in determining fair value. When observable

market prices and parameters do not exist, management judgment is neces-

sary to estimate fair value. The valuation process takes into consideration fac-

tors such as liquidity and concentration concerns and, for the derivatives port-

folio, counterparty credit risk (see the discussion of CVA on page 63 of this

Annual Report). For example, there is often limited market data to rely on

when estimating the fair value of a large or aged position. Similarly, judgment

must be applied in estimating prices for less readily observable external

parameters. Finally, other factors such as model assumptions, market disloca-

tions and unexpected correlations can affect estimates of fair value.

Imprecision in estimating these factors can impact the amount of revenue or

loss recorded for a particular position.

Trading and available-for-sale portfolios

Substantially all of the Firm’s securities held for trading and investment purposes

(“long” positions) and securities that the Firm has sold to other parties but

does not own (“short” positions) are valued based on quoted market prices.

However, certain securities are less actively traded and, therefore, are not

always able to be valued based on quoted market prices. The determination

of their fair value requires management judgment, as this determination may

require benchmarking to similar instruments or analyzing default and recovery

rates. Examples include certain collateralized mortgage and debt obligations

and high-yield debt securities.

As few derivative contracts are listed on an exchange, the majority of the

Firm’s derivative positions are valued using internally developed models that

use as their basis readily observable market parameters – that is, parameters

that are actively quoted and can be validated to external sources, including

industry-pricing services. Certain derivatives, however, are valued based on

models with significant unobservable market parameters – that is, parameters

that may be estimated and are, therefore, subject to management judgment to

substantiate the model valuation. These instruments are normally either less

actively traded or trade activity is one-way. Examples include long-dated inter-

est rate or currency swaps, where swap rates may be unobservable for longer

maturities, and certain credit products, where correlation and recovery rates

are unobservable. Due to the lack of observable market data, the Firm defers

the initial trading profit for these financial instruments. The deferred profit is

recognized in Trading revenue on a systematic basis and when observable mar-

ket data becomes available. Management judgment includes recording fair

value adjustments (i.e., reductions) to model valuations to account for parame-

ter uncertainty when valuing complex or less actively traded derivative transac-

tions. The following table summarizes the Firm’s trading and available-for-sale

portfolios by valuation methodology at December 31, 2004:

Trading assets Trading liabilities

Securities Securities AFS

purchased

(a)

Derivatives

(b)

sold

(a)

Derivatives

(b)

securities

Fair value based on:

Quoted market prices 92% 1% 99% 1% 94%

Internal models with significant

observable market parameters 597 197 2

Internal models with significant

unobservable market parameters 32

—

Total 100% 100% 100% 100% 100%

(a) Reflected as debt and equity instruments on the Firm’s Consolidated balance sheets.

(b) Based on gross mark-to-market valuations of the Firm’s derivatives portfolio prior to netting positions pursuant to FIN 39, as cross-product netting is not relevant to an analysis based upon valuation

methodologies.

To ensure that the valuations are appropriate, the Firm has various controls in

place. These include: an independent review and approval of valuation mod-

els; detailed review and explanation for profit and loss analyzed daily and

over time; decomposing the model valuations for certain structured derivative

instruments into their components and benchmarking valuations, where pos-

sible, to similar products; and validating valuation estimates through actual

cash settlement. As markets and products develop and the pricing for certain

derivative products becomes more transparent, the Firm refines its valuation

methodologies. The Valuation Control Group within the Finance area, a group

independent of the risk-taking function, is responsible for reviewing the accu-

racy of the valuations of positions taken within the Investment Bank.

For a discussion of market risk management, including the model review

process, see Market risk management on pages 70–74 of this Annual Report.

For further details regarding the Firm’s valuation methodologies, see Note 29

on pages 121–124 of this Annual Report.

Loans held-for-sale

The fair value of loans in the held-for-sale portfolio is generally based on

observable market prices of similar instruments, including bonds, credit deriva-

tives and loans with similar characteristics. If market prices are not available,

fair value is based on the estimated cash flows, adjusted for credit risk that is

discounted using a rate appropriate for each maturity that incorporates the

effects of interest rate changes.

Private equity investments

Valuation of private investments held primarily by the Private Equity business

within Corporate requires significant management judgment due to the

absence of quoted market prices, inherent lack of liquidity and the long-term

nature of such assets. Private investments are initially valued based on cost.

The carrying values of private investments are adjusted from cost to reflect

both positive and negative changes evidenced by financing events with third-

party capital providers. In addition, these investments are subject to ongoing

JPMorgan Chase & Co. / 2004 Annual Report 79

impairment reviews by Private Equity’s senior investment professionals. A vari-

ety of factors are reviewed and monitored to assess impairment including, but

not limited to, operating performance and future expectations, industry valua-

tions of comparable public companies, changes in market outlook and the

third-party financing environment over time. The Valuation Control Group

within the Finance area is responsible for reviewing the accuracy of the carry-

ing values of private investments held by Private Equity. For additional infor-

mation about private equity investments, see the Private equity risk management

discussion on page 76 and Note 9 on pages 98–100 of this Annual Report.

MSRs and certain other retained interests in securitizations

MSRs and certain other retained interests from securitization activities do not

trade in an active, open market with readily observable prices. For example,

sales of MSRs do occur, but the precise terms and conditions are typically not

readily available. Accordingly, the Firm estimates the fair value of MSRs and

certain other retained interests in securitizations using a discounted future

cash flow model. For MSRs, the model considers portfolio characteristics, con-

tractually specified servicing fees and prepayment assumptions, delinquency

rates, late charges, other ancillary revenues, costs to service and other eco-

nomic factors. For other retained interests in securitizations (such as interest-

only strips), the model is generally based on projections of finance charges

related to the securitized assets, net credit losses, average life, and contractu-

al interest paid to the third-party investors. Changes in the assumptions used

may have a significant impact on the Firm’s valuation of retained interests.

Management believes that the fair values and related assumptions utilized in

the models are comparable to those used by other market participants. For a

further discussion of the most significant assumptions used to value retained

interests in securitizations and MSRs, as well as the applicable stress tests for

those assumptions, see Notes 13 and 15 on pages 103–106 and 109–111,

respectively, of this Annual Report.

Goodwill impairment

Under SFAS 142, goodwill must be allocated to reporting units and tested for

impairment. The Firm tests goodwill for impairment at least annually or more

frequently if events or circumstances, such as adverse changes in the business

climate, indicate that there may be justification for conducting an interim test.

Impairment testing is performed at the reporting-unit level (which is generally

one level below the six major business segments identified in Note 31 on pages

126–127 of this Annual Report, plus Private Equity which is included in

Corporate). The first part of the test is a comparison, at the reporting unit level,

of the fair value of each reporting unit to its carrying amount, including good-

will. If the fair value is less than the carrying value, then the second part of the

test is needed to measure the amount of potential goodwill impairment. The

implied fair value of the reporting unit goodwill is calculated and compared to

the carrying amount of goodwill recorded in the Firm’s financial records. If the

carrying value of reporting unit goodwill exceeds the implied fair value of that

goodwill, then the Firm would recognize an impairment loss in the amount of

the difference, which would be recorded as a charge against Net income.

The fair values of the reporting units are determined using discounted cash

flow models based on each reporting unit’s internal forecasts. In addition,

analysis using market-based trading and transaction multiples, where available,

are used to assess the reasonableness of the valuations derived from the

discounted cash flow models.

Goodwill was not impaired as of December 31, 2004 or December 31, 2003,

nor was any goodwill written off during the years ended December 31, 2004,

2003 and 2002. See Note 15 on page 109 of this Annual Report for addition-

al information related to the nature and accounting for goodwill and the car-

rying values of goodwill by major business segment.

Management’s discussion and analysis

JPMorgan Chase & Co.

80 JPMorgan Chase & Co. / 2004 Annual Report

In the normal course of business, JPMorgan Chase trades nonexchange-trad-

ed commodity contracts. To determine the fair value of these contracts, the

Firm uses various fair value estimation techniques, which are primarily based

on internal models with significant observable market parameters. The Firm’s

nonexchange-traded commodity contracts are primarily energy-related con-

tracts. The following table summarizes the changes in fair value for nonex-

change-traded commodity contracts for the year ended December 31, 2004:

For the year ended

December 31, 2004 (in millions) Asset position Liability position

Net fair value of contracts

outstanding at January 1, 2004 $ 1,497 $ 751

Effect of legally enforceable master

netting agreements 834 919

Gross fair value of contracts

outstanding at January 1, 2004 2,331 1,670

Contracts realized or otherwise settled

during the period (5,486) (4,139)

Fair value of new contracts 1,856 1,569

Changes in fair values attributable to

changes in valuation techniques

and assumptions ——

Other changes in fair value 5,052 4,132

Gross fair value of contracts

outstanding at December 31, 2004 3,753 3,232

Effect of legally enforceable master

netting agreements (2,304) (2,233)

Net fair value of contracts

outstanding at December 31, 2004 $ 1,449 $ 999

The following table indicates the schedule of maturities of nonexchange-

traded commodity contracts at December 31, 2004:

At December 31, 2004 (in millions) Asset position Liability position

Maturity less than 1 year $ 1,999 $ 1,874

Maturity 1–3 years 1,266 1,056

Maturity 4–5 years 454 293

Maturity in excess of 5 years 34 9

Gross fair value of contracts

outstanding at December 31, 2004 3,753 3,232

Effects of legally enforceable master

netting agreements (2,304) (2,233)

Net fair value of contracts

outstanding at December 31, 2004 $ 1,449 $ 999

Nonexchange-traded commodity contracts at fair value

Accounting for income taxes – repatriation of foreign earnings

under the American Jobs Creation Act of 2004

In December 2004, the FASB issued FSP SFAS 109-2, which provides account-

ing and disclosure guidance for the foreign earnings repatriation provision

within the American Jobs Creation Act of 2004 (the “Act”). The Act was

signed into law on October 22, 2004.

The Act creates a temporary incentive for U.S. companies to repatriate accu-

mulated foreign earnings at a substantially reduced U.S. effective tax rate by

providing a dividends received deduction on the repatriation of certain for-

eign earnings to the U.S. taxpayer (the “repatriation provision”). The new

deduction is subject to a number of limitations and requirements.

Clarification to key elements of the repatriation provision from Congress or the

U.S. Treasury Department may affect an enterprise’s evaluation of the effect of the

Act on its plan for repatriation or reinvestment of foreign earnings. The FSP pro-

vides a practical exception to the SFAS 109 requirement to reflect the effect of a

new tax law in the period of enactment, because of the lack of clarification to cer-

tain provisions within the Act and the timing of the enactment. Thus, companies

have additional time to assess the effect of the Act on its plan for reinvestment or

repatriation of foreign earnings for purposes of applying SFAS 109. A company

should apply the provisions of SFAS 109 (i.e., reflect the tax impact in the finan-

cial statements) in the period in which it makes the decision to repatriate or rein-

vest unremitted foreign earnings in accordance with the Act. Decisions can be

made in stages (e.g., by foreign country). The repatriation provision is effective for

either the 2004 or 2005 tax years for calendar year taxpayers.

The range of possible amounts that may be considered for repatriation under

this provision is between zero and $1.9 billion. The Firm is currently assessing

the impact of the repatriation provision and, at this time, cannot reasonably

estimate the related range of income tax effects of such repatriation provision.

Accordingly, the Firm has not reflected the tax effect of the repatriation provi-

sion in income tax expense or income tax liabilities.

Accounting for share-based payments

In December 2004, the FASB issued SFAS 123R, which revises SFAS 123 and

supersedes APB 25. Accounting and reporting under SFAS 123R is generally

similar to the SFAS 123 approach. However, SFAS 123R requires all share-

based payments to employees, including grants of employee stock options, to

be recognized in the income statement based on their fair values. Pro forma

disclosure is no longer an alternative.

Accounting and reporting developments

JPMorgan Chase & Co. / 2004 Annual Report 81

The Firm has continued to account for stock options that were outstanding

as of December 31, 2002 under APB 25 using the intrinsic value method.

Therefore, compensation expense for some previously granted awards that

was not recognized under SFAS 123 will be recognized under SFAS 123R.

Had the Firm adopted SFAS 123R in prior periods, the impact would have

approximated the impact of SFAS 123 as described in the disclosure of pro

forma net income and earnings per share as presented in Note 7 on page 97

of this Annual Report. SFAS 123R must be adopted no later than July 1,

2005. SFAS 123R permits adoption using one of two methods – modified

prospective or modified retrospective. The Firm is currently evaluating both

the timing and method of adopting the new standard.

Impairment of available-for-sale and held-to-maturity securities

In September 2004, the FASB issued FSP EITF 03-1-1, indefinitely delaying

the measurement provisions of EITF 03-1. The disclosure requirements of

EITF 03-1 remain effective and are included in Note 9 on pages 98–100 of

this Annual Report. EITF 03-1 addresses issues related to other-than-tempo-

rary impairment for securities classified as either available-for-sale or held-to-

maturity under SFAS 115 (including individual securities and investments in

mutual funds) and for investments accounted for under the cost method. A

proposed FSP addressing these issues was issued by the FASB and is expect-

ed to be finalized in 2005. The impact of EITF 03-1, if any, to the Firm’s

investment portfolios will not be known until the final consensus is issued.

Accounting for interest rate lock commitments (“IRLCs”)

IRLCs associated with mortgages to be held for sale represent commitments

to extend credit at specified interest rates. On March 9, 2004, the Securities

and Exchange Commission issued SAB No. 105, which summarizes the views

of the Securities and Exchange Commission staff regarding the application of

U.S. GAAP to loan commitments accounted for as derivative instruments. SAB

105 states that the value of the servicing asset should not be included in the

estimate of fair value of IRLCs. SAB 105 is applicable for all IRLCs accounted

for as derivatives and entered into on or after April 1, 2004.

Prior to April 1, 2004, JPMorgan Chase recorded IRLCs at estimated fair

value. The fair value of IRLCs included an estimate of the value of the loan

servicing right inherent in the underlying loan, net of the estimated costs to

close the loan. Effective April 1, 2004, and as a result of SAB 105, the Firm

no longer assigns fair value to IRLCs on the date they are entered into, with

any initial gain being recognized upon the sale of the resultant loan. Also in

connection with SAB 105, the Firm records any changes in the value of the

IRLCs, excluding the servicing asset component, due to changes in interest

rates after they are locked. Adopting SAB 105 did not have a material impact

on the Firm’s 2004 Consolidated financial statements.

Accounting for certain loans or debt securities acquired in a transfer

In December 2003, the AICPA issued SOP 03-3, which requires that loans

purchased at a discount due to poor credit quality be recorded at fair value

and prohibits the recognition of a loss accrual or valuation allowance at the

time of purchase. SOP 03-3 also limits the yield that may be accreted to the

excess of the undiscounted expected cash flows over the initial investment

in the loan. Subsequent increases in expected cash flows are recognized

prospectively through an adjustment of yield over its remaining life and

decreases in expected cash flows are recognized as an impairment. For

JPMorgan Chase entities, SOP 03-3 became effective for loans or debt

securities acquired after December 31, 2004.

Accounting for postretirement health care plans that provide

prescription drug benefits

In December 2003, the Medicare Prescription Drug, Improvement and

Modernization Act of 2003 (the “Act”) was enacted. In May 2004, the FASB

issued FSP SFAS 106-2, which provides guidance on accounting for the Act.

For additional information, see Note 6 on page 92–95 of this Annual Report.

In early 2005, the federal government issued additional guidance about how

to apply certain provisions of the Act, which may lead to future accounting

adjustments. Such adjustments, however, are not expected to be material.

Accounting for variable interest entities

In December 2003, the FASB issued a revision to FIN 46 to address various

technical corrections and implementation issues that had 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. Implementation of FIN 46R did not have a material effect on the

Firm’s Consolidated financial statements.

The application of FIN 46R involved significant judgement and interpretations

by management. The Firm is aware of differing interpretations being devel-

oped among accounting professionals and the EITF with regard to analyzing

derivatives under FIN 46R. Management’s current interpretation is that deriv-

atives 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 the derivative con-

tract and the role it has with entity; and whether the derivative contract cre-

ates and/or absorbs variability of the VIE. The Firm will continue to monitor

developing interpretations.

Management’s report on internal control over financial reporting

JPMorgan Chase & Co.

82 JPMorgan Chase & Co. / 2004 Annual Report

Management of JPMorgan Chase & Co. is responsible for establishing and

maintaining adequate internal control over financial reporting. As defined

in Rules 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934,

internal control over financial reporting is a process designed by, or under

the supervision of, the Firm’s principal executive, principal operating and prin-

cipal financial officers, or persons performing similar functions, and effected

by JPMorgan Chase’s board of directors, management and other personnel,

to provide reasonable assurance regarding the reliability of financial reporting

and the preparation of financial statements for external purposes in accordance

with accounting principles generally accepted in the United States of America.

JPMorgan Chase’s internal control over financial reporting includes those

policies and procedures that (1) pertain to the maintenance of records, that,

in reasonable detail, accurately and fairly reflect the transactions and disposi-

tions of the Firm’s assets; (2) provide reasonable assurance that transactions

are recorded as necessary to permit preparation of financial statements in

accordance with generally accepted accounting principles, and that receipts

and expenditures of the Firm are being made only in accordance with author-

izations of JPMorgan Chase’s management and directors; and (3) provide rea-

sonable assurance regarding prevention or timely detection of unauthorized

acquisition, use or disposition of the Firm’s assets that could have a material

effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting

may not prevent or detect misstatements. Also, projections of any evaluation

of effectiveness to future periods are subject to the risk that controls may

become inadequate because of changes in conditions, or that the degree

of compliance with the policies or procedures may deteriorate.

Management has completed an assessment of the effectiveness of the Firm’s

internal control over financial reporting as of December 31, 2004. In making

the assessment, management used the framework in “Internal Control –

Integrated Framework” promulgated by the Committee of Sponsoring

Organizations of the Treadway Commission, commonly referred to as the

“COSO” criteria.

Based on the assessment performed, management concluded that as of

December 31, 2004, JPMorgan Chase’s internal control over financial reporting

was effective based upon the COSO criteria. Additionally, based on manage-

ment’s assessment, the Firm determined that there were no material weak-

nesses in its internal control over financial reporting as of December 31, 2004.

Management’s assessment of the effectiveness of the Firm’s internal control

over financial reporting as of December 31, 2004 has been audited by

PricewaterhouseCoopers LLP, JPMorgan Chase’s independent registered public

accounting firm, who also audited the Firm’s financial statements as of and

for the year ended December 31, 2004, as stated in their report which is

included herein.

William B. Harrison, Jr.

Chairman and Chief Executive Officer

James Dimon

President and Chief Operating Officer

Michael J. Cavanagh

Executive Vice President and Chief Financial Officer

February 22, 2005

JPMorgan Chase & Co. / 2004 Annual Report 83

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of JPMorgan Chase & Co.:

We have completed an integrated audit of JPMorgan Chase & Co.’s 2004

consolidated financial statements and of its internal control over financial

reporting as of December 31, 2004 and audits of its 2003 and 2002 consoli-

dated financial statements in accordance with the standards of the Public

Company Accounting Oversight Board (United States). Our opinions, based

on our audits, are presented below.

Consolidated financial statements

In our opinion, the accompanying consolidated balance sheets and the relat-

ed consolidated statements of income, changes in stockholders’ equity and

cash flows present fairly, in all material respects, the financial position of

JPMorgan Chase & Co. and its subsidiaries (the “Company”) at December 31,

2004 and 2003, and the results of their operations and their cash flows for

each of the three years in the period ended December 31, 2004 in conformity

with accounting principles generally accepted in the United States of America.

These financial statements are the responsibility of the Company’s manage-

ment. Our responsibility is to express an opinion on these financial state-

ments based on our audits. We conducted our audits of these statements in

accordance with the standards of the Public Company Accounting Oversight

Board (United States). Those standards require that we plan and perform the

audit to obtain reasonable assurance about whether the financial statements

are free of material misstatement. An audit of financial statements includes

examining, on a test basis, evidence supporting the amounts and disclosures

in the financial statements, assessing the accounting principles used and sig-

nificant estimates made by management, and evaluating the overall financial

statement presentation. We believe that our audits provide a reasonable basis

for our opinion.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in the accompany-

ing Management’s report on internal control over financial reporting, that the

Company maintained effective internal control over financial reporting as of

December 31, 2004 based on criteria established in Internal Control –

Integrated Framework issued by the Committee of Sponsoring Organizations of

the Treadway Commission (“COSO”), is fairly stated, in all material respects,

based on those criteria. Furthermore, in our opinion, the Company main-

tained, in all material respects, effective internal control over financial report-

ing as of December 31, 2004, based on criteria established in Internal Control

– Integrated Framework issued by COSO. The Company’s management is

responsible for maintaining effective internal control over financial reporting

and for its assessment of the effectiveness of internal control over financial

PRICEWATERHOUSECOOPERS LLP • 300 MADISON AVENUE • NEW YORK, NY 10017

reporting. Our responsibility is to express opinions on management’s assess-

ment and on the effectiveness of the Company’s internal control over finan-

cial reporting based on our audit. We conducted our audit of internal control

over financial reporting in accordance with the standards of the Public

Company Accounting Oversight Board (United States). Those standards

require that we plan and perform the audit to obtain reasonable assurance

about whether effective internal control over financial reporting was main-

tained in all material respects. An audit of internal control over financial

reporting includes obtaining an understanding of internal control over finan-

cial reporting, evaluating management’s assessment, testing and evaluating

the design and operating effectiveness of internal control, and performing

such other procedures as we consider necessary in the circumstances. We

believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to

provide reasonable assurance regarding the reliability of financial reporting

and the preparation of financial statements for external purposes in accor-

dance with generally accepted accounting principles. A company’s internal

control over financial reporting includes those policies and procedures that

(i) pertain to the maintenance of records that, in reasonable detail, accurately

and fairly reflect the transactions and dispositions of the assets of the company;

(ii) provide reasonable assurance that transactions are recorded as necessary

to permit preparation of financial statements in accordance with generally

accepted accounting principles, and that receipts and expenditures of the

company are being made only in accordance with authorizations of manage-

ment and directors of the company; and (iii) provide reasonable assurance

regarding prevention or timely detection of unauthorized acquisition, use, or

disposition of the company’s assets that could have a material effect on the

financial statements.

Because of its inherent limitations, internal control over financial reporting

may not prevent or detect misstatements. Also, projections of any evaluation

of effectiveness to future periods are subject to the risk that controls may

become inadequate because of changes in conditions, or that the degree of

compliance with the policies or procedures may deteriorate.

February 22, 2005

Report of independent registered public accounting firm

JPMorgan Chase & Co.

84 JPMorgan Chase & Co. / 2004 Annual Report84

Consolidated statements of income

JPMorgan Chase & Co.

Year ended December 31, (in millions, except per share data)

(a)

2004 2003 2002

Revenue

Investment banking fees $ 3,537 $ 2,890 $ 2,763

Trading revenue 3,612 4,427 2,675

Lending & deposit related fees 2,672 1,727 1,674

Asset management, administration and commissions 7,967 5,906 5,754

Securities/private equity gains 1,874 1,479 817

Mortgage fees and related income 1,004 923 988

Credit card income 4,840 2,466 2,307

Other income 830 601 458

Noninterest revenue 26,336 20,419 17,436

Interest income 30,595 24,044 25,936

Interest expense 13,834 11,079 13,758

Net interest income 16,761 12,965 12,178

Total net revenue 43,097 33,384 29,614

Provision for credit losses 2,544 1,540 4,331

Noninterest expense

Compensation expense 14,506 11,387 10,693

Occupancy expense 2,084 1,912 1,606

Technology and communications expense 3,702 2,844 2,554

Professional & outside services 3,862 2,875 2,587

Marketing 1,335 710 689

Other expense 2,859 1,694 1,802

Amortization of intangibles 946 294 323

Total noninterest expense before merger costs and litigation reserve charge 29,294 21,716 20,254

Merger costs 1,365 — 1,210

Litigation reserve charge 3,700 100 1,300

Total noninterest expense 34,359 21,816 22,764

Income before income tax expense 6,194 10,028 2,519

Income tax expense 1,728 3,309 856

Net income $ 4,466 $ 6,719 $ 1,663

Net income applicable to common stock $ 4,414 $ 6,668 $ 1,612

Net income per common share

Basic earnings per share $ 1.59 $ 3.32 $ 0.81

Diluted earnings per share 1.55 3.24 0.80

Average basic shares 2,780 2,009 1,984

Average diluted shares 2,851 2,055 2,009

Cash dividends per common share $ 1.36 $ 1.36 $ 1.36

(a) 2004 results include six months of the combined Firm’s results and six months of heritage JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

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

JPMorgan Chase & Co. / 2004 Annual Report 85

Consolidated balance sheets

JPMorgan Chase & Co.

At December 31, (in millions, except share data) 2004 2003

(a)

Assets

Cash and due from banks $ 35,168 $ 20,268

Deposits with banks 21,680 10,175

Federal funds sold and securities purchased under resale agreements 101,354 76,868

Securities borrowed 47,428 41,834

Trading assets (including assets pledged of $77,266 at December 31, 2004, and $81,312 at December 31, 2003) 288,814 252,871

Securities:

Available-for-sale (including assets pledged of $26,881 at December 31, 2004, and $31,639 at December 31, 2003) 94,402 60,068

Held-to-maturity (fair value: $117 at December 31, 2004, and $186 at December 31, 2003) 110 176

Interests in purchased receivables 31,722 4,752

Loans 402,114 214,766

Allowance for loan losses (7,320) (4,523)

Loans, net of Allowance for loan losses 394,794 210,243

Private equity investments 7,735 7,250

Accrued interest and accounts receivable 21,409 12,356

Premises and equipment 9,145 6,487

Goodwill 43,203 8,511

Other intangible assets:

Mortgage servicing rights 5,080 4,781

Purchased credit card relationships 3,878 1,014

All other intangibles 5,726 685

Other assets 45,600 52,573

Total assets $ 1,157,248 $ 770,912

Liabilities

Deposits:

U.S. offices:

Noninterest-bearing $ 129,257 $ 73,154

Interest-bearing 261,673 125,855

Non-U.S. offices:

Noninterest-bearing 6,931 6,311

Interest-bearing 123,595 121,172

Total deposits 521,456 326,492

Federal funds purchased and securities sold under repurchase agreements 127,787 113,466

Commercial paper 12,605 14,284

Other borrowed funds 9,039 8,925

Trading liabilities 151,207 149,448

Accounts payable, accrued expenses and other liabilities (including the Allowance for lending-related

commitments of $492 at December 31, 2004, and $324 at December 31, 2003) 75,722 45,066

Beneficial interests issued by consolidated VIEs 48,061 12,295

Long-term debt 95,422 48,014

Junior subordinated deferrable interest debentures held by trusts that issued guaranteed capital debt securities 10,296 6,768

Total liabilities 1,051,595 724,758

Commitments and contingencies (see Note 25 of this Annual Report)

Stockholders’ equity

Preferred stock 339 1,009

Common stock (authorized 9,000,000,000 shares and 4,500,000,000 shares

at December 31, 2004 and 2003, respectively; issued 3,584,747,502 shares and

2,044,436,509 shares at December 31, 2004 and 2003, respectively) 3,585 2,044

Capital surplus 72,801 13,512

Retained earnings 30,209 29,681

Accumulated other comprehensive income (loss) (208) (30)

Treasury stock, at cost (28,556,534 shares at December 31, 2004, and 1,816,495 shares at December 31, 2003) (1,073) (62)

Total stockholders’ equity 105,653 46,154

Total liabilities and stockholders’ equity $ 1,157,248 $ 770,912

(a) Heritage JPMorgan Chase only.

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

86 JPMorgan Chase & Co. / 2004 Annual Report

Consolidated statements of changes in stockholders’ equity

JPMorgan Chase & Co.

Year ended December 31, (in millions, except per share data)

(a)

2004 2003 2002

Preferred stock

Balance at beginning of year $ 1,009 $ 1,009 $ 1,009

Redemption of preferred stock (670) ——

Balance at end of year 339 1,009 1,009

Common stock

Balance at beginning of year 2,044 2,024 1,997

Issuance of common stock 72 20 27

Issuance of common stock for purchase accounting acquisitions 1,469 ——

Balance at end of year 3,585 2,044 2,024

Capital surplus

Balance at beginning of year 13,512 13,222 12,495

Issuance of common stock and options for purchase accounting acquisitions 55,867 ——

Shares issued and commitments to issue common stock for employee stock-based

awards and related tax effects 3,422 290 727

Balance at end of year 72,801 13,512 13,222

Retained earnings

Balance at beginning of year 29,681 25,851 26,993

Net income 4,466 6,719 1,663

Cash dividends declared:

Preferred stock (52) (51) (51)

Common stock ($1.36 per share each year) (3,886) (2,838) (2,754)

Balance at end of year 30,209 29,681 25,851

Accumulated other comprehensive income (loss)

Balance at beginning of year (30) 1,227 (442)

Other comprehensive income (loss) (178) (1,257) 1,669

Balance at end of year (208) (30) 1,227

Treasury stock, at cost

Balance at beginning of year (62) (1,027) (953)

Purchase of treasury stock (738) ——

Reissuance from treasury stock — 1,082 107

Share repurchases related to employee stock-based awards (273) (117) (181)

Balance at end of year (1,073) (62) (1,027)

Total stockholders’ equity $ 105,653 $ 46,154 $ 42,306

Comprehensive income

Net income $ 4,466 $ 6,719 $ 1,663

Other comprehensive income (loss) (178) (1,257) 1,669

Comprehensive income $ 4,288 $ 5,462 $ 3,332

(a) 2004 results include six months of the combined Firm’s results and six months of heritage JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

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

JPMorgan Chase & Co. / 2004 Annual Report 87

Consolidated statements of cash flows

JPMorgan Chase & Co.

Year ended December 31, (in millions)

(a)

2004 2003 2002

Operating activities

Net income $ 4,466 $ 6,719 $ 1,663

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Provision for credit losses 2,544 1,540 4,331

Depreciation and amortization 3,835 3,101 2,979

Deferred tax (benefit) provision (827) 1,428 1,636

Investment securities (gains) losses (338) (1,446) (1,563)

Private equity unrealized (gains) losses (766) (77) 641

Net change in:

Trading assets (48,703) (2,671) (58,183)

Securities borrowed (4,816) (7,691) 2,437

Accrued interest and accounts receivable (2,391) 1,809 677

Other assets (17,588) (9,916) 6,182

Trading liabilities 29,764 15,769 25,402

Accounts payable, accrued expenses and other liabilities 13,277 5,973 (11,664)

Other operating adjustments (262) 63 328

Net cash (used in) provided by operating activities (21,805) 14,601 (25,134)

Investing activities

Net change in:

Deposits with banks (4,196) (1,233) 3,801

Federal funds sold and securities purchased under resale agreements (13,101) (11,059) (2,082)

Other change in loans (136,851) (171,779) (98,695)

Held-to-maturity securities:

Proceeds 66 221 85

Purchases — — (40)

Available-for-sale securities:

Proceeds from maturities 45,197 10,548 5,094

Proceeds from sales 134,534 315,738 219,385

Purchases (173,745) (301,854) (244,547)

Loans due to sales and securitizations 108,637 170,870 97,004

Net cash received (used) in business acquisitions 13,839 (669) (72)

All other investing activities, net 2,544 1,635 (3,277)

Net cash (used in) provided by investing activities (23,076) 12,418 (23,344)

Financing Activities

Net change in:

Deposits 52,082 21,851 11,103

Federal funds purchased and securities sold under repurchase agreements 7,065 (56,017) 41,038

Commercial paper and other borrowed funds (4,343) 555 (4,675)

Proceeds from the issuance of long-term debt and capital debt securities 25,344 17,195 11,971

Repayments of long-term debt and capital debt securities (16,039) (8,316) (12,185)

Net issuance of stock and stock-based awards 848 1,213 725

Redemption of preferred stock (670) ——

Redemption of preferred stock of subsidiary — — (550)

Treasury stock purchased (738) ——

Cash dividends paid (3,927) (2,865) (2,784)

All other financing activities, net (26) 133 —

Net cash provided by (used in) financing activities 59,596 (26,251) 44,643

Effect of exchange rate changes on cash and due from banks 185 282 453

Net increase (decrease) in cash and due from banks 14,900 1,050 (3,382)

Cash and due from banks at the beginning of the year 20,268 19,218 22,600

Cash and due from banks at the end of the year $ 35,168 $ 20,268 $ 19,218

Cash interest paid $ 13,384 $ 10,976 $ 13,534

Cash income taxes paid $ 1,477 $ 1,337 $ 1,253

Note: The fair values of noncash assets acquired and liabilities assumed in the Merger with Bank One were $320.9 billion and $277.0 billion, respectively. Approximately 1,469 million shares of common

stock, valued at approximately $57.3 billion, were issued in connection with the merger with Bank One.

(a) 2004 results include six months of the combined Firm’s results and six months of heritage JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

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

Notes to consolidated financial statements

JPMorgan Chase & Co.

88 JPMorgan Chase & Co. / 2004 Annual Report

When the SPE does not meet the QSPE criteria, consolidation is assessed pur-

suant to FIN 46R. Under FIN 46R, a VIE is defined as an entity that: (1) lacks

enough equity investment at risk to permit the entity to finance its activities

without additional subordinated financial support from other parties, (2) has

equity owners that lack the right to make significant decisions affecting the

entity’s operations, and/or (3) has equity owners that do not have an obliga-

tion to absorb or the right to receive the entity’s losses or returns.

FIN 46R requires a variable interest holder (i.e., a counterparty to a VIE) to

consolidate the VIE if that party will absorb a majority of the expected losses

of the VIE, receive a majority of the residual returns of the VIE, or both. This

party is considered the primary beneficiary of the entity. The determination of

whether the Firm meets the criteria to be considered the primary beneficiary

of a VIE requires an evaluation of all transactions (such as investments, liquidity

commitments, derivatives and fee arrangements) with the entity and an

expected loss calculation when necessary. For further details, see Note 14 on

pages 106–109 of this Annual Report.

Prior to the Firm’s adoption of FIN 46 on July 1, 2003, the decision of

whether or not to consolidate depended on the applicable accounting princi-

ples for non-QSPEs, including a determination regarding the nature and

amount of investment made by third parties in the SPE. Consideration was

given to, among other factors, whether a third party had made a substantive

equity investment in the SPE; which party had voting rights, if any; who made

decisions about the assets in the SPE; and who was at risk of loss. The SPE

was consolidated if JPMorgan Chase retained or acquired control over the

risks and rewards of the assets in the SPE.

Financial assets are derecognized when they meet the accounting sale

criteria. Those criteria are: (1) the assets are legally isolated from the Firm’s

creditors; (2) the entity can pledge or exchange the financial assets or, if

the entity is a QSPE, its investors can pledge or exchange their interests;

and (3) the Firm does not maintain effective control via an agreement to

repurchase the assets before their maturity or have the ability to unilaterally

cause the holder to return the assets. All significant transactions and retained

interests between the Firm, QSPEs and nonconsolidated VIEs are reflected

on JPMorgan Chase’s Consolidated balance sheets or in the Notes to consoli-

dated financial statements.

Investments in companies that are considered to be voting-interest entities

under FIN 46R, in which the Firm has significant influence over operating and

financing decisions (generally defined as owning a voting or economic interest

of 20% to 50%) are accounted for in accordance with the equity method of

accounting. These investments are generally included in Other assets, and the

Firm’s share of income or loss is included in Other income. For a discussion of

private equity investments, see Note 9 on pages 98–100 of this Annual Report.

Assets held for clients in an agency or fiduciary capacity by the Firm are

not assets of JPMorgan Chase and are not included in the Consolidated

balance sheets.

Use of estimates in the preparation of consolidated

financial statements

The preparation of consolidated financial statements requires management to

make estimates and assumptions that affect the reported amounts of assets,

liabilities, revenue, expenses and disclosures of contingent assets and liabilities.

Actual results could be different from these estimates.

Note 1 – Basis of presentation

JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”), a financial hold-

ing 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 operations in more than 50 countries. The Firm is a leader

in investment banking, financial services for consumers and businesses, finan-

cial transaction processing, investment management, private banking and

private equity. For a discussion of the Firm’s business segment information,

see Note 31 on pages 126–127 of this Annual Report.

The accounting and financial reporting policies of JPMorgan Chase and its

subsidiaries conform to accounting principles generally accepted in the United

States of America (“U.S. GAAP”) and prevailing industry practices. Additionally,

where applicable, the policies conform to the accounting and reporting guide-

lines prescribed by bank regulatory authorities.

Certain amounts in the prior periods have been reclassified to conform to the

current presentation.

Consolidation

The consolidated financial statements include accounts of JPMorgan Chase

and other entities in which the Firm has a controlling financial interest. All

material intercompany balances and transactions have been eliminated.

The usual condition for a controlling financial interest is ownership of a

majority of the voting interests of an entity. However, a controlling financial

interest may also exist in entities, such as special purpose entities (“SPEs”),

through arrangements that do not involve controlling voting interests.

SPEs are an important part of the financial markets, providing market liquidity

by facilitating investors’ access to specific portfolios of assets and risks. They

are, for example, critical to the functioning of the mortgage- and asset-

backed securities and commercial paper markets. SPEs may be organized as

trusts, partnerships or corporations and are typically set up for a single, dis-

crete purpose. SPEs are not typically operating entities and usually have a lim-

ited life and no employees. The basic SPE structure involves a company selling

assets to the SPE. The SPE funds the purchase of those assets by issuing secu-

rities to investors. The legal documents that govern the transaction describe

how the cash earned on the assets must be allocated to the SPE’s investors

and other parties that have rights to those cash flows. SPEs can be structured

to be bankruptcy-remote, thereby insulating investors from the impact of the

creditors of other entities, including the seller of the assets.

There are two different accounting frameworks applicable to SPEs; the quali-

fying SPE (“QSPE”) framework under SFAS 140; and the variable interest

entity (“VIE”) framework under FIN 46R. The applicable framework depends

on the nature of the entity and the Firm’s relation to that entity. The QSPE

framework is applicable when an entity transfers (sells) financial assets to an

SPE meeting certain criteria as defined in SFAS 140. These criteria are

designed to ensure that the activities of the entity are essentially predeter-

mined in their entirety at the inception of the vehicle and that the transferor

of the financial assets cannot exercise control over the entity and the assets

therein. Entities meeting these criteria are not consolidated by the transferor

or other counterparty, as long as the entity does not have the unilateral abili-

ty to liquidate or to cause it to no longer meet the QSPE criteria. The Firm pri-

marily follows the QSPE model for securitizations of its residential and com-

mercial mortgages, credit card loans and automobile loans. For further details,

see Note 13 on pages 103–106 of this Annual Report.

JPMorgan Chase & Co. / 2004 Annual Report 89

Foreign currency translation

Assets and liabilities denominated in foreign currencies are translated into

U.S. dollars using applicable rates of exchange. JPMorgan Chase translates

revenues and expenses using exchange rates at the transaction date.

Gains and losses relating to translating functional currency financial state-

ments for U.S. reporting are included in Other comprehensive income (loss)

within Stockholders’ equity. Gains and losses relating to nonfunctional currency

transactions, including non-U.S. operations where the functional currency is

the U.S. dollar and operations in highly inflationary environments, are reported

in the Consolidated statements of income.

Statements of cash flows

For JPMorgan Chase’s Consolidated statements of cash flows, cash and cash

equivalents are defined as those amounts included in Cash and due from

banks.

Significant accounting policies

The following table identifies JPMorgan Chase’s significant accounting poli-

cies and the Note and page where a detailed description of each policy can

be found:

Trading activities Note 3 Page 90

Other noninterest revenue Note 4 Page 91

Pension and other postretirement employee

benefit plans Note 6 Page 92

Employee stock-based incentives Note 7 Page 95

Securities and private equity investments Note 9 Page 98

Securities financing activities Note 10 Page 100

Loans Note 11 Page 101

Allowance for credit losses Note 12 Page 102

Loan securitizations Note 13 Page 103

Variable interest entities Note 14 Page 106

Goodwill and other intangible assets Note 15 Page 109

Premises and equipment Note 16 Page 111

Income taxes Note 22 Page 115

Derivative instruments and hedging activities Note 26 Page 118

Off–balance sheet lending-related financial

instruments and guarantees Note 27 Page 119

Fair value of financial instruments Note 29 Page 121

Note 2 – Business changes and developments

Merger with Bank One Corporation

Bank One Corporation merged with and into JPMorgan Chase (the “Merger”)

on July 1, 2004. As a result of the Merger, each outstanding share of com-

mon stock of Bank One was converted in a stock-for-stock exchange into

1.32 shares of common stock of JPMorgan Chase; cash payments for frac-

tional shares were approximately $3.1 million. JPMorgan Chase stockholders

kept their shares, which remained outstanding and unchanged as shares of

JPMorgan Chase following the Merger. Key objectives of the Merger were to

provide the Firm with a more balanced business mix and greater geographic

diversification. The Merger was accounted for using the purchase method of

accounting, which requires that the assets and liabilities of Bank One be fair

valued as of July 1, 2004. The purchase price to complete the Merger was

$58.5 billion.

The purchase price of the Merger has been allocated to the assets acquired

and liabilities assumed using their fair values at the merger date. The compu-

tation of the purchase price and the allocation of the purchase price to the

net assets of Bank One – based on their respective fair values as of July 1,

2004 – and the resulting goodwill are presented below. The allocation of the

purchase price may be modified through June 30, 2005, as more information

is obtained about the fair value of assets acquired and liabilities assumed.

(in millions, except per share amounts) July 1, 2004

Purchase price

Bank One common stock exchanged 1,113

Exchange ratio 1.32

JPMorgan Chase common stock issued 1,469

Average purchase price per

JPMorgan Chase common share

(a)

$ 39.02

$ 57,336

Fair value of employee stock awards and

direct acquisition costs 1,210

Total purchase price $ 58,546

Net assets acquired:

Bank One stockholders’ equity $ 24,156

Bank One goodwill and other intangible assets (2,754)

Subtotal 21,402

Adjustments to reflect assets

acquired at fair value:

Loans and leases (2,261)

Private equity investments (75)

Identified intangibles 8,665

Pension plan assets (778)

Premises and equipment (427)

Other assets (262)

Amounts to reflect liabilities

assumed at fair value:

Deposits (373)

Deferred income taxes 767

Postretirement plan liabilities (49)

Other liabilities (975)

Long-term debt (1,234)

24,400

Goodwill resulting from Merger $ 34,146

(a) The value of the Firm’s common stock exchanged with Bank One shareholders was based

on the average closing prices of the Firm’s common stock for the two days prior to, and the

two days following, the announcement of the Merger on January 14, 2004.

Notes to consolidated financial statements

JPMorgan Chase & Co.

90 JPMorgan Chase & Co. / 2004 Annual Report

Unaudited condensed statement of net assets acquired

The following unaudited condensed statement of net assets acquired reflects

the fair value of Bank One net assets as of July 1, 2004.

(in millions) July 1, 2004

Assets

Cash and cash equivalents $ 14,669

Securities 70,512

Interests in purchased receivables 30,184

Loans, net of allowance 129,650

Goodwill and other intangible assets 42,811

All other assets 47,731

Total assets $ 335,557

Liabilities

Deposits $ 164,848

Short-term borrowings 9,811

All other liabilities 61,472

Long-term debt 40,880

Total Liabilities 277,011

Net assets acquired $ 58,546

Acquired, identifiable intangible assets

Components of the fair value of acquired, identifiable intangible assets as of

July 1, 2004 were as follows:

Weighted average Useful life

(in millions) Fair value life (in years) (in years)

Core deposit intangibles $ 3,650 5.1 Up to 10

Purchased credit card relationships 3,340 4.6 Up to 10

Other credit card–related intangibles 295 4.6 Up to 10

Other customer relationship intangibles 870 4.6–10.5 Up to 20

Subtotal 8,155 5.1 Up to 20

Indefinite-lived asset management

intangibles 510 NA NA

Total $ 8,665 5.1

Unaudited pro forma condensed combined financial

information

The following unaudited pro forma condensed combined financial information

presents the results of operations of the Firm had the Merger taken place at

January 1, 2003.

Year ended December 31, (in millions) 2004 2003

Noninterest revenue $ 31,175 $ 28,966

Net interest income 21,366 21,715

Total net revenue 52,541 50,681

Provision for credit losses 2,727 3,570

Noninterest expense 40,504 33,136

Income before income tax expense 9,310 13,975

Net income $ 6,544 $ 9,330

Net income per common share:

Basic $ 1.85 $ 2.66

Diluted 1.81 2.61

Average common shares outstanding:

Basic 3,510 3,495

Diluted 3,593 3,553

Other acquisitions

During 2004, JPMorgan Chase purchased the Electronic Financial Services

(“EFS”) business from Citigroup and acquired a majority interest in hedge

fund manager Highbridge Capital Management (“Highbridge”).

Note 3 – Trading activities

Trading assets include debt and equity securities held for trading purposes

that JPMorgan Chase owns (“long” positions). Trading liabilities include debt

and equity securities that the Firm has sold to other parties but does not own

(“short” positions). The Firm is obligated to purchase securities at a future

date to cover the short positions. Included in Trading assets and Trading liabil-

ities are the reported receivables (unrealized gains) and payables (unrealized

losses) related to derivatives. These amounts include the effect of master net-

ting agreements as permitted under FIN 39. Effective January 1, 2004, the

Firm elected to report the fair value of derivative assets and liabilities net of

cash received and paid, respectively, under legally enforceable master netting

agreements. At December 31, 2004, the amount of cash received and paid

was approximately $32.2 billion and $22.0 billion, respectively. Trading posi-

tions are carried at fair value on the Consolidated balance sheets.

Trading revenue

Year ended December 31,

(a)

(in millions) 2004 2003 2002

Fixed income and other

(b)

$ 2,976 $ 4,046 $ 2,527

Equities

(c)

797 764 331

Credit portfolio

(d)

(161) (383) (183)

Total $ 3,612 $ 4,427 $ 2,675

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

(b) Includes bonds and commercial paper and various types of interest rate derivatives

as well as foreign exchange and commodities.

(d) Includes credit derivatives

JPMorgan Chase & Co. / 2004 Annual Report 91

Trading assets and liabilities

The following table presents the fair value of Trading assets and Trading

liabilities for the dates indicated:

December 31, (in millions) 2004 2003

(a)

Trading assets

Debt and equity instruments:

U.S. government, federal agencies/corporations

obligations and municipal securities $ 43,866 $ 44,678

Certificates of deposit, bankers’ acceptances

and commercial paper 7,341 5,765

Debt securities issued by non-U.S. governments 50,699 36,243

Corporate securities and other 120,926 82,434

Total debt and equity instruments 222,832 169,120

Derivative receivables:

Interest rate 45,892 60,176

Foreign exchange 7,939 9,760

Equity 6,120 8,863

Credit derivatives 2,945 3,025

Commodity 3,086 1,927

Total derivative receivables 65,982 83,751

Total trading assets $ 288,814 $252,871

Trading liabilities

Debt and equity instruments

(b)

$ 87,942 $ 78,222

Derivative payables:

Interest rate 41,075 49,189

Foreign exchange 8,969 10,129

Equity 9,096 8,203

Credit derivatives 2,499 2,672

Commodity 1,626 1,033

Total derivative payables 63,265 71,226

Total trading liabilities $ 151,207 $ 149,448

(a) Heritage JPMorgan Chase only.

(b) Primarily represents securities sold, not yet purchased.

Average Trading assets and liabilities were as follows for the periods indicated:

Year ended December 31,

(a)

(in millions) 2004 2003 2002

Trading assets – debt and

equity instruments $200,467 $ 154,597 $149,173

Trading assets – derivative receivables 59,521 85,628 73,641

Trading liabilities – debt and

equity instruments

(b)

$ 82,204 $ 72,877 $ 64,725

Trading liabilities – derivative payables 52,761 67,783 57,607

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

(b) Primarily represents securities sold, not yet purchased.

Note 4 – Other noninterest revenue

Investment banking fees

This revenue category includes advisory and equity and debt underwriting

fees. Advisory fees are recognized as revenue when related services are

performed. Underwriting fees are recognized as revenue when the Firm has

rendered all services to the issuer and is entitled to collect the fee from the

issuer, as long as there are no other contingencies associated with the fee

(e.g., not contingent on the customer obtaining financing). Underwriting fees

are net of syndicate expenses. In addition, the Firm recognizes credit arrange-

ment and syndication fees as revenue after satisfying certain retention, timing

and yield criteria.

The following table presents the components of Investment banking fees:

Year ended December 31, (in millions)

(a)

2004 2003 2002

Underwriting:

Equity $ 780 $ 699 $ 464

Debt 1,859 1,549 1,543

Total Underwriting 2,639 2,248 2,007

Advisory 898 642 756

Total $ 3,537 $ 2,890 $ 2,763

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

Lending & deposit related fees

This revenue category includes fees from loan commitments, standby letters

of credit, financial guarantees, deposit services in lieu of compensating bal-

ances, cash management-related activities or transactions, deposit accounts,

and other loan servicing activities. These fees are recognized over the period

in which the related service is provided.

Asset management, administration and commissions

This revenue category includes fees from investment management and related

services, custody and institutional trust services, brokerage services, insurance

premiums and commissions and other products. These fees are recognized

over the period in which the related service is provided.

Mortgage fees and related income

This revenue category includes fees and income derived from mortgage origina-

tion, sales and servicing; and includes the effect of risk management activities

associated with the mortgage pipeline, warehouse and the mortgage servicing

rights (“MSRs”) asset (excluding gains and losses on the sale of Available-for-

sale (“AFS”) securities). Origination fees and gains or losses on loan sales are

recognized in income upon sale. Mortgage servicing fees are recognized over the

period the related service is provided, net of amortization. Valuation changes in

the mortgage pipeline, warehouse, MSR asset and corresponding risk manage-

ment instruments are generally adjusted through earnings as these changes

occur. Net interest income and securities gains and losses on AFS securities used

in mortgage-related risk management activities are not included in Mortgage

fees and related income. For a further discussion of MSRs, see Note 15 on pages

109–111 of this Annual Report.

Credit card income

This revenue category includes interchange income (i.e., transaction-processing

fees) from credit and debit cards, annual fees, and servicing fees earned in con-

nection with securitization activities. Also included in this category are volume-

related payments to partners and rewards expense. Fee revenues are recognized

as earned, except for annual fees, which are recognized over a 12-month period.

Credit card revenue sharing agreements

The Firm has contractual agreements with numerous affinity organizations

and co-brand partners, which grant to the Firm exclusive rights to market to

their members or customers. These organizations and partners provide to the

Firm their endorsement of the credit card programs, mailing lists, and may

also conduct marketing activities, and provide awards under the various credit

card programs. The terms of these agreements generally range from 3 to 10

years. The economic incentives the Firm pays to the endorsing organizations

and partners typically include payments based on new accounts, activation,

charge volumes, and the cost of their marketing activities and awards.

Notes to consolidated financial statements

JPMorgan Chase & Co.

92 JPMorgan Chase & Co. / 2004 Annual Report

In December 2003, the Medicare Prescription Drug, Improvement and

Modernization Act of 2003 (the “Act”) was enacted. The Act established a

prescription drug benefit under Medicare (“Medicare Part D”) and a federal

subsidy to sponsors of retiree health care benefit plans that provide a benefit

that is at least actuarially equivalent to Medicare Part D. The Firm has deter-

mined that benefits provided to certain participants will be at least actuarially

equivalent to Medicare Part D and has reflected the estimated effects of the

subsidy in its financial statements and disclosures retroactive to the beginning

of 2004 (July 1, 2004 for Bank One Plans) in accordance with FSP SFAS 106-2.

Defined benefit pension plans

The Firm has a qualified noncontributory U.S. defined benefit pension plan

that provides benefits to substantially all U.S. employees. The U.S. plan

employs a cash balance formula, in the form of salary and interest credits, to

determine the benefits to be provided at retirement, based on eligible com-

pensation and years of service. Employees begin to accrue plan benefits after

completing one year of service, and benefits vest after five years of service.

The Firm also offers benefits through defined benefit pension plans to qualify-

ing employees in certain non-U.S. locations based on eligible compensation

and years of service.

It is the Firm’s policy to fund its pension plans in amounts sufficient to meet

the requirements under applicable employee benefit and local tax laws. In

2004, the Firm made a cash contribution to its U.S. defined benefit pension

plan of $1.1 billion on April 1, funding the plan to the maximum allowable

amount under applicable tax law. Additionally, the Firm made cash contribu-

tions totaling $40 million to fully fund the accumulated benefit obligations of

certain non-U.S. defined benefit pension plans as of December 31, 2004.

Based on the current funded status of the U.S. and non-U.S. pension plans,

the Firm does not expect to make significant contributions in 2005.

Postretirement medical and life insurance

JPMorgan Chase offers postretirement medical and life insurance benefits

to certain retirees and qualifying U.S. employees. These benefits vary with

length of service and date of hire and provide for limits on the Firm’s share

of covered medical benefits. The medical benefits are contributory, while the

life insurance benefits are noncontributory. Postretirement medical benefits

are also offered to qualifying U.K. employees.

JPMorgan Chase’s U.S. postretirement benefit obligation is partially funded

with corporate-owned life insurance (“COLI”) purchased on the lives of

eligible employees and retirees. While the Firm owns the COLI policies,

COLI proceeds (death benefits, withdrawals and other distributions) may

be used only to reimburse the Firm for its net postretirement benefit claim

payments and related administrative expenses. The U.K. postretirement

benefit plan is unfunded.

The following tables present the funded status and amounts reported on

the Consolidated balance sheets, the accumulated benefit obligation and the

components of net periodic benefit costs reported in the Consolidated state-

ments of income for the Firm’s U.S. and non-U.S. defined benefit pension and

postretirement benefit plans.

The Firm recognizes the portion of its payments based on new accounts to the

affinity organizations and co-brand partners as deferred loan origination costs.

The Firm defers these costs and amortizes them over 12 months. The Firm

expenses payments based on marketing efforts performed by the endorsing

organization or partner to activate a new account after the account has been

originated as incurred. Payments based on charge volumes and considered by

the Firm as revenue sharing with the affinity organizations and co-brand part-

ners, are deducted from Credit card income as the related revenue is earned.

Note 5 – Interest income and interest expense

Details of Interest income and Interest expense were as follows:

Year ended December 31, (in millions)

(a)

2004 2003 2002

Interest Income

Loans $ 16,771 $ 11,812 $ 12,709

Securities 3,377 3,542 3,367

Trading assets 7,527 6,592 6,798

Federal funds sold and securities

purchased under resale agreements 1,627 1,497 2,078

Securities borrowed 463 323 681

Deposits with banks 539 214 303

Interests in purchased receivables 291 64 —

Total interest income 30,595 24,044 25,936

Interest Expense

Interest-bearing deposits 4,600 3,604 5,253

Short-term and other liabilities 6,290 5,871 7,038

Long-term debt 2,466 1,498 1,467

Beneficial interests issued by

consolidated VIEs 478 106 —

Total interest expense 13,834 11,079 13,758

Net interest income 16,761 12,965 12,178

Provision for credit losses 2,544 1,540 4,331

Net interest income after provision

for credit losses $ 14,217 $ 11,425 $ 7,847

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

Note 6 – Pension and other postretirement

employee benefit plans

New U.S.-based postretirement plans were approved in 2004 and the prior plans

of JPMorgan Chase and Bank One were merged as of December 31, 2004.

The Firm’s defined benefit pension plans are accounted for in accordance

with SFAS 87 and SFAS 88. Its postretirement medical and life insurance

plans are accounted for in accordance with SFAS 106.

The Firm uses a measurement date of December 31 for its pension and other

postretirement employee benefit plans. The fair value of plan assets is used to

determine the expected return on plan assets for its U.S. and non-U.S. defined

benefit pension plans. For the U.S. postretirement benefit plan, the market-

related value, which recognizes changes in fair value over a five-year period,

is used to determine the expected return on plan assets. Unrecognized net

actuarial gains and losses are amortized over the average remaining service

period of active plan participants, if required.

JPMorgan Chase & Co. / 2004 Annual Report 93

Defined benefit pension plans

U.S. Non-U.S. Postretirement benefit plans

(d)

December 31, (in millions) 2004

(a)

2003

(b)

2004

(a)

2003

(b)

2004

(a)(c)

2003

(b)

Change in benefit obligation

Benefit obligation at beginning of year $ (4,633) $ (4,241) $ (1,659) $ (1,329) $ (1,252) $ (1,126)

Merger with Bank One (2,497) NA (25) NA (216) NA

Benefits earned during the year (251) (180) (17) (16) (15) (15)

Interest cost on benefit obligations (348) (262) (87) (74) (81) (73)

Plan amendments 70 (89) — (1) 32 —

Employee contributions — — — (1) (36) (11)

Actuarial gain (loss) (511) (262) (99) (125) (163) (134)

Benefits paid 555 386 64 55 167 113

Curtailments 21 15 — — (8) (2)

Special termination benefits — — (12) (1) (2) —

Foreign exchange impact and other — — (134) (167) (3) (4)

Benefit obligation at end of year $ (7,594) $ (4,633) $ (1,969) $ (1,659) $ (1,577) $ (1,252)

Change in plan assets

Fair value of plan assets at beginning of year $ 4,866 $ 4,114 $ 1,603 $ 1,281 $ 1,149 $ 1,020

Merger with Bank One 3,280 NA 20 NA 98 NA

Actual return on plan assets 946 811 164 133 84 154

Firm contributions 1,100 327 40 87 2 2

Benefits paid (555) (386) (64) (43) (31) (27)

Settlement payments — — — (12) — —

Foreign exchange impact and other — — 126 157 — —

Fair value of plan assets at end of year $ 9,637

(e)

$ 4,866

(e)

$ 1,889 $ 1,603 $ 1,302 $ 1,149

Reconciliation of funded status

Funded status $ 2,043 $ 233 $ (80) $ (56) $ (275) $ (103)

Unrecognized amounts:

Net transition asset — — (1) (1) — —

Prior service cost 47 137 4 5 (23) 8

Net actuarial (gain) loss 997 920 590 564 321 156

Prepaid benefit cost reported in Other assets $ 3,087 $ 1,290 $ 513

(f)

$ 512

(f)

$23 $61

Accumulated benefit obligation $ (7,167) $ (4,312) $ (1,931) $ (1,626) NA NA

(a) Effective July 1, 2004, the Firm assumed the obligations of heritage Bank One’s pension and other postretirement plans. These plans were similar to those of JPMorgan Chase and were merged into

the Firm’s plans effective December 31, 2004.

(b) Heritage JPMorgan Chase only.

(c) The effect of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 resulted in a $35 million reduction in the Accumulated other postretirement benefit obligation.

(d) Includes postretirement benefit obligation of $43 million and $36 million and postretirement benefit liability (included in Accrued expenses) of $57 million and $54 million at December 31, 2004

and 2003, respectively, for the UK plan, which is unfunded.

(e) At December 31, 2004 and 2003, approximately $358 million and $315 million, respectively, of U.S. plan assets relate to surplus assets of group annuity contracts.

(f) At December 31, 2004 and 2003, Accrued expenses related to non-U.S. defined benefit pension plans that JPMorgan Chase elected not to pre-fund fully totaled $124 million and $99 million, respectively.

Defined benefit pension plans

U.S. Non-U.S. Postretirement benefit plans

For the year ended December 31, (in millions)

(a)

2004 2003 2002 2004 2003 2002 2004 2003 2002

Components of net periodic benefit costs

Benefits earned during the period $ 251 $ 180 $ 174 $17 $16 $16 $15 $15 $12

Interest cost on benefit obligations 348 262 275 87 74 62 81 73 69

Expected return on plan assets (556) (322) (358) (90) (83) (76) (86) (92) (98)

Amortization of unrecognized amounts:

Prior service cost 13 67 1 ——— 12

Net actuarial (gain) loss 23 62 — 44 35 6 — — (10)

Curtailment (gain) loss 7 215 — 8 (3) 8 2 (8)

Settlement (gain) loss — —— (1) — (2) — ——

Special termination benefits — —— 11 —32 —57

Net periodic benefit costs reported in

Compensation expense $86 $ 190 $ 113 $69 $50 $ 6 $20

(b)

$ (1) $ 24

(a) 2004 results include six months of the combined Firm’s results and six months of heritage JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

(b) The effect of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 resulted in a $5 million reduction in the Firm’s net periodic benefit costs.

Notes to consolidated financial statements

JPMorgan Chase & Co.

94 JPMorgan Chase & Co. / 2004 Annual Report

JPMorgan Chase has a number of other defined benefit pension plans (i.e., U.S.

plans not subject to Title IV of the Employee Retirement Income Security Act).

The most significant of these plans is the Excess Retirement Plan, pursuant to

which certain employees earn service credits on compensation amounts above

the maximum stipulated by law. This plan is a nonqualified, noncontributory

U.S. pension plan with an unfunded liability at December 31, 2004 and 2003,

in the amount of $292 million and $178 million, respectively. Compensation

expense related to the Firm’s other defined benefit pension plans totaled $28

million in 2004, $19 million in 2003 and $15 million in 2002.

Plan assumptions

JPMorgan Chase’s expected long-term rate of return for U.S. pension and other

postretirement plan assets is a blended average of its investment advisor’s

projected long-term (10 years or more) returns for the various asset classes,

weighted by the portfolio allocation. Asset-class returns are developed using

a forward-looking building-block approach and are not based strictly on his-

torical returns. Equity returns are generally developed as the sum of inflation,

expected real earnings growth and expected long-term dividend yield. Bond

returns are generally developed as the sum of inflation, real bond yields and

risk spreads (as appropriate), adjusted for the expected effect on returns from

changing yields. Other asset-class returns are derived from their relationship

to the equity and bond markets.

long-term rate of return on the Firm’s COLI postretirement plan assets remained

at 7%; however, with the merger of Bank One’s other postretirement plan

assets, the Firm’s overall expected long-term rate of return on U.S. postretirement

plan assets decreased to 6.80% to reflect a weighted average expected rate of

return for the merged plan. The changes as of December 31, 2004, to the dis-

count rate and the expected long-term rate of return on plan assets is expect-

ed to increase 2005 U.S. pension and other postretirement benefit expenses

by approximately $41 million. The impact of any changes to the discount rate

and the expected long-term rate of return on plan assets on non-U.S. pension

and other postretirement benefit expenses is not expected to be material.

JPMorgan Chase’s U.S. pension and other postretirement benefit expenses are

most sensitive to the expected long-term rate of return on plan assets. With

all other assumptions held constant, a 25–basis point decline in the expected

long-term rate of return on U.S. plan assets would result in an increase of

approximately $25 million in 2005 U.S. pension and other postretirement

benefit expenses. Additionally, a 25–basis point decline in the discount rate

for the U.S. plans would result in an increase in 2005 U.S. pension and other

postretirement benefit expenses of approximately $16 million and an increase

in the related projected benefit obligations of approximately $215 million.

U.S. Non-U.S.

For the year ended December 31, 2004 2003 2004 2003

Weighted-average assumptions used to determine

benefit obligations

Discount rate 5.75% 6.00% 2.00-5.30% 2.00-5.40%

Rate of compensation increase 4.50 4.50 1.75-3.75 1.75-3.75

U.S. Non-U.S.

For the year ended December 31, 2004 2003 2002 2004 2003 2002

Weighted-average assumptions used to determine net

periodic benefit costs

Discount rate 6.00% 6.50% 7.25% 2.00-5.75% 1.50-5.60% 2.50-6.00%

Expected long-term rate of return on plan assets:

Pension 7.50-7.75 8.00 9.25 3.00-6.50 2.70-6.50 3.25-7.25

Postretirement benefit 4.75-7.00 8.00 9.00 NA NA NA

Rate of compensation increase 4.25-4.50 4.50 4.50 1.75-3.75 1.25-3.00 2.00-4.00

In the United Kingdom, which represents the most significant of the non-U.S.

pension plans, procedures similar to those in the United States are used to

develop the expected long-term rate of return on pension plan assets, taking

into consideration local market conditions and the specific allocation of plan

assets. The expected long-term rate of return on U.K. plan assets is an aver-

age of projected long-term returns for each asset class, selected by reference

to the yield on long-term U.K. government bonds and AA-rated long-term

corporate bonds, plus an equity risk premium above the risk-free rate.

The discount rate used in determining the benefit obligation under the U.S.

pension and other postretirement employee benefit plans is selected by refer-

ence to the year-end Moody’s corporate AA rate, as well as other high-quality

indices with similar duration to that of the respective plan’s benefit obliga-

tions. The discount rate for the U.K. postretirement plans is selected by refer-

ence to the year-end iBoxx £ corporate AA 15-year-plus bond rate.

The following tables present the weighted-average annualized actuarial

assumptions for the projected and accumulated benefit obligations, and the

components of net periodic benefit costs for the Firm’s U.S. and non-U.S.

defined benefit pension and postretirement benefit plans, as of year-end.

The following tables present JPMorgan Chase’s assumed weighted-average

medical benefits cost trend rate, which is used to measure the expected cost

of benefits at year-end, and the effect of a one-percentage-point change in

the assumed medical benefits cost trend rate.

December 31, 2004 2003

(a)

2002

(a)

Health care cost trend rate assumed

for next year 10% 10% 9%

Rate to which cost trend rate is assumed

to decline (ultimate trend rate) 5 55

Year that rate reaches ultimate trend rate 2012 2010 2008

(in millions) 1-Percentage- 1-Percentage-

For the year ended December 31,2004 point increase point decrease

Effect on total service and interest costs $5 $ (4)

Effect on postretirement benefit obligation 71 (62)

(a) Heritage JPMorgan Chase only.

At December 31, 2004, the Firm reduced the discount rate used to determine

its U.S. benefit obligations to 5.75%. The Firm also reduced the 2005 expected

long-term rate of return on its U.S. pension plan assets to 7.50%. The expected

Defined benefit pension plans

U.S. Non-U.S.

(a)

Postretirement benefit plans

(b)

Target % of plan assets Target % of plan assets Target % of plan assets

December 31, Allocation 2004 2003

(c)

Allocation 2004 2003

(c)

Allocation 2004 2003

(c)

Asset class

Debt securities 40% 38% 41% 74% 74% 70% 50% 46% 50%

Equity securities 50 53 53 26 26 24 50 54 50

Real estate 5 5 5—— —— — —

Other 5 4 1—— 6— — —

Total 100% 100% 100% 100% 100% 100% 100% 100% 100%

(a) Represents the U.K. defined benefit pension plan only, as plans outside the U.K. are not significant.

(b) Represents the U.S. postretirement benefit plan only, as the U.K. plan is unfunded.

JPMorgan Chase & Co. / 2004 Annual Report 95

Investment strategy and asset allocation

The investment policy for the Firm’s postretirement employee benefit plan assets

is to optimize the risk-return relationship as appropriate to the respective plan’s

needs and goals, using a global portfolio of various asset classes diversified by

market segment, economic sector and issuer. Specifically, the goal is to optimize

the asset mix for future benefit obligations, while managing various risk factors

and each plan’s investment return objectives. For example, long-duration fixed

income securities are included in the U.S. qualified pension plan’s asset alloca-

tion, in recognition of its long-duration obligations. Plan assets are managed

by a combination of internal and external investment managers and, on a

quarterly basis, are rebalanced to target, to the extent economically practical.

The Firm’s U.S. pension plan assets are held in various trusts and are invested

in well diversified portfolios of equity (including U.S. large and small capital-

ization and international equities), fixed income (including corporate and

Estimated future benefit payments

The following table presents benefit payments expected to be paid, which

include the effect of expected future service for the years indicated. The

postretirement medical and life insurance payments are net of expected

retiree contributions and the estimated Medicare Part D subsidy.

Non- U.S. and U.K.

Year ended December 31, U.S. pension U.S. pension postretirement

(in millions) benefits benefits benefits

2005 $ 619 $ 60 $ 113

2006 578 62 110

2007 592 65 112

2008 606 67 114

2009 621 70 116

Years 2010–2014 3,352 387 588

Defined contribution plans

JPMorgan Chase offers several defined contribution plans in the U.S. and in cer-

tain non-U.S. locations. The most significant of these is the JPMorgan Chase

401(k) Savings Plan, covering substantially all U.S. employees. This plan allows

employees to make pre-tax contributions to tax-deferred investment portfolios.

The Firm matches eligible employee contributions up to a certain percentage of

benefits eligible compensation per pay period, subject to plan and legal limits.

Employees begin to receive matching contributions after completing a specified

service requirement and are immediately vested in such company contributions.

The Firm’s defined contribution plans are administered in accordance with appli-

cable local laws and regulations. Compensation expense related to these plans

totaled $317 million in 2004, $240 million in 2003 and $251 million in 2002.

Note 7 – Employee stock-based incentives

Effective January 1, 2003, JPMorgan Chase adopted SFAS 123 using the

prospective transition method. SFAS 123 requires all stock-based compensation

awards, including stock options and stock-settled stock appreciation rights

(“SARs”), to be accounted for at fair value. Stock options that were outstanding

as of December 31, 2002 continue to be accounted for under APB 25 using the

intrinsic value method. Under this method, no expense is recognized for stock

options or SARs granted at the stock price on grant date, since such options

have no intrinsic value. The Firm currently uses the Black-Scholes valuation model

to estimate the fair value of stock options and SARs. Compensation expense for

restricted stock and restricted stock units (“RSUs”) is measured based on the

number of shares granted and the stock price at the grant date. Compensation

expense is recognized in earnings over the required service period.

In connection with the Merger, JPMorgan Chase converted all outstanding

Bank One employee stock-based awards at the merger date, and those

awards became exercisable for or based upon JPMorgan Chase common

stock. The number of awards converted, and the exercise prices of those

awards, was adjusted to take into account the Merger exchange ratio of 1.32.

On December 16, 2004, the FASB issued SFAS 123R, which revises SFAS 123

and supersedes APB 25. Accounting and reporting under SFAS 123R is generally

similar to the SFAS 123 approach except that SFAS 123R requires all share-

based payments to employees, including grants of stock options and SARs, to be

recognized in the income statement based on their fair values. SFAS 123R must

be adopted no later than July 1, 2005. SFAS 123R permits adoption using one of

two methods — modified prospective or modified retrospective. The Firm is cur-

rently evaluating both the timing and method of adopting the new standard.

government bonds), Treasury inflation-indexed and high-yield securities, cash

equivalents and other securities. Non-U.S. pension plan assets are similarly

invested in well-diversified portfolios of equity, fixed income and other securi-

ties. Assets of the Firm’s COLI policies, which are used to fund partially the

U.S. postretirement benefit plan, are held in separate accounts with an insur-

ance company and are invested in equity and fixed income index funds. In

addition, tax-exempt municipal debt securities, held in a trust, are used to

fund the U.S. postretirement benefit plan. Assets used to fund the Firm’s U.S.

and non-U.S. defined benefit pension plans include $53 million of JPMorgan

Chase common stock in addition to JPMorgan Chase common stock held in

connection with investments in third-party stock-index funds.

The following table presents the weighted-average asset allocation at

December 31 for the years indicated, and the respective target allocation by

asset category, for the Firm’s U.S. and non-U.S. defined benefit pension and

postretirement benefit plans.

Notes to consolidated financial statements

JPMorgan Chase & Co.

96 JPMorgan Chase & Co. / 2004 Annual Report

Key employee stock-based awards

JPMorgan Chase grants long-term stock-based incentive awards to certain

key employees under two plans (the “LTI Plans”): the 1996 Long-Term

Incentive Plan (the “1996 Plan”), as amended and approved by shareholders

in May 2000, provides for grants of stock options, SARs, restricted stock and

RSU awards, and the Stock Option Plan, a nonshareholder-approved plan,

provides for grants of stock options and SARs. In 2004, 14.5 million SARs

settled only in shares and 2.2 million nonqualified stock options were granted

under the 1996 Plan.

Under the LTI Plans, stock options and SARs are granted with an exercise price

equal to JPMorgan Chase’s common stock price on the grant date. Generally,

options and SARs cannot be exercised until at least one year after the grant

date and become exercisable over various periods as determined at the time

of the grant. These awards generally expire 10 years after the grant date.

The following table presents a summary of JPMorgan Chase’s option and SAR activity under the LTI Plans during the last three years:

2004 2003 2002

Year ended December 31,

(a)

Number of Weighted-average Number of Weighted-average Number of Weighted-average

(in thousands) options/SARs exercise price options exercise price options exercise price

Outstanding, January 1 294,026 $ 39.88 298,731 $ 40.84 272,304 $ 41.23

Granted 16,667 39.79 26,751 22.15 53,230 36.41

Bank One Conversion, July 1 111,287 29.63 NA NA NA NA

Exercised (27,763) 25.33 (14,574) 17.47 (9,285) 16.85

Canceled (17,887) 46.68 (16,882) 47.57 (17,518) 45.59

Outstanding, December 31 376,330 $ 37.59 294,026 $ 39.88 298,731 $ 40.84

Exercisable, December 31 246,945 $ 36.82 176,163 $ 37.88 144,421 $ 34.91

(a) 2004 includes six months of awards for the combined Firm and six months of awards for heritage JPMorgan Chase. All other periods reflect the awards for heritage JPMorgan Chase only.

The following table details the distribution of options and SARs outstanding under the LTI Plans at December 31, 2004:

Options/SARs outstanding Options/SARs exercisable

(in thousands) Weighted-average Weighted-average remaining Weighted-average

Range of exercise prices Outstanding exercise price contractual life (in years) Exercisable exercise price

$3.41–$20.00 9,715 $ 17.67 0.9 9,707 $ 17.66

$20.01–$35.00 131,767 26.99 6.1 77,537 27.02

$35.01–$50.00 144,521 40.05 5.7 123,585 40.23

$50.01–$65.58 90,327 51.27 5.8 36,116 51.34

Total 376,330 $ 37.59 5.8 246,945 $ 36.82

recipient is entitled to receive cash payments equivalent to any dividends paid

on the underlying common stock during the period the RSU is outstanding.

The vesting of certain awards issued prior to 2002 is conditioned upon cer-

tain service requirements being met and JPMorgan Chase’s common stock

reaching and sustaining target prices within a five-year performance period.

During 2002, it was determined that it was no longer probable that the tar-

get stock prices related to forfeitable awards granted in 1999, 2000, and

2001 would be achieved within their respective performance periods, and

accordingly, previously accrued expenses were reversed. The target stock

prices for these awards range from $73.33 to $85.00. Forfeitures of the 1999

awards in 2004 equaled 1.2 million shares; and 1.2 million shares of the

2000 award were forfeited in January 2005. The 2001 awards will be forfeit-

ed in January 2006 if their stock price targets are not achieved.

Broad-based employee stock options

In January 2004, JPMorgan Chase granted a total of 6.3 million options and

SARs to all eligible full-time (75 options each) and part-time (38 options

each) employees under the Value Sharing Plan, a nonshareholder-approved

plan. The exercise price is equal to JPMorgan Chase’s common stock price on

the grant date. The options become exercisable over various periods and gen-

erally expire 10 years after the grant date.

The following table presents a summary of JPMorgan Chase’s restricted stock

and RSU activity under the 1996 Plan during the last three years:

(in thousands) Number of restricted stock/RSUs

Year ended December 31,

(a)

2004 2003 2002

Outstanding, January 1 85,527 55,886 48,336

Granted 32,514 44,552 24,624

Bank One conversion 15,116 NA NA

Lapsed

(b)

(43,349) (12,545) (15,203)

Forfeited (4,709) (2,366) (1,871)

Outstanding, December 31 85,099 85,527 55,886

(a) 2004 results include six months of awards for the combined Firm and six months of

awards for heritage JPMorgan Chase. All other periods reflect the awards for heritage

JPMorgan Chase only.

(b) Lapsed awards represent both restricted stock for which restrictions have lapsed and RSUs

that have been converted into common stock.

Restricted stock and RSUs are granted by JPMorgan Chase under the 1996

Plan at no cost to the recipient. These awards are subject to forfeiture until

certain restrictions have lapsed, including continued employment for a speci-

fied period. The recipient of a share of restricted stock is entitled to voting

rights and dividends on the common stock. An RSU entitles the recipient to

receive a share of common stock after the applicable restrictions lapse; the

The following table presents a summary of JPMorgan Chase’s broad-based employee stock option plan and SAR activity during the past three years:

Year ended December 31,

(a)

2004 2003 2002

Number of Weighted-average Number of Weighted-average Number of Weighted-average

(in thousands) options/SARs exercise price options exercise price options exercise price

Outstanding, January 1 117,822 $ 39.11 113,155 $ 40.62 87,393 $ 41.86

Granted 6,321 39.96 12,846 21.87 32,550 36.85

Exercised (5,960) 15.26 (2,007) 13.67 (674) 15.01

Canceled (5,999) 39.18 (6,172) 37.80 (6,114) 41.14

Outstanding, December 31 112,184 $ 40.42 117,822 $ 39.11 113,155 $ 40.62

Exercisable, December 31 30,082 $ 36.33 36,396 $ 32.88 38,864 $ 31.95

(a) All awards are for heritage JPMorgan Chase employees only.

The following table details the distribution of broad-based employee stock options and SARs outstanding at December 31, 2004:

Options/SARs outstanding Options/SARs exercisable

(in thousands) Weighted-average Weighted-average remaining Weighted-average

Range of exercise prices Outstanding exercise price contractual life (in years) Exercisable exercise price

$ 20.01–$35.00 17,750 $ 24.72 5.6 7,319 $ 28.79

$ 35.01–$50.00 73,298 41.11 5.6 22,763 38.76

$ 50.01–$51.22 21,136 51.22 6.1 — —

Total

(a)

112,184 $ 40.42 5.7 30,082 $ 36.33

(a) All awards are for heritage JPMorgan Chase employees only.

JPMorgan Chase & Co. / 2004 Annual Report 97

The following table presents JPMorgan Chase’s weighted-average grant-date

fair values for the employee stock-based compensation awards granted, and

the assumptions used to value stock options and SARs under a Black-Scholes

valuation model:

Year ended December 31,

(a)

2004 2003 2002

Weighted-average grant-date fair value

Stock options:

Key employee $ 13.04 $ 5.60 $ 11.57

Broad-based employee 10.71 4.98 13.01

Converted Bank One options 14.05 NA NA

Restricted stock and RSUs

(all payable solely in stock) 39.58 22.03 36.28

Weighted-average annualized

stock option valuation assumptions

Risk-free interest rate 3.44% 3.19% 4.61%

Expected dividend yield

(b)

3.59 5.99 3.72

Expected common stock price volatility 41 44 39

Assumed weighted-average expected

life of stock options (in years)

Key employee 6.8 6.8 6.8

Broad-based employee 3.8 3.8 6.8

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

(b) Based primarily on historical data at the grant dates.

Comparison of the fair and intrinsic value measurement methods

Pre-tax employee stock-based compensation expense related to these plans

totaled $1.3 billion in 2004, $919 million in 2003 and $590 million in 2002. In

response to the fact that the adoption of SFAS 123 eliminated the difference in

the expense impact of issuing options and restricted stock, the Firm changed its

incentive compensation policies upon the adoption of SFAS 123 to permit

employees to elect to receive incentive awards in the form of options, restricted

stock or a combination of both. The $266 million impact of the adoption of

SFAS 123 in 2003 is comprised of (i) $86 million representing the value of stock

options granted during 2003 and (ii) $180 million representing the value of

restricted stock granted during 2003 that would have been issuable solely in the

form of stock options prior to the adoption of SFAS 123.

The following table presents net income (after-tax) and basic and diluted earn-

ings per share as reported, and as if all outstanding awards were accounted for

at fair value:

Year ended December 31,

(a)

(in millions, except per share data) 2004 2003 2002

Net income as reported $ 4,466 $ 6,719 $ 1,663

Add: Employee stock-based

compensation expense

originally included in

reported net income 778 551 354

Deduct: Employee stock-based

compensation expense

determined under the fair

value method for all awards (960) (863) (1,232)

Pro forma net income $ 4,284 $ 6,407 $ 785

Earnings per share:

Basic: As reported $ 1.59 $ 3.32 $ 0.81

Pro forma 1.52 3.16 0.37

Diluted: As reported $ 1.55 $ 3.24 $ 0.80

Pro forma 1.48 3.09 0.37

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results.All other periods reflect the results of heritage JPMorgan Chase only.

Notes to consolidated financial statements

JPMorgan Chase & Co.

98 JPMorgan Chase & Co. / 2004 Annual Report

Note 9 – Securities and

private equity investments

Securities are classified as AFS, Held-to-maturity (“HTM”) or Trading. Trading

securities are discussed in Note 3 on pages 90–91. Securities are classified as

AFS when, in management’s judgment, they may be sold in response to or in

anticipation of changes in market conditions, or as part of the Firm’s manage-

ment of its structural interest rate risk. AFS securities are carried at fair value

on the Consolidated balance sheets. Unrealized gains and losses after SFAS

133 valuation adjustments are reported as net increases or decreases to

Accumulated other comprehensive income (loss). The specific identification

method is used to determine realized gains and losses on AFS securities,

which are included in Securities /private equity gains on the Consolidated

statements of income. Securities that the Firm has the positive intent and

ability to hold to maturity are classified as HTM and are carried at amortized

cost on the Consolidated balance sheets.

The following table presents realized gains and losses from AFS securities and

private equity gains (losses):

Year ended December 31,

(a)

(in millions) 2004 2003 2002

Realized gains $ 576 $ 2,123 $1,904

Realized losses (238) (677) (341)

Net realized securities gains 338 1,446 1,563

Private equity gains (losses) 1,536 33 (746)

Total Securities/private

equity gains $ 1,874 $ 1,479 $ 817

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

The amortized cost and estimated fair value of AFS and held-to-maturity securities were as follows for the dates indicated:

2004 2003

(a)

Gross Gross Gross Gross

Amortized unrealized unrealized Fair Amortized unrealized unrealized Fair

December 31, (in millions) cost gains losses value cost gains losses value

Available-for-sale securities

U.S. government and federal agencies/

corporations obligations:

Mortgage-backed securities $ 46,577 $ 165 $ 601 $ 46,141 $ 32,248 $ 101 $ 417 $ 31,932

Collateralized mortgage obligations 682 4 4 682 1,825 3 — 1,828

U.S. treasuries 13,621 7 222 13,406 11,511 13 168 11,356

Agency obligations 1,423 18 9 1,432 106 2 — 108

Obligations of state and political subdivisions 2,748 126 8 2,866 2,841 171 52 2,960

Debt securities issued by non-U.S. governments 7,901 59 38 7,922 7,232 47 41 7,238

Corporate debt securities 7,007 127 18 7,116 818 23 8 833

Equity securities 5,810 39 14 5,835 1,393 24 11 1,406

Other, primarily asset-backed securities

(b)

9,052 25 75 9,002 2,448 61 102 2,407

Total available-for-sale securities $ 94,821 $ 570 $ 989 $ 94,402 $ 60,422 $ 445 $ 799 $ 60,068

Held-to-maturity securities

(c)

Total held-to-maturity securities $ 110 $ 7 $ — $ 117 $ 176 $ 10 $ — $ 186

(a) Heritage JPMorgan Chase only.

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

Note 8 – Noninterest expense

Merger costs

Costs associated with the Bank One merger in 2004, and costs associated

with various programs announced prior to January 1, 2002 and incurred as

of December 31, 2002, were reflected in the Merger costs caption of the

Consolidated statements of income. A summary of such costs, by expense

category, is shown in the following table for 2004, 2003 and 2002.

Year ended December 31,

(a)

(in millions) 2004 2003 2002

Expense category

Compensation $ 467 $ — $ 379

Occupancy 448 — 216

Technology and communications and other 450 — 615

Total

(b)

$ 1,365 $ — $ 1,210

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

(b) With the exception of occupancy-related write-offs, all of the costs in the table require the

expenditure of cash.

The table below shows the change in the liability balance related to the costs

associated with the Bank One merger.

Year ended December 31,

(a)

(in millions) 2004 2003

Liability balance, beginning of period $— $—

Recorded as merger costs 1,365 —

Recorded as goodwill 1,028 —

Liability utilized (1,441) —

Total $ 952 $—

(a) 2004 activity includes six months of the combined Firm’s activity and six months of heritage

JPMorgan Chase activity, while 2003 activity includes heritage JPMorgan Chase only.

The following table presents the fair value and unrealized losses for AFS securities by aging category:

Securities with unrealized losses

Less than 12 months 12 months or more

Total

Gross Gross Total Gross

Fair unrealized Fair unrealized Fair unrealized

December 31, 2004 (in millions) value losses value losses value losses

Available-for-sale securities

U.S. government and federal agencies/corporations obligations:

Mortgage-backed securities $ 33,806 $ 274 $ 11,884 $ 327 $ 45,690 $ 601

Collateralized mortgage obligations 278 4 2 — 280 4

U.S. treasuries 10,186 154 940 68 11,126 222

Agency obligations 1,303 9 3 — 1,306 9

Obligations of state and political subdivisions 678 6 96 2 774 8

Debt securities issued by non-U.S. governments 3,395 17 624 21 4,019 38

Corporate debt securities 1,103 13 125 5 1,228 18

Equity securities 1,804 14 23 — 1,827 14

Other, primarily asset-backed securities 1,896 41 321 34 2,217 75

Total securities with unrealized losses $ 54,449 $ 532 $ 14,018 $ 457 $ 68,467 $ 989

JPMorgan Chase & Co. / 2004 Annual Report 99

Available-for-sale securities Held-to-maturity securities

Maturity schedule of securities Amortized Fair Average Amortized Fair Average

December 31, 2004 (in millions) cost value yield

(a)

cost value yield

(a)

Due in one year or less $ 8,641 $ 8,644 2.44% $ — $ — —%

Due after one year through five years 19,640 19,600 3.18 — — —

Due after five years through 10 years 9,270 9,278 3.77 16 16 6.96

Due after 10 years

(b)

57,270 56,880 4.48 94 101 6.88

Total securities $ 94,821 $ 94,402 3.95% $ 110 $ 117 6.89%

(a) The average yield is based on amortized cost balances at year-end. Yields are derived by dividing interest income by total amortized cost. Taxable-equivalent yields are used where applicable.

(b) Includes securities with no stated maturity. Substantially all of JPMorgan Chase’s MBSs and CMOs are due in 10 years or more based on contractual maturity. The estimated duration, which reflects

anticipated future prepayments based on a consensus of dealers in the market, is approximately four years for MBSs and CMOs.

Impairment is evaluated considering numerous factors, and their relative sig-

nificance varies case to case. Factors considered include the length of time

and extent to which the market value has been less than cost; the financial

condition and near-term prospects of the issuer; and the intent and ability to

retain the security in order to allow for an anticipated recovery in market

value. If, based on the analysis, it is determined that the impairment is other-

than-temporary, the security is written down to fair value, and a loss is recog-

nized through earnings.

Included in the $989 million of gross unrealized losses on AFS securities at

December 31, 2004, was $457 million of unrealized losses that have existed

for a period greater than 12 months. These securities are predominately rated

AAA and the unrealized losses are due to overall increases in market interest

rates and not due to underlying credit concerns of the issuers. Substantially

all of the securities with unrealized losses aged greater than 12 months have

a market value at December 31, 2004, that is within 3% of their amortized

cost basis.

The Firm believes that all aged unrealized losses, as described above, are

expected to be recovered within a reasonable time through a typical interest

rate cycle. Accordingly, the Firm has concluded that none of the securities in its

investment portfolios are other-than-temporarily impaired at December 31, 2004.

In calculating the effective yield for mortgage-backed securities (“MBS”) and

collateralized mortgage obligations (“CMO”), JPMorgan Chase includes the

effect of principal prepayments. Management regularly performs simulation

testing to determine the impact that market conditions would have on its MBS

and CMO portfolios. MBSs and CMOs that management believes have pre-

payment risk are included in the AFS portfolio and are reported at fair value.

The following table presents the amortized cost, estimated fair value and

average yield at December 31, 2004, of JPMorgan Chase’s AFS and HTM

securities by contractual maturity:

Notes to consolidated financial statements

JPMorgan Chase & Co.

100 JPMorgan Chase & Co. / 2004 Annual Report

Private equity investments are primarily held by the Private Equity business

within Corporate (which includes JPMorgan Partners, reported as a stand-

alone business segment prior to the Merger, and Bank One’s ONE Equity

Partners). The Private Equity business invests in buyouts, growth equity and

venture opportunities in the normal course of business. These investments are

accounted for under investment company guidelines. Accordingly, these

investments, irrespective of the percentage of equity ownership interest held

by Private Equity, are carried on the Consolidated balance sheets at fair value.

Realized and unrealized gains and losses arising from changes in value are

reported in Securities/private equity gains in the Consolidated statements of

income in the period that the gains or losses occur.

Private investments are initially valued based on cost. The carrying values of

private investments are adjusted from cost to reflect both positive and nega-

tive changes evidenced by financing events with third-party capital providers.

In addition, these investments are subject to ongoing impairment reviews by

Private Equity’s senior investment professionals. A variety of factors are

reviewed and monitored to assess impairment – including, but not limited to,

operating performance and future expectations, comparable industry valua-

tions of public companies, changes in market outlook and changes in the

third-party financing environment. The Valuation Control Group within the

Finance area is responsible for reviewing the accuracy of the carrying values

of private investments held by Private Equity.

Private Equity also holds publicly-held equity investments, generally obtained

through the initial public offering of private equity investments. These invest-

ments are marked to market at the quoted public value. To determine the

carrying values of these investments, Private Equity incorporates the use of

discounts to take into account the fact that it cannot immediately realize or

risk manage the quoted public values as a result of regulatory, corporate

and/or contractual sales restrictions imposed on these holdings.

The following table presents the carrying value and cost of the Private Equity

investment portfolio for the dates indicated:

2004 2003

(a)

Carrying Carrying

December 31, (in millions) value Cost value Cost

Total private

equity investments $ 7,735 $ 9,103 $ 7,250 $ 9,147

(a) Heritage JPMorgan Chase only.

Note 10 – Securities financing activities

JPMorgan Chase enters into resale agreements, repurchase agreements,

securities borrowed transactions and securities loaned transactions primarily

to finance the Firm’s inventory positions, acquire securities to cover short

positions and settle other securities obligations. The Firm also enters into

these transactions to accommodate customers’ needs.

Securities purchased under resale agreements (“resale agreements”) and secu-

rities sold under repurchase agreements (“repurchase agreements”) are gener-

ally treated as collateralized financing transactions and are carried on the

Consolidated balance sheets at the amounts the securities will be subsequently

sold or repurchased, plus accrued interest. Where appropriate, resale and repur-

chase agreements with the same counterparty are reported on a net basis in

accordance with FIN 41. JPMorgan Chase takes possession of securities pur-

chased under resale agreements. On a daily basis, JPMorgan Chase monitors

the market value of the underlying collateral received from its counterparties,

consisting primarily of U.S. and non-U.S. government and agency securities, and

requests additional collateral from its counterparties when necessary.

Transactions similar to financing activities that do not meet the SFAS 140 defini-

tion of a repurchase agreement are accounted for as “buys” and “sells” rather

than financing transactions. These transactions are accounted for as a purchase

(sale) of the underlying securities with a forward obligation to sell (purchase)

the securities. The forward purchase (sale) obligation, a derivative, is recorded

on the Consolidated balance sheets at its fair value, with changes in fair value

recorded in Trading revenue. Notional amounts of transactions accounted for as

purchases under SFAS 140 were $6 billion at December 31, 2004, and $15 bil-

lion at December 31, 2003, respectively. Notional amounts of transactions

accounted for as sales under SFAS 140 were $20 billion and $8 billion at

December 31, 2004, and December 31, 2003, respectively. Based on the short-

term duration of these contracts, the unrealized gain or loss is insignificant.

Securities borrowed and securities lent are recorded at the amount of cash

collateral advanced or received. Securities borrowed consist primarily of

government and equity securities. JPMorgan Chase monitors the market value

of the securities borrowed and lent on a daily basis and calls for additional

collateral when appropriate. Fees received or paid are recorded in Interest

income or Interest expense.

December 31, (in millions) 2004 2003

(a)

Securities purchased under resale agreements $ 94,076 $ 62,801

Securities borrowed 47,428 41,834

Securities sold under repurchase agreements $ 105,912 $103,610

Securities loaned 6,435 4,260

(a) Heritage JPMorgan Chase only.

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 instru-

ments owned (pledged to various parties) on the Consolidated balance sheets.

At December 31, 2004, the Firm had received securities as collateral that can

be repledged, delivered or otherwise used with a fair value of approximately

$252 billion. This collateral was generally obtained under resale or securities

borrowing agreements. Of these securities, approximately $238 billion were

repledged, delivered or otherwise used, generally as collateral under repurchase

agreements, securities lending agreements or to cover short sales.

JPMorgan Chase & Co. / 2004 Annual Report 101

Note 11 – Loans

Loans are reported at the principal amount outstanding, net of the Allowance

for loan losses, unearned income and any net deferred loan fees. Loans held

for sale are carried at the lower of cost or fair value, with valuation changes

recorded in noninterest revenue. Loans are classified as “trading” where posi-

tions are bought and sold to make profits from short-term movements in

price. Loans held for trading purposes are included in Trading assets and are

carried at fair value, with the gains and losses included in Trading revenue.

Interest income is recognized using the interest method, or on a basis approx-

imating a level rate of return over the term of the loan.

Nonaccrual loans are those on which the accrual of interest is discontinued.

Loans (other than certain consumer loans discussed below) are placed on

nonaccrual status immediately if, in the opinion of management, full payment

of principal or interest is in doubt, or when principal or interest is 90 days or

more past due and collateral, if any, is insufficient to cover principal and inter-

est. Interest accrued but not collected at the date a loan is placed on nonac-

crual status is reversed against Interest income. In addition, the amortization

of net deferred loan fees is suspended. Interest income on nonaccrual loans is

recognized only to the extent it is received in cash. However, where there is

doubt regarding the ultimate collectibility of loan principal, all cash thereafter

received is applied to reduce the carrying value of the loan. Loans are

restored to accrual status only when interest and principal payments are

brought current and future payments are reasonably assured.

Consumer loans are generally charged to the Allowance for loan losses upon

reaching specified stages of delinquency, in accordance with the Federal

Financial Institutions Examination Council (“FFIEC”) policy. For example, credit

card loans are charged off by the end of the month in which the account

becomes 180 days past due or within 60 days from receiving notification of

the filing of bankruptcy, whichever is earlier. Residential mortgage products

are generally charged off to net realizable value at 180 days past due. Other

consumer products are generally charged off (to net realizable value if collat-

eralized) at 120 days past due. Accrued interest on residential mortgage

products, auto & education financings and certain other consumer loans are

accounted for in accordance with the nonaccrual loan policy discussed above.

Interest and fees related to credit card loans continue to accrue until the loan

is charged-off or paid. Accrued interest on all other loans is generally

reversed against interest income when the consumer loan is charged off. A

collateralized loan is considered an in-substance foreclosure and is reclassi-

fied to assets acquired in loan satisfactions, within Other assets, only when

JPMorgan Chase has taken physical possession of the collateral. This is

regardless of whether formal foreclosure proceedings have taken place.

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

follows:

December 31, (in millions) 2004 2003

(a)

U.S. wholesale loans:

Commercial and industrial $ 60,223 $ 30,748

Real estate 13,038 2,775

Financial institutions 14,060 8,346

Lease financing receivables 4,043 606

Other 8,504 1,850

Total U.S. wholesale loans 99,868 44,325

Non-U.S. wholesale loans:

Commercial and industrial 25,115 22,916

Real estate 1,747 1,819

Financial institutions 7,269 6,269

Lease financing receivables 1,068 90

Total non-U.S. wholesale loans 35,199 31,094

Total wholesale loans:

(b)

Commercial and industrial 85,338 53,664

Real estate

(c)

14,785 4,594

Financial institutions 21,329 14,615

Lease financing receivables 5,111 696

Other 8,504 1,850

Total wholesale loans 135,067 75,419

Total consumer loans:

(d)

Consumer real estate

Home finance – home equity & other 67,837 24,179

Home finance – mortgage 56,816 50,381

Total Home finance 124,653 74,560

Auto & education finance 62,712 43,157

Consumer & small business and other 15,107 4,204

Credit card receivables

(e)

64,575 17,426

Total consumer loans 267,047 139,347

Total loans

(f)(g)(h)

$ 402,114 $ 214,766

(a) Heritage JPMorgan Chase only.

(b) Includes Investment Bank, Commercial Banking, Treasury & Securities Services and Asset &

Wealth Management.

in the real estate development or investment businesses and for which the primary repay-

ment is from the sale, lease, management, operations or refinancing of the property.

(d) Includes Retail Financial Services and Card Services.

(e) Includes billed finance charges and fees net of an allowance for uncollectible amounts.

(f) Loans are presented net of unearned income of $4.1 billion and $1.3 billion at December

31, 2004, and December 31, 2003, respectively.

(g) Includes loans held for sale (principally mortgage-related loans) of $25.7 billion at

December 31, 2004, and $20.8 billion at December 31, 2003.

(h) Amounts are presented gross of the Allowance for loan losses.

Notes to consolidated financial statements

JPMorgan Chase & Co.

102 JPMorgan Chase & Co. / 2004 Annual Report

The following table reflects information about the Firm’s loans held for sale,

principally mortgage-related:

Year ended December 31, (in millions)

(a)

2004 2003 2002

Net gains on sales of loans held for sale $ 368 $ 933 $ 754

Lower of cost or market adjustments 39 26 (36)

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

Impaired loans

JPMorgan Chase accounts for and discloses nonaccrual loans as impaired

loans and recognizes their interest income as discussed previously for nonac-

crual loans. The Firm excludes from impaired loans its small-balance, homoge-

neous consumer loans; loans carried at fair value or the lower of cost or fair

value; debt securities; and leases.

The table below sets forth information about JPMorgan Chase’s impaired

loans. The Firm primarily uses the discounted cash flow method for valuing

impaired loans:

December 31, (in millions) 2004 2003

(a)

Impaired loans with an allowance $ 1,496 $ 1,597

Impaired loans without an allowance

(b)

284 406

Total impaired loans $ 1,780 $ 2,003

Allowance for impaired loans under SFAS 114

(c)

$ 521 $ 595

Average balance of impaired loans during the year 1,883 2,969

Interest income recognized on impaired

loans during the year 8 4

(a) Heritage JPMorgan Chase only.

(b) When the discounted cash flows, collateral value or market price equals or exceeds the

carrying value of the loan, then the loan does not require an allowance under SFAS 114.

Allowance for loan losses.

Note 12 – Allowance for credit losses

JPMorgan Chase’s Allowance for loan losses covers the wholesale (primarily

risk-rated) and consumer (primarily scored) loan portfolios and represents man-

agement’s estimate of probable credit losses inherent in the Firm’s loan portfo-

lio. Management also computes an Allowance for wholesale lending-related

commitments using a methodology similar to that used for the wholesale loans.

As a result of the Merger, management modified its methodology for determin-

ing the Provision for credit losses for the combined Firm. The effect of conform-

ing methodologies in 2004 was a decrease in the consumer allowance of $254

million and a decrease in the wholesale allowance (including both funded loans

and lending-related commitments) of $330 million. In addition, the Bank One

seller’s interest in credit card securitizations was decertificated; this resulted in

an increase to the provision for loan losses of approximately $1.4 billion

(pre-tax) in 2004.

The Allowance for loan losses consists of two components: asset-specific loss

and formula-based loss. Within the formula-based loss is a statistical calcula-

tion and an adjustment to the statistical calculation.

The asset-specific loss component relates to provisions for losses on loans

considered impaired and measured pursuant to SFAS 114. An allowance is

established when the discounted cash flows (or collateral value or observable

market price) of the loan are lower than the carrying value of that loan. To

compute the asset-specific loss component of the allowance larger impaired

loans are evaluated individually, and smaller impaired loans are evaluated as a

pool using historical loss experience for the respective class of assets.

The formula-based loss component covers performing wholesale and consumer

loans and is the product of a statistical calculation, as well as adjustments to

such calculation. These adjustments take into consideration model imprecision,

external factors and economic events that have occurred but are not yet

reflected in the factors used to derive the statistical calculation.

The statistical calculation is the product of probability of default and loss

given default. For risk-rated loans (generally loans originated by the whole-

sale lines of business), these factors are differentiated by risk rating and

maturity. For scored loans (generally loans originated by the consumer lines of

business), loss is primarily determined by applying statistical loss factors and

other risk indicators to pools of loans by asset type. Adjustments to the statis-

tical calculation for the risk-rated portfolios are determined by creating esti-

mated ranges using historical experience of both loss given default and prob-

ability of default. Factors related to concentrated and deteriorating industries

are also incorporated into the calculation where relevant. Adjustments to the

statistical calculation for the scored loan portfolios are accomplished in part

by analyzing the historical loss experience for each major product segment.

The estimated ranges and the determination of the appropriate point within

the range are based upon management’s view of uncertainties that relate to

current macroeconomic and political conditions, quality of underwriting stan-

dards, and other relevant internal and external factors affecting the credit

quality of the portfolio.

The Allowance for lending-related commitments represents management’s

estimate of probable credit losses inherent in the Firm’s process of extending

credit. Management establishes an asset-specific allowance for lending-related

commitments that are considered impaired and computes a formula-based

allowance for performing wholesale lending-related commitments. These are

computed using a methodology similar to that used for the wholesale loan

portfolio, modified for expected maturities and probabilities of drawdown.

At least quarterly, the allowance for credit losses is reviewed by the Chief Risk

Officer and the Deputy Chief Risk Officer of the Firm and is discussed with a

risk subgroup of the Operating Committee, relative to the risk profile of the

Firm’s credit portfolio and current economic conditions. As of December 31,

2004, JPMorgan Chase deemed the allowance for credit losses to be appro-

priate (i.e., sufficient to absorb losses that are inherent in the portfolio,

including those not yet identifiable).

JPMorgan Chase maintains an Allowance for credit losses as follows:

Reported in:

Allowance for

credit losses on: Balance sheet Income statement

Loans Allowance for loan losses Provision for credit losses

Lending-related

commitments Other liabilities Provision for credit losses

The table below summarizes the changes in the Allowance for loan losses:

December 31,

(a)

(in millions) 2004 2003

Allowance for loan losses at January 1 $ 4,523 $ 5,350

Addition resulting from the Merger, July 1, 2004 3,123 —

Gross charge-offs

(b)

(3,805) (2,818)

Gross recoveries 706 546

Net charge-offs (3,099) (2,272)

Provision for loan losses:

Provision excluding

accounting policy conformity 1,798 1,579

Accounting policy conformity

(c)

1,085 —

Total Provision for loan losses 2,883 1,579

Other

(d)

(110) (134)

Allowance for loan losses at December 31

(e)

$ 7,320 $ 4,523

(a) 2004 activity includes six months of the combined Firm’s activity and six months of heritage

JPMorgan Chase activity, while 2003 activity includes heritage JPMorgan Chase only.

(b) Includes $406 million related to the Manufactured Home Loan portfolio in the fourth

quarter of 2004.

heritage Bank One’s seller’s interest in credit card securitizations, partially offset by a

reduction of $357 million to conform provision methodologies.

(d) Primarily represents the transfer of the allowance for accrued interest and fees on reported

credit card loans.

(e) 2004 includes $469 million of asset-specific loss and $6.8 billion of formula-based loss.

Included within the formula-based loss is $4.8 billion related to statistical calculation and

an adjustment to the statistical calculation of $2.0 billion.

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

commitments:

December 31,

(a)

(in millions) 2004 2003

Allowance for lending-related commitments

at January 1 $ 324 $ 363

Addition resulting from the Merger, July 1, 2004 508 —

Provision for lending-related commitments:

Provision excluding

accounting policy conformity (112) (39)

Accounting policy conformity

(b)

(227) —

Total Provision for lending-related commitments (339) (39)

Other (1) —

Allowance for lending-related commitments

at December 31

(c)

$ 492 $ 324

(a) 2004 activity includes six months of the combined Firm’s activity and six months of heritage

JPMorgan Chase activity, while 2003 activity includes heritage JPMorgan Chase only.

(b) Represents a reduction of $227 million to conform provision methodologies in the whole-

sale portfolio.

Note: The formula-based loss for lending-related commitments is based on statistical calcu-

lation. There is no adjustment to the statistical calculation for lending-related commitments.

JPMorgan Chase & Co. / 2004 Annual Report 103

Note 13 – Loan securitizations

JPMorgan Chase securitizes, sells and services various consumer loans, such

as consumer real estate, credit card and automobile loans, as well as certain

wholesale loans (primarily real estate) originated by the Investment Bank. In

addition, the Investment Bank purchases, packages and securitizes commer-

cial and consumer loans. All IB activity is collectively referred to as Wholesale

activities below. Interests in the sold and securitized loans may be retained as

described below.

The Firm records a loan securitization as a sale when the transferred loans

are legally isolated from the Firm’s creditors and the accounting criteria for a

sale are met. Gains or losses recorded on loan securitizations depend, in part,

on the carrying amount of the loans sold and are allocated between the loans

sold and the retained interests, based on their relative fair values at the date

of sale. Since quoted market prices are generally not available, the Firm

usually estimates the fair value of these retained interests by determining

the present value of future expected cash flows using modeling techniques.

Such models incorporate management’s best estimates of key variables, such

as expected credit losses, prepayment speeds and the discount rates appropri-

ate for the risks involved. Gains on securitizations are reported in noninterest

revenue. Retained interests that are subject to prepayment risk, such that

JPMorgan Chase may not recover substantially all of its investment, are

recorded at fair value; subsequent adjustments are reflected in Other compre-

hensive income or in earnings, if the fair value of the retained interest has

declined below its carrying amount and such decline has been determined to

be other-than-temporary.

JPMorgan Chase–sponsored securitizations utilize SPEs as part of the securiti-

zation process. These SPEs are structured to meet the definition of a QSPE (as

discussed in Note 1 on page 88 of this Annual Report); accordingly, the assets

and liabilities of securitization-related QSPEs are not reflected in the Firm’s

Consolidated balance sheets (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 SPEs as of December 31, 2004

and 2003, were as follows:

December 31, (in billions) 2004 2003

(a)

Credit card receivables $ 106.3 $ 42.6

Residential mortgage receivables 19.1 21.1

Wholesale activities 44.8 33.8

Automobile loans 4.9 6.5

Total $ 175.1 $104.0

(a) Heritage JPMorgan Chase only.

Interests in the securitized loans are generally retained by the Firm in the

form of senior or subordinated interest-only strips, subordinated tranches,

escrow accounts and servicing rights, and they are primarily recorded in Other

assets. In addition, credit card securitization trusts require the Firm to main-

tain a minimum undivided interest in the trusts, representing the Firm’s inter-

ests in the receivables transferred to the trust that have not been securitized.

These interests are not represented by security certificates. The Firm’s undivided

interests are carried at historical cost and are classified in Loans.

JPMorgan Chase retains servicing responsibilities for all residential mortgage,

credit card and automobile loan securitizations and for certain wholesale

activity securitizations it sponsors, and receives annual servicing fees based

Notes to consolidated financial statements

JPMorgan Chase & Co.

104 JPMorgan Chase & Co. / 2004 Annual Report

Year ended December 31,

(a)

2004 2003

Wholesale Wholesale

(in millions) Mortgage Credit card Automobile activities

(d)

Mortgage Credit card Automobile activities

Principal securitized $ 6,529 $ 8,850 $ 1,600 $ 8,756 $ 13,270 $ 8,823 $ 4,510 $ 5,386

Pre-tax gains (losses) 47 52 (3) 135 168 44 13 107

Cash flow information:

Proceeds from securitizations $ 6,608 $ 8,850 $ 1,597 $ 8,430 $ 13,540 $ 8,823 $ 4,503 $ 5,493

Servicing fees collected 12 69 1 3 20 79 15 2

Other cash flows received 25 225 — 16 2 216 12 8

Proceeds from collections reinvested

in revolving securitizations — 110,697 — — — 58,199 —

—

Key assumptions (rates per annum):

Prepayment rate

(b)

23.8–37.6% 15.5–16.7% 1.5% 17.0–50.0% 10.1–36.2% 8.1–16.5% 1.5–1.6% 50.0%

CPR PPR ABS CPR PPR ABS

Weighted-average life (in years) 1.9–3.0 0.5–0.6 1.8 2.0–4.0 2.0–4.6 0.6–1.0 1.7–1.8 1.3–5.2

Expected credit losses 1.0–2.3% 5.5–5.8% 0.6% 0.0–3.0%

(c)

0.0–2.5%

(c)

5.5–8.0% 0.5–0.6% 0.0%

(c)

Discount rate 15.0–30.0% 12.0% 4.1% 0.6–5.0% 13.0–30.0% 12.0% 3.9–4.5% 1.0–5.0%

(a) 2004 results include six months of the combined Firm’s results and six months of heritage JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

(b) CPR: constant prepayment rate; ABS: absolute prepayment speed; PPR: principal payment rate.

(c) Expected credit losses for prime residential mortgage and certain wholesale securitizations are minimal and are incorporated into other assumptions.

(d) Wholesale activities consist of wholesale loans (primarily real estate) originated by the Investment Bank as well as $1.8 billion of consumer loans purchased from the market, packaged and securi-

tized by the Investment Bank.

In addition to securitization transactions, the Firm sold residential mortgage

loans totaling $65.7 billion and $123.2 billion during 2004 and 2003,

respectively, primarily as GNMA, FNMA and Freddie Mac mortgage-backed

securities; these sales resulted in pre-tax gains of $58.1 million and $564.3

million, respectively.

At both December 31, 2004 and 2003, the Firm had, with respect to its credit

card master trusts, $35.2 billion and $7.3 billion, respectively, related to its

undivided interest, and $2.1 billion and $1.1 billion, respectively, related to its

subordinated interest in accrued interest and fees on the securitized receiv-

ables, net of an allowance for uncollectible amounts. Credit card securitiza-

tion trusts require the Firm to maintain a minimum undivided interest of 4%

to 7% of the principal receivables in the trusts. The Firm maintained an aver-

age undivided interest in its principal receivables in the trusts of approximate-

ly 23% and 17% for 2004 and 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 defi-

ciencies in cash flows owed to investors. The amounts available in such

escrow accounts are recorded in Other assets and, as of December 31, 2004,

amounted to $395 million and $132 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:

December 31, (in millions) 2004 2003

(a)

Residential mortgage

(b)

$ 433 $ 570

Credit card

(b)

494 193

Automobile

(b)

85 151

Wholesale activities 23 34

Total $ 1,035 $ 948

(a) Heritage JPMorgan Chase only.

(b) Pre-tax unrealized gains (losses) recorded in Stockholders’ equity that relate to retained

securitization interests totaled $118 million and $155 million for Residential mortgage;

$(3) million and $11 million for Credit cards; and $11 million and $6 million for Automobile

at December 31, 2004 and 2003, respectively.

on the securitized loan balance plus certain ancillary fees. The Firm also

retains the right to service the residential mortgage loans it sells in connection

with mortgage-backed securities transactions with the Government National

Mortgage Association (“GNMA”), Federal National Mortgage Association

(“FNMA”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”).

For a discussion of mortgage servicing rights, see Note 15 on pages 109–111

of this Annual Report.

The following table summarizes new securitization transactions that were

completed during 2004 and 2003, the resulting gains arising from such secu-

ritizations, 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:

The table below displays the expected static-pool net credit losses for 2004, 2003 and 2002, based on securitizations occurring in that year:

Loans securitized in:

(a)

2004 2003

(b)

2002

(b)

Mortgage Automobile Mortgage Automobile Mortgage Automobile

December 31, 2004 0.0–3.3% 1.1% 0.0–2.1% 0.9% 0.0–2.4% 0.8%

December 31, 2003 NA NA 0.0–3.6 0.9 0.0–2.8 0.8

December 31, 2002 NA NA NA NA 0.1–3.7 0.9

(a) Static-pool losses not applicable to credit card securitizations, due to their revolving structure.

(b) Heritage JPMorgan Chase only.

JPMorgan Chase & Co. / 2004 Annual Report 105

The table below outlines the key economic assumptions used to determine the fair value of the remaining retained interests at December 31, 2004 and 2003,

respectively; and the sensitivities to those fair values to immediate 10% and 20% adverse changes in those assumptions:

December 31, 2004 (in millions) Mortgage Credit card Automobile Wholesale activities

Weighted-average life (in years) 0.8–3.4 0.5–1.0 1.3 0.2–4.0

Prepayment rate 15.1–37.1% CPR 8.3–16.7% PPR 1.4% ABS 0.0–50.0%

(b)

Impact of 10% adverse change $ (5) $ (34) $ (6) $ (1)

Impact of 20% adverse change (8) (69) (13) (1)

Loss assumption 0.0–5.0%

(c)

5.7–8.4% 0.7% 0.0–3.0%

(c)

Impact of 10% adverse change $ (17) $ (144) $ (4) $ —

Impact of 20% adverse change (34) (280) (8) —

Discount rate 13.0–30.0%

(d)

4.9–12.0% 5.5% 1.0–22.9%

Impact of 10% adverse change $ (9) $ (2) $ (1) $ —

Impact of 20% adverse change (18) (4) (2) —

December 31, 2003 (in millions)

(a)

Mortgage Credit card Automobile Wholesale activities

Weighted-average life (in years) 1.4–2.7 0.4–1.3 1.5 0.6–5.9

Prepayment rate 29.0–31.7% CPR 8.1–15.1% PPR 1.5% ABS 0.0–50.0%

(b)

Impact of 10% adverse change $ (17) $ (7) $ (10) $ (1)

Impact of 20% adverse change (31) (13) (19) (2)

Loss assumption 0.0–4.0%

(c)

5.5–8.0% 0.6% 0.0%

(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) Heritage JPMorgan Chase only.

(b) Prepayment risk on certain wholesale retained interests are minimal and are incorporated into other assumptions.

(c) Expected credit losses for prime residential mortgage and certain wholesale securitizations are minimal and 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.

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 assump-

tions 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.

Expected static-pool net credit losses include actual incurred losses plus pro-

jected net credit losses, divided by the original balance of the outstandings

comprising the securitization pool.

Notes to consolidated financial statements

JPMorgan Chase & Co.

106 JPMorgan Chase & Co. / 2004 Annual Report

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

Nonaccrual and 90 days or Net loan charge-offs

(b)

Total Loans more past due Year ended

December 31, (in millions) 2004 2003

(a)

2004 2003

(a)

2004 2003

Home finance $ 124,653 $ 74,560 $ 673 $ 374 $ 573 $ 135

Auto & education finance 62,712 43,157 193 123 263 171

Consumer & small business and other 15,107 4,204 295 72 154 75

Credit card receivables 64,575 17,426 1,006 284 1,923 1,126

Total consumer loans 267,047 139,347 2,167 853 2,913 1,507

Total wholesale loans 135,067 75,419 1,582 2,046 186 765

Total loans reported 402,114 214,766 3,749 2,899 3,099 2,272

Securitized loans:

Residential mortgage

(c)

11,533 15,564 460 594 150 191

Automobile 4,763 6,315 12 13 24 25

Credit card 70,795 34,856 1,337 879 2,898 1,870

Total consumer loans securitized 87,091 56,735 1,809 1,486 3,072 2,086

Securitized wholesale activities 1,401 2,108 — 9 — —

Total loans securitized

(d)

88,492 58,843 1,809 1,495 3,072 2,086

Total loans reported and securitized

(e)

$ 490,606 $ 273,609 $ 5,558 $ 4,394 $ 6,171 $ 4,358

(a) Heritage JPMorgan Chase only.

(b) 2004 results include six months of the combined Firm’s results and six months of heritage JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

(c) Includes $10.3 billion and $13.6 billion of outstanding principal balances on securitized sub-prime 1–4 family residential mortgage loans as of December 31, 2004 and 2003, respectively.

(d) Total assets held in securitization-related SPEs were $175.1 billion and $104.0 billion at December 31, 2004 and 2003, respectively. The $88.5 billion and $58.8 billion of loans securitized at

December 31, 2004 and 2003, respectively, excludes: $50.8 billion and $37.1 billion of securitized loans, in which the Firm’s only continuing involvement is the servicing of the assets; $35.2 billion

and $7.3 billion of seller’s interests in credit card master trusts; and $0.6 billion and $0.8 billion of escrow accounts and other assets, respectively.

(e) Represents both loans on the Consolidated balance sheets and loans that have been securitized, but excludes loans for which the Firm’s only continuing involvement is servicing of the assets.

Note 14 – Variable interest entities

Refer to Note 1 on page 88 of this Annual Report for a further description of

JPMorgan Chase’s policies regarding consolidation of variable interest entities.

JPMorgan Chase’s principal involvement with VIEs occurs in the following

business segments:

• Investment Bank: Utilizes VIEs to assist clients in accessing the financial

markets in a cost-efficient manner, by providing the structural flexibility to

meet their needs pertaining to price, yield and desired risk. There are two

broad categories of transactions involving VIEs in the IB: (1) multi-seller

conduits and (2) client intermediation; both are discussed below. The IB

also securitizes loans through QSPEs which are not considered VIEs, to

create asset-backed securities, as further discussed in Note 13 on pages

103–106 of this Annual Report.

• Asset & Wealth Management: Provides investment management services to

a limited number of the Firm’s mutual funds deemed VIEs. AWM earns a

fixed fee based on assets managed; the fee varies with each fund’s invest-

ment objective and is competitively priced. For the limited number of funds

that qualify as VIEs, the Firm’s interest is not considered significant under

FIN 46R.

• Treasury & Securities Services: Provides trustee and custodial services to a

number of VIEs. These services are similar to those provided to non-VIEs.

TSS earns market-based fees for services provided. Such relationships are

not considered significant interests under FIN 46R.

• Commercial Banking: Utilizes VIEs as part of its middle markets business.

This involvement includes: (1) structuring and administering independent,

member-owned finance entities for companies with dedicated distribution

systems, where the Firm may also provide some liquidity, letters of credit

and/or derivative instruments; and (2) synthetic lease transactions, in which

the Firm provides financing to a SPE; in turn, the SPE purchases assets,

which are then leased by the SPE to the Firm’s customer. The CB earns

market-based fees for providing such services. These activities do not

involve the Firm holding a significant interest in VIEs.

• The Firm’s Private Equity business, now included in Corporate, is involved

with entities that may be deemed VIEs. Private equity activities are

accounted for in accordance with the Investment Company Audit Guide

(“Audit Guide”). The FASB deferred adoption of FIN 46R for non-registered

investment companies that apply the Audit Guide until the proposed

Statement of Position on the clarification of the scope of the Audit Guide

is finalized. The Firm continues to apply this deferral provision; had FIN

46R been applied to VIEs subject to this deferral, the impact would have

had an insignificant impact on the Firm’s Consolidated financial statements

as of December 31, 2004.

As noted above, there are two broad categories of transactions involving VIEs

with which the IB is involved: multi-seller conduits and client intermediation.

These are discussed more fully below.

Multi-seller conduits

The Firm is an active participant in the asset-backed securities business,

where it helps meet customers’ financing needs by providing access to the

commercial paper markets through VIEs known as multi-seller conduits. These

entities are separate bankruptcy-remote corporations in the business of pur-

chasing interests in, and making loans secured by, receivable pools and other

financial assets pursuant to agreements with customers. The entities fund

their purchases and loans through the issuance of highly-rated commercial

paper. The primary source of repayment of the commercial paper is the cash

flow from the pools of assets.

JPMorgan Chase & Co. / 2004 Annual Report 107

Program-wide liquidity in the form of revolving and short-term lending com-

mitments is provided by the Firm to these vehicles in the event of short-term

disruptions in the commercial paper market.

Deal-specific credit enhancement that supports the commercial paper issued

by the conduits is generally structured to cover a multiple of historical losses

expected on the pool of assets and is primarily provided by customers (i.e.,

sellers) or other third parties. The deal-specific credit enhancement is typically

in the form of over-collateralization provided by the seller but may also

include any combination of the following: recourse to the seller or originator,

cash collateral accounts, letters of credit, excess spread, retention of subordi-

nated interests or third-party guarantees. In certain instances, the Firm

provides limited credit enhancement in the form of standby letters of credit.

JPMorgan Chase serves as the administrator and provides contingent liquidity

support and limited credit enhancement for several multi-seller conduits. The

commercial paper issued by the conduits is backed by sufficient collateral,

credit enhancements and commitments to provide liquidity to support receiv-

ing at least a liquidity rating of A-1, P-1 and, in certain cases, F1.

As a means of ensuring timely repayment of the commercial paper, each asset

pool financed by the conduits has a minimum 100% deal-specific liquidity

facility associated with it. In the unlikely event an asset pool is removed from

the conduit, the administrator can draw on the liquidity facility to repay the

maturing commercial paper. The liquidity facilities are typically in the form of

asset purchase agreements and are generally structured such that the bank

liquidity is provided by purchasing, or lending against, a pool of non-defaulted,

performing assets. Deal-specific liquidity is the primary source of liquidity

support for the conduits.

The following table summarizes the Firm’s involvement with Firm-administered multi-seller conduits:

Consolidated Nonconsolidated Total

December 31, (in billions) 2004

(c)

2003

(b)

2004

(c)

2003

(b)(c)

2004

(c)

2003

(b)(c)

Total commercial paper issued

by conduits $ 35.8 $ 6.3 $9.3 $ 5.4 $ 45.1 $ 11.7

Commitments

Asset-purchase agreements $ 47.2 $ 9.3 $ 16.3 $ 8.7 $ 63.5 $ 18.0

Program-wide liquidity commitments 4.0 1.6 2.0 1.0 6.0 2.6

Limited credit enhancements 1.4 0.9 1.2 1.0 2.6 1.9

Maximum exposure to loss

(a)

48.2 9.7 16.9 9.0 65.1 18.7

(a) The Firm’s maximum exposure to loss is limited to the amount of drawn commitments (i.e., sellers’ assets held by the multi-seller conduits for which the Firm provides liquidity support) of

$42.2 billion and $11.7 billion at December 31, 2004 and 2003, respectively, plus contractual but undrawn commitments of $22.9 billion and $7.0 billion at December 31, 2004 and 2003,

respectively. 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.

(b) Heritage JPMorgan Chase only.

(c) In December 2003 and February 2004, two multi-seller conduits were restructured, with each conduit issuing preferred securities acquired by an independent third-party investor; the investor

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 – an

independent market standard – to estimate the size of the expected losses, and considered the relative rights and obligations of each of the variable interest holders.

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 customer or other third parties – for example, by the overcol-

lateralization of the VIE with the assets sold to it or notes subordinated to the

Firm’s liquidity facilities.

Additionally, the Firm is involved with a structured investment vehicle (“SIV”)

that funds a diversified portfolio of highly rated assets by issuing commercial

paper, medium-term notes and capital. The assets and liabilities of this SIV

were approximately $7.1 billion and are included in the Firm’s Consolidated

balance sheet at December 31, 2004.

Client intermediation

As a financial intermediary, the Firm is involved in structuring VIE transactions

to meet investor and client needs. The Firm intermediates various types of risks

(including fixed income, equity and credit), typically using derivative instru-

ments as further discussed below. In certain circumstances, the Firm also pro-

vides liquidity and other support to the VIEs to facilitate the transaction. The

Firm’s current exposure to nonconsolidated VIEs is reflected in its Consolidated

balance sheets or in the Notes to consolidated financial statements. The risks

inherent in derivative instruments or liquidity commitments are managed simi-

larly to other credit, market and liquidity risks to which the Firm is exposed.

The Firm intermediates principally with the following types of VIEs: structured

wholesale loan vehicles, credit-linked note vehicles, municipal bond vehicles

and other client-intermediation vehicles, as discussed below. Following this

discussion is a table summarizing the total assets held by these vehicles at

December 31, 2004 and 2003.

The Firm has created structured wholesale loan vehicles managed by third

parties, in which loans are purchased from third parties or through the Firm’s

syndication and trading functions and funded by issuing commercial paper.

The amount of the commercial paper issued by these vehicles totaled $3.4

billion and $5.3 billion as of December 31, 2004 and 2003, respectively.

Investors provide collateral and have a first risk of loss up to the amount of

collateral pledged. The Firm retains a second-risk-of-loss position and does

not absorb a majority of the expected losses of the vehicles. Documentation

includes provisions intended, subject to certain conditions, to enable

JPMorgan Chase to terminate the transactions related to a particular loan

vehicle if the value of the relevant portfolio declines below a specified level.

The Firm also provides liquidity support to these VIEs.

Notes to consolidated financial statements

JPMorgan Chase & Co.

108 JPMorgan Chase & Co. / 2004 Annual Report

The Firm structures credit-linked notes in which the VIE purchases highly-rated

assets (such as asset-backed securities) and enters into a credit derivative

contract with the Firm to obtain exposure to a referenced credit not held by

the VIE. Credit-linked notes are issued by the VIE to transfer the risk of the

referenced credit to the investors in the VIE. Clients and investors often prefer

a VIE structure, since the credit-linked notes generally carry a higher credit

rating than they would if issued directly by JPMorgan Chase.

The Firm is involved with municipal bond vehicles for the purpose of creating

a series of secondary market trusts that allow tax-exempt investors to finance

their investments at short-term tax-exempt rates. The VIE purchases fixed-rate,

longer-term highly rated municipal bonds by issuing puttable floating-rate

certificates and inverse floating-rate certificates; the investors in the inverse

floating-rate certificates are exposed to the residual losses of the VIE (the

“residual interests”). For vehicles in which the Firm owns the residual inter-

ests, the Firm consolidates the VIE. In vehicles where third-party investors

own the residual interests, the Firm’s exposure is limited because of the high

credit quality of the underlying municipal bonds, the unwind triggers based

on the market value of the underlying collateral and the residual interests

held by third parties. The Firm often serves as remarketing agent for the VIE

and provides liquidity to support the remarketing.

Additionally, JPMorgan Chase structures, on behalf of clients, other client

intermediation vehicles in which the Firm transfers the risks and returns of

the assets held by the VIE, typically debt and equity instruments, to clients

through derivative contracts.

Assets held by certain client intermediation–related VIEs at December 31,

2004 and 2003, were as follows:

December 31, (in billions) 2004 2003

(e)

Structured wholesale loan vehicles

(a)

$ 3.4 $ 5.3

Credit-linked note vehicles

(b)

17.8 17.7

Municipal bond vehicles

(c)

7.5 5.5

Other client intermediation vehicles

(d)

4.0 5.8

(a) JPMorgan Chase was committed to provide liquidity to these VIEs of up to $5.2 billion and

$8.0 billion at December 31, 2004 and 2003, respectively, of which $3.8 billion at

December 31, 2004, and $6.3 billion at December 31, 2003, was in the form of asset pur-

chase agreements. The Firm’s maximum exposure to loss to these vehicles at December 31,

2004 and 2003, was $3.2 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 December 31, 2004. Assets of $2.3 billion and $2.1 billion reported in the table

above were recorded on the Firm’s Consolidated balance sheets at December 31, 2004 and

2003, respectively, due to contractual relationships held by the Firm that relate to collateral

held by the VIE.

December 31, 2004 and $2.5 billion at December 31, 2003, and are reported in the table.

Total liquidity commitments were $3.1 billion and $1.8 billion at December 31, 2004 and

2003, respectively. The Firm’s maximum credit exposure to all municipal bond vehicles was

$5.7 billion and $4.3 billion at December 31, 2004 and 2003, respectively.

(d) The Firm’s net exposure arising from these intermediations is not significant.

(e) Heritage JPMorgan Chase only.

Finally, the Firm may enter into transactions with VIEs structured by other par-

ties. These transactions can include, for example, acting as a derivative coun-

terparty, liquidity provider, investor, underwriter, placement agent, trustee or

custodian. These transactions are conducted at arm’s length, and individual

credit decisions are based upon the analysis of the specific VIE, taking into

consideration the quality of the underlying assets. JPMorgan Chase records

and reports these positions similarly to any other third-party transaction.

These activities do not cause JPMorgan Chase to absorb a majority of the

expected losses of the VIEs or to receive a majority of the residual returns of

the VIE, and they are not considered significant for disclosure purposes.

Consolidated VIE assets

The following table summarizes the Firm’s total consolidated VIE assets, by

classification on the Consolidated balance sheets, as of December 31, 2004

and 2003:

December 31, (in billions) 2004 2003

(c)

Consolidated VIE assets

(a)

Investment securities $ 10.6 $ 3.8

Trading assets

(b)

4.7 2.7

Loans 3.4 1.1

Interests in purchased receivables 31.6 4.7

Other assets 0.4 0.1

Total consolidated assets $ 50.7 $ 12.4

(a) The Firm also holds $3.4 billion and $3.0 billion of assets, at December 31, 2004 and

December 31, 2003, respectively, primarily as a seller’s interest, in certain consumer securiti-

zations in a segregated entity, as part of a two-step securitization transaction. This interest

is included in the securitization activities disclosed in Note 13 on pages 103–106 of this

Annual Report.

(b) Includes the fair value of securities and derivatives.

Interests in purchased receivables include interests in receivables purchased

by Firm-administered conduits, which have been consolidated in accordance

with FIN 46R. Interests in purchased receivables are carried at cost and are

reviewed to determine whether an other-than-temporary impairment exists.

Based on the current level of credit protection specified in each transaction,

primarily through overcollateralization, the Firm determined that no other-

than-temporary impairment existed at December 31, 2004.

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” on the Consolidated balance sheets. The holders of

these beneficial interests do not have recourse to the general credit of

JPMorgan Chase. See Note 17 on page 112 of this Annual Report for the

maturity profile of FIN 46 long-term beneficial interests.

FIN 46 transition

Effective February 1, 2003, JPMorgan Chase implemented FIN 46 for VIEs

created or modified after January 31, 2003, in which the Firm has an interest.

Effective July 1, 2003, the Firm implemented FIN 46 for all VIEs originated

prior to February 1, 2003, excluding certain investments made by its private

equity business, as discussed above. The effect of adoption was an incremental

increase in the Firm’s assets and liabilities of approximately $17 billion at

July 1, 2003. As a result of its adoption of FIN 46, the Firm also deconsolidated

certain vehicles, primarily the wholly-owned Delaware statutory business

trusts further discussed in Note 17 on pages 112–113 of this Annual Report.

Upon adoption of FIN 46, the assets, liabilities and noncontrolling interests of

VIEs were generally measured at the amounts at which such interests would

have been carried had FIN 46 been effective when the Firm first met the con-

ditions to be considered the primary beneficiary. The difference between the

net amount added to the balance sheet and the amount of any previously

recognized interest in the newly consolidated entity was recognized as a

cumulative effect of an accounting change at July 1, 2003, which resulted in

a $2 million (after-tax) reduction to the Firm’s consolidated earnings. The Firm

also recorded a $34 million (after-tax) reduction in Other comprehensive

income, related to AFS securities and derivative cash flow hedges; these were

related to entities measured at the amount at which such interests would

have been carried had FIN 46 been effective when the Firm first met the con-

ditions of being the primary beneficiary.

JPMorgan Chase & Co. / 2004 Annual Report 109

FIN 46R transition

In December 2003, the FASB issued a revision to FIN 46 (“FIN 46R”) to

address various technical corrections and implementation issues that had

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, as previously discussed. Implementation of FIN

46R did not have a significant effect on the Firm’s Consolidated financial

statements.

The application of FIN 46R involved significant judgments and interpretations

by management. The Firm is aware of differing interpretations being devel-

oped among accounting professionals and the EITF with regard to analyzing

derivatives under FIN 46R. Management’s current interpretation is that deriv-

atives 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 the derivative con-

tract and the role it has with the entity; and whether the derivative contract

creates and/or absorbs variability of the VIE. The Firm will continue to monitor

developing interpretations.

Note 15 – Goodwill and other intangible assets

Effective January 1, 2002, the Firm adopted SFAS 142, reclassifying certain

intangible assets from Goodwill to Other intangible assets. There was no

impairment of goodwill upon adoption of SFAS 142.

Goodwill is not amortized but instead tested for impairment at the reporting-

unit segment (which is generally one level below the six major reportable

business segments as described in Note 31 on pages 126–127 of this Annual

Report; plus Private Equity, which is included in Corporate). Goodwill is tested

annually (during the fourth quarter) or more often if events or circumstances,

such as adverse changes in the business climate, indicate there may be impair-

ment. Intangible assets determined to have indefinite lives are not amortized

but instead are tested for impairment at least annually, or more frequently if

events or changes in circumstances indicate that the asset might be impaired.

The impairment test compares the fair value of the indefinite lived intangible

asset to its carrying amount. Other acquired intangible assets determined

to have finite lives, such as core deposits and credit card relationships, are

amortized over their estimated useful lives in a manner that best reflects the

economic benefits of the intangible asset. In addition, impairment testing is

performed periodically on these amortizing intangible assets.

Goodwill and Other intangible assets consist of the following:

December 31, (in millions) 2004 2003

(a)

Goodwill $ 43,203 $ 8,511

Mortgage servicing rights 5,080 4,781

Purchased credit card relationships 3,878 1,014

All other intangibles:

Other credit card–related intangibles $ 272 $—

Core deposit intangibles 3,328 8

All other intangibles 2,126 677

Total other intangible assets $ 5,726 $ 685

(a) Heritage JPMorgan Chase only.

Goodwill

As of December 31, 2004, goodwill increased by $34.7 billion compared with

December 31, 2003, principally in connection with the Merger, but also due

to the acquisitions of EFS and a majority stake in Highbridge. Goodwill was

not impaired at December 31, 2004 or 2003, nor was any goodwill written

off during the years ended December 31, 2004, 2003 or 2002.

Under SFAS 142, goodwill must be allocated to reporting units and tested for

impairment. Goodwill attributed to the business segments was as follows:

Goodwill resulting

Dec. 31, Dec. 31, from the Merger,

(in millions) 2004 2003

(a)

July 1, 2004

Investment Bank $ 3,309 $ 2,084 $ 1,233

Retail Financial Services 15,022 446 14,559

Card Services 12,781 — 12,765

Commercial Banking 2,650 61 2,592

Treasury & Securities Services 2,044 1,390 461

Asset & Wealth Management 7,020 4,153 2,536

Corporate (Private Equity) 377 377 —

Total goodwill $ 43,203 $ 8,511 $ 34,146

(a) Heritage JPMorgan Chase only.

Mortgage servicing rights

JPMorgan Chase recognizes as intangible assets mortgage servicing rights,

which represent the right to perform specified residential mortgage servicing

activities for others. MSRs are either purchased from third parties or retained

upon sale or securitization of mortgage loans. Servicing activities include col-

lecting principal, interest, and escrow payments from borrowers; making tax

and insurance payments on behalf of the borrowers; monitoring delinquencies

and executing foreclosure proceedings; and accounting for and remitting prin-

cipal and interest payments to the investors of the mortgage-backed securities.

The amount capitalized as MSRs represents the amount paid to third parties

to acquire MSRs or is based on fair value, if retained upon the sale or securiti-

zation of mortgage loans. The Firm estimates the fair value of MSRs using a

discounted future cash flow model. The model considers portfolio characteris-

tics, contractually specified servicing fees, prepayment assumptions, delin-

quency rates, late charges, other ancillary revenues, costs to service and other

economic factors. The Firm compares its fair value estimates and assumptions

to observable market data where available and to recent market activity and

actual portfolio experience. Management believes that the assumptions used

to estimate fair values are supportable and reasonable.

The Firm accounts for its MSRs at the lower of cost or market, in accordance

with SFAS 140. MSRs are amortized as a reduction of the actual servicing

income received in proportion to, and over the period of the estimated future

net servicing income stream of, the underlying mortgage loans. For purposes

of evaluating and measuring impairment of MSRs, the Firm stratifies its port-

folio on the basis of the predominant risk characteristics, which are loan type

and interest rate. Any indicated impairment is recognized as a reduction in

revenue through a valuation allowance, to the extent that the carrying value

of an individual stratum exceeds its estimated fair value.

The Firm evaluates other-than-temporary impairment by reviewing changes in

mortgage and other market interest rates over historical periods and then

determines an interest rate scenario to estimate the amounts of the MSRs’

gross carrying value and the related valuation allowance that could be

expected to be recovered in the foreseeable future. Any gross carrying value

and related valuation allowance amount that are not expected to be recov-

ered in the foreseeable future, based upon the interest rate scenario, are con-

sidered to be other-than-temporary.

Notes to consolidated financial statements

JPMorgan Chase & Co.

110 JPMorgan Chase & Co. / 2004 Annual Report

The carrying value of MSRs is sensitive to changes in interest rates, including

their effect on prepayment speeds. JPMorgan Chase uses a combination of

derivatives, AFS securities and trading instruments to manage changes in the

fair value of MSRs. The intent is to offset any changes in the fair value of

MSRs with changes in the fair value of the related risk management instru-

ment. MSRs decrease in value when interest rates decline. Conversely, securi-

ties (such as mortgage-backed securities), principal-only certificates and deriv-

atives (when the Firm receives fixed-rate interest payments) decrease in value

when interest rates increase. The Firm offsets the interest rate risk of its MSRs

by designating certain derivatives (e.g., a combination of swaps, swaptions

and floors that produces an interest rate profile opposite to the designated

risk of the hedged MSRs) as fair value hedges of specified MSRs under SFAS

133. SFAS 133 hedge accounting allows the carrying value of the hedged

MSRs to be adjusted through earnings in the same period that the change in

value of the hedging derivatives is recognized through earnings. Both of these

valuation adjustments are recorded in Mortgage fees and related income.

When applying SFAS 133, the loans underlying the MSRs being hedged are

stratified into specific SFAS 133 asset groupings that possess similar interest

rate and prepayment risk exposures. The documented hedge period for the

Firm is daily. Daily adjustments are performed to incorporate new or terminated

derivative contracts and to modify the amount of the corresponding similar

asset grouping that is being hedged. The Firm has designated changes in the

benchmark interest rate (LIBOR) as the hedged risk. In designating the bench-

mark interest rate, the Firm considers the impact that the change in the bench-

mark rate has on the prepayment speed estimates in determining the fair

value of the MSRs. The Firm performs both prospective and retrospective

hedge effectiveness evaluations, using a regression analysis, to determine

whether the hedge relationship is expected to be highly effective. Hedge effec-

tiveness is assessed by comparing the change in value of the MSRs, as a result

of changes in benchmark interest rates, to the change in the value of the des-

ignated derivatives. For a further discussion on derivative instruments and

hedging activities, see Note 26 on pages 118–119 of this Annual Report.

Securities (both AFS and Trading) are also used to manage the risk exposure of

MSRs. Because these securities do not qualify as hedges under SFAS 133, they

are accounted for under SFAS 115, with realized gains and losses and unreal-

ized gains and losses on trading securities recognized in earnings in

Securities/private equity gains, interest income on the AFS securities is recog-

nized in earnings in Net interest income, and unrealized gains and losses on

AFS securities are reported in Other comprehensive income. Finally, certain non-

hedge derivatives, which have not been designated by management in SFAS

133 hedge relationships, are used to manage the economic risk exposure of

MSRs and are recorded in Mortgage fees and related income.

The following table summarizes MSR activity and related amortization for the

dates indicated. It also includes the key assumptions and the sensitivity of the

fair value of MSRs at December 31, 2004, to immediate 10% and 20%

adverse changes in each of those assumptions.

Year ended December 31, (in millions)

(a)

2004 2003 2002

Balance at January 1 $ 6,159 $ 4,864 $ 7,749

Additions 1,757 3,201 2,071

Bank One merger 90 NA NA

Sales (3) ——

Other-than-temporary impairment (149) (283) —

Amortization (1,297) (1,397) (1,367)

SFAS 133 hedge valuation adjustments (446) (226) (3,589)

Balance at December 31 6,111 6,159 4,864

Less: valuation allowance 1,031 1,378 1,634

Balance at December 31, after

valuation allowance $ 5,080 $ 4,781 $ 3,230

Estimated fair value at December 31 $ 5,124 $ 4,781 $ 3,230

Weighted-average prepayment

speed assumption (CPR) 17.29% 17.67% 28.50%

Weighted-average discount rate 7.93% 7.31% 7.70%

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

CPR: Constant prepayment rate

2004

Weighted-average prepayment speed assumption (CPR) 17.29%

Impact on fair value with 10% adverse change $ (295)

Impact on fair value with 20% adverse change (558)

Weighted-average discount rate 7.93%

Impact on fair value with 10% adverse change $ (128)

Impact on fair value with 20% adverse change (249)

CPR: Constant prepayment rate.

The sensitivity analysis in the preceding table is hypothetical and should be

used with caution. As the figures indicate, changes in fair value based on a

10% and 20% variation in assumptions generally cannot be easily extrapolated

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 chang-

ing any other assumption. In reality, changes in one factor may result in

changes in another, which might magnify or counteract the sensitivities.

The valuation allowance represents the extent to which the carrying value of

MSRs exceeds its estimated fair value for its applicable SFAS 140 strata.

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 valua-

tion allowance for MSRs were as follows:

Year ended December 31, (in millions)

(a)

2004 2003 2002

Balance at January 1 $ 1,378 $ 1,634 $ 1,170

Other-than-temporary impairment (149) (283) —

SFAS 140 impairment (recovery) adjustment (198) 27 464

Balance at December 31 $ 1,031 $ 1,378 $ 1,634

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results, while 2003 results include heritage JPMorgan Chase only.

JPMorgan Chase & Co. / 2004 Annual Report 111

During 2004 and 2003, the Firm recorded an other-than-temporary impair-

ment of its MSRs of $149 million and $283 million, respectively, which

permanently reduced the gross carrying value of the MSRs and the related

valuation allowance. The permanent reduction precludes subsequent reversals.

This write-down had no impact on the results of operations or financial con-

dition of the Firm.

All other intangible assets

For 2004, All other intangible assets increased by approximately $7.9 billion,

principally as a result of the Merger. This increase is net of amortization and

includes $510 million of indefinite lived intangibles related to asset manage-

ment advisory contracts. Indefinite-lived intangibles are not amortized, but

instead are tested for impairment at least annually. The remainder of the

Firm’s other acquired intangible assets are subject to amortization.

Note 16 – Premises and equipment

Premises and equipment, including leasehold improvements, are carried at

cost less accumulated depreciation and amortization. JPMorgan Chase com-

putes depreciation using the straight-line method over the estimated useful

life of an asset. For leasehold improvements, the Firm uses the straight-line

method computed over the lesser of the remaining term of the leased facility

or 10 years.

JPMorgan Chase capitalizes certain costs associated with the acquisition or

development of internal-use software under SOP 98-1. Once the software is

ready for its intended use, these costs are amortized on a straight-line basis

over the software’s expected useful life.

The components of credit card relationships, core deposits and other intangible assets were as follows:

2004 2003

(b)

Net Net

Gross Accumulated carrying Gross Accumulated carrying

December 31, (in millions) amount amortization value amount amortization value

Purchased credit card relationships $ 5,225 $ 1,347 $ 3,878 $ 1,885 $ 871 $ 1,014

Other credit card–related intangibles 295 23 272 —— —

Core deposit intangibles 3,797 469 3,328 147 139 8

All other intangibles 2,528 402

(a)

2,126 946 269 677

Amortization expense (in millions)

(c)

2004 2003 2002

Purchased credit card relationships $476 $ 256 $ 280

Other credit card–related intangibles 23 ——

Core deposit intangibles 330 610

All other intangibles 117 32 33

Total amortization expense $946 $ 294 $ 323

(a) Includes $16 million of amortization expense related to servicing assets on securitized automobile loans, which is recorded in Asset management, administration and commissions, for 2004.

(b) Heritage JPMorgan Chase only.

Future amortization expense

The following table presents estimated amortization expenses related to credit card relationships, core deposits and All other intangible assets at December 31, 2004:

Other credit

(in millions) Purchased credit card-related Core deposit All other

Year ended December 31, card relationships intangibles intangibles intangible assets Total

2005 $ 701 $ 45 $ 622 $ 165 $ 1,533

2006 674 40 531 153 1,398

2007 606 35 403 136 1,180

2008 502 33 294 128 957

2009 360 29 239 124 752

Notes to consolidated financial statements

JPMorgan Chase & Co.

112 JPMorgan Chase & Co. / 2004 Annual Report

Note 17 – Long-term debt

JPMorgan Chase issues long-term debt denominated in various currencies, although predominantly U.S. dollars, with both fixed and variable interest rates.

The following table is a summary of long-term debt (net of unamortized original issue debt discount and SFAS 133 valuation adjustments):

By remaining contractual maturity at December 31, 2004 Under After 2004 2003

(in millions) 1 year 1–5 years 5 years total total

(g)

Parent company

Senior debt:

(a)

Fixed rate $ 2,864 $ 20,029 $ 2,670 $ 25,563 $ 15,044

Variable rate 6,221 8,295 612 15,128 10,696

Interest rates

(b)

1.22–7.63% 0.20–6.88% 1.12–5.00% 0.20–7.63% 0.96–7.50%

Subordinated debt: Fixed rate $ 1,419 $ 7,536 $ 13,100 $ 22,055 $ 14,382

Variable rate 309 46 2,331 2,686 513

Interest rates

(b)

4.78–7.13% 5.75–9.88% 1.92–10.00% 1.92–10.00% 4.78–8.25%

Subtotal $ 10,813 $ 35,906 $ 18,713 $ 65,432 $ 40,635

Subsidiaries

Senior debt:

(a)

Fixed rate $ 283 $ 4,133 $ 1,833 $ 6,249 $ 2,829

Variable rate 4,234 13,547 4,316 22,097 3,842

Interest rates

(b)

2.13–10.45% 1.71–11.74% 2.19–13.00% 1.71–13.00% 1.13–13.00%

Subordinated debt: Fixed rate $ 503 $ 831 $ 310 $ 1,644 $ 708

Variable rate — — — — —

Interest rates

(b)

6.00–7.00% 6.13–6.70% 8.25% 6.00–8.25% 6.13–7.00%

Subtotal $ 5,020 $ 18,511 $ 6,459 $ 29,990 $ 7,379

Total long-term debt $ 15,833 $ 54,417 $ 25,172 $ 95,422

(d)(e)(f)

$ 48,014

FIN 46R long-term beneficial interests:

(c)

Fixed rate $ — $ 341 $ 434 $775 $ 353

Variable rate 3,072 570 1,976 5,618 2,076

Interest rates

(b)

2.02–2.84% 0.54–7.35% 2.25–12.79% 0.54–12.79% 1.12–10.00%

Total FIN 46R long-term beneficial interests $ 3,072 $ 911 $ 2,410 $ 6,393 $ 2,429

(a) Included are various equity-linked or other indexed instruments. Embedded derivatives separated from hybrid securities in accordance with SFAS 133 are reported at fair value and shown net with

the host contract on the balance sheet. Changes in fair value of separated derivatives are recorded in Trading revenue.

(b) The interest rates shown are the range of contractual rates in effect at year-end, including non-U.S. dollar fixed and variable-rate issuances, which excludes the effects of related derivative instru-

ments. The use of these derivative instruments modifies the Firm’s exposure to the contractual interest rates disclosed in the table above. Including the effects of derivatives, the range of modified

rates in effect at December 31, 2004, for total long-term debt was 0.14% to 11.74%, versus the contractual range of 0.20% to 13.00% presented in the table above.

(c) Included on the Consolidated balance sheets in Beneficial interests issued by consolidated variable interest entities.

(d) At December 31, 2004, long-term debt aggregating $23.3 billion was redeemable at the option of JPMorgan Chase, in whole or in part, prior to maturity, based on the terms specified in the

respective notes.

(e) The aggregate principal amount of debt that matures in each of the five years subsequent to 2004 is $15.8 billion in 2005, $15.4 billion in 2006, $15.5 billion in 2007, $11.6 billion in 2008 and

$11.9 billion in 2009.

(f) Includes $1.5 billion of outstanding zero-coupon notes at December 31, 2004. The aggregate principal amount of these notes at their respective maturities is $4.6 billion.

(g) Heritage JPMorgan Chase only.

The weighted-average contractual interest rate for total long-term debt was

4.50% and 4.71% as of December 31, 2004 and 2003, respectively. In order

to modify exposure to interest rate and currency exchange rate movements,

JPMorgan Chase utilizes derivative instruments, primarily interest rate and

cross-currency interest rate swaps, in conjunction with some of its debt issues.

The use of these instruments modifies the Firm’s interest expense on the

associated debt. The modified weighted-average interest rate for total long-

term debt, including the effects of related derivative instruments, was 3.97%

and 2.79% as of December 31, 2004 and 2003, respectively.

JPMorgan Chase has guaranteed certain debt of its subsidiaries, including

both long-term debt and structured notes sold as part of the Firm’s trading

activities. These guarantees rank on a parity with all of the Firm’s other

unsecured and unsubordinated indebtedness. Guaranteed liabilities totaled

$320 million and $509 million at December 31, 2004 and 2003, respectively.

Junior subordinated deferrable interest debentures held by trusts

that issued guaranteed capital debt securities

At December 31, 2004, the Firm had 22 wholly-owned Delaware statutory

business trusts (“issuer trusts”) that issued guaranteed preferred beneficial

interests in the Firm’s junior subordinated deferrable interest debentures.

As a result of the adoption of FIN 46, JPMorgan Chase deconsolidated all the

issuer trusts. Accordingly, the junior subordinated deferrable interest deben-

tures issued by the Firm to the issuer trusts, totaling $10.3 billion and $6.8

billion at December 31, 2004 and 2003, respectively, were reflected in the

Firm’s Consolidated balance sheets in the Liabilities section under the caption

“Junior subordinated deferrable interest debentures held by trusts that issued

guaranteed capital debt securities.” JPMorgan Chase records interest expens-

es on the corresponding junior subordinated debentures in its Consolidated

statements of income. The Firm also records the common capital securities

issued by the issuer trusts in Other assets in its Consolidated balance sheets

at December 31, 2004 and 2003.

JPMorgan Chase & Co. / 2004 Annual Report 113

The debentures issued to the issuer trusts by the Firm, less the capital securi-

ties of the issuer trusts, qualify as Tier 1 capital. The following is a summary of

the outstanding capital securities, net of discount, issued by each trust and

the junior subordinated deferrable interest debenture issued by JPMorgan

Chase to each trust as of December 31, 2004:

Amount Principal Stated maturity

of capital amount of of capital

securities debenture, securities Earliest Interest rate of Interest

issued held Issue and redemption capital securities payment/

December 31, 2004 (in millions) by trust

(a)

by trust

(b)

date debentures date and debentures distribution dates

Bank One Capital II $ 280 $ 312 2000 2030 2005 8.50% Quarterly

Bank One Capital III 474 621 2000 2030 Any time 8.75% Semiannually

Bank One Capital IV 158 163 2000 2030 2005 LIBOR + 1.50% Quarterly

Bank One Capital V 300 336 2001 2031 2006 8.00% Quarterly

Bank One Capital VI 525 565 2001 2031 2006 7.20% Quarterly

Chase Capital I 600 619 1996 2026 2006 7.67% Semiannually

Chase Capital II 495 510 1997 2027 2007 LIBOR + 0.50% Quarterly

Chase Capital III 296 306 1997 2027 2007 LIBOR + 0.55% Quarterly

Chase Capital VI 248 256 1998 2028 Any time LIBOR + 0.625% Quarterly

Chase Capital VIII 250 258 2000 2030 2005 8.25% Quarterly

First Chicago NBD Capital I 248 256 1997 2027 2007 LIBOR + 0.55% Quarterly

First Chicago NBD Institutional Capital A 499 553 1996 2026 2006 7.95% Semiannually

First Chicago NBD Institutional Capital B 250 274 1996 2026 2006 7.75% Semiannually

First USA Capital Trust I 3 3 1996 2027 2007 9.33% Semiannually

JPM Capital Trust I 750 773 1996 2027 2007 7.54% Semiannually

JPM Capital Trust II 400 412 1997 2027 2007 7.95% Semiannually

J.P. Morgan Chase Capital IX 500 515 2001 2031 2006 7.50% Quarterly

J.P. Morgan Chase Capital X 1,000 1,046 2002 2032 2007 7.00% Quarterly

J.P. Morgan Chase Capital XI 1,075 1,022 2003 2033 2008 5.88% Quarterly

J.P. Morgan Chase Capital XII 400 403 2003 2033 2008 6.25% Quarterly

J.P. Morgan Chase Capital XIII 472 486 2004 2034 2014 LIBOR + 0.95% Quarterly

JPMorgan Chase Capital XIV 600 607 2004 2034 2009 6.20% Quarterly

Total $ 9,823 $ 10,296

(a) Represents the amount of capital securities issued to the public by each trust, net of unamortized discount.

(b) Represents the principal amount of JPMorgan Chase debentures held as assets by each trust, net of unamortized discount amounts. The principal amount of debentures held by the trusts includes

the impact of hedging and purchase accounting fair value adjustments that are recorded on the Firm’s financial statements.

Note 18 – Preferred stock

JPMorgan Chase is authorized to issue 200 million shares of preferred stock,

in one or more series, with a par value of $1 per share. Outstanding preferred

stock at December 31, 2004 and 2003, was 4 million and 18 million shares,

respectively. On December 31, 2004, JPMorgan Chase redeemed a total of 14

million shares of its Series A, L and N variable cumulative preferred stocks.

The following is a summary of JPMorgan Chase’s preferred stock outstanding:

Stated value and Rate in effect at

(in millions, except redemption

Shares Outstanding at December 31,

Earliest December 31,

per share amounts and rates) price per share

(a)

2004 2003 2004 2003 redemption date 2004

Fixed/adjustable rate, noncumulative $ 50.00 4.00 4.00 $200 $ 200 See Note

(c)

5.46%

(d)

6.63% Series H cumulative

(b)

500.00 0.28 0.28 139 139 3/31/2006 6.63

Adjustable rate, Series A cumulative 100.00 — 2.42 — 242 — —

Adjustable rate, Series L cumulative 100.00 — 2.00 — 200 — —

Adjustable rate, Series N cumulative 25.00 — 9.10 — 228 — —

Total preferred stock 4.28 17.80 $339 $ 1,009

(a) Redemption price includes amount shown in the table plus any accrued but unpaid dividends.

(b) Represented by depositary shares.

(d) The fixed/adjustable rate preferred stock remained fixed at 4.96% through June 30, 2003; thereafter, the minimum and maximum rates are 5.46% and 11.46%, respectively.

Dividends on shares of each outstanding series of preferred stock are payable

quarterly. All of the preferred stock outstanding takes precedence over

JPMorgan Chase’s common stock for the payment of dividends and the distri-

bution of assets in the event of a liquidation or dissolution of the Firm.

Notes to consolidated financial statements

JPMorgan Chase & Co.

114 JPMorgan Chase & Co. / 2004 Annual Report

Note 19 – Common stock

At December 31, 2004, JPMorgan Chase was authorized to issue 9.0 billion

shares of common stock, with a $1 par value per share. In connection with

the Merger, the shareholders approved an increase in the amount of author-

ized shares of 4.5 billion from the 4.5 billion that had been authorized as of

December 31, 2003. Common shares issued (newly issued or distributed from

treasury) by JPMorgan Chase during 2004, 2003 and 2002 were as follows:

December 31, (in millions) 2004 2003

(a)

2002

(a)

Issued – balance at January 1 2,044.4 2,023.6 1,996.9

Newly issued:

Employee benefits and

compensation plans 69.0 20.9 25.9

Employee stock purchase plans 3.1 0.7 0.8

Purchase accounting acquisitions

and other 1,469.4 ——

Total newly issued 1,541.5 21.6 26.7

Cancelled shares (1.1) (0.8) —

Total issued – balance at December 31 3,584.8 2,044.4 2,023.6

Treasury – balance at January 1 (1.8) (24.9) (23.5)

Purchase of treasury stock (19.3) ——

Share repurchases related to employee

stock-based awards

(b)

(7.5) (3.0) (3.9)

Issued from treasury:

Employee benefits and

compensation plans — 25.8 2.1

Employee stock purchase plans — 0.3 0.4

Total issued from treasury — 26.1 2.5

Total treasury – balance at December 31 (28.6) (1.8) (24.9)

Outstanding 3,556.2 2,042.6 1,998.7

(a) Heritage JPMorgan Chase only.

(b) Participants in the 1996 Long-Term Incentive Plan and Stock Option Plan have shares with-

held to cover income taxes. The shares withheld amounted to 5.7 million, 2.3 million and

2.9 million for 2004, 2003 and 2002, respectively.

During 2004, the Firm repurchased 19.3 million shares of common stock

under a stock repurchase program which was approved by the Board of

Directors on July 20, 2004. The Firm did not repurchase shares of its common

stock during 2003 or 2002 under the prior stock repurchase program.

As of December 31, 2004, approximately 531 million unissued shares of com-

mon stock were reserved for issuance under various employee incentive,

option and stock-purchase plans.

Note 20 – Earnings per share

SFAS 128 requires the presentation of basic and diluted earnings per share

(“EPS”) in the income statement. Basic EPS is computed by dividing net

income applicable to common stock by the weighted-average number of

common shares outstanding for the period. Diluted EPS is computed using

the same method as basic EPS but, in the denominator, the number of com-

mon shares reflect, in addition to outstanding shares, the potential dilution

that could occur if convertible securities or other contracts to issue common

stock were converted or exercised into common stock. Net income available

for common stock is the same for basic EPS and diluted EPS, as JPMorgan

Chase had no convertible securities, and therefore, no adjustments to net

income available for common stock were necessary. The following table pres-

ents the calculation of basic and diluted EPS for 2004, 2003 and 2002:

Year ended December 31,

(in millions, except per share amounts)

(a)

2004 2003 2002

Basic earnings per share

Net income $ 4,466 $ 6,719 $ 1,663

Less: preferred stock dividends 52 51 51

Net income applicable to

common stock $ 4,414 $ 6,668 $ 1,612

Weighted-average basic

shares outstanding 2,779.9 2,008.6 1,984.3

Net income per share $ 1.59 $ 3.32 $ 0.81

Diluted earnings per share

Net income applicable to

common stock $ 4,414 $ 6,668 $ 1,612

Weighted-average basic

shares outstanding 2,779.9 2,008.6 1,984.3

Add: Broad-based options 5.4 4.1 2.8

Key employee options 65.3 42.4 22.0

Weighted-average diluted

shares outstanding 2,850.6 2,055.1 2,009.1

Net income per share

(b)

$ 1.55 $ 3.24 $ 0.80

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

(b) Options issued under employee benefit plans to purchase 300 million, 335 million and 362

million shares of common stock were outstanding for the years ended 2004, 2003 and

2002, 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 21 – Accumulated other

comprehensive income (loss)

Accumulated other comprehensive income 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).

Accumulated

Year ended Unrealized Cash other

December 31,

(a)

gains (losses) Translation flow comprehensive

(in millions) on AFS securities

(b)

adjustments hedges income (loss)

Balance at

December 31, 2001 $ (135) $ (2) $ (305) $ (442)

Net change 866 (4) 807 1,669

Balance at

December 31, 2002 731 (6) 502 1,227

Net change (712) — (545) (1,257)

Balance at

December 31, 2003 19 (6) (43) (30)

Net change (80)

(c)

(2)

(d)

(96) (178)

Balance at

December 31, 2004 $ (61) $ (8)

(e)

$ (139) $ (208)

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

(b) 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.

unrealized gains through securities sales.

(d) Includes $280 million of after-tax gains (losses) on foreign currency translation from opera-

tions for which the functional currency is other than the U.S. dollar, offset by $(282) million

of after-tax gains (losses) on hedges.

(e) 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.

JPMorgan Chase & Co. / 2004 Annual Report 115

The following table presents the after-tax changes in net unrealized holdings

gains (losses) and the reclassification adjustments in unrealized gains and

losses on AFS securities and cash flow hedges. Reclassification adjustments

include amounts recognized in net income during the current year that had

been previously recorded in Other comprehensive income.

Year ended December 31, (in millions)

(a)

2004 2003 2002

Unrealized gains (losses) on AFS securities:

Net unrealized holdings gains (losses)

arising during the period, net of taxes

(b)

$41 $ 149 $ 1,090

Reclassification adjustment for gains

included in income, net of taxes

(c)

(121) (861) (224)

Net change $ (80) $ (712) $ 866

Cash flow hedges:

Net unrealized holdings gains (losses)

arising during the period, net of taxes

(d)

$34 $ 86 $ 663

Reclassification adjustment for (gains) losses

included in income, net of taxes

(e)

(130) (631) 144

Net change $ (96) $ (545) $ 807

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

(b) Net of tax expense of $27 million for 2004, $92 million for 2003 and $758 million for 2002.

(d) Net of tax expense of $23 million for 2004, $60 million for 2003 and $461 million for 2002.

(e) Net of tax expense of $86 million for 2004 and $438 million for 2003, and net of tax benefit

of $100 million for 2002.

Note 22 – Income taxes

JPMorgan Chase and its eligible subsidiaries file a consolidated U.S. federal

income tax return. JPMorgan Chase uses the asset-and-liability method required

by SFAS 109 to provide income taxes on all transactions recorded in the

Consolidated financial statements. This requires that income taxes reflect the

expected future tax consequences of temporary differences between the carrying

amounts of assets or liabilities for book and tax purposes. Accordingly, a deferred

tax liability or asset for each temporary difference is determined based on the tax

rates that the Firm expects to be in effect when the underlying items of income

and expense are realized. JPMorgan Chase’s expense for income taxes includes

the current and deferred portions of that expense. A valuation allowance is estab-

lished to reduce deferred tax assets to the amount the Firm expects to realize.

Due to the inherent complexities arising from the nature of the Firm’s businesses,

and from conducting business and being taxed in a substantial number of juris-

dictions, significant judgments and estimates are required to be made. Thus, the

Firm’s final tax-related assets and liabilities may ultimately be different.

Deferred income tax expense (benefit) results from differences between assets

and liabilities measured for financial reporting and for income-tax return pur-

poses. The significant components of deferred tax assets and liabilities are

reflected in the following table:

December 31, (in millions) 2004 2003

(a)

Deferred tax assets

Allowance for other than loan losses $ 3,711 $ 1,152

Allowance for loan losses 2,739 1,410

Employee benefits 2,677 2,245

Non-U.S. operations 743 741

Gross deferred tax assets $ 9,870 $ 5,548

Deferred tax liabilities

Leasing transactions $ 4,266 $ 3,703

Depreciation and amortization 3,558 1,037

Fee income 1,162 387

Non-U.S. operations 1,144 687

Fair value adjustments 186 538

Other, net 348 68

Gross deferred tax liabilities $ 10,664 $ 6,420

Valuation allowance $ 150 $ 200

Net deferred tax liability $ (944) $ (1,072)

(a) Heritage JPMorgan Chase only.

A valuation allowance has been recorded in accordance with SFAS 109, pri-

marily relating to deferred tax assets associated with non-U.S. operations.

The components of income tax expense included in the Consolidated state-

ments of income were as follows:

Year ended December 31, (in millions)

(a)

2004 2003 2002

Current income tax expense (benefit)

U.S. federal $ 1,695 $ 965 $ (1,334)

Non-U.S. 679 741 461

U.S. state and local 181 175 93

Total current expense (benefit) 2,555 1,881 (780)

Deferred income tax (benefit) expense

U.S. federal (382) 1,341 1,630

Non-U.S. (322) 14 (352)

U.S. state and local (123) 73 358

Total deferred (benefit) expense (827) 1,428 1,636

Total income tax expense $ 1,728 $ 3,309 $ 856

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results.All other periods reflect the results of heritage JPMorgan Chase only.

The preceding table does not reflect the tax effects of unrealized gains and

losses on AFS securities, SFAS 133 hedge transactions and certain tax benefits

associated with the Firm’s employee stock plans. The tax effect of these items

is recorded directly in Stockholders’ equity. Stockholders’ equity increased by

$190 million and $898 million in 2004 and 2003, respectively, and decreased

by $1.1 billion in 2002 as a result of these tax effects.

U.S. federal income taxes have not been provided on the undistributed earn-

ings of certain non-U.S. subsidiaries, to the extent that such earnings have

been reinvested abroad for an indefinite period of time. For 2004, such earn-

ings approximated $369 million on a pre-tax basis. At December 31, 2004,

the cumulative amount of undistributed earnings in these subsidiaries approx-

imated $2.6 billion. It is not practicable at this time to determine the income

tax liability that would result upon repatriation of these earnings.

Notes to consolidated financial statements

JPMorgan Chase & Co.

116 JPMorgan Chase & Co. / 2004 Annual Report

On October 22, 2004, the American Jobs Creation Act of 2004 (the “Act”)

was signed into law. The Act creates a temporary incentive for U.S. companies

to repatriate accumulated foreign earnings at a substantially reduced U.S.

effective tax rate by providing a dividends received deduction on the repatria-

tion of certain foreign earnings to the U.S. taxpayer (the “repatriation provi-

sion”). The new deduction is subject to a number of limitations and require-

ments and is effective for either the 2004 or 2005 tax years for calendar year

taxpayers. The range of possible amounts that may be considered for repatria-

tion under this provision is between zero and $1.9 billion. The Firm is current-

ly assessing the impact of the repatriation provision and, at this time, cannot

reasonably estimate the related range of income tax effects of such repatria-

tion provision. Accordingly, the Firm has not reflected the tax effect of the

repatriation provision in income tax expense or income tax liabilities.

The tax expense applicable to securities gains and losses for the years 2004,

2003 and 2002 was $126 million, $477 million and $531 million, respectively.

A reconciliation of the applicable statutory U.S. income tax rate to the effective

tax rate for the past three years is shown in the following table:

Year ended December 31,

(a)

2004 2003 2002

Statutory U.S. federal tax rate 35.0% 35.0% 35.0%

Increase (decrease) in tax rate resulting from:

U.S. state and local income taxes, net of

federal income tax benefit 0.6

(b)

2.1 11.6

Tax-exempt income (4.1) (2.4) (6.2)

Non-U.S. subsidiary earnings (1.3) (0.7) (2.2)

Business tax credits (4.1) (0.9) (3.5)

Other, net 1.8 (0.1) (0.7)

Effective tax rate 27.9% 33.0% 34.0%

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

(b) The decrease in 2004 is attributable to changes in the proportion of income subject to

different state and local taxes.

The following table presents the U.S. and non-U.S. components of income

before income tax expense:

Year ended December 31, (in millions)

(a)

2004 2003 2002

U.S. $ 3,817 $ 7,333 $ 1,834

Non-U.S.

(b)

2,377 2,695 685

Income before income tax expense $ 6,194 $ 10,028 $ 2,519

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

(b) For purposes of this table, non-U.S. income is defined as income generated from operations

located outside the United States.

Note 23 – Restrictions on cash and

intercompany funds transfers

The Federal Reserve Board requires depository institutions to maintain cash

reserves with a Federal Reserve Bank. The average amount of reserve balances

deposited by the Firm’s bank subsidiaries with various Federal Reserve Banks

was approximately $3.8 billion in 2004 and $2.6 billion in 2003.

Restrictions imposed by federal law prohibit JPMorgan Chase and certain

other affiliates from borrowing from banking subsidiaries unless the loans are

secured in specified amounts. Such secured loans to the Firm or to other affil-

iates are generally limited to 10% of the banking subsidiary’s total capital, as

determined by the risk-based capital guidelines; the aggregate amount of all

such loans is limited to 20% of the banking subsidiary’s total capital.

The principal sources of JPMorgan Chase’s income (on a parent company-

only basis) are dividends and interest from JPMorgan Chase Bank and the

other banking and nonbanking subsidiaries of JPMorgan Chase. In addition

to dividend restrictions set forth in statutes and regulations, the FRB, the

Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit

Insurance Corporation (“FDIC”) have authority under the Financial

Institutions Supervisory Act to prohibit or to limit the payment of dividends

by the banking organizations they supervise, including JPMorgan Chase and

its subsidiaries that are banks or bank holding companies, if, in the banking

regulator’s opinion, payment of a dividend would constitute an unsafe or

unsound practice in light of the financial condition of the banking organization.

At January 1, 2005 and 2004, JPMorgan Chase’s bank subsidiaries could pay,

in the aggregate, $6.2 billion and $4.4 billion, respectively, in dividends to

their respective bank holding companies without prior approval of their rele-

vant banking regulators. Dividend capacity in 2005 will be supplemented by

the banks’ earnings during the year.

In compliance with rules and regulations established by U.S. and non-U.S.

regulators, as of December 31, 2004 and 2003, cash in the amount of

$4.3 billion and $3.5 billion, respectively, and securities with a fair value of

$3.6 billion and $3.1 billion, respectively, were segregated in special bank

accounts for the benefit of securities and futures brokerage customers.

Note 24 – Capital

There are two categories of risk-based capital: Tier 1 capital and Tier 2 capi-

tal. Tier 1 capital includes common stockholders’ equity, qualifying preferred

stock and minority interest less goodwill and other adjustments. Tier 2 capital

consists of preferred stock not qualifying as Tier 1, subordinated long-term

debt and other instruments qualifying as Tier 2, and the aggregate allowance

for credit losses up to a certain percentage of risk-weighted assets. Total reg-

ulatory capital is subject to deductions for investments in certain subsidiaries.

Under the risk-based capital guidelines of the FRB, JPMorgan Chase is

required to maintain minimum ratios of Tier 1 and total (Tier 1 plus Tier 2)

capital to risk-weighted assets, as well as minimum leverage ratios (which are

defined as Tier 1 capital to average adjusted on–balance sheet assets). Failure

to meet these minimum requirements could cause the FRB to take action.

Bank subsidiaries also are subject to these capital requirements by their

respective primary regulators. As of December 31, 2004 and 2003, JPMorgan

Chase and its primary banking subsidiaries met all capital requirements to

which each was subject.

JPMorgan Chase & Co. / 2004 Annual Report 117

The following table presents the risk-based capital ratios for JPMorgan Chase and its significant banking subsidiaries at December 31, 2004 and 2003:

Tier 1 Total Risk-weighted Adjusted Tier 1 Total Tier 1

(in millions, except ratios) capital capital assets

(b)

average assets

(c)

capital ratio capital ratio leverage ratio

December 31, 2004

JPMorgan Chase & Co.

(a)

$ 68,621 $ 96,807 $ 791,373 $ 1,102,456 8.7% 12.2% 6.2%

JPMorgan Chase Bank, N.A. 55,489 78,478 670,295 922,877 8.3 11.7 6.0

Chase Bank USA, N.A. 8,726 11,186 86,955 71,797 10.0 12.9 12.2

December 31, 2003

(d)

JPMorgan Chase & Co.

(a)

$ 43,167 $ 59,816 $ 507,456 $ 765,910 8.5% 11.8% 5.6%

JPMorgan Chase Bank 34,972 45,290 434,218 628,076 8.1 10.4 5.6

Chase Manhattan Bank USA, N.A. 4,950 6,939 48,030 34,565 10.3 14.4 14.3

Well-capitalized ratios

(e)

6.0% 10.0% 5.0%

(f)

Minimum capital ratios

(e)

4.0 8.0 3.0

(a) Asset and capital amounts for JPMorgan Chase’s banking subsidiaries reflect intercompany transactions, whereas the respective amounts for JPMorgan Chase reflect the elimination

of intercompany transactions.

(b) Includes off–balance sheet risk-weighted assets in the amounts of $250.3 billion, $229.6 billion and $15.5 billion, respectively, at December 31, 2004, and $174.2 billion, $152.1 billion

and $13.3 billion, respectively, at December 31, 2003.

(c) Average adjusted assets for purposes of calculating the leverage ratio include total average assets adjusted for unrealized gains/losses on securities, less deductions for disallowed goodwill and other

intangible assets, investments in subsidiaries and the total adjusted carrying value of nonfinancial equity investments that are subject to deductions from Tier 1 capital.

(d) Heritage JPMorgan Chase only.

(e) As defined by the regulations issued by the FRB, FDIC and OCC.

(f) Represents requirements for bank subsidiaries pursuant to regulations issued under the Federal Deposit Insurance Corporation Improvement Act. There is no Tier 1 leverage component in

the definition of a well-capitalized bank holding company.

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

December 31, (in millions) 2004 2003

(a)

Tier 1 capital

Total stockholders’ equity $ 105,653 $ 46,154

Effect of net unrealized losses on AFS

securities and cash flow hedging activities 200 24

Adjusted stockholders’ equity 105,853 46,178

Minority interest

(b)

11,050 6,882

Less: Goodwill 43,203 8,511

Investments in certain subsidiaries 370 266

Nonqualifying intangible assets 4,709 1,116

Tier 1 capital $ 68,621 $ 43,167

Tier 2 capital

Long-term debt and other instruments

qualifying as Tier 2 $ 20,690 $ 12,128

Qualifying allowance for credit losses 7,798 4,777

Less: Investments in certain subsidiaries

and other 302 256

Tier 2 capital $ 28,186 $ 16,649

Total qualifying capital $ 96,807 $ 59,816

(a) Heritage JPMorgan Chase only.

(b) Primarily includes trust preferred securities of certain business trusts.

Note 25 – Commitments and contingencies

At December 31, 2004, JPMorgan Chase and its subsidiaries were obligated

under a number of noncancelable operating leases for premises and equipment

used primarily for banking purposes. Certain leases contain rent escalation

clauses for real estate taxes; they may also contain other operating expenses

and renewal-option clauses calling for increased rents. No lease agreement

imposes restrictions on the Firm’s ability to pay dividends, engage in debt or

equity financing transactions, or enter into further lease agreements.

The following table shows required future minimum rental payments under oper-

ating leases with noncancelable lease terms that expire after December 31, 2004:

Year ended December 31, (in millions)

2005 $ 1,060

2006 979

2007 899

2008 838

2009 776

After 5,301

Total minimum payments required 9,853

Less: Sublease rentals under noncancelable subleases (689)

Net minimum payment required $ 9,164

Total rental expense was as follows:

Year ended December 31, (in millions)

(a)

2004 2003 2002

Gross rentals $ 1,187 $ 1,061 $ 1,012

Sublease rentals (158) (106) (134)

Net rental expense $ 1,029 $ 955 $ 878

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

At December 31, 2004, assets were pledged to secure public deposits and for

other purposes. The significant components of the assets pledged were as follows:

December 31, (in billions) 2004 2003

(b)

Reverse repurchase/securities

borrowing agreements $ 238 $ 197

Securities 49 45

Loans 75 48

Other

(a)

90 96

Total assets pledged $ 452 $ 386

(a) Primarily composed of trading assets.

(b) Heritage JPMorgan Chase only.

Notes to consolidated financial statements

JPMorgan Chase & Co.

118 JPMorgan Chase & Co. / 2004 Annual Report

Litigation reserve

During 2004, JPMorgan Chase increased its Litigation reserve by $3.7 billion.

While the outcome of litigation is inherently uncertain, the amount of the

Firm’s Litigation reserve at December 31, 2004, reflected management’s

assessment of the appropriate litigation reserve level in light of all informa-

tion known as of that date. Management reviews litigation reserves periodi-

cally, and the reserve may be increased or decreased in the future to reflect

further developments. The Firm believes it has meritorious defenses to claims

asserted against it and intends to continue to defend itself vigorously, litigat-

ing or settling cases, according to management’s judgment as to what is in

the best interest of stockholders.

Note 26 – Accounting for derivative

instruments and hedging activities

Derivative instruments enable end users to increase, reduce or alter exposure

to credit or market risks. The value of a derivative is derived from its reference

to an underlying variable or combination of variables such as equity, foreign

exchange, credit, commodity or interest rate prices or indices. JPMorgan Chase

makes markets in derivatives for its customers and also is an end-user of

derivatives in order to manage the Firm’s exposure to credit and market risks.

SFAS 133, as amended by SFAS 138 and SFAS 149, establishes accounting

and reporting standards for derivative instruments, including those used for

trading and hedging activities, and derivative instruments embedded in other

contracts. All free-standing derivatives, whether designated for hedging rela-

tionships or not, are required to be recorded on the balance sheet at fair value.

The accounting for changes in value of a derivative depends on whether the

contract is for trading purposes or has been designated and qualifies for

hedge accounting. The majority of the Firm’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 at fair value in Trading assets and Trading

liabilities as set forth in Note 3 on pages 90–91 of this Annual Report.

In order to qualify for hedge accounting, a derivative must be considered highly

effective at reducing the risk associated with the exposure being hedged. Each

derivative must be designated as a hedge, with documentation of the risk

management objective and strategy, including identification of the hedging

instrument, the hedged item and the risk exposure, and how effectiveness is

to be assessed prospectively and retrospectively. The extent to which a hedg-

ing instrument is effective at achieving offsetting changes in fair value or cash

flows must be assessed at least quarterly. Any ineffectiveness must be report-

ed in current-period earnings. For certain types of hedge relationships meet-

ing stringent criteria, SFAS 133’s “shortcut” method provides for an assump-

tion of zero ineffectiveness. Under the shortcut method, quarterly effective-

ness assessment is not required, and the entire change in the fair value of the

hedging derivative is considered to be effective at achieving offsetting changes

in fair values or cash flows. Due to the strict criteria of the shortcut method,

the Firm’s use of this method is primarily limited to hedges of Long-term debt.

For qualifying fair value hedges, all changes in the fair value of the derivative

and in the fair value of the item for the risk being hedged are recognized in

earnings. If the hedge relationship is terminated, then the fair value adjustment

to the hedged item continues to be reported as part of the basis of the item and

is amortized to earnings as a yield adjustment. For qualifying cash flow hedges,

the effective portion of the change in the fair value of the derivative is recorded

in Other comprehensive income and recognized in the income statement when

the hedged cash flows affect earnings. The ineffective portions of cash flow

hedges are immediately recognized in earnings. If the hedge relationship is

terminated, then the change in fair value of the derivative recorded in Other

comprehensive income is recognized when the cash flows that were hedged

occur, consistent with the original hedge strategy. For hedge relationships dis-

continued because the forecasted transaction is not expected to occur accord-

ing to the original strategy, any related derivative amounts recorded in Other

comprehensive income are immediately recognized in earnings. For qualifying

net investment hedges, changes in the fair value of the derivative or the revalu-

ation of the foreign currency–denominated debt instrument are recorded in the

translation adjustments account within Other comprehensive income. Any inef-

fective portions of net investment hedges are immediately recognized in earnings.

JPMorgan Chase’s fair value hedges primarily include hedges of fixed-rate

long-term debt, loans, AFS securities and MSRs. Interest rate swaps are the

most common type of derivative contract used to modify exposure to interest

rate risk, converting fixed-rate assets and liabilities to a floating rate. Interest

rate options, swaptions and forwards are also used in combination with interest

rate swaps to hedge the fair value of the Firm’s MSRs. For a further discussion

of MSR risk management activities, see Note 15 on pages 109–111 of this

Annual Report. All amounts have been included in earnings consistent with the

classification of the hedged item, primarily Net interest income, Mortgage fees

and related income, and Other income. The Firm did not recognize any gains or

losses during 2004 on commitments that no longer qualify as fair value hedges.

JPMorgan Chase also enters into derivative contracts to hedge exposure to

variability in cash flows from floating-rate financial instruments and forecasted

transactions, primarily the rollover of short-term assets and liabilities, and

foreign currency-denominated revenues and expenses. Interest rate swaps,

futures and forward contracts are the most common instruments used to

reduce the impact of interest rate and foreign exchange rate changes on

future earnings. All amounts affecting earnings have been recognized consis-

tent with the classification of the hedged item, primarily Net interest income.

The Firm uses forward foreign exchange contracts and foreign currency-

denominated debt instruments to protect the value of its net investments in

foreign currencies in its non-U.S. subsidiaries. The portion of the hedging

instruments excluded from the assessment of hedge effectiveness (forward

points) is recorded in Net interest income.

The following table presents derivative instrument hedging-related activities

for the periods indicated:

Year ended December 31, (in millions)

(a)

2004 2003

Fair value hedge ineffective net gains/(losses)

(b)

$199 $731

(c)

Cash flow hedge ineffective net gains/(losses)

(b)

— (5)

Cash flow hedging gains on forecasted

transactions that failed to occur 1 —

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only.

(b) Includes ineffectiveness and the components of hedging instruments that have been

excluded from the assessment of hedge effectiveness.

of effectiveness associated with MSR hedging results.

Over the next 12 months, it is expected that $157 million (after-tax) of net gains

recorded in Other comprehensive income at December 31, 2004, will be recog-

nized in earnings. The maximum length of time over which forecasted transac-

tions are hedged is 10 years, related to core lending and borrowing activities.

JPMorgan Chase & Co. / 2004 Annual Report 119

JPMorgan Chase does not seek to apply hedge accounting to all of its eco-

nomic hedges. For example, the Firm does not apply hedge accounting to

credit derivatives used to manage the credit risk of loans and commitments

because of the difficulties in qualifying such contracts as hedges under SFAS

133. Similarly, the Firm does not apply hedge accounting to certain interest

rate derivatives used as economic hedges.

Note 27 – Off-balance sheet lending-related

financial instruments and guarantees

JPMorgan Chase utilizes lending-related financial instruments (e.g., commit-

ments and guarantees) to meet the financing needs of its customers. The con-

tractual amount of these financial instruments represents the maximum possi-

ble credit risk should the counterparty draw down the commitment or the Firm

fulfill its obligation under the guarantee, and the counterparty subsequently

failed to perform according to the terms of the contract. Most of these com-

mitments and guarantees expire without a default occurring or without being

drawn. As a result, the total contractual amount of these instruments is not, in

the Firm’s view, representative of its actual future credit exposure or funding

requirements. Further, certain commitments, primarily related to consumer

financings, are cancelable, upon notice, at the option of the Firm.

To provide for the risk of loss inherent in wholesale-related contracts, an

allowance for credit losses on lending-related commitments is maintained.

See Note 12 on pages 102–103 of this Annual Report for a further discussion

on the allowance for credit losses on lending-related commitments.

The following table summarizes the contractual amounts of off–balance

sheet lending-related financial instruments and guarantees and the related

allowance for credit losses on lending-related commitments at December 31,

2004 and 2003:

Off–balance sheet lending-related financial instruments

Allowance for

Contractual lending-related

amount commitments

December 31, (in millions) 2004 2003

(a)

2004 2003

(a)

Consumer $ 601,196 $ 181,198 $12 $4

Wholesale:

Other unfunded commitments

to extend credit

(b)(c)(d)

$ 225,152 $ 172,369 $ 185 $ 153

Standby letters of credit

and guarantees

(b)

78,084 34,922 292 165

Other letters of credit

(b)

6,163 4,192 3 2

Total wholesale $ 309,399 $ 211,483 $ 480 $ 320

Total $ 910,595 $ 392,681 $ 492 $ 324

Customers’ securities lent $ 215,972 $ 143,143 NA NA

(a) Heritage JPMorgan Chase only.

(b) Represents contractual amount net of risk participations totaling $26.4 billion and $16.5

billion at December 31, 2004 and 2003, respectively.

31, 2004 and 2003, respectively, which are not legally binding. In regulatory filings with the

Federal Reserve Board, unused advised lines are not reportable.

(d) Includes certain asset purchase agreements to the Firm’s administered multi-seller asset-

backed commercial paper conduits of $31.8 billion and $11.7 billion at December 31, 2004

and 2003, respectively; excludes $31.7 billion and $6.3 billion at December 31, 2004 and

2003, respectively, of asset purchase agreements related to the Firm’s administered multi-

seller asset-backed commercial paper conduits consolidated in accordance with FIN 46R,

as the underlying assets of the conduits are reported in the Firm’s Consolidated balance

sheets. It also includes $7.5 billion and $9.2 billion at December 31, 2004 and 2003,

respectively, of asset purchase agreements to structured wholesale loan vehicles and other

third-party entities. The allowance for credit losses on lending-related commitments related

to these agreements was insignificant at December 31, 2004 and 2003.

FIN 45 establishes accounting and disclosure requirements for guarantees,

requiring that a guarantor recognize, at the inception of a guarantee, a liability

in an amount equal to the fair value of the obligation undertaken in issuing

the guarantee. FIN 45 defines a guarantee as a contract that contingently

requires the Firm to pay a guaranteed party, based on: (a) changes in an

underlying asset, liability or equity security of the guaranteed party; or (b) a

third party’s failure to perform under a specified agreement. The Firm considers

the following off–balance sheet lending arrangements to be guarantees under

FIN 45: certain asset purchase agreements, standby letters of credit and finan-

cial guarantees, securities lending indemnifications, certain indemnification

agreements included within third-party contractual arrangements and certain

derivative contracts. These guarantees are described in further detail below.

As of January 1, 2003, newly issued or modified guarantees that are not deriv-

ative contracts have been recorded on the Firm’s Consolidated balance sheets

at their fair value at inception. The fair value of the obligation undertaken in

issuing the guarantee at inception is typically equal to the net present value of

the future amount of premium receivable under the contract. The Firm has

recorded this amount in Other Liabilities with an offsetting entry recorded in

Other Assets. As cash is received under the contract, it is applied to the premium

receivable recorded in Other Assets, and the fair value of the liability recorded

at inception is amortized into income as Lending & deposit related fees over

the life of the guarantee contract. The amount of the liability related to guar-

antees recorded at December 31, 2004 and 2003, excluding the allowance

for credit losses on lending-related commitments and derivative contracts dis-

cussed below, was approximately $341 million and $59 million, respectively.

Unfunded commitments to extend credit are agreements to lend only when a

customer has complied with predetermined conditions, and they generally

expire on fixed dates. The allowance for credit losses on wholesale lending-

related commitments includes $185 million and $153 million at December

31, 2004 and 2003, respectively, related to unfunded commitments to extend

credit. The majority of the Firm’s unfunded commitments are not guarantees

as defined in FIN 45, except for certain asset purchase agreements. These

asset-purchase agreements are principally used as a mechanism to provide

liquidity to SPEs, primarily multi-seller conduits, as described in Note 14 on

pages 106–109 of this Annual Report.

Certain asset purchase agreements can be exercised at any time by the SPE’s

administrator, while others require a triggering event to occur. Triggering

events include, but are not limited to, a need for liquidity, a market value

decline of the assets or a downgrade in the rating of JPMorgan Chase Bank.

These agreements may cause the Firm to purchase an asset from the SPE at

an amount above the asset’s fair value, in effect providing a guarantee of the

initial value of the reference asset as of the date of the agreement. In most

instances, third-party credit enhancements of the SPE mitigate the Firm’s

potential losses on these agreements. The allowance for credit losses on

wholesale lending-related commitments related to these agreements was

insignificant at December 31, 2004.

Standby letters of credit and financial guarantees are conditional lending

commitments issued by JPMorgan Chase to guarantee the performance of a

customer to a third party under certain arrangements, such as commercial

paper facilities, bond financings, acquisition financings and similar transac-

tions. Approximately 70% of these arrangements mature within three years.

The Firm typically has recourse to recover from the customer any amounts paid

under these guarantees; in addition, the Firm may hold cash or other highly

liquid collateral to support these guarantees. At December 31, 2004 and 2003,

Notes to consolidated financial statements

JPMorgan Chase & Co.

120 JPMorgan Chase & Co. / 2004 Annual Report

the Firm held collateral relating to $7.4 billion and $7.7 billion, respectively, of

these arrangements. The allowance for credit losses on lending-related commit-

ments at December 31, 2004 and 2003, included $292 million and $165 mil-

lion, respectively, related to standby letters of credit and financial guarantees.

The Firm holds customers’ securities under custodial arrangements. At times,

these securities are loaned to third parties, and the Firm issues securities lending

indemnification agreements to the customer that protect the customer against

the risk of loss if the third party fails to return the securities. To support these

indemnification agreements, the Firm obtains from the third party cash or other

highly liquid collateral with a market value exceeding 100% of the value of the

loaned securities. At December 31, 2004 and 2003, the Firm held $221.6 billion

and $146.7 billion, respectively, in collateral in support of these agreements.

In connection with issuing securities to investors, the Firm may enter into con-

tractual arrangements with third parties that may require the Firm to make a

payment to them in the event of a change in tax law or an adverse interpreta-

tion of tax law. In certain cases, the contract may also include a termination

clause, which would allow the Firm to settle the contract at its fair value; thus,

such a clause would not require the Firm to make a payment under the indemni-

fication agreement. Even without the termination clause, management does not

expect such indemnification agreements to have a material adverse effect on the

consolidated financial condition of JPMorgan Chase. The Firm may also enter

into indemnification clauses when it sells a business or assets to a third party,

pursuant to which it indemnifies that third party for losses it may incur due to

actions taken by the Firm prior to the sale. See below for more information

regarding the Firm’s loan securitization activities. It is difficult to estimate the

Firm’s maximum exposure under these indemnification arrangements, since this

would require an assessment of future changes in tax law and future claims that

may be made against the Firm that have not yet occurred. However, based on

historical experience, management expects the risk of loss to be remote.

As part of the Firm’s loan securitization activities, as described in Note 13 on

pages 103–106 of this Annual Report, the Firm provides representations and

warranties that certain securitized loans meet specific requirements. The Firm

may be required to repurchase the loans and/or indemnify the purchaser of

the loans against losses due to any breaches of such representations or war-

ranties. Generally, the maximum amount of future payments the Firm would

be required to make under such repurchase and/or indemnification provisions

would be equal to the current amount of assets held by such securitization-

related SPEs as of December 31, 2004, plus, in certain circumstances, accrued

and unpaid interest on such loans and certain expenses. The potential loss due

to such repurchase and/or indemnity is mitigated by the due diligence the Firm

performs to ensure that the assets comply with the requirements set forth in

the representations and warranties. Historically, losses incurred on such repur-

chases and/or indemnifications have been insignificant, and therefore manage-

ment expects the risk of material loss to be remote.

In connection with Card Services, the Firm is a partner with one of the lead-

ing companies in electronic payment services in two separate ventures, Chase

Merchant Services and Paymentech (the “ventures”), the latter of which was

acquired as a result of the Merger. These ventures provide merchant process-

ing services in the United States and Canada. The ventures are each individu-

ally contingently liable for processed credit card sales transactions in the

event of a dispute between the cardmember and a merchant. If a dispute is

resolved in the cardmember’s favor, the ventures will credit or refund the

amount to the cardmember and charge back the transaction to the merchant.

If the ventures are unable to collect the amount from the merchant, the

ventures will bear the loss for the amount credited or refunded to the card-

member. The ventures mitigate this risk by withholding settlement, or by

obtaining escrow deposits or letters of credit from certain merchants.

However, in the unlikely event that: 1) a merchant ceases operations and is

unable to deliver products, services or a refund; 2) the ventures do not have

sufficient collateral from the merchants to provide customer refunds; and 3)

the ventures do not have sufficient financial resources to provide customer

refunds, the Firm would be liable to refund the cardholder in proportion to its

approximate equity interest in the ventures. For the year ended December 31,

2004, the ventures incurred aggregate credit losses of $7.1 million on $396

billion of aggregate volume processed, of which the Firm shared liability only

on $205 billion of aggregate volume processed. At December 31, 2004, the

ventures held $620 million of collateral. In 2003, the Chase Merchant

Services venture incurred aggregate credit losses of $2.0 million on $260 bil-

lion of aggregate volume processed, of which the Firm shared liability only on

$77 billion of aggregate volume processed. At December 31, 2003, the Chase

Merchant Services venture held $242 million of collateral. The Firm believes

that, based on historical experience and the collateral held by the ventures,

the fair value of the guarantee would not be materially different from the credit

loss allowance recorded by the ventures; therefore, the Firm has not recorded

any allowance for losses in excess of the allowance recorded by the ventures.

The Firm is a member of several securities and futures exchanges and clearing-

houses both in the United States and overseas. Membership in some of these

organizations requires the Firm to pay a pro rata share of the losses incurred by

the organization as a result of the default of another member. Such obligation

varies with different organizations. It may be limited to members who dealt with

the defaulting member or to the amount (or a multiple of the amount) of the

Firm’s contribution to a members’ guaranty fund, or, in a few cases, it may be

unlimited. It is difficult to estimate the Firm’s maximum exposure under these

membership agreements, since this would require an assessment of future claims

that may be made against the Firm that have not yet occurred. However, based

on historical experience, management expects the risk of loss to be remote.

In addition to the contracts described above, there are certain derivative

contracts to which the Firm is a counterparty that meet the characteristics of

a guarantee under FIN 45. These derivatives are recorded on the Consolidated

balance sheets at fair value. These contracts include written put options that

require the Firm to purchase assets from the option holder at a specified price

by a specified date in the future, as well as derivatives that effectively guaran-

tee the return on a counterparty’s reference portfolio of assets. The total

notional value of the derivatives that the Firm deems to be guarantees was

$53 billion and $50 billion at December 31, 2004 and 2003, respectively. The

Firm reduces its exposures to these contracts by entering into offsetting trans-

actions or by entering into contracts that hedge the market risk related to

these contracts. The fair value related to these contracts was a derivative

receivable of $180 million and $163 million, and a derivative payable of

$622 million and $333 million at December 31, 2004 and 2003, respectively.

Finally, certain written put options and credit derivatives permit cash settle-

ment and do not require the option holder or the buyer of credit protection

to own the reference asset. The Firm does not consider these contracts to be

guarantees as described in FIN 45.

JPMorgan Chase & Co. / 2004 Annual Report 121

Note 28 – Credit risk concentrations

Concentrations of credit risk arise when a number of customers are engaged in

similar business activities or activities in the same geographic region, or when

they have similar economic features that would cause their ability to meet con-

tractual obligations to be similarly affected by changes in economic conditions.

JPMorgan Chase regularly monitors various segments of its credit risk portfo-

lio to assess potential concentration risks and to obtain collateral when

deemed necessary. In the Firm’s wholesale portfolio, risk concentrations are

primarily evaluated by industry and by geographic region. In the consumer

portfolio, concentrations are primarily evaluated by product and by U.S.

geographic region.

For further information regarding on–balance sheet credit concentrations

by major product and geography, see Note 11 on page 101 of this Annual

Report. For information regarding concentrations of off–balance sheet

lending-related financial instruments by major product, see Note 27 on

page 119 of this Annual Report. More information about concentrations can

be found in the following tables or discussion in the MD&A:

Wholesale exposure Page 60

Wholesale selected industry concentrations Page 61

Country exposure Page 65

Consumer real estate by geographic location Page 67

The table below presents both on-balance sheet and off-balance sheet wholesale- and consumer-related credit exposure as of December 31, 2004 and 2003:

2004 2003

(c)

Credit On-balance Off-balance Credit On-balance Off-balance

December 31, (in billions) exposure sheet

(a)

sheet

(b)

exposure sheet

(a)

sheet

(b)

Wholesale-related:

Banks and finance companies $ 56.2 $ 25.7 $ 30.5 $ 62.7 $ 39.7 $ 23.0

Real estate 28.2 16.7 11.5 14.5 8.8 5.7

Healthcare 22.0 4.5 17.5 11.3 1.8 9.5

Retail and consumer services 21.7 6.0 15.7 14.5 4.2 10.3

Consumer products 21.4 7.1 14.3 13.8 3.6 10.2

All other wholesale 392.7 172.8 219.9 258.7 105.9 152.8

Total wholesale-related 542.2 232.8 309.4 375.5 164.0 211.5

Consumer-related:

Home finance 177.9 124.7 53.2 106.2 74.6 31.6

Auto & education finance 67.9 62.7 5.2 45.8 43.2 2.6

Consumer & small business and other 25.4 15.1 10.3 10.0 4.2 5.8

Credit card receivables

(d)

597.0 64.5 532.5 158.5 17.4 141.1

Total consumer-related 868.2 267.0 601.2 320.5 139.4 181.1

Total exposure $ 1,410.4 $ 499.8 $ 910.6 $ 696.0 $ 303.4 $ 392.6

(a) Represents loans, derivative receivables, interests in purchased receivables and other receivables.

(b) Represents lending-related financial instruments.

(d) Excludes $70.8 billion and $34.9 billion of securitized credit card receivables at December 31, 2004 and 2003, respectively.

Note 29 – Fair value of financial instruments

The fair value of a financial instrument is the amount at which the instrument

could be exchanged in a current transaction between willing parties, other

than in a forced or liquidation sale.

The accounting for an asset or liability may differ based on the type of instru-

ment and/or its use in a trading or investing strategy. Generally, the measure-

ment framework in financial statements is one of the following:

• at fair value on the Consolidated balance sheets, with changes in fair value

recorded each period in the Consolidated statements of income;

• at fair value on the Consolidated balance sheets, with changes in fair value

recorded each period in a separate component of Stockholders’ equity and

as part of Other comprehensive income;

• at cost (less other-than-temporary impairments), with changes in fair value

not recorded in the financial statements but disclosed in the notes thereto;

• at the lower of cost or fair value.

The Firm has an established and well-documented process for determining

fair values. 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 to the valuation model. Valuation adjustments may be necessary to

ensure that financial instruments are recorded at fair value. These adjustments

include amounts to reflect counterparty credit quality, liquidity and concentra-

tion concerns and are based on defined methodologies that

are applied consistently over time.

Notes to consolidated financial statements

JPMorgan Chase & Co.

122 JPMorgan Chase & Co. / 2004 Annual Report

• Credit valuation adjustments are necessary when the market price (or

parameter) is not indicative of the credit quality of the counterparty. As few

derivative contracts are listed on an exchange, the majority of derivative

positions are valued using internally developed models that use as their

basis observable market parameters. Market practice is to quote parame-

ters equivalent to a AA credit rating; thus, all counterparties are assumed

to have the same credit quality. An adjustment is therefore necessary to

reflect the credit quality of each derivative counterparty and to arrive at

fair value. Without this adjustment, derivative positions would not be

appropriately valued.

• Liquidity adjustments are necessary when the Firm may not be able to

observe a recent market price for a financial instrument that trades in inac-

tive (or less active) markets. Thus, valuation adjustments for risk of loss due

to a lack of liquidity are applied to those positions to arrive at fair value.

The Firm tries to ascertain the amount of uncertainty in the initial valuation

based upon the liquidity or illiquidity, as the case may be, of the market in

which the instrument trades and makes liquidity adjustments to the finan-

cial instruments. The Firm measures the liquidity adjustment based on the

following factors: (1) the amount of time since the last relevant pricing

point; (2) whether there was an actual trade or relevant external quote;

and (3) the volatility of the principal component of the financial instrument.

• Concentration valuation adjustments are necessary to reflect the cost of

unwinding larger-than-normal market-size risk positions. The cost is deter-

mined based on the size of the adverse market move that is likely to occur

during the extended period required to bring a position down to a noncon-

centrated level. An estimate of the period needed to reduce, without mar-

ket disruption, a position to a nonconcentrated level is generally based on

the relationship of the position to the average daily trading volume of that

position. Without these adjustments, larger positions would be valued at a

price greater than the price at which the Firm could exit the positions.

Valuation adjustments are determined based on established policies and are

controlled by a price verification group independent of the risk-taking function.

Economic substantiation of models, prices, market inputs and revenue through

price/input testing, as well as backtesting, is done to validate the appropriate-

ness of the valuation methodology. Any changes to the valuation methodology

are reviewed by management to ensure the changes are justified.

The methods described above 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.

Certain financial instruments and all nonfinancial instruments are excluded

from the scope of SFAS 107. Accordingly, the fair value disclosures required

by SFAS 107 provide only a partial estimate of the fair value of JPMorgan

Chase. For example, the Firm has developed long-term relationships with its

customers through its deposit base and credit card accounts, commonly

referred to as core deposit intangibles and credit card relationships. In the

opinion of management, these items, in the aggregate, add significant value

to JPMorgan Chase, but their fair value is not disclosed in this Note.

The following describes the methodologies and assumptions used, by financial

instrument, to determine fair value.

Financial assets

Assets for which fair value approximates carrying value

The Firm considers fair values of certain financial assets carried at cost –

including cash and due from banks, deposits with banks, securities borrowed,

short-term receivables and accrued interest receivable – to approximate their

respective carrying values, due to their short-term nature and generally negli-

gible credit risk.

Assets where fair value differs from cost

The Firm’s debt, equity and derivative trading instruments are carried at their

estimated fair value. Quoted market prices, when available, are used to deter-

mine the fair value of trading instruments. If quoted market prices are not

available, then fair values are estimated by using pricing models, quoted prices

of instruments with similar characteristics, or discounted cash flows.

Federal funds sold and securities purchased under resale agreements

Federal funds sold and securities purchased under resale agreements are

typically short-term in nature and, as such, for a significant majority of the

Firm’s transactions, cost approximates carrying value. This balance sheet item

also includes structured resale agreements and similar products with long-

dated maturities. To estimate the fair value of these instruments, cash flows

are discounted using the appropriate market rates for the applicable maturity.

Securities

Fair values of actively traded securities are determined by the secondary

market, while the fair values for nonactively traded securities are based on

independent broker quotations.

Derivatives

Fair value for derivatives is determined based on the following:

• position valuation, principally based on liquid market pricing as evidenced

by exchange-traded prices, broker-dealer quotations or related input

parameters, which assume all counterparties have the same credit rating;

• credit valuation adjustments to the resulting portfolio valuation, to reflect

the credit quality of individual counterparties; and

• other fair value adjustments to take into consideration liquidity, concentra-

tion and other factors.

For those derivatives valued based on models with significant unobservable

market parameters, the Firm defers the initial trading profit for these financial

instruments. The deferred profit is recognized in Trading revenue on a systematic

basis and when observable market data becomes available.

The fair value of derivative payables does not incorporate a valuation adjust-

ment to reflect JPMorgan Chase’s credit quality.

Interests in purchased receivables

The fair value of variable-rate interests in purchased receivables approximate

their respective carrying amounts due to their variable interest terms and

negligible credit risk. The estimated fair values for fixed-rate interests in

purchased receivables are determined using a discounted cash flow analysis

using appropriate market rates for similar instruments.

JPMorgan Chase & Co. / 2004 Annual Report 123

Loans

Fair value for loans is determined using methodologies suitable for each type

of loan:

• Fair value for the wholesale loan portfolio is estimated primarily using the

cost of credit derivatives, which is adjusted to account for the differences

in recovery rates between bonds, on which the cost of credit derivatives is

based, and loans.

• Fair values for consumer installment loans (including automobile financ-

ings) and consumer real estate, for which market rates for comparable

loans are readily available, are based on discounted cash flows, adjusted

for prepayments. The discount rates used for consumer installment loans

are current rates offered by commercial banks. For consumer real estate,

secondary market yields for comparable mortgage-backed securities,

adjusted for risk, are used.

• Fair value for credit card receivables is based on discounted expected cash

flows. The discount rates used for credit card receivables incorporate only

the effects of interest rate changes, since the expected cash flows already

reflect an adjustment for credit risk.

• The fair value of loans in the held-for-sale and trading portfolios is generally

based on observable market prices and on prices of similar instruments,

including bonds, credit derivatives and loans with similar characteristics. If

market prices are not available, the fair value is based on the estimated cash

flows adjusted for credit risk; that risk is discounted, using a rate appropri-

ate for each maturity that incorporates the effects of interest rate changes.

Other assets

This caption includes private equity investments and MSRs.

For a discussion of the fair value methodology for private equity investments,

see Note 9 on page 100 of this Annual Report.

For a discussion of the fair value methodology for MSRs, see Note 15 on

pages 109–111 of this Annual Report.

Financial liabilities

Liabilities for which fair value approximates carrying value

SFAS 107 requires that the fair value for deposit liabilities with no stated

maturity (i.e., demand, savings and certain money market deposits) be equal

to their carrying value. SFAS 107 does not allow for the recognition of the

inherent funding value of these instruments.

Fair value of commercial paper, other borrowed funds, accounts payable and

accrued liabilities is considered to approximate their respective carrying values

due to their short-term nature.

Interest-bearing deposits

Fair values of interest-bearing deposits are estimated by discounting cash

flows based on the remaining contractual maturities of funds having similar

interest rates and similar maturities.

Federal funds purchased and securities sold

under repurchase agreements

Federal funds purchased and securities sold under repurchase agreements are

typically short-term in nature; as such, for a significant majority of these

transactions, cost approximates carrying value. This balance sheet item also

includes structured repurchase agreements and similar products with long-dated

maturities. To estimate the fair value of these instruments, the cash flows are

discounted using the appropriate market rates for the applicable maturity.

Beneficial interests issued by consolidated VIEs

Beneficial interests issued by consolidated VIEs (“beneficial interests”) are

generally short-term in nature and, as such, for a significant majority of the

Firm’s transactions, cost approximates carrying value. The Consolidated

balance sheets also include beneficial interests with long-dated maturities.

The fair value of these instruments is based on current market rates.

Long-term debt-related instruments

Fair value for long-term debt, including the junior subordinated deferrable

interest debentures held by trusts that issued guaranteed capital debt securi-

ties, is based on current market rates and is adjusted for JPMorgan Chase’s

credit quality.

Lending-related commitments

Although there is no liquid secondary market for wholesale commitments,

the Firm estimates the fair value of its wholesale lending-related commit-

ments primarily using the cost of credit derivatives (which is adjusted to

account for the difference in recovery rates between bonds, on which the

cost of credit derivatives is based, and loans) and loan equivalents (which

represent the portion of an unused commitment expected, based on the

Firm’s average portfolio historical experience, to become outstanding in the

event an obligor defaults). The Firm estimates the fair value of its consumer

commitments to extend credit based on the primary market prices to originate

new commitments. It is the change in current primary market prices that

provides the estimate of the fair value of these commitments.

On this basis, at December 31, 2004 and 2003, the fair value of the Firm’s

lending-related commitments approximated the Allowance for lending-related

commitments of $492 million and $324 million, respectively.

Notes to consolidated financial statements

JPMorgan Chase & Co.

124 JPMorgan Chase & Co. / 2004 Annual Report

The following table presents the carrying value and estimated fair value of financial assets and liabilities valued under SFAS 107; accordingly, certain assets and lia-

bilities that are not considered financial instruments are excluded from the table.

2004 2003

(a)(b)

Carrying Estimated Appreciation/ Carrying Estimated Appreciation/

December 31, (in billions) value fair value (depreciation) value fair value (depreciation)

Financial assets

Assets for which fair value approximates carrying value $ 125.7 $ 125.7 $ — $ 84.6 $ 84.6 $ —

Federal funds sold and securities purchased under resale agreements 101.4 101.3 (0.1) 76.9 77.2 0.3

Trading assets 288.8 288.8 — 252.9 252.9 —

Securities 94.5 94.5 — 60.3 60.3 —

Loans:

Wholesale, net of allowance for loan losses 132.0 134.6 2.6 73.2 74.5 1.3

Consumer, net of allowance for loan losses 262.8 262.5 (0.3) 137.0 138.2 1.2

Interests in purchased receivables 31.7 31.8 0.1 4.8 4.8 —

Other assets 50.4 51.1 0.7 61.0 61.5 0.5

Total financial assets $ 1,087.3 $ 1,090.3 $ 3.0 $ 750.7 $ 754.0 $ 3.3

Financial liabilities

Liabilities for which fair value approximates carrying value $ 228.8 $ 228.8 $ — $ 146.6 $ 146.6 $ —

Interest-bearing deposits 385.3 385.5 (0.2) 247.0 247.1 (0.1)

Federal funds purchased and securities

sold under repurchase agreements 127.8 127.8 — 113.5 113.6 (0.1)

Trading liabilities 151.2 151.2 — 149.4 149.4 —

Beneficial interests issued by consolidated VIEs 48.1 48.0 0.1 12.3 12.3 —

Long-term debt-related instruments 105.7 107.7 (2.0) 54.8 57.0 (2.2)

Total financial liabilities $ 1,046.9 $ 1,049.0 $ (2.1) $ 723.6 $ 726.0 $ (2.4)

Net appreciation $ 0.9 $0.9

(a) Heritage JPMorgan Chase only.

(b) Amounts have been revised to reflect the current year’s presentation.

JPMorgan Chase & Co. / 2004 Annual Report 125

Income before

For the year ended December 31, (in millions)

(a)

Revenue

(b)

Expense

(c)

income taxes Net income

2004

Europe/Middle East and Africa $ 6,566 $ 4,635 $ 1,931 $ 1,305

Asia and Pacific 2,631 1,766 865 547

Latin America and the Caribbean 816 411 405 255

Other 112 77 35 25

Total international 10,125 6,889 3,236 2,132

Total U.S. 32,972 30,014 2,958 2,334

Total $ 43,097 $ 36,903 $ 6,194 $ 4,466

2003

Europe/Middle East and Africa $ 6,344 $ 4,076 $ 2,268 $ 1,467

Asia and Pacific 1,902 1,772 130 91

Latin America and the Caribbean 1,000 531 469 287

Other 50 17 33 34

Total international 9,296 6,396 2,900 1,879

Total U.S. 24,088 16,960 7,128 4,840

Total $ 33,384 $ 23,356 $ 10,028 $ 6,719

2002

Europe/Middle East and Africa $ 5,120 $ 4,882 $ 238 $ 157

Asia and Pacific 1,900 1,820 80 53

Latin America and the Caribbean 685 557 128 85

Other 42 34 8 5

Total international 7,747 7,293 454 300

Total U.S. 21,867 19,802 2,065 1,363

Total $ 29,614 $ 27,095 $ 2,519 $ 1,663

(a) 2004 results include six months of the combined Firm’s results and six months of heritage JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

(b) Revenue is composed of Net interest income and noninterest revenue.

Note 30 – International operations

The following table presents income statement information of JPMorgan

Chase by major geographic area. The Firm defines international activities as

business transactions that involve customers residing outside of the United

States, and the information presented below is based primarily on the domi-

cile of the customer. However, many of the Firm’s U.S. operations serve inter-

national businesses.

As the Firm’s operations are highly integrated, estimates and subjective

assumptions have been made to apportion revenue and expense between

U.S. and international operations. These estimates and assumptions are con-

sistent with the allocations used for the Firm’s segment reporting as set forth

in Note 31 on pages 126–127 of this Annual Report.

The Firm’s long-lived assets for the periods presented are not considered by

management to be significant in relation to total assets. The majority of the

Firm’s long-lived assets are located in the United States.

Notes to consolidated financial statements

JPMorgan Chase & Co.

126 JPMorgan Chase & Co. / 2004 Annual Report

Note 31 – Business segments

JPMorgan Chase is organized into 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 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 footnotes to the table below. For a further discus-

sion concerning JPMorgan Chase’s business segments, see Business segment

results on pages 28–29 of this Annual Report.

In connection with the Merger, business segment reporting was realigned to

reflect the new business structure of the combined Firm. Treasury was trans-

ferred from the Investment Bank into Corporate. The segment formerly known

as Chase Financial Services had been comprised of Chase Home Finance,

Chase Cardmember Services, Chase Auto Finance, Chase Regional Banking

and Chase Middle Market; as a result of the Merger, this segment is now

called Retail Financial Services and is comprised of Home Finance, Auto &

Education Finance, Consumer & Small Business Banking and Insurance. Chase

Middle Market moved into Commercial Banking, and Chase Cardmember

Services is now its own segment called Card Services. Treasury & Securities

Services remains unchanged. Investment Management & Private Banking has

been renamed Asset & Wealth Management. JPMorgan Partners, which formerly

was a stand-alone business segment, was moved into Corporate. Lastly,

Segment results and reconciliation

(a)

(table continued on next page)

Year ended December 31,

(b)

Investment Bank

(e)

Retail Financial Services Card Services

(f)

Commercial Banking

(in millions, except ratios) 2004 2003 2002 2004 2003 2002 2004 2003 2002 2004 2003 2002

Net interest income $ 1,325 $ 1,667 $ 1,978 $ 7,714 $ 5,220 $ 3,823 $ 8,374 $ 5,052 $ 4,930 $ 1,692 $ 959 $ 999

Noninterest revenue 11,705 11,270 8,881 3,119 2,232 2,541 2,349 1,097 995 561 354 348

Intersegment revenue

(c)

(425) (253) (177) (42) (24) (16) 22 (5) (12) 121 39 18

Total net revenue 12,605 12,684 10,682 10,791 7,428 6,348 10,745 6,144 5,913 2,374 1,352 1,365

Provision for credit losses (640) (181) 2,392 449 521 334 4,851 2,904 2,751 41 672

Credit reimbursement

(to)/from TSS

(d)

90 (36) (82) — —— — —— — ——

Merger costs — ——— —— — —— — ——

Litigation reserve charge — 100 — — —— — —— — ——

Excess real estate charge — ——— —— — —— — ——

Other noninterest expense 8,696 8,202 7,798 6,825 4,471 3,733 3,883 2,178 2,129 1,343 822 809

Income (loss) before

income tax expense 4,639 4,527 410 3,517 2,436 2,281 2,011 1,062 1,033 990 524 484

Income tax expense (benefit) 1,691 1,722 (3) 1,318 889 849 737 379 369 382 217 201

Net income (loss) $ 2,948 $ 2,805 $ 413 $ 2,199 $ 1,547 $ 1,432 $ 1,274 $ 683 $ 664 $608$ 307 $ 283

Average equity $ 17,290 $ 18,350 $ 19,134 $ 9,092 $ 4,220 $ 3,907 $ 7,608 $ 3,440 $ 3,444 $ 2,093 $ 1,059 $ 1,199

Average assets 473,121 436,488 429,866 185,928 147,435 114,248 94,741 51,406 49,648 36,435 16,460 15,973

Return on average equity 17% 15% 2% 24% 37% 37% 17% 20% 19% 29% 29% 24%

Overhead ratio 69 65 73 63 60 59 36 35 36 57 61 59

(a) In addition to analyzing the Firm’s results on a reported basis, management looks at results on an “operating basis,” which is a non-GAAP financial measure. Operating basis starts with the reported U.S.

GAAP results. In the case of the Investment Bank, the operating basis includes the reclassification of net interest income related to trading activities to Trading revenue. In the case of Card Services, refer

to footnote (f). These adjustments do not change JPMorgan Chase’s reported net income. Finally, operating basis excludes the Merger costs, the Litigation reserve charge and accounting policy conformity

adjustments related to the Merger, as management believes these items are not part of the Firm’s normal daily business operations (and, therefore, not indicative of trends) and do not provide meaningful

comparisons with other periods.

(b) 2004 results include six months of the combined Firm’s results and six months of heritage JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

(c) Intersegment revenue includes intercompany revenue and revenue-sharing agreements, net of intersegment expenses. Transactions between business segments are primarily conducted at

fair value.

(d) TSS reimburses the IB for credit portfolio exposures the IB manages on behalf of clients the segments share. At the time of the Merger, the reimbursement methodology was revised to be based on pre-tax

earnings, net of the cost of capital related to those exposures. Prior to the Merger, the credit reimbursement was based on pre-tax earnings, plus the allocated capital associated with the shared clients.

(e) Segment operating results include the reclassification of Net interest income (“NII”) related to trading activities to Trading revenue within Noninterest revenue, which primarily impacts the Investment

Bank. Trading-related NII reclassified to Trading revenue was $2.0 billion, $2.1 billion and $1.9 billion for 2004, 2003 and 2002, respectively. These amounts are eliminated in Corporate/reconciling

items to arrive at NII and Noninterest revenue on a reported GAAP basis for JPMorgan Chase.

(f) Operating results for Card Services exclude the impact of credit card securitizations on revenue, provision for credit losses and average assets, as JPMorgan Chase treats the sold receivables as if they

were still on the balance sheet in evaluating the overall performance of the credit card portfolio. The related securitization adjustments for 2004, 2003 and 2002 were: $5.3 billion, $3.3 billion and

$2.8 billion, respectively, in NII; $(2.4) billion, $(1.4) billion and $(1.4) billion, respectively, in Noninterest revenue; $2.9 billion, $1.9 billion and $1.4 billion, respectively, in Provision for credit losses;

and $51.1 billion, $32.4 billion and $26.5 billion, respectively, in Average assets. These adjustments are eliminated in Corporate/reconciling items to arrive at the Firm’s reported GAAP results.

(g) Includes $858 million of accounting policy conformity adjustments consisting of approximately $1.4 billion related to the decertification of the seller’s retained interest in credit card securitizations,

partially offset by a benefit of $584 million related to conforming wholesale and consumer provision methodologies for the combined Firm.

(h) Merger costs attributed to the lines of business for 2004 were as follows: $74 million, Investment Bank; $201 million, Retail Financial Services; $79 million, Card Services; $23 million, Commercial

Banking; $68 million, Treasury & Securities Services; $31 million, Asset & Wealth Management; and $889 million, Corporate.

JPMorgan Chase & Co. / 2004 Annual Report 127

(table continued from previous page)

Corporate/

Treasury & Securities Services Asset & Wealth Management reconciling items

(e)(f)

Total

2004 2003 2002 2004 2003 2002 2004 2003 2002 2004 2003 2002

$ 1,383 $ 947 $ 962 $ 796 $ 488 $ 467 $ (4,523) $ (1,368) $ (981) $ 16,761 $ 12,965 $ 12,178

3,226 2,475 2,387 3,297 2,415 2,328 2,079 576 (44) 26,336 20,419 17,436

248 186 186 86 67 137 (10) (10) (136) — ——

4,857 3,608 3,535 4,179 2,970 2,932 (2,454) (802) (1,161) 43,097 33,384 29,614

7 13(14) 35 85 (2,150)

(g)

(1,746) (1,306) 2,544 1,540 4,331

(90) 36 82 — —— — —— — ——

— —— — ——1,365

(h)

— 1,210 1,365 — 1,210

— —— — ——3,700 — 1,300 3,700 100 1,300

— —— — —— — —98 — —98

4,113 3,028 2,771 3,133 2,486 2,408 1,301 529 508 29,294 21,716 20,156

647 615 843 1,060 449 439 (6,670) 415 (2,971) 6,194 10,028 2,519

207 193 294 379 162 161 (2,986) (253) (1,015) 1,728 3,309 856

$ 440 $ 422 $ 549 $ 681 $ 287 $ 278 $ (3,684) $ 668 $ (1,956) $ 4,466 $ 6,719 $ 1,663

$ 2,544 $ 2,738 $ 2,700 $ 3,902 $ 5,507 $ 5,649 $ 33,112 $ 7,674 $ 5,335 $ 75,641 $ 42,988 $ 41,368

23,430 18,379 17,239 37,751 33,780 35,813 111,150 72,030 70,570 962,556 775,978 733,357

17% 15% 20% 17% 5% 5% NM NM NM 6% 16% 4%

85 84 78 75 84 82 NM NM NM 80 65 77

Corporate is currently comprised of Private Equity (JPMorgan Partners and

ONE Equity Partners), Treasury, as well as corporate support areas, which

include Central Technology and Operations, Internal Audit, Executive Office,

Finance, General Services, Human Resources, Marketing & Communications,

the Office of General Counsel, Real Estate and Business Services, Risk

Management and Strategy and Development.

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. Operating revenue for the

Investment Bank includes tax-equivalent adjustments for income tax credits

primarily related to affordable housing investments as well as tax-exempt

income from municipal bond investments. Information prior to the Merger has

not been restated to conform with this new presentation. The amount of the

tax-equivalent gross-up for each business segment is eliminated within the

Corporate segment and was $(303) million, $(122) million and $(116) million

for the years ended December 31, 2004, 2003 and 2002, respectively.

The following table provides a summary of the Firm’s segment results for 2004,

2003 and 2002 on an operating basis. The impact of credit card securitizations,

merger costs, litigation charges and accounting policy conformity adjustments

have been included in Corporate/reconciling items so that the total Firm results

are on a reported basis. Segment results for periods prior to July 1, 2004, reflect

heritage JPMorgan Chase–only results and have been restated to reflect the

current business segment organization and reporting classifications.

Notes to consolidated financial statements

JPMorgan Chase & Co.

128 JPMorgan Chase & Co. / 2004 Annual Report

Note 32 – Parent company

Parent company – statements of income

Year ended December 31, (in millions)

(a)

2004 2003 2002

Income

Dividends from bank and bank

holding company subsidiaries

(b)

$ 1,208 $ 2,436 $ 3,079

Dividends from nonbank subsidiaries

(c)

773 2,688 422

Interest income from subsidiaries 1,370 945 1,174

Other interest income 137 130 148

Other income from subsidiaries, primarily fees:

Bank and bank holding company 833 632 277

Nonbank 499 385 390

Other income 204 (25) 264

Total income 5,024 7,191 5,754

Expense

Interest expense to subsidiaries

(c)

603 422 405

Other interest expense 1,834 1,329 1,511

Compensation expense 353 348 378

Other noninterest expense 1,105 747 699

Total expense 3,895 2,846 2,993

Income before income tax benefit and

undistributed net income of subsidiaries 1,129 4,345 2,761

Income tax benefit 556 474 432

Equity in undistributed net income (loss)

of subsidiaries 2,781 1,900 (1,530)

Net income $ 4,466 $ 6,719 $ 1,663

Parent company – balance sheets

December 31, (in millions) 2004 2003

(d)

Assets

Cash with banks, primarily with bank subsidiaries $ 513 $ 148

Deposits with banking subsidiaries 10,703 12,554

Securities purchased under resale agreements,

primarily with nonbank subsidiaries — 285

Trading assets 3,606 3,915

Available-for-sale securities 2,376 2,099

Loans 162 550

Advances to, and receivables from, subsidiaries:

Bank and bank holding company 19,076 9,239

Nonbank 34,456 24,489

Investment (at equity) in subsidiaries:

Bank and bank holding company 105,599 43,853

Nonbank

(c)

17,701 10,399

Goodwill and other intangibles 890 860

Other assets 11,557 9,213

Total assets $ 206,639 $ 117,604

Liabilities and stockholders’ equity

Borrowings from, and payables to, subsidiaries

(c)

$ 14,195 $ 9,488

Other borrowed funds, primarily commercial paper 15,050 16,560

Other liabilities 6,309 4,767

Long-term debt

(e)

65,432 40,635

Total liabilities 100,986 71,450

Stockholders’ equity 105,653 46,154

Total liabilities and stockholders’ equity $ 206,639 $ 117,604

Parent company – statements of cash flows

Year ended December 31, (in millions)

(a)

2004 2003 2002

Operating activities

Net income $ 4,466 $ 6,719 $ 1,663

Less: Net income of subsidiaries 4,762 7,017 1,971

Parent company net loss (296) (298) (308)

Add: Cash dividends from subsidiaries

(b)(c)

1,964 5,098 2,320

Other, net (81) (272) (912)

Net cash provided by operating activities 1,587 4,528 1,100

Investing activities

Net cash change in:

Deposits with banking subsidiaries 1,851 (2,560) (3,755)

Securities purchased under resale agreements,

primarily with nonbank subsidiaries 355 99 (40)

Loans 407 (490) (27)

Advances to subsidiaries (5,772) (3,165) 6,172

Investment (at equity) in subsidiaries (4,015) (2,052) (2,284)

Other, net 11 12 (37)

Available-for-sale securities:

Purchases (392) (607) (1,171)

Proceeds from sales and maturities 114 654 1,877

Cash received in business acquisitions 4,608 ——

Net cash (used in) provided by

investing activities (2,833) (8,109) 735

Financing activities

Net cash change in borrowings

from subsidiaries

(c)

941 2,005 573

Net cash change in other borrowed funds (1,510) (2,104) (915)

Proceeds from the issuance of

long-term debt 12,816 12,105 12,533

Repayments of long-term debt (6,149) (6,733) (12,271)

Proceeds from the issuance of stock

and stock-related awards 848 1,213 725

Redemption of preferred stock (670) ——

Treasury stock purchased (738) ——

Cash dividends paid (3,927) (2,865) (2,784)

Net cash provided by (used in)

financing activities 1,611 3,621 (2,139)

Net increase (decrease) in cash with banks 365 40 (304)

Cash with banks

at the beginning of the year 148 108 412

Cash with banks at the end of

the year, primarily with bank subsidiaries $ 513 $ 148 $ 108

Cash interest paid $ 2,383 $ 1,918 $ 1,829

Cash income taxes paid $ 701 $ 754 $ 592

(a) 2004 results include six months of the combined Firm’s results and six months of heritage

JPMorgan Chase results. All other periods reflect the results of heritage JPMorgan Chase only.

For a further discussion of the Merger, see Note 2 on pages 89–90 of this Annual Report.

(b) Dividends in 2002 include a stock dividend of $1.2 billion from the mortgage business,

which was contributed to JPMorgan Chase Bank.

As a result of FIN 46, the Parent deconsolidated these trusts in 2003. The Parent received

dividends of $15 million and $11 million from the issuer trusts in 2004 and 2003, respec-

tively. For a further discussion on these issuer trusts, see Note 17 on pages 112–113 of this

Annual Report.

(d) Heritage JPMorgan Chase only.

(e) At December 31, 2004, all debt that contractually matures in 2005 through 2009 totaled

$10.8 billion, $10.5 billion, $9.4 billion, $6.8 billion and $9.2 billion, respectively.

JPMorgan Chase & Co. / 2004 Annual Report 129

Supplementary information

Selected quarterly financial data (unaudited)

(in millions, except per share, ratio and headcount data) 2004 2003

(b)

As of or for the period ended 4th

(a)

3rd

(a)

2nd

(b)

1st

(b)

4th 3rd 2nd 1st

Selected income statement data

Net interest income $ 5,329 $ 5,452 $ 2,994 $ 2,986 $ 3,182 $ 3,198 $ 3,228 $ 3,357

Noninterest revenue 7,621 7,053 5,637 6,025 4,924 4,582 5,840 5,073

Total net revenue 12,950 12,505 8,631 9,011 8,106 7,780 9,068 8,430

Provision for credit losses 1,157 1,169 203 15 139 223 435 743

Noninterest expense before Merger costs

and Litigation reserve charge 8,863 8,625 5,713 6,093 5,258 5,127 5,766 5,565

Merger costs 523 752 90 — —— — —

Litigation reserve charge — — 3,700 — — — 100 —

Total noninterest expense 9,386 9,377 9,503 6,093 5,258 5,127 5,866 5,565

Income (loss) before income tax expense (benefit) 2,407 1,959 (1,075) 2,903 2,709 2,430 2,767 2,122

Income tax expense (benefit) 741 541 (527) 973 845 802 940 722

Net income (loss) $ 1,666 $ 1,418 $ (548) $ 1,930 $ 1,864 $ 1,628 $ 1,827 $ 1,400

Per common share

Net income (loss) per share: Basic $ 0.47 $ 0.40 $ (0.27) $ 0.94 $ 0.92 $ 0.80 $ 0.90 $ 0.69

Diluted 0.46 0.39 (0.27) 0.92 0.89 0.78 0.89 0.69

Cash dividends declared per share 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34

Book value per share 29.61 29.42 21.52 22.62 22.10 21.55 21.53 20.73

Common shares outstanding

Average: Basic 3,515 3,514 2,043 2,032 2,016 2,012 2,006 2,000

Diluted 3,602 3,592 2,043 2,093 2,079 2,068 2,051 2,022

Common shares at period end 3,556 3,564 2,088 2,082 2,043 2,039 2,035 2,030

Selected ratios

Return on common equity (“ROE”)

(c)

6% 5% NM 17% 17% 15% 17% 13%

Return on assets (“ROA”)

(c)(d)

0.57 0.50 NM 1.01 0.95 0.83 0.96 0.73

Tier 1 capital ratio 8.7 8.6 8.2% 8.4 8.5 8.7 8.4 8.4

Total capital ratio 12.2 12.0 11.2 11.4 11.8 12.1 12.0 12.2

Tier 1 leverage ratio 6.2 6.5 5.5 5.9 5.6 5.5 5.5 5.0

Selected balance sheet (period-end)

Total assets $ 1,157,248 $ 1,138,469 $ 817,763 $801,078 $ 770,912 $792,700 $ 802,603 $ 755,156

Securities 94,512 92,816 64,915 70,747 60,244 65,152 82,549 85,178

Total loans 402,114 393,701 225,938 217,630 214,766 225,287 227,394 217,471

Deposits 521,456 496,454 346,539 336,886 326,492 313,626 318,248 300,667

Long-term debt 95,422 91,754 52,981 50,062 48,014 43,945 43,371 42,851

Common stockholders’ equity 105,314 104,844 44,932 47,092 45,145 43,948 43,812 42,075

Total stockholders’ equity 105,653 105,853 45,941 48,101 46,154 44,957 44,821 43,084

Credit quality metrics

Allowance for credit losses $ 7,812 $ 8,034 $ 4,227 $ 4,417 $ 4,847 $ 5,082 $ 5,471 $ 5,651

Nonperforming assets 3,231 3,637 2,482 2,882 3,161 3,853 4,111 4,448

Allowance for loan losses to total loans

(e)

1.94% 2.01% 1.92% 2.08% 2.33% 2.51% 2.60% 2.73%

Net charge-offs $ 1,398 $ 865 $ 392 $ 444 $ 374 $ 614 $ 614 $ 670

Net charge-off rate

(c)(f)

1.47% 0.93% 0.77% 0.92% 0.76% 1.27% 1.31% 1.43%

Wholesale net charge-off rate

(c)(f)

0.21 (0.08) 0.29 0.50 (0.05) 1.25 1.25 1.36

Managed Card net charge-off rate

(c)

5.24 4.88 5.85 5.81 5.77 5.84 6.04 5.95

Headcount 160,968 162,275 94,615 96,010 96,367 95,931 95,862 96,637

Share price

(g)

High $ 40.45 $ 40.25 $ 42.57 $ 43.84 $ 36.99 $ 38.26 $ 36.52 $ 28.29

Low 36.32 35.50 34.62 36.30 34.45 32.40 23.75 20.13

Close 39.01 39.73 38.77 41.95 36.73 34.33 34.18 23.71

(a) Quarterly results include three months of the combined Firm’s results.

(b) Heritage JPMorgan Chase only.

(d) Represents Net income / Total average assets.

(e) Excluded from this ratio were loans held for sale.

(f) Excluded from this ratio were average loans held for sale.

(g) JPMorgan Chase’s common stock is listed and traded on the New York Stock Exchange, the London Stock Exchange Limited and the Tokyo Stock Exchange. The high, low and closing prices of

JPMorgan Chase’s common stock are from The New York Stock Exchange Composite Transaction Tape.

NM – Not meaningful due to net loss.

(unaudited)

(in millions, except per share, headcount and ratio data) Heritage JPMorgan Chase only

As of or for the year ended December 31, 2004

(a)

2003 2002 2001 2000

Selected income statement data

Net interest income $ 16,761 $ 12,965 $ 12,178 $ 11,401 $ 9,865

Noninterest revenue 26,336 20,419 17,436 17,943 23,321

Total net revenue 43,097 33,384 29,614 29,344 33,186

Provision for credit losses 2,544 1,540 4,331 3,182 1,380

Noninterest expense before Merger costs and Litigation reserve charge 29,294 21,716 20,254 21,073 21,642

Merger and restructuring costs 1,365 — 1,210 2,523 1,431

Litigation reserve charge 3,700 100 1,300 — —

Total noninterest expense 34,359 21,816 22,764 23,596 23,073

Income before income tax expense and effect of accounting change 6,194 10,028 2,519 2,566 8,733

Income tax expense 1,728 3,309 856 847 3,006

Income before effect of accounting change 4,466 6,719 1,663 1,719 5,727

Cumulative effect of change in accounting principle (net of tax) — — — (25) —

Net income $ 4,466 $ 6,719 $ 1,663 $ 1,694 $ 5,727

Per common share

Net income per share: Basic $ 1.59 $ 3.32 $ 0.81 $ 0.83

(f)

$ 2.99

Diluted 1.55 3.24 0.80 0.80

(f)

2.86

Cash dividends declared per share 1.36 1.36 1.36 1.36 1.28

Book value per share 29.61 22.10 20.66 20.32 21.17

Common shares outstanding

Average: Basic 2,780 2,009 1,984 1,972 1,884

Diluted 2,851 2,055 2,009 2,024 1,969

Common shares at period-end 3,556 2,043 1,999 1,973 1,928

Selected ratios

Return on common equity (“ROE”) 6% 16% 4% 4% 16%

Return on assets (“ROA”)

(b)

0.46 0.87 0.23 0.23 0.85

Tier 1 capital ratio 8.7 8.5 8.2 8.3 8.5

Total capital ratio 12.2 11.8 12.0 11.9 12.0

Tier 1 leverage ratio 6.2 5.6 5.1 5.2 5.4

Selected balance sheet (period-end)

Total assets $ 1,157,248 $770,912 $758,800 $ 693,575 $ 715,348

Securities 94,512 60,244 84,463 59,760 73,695

Loans 402,114 214,766 216,364 217,444 216,050

Deposits 521,456 326,492 304,753 293,650 279,365

Long-term debt 95,422 48,014 39,751 39,183 43,299

Common stockholders’ equity 105,314 45,145 41,297 40,090 40,818

Total stockholders’ equity 105,653 46,154 42,306 41,099 42,338

Credit quality metrics

Allowance for credit losses $ 7,812 $ 4,847 $ 5,713 $ 4,806 $ 3,948

Nonperforming assets 3,231 3,161 4,821 4,037 1,923

Allowance for loan losses to total loans

(c)

1.94% 2.33% 2.80% 2.25% 1.77%

Net charge-offs $ 3,099 $ 2,272 $ 3,676 $ 2,335 $ 1,480

Net charge-off rate

(d)

1.08% 1.19% 1.90% 1.13% 0.73%

Headcount 160,968 96,367 97,124 95,812

(g)

99,757

(g)

Share price

(e)

High $ 43.84 $ 38.26 $ 39.68 $ 59.19 $ 67.17

Low 34.62 20.13 15.26 29.04 32.38

Close 39.01 36.73 24.00 36.35 45.44

(a) 2004 results include six months of the combined Firm’s results and six months of heritage JPMorgan Chase results.

(b) Represents Net income / Total average assets.

(c) Excluded from this ratio were loans held for sale of $25.7 billion, $20.8 billion, $25.0 billion, $16.6 billion and $8.8 billion at December 31, 2004, 2003, 2002, 2001 and 2000, respectively.

(d) Excluded from the net charge-off rates were average loans held for sale of $21.1 billion, $29.1 billion, $17.8 billion, $12.7 billion and $7.1 billion as of December 31, 2004, 2003, 2002, 2001

and 2000, respectively.

(e) JPMorgan Chase’s common stock is listed and traded on the New York Stock Exchange, the London Stock Exchange Limited and the Tokyo Stock Exchange. The high, low and closing prices of

JPMorgan Chase’s common stock are from The New York Stock Exchange Composite Transaction Tape.

(f) Basic and diluted earnings per share were each reduced by $0.01 in 2001 because of the impact of the adoption of SFAS 133 relating to the accounting for derivative instruments and hedging activities.

(g) Represents full-time equivalent employees, as headcount data is unavailable.

130 JPMorgan Chase & Co. / 2004 Annual Report

Five-year summary of consolidated financial highlights

JPMorgan Chase & Co

JPMorgan Chase & Co. / 2004 Annual Report 131

Glossary of terms

JPMorgan Chase & Co.

AICPA: American Institute of Certified Public Accountants.

APB: Accounting Principles Board Opinion.

APB 25: “Accounting for Stock Issued to Employees.”

Assets under management: Represent assets actively managed by Asset &

Wealth Management on behalf of institutional, private banking, private client

services and retail clients.

Assets under supervision: Represent assets under management as well as

custody, brokerage, administration and deposit accounts.

Average managed assets: Refers to total assets on the Firm’s balance

sheet plus credit card receivables that have been securitized.

bp: Denotes basis points; 100 bp equals 1%.

Contractual credit card charge-off: In accordance with the Federal

Financial Institutions Examination Council policy, credit card loans are

charged-off by the end of the month in which the account becomes 180 days

past due or within 60 days from receiving notification of the filing of bank-

ruptcy, whichever is earlier.

Core deposits: U.S. deposits insured by the Federal Deposit Insurance

Corporation, up to the legal limit of $100,000 per depositor.

EITF: Emerging Issues Task Force.

EITF Issue 03-01: “The Meaning of Other-than-temporary Impairment and

Its Application to Certain Investments.”

FASB: Financial Accounting Standards Board.

FIN 39: FASB Interpretation No. 39, “Offsetting of Amounts Related to

Certain Contracts.”

FIN 41: FASB Interpretation No. 41, “Offsetting of Amounts Related to

Certain Repurchase and Reverse Repurchase Agreements.”

FIN 45: FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure

Requirement for Guarantees, including Indirect Guarantees of Indebtedness of

Others.”

FIN 46R: FASB Interpretation No. 46 (revised December 2003), “Consolidation

of Variable Interest Entities, an interpretation of Accounting Research Bulletin

No. 51.”

FASB Staff Position (“FSP”) EITF Issue 03-1-1: “Effective Date of

Paragraphs 10–20 of EITF Issue No. 03-01, ‘The Meaning of Other-than-

temporary Impairment and Its Application to Certain Investments.’ ”

FSP SFAS 106-2: “Accounting and Disclosure Requirements Related to the

Medicare Prescription Drug, Improvement and Modernization Act of 2003.”

FSP SFAS 109-2: “Accounting and Disclosure Guidance for the Foreign

Earnings Repatriation Provision within the American Jobs Creation Act of 2004.”

Investment-grade: An indication of credit quality based on JPMorgan

Chase’s internal risk assessment system. “Investment-grade” generally repre-

sents a risk profile similar to a rating of a BBB-/Baa3 or better, as defined by

independent rating agencies.

Mark-to-market exposure: A measure, at a point in time, of the value of a

derivative or foreign exchange contract in the open market. When the mark-

to-market value is positive, it indicates the counterparty owes JPMorgan

Chase and, therefore, creates a repayment risk for the Firm. When the mark-

to-market value is negative, JPMorgan Chase owes the counterparty. In this

situation, the Firm does not have repayment risk.

Master netting agreement: An agreement between two counterparties

that have multiple derivative contracts with each other that provides for the

net settlement of all contracts through a single payment, in a single currency,

in the event of default on or termination of any one contract. See FIN 39.

NA: Data is not applicable for the period presented.

Net yield on interest-earning assets: The average rate for interest-

earning assets less the average rate paid for all sources of funds.

NM: Not meaningful.

Overhead ratio: Noninterest expense as a percentage of total net revenue.

SFAS: Statement of Financial Accounting Standards.

SFAS 87: “Employers’ Accounting for Pensions.”

SFAS 88: “Employers’ Accounting for Settlements and Curtailments of

Defined Benefit Pension Plans and for Termination Benefits.”

SFAS 106: “Employers’ Accounting for Postretirement Benefits Other Than

Pensions.”

SFAS 107: “Disclosures about Fair Value of Financial Instruments.”

SFAS 109: “Accounting for Income Taxes.”

SFAS 114: “Accounting by Creditors for Impairment of a Loan.”

SFAS 115: “Accounting for Certain Investments in Debt and Equity Securities.”

SFAS 123: “Accounting for Stock-Based Compensation.”

SFAS 123R: “Share-Based Payment.”

SFAS 128: “Earnings per Share.”

SFAS 133: “Accounting for Derivative Instruments and Hedging Activities.”

SFAS 138: “Accounting for Certain Derivative Instruments and Certain

Hedging Activities – an amendment of FASB Statement No. 133.”

SFAS 140: “Accounting for Transfers and Servicing of Financial Assets and

Extinguishments of Liabilities – a replacement of FASB Statement No. 125.”

SFAS 142: “Goodwill and Other Intangible Assets.”

SFAS 149: “Amendment of Statement No. 133 on Derivative Instruments and

Hedging Activities.”

Staff Accounting Bulletin (“SAB”) 105: “Application of Accounting

Principles to Loan Commitments.”

Statement of Position (“SOP”) 98-1: “Accounting for the Costs of

Computer Software Developed or Obtained for Internal Use.”

Statement of Position (“SOP”) 03-3: “Accounting for Certain Loans or

Debt Securities Acquired in a Transfer.”

Stress testing: A scenario that measures market risk under unlikely but

plausible events in abnormal markets.

U.S. GAAP: Accounting principles generally accepted in the United States of

America.

Value-at-Risk (“VAR”): A measure of the dollar amount of potential loss

from adverse market moves in an ordinary market environment.

Community Advisory Board

132 JPMorgan Chase & Co./2004 Annual Report

Mark A. Willis

Chairman

Community Advisory Board

JPMorgan Chase Community

Development Group

Sharon Alexander-Holt

COO

The Urban League of

Metropolitan Denver

Denver, CO

Lauren Anderson

Executive Director

Neighborhood Housing Services

of New Orleans

New Orleans, LA

Polly Baca

CEO/Executive Director

Latin American Research and

Service Agency

Denver, CO

Dionne Bagsby

Commissioner

Fort Worth, TX

Salvador Balcorta

Executive Director

Centro de Salud Familiar La Fe

El Paso, TX

Frank Ballesteros

Chief Administrative Officer

PPEP Microbusiness & Housing

Development Corp.

Tucson, AZ

Eli Barbosa

Director of Neighborhood

Reinvestment

Latin United Community Housing

Association

Chicago, IL

Janie Barrera

President/CEO

ACCION Texas

San Antonio, TX

Shaun Belle

President/CEO

The Mt. Hope Housing Company

Bronx, NY

Pascual Blanco

Executive Director

La Fuerza Unida

Glen Cove, NY

Teresa Brice-Heames

Vice President

Housing for Mesa

Mesa, AZ

Sylvia Brooks

President/CEO

Houston Area Urban League

Houston, TX

Donnie Brown

Executive Director

Genesis Housing Development

Corp.

Chicago, IL

James Buckley

Executive Director

University Neighborhood

Housing Program

Bronx, NY

Jean Butzen

President/CEO

Lakefront Supportive Housing

Chicago, IL

Joseph Carbone

President/CEO

The WorkPlace, Inc.

Bridgeport, CT

David Chen

Executive Director

Chinese American Planning

Council

New York, NY

William Clark

President/CEO

Urban League of Rochester

Rochester, NY

Cesar Claro

Executive Director

Staten Island Economic

Development Corp.

Staten Island, NY

Ricardo Diaz

Executive Director

United Community Center

Milwaukee, WI

Peter Elkowitz

President

Long Island Housing Partnership

Hauppauge, NY

Ron Fafoglia

Executive Director

TSP Hope, Inc.

Springfield, IL

Melissa Flournoy

President/CEO

The Louisiana Assoc. of Nonprofit

Organizations (LANO)

Baton Rouge, LA

William Frey

Vice President, Director

Enterprise Foundation NYC Office

New York, NY

David Gallagher

Executive Director

Center for Neighborhood

Economic Development

Long Island City, NY

Reuben Gant

Executive Director

Greenwood Community

Development Corp.

Tulsa, OK

Reginald Gates

President/CEO

Dallas Black Chamber of

Commerce

Dallas, TX

Sarah Gerecke

CEO

Neighborhood Housing Services

of NYC

New York, NY

Christie Gillespie

Executive Director

Indiana Assoc. for Community

Economic Development

Indianapolis, IN

Ernest Gonzalez

Corporate Committee Chair

Long Island Hispanic Chamber

of Commerce

West Islip, NY

Mary Jane Gonzalez

Regional Director

Central Indiana Small Business

Development Center

Indianapolis, IN

Dina Gonzalez

President

West Michigan Hispanic

Chamber of Commerce

Grand Rapids, MI

Bruce Gottschall

Executive Director

Neighborhood Housing Services

of Chicago

Chicago, IL

Colvin Grannum

President/CEO

Bedford Stuyvesant Restoration

Corp.

Brooklyn, NY

Meg Haller

CEO

Gary Citywide CDC

Gary, IN

James Hargrove

Executive Director

Housing Authority of the City

of Austin

Austin, TX

Don Hartman

Deputy Director

NHS of Phoenix

Phoenix, AZ

Roy Hastick

President/CEO

Caribbean American Chamber

of Commerce & Industry

Brooklyn, NY

Norman Henry

President

Builders of Hope Community

Development Corp.

Dallas, TX

Ralph Hollmon

President/CEO

Milwaukee Urban League, Inc.

Milwaukee, WI

Kevin Jackson

Executive Director

Chicago Rehab Network

Chicago, IL

Kim Jacobs

Executive Director

Westchester Housing Fund

Hawthorne, NY

Erma Johnson-Hadley

Vice Chancellor for

Administration

Tarrant County College Dist.

Fort Worth, TX

Amy Klaben

President/CEO

Columbus Housing Partnership,

Inc.

Columbus, OH

James Klein

Executive Director

Ohio Community Development

Finance Fund

Columbus, OH

Christopher Kui

Executive Director

Asian Americans for Equality

New York, NY

Rhonda Lewis

President/CEO

Bridge Street Development Corp.

Brooklyn, NY

William Linder

Founder

New Community Corporation

Newark, NJ

Fred Lucas

President/CEO

Faith Center for Community

Development

New York, NY

Richard Manson

Vice President

LISC

New York, NY

Maria Matos

Executive Director

Latin American Community

Center

Wilmington, DE

Christie McCravy

Director of Homeownership

Programs

The Housing Partnership, Inc.

Louisville, KY

Ghebre Selassie Mehreteab

Co-Chairman & CEO

The NHP Foundation

Washington, DC

Luis Miranda

Chairman

Audubon Partnership for

Economic Development

New York, NY

Marlon Mitchell

Executive Director

City of Houston Small Business

Development Corp.

Houston, TX

(continued on next page)

*Board membership as of January 2005

JPMorgan Chase & Co./2004 Annual Report 133

Andrew J. Mooney

Senior Program Director

Local Initiative Support

Corporation

Chicago, IL

Randy Moore

Executive Director

Community Works in West

Virginia, Inc.

Charleston, WV

Gilbert Moreno

President

Association for the Advancement

of Mexican Americans

Houston, TX

Vincent Murray

Executive Director

Bagley Housing Association, Inc.

Detroit, MI

Joe Myer

Executive Director

NCALL Research

Dover, DE

Jeremy Nowak

President/CEO

The Reinvestment Fund

Philadelphia, PA

David Pagan

Executive Director

Southside United Housing

Development Fund Corp.

Brooklyn, NY

James Paley

Executive Director

Neighborhood Housing Services

of New Haven

New Haven, CT

John Parvensky

President

Colorado Coalition for the

Homeless

Denver, CO

John Pritschard

President

Community Investment Corp.

Chicago, IL

Edwin Reed

CFO

Greater Allen Cathedral of NY

Jamaica, NY

Kathy Ricci

Executive Director

Utah Micro-Enterprise Loan Fund

Salt Lake City, UT

Gwen Robinson

President/CEO

Hamilton County Community

Action Agency

Cincinnati, OH

Marcos Ronquillo

Lawyer

Godwin Gruber, LLP

Dallas, TX

Clifford Rosenthal

Executive Director

National Federation of

Community Development Credit

Unions

New York, NY

Winston Ross

Executive Director

Westchester Community

Opportunity Program

Elmsford, NY

David Scheck

Executive Director

NJ Community Capital Corp.

Trenton, NJ

Doris Schnider

President

Delaware Community Investment

Corp.

Wilmington, DE

Shirley Stancato

President/CEO

New Detroit, Inc.

Detroit, MI

Thomas Stone

Executive Director

Mt. Pleasant Now Development

Corporation

Cleveland, OH

Valerie Thompson

President/CEO

Urban League of Greater

Oklahoma City

Oklahoma City, OK

Carlisle Towery

President

Greater Jamaica Development

Corp.

Jamaica, NY

Margaret Trahan

President/CEO

United Way of Acadiana

Lafayette, LA

Terry Troia

Executive Director

Project Hospitality

Staten Island, NY

Reginald Tuggle

Pastor

Memorial Presbyterian Church

Roosevelt, NY

Mark VanBrunt

Executive Director

Raza Development Fund

Phoenix, AZ

Arturo Violante

President

Greater Dallas Hispanic Chamber

of Commerce

Dallas, TX

Donna Wertenbach

President/CEO

Community Economic

Development Fund

W. Hartford, CT

Lloyd Williams

President/CEO

Greater Harlem Chamber of

Commerce

New York, NY

Melinda R. Wright

Director

Momentive Consumer Credit

Counseling Service

Indianapolis, IN

Ravi Yalamanchi

CEO

Metro Housing Partnership

Flint, MI

Diana Yazzie-Devine

President

Native American Connections

Phoenix, AZ

Community Advisory Board

(continued)

*Board membership as of January 2005

134 JPMorgan Chase & Co./2004 Annual Report

National Advisory Board

James B. Lee, Jr.

Chairman

National Advisory Board

JPMorgan Investment Bank

J.T. Battenberg III

Chairman of the Board

and Chief Executive Officer

Delphi Corporation

Richard I. Beattie, Esq.

Chairman,

Executive Committee

Simpson Thacher & Bartlett LLP

Leon D. Black

Founding Partner

Apollo Management, L.P.

John B. Blystone

Advisor

David Bonderman

Founding Partner

Texas Pacific Group

Richard J. Bressler

Senior Executive Vice President

and Chief Financial Officer

Viacom Inc.

Frank A. D’Amelio

Executive Vice President

and Chief Financial Officer

Lucent Technologies

Nancy J. De Lisi

Senior Vice President

of Mergers & Acquisitions

Altria Group, Inc.

David F. DeVoe

Chief Financial Officer

News Corporation

William T. Dillard II

Chairman and

Chief Executive Officer

Dillard’s, Inc.

Archie W. Dunham

Chairman (Retired)

ConocoPhillips

Paul J. Fribourg

Chairman and

Chief Executive Officer

ContiGroup Companies, Inc.

Charles E. Golden

Executive Vice President

and Chief Financial Officer

Eli Lilly and Company

John B. Hess

Chairman of the Board

and Chief Executive Officer

Amerada Hess Corporation

Thomas O. Hicks

Chairman of the Board (Retired)

Hicks, Muse, Tate & Furst

Incorporated

John W. Kluge

Chairman and President

Metromedia Company

Thomas H. Lee

Chairman and

Chief Executive Officer

The Thomas H. Lee Partners, LP

David C. McCourt

Chairman and

Chief Executive Officer

Granahan McCourt Capital

Darla D. Moore

Executive Vice President

Rainwater, Inc.

Patrick J. Moore

Chairman, President

and Chief Executive Officer

Smurfit-Stone Container

Corporation

Joseph L. Rice III

Chairman

Clayton, Dubilier & Rice, Inc.

David M. Rubenstein

Managing Director

The Carlyle Group

Stephen A. Schwarzman

President and

Chief Executive Officer

The Blackstone Group

Richard W. Scott

Senior Managing Director,

Head of Global Fixed Income

AIG Global Investment Group, Inc.

David L. Shedlarz

Executive Vice President

and Chief Financial Officer

Pfizer Inc.

Henry R. Silverman

Chairman and

Chief Executive Officer

Cendant Corporation

Barry S. Sternlicht

Executive Chairman

Starwood Hotels & Resorts

Worldwide, Inc.

Doreen A. Toben

Executive Vice President

and Chief Financial Officer

Verizon Communications

Thomas J. Usher

Chairman

United States Steel Corporation

Mortimer B. Zuckerman

Chairman

Boston Properties, Inc.

Frank Lourenso

Chairman

Regional Advisory Board

Chase Commercial Banking

Philip C. Ackerman

Chairman, President and

Chief Executive Officer

National Fuel Gas Company

Richard Bernstein

Chairman and

Chief Executive Officer

R.A.B. Holdings, Inc.

Robert B. Catell

Chairman and

Chief Executive Officer

KeySpan Energy Corporation

Eugene R. Corasanti

Chairman and

Chief Executive Officer

CONMED Corporation

Emil Duda

Senior Executive Vice President

and Chief Financial Officer

Lifetime Healthcare Company/

Excellus Health Plan Inc.

James N. Fernandez

Executive Vice President & CFO

Tiffany & Company

Charles F. Fortgang

Chairman

M. Fabrikant & Sons, Inc.

Gladys George

President and

Chief Executive Officer

Lenox Hill Hospital

Arnold B. Glimcher

Chairman

PaceWildenstein

Lewis Golub

Chairman of the Board

The Golub Corporation

Wallace A. Graham

Chairman of the Board and Chief

Executive Officer

Schenectady International, Inc.

Joel J. Horowitz

Chairman of the Board

Tommy Hilfiger Corporation

Thomas H. Jackson

President

University of Rochester

Peter J. Kallet

Chairman, President and

Chief Executive Officer

Oneida Ltd.

Charles A. Krasne

President and

Chief Executive Officer

Krasdale Foods, Inc.

Richard S. LeFrak

President

LeFrak Organization, Inc.

Leo Liebowitz

Chief Executive Officer

Getty Realty Corp.

William L. Mack

Co-Founder and

Managing Partner

Apollo Real Estate Advisors L.P.

Theodore Markson

Chairman

Paris Accessories, Inc.

Herman I. Merinoff

Chairman of the Board

The Charmer Sunbelt Group

John Morphy

Chief Financial Officer,

Secretary and Treasurer

Paychex, Inc.

Dennis M. Mullen

Chairman, President and

Chief Financial Officer

Birds Eye Foods

Michael C. Nahl

Senior Vice President and

Chief Financial Officer

Albany International Corp.

Samuel I. Newhouse III

General Manager

Advance Publications Inc.

William C. Rudin

President

Rudin Management Company, Inc.

John Shalam

Chairman and

Chief Executive Officer

Audiovox Corporation

Arthur T. Shorin

Chairman and

Chief Executive Officer

The Topps Company, Inc.

Kenneth L. Wallach

Chairman, President and

Chief Executive Officer

Central National-Gottesman Inc.

Fred Wilpon

Chairman

Sterling Equities, Inc.

Judith D. Zuk

President

Brooklyn Botanic Garden

Regional Advisory Board

*Board membership as of January 2005

JPMorgan Chase & Co./2004 Annual Report 135

JPMorgan Chase International Council

Hon. George P. Shultz

Chairman of the Council

Distinguished Fellow

Hoover Institution

Stanford University

Stanford, California

Riley P. Bechtel

Chairman and

Chief Executive Officer

Bechtel Group, Inc.

San Francisco, California

Jean-Louis Beffa

Chairman and

Chief Executive Officer

Compagnie de Saint-Gobain

Paris, France

Hon. Bill Bradley

Allen & Company

New York, New York

Michael A. Chaney

Managing Director

Wesfarmers Limited

Perth, Australia

André Desmarais

President and

Co-Chief Executive Officer

Power Corporation of Canada

Montreal, Canada

Martin Feldstein

President and

Chief Executive Officer

National Bureau of

Economic Research, Inc.

Cambridge, Massachusetts

Arminio Fraga Neto

Founding Partner

Gavea Investimentos, Ltd.

Rio de Janeiro, Brazil

Xiqing Gao

Vice Chairman

National Council

for Social Security Fund

Beijing, People’s Republic of China

Franz B. Humer

Chairman and

Chief Executive Officer

Roche Holding Ltd.

Basel, Switzerland

Abdallah S. Jum’ah

President and CEO

Saudi Arabian Oil Company

Dhahran, Saudi Arabia

Hon. Henry A. Kissinger

Chairman

Kissinger Associates, Inc.

New York, New York

Mustafa V. Koç

Chairman of the Board

of Directors

Koç Holding A.S.

Istanbul, Turkey

Hon. Lee Kuan Yew

Minister Mentor

Republic of Singapore

Singapore

Minoru Makihara

Senior Corporate Advisor and

Former Chairman

Mitsubishi Corporation

Tokyo, Japan

The Rt. Hon. Brian Mulroney

Senior Partner

Ogilvy Renault

Montreal, Canada

David J. O’Reilly

Chairman and

Chief Executive Officer

ChevronTexaco Corporation

San Ramon, California

David Rockefeller

Former Chairman

The Chase Manhattan Bank, N.A.

New York, New York

Sir John Rose

Chief Executive

Rolls-Royce plc

London, United Kingdom

Walter V. Shipley

Former Chairman of the Board

The Chase Manhattan

Corporation

New York, New York

Jess Søderberg

Partner and

Chief Executive Officer

A.P. Møller-Maersk Group

Copenhagen, Denmark

William S. Stavropoulos

Chairman of the Board

The Dow Chemical Company

Midland, Michigan

Ratan Naval Tata

Chairman

Tata Sons Limited

Mumbai, India

Marco Tronchetti Provera

Chairman and

Chief Executive Officer

Pirelli & C. SpA

Milan, Italy

Cees J.A. van Lede

Former Chairman,

Board of Management

Akzo Nobel

Arnhem, The Netherlands

Douglas A. Warner III

Former Chairman of the Board

J.P. Morgan Chase & Co.

New York, New York

Ernesto Zedillo

Director

Yale Center for the Study

of Globalization

New Haven, Connecticut

Jaime Augusto Zobel de Ayala

President

Ayala Corporation

Makati City, Philippines

Ex-Officio Members

William B. Harrison, Jr.

Chairman and

Chief Executive Officer

JPMorgan Chase & Co.

New York, New York

James Dimon

President and

Chief Operating Officer

JPMorgan Chase & Co.

New York, New York

Andrew Crockett

President

JPMorgan Chase International

New York, New York

William M. Daley

Chairman of the Midwest Region

JPMorgan Chase & Co.

Chicago, Illinois

Walter A. Gubert

Vice Chairman

JPMorgan Chase & Co.

Chairman

JPMorgan Chase EMEA

London, United Kingdom

This page has been amended since the Annual Report was printed and presents the International Committee of the Firm as of March 30, 2005.

136 JPMorgan Chase & Co./2004 Annual Report

Governance

Our merger with Bank One Corporation gave us the opportunity to examine the corporate governance practices of both

companies. By corporate governance, we mean the system of checks and balances among the Board of Directors, management

and stockholders designed to produce an efficiently functioning corporation that is directed to creating long-term stockholder

value, maintaining the highest standards of ethical conduct, reporting financial results with accuracy and transparency, and

fully complying with all applicable laws and regulations as we conduct the Firm’s business.We believe we have brought the

best of both predecessors to the combined Firm’s governance practices.

The Board

The Board of Directors reflects strong continuity with both predecessors. It has a super-majority of non-management directors

and only two management members, Mr. Harrison and Mr. Dimon.The Board has determined that all of the non-management

directors are independent under the Board’s independence standards.

After the merger became effective, the Board took a fresh look at its structure and practices in its efforts to integrate the

practices and experience of each predecessor company.

•The Board determined to maintain the existing Board committee structure with the principal committees consisting of

Audit, Compensation & Management Development, Corporate Governance & Nominating, Public Responsibility and Risk Policy.

Each committee reviewed its charter, taking into consideration the charters of corresponding predecessor committees. The

revised committee charters can be found on our website at www.jpmorganchase.com (Governance).

• New committee assignments provided for both continuity in oversight as well as the application of new perspectives to

the functions of the committees.

•The Board reviewed and revised its Corporate Governance Principles, retaining best practices from the predecessor

companies. Among the changes adopted, the Corporate Governance Principles specify limits on other board memberships

and include a pledge by directors to retain, as long as they serve, all shares of the Firm’s common stock purchased on

the open market or received pursuant to their service as a Board member. The Corporate Governance Principles can be

found at www.jpmorganchase.com (Governance).

Internal Governance

Connecting the oversight of the Board and the day-to-day functioning of our employees are mechanisms intended to ensure

that we conduct our daily business in accordance with the Firm’s objectives and policies and in compliance with the laws

and regulations that govern our diverse businesses. JPMorgan Chase operates multiple lines of business through a number of

subsidiaries throughout the world. The Firm as a whole manages by line of business, supported by global policies and

standards that typically apply to all relevant units regardless of geography or legal structure.

At the top of our control structure is our risk management process. At JPMorgan Chase, we are all risk managers. Risk

governance begins with creating the right risk culture, and that is done by ensuring that every employee understands that risk

management and control is the responsibility of each and every individual of the Firm. The Firm’s risk governance structure is

built upon the premise that each line of business is responsible for managing the risks inherent in its business activity.As

part of the risk management structure, each line of business has a Risk Committee responsible for decisions relating to risk

strategy, policies and control.Where appropriate, the Risk Committees escalate risk issues to the Firm’s Operating Committee

or to the Risk Working Group, a subgroup of the Operating Committee. The Board of Directors exercises oversight of risk

management as a whole and through the Board’s Audit Committee and the Risk Policy Committee.

Code of Conduct

The Firm’s Code of Conduct is an important part of our policies and procedures to maintain high standards of conduct and to

reduce or avoid reputational risk. Our integrity and reputation depend on our ability to do the right thing, even when it is not

the easy thing. Our commitment to responsible, honest and ethical behavior was at the heart of the codes of conduct of both

heritage firms and it remains so at JPMorgan Chase today. Following a thorough review, the Firm adopted a new Code of

Conduct to replace similar policies that existed in our predecessor firms. The Code of Conduct sets forth the guiding principles

and rules of behavior by which we conduct our daily business with our customers, vendors, stockholders and with our fellow

employees. The Code of Conduct also requires preclearance of outside business activities and, for certain units, preclearance

of personal securities transactions. The Code of Conduct applies to all employees and directors, who must annually affirm that

they are in compliance with it. The Code of Conduct is available on our website at www.jpmorganchase.com (Governance).

JPMorgan Chase & Co.

Corporate headquarters

270 Park Avenue

New York, New York 10017-2070

Telephone: 212-270-6000

http://www.jpmorganchase.com

Principal subsidiaries

JPMorgan Chase Bank,

National Association

Chase Bank USA,

National Association

J.P. Morgan Securities Inc.

Annual report on Form 10-K

The Annual Report on Form 10-K of

JPMorgan Chase & Co. as filed with the

Securities and Exchange Commission

will be made available upon request to:

Office of the Secretary

JPMorgan Chase & Co.

270 Park Avenue

New York, New York 10017-2070

Stock listing

New York Stock Exchange, Inc.

London Stock Exchange Limited

Tokyo Stock Exchange

The New York Stock Exchange (NYSE)

ticker symbols for stock of JPMorgan Chase &

Co. are as follows:

JPM (Common Stock)

JPMPRH (Depositary Shares Each

Representing a One-Tenth Interest in

6 5/8% Cumulative Preferred Stock)

Certifications by the Chief Executive Officer,

President and Chief Financial Officer of

JPMorgan Chase & Co. pursuant to Section

302 of the Sarbanes-Oxley Act of 2002, have

been filed as exhibits to the Firm’s 2004

Annual Report on Form 10-K

The NYSE requires that the Chief Executive

Officer of a listed company certify annually

that he or she was not aware of any violation

by the company of the NYSE's Corporate

Governance listing standards. Such certification

was made on June 21, 2004.

Financial information about JPMorgan Chase

& Co. can be accessed by visiting the Investor

Relations site of www.jpmorganchase.com.

Additional questions should be addressed to:

Investor Relations

JPMorgan Chase & Co.

270 Park Avenue

New York, New York 10017-2070

Telephone: 212-270-6000

Direct deposit of dividends

For information about direct deposit of

dividends, please contact Mellon Investor

Services LLC.

Stockholder inquiries

Contact Mellon Investor Services LLC:

By telephone:

Within the United States, Canada and

Puerto Rico: 1-800-758-4651

(toll free)

From all other locations:

1-201-329-8660 (collect)

TDD service for the hearing impaired

within the United States, Canada and

Puerto Rico: 1-800-231-5469 (toll free)

All other locations:

1-201-329-8354 (collect)

By mail:

Mellon Investor Services LLC

Overpeck Center

85 Challenger Road

Ridgefield Park, New Jersey 07660-2108

Duplicate mailings

If you receive duplicate mailings because

you have more than one account listing

and you wish to consolidate your accounts,

please write to Mellon Investor Services

LLC at the address above.

Independent registered public

accounting firm

PricewaterhouseCoopers LLP

300 Madison Avenue

New York, New York 10017

This Annual Report has been printed on paper that is

produced from raw materials that originated from a com-

bination of well managed forests and post consumer

waste (PCW) recycled fibers.

•The covers and financial reporting sections (pages 17-

136) of this report are printed on paper independently

certified by SmartWood, a program of the Rainforest

Alliance, to the Forest Stewardship Council (FSC) stan-

dards and contains 30% PCW.

The Forest Stewardship Council (FSC) is an independent

nonprofit organization devoted to encouraging the

responsible management of the world’s forests. FSC sets

high standards that ensure forestry is practiced in an

environmentally responsible, socially beneficial, and eco-

nomically viable way. Landowners and companies that

Directors

To contact any of the Board members please

mail correspondence to:

JPMorgan Chase & Co.

Attention (Board member)

Office of the Secretary

270 Park Avenue, 35th Floor

New York, New York 10017-2070

The corporate governance principles of

the board, the charters of the principal

board committees and other governance

information can be accessed by visiting

www.jpmorganchase.com and clicking on

“Governance.”Stockholders may request

a copy of such materials by writing to the

Office of the Secretary at the above address.

Transfer agent and registrar

Mellon Investor Services LLC

Overpeck Center

85 Challenger Road

Ridgefield Park, New Jersey 07660-2108

Telephone: 1-800-758-4651

https://vault.melloninvestor.com/isd

Investor Services Program

JPMorgan Chase & Co.’s Investor Services

Program offers a variety of convenient, low-

cost services to make it easier to reinvest

dividends and buy and sell shares of

JPMorgan Chase & Co. common stock. A

brochure and enrollment materials may be

obtained by contacting the Program

Administrator, Mellon Investor Services LLC,

by calling 1-800-758-4651, by writing them

at the address indicated above or by visiting

their Web site at www.melloninvestor.com.

sell timber or forest products seek certification as a

way to verify to consumers that they have practiced

forestry consistent with FSC standards.

•The remainder of the report (pages 1-16) is printed on

paper made with 20% PCW recycled fibers.

Printed in the U.S.A.