jpmorgan chase bank, national association · consolidated financial statements should be read in...

JPMORGAN CHASE BANK, NATIONAL ASSOCIATION (a wholly-owned subsidiary of JPMorgan Chase & Co.)

CONSOLIDATED FINANCIAL STATEMENTS For the quarterly period ended June 30, 2009

2

TABLE OF CONTENTS

For the quarterly period ended June 30, 2009

Page(s)

Consolidated Financial Statements – JPMorgan Chase Bank, National Association

Consolidated Statements of Income (unaudited) for the three and six months ended June 30, 2009 and 2008 ................ 3

Consolidated Balance Sheets (unaudited) at June 30, 2009, and December 31, 2008....................................................... 4

Consolidated Statements of Changes in Stockholder’s Equity and Comprehensive Income (unaudited) for the six months ended June 30, 2009 and 2008 ..................................................................................................................... 5

Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2009 and 2008 ......................... 6

Notes to Consolidated Financial Statements (unaudited) ............................................................................................ 7–73

Supplementary Information

Selected Quarterly Financial Data (unaudited)................................................................................................................ 74

Selected Annual Financial Data (unaudited) ................................................................................................................... 75

Glossary of Terms.................................................................................................................................................... 76–78

3

JPMORGAN CHASE BANK, NATIONAL ASSOCIATION (a wholly-own subsidiary of JPMorgan Chase & Co.)

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three months ended June 30, Six months ended June 30, (in millions) 2009 2008 2009 2008 Revenue Investment banking fees $ 1,057 $ 818 $ 1,796 $ 1,394 Principal transactions 1,931 1,779 5,035 4,254 Lending & deposit-related fees 1,765 1,103 3,448 2,134 Asset management, administration and commissions 2,270 2,503 4,405 5,034 Securities gains(a) 362 333 564 388 Mortgage fees and related income 694 693 2,270 1,217 Credit card income 1,025 831 2,067 1,664 Other income 330 269 605 616 Noninterest revenue 9,434 8,329 20,190 16,701

Interest income 12,497 13,253 26,135 27,587 Interest expense 2,653 6,288 5,828 14,039 Net interest income 9,844 6,965 20,307 13,548 Total net revenue 19,278 15,294 40,497 30,249 Provision for credit losses 5,799 2,533 11,877 6,271 Noninterest expense Compensation expense 5,188 5,277 11,134 8,725 Occupancy expense 814 594 1,598 1,179 Technology, communications and equipment expense 1,003 873 1,999 1,737 Professional & outside services 1,049 987 2,107 1,983 Marketing 152 135 295 285 Other expense 2,880 2,039 5,018 3,638 Amortization of intangibles 152 153 302 304 Merger costs 141 19 317 19 Total noninterest expense 11,379 10,077 22,770 17,870 Income before income tax expense 2,100 2,684 5,850 6,108 Income tax expense 644 674 1,891 1,878 Net income $ 1,456 $ 2,010 $ 3,959 $ 4,230 (a) Securities gains for the three and six months ended June 30, 2009, each included credit losses of $66 million, consisting of $676 million

of gross unrealized losses, net of $610 million recognized in other comprehensive income.

The Notes to Consolidated Financial Statements (unaudited) are an integral part of these statements.

4

JPMORGAN CHASE BANK, NATIONAL ASSOCIATION

(a wholly-own subsidiary of JPMorgan Chase & Co.) CONSOLIDATED BALANCE SHEETS (UNAUDITED)

June 30, December 31,(in millions, except share data) 2009 2008 Assets Cash and due from banks $ 24,279 $ 25,502 Deposits with banks 60,124 127,623 Federal funds sold and securities purchased under resale agreements (included $18,315 and $19,865 at fair value at

June 30, 2009, and December 31, 2008, respectively) 193,364 199,716 Securities borrowed (included $3,360 and $3,381 at fair value at June 30, 2009, and December 31, 2008,

respectively) 48,343 42,658 Trading assets (included assets pledged of $42,209 and $118,079 at June 30, 2009, and December 31, 2008,

respectively) 276,837 365,365 Securities (included $334,589 and $199,710 at fair value at June 30, 2009, and December 31, 2008,

respectively, and assets pledged of $105,594 and $26,376 at June 30, 2009, and December 31, 2008, respectively) 334,618 199,744

Loans (included $1,990 and $6,038 at fair value at June 30, 2009, and December 31, 2008, respectively) 596,605 662,312 Allowance for loan losses (21,995) (17,153)

Loans, net of allowance for loan losses 574,610 645,159

Accrued interest and accounts receivable 45,757 44,345 Premises and equipment 9,601 9,161 Goodwill 27,438 27,371 Other intangible assets:

Mortgage servicing rights 14,430 9,236 Purchased credit card relationships 122 128 All other intangibles 3,089 3,346

Other assets (included $1,450 and $1,780 at fair value at June 30, 2009, and December 31, 2008, respectively) 51,386 46,888

Total assets $ 1,663,998 $ 1,746,242 Liabilities Deposits (included $3,787 and $5,605 at fair value at June 30, 2009, and December 31, 2008, respectively) $ 974,480 $ 1,055,765 Federal funds purchased and securities loaned or sold under repurchase agreements (included $2,957 and $2,968 at

fair value at June 30, 2009, and December 31, 2008, respectively) 258,421 180,716 Other borrowed funds (included $1,098 and $2,714 at fair value at June 30, 2009, and December 31, 2008,

respectively) 52,673 94,953 Trading liabilities 102,267 142,409 Accounts payable and other liabilities (included the allowance for lending-related commitments

of $745 and $656 at June 30, 2009, and December 31, 2008, respectively, and $8 and zero at fair value at June 30, 2009, and December 31, 2008, respectively) 66,060 67,014

Beneficial interests issued by consolidated variable interest entities (included $1,185 and $1,364 at fair value at June 30, 2009, and December 31, 2008, respectively) 10,700 4,156

Long-term debt (included $31,490 and $34,924 at fair value at June 30, 2009, and December 31, 2008, respectively) 67,667 71,862

Junior subordinated deferrable interest debentures held by trusts that issued guaranteed capital debt securities 600 600 Total liabilities 1,532,868 1,617,475 Commitments and contingencies (see Note 24 of these Consolidated Financial Statements) Stockholder’s equity Preferred stock ($1 par value; authorized 15,000,000 shares at June 30, 2009, and December 31, 2008;

issued 0 shares at June 30, 2009, and December 31, 2008, respectively) — — Common stock ($12 par value; authorized 150,000,000 shares at June 30, 2009, and December 31, 2008; issued

148,761,243 shares at June 30, 2009, and December 31, 2008, respectively) 1,785 1,785 Capital surplus 78,031 77,254 Retained earnings 52,267 52,309 Accumulated other comprehensive income (loss) (953) (2,581) Total stockholder’s equity 131,130 128,767 Total liabilities and stockholder’s equity $ 1,663,998 $ 1,746,242


5


(a wholly-own subsidiary of JPMorgan Chase & Co.) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY

AND COMPREHENSIVE INCOME (UNAUDITED)

Six months ended June 30, (in millions) 2009 2008 Common stock Balance at January 1, and June 30 $ 1,785 $ 1,785 Capital surplus Balance at January 1 77,254 62,439 Cash capital contribution from JPMorgan Chase & Co. 604 1 Adjustments to capital due to transactions with JPMorgan Chase & Co. 173 68 Balance at June 30 78,031 62,508 Retained earnings Balance at January 1 52,309 42,808 Net income 3,959 4,230 Cash dividends paid to JPMorgan Chase & Co. (4,000) (1,000) Net legal entity mergers (1) — Balance at June 30 52,267 46,038 Accumulated other comprehensive income (loss) Balance at January 1 (2,581) (686) Other comprehensive income (loss) 1,628 (716) Balance at June 30 (953) (1,402) Total stockholder’s equity $ 131,130 $ 108,929 Comprehensive income Net income $ 3,959 $ 4,230 Other comprehensive income (loss) 1,628 (716) Comprehensive income $ 5,587 $ 3,514


6


(a wholly-own subsidiary of JPMorgan Chase & Co.) CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Six months ended June 30, (in millions) 2009 2008 Operating activities Net income $ 3,959 $ 4,230 Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Provision for credit losses 11,877 6,271 Depreciation and amortization 1,291 1,190 Amortization of intangibles 302 304 Deferred tax benefit (2,308) (1,099) Investment securities gains (564) (388)

Originations and purchases of loans held-for-sale (9,843) (21,269) Proceeds from sales, securitizations and paydowns of loans held-for-sale 15,787 22,589 Net change in:

Trading assets 117,585 8,137 Securities borrowed (5,704) (14,864) Accrued interest and accounts receivable (1,444) 300 Other assets 15,598 (12,991) Trading liabilities (57,263) (889) Accounts payable and other liabilities 796 (2,241)

Other operating adjustments (2,797) 1,730 Net cash provided by (used in) operating activities 87,272 (8,990) Investing activities Net change in:

Deposits with banks 67,456 (1,854) Federal funds sold and securities purchased under resale agreements 5,877 (15,910)

Held-to-maturity securities: Proceeds 5 5

Available-for-sale securities: Proceeds from maturities 46,747 21,078 Proceeds from sales 65,245 31,403 Purchases (242,832) (85,624)

Proceeds from sales and securitization of loans held-for-investment 21,973 8,838 Other changes in loans, net 33,613 (35,917) Net cash used in business acquisitions or dispositions (29) (174) Net maturities of asset-backed commercial paper guaranteed by the FRBB 130 — All other investing activities, net (918) (2,776) Net cash used in investing activities (2,733) (80,931) Financing activities Net change in:

Deposits (111,747) 39,682 Federal funds purchased and securities loaned or sold under repurchase agreements 77,797 57,880 Other borrowed funds (42,121) (7,602)

Proceeds from the issuance of long-term debt and trust-preferred capital debt securities 9,285 12,238 Repayments of long-term debt and trust-preferred capital debt securities (15,001) (19,653) Cash capital contribution from JPMorgan Chase & Co. 604 1 Cash dividends paid (4,000) (1,000) All other financing activities, net (681) 660 Net cash (used in) provided by financing activities (85,864) 82,206 Effect of exchange rate changes on cash and due from banks 102 244 Net (decrease) in cash and due from banks (1,223) (7,471) Cash and due from banks at the beginning of the year 25,502 38,696 Cash and due from banks at the end of the period $ 24,279 $ 31,225 Cash interest paid $ 5,187 $ 16,143 Cash income taxes paid 4,709 3,335


7

See Glossary of Terms on pages 76–78 of these Consolidated Financial Statements for definitions of terms used throughout the Notes to Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1 – BASIS OF PRESENTATION JPMorgan Chase Bank, National Association (“JPMorgan Chase Bank, N.A.”) is a wholly-owned bank subsidiary of JPMorgan Chase & Co. (“JPMorgan Chase”), which is a leading global financial services firm and one of the largest banking institutions in the United States of America (“U.S.”), with operations in more than 60 countries. JPMorgan Chase Bank, N.A. offers a wide range of banking services to its customers both domestically in the U.S. and internationally, including investment banking, financial services for consumers and businesses, financial transactions processing and asset management. Under the J.P. Morgan and Chase brands, JPMorgan Chase Bank, N.A. serves millions of customers in the U.S. and many of the world’s most prominent corporate, institutional and governmental clients.

JPMorgan Chase Bank, N.A. is chartered by the Office of the Comptroller of the Currency (“OCC”), a bureau of the United States Department of the Treasury. JPMorgan Chase Bank, N.A.’s main office is located in Columbus, Ohio, and it has branches in 23 states.

The accounting and financial reporting policies of JPMorgan Chase Bank, N.A. and its subsidiaries conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”). Additionally, where applicable, the policies conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. The unaudited consolidated financial statements prepared in conformity with U.S. GAAP require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expense, and the disclosures of contingent assets and liabilities. Actual results could be different from these estimates. In the opinion of management, all normal recurring adjustments have been included for a fair statement of this interim financial information. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in JPMorgan Chase Bank, N.A.’s Consolidated Financial Statements for the year ended December 31, 2008 (the “2008 Annual Financial Statements”).

Certain amounts in prior periods have been reclassified to conform to the current presentation.

NOTE 2 – ACCOUNTING AND REPORTING DEVELOPMENTS Business combinations/noncontrolling interests in consolidated financial statements In December 2007, the FASB issued SFAS 141R and SFAS 160, which amend the accounting and reporting of business combinations, as well as noncontrolling (i.e., minority) interests. For JPMorgan Chase Bank, N.A., SFAS 141R became effective for business combinations that close on or after January 1, 2009. SFAS 160 became effective for JPMorgan Chase Bank, N.A. for fiscal periods beginning January 1, 2009. In April 2009, the FASB issued FSP FAS 141(R)-1, which amends the accounting for contingencies acquired in a business combination.

SFAS 141R, as amended, will generally only impact the accounting for future business combinations and will impact certain aspects of business combination accounting, such as transaction costs and certain merger-related restructuring reserves, as well as the accounting for partial acquisitions where control is obtained by JPMorgan Chase Bank, N.A. One exception to the prospective application of SFAS 141R relates to accounting for income taxes associated with business combinations that closed prior to January 1, 2009. Once the purchase accounting measurement period closes for these acquisitions, any further adjustments to income taxes recorded as part of these business combinations will impact income tax expense. Previously, further adjustments were predominantly recorded as adjustments to goodwill.

SFAS 160 requires that noncontrolling interests be accounted for and presented as equity if material, rather than as a liability or mezzanine equity. SFAS 160’s presentation and disclosure requirements are to be applied retrospectively. The adoption of the reporting requirements of this pronouncement was not material to JPMorgan Chase Bank, N.A.’s Consolidated Balance Sheets or financial performance.

Accounting for transfers of financial assets and repurchase financing transactions In February 2008, the FASB issued FSP FAS 140-3, which requires an initial transfer of a financial asset and a repurchase financing that was entered into contemporaneously with, or in contemplation of, the initial transfer to be evaluated together as a linked transaction under SFAS 140, unless certain criteria are met. JPMorgan Chase Bank, N.A. adopted FSP FAS 140-3 on January 1, 2009, for new transactions entered into after the date of adoption. The adoption of FSP FAS 140-3 did not have a material impact on the Consolidated Balance Sheets or financial performance.

8

Disclosures about derivative instruments and hedging activities – FASB Statement No. 161 In March 2008, the FASB issued SFAS 161, which amends the disclosure requirements of SFAS 133. SFAS 161 requires increased disclosures about derivative instruments and hedging activities and their effects on an entity’s financial position, financial performance and cash flows. SFAS 161 is effective for fiscal years beginning after November 15, 2008. JPMorgan Chase Bank, N.A. adopted SFAS 161 on January 1, 2009. SFAS 161 only affected JPMorgan Chase Bank, N.A.’s disclosures of derivative instruments and related hedging activities, and not it’s Consolidated Balance Sheets, financial performance or Consolidated Statements of Cash Flows.

Determining whether an instrument (or embedded feature) is indexed to an entity’s own stock In September 2008, the EITF issued EITF 07-5, which establishes a two-step process for evaluating whether equity-linked financial instruments and embedded features are indexed to a company’s own stock for purposes of determining whether the derivative scope exception in SFAS 133 should be applied. EITF 07-5 is effective for fiscal years beginning after December 2008. The adoption of this EITF on January 1, 2009, did not have an impact on JPMorgan Chase Bank, N.A.’s Consolidated Balance Sheets or financial performance.

The recognition and presentation of other-than-temporary impairment In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, which amends the other-than-temporary impairment model for debt securities. Under the FSP, an other-than-temporary-impairment must be recognized if an investor has the intent to sell the debt security or if it is more likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. In addition, the FSP changes the amount of impairment to be recognized in current-period earnings when an investor does not have the intent to sell or if it is more likely than not that it will not be required to sell the debt security, as in these cases only the amount of the impairment associated with credit losses is recognized in income. The FSP also requires additional disclosures regarding the calculation of credit losses, as well as factors considered in reaching a conclusion that an investment is not other-than-temporarily impaired. The FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. JPMorgan Chase Bank, N.A. elected to early adopt the FSP as of January 1, 2009. For additional information regarding the impact on JPMorgan Chase Bank, N.A. of the adoption of the FSP, see Note 12 on pages 38–43 of these Consolidated Financial Statements.

Determining fair value when the volume and level of activity for the asset or liability have significantly decreased, and identifying transactions that are not orderly In April 2009, the FASB issued FSP FAS 157-4. The FSP provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly declined. The FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. The FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted. JPMorgan Chase Bank, N.A. elected to early adopt the FSP in the first quarter of 2009. The application of the FSP did not have an impact on JPMorgan Chase Bank, N.A.’s Consolidated Balance Sheets or financial performance.

Interim disclosures about fair value of financial instruments In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1. The FSP requires the SFAS 107 disclosures about the fair value of financial instruments to be presented in interim financial statements in addition to annual financial statements. The FSP is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. JPMorgan Chase Bank, N.A. adopted the additional disclosure requirements for second quarter reporting.

Employers’ disclosures about postretirement benefit plan assets In December 2008, the FASB issued FSP FAS 132(R)-1, which requires more detailed disclosures about employers’ plan assets, including investment strategies, major categories of plan assets, concentrations of risk within plan assets, and valuation techniques used to measure the fair value of plan assets. This FSP is effective for fiscal years ending after December 15, 2009. JPMorgan Chase Bank, N.A. intends to adopt these additional disclosure requirements on the effective date.

Accounting for transfers of financial assets and consolidation of variable interest entities In June 2009, the FASB issued two new standards (SFAS 166 and SFAS 167), which amend the guidance of accounting for the transfers of financial assets and the consolidation of variable interest entities. SFAS 166 eliminates the concept of QSPEs and provides additional guidance with regard to accounting for transfers of financial assets. SFAS 167 changes the approach for determining the primary beneficiary of a VIE from a quantitative risk and reward model to a qualitative model, based on control and economics. Both standards are effective for annual reporting periods beginning after November 15, 2009, including all interim periods within the first annual reporting period. Upon adoption, all existing QSPEs must be evaluated for consolidation. Entities expected to be impacted include revolving securitization entities,

9

bank-administered asset-backed commercial paper conduits, and certain mortgage and consumer securitization entities. JPMorgan Chase Bank, N.A. is still assessing the potential impact of the standards. Subsequent events In May 2009, the FASB issued SFAS 165, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The statement is effective for interim or annual financial periods ending after June 15, 2009. JPMorgan Chase Bank, N.A. adopted the statement in the second quarter of 2009. The application of the statement did not have any impact on JPMorgan Chase Bank, N.A.’s Consolidated Balance Sheets or financial performance.

NOTE 3 – BUSINESS CHANGES AND DEVELOPMENTS Acquisition of the banking operations of Washington Mutual Bank Refer to Note 3 on pages 10–11 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements for a discussion of JPMorgan Chase Bank, N.A.’s acquisition of the banking operations of Washington Mutual Bank (“Washington Mutual”) on September 25, 2008, including its purchase price and the allocation of the purchase price to the net assets acquired and the resulting extraordinary gain. The acquisition is being accounted for under the purchase method of accounting in accordance with SFAS 141. The total purchase price to complete the acquisition was $1.9 billion, which was allocated to the Washington Mutual assets acquired and liabilities assumed using their fair values as of September 25, 2008. The allocation of the purchase price may be modified through September 25, 2009, as more information is obtained about the fair value of assets acquired and liabilities assumed.

Unaudited pro forma condensed combined financial information reflecting the Washington Mutual transaction The following unaudited pro forma condensed combined financial information presents the results of operations of JPMorgan Chase Bank, N.A. as they may have appeared for the three and six months ended June 30, 2008, if the Washington Mutual transaction had been completed on January 1, 2008.

Three months ended Six months ended (in millions) June 30, 2008 June 30, 2008 Total net revenue $ 18,843 $ 37,313 Net income 71 329 The unaudited pro forma combined financial information is presented for illustrative purposes only and does not indicate the financial results of the combined company had the companies actually been combined as of January 1, 2008, nor is it indicative of the results of operations in future periods. Included in the unaudited pro forma combined financial information for the three and six months ended June 30, 2008, were pro forma adjustments to reflect the results of operations of Washington Mutual’s banking operations, considering the purchase accounting, valuation and accounting conformity adjustments related to the transaction. The amortization of purchase accounting adjustments to report interest-earnings assets acquired and interest-bearing liabilities assumed at current interest rates is reflected.

Merger with The Bear Stearns Companies Inc. Refer to Note 3 on pages 10–11 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements for a discussion of the merger on May 30, 2008, of a wholly-owned subsidiary of JPMorgan Chase with The Bear Stearns Companies Inc. (“Bear Stearns”). The merger is being accounted for under the purchase method of accounting in accordance with SFAS 141. The total purchase price to complete the merger was $1.5 billion, which was allocated to the Bear Stearns assets acquired and liabilities assumed using their fair values as of April 8, 2008, and May 30, 2008. Additional information regarding the merger is provided in Note 2 on pages 125–127 of JPMorgan Chase’s Annual Report on Form 10-K for the year ended December 31, 2008, and Note 2 on pages 96–99 of JPMorgan Chase’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2009.

Subsequent events JPMorgan Chase Bank, N.A. has performed an evaluation of events that have occurred subsequent to June 30, 2009, and through August 28, 2009 (the date of the issuance of these Consolidated Financial Statements). There have been no subsequent events that occurred during such period that would require disclosure in these Consolidated Financial Statements or would be required to be recognized in the Consolidated Financial Statements as of or for the three- and six-month periods ending June 30, 2009.

10

NOTE 4 – FAIR VALUE MEASUREMENT For a further discussion of JPMorgan Chase Bank, N.A.’s valuation methodologies for assets, liabilities and lending-related commitments measured at fair value and the SFAS 157 valuation hierarchy, see Note 5 on pages 13–24 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements. During the first half of 2009, there were no material changes made to JPMorgan Chase Bank, N.A.’s valuation models. For a further discussion of the accounting for trading assets and liabilities, see Note 7 on pages 27–28 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements.

The following table presents the financial instruments carried at fair value as of June 30, 2009, and December 31, 2008, by major product category and by the SFAS 157 valuation hierarchy. Assets and liabilities measured at fair value on a recurring basis Fair value hierarchy

June 30, 2009 (in millions) Level 1 Level 2 Level 3 FIN 39

netting(d) Total

fair value Federal funds sold and securities purchased under resale

agreements $ — $ 18,315 $ — $ — $ 18,315 Securities borrowed — 3,360 — — 3,360 Trading assets:

Debt instruments: Mortgage-backed securities:

U.S. government agencies(a) 2,009 — — — 2,009 Residential-nonagency — 545 208 — 753 Commercial-nonagency — 47 168 — 215

Total mortgage-backed securities 2,009 592 376 — 2,977 U.S. Treasury and government agencies(a) 5,049 12 — — 5,061 Obligations of U.S. states and municipalities — 1,022 300 — 1,322 Certificates of deposit, bankers’ acceptances and

commercial paper — 878 — — 878 Non-U.S. government debt securities 30,324 27,446 62 — 57,832 Corporate debt securities — 33,511 4,934 — 38,445 Loans — 15,732 13,158 — 28,890 Asset-backed securities — 1,085 6,462 — 7,547

Total debt instruments 37,382 80,278 25,292 — 142,952 Equity securities 44,401 1,161 224 — 45,786 Physical commodities(b) 984 2,121 — — 3,105 Other — 1,150 149 — 1,299

Total debt and equity instruments 82,767 84,710 25,665 — 193,142 Derivative receivables(c) 1,719 1,725,134 56,888 (1,700,046) 83,695

Total trading assets 84,486 1,809,844 82,553 (1,700,046) 276,837 Available-for-sale securities:

Mortgage-backed securities: U.S. government agencies(a) 176,701 3,738 — — 180,439 Residential-nonagency — 11,255 1,053 — 12,308 Commercial-nonagency — 4,235 — — 4,235

Total mortgage-backed securities 176,701 19,228 1,053 — 196,982 U.S. Treasury and government agencies(a) 606 33,982 — — 34,588 Obligations of U.S. states and municipalities — 3,136 — — 3,136 Certificates of deposit — 5,603 — — 5,603 Non-U.S. government debt securities 5,034 11,317 — — 16,351 Corporate debt securities 3,714 44,046 52 — 47,812 Asset-backed securities: —

Credit card receivables — 16,401 — — 16,401 Collateralized debt and loan obligations — 10 11,489 — 11,499 Other — 1,428 — — 1,428

Equity securities 689 48 52 — 789 Total available-for-sale securities 186,744 135,199 12,646 — 334,589

Loans — 1,285 705 — 1,990 Mortgage servicing rights — — 14,430 — 14,430 Other assets — — 1,450 — 1,450 Total assets measured at fair value on a recurring basis $ 271,230 $ 1,968,003 $ 111,784 $ (1,700,046) $ 650,971

11

Fair value hierarchy

June 30, 2009 (in millions) Level 1 Level 2 Level 3 FIN 39

netting(d) Total

fair value Deposits $ — $ 3,160 $ 627 $ — $ 3,787 Federal funds purchased and securities loaned or sold

under repurchase agreements — 2,957 — — 2,957 Other borrowed funds — 1,006 92 — 1,098

Trading liabilities: Debt and equity instruments 29,310 9,542 44 — 38,896 Derivative payables(c) 1,363 1,705,012 39,103 (1,682,107) 63,371

Total trading liabilities 30,673 1,714,554 39,147 (1,682,107) 102,267 Accounts payable and other liabilities — 4 4 — 8 Beneficial interests issued by consolidated VIEs — 157 1,028 — 1,185 Long-term debt — 17,094 14,396 — 31,490 Total liabilities measured at fair value on a

recurring basis $ 30,673 $ 1,738,932 $ 55,294 $ (1,682,107) $ 142,792

12


December 31, 2008 (in millions) Level 1 Level 2 Level 3 FIN 39

netting(d) Total

fair value Federal funds sold and securities purchased under

resale agreements $ — $ 19,865 $ — $ — $ 19,865 Securities borrowed — 3,381 — — 3,381 Trading assets(e):


U.S. government agencies(a) 7,025 3,565 — — 10,590Residential- nonagency — 145 615 — 760Commercial- nonagency — 140 174 — 314

Total mortgage-backed securities 7,025 3,850 789 — 11,664U.S. Treasury and government agencies(a) 7,368 1,489 — — 8,857Obligations of U.S. states and municipalities — 1,709 353 — 2,062Certificates of deposit, bankers’ acceptances and

commercial paper 1,180 1,204 — — 2,384Non-U.S. government debt securities 20,716 17,992 12 — 38,720Corporate debt securities 18 47,370 4,838 — 52,226Loans — 14,254 14,481 — 28,735

Asset-backed securities — 1,082 5,540 — 6,622Total debt instruments 36,307 88,950 26,013 — 151,270Equity securities 64,867 2,218 235 — 67,320Physical commodities(b) — 3,455 — — 3,455Other 4 1,718 21 — 1,743

Total debt and equity instruments 101,178 96,341 26,269 — 223,788Derivative receivables(c) 1,759 2,661,825 50,663 (2,572,670) 141,577

Total trading assets 102,937 2,758,166 76,932 (2,572,670) 365,365

Available-for-sale securities(e): Mortgage-backed securities: U.S. government agencies(a) 109,008 8,377 — — 117,385 Residential-nonagency — 8,964 6 — 8,970 Commercial-nonagency — 3,939 — — 3,939Total mortgage-backed securities 109,008 21,280 6 — 130,294U.S. Treasury and government agencies(a) 537 9,741 — — 10,278Obligations of U.S. states and municipalities 34 879 — — 913Certificates of deposit — 17,282 — — 17,282Non-U.S. government debt securities 6,112 2,232 — — 8,344Corporate debt securities — 9,448 57 — 9,505Asset-backed securities:

Credit card receivables — 9,468 — — 9,468Collateralized debt and loan obligations — — 11,195 — 11,195Other — 643 — — 643

Equity securities 1,776 12 — — 1,788Total available-for-sale securities 117,467 70,985 11,258 — 199,710

Loans — 4,641 1,397 — 6,038Mortgage servicing rights — — 9,236 — 9,236Other assets — 130 1,650 — 1,780Total assets measured at fair value on a recurring

basis $ 220,404 $ 2,857,168 $ 100,473 $ (2,572,670) $ 605,375

13



netting(d) Total

fair value Deposits $ — $ 4,370 $ 1,235 $ — $ 5,605 Federal funds purchased and securities loaned

or sold under repurchase agreements — 2,968 — — 2,968 Other borrowed funds — 2,658 56 — 2,714

Trading liabilities: Debt and equity instruments 21,595 9,030 287 — 30,912 Derivative payables(c) 1,211 2,610,277 41,731 (2,541,722) 111,497

Total trading liabilities 22,806 2,619,307 42,018 (2,541,722) 142,409 Accounts payable and other liabilities — — — — — Beneficial interests issued by consolidated VIEs — 1,364 — — 1,364 Long-term debt — 20,399 14,525 — 34,924 Total liabilities measured at fair value on a

recurring basis $ 22,806 $ 2,651,066 $ 57,834 $(2,541,722) $ 189,984 (a) Includes total U.S. government-sponsored enterprise obligations of $174.9 billion and $130.6 billion at June 30, 2009, and December

31, 2008, respectively, which were predominantly mortgage-related. (b) Physical commodities inventories are accounted for at the lower of cost or fair value. (c) Derivative receivables and derivative payables balances are presented net on the Consolidated Balance Sheets where there is a legally

enforceable master netting agreement in place with counterparties. For purposes of the table above, JPMorgan Chase Bank, N.A. does not reduce the derivative receivables and derivative payables balances for this netting adjustment, either within or across the levels of the fair value hierarchy, as such netting is not relevant to a presentation that is based on the transparency of inputs to the valuation of an asset or liability. Therefore, the balances reported in the fair value hierarchy table are gross of any counterparty netting adjustments. However, if JPMorgan Chase Bank, N.A. were to net such balances, the reduction in the level 3 derivative receivables and derivative payables balances would be $20.2 billion at June 30, 2009

(d) As permitted under FIN 39, JPMorgan Chase Bank, N.A. has elected to net derivative receivables and derivative payables and the related cash collateral received and paid when a legally enforceable master netting agreement exists.

(e) Prior periods have been revised to conform to the current presentation. Changes in level 3 recurring fair value measurements The following tables include a rollforward of the balance sheet amounts for the three and six months ended June 30, 2009 and 2008 (including changes in fair value), for financial instruments classified by JPMorgan Chase Bank, N.A. within level 3 of the valuation hierarchy. When a determination is made to classify a financial instrument within level 3, the determination is based on the significance of the unobservable parameters to the overall fair value measurement. However, level 3 financial instruments typically include, in addition to the unobservable or level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources); accordingly, the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology. Also, JPMorgan Chase Bank, N.A. risk manages the observable components of level 3 financial instruments using securities and derivative positions that are classified within level 1 or 2 of the valuation hierarchy; as these level 1 and level 2 risk management instruments are not included below, the gains or losses in the following tables do not reflect the effect of JPMorgan Chase Bank, N.A.’s risk management activities related to such level 3 instruments.

14

Fair value measurements using significant unobservable inputs

Three months ended June 30, 2009 (in millions)

Fair value, March 31,

2009

Total realized/

unrealized gains/(losses)

Purchases, issuances,

settlements, net

Transfers into and/or

out of level 3

Fair value, June 30,

2009

Change in unrealizedgains and (losses) related to financial instruments held at June 30, 2009

Assets: Trading assets:


U.S. government agencies $ — $ — $ — $ — $ — $ — Residential-nonagency 221 20 (17) (16) 208 6 Commercial-nonagency 172 51 (56) 1 168 15

Total mortgage-backed securities 393 71 (73) (15) 376 21

Obligations of U.S. states and municipalities 293 10 (3) — 300 10

Non-U.S. government debt securities 77 9 (23) (1) 62 4

Corporate debt securities 5,468 72 (697) 91 4,934 49 Loans 13,059 383 (76) (208) 13,158 336

Asset-backed securities 5,278 827 421 (64) 6,462 721 Total debt instruments 24,568 1,372 (451) (197) 25,292 1,141 Equity securities 52 14 69 89 224 12 Other 53 9 51 36 149 10

Total debt and equity instruments 24,673 1,395(b)(c) (331) (72) 25,665 1,163(b)(c) Net derivative receivables 19,419 (6,472)(b) 932 3,906 17,785 (4,962)(b) Available-for-sale securities:

Asset-backed securities 10,632 765 92 — 11,489 766 Other 779 33 340 5 1,157 32

Total available-for-sale securities 11,411 798(d) 432 5 12,646 798(d)

Loans 1,882 (31)(b) (1,128) (18) 705 (67)(b) Mortgage servicing rights 10,486 3,798(c) 146 — 14,430 3,798(c) Other assets 1,685 (97)(e) (133) (5) 1,450 (99)(e) Liabilities(a): Deposits $ (928) $ (9)(b) $ 310 $ — $ (627) $ (9)(b) Other borrowed funds (5) (10)(b) (40) (37) (92) (7)(b) Trading liabilities: Debt and equity instruments (259) 16(b) 199 — (44) 20(b) Accounts payable and other liabilities (6) 2(b) — — (4) 4(b) Beneficial interests issued by consolidated VIEs — (160)(b) 122 (990) (1,028) (160)(b) Long-term debt (14,153) (864)(b) 619 2 (14,396) (1,016)(b)

15




2008

Total realized/



settlements, net


out of level 3


2008



Debt and equity instruments $ 28,044 $ (431)(b)(c) $ 719 $ 2,792 $ 31,124 $ (806)(b)(c) Net derivative receivables 2,445 693(b) 2,482 211 5,831 (138)(b)

Available-for-sale securities 9 1(d) — — 10 2(d)

Loans 7,848 (86)(b) 29 (704) 7,087 (156)(b) Mortgage servicing rights 8,419 1,519(c) 992 — 10,930 1,519(c)

Other assets 790 (17)(e) 19 (25) 767 (38)(e) Liabilities: Deposits $ (1,279) $ (44)(b) $ (7) $ (50) $ (1,380) $ (45)(b) Other borrowed funds (101) (110)(b) 1 (39) (249) (23)(b) Trading liabilities:

Debt and equity instruments (727) 22(b) 3 — (702) (164)(b) Accounts payable and other

liabilities — — — — — — Beneficial interests issued by

consolidated VIEs (51) 22(b) — — (29) 22(b) Long-term debt (20,306) (404)(b) 661 (140) (20,189) (407)(b)

16


Six months ended June 30, 2009 (in millions)

Fair value, January 1,

2009

Total realized/



settlements, net


out of level 3


2009




U.S. government agencies $ — $ — $ — $ — $ — $ — Residential-nonagency 615 12 (32) (387) 208 (23) Commercial-nonagency 174 53 (60) 1 168 31

Total mortgage-backed securities 789 65 (92) (386) 376 8 Obligations of U.S. states and

municipalities 353 (8) (45) — 300 (8) Non-U.S. government debt securities 12 34 (18) 34 62 2 Corporate debt securities 4,838 37 (3,225) 3,284 4,934 32 Loans 14,481 (771) (573) 21 13,158 (782) Asset-backed securities 5,540 732 292 (102) 6,462 634

Total debt instruments 26,013 89 (3,661) 2,851 25,292 (114) Equity securities 235 (74) (76) 139 224 11 Other 21 (3) 81 50 149 (2)

Total debt and equity instruments 26,269 12(b)(c) (3,656) 3,040 25,665 (105)(b)(c) Net derivative receivables 8,932 (6,205)(b) (685) 15,743 17,785 (5,998)(b) Available-for-sale securities:

Asset-backed securities 11,195 (133) 427 — 11,489 (320) Other 63 33 340 721 1,157 33

Total available-for-sale securities 11,258 (100)(d) 767 721 12,646 (287)(d)

Loans 1,397 (303)(b) (1,319) 930 705 (270)(b) Mortgage servicing rights 9,236 5,103(c) 91 — 14,430 5,103(c) Other assets 1,650 (262)(e) 45 17 1,450 (261)(e) Liabilities(a): Deposits $ (1,235) $ (23)(b) $ 693 $ (62) $ (627) $ (36)(b) Other borrowed funds (56) 74(b) (78) (32) (92) (5)(b) Trading liabilities: Debt and equity instruments (287) (46)(b) 286 3 (44) 13(b) Accounts payable and other liabilities — 4(b) (8) — (4) 4(b) Beneficial interests issued by consolidated VIEs — (160)(b) 122 (990) (1,028) (160)(b) Long-term debt (14,525) 9(b) 1,782 (1,662) (14,396) (303)(b)

17




2008

Total realized/



settlements, net


out of level 3


2008



Debt and equity instruments $ 18,815 $ (372)(b)(c) $ 4,041 $ 8,640 $ 31,124 $ (439)(b)(c) Net derivative receivables 206 2,293(b) 2,801 531 5,831 416(b)

Available-for-sale securities 10 2(d) (2) — 10 2(d) Loans 7,797 (280)(b) 274 (704) 7,087 (221)(b) Mortgage servicing rights 8,632 887(c) 1,411 — 10,930 887(c) Other assets 797 3(e) (8) (25) 767 25(e) Liabilities(a): Deposits $ (1,228) $ (62)(b) $ (38) $ (52) $ (1,380) $ (69)(b) Other borrowed funds (101) (75)(b) (137) 64 (249) —(b) Trading liabilities:

Debt and equity instruments (480) (71)(b) (9) (142) (702) (253)(b) Accounts payable and other

liabilities (25) 25 — — — — Beneficial interests issued by

consolidated VIEs (82) 53(b) — — (29) 53(b) Long-term debt (21,198) (185)(b) 1,739 (545) (20,189) (97)(b) (a) Level 3 liabilities as a percentage of total liabilities accounted for at fair value (including liabilities carried at fair value on a nonrecurring basis)

were 39% and 30% at June 30, 2009, and December 31, 2008, respectively. (b) Reported in principal transactions revenue. (c) Changes in fair value for retail mortgage loans originated with the intent to sell, and mortgage servicing rights are measured at fair value and

reported in mortgage fees and related income. (d) Realized gains (losses) and credit-related unrealized losses are reported in securities gains (losses). Unrealized gains (losses) not related to credit

are reported in accumulated other comprehensive income (loss). (e) Reported in other income. Assets and liabilities measured at fair value on a nonrecurring basis Certain assets, liabilities and unfunded lending-related commitments are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). The following tables present assets and liabilities carried on the Consolidated Balance Sheets as well as off-balance sheet instruments by caption and level within the SFAS 157 valuation hierarchy (as described above) as of June 30, 2009, and December 31, 2008, for which a nonrecurring change in fair value has been recorded during the reporting period. Fair value hierarchy June 30, 2009 (in millions) Level 1 Level 2 Level 3 Total fair value Loans(a) $ — $ 4,364 $ 3,419 $ 7,783

Other real estate owned — 110 134 244 Other assets — — 197 197 Total other assets — 110 331 441 Total assets at fair value on a nonrecurring basis $ — $ 4,474 $ 3,750 $ 8,224 Accounts payable and other liabilities(b) $ — $ 147 $ 90 $ 237 Total liabilities at fair value on a nonrecurring basis $ — $ 147 $ 90 $ 237

18

Fair value hierarchy December 31, 2008 (in millions) Level 1 Level 2 Level 3 Total fair value Loans(a) $ — $ 4,975 $ 3,685 $ 8,660

Other real estate owned — 6 103 109 Other assets — 257 35 292 Total other assets — 263 138 401 Total assets at fair value on a nonrecurring basis $ — $ 5,238 $ 3,823 $ 9,061 Accounts payable and other liabilities(b) $ — $ 207 $ 81 $ 288 Total liabilities at fair value on a nonrecurring basis $ — $ 207 $ 81 $ 288 (a) Includes leveraged lending and other loan warehouses held-for-sale. (b) Represents the fair value adjustment associated with $887 million and $1.4 billion of unfunded held-for-sale lending-related commitments within

the leveraged lending portfolio at June 30, 2009, and December 31, 2008, respectively. Nonrecurring fair value changes The following table presents the total change in value of financial instruments for which a fair value adjustment has been included in the Consolidated Statements of Income for the three and six months ended June 30, 2009 and 2008, related to financial instruments held at June 30, 2009 and 2008.

Three months ended June 30, Six months ended June 30, (in millions) 2009 2008 2009 2008 Loans $ (1,329) $ (843) $ (2,302) $ (1,565) Other assets (40) (2) (77) (4) Accounts payable and other liabilities 16 — 47 — Total nonrecurring fair value gains (losses) $ (1,353) $ (845) $ (2,332) $ (1,569) In the above table, loans predominantly include: (1) write-downs of delinquent consumer residential mortgage and home equity loans within the retail business, where impairment is based on the fair value of the underlying collateral; and (2) the change in fair value of leveraged lending and warehouse loans in the investment banking business, which are carried on the Consolidated Balance Sheet at the lower of cost or fair value. Accounts payable and other liabilities predominantly include the change in fair value for unfunded lending-related commitments within the leveraged lending portfolio.

Level 3 analysis Consolidated Balance Sheets changes Level 3 assets (including assets measured at fair value on a nonrecurring basis) were 7% of total JPMorgan Chase Bank, N.A. assets and 18% of total assets measured at fair value at June 30, 2009, compared with 6% and 17%, respectively, at December 31, 2008. The following describes significant changes to level 3 assets during the quarter.

For the three months ended June 30, 2009 Level 3 assets decreased by $6.4 billion in the second quarter of 2009, largely due to an $11.8 billion decrease in derivative receivables predominantly due to changes in credit spreads. This decrease was partially offset by a $3.9 billion increase in mortgage servicing rights (“MSRs”) primarily due to market interest rate and other changes impacting JPMorgan Chase Bank, N.A.’s estimate of future prepayments, as well as sales in the retail business of originated loans for which servicing rights were retained.

For the six months ended June 30, 2009 Level 3 assets increased by $11.2 billion in the first half of 2009 due to the following:

• Transfer of structured credit derivative receivables resulting from a decrease in transaction activity and the lack of observable market data. At June 30, 2009, the fair value of these receivables was approximately $32.3 billion. Offsetting these receivables were derivative payables with a fair value of $17.5 billion at June 30, 2009.

• $5.2 billion increase in MSRs primarily due to market interest rate and other changes impacting JPMorgan Chase Bank, N.A.’s estimate of future prepayments, as well as sales in the retail business of originated loans for which servicing rights were retained.

• $3.1 billion transfer of certain structured notes reflecting lower liquidity and pricing observability in the first quarter.

19

The increase in level 3 assets described above was partially offset by:

• $17.7 billion transfer of single-name CDS on ABS from level 3 to level 2, resulting from a decline in pricing uncertainty. The fair value of these assets is generally based on observable market data from third-party transactions, benchmarking to relevant indices such as the Asset-Backed Securities Index (“ABX”), and calibration to other available market information such as broker quotes.

• $11.2 billion of derivative receivables principally due to changes in credit spreads. • $3.6 billion related to sales of CDS positions on CMBS and RMBS. • $3.1 billion related to sales and unwinds of structured transactions with hedge funds. • $1.5 billion decrease in trading assets debt and equity, primarily in residential and commercial mortgage-backed

securities and loans, principally driven by markdowns and sales, partially offset by increases of $922 million in certain asset-backed securities.

Gains and Losses JPMorgan Chase Bank, N.A. risk manages level 3 financial instruments using securities and derivative positions classified within level 1 or 2 of the valuation hierarchy; the effect of these risk management activities is not reflected in the level 3 gains and losses included in the tables above.

Three months ended June 30, 2009 Included in the tables for the three months ended June 30, 2009 were gains and losses resulting from:

• $6.5 billion of net losses on derivatives primarily related to changes in credit spreads; • $864 million of losses related to structured note liabilities, primarily due to volatility in the equity markets; • $3.8 billion in gains on MSRs; • $1.4 billion in gains on trading debt and equity instruments, primarily from certain asset-backed securities.

Three months ended June 30, 2008 Included in the tables for the three months ended June 30, 2008 were gains and losses resulting from:

• $1.5 billion of gains on MSRs; • Net gains of approximately $690 million, principally related to fixed income and equity derivatives transactions; • $700 million of losses on leveraged loans. Leveraged loans are typically classified as held-for-sale and measured at

the lower of cost or fair value and therefore included in the nonrecurring fair value assets; • Losses of approximately $430 million on trading debt and equity instruments, principally from mortgage-related

transactions; • Net losses of approximately $400 million on equity-related structured notes.

Six months ended June 30, 2009 Included in the tables for the first six months of 2009 were gains and losses resulting from:

• $6.2 billion of net losses on derivatives primarily related to changes in credit spreads and changes in interest rates; • $808 million of losses on leveraged loans. Leveraged loans are primarily classified as held-for-sale and measured at

the lower of cost or fair value and therefore included in nonrecurring fair value assets; • $5.1 billion of gains on MSRs.

20

Six months ended June 30, 2008 Included in the tables for the first six months of 2008 were gains and losses resulting from:

• Net gains of approximately $2.3 billion related to fixed income and equity derivatives; • Gains of $887 million on MSRs; • Losses of approximately $1.6 billion on leveraged loans. Leveraged loans are typically classified as held-for-sale

and measured at the lower of cost or fair value and therefore included in the nonrecurring fair value assets; • Losses on trading debt and equity instruments of approximately $370 million, principally from mortgage-related

transactions.

For further information on changes in the fair value of the MSRs see Note 18 on pages 63–64 of these Consolidated Financial Statements.

Financial disclosures required by SFAS 107 Many, but not all, of the financial instruments held by JPMorgan Chase Bank, N.A. are recorded at fair value on the Consolidated Balance Sheets. SFAS 107 requires disclosure of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate their fair value. Financial instruments within the scope of SFAS 107 are included in the following table. Additionally, 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 Bank, N.A. For example, JPMorgan Chase Bank, N.A. 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 Bank, N.A., but their fair value is not disclosed in this Note.

Financial instruments for which carrying value approximates fair value Certain financial instruments that are not carried at fair value on the Consolidated Balance Sheets are carried at amounts that approximate fair value, due to their short-term nature and generally negligible credit risk. These instruments include cash and due from banks; deposits with banks, federal funds sold and securities purchased under resale agreements; and securities borrowed with short-dated maturities; short-term receivables and accrued interest receivable; commercial paper; federal funds purchased, and securities loaned or sold, under repurchase agreements with short-dated maturities; other borrowed funds (excluding advances from Federal Home Loan Banks); accounts payable; and accrued liabilities. In addition, 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.

21

The following table presents the carrying value and estimated fair value of financial assets and liabilities as required by SFAS 107. June 30, 2009 December 31, 2008

(in billions) Carrying

value Estimatedfair value

Appreciation/(depreciation)

Carrying value

Estimated fair value

Appreciation/ (depreciation)

Financial assets Assets for which fair value approximates

carrying value $ 130.2 $ 130.2 $ — $ 197.4 $ 197.4 $ — Federal funds sold and securities purchased

under resale agreements (included $18.3 and $19.9 at fair value at June 30, 2009, and December 31, 2008, respectively) 193.4 193.4 — 199.7 199.7 —

Securities borrowed (included $3.4 at fair value at both June 30, 2009, and December 31, 2008) 48.3 48.3 — 42.7 42.7 —

Trading assets 276.8 276.8 — 365.4 365.4 — Securities 334.6 334.6 — 199.7 199.7 — Loans (included $2.0 and $6.0 at fair value at

June 30, 2009, and December 31, 2008, respectively) 574.6 554.8 (19.8) 645.2 620.4 (24.8)

Mortgage servicing rights at fair value 14.4 14.4 — 9.2 9.2 — Other (included $1.5 and $1.8 at fair value at

June 30, 2009, and December 31, 2008, respectively)(a) 34.3 34.1 (0.2) 33.5 33.7 0.2 Total financial assets $ 1,606.6 $ 1,586.6 $ (20.0) $ 1,692.8 $ 1,668.2 $ (24.6)

Financial liabilities Deposits (included $3.8 and $5.6 at fair value at

June 30, 2009, and December 31, 2008, respectively) $ 974.5 $ 975.3 $ (0.8) $ 1,055.8 $ 1,056.7 $ (0.9)

Federal funds purchased and securities loaned or sold under repurchase agreements (included $3.0 at fair value at both June 30, 2009, and December 31, 2008) 258.4 258.4 — 180.7 180.7 —

Other borrowed funds (included $1.1 and $2.7 at fair value at June 30, 2009, and December 31, 2008, respectively) 52.7 53.3 (0.6) 95.0 96.7 (1.7)

Trading liabilities 102.3 102.3 — 142.4 142.4 — Accounts payable and other liabilities(a) 52.1 52.1 — 54.5 54.5 — Beneficial interests issued by consolidated VIEs

(included $1.2 and $1.4 at fair value at June 30, 2009, and December 31, 2008, respectively) 10.7 10.7 — 4.2 4.1 0.1

Long-term debt and junior subordinated deferrable interest debentures (included $31.5 and $34.9 at fair value at June 30, 2009, and December 31, 2008, respectively) 68.3 63.5 4.8 72.5 66.4 6.1 Total financial liabilities $ 1,519.0 $ 1,515.6 $ 3.4 $ 1,605.1 $ 1,601.5 $ 3.6

Net (depreciation) appreciation $ (16.6) $ (21.0)

(a) Prior periods have been revised to conform to the current presentation.

The majority of JPMorgan Chase Bank, N.A.’s unfunded lending-related commitments is not carried at fair value on a recurring basis on the Consolidated Balance Sheets nor are they actively traded. The estimated fair values of JPMorgan Chase Bank, N.A.’s wholesale lending-related commitments at June 30, 2009, and December 31, 2008, were liabilities of $3.3 billion and $7.5 billion, respectively. JPMorgan Chase Bank, N.A. does not estimate the fair value of consumer lending-related commitments. In many cases, JPMorgan Chase Bank, N.A. can reduce or cancel these commitments by providing the borrower prior notice, or, in some cases, without notice as permitted by law.

22

Trading assets and liabilities average balances Average trading assets and liabilities were as follows for the periods indicated. Three months ended June 30, Six months ended June 30, (in millions) 2009 2008 2009 2008 Trading assets – debt and equity instruments $ 203,500 $ 281,431 $ 203,242 $ 293,097 Trading assets – derivative receivables 97,572 85,309 109,614 88,254

Trading liabilities – debt and equity instruments(a) $ 37,248 $ 57,150 $ 36,017 $ 64,654 Trading liabilities – derivative payables 71,945 71,857 78,401 76,512 (a) Primarily represent securities sold, not yet purchased.

NOTE 5 – FAIR VALUE OPTION For a discussion of the primary financial instruments for which fair value elections have been made, including the determination of instrument-specific credit risk for these items, and the basis for those elections, see Note 6 on pages 25–27 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements. Changes in fair value under the fair value option election The following table presents the changes in fair value included in the Consolidated Statements of Income for the three and six months ended June 30, 2009 and 2008, for items for which the fair value election was made. The profit and loss information presented below only includes the financial instruments that were elected to be measured at fair value; related risk management instruments, which are required to be measured at fair value, are not included in the table.

Three months ended June 30, 2009 2008

(in millions) Principal

transactions(b) Other

income(b)

Total changes in fair value

recorded Principal


income(b)


recorded Federal funds sold and securities purchased

under resale agreements $ (254) $ — $ (254) $ (389) $ — $ (389) Securities borrowed (12) — (12) 79 — 79

Trading assets: Debt and equity instruments, excluding loans 151 20(c) 171 (157) 18(c) (139) Loans reported as trading assets:

Changes in instrument-specific credit risk 67 (115)(c) (48) (669) 2(c) (667) Other changes in fair value 919 495(c) 1,414 109 16(c) 125

Loans: Changes in instrument-specific credit risk (46) — (46) (51) — (51) Other changes in fair value 30 — 30 (5) — (5)

Other assets — (98)(d) (98) — (21)(d) (21)

Deposits(a) (21) — (21) 50 — 50 Federal funds purchased and securities loaned

or sold under repurchase agreements 60 — 60 70 — 70 Other borrowed funds(a) (66) — (66) 180 — 180 Trading liabilities (10) — (10) 3 — 3 Beneficial interests issued by consolidated VIEs (179) — (179) 205 — 205 Other liabilities 1 — 1 — — — Long-term debt:

Changes in instrument-specific credit risk(a) (894) — (894) 163 — 163 Other changes in fair value (2,032) — (2,032) 499 — 499

23

Six months ended June 30,

2009 2008



income(b)


recorded Principal


income(b)



under resale agreements $ (475) $ — $ (475) $ 149 $ — $ 149 Securities borrowed (19) — (19) 79 — 79

Trading assets: Debt and equity instruments, excluding loans 284 27(c) 311 1 13(c) 14 Loans reported as trading assets:

Changes in instrument-specific credit risk (209) (165)(c) (374) (1,452) (50)(c) (1,502) Other changes in fair value 659 1,432(c) 2,091 (20) 409(c) 389

Loans: Changes in instrument-specific credit risk (309) — (309) (294) — (294) Other changes in fair value 24 — 24 20 — 20

Other assets — (249)(d) (249) — (8)(d) (8)

Deposits(a) (186) — (186) (355) — (355) Federal funds purchased and securities loaned

or sold under repurchase agreements 92 — 92 3 — 3 Other borrowed funds(a) 200 — 200 135 — 135 Trading liabilities (13) — (13) 2 — 2 Beneficial interests issued by consolidated VIEs 36 — 36 65 — 65 Other liabilities — — — — — — Long-term debt:

Changes in instrument-specific credit risk(a) (248) — (248) 961 — 961 Other changes in fair value (1,369) — (1,369) 497 — 497

(a) Total changes in instrument-specific credit risk related to structured notes were $(956) million and $167 million for the three months ended June 30, 2009 and 2008, respectively, and $(316) million and $988 million for the six months ended June 30, 2009 and 2008, respectively. These totals include adjustments for structured notes classified within deposits and other borrowed funds, as well as long-term debt.

(b) Included in the amounts are gains and losses related to certain financial instruments previously carried at fair value by JPMorgan Chase Bank, N.A., such as structured liabilities elected pursuant to SFAS 155 and loans purchased as part of the trading activities of the investment banking business.

(c) Reported in mortgage fees and related income. (d) Reported in other income.

24

Difference between aggregate fair value and aggregate remaining contractual principal balance outstanding The following table reflects the difference between the aggregate fair value and the aggregate remaining contractual principal balance outstanding as of June 30, 2009, and December 31, 2008, for loans and long-term debt for which the SFAS 159 fair value option has been elected. The loans were classified in trading assets – debt and equity instruments or in loans. June 30, 2009 December 31, 2008

(in millions)

Contractual principal

outstanding Fair value

Fair value over (under) contractual principal

outstanding




outstanding Loans Performing loans 90 days or more past due

Loans reported as trading assets $ — $ — $ — $ — $ — $ — Loans — — — — — —

Nonaccrual loans Loans reported as trading assets 3,395 1,127 (2,268) 2,653 894 (1,759) Loans 332 142 (190) 22 10 (12)

Subtotal 3,727 1,269 (2,458) 2,675 904 (1,771) All other performing loans

Loans reported as trading assets 33,554 27,763 (5,791) 34,240 27,841 (6,399) Loans 2,631 1,848 (783) 7,189 6,028 (1,161)

Total loans $ 39,912 $ 30,880 $ (9,032) $ 44,104 $ 34,773 $ (9,331) Long-term debt Principal protected debt $ (11,807)(c) $ (11,443) $ (364) $ (10,411)(c) $ (10,377) $ (34) Nonprincipal protected debt(a) NA (20,047) NA NA (24,547) NA Total long-term debt NA $ (31,490) NA NA $ (34,924) NA Total FIN 46R long-term beneficial

interests(a)(b) NA $ (1,185) NA NA $ (1,364) NA (a) Remaining contractual principal is not applicable to nonprincipal-protected notes. Unlike principal-protected notes, for which JPMorgan Chase

Bank, N.A. is obligated to return a stated amount of principal at the maturity of the note, nonprincipal-protected notes do not obligate JPMorgan Chase Bank, N.A. to return a stated amount of principal at maturity, but to return an amount based on the performance of an underlying variable or derivative feature embedded in the note.

(b) Includes only nonprincipal protected debt at June 30, 2009, and December 31, 2008. (c) Where JPMorgan Chase Bank, N.A. issues principal-protected zero-coupon or discount notes, the balance reflected as the remaining contractual

principal is the final principal payment at maturity.

25

NOTE 6 – DERIVATIVE INSTRUMENTS Derivative instruments enable end-users to transform or mitigate exposure to credit or market risks. Counterparties to a derivative contract seek to obtain risks and rewards similar to those that could be obtained from purchasing or selling a related cash instrument without having to exchange the full purchase or sales price upfront. JPMorgan Chase Bank, N.A. makes markets in derivatives for customers and also uses derivatives to hedge or manage risks of market exposures. The majority of JPMorgan Chase Bank, N.A.’s derivatives are entered into for market-making purposes.

Trading Derivatives JPMorgan Chase Bank, N.A. transacts in a variety of derivatives in its trading portfolios to meet the needs of customers (both dealers and clients) and to generate revenue through this trading activity. JPMorgan Chase Bank, N.A. makes markets in derivatives for its customers (collectively, “client derivatives”) seeking to mitigate or transform interest rate, credit, foreign exchange, equity and commodity risks. JPMorgan Chase Bank, N.A. actively manages the risks from its exposure to these derivatives by entering into other derivative transactions or by purchasing or selling other financial instruments that partially or fully offset the exposure from client derivatives. JPMorgan Chase Bank, N.A. also seeks to earn a spread between the client derivatives and offsetting positions, and from the remaining open risk positions. For more information about trading derivatives, see the trading derivatives gains and losses table on page 31 of this Note.

Risk Management Derivatives JPMorgan Chase Bank, N.A. manages its market exposures using various derivative instruments.

Interest rate contracts are used to minimize fluctuations in earnings that are caused by changes in interest rates. Fixed-rate assets and liabilities appreciate or depreciate in market value as interest rates change. Similarly, interest income and interest expense increase or decrease as a result of variable-rate assets and liabilities resetting to current market rates, and as a result of the repayment and subsequent origination or issuance of fixed-rate assets and liabilities at current market rates. Gains and losses on the derivative instruments that are related to such assets and liabilities are expected to substantially offset this variability in earnings. JPMorgan Chase Bank, N.A. generally uses interest rate swaps, forwards and futures to manage the impact of interest rate fluctuations on earnings.

Foreign currency forward contracts are used to manage the foreign exchange risk associated with certain foreign currency–denominated (i.e., non-U.S.) assets and liabilities and forecasted transactions denominated in a foreign currency, as well as JPMorgan Chase Bank, N.A.’s net investments in certain non-U.S. subsidiaries or branches whose functional currencies are not the U.S. dollar. As a result of fluctuations in foreign currencies, the U.S. dollar–equivalent values of the foreign currency–denominated assets and liabilities or forecasted revenue or expense increase or decrease. Gains or losses on the derivative instruments that are related to the foreign currency–denominated assets or liabilities, or forecasted transactions, are expected to substantially offset this variability.

Gold forward contracts are used to manage the price risk of gold inventory in JPMorgan Chase Bank, N.A.’s commodities portfolio. Gains or losses on the gold forwards are expected to substantially offset the depreciation or appreciation of the gold inventory as a result of gold price changes. Also in the commodities portfolio, electricity and natural gas futures and forwards contracts are used to manage the price risk associated with energy-related tolling and load-serving contracts and energy-related investments.

JPMorgan Chase Bank, N.A. uses credit derivatives to manage the counterparty credit risk associated with loans and lending-related commitments. Credit derivatives compensate the purchaser when the entity referenced in the contract experiences a credit event, such as bankruptcy or a failure to pay an obligation when due. For a further discussion of credit derivatives, see the discussion in the Credit derivatives section on pages 32–34 of this Note.

For more information about risk management derivatives, see the risk management derivatives gains and losses table on page 31 of this Note.

26

Notional amount of derivative contracts The following table summarizes the notional amount of derivative contracts outstanding as of June 30, 2009.

Notional amounts(b) (in billions) June 30, 2009 Interest rate contracts

Swaps $ 48,996 Futures and forwards 6,050 Written options 4,776 Purchased options 4,742

Total interest rate contracts 64,564 Credit derivatives(a) 6,818 Foreign exchange contracts

Cross-currency swaps 1,848 Spot, futures and forwards 3,677 Written options 727 Purchased options 752

Total foreign exchange contracts 7,004 Equity contracts

Swaps 83 Futures and forwards 45 Written options 831 Purchased options 614

Total equity contracts 1,573 Commodity contracts

Swaps 229 Spot, futures and forwards 84 Written options 204 Purchased options 198

Total commodity contracts 715 Total derivative notional amounts $ 80,674 (a) For more information on volumes and types of credit derivative contracts, see the credit derivative discussion on pages 32–34 of this Note. (b) Represents the sum of gross long and gross short third-party notional derivative contracts.

27

While the notional amounts disclosed above indicate the volume of JPMorgan Chase Bank, N.A.’s derivative activity, the notional amounts significantly exceed, in JPMorgan Chase Bank, N.A.’s view, the possible losses that could arise from such transactions. For most derivative transactions, the notional amount does not change hands; it is used simply as a reference to calculate payments.

Accounting for Derivatives All free-standing derivatives are required to be recorded on the Consolidated Balance Sheets at fair value. The accounting for changes in value of a derivative depends on whether or not the contract has been designated and qualifies for hedge accounting. Derivatives that are not designated as hedges are marked to market through earnings. The tabular disclosures on pages 28–34 of this Note provide additional information on the amount of and reporting for derivative assets, liabilities, gains and losses. For further discussion of derivatives embedded in structured notes, see Notes 5 and 6 on pages 13–24 and 25–27, respectively, of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements.

Derivatives designated as hedges JPMorgan Chase Bank, N.A. applies hedge accounting to certain derivatives executed for risk management purposes – typically interest rate, foreign exchange and gold derivatives, as described above. JPMorgan Chase Bank, N.A. does not seek to apply hedge accounting to all of JPMorgan Chase Bank, N.A.’s risk management activities involving derivatives. For example, JPMorgan Chase Bank, N.A. does not apply hedge accounting to purchased credit default swaps used to manage the credit risk of loans and commitments, because of the difficulties in qualifying such contracts as hedges. For the same reason, JPMorgan Chase Bank, N.A. does not apply hedge accounting to certain interest rate derivatives used for risk management purposes, or to commodity derivatives used to manage the price risk of tolling and load-serving contracts.

To qualify for hedge accounting, a derivative must be highly effective at reducing the risk associated with the exposure being hedged. In addition, for a derivative to be designated as a hedge, the risk management objective and strategy must be documented. Hedge documentation must identify the derivative hedging instrument, the asset or liability and type of risk to be hedged, and how the effectiveness of the derivative will be assessed prospectively and retrospectively. To assess effectiveness, JPMorgan Chase Bank, N.A. uses statistical methods such as regression analysis, as well as nonstatistical methods including dollar-value comparisons of the change in the fair value of the derivative to the change in the fair value or cash flows of the hedged item. The extent to which a derivative has been, and is expected to continue to be, effective at offsetting changes in the fair value or cash flows of the hedged item must be assessed and documented at least quarterly. Any hedge ineffectiveness (i.e., the amount by which the gain or loss on the designated derivative instrument does not exactly offset the gain or loss on the hedged item attributable to the hedged risk) must be reported in current-period earnings. If it is determined that a derivative is not highly effective at hedging the designated exposure, hedge accounting is discontinued.

There are three types of hedge accounting designations: fair value hedges, cash flow hedges and net investment hedges. JPMorgan Chase Bank, N.A. uses fair value hedges primarily to hedge fixed-rate long-term debt, available-for-sale (“AFS”) securities and gold inventory. For qualifying fair value hedges, the changes in the fair value of the derivative, and in the value of the hedged 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 hedged item and is amortized to earnings as a yield adjustment.

JPMorgan Chase Bank, N.A. uses cash flow hedges to hedge the 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 revenue and expense. For qualifying cash flow hedges, the effective portion of the change in the fair value of the derivative is recorded in other comprehensive income (loss) (“OCI”) and recognized in the Consolidated Statements of Income when the hedged cash flows affect earnings. Derivative amounts affecting earnings are recognized consistent with the classification of the hedged item – primarily interest income, interest expense, noninterest revenue and compensation expense. The ineffective portions of cash flow hedges are immediately recognized in earnings. If the hedge relationship is terminated, then the value of the derivative recorded in accumulated other comprehensive income (loss) (“AOCI”) is recognized in earnings when the cash flows that were hedged affect earnings. For hedge relationships that are discontinued because a forecasted transaction is not expected to occur according to the original hedge forecast, any related derivative values recorded in AOCI are immediately recognized in earnings.

JPMorgan Chase Bank, N.A. uses foreign currency hedges to protect the value of its net investments in certain non-U.S. subsidiaries or branches whose functional currencies are not the U.S. dollar. For qualifying net investment hedges, changes in the fair value of the derivatives are recorded in the translation adjustments account within AOCI.

28

Impact of derivatives on the Consolidated Balance Sheets The following table summarizes information on derivative fair values that are reflected on JPMorgan Chase Bank, N.A.’s Consolidated Balance Sheets as of June 30, 2009, by accounting designation (e.g., whether the derivatives were designated as hedges or not) and contract type.

Free-standing derivatives(a) Derivative receivables Derivative payables June 30, 2009 (in millions)

Not designated as hedges

Designated as hedges

Total derivative receivables


Designated as hedges(c)

Total derivative payables

Trading assets and liabilities Interest rate $ 1,242,171 $ 1,693 $ 1,243,864 $ 1,209,697 $ 70 $ 1,209,767 Credit 295,935 — 295,935 285,018 — 285,018 Foreign exchange 151,775 1,018 152,793 157,839 1,170 159,009 Equity 54,601 — 54,601 55,237 — 55,237 Commodity 36,548 — 36,548 36,447 — 36,447

Gross fair value of trading assets and liabilities $ 1,781,030 $ 2,711 $ 1,783,741 $ 1,744,238 $ 1,240 $ 1,745,478

FIN 39 netting(b) (1,700,046) (1,682,107) Carrying value of

derivative trading assets and trading liabilities on the Consolidated Balance Sheet $ 83,695 $ 63,371

(a) Excludes structured notes for which the fair value option has been elected. See Note 5 on pages 22–24 of these Consolidated Financial Statements for further information.

(b) FIN 39 permits the netting of derivative receivables and derivative payables and the related cash collateral received and paid when a legally enforceable master netting agreement exists between JPMorgan Chase Bank, N.A. and a derivative counterparty.

(c) Excludes $1.0 billion related to separated commodity derivatives used as fair value hedging instruments that are recorded in the line item of the host contract (i.e., other borrowed funds).

Derivative receivables and payables mark-to-market The following table summarizes the fair values of derivative receivables and payables by contract type after application of FIN 39 netting as of June 30, 2009, and December 31, 2008.

(in millions) June 30, 2009 December 31, 2008 Derivative receivables:

Interest rate(a) $ 34,788 $ 48,991 Credit 19,710 34,172 Foreign exchange(a) 17,944 38,889 Equity 6,331 11,939 Commodity 4,922 7,586

Total derivative receivables $ 83,695 $ 141,577

Trading liabilities Derivative payables:

Interest rate(a) $ 14,976 $ 32,002 Credit 8,793 14,217 Foreign exchange(a) 24,206 44,639 Equity 12,692 15,770 Commodity 2,704 4,869

Total derivative payables $ 63,371 $ 111,497 (a) During the first quarter of 2009, cross-currency interest rate swaps previously reported in interest rate contracts were reclassified to foreign

exchange contracts to be more consistent with industry practice. The effect of this change resulted in reclassifications of $14.1 billion and $20.6 billion of derivative receivables and derivative payables, respectively, between cross-currency interest rate swaps and foreign exchange contracts, as of December 31, 2008.

29

Impact of derivatives and hedged items on the income statement and on other comprehensive income The following table summarizes the total pretax impact of JPMorgan Chase Bank, N.A.’s derivative-related activities on its Consolidated Statements of Income and Other Comprehensive Income for the three and six months ended June 30, 2009, by accounting designation.

Derivative-related gains/(losses) Consolidated Statements of Income (in millions)

Fair value hedges(a)

Cash flow hedges

Net investment hedges

Risk management

activities Trading

activities(a) Total Three months ended

June 30, 2009 $ 326 $ 55 $ (19) $ (4,564) $ 5,268 $ 1,066 Six months ended

June 30, 2009 97 142 (28) (5,228) 9,158 4,141 Derivative-related net changes in other comprehensive income Other Comprehensive

Income (loss) (in millions)

Fair value hedges

Cash flow hedges


Risk management

activities Trading activities Total

Three months ended June 30, 2009 NA $ (82) $ (236) NA NA $ (318)

Six months ended June 30, 2009 NA 168 (136) NA NA 32

(a) Includes the hedge accounting impact of the hedged item for fair value hedges and includes cash instruments within trading activities.

The tables that follow reflect more detailed information regarding the derivative-related income statement impact by accounting designation for the three and six months ended June 30, 2009. Fair value hedge gains and losses The following table presents derivative instruments, by contract type, used in fair value hedge accounting relationships, as well as pretax gains (losses) recorded on such derivatives and the related hedged items for the three and six months ended June 30, 2009. JPMorgan Chase Bank, N.A. includes gains (losses) on the hedging derivative and the related hedged item in the same line item in the Consolidated Statements of Income. Gains/(losses) recorded in income


Derivatives – hedged risk Hedged items

Hedge ineffectiveness(d)

Derivatives –

excluded components(e)

Total income statement impact

Contract type Interest rate(a) $ (332) $ 294 $ (38) $ (36) $ (74) Foreign exchange(b) (2,060) 2,060 — 415 415 Commodity(c) (24) 24 — (15) (15) Total $ (2,416) $ 2,378 $ (38) $ 364 $ 326

30

Gains/(losses) recorded in income




Derivatives –



Contract type Interest rate(a) $ (297) $ 234 $ (63) $ 37 $ (26) Foreign exchange(b) (1,723) 1,723 — 136 136 Commodity(c) (182) 182 — (13) (13) Total $ (2,202) $ 2,139 $ (63) $ 160 $ 97

(a) Primarily consists of hedges of the benchmark (e.g., LIBOR) interest rate risk of fixed-rate long-term debt. Gains and losses were recorded in net interest income.

(b) Primarily consists of hedges of the foreign currency risk of long-term debt and AFS securities for changes in spot foreign currency rates. Gains and losses related to the derivatives and the hedged items due to changes in spot foreign currency rates were recorded in principal transactions revenue and net interest income. The excluded components were recorded in net interest income.

(c) Consists of overall fair value hedges of physical gold inventory. Gains and losses were recorded in principal transactions revenue. (d) Hedge ineffectiveness is the amount by which the gain or loss on the designated derivative instrument does not exactly offset the gain or

loss on the hedged item attributable to the hedged risk. (e) Certain components of hedging derivatives are permitted to be excluded from the assessment of hedge effectiveness, such as forward

points on a futures or forwards contract. Amounts related to excluded components are recorded in current-period income. Cash flow hedge gains and losses The following table presents derivative instruments, by contract type, used in cash flow hedge accounting relationships, and the pretax gains (losses) recorded on such derivatives, for the three and six months ended June 30, 2009. JPMorgan Chase Bank, N.A. includes the gain (loss) on the hedging derivative in the same line item as the offsetting change in cash flows on the hedged item in the Consolidated Statements of Income. Gains/(losses) recorded in income and other comprehensive income (loss)


Derivatives – effective portion reclassified from

AOCI into income

Hedge ineffectiveness

recorded directly in income(c)

Total income

statement impact

Derivatives – effective portion recorded in OCI

Total change in OCI

for period Contract type Interest rate(a) $ (26) $ 1 $ (25) $ (343) $ (317) Foreign exchange(b) 80 — 80 315 235 Total $ 54 $ 1 $ 55 $ (28) $ (82) Gains/(losses) recorded in income and other comprehensive income (loss)



AOCI into income



Total income

statement impact


Total change in OCI

for period Contract type Interest rate(a) $ (69) $ 2 $ (67) $ (299) $ (230) Foreign exchange(b) 209 — 209 607 398 Total $ 140 $ 2 $ 142 $ 308 $ 168

(a) Primarily consists of benchmark interest rate hedges of LIBOR-indexed floating-rate assets and floating-rate liabilities. Gains and losses were recorded in net interest income.

(b) Primarily consists of hedges of the foreign currency risk of non-U.S. dollar–denominated revenue and expense. The income statement classification of gains and losses follows the hedged item – primarily net interest income, compensation expense and other expense.

(c) Hedge ineffectiveness is the amount by which the cumulative gain or loss on the designated derivative instrument exceeds the present value of the cumulative expected change in cash flows on the hedged item attributable to the hedged risk.

Over the next 12 months, it is expected that $61 million (after tax) of net losses recorded in AOCI at June 30, 2009, related to cash flow hedges will be recognized in income. The maximum length of time over which forecasted transactions are hedged is 10 years, and such transactions primarily relate to core lending and borrowing activities.

31

Net investment hedge gains and losses The following table presents hedging instruments, by contract type, that were used in net investment hedge accounting relationships, and the pretax gains (losses) recorded on such derivatives for the three and six months ended June 30, 2009.

Gains/(losses) recorded in income and other comprehensive income (loss) Three months ended June 30, 2009 (in millions)

Derivatives – excluded components recorded directly in income(a)


Contract type Foreign exchange $ (19) $ (236) Total $ (19) $ (236) Gains/(losses) recorded in income and other comprehensive income (loss) Six months ended June 30, 2009 (in millions)



Contract type Foreign exchange $ (28) $ (136) Total $ (28) $ (136)

(a) Certain components of derivatives used as hedging instruments are permitted to be excluded from the assessment of hedge effectiveness, such as forward points on a futures or forwards contract. Amounts related to excluded components are recorded in current-period income. There was no ineffectiveness for net investment hedge accounting relationships during the three and six months ended June 30, 2009.

Risk management derivatives gains and losses (not designated as hedging instruments) The following table presents nontrading derivatives, by contract type, that were not designated in hedge relationships, and the pretax gains (losses) recorded on such derivatives for the three and six months ended June 30, 2009. These derivatives are risk management instruments used to mitigate or transform the risk of market exposures arising from banking activities other than trading activities, which are discussed separately below.

Derivatives gains/(losses) recorded in income (in millions) Three months ended June 30, 2009 Six months ended June 30, 2009 Contract type

Interest rate(a) $ (3,050) $ (3,188) Credit(b) (1,512) (2,028) Foreign exchange(c) (2) (11) Equity(b) — (1) Commodity(b) — —

Total $ (4,564) $ (5,228) (a) Gains and losses were recorded in principal transactions revenue, mortgage fees and related income, and net interest income. (b) Gains and losses were recorded in principal transactions revenue. (c) Gains and losses were recorded in principal transactions revenue and net interest income.

Trading derivative gains and losses JPMorgan Chase Bank, N.A. has elected to present derivative gains and losses related to its trading activities together with the cash instruments with which they are risk managed. All amounts are recorded in principal transactions revenue in the Consolidated Statements of Income for the three and six months ended June 30, 2009.

Gains/(losses) recorded in principal transactions revenue (in millions) Three months ended June 30, 2009 Six months ended June 30, 2009 Type of instrument

Interest rate $ 1,471 $ 3,716 Credit 1,642 1,326 Foreign exchange 2,086 3,145 Equity (119) 669 Commodity 188 302

Total $ 5,268 $ 9,158 Credit risk, liquidity risk and credit-related contingent features In addition to the specific market risks introduced by each derivative contract type, derivatives expose JPMorgan Chase Bank, N.A. to credit risk – the risk that derivative counterparties may fail to meet their payment obligations under the derivative contracts and the collateral, if any, held by JPMorgan Chase Bank, N.A. proves to be of insufficient value to cover the payment obligation. The amount of derivative receivables reported on the Consolidated Balance Sheets is the fair value of the derivative contracts after giving effect to legally enforceable master netting agreements and cash

32

collateral held by JPMorgan Chase Bank, N.A. These amounts represent the cost to JPMorgan Chase Bank, N.A. to replace the contracts at then-current market rates should the counterparty default. However, in management’s view, the appropriate measure of current credit risk should take into consideration other additional liquid securities held as collateral by JPMorgan Chase Bank, N.A., which is disclosed in the table below.

While derivative receivables expose JPMorgan Chase Bank, N.A. to credit risk, derivative payables expose JPMorgan Chase Bank, N.A. to liquidity risk, as the derivative contracts typically require JPMorgan Chase Bank, N.A. to post cash or securities collateral with counterparties as the MTM moves in the counterparties’ favor, or upon specified downgrades in JPMorgan Chase Bank, N.A.’s and its subsidiaries’ respective credit ratings. At June 30, 2009, the impact of a single-notch and six-notch ratings downgrade to JPMorgan Chase Bank, N.A., and its subsidiaries would have required $1.1 billion and $3.5 billion, respectively, of additional collateral to be posted by JPMorgan Chase Bank, N.A. Certain derivative contracts also provide for termination of the contract, generally upon a downgrade of either JPMorgan Chase Bank, N.A. or the counterparty, at the fair value of the derivative contracts. At June 30, 2009, the impact of a single-notch and six-notch ratings downgrade to JPMorgan Chase Bank, N.A., and its subsidiaries related to contracts with termination triggers would have required JPMorgan Chase Bank, N.A. to settle trades with a fair value of $0.3 million and $4.6 billion, respectively. The aggregate fair value of net derivative payables that contain contingent collateral or termination features triggered upon a downgrade was $26.4 billion at June 30, 2009, for which JPMorgan Chase Bank, N.A. has posted collateral of $18.9 billion in the normal course of business.

The following table shows the current credit risk of derivative receivables after FIN 39 netting and collateral received, and current liquidity risk of derivative payables after FIN 39 netting and collateral posted, as of June 30, 2009.

June 30, 2009 (in millions) Derivative receivables Derivative payables Gross derivative fair value $ 1,783,741 $ 1,745,478 Fin 39 netting – offsetting receivables/payables (1,628,843) (1,628,843) Fin 39 netting – cash collateral received/paid (71,203) (53,264) Carrying value on Consolidated Balance Sheets 83,695 63,371 Securities collateral received/paid (13,580) (8,622) Derivative fair value, net of all collateral $ 70,115 $ 54,749

In addition to the collateral amounts reflected in the table above, JPMorgan Chase Bank, N.A. receives and delivers collateral at the initiation of derivative transactions, which is available as security against potential exposure that could arise should the fair value of the transactions move in JPMorgan Chase Bank, N.A.’s or client’s favor, respectively. JPMorgan Chase Bank, N.A. and its counterparties also hold collateral related to contracts that have a non-daily call frequency for collateral to be posted, and collateral that JPMorgan Chase Bank, N.A. or a counterparty has agreed to return but has not yet settled, as of the reporting date. At June 30, 2009, JPMorgan Chase Bank, N.A. received $18.7 billion and delivered $1.4 billion of such additional collateral. These amounts were not netted against the derivative receivables and payables in the table above, because, at an individual counterparty level, the collateral exceeded the fair value exposure at June 30, 2009.

Credit derivatives Credit derivatives are financial instruments whose value is derived from the credit risk associated with the debt of a third-party issuer (the reference entity) and which allow one party (the protection purchaser) to transfer that risk to another party (the protection seller). Credit derivatives expose the protection purchaser to the creditworthiness of the protection seller, as the protection seller is required to make payments under the contract when the reference entity experiences a credit event, such as a bankruptcy, a failure to pay its obligation or a restructuring. The seller of credit protection receives a premium for providing protection but has the risk that the underlying instrument referenced in the contract will be subject to a credit event. JPMorgan Chase Bank, N.A. is both a purchaser and seller of credit protection in the credit derivatives market and uses credit derivatives for two primary purposes. First, in its capacity as a market-maker in the dealer/client business, JPMorgan Chase Bank, N.A. actively risk manages a portfolio of credit derivatives by purchasing and selling credit protection, predominantly on corporate debt obligations, to meet the needs of customers. As a seller of protection, JPMorgan Chase Bank, N.A.’s exposure to a given reference entity may be offset partially, or entirely, with a contract to purchase protection from another counterparty on the same or similar reference entity. Second, JPMorgan Chase Bank, N.A. uses credit derivatives to mitigate credit risk associated with its overall derivative receivables and traditional commercial credit lending exposures (loans and unfunded commitments) as well as to manage its exposure to residential and commercial mortgages.

33

For a further discussion of credit derivatives, including a description of the different types used by JPMorgan Chase Bank, N.A., see Note 30 on pages 80–83 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements. The following table presents a summary of the notional amounts of credit derivatives and credit-related notes JPMorgan Chase Bank, N.A. sold and purchased as of June 30, 2009, and December 31, 2008. Upon a credit event, JPMorgan Chase Bank, N.A. as seller of protection would typically pay out only a percentage of the full notional amount of net protection sold, as the amount actually required to be paid on the contracts takes into account the recovery value of the reference obligation at the time of settlement. JPMorgan Chase Bank, N.A. manages the credit risk on contracts to sell protection by purchasing protection with identical or similar underlying reference entities. As such, other purchased protection referenced in the following table includes credit derivatives bought on related, but not identical, reference positions; these include indices, portfolio coverage and other reference points. JPMorgan Chase Bank, N.A. does not use notional as the primary measure of risk management for credit derivatives because notional does not take into account the probability of occurrence of a credit event, recovery value of the reference obligation, or related cash instruments and economic hedges.

Total credit derivatives and credit-related notes Maximum payout/Notional amount June 30, 2009 (in millions)

Protection sold

Protection purchased with identical underlyings(c)

Net protection (sold)/purchased(d)

Other protection purchased(e)

Credit derivatives Credit default swaps $ (3,317,959) $ 3,400,665 $ 82,706 $ 41,539 Other credit derivatives(a) (11,206) 13,707 2,501 32,712

Total credit derivatives (3,329,165) 3,414,372 85,207 74,251 Credit-related notes (3,247) — (3,247) 985 Total $ (3,332,412) $ 3,414,372 $ 81,960 $ 75,236

Maximum payout/Notional amount December 31, 2008 (in millions)

Protection sold




Credit derivatives Credit default swaps(b) $ (4,103,539) $ 3,984,139 $ (119,400) $ 278,181 Other credit derivatives(a) (3,726) — (3,726) 22,044(b)

Total credit derivatives (4,107,265) 3,984,139 (123,126) 300,225 Credit-related notes(b) (4,080) — (4,080) 2,373 Total $ (4,111,345) $ 3,984,139 $ (127,206) $ 302,598 (a) Primarily consists of total return swaps and credit default swap options. (b) Total credit derivatives and credit-related notes amounts of protection purchased and protection sold have been revised for the prior period. (c) Represents the notional amount of purchased credit derivatives where the underlying reference instrument is identical to the reference

instrument on which JPMorgan Chase Bank, N.A. has sold credit protection. (d) Does not take into account the fair value of the reference obligation at the time of settlement, which would generally reduce the amount

the seller of protection pays to the buyer of protection in determining settlement value. (e) Represents single-name and index CDS protection JPMorgan Chase Bank, N.A. purchased.

34

The following table summarizes the notional and fair value amounts of credit derivatives and credit-related notes as of June 30, 2009, and December 31, 2008, where JPMorgan Chase Bank, N.A. is the seller of protection. The maturity profile is based on the remaining contractual maturity of the credit derivative contracts. The ratings profile is based on the rating of the reference entity on which the credit derivative contract is based. The ratings and maturity profile of protection purchased are comparable to the profile reflected below.

Protection sold – credit derivatives and credit-related notes ratings/maturity profile

June 30, 2009 (in millions) <1 year 1–5 years >5 years Total

notional amount Fair value(c) Risk rating of reference entity

Investment grade (AAA to BBB-)(a) $ (254,784) $ (1,387,766) $ (553,906) $ (2,196,456) $ (89,350) Noninvestment grade (BB+ and below)(a) (144,297) (761,089) (230,570) (1,135,956) (160,407)

Total $ (399,081) $ (2,148,855) $ (784,476) $ (3,332,412) $ (249,757)

December 31, 2008 (in millions) <1 year 1–5 years >5 years Total


Investment grade (AAA to BBB-)(a)(b) $ (178,569) $ (1,741,467) $ (700,984) $ (2,621,020) $ (229,877) Noninvestment grade (BB+ and below)(a)(b) (120,531) (955,601) (414,193) (1,490,325) (261,668)

Total $ (299,100) $ (2,697,068) $ (1,115,177) $ (4,111,345) $ (491,545) (a) Ratings scale is based on JPMorgan Chase Bank, N.A.’s internal ratings, which generally correspond to ratings defined by S&P and Moody’s. (b) The amounts of protection sold for total credit derivatives and credit-related notes have been revised for the prior period. (c) Amounts are shown on a gross basis, before the benefit of legally enforceable master netting agreements and cash collateral held by JPMorgan

Chase Bank, N.A.

NOTE 7 – OTHER NONINTEREST REVENUE For a discussion of the components of and accounting policies for JPMorgan Chase Bank, N.A.’s other noninterest revenue, see Note 8 on pages 28–29 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements. The following table presents the components of investment banking fees.

Three months ended June 30, Six months ended June 30, (in millions) 2009 2008 2009 2008 Underwriting:

Equity $ 488 $ 235 $ 666 $ 418 Debt 399 399 753 577 Total underwriting 887 634 1,419 995

Advisory 170 184 377 399 Total investment banking fees $ 1,057 $ 818 $ 1,796 $ 1,394

The following table presents components of asset management, administration and commissions.

Three months ended June 30, Six months ended June 30, (in millions) 2009 2008 2009 2008 Total asset management fees $ 350 $ 393 $ 679 $ 783 Total administration fees(a) 455 634 874 1,255 Commission and other fees:

Brokerage commissions 331 451 633 968 All other commissions and fees 1,134 1,025 2,219 2,028 Total commissions and fees 1,465 1,476 2,852 2,996

Total asset management, administration and commissions $ 2,270 $ 2,503 $ 4,405 $ 5,034 (a) Includes fees for custody, securities lending, funds services and securities clearance.

35

NOTE 8 – INTEREST INCOME AND INTEREST EXPENSE Details of interest income and interest expense were as follows.

Three months ended June 30, Six months ended June 30, (in millions) 2009 2008 2009 2008 Interest income(a) Loans $ 7,213 $ 6,951 $ 15,225 $ 14,591 Securities 3,071 1,369 5,872 2,538 Trading assets 1,674 2,675 3,439 5,809 Federal funds sold, securities purchased under resale

agreements and securities borrowed 374 1,862 1,011 3,929 Deposits with banks 232 363 638 687 Other assets(b) (67) 33 (50) 33 Total interest income 12,497 13,253 26,135 27,587

Interest expense(a) Interest-bearing deposits 1,283 3,940 3,086 8,807 Short-term and other liabilities(c) 1,011 1,902 2,060 4,253 Long-term debt 332 390 622 840 Beneficial interests issued by consolidated VIEs 27 56 60 139 Total interest expense 2,653 6,288 5,828 14,039 Net interest income 9,844 6,965 20,307 13,548 Provision for credit losses 5,799 2,533 11,877 6,271 Net interest income after provision for credit losses $ 4,045 $ 4,432 $ 8,430 $ 7,277 (a) Interest income and interest expense include the current-period interest accruals for financial instruments measured at fair value, except for

financial instruments containing embedded derivatives that would be separately accounted for in accordance with SFAS 133 absent the SFAS 159 fair value election; for those instruments, all changes in fair value, including any interest elements, are reported in principal transactions revenue.

(b) Predominantly margin loans. (c) Includes brokerage customer payables.

NOTE 9 – PENSION AND OTHER POSTRETIREMENT EMPLOYEE BENEFIT PLANS For a discussion of JPMorgan Chase Bank, N.A.’s pension plans and United Kingdom (“U.K.”) other postretirement employee benefit (“OPEB”) plan, see Note 10 on pages 30–34 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements.

The following table presents the components of net periodic benefit cost reported in the Consolidated Statements of Income for JPMorgan Chase Bank, N.A.’s U.S. nonqualified defined benefit pension plans, non-U.S. defined benefit pension plans and U.K. OPEB plan.

Defined benefit pension plans U.S. Non-U.S. U.K. OPEB plan Three months ended June 30, (in millions) 2009 2008 2009 2008 2009 2008 Components of net periodic benefit cost Benefits earned during the period $ 1 $ 1 $ 6 $ 7 $ — $ — Interest cost on benefit obligations 4 4 30 38 1 1 Expected return on plan assets — — (28) (41) — — Amortization of net loss 1 — 11 7 — — Net periodic benefit cost 6 5 19 11 1 1 Other defined benefit pension plans(a) 4 3 2 3 NA NA Total defined benefit pension and OPEB plans 10 8 21 14 1 1 Total defined contribution plans 67 57 55 73 NA NA Total pension and OPEB cost included in compensation expense $ 77 $ 65 $ 76 $ 87 $ 1 $ 1

36

Defined benefit pension plans U.S. Non-U.S. U.K. OPEB plan Six months ended June 30, (in millions) 2009 2008 2009 2008 2009 2008 Components of net periodic benefit cost Benefits earned during the period $ 2 $ 2 $ 12 $ 14 $ — $ — Interest cost on benefit obligations 11 9 56 76 1 2 Expected return on plan assets — — (52) (82) — — Amortization of net loss 1 — 21 14 — — Net periodic benefit cost 14 11 37 22 1 2 Other defined benefit pension plans(a) 7 6 5 6 NA NA Total defined benefit pension and OPEB plans 21 17 42 28 1 2 Total defined contribution plans 131 108 107 145 NA NA Total pension and OPEB cost included in compensation expense $ 152 $ 125 $ 149 $ 173 $ 1 $ 2 (a) Includes various defined benefit pension plans, which are individually immaterial.

The fair value of plan assets for the material non-U.S. defined benefit pension plans were $2.2 billion as of June 30, 2009, and $2.0 billion as of December 31, 2008. See Note 22 on page 67 of these Consolidated Financial Statements for further information on unrecognized amounts (i.e., net loss and prior service costs/(credit)) reflected in accumulated other comprehensive income for the six months ended June 30, 2009 and 2008. The 2009 potential contributions for JPMorgan Chase Bank, N.A.’s U.S. non-qualified defined benefit pension plans are $39 million. The 2009 potential contributions for JPMorgan Chase Bank, N.A.’s non-U.S. defined benefit pension plans (excluding the main U.K. plan) are $44 million and for the U.K. OPEB plan is $2 million. The amount of potential 2009 contributions to JPMorgan Chase Bank, N.A.’s main U.K. defined benefit pension plan is not reasonably estimable at this time. JPMorgan Chase charged JPMorgan Chase Bank, N.A. $63 million and $51 million, for the three months ended June 30, 2009 and 2008, respectively, and $124 million and $101 million in the first six months of 2009 and 2008, respectively, for its share of the U.S. qualified defined benefit pension plan expense. For its share of the U.S. OPEB plan expense, JPMorgan Chase charged JPMorgan Chase Bank, N.A. $1 million for the three months ended June 30, 2009 and 2008, and $3 million and $2 million in the first six months of 2009 and 2008, respectively. On May 1, 2009, JPMorgan Chase amended the employer matching contribution feature of the 401(k) Savings Plan (the “Plan”) to provide that: (i) for employees earning less than $50,000, matching contributions will be based on their contributions to the Plan, but not to exceed 5% of their eligible compensation (e.g., base pay); and (ii) for employees earning $50,000 or more per year, matching contributions will be made at the discretion of JPMorgan Chase’s management, depending on JPMorgan Chase's earnings for the year. Any such matching contributions will be made on an annual basis, following the end of the calendar year, to employees who are employed by JPMorgan Chase Bank, N.A. or an affiliate at the end of such year. Pursuant to a compromise and settlement agreement between JPMorgan Chase Bank, N.A. and Washington Mutual Inc., JPMorgan Chase Bank, N.A. became a contributing employer under the WaMu Savings Plan effective as of September 25, 2008, and the sponsor of the WaMu Savings Plan as of August 10, 2009. As of July 28, 2009, the United States Bankruptcy Court for the District of Delaware entered an order approving the compromise and settlement agreement, which became final and non-appealable on August 10, 2009. Consolidated disclosures of information about the pension and OPEB plans of JPMorgan Chase are included in Note 9 on pages 149–155 of JPMorgan Chase’s 2008 Annual Report on Form 10-K and in Note 8 on pages 126–127 of JPMorgan Chase’s Form 10-Q for the quarterly period ended June 30, 2009.

NOTE 10 – EMPLOYEE STOCK-BASED INCENTIVES Certain employees of JPMorgan Chase Bank, N.A. participate in JPMorgan Chase’s long-term stock-based incentive plans, which provide for grants of common stock-based awards, including stock options, stock-settled stock appreciation rights, and restricted stock units (“RSUs”). For a discussion of the accounting policies and other information relating to employee stock-based compensation, see Note 11 on pages 34–37 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements and Note 10 on pages 155–157 of JPMorgan Chase’s 2008 Annual Report on Form 10-K.

JPMorgan Chase Bank, N.A. recognized stock-based incentive compensation expense of $609 million and $451 million for the quarters ended June 30, 2009 and 2008, respectively, and $1.0 billion and $879 million in the first six months of 2009 and 2008, respectively, in its Consolidated Statements of Income. These amounts included an accrual for the estimated cost of stock awards to be granted to full-career eligible employees of $120 million and $94 million for the

37

quarters ended June 30, 2009 and 2008, respectively, and $210 million and $183 million in the first six months of 2009 and 2008, respectively.

In the first quarter of 2009, JPMorgan Chase granted 88 million RSUs to employees of JPMorgan Chase Bank, N.A. with a grant date fair value of $19.49 per RSU in connection with its annual incentive grant.

NOTE 11 – NONINTEREST EXPENSE Merger costs Costs associated with the Bear Stearns merger and the Washington Mutual transactions are reflected in the merger costs caption of the Consolidated Statements of Income. For a further discussion of the Bear Stearns merger and the Washington Mutual transaction, see Note 3 on page 9 of these Consolidated Financial Statements. A summary of merger-related costs is shown in the following table.

Three months ended June 30, 2009 (in millions) Bear Stearns Washington Mutual Total 2008 Expense category Compensation(a) $ (1) $ 77 $ 76 $ 6 Occupancy(a) (4) 18 14 — Technology and communications and other(a) (2) 53 51 13 Total(b)(c) $ (7) $ 148 $ 141 $ 19 Six months ended June 30, 2009 (in millions) Bear Stearns Washington Mutual Total 2008 Expense category Compensation(a) $ (1) $ 213 $ 212 $ 6 Occupancy(a) (4) 23 19 — Technology and communications and other(a) (2) 88 86 13 Total(b)(c) $ (7) $ 324 $ 317 $ 19 (a) Represents partial reversals of merger costs accrued in prior periods. (b) With the exception of occupancy- and technology-related write-offs, all of the costs in the table required the expenditure of cash. (c) 2008 Merger Activity is related to Bear Stearns only.

The table below shows the change in the merger reserve balance related to the costs associated with the transactions.

Six months ended June 30, 2009 (in millions) Bear Stearns Washington Mutual Total 2008 Merger reserve balance, beginning of period $ 64 $ 441 $ 505 $ — Recorded as merger costs (7) 324 317 19 Utilization of merger reserve (55) (564) (619) (19) Merger reserve balance, end of period(a) $ 2 $ 201 $ 203 $ — (a) 2008 Merger Activity is related to Bear Stearns only.

The following table presents the components of noninterest expense. Three months ended June 30, Six months ended June 30, (in millions) 2009 2008 2009 2008 Compensation expense $ 5,188 $ 5,277 $ 11,134 $ 8,725 Noncompensation expense:

Occupancy expense 814 594 1,598 1,179 Technology, communications and equipment

expense 1,003 873 1,999 1,737 Professional & outside services 1,049 987 2,107 1,983 Marketing 152 135 295 285 Other expense(a) 2,880 2,039 5,018 3,638 Amortization of intangibles 152 153 302 304

Total noncompensation expense 6,050 4,781 11,319 9,126 Merger costs 141 19 317 19 Total noninterest expense $ 11,379 $ 10,077 $ 22,770 $ 17,870 (a) On May 22, 2009, the Federal Deposit Insurance Corporation (“FDIC”) announced a five basis point special assessment on each insured

depository institution’s assets minus Tier 1 capital as of June 30, 2009. The maximum amount of the special assessment for any institution is 10 basis points times such institution’s average U.S. deposits for the second quarter. The FDIC announced that the special assessment will be collected on September 30, 2009. As of June 30, 2009, JPMorgan Chase Bank, N.A. had accrued $650 million for the special assessment.

38

NOTE 12 – SECURITIES Securities are classified as AFS, held-to-maturity (“HTM”) or trading. For additional information regarding AFS and HTM securities, see Note 13 on pages 38–41 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements. Trading securities are discussed in Note 6 on pages 25–34 of these Consolidated Financial Statements.

Securities gains and losses The following table presents realized gains and realized and unrealized losses that were recognized in income from AFS securities.

Three months ended June 30, Six months ended June 30, (in millions) 2009 2008 2009 2008 Realized gains $ 619 $ 358 $ 1,017 $ 492 Realized losses (191) (25) (387) (104) Net realized gains 428 333 630 388 Unrealized credit losses included in securities gains (66)(b) — (66)(b) — Net securities gains(a) $ 362 $ 333 $ 564 $ 388 (a) Proceeds from securities sold were within approximately 2% of amortized cost. (b) Includes impairment losses recognized in income for the three and six months ended June 30, 2009, on certain prime mortgage-backed securities.

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

June 30, 2009 December 31, 2008

(in millions) Amortized

cost

Gross unrealized

gains

Gross unrealized

losses Fair

value Amortized

cost

Gross unrealized

gains

Gross unrealized

losses Fair

value Available-for-sale debt securities Mortgage-backed securities(a):

U.S. government agencies(b) $ 179,086 $ 2,219 $ 866 $ 180,439 $ 115,198 $ 2,414 $ 227 $ 117,385Residential: Prime and Alt-A 7,540 45 1,711 5,874 8,826 4 1,935 6,895 Non-U.S. 6,555 123 244 6,434 2,233 24 182 2,075Commercial 4,738 7 510 4,235 4,623 — 684 3,939

Total mortgage-backed securities $ 197,919 $ 2,394 $ 3,331 $ 196,982 $ 130,880 $ 2,442 $ 3,028 $ 130,294

U.S. Treasury and government agencies(b) 34,850 108 370 34,588 10,323 52 97 10,278

Obligations of U.S. states and municipalities 3,174 32 70 3,136 931 13 31 913

Certificates of deposit 5,587 16 — 5,603 17,226 64 8 17,282Non-U.S. government debt

securities 16,221 162 32 16,351 8,173 173 2 8,344Corporate debt securities 47,363 518 69 47,812 9,310 256 61 9,505Asset-backed securities(a):

Credit card receivables 16,507 269 375 16,401 11,446 8 1,986 9,468Collateralized debt and loan obligations 11,637 409 547 11,499 11,847 168 820 11,195Other 1,428 25 25 1,428 748 2 107 643

Total available-for-sale debt securities $ 334,686 $ 3,933 $ 4,819 $ 333,800 $ 200,884 $ 3,178 $ 6,140 $ 197,922

Available-for-sale equity securities 735 57 3 789 1,794 1 7 1,788

Total available-for-sale securities $ 335,421 $ 3,990 $ 4,822 $ 334,589 $ 202,678 $ 3,179 $ 6,147 $ 199,710

Total held-to-maturity securities(c) $ 29 $ 2 $ — $ 31 $ 34 $ 1 $ — $ 35

(a) Prior periods have been revised to conform to the current presentation. (b) Includes total U.S. government-sponsored enterprise obligations with fair values of $171.6 billion and $120.1 billion at June 30, 2009, and

December 31, 2008, respectively, which were predominantly mortgage-related. (c) Consists primarily of mortgage-backed securities issued by U.S. government-sponsored enterprises.

39

Securities impairment The following tables present the fair value and gross unrealized losses for AFS securities by aging category at June 30, 2009, and December 31, 2008.

Securities with gross unrealized losses Less than 12 months 12 months or more Total Gross Gross Total gross Fair unrealized Fair unrealized fair unrealized June 30, 2009 (in millions) value losses value losses value losses Available-for-sale debt securities Mortgage-backed securities:

U.S. government agencies $ 90,016 $ 848 $ 1,243 $ 18 $ 91,259 $ 866 Residential: Prime and Alt-A 2,626 375 2,757 1,336 5,383 1,711 Non-U.S. 1,964 244 — — 1,964 244

Commercial 3,880 510 — — 3,880 510 Total mortgage-backed securities 98,486 1,977 4,000 1,354 102,486 3,331 U.S. Treasury and government agencies 16,359 370 — — 16,359 370 Obligations of U.S. states and municipalities 1,601 67 25 3 1,626 70 Certificates of deposit — — — — — — Non-U.S. government debt securities 2,013 32 — — 2,013 32 Corporate debt securities 6,741 55 1,108 14 7,849 69 Asset-backed securities:

Credit card receivables 592 29 4,668 346 5,260 375 Collateralized debt and loan obligations 6,755 239 3,993 308 10,748 547 Other — — 576 25 576 25

Total available-for-sale debt securities 132,547 2,769 14,370 2,050 146,917 4,819 Available-for-sale equity securities 3 3 — — 3 3 Total securities with gross unrealized losses $ 132,550 $ 2,772 $ 14,370 $ 2,050 $ 146,920 $ 4,822 Securities with gross unrealized losses Less than 12 months 12 months or more Total Gross Gross Total gross Fair unrealized Fair unrealized fair unrealized December 31, 2008 (in millions) value losses value losses value losses Available-for-sale debt securities Mortgage-backed securities(a):

U.S. government agencies $ 6,016 $ 224 $ 469 $ 3 $ 6,485 $ 227 Residential Prime and Alt-A 6,254 1,838 333 97 6,587 1,935 Non-U.S. 1,908 182 — — 1,908 182 Commercial 3,939 684 — — 3,939 684

Total mortgage-backed securities 18,117 2,928 802 100 18,919 3,028 U.S. Treasury and government agencies(a) 7,659 97 — — 7,659 97 Obligations of U.S. states and municipalities 312 25 16 6 328 31 Certificates of deposit 382 8 — — 382 8 Non-U.S. government debt securities 308 1 74 1 382 2 Corporate debt securities 532 54 30 7 562 61 Asset-backed securities(a):

Credit card receivables 8,191 1,792 282 194 8,473 1,986 Collateralized debt and loan obligations 9,059 820 — — 9,059 820 Other 558 106 17 1 575 107

Total available-for-sale debt securities 45,118 5,831 1,221 309 46,339 6,140 Available-for-sale equity securities 19 7 — — 19 7 Total securities with gross unrealized losses $ 45,137 $ 5,838 $ 1,221 $ 309 $ 46,358 $ 6,147 (a) Prior periods have been revised to conform to the current presentation.

40

Other-than-temporary impairment In April 2009, the FASB amended the other-than-temporary impairment (“OTTI”) model for debt securities. The impairment model for equity securities was not affected. Under the new guidance, OTTI loss must be recognized in earnings if an investor has the intent to sell the debt security, or if it is more likely than not, will be required to sell the debt security before recovery of its amortized cost basis. However, even if an investor does not expect to sell a debt security, it must evaluate expected cash flows to be received and determine if a credit loss exists. In the event of a credit loss, only the amount of impairment associated with the credit loss is recognized in income. Amounts relating to factors other than credit losses are recorded in OCI. The guidance also requires additional disclosures regarding the calculation of credit losses, as well as factors considered in reaching a conclusion that an investment is not other-than-temporarily impaired. JPMorgan Chase Bank, N.A. early adopted the new guidance effective for the period ending March 31, 2009. AFS securities in unrealized loss positions are analyzed as part of JPMorgan Chase Bank, N.A.’s ongoing assessment of OTTI. When JPMorgan Chase Bank, N.A. intends to sell AFS securities, it recognizes an impairment loss equal to the full difference between the amortized cost basis and the fair value of those securities. When JPMorgan Chase Bank, N.A. does not intend to sell AFS equity or debt securities in an unrealized loss position, potential OTTI is considered using a variety of factors, including the length of time and extent to which the market value has been less than cost; adverse conditions specifically related to the industry, geographic area or financial condition of the issuer or underlying collateral of a security; payment structure of the security; changes to the rating of the security by a rating agency; the volatility of the fair value changes, and changes in fair value of the security after the balance sheet date. For debt securities, JPMorgan Chase Bank, N.A. estimates cash flows over the remaining lives of the underlying collateral to assess whether credit losses exist, and, where applicable under EITF Issue 99-20, to determine if any adverse changes in cash flows have occurred. JPMorgan Chase Bank, N.A.’s cash flow estimates take into account expectations of relevant market and economic data as of the end of the reporting period – including, for example, for securities issued in a securitization, underlying loan-level data, and structural features of the securitization, such as subordination, excess spread, overcollateralization or other forms of credit enhancement. JPMorgan Chase Bank, N.A. compares the losses projected for the underlying collateral (“pool losses”) against the level of credit enhancement in the securitization structure to determine whether these features are sufficient to absorb the pool losses, or whether a credit loss on the AFS debt security exists. JPMorgan Chase Bank, N.A. also performs other analyses to support its cash flow projections, such as first-loss analyses or stress scenarios. For debt securities, JPMorgan Chase Bank, N.A. considers a decline in fair value to be other-than-temporary when JPMorgan Chase Bank, N.A. does not expect to recover the entire amortized cost basis of the security, including, as applicable under EITF Issue 99-20, when an adverse change in cash flows has occurred. JPMorgan Chase Bank, N.A. applies EITF Issue 99-20 to beneficial interests in securitizations that are rated below “AA” at acquisition, or that can be contractually prepaid or otherwise settled in such a way that JPMorgan Chase Bank, N.A. would not recover substantially all of its recorded investment. For equity securities, JPMorgan Chase Bank, N.A. considers the above factors, as well as JPMorgan Chase Bank, N.A.’s intent and ability to retain its investment for a period of time sufficient to allow for any anticipated recovery in market value, and whether evidence exists to support a realizable value equal to or greater than the carrying value. JPMorgan Chase Bank, N.A. considers a decline in fair value of AFS equity securities to be other-than-temporary if it is probable that JPMorgan Chase Bank, N.A. will not recover its amortized cost basis. The following table presents unrealized losses that are included in securities gains and losses above.

June 30, 2009 (in millions) Three months ended Six months ended Debt securities JPMorgan Chase Bank, N.A. does not intend to sell with credit losses Total unrealized losses $ (676) $ (676) Unrealized losses not related to credit 610 610 Unrealized credit losses recognized in income(a) (66) (66) Unrealized losses recognized in income on debt securities JPMorgan Chase Bank, N.A. intends to sell — — Total unrealized losses recognized in income $ (66) $ (66) (a) Represents the credit loss component of certain prime mortgage-backed securities that JPMorgan Chase Bank, N.A. does not intend to sell.

41

Since the first quarter of 2008, JPMorgan Chase Bank, N.A. has increased its investment securities positions. Many of these securities were purchased at discounts to par, given the significant liquidity constraints in the market. The timing and prices at which JPMorgan Chase Bank, N.A. acquired its investments have resulted in the majority of unrealized losses existing for less than 12 months. Based on the analyses described above, which have been applied to these securities, JPMorgan Chase Bank, N.A. believes that the unrealized losses that it does not consider to be other-than-temporary result from liquidity conditions in the current market environment. As of June 30, 2009, JPMorgan Chase Bank, N.A. does not intend to sell the securities with a loss position in AOCI, and it is not likely that JPMorgan Chase Bank, N.A. will be required to sell these securities before recovery of their amortized cost basis. As a result, except for the securities reported in the table above for which credit losses have been recognized in income, JPMorgan Chase Bank, N.A. believes that the securities with an unrealized loss in AOCI are not other-than-temporarily impaired as of June 30, 2009.

Following is a description of JPMorgan Chase Bank, N.A.’s main security investments and the key assumptions used in its estimate of the present value of the cash flows most likely to be collected from those investments.

Mortgage-backed securities – U.S. government agencies As of June 30, 2009, gross unrealized losses on mortgage-backed securities related to U.S. agencies were $866 million, of which $18 million related to securities that have been in an unrealized loss position for longer than 12 months. These mortgage-backed securities do not have any credit losses, given the explicit and implicit guarantees provided by the U.S. federal government.

Mortgage-backed securities – Prime and Alt-A non-agency As of June 30, 2009, gross unrealized losses related to prime and Alt-A mortgage-backed securities issued by private issuers were $1.7 billion, of which $1.3 billion related to securities that have been in an unrealized loss position for longer than 12 months. Approximately one-third of these positions are currently rated “AAA.” Approximately half of the amortized cost of the investments in prime and Alt-A mortgage-backed securities have experienced downgrades and approximately one-third of the amortized cost of investments in prime and Alt-A mortgage-backed securities are currently rated below investment grade. Despite the downgrades experienced, the portfolio generally continues to possess credit enhancement levels sufficient to support JPMorgan Chase Bank, N.A.’s investment. However, JPMorgan Chase Bank, N.A. has recognized $66 million of OTTIs in earnings for securities that have experienced increased delinquency rates associated with specific collateral types and origination dates. In analyzing prime and Alt-A residential mortgage-backed securities for potential credit losses, the key inputs to JPMorgan Chase Bank, N.A.’s cash flow projections were estimated peak-to-trough home price declines of up to 44% and an unemployment rate of 10.3%. JPMorgan Chase Bank, N.A.’s cash flow projections assumed liquidation rates of 75% to 100% and loss severities of 45% to 55%, depending on the underlying collateral type and seasoning.

Mortgage-backed securities – Commercial As of June 30, 2009, gross unrealized losses related to commercial mortgage-backed securities were $510 million; none of the losses related to securities that were in an unrealized loss position for longer than 12 months. Substantially all of JPMorgan Chase Bank, N.A.’s commercial mortgage-backed securities are rated “AAA” and possess, on average, 27% subordination (a form of credit enhancement for the benefit of senior securities, expressed here as the percentage of pool losses that can occur before an asset-backed security will incur its first dollar of principal loss). In considering whether potential credit-related losses exist, JPMorgan Chase Bank, N.A. conducted a scenario analysis, using high levels of delinquencies and losses over the near term, followed by lower levels over the long term. Specific assumptions included: (i) all loans more than 60 days delinquent will default; (ii) additional default rates for the remaining portfolio forecasted to be up to 8% in the near term and 2% in the long term; and (iii) loss severity assumptions ranging from 45% in the near term to 40% in later years.

42

Asset-backed securities – Credit card receivables As of June 30, 2009, gross unrealized losses related to credit card receivables asset-backed securities were $375 million, of which $346 million of the losses related to securities that were in an unrealized loss position for longer than 12 months. The $375 million of unrealized losses related to credit card–related asset-backed securities was due to purchased credit card–related asset-backed securities. The credit card–related asset-backed securities include “AAA,” “AA,” “A” and “BBB” ratings. One of the key metrics JPMorgan Chase Bank, N.A. reviews for credit card-related asset-backed securities is each trust’s excess spread – which is the credit enhancement resulting from cash that remains each month after payments are made to investors for principal and interest, and to servicers for servicing fees, and after credit losses are allocated. The average excess spread for the issuing trusts in which JPMorgan Chase Bank, N.A. holds interests ranges from 1% to 6%. JPMorgan Chase Bank, N.A. uses internal models to project the cash flows that impact excess spread. For retained interests, JPMorgan Chase Bank, N.A. uses its own underlying loan data as well as available market benchmarks. For purchased investments, JPMorgan Chase Bank, N.A. uses available market benchmarks and trends to support the assumptions used in the projections. In analyzing potential credit losses, the primary assumptions are underlying charge-off rates, which range from 9% to 16% (charge-off rates consider underlying assumptions such as unemployment rates and roll rates), payment rates of 11% to 22%, and portfolio yields of 14% to 24%.

Asset-backed securities – Collateralized debt and loan obligations As of June 30, 2009, gross unrealized losses related to collateralized debt and loan obligations were $547 million, of which $308 million related to securities that were in an unrealized loss position for longer than 12 months. Substantially all of these securities are rated “AAA” and have an average of 28% credit enhancement. Credit enhancement in collateralized loan obligations (“CLOs”) is mainly composed of overcollateralization – the excess of the par amount of collateral over the par amount of securities. The key assumptions considered in analyzing potential credit losses were underlying loan and debt security defaults and loss severity. Based on current default trends, JPMorgan Chase Bank, N.A. assumed collateral default rates of 15% in 2009, 12% in 2010 and 5% thereafter. Further, loss severities were assumed to be 50% for loans and 80% for debt securities. Losses on collateral were estimated to occur approximately 18 months after default.

43

Contractual maturities and yields The following table presents the amortized cost and estimated fair value at June 30, 2009, of JPMorgan Chase Bank, N.A.’s AFS and HTM securities by contractual maturity. June 30, 2009

By remaining maturity (in millions)

Due in one year or less

Due after one year through

five years

Due after five years through

ten years Due after

ten years(c) Total Available-for-sale debt securities Mortgage-backed securities(b)

Amortized cost $ 19 $ 1,281 $ 8,467 $ 188,152 $ 197,919 Fair value 20 1,306 7,998 187,658 196,982 Average yield(a) 4.28% 3.06% 4.33% 4.76% 4.73%

U.S. Treasury and government agencies(b) Amortized cost $ 452 $ 26,141 $ 8,028 $ 229 $ 34,850 Fair value 452 26,176 7,734 226 34,588 Average yield(a) 0.06% 2.42% 3.48% 5.95% 2.66%

Obligations of U.S. states and municipalities Amortized cost $ — $ 15 $ 292 $ 2,867 $ 3,174 Fair value — 15 290 2,831 3,136 Average yield(a) —% 0.44% 5.30% 4.64% 4.68%

Certificates of deposit Amortized cost $ 5,587 $ — $ — $ — $ 5,587 Fair value 5,603 — — — 5,603 Average yield(a) 2.92% —% —% —% 2.92%

Non-U.S. government debt securities Amortized cost $ 5,015 $ 8,160 $ 897 $ 2,149 $ 16,221 Fair value 5,024 8,286 890 2,151 16,351 Average yield(a) 1.53% 2.57% 3.73% 2.29% 2.28%

Corporate debt securities Amortized cost $ 3,470 $ 43,078 $ 603 $ 212 $ 47,363 Fair value 3,532 43,446 618 216 47,812 Average yield(a) 2.42% 2.47% 6.28% 6.94% 2.53%

Asset-backed securities Amortized cost $ 7,113 $ 8,907 $ 8,432 $ 5,120 $ 29,572 Fair value 7,163 8,765 8,277 5,123 29,328 Average yield(a) 2.14% 1.92% 1.87% 2.19% 2.01%

Total available-for-sale debt securities Amortized cost $ 21,656 $ 87,582 $ 26,719 $ 198,729 $ 334,686 Fair value 21,794 87,994 25,807 198,205 333,800 Average yield(a) 2.20% 2.42% 3.33% 4.67% 3.81%

Available-for-sale equity securities Amortized cost $ — $ — $ — $ 735 $ 735 Fair value — — — 789 789 Average yield(a) —% —% —% 0.61% 0.61%

Total available-for-sale securities Amortized cost $ 21,656 $ 87,582 $ 26,719 $ 199,464 $ 335,421 Fair value 21,794 87,994 25,807 198,994 334,589 Average yield(a) 2.20% 2.42% 3.33% 4.66% 3.81%

Total held-to-maturity securities

Amortized cost $ — $ — $ 27 $ 2 $ 29 Fair value — — 29 2 31 Average yield(a) —% —% 6.88% 6.47% 6.85%

(a) The average yield was based on amortized cost balances at the end of the period and does not give effect to changes in fair value that are reflected in accumulated other comprehensive income (loss). Yields are derived by dividing interest/dividend/income (including the effect of related derivatives on available-for-sale securities and the amortization of premiums and accretion of discounts) by total amortized cost. Taxable-equivalent yields are used where applicable.

(b) U.S. government agencies and U.S. government-sponsored enterprises were the only issuers whose securities exceeded 10% of JPMorgan Chase Bank, N.A.’s total stockholder’s equity at June 30, 2009.

(c) Includes securities with no stated maturity. Substantially all of JPMorgan Chase Bank, N.A.’s mortgage-backed securities and collateralized mortgage obligations 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 five years for nonagency mortgage-backed securities and three years for collateralized mortgage obligations.

44

NOTE 13 – SECURITIES FINANCING ACTIVITIES For a discussion of accounting policies relating to securities financing activities, see Note 13 on pages 162–163 of JPMorgan Chase’s 2008 Annual Report. For further information regarding securities borrowed and securities lending agreements for which the SFAS 159 fair value option has been elected, see Note 5 on pages 22–24 of these Consolidated Financial Statements. The following table details the components of collateralized financings. (in millions) June 30, 2009 December 31, 2008 Securities purchased under resale agreements(a) $ 149,640 $ 196,867 Securities borrowed(b) 48,343 42,658 Securities sold under repurchase agreements(c) $ 236,685 $ 158,655 Securities loaned 13,558 8,896 (a) Includes resale agreements of $18.3 billion and $19.9 billion accounted for at fair value at June 30, 2009, and December 31, 2008, respectively. (b) Includes securities borrowed of $3.4 billion accounted for at fair value at both June 30, 2009, and December 31, 2008. (c) Includes repurchase agreements of $3.0 billion accounted for at fair value at both June 30, 2009, and December 31, 2008.

JPMorgan Chase Bank, N.A. pledges certain financial instruments it owns to collateralize repurchase agreements and other securities financings. Pledged securities that can be sold or repledged by the secured party are identified as financial instruments owned (pledged to various parties) on the Consolidated Balance Sheets.

At June 30, 2009, JPMorgan Chase Bank, N.A. received securities as collateral that could be repledged, delivered or otherwise used with a fair value of approximately $295.4 billion. This collateral was generally obtained under resale or securities-borrowing agreements. Of these securities, approximately $237.7 billion were repledged, delivered or otherwise used, generally as collateral under repurchase agreements, securities lending agreements or to cover short sales.

NOTE 14 – LOANS The accounting for a loan is based on whether it is originated or purchased, and whether the loan is used in an investing or trading strategy. The measurement framework for loans in the Consolidated Financial Statements is one of the following:

• At the principal amount outstanding, net of the allowance for loan losses, unearned income and any net deferred loan fees or costs, for loans held-for-investment (other than purchased credit-impaired loans);

• At the lower of cost or fair value, with valuation changes recorded in noninterest revenue, for loans that are classified as held-for-sale;

• At fair value, with changes in fair value recorded in noninterest revenue, for loans classified as trading assets or risk managed on a fair value basis; or

• Purchased credit-impaired loans held-for-investment are accounted for under SOP 03-3 and initially measured at fair value, which includes estimated future credit losses. Accordingly, an allowance for loan losses related to these loans is not recorded at the acquisition date.

For a detailed discussion of accounting policies relating to loans, see Note 15 on pages 42–46 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements. See Note 5 on pages 22–24 of these Consolidated Financial Statements for further information on JPMorgan Chase Bank, N.A.’s elections of fair value accounting under SFAS 159. See Note 4 on pages 10–22 of these Consolidated Financial Statements for further information on loans carried at fair value and classified as trading assets.

45

The composition of JPMorgan Chase Bank, N.A.’s aggregate loan portfolio at each of the dates indicated was as follows.

(in millions) June 30, 2009 December 31, 2008 U.S. wholesale loans: Commercial and industrial $ 57,232 $ 66,592 Real estate 61,295 63,944 Financial institutions 17,648 19,902 Government agencies 4,680 4,725 Other 23,353 20,883 Loans held-for-sale and at fair value 1,745 3,225

Total U.S. wholesale loans 165,953 179,271 Non-U.S. wholesale loans: Commercial and industrial 23,516 27,168 Real estate 2,875 2,673 Financial institutions 10,190 16,413 Government agencies 488 403 Other 16,806 18,516 Loans held-for-sale and at fair value 4,391 8,743

Total non-U.S. wholesale loans 58,266 73,916 Total wholesale loans: Commercial and industrial 80,748 93,760 Real estate(a) 64,170 66,617 Financial institutions 27,838 36,315 Government agencies 5,168 5,128 Other 40,159 39,399 Loans held-for-sale and at fair value(b) 6,136 11,968

Total wholesale loans 224,219 253,187 Total consumer loans: Home equity 108,229 114,335 Prime mortgage 62,173 72,168 Subprime mortgage 13,821 15,326 Option ARMs 5,095 9,018 Auto loans 42,887 42,603 Credit card(c) 19,814 31,141 Other 33,021 33,693 Loans held-for-sale(d) 1,940 2,028

Total consumer loans – excluding purchased credit-impaired loans 286,980 320,312 Consumer loans – purchased credit-impaired loans 85,406 88,813

Total consumer loans 372,386 409,125 Total loans(e) $ 596,605 $ 662,312 (a) Represents credits extended for real estate–related purposes to borrowers who are primarily in the real estate development or investment

businesses, and for which repayment is predominantly from the sale, lease, management, operations or refinancing of the property. (b) Includes loans for commercial & industrial, real estate, financial institutions and other of $4.7 billion, $334 million, $631 million and $458

billion, respectively, at June 30, 2009, and $9.2 billion, $423 million, $1.4 billion and $995 million, respectively, at December 31, 2008, (c) Includes billed finance charges and fees net of an allowance for uncollectible amounts. (d) Includes loans for prime mortgage and other (largely student loans) of $589 million and $1.4 billion, respectively, at June 30, 2009, and $206

million and $1.8 billion, respectively, at December 31, 2008. (e) Loans (other than purchased loans and those for which the SFAS 159 fair value option has been elected) are presented net of $147 million and

$152 million of net deferred loan costs and unearned income at June 30, 2009, and December 31, 2008, respectively.

The following table reflects information about JPMorgan Chase Bank, N.A.’s loan sales. Three months ended June 30, Six months ended June 30, (in millions) 2009 2008 2009 2008 Net gains/(losses) on sales of loans (including lower of cost

or fair value adjustments)(a) $ 278 $ (428) $ 4 $(1,067) (a) Excludes sales related to loans accounted for at fair value.

46

Purchased credit-impaired loans In connection with the Washington Mutual transaction, JPMorgan Chase Bank, N.A. acquired certain loans that it deemed to be credit-impaired under SOP 03-3. For a detailed discussion of purchased credit-impaired loans, including accounting policies, see Note 15 on pages 42–46 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements. Purchased credit-impaired loans are reported in loans on JPMorgan Chase Bank, N.A.’s Consolidated Balance Sheets. The allowance for loan losses, if required, would be reported as a reduction of the carrying amount of the loans. No allowance for loan losses has been recorded for these loans as of June 30, 2009. The outstanding balance and the carrying amount of the purchased credit-impaired consumer loans were as follows. (in millions) June 30, 2009 December 31, 2008 Outstanding balance(a) $ 110,793 $ 118,180 Carrying amount 85,406 88,813 (a) Represents the sum of contractual principal, interest and fees earned at the reporting date.

The accretable yield represents the excess of cash flows expected to be collected over the fair value of the purchased credit-impaired loans. This amount is not reported on JPMorgan Chase Bank, N.A.’s Consolidated Balance Sheets, but is accreted into interest income at a level rate of return over the expected lives of the underlying loans. For variable rate loans, expected future cash flows were initially based on the rate in effect at acquisition; expected future cash flows are recalculated as rates change over the lives of the loans.

The table below sets forth the accretable yield activity for purchased credit-impaired consumer loans for the three and six months ended June 30, 2009.

Accretable yield activity (in millions) Three months ended June 30, 2009 Six months ended June 30, 2009(a) Balance at the beginning of the period $ 29,114 $ 32,619

Accretion into interest income (1,106) (2,365) Changes in interest rates on variable-rate loans (1,045) (3,291)

Balance, June 30, 2009 $ 26,963 $ 26,963 (a) During the first quarter of 2009, JPMorgan Chase Bank, N.A. continued to refine its model to estimate future cash flows for its purchased credit-

impaired consumer loans, which resulted in an adjustment of the initial estimate of cash flows expected to be collected. These refinements, which primarily affected the amount of undiscounted-interest cash flows expected to be received over the life of the loans, resulted in a $6.1 billion increase in cash flows expected to be collected. However, on a discounted basis, these refinements did not have a material impact on the fair value of the purchased credit-impaired loans as of the September 25, 2008, acquisition date; nor did they have a material impact on the amount of interest income recognized in JPMorgan Chase Bank, N.A.’s Consolidated Statements of Income since that date.

Other impaired loans For a detailed discussion of impaired loans, including types of impaired loans, certain troubled debt restructurings and accounting policies relating to the interest income on these loans, see Note 15 on pages 42–46 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements.

The tables below set forth information about JPMorgan Chase Bank, N.A.’s impaired loans, excluding credit card loans, which are discussed below. JPMorgan Chase Bank, N.A. primarily uses the discounted cash flow method for valuing impaired loans.

(in millions) June 30, 2009 December 31, 2008 Impaired loans with an allowance:

Wholesale $ 5,246 $ 1,999 Consumer(a) 3,751 2,252

Total impaired loans with an allowance 8,997 4,251 Impaired loans without an allowance:(b)

Wholesale 262 62 Consumer(a) — —

Total impaired loans without an allowance 262 62 Total impaired loans $ 9,259 $ 4,313 Allowance for impaired loans under SFAS 114:

Wholesale $ 2,108 $ 712 Consumer(a) 801 379

Total allowance for impaired loans under SFAS 114(c) $ 2,909 $ 1,091

47

Three months ended June 30, Six months ended June 30, (in millions) 2009 2008 2009 2008 Average balance of impaired loans during the period:

Wholesale $ 4,344 $ 747 $ 3,609 $ 683 Consumer(a) 3,479 962 3,042 837 Total impaired loans $ 7,823 $ 1,709 $ 6,651 $ 1,520

Interest income recognized on impaired loans during the period:

Wholesale $ — $ — $ — $ — Consumer(a) 37 13 67 21 Total interest income recognized on impaired loans during the period $ 37 $ 13 $ 67 $ 21

(a) Excludes credit card loans. (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. (c) The allowance for impaired loans under SFAS 114 is included in JPMorgan Chase Bank, N.A.’s allowance for loan losses. The allowance for

certain consumer-impaired loans has been categorized in the allowance for loan losses as formula-based.

Included in the table above are consumer loans, excluding credit card loans, that have been modified in a troubled debt restructuring, with balances of approximately $3.1 billion and $1.8 billion as of June 30, 2009, and December 31, 2008, respectively. For detailed discussion of modification of the terms of credit card loan agreements, see Note 15 on pages 42–46 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements. At June 30, 2009, and December 31, 2008, JPMorgan Chase Bank, N.A. modified $946 million and $842 million, respectively, of on–balance sheet credit card loans outstanding.

During the first quarter of 2009, the U.S. Treasury introduced the Making Home Affordable Plan (“MHA”), which includes programs designed to assist eligible homeowners by modifying the terms of their mortgages. JPMorgan Chase Bank, N.A. is participating in MHA while continuing to expand its other loss-mitigation efforts for financially stressed borrowers who do not qualify for the MHA programs. MHA and JPMorgan Chase Bank, N.A.’s other loss mitigation programs generally represent various forms of term extensions, rate reductions and forbearances provided to financially troubled borrowers. Under these programs, borrowers must make three payments during a 90-day trial modification period and be successfully re-underwritten with income verification, before their loan is officially deemed to be modified. Upon formal modification, the loan is generally accounted for as a troubled debt restructuring. For purchased credit-impaired loans, the impact of the modification is incorporated into JPMorgan Chase Bank, N.A.’s quarterly assessment of whether a probable and/or significant change in estimated future cash flows has occurred and the loans continue to be reported as purchased credit-impaired loans. As of June 30, 2009, approximately 26,000 approved trial mortgage modifications with an unpaid principal balance of $8.3 billion were included on JPMorgan Chase Bank, N.A.’s balance sheet. Approximately $4.6 billion of these loans were included in JPMorgan Chase Bank, N.A.’s purchased credit-impaired loan portfolio.

48

NOTE 15 – ALLOWANCE FOR CREDIT LOSSES For further discussion of the allowance for credit losses and the related accounting policies, see Note 16 on pages 46–47 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements.

The table below summarizes the changes in the allowance for loan losses.

Six months ended June 30, (in millions) 2009 2008 Allowance for loan losses at January 1 $ 17,153 $ 7,015 Gross charge-offs 7,138 3,013 Gross (recoveries) (259) (298)

Net charge-offs 6,879 2,715 Provision for loan losses 11,788 6,435 Other(a) (67) 5 Allowance for loan losses at June 30 $ 21,995 $ 10,740 Components:

Asset-specific $ 2,240 $ 235 Formula-based 19,755 10,505 Total allowance for loan losses $ 21,995 $ 10,740

(a) Other predominantly includes a reclassification in 2009 related to the issuance and retention of securities from the Chase Issuance Trust. See Note 16 below.

The table below summarizes the changes in the allowance for lending-related commitments.

Six months ended June 30, (in millions) 2009 2008 Allowance for lending-related commitments at January 1 $ 656 $ 849 Provision for lending-related commitments 89 (164) Allowance for lending-related commitments at June 30 $ 745 $ 685 Components:

Asset-specific $ 111 $ 16 Formula-based 634 669

Total allowance for lending-related commitments $ 745 $ 685

NOTE 16 – LOAN SECURITIZATIONS For a discussion of the accounting policies relating to loan securitizations, see Note 17 on pages 47–56 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements. JPMorgan Chase Bank, N.A. securitizes and sells a variety of loans, including residential mortgage, credit card, automobile, student, and commercial (primarily related to real estate) loans. JPMorgan Chase Bank, N.A.–sponsored securitizations use special-purpose entities (“SPEs”) as part of the securitization process. These SPEs are structured to meet the definition of a qualifying special-purpose entity (“QSPE”) (for a further discussion, see Note 1 on page 6 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements); accordingly, the assets and liabilities of securitization-related QSPEs are not reflected on JPMorgan Chase Bank, N.A.’s Consolidated Balance Sheets (except for retained interests, as described below). The primary purposes of these securitization vehicles are to meet investor needs and to generate liquidity for JPMorgan Chase Bank, N.A. through the sale of loans to the QSPEs, which are financed through the issuance of fixed- or floating-rate asset-backed securities.

49

The following table presents the total unpaid principal amount of assets held in JPMorgan Chase Bank, N.A.–sponsored securitization entities, for which sale accounting was achieved and to which JPMorgan Chase Bank, N.A. has continuing involvement, at June 30, 2009, and December 31, 2008. Continuing involvement includes servicing the loans, holding senior or subordinated interests, recourse or guarantee arrangements and derivative transactions. In certain instances, JPMorgan Chase Bank, N.A.’s only continuing involvement is servicing the loans.

Principal amount outstanding JPMorgan Chase Bank, N.A. interest in securitized assets(e)(f)(g)(h)

June 30, 2009 (in billions)

Total assets held by JPMorgan Chase Bank, N.A.-sponsored QSPEs

Assets held in QSPEs

with continuing involvement

Trading assets(i)

AFS securities(i) Loans

Other assets(i)

Total interests held by

JPMorgan Chase Bank, N.A.

Securitization related: Credit card $ 44.6 $ 44.6(d) $ 0.2 $ 8.4 $ 3.5 $ 3.7 $ 15.8 Residential mortgage:

Prime(a) 112.8 112.7 0.1 0.6 — — 0.7 Subprime 38.4 37.0 — — — — — Option ARMs 45.3 45.3 — 0.1 — — 0.1

Commercial and other(b) 102.3 27.0 — 0.6 — — 0.6 Student loans 1.0 1.0 — — — 0.1 0.1 Auto 0.4 0.4 — — — — —

Total(c) $ 344.8 $ 268.0 $ 0.3 $ 9.7 $ 3.5 $ 3.8 $ 17.3 Principal amount outstanding JPMorgan Chase Bank, N.A. interest in securitized assets(e)(f)(g)(h)

December 31, 2008 (in billions)




Trading assets(i)

AFS securities(i) Loans

Other assets(i)

Total interests held by

JPMorgan Chase Bank, N.A.

Securitization related: Credit card $ 41.2 $ 41.2(d) $ 0.1 $ 3.6 $ 8.4 $ 1.4 $ 13.5 Residential mortgage:

Prime(a) 122.6 122.4 0.4 0.7 — — 1.1 Subprime 43.7 42.1 — — — — — Option ARMs 48.3 48.3 0.1 0.3 — — 0.4

Commercial and other(b) 113.5 39.8 0.1 0.5 — — 0.6 Student loans 1.1 1.1 — — — 0.1 0.1 Auto 0.7 0.7 — — — — —

Total(c) $ 371.1 $ 295.6 $ 0.7 $ 5.1 $ 8.4 $ 1.5 $ 15.7

(a) Includes Alt-A loans. (b) Consists of securities backed by commercial loans (predominantly real estate) and non-mortgage-related consumer receivables purchased from

third parties. JPMorgan Chase Bank, N.A. generally does not retain a residual interest in its sponsored commercial mortgage securitization transactions. Includes co-sponsored commercial securitizations and, therefore, includes non–JPMorgan Chase Bank, N.A.-originated commercial mortgage loans.

(c) Includes securitized loans where JPMorgan Chase Bank, N.A. owns less than a majority of the subordinated or residual interests in the securitizations.

(d) Includes credit card loans, accrued interest and fees, and cash amounts on deposit. (e) Excludes retained servicing (for a discussion of MSRs, see Note 18 on pages 63–64 of these Consolidated Financial Statements). (f) Excludes senior and subordinated securities of $13 million and zero at June 30, 2009, and December 31, 2008, respectively, that JPMorgan Chase

Bank, N.A. purchased in connection with the investment banking business’ secondary market-making activities. (g) Includes investments acquired in the secondary market, but predominantly held-for-investment purposes, of $1.5 billion and $1.8 billion as of June

30, 2009, and December 31, 2008, respectively. This is comprised of $1.3 billion and $1.4 billion of investments classified as available-for-sale, including $1.2 billion and $172 million in credit cards, $19 million and $693 million of residential mortgages, and zero and $495 million of commercial and other; and $241 million and $452 million of investments classified as trading, including $156 million and $112 million of credit cards, $83 million and $303 million of residential mortgages, and $2 million and $37 million of commercial and other at June 30, 2009, and December 31, 2008, respectively.

(h) Excludes interest rate and foreign exchange derivatives primarily used to manage the interest rate and foreign exchange risks of the securitization entities. See Note 6 on pages 25–34 of these Consolidated Financial Statements for further information on derivatives.

(i) Certain of JPMorgan Chase Bank, N.A.’s retained interests are reflected at their fair values.

50

Securitization activity by major product type The following discussion describes the nature of JPMorgan Chase Bank, N.A.’s securitization activities by major product type. Credit card securitizations Overview JPMorgan Chase Bank, N.A. securitizes originated and purchased credit card loans. JPMorgan Chase Bank, N.A.’s primary continuing involvement after securitization includes servicing the receivables, retaining an undivided seller’s interest in the receivables, retaining certain senior securities and maintaining escrow accounts. JPMorgan Chase Bank, N.A. also retains a participation interest in the undivided seller’s interest in receivables and certain senior securities resulting from securitizations sponsored by an affiliate (“participating securitization”). JPMorgan Chase Bank, N.A. maintains servicing responsibilities for all credit card securitizations that it sponsors and also receives servicing fees from participating securitizations. As servicer and transferor, JPMorgan Chase Bank, N.A. receives excess servicing fees, which are recorded in credit card income as discussed in Note 7 on page 34 of these Consolidated Financial Statements. For further discussion of credit card securitizations, see Note 17 on pages 49–50 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements. Actions taken in the second quarter of 2009 JPMorgan Chase Bank N.A. retains a participation interest in the undivided seller’s interest in receivables of the Chase Issuance Trust (the “Trust”), which is sponsored by an affiliate. During the quarter ended June 30, 2009, the overall performance of the Trust declined primarily due to the increase in credit losses incurred on the underlying credit card receivables. The Trust, which holds prime quality credit card receivables, maintained positive excess spread, a key metric for evaluating the performance of a credit card trust, through the first six months of 2009. However, given market uncertainty concerning projected credit costs in the credit card industry, and to mitigate any further deterioration in the performance of the Trust, certain actions were taken by the Trust’s sponsor, as permitted by the Trust agreements, to enhance the performance of the Trust. On May 12, 2009, the required credit enhancement level for each tranche of outstanding notes issued by the Trust was increased by increasing the minimum required amount of subordinated notes and the funding requirements for the Trust’s cash escrow accounts. On June 1, 2009, the Trust’s sponsor began designating as “discount receivables” a percentage of new credit card receivables for inclusion in the Trust, thereby requiring collections of such discounted receivables to be applied as finance charge collections in the Trust, which is expected to increase the excess spread for the Trust. The Trust’s sponsor expects to discontinue designating a percentage of new receivables as discount receivables on July 1, 2010. Also, during the second quarter of 2009, the sponsor of the Trust exchanged its $3.5 billion undivided seller’s interest in the Trust for $3.5 billion of zero-coupon subordinated securities issued by the Trust and retained by the sponsor of the Trust. The issuance of the zero-coupon securities by the Trust is also expected to increase the excess spread for the Trust. These actions resulted in the addition of approximately $20.0 billion of risk-weighted assets for regulatory capital purposes, which decreased JPMorgan Chase Bank, N.A.’s Tier 1 capital ratio by approximately 20 basis points, but did not have a material impact on JPMorgan Chase Bank, N.A.’s Consolidated Balance Sheets or results of operations. Retained interests in nonconsolidated credit card securitizations Following is a description of JPMorgan Chase Bank, N.A.’s retained interests in credit card securitizations at the dates presented. JPMorgan Chase Bank, N.A.’s agreement with a credit card securitization trust that it sponsors requires JPMorgan Chase Bank, N.A. to maintain a minimum undivided interest of 12%. At June 30, 2009 and December 31, 2008, JPMorgan Chase Bank, N.A. had $3.5 billion and $8.4 billion, respectively, related to its undivided interest in the trust (and participating securitizations). The undivided interest in the trust represents JPMorgan Chase Bank, N.A.’s interest in the receivables transferred to the trust that have not been securitized; the undivided interest is not represented by a security certificate, is carried at historical cost and classified within loans. JPMorgan Chase Bank, N.A. retained senior securities issued from the Trust. The senior securities totaled $7.2 billion and $3.5 billion at June 30, 2009 and December 31, 2008, respectively, and were classified as AFS securities at June 30, 2009 and December 31, 2008, respectively. The senior AFS securities were used by JPMorgan Chase Bank, N.A. as collateral for a secured financing transaction. Credit card securitizations include escrow accounts up to predetermined limits to cover deficiencies in cash flows owed to investors. Amounts in such escrow accounts were $437 million and $17 million as of June 30, 2009 and December 31, 2008, respectively. The increase in the balance of these escrow accounts primarily relates to the Trust actions described above that were taken by the Trust’s sponsor on May 12, 2009. Additionally, JPMorgan Chase Bank, N.A. has retained subordinated interests in accrued interest and fees on the securitized receivables totaling $1.5 billion and $1.2 billion as of June 30, 2009 and December 31, 2008, respectively. JPMorgan Chase Bank, N.A. has also recorded $109 million representing receivables that have been transferred by its affiliate to the Trust and designated as “discount receivables.” All of these residual interests are reported in other assets.

51

Mortgage securitizations JPMorgan Chase Bank, N.A. securitizes originated and purchased residential mortgages and originated commercial mortgages.

The retail business securitizes residential mortgage loans that it originates and purchases, and it typically retains servicing for all of its originated and purchased residential mortgage loans. Additionally, the retail business may retain servicing for certain mortgage loans purchased by the investment banking business. As servicer, JPMorgan Chase Bank, N.A. receives servicing fees based on the securitized loan balance plus ancillary fees. JPMorgan Chase Bank, N.A. also retains the right to service the residential mortgage loans it sells to Government National Mortgage Association (“GNMA”), Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) in accordance with their servicing guidelines and standards. For a discussion of MSRs, see Note 18 on pages 63–64 of these Consolidated Financial Statements. In a limited number of securitizations, the retail business may retain an interest in addition to servicing rights. The amount of interest retained related to these securitizations totaled $154 million and $588 million at June 30, 2009, and December 31, 2008, respectively. These retained interests are accounted for as trading or AFS securities; the classification depends on whether the retained interest is represented by a security certificate or has an embedded derivative, and when it was retained (i.e., prior to the adoption of SFAS 155).

The investment banking business securitizes residential mortgage loans (including those that it purchased and certain mortgage loans originated by the retail business) and commercial mortgage loans that it originated. These loans are often serviced by the retail business. Upon securitization, the investment banking business may engage in underwriting and trading activities of the securities issued by the securitization trust. The investment banking business may retain unsold senior and/or subordinated interests (including residual interests) in both residential and commercial mortgage securitizations at the time of securitization. These retained interests are accounted for at fair value and classified as trading assets. Additionally, the investment banking business retained $3 million and $4 million of senior and subordinated interests as of June 30, 2009, and December 31, 2008, respectively; these securities were retained in connection with JPMorgan Chase Bank, N.A.’s underwriting activities.

In addition to the amounts reported in the securitization activity tables below, JPMorgan Chase Bank, N.A. sold residential mortgage loans totaling $40.2 billion and $39.4 billion during the three months ended June 30, 2009 and 2008, respectively, and $78.4 billion and $69.1 billion during the six months ended June 30, 2009 and 2008, respectively. The majority of these loan sales were for securitization by the GNMA, FNMA and FHLMC. These sales resulted in pretax gains (losses) of $34 million and $36 million during the three months ended June 30, 2009 and 2008, respectively, and $51 million and $26 million during the six months ended June 30, 2009 and 2008, respectively.

JPMorgan Chase Bank, N.A.’s mortgage loan sales are primarily nonrecourse, thereby effectively transferring the risk of future credit losses to the purchaser of the loans. However, for a limited number of loan sales, JPMorgan Chase Bank, N.A. is obligated to share up to 100% of the credit risk associated with the sold loans with the purchaser. See Note 25 on page 73 of these Consolidated Financial Statements for additional information on loans sold with recourse.

Other securitizations JPMorgan Chase Bank, N.A. also securitizes automobile and student loans originated by the retail business and purchased consumer loans (including automobile and student loans). JPMorgan Chase Bank, N.A. retains servicing responsibilities for all originated and certain purchased student and automobile loans. It may also hold a retained interest in these securitizations; such residual interests are classified as other assets. At June 30, 2009, and December 31, 2008, JPMorgan Chase Bank, N.A. held $17 million and $30 million, respectively, of retained interests in securitized automobile loan securitizations, and $52 million at both June 30, 2009, and December 31, 2008, respectively, of residual interests in securitized student loans.

52

Securitization activity The following tables provide information related to JPMorgan Chase Bank, N.A.’s securitization activities for the three and six months ended June 30, 2009, and 2008. For the periods presented, there were no cash flows from JPMorgan Chase Bank, N.A. to the QSPEs related to recourse or guarantee arrangements. Three months ended June 30, 2009 Residential mortgage (in millions, except for ratios and where otherwise noted) Credit card Prime(f) Subprime

Option ARMs

Commercial and other

Student loans Auto

Principal securitized $ 5,631 $ — $ — $ — $ — $ — $ — Pretax gains 8 — — — — — — All cash flows during the period: Proceeds from new securitizations $ 5,631(e)(g) $ — $ — $ — $ — $ — $ — Servicing fees collected 134 74 30 118 1 1 2 Other cash flows received(a) 11 — — — — — — Proceeds from collections reinvested in revolving

securitizations 16,511 — — — — — — Purchases of previously transferred financial

assets (or the underlying collateral)(b) — 35 — 10 — — — Cash flows received on the interests that continue

to be held by JPMorgan Chase Bank, N.A.(c) 48 184 1 16 22 3 3 Key assumptions used to measure retained

interests originated during the year (rates per annum):

Prepayment rate(d) 16.7% PPR Weighted-average life (in years) 0.5 Expected credit losses 8.7% Discount rate 18.0% Three months ended June 30, 2008 Residential mortgage (in millions, except for ratios and where otherwise noted) Credit card Prime(f) Subprime

Option ARMs


Student loans Auto

Principal securitized $ 4,304 $ — $ — $ — $ 662 $ — $ — Pretax gains 38 — — — — — — All cash flows during the period: Proceeds from new securitizations $ 4,304(e) $ — $ — $ — $ 632 $ — $ — Servicing fees collected 112 23 25 — 2 2 3 Other cash flows received(a) 516 — — — — — — Proceeds from collections reinvested in revolving


assets (or the underlying collateral)(b) — 100 2 — — — — Cash flows received on the interests that continue

to be held by JPMorgan Chase Bank, N.A.(c) — 83 2 — 21 — 8 Key assumptions used to measure retained


Prepayment rate(d) 19.7% PPR Weighted-average life (in years) 0.4 Expected credit losses 4.5% Discount rate 13.0%

53

Six months ended June 30, 2009 Residential mortgage (in millions, except for ratios and where otherwise noted) Credit card Prime(f) Subprime

Option ARMs


Student loans Auto

Principal securitized $ 9,324 $ — $ — $ — $ — $ — $ — Pretax gains 8 — — — — — — All cash flows during the period: Proceeds from new securitizations $ 9,324(e)(g) $ — $ — $ — $ — $ — $ — Servicing fees collected 262 153 62 246 8 2 3 Other cash flows received(a) 423 — — — — — — Proceeds from collections reinvested in revolving


assets (or the underlying collateral)(b) — 76 — 13 — — 89 Cash flows received on the interests that continue

to be held by JPMorgan Chase Bank, N.A.(c) 92 309 2 64 130 3 10 Key assumptions used to measure retained



Six months ended June 30, 2008 Residential mortgage (in millions, except for ratios and where otherwise noted) Credit card Prime(f) Subprime

Option ARMs


Student loans Auto

Principal securitized $ 6,122 $ — $ — $ — $ 662 $ — $ — Pretax gains 54 — — — — — — All cash flows during the period: Proceeds from new securitizations $ 6,122(e) $ — $ — $ — $ 632 $ — $ — Servicing fees collected 220 46 51 — 3 2 7 Other cash flows received(a) 1,086 — — — — — — Proceeds from collections reinvested in revolving


assets (or the underlying collateral)(b) — 149 13 — — — 97 Cash flows received on the interests that continue




(a) Includes excess servicing fees and other ancillary fees received. (b) Includes cash paid by JPMorgan Chase Bank, N.A. to reacquire assets from the QSPEs – for example, servicer clean-up calls. (c) Includes cash flows received on retained interests including, for example, principal repayments and interest payments. (d) PPR: principal payment rate. (e) Includes zero and $3.5 billion of securities retained by JPMorgan Chase Bank, N.A. for the three and six months ended June 30, 2009,

respectively. No securities were retained by JPMorgan Chase Bank, N.A. for both the three and six months ended June 30, 2008. (f) Includes Alt-A loans. (g) As required under the terms of the transaction documents, $231 million of proceeds from new securitizations were deposited to cash escrow

accounts during the three and six months ended June 30, 2009.

54

JPMorgan Chase Bank, N.A.’s interest in securitized assets held at fair value The following table summarizes JPMorgan Chase Bank, N.A.’s securitization interests, which are carried at fair value on JPMorgan Chase Bank, N.A.’s Consolidated Balance Sheets at June 30, 2009, and December 31, 2008, respectively. The risk ratings are periodically reassessed as information becomes available. As of June 30, 2009, and December 31, 2008, 78% and 72%, respectively, of JPMorgan Chase Bank, N.A.’s retained securitization interests, which are carried at fair value, were risk-rated “A” or better.

Ratings profile of interests held(c)(d)(e) June 30, 2009 December 31, 2008(d) (in billions)

Investment grade

Noninvestmentgrade

Total interests held

Investment grade

Noninvestment grade


Asset types: Credit card(a) $ 8.6 $ 2.1 $ 10.7 $ 3.8 $ 1.3 $ 5.1 Residential mortgage:

Prime(b) 0.6 0.1 0.7 1.0 0.2 1.2 Subprime — — — — — — Option ARMs 0.1 — 0.1 0.4 — 0.4

Commercial and other 0.6 — 0.6 0.5 — 0.5 Student loans — 0.1 0.1 — 0.1 0.1 Auto — — — — — — Total $ 9.9 $ 2.3 $ 12.2 $ 5.7 $ 1.6 $ 7.3 (a) Includes retained subordinated interests carried at fair value, including the credit card business’ accrued interests and fees, escrow accounts, and

other residual interests. Excludes undivided seller interest in the trusts of $3.5 billion and $8.4 billion and unencumbered cash amounts on deposit of $1.6 billion and $62 million at June 30, 2009, and December 31, 2008, respectively, which are carried at historical cost.

(b) Includes Alt-A loans. (c) The ratings scale is presented on an S&P-equivalent basis. (d) Includes $1.5 billion and $1.8 billion of investments acquired in the secondary market, but predominantly held for investment purposes as of June

30, 2009, and December 31, 2008, respectively. Of these amounts, $1.4 billion and $1.7 billion are classified as investment-grade as of June 30, 2009, and December 31, 2008, respectively.

(e) Excludes senior and subordinated securities of $13 million and zero at June 30, 2009, and December 31, 2008, respectively, that JPMorgan Chase Bank, N.A. purchased in connection with the investment banking business’ secondary market-making activities.

The table below outlines the key economic assumptions used at June 30, 2009, and December 31, 2008, to determine the fair value of certain of JPMorgan Chase Bank, N.A.’s retained interests, other than MSRs, that are valued using modeling techniques. The table below also outlines the sensitivities of those fair values to immediate 10% and 20% adverse changes in assumptions used to determine fair value. For a discussion of residential MSRs, see Note 18 on pages 63–64 of these Consolidated Financial Statements.

Residential mortgage June 30, 2009(a) (in millions, except rates and where otherwise noted) Credit card Prime(d) Option ARMs

Commercial and other Student Auto

JPMorgan Chase Bank, N.A. interests in securitized assets $ 1,619(c) $ 661 $ 132 $ 595 $ 55 $ 17 Weighted-average life (in years) 0.5 6.7 6.7 5.2 8.1 0.6 Weighted-average prepayment rate(b) 16.5% 10.0% 10.0% 0.8% 5.0% 1.4% PPR CPR CPR CPR CPR ABS

Impact of 10% adverse change $ (5) $ (12) $ (1) $ (1) $ (1) $ — Impact of 20% adverse change (10) (25) (2) (1) (2) (1)

Weighted-average loss assumption 9.3% 2.1% 3.3% 0.5% —%(e) 1.1% Impact of 10% adverse change $ (38) $ — $ — $ — $ — $ — Impact of 20% adverse change (39) — — 1 — (1)

Weighted-average discount rate 12.0% 15.8% 12.9% 11.8% 9.0% 3.4% Impact of 10% adverse change $ (3) $ (9) $ (2) $ 2 $ (2) $ — Impact of 20% adverse change (6) (17) (5) 6 (4) —

55

Residential mortgage December 31, 2008 (in millions, except rates and where otherwise noted Credit card Prime(d) Option ARMs


JPMorgan Chase Bank, N.A. interests in securitized assets $ 1,348(c) $ 153 $ 436 $ 30 $ 55 $ 32 Weighted-average life (in years) 0.5 6.6 7.3 5.9 8.2 0.7 Weighted-average prepayment rate(b) 16.6% 17.9% 7.6% 3.0% 5.0% 1.3% PPR CPR CPR CPR CPR ABS

Impact of 10% adverse change $ (18) $ (5) $ (4) $ — $ (1) $ — Impact of 20% adverse change (36) (11) (11) — (2) (1)

Weighted-average loss assumption 7.0% 3.3% 0.3% 2.7%(e) —%(e) 0.5% Impact of 10% adverse change $ (101) $ (1) $ — $ — $ — $ — Impact of 20% adverse change (177) (2) (1) — — (1)

Weighted-average discount rate 18.0% 30.5% 17.3% 31.2% 9.0% 4.1% Impact of 10% adverse change $ (4) $ (6) $ (16) $ (1) $ (2) $ — Impact of 20% adverse change (8) (13) (28) (1) (4) —

(a) As of June 30, 2009, certain investments acquired in the secondary market but predominantly held for investment purposes are included. (b) PPR: principal payment rate; ABS: absolute prepayment speed; CPR: constant prepayment rate. (c) Excludes JPMorgan Chase Bank, N.A.’s retained senior and subordinated AFS securities in its credit card securitization trusts which are

discussed in Note 12 of these Consolidated Financial Statements. (d) Includes Alt-A loans. (e) Expected losses for student loans and certain wholesale securitizations are minimal and are incorporated into other assumptions.

The sensitivity analysis in the preceding table is hypothetical. Changes in fair value based on a 10% or 20% variation in assumptions generally cannot be extrapolated easily, because the relationship of the change in the assumptions to the change in fair value may not be linear. Also, in the 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, which might counteract or magnify the sensitivities. The above sensitivities also do not reflect risk management practices JPMorgan Chase Bank, N.A. may undertake to mitigate such risks.

56

Loan delinquencies and net charge-offs The table below includes information about delinquencies, net charge-offs/(recoveries) and components of reported and securitized financial assets at June 30, 2009, and December 31, 2008.

Total loans

90 days past due

and still accruing

Nonaccrual assets(g)

Net loan charge-offs (recoveries)

June 30, Dec. 31, June 30, Dec. 31, June 30, Dec. 31, Three months ended

June 30, Six months ended

June 30, (in millions) 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 Home equity $ 108,229 $ 114,335 $ — $ — $ 1,487 $ 1,394 $ 1,265 $ 511 $ 2,363 $ 958 Prime mortgage(a) 62,173 72,168 — — 3,448 1,888 481 104 793 154 Subprime mortgage 13,821 15,326 — — 2,772 2,689 410 192 774 341 Option ARM 5,095 9,018 — — 162 — 15 — 19 — Auto 42,887 42,603 — — 154 148 146 119 320 237 Credit card 19,814 31,141 740 703 — — 673 385 1,209 745 All other 33,021 33,693 473 463 722 430 332 99 556 160 Loans held-for-sale(b) 1,940 2,028 — — — — NA NA NA NA

Total consumer loans – excluding purchased credit-impaired loans 286,980 320,312 1,213 1,166 8,745 6,549 3,322 1,410 6,034 2,595

Consumer loans – purchased credit-impaired loans(c) 85,406 88,813 — — — — — — —

—

Total consumer loans 372,386 409,125 1,213 1,166 8,745 6,549 3,322 1,410 6,034 2,595 Total wholesale loans 224,219 253,187 233 162 5,892(h) 2,354(h) 661 41 845 120 Total loans reported 596,605 662,312 1,446 1,328 14,637 8,903 3,983 1,451 6,879 2,715 Securitized loans: Residential mortgage:

Prime mortgage(a) 112,664 122,419 — — 10,451 6,081 506 38 823 47 Subprime mortgage 36,982 42,142 — — 11,484 9,230 1,698 384 3,390 626 Option ARMs 45,341 48,328 — — 9,692 6,440 474 — 854 —

Auto 395 668 — — 1 1 1 2 3 4 Credit card 38,635 32,470 932 609 — — 635 335 1,122 609 Student 1,042 1,074 61 66 — — — 1 — 1 Commercial and other 26,988 39,812 — 28 903 156 5 3 10 5 Total loans securitized(d) 262,047 286,913 993 703 32,531 21,908 3,319 763 6,202 1,292 Total loans reported

and securitized(e) $ 858,652(f) $ 949,225(f) $ 2,439 $ 2,031 $ 47,168 $ 30,811 $ 7,302 $ 2,214 $ 13,081 $ 4,007

(a) Includes Alt-A loans. (b) Includes loans for prime mortgage and other (largely student loans) of $589 million and $1.4 billion at June 30, 2009, respectively, and

$206 million and $1.8 billion at December 31, 2008, respectively. (c) Purchased credit-impaired loans represent loans acquired in the Washington Mutual transaction for which a deterioration in credit

quality occurred between the origination date and JPMorgan Chase Bank, N.A.’s acquisition date. Under SOP 03-3, these loans were initially recorded at fair value and accrete interest income over the estimated life of the loan when cash flows are reasonably estimable, even if the underlying loans are contractually past due. For additional information, see Note 14 on pages 44–47 of these Consolidated Financial Statements.

(d) Total assets held in securitization-related SPEs were $344.8 billion and $371.1 billion at June 30, 2009, and December 31, 2008, respectively. The $262.0 billion and $286.9 billion of loans securitized at June 30, 2009, and December 31, 2008, respectively, excludes: $76.8 billion and $75.5 billion of securitized loans, in which JPMorgan Chase Bank, N.A. has no continuing involvement; $3.5 billion and $8.4 billion, of seller’s interests in credit card master trusts; and $2.5 billion and $262 million, of cash amounts on deposit and escrow accounts, all respectively.

(e) Represents both loans on the Consolidated Balance Sheets and loans that have been securitized. (f) Includes securitized loans that were previously recorded at fair value and classified as trading assets. (g) Excludes nonperforming loans and assets related to: (i) loans eligible for repurchase, as well as loans repurchased from GNMA pools

that are insured by U.S. government agencies, of $4.7 billion and $3.3 billion at June 30, 2009, and December 31, 2008, respectively; and (ii) student loans that are 90 days past due and still accruing, which are insured by U.S. government agencies under the Federal Family Education Loan Program, of $473 million and $437 million at June 30, 2009, and December 31, 2008, respectively. These amounts for GNMA and student loans are excluded, as reimbursement is proceeding normally.

(h) Includes nonperforming loans held-for-sale and loans at fair value of $93 million and $32 million at June 30, 2009, and December 31, 2008, respectively.

57

NOTE 17 – VARIABLE INTEREST ENTITIES Refer to Note 1 on page 6 and Note 18 on page 56 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements for a further description of JPMorgan Chase Bank, N.A.’s policies regarding consolidation of variable interest entities (“VIEs”) and JPMorgan Chase Bank, N.A.’s principal involvement with VIEs.

Multi-seller conduits The following table summarizes JPMorgan Chase Bank, N.A.’s involvement with JPMorgan Chase Bank, N.A.-administered multi-seller conduits. On May 31, 2009, JPMorgan Chase Bank, N.A. consolidated one of JPMorgan Chase Bank, N.A.’s administered multi-seller conduits due to the redemption of the expected loss note (“ELN”). There was no consolidated JPMorgan Chase Bank, N.A.-administered multi-seller conduits as of December 31, 2008.

June 30, 2009 (in billions) Consolidated Nonconsolidated December 31, 2008 Total assets held by conduits $ 6.9 $ 23.0 $ 42.9

Total commercial paper issued by conduits 6.9 23.0 43.1

Liquidity and credit enhancements Deal-specific liquidity facilities (primarily asset purchase agreements)

9.8

31.6(b)

55.4(b)

Program-wide liquidity facilities 4.0 13.0 17.0 Program-wide credit enhancements 0.4 2.0 3.0 Maximum exposure to loss(a) 9.8 32.3 56.9 (a) JPMorgan Chase Bank, N.A.’s maximum exposure to loss, calculated separately for each multi-seller conduit, includes JPMorgan Chase Bank,

N.A.’s exposure to both deal-specific liquidity facilities and program-wide credit enhancements. For purposes of calculating JPMorgan Chase Bank, N.A.’s maximum exposure to loss, JPMorgan Chase Bank, N.A.-provided, program-wide credit enhancement is limited to deal-specific liquidity facilities provided by third parties.

(b) The accounting for these agreements is further discussed in Note 31 on pages 83–87 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements. The carrying value related to asset purchase agreements was $112 million and $147 million at June 30, 2009, and December 31, 2008, respectively, of which $110 million and $138 million, respectively, represented the remaining fair value of the guarantee under FIN 45. JPMorgan Chase Bank, N.A. has recorded this guarantee in other liabilities, with an offsetting entry recognized in other assets for the net present value of the future premium receivable under the contracts.

Assets funded by nonconsolidated multi-seller conduits The following table presents information on the commitments and assets held by JPMorgan Chase Bank, N.A.’s nonconsolidated JPMorgan Chase Bank, N.A.-administered multi-seller conduits as of June 30, 2009, and December 31, 2008. June 30, 2009 December 31, 2008

(in billions)

Unfunded commitments to JPMorgan Chase Bank, N.A.’s clients

Commercial paper–funded

assets

Liquidity provided by third parties

Liquidity provided

by JPMorgan Chase Bank,

N.A.

Unfunded commitments to JPMorgan Chase Bank, N.A.’s clients


assets


Liquidity provided

by JPMorgan Chase Bank,

N.A. Asset types: Credit card $ 1.8 $ 4.5 $ — $ 6.3 $ 3.0 $ 8.9 $ 0.1 $ 11.8 Vehicle loans and leases 1.4 7.4 — 8.8 1.4 10.0 — 11.4 Trade receivables 3.2 2.3 — 5.5 3.8 5.5 — 9.3 Student loans 0.6 2.1 — 2.7 0.7 4.6 — 5.3 Commercial 0.7 2.1 — 2.8 1.5 4.0 0.4 5.1 Residential mortgage — 0.6 — 0.6 — 0.7 — 0.7 Capital commitments 0.5 1.7 0.6 1.6 1.3 3.9 0.6 4.6 Rental car finance 0.2 0.3 — 0.5 0.2 0.4 — 0.6 Equipment loans and

leases 0.3 0.6 — 0.9 0.7 1.6 — 2.3 Floorplan – vehicle — 0.4 — 0.4 0.7 1.8 — 2.5 Consumer 0.2 0.4 — 0.6 0.1 0.7 0.1 0.7 Other 0.6 0.6 0.3 0.9 0.6 0.8 0.3 1.1 Total $ 9.5 $ 23.0 $ 0.9 $ 31.6 $ 14.0 $ 42.9 $ 1.5 $ 55.4

58

Ratings profile of VIE assets of the nonconsolidated multi-seller conduits(a)

June 30, 2009 Investment-grade Noninvestment-

grade Commercialpaper funded

Wt. avg. expected

(in billions) AAA to AAA- AA+ to AA- A+ to A- BBB to BBB- BB+ and below assets life (years)(b) Asset types: Credit card $ 2.9 $ 1.5 $ 0.1 $ — $ — $ 4.5 1.6 Vehicle loans and leases 2.7 3.8 0.8 0.1 — 7.4 2.3 Trade receivables — 1.9 0.4 — — 2.3 0.7 Student loans 2.1 — — — — 2.1 1.3 Commercial 0.7 0.9 0.2 — 0.3 2.1 2.5 Residential mortgage — 0.5 — — 0.1 0.6 3.5 Capital commitments — 0.1 1.6 — — 1.7 2.3 Rental car finance — — 0.3 — — 0.3 1.0 Equipment loans and leases 0.4 0.2 — — — 0.6 2.5 Floorplan – vehicle — — — 0.4 — 0.4 0.6 Consumer 0.3 0.1 — — — 0.4 2.0 Other — 0.6 — — — 0.6 3.9 Total $ 9.1 $ 9.6 $ 3.4 $ 0.5 $ 0.4 $ 23.0 2.0

Ratings profile of VIE assets of the nonconsolidated multi-seller conduits (a)

December 31, 2008 Investment-grade Noninvestment-


Wt. avg. Expected

(in billions) AAA to AAA- AA+ to AA- A+ to A- BBB to BBB- BB+ and below assets life (years)(b) Asset types: Credit card $ 4.8 $ 3.9 $ 0.1 $ 0.1 $ — $ 8.9 1.5 Vehicle loans and leases 4.1 4.1 1.8 — — 10.0 2.5 Trade receivables — 4.0 1.5 — — 5.5 1.0 Student loans 3.6 0.9 — 0.1 — 4.6 1.8 Commercial 1.1 2.0 0.6 0.3 — 4.0 2.7 Residential mortgage — 0.6 — 0.1 — 0.7 4.0 Capital commitments — 3.6 0.3 — — 3.9 2.4 Rental car finance — — 0.4 — — 0.4 1.5 Equipment loans and leases 0.4 1.2 — — — 1.6 2.2 Floorplan – vehicle 0.1 1.0 0.7 — — 1.8 1.1 Consumer 0.1 0.4 0.2 — — 0.7 1.6 Other 0.5 0.3 — — — 0.8 3.7 Total $ 14.7 $ 22.0 $ 5.6 $ 0.6 $ — $ 42.9 2.0

(a) The ratings scale is presented on an S&P-equivalent basis. (b) Weighted-average expected life for each asset type is based on the remaining term of each conduit transaction’s committed liquidity, plus either

the expected weighted-average life of the assets should the committed liquidity expire without renewal, or the expected time to sell the underlying assets in the securitization market.

The assets held by the multi-seller conduits are structured so that if they were rated, JPMorgan Chase Bank, N.A. believes the majority of them would receive an “A” rating or better by external rating agencies. However, it is unusual for the assets held by the conduits to be explicitly rated by an external rating agency. Instead, JPMorgan Chase Bank, N.A.’s Credit Risk group assigns each asset purchase liquidity facility an internal risk-rating based on its assessment of the probability of default for the transaction. The ratings provided in the above table reflect the S&P-equivalent ratings of the internal rating grades assigned by JPMorgan Chase Bank, N.A.

The risk ratings are periodically reassessed as information becomes available. As of June 30, 2009, and December 31, 2008, 93% and 90%, respectively, of the assets in the nonconsolidated conduits were risk-rated “A” or better.

Commercial paper issued by nonconsolidated multi-seller conduits The weighted-average life of commercial paper issued by nonconsolidated multi-seller conduits at June 30, 2009, and December 31, 2008, was 20 days and 27 days, respectively, and the average yield on the commercial paper at June 30, 2009, and December 31, 2008, was 0.3% and 0.6%, respectively. In the normal course of business, JPMorgan Chase trades and invests in commercial paper, including paper issued by JPMorgan Chase Bank, N.A.-administered conduits. JPMorgan Chase Bank, N.A. did not purchase commercial paper from any JPMorgan Chase Bank, N.A.-administered conduits during the six month period ended June 30, 2009. JPMorgan Chase Bank, N.A. is not obligated under any agreement (contractual or noncontractual) to purchase the commercial paper issued by nonconsolidated JPMorgan Chase Bank, N.A.–administered conduits.

59

Consolidation analysis Each nonconsolidated multi-seller conduit administered by JPMorgan Chase Bank, N.A. at June 30, 2009, and December 31, 2008, had issued ELNs, the holders of which are committed to absorbing the majority of the expected loss of each respective conduit. The total amounts of ELNs outstanding for nonconsolidated conduits at June 30, 2009, and December 31, 2008, were $96 million and $136 million, respectively.

JPMorgan Chase Bank, N.A. could fund purchases of assets from nonconsolidated, JPMorgan Chase Bank, N.A.-administered multi-seller conduits should it become necessary.

Investor intermediation Municipal bond vehicles Exposure to nonconsolidated municipal bond VIEs at June 30, 2009, and December 31, 2008, including the ratings profile of the VIEs’ assets, were as follows. June 30, 2009 December 31, 2008

(in billions)

Fair value of assets held

by VIEs Liquidity facilities(c)

Excess/ (deficit)(d)

Maximum exposure




Maximum exposure

Nonconsolidated municipal bond vehicles(a)(b) $ 12.0 $ 7.9 $ 4.1 $ 7.9 $ 10.0 $ 6.9 $ 3.1 $ 6.9

Ratings profile of VIE assets(e)

Investment-grade

Noninvestment-

grade Fair value of assets held

Wt. avg. expected

life of assets(in billions) AAA to AAA- AA+ to AA- A+ to A- BBB to BBB- BB+ and below by VIEs (years)

Nonconsolidated municipal bond vehicles(a)

June 30, 2009 $ 1.4 $ 10.5 $ 0.1 $ — $ — $ 12.0 16.6 December 31, 2008 3.8 5.9 0.2 0.1 — 10.0 22.3

(a) Excluded $228 million and $340 million at June 30, 2009, and December 31, 2008, respectively, which were consolidated due to JPMorgan Chase Bank, N.A. owning the residual interests.

(b) Certain of the municipal bond vehicles are structured to meet the definition of a QSPE (as discussed in Note 1 on page 6 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements); accordingly, the assets and liabilities of QSPEs are not reflected in JPMorgan Chase Bank, N.A.’s Consolidated Balance Sheets (except for retained interests that are reported at fair value). Excluded nonconsolidated amount of $603 million at December 31, 2008, related to QSPE municipal bond vehicles in which JPMorgan Chase Bank, N.A. owned the residual interests. JPMorgan Chase Bank, N.A. did not own residual interests in QSPE municipal bond vehicles at June 30, 2009.

(c) JPMorgan Chase Bank, N.A. may serve as credit enhancement provider in municipal bond vehicles in which it serves as liquidity provider. JPMorgan Chase Bank, N.A. provided insurance on underlying municipal bonds, in the form of letters of credit, of $10 million at both June 30, 2009, and December 31, 2008.

(d) Represents the excess/(deficit) of municipal bond asset fair value available to repay the liquidity facilities, if drawn. (e) The ratings scale is based on JPMorgan Chase Bank, N.A.’s internal risk ratings and presented on an S&P-equivalent basis.

In the first half of 2009, JPMorgan Chase Bank, N.A. did not experience a drawdown on its liquidity facilities. In addition, the municipal bond vehicles did not experience any bankruptcy or downgrade termination events during the first half of 2009.

At June 30, 2009, and December 31, 2008, 99% and 97%, respectively, of the municipal bonds held by vehicles to which JPMorgan Chase Bank, N.A. served as liquidity provider were rated “AA-” or better, based upon either the rating of the underlying municipal bond itself, or the rating including any credit enhancement. At June 30, 2009, and December 31, 2008, $2.4 billion and $2.6 billion, respectively, of the bonds were insured by monoline bond insurers.

60

Credit-linked note vehicles Exposure to nonconsolidated credit-linked note VIEs at June 30, 2009, and December 31, 2008, was as follows. June 30, 2009 December 31, 2008

Derivative Trading Total Par value of

collateral held Derivative Trading Total Par value of

collateral held(in billions) receivables assets(c) exposure(d) by VIEs(e) receivables assets(c) exposure(d) by VIEs(e) Credit-linked notes(a)

Static structure $ 2.8 $ 0.8 $ 3.6 $ 12.1 $ 3.5 $ 0.7 $ 4.2 $ 13.6 Managed structure(b) 6.1 0.6 6.7 15.1 6.4 0.3 6.7 12.4

Total $ 8.9 $ 1.4 $ 10.3 $ 27.2 $ 9.9 $ 1.0 $ 10.9 $ 26.0

(a) Excluded collateral with a fair value of $2.2 billion and $2.0 billion at June 30, 2009, and December 31, 2008, respectively, which was consolidated as JPMorgan Chase Bank, N.A., in its role as secondary market maker, held a majority of the issued credit-linked notes of certain vehicles.

(b) Included synthetic collateralized debt obligation vehicles, which have similar risk characteristics to managed credit-linked note vehicles. At December 31, 2008, trading assets included $7 million of transactions with subprime collateral; there were no such transactions in trading assets at June 30, 2009.

(c) Trading assets principally comprise notes issued by VIEs, which from time to time are held as part of the termination of a deal or to support limited market-making.

(d) On–balance sheet exposure that includes derivative receivables and trading assets. (e) JPMorgan Chase Bank, N.A.,’s maximum exposure arises through the derivatives executed with the VIEs; the exposure varies over time with

changes in the fair value of the derivatives. JPMorgan Chase Bank, N.A. relies upon the collateral held by the VIEs to pay any amounts due under the derivatives; the vehicles are structured at inception so that the par value of the collateral is expected to be sufficient to pay amounts due under the derivative contracts.

Asset swap vehicles Exposure to nonconsolidated asset swap VIEs at June 30, 2009, and December 31, 2008, was as follows. June 30, 2009 December 31, 2008

Derivative receivables Trading Total

Par value of collateral held



(in billions) (payables) assets(a) exposure(b) by VIEs(c) (payables) assets(a) exposure(b) by VIEs(c) Nonconsolidated asset swap

vehicles(d) $ 0.2 $ — $ 0.2 $ 6.0 $ (0.2) $ — $ (0.2) $ 7.0

(a) Trading assets principally comprise notes issued by VIEs, which from time to time are held as part of the termination of a deal or to support limited market-making.

(b) On–balance sheet exposure that includes derivative receivables and trading assets. (c) JPMorgan Chase Bank, N.A.,’s maximum exposure arises through the derivatives executed with the VIEs; the exposure varies over time with

changes in the fair value of the derivatives. JPMorgan Chase Bank, N.A., relies upon the collateral held by the VIEs to pay any amounts due under the derivatives; the vehicles are structured at inception so that the par value of the collateral is expected to be sufficient to pay amounts due under the derivative contracts.

(d) Excluded collateral with a fair value of $1.1 billion and $1.0 billion at June 30, 2009, and December 31, 2008, respectively, which was consolidated as JPMorgan Chase Bank, N.A., in its role as secondary market maker, held a majority of the issued notes of certain vehicles.

Collateralized debt obligation vehicles For further information on JPMorgan Chase Bank, N.A.’s involvement with collateralized debt obligations (“CDOs”), see Note 18 on pages 64–65 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements.

As of June 30, 2009, and December 31, 2008, JPMorgan Chase Bank, N.A. had noninvestment-grade funded loans of $308 million and $401 million, respectively, to nonconsolidated CDO warehouse VIEs. Additionally, JPMorgan Chase Bank, N.A. had unfunded commitments of $43 million and $747 million as of June 30, 2009, and December 31, 2008, respectively, to these nonconsolidated CDO warehouse VIEs. These unfunded commitments are typically contingent on certain asset-quality conditions being met. JPMorgan Chase Bank, N.A.’s maximum exposure to loss related to the nonconsolidated CDO warehouse VIEs was $351 million and $1.1 billion as of June 30, 2009, and December 31, 2008, respectively.

Once the CDO vehicle closes and issues securities, JPMorgan Chase Bank, N.A. has no obligation to provide further support to the vehicle. At the time of closing, JPMorgan Chase Bank, N.A. may hold unsold securities that it was not able to place with third-party investors. In addition, JPMorgan Chase Bank, N.A. may on occasion hold some of the CDO vehicles’ securities as a secondary market-maker or as a principal investor, or it may be a derivative counterparty to the vehicles. At June 30, 2009, and December 31, 2008, these amounts were not significant.

61

VIEs sponsored by third parties Investment in a third-party credit card securitization trust JPMorgan Chase Bank, N.A. holds a note in a third-party-sponsored VIE, which is a credit card securitization trust that owns credit card receivables issued by a national retailer. The note is structured so that the principal amount can float up to 47% of the principal amount of the receivables held by the trust, not to exceed $4.2 billion. JPMorgan Chase Bank, N.A. is not the primary beneficiary of the trust and accounts for its investment at fair value within AFS investment securities. The amortized cost of the note was $3.6 billion at both June 30, 2009 and December 31, 2008, respectively, and the fair value was $3.4 billion and $2.6 billion at June 30, 2009 and December 31, 2008, respectively. For more information on AFS securities, see Note 12 on pages 38–43 of these Consolidated Financial Statements. Other VIEs sponsored by third parties JPMorgan Chase Bank, N.A. enters into transactions with VIEs structured by other parties. These include, for example, acting as a derivative counterparty, liquidity provider, investor, underwriter, placement agent, trustee or custodian. These transactions are conducted at arm’s length, and individual credit decisions are based on the analysis of the specific VIE, taking into consideration the quality of the underlying assets. Where these activities do not cause JPMorgan Chase Bank, N.A. to absorb a majority of the expected losses, or to receive a majority of the residual returns, JPMorgan Chase Bank, N.A. records and reports these positions on its Consolidated Balance Sheets similarly to the way it would record and report positions from any other third-party transaction. These transactions are not considered significant for disclosure purposes under FIN 46. Consolidated VIE assets and liabilities The following table presents information on assets, liabilities and commitments related to VIEs that are consolidated by JPMorgan Chase Bank, N.A.

Consolidated VIEs Assets June 30, 2009 (in billions)

Trading assets – debt and equity instruments Loans Other(a) Total assets(b)

VIE program type Multi-seller conduits $ — $ 3.9 $ 3.0 $ 6.9 Municipal bond vehicles 0.2 — — 0.2 Credit-linked notes 1.6 — 0.6 2.2 CDO warehouses 0.1 — — 0.1 Student loans — 3.9 — 3.9 Other 1.0 0.6 0.5 2.1 Total $ 2.9 $ 8.4 $ 4.1 $ 15.4

Liabilities June 30, 2009 (in billions)

Beneficial interests in VIE assets(c) Other(d) Total liabilities

VIE program type Multi-seller conduits $ 6.9 $ — $ 6.9 Municipal bond vehicles — 0.2 0.2 Credit-linked notes 0.8 — 0.8 CDO warehouses — — — Student loans 2.7 1.1 3.8 Other 0.3 0.1 0.4 Total $ 10.7 $ 1.4 $ 12.1

62

Consolidated VIEs Assets December 31, 2008 (in billions)


VIE program type Multi-seller conduits $ — $ — $ — $ — Municipal bond vehicles 0.3 — — 0.3 Credit-linked notes 1.9 — 0.1 2.0 CDO warehouses — — — — Student loans — 4.0 0.1 4.1 Other 1.5 0.7 0.1 2.3 Total $ 3.7 $ 4.7 $ 0.3 $ 8.7 Liabilities December 31, 2008 (in billions)


VIE program type Multi-seller conduits $ — $ — $ — Municipal bond vehicles — 0.3 0.3 Credit-linked notes 1.0 2.0 3.0 CDO warehouses — — — Student loans 2.8 1.1 3.9 Other 0.4 1.1 1.5 Total $ 4.2 $ 4.5 $ 8.7 (a) Included assets classified as resale agreements and other assets within the Consolidated Balance Sheets. (b) Assets of each consolidated VIE included in the program types above are generally used to satisfy the liabilities to third parties. The difference

between total assets and total liabilities recognized for consolidated VIEs represents JPMorgan Chase Bank, N.A.’s interest in the consolidated VIEs for each program type.

(c) The interest-bearing beneficial interest liabilities issued by consolidated VIEs are classified in the line item on the Consolidated Balance Sheets titled, “Beneficial interests issued by consolidated variable interest entities.” The holders of these beneficial interests do not have recourse to the general credit of JPMorgan Chase Bank, N.A. Included in beneficial interests in VIE assets are long-term beneficial interests of $3.8 billion and $4.2 billion at June 30, 2009, and December 31, 2008, respectively.

(d) Included liabilities classified as other borrowed funds, long-term debt, and accounts payable and other liabilities in the Consolidated Balance Sheets.

NOTE 18 – GOODWILL AND ALL OTHER INTANGIBLE ASSETS For a discussion of accounting policies related to goodwill and other intangible assets, see Note 19 on pages 66–69 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements.

Goodwill and all other intangible assets consist of the following.

(in millions) June 30, 2009 December 31, 2008 Goodwill $ 27,438 $ 27,371 Mortgage servicing rights 14,430 9,236

Purchased credit card relationships 122 128

All other intangible assets:

Other credit card–related intangibles $ 670 $ 698 Core deposit intangibles 1,399 1,597 Other intangibles 1,020 1,051

Total all other intangible assets $ 3,089 $ 3,346

63

Goodwill The $67 million increase in goodwill from December 31, 2008, was partially a result of currency translation adjustments related to the Canadian credit card operations.

Goodwill was not impaired at June 30, 2009, or December 31, 2008, nor was any goodwill written off due to impairment during either of the six month periods ended June 30, 2009 or 2008.

Mortgage servicing rights For a further description of the MSR asset, interest rate risk management, and the valuation methodology of MSRs, see Notes 5 and 19 on pages 16–17 and 66–69, respectively, of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements.

The fair value of MSRs is sensitive to changes in interest rates, including their effect on prepayment speeds. JPMorgan Chase Bank, N.A. uses, or has used, combinations of derivatives 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 instruments. MSRs decrease in value when interest rates decline. Conversely, securities (such as mortgage-backed securities), principal-only certificates and certain derivatives (when JPMorgan Chase Bank, N.A. receives fixed-rate interest payments) increase in value when interest rates decline.

The following table summarizes MSR activity for the three and six months ended June 30, 2009 and 2008.

Three months ended June 30, Six months ended June 30, (in millions, except where otherwise noted) 2009 2008 2009 2008 Fair value at the beginning of the period $ 10,486 $ 8,419 $ 9,236 $ 8,632 MSR activity

Originations of MSRs 984 1,074 1,978 1,811 Purchase of MSRs — 312 2 419 Disposition of MSRs (10) — (10) —

Total net additions 974 1,386 1,970 2,230

Change in valuation due to inputs and assumptions(a) 3,798 1,519 5,103 887 Other changes in fair value(b) (828) (394) (1,879) (819)

Total change in fair value of MSRs(c) 2,970 1,125 3,224 68 Fair value at June 30 $ 14,430(d) $ 10,930 $ 14,430(d) $ 10,930 Change in unrealized gains/(losses) included in income

related to MSRs held at June 30 $ 3,798 $ 1,519 $ 5,103 $ 887 Contractual service fees, late fees and other ancillary

fees included in income $ 1,127 $ 651 $ 2,246 $ 1,279 Third-party mortgage loans serviced at June 30 (in billions) $ 1,060.0 $ 659.1 $ 1,060.0 $ 659.1 (a) Represents MSR asset fair value adjustments due to changes in inputs, such as interest rates and volatility, as well as updates to

assumptions used in the valuation model. Also represents total realized and unrealized gains/(losses) included in net income per the SFAS 157 disclosure for fair value measurement using significant unobservable inputs (level 3).

(b) Includes changes in the MSR value due to modeled servicing portfolio runoff (or time decay). Represents the impact of cash settlements per the SFAS 157 disclosure for fair value measurement using significant unobservable inputs (level 3).

(c) Includes $(2) million and $(4) million related to commercial real estate for the three and six month periods ended June 30, 2009. (d) Includes $41 million related to commercial real estate.

The table below outlines the key economic assumptions used to determine the fair value of JPMorgan Chase Bank, N.A.’s MSRs at June 30, 2009, and December 31, 2008; and it outlines the sensitivities of those fair values to immediate 10% and 20% adverse changes in those assumptions.

(in millions, except rates and where otherwise noted) June 30, 2009 December 31, 2008 Weighted-average prepayment speed assumption (CPR) 11.92% 35.10%

Impact on fair value of 10% adverse change $ (933) $ (1,021) Impact on fair value of 20% adverse change (1,792) (1,936)

Weighted-average option adjusted spread 3.97% 3.80% Impact on fair value of 100 basis points adverse change $ (589) $ (308) Impact on fair value of 200 basis points adverse change (1,131) (601)

CPR: Constant prepayment rate.

64

The sensitivity analysis in the preceding table is hypothetical and should be used with caution. 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 changing any other assumption. In reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities.

Purchased credit card relationships and all other intangible assets For the six months ended June 30, 2009, purchased credit card relationships, other credit card-related intangibles, core deposit intangibles and other intangible assets decreased by $263 million, primarily reflecting amortization expense.

Except for $315 million of indefinitely-lived intangibles related to asset management advisory contracts, which are not amortized but are tested for impairment at least annually, the remainder of JPMorgan Chase Bank, N.A.’s other acquired intangible assets are subject to amortization.

Purchased credit card relationships and all other intangible assets Other intangible assets were as follows.

June 30, 2009 December 31, 2008

Gross Accumulated Net

carrying Gross Accumulated Net

carrying (in millions) amount amortization value amount amortization value Purchased credit card relationships $ 229 $ 107 $ 122 $ 224 $ 96 $ 128 All other intangibles:

Other credit card–related intangibles $ 786 $ 116 $ 670 $ 773 $ 75 $ 698 Core deposit intangibles 4,280 2,881 1,399 4,280 2,683 1,597 Other intangibles 1,487 467(a)(b) 1,020 1,539 488(a) 1,051

(a) Includes amortization expense related to servicing assets on securitized automobile loans, which is recorded in lending & deposit–related fees, of $1 million and $2 million for the six months ended June 30, 2009 and 2008, respectively.

(b) The decrease in other intangibles gross amount and accumulated amortization from December 2008 was primarily attributable to the removal of fully amortized assets.

Amortization expense The following table presents amortization expense related to credit card relationships, core deposits and all other intangible assets.

Three months ended June 30, Six months ended June 30, (in millions) 2009 2008 2009 2008 Purchased credit card relationships $ 6 $ 8 $ 11 $ 16 All other intangibles:

Other credit card–related intangibles 21 2 41 4 Core deposit intangibles 99 119 198 238 Other intangibles 26 24 52 46

Total amortization expense $ 152 $ 153 $ 302 $ 304

Future amortization expense The following table presents estimated future amortization expense related to credit card relationships, core deposits and all other intangible assets.

For the year: (in millions) Purchased credit card relationships

Other credit card–related intangibles

Core deposit intangibles

All other intangible

assets Total 2009(a) $ 24 $ 83 $ 387 $ 129 $ 623 2010 22 90 329 110 551 2011 20 91 284 96 491 2012 20 93 240 87 440 2013 18 93 195 78 384 (a) Includes $11 million, $41 million, $198 million and $52 million of amortization expense related to purchased credit card relationships,

other credit card–related intangibles, core deposit intangibles and all other intangibles, respectively, recognized during the first six months of 2009.

65

NOTE 19 – DEPOSITS For further discussion of deposits, see Note 21 on page 70 in JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements.

At June 30, 2009, and December 31, 2008, noninterest-bearing and interest-bearing deposits were as follows.

(in millions) June 30, 2009 December 31, 2008 U.S. offices:

Noninterest-bearing $ 199,094 $ 213,115 Interest-bearing (included $1,002 and $1,849 at fair value at June 30, 2009, and

December 31, 2008, respectively) 419,030 482,382 Non-U.S. offices:

Noninterest-bearing 8,671 8,026 Interest-bearing (included $2,785 and $3,756 at fair value at June 30, 2009, and

December 31, 2008, respectively) 347,685 352,242 Total $ 974,480 $ 1,055,765

On May 20, 2009, the Helping Families Save Their Homes Act of 2009 was signed into law. The Act extends through December 31, 2013, the FDIC’s temporary standard maximum deposit insurance amount, which was increased on October 3, 2008, from $100,000 to $250,000 per depositor per institution.

NOTE 20 – OTHER BORROWED FUNDS The following table details the components of other borrowed funds.

(in millions) June 30, 2009 December 31, 2008 Advances from Federal Home Loan Banks(a) $ 46,338 $ 70,187 Nonrecourse advances – FRBB(b) — 130 Other(c) 6,335 24,636 Total other borrowed funds(d) $ 52,673 $ 94,953 (a) Maturities of advances from the FHLBs were $37.1 billion, $7.6 billion, and $719 million in each of the 12-month periods ending June 30, 2010,

2011, and 2013, respectively, and $939 million maturing after June 30, 2014. Maturities for the 12 month period ending June 30, 2012 and 2014 were not material.

(b) On September 19, 2008, the Federal Reserve Board established a special lending facility, the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), to provide liquidity to eligible U.S. money market mutual funds (“MMMFs”). Under the AMLF, banking organizations must use the loan proceeds to finance their purchases of eligible high-quality asset-backed commercial paper (“ABCP”) investments from MMMFs, which are pledged to secure nonrecourse advances from the Federal Reserve Bank of Boston (“FRBB”). Participating banking organizations do not bear any credit or market risk related to the ABCP investments they hold under this facility; therefore, the ABCP investments held are not assessed any regulatory capital. The AMLF will be in effect until October 30, 2009. The nonrecourse advances from the FRBB were elected under the fair value option and recorded in other borrowed funds; the corresponding ABCP investments were also elected under the fair value option and recorded in other assets.

(c) Includes zero and $15.0 billion of advances from the Federal Reserve under the Federal Reserve’s Term Auction Facility (“TAF”) at June 30, 2009, and December 31, 2008, respectively, pursuant to which the Federal Reserve auctions term funds to depository institutions that are eligible to borrow under the primary credit program. The TAF allows all eligible depository institutions to place a bid for an advance from its local Federal Reserve Bank at an interest rate set by an auction. All advances are required to be fully collateralized. The TAF is designed to improve liquidity by making it easier for sound institutions to borrow when the markets are not operating efficiently.

(d) Includes other borrowed funds of $1.1 billion and $2.7 billion accounted for at fair value at June 30, 2009 and December 31, 2008, respectively.

66

NOTE 21 – RELATED PARTY TRANSACTIONS JPMorgan Chase Bank, N.A. regularly enters into transactions with JPMorgan Chase and its various subsidiaries. Significant revenue- and expense-related transactions with related parties are listed below. Three months ended June 30, Six months ended June 30, (in millions) 2009 2008 2009 2008 Interest income from affiliates Deposits with affiliated banks $ 4 $ 4 $ 6 $ 11 Federal funds sold and securities purchased under resale agreements, and securities borrowed with affiliates

14

448

29

1,121

Loans to affiliates 9 16 17 30 Interest expense to affiliates Interest-bearing deposits of affiliates 129 565 278 1,212 Federal funds purchased and securities loaned or sold under repurchase agreements, and Other borrowed funds due to affiliates

81

576

222

1,300

Long-term debt payable to JPMorgan Chase & Co. and affiliates

143

160

334

385

Guaranteed capital debt securities issued to nonblank affiliates

11

11

23

23

Servicing agreements with affiliates Noninterest revenue 934 807 1,841 1,628 Noninterest expense 1,170 1,193 2,212 2,237 Significant balances with related parties are listed below.

(in millions) June 30, 2009 December 31, 2008 Assets Deposits with affiliated banks $ 747 $ 661 Federal funds sold and securities purchased under resale agreements, and securities borrowed with affiliates 102,363

65,948

Loans to affiliates 77 87 Accrued interest and accounts receivable, and other assets due from affiliates 12,801 13,623

Liabilities Noninterest-bearing deposits of affiliates 7,381 3,151 Interest-bearing deposits of affiliates 123,604 86,481 Federal funds purchased and securities loaned or sold with affiliates under repurchase agreements, and other borrowed funds due to affiliates 110,967

121,049

Accounts payable, accrued expense and other liabilities payable to affiliates 8,201 6,365 Long-term debt payable to JPMorgan Chase & Co. and affiliates 18,527 18,526 Junior subordinated deferred interest debentures held by trusts that issued guaranteed capital debt securities 600

600

At June 30, 2009, and December 31, 2008, net derivative payables to affiliates were $6.1 billion and $2.8 billion, respectively.

67

NOTE 22 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Accumulated other comprehensive income (loss) includes the after-tax change in unrealized gains and losses on AFS securities, SFAS 52 foreign currency translation adjustments (including the impact of related derivatives), SFAS 133 cash flow hedging activities and SFAS 158 net loss and prior service cost (credit) related to JPMorgan Chase Bank, N.A.’s defined benefit pension and OPEB plans.


Unrealized gains (losses) on AFS

securities(a)

Translation adjustments, net of hedges Cash flow hedges

Net loss and prior service costs (credit) of defined

benefit pension and OPEB plans

Accumulated other

comprehensiveincome (loss)

Balance at January 1, 2009 $ (1,815) $ (220) $ (239) $ (307) $ (2,581) Net change 1,303(b) 260(d) 97(e) (32)(f) 1,628

Balance at June 30, 2009 $ (512)(c) $ 40 $ (142) $ (339) $ (953)



securities(a)




Accumulated other

comprehensiveincome (loss)

Balance at January 1, 2008 $ 376 $ 17 $ (816) $ (263) $ (686) Net change (853)(b) 108(d) 13(e) 16(f) (716)

Balance at June 30, 2008 $ (477) $ 125 $ (803) $ (247) $ (1,402)

(a) Represents the after-tax difference between the fair value and amortized cost of the AFS securities portfolio and retained interests in securitizations recorded in other assets.

(b) The net change for the six months ended June 30, 2009, was due primarily to the narrowing of spreads on U.S. government agency mortgage-backed securities and credit card ABS positions as a result of improvement in the credit environment. The net change for the six months ended June 30, 2008, was due primarily to the net increase in interest rates on agency mortgage-backed pass-through securities and market spreads.

(c) Includes after-tax unrealized losses of $(374) million not related to credit on debt securities for which credit losses have been recognized in income.

(d) Includes $343 million and $154 million at June 30, 2009 and 2008, respectively, of after-tax gains/(losses) on foreign currency translation from operations for which the functional currency is other than the U.S. dollar, partially offset by $(83) million and $(46) million, respectively, of after-tax gains/(losses) on hedges. JPMorgan Chase Bank, N.A. may not hedge its entire exposure to foreign currency translation on net investments in foreign operations.

(e) The net change for the six months ended June 30, 2009, included $183 million of after-tax gains recognized in income and $86 million of after-tax gains, representing the net change in derivative fair value that was reported in comprehensive income. The net change for the six months ended June 30, 2008, included $130 million of after-tax losses recognized in income and $117 million of after-tax losses representing the net change in derivative fair value that was reported in comprehensive income.

(f) The net change for the six months ended June 30, 2009 and 2008, was primarily due to after-tax adjustments based upon the respective 2008 and 2007 final year-end actuarial valuations for the U.S. and non-U.S. defined benefit pension plans and the amortization of net loss and prior service credit into net periodic benefit cost.

68

NOTE 23 – CAPITAL JPMorgan Chase Bank, N.A.’s banking regulator, the OCC, establishes capital requirements, including well-capitalized standards, for national banks. The “well-capitalized” and minimum capital and leverage ratios applicable to JPMorgan Chase Bank, N.A. under U.S. banking regulatory agency definitions are listed in the table below.

In connection with the U.S. Government’s recent Supervisory Capital Assessment Program, U.S. banking regulators have developed a new measure of capital called Tier 1 common, which is defined as Tier 1 capital less elements of capital not in the form of common equity, including qualifying perpetual preferred stock, qualifying minority interest in subsidiaries and qualifying trust preferred capital debt securities.

For additional information regarding JPMorgan Chase Bank, N.A.’s capital ratios and the federal regulatory capital standards to which it is subject, see Note 28 on pages 78–79 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements. As of June 30, 2009, and December 31, 2008, JPMorgan Chase Bank, N.A. was well-capitalized and met all capital requirements to which it was subject.

The following table presents the capital ratios for JPMorgan Chase Bank, N.A. at June 30, 2009, and December 31, 2008. JPMorgan Chase Bank, N.A. exceeded all well-capitalized regulatory thresholds for all periods presented.

(in millions, except ratios)

Tier 1 common capital

Tier 1 capital

Total capital

Risk-weighted assets(e)

Adjusted average assets(f)

Tier 1 common

ratio

Tier 1 capital ratio

Total capital ratio

Tier 1 leverage

ratio June 30, 2009 $ 100,643 $ 101,598(b)(c)(d) $ 142,825 $ 1,091,658 $ 1,645,827 9.2% 9.3% 13.1% 6.2% December 31, 2008 $ 99,571 $ 100,594 $ 143,854 $ 1,153,039 $ 1,705,750 8.6% 8.7% 12.5% 5.9% Well-capitalized ratios(a) NA 6.0% 10.0% 5.0%(g)

Minimum capital ratios(a) NA 4.0 8.0 3.0(h)

(a) As defined by the regulations issued by the OCC, the Federal Deposit Insurance Corporation and the Federal Reserve (“FRB”). (b) The OCC granted JPMorgan Chase Bank, N.A., for a period of 18 months following the Bear Stearns merger, relief up to a certain specified

amount and subject to certain conditions from the Federal Reserve’s risk-based capital and leverage requirements with respect to Bear Stearns’ risk-weighted assets and other exposures acquired by JPMorgan Chase Bank, N.A. in connection with the Bear Stearns merger. The relief ends September 30, 2009. Commencing in the second quarter of 2009, JPMorgan Chase Bank, N.A no longer adjusts its risk-based capital ratios to take into account the relief in the calculation of its risk-based capital ratios as of June 30, 2009.

(c) On May 12, 2009, JPMorgan Chase Bank, N.A. increased the required enhancement level underlying each tranche of outstanding notes issued by the Chase Issuance Trust (the “Trust”). On June 1, 2009, JPMorgan Chase Bank, N.A. began designating as “discount receivables” a percentage of new card receivables for inclusion in the Trust, which is expected to increase the yield in the Trust. The impact of these actions added $20 billion of risk-weighted assets for regulatory purposes, which decreased the Tier 1 capital ratio by approximately 20 basis points in the second quarter of 2009; this impact is included in the table above. Therefore, the consolidation of the Trust upon the implementation of SFAS 167 on January 1, 2010, will not have an additional impact on risk-weighted assets, but it will have an incremental impact on Tier 1 capital due to the effect of consolidating the assets and liabilities for GAAP at their assumed carrying values, including the establishment of loan loss reserves, at the adoption date. This incremental impact to the Tier 1 capital ratio expected as a result of the consolidation of the Trust in accordance with SFAS 166 and SFAS 167 is still being assessed for JPMorgan Chase Bank, N.A. For further discussion of the Trust, see Note 16 on pages 48–56 of these Consolidated Financial Statements.

(d) The FASB issued SFAS 166 and SFAS 167, which amend both SFAS 140 and FIN 46R and impacts the accounting for transactions that involve QSPEs and VIEs. Both standards are effective beginning January 1, 2010. JPMorgan Chase Bank, N.A. is still assessing the potential impact of the standards.

(e) Includes off–balance sheet risk-weighted assets at June 30, 2009, and December 31, 2008, of $315.1 billion and $332.2 billion, respectively. (f) Adjusted average assets, for purposes of calculating the leverage ratio, include total average assets adjusted for unrealized gains/losses

on securities, less deductions for disallowed goodwill and other intangible assets, investments in certain subsidiaries, and the total adjusted carrying value of nonfinancial equity investments that are subject to deductions from Tier 1 capital.

(g) Represents requirements for banking subsidiaries pursuant to regulations issued under the FDIC Improvement Act. (h) The minimum Tier 1 leverage ratio for bank holding companies and banks is 3% or 4%, depending on factors specified in regulations

issued by the OCC and FRB. Note:Rating agencies allow measures of capital to be adjusted upward for deferred tax liabilities, which have resulted from both nontaxable

business combinations and from tax-deductible goodwill. JPMorgan Chase Bank, N.A. had deferred tax liabilities resulting from nontaxable business combinations totaling $791 million at June 30, 2009, and $965 million at December 31, 2008. Additionally, JPMorgan Chase Bank, N.A. had deferred tax liabilities resulting from tax-deductible goodwill of $808 million at June 30, 2009, and $838 million at December 31, 2008.

69

The following table presents the components of JPMorgan Chase Bank, N.A.’s Tier 1 common capital, Tier 1 capital and Total capital. (in millions)

June 30, 2009

December 31, 2008

Tier 1 capital Tier 1 common capital: Common stockholder’s equity $ 131,130 $ 128,767 Effect of certain items in accumulated other comprehensive income (loss) excluded from Tier 1 common equity 993 2,355 Adjusted common stockholders’ equity 132,123 131,122 Less: Goodwill(a) 26,631 26,533

SFAS 157 DVA 1,406 1,802 Investments in certain subsidiaries — 1 Other intangible assets 3,443 3,215

Tier 1 common capital 100,643 99,571 Preferred stock — — Qualifying hybrid securities and minority interest(b) 955 1,023 Total Tier 1 capital 101,598 100,594 Tier 2 capital Long-term debt and other instruments qualifying as Tier 2 27,382 28,469 Qualifying allowance for credit losses 13,821 14,791 Adjustment for investments in certain subsidiaries and other 24 — Tier 2 capital 41,227 43,260 Total qualifying capital $ 142,825 $ 143,854

(a) The goodwill balance is net of any associated deferred tax liability. The prior period has been revised to conform with the current presentation.

(b) Primarily includes trust preferred capital debt securities of certain business trusts.

NOTE 24 – COMMITMENTS AND CONTINGENCIES For a discussion of JPMorgan Chase Bank, N.A.’s commitments and contingencies, see Note 29 on page 79 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements.

Litigation reserve JPMorgan Chase Bank, N.A. maintains litigation reserves for certain of its outstanding litigation. In accordance with the provisions of SFAS 5, JPMorgan Chase Bank, N.A. accrues for a litigation-related liability when it is probable that such a liability has been incurred and the amount of the loss can be reasonably estimated. When JPMorgan Chase Bank, N.A. is named a defendant in a litigation and may be subject to joint and several liability and a judgment sharing agreement is in place, JPMorgan Chase Bank, N.A. recognizes expense and obligations net of amounts expected to be paid by other signatories to the judgment-sharing agreement.

While the outcome of litigation is inherently uncertain, management believes, in light of all information known to it at June 30, 2009, JPMorgan Chase Bank, N.A.’s litigation reserves were adequate at such date. Management reviews litigation reserves at least quarterly, and the reserves may be increased or decreased in the future to reflect further relevant developments. JPMorgan Chase Bank, N.A. believes it has meritorious defenses to the claims asserted against it in its currently outstanding litigation and, with respect to such litigation, intends to continue to defend itself vigorously, litigating or settling cases according to management’s judgment as to what is in the best interests of JPMorgan Chase and its stockholders.

70

NOTE 25 – OFF–BALANCE SHEET LENDING-RELATED FINANCIAL INSTRUMENTS AND GUARANTEES JPMorgan Chase Bank, N.A. utilizes lending-related financial instruments, such as commitments and guarantees, to meet the financing needs of its customers. The contractual amount of these financial instruments represents the maximum possible credit risk should the counterparties draw down on these commitments or JPMorgan Chase Bank, N.A. fulfills its obligation under these guarantees, and the counterparties subsequently fail to perform according to the terms of these contracts. For a discussion of off-balance sheet lending-related financial instruments and guarantees, and JPMorgan Chase Bank, N.A.’s related accounting policies, see Note 31 on pages 83–87 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements.

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 15 on page 48 of these Consolidated Financial Statements for further discussion regarding 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 June 30, 2009, and December 31, 2008. The amounts in the table below for credit card and home equity lending-related commitments represent the total available credit for these products. JPMorgan Chase Bank, N.A. has not experienced, and does not anticipate, that all available lines of credit for these products will be utilized at the same time. JPMorgan Chase Bank, N.A. can reduce or cancel these lines of credit by providing the borrower prior notice or, in some cases, without notice as permitted by law.

Off–balance sheet lending-related financial instruments and guarantees

Contractual amount Allowance for lending-related commitments

(in millions) June 30,

2009 December 31,

2008 June 30,

2009 December 31,

2008 Lending-related Consumer:

Credit card $ 19,306 $ 25,742 $ — $ — Home equity 70,642 95,743 — — Other 20,691 22,062 27 25

Total consumer $ 110,639 $ 143,547 $ 27 $ 25 Wholesale: Other unfunded commitments to extend credit(a)(b)(d) 183,085 186,136 319 348 Asset purchase agreements 30,010 53,729 2 9 Standby letters of credit and other financial guarantees(a)(c)(e) 89,125 94,796 396 272 Unused advised lines of credit 34,704 36,100 — — Other letters of credit(a)(c) 4,391 4,927 1 2

Total wholesale 341,315 375,688 718 631 Total lending-related $ 451,954 $ 519,235 $ 745 $ 656 Other guarantees Securities lending guarantees(f) $ 174,219 $ 182,204 NA NA Derivatives qualifying as guarantees(g) 85,694 83,730 NA NA (a) Represents the contractual amount net of risk participations totaling $27.0 billion and $28.2 billion at June 30, 2009, and December 31,

2008, respectively. In regulatory filings with the FRB these commitments are shown gross of risk participations. (b) Excludes unfunded commitments for other equity investments of $649 million and $627 million at June 30, 2009, and December 31, 2008,

respectively. (c) JPMorgan Chase Bank. N.A. held collateral relating to $29.2 billion and $30.8 billion of standby letters of credit and $1.3 billion and

$1.0 billion of other letters of credit at June 30, 2009, and December 31, 2008, respectively. (d) Includes commitments to affiliates of $78 million and $84 million at June 30, 2009, and December 31,2008, respectively. (e) Includes unissued standby letters of credit commitments of $37.3 billion and $39.3 billion at June 30, 2009, and December 31, 2008,

respectively. (f) Collateral held by JPMorgan Chase Bank, N.A. in support of securities lending indemnification agreements was $173.6 billion and

$182.7 billion at June 30, 2009, and December 31, 2008, respectively. Securities lending collateral comprises primarily cash, securities issued by governments that are members of the Organisation for Economic Co-operation and Development (“OECD”) and U.S. government agencies.

(g) Represents notional amounts of derivatives qualifying as guarantees.

71

Other unfunded commitments to extend credit Other unfunded commitments to extend credit include commitments to U.S. domestic states and municipalities, hospitals and other not-for-profit entities to provide funding for periodic tenders of their variable-rate demand bond obligations or commercial paper. Performance by JPMorgan Chase Bank, N.A. is required in the event that the variable-rate demand bonds or commercial paper cannot be remarketed to new investors. The amount of commitments related to variable-rate demand bonds and commercial paper of U.S. domestic states and municipalities, hospitals and not-for-profit entities was $23.3 billion and $23.5 billion at June 30, 2009, and December 31, 2008, respectively. Similar commitments exist to extend credit in the form of liquidity facility agreements with nonconsolidated municipal bond VIEs. For further information, see Note 17 on pages 57–62 of these Consolidated Financial Statements. Also included in other unfunded commitments to extend credit are commitments to investment- and noninvestment-grade counterparties in connection with leveraged acquisitions. These commitments are dependent on whether the acquisition by the borrower is successful, tend to be short-term in nature and, in most cases, are subject to certain conditions based on the borrower’s financial condition or other factors. The amount of commitments related to leveraged acquisitions at June 30, 2009, and December 31, 2008, was $2.9 billion and $3.6 billion, respectively. For further information, see Note 4 and Note 5 on pages 10–22 and 22–24 respectively, of these Consolidated Financial Statements. FIN 45 guarantees JPMorgan Chase Bank, N.A. considers the following off–balance sheet lending-related arrangements to be guarantees under FIN 45: certain asset purchase agreements, standby letters of credit and financial guarantees, securities lending indemnifications, certain indemnification agreements included within third-party contractual arrangements and certain derivative contracts. For a further discussion of the off–balance sheet lending-related arrangements JPMorgan Chase Bank, N.A. considers to be guarantees under FIN 45, and the related accounting policies, see Note 31 on pages 83–87 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements. The amount of the liability related to FIN 45 guarantees recorded at June 30, 2009, and December 31, 2008, excluding the allowance for credit losses on lending-related commitments and derivative contracts discussed below, was $475 million and $535 million, respectively.

Asset purchase agreements Assets purchase agreements are principally used as a mechanism to provide liquidity to SPEs, predominantly multi-seller conduits, as described in Note 17 on pages 57–62 of these Consolidated Financial Statements.

The carrying value of asset purchase agreements of $112 million and $147 million at June 30, 2009, and December 31, 2008, respectively, which is classified in accounts payable and other liabilities on the Consolidated Balance Sheets, includes $2 million and $9 million at June 30, 2009, and December 31, 2008, respectively, for the allowance for lending-related commitments, and $110 million and $138 million at June 30, 2009, and December 31, 2008, respectively, for the fair value of the FIN 45 guarantee liability.

Standby letters of credit Standby letters of credit (“SBLC”) and financial guarantees are conditional lending commitments issued by JPMorgan Chase Bank, N.A. to guarantee the performance of a customer to a third party under certain arrangements, such as commercial paper facilities, bond financings, acquisition financings, trade and similar transactions. The carrying value of standby and other letters of credit of $762 million and $671 million at June 30, 2009, and December 31, 2008, respectively, which is classified in accounts payable and other liabilities on the Consolidated Balance Sheets, includes $397 million and $274 million at June 30, 2009, and December 31, 2008, respectively, for the allowance for lending-related commitments, and $365 million and $397 million at June 30, 2009, and December 31, 2008, respectively, for the fair value of the FIN 45 guarantee.

72

The following table summarizes the types of facilities under which standby letters of credit and other letters of credit arrangements are outstanding by the ratings profiles of JPMorgan Chase Bank, N.A.’s customers as of June 30, 2009, and December 31, 2008. The ratings scale is representative of the payment or performance risk to JPMorgan Chase Bank, N.A.’s internal risk ratings, which generally correspond to ratings defined by S&P and Moody’s.

Standby letters of credit and other financial guarantees and other letters of credit June 30, 2009 December 31, 2008

(in millions)

Standby letters of credit and other

financial guaranteesOther letters

of credit


financial guarantees Other letters of credit(c)

Investment-grade(a) $ 66,454 $ 3,212 $ 73,032 $ 3,772 Noninvestment-grade(a) 22,671 1,179 21,764 1,155 Total contractual amount $ 89,125(b) $ 4,391 $ 94,796(b) $ 4,927 Allowance for lending-related commitments $ 396 $ 1 $ 272 $ 2 Commitments with collateral 29,174 1,348 30,831 1,000 (a) Ratings scale is based on JPMorgan Chase Bank, N.A.’s internal ratings, which generally correspond to ratings defined by S&P and Moody’s. (b) Represents contractual amount net of risk participations totaling $27.0 billion and $28.2 billion at June 30, 2009, and December 31, 2008,

respectively. (c) The investment-grade and noninvestment-grade amounts have been revised from previous disclosures.

Derivatives qualifying as guarantees In addition to the contracts described above, JPMorgan Chase Bank, N.A. transacts certain derivative contracts that meet the characteristics of a guarantee under FIN 45. The total notional value of the derivatives that JPMorgan Chase Bank, N.A. deems to be guarantees was $85.7 billion and $83.7 billion at June 30, 2009, and December 31, 2008, respectively. The notional value generally represents JPMorgan Chase Bank, N.A.’s maximum exposure to derivatives qualifying as guarantees, although exposure to certain stable value derivatives is contractually limited to a substantially lower percentage of the notional value. The fair value of the contracts reflects the probability of whether JPMorgan Chase Bank, N.A. will be required to perform under the contract. At June 30, 2009, and December 31, 2008, the fair value related to derivative guarantees was a derivative receivable of $211 million and $183 million, respectively, and a derivative payable of $3.0 billion and $5.6 billion, respectively. JPMorgan Chase Bank, N.A. reduces exposures to these contracts by entering into offsetting transactions, or by entering into contracts that hedge the market risk related to the derivative guarantees. In addition to derivative contracts that meet the characteristics of a guarantee under FIN 45, JPMorgan Chase Bank, N.A. is both a purchaser and seller of credit protection in the credit derivatives market. For a further discussion of credit derivatives, see Note 6 on pages 25–34 of these Consolidated Financial Statements, and Note 30 on pages 80–83 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements

Loan sale- and securitization-related indemnifications Indemnifications for breaches of representations and warranties As part of JPMorgan Chase Bank, N.A.’s loan sale and securitization activities, as described in Note 15 and Note 17 on pages 42–46 and 47–56, respectively, of J JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements, and Note 14 and Note 16 on pages 44–47 and 48–56 respectively, of these Consolidated Financial Statements, JPMorgan Chase Bank, N.A. generally makes representations and warranties in its loan sale and securitization agreements that the loans sold meet certain requirements. These agreements may require JPMorgan Chase Bank, N.A. (including in its roles as a servicer) to repurchase the loans and/or indemnify the purchaser of the loans against losses due to any breaches of such representations or warranties. Generally, the maximum amount of future payments JPMorgan Chase Bank, N.A. would be required to make for breaches under these representations and warranties would be equal to the current amount of assets held by such securitization-related SPEs, plus, in certain circumstances, accrued and unpaid interest on such loans and certain expense. During the first quarter of 2009, JPMorgan Chase Bank, N.A. resolved certain current and future claims for certain loans originated and sold by Washington Mutual. At June 30, 2009, and December 31, 2008, JPMorgan Chase Bank, N.A. had recorded a repurchase liability of $641 million and $1.0 billion, respectively.

73

Loans sold with recourse JPMorgan Chase Bank, N.A. provides servicing for mortgages and certain commercial lending products on both a recourse and nonrecourse basis. In nonrecourse servicing, the principal credit risk to JPMorgan Chase Bank, N.A. is the cost of temporary servicing advances of funds (i.e., normal servicing advances). In recourse servicing, the servicer agrees to share credit risk with the owner of the mortgage loans, such as the FNMA, or the FHLMC or a private investor, insurer or guarantor. Losses on recourse servicing predominantly occur when foreclosure sales proceeds of the property underlying a defaulted loan are less than the sum of the outstanding principal balance, plus accrued interest on the loan and the cost of holding and disposing of the underlying property. JPMorgan Chase Bank, N.A.’s loan sale transactions have primarily been executed on a nonrecourse basis, thereby effectively transferring the risk of future credit losses to the purchaser of the mortgage-backed securities issued by the trust. At June 30, 2009, and December 31, 2008, the unpaid principal balance of loans sold with recourse totaled $13.1 billion and $13.9 billion, respectively. The carrying values of the related liability that JPMorgan Chase Bank, N.A. had recorded, which is representative of JPMorgan Chase Bank, N.A.’s view of the likelihood it will have to perform under this guarantee, were $247 million and $230 million at June 30, 2009, and December 31, 2008, respectively.

NOTE 26 – BUSINESS SEGMENTS SFAS 131 defines the criteria by which management determines the number and nature of its “operating segments” (i.e., business segments) and sets forth the financial information that is required to be disclosed about these business segments. This information is accumulated, managed and discussed at the JPMorgan Chase level and not at the subsidiary level (i.e., JPMorgan Chase Bank, N.A.). For financial reporting purposes, JPMorgan Chase Bank, N.A. is viewed by JPMorgan Chase as a legal entity only; business segment financial information is not prepared for JPMorgan Chase Bank, N.A.

74

SUPPLEMENTARY INFORMATION Selected quarterly financial data (unaudited) (in millions, except ratio data) 2009 2008(c) Six months ended June 30, As of or for the period ended 2nd 1st 4th 3rd 2nd 2009 2008 Selected income statement data Noninterest revenue $ 9,434 $ 10,756 $ 8,176 $ 8,352 $ 8,329 $ 20,190 $ 16,701 Net interest income 9,844 10,463 10,858 7,111 6,965 20,307 13,548 Total net revenue 19,278 21,219 19,034 15,463 15,294 40,497 30,249 Provision for credit losses 5,799 6,078 5,497 2,936 2,533 11,877 6,271 Provision for credit losses –

accounting conformity(a) — — (442) 1,976 — — — Total noninterest expense 11,379 11,391 10,404 9,010 10,077 22,770 17,870 Income before income tax expense

(benefit) and extraordinary gain 2,100 3,750 3,575 1,541 2,684 5,850 6,108 Income tax expense (benefit) 644 1,247 1,352 (519) 674 1,891 1,878 Income before extraordinary

gain 1,456 2,503 2,223 2,060 2,010 3,959 4,230 Extraordinary gain(b) — — 1,325 581 — — — Net income $ 1,456 $ 2,503 $ 3,548 $ 2,641 $ 2,010 $ 3,959 $ 4,230

Tier 1 common capital ratio 9.2% 8.9% 8.6% 7.8% 8.1% Tier 1 capital ratio 9.3 9.0 8.7 7.9 8.2 Total capital ratio 13.1 12.8 12.5 11.4 12.0 Tier 1 leverage ratio 6.2 6.1 5.9 7.3 6.1

Selected balance sheet data (period-end)

Trading assets $ 276,837 $ 299,428 $ 365,365 $ 376,888 $ 368,829 Securities 334,618 323,980 199,744 145,439 114,837 Loans 596,605 628,358 662,312 701,664 481,213 Allowance for credit losses (22,740) (20,977) (17,809) (17,086) (11,425) Total assets 1,663,998 1,688,164 1,746,242 1,765,128 1,378,468 Deposits 974,480 979,696 1,055,765 1,013,390 797,676 Long-term debt 67,667 65,774 71,862 79,102 81,399 Total stockholder’s equity 131,130 130,548 128,767 125,639 108,929 (a) The third and fourth quarters of 2008 included an accounting conformity loan loss reserve provision related to the acquisition of Washington

Mutual Bank’s banking operations. (b) For a discussion of the extraordinary gain, see Note 3 on pages 10–12 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements. (c) On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual Bank. The transaction was accounted for as a

purchase and Washington Mutual’s results of operations are included in JPMorgan Chase Bank, N.A.’s results from the transaction date. For additional information on the Washington Mutual transaction, see Note 3 on page 9 of these Consolidated Financial Statements.

75

SUPPLEMENTARY INFORMATION

Selected annual financial data (unaudited) (in millions, except ratio data) As of or for the year ended December 31, 2008(e) 2007 2006 2005 2004(f) Selected income statement data Noninterest revenue(a) $ 33,229 $ 31,630 $ 29,191 $ 23,065 $ 16,979 Net interest income 31,517 23,137 18,135 15,283 11,962 Total net revenue 64,746 54,767 47,326 38,348 28,941 Provision for credit losses 14,704 4,672 1,809 1,101 198 Provision for credit losses – accounting

conformity(b) 1,534 — — — 336 Total noninterest expense 37,284 33,998 31,909 29,799 25,488 Income from continuing operations before income tax expense (benefit)

11,224

16,097

13,608

7,448

2,919

Income tax expense 2,711 5,365 4,487 2,563 937 Income from continuing operations 8,513 10,732 9,121 4,885 1,982 Income from discontinued operations(c) — — 798 207 196 Income before extraordinary gain 8,513 10,732 9,919 5,092 2,178 Extraordinary gain(d) 1,906 — — — — Net income $ 10,419 $ 10,732 $ 9,919 $ 5,092 $ 2,178

Tier 1 common capital ratio 8.6% 8.1% 8.1% 8.0% 8.1% Tier 1 capital ratio 8.7 8.3 8.2 8.1 8.3 Total capital ratio 12.5 11.8 11.4 11.2 11.7 Tier 1 leverage ratio 5.9 6.2 5.9 6.1 6.0

Selected balance sheet data (period-end) Trading assets $ 365,365 $ 390,459 $ 284,282 $ 221,837 $ 236,768 Securities 199,744 82,511 88,487 37,113 81,033 Loans 662,312 461,662 421,833 365,991 334,323 Allowance for credit losses (17,809) (7,864) (5,693) (5,254) (5,804) Total assets 1,746,242 1,318,888 1,179,390 1,013,985 967,365 Deposits 1,055,765 772,087 640,466 552,610 517,710 Long-term debt 71,862 87,575 71,256 55,612 46,406 Total stockholder’s equity 128,767 106,346 96,010 86,350 80,640 (a) JPMorgan Chase Bank, N.A. adopted SFAS 157 in the first quarter of 2007. See Note 5 on pages 13–24 of JPMorgan Chase Bank, N.A.’s 2008

Annual Financial Statements. (b) Results for 2008 and 2004 included an accounting conformity loan loss reserve provision related to the acquisition of the Washington Mutual’s

banking operations and the merger with Bank One Corporation, respectively. (c) On October 1, 2006, JPMorgan Chase & Co. completed the exchange of selected corporate trust businesses for the consumer, business banking

and middle-market banking businesses of The Bank of New York Company Inc. The results of operations of these corporate trust businesses are reported as discontinued operations for each period prior to 2007.

(d) For a discussion of the extraordinary gain, see Note 3 on pages 10–12 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements. (e) On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual Bank. The transaction was accounted for as a

purchase and Washington Mutual’s results of operations are included in JPMorgan Chase Bank, N.A.’s results from the transaction date. For additional information on the Washington Mutual transaction, see Note 3 on page 9 of these Consolidated Financial Statements.

(f) On July 1, 2004, Bank One Corporation merged with and into JPMorgan Chase Bank, N.A. Accordingly, 2004 results include six months of the combined JPMorgan Chase Bank, N.A.’s results and six months of heritage JPMorgan Chase Bank, N.A. results.

76

GLOSSARY OF TERMS

Advised lines of credit: An authorization which specifies the maximum amount of a credit facility JPMorgan Chase Bank, N.A. has made available to an obligor on a revolving but non-binding basis. The borrower receives written or oral advice of this facility. JPMorgan Chase Bank, N.A. may cancel this facility at any time.

AICPA: American Institute of Certified Public Accountants.

AICPA Statement of Position (“SOP”) 03-3: “Accounting for Certain Loans or Debt Securities Acquired in a Transfer.”

Beneficial interests issued by consolidated VIEs: Represents the interests of third-party holders of debt/equity securities, or other obligations, issued by VIEs that JPMorgan Chase Bank, N.A. consolidates under FIN 46R. The underlying obligations of the VIEs consist of short-term borrowings, commercial paper and long-term debt. The related assets consist of trading assets, available-for-sale securities, loans and other assets.

Benefit obligation: Refers to the projected benefit obligation for pension plans and the accumulated postretirement benefit obligation for OPEB plans.

Commodities contracts: Exchange-traded futures and over-the-counter forwards are contracts to deliver specified commodities (e.g., gold, electricity, natural gas, other precious and base metals, oil, farm products, livestock) on an agreed-upon future settlement date in exchange for cash. Exchange-traded commodities swaps and over-the-counter commodities swap contracts are contracts to deliver fixed cash payments in exchange for cash payments that float based on changes in an underlying commodities index.

Credit derivatives: Contractual agreements that provide protection against a credit event on one or more referenced credits. The nature of a credit event is established by the protection buyer and protection seller at the inception of a transaction, and such events include bankruptcy, insolvency or failure to meet payment obligations when due. The buyer of the credit derivative pays a periodic fee in return for a payment by the protection seller upon the occurrence, if any, of a credit event.

EITF: Emerging Issues Task Force.

EITF Issue 07-5: “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock.”

EITF Issue 99-20: “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets.”

FASB: Financial Accounting Standards Board.

FIN 39: FASB Interpretation No. 39, “Offsetting of Amounts Related to Certain Contracts – an interpretation of APB Opinion No. 10 and FASB Statement No. 105.”

FIN 45: FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others – an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34.”

FIN 46R: FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities – an interpretation of ARB No. 51.”

Foreign exchange contracts: Includes foreign exchange forward contracts and cross-currency swaps. Foreign exchange forward contracts are contracts to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon future settlement date. Cross-currency swaps are contracts between two parties to exchange interest and principal payments in one currency for the same in another currency.

Forward points: Represents the interest rate differential between two currencies, which is either added to or subtracted from the current exchange rate (i.e., “spot rate”) to determine the forward exchange rate.

FSP: FASB Staff Position.

FSP FAS 107-1 and APB 28-1: “Interim Disclosures about Fair Value of Financial Instruments.”

FSP FAS 115-2 and FAS 124-2: “Recognition and Presentation of Other-Than-Temporary Impairments.”

FSP FAS 132(R)-1: “Employers’ Disclosures about Postretirement Benefit Plan Assets.”

77

FSP FAS 140-3: “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.”

FSP FAS 141(R)-1: “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.”

FSP FAS 157-4: “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.”

Interest rate contracts: Includes interest rate swaps, forwards and futures contracts. Interest rate swap contracts involve the exchange of fixed- and variable-rate interest payments based on a contracted notional amount. Interest rate forward contracts are primarily arrangements to exchange cash in the future based on price movements of specified financial instruments. Interest rate futures contracts are financial futures which provide for cash payments based on interest rate changes on an underlying interest-bearing instrument or index.

Investment-grade: An indication of credit quality based on JPMorgan Chase Bank, N.A.’s internal risk assessment system. “Investment grade” generally represents a risk profile similar to a rating of a “BBB-”/”Baa3” or better, as defined by independent rating agencies.

LIBOR: London Interbank Offered Rate.

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 Bank, N.A. and, therefore, creates a repayment risk for JPMorgan Chase Bank, N.A. When the mark-to-market value is negative, JPMorgan Chase Bank, N.A. owes the counterparty; in this situation, JPMorgan Chase Bank, N.A. 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.

Mortgage product types:

Alt-A Alt-A loans are generally higher in credit quality than subprime loans but have characteristics that would disqualify the borrower from a traditional prime loan. Alt-A lending characteristics may include one or more of the following: (i) limited documentation; (ii) high combined-loan-to-value (“CLTV”) ratio; (iii) loans secured by non-owner occupied properties; or (iv) debt-to-income ratio above normal limits. Perhaps the most important characteristic is limited documentation. A substantial proportion of traditional Alt-A loans are those where a borrower does not provide complete documentation of his or her assets or the amount or source of his or her income.

Option ARMs The option ARM home loan product is an adjustable-rate mortgage loan that provides the borrower with the option each month to make a fully amortizing, interest-only, or minimum payment. The minimum payment on an option ARM loan is based on the interest rate charged during the introductory period. This introductory rate has usually been significantly below the fully indexed rate. The fully indexed rate is calculated using an index rate plus a margin. Once the introductory period ends, the contractual interest rate charged on the loan increases to the fully indexed rate and adjusts monthly to reflect movements in the index. The minimum payment is typically insufficient to cover interest accrued in the prior month, and will “negatively amortize” as any unpaid interest is deferred and added to the principal balance of the loan. Option ARMs typically become fully amortizing loans upon reaching a negative amortization cap or on dates specified in the borrowing agreement, at which time the required payment generally increases substantially.

Prime Prime mortgage loans are made to borrowers with good credit records and a monthly income that is at least three to four times greater than their monthly housing expense (mortgage payments plus taxes and other debt payments). These borrowers provide full documentation and generally have reliable payment histories.

Subprime Subprime loans are designed for customers with one or more high risk characteristics, including but not limited to: (i) unreliable or poor payment histories; (ii) high loan-to-value (“LTV”) ratio of greater than 80% (without borrower-paid mortgage insurance); (iii) high debt-to-income ratio; (iv) the occupancy type for the loan is other than the borrower’s primary residence; or (v) a history of delinquencies or late payments on the loan.

NA: Data is not applicable or available for the period presented.

78

OPEB: Other postretirement employee benefits.

Principal transactions: Realized and unrealized gains and losses from trading activities (including physical commodities inventories that are accounted for at the lower of cost or fair value) and changes in fair value associated with financial instruments held by the investment banking business for which the SFAS 159 fair value option was elected. Principal transactions revenue also includes private equity gains and losses.

Purchased credit-impaired loans: Purchased loans for which the credit quality has deteriorated since origination, but prior to purchase. These loans are accounted for at fair value as of the purchase date, which includes the impact of estimated credit losses for the loans over the life of loan.

SFAS: Statement of Financial Accounting Standards.

SFAS 5: “Accounting for Contingencies.”

SFAS 52: “Foreign Currency Translation.”

SFAS 107: “Disclosures about Fair Value of Financial Instruments.”

SFAS 114: “Accounting by Creditors for Impairment of a Loan – an amendment of FASB Statements No. 5 and 15.”

SFAS 133: “Accounting for Derivative Instruments and Hedging Activities.”

SFAS 140: “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities – a replacement of FASB Statement No. 125.”

SFAS 141 and SFAS 141R: “Business Combinations.”

SFAS 155: “Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and 140.”

SFAS 157: “Fair Value Measurements.”

SFAS 158: “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R).”

SFAS 159: “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115.”

SFAS 160: “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51.”

SFAS 161: “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133.”

SFAS 165: “Subsequent Events.”

SFAS 166: “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140.”

SFAS 167: “Amendments to FASB Interpretation No. 46(R).”

Troubled debt restructuring: Occurs when JPMorgan Chase Bank, N.A. modifies the original terms of a loan agreement by granting a concession to a borrower that is experiencing financial difficulty.

Unaudited: Financial statements and information that have not been subjected to auditing procedures sufficient to permit an independent certified public accountant to express an opinion.

U.S. GAAP: Accounting principles generally accepted in the United States of America.

U.S. government and federal agency obligations: Obligations of the U.S. government or an instrumentality of the U.S. government whose obligations are fully and explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the U.S. government.

U.S. government-sponsored enterprise obligations: Obligations of agencies originally established or chartered by the U.S. government to serve public purposes as specified by the U.S. Congress; these obligations are not explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the U.S. government.

JPMORGAN CHASE BANK, NATIONAL ASSOCIATION (a wholly-owned subsidiary of JPMorgan Chase & Co.)

CONSOLIDATED FINANCIAL STATEMENTS For the quarterly period ended March 31, 2009

2

TABLE OF CONTENTS

For the quarterly period ended March 31, 2009

Page(s)

Consolidated Financial Statements – JPMorgan Chase Bank, National Association

Consolidated Statements of Income (unaudited) for the three months ended March 31, 2009 and 2008.......................... 3

Consolidated Balance Sheets (unaudited) at March 31, 2009 and December 31, 2008..................................................... 4

Consolidated Statements of Changes in Stockholder’s Equity and Comprehensive Income (unaudited) for the three months ended March 31, 2009 and 2008 ............................................................................................................... 5

Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2009 and 2008 ................... 6

Notes to Consolidated Financial Statements (unaudited) ............................................................................................ 7–61


Selected Quarterly Financial Data (unaudited)................................................................................................................ 62

Selected Annual Financial Data (unaudited) ................................................................................................................... 63

Glossary of Terms.................................................................................................................................................... 64–66

3


CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three months ended March 31, (in millions) 2009 2008 Revenue Investment banking fees $ 739 $ 576 Principal transactions 3,104 2,475 Lending & deposit-related fees 1,683 1,031 Asset management, administration and commissions 2,135 2,531 Securities gains 202 55 Mortgage fees and related income 1,576 524 Credit card income 1,042 833 Other income 275 347 Noninterest revenue 10,756 8,372

Interest income 13,638 14,334 Interest expense 3,175 7,751 Net interest income 10,463 6,583 Total net revenue 21,219 14,955 Provision for credit losses 6,078 3,738 Noninterest expense Compensation expense 5,946 3,448 Occupancy expense 784 585 Technology, communications and equipment expense 996 864 Professional & outside services 1,058 996 Marketing 143 150 Other expense 2,138 1,599 Amortization of intangibles 150 151 Merger costs 176 — Total noninterest expense 11,391 7,793 Income before income tax expense 3,750 3,424 Income tax expense 1,247 1,204 Net income $ 2,503 $ 2,220


4


(a wholly-own subsidiary of JPMorgan Chase & Co.) CONSOLIDATED BALANCE SHEETS (UNAUDITED)

March 31, December 31,(in millions, except share data) 2009 2008 Assets Cash and due from banks $ 25,728 $ 25,502 Deposits with banks 88,296 127,623 Federal funds sold and securities purchased under resale agreements (included $18,974 and $19,865 at fair value at

March 31, 2009, and December 31, 2008, respectively) 153,106 199,716 Securities borrowed (included $3,305 and $3,381 at fair value at March 31, 2009, and December 31, 2008,

respectively) 52,899 42,658 Trading assets (included assets pledged of $22,014 and $118,079 at March 31, 2009, and December 31, 2008,

respectively) 299,428 365,365 Securities (included $323,949 and $199,710 at fair value at March 31, 2009, and December 31, 2008,

respectively, and assets pledged of $128,050 and $26,376 at March 31, 2009, and December 31, 2008, respectively) 323,980 199,744

Loans (included $4,657 and $6,038 at fair value at March 31, 2009, and December 31, 2008, respectively) 628,358 662,312 Allowance for loan losses (20,342) (17,153)


Accrued interest and accounts receivable 39,151 44,345 Premises and equipment 9,228 9,161 Goodwill 27,355 27,371 Other intangible assets:

Mortgage servicing rights 10,486 9,236 Purchased credit card relationships 118 128 All other intangibles 3,213 3,346

Other assets (included $1,685 and $1,780 at fair value at March 31, 2009, and December 31, 2008, respectively) 47,160 46,888

Total assets $ 1,688,164 $ 1,746,242 Liabilities Deposits (included $5,114 and $5,605 at fair value at March 31, 2009, and December 31, 2008, respectively) $ 979,696 $ 1,055,765 Federal funds purchased and securities loaned or sold under repurchase agreements (included $2,484 and $2,968 at

fair value at March 31, 2009, and December 31, 2008, respectively) 242,679 180,716 Other borrowed funds (included $1,558 and $2,714 at fair value at March 31, 2009, and December 31, 2008,

respectively) 90,720 94,953 Trading liabilities 112,353 142,409 Accounts payable and other liabilities (included the allowance for lending-related commitments

of $635 and $656 at March 31, 2009, and December 31, 2008, respectively, and $11 and zero at fair value at March 31, 2009, and December 31, 2008, respectively) 62,048 67,014

Beneficial interests issued by consolidated variable interest entities (included $1,021 and $1,364 at fair value at March 31, 2009, and December 31, 2008, respectively) 3,746 4,156

Long-term debt (included $29,744 and $34,924 at fair value at March 31, 2009, and December 31, 2008, respectively) 65,774 71,862

Junior subordinated deferrable interest debentures held by trusts that issued guaranteed capital debt securities 600 600 Total liabilities 1,557,616 1,617,475 Commitments and contingencies (see Note 24 of these Consolidated Financial Statements) Stockholder’s equity Preferred stock ($1 par value; authorized 15,000,000 shares at March 31, 2009, and December 31, 2008;

issued 0 shares at March 31, 2009, and December 31, 2008)

— — Common stock ($12 par value; authorized 150,000,000 shares at March 31, 2009, and December 31,

2008; issued 148,761,243 shares at March 31, 2009, and December 31, 2008) 1,785 1,785 Capital surplus 77,450 77,254 Retained earnings 52,812 52,309 Accumulated other comprehensive income (loss) (1,499) (2,581) Total stockholder’s equity 130,548 128,767 Total liabilities and stockholder’s equity $ 1,688,164 $ 1,746,242


5


(a wholly-own subsidiary of JPMorgan Chase & Co.) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY

AND COMPREHENSIVE INCOME (UNAUDITED)

Three months ended March 31, (in millions) 2009 2008 Common stock Balance at January 1, and March 31 $ 1,785 $ 1,785 Capital surplus Balance at January 1 77,254 62,439 Cash capital contribution from JPMorgan Chase & Co. 194 1 Adjustments to capital due to transactions with JPMorgan Chase & Co. 2 (12) Balance at March 31 77,450 62,428 Retained earnings Balance at January 1 52,309 42,808 Net income 2,503 2,220 Cash dividends paid to JPMorgan Chase & Co. (2,000) — Balance at March 31 52,812 45,028 Accumulated other comprehensive income (loss) Balance at January 1 (2,581) (686) Other comprehensive income 1,082 405 Balance at March 31 (1,499) (281) Total stockholder’s equity $ 130,548 $ 108,960 Comprehensive income Net income $ 2,503 $ 2,220 Other comprehensive income 1,082 405 Comprehensive income $ 3,585 $ 2,625


6


CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three months ended March 31, (in millions) 2009 2008 Operating activities Net income $ 2,503 $ 2,220 Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Provision for credit losses 6,078 3,738 Depreciation and amortization 573 580 Amortization of intangibles 150 151 Deferred tax benefit (1,337) (927) Investment securities gains (202) (55)

Originations and purchases of loans held-for-sale (5,668) (11,163) Proceeds from sales, securitizations and paydowns of loans held-for-sale 5,819 10,401 Net change in:

Trading assets 74,668 (8,026) Securities borrowed (10,248) (11,368) Accrued interest and accounts receivable 5,194 (3,365) Other assets 3,286 (13,936) Trading liabilities (34,073) 8,165 Accounts payable, accrued expense and other liabilities (3,899) 6,686

Other operating adjustments (1,125) 2,038 Net cash provided by (used in) operating activities 41,719 (14,861) Investing activities Net change in:

Deposits with banks 39,327 (439) Federal funds sold and securities purchased under resale agreements 46,389 (38,641)

Held-to-maturity securities: Proceeds 3 2

Available-for-sale securities: Proceeds from maturities 27,129 9,188 Proceeds from sales 23,635 21,342 Purchases (173,260) (46,152)

Proceeds from sales and securitization of loans held-for-investment 10,572 2,931 Other changes in loans, net 19,159 (27,766) Net cash received in business disposition 3 — Net maturities of asset-backed commercial paper guaranteed by the FRBB 130 — All other investing activities, net 75 57 Net cash used in investing activities (6,838) (79,478) Financing activities Net change in:

Deposits (85,943) 52,068 Federal funds purchased and securities loaned or sold under repurchase agreements 61,995 59,183 Other borrowed funds (4,138) (4,361)

Proceeds from the issuance of long-term debt and trust-preferred capital debt securities 3,716 5,968 Repayments of long-term debt and trust-preferred capital debt securities (8,146) (12,178) Cash capital contribution from JPMorgan Chase & Co. 194 1 Cash dividends paid (2,000) — All other financing activities, net (375) 382 Net cash (used in) provided by financing activities (34,697) 101,063 Effect of exchange rate changes on cash and due from banks 42 360 Net increase in cash and due from banks 226 7,084 Cash and due from banks at the beginning of the year 25,502 38,696 Cash and due from banks at the end of the period $ 25,728 $ 45,780 Cash interest paid $ 2,684 $ 8,107 Cash income taxes refund, net (4) (43)


7

See Glossary of Terms on pages 64–66 of these Consolidated Financial Statements for definitions of terms used throughout the Notes to Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1 – BASIS OF PRESENTATION JPMorgan Chase Bank, National Association (“JPMorgan Chase Bank, N.A.”) is a wholly-owned bank subsidiary of JPMorgan Chase & Co. (“JPMorgan Chase”), which is a leading global financial services firm and one of the largest banking institutions in the United States of America (“U.S.”), with operations in more than 60 countries. JPMorgan Chase Bank, N.A. offers a wide range of banking services to its customers both domestically in the U.S. and internationally, including investment banking, financial services for consumers and businesses, financial transactions processing and asset management. Under the J.P. Morgan and Chase brands, JPMorgan Chase Bank, N.A. serves millions of customers in the U.S. and many of the world’s most prominent corporate, institutional and governmental clients.

JPMorgan Chase Bank, N.A. is chartered by the Office of the Comptroller of the Currency (“OCC”), a bureau of the United States Department of the Treasury. JPMorgan Chase Bank, N.A.’s main office is located in Columbus, Ohio, and it has branches in 23 states.

The accounting and financial reporting policies of JPMorgan Chase Bank, N.A. and its subsidiaries conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”). Additionally, where applicable, the policies conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. The unaudited consolidated financial statements prepared in conformity with U.S. GAAP require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expense, and the disclosures of contingent assets and liabilities. Actual results could be different from these estimates. In the opinion of management, all normal recurring adjustments have been included for a fair statement of this interim financial information. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in JPMorgan Chase Bank, N.A.’s Consolidated Financial Statements for the year ended December 31, 2008 (the “2008 Annual Financial Statements”).

Certain amounts in prior periods have been reclassified to conform to the current presentation.

NOTE 2 – ACCOUNTING AND REPORTING DEVELOPMENTS Business combinations/noncontrolling interests in consolidated financial statements In December 2007, the FASB issued SFAS 141R and SFAS 160, which amend the accounting and reporting of business combinations, as well as noncontrolling (i.e., minority) interests. For JPMorgan Chase Bank, N.A., SFAS 141R became effective for business combinations that close on or after January 1, 2009. SFAS 160 became effective for JPMorgan Chase Bank, N.A. for fiscal periods beginning January 1, 2009. In April 2009, the FASB issued FSP FAS 141(R)-1, which amends the accounting for contingencies acquired in a business combination.

SFAS 141R, as amended, will generally only impact the accounting for future business combinations and will impact certain aspects of business combination accounting, such as transaction costs and certain merger-related restructuring reserves, as well as the accounting for partial acquisitions where control is obtained by JPMorgan Chase Bank, N.A. One exception to the prospective application of SFAS 141R relates to accounting for income taxes associated with business combinations that closed prior to January 1, 2009. Once the purchase accounting measurement period closes for these acquisitions, any further adjustments to income taxes recorded as part of these business combinations will impact income tax expense. Previously, further adjustments were predominantly recorded as adjustments to goodwill.

SFAS 160 requires that noncontrolling interests be accounted for and presented as equity if material, rather than as a liability or mezzanine equity. SFAS 160’s presentation and disclosure requirements are to be applied retrospectively. The adoption of the reporting requirements of this pronouncement was not material to JPMorgan Chase Bank, N.A.’s Consolidated Balance Sheets or financial performance.

Accounting for transfers of financial assets and repurchase financing transactions In February 2008, the FASB issued FSP FAS 140-3, which requires an initial transfer of a financial asset and a repurchase financing that was entered into contemporaneously with, or in contemplation of, the initial transfer to be evaluated together as a linked transaction under SFAS 140, unless certain criteria are met. JPMorgan Chase Bank, N.A. adopted FSP FAS 140-3 on January 1, 2009, for new transactions entered into after the date of adoption. The adoption of FSP FAS 140-3 did not have a material impact on the Consolidated Balance Sheets or financial performance.

8

Disclosures about derivative instruments and hedging activities – FASB Statement No. 161 In March 2008, the FASB issued SFAS 161, which amends the disclosure requirements of SFAS 133. SFAS 161 requires increased disclosures about derivative instruments and hedging activities and their effects on an entity’s financial position, financial performance and cash flows. SFAS 161 is effective for fiscal years beginning after November 15, 2008. JPMorgan Chase Bank, N.A. adopted SFAS 161 on January 1, 2009. SFAS 161 only affected JPMorgan Chase Bank, N.A.’s disclosures of derivative instruments and related hedging activities, and not its Consolidated Balance Sheets, financial performance or Consolidated Statements of Cash Flows.

Determining whether an instrument (or embedded feature) is indexed to an entity’s own stock In September 2008, the EITF issued EITF 07-5, which establishes a two-step process for evaluating whether equity-linked financial instruments and embedded features are indexed to a company’s own stock for purposes of determining whether the derivative scope exception in SFAS 133 should be applied. EITF 07-5 is effective for fiscal years beginning after December 2008. The adoption of this EITF on January 1, 2009, did not have a material impact on JPMorgan Chase Bank, N.A.’s Consolidated Balance Sheets or financial performance.

The recognition and presentation of other-than-temporary impairment In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, which amends the other-than-temporary impairment model for debt securities. Under the FSP, an other-than-temporary-impairment must be recognized if an investor has the intent to sell the debt security or if it is more likely than not will be required to sell the debt security before recovery of its amortized cost basis. In addition, the FSP changes the amount of impairment to be recognized in current-period earnings when an investor does not have the intent to sell or if it is more likely than not will not be required to sell the debt security, as in these cases only the amount of the impairment associated with credit losses is recognized in income. The FSP also requires additional disclosures regarding the calculation of credit losses, as well as factors considered in reaching a conclusion that an investment is not other-than-temporarily impaired. The FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. JPMorgan Chase Bank, N.A. elected to early adopt the FSP as of January 1, 2009. The adoption of the FSP did not have a material impact on the Consolidated Balance Sheets or financial performance.

Determining fair value when the volume and level of activity for the asset or liability have significantly decreased, and identifying transactions that are not orderly In April 2009, the FASB issued FSP FAS 157-4. The FSP provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly declined. The FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. The FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted. JPMorgan Chase Bank, N.A. elected to early adopt the FSP in the first quarter of 2009. The application of the FSP did not have an impact on JPMorgan Chase Bank, N.A.’s Consolidated Balance Sheets or financial performance.

Interim disclosures about fair value of financial instruments In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1. The FSP requires the SFAS 107 disclosures about the fair value of financial instruments to be presented in interim financial statements in addition to annual financial statements. The FSP is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. JPMorgan Chase Bank, N.A. intends to adopt these additional disclosure requirements on the effective date.

Employers’ disclosures about postretirement benefit plan assets In December 2008, the FASB issued FSP FAS 132(R)-1, which requires more detailed disclosures about employers’ plan assets, including investment strategies, major categories of plan assets, concentrations of risk within plan assets, and valuation techniques used to measure the fair value of plan assets. This FSP is effective for fiscal years ending after December 15, 2009. JPMorgan Chase Bank, N.A. intends to adopt these additional disclosure requirements on the effective date.

Accounting for transfers of financial assets and consolidation of variable interest entities The FASB has been deliberating certain amendments to both SFAS 140 and FIN 46R that may impact the accounting for transactions that involve QSPEs and VIEs. Among other things, the FASB is proposing to eliminate the concept of QSPEs from both SFAS 140 and FIN 46R and make key changes to the consolidation model of FIN 46R that will change the method of determining which party to a VIE should consolidate the VIE. A final standard is expected to be issued in the second quarter of 2009, with an expected effective date of January 2010. Entities expected to be impacted include revolving securitization entities, bank-administered asset-backed commercial paper conduits, and certain mortgage securitization entities. JPMorgan Chase Bank, N.A. is monitoring the FASB’s deliberations on these proposed

9

amendments and continues to evaluate their potential impact. The ultimate impact to JPMorgan Chase Bank, N.A. will depend on the guidance issued by the FASB in a final statement amending SFAS 140 and FIN 46R.

NOTE 3 – BUSINESS CHANGES AND DEVELOPMENTS Acquisition of the banking operations of Washington Mutual Bank Refer to Note 3 on pages 10-11 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements for a discussion of JPMorgan Chase Bank, N.A.’s acquisition of the banking operations of Washington Mutual Bank (“Washington Mutual”) on September 25, 2008. The acquisition is being accounted for under the purchase method of accounting in accordance with SFAS 141. The total purchase price to complete the acquisition was $1.9 billion. The total purchase price was allocated to the Washington Mutual assets acquired and liabilities assumed using their fair values as of September 25, 2008. The allocation of the purchase price may be modified through September 25, 2009, as more information is obtained about the fair value of assets acquired and liabilities assumed. There were no changes to the allocation of the purchase price during the three months ended March 31, 2009.

Unaudited pro forma condensed combined financial information reflecting the Washington Mutual transaction The following unaudited pro forma condensed combined financial information presents the results of operations of JPMorgan Chase Bank, N.A. as they may have appeared for the three months ended March 31, 2008, if the Washington Mutual transaction had been completed on January 1, 2008.

Three months ended March 31, 2008 (in millions) Total net revenue $ 18,470Net income 258

The unaudited pro forma combined financial information is presented for illustrative purposes only and does not indicate the financial results of the combined company had the companies actually been combined as of January 1, 2008, nor is it indicative of the results of operations in future periods. Included in the unaudited pro forma combined financial information for the three months ended March 31, 2008, were pro forma adjustments to reflect the results of operations of Washington Mutual’s banking operations, considering the purchase accounting, valuation and accounting conformity adjustments related to the transaction. The amortization of purchase accounting adjustments to report interest-earning assets acquired and interest-bearing liabilities assumed at current interest rates is reflected. Valuation adjustments and the adjustment to conform allowance methodologies are reflected in the results for the three months ended March 31, 2008.

Merger with The Bear Stearns Companies Inc. Refer to Note 3 on pages 10-11 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements for a discussion of the merger on May 30, 2008, of a wholly-owned subsidiary of JPMorgan Chase with The Bear Stearns Companies Inc. (“Bear Stearns”). The merger is being accounted for under the purchase method of accounting in accordance with SFAS 141. The total purchase price to complete the merger was $1.5 billion. Additional information regarding the merger is provided in Note 2 on pages 125–127 of JPMorgan Chase’s Annual Report on Form 10-K for the year ended December 31, 2008, and Note 2 on pages 87-89 of JPMorgan Chase’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2009.

FDIC Special Assessment On May 22, 2009, the FDIC announced a 5 basis point special assessment on each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009. The amount of the special assessment for any institution will not exceed 10 basis points times such institution’s average U.S. deposits for the second quarter. The special assessment on JPMorgan Chase Bank, N.A. will be collected on September 30, 2009, and is expected to amount to approximately $700 million.

10

NOTE 4 – FAIR VALUE MEASUREMENT For a further discussion of JPMorgan Chase Bank, N.A.’s valuation methodologies for assets and liabilities measured at fair value and the SFAS 157 valuation hierarchy, see Note 5 on pages 13–24 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements. During the first quarter of 2009, there were no material changes made to JPMorgan Chase Bank, N.A.’s valuation models. The following table presents the financial instruments carried at fair value as of March 31, 2009, and December 31, 2008, by level within the SFAS 157 valuation hierarchy. Assets and liabilities measured at fair value on a recurring basis Fair value hierarchy

March 31, 2009 (in millions) Level 1 Level 2 Level 3 FIN 39

netting(c) Total

fair value Federal funds sold and securities purchased

under resale agreements $ — $ 18,974 $ — $ — $ 18,974 Securities borrowed — 3,305 — — 3,305 Trading assets:

Debt and equity instruments: U.S. government, agency and sponsored-

enterprises 14,947 697 — — 15,644 Obligations of states and municipalities — 1,221 293 — 1,514

Certificates of deposit, bankers’ acceptances and commercial paper — 1,455 — — 1,455

Non-U.S. government debt securities 27,174 15,816 77 — 43,067 Corporate debt securities — 40,065 5,468 — 45,533 Other 3 1,485 53 — 1,541 Equity securities 40,300 1,653 52 — 42,005 Loans — 12,873 13,059 — 25,932 Residential mortgage-backed securities — 630 221 — 851 Commercial mortgage-backed securities — 94 172 — 266 Asset-backed securities — 1,013 5,278 — 6,291 Physical commodities(a) — 3,482 — — 3,482

Total debt and equity instruments 82,424 80,484 24,673 — 187,581 Derivative receivables(b) 1,367 2,394,667 68,717 (2,352,904) 111,847

Total trading assets 83,791 2,475,151 93,390 (2,352,904) 299,428 Available-for-sale securities:

U.S. government, agency and sponsored-enterprises 160,557 39,066 — — 199,623

Obligations of states and municipalities 36 973 — — 1,009 Certificates of deposit — 3,735 — — 3,735 Non-U.S. government debt securities 8,074 15,894 — — 23,968 Corporate debt securities 53 53,027 57 — 53,137 Equity securities 2,116 15 — — 2,131 Residential mortgage-backed securities — 8,141 722 — 8,863 Commercial mortgage-backed securities — 3,748 — — 3,748 Asset-backed securities — 17,103 10,632 — 27,735

Total available-for-sale securities 170,836 141,702 11,411 — 323,949 Loans — 2,775 1,882 — 4,657 Mortgage servicing rights — — 10,486 — 10,486 Other assets — — 1,685 — 1,685 Total assets measured at fair value on a

recurring basis $ 254,627 $ 2,641,907 $ 118,854 $ (2,352,904) $ 662,484

11


March 31, 2009 (in millions) Level 1 Level 2 Level 3 FIN 39

netting(c) Total

fair value Deposits $ — $ 4,186 $ 928 $ — $ 5,114Federal funds purchased and securities loaned

or sold under repurchase agreements — 2,484 — — 2,484Other borrowed funds — 1,553 5 — 1,558

Trading liabilities: Debt and equity instruments 25,175 9,405 259 — 34,839Derivative payables(b) 1,039 2,354,539 49,298 (2,327,362) 77,514

Total trading liabilities 26,214 2,363,944 49,557 (2,327,362) 112,353Accounts payable and other liabilities — 5 6 — 11Beneficial interests issued by consolidated VIEs — 1,021 — — 1,021Long-term debt — 15,591 14,153 — 29,744Total liabilities measured at fair value on a

recurring basis $ 26,214 $2,388,784 $ 64,649 $ (2,327,362) $ 152,285

12



netting(c) Total

fair value Federal funds sold and securities purchased

under resale agreements $ — $ 19,865 $ — $ — $ 19,865 Securities borrowed — 3,381 — — 3,381 Trading assets:

Debt and equity instruments: U.S. government, agency and sponsored-

enterprises 14,393 5,054 — — 19,447 Obligations of states and municipalities — 1,709 353 — 2,062

Certificates of deposit, bankers’ acceptances and commercial paper 1,180 1,204 — — 2,384

Non-U.S. government debt securities 20,716 17,992 12 — 38,720 Corporate debt securities 18 47,370 4,838 — 52,226 Other 4 1,718 21 — 1,743 Equity securities 64,867 2,218 235 — 67,320 Loans — 14,254 14,481 — 28,735 Residential mortgage-backed securities — 145 615 — 760 Commercial mortgage-backed securities — 140 174 — 314 Asset-backed securities — 1,082 5,540 — 6,622 Physical commodities(a) — 3,455 — — 3,455

Total debt and equity instruments 101,178 96,341 26,269 — 223,788 Derivative receivables(b) 1,759 2,661,825 50,663 (2,572,670) 141,577


Available-for-sale securities: U.S. government, agency and sponsored-enterprises 109,545 18,118 — — 127,663

Obligations of states and municipalities 34 879 — — 913 Certificates of deposit — 17,282 — — 17,282 Non-U.S. government debt securities 6,112 2,232 — — 8,344 Corporate debt securities — 9,448 57 — 9,505 Equity securities 1,776 12 — — 1,788 Residential mortgage-backed securities — 8,964 6 — 8,970 Commercial mortgage-backed securities — 3,939 — — 3,939 Asset-backed securities — 10,111 11,195 — 21,306

Total available-for-sale securities 117,467 70,985 11,258 — 199,710

Loans — 4,641 1,397 — 6,038 Mortgage servicing rights — — 9,236 — 9,236 Other assets — 130 1,650 — 1,780 Total assets measured at fair value on a

recurring basis $ 220,404 $ 2,857,168 $ 100,473 $ (2,572,670) $ 605,375

13



netting(c) Total

fair value Deposits $ — $ 4,370 $ 1,235 $ — $ 5,605 Federal funds purchased and securities loaned

or sold under repurchase agreements — 2,968 — — 2,968 Other borrowed funds — 2,658 56 — 2,714

Trading liabilities: Debt and equity instruments 21,595 9,030 287 — 30,912 Derivative payables(b) 1,211 2,610,277 41,731 (2,541,722) 111,497

Total trading liabilities 22,806 2,619,307 42,018 (2,541,722) 142,409 Accounts payable and other liabilities — — — — — Beneficial interests issued by consolidated VIEs — 1,364 — — 1,364 Long-term debt — 20,399 14,525 — 34,924 Total liabilities measured at fair value on a

recurring basis $ 22,806 $ 2,651,066 $ 57,834 $(2,541,722) $ 189,984 (a) Physical commodities inventories are accounted for at the lower of cost or fair value. (b) JPMorgan Chase Bank, N.A. does not reduce the derivative receivables and derivative payables balances for the FIN 39 netting

adjustment either within or across the levels of the fair value hierarchy as it is not relevant to a presentation that is based on the transparency of inputs to the valuation of an asset or liability. As such, the derivative balances reported in the fair value hierarchy levels are gross of any netting adjustments.

(c) As permitted under FIN 39, JPMorgan Chase Bank, N.A. has elected to net derivative receivables and derivative payables and the related cash collateral received and paid when a legally enforceable master netting agreement exists.

Changes in level 3 recurring fair value measurements The following tables include a rollforward of the balance sheet amounts for the three months ended March 31, 2009 and 2008 (including changes in fair value), for financial instruments classified by JPMorgan Chase Bank, N.A. within level 3 of the fair value hierarchy. When a determination is made to classify a financial instrument within level 3, the determination is based on the significance of the unobservable parameters to the overall fair value measurement. However, level 3 financial instruments typically include, in addition to the unobservable or level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources); accordingly, the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology. Also, JPMorgan Chase Bank, N.A. risk manages the observable components of level 3 financial instruments using securities and derivative positions that are classified within level 1 or 2 of the valuation hierarchy; as these level 1 and level 2 risk management instruments are not included below, the gains or losses in the following tables do not reflect the effect of JPMorgan Chase Bank, N.A.’s risk management activities related to such level 3 instruments.

14


Three months ended March 31, 2009 (in millions)


2009

Total realized/unrealized

gains/(losses)

Purchases, issuances

settlements, net


out of level 3


2009

Change in unrealizedgains and (losses) related to financial instruments held

at March 31, 2009 Assets: Trading assets:

Debt and equity instruments: Obligations of states and

municipalities $ 353 $ (18) $ (42) $ — $ 293 $ (18) Non-U.S. government debt

securities 12 25 5 35 77 (1) Corporate debt securities 4,838 (35) (2,528) 3,193 5,468 (31) Other 21 (12) 30 14 53 8 Equity securities 235 (88) (145) 50 52 (26) Loans 14,481 (1,154) (497) 229 13,059 (1,156) Residential mortgage-backed

securities 615 (8) (15) (371) 221 (30) Commercial mortgage-backed

securities 174 2 (4) — 172 2 Asset-backed securities 5,540 (95) (129) (38) 5,278 (84) Physical commodities — — — — — —

Total debt and equity instruments 26,269 (1,383)(b)(c) (3,325) 3,112 24,673 (1,336)(b)(c)

Net derivative receivables 8,932 267(b) (1,617) 11,837 19,419 (274)(b) Available-for-sale securities:

Asset-backed securities 11,195 (898) 335 — 10,632 (1,086) Other 63 — — 716 779 —

Total available-for-sale securities 11,258 (898)(d) 335 716 11,411 (1,086)(d)

Loans 1,397 (272)(b) (191) 948 1,882 (229)(b) Mortgage servicing rights 9,236 1,305(c) (55) — 10,486 1,305(c) Other assets 1,650 (165)(e) 178 22 1,685 (162)(e) Liabilities(a): Deposits $ (1,235) $ (14)(b) $ 383 $ (62) $ (928) $ 9(b) Other borrowed funds (56) 84(b) (38) 5 (5) (1)(b) Trading liabilities:

Debt and equity instruments (287) (62)(b) 87 3 (259) 100(b) Accounts payable and other

liabilities — 2(b) (8) — (6) 2(b) Beneficial interests issued by

consolidated VIEs — —(b) — — — —(b) Long-term debt (14,525) 873(b) 1,163 (1,664) (14,153) 378(b)

15




2008

Total realized/unrealized

gains/(losses)

Purchases, issuances

settlements, net


out of level 3


2008

Change in unrealizedgains and (losses) related to financial instruments held

at March 31, 2008


Debt and equity instruments $ 18,815 $ (115)(b)(c) $ 3,640 $ 5,704 $ 28,044 $ 14(b)(c) Net derivative receivables 206 1,385(b) 265 589 2,445 1,539(b)

Available-for-sale securities 10 —(d) (1) — 9 —(d) Loans 7,797 (194)(b) 245 — 7,848 (198)(b) Mortgage servicing rights 8,632 (632)(c) 419 — 8,419 (632)(c) Other assets 797 19(e) (27) 1 790 18(e)

Liabilities(c): Deposits $ (1,228) $ (18)(b) $ (31) $ (2) $ (1,279) $ (17)(b) Other borrowed funds (101) 36(b) (138) 102 (101) (15)(b) Trading liabilities:

Debt and equity instruments (480) (59)(b) (9) (179) (727) (341)(b) Accounts payable and other

liabilities (25) 25(b) — — — —(b) Beneficial interests issued by

consolidated VIEs (82) 31(b) — — (51) 31(b) Long-term debt (21,198) 242(b) 1,077 (427) (20,306) 179(b) (a) Level 3 liabilities as a percentage of total JPMorgan Chase Bank, N.A. liabilities accounted for at fair value (including liabilities carried at fair

value on a nonrecurring basis) were 42% and 30% at March 31, 2009, and December 31, 2008, respectively. (b) Reported in principal transactions revenue. (c) Changes in fair value for retail mortgage loans originated with the intent to sell, and mortgage servicing rights (“MSRs”) are measured at fair

value and reported in mortgage fees and related income. (d) Realized gains (losses) are reported in securities gains (losses). Unrealized gains (losses) are reported in accumulated other comprehensive

income (loss). (e) Reported in other income. Assets and liabilities measured at fair value on a nonrecurring basis Certain assets, liabilities and unfunded lending-related commitments are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). The following tables present the financial instruments carried on the Consolidated Balance Sheets by caption and level within the SFAS 157 valuation hierarchy (as described above) as of March 31, 2009, and December 31, 2008, for which a nonrecurring change in fair value has been recorded during the reporting period. Fair value hierarchy March 31, 2009 (in millions) Level 1 Level 2 Level 3 Total fair value Loans(a) $ — $ 3,472 $ 2,756 $ 6,228 Other assets:

Other real estate owned — 122 108 230 Other — — 217 217

Total other assets — 122 325 447 Total assets at fair value on a nonrecurring basis $ — $ 3,594 $ 3,081 $ 6,675 Accounts payable and other liabilities(b) $ — $ 175 $ 76 $ 251 Total liabilities at fair value on a nonrecurring

basis $ — $ 175 $ 76 $ 251

16

Fair value hierarchy December 31, 2008 (in millions) Level 1 Level 2 Level 3 Total fair value Loans(a) $ — $ 4,975 $ 3,685 $ 8,660 Other assets:

Other real estate owned — 6 103 109 Other — 257 35 292

Total other assets — 263 138 401 Total assets at fair value on a nonrecurring basis $ — $ 5,238 $ 3,823 $ 9,061 Accounts payable and other liabilities(b) $ — $ 207 $ 81 $ 288 Total liabilities at fair value on a nonrecurring

basis $ — $ 207 $ 81 $ 288 (a) Includes leveraged lending and other loan warehouses held-for-sale. (b) Represents the fair value adjustment associated with $1.0 billion and $1.4 billion of unfunded held-for-sale lending-related commitments within

the leveraged lending portfolio at March 31, 2009, and December 31, 2008, respectively. Nonrecurring fair value changes The following table presents the total change in value of financial instruments for which a fair value adjustment has been included in the Consolidated Statements of Income for the three months ended March 31, 2009 and 2008, related to financial instruments held at March 31, 2009 and 2008.

Three months ended March 31, (in millions) 2009 2008 Loans $ (1,245) $ (907) Other assets (59) (2) Accounts payable and other liabilities 30 (55) Total nonrecurring fair value gains (losses) $ (1,274) $ (964) In the above table, loans predominantly include writedowns of delinquent consumer residential mortgage and home equity loans within the retail business, where impairment is based on the fair value of the underlying collateral, and the change in fair value of leveraged lending and warehouse loans in the investment banking business, which are carried on the Consolidated Balance Sheets at the lower of cost or fair value. Accounts payable and other liabilities predominantly include the change in fair value for unfunded lending-related commitments within the leveraged lending portfolio.

Level 3 analysis Level 3 assets (including assets measured at fair value on a nonrecurring basis) were 7% of total assets and 18% of total assets measured at fair value at March 31, 2009, compared with 6% and 17%, respectively, at December 31, 2008. The following describes significant changes to level 3 assets during the quarter.

Level 3 assets increased $17.6 billion in the first quarter of 2009, largely due to:

• The transfer of approximately $37.4 billion of structured credit derivatives to level 3 as a result of decreasing transaction activity, and the lack of observable market data in the first quarter. The fair value of such derivatives is based on observable market data, where available. Where observable market data is not available or is limited, such derivatives are also priced using independently reviewed and approved valuation models. Such models include pricing inputs such as correlation that are calibrated to observable parameters where available. Valuation adjustments, including parameter uncertainty, are made where appropriate to ensure that the derivatives are recorded at fair value. As and when transactions occur, JPMorgan Chase Bank, N.A. considers those prices in valuing positions with similar risk. JPMorgan Chase Bank, N.A.’s valuation approach did not change as a result of the transfer to level 3; rather the inputs to the valuation were less observable in the current period as compared to prior periods. In assessing JPMorgan Chase Bank, N.A.’s actual risk exposure to such derivatives, consideration must be given to level 3 liabilities with offsetting risk characteristics. In the first quarter of 2009, there were approximately $21.6 billion of level 3 liabilities with offsetting risk characteristics; these liabilities are modeled and valued the same way with the same parameters and inputs as the assets. After consideration of the offsetting liabilities, the counterparty credit risk and market risk related to the net $15.8 billion asset is hedged dynamically with credit default swaps and index tranches, which are largely observable and liquid.

• The transfer of $3.1 billion of certain structured notes reflective of lower liquidity and pricing observability.

• Gains of $1.3 billion on MSRs.

17

The increase in level 3 assets described above was partially offset by:

• The transfer of $17.7 billion of single-name CDS on ABS from level 3 to level 2, resulting from a decline in pricing uncertainty. The fair value of these assets is generally based on observable market data from third-party transactions, benchmarking to relevant indices such as the Asset-Backed Securities Index (“ABX”), and calibration to other available market information such as broker quotes.

• $3.6 billion related to sales of CDS positions on CMBS and RMBS.

• $2.4 billion related to sales and unwinds of structured transactions with hedge funds.

• $951 million in residential and commercial mortgage-backed loans and securities and other asset-backed securities, primarily driven by markdowns and sales.

Gains and Losses JPMorgan Chase Bank, N.A. risk manages level 3 financial instruments using securities and derivative positions classified within level 1 or 2 of the valuation hierarchy; the effect of these risk management activities is not reflected in the level 3 gains and losses included in the tables above.

Included in the tables for the first three months of 2009 were gains and losses resulting from:

• Gains of $1.3 billion on MSRs.

• Gains of $873 million related to structured notes, principally due to significant volatility in equity markets.

• Net gains on derivatives of $267 million primarily related to changes in interest rates and credit spreads.

• Losses on trading debt and equity instruments of approximately $1.4 billion, principally from mortgage-related transactions and certain asset-backed securities.

• Losses of $552 million on leveraged loans. Leveraged loans are typically classified as held-for-sale and measured at the lower of cost or fair value and therefore included in nonrecurring fair value assets.

Included in the tables for the first three months of 2008 were gains and losses resulting from:

• Net gains of $1.4 billion related to fixed income and equity derivatives.

• Gains of $242 million related to structured notes, principally due to significant volatility in equity markets.

• Losses of approximately $900 million on leveraged loans. Leveraged loans are typically classified as held-for-sale and measured at the lower of cost or fair value and therefore included in the nonrecurring fair value assets.

• Losses on trading debt and equity instruments of approximately $115 million, principally from mortgage-related transactions.

For further information on changes in the fair value of the MSRs see Note 19 on page 54 of these Consolidated Financial Statements.

NOTE 5 – FAIR VALUE OPTION SFAS 159 provides an option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments, and written loan commitments not previously carried at fair value. JPMorgan Chase Bank, N.A.’s fair value elections were intended to mitigate the volatility in earnings that had been created by recording financial instruments and the related risk management instruments on a different basis of accounting, or to eliminate the operational complexities of applying hedge accounting.

For a discussion of the primary financial instruments for which fair value elections have been made and the basis for those elections, see Note 6 on pages 25–27 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements.

18

Changes in fair value under the fair value option election The following table presents the changes in fair value included in the Consolidated Statements of Income for the three months ended March 31, 2009 and 2008, for items for which the fair value election was made. The profit and loss information presented below only includes the financial instruments that were elected to be measured at fair value; related risk management instruments, which are required to be measured at fair value, are not included in the table.

Three months ended March 31, 2009 2008



income(b)


recorded Principal


income(b)



under resale agreements $ (221) $ — $ (221) $ 538 $ — $ 538 Securities borrowed (7) — (7) — — —

Trading assets: Debt and equity instruments, excluding loans 133 7(c) 140 158 (5)(c) 153 Loans reported as trading assets:

Changes in instrument-specific credit risk (276) (50)(c) (326) (783) (52)(c) (835) Other changes in fair value (260) 937(c) 677 (129) 393(c) 264

Loans: Changes in instrument-specific credit risk (263) — (263) (243) — (243) Other changes in fair value (6) — (6) 25 — 25

Other assets —

(151)(d) (151) — 13(d) 13

Deposits(a) (165) — (165) (405) — (405) Federal funds purchased and securities loaned

or sold under repurchase agreements 32 — 32 (67) — (67) Other borrowed funds(a) 266 — 266 (45) — (45) Trading liabilities (3) — (3) (1) — (1) Beneficial interests issued by consolidated VIEs 215 — 215 (140) — (140) Other liabilities (1) — (1) — — — Long-term debt:

Changes in instrument-specific credit risk(a) 646 — 646 798 — 798 Other changes in fair value 663 — 663 (2) — (2)

(a) Total changes in instrument-specific credit risk related to structured notes were $640 million and $821 million for the three months ended March 31, 2009 and 2008, respectively, which includes adjustments for structured notes classified within deposits and other borrowed funds, as well as long-term debt.

(b) Included in the amounts are gains and losses related to certain financial instruments previously carried at fair value by JPMorgan Chase Bank, N.A., such as structured liabilities elected pursuant to SFAS 155 and loans purchased as part of the trading activities of the investment banking business.

(c) Reported in mortgage fees and related income. (d) Reported in other income.

Determination of instrument-specific credit risk for items for which a fair value election was made The following describes how the gains and losses included in earnings during 2009 and 2008, which were attributable to changes in instrument-specific credit risk, were determined.

• Loans and lending-related commitments: For floating-rate instruments, all changes in value are presented as instrument-specific credit risk. For fixed-rate instruments, an allocation of the changes in value for the period is made between those changes in value that are interest rate–related and changes in value that are credit-related. Allocations are generally based on an analysis of borrower-specific credit spread and recovery information, where available, or benchmarking to similar entities or industries. Instrument-specific credit risk, as presented, also incorporates the impact of liquidity in current markets.

• Long-term debt: Changes in value attributable to instrument-specific credit risk were derived principally from observable changes in JPMorgan Chase Bank, N.A.’s credit spread. The gains for 2009 and 2008 were attributable to the widening of JPMorgan Chase Bank, N.A.’s credit spread.

19

• Resale and repurchase agreements, securities borrowed agreements and securities lending agreements: Generally, for these types of agreements, there is a requirement that collateral be maintained with a market value equal to or in excess of the principal amount loaned; as a result, there would be no adjustment, or an immaterial adjustment, for instrument-specific credit risk related to these agreements.

Difference between aggregate fair value and aggregate remaining contractual principal balance outstanding The following table reflects the difference between the aggregate fair value and the aggregate remaining contractual principal balance outstanding as of March 31, 2009, and December 31, 2008, for loans and long-term debt for which the SFAS 159 fair value option has been elected. The loans were classified in trading assets – debt and equity instruments or in loans. March 31, 2009 December 31, 2008

(in millions)




outstanding




outstanding Loans Performing loans 90 days or more past due

Loans reported as trading assets $ — $ — $ — $ — $ — $ — Loans — — — — — —

Nonaccrual loans Loans reported as trading assets 2,984 1,111 (1,873) 2,653 894 (1,759) Loans 199 102 (97) 22 10 (12)

Subtotal 3,183 1,213 (1,970) 2,675 904 (1,771) All other performing loans

Loans reported as trading assets 30,397 24,821 (5,576) 34,240 27,841 (6,399) Loans 5,623 4,555 (1,068) 7,189 6,028 (1,161)

Total loans $ 39,203 $ 30,589 $ (8,614) $ 44,104 $ 34,773 $ (9,331) Long-term debt Principal protected debt $ (11,929)(c) $ (11,879) $ (50) $ (10,411)(c) $ (10,377) $ (34) Nonprincipal protected debt(a) NA (17,865) NA NA (24,547) NA Total long-term debt NA $ (29,744) NA NA $ (34,924) NA FIN 46R long-term beneficial interests(a)(b) $ NA $ (1,021) $ NA $ NA $ (1,364) $ NA (a) Remaining contractual principal is not applicable to nonprincipal-protected notes. Unlike principal-protected notes, for which JPMorgan Chase

Bank, N.A. is obligated to return a stated amount of principal at the maturity of the note, nonprincipal-protected notes do not obligate JPMorgan Chase Bank, N.A. to return a stated amount of principal at maturity, but to return an amount based on the performance of an underlying variable or derivative feature embedded in the note.

(b) Includes only nonprincipal protected debt at March 31, 2009, and December 31, 2008. (c) Where JPMorgan Chase Bank, N.A. issues principal-protected zero coupon or discount notes, the balance reflected as the remaining contractual

principal is the final principal payment at maturity.

20

NOTE 6 – PRINCIPAL TRANSACTIONS Principal transactions revenue predominantly consists of realized and unrealized gains and losses from trading activities (including physical commodities inventories that are accounted for at the lower of cost or fair value), changes in fair value associated with financial instruments held by the investment banking business for which the SFAS 159 fair value option was elected, and loans held-for-sale within the wholesale lines of business. For loans measured at fair value under SFAS 159, origination costs are recognized in the associated expense category as incurred. Trading assets and liabilities Trading assets include debt and equity instruments held for trading purposes that JPMorgan Chase Bank, N.A. owns (“long” positions), certain loans for which JPMorgan Chase Bank, N.A. manages on a fair value basis and has elected the SFAS 159 fair value option, and physical commodities inventories that are accounted for at the lower of cost or fair value. Trading liabilities include debt and equity instruments that JPMorgan Chase Bank, N.A. has sold to other parties but does not own (“short” positions). JPMorgan Chase Bank, N.A. is obligated to purchase instruments at a future date to cover the short positions. Included in trading assets and trading liabilities are the reported receivables (unrealized gains) and payables (unrealized losses) related to derivatives. Trading assets and liabilities are carried at fair value on the Consolidated Balance Sheets. For a discussion of the valuation of trading assets and trading liabilities, see Note 5 on pages 13–24 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements. The following table presents the fair value of trading assets and trading liabilities for the dates indicated.

(in millions) March 31, 2009 December 31, 2008 Trading assets Debt and equity instruments

U.S. government and agency: U.S. treasuries $ 6,944 $ 6,419 Mortgage-backed securities 2,737 2,462

U.S. government-sponsored enterprise: Mortgage-backed securities 4,239 8,128 Direct obligations 1,724 2,438

Obligations of states and municipalities 1,514 2,062 Certificates of deposit, bankers’ acceptances and commercial paper 1,455 2,384 Non-U.S. government debt securities 43,067 38,720 Corporate debt securities 45,533 52,226 Equity securities 42,005 67,320 Loans 25,932 28,735 Residential mortgage-backed securities: Prime and Alt A 456 270 Subprime 89 101 Non-U.S. residential 306 389

Commercial mortgage-backed securities 266 314 Asset-backed securities: Credit card receivables, automobile loans, other consumer loans and other 1,142 1,293 Commercial and industrial loans 1,360 1,584 Collateralized debt obligations 3,789 3,745

Physical commodities 3,482 3,455 Other 1,541 1,743

Total debt and equity instruments 187,581 223,788

21

(in millions) March 31, 2009 December 31, 2008 Derivative receivables:

Interest rate(a) $ 41,346 $ 48,991 Credit 30,158 34,172 Commodity 6,358 7,586 Foreign exchange(a) 22,742 38,889 Equity 11,243 11,939

Total derivative receivables 111,847 141,577 Total trading assets $ 299,428 $ 365,365

Trading liabilities Debt and equity instruments(b) $ 34,839 $ 30,912 Derivative payables:

Interest rate(a) 20,515 32,002 Credit 13,099 14,217 Commodity 1,833 4,869 Foreign exchange(a) 29,268 44,639 Equity 12,799 15,770

Total derivative payables 77,514 111,497 Total trading liabilities $ 112,353 $ 142,409 (a) During the first quarter of 2009, cross-currency interest rate swaps, previously reported in interest rate contracts, were reclassified to foreign

exchange contracts to be more consistent with industry practice. The effect of this change resulted in reclassifications of $14.1 billion and $20.6 billion of derivative receivables and derivative payables, respectively, between interest rate and foreign exchange contracts as of December 31, 2008.

(b) Primarily represents securities sold, not yet purchased.

As noted above, included in trading assets and trading liabilities are the reported receivables (unrealized gains) and payables (unrealized losses) related to derivatives. As permitted under FIN 39, JPMorgan Chase Bank, N.A. has elected to net derivative receivables and derivative payables and the related cash collateral received and paid when a legally enforceable master netting agreement exists. The netted amount of cash collateral received and paid was $92.1 billion and $66.6 billion, respectively, at March 31, 2009, and $102.2 billion and $71.2 billion, respectively, at December 31, 2008. JPMorgan Chase Bank, N.A. received and paid excess collateral of $21.6 billion and $2.8 billion, respectively, at March 31, 2009, and $22.2 billion and $3.7 billion, respectively, at December 31, 2008. This additional collateral received and paid secures potential exposure that could arise in the derivatives portfolio should the mark-to-market value of the transactions move in JPMorgan Chase Bank, N.A.’s favor or the client’s favor, respectively, and is not nettable against the amount of derivative receivables or derivative payables in the table above. The above amounts also exclude liquid securities held and posted as collateral by JPMorgan Chase Bank, N.A. to secure derivative receivables and derivative payables. Collateral amounts held and posted in securities form are not recorded on JPMorgan Chase Bank, N.A.’s balance sheet, and are therefore not nettable against derivative receivables or derivative payables. JPMorgan Chase Bank, N.A. held securities collateral of $15.3 billion and $19.8 billion at March 31, 2009, and December 31, 2008, respectively, related to derivative receivables. JPMorgan Chase Bank, N.A. posted $8.1 billion and $11.7 billion of securities collateral at March 31, 2009, and December 31, 2008, respectively, related to derivative payables. For additional discussion of derivative instruments, see Note 7 on pages 22–30 of these Consolidated Financial Statements.

Average trading assets and liabilities were as follows for the periods indicated.

Three months ended March 31, (in millions) 2009 2008 Trading assets – debt and equity instruments $ 202,982 $ 304,764 Trading assets – derivative receivables 121,790 91,200

Trading liabilities – debt and equity instruments(a) $ 34,772 $ 72,157 Trading liabilities – derivative payables 84,928 81,166 (a) Primarily represent securities sold, not yet purchased.

22

NOTE 7 – DERIVATIVE INSTRUMENTS Derivative instruments enable end-users to transform or mitigate exposure to credit or market risks. Counterparties to a derivative contract seek to obtain risks and rewards similar to those that could be obtained from purchasing or selling a related cash instrument without having to exchange the full purchase or sales price upfront. JPMorgan Chase Bank, N.A. makes markets in derivatives for customers and also uses derivatives to hedge or manage risks of market exposures. JPMorgan Chase Bank, N.A.’s derivatives are predominantly entered into for market-making purposes.

Trading Derivatives JPMorgan Chase Bank, N.A. transacts in a variety of derivatives in its trading portfolios to meet the needs of customers (both dealers and clients) and to generate revenue through this trading activity. JPMorgan Chase Bank, N.A. makes markets in derivatives for its customers (collectively, “client derivatives”) seeking to mitigate or transform interest rate, credit, foreign exchange, equity and commodity risks. JPMorgan Chase Bank, N.A. actively manages the risks from its exposure to such derivatives by entering into other derivative transactions or purchasing or selling other financial instruments that partially or fully offset the exposure from client derivatives. JPMorgan Chase Bank, N.A. seeks to earn a spread between the client derivatives and offsetting positions, and from the remaining open risk positions. For more information about trading derivatives, see the trading derivatives gains and losses table on page 27 of this Note.

Risk Management Derivatives JPMorgan Chase Bank, N.A. manages its market exposures using various derivative instruments.

Interest rate contracts are used to minimize fluctuations in earnings that are caused by changes in interest rates. Fixed-rate assets and liabilities appreciate or depreciate in market value as interest rates change. Similarly, interest income and interest expense increase or decrease as a result of variable-rate assets and liabilities resetting to current market rates, and as a result of the repayment and subsequent origination or issuance of fixed-rate assets and liabilities at current market rates. Gains and losses on the derivative instruments that are related to such assets and liabilities are expected to substantially offset this variability in earnings. JPMorgan Chase Bank, N.A. generally uses interest rate swaps, forwards and futures to manage the impact of interest rate fluctuations on earnings.

Foreign currency forward contracts are used to manage the foreign exchange risk associated with certain foreign currency–denominated (i.e., non-U.S.) assets and liabilities and forecasted transactions denominated in a foreign currency, and JPMorgan Chase Bank, N.A.’s equity investments in non-U.S. subsidiaries. As a result of fluctuations in foreign currencies, the U.S. dollar-equivalent values of the foreign currency–denominated assets and liabilities or forecasted revenue or expense increase or decrease. Gains or losses on the derivative instruments that are related to the foreign currency–denominated assets or liabilities, or forecasted transactions, are expected to substantially offset this variability.

Gold forward contracts are used to manage the price risk of gold inventory in JPMorgan Chase Bank, N.A.’s commodities portfolio. Gains or losses on the gold forwards are expected to substantially offset the depreciation or appreciation of the gold inventory as a result of gold price changes. Also in the commodities portfolio, electricity and natural gas futures and forwards contracts are used to manage the price risk associated with energy-related tolling and load serving contracts and energy-related investments.

JPMorgan Chase Bank, N.A. uses credit derivatives to manage the counterparty credit risk associated with loans and lending-related commitments. Credit derivatives compensate the purchaser when the entity referenced in the contract experiences a credit event, such as bankruptcy or a failure to pay an obligation when due. For a further discussion of credit derivatives, see the discussion in the Credit derivatives section on pages 28–29 of these Consolidated Financial Statements.

For more information about risk management derivatives, see the risk management derivatives gains and losses table on page 27 of this Note.

23

Notional amount of derivative contracts The following table summarizes the notional amount of derivative contracts outstanding as of March 31, 2009.

Notional amounts(b) (in billions) March 31, 2009 Interest rate contracts

Swaps $ 49,411 Futures and forwards 6,325 Written options 4,760 Purchased options 4,611

Total interest rate contracts 65,107 Credit derivatives(a) 7,500 Foreign exchange contracts

Cross-currency swaps 1,662 Spot, futures and forwards 3,571 Written options 925 Purchased options 924

Total foreign exchange contracts 7,082 Equity contracts


Total equity contracts 1,448 Commodity contracts


Total commodity contracts 759 Total derivative notional amounts $ 81,896 (a) For more information on volumes and types of credit derivative contracts, see the credit derivative discussion on pages 28–29 of this Note. (b) Represents the sum of gross long and gross short third-party notional derivative contracts. While the notional amounts disclosed above give an indication of the volume of JPMorgan Chase Bank, N.A.’s derivative activity, the notional amounts significantly exceed, in JPMorgan Chase Bank, N.A.’s view, the possible losses that could arise from such transactions. For most derivative transactions, the notional amount does not change hands; it is used simply as a reference to calculate payments.

Accounting for Derivatives All free-standing derivatives are required to be recorded on the Consolidated Balance Sheets at fair value. The accounting for changes in value of a derivative depends on whether or not the contract has been designated and qualifies for hedge accounting. Derivatives that are not designated as hedges are marked to market through earnings. The tabular disclosures on pages 25–29 of this Note provide additional information on the amount of and reporting for derivative assets, liabilities, gains and losses. For further discussion of derivatives embedded in structured notes, see Notes 5 and 6 on pages 13–24 and 25–27, respectively, of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements.

Derivatives designated as hedges JPMorgan Chase Bank, N.A. applies hedge accounting to certain derivatives executed for risk management purposes typically interest rate, foreign exchange and gold derivatives, as described above. JPMorgan Chase Bank, N.A. does not seek to apply hedge accounting to all of its risk management activities involving derivatives. For example, JPMorgan Chase Bank, N.A. does not apply hedge accounting to purchased credit default swaps used to manage the credit risk of loans and commitments, because of the difficulties in qualifying such contracts as hedges. For the same reason, JPMorgan Chase Bank, N.A. does not apply hedge accounting to certain interest rate derivatives used for risk management purposes, or to commodity derivatives used to manage the price risk of tolling and load-serving contracts.

24

To qualify for hedge accounting, a derivative must be highly effective at reducing the risk associated with the exposure being hedged. In addition, for a derivative to be designated as a hedge, the risk management objective and strategy must be documented. Hedge documentation must identify the derivative hedging instrument, the asset or liability and type of risk to be hedged, and how the effectiveness of the derivative will be assessed prospectively and retrospectively. To assess effectiveness, JPMorgan Chase Bank, N.A. uses statistical methods such as regression analysis, as well as nonstatistical methods including dollar-value comparisons of the change in the fair value of the derivative to the change in the fair value or cash flows of the hedged item. The extent to which a derivative has been, and is expected to continue to be, effective at offsetting changes in the fair value or cash flows of the hedged item must be assessed and documented at least quarterly. Any hedge ineffectiveness (i.e., the amount by which the gain or loss on the designated derivative instrument does not exactly offset the gain or loss on the hedged item attributable to the hedged risk) must be reported in current-period earnings. If it is determined that a derivative is not highly effective at hedging the designated exposure, hedge accounting is discontinued.

There are three types of hedge accounting designations: fair value hedges, cash flow hedges and net investment hedges. JPMorgan Chase Bank, N.A. uses fair value hedges primarily to hedge fixed-rate long-term debt, available-for-sale (“AFS”) securities and gold inventory. For qualifying fair value hedges, the changes in the fair value of the derivative, and in the value of the hedged 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 hedged item and is amortized to earnings as a yield adjustment.

JPMorgan Chase Bank, N.A. uses cash flow hedges to hedge the 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 revenue and expense. For qualifying cash flow hedges, the effective portion of the change in the fair value of the derivative is recorded in other comprehensive income (loss) (“OCI”) and recognized in the Consolidated Statements of Income when the hedged cash flows affect earnings. Derivative amounts affecting earnings are recognized consistent with the classification of the hedged item — primarily interest income, interest expense, noninterest revenue, and compensation expense. The ineffective portions of cash flow hedges are immediately recognized in earnings. If the hedge relationship is terminated, then the value of the derivative recorded in accumulated other comprehensive income (loss) (“AOCI”) is recognized in earnings when the cash flows that were hedged affect earnings. For hedge relationships that are discontinued because a forecasted transaction is not expected to occur according to the original hedge forecast, any related derivative values recorded in AOCI are immediately recognized in earnings.

JPMorgan Chase Bank, N.A. uses foreign currency hedges to protect the value of its net investments in certain non-U.S. subsidiaries or branches whose functional currencies are not the U.S. dollar. For qualifying net investment hedges, changes in the fair value of the derivative are recorded in the translation adjustments account within AOCI.

25

Impact of derivatives on the Consolidated Balance Sheet The following table summarizes information on derivative fair values that are reflected on JPMorgan Chase Bank, N.A.’s Consolidated Balance Sheet as of March 31, 2009, by accounting designation (e.g., whether the derivatives were designated as hedges or not) and contract type.

Free-standing derivatives(a) Derivative receivables Derivative payables March 31, 2009 (in millions)


Designated as hedges

Total derivative receivables


Designated as hedges(c)

Total derivative payables

Trading assets and liabilities Interest rate $ 1,639,604 $ 4,330 $ 1,643,934 $ 1,601,226 $ 18 $ 1,601,244 Credit 512,281 — 512,281 495,221 — 495,221 Foreign exchange 185,781 1,721 187,502 191,556 1,836 193,392 Equity 68,306 — 68,306 64,314 — 64,314 Commodity 52,728 — 52,728 50,705 — 50,705

Gross fair value of trading assets and liabilities $ 2,458,700 $ 6,051 $ 2,464,751 $ 2,403,022 $ 1,854 $ 2,404,876

FIN 39 netting(b) (2,352,904) (2,327,362) Carrying value of

derivatives in trading assets and trading liabilities on the Consolidated Balance Sheet $ 111,847 $ 77,514

(a) Excludes structured notes for which the fair value option has been elected. See Note 5 on pages 17–19 of these Consolidated Financial Statements for further information.

(b) FIN 39 permits the netting of derivative receivables and derivative payables and the related cash collateral received and paid when a legally enforceable master netting agreement exists between JPMorgan Chase Bank, N.A. and a derivative counterparty.

(c) Excludes $1.6 billion related to separated commodity derivatives used as fair value hedging instruments that are recorded in the line item of the host contract (i.e., other borrowed funds).

Impact of derivatives and hedged items on the income statement and on other comprehensive income The following table summarizes the total pretax impact of JPMorgan Chase Bank, N.A.’s derivative-related activities on JPMorgan Chase Bank, N.A.’s Consolidated Statement of Income and Other Comprehensive Income for the three months ended March 31, 2009, by accounting designation.

Derivative-related gains/(losses) reported in income Three months ended March 31, 2009 (in millions)

Fair value hedges(a)

Cash flow hedges


Risk management

activities Trading

activities(a) Total Consolidated Statement of

Income $ (229) $ 87 $ (9) $ (664) $ 3,890 $ 3,075 Derivative-related net changes reported in other comprehensive income Three months ended March 31, 2009 (in millions)

Fair value hedges

Cash flow hedges


Risk management

activities Trading activities Total

Other comprehensive income (loss) NA $ 250 $ 100 NA NA $ 350

(a) Also includes the hedge accounting impact from the hedged item for fair value hedges and cash instruments within trading activities.

26

The tables that follow reflect more detailed information regarding the impact of derivatives reported in income and/or other comprehensive income by accounting designation for the three months ended March 31, 2009.

Fair value hedge gains and losses The following table presents derivative instruments, by contract type, used in fair value hedge accounting relationships, and the pretax gains (losses) recorded on such derivatives and the related hedged items for the three months ended March 31, 2009. JPMorgan Chase Bank, N.A. includes gains (losses) on the hedging derivative and the related hedged item in the same line item in the Consolidated Statements of Income. Gains/(losses) recorded in income




Derivatives –



Contract type Interest rate(a) $ 35 $ (60) $ (25) $ 73 $ 48 Foreign exchange(b) 337 (337) — (279) (279) Commodity(c) (158) 158 — 2 2 Total $ 214 $ (239) $ (25) $ (204) $ (229)

(a) Primarily consists of hedges of the benchmark (e.g. LIBOR) interest rate risk of fixed-rate long-term debt. Gains and losses were recorded in net interest income.

(b) Primarily consists of hedges of the foreign currency risk of long-term debt and AFS securities for changes in spot foreign currency rates. Gains and losses related to the derivatives and the hedged items due to changes in spot foreign currency rates were recorded in principal transactions revenue. The excluded components were recorded in net interest income.

(c) Consists of overall fair value hedges of physical gold inventory. Gains and losses were recorded in principal transactions revenue. (d) Hedge ineffectiveness is the amount by which the gain or loss on the designated derivative instrument does not exactly offset the gain or

loss on the hedged item attributable to the hedged risk. (e) Certain components of hedging derivatives are permitted to be excluded from the assessment of hedge effectiveness, such as forward

points on a futures or forwards contract. Amounts related to excluded components are recorded in current-period income. Cash flow hedge gains and losses The following table presents derivative instruments, by contract type, used in cash flow hedge accounting relationships, and the pretax gains (losses) recorded on such derivatives, for the three months ended March 31, 2009. JPMorgan Chase Bank, N.A. includes the gain (loss) on the hedging derivative in the same line item as the offsetting change in cash flows on the hedged item in the Consolidated Statements of Income. Gains/(losses) recorded in income and other comprehensive income (loss)



AOCI into income



Total income

statement impact


Total change in OCI

for period Contract type Interest rate(a) $ (43) $ 1 $ (42) $ 44 $ 87 Foreign exchange (b) 129 — 129 292 163 Total $ 86 $ 1 $ 87 $ 336 $ 250

(a) Primarily consists of benchmark interest rate hedges of LIBOR-indexed floating-rate assets and floating-rate liabilities. Gains and losses were recorded in net interest income.

(b) Primarily consists of hedges of the foreign currency risk of non-U.S. dollar–denominated revenue and expense. The income statement classification of gains and losses follows the hedged item – primarily net interest income, compensation expense and other expense.

(c) Hedge ineffectiveness is the amount by which the cumulative gain or loss on the designated derivative instrument exceeds the present value of the cumulative expected change in cash flows on the hedged item attributable to the hedged risk.

Over the next 12 months, it is expected that $157 million (after-tax) of net losses recorded in AOCI at March 31, 2009, related to cash flow hedges will be recognized in income. The maximum length of time over which forecasted transactions are hedged is 10 years, and such transactions primarily relate to core lending and borrowing activities. There were no forecasted transactions that failed to occur during the first quarter of 2009.

27

Net investment hedge gains and losses The following table presents hedging instruments, by contract type, that were used in net investment hedge accounting relationships, and the pretax gains (losses) recorded on such derivatives for the three months ended March 31, 2009.

Gains/(losses) recorded in income and other comprehensive income (loss) Three months ended March 31, 2009 (in millions)



Contract type Foreign exchange $ (9) $ 100 Total $ (9) $ 100

(a) Certain components of derivatives used as hedging instruments are permitted to be excluded from the assessment of hedge effectiveness, such as forward points on a futures or forwards contract. Amounts related to excluded components are recorded in current-period income. There was no ineffectiveness for net investment hedge accounting relationships during the first quarter of 2009.

Risk management derivatives gains and losses (not designated as hedging instruments) The following table presents nontrading derivatives, by contract type, that were not designated in hedge relationships, and the pretax gains (losses) recorded on such derivatives for the three months ended March 31, 2009. These derivatives are risk management instruments used to mitigate or transform the risk of market exposures arising from banking activities other than trading activities, which are discussed separately below. March 31, 2009 (in millions)

Derivatives gains/(losses) recorded in income

Contract type Interest rate(a) $ (138) Credit(b) (516) Foreign exchange(c) (9) Equity(b) (1) Commodity(b) —

Total $ (664) (a) Gains and losses were recorded in principal transactions revenue, mortgage fees and related income, and net interest income. (b) Gains and losses were recorded in principal transactions revenue. (c) Gains and losses were recorded in principal transactions revenue and net interest income.

Trading derivative gains and losses JPMorgan Chase Bank, N.A. has elected to present derivative gains and losses related to its trading activities together with the cash instruments with which they are risk managed. All amounts are recorded in principal transactions revenue in the Consolidated Statement of Income for the three months ended March 31, 2009.

March 31, 2009 (in millions)

Gains/(losses) recorded in principal transactions revenue

Type of instrument Interest rate $ 2,245 Credit (316) Foreign exchange 1,059 Equity 788 Commodity 114

Total $ 3,890 Credit risk, liquidity risk and credit-related contingent features In addition to the specific market risks introduced by each derivative contract type, derivatives expose JPMorgan Chase Bank, N.A. to credit risk – the risk that derivative counterparties may fail to meet their payment obligations under the derivative contracts and the collateral, if any, held by JPMorgan Chase Bank, N.A. proves to be of insufficient value to cover the payment obligation. The amount of derivative receivables reported on the Consolidated Balance Sheets is the fair value of the derivative contracts after giving effect to legally enforceable master netting agreements and cash collateral held by JPMorgan Chase Bank, N.A. These amounts represent the cost to JPMorgan Chase Bank, N.A. to replace the contracts at then current market rates should the counterparty default. However, in management’s view, the appropriate measure of current credit risk should take into consideration other additional liquid securities held as collateral by JPMorgan Chase Bank, N.A., which are disclosed in the table below.

28

While derivative receivables expose JPMorgan Chase Bank, N.A. to credit risk, derivative payables expose JPMorgan Chase Bank, N.A. to liquidity risk, as the derivative contracts typically require JPMorgan Chase Bank, N.A. to post cash or securities collateral with counterparties as the MTM moves in the counterparties’ favor, or upon specified downgrades in JPMorgan Chase Bank, N.A.’s and its subsidiaries respective credit ratings. At March 31, 2009, the impact of a single-notch and a six-notch ratings downgrade to JPMorgan Chase Bank, N.A. and its subsidiaries would have required $1.4 billion and $4.4 billion, respectively, of additional collateral to be posted by JPMorgan Chase Bank, N.A. Certain derivative contracts also provide for termination of the contract, generally upon a downgrade of either JPMorgan Chase Bank, N.A. or the counterparty, at the fair value of the derivative contracts. At March 31, 2009, the impact of a single-notch and a six-notch ratings downgrade to JPMorgan Chase Bank, N.A. and its subsidiaries related to contracts with termination triggers would have required JPMorgan Chase Bank, N.A. to settle trades with a fair value of $0.2 million and $6.7 billion, respectively. The aggregate fair value of net derivative payables that contain contingent collateral or termination features triggered upon a downgrade was $36.4 billion at March 31, 2009, for which JPMorgan Chase Bank, N.A. has posted collateral of $27.1 billion in the normal course of business.

The following table shows the current credit risk of derivative receivables after FIN 39 netting and collateral received, and current liquidity risk of derivatives payables after FIN 39 netting and collateral posted, as of March 31, 2009.

March 31, 2009 (in millions) Derivative receivables Derivative payables Gross derivative fair value $ 2,464,751 $ 2,404,876 Fin 39 netting – offsetting payables/receivables (2,260,788) (2,260,788) Fin 39 netting – cash collateral received/paid (92,116) (66,574) Carrying value on Consolidated Balance Sheets 111,847 77,514 Securities collateral received/paid (15,272) (8,100) Derivative fair value, net of all collateral $ 96,575 $ 69,414

In addition to the collateral amounts reflected in the table above, JPMorgan Chase Bank, N.A. receives and delivers collateral at the initiation of derivative transactions, which is available as security against potential exposure that could arise should the fair value of the transactions move in JPMorgan Chase Bank, N.A.’s or the client’s favor, respectively. JPMorgan Chase Bank, N.A. and its counterparties also hold collateral related to contracts that have a non-daily call frequency for collateral to be posted and collateral that JPMorgan Chase Bank, N.A. or the counterparty has agreed to return, but has not yet settled, as of the reporting date. At March 31, 2009, JPMorgan Chase Bank, N.A. received $24.0 billion of such additional collateral and paid $6.6 billion of such additional collateral. These amounts are not netted against the derivative receivables and payables in the table above, because at an individual counterparty level, the collateral exceeded the fair value exposure at March 31, 2009.

Credit derivatives Credit derivatives are financial instruments whose value is derived from the credit risk associated with the debt of a third-party issuer (the reference entity) and which allow one party (the protection purchaser) to transfer that risk to another party (the protection seller). Credit derivatives expose the protection purchaser to the creditworthiness of the protection seller, as the protection seller is required to make payments under the contract when the reference entity experiences a credit event, such as a bankruptcy, a failure to pay its obligation or a restructuring. The seller of credit protection receives a premium for providing protection but has the risk that the underlying instrument referenced in the contract will be subject to a credit event.

JPMorgan Chase Bank, N.A. is both a purchaser and seller of credit protection in the credit derivatives market and uses credit derivatives for two primary purposes. First, in its capacity as a market-maker in the dealer/client business, JPMorgan Chase Bank, N.A. actively risk manages a portfolio of credit derivatives by purchasing and selling credit protection, predominantly on corporate debt obligations, to meet the needs of customers. As a seller of protection, JPMorgan Chase Bank, N.A.’s exposure to a given reference entity may be offset partially, or entirely, with a contract to purchase protection from another counterparty on the same or similar reference entity. Second, JPMorgan Chase Bank, N.A. uses credit derivatives to mitigate credit risk associated with its overall derivative receivables and traditional commercial credit lending exposures (loans and unfunded commitments) as well as to manage its exposure to residential and commercial mortgages.

For a further discussion of credit derivatives, including a description of the different types used by JPMorgan Chase Bank, N.A., see Note 30 on pages 80–83 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements.

29

The following table presents a summary of the notional amounts of credit derivatives and credit-related notes JPMorgan Chase Bank, N.A. sold and purchased, as of March 31, 2009, and December 31, 2008. Upon a credit event, JPMorgan Chase Bank, N.A. as seller of protection would typically pay out only a percentage of the full notional amount of net protection sold, as the amount actually required to be paid on the contracts takes into account the recovery value of the reference obligation at the time of settlement. JPMorgan Chase Bank, N.A. manages the credit risk on contracts to sell protection by purchasing protection with identical or similar underlying reference entities. As such, other purchased protection referenced in the following table includes credit derivatives bought on related, but not identical, reference positions; these include indices, portfolio coverage and other reference points. JPMorgan Chase Bank, N.A. does not use the notional amount as the primary measure of risk management for credit derivatives because the notional amount does not take into account the probability that a credit event will occur, the recovery value of the reference obligation, or related cash instruments and economic hedges.

Total credit derivatives and credit-related notes Maximum payout/Notional amount March 31, 2009 (in millions)

Protection sold




Credit derivatives Credit default swaps $ (3,661,843) $ 3,753,664 $ 91,821 $ 58,184 Other credit derivatives(a) (3,534) 6,786 3,252 15,954

Total credit derivatives (3,665,377) 3,760,450 95,073 74,138 Credit-related notes (5,748) — (5,748) 2,054 Total $ (3,671,125) $ 3,760,450 $ 89,325 $ 76,192

Maximum payout/Notional amount December 31, 2008 (in millions)

Protection sold




Credit derivatives Credit default swaps(b) $ (4,103,539) $ 3,984,139 $ (119,400) $ 278,181 Other credit derivatives(a) (3,726) — (3,726) 22,044(b)

Total credit derivatives (4,107,265) 3,984,139 (123,126) 300,225 Credit-related notes(b) (4,080) — (4,080) 2,373 Total $ (4,111,345) $ 3,984,139 $ (127,206) $ 302,598 (a) Primarily consists of total return swaps and credit default swap options. (b) Amounts for credit derivatives and credit-related notes protection purchased and/or sold as of December 31, 2008, have been revised. (c) Represents the notional amount of purchased credit derivatives where the underlying reference instrument is identical to the reference

instrument on which JPMorgan Chase Bank, N.A. has sold credit protection. (d) Does not take into account the fair value of the reference obligation at the time of settlement, which would generally reduce the amount

the seller of protection pays to the buyer of protection in determining settlement value. (e) Represents single-name and index CDS protection JPMorgan Chase Bank, N.A. purchased.

The following table summarizes the notional and fair value amounts of credit derivatives and credit-related notes as of March 31, 2009, and December 31, 2008, where JPMorgan Chase Bank, N.A. is the seller of protection. The maturity profile is based on the remaining contractual maturity of the credit derivative contracts. The ratings profile is based on the rating of the reference entity on which the credit derivative contract is based. The ratings and maturity profile of protection purchased are comparable to the profile reflected below.

Protection sold – credit derivatives and credit-related notes ratings/maturity profile

March 31, 2009 (in millions) <1 year 1–5 years >5 years Total

notional amount Fair value(b) Risk rating of reference entity

Investment grade (AAA to BBB-)(a) $ (208,873) $ (1,443,455) $ (632,477) $ (2,284,805) $ (206,359) Noninvestment grade (BB+ and below)(a) (117,103) (914,421) (354,796) (1,386,320) (274,018)

Total $ (325,976) $ (2,357,876) $ (987,273) $ (3,671,125) $ (480,377)

December 31, 2008 (in millions) <1 year 1–5 years >5 years Total


Investment grade (AAA to BBB-)(a)(b) $ (178,569) $ (1,741,467) $ (700,984) $ (2,621,020) $ (229,877) Noninvestment grade (BB+ and below)(a)(b) (120,531) (955,601) (414,193) (1,490,325) (261,668)

Total $ (299,100) $ (2,697,068) $ (1,115,177) $ (4,111,345) $ (491,545) (a) The ratings scale is based on JPMorgan Chase Bank, N.A.’s internal ratings, which generally correspond to ratings defined by S&P and Moody’s.

30

(b) Amounts for credit derivatives and credit-related notes protection sold as of December 31, 2008, have been revised. (c) Amounts are shown on a gross basis, before the benefit of legally enforceable master netting agreements and cash collateral held by JPMorgan

Chase Bank, N.A.

NOTE 8 – OTHER NONINTEREST REVENUE For a discussion of the components of and accounting policies for JPMorgan Chase Bank, N.A.’s other noninterest revenue, see Note 8 on pages 28–29 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements.

The following table presents the components of investment banking fees.

Three months ended March 31, (in millions) 2009 2008 Underwriting:

Equity $ 178 $ 183 Debt 354 178 Total underwriting 532 361

Advisory 207 215 Total investment banking fees $ 739 $ 576

The following table presents the components of asset management, administration and commissions revenue.

Three months ended March 31, (in millions) 2009 2008

Total asset management fees $ 329 $ 390 Total administration fees(a) 419 621

Commission and other fees: Brokerage commissions 302 517 All other commissions and fees 1,085 1,003 Total commissions and fees 1,387 1,520

Total asset management, administration and commissions $ 2,135 $ 2,531 (a) Includes fees for custody, securities lending, funds services and securities clearance.

NOTE 9 – INTEREST INCOME AND INTEREST EXPENSE Details of interest income and interest expense were as follows.

Three months ended March 31, (in millions) 2009 2008 Interest income(a) Loans $ 8,012 $ 7,640 Securities 2,801 1,169 Trading assets 1,765 3,134 Federal funds sold and securities purchased under resale agreements 517 1,607 Securities borrowed 120 460 Deposits with banks 406 324 Other assets(b) 17 — Total interest income 13,638 14,334

Interest expense(a) Interest-bearing deposits 1,803 4,867 Short-term and other liabilities(c) 1,049 2,351 Long-term debt 290 450 Beneficial interests issued by consolidated VIEs 33 83 Total interest expense 3,175 7,751 Net interest income 10,463 6,583 Provision for credit losses 6,078 3,738 Net interest income after provision for credit losses $ 4,385 $ 2,845 (a) Interest income and interest expense include the current-period interest accruals for financial instruments measured at fair value, except for

financial instruments containing embedded derivatives that would be separately accounted for in accordance with SFAS 133 absent the SFAS 159 fair value election; for those instruments, all changes in fair value, including any interest elements, are reported in principal transactions revenue.

(b) Predominantly margin loans. (c) Includes brokerage customer payables.

31

NOTE 10 – PENSION AND OTHER POSTRETIREMENT EMPLOYEE BENEFIT PLANS For a discussion of JPMorgan Chase Bank, N.A.’s pension plans and the United Kingdom (“U.K.”) other postretirement employee benefit (“OPEB”) plan, see Note 10 on pages 30-34 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements.

The following table presents the components of net periodic benefit cost reported in the Consolidated Statements of Income for JPMorgan Chase Bank, N.A.’s U.S. nonqualified defined benefit pension plans, non-U.S. defined benefit pension plans and U.K. OPEB plan.

Defined benefit pension plans U.S. Non-U.S. U.K. OPEB plans Three months ended March 31, (in millions) 2009 2008 2009 2008 2009 2008 Components of net periodic benefit cost Benefits earned during the period $ 1 $ 1 $ 6 $ 7 $ — $ — Interest cost on benefit obligations 7 5 26 38 — 1 Expected return on plan assets — — (24) (41) — — Amortization of net loss — — 10 7 — — Net periodic benefit cost 8 6 18 11 — 1 Other defined benefit pension plans(a) 3 3 3 3 NA NA Total defined benefit pension and OPEB plans 11 9 21 14 — 1 Total defined contribution plans 64 51 52 72 NA NA Total pension and OPEB cost included in compensation expense $ 75 $ 60 $ 73 $ 86 $ — $ 1 (a) Includes various defined benefit pension plans, which are individually immaterial.

The fair value of plan assets for material non-U.S. defined benefit pension plans was $1.9 billion as of March 31, 2009, and $2.0 billion as of December 31, 2008. See Note 22 on page 57 of these Consolidated Financial Statements for further information on unrecognized amounts (i.e., net loss and prior service costs/(credit)) reflected in accumulated other comprehensive income for the three months ended March 31, 2009 and 2008.

The 2009 potential contributions for JPMorgan Chase Bank, N.A.’s U.S. non-qualified defined benefit pension plans are $39 million. The 2009 potential contributions for JPMorgan Chase Bank, N.A.’s non-U.S. (excluding the main U.K. plan) defined benefit pension plans are $44 million and for the U.K. OPEB plans are $2 million. The amount of potential 2009 contributions to JPMorgan Chase Bank, N.A.’s main U.K. defined benefit pension plan is not reasonably estimable at this time.

JPMorgan Chase charged JPMorgan Chase Bank, N.A. $61 million and $50 million, for the three months ended March 31, 2009 and 2008, respectively, for its share of the U.S. qualified defined benefit pension plan expense. For its share of the U.S. OPEB plan expense, JPMorgan Chase charged JPMorgan Chase Bank, N.A. $2 million and $1 million, for the three months ended March 31, 2009 and 2008, respectively.

Effective May 1, 2009, JPMorgan Chase amended the employer matching contribution feature of the 401(k) Savings Plan (the “Plan”) to provide that: (i) for employees earning $50,000 or less, matching contributions will be based on their contributions to the Plan, but not to exceed 5 percent of their eligible compensation (e.g., base pay) and (ii) for employees earning more than $50,000 per year, matching contributions will be made at the discretion of JPMorgan Chase’s management, depending on JPMorgan Chase’s earnings for the year. Any such matching contributions will be made on an annual basis, following the end of the calendar year, to eligible employees who are employed by JPMorgan Chase Bank, N.A. or an affiliate at the end of such year.

Consolidated disclosures of information about the pension and OPEB plans of JPMorgan Chase are included in Note 9 on pages 149–155 of JPMorgan Chase’s 2008 Annual Report on Form 10-K and in Note 9 on page 113 of JPMorgan Chase’s Form 10-Q for the quarterly period ended March 31, 2009.

32

NOTE 11 – EMPLOYEE STOCK-BASED INCENTIVES Certain employees of JPMorgan Chase Bank, N.A. participate in JPMorgan Chase’s long-term stock-based incentive plans, which provide for grants of common stock-based awards, including stock options, stock-settled stock appreciation rights, and restricted stock units (“RSUs”). For a discussion of the accounting policies and other information relating to employee stock-based compensation, see Note 11 on pages 34-37 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements and Note 10 on pages 155–158 of JPMorgan Chase’s 2008 Annual Report on Form 10-K.

JPMorgan Chase Bank, N.A. recognized stock-based incentive compensation expense of $426 million and $428 million for the quarters ended March 31, 2009 and 2008, respectively, in its Consolidated Statements of Income. These amounts included an accrual for the estimated cost of stock awards to be granted to full career eligible employees of $90 million and $89 million for the quarters ended March 31, 2009 and 2008, respectively.

In the first quarter of 2009, JPMorgan Chase granted 88 million RSUs to employees of JPMorgan Chase Bank, N.A. with a grant date fair value of $19.49 per RSU in connection with its annual incentive grant.

NOTE 12 – NONINTEREST EXPENSE Merger costs Costs associated with the Bear Stearns merger and the Washington Mutual transaction are reflected in the merger costs caption of the Consolidated Statements of Income. For a further discussion of the Bear Stearns merger and the Washington Mutual transaction, see Note 3 on page 9 of these Consolidated Financial Statements. A summary of merger-related costs is shown in the following table.

Three months ended March 31, 2009 (in millions) Bear Stearns Washington Mutual Total Expense category Compensation $ — $ 136 $ 136 Occupancy — 5 5 Technology and communications and other — 35 35 Total(a)(b) $ — $ 176 $ 176 (a) With the exception of occupancy- and technology-related write-offs, all of the costs in the table required the expenditure of cash. (b) There was no activity during the three months ended March 31, 2008.


Three months ended March 31, 2009 (in millions) Bear Stearns Washington Mutual Total Merger reserve balance, beginning of period $ 64 $ 441 $ 505 Recorded as merger costs — 176 176 Utilization of merger reserve (34) (330) (364) Merger reserve balance, end of period(a) $ 30 $ 287 $ 317 (a) There was no activity during the three months ended March 31, 2008.

NOTE 13 – SECURITIES Securities are classified as AFS, held-to-maturity (“HTM”) or trading. For additional information regarding AFS and HTM securities, see Note 13 on pages 38–41 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements. Trading securities are discussed in Note 6 on pages 20–21 of these Consolidated Financial Statements.

The following table presents realized gains and losses from AFS securities.

Three months ended March 31, (in millions) 2009 2008 Realized gains $ 398 $ 134 Realized losses(a) (196) (79) Net realized securities gains (losses)(b) $ 202 $ 55 (a) There were no other-than-temporary impairment (“OTTI”) losses recorded in the first quarter of 2009. (b) Proceeds from securities sold were within approximately 2% of amortized cost.

33


March 31, 2009 December 31, 2008

(in millions) Amortized

cost

Gross unrealized

gains

Gross unrealized

losses Fair

value Amortized

cost

Gross unrealized

gains

Gross unrealized

losses Fair

value Available-for-sale securities U.S. government and agency:

U.S. treasuries and agency obligations $ 289 $ 3 $ 3 $ 289 $ 606 $ 15 $ 7 $ 614 Mortgage-backed securities 25,922 324 28 26,218 6,281 148 5 6,424 Collateralized mortgage

obligations 555 15 3 567 557 9 8 558 U.S. government-sponsored

enterprise: Mortgage-backed securities 139,472 3,254 28 142,698 108,360 2,257 214 110,403 Direct obligations(a) 29,968 77 194 29,851 9,717 37 90 9,664

Obligations of states and municipalities 1,026 18 35 1,009 931 13 31 913

Certificates of deposit 3,721 14 — 3,735 17,226 64 8 17,282 Non-U.S. government debt

securities 23,843 165 40 23,968 8,173 173 2 8,344 Corporate debt securities 52,785 449 97 53,137 9,310 256 61 9,505 Equity securities 2,136 1 6 2,131 1,794 1 7 1,788 Residential mortgage-backed securities(b):

Prime 7,281 2 2,048 5,235 7,762 4 1,739 6,027 Alt-A 536 — 169 367 1,064 — 196 868 Non-U.S. residential 3,272 228 239 3,261 2,233 24 182 2,075

Commercial mortgage-backed securities 4,647 1 900 3,748 4,623 — 684 3,939 Asset-backed securities:

Credit card receivables 16,119 105 1,378 14,846 11,446 8 1,986 9,468 Commercial and industrial loans 12,497 219 868 11,848 11,847 168 820 11,195 Other consumer loans and other 1,102 8 69 1,041 748 2 107 643

Total available-for-sale securities $ 325,171 $ 4,883 $ 6,105 $ 323,949 $ 202,678 $ 3,179 $ 6,147 $ 199,710 Total held-to-maturity

securities(c) $ 31 $ 1 $ — $ 32 $ 34 $ 1 $ — $ 35 (a) Consists primarily of mortgage-related obligations. (b) There were no subprime mortgage-backed securities at March 31, 2009, or December 31, 2008. (c) Consists primarily of mortgage-backed securities issued by U.S. government-sponsored entities.

34

The following table presents the fair value and gross unrealized losses for AFS securities by aging category at March 31, 2009, and December 31, 2008.

Securities with gross unrealized losses Less than 12 months 12 months or more Total Gross Gross Total gross Fair unrealized Fair unrealized fair unrealized March 31, 2009 (in millions) value losses value losses value losses Available-for-sale securities U.S. government and agency:

U.S. treasuries and agency obligations $ 256 $ 3 $ — $ — $ 256 $ 3 Mortgage-backed securities 3,502 28 — — 3,502 28 Collateralized mortgage obligations 390 3 — — 390 3

U.S. government-sponsored enterprise: Mortgage-backed securities 3,150 11 1,023 17 4,173 28 Direct obligations 22,519 194 — — 22,519 194

Obligations of states and municipalities 245 32 19 3 264 35 Certificates of deposit — — — — — — Non-U.S. government debt securities 5,719 39 71 1 5,790 40 Corporate debt securities 7,429 90 56 7 7,485 97 Equity securities 19 6 — — 19 6 Residential mortgage-backed securities:

Prime 2,827 533 2,337 1,515 5,164 2,048 Alt-A 367 169 — — 367 169 Non-U.S. residential 2,392 239 — — 2,392 239

Commercial mortgage-backed securities 3,579 900 — — 3,579 900 Asset-backed securities:

Credit card receivables 11,836 1,116 276 262 12,112 1,378 Commercial and industrial loans 7,021 647 1,442 221 8,463 868 Other consumer loans and other — — 551 69 551 69

Total securities with gross unrealized losses $ 71,251 $ 4,010 $ 5,775 $ 2,095 $ 77,026 $ 6,105

Securities with gross unrealized losses Less than 12 months 12 months or more Total Gross Gross Total gross Fair unrealized Fair unrealized fair unrealized December 31, 2008 (in millions) value losses value losses value losses Available-for-sale securities U.S. government and agency:

U.S. treasuries and agency obligations $ 249 $ 7 $ — $ — $ 249 $ 7 Mortgage-backed securities 2,043 5 — — 2,043 5 Collateralized mortgage obligations 427 8 — — 427 8

U.S. government-sponsored enterprise: Mortgage-backed securities 3,547 211 468 3 4,015 214 Direct obligations 7,410 90 — — 7,410 90

Obligations of states and municipalities 312 25 16 6 328 31 Certificates of deposit 382 8 — — 382 8 Non-U.S. government debt securities 308 1 74 1 382 2 Corporate debt securities 532 54 30 7 562 61 Equity securities 19 7 — — 19 7 Residential mortgage-backed securities:

Prime 5,386 1,642 333 97 5,719 1,739 Alt-A 868 196 — — 868 196 Non-U.S. residential 1,908 182 — — 1,908 182

Commercial mortgage-backed securities 3,939 684 — — 3,939 684 Asset-backed securities:

Credit card receivables 8,191 1,792 282 194 8,473 1,986 Commercial and industrial loans 9,059 820 — — 9,059 820 Other consumer loans and other 558 106 17 1 575 107

Total securities with gross unrealized losses $45,138 $ 5,838 $ 1,220 $ 309 $ 46,358 $ 6,147

35

In April 2009, the FASB amended the OTTI for debt securities. The impairment model for equity securities was not affected. Under the new guidance, OTTI losses must be recognized in earnings if an investor has the intent to sell the debt security or it is more likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. However, even if an investor does not expect to sell a debt security, the investor must evaluate the expected cash flows to be received from the security and determine if a credit loss has occurred. In the event of an OTTI loss, only the amount of impairment associated with the credit loss is recognized in income. Amounts relating to factors other than credit losses are recorded in OCI. The guidance also requires additional disclosures regarding the calculation of credit losses as well as factors considered in reaching a conclusion that an investment is not other-than-temporarily impaired. JPMorgan Chase Bank, N.A. early adopted the new guidance effective for the period ending March 31, 2009.

AFS securities in unrealized loss positions are analyzed in-depth as part of JPMorgan Chase Bank, N.A.’s ongoing assessment of OTTI. When JPMorgan Chase Bank, N.A. intends to sell AFS securities, JPMorgan Chase Bank, N.A. recognizes an impairment loss, if any, equal to the full amount by which the amortized cost basis exceeds the fair value of those securities.

When JPMorgan Chase Bank, N.A. does not intend to sell AFS equity or debt securities in an unrealized loss position, potential OTTI is considered using a variety of factors, including the length of time and extent to which the market value has been less than cost; adverse conditions specifically related to the industry, geographic area or financial condition of the issuer or underlying collateral of a security; payment structure of the security; changes to the rating of the security by a rating agency; the volatility of the fair value changes, and changes in fair value of the security after the balance sheet date. For debt securities, JPMorgan Chase Bank, N.A. estimates cash flows over the remaining lives of the underlying collateral to assess whether credit losses exist and where applicable under EITF Issue 99-20, to determine if any adverse changes in cash flows have occurred. JPMorgan Chase Bank, N.A.’s cash flow estimates take into account expectations of relevant market and economic data as of the end of the reporting period, including, for example, for securities issued in a securitization, underlying loan level data and structural features of the securitization such as subordination, excess spread, overcollateralization or other forms of credit enhancement. JPMorgan Chase Bank, N.A. compares the losses projected for the underlying collateral (“pool losses”) against the level of credit enhancement in the securitization structure to determine whether these features are sufficient to absorb the pool losses, or whether a credit loss on the AFS debt security exists. JPMorgan Chase Bank, N.A. also performs other analyses to support its cash flow projections such as first-loss analyses or stress scenarios. For a debt security, JPMorgan Chase Bank, N.A. considers a decline in fair value to be other-than-temporary when it does not expect to recover the entire amortized cost basis of the security, including as applicable under EITF Issue 99-20, when an adverse change in cash flows has occurred. JPMorgan Chase Bank, N.A. applies EITF Issue 99-20 to beneficial interests in securitizations that are rated below “AA” at acquisition or that can be contractually prepaid or otherwise settled in such a way that it would not recover substantially all of its recorded investment. For an equity security, JPMorgan Chase Bank, N.A. considers the above factors, as well as its intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in market value, and whether evidence exists to support a realizable value equal to or greater than the carrying value. JPMorgan Chase Bank, N.A. considers a decline in fair value of an AFS equity security to be other-than-temporary if it is probable that the amortized cost basis of the security will not be recovered.

Over the past 12 months, JPMorgan Chase Bank, N.A. has increased its investment securities positions. Many of these securities were purchased at discounts to par given the significant liquidity constraints in the market. The timing and prices at which JPMorgan Chase Bank, N.A. acquired its investments has resulted in the majority of unrealized losses existing for less than 12 months. Based on the analyses described above, which have been applied to these securities, JPMorgan Chase Bank, N.A. believes that the unrealized losses result from liquidity conditions in the current market environment. As of March 31, 2009, JPMorgan Chase Bank, N.A. does not intend to sell the securities with an unrealized loss position in AOCI and it is not likely that JPMorgan Chase Bank, N.A. will be required to sell these securities before recovery of their amortized cost basis, and as a result, JPMorgan Chase Bank, N.A. believes that the securities with an unrealized loss in AOCI are not other-than-temporarily impaired as of March 31, 2009.

The following is a description of JPMorgan Chase Bank, N.A.’s main security investments and the key assumptions used to estimate the present value of the cash flows most likely to be collected from those investments.

U.S. government and federal agency and U.S. government-sponsored enterprise obligations As of March 31, 2009, gross unrealized losses on securities related to U.S. government and federal agency obligations and U.S. government-sponsored enterprise obligations were $256 million, of which $17 million related to securities that have been in an unrealized loss position for longer than 12 months. These securities do not have any credit losses given the explicit and implicit guarantees provided by the U.S. federal government.

36

Mortgage-backed securities – Prime and Alt-A non-agency As of March 31, 2009, gross unrealized losses related to prime and Alt-A mortgage-backed securities issued by private issuers were $2.2 billion of which $1.5 billion related to securities that have been in an unrealized loss position for longer than 12 months. The majority of these securities are currently rated “AAA.” Approximately 42% of the amortized cost of the investments in prime and Alt-A mortgage-backed securities have experienced downgrades and approximately 26% are currently rated below investment grade. Despite the downgrades experienced, the portfolio continues to possess credit enhancement levels sufficient to support JPMorgan Chase Bank, N.A.’s investment. In analyzing prime and Alt-A residential mortgage-backed securities for potential credit losses, the key inputs to JPMorgan Chase Bank, N.A.’s cash flow projections were estimated peak-to-trough home price declines of up to 40% and an anticipated unemployment rate of 8.8%. JPMorgan Chase Bank, N.A.’s cash flow projections assumed liquidation rates of 75–100% and loss severities of 35–45%, depending on the underlying collateral type and seasoning.

Mortgage-backed securities – Commercial As of March 31, 2009, gross unrealized losses related to commercial mortgage-backed securities were $900 million; none of the losses related to securities that were in an unrealized loss position for longer than 12 months. Substantially all of JPMorgan Chase Bank, N.A.’s commercial mortgage-backed securities are rated “AAA” and possess, on average, 29% subordination (a form of credit enhancement for the benefit of senior securities expressed here as the percentage of pool losses that can occur before an asset-backed security will incur its first dollar of principal loss). In considering whether potential credit-related losses exist, JPMorgan Chase Bank, N.A. conducted a scenario analysis using high levels of delinquencies and losses over the near term followed by lower levels over the long term. Specific assumptions included: (i) all loans underlying the securities that were more than 60 days delinquent will default; (ii) additional default rates for the remaining portfolio forecasted to be 6% in the near term and 2% in the long term; and (iii) the loss severity assumptions ranged from 40% in the near term to 35% in later years.

Asset-backed securities – Credit card receivables As of March 31, 2009, gross unrealized losses related to credit card receivables asset-backed securities were $1.4 billion, of which $262 million of the losses related to securities that were in an unrealized loss position for longer than 12 months. Of the $1.4 billion of unrealized losses related to credit card-related asset-backed securities, $1.3 billion related to purchased credit card-related asset-backed securities, and $33 million related to retained interests in JPMorgan Chase Bank, N.A.’s own credit card receivable securitizations. The credit card-related asset-backed securities include “AAA,” “A” and “BBB” ratings. One of the key metrics JPMorgan Chase Bank, N.A. reviews for credit card-related asset-backed securities is each trust’s excess spread – which is the credit enhancement resulting from cash that remains each month after payments are made to investors for principal and interest, and to servicers for servicing fees, and after credit losses are allocated. The average excess spread for the issuing trusts in which JPMorgan Chase Bank, N.A. holds interests ranges from 4% to 7%. JPMorgan Chase Bank, N.A. uses internal models to project the cash flows that impact excess spread. For retained interests, JPMorgan Chase Bank, N.A. uses its own underlying loan data. For purchased investments, JPMorgan Chase Bank, N.A. uses available market benchmarks and trends to support the assumptions used in the projections. In analyzing potential credit losses, the primary assumptions used were underlying charge-off rates, which range from 8% to 15% (charge-off rates consider underlying assumptions such as unemployment rates and roll rates), payment rates of 11% to 21%, and portfolio yields of 14% to 24%.

Asset-backed securities – Commercial and industrial loans As of March 31, 2009, gross unrealized losses related to commercial and industrial loans asset-backed securities were $868 million, of which $221 million related to securities that were in an unrealized loss position for longer than 12 months. Substantially all of these securities are rated “AAA” and have an average of 29% credit enhancement. Credit enhancement in CLOs is mainly composed of overcollateralization - the excess of the par amount of collateral over the par amount of securities. The key assumptions considered in analyzing potential credit losses were underlying loan and debt security defaults and loss severity. Based on current default trends, JPMorgan Chase Bank, N.A. assumed collateral default rates of 15% in 2009, 12% in 2010 and 5% thereafter. Further, loss severities were assumed to be 50% for loans and 80% for debt securities. Losses were estimated to occur approximately 18 months after default.

37

The following table presents the amortized cost and estimated fair value at March 31, 2009, of JPMorgan Chase Bank, N.A.’s AFS and HTM securities by contractual maturity.

By remaining maturity at Available-for-sale securities Held-to-maturity securities March 31, 2009 (in millions) Amortized cost Fair value Amortized cost Fair value Due in one year or less $ 21,132 $ 21,174 $ — $ — Due after one year through five years 92,268 91,892 — — Due after five years through ten years 22,127 20,893 29 30 Due after ten years(a) 189,644 189,990 2 2 Total securities $ 325,171 $ 323,949 $ 31 $ 32 (a) Includes securities with no stated maturity. Substantially all of JPMorgan Chase Bank, N.A.’s mortgage-backed securities and collateralized

mortgage obligations are due in ten 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 three years for mortgage-backed securities and collateralized mortgage obligations.

NOTE 14 – SECURITIES FINANCING ACTIVITIES For a discussion of accounting policies relating to securities financing activities, see Note 14 on page 42 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements. For further information regarding securities borrowed and securities lending agreements for which the SFAS 159 fair value option has been elected, see Note 5 on pages 17–19 of these Consolidated Financial Statements. The following table details the components of collateralized financings. (in millions) March 31, 2009 December 31, 2008 Securities purchased under resale agreements(a) $ 149,099 $ 196,867 Securities borrowed(b) 52,899 42,658 Securities sold under repurchase agreements(c) $ 214,084 $ 158,655 Securities loaned 12,167 8,896 (a) Includes resale agreements of $19.0 billion and $19.9 billion accounted for at fair value at March 31, 2009, and December 31, 2008, respectively. (b) Includes securities borrowed of $3.3 billion and $3.4 billion accounted for at fair value at March 31, 2009, and December 31, 2008, respectively. (c) Includes repurchase agreements of $2.5 billion and $3.0 billion accounted for at fair value at March 31, 2009, and December 31, 2008,

respectively.

JPMorgan Chase Bank, N.A. pledges certain financial instruments it owns to collateralize repurchase agreements and other securities financings. Pledged securities that can be sold or repledged by the secured party are identified as financial instruments owned (pledged to various parties) on the Consolidated Balance Sheets.

At March 31, 2009, JPMorgan Chase Bank, N.A. received securities as collateral that could be repledged, delivered or otherwise used with a fair value of approximately $219.3 billion. This collateral was generally obtained under resale or securities borrowing agreements. Of these securities, approximately $197.2 billion were repledged, delivered or otherwise used, generally as collateral under repurchase agreements, securities lending agreements or to cover short sales.

NOTE 15 – LOANS The accounting for a loan is based on whether it is originated or purchased, and whether the loan is used in an investing or trading strategy. The measurement framework for loans in the Consolidated Financial Statements is one of the following:

• At the principal amount outstanding, net of the allowance for loan losses, unearned income and any net deferred loan fees or costs, for loans held-for-investment (other than purchased credit-impaired loans);

• At the lower of cost or fair value, with valuation changes recorded in noninterest revenue, for loans that are classified as held-for-sale; or

• At fair value, with changes in fair value recorded in noninterest revenue, for loans classified as trading assets or risk managed on a fair value basis;

• Purchased credit-impaired loans held-for-investment are accounted for under SOP 03-3 and initially measured at fair value, which includes estimated future credit losses. Accordingly, an allowance for loan losses related to these loans is not recorded at the acquisition date.

38

For a detailed discussion of accounting policies relating to loans, see Note 15 on pages 42–46 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements. See Note 5 on pages 17–19 of these Consolidated Financial Statements for further information on JPMorgan Chase Bank, N.A.’s elections of fair value accounting under SFAS 159. See Note 6 on pages 20–21 of these Consolidated Financial Statements for further information on loans carried at fair value and classified as trading assets.

The composition of JPMorgan Chase Bank, N.A.’s aggregate loan portfolio at each of the dates indicated was as follows.

(in millions) March 31, 2009 December 31, 2008 U.S. wholesale loans: Commercial and industrial $ 64,647 $ 66,592 Real estate 62,844 63,944 Financial institutions 16,130 19,902 Government agencies 4,875 4,725 Other 19,829 20,883 Loans held-for-sale and at fair value 2,452 3,225

Total U.S. wholesale loans 170,777 179,271 Non-U.S. wholesale loans: Commercial and industrial 24,797 27,168 Real estate 2,991 2,673 Financial institutions 12,537 16,413 Government agencies 214 403 Other 16,758 18,516 Loans held-for-sale and at fair value 7,643 8,743

Total non-U.S. wholesale loans 64,940 73,916 Total wholesale loans:(a) Commercial and industrial 89,444 93,760 Real estate(b) 65,835 66,617 Financial institutions 28,667 36,315 Government agencies 5,089 5,128 Other 36,587 39,399 Loans held-for-sale and at fair value(c) 10,095 11,968

Total wholesale loans 235,717 253,187 Total consumer loans: Home equity 111,781 114,335 Prime mortgage 67,774 72,168 Subprime mortgage 14,590 15,326 Option ARMs 6,918 9,018 Auto loans 43,065 42,603 Credit card(d) 23,592 31,141 Other 33,684 33,693 Loans held-for-sale(e) 3,665 2,028

Total consumer loans – excluding purchased credit-impaired loans 305,069 320,312 Consumer loans – purchased credit-impaired loans 87,572 88,813

Total consumer loans 392,641 409,125 Total loans(a)(f) $ 628,358 $ 662,312 (a) Includes purchased credit-impaired loans of $210 million and $224 million at March 31, 2009, and December 31, 2008, respectively, acquired

in the Washington Mutual transaction. (b) Represents credits extended for real estate–related purposes to borrowers who are primarily in the real estate development or investment

businesses, and for which repayment is predominantly from the sale, lease, management, operations or refinancing of the property. (c) Includes loans for commercial & industrial, real estate, financial institutions and other of $8.6 billion, $409 million, $875 million and $252

million, respectively, at March 31, 2009, and $9.2 billion, $423 million, $1.4 billion and $995 million, respectively, at December 31, 2008. (d) Includes billed finance charges and fees net of an allowance for uncollectible amounts. (e) Includes loans for prime mortgage and other (largely student loans) of $825 million and $2.8 billion, respectively, at March 31, 2009, and $206

million and $1.8 billion, respectively, at December 31, 2008. (f) Loans (other than purchased loans and those for which the SFAS 159 fair value option has been elected) are presented net of deferred loan

costs (which includes unearned income) of $220 million and $152 million at March 31, 2009, and December 31, 2008, respectively.

39

The following table reflects information about JPMorgan Chase Bank, N.A.’s loan sales. Three months ended March 31, (in millions) 2009 2008 Net gains/(losses) on sales of loans (including lower of cost or fair value

adjustments)(a) $ (274) $ (639) (a) Excludes sales related to loans accounted for at fair value.

Purchased credit-impaired loans In connection with the Washington Mutual transaction, JPMorgan Chase Bank, N.A. acquired certain loans that it deemed to be credit-impaired under SOP 03-3. For a detailed discussion of purchased credit-impaired loans including accounting policies, see Note 15 on pages 42–46 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements. Purchased credit-impaired loans are reported in loans on JPMorgan Chase Bank, N.A.’s Consolidated Balance Sheets. The allowance for loan losses, if required, would be reported as a reduction of the carrying amount of the loans. No allowance for loan losses has been recorded for these loans as of March 31, 2009. The outstanding balance and the carrying value of the purchased credit-impaired consumer loans were as follows: (in millions) March 31, 2009 December 31, 2008 Outstanding balance(a) $ 114,655 $ 118,180 Carrying amount 87,572 88,813 (a) Represents the sum of contractual principal, interest and fees earned at the reporting date.

The accretable yield represents the excess of cash flows expected to be collected over the fair value of the purchased credit-impaired loans. This amount is not reported on JPMorgan Chase Bank, N.A.’s Consolidated Balance Sheets, but is accreted into interest income at a level rate of return over the term of the underlying loans. For variable rate loans, expected future cash flows were initially based on the rate in effect at acquisition; expected future cash flows are recalculated as rates change over the lives of the loans.

The table below sets forth the accretable yield activity for purchased credit-impaired consumer loans for the three months ended March 31, 2009. Accretable yield activity (in millions) Balance, December 31, 2008(a) $ 32,619

Accretion into interest income (1,259)Changes in interest rates on variable-rate loans (2,246)

Balance, March 31, 2009 $ 29,114 (a) During the first quarter of 2009, JPMorgan Chase Bank, N.A. continued to refine its model to estimate future cash flows for its purchased credit

impaired consumer loans, which resulted in an adjustment of the initial estimate of cash flows expected to be collected. These refinements, which primarily affected the amount of undiscounted interest cash flows expected to be received over the life of the loans, resulted in a $6.1 billion increase in cash flows expected to be collected; however, on a discounted basis, these refinements did not have a material impact on the fair value of the purchased credit-impaired loans as of the September 25, 2008 acquisition date, nor did they have a material impact on the amount of interest income recognized in JPMorgan Chase Bank, N.A.’s Consolidated Statements of Income since that date.

Impaired loans For a detailed discussion of impaired loans, including types of impaired loans, certain troubled debt restructurings and accounting policies relating to the interest income on these loans, see Note 15 on pages 42–46 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements.

40

The tables below set forth information about JPMorgan Chase Bank, N.A.’s impaired loans, excluding credit card loans which are discussed below. JPMorgan Chase Bank, N.A. primarily uses the discounted cash flow method for valuing impaired loans. (in millions) March 31, 2009 December 31, 2008 Impaired loans with an allowance:

Wholesale $ 3,211 $ 1,999 Consumer(a) 3,187 2,252

Total impaired loans with an allowance 6,398 4,251 Impaired loans without an allowance:(b)

Wholesale 71 62 Consumer(a) — —

Total impaired loans without an allowance 71 62 Total impaired loans $ 6,469 $ 4,313 Allowance for impaired loans under SFAS 114:

Wholesale $ 1,213 $ 712 Consumer(a) 546 379

Total allowance for impaired loans under SFAS 114(c) $ 1,759 $ 1,091 Three months ended March 31, (in millions) 2009 2008 Average balance of impaired loans during the period:

Wholesale $ 2,866 $ 620 Consumer(a)(d) 2,593 635 Total impaired loans $ 5,459 $ 1,255

Interest income recognized on impaired loans during the period: Wholesale $ — $ — Consumer(a)(d) 30 8 Total interest income recognized on impaired loans during the period $ 30 $ 8

(a) Excludes credit card loans. (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. (c) The allowance for impaired loans under SFAS 114 is included in JPMorgan Chase Bank, N.A.’s allowance for loan losses. The allowance for

certain consumer impaired loans has been categorized in the allowance for loan losses as formula-based. (d) During the second quarter of 2008, the presentation of impaired loans was revised to include loans that had been restructured in troubled debt

restructurings. Prior periods have been revised to conform to this presentation.

Included in the table above are consumer loans, excluding credit card loans, that have been modified in a troubled debt restructuring, with balances of approximately $2.6 billion and $1.8 billion as of March 31, 2009, and December 31, 2008, respectively.

During the first quarter of 2009, the U.S. Department of the Treasury (the “U.S. Treasury”) introduced the Making Home Affordable (“MHA”) Plan, which includes programs designed to assist eligible homeowners in refinancing or modifying their mortgages. JPMorgan Chase Bank, N.A. is participating in the MHA programs, while continuing to expand its other loss mitigation efforts for financially stressed borrowers who do not qualify for the MHA programs. A substantial portion of the modifications under the MHA programs are expected to be accounted for as troubled debt restructurings.

For detailed discussion of modification of the terms of credit card loan agreements, see Note 15 on pages 42–46 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements. At March 31, 2009, and December 31, 2008, JPMorgan Chase Bank, N.A. modified $826 million and $842 million, respectively, of on–balance sheet credit card loans outstanding.

41

NOTE 16 – ALLOWANCE FOR CREDIT LOSSES For further discussion of the allowance for credit losses and the related accounting policies, see Note 16 on pages 46–47 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements.


Three months ended March 31, (in millions) 2009 2008 Allowance for loan losses at January 1 $ 17,153 $ 7,015 Gross charge-offs 3,022 1,415 Gross (recoveries) (126) (151)

Net charge-offs 2,896 1,264 Provision for loan losses 6,099 3,734 Other (14) (1) Allowance for loan losses at March 31 $ 20,342 $ 9,484 Components:

Asset-specific $ 1,319 $ 221 Formula-based 19,023 9,263 Total allowance for loan losses $ 20,342 $ 9,484

The table below summarizes the changes in the allowance for lending-related commitments. Three months ended March 31, (in millions) 2009 2008 Allowance for lending-related commitments at January 1 $ 656 $ 849 Provision for lending-related commitments (21) 4 Other — 1 Allowance for lending-related commitments at March 31 $ 635 $ 854 Components:

Asset-specific $ 65 $ 23 Formula-based 570 831

Total allowance for lending-related commitments $ 635 $ 854

NOTE 17 – LOAN SECURITIZATIONS For a discussion of the accounting policies relating to loan securitizations, see Note 17 on pages 47–56 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements. JPMorgan Chase Bank, N.A. securitizes and sells a variety of loans, including residential mortgage, credit card, automobile, student, and commercial (primarily related to real estate) loans. JPMorgan Chase Bank, N.A.–sponsored securitizations use SPEs as part of the securitization process. These SPEs are structured to meet the definition of a qualifying special-purpose entity (“QSPE”) (for a further discussion, see Note 1 on page 6 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements); accordingly, the assets and liabilities of securitization-related QSPEs are not reflected on JPMorgan Chase Bank, N.A.’s Consolidated Balance Sheets (except for retained interests, as described below). The primary purposes of these securitization vehicles are to meet investor needs and to generate liquidity for JPMorgan Chase Bank, N.A. through the sale of loans to the QSPEs. These QSPEs are financed through the issuance of fixed- or floating-rate asset-backed securities.

42

The following table presents the total unpaid principal amount of assets held in JPMorgan Chase Bank, N.A.–sponsored securitization entities, for which sale accounting was achieved and to which JPMorgan Chase Bank, N.A. has continuing involvement, at March 31, 2009, and December 31, 2008. Continuing involvement includes servicing the loans, holding senior or subordinated interests, recourse or guarantee arrangements and derivative transactions. In certain instances, JPMorgan Chase Bank, N.A.’s only continuing involvement is servicing the loans.

Principal amount outstanding JPMorgan Chase Bank, N.A. interest in securitized assets(e)(f)(g)(i)

March 31, 2009 (in billions)




Trading assets(h)

AFS securities(h) Loans

Other assets(h)

Total interests

held by JPMorgan Chase

Bank, N.A. Securitization related:

Credit card $ 38.2 $ 38.2(d) $ 0.1 $ 8.0 $ 2.2 $ 1.6 $ 11.9 Residential mortgage:


Commercial and other(b) 108.2 31.0 — 0.5 — — 0.5 Student loans 1.1 1.1 — — — 0.1 0.1 Auto 0.5 0.5 — — — — —

Total(c) $ 354.0 $ 275.1 $ 0.3 $ 9.4 $ 2.2 $ 1.7 $ 13.6 Principal amount outstanding JPMorgan Chase Bank, N.A. interest in securitized assets(e)(f)(g)

December 31, 2008 (in billions)

Total assets held by JPMorgan Chase

Bank, N.A.- sponsored QSPEs



Trading assets(h)

AFS securities(h) Loans

Other assets(h)

Total interests

held by JPMorgan Chase

Bank, N.A. Securitization related:

Credit card $ 41.2 $ 41.2(d) $ 0.1 $ 3.6 $ 8.4 $ 1.4 $ 13.5 Residential mortgage:


Commercial and other(b) 113.5 39.8 0.1 0.5 — — 0.6 Student loans 1.1 1.1 — — — 0.1 0.1 Auto 0.7 0.7 — — — — —

Total(c) $ 371.1 $ 295.6 $ 0.7 $ 5.1 $ 8.4 $ 1.5 $ 15.7

(a) Includes Alt-A loans. (b) Consists of securities backed by commercial loans (predominantly real estate) and non-mortgage-related consumer receivables purchased from

third parties. JPMorgan Chase Bank, N.A. generally does not retain a residual interest in its sponsored commercial mortgage securitization transactions. Includes co-sponsored commercial securitizations and, therefore, includes non–JPMorgan Chase Bank, N.A.-originated commercial mortgage loans.

(c) Includes securitized loans where JPMorgan Chase Bank, N.A. owns less than a majority of the subordinated or residual interests in the securitizations.

(d) Includes credit card loans, accrued interest and fees, and cash amounts on deposit. (e) Excludes retained servicing (for a discussion of MSRs, see Note 19 on page 54 of these Consolidated Financial Statements). (f) Includes investments acquired in the secondary market, but predominantly held-for-investment purposes, of $2.4 billion and $1.8 billion as of

March 31, 2009, and December 31, 2008, respectively. These investments are comprised of $2.1 billion and $1.4 billion of investments classified as available-for-sale, including $901 million and $172 million in credit cards, $637 million and $693 million of residential mortgages, and $530 million and $495 million of commercial and other. Also includes $307 million and $452 million of investments classified as trading, including $135 million and $112 million of credit cards, $155 million and $303 million of residential mortgages, and $17 million and $37 million of commercial and other at March 31, 2009, and December 31, 2008, respectively.

(g) Excludes interest rate and foreign exchange derivatives primarily used to manage the interest rate and foreign exchange risks of the securitization entities. See Note 6 and Note 7 on pages 20–21 and 22–30, respectively, of these Consolidated Financial Statements for further information on derivatives.

(h) Certain of JPMorgan Chase Bank, N.A.’s retained interests are reflected at their fair values. (i) Excludes senior and subordinated securities of $17 million and zero at March 31, 2009, and December 31, 2008, respectively, that JPMorgan

Chase Bank, N.A. purchased in connection with the investment banking business’ secondary market-making activities.

43

Securitization activity by major product type The following discussion describes the nature of JPMorgan Chase Bank, N.A.’s securitization activities by major product type.

Credit card securitizations JPMorgan Chase Bank, N.A. securitizes originated and purchased credit card loans. JPMorgan Chase Bank, N.A.’s primary continuing involvement includes servicing the receivables, retaining an undivided seller’s interest in the receivables, retaining certain senior securities and the maintenance of escrow accounts. JPMorgan Chase Bank, N.A. also retains a participation interest in the undivided seller’s interest in receivables and certain senior securities resulting from securitizations sponsored by an affiliate (“participating securitizations”). For further discussion of credit card securitizations, see Note 17 on pages 49–50 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements.

JPMorgan Chase Bank, N.A. maintains servicing responsibilities for all credit card securitizations that it sponsors and also receives servicing fees from participating securitizations. As servicer and transferor, JPMorgan Chase Bank, N.A. receives contractual servicing fees based on the securitized loan balance plus excess servicing fees, which are recorded in credit card income as discussed in Note 8 on page 29 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements.

The agreement with the credit card securitization trust requires JPMorgan Chase Bank, N.A. to maintain a minimum undivided interest in the trust it sponsors of 12%. The undivided interest in the securitization trust represents JPMorgan Chase Bank, N.A.’s interest in the receivables transferred to the trust that have not been securitized; the undivided interest is not represented by a security certificate, is carried at historical cost and is classified within loans. At March 31, 2009, and December 31, 2008, JPMorgan Chase Bank, N.A. had $2.2 billion and $8.4 billion, respectively, related to its undivided interest in the securitization trust (including participating securitizations).

Additionally, JPMorgan Chase Bank, N.A. retained subordinated interests in accrued interest and fees on the securitized receivables totaling $1.4 billion and $1.2 billion (net of an allowance for uncollectible amounts) as of March 31, 2009, and December 31, 2008, respectively, which are classified in other assets.

JPMorgan Chase Bank, N.A. retained senior securities totaling $7.1 billion and $3.5 billion at March 31, 2009, and December 31, 2008, respectively, which were classified as AFS securities at March 31, 2009, and December 31, 2008, respectively. The senior AFS securities were used by JPMorgan Chase Bank, N.A. as collateral for a secured financing transaction.

JPMorgan Chase Bank, N.A. also maintains escrow accounts up to predetermined limits for some credit card securitizations to cover deficiencies in cash flows owed to investors. The amounts available in such escrow accounts related to credit cards are recorded in other assets and amounted to $28 million and $17 million as of March 31, 2009, and December 31, 2008, respectively.

Mortgage securitizations JPMorgan Chase Bank, N.A. securitizes originated and purchased residential mortgages and originated commercial mortgages.

The retail business securitizes residential mortgage loans that it originates and purchases, and it typically retains servicing for all of its originated and purchased residential mortgage loans. Additionally, the retail business may retain servicing for certain mortgage loans purchased by the investment banking business. As servicer, JPMorgan Chase Bank, N.A. receives servicing fees based on the securitized loan balance plus ancillary fees. JPMorgan Chase Bank, N.A. also retains the right to service the residential mortgage loans it sells to Government National Mortgage Association (“GNMA”), Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) in accordance with their servicing guidelines and standards. For a discussion of MSRs, see Note 19 on page 54 of these Consolidated Financial Statements. In a limited number of securitizations, the retail business may retain an interest in addition to servicing rights. The amount of interest retained related to these securitizations totaled $346 million and $588 million at March 31, 2009, and December 31, 2008, respectively. These retained interests are accounted for as trading or AFS securities; the classification depends on whether the retained interests are represented by security certificates, have embedded derivatives and when they were retained (i.e., prior to the adoption of SFAS 155).

The investment banking business securitizes residential mortgage loans (including those that it purchased and certain mortgage loans originated by the retail business) and commercial mortgage loans that it originated. These loans are often serviced by the retail business. Upon securitization, the investment banking business may engage in underwriting and trading activities of the securities issued by the securitization trust. The investment banking business may retain unsold senior and/or subordinated interests (including residual interests) in both residential and commercial mortgage

44

securitizations at the time of securitization. These retained interests are accounted for at fair value and classified as trading assets. The investment banking business retained $2 million and $4 million senior and subordinated interests at March 31, 2009, and December 31, 2008, respectively; these securities were retained at securitization in connection with JPMorgan Chase Bank, N.A.’s underwriting activity.

In addition to the amounts reported in the securitization activity tables below, JPMorgan Chase Bank, N.A. sold residential mortgage loans totaling $38.2 billion and $29.7 billion during the first three months of 2009 and 2008, respectively. The majority of these loan sales were for securitization by the GNMA, FNMA and FHLMC. These sales resulted in pretax gains (losses) of $17 million and $(10) million during the first three months of 2009 and 2008, respectively.

JPMorgan Chase Bank, N.A.’s mortgage loan sales are primarily nonrecourse, thereby effectively transferring the risk of future credit losses to the purchaser of the loans. However, for a limited number of loan sales, JPMorgan Chase Bank, N.A. is obligated to share up to 100% of the credit risk associated with the sold loans with the purchaser. See Note 25 on page 61 of these Consolidated Financial Statements for additional information on loans sold with recourse.

Other securitizations JPMorgan Chase Bank, N.A. also securitizes automobile and student loans originated by the retail business and purchased consumer loans (including automobile and student loans). JPMorgan Chase Bank, N.A. retains servicing responsibilities for all originated and certain purchased student and automobile loans. It may also hold a retained interest in these securitizations; such residual interests are classified as other assets. At March 31, 2009, and December 31, 2008, JPMorgan Chase Bank, N.A. held $19 million and $30 million, respectively, of retained interests in securitized automobile loans, and $49 million and $52 million, respectively, of residual interests in securitized student loans.

JPMorgan Chase Bank, N.A. also maintains escrow accounts up to predetermined limits for some automobile and student loan securitizations to cover deficiencies in cash flows owed to investors. These escrow accounts are classified within other assets and carried at fair value. The amounts available in such escrow accounts as of March 31, 2009, were zero and $3 million for automobile and student loan securitizations, respectively; as of December 31, 2008, these amounts were $2 million and $3 million for automobile and student loan securitizations, respectively.

Securitization activity The following tables provide information related to JPMorgan Chase Bank, N.A.’s securitization activities for the three months ended March 31, 2009, and 2008. For the periods presented, there were no cash flows from JPMorgan Chase Bank, N.A. to the QSPEs related to recourse or guarantee arrangements. Three months ended March 31, 2009 Residential mortgage (in millions, except for ratios and where otherwise noted) Credit card Prime(f) Subprime

Option ARMs


Student loans Auto

Principal securitized $ 3,693 $ — $ — $ — $ — $ — $ — Pretax gains — — — — — — — All cash flows during the period: Proceeds from new securitizations $ 3,693(e) $ — $ — $ — $ — $ — $ — Servicing fees collected 128 79 32 128 7 1 1 Other cash flows received(a) 412 — — — — — — Proceeds from collections reinvested in revolving


assets (or the underlying collateral)(b) — 41 — 3 — — 89 Cash flows received on the interests that continue

to be held by JPMorgan Chase Bank, N.A.(c) 44 125 1 48 108 — 7 Key assumptions used to measure retained



45

Three months ended March 31, 2008 Residential mortgage (in millions, except for ratios and where otherwise noted) Credit card Prime(f) Subprime

Option ARMs


Student loans Auto

Principal securitized $ 1,818 $ — $ — $ — $ — $ — $ — Pretax gains 16 — — — — — — All cash flows during the period: Proceeds from new securitizations $ 1,818(e) $ — $ — $ — $ — $ — $ — Servicing fees collected 108 23 26 — 1 — 4 Other cash flows received(a) 570 — — — — — — Proceeds from collections reinvested in revolving


assets (or the underlying collateral)(b) — 49 11 — — — 97 Cash flows received on the interests that continue




(a) Included excess servicing fees and other ancillary fees received. (b) Included cash paid by JPMorgan Chase Bank, N.A. to reacquire assets from the QSPEs – for example, servicer clean-up calls. (c) Included cash flows received on retained interests including, for example, principal repayments, and interest payments. (d) PPR: principal payment rate. (e) Includes $3.5 billion of securities retained by JPMorgan Chase Bank, N.A. at March 31, 2009. There were no securities retained by JPMorgan

Chase Bank, N.A. at March 31, 2008. (f) Includes Alt-A loans. JPMorgan Chase Bank, N.A.’s interest in securitized assets held at fair value The following table summarizes JPMorgan Chase Bank, N.A.’s securitization interests, which are carried at fair value on JPMorgan Chase Bank, N.A.’s Consolidated Balance Sheets at March 31, 2009, and December 31, 2008, respectively. The risk ratings are periodically reassessed as information becomes available. As of March 31, 2009, and December 31, 2008, 83% and 72%, respectively, of JPMorgan Chase Bank, N.A.’s retained securitization interests, which are carried at fair value, were risk rated “A” or better.

Ratings profile of interests held(c)(d)(e) March 31, 2009 December 31, 2008(d) (in billions)

Investment grade

Noninvestmentgrade


Investment grade

Noninvestment grade


Asset types: Credit card(a) $ 8.1 $ 1.5 $ 9.6 $ 3.8 $ 1.3 $ 5.1 Residential mortgage:

Prime(b) 0.7 — 0.7 1.0 0.2 1.2 Subprime — — — — — — Option ARMs 0.3 0.1 0.4 0.4 — 0.4

Commercial and other 0.5 — 0.5 0.5 — 0.5 Student loans — 0.1 0.1 — 0.1 0.1 Auto — — — — — — Total $ 9.6 $ 1.7 $ 11.3 $ 5.7 $ 1.6 $ 7.3 (a) Includes retained subordinated interests carried at fair value, including the credit card business’ accrued interests and fees, escrow accounts, and

other residual interests. Excludes undivided seller interest in the trusts of $2.2 billion and $8.4 billion and unencumbered cash amounts on deposit of $112 million and $62 million at March 31, 2009, and December 31, 2008, respectively, which are carried at historical cost.

(b) Includes Alt-A loans. (c) The ratings scale is presented on an S&P-equivalent basis. (d) Includes $2.4 billion and $1.8 billion of investments acquired in the secondary market, but predominantly held for investment purposes as of

March 31, 2009, and December 31, 2008, respectively. Of this amount, $2.2 billion and $1.7 billion is classified as investment-grade as of March 31, 2009, and December 31, 2008, respectively.

(e) Excludes senior and subordinated securities of $17 million and zero at March 31, 2009, and December 31, 2008, respectively, that JPMorgan Chase Bank, N.A. purchased in connection with the investment banking business’ secondary market-making activities.

46

The table below outlines the key economic assumptions used at March 31, 2009, and December 31, 2008, to determine the fair value of JPMorgan Chase Bank, N.A.’s retained interests, other than MSRs, that are valued using modeling techniques. The table below also outlines the sensitivities of those fair values to immediate 10% and 20% adverse changes in assumptions used to determine fair value. For a discussion of residential MSRs, see Note 19 on page 54 of these Consolidated Financial Statements.

Residential mortgage March 31, 2009(a) (in millions, except rates and where otherwise noted) Credit card Prime(d) Option ARMs


Interests held $ 1,439(c) $ 729 $ 408 $ 550 $ 51 $ 19 Weighted-average life (in years) 0.5 6.8 5.5 5.2 8.1 0.7 Weighted-average prepayment rate(b) 16.4% 11.0% 13.8% 0.4% 5.0% 1.4% PPR CPR CPR CPR CPR ABS

Impact of 10% adverse change $ (8) $ (20) $ (9) $ — $ (1) $ — Impact of 20% adverse change (16) (32) (15) (1) (2) (1)

Weighted-average loss assumption 8.6% 0.7% 2.0% 0.7%(e) —%(e) 1.2% Impact of 10% adverse change $ (73) $ (1) $ — $ 1 $ — $ (1) Impact of 20% adverse change (74) (12) (6) (4) — (1)


Residential mortgage December 31, 2008 (in millions, except rates and where otherwise noted Credit card Prime(d) Option ARMs


Interests held $ 1,348(c) $ 153 $ 436 $ 30 $ 55 $ 32 Weighted-average life (in years) 0.5 6.6 7.3 5.9 8.2 0.7 Weighted-average prepayment rate(b) 16.6% 17.9% 7.6% 3.0% 5.0% 1.3% PPR CPR CPR CPR CPR ABS

Impact of 10% adverse change $ (18) $ (5) $ (4) $ — $ (1) $ — Impact of 20% adverse change (36) (11) (11) — (2) (1)

Weighted-average loss assumption 7.0% 3.3% 0.3% 2.7%(e) —%(e) 0.5% Impact of 10% adverse change $ (101) $ (1) $ — $ — $ — $ — Impact of 20% adverse change (177) (2) (1) — — (1)


(a) As of March 31, 2009, certain investments acquired in the secondary market but predominantly held for investment purposes are included in the table.

(b) PPR: principal payment rate; ABS: absolute prepayment speed; CPR: constant prepayment rate. (c) Excludes certain interests that are not valued using modeling techniques. (d) Includes Alt-A loans. (e) Expected losses for student loans and certain wholesale securitizations are minimal and are incorporated into other assumptions.

The sensitivity analysis in the preceding table is hypothetical. Changes in fair value based on a 10% or 20% variation in assumptions generally cannot be extrapolated easily, because the relationship of the change in the assumptions to the change in fair value may not be linear. Also, in the 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, which might counteract or magnify the sensitivities. The above sensitivities also do not reflect JPMorgan Chase Bank, N.A.’s risk management practices that may be undertaken to mitigate such risks.

47

The table below includes information about delinquencies, net charge-offs/(recoveries) and components of reported and securitized financial assets at March 31, 2009, and December 31, 2008.

Total loans 90 days past due

and still accruing

Nonaccrual assets(g)

Net loan charge-offs March 31, Dec. 31, March 31, Dec. 31, March 31, Dec. 31, Three months ended March 31, (in millions) 2009 2008 2009 2008 2009 2008 2009 2008 Home equity $ 111,781 $ 114,335 $ — $ — $ 1,591 $ 1,394 $ 1,098 $ 447 Prime mortgage(a) 67,774 72,168 — — 2,699 1,888 312 50 Subprime mortgage 14,590 15,326 — — 2,544 2,689 364 149 Option ARMs 6,918 9,018 — — 97 — 4 — Auto loans 43,065 42,603 — — 165 148 174 118 Credit card 23,592 31,141 709 703 — — 536 360 All other 33,684 33,693 433 463 625 430 224 61 Loans held-for-sale(b) 3,665 2,028 — — — — NA NA

Total consumer loans – excluding purchased credit-impaired loans 305,069 320,312 1,142 1,166 7,721 6,549 2,712 1,185

Consumer loans – purchased credit-impaired loans(c) 87,572 88,813 — — — — — —

Total consumer loans 392,641 409,125 1,142 1,166 7,721 6,549 2,712 1,185

Total wholesale loans 235,717 253,187 171 162

3,629(h) 2,354(h) 184 79 Total loans reported 628,358 662,312 1,313 1,328 11,350 8,903 2,896 1,264 Securitized loans: Residential mortgage:

Prime mortgage(a) 118,214 122,419 — — 8,120 6,081 317 9 Subprime mortgage 39,596 42,142 — — 10,835 9,230 1,692 242 Option ARMs 46,546 48,328 — — 8,348 6,440 380 —

Auto loans 476 668 — — 1 1 2 2 Credit card 35,611 32,470 908 609 — — 487 274 Student 1,058 1,074 60 66 — — — — Commercial and other 30,952 39,812 45 28 571 156 5 2 Total loans securitized(d) 272,453 286,913 1,013 703 27,875 21,908 2,883 529 Total loans reported

and securitized(e) $ 900,811(f) $ 949,225(f) $ 2,326 $ 2,031 $ 39,225 $ 30,811 $ 5,779 $ 1,793 (a) Includes Alt-A loans. (b) Includes loans for prime mortgage and other (largely student loans) of $825 million and $2.8 billion at March 31, 2009, respectively, and $206

million and $1.8 billion at December 31, 2008, respectively. (c) Purchased credit-impaired loans represent loans acquired in the Washington Mutual transaction for which a deterioration in credit quality

occurred between the origination date and JPMorgan Chase Bank, N.A.’s acquisition date. Under SOP 03-3, these loans were initially recorded at fair value and accrete interest income over the estimated life of the loan when cash flows are reasonably estimable, even if the underlying loans are contractually past due. For additional information, see Note 15 on pages 37–40 of these Consolidated Financial Statements.

(d) Total assets held in securitization-related SPEs were $354.0 billion and $371.1 billion at March 31, 2009, and December 31, 2008, respectively. The $272.5 billion and $286.9 billion of loans securitized at March 31, 2009, and December 31, 2008, respectively, excludes $78.9 billion and $75.5 billion of securitized loans, respectively, in which JPMorgan Chase Bank, N.A. has no continuing involvement; $2.2 billion and $8.4 billion, respectively, of seller’s interests in credit card master trusts; and $373 million and $262 million, respectively, of cash amounts on deposit and escrow accounts.

(e) Represents both loans on the Consolidated Balance Sheets and loans that have been securitized. (f) Includes securitized loans that were previously recorded at fair value and classified as trading assets. (g) Excludes nonperforming assets related to: (i) loans eligible for repurchase, as well as loans repurchased from GNMA pools that are insured by

U.S. government agencies, of $4.6 billion and $3.3 billion at March 31, 2009, and December 31, 2008, respectively; and (ii) student loans that are 90 days past due and still accruing, which are insured by U.S. government agencies under the Federal Family Education Loan Program, of $433 million and $437 million at March 31, 2009, and December 31, 2008, respectively. These amounts for GNMA and student loans are excluded, as reimbursement is proceeding normally.

(h) Includes nonperforming loans held-for-sale and loans at fair value of $43 million and $32 million at March 31, 2009, and December 31, 2008, respectively.

48

NOTE 18 – VARIABLE INTEREST ENTITIES Refer to Note 1 on page 6 and Note 18 on page 56 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements for a further description of JPMorgan Chase Bank, N.A.’s policies regarding consolidation of variable interest entities (“VIEs”) and JPMorgan Chase Bank, N.A.’s principal involvement with VIEs. Multi-seller conduits The following table summarizes JPMorgan Chase Bank, N.A.’s involvement with nonconsolidated JPMorgan Chase Bank, N.A.-administered multi-seller conduits. There were no consolidated JPMorgan Chase Bank, N.A.-administered multi-seller conduits as of March 31, 2009, or December 31, 2008.

(in billions) March 31, 2009 December 31, 2008 Total assets held by conduits $ 35.9 $ 42.9 Total commercial paper issued by conduits 35.9 43.1 Liquidity and credit enhancements(a)

Deal-specific liquidity facilities (primarily asset purchase agreements) 48.9 55.4 Program-wide liquidity facilities 17.0 17.0 Program-wide credit enhancements 2.4 3.0

Maximum exposure to loss(b) 50.1 56.9 (a) The accounting for these agreements is further discussed in Note 31 on pages 83–87 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial

Statements. The carrying value related to asset purchase agreements was $145 million and $147 million at March 31, 2009, and December 31, 2008, respectively, of which $139 million and $138 million, respectively, represented the remaining fair value of the guarantee under FIN 45. JPMorgan Chase Bank, N.A. has recorded this guarantee in other liabilities, with an offsetting entry recognized in other assets for the net present value of the future premium receivable under the contracts.

(b) JPMorgan Chase Bank, N.A.’s maximum exposure to loss, calculated separately for each multi-seller conduit, includes JPMorgan Chase Bank, N.A.’s exposure to both deal-specific liquidity facilities and program-wide credit enhancements. For purposes of calculating JPMorgan Chase Bank, N.A.’s maximum exposure to loss, JPMorgan Chase Bank, N.A.-provided, program-wide credit enhancement is limited to deal-specific liquidity facilities provided by third parties.

Assets funded by multi-seller conduits The following table presents information on the commitments and assets held by JPMorgan Chase Bank, N.A.’s administered multi-seller conduits as of March 31, 2009, and December 31, 2008.


(in billions)

Unfunded commitments to

JPMorgan Chase Bank, N.A.’s clients


assets


Liquidity provided

by JPMorgan

Chase Bank, N.A.

Unfunded commitments to

JPMorgan Chase Bank, N.A.’s clients


assets


Liquidity provided

by JPMorgan

Chase Bank, N.A.

Asset types: Credit card $ 3.0 $ 7.6 $ — $ 10.6 $ 3.0 $ 8.9 $ 0.1 $ 11.8 Vehicle loans and leases 1.7 10.0 — 11.7 1.4 10.0 — 11.4 Trade receivables 4.4 3.5 — 7.9 3.8 5.5 — 9.3 Student loans 0.6 4.8 — 5.4 0.7 4.6 — 5.3 Commercial 1.5 3.5 0.4 4.6 1.5 4.0 0.4 5.1 Residential mortgage — 0.6 — 0.6 — 0.7 — 0.7 Capital commitments 1.3 2.1 0.6 2.8 1.3 3.9 0.6 4.6 Rental car finance 0.4 0.2 — 0.6 0.2 0.4 — 0.6 Equipment loans and

leases 0.4 1.3 — 1.7 0.7 1.6 — 2.3 Floorplan – vehicle 0.5 0.8 — 1.3 0.7 1.8 — 2.5 Floorplan – other — 0.1 — 0.1 — — — — Consumer 0.1 0.6 — 0.7 0.1 0.7 0.1 0.7 Other 0.5 0.8 0.4 0.9 0.6 0.8 0.3 1.1 Total $ 14.4 $ 35.9 $ 1.4 $ 48.9 $ 14.0 $ 42.9 $ 1.5 $ 55.4

49

Ratings profile of VIE assets of the multi-seller conduits(a)

March 31, 2009 Investment-grade Noninvestment-


Wt. avg. expected

(in billions) AAA to AAA- AA+ to AA- A+ to A- BBB to BBB- BB+ and below assets life (years)(b) Asset types: Credit card $ 4.8 $ 2.6 $ 0.1 $ 0.1 $ — $ 7.6 1.5 Vehicle loans and leases 4.3 4.3 1.2 0.2 — 10.0 2.4 Trade receivables — 2.3 1.1 0.1 — 3.5 1.0 Student loans 3.7 1.0 — 0.1 — 4.8 1.6 Commercial 1.3 1.4 0.5 0.2 0.1 3.5 2.5 Residential mortgage — 0.5 — — 0.1 0.6 3.7 Capital commitments — 0.2 1.9 — — 2.1 2.4 Rental car finance — — 0.2 — — 0.2 1.3 Equipment loans and leases 0.6 0.7 — — — 1.3 2.3 Floorplan – vehicle — — 0.8 — — 0.8 0.9 Floorplan – other 0.1 — — — — 0.1 0.7 Consumer 0.4 0.1 0.1 — — 0.6 1.8 Other 0.5 0.2 0.1 — — 0.8 3.9 Total $ 15.7 $ 13.3 $ 6.0 $ 0.7 $ 0.2 $ 35.9 2.0

Ratings profile of VIE assets of the multi-seller conduits (a)

December 31, 2008 Investment-grade Noninvestment-


Wt. avg. expected

(in billions) AAA to AAA- AA+ to AA- A+ to A- BBB to BBB- BB+ and below assets life (years)(b) Asset types: Credit card $ 4.8 $ 3.9 $ 0.1 $ 0.1 $ — $ 8.9 1.5 Vehicle loans and leases 4.1 4.1 1.8 — — 10.0 2.5 Trade receivables — 4.0 1.5 — — 5.5 1.0 Student loans 3.6 0.9 — 0.1 — 4.6 1.8 Commercial 1.1 2.0 0.6 0.3 — 4.0 2.7 Residential mortgage — 0.6 — 0.1 — 0.7 4.0 Capital commitments — 3.6 0.3 — — 3.9 2.4 Rental car finance — — 0.4 — — 0.4 1.5 Equipment loans and leases 0.4 1.2 — — — 1.6 2.2 Floorplan – vehicle 0.1 1.0 0.7 — — 1.8 1.1 Floorplan – other — — — — — — — Consumer 0.1 0.4 0.2 — — 0.7 1.6 Other 0.5 0.3 — — — 0.8 3.7 Total $ 14.7 $ 22.0 $ 5.6 $ 0.6 $ — $ 42.9 2.0

(a) The ratings scale is presented on an S&P-equivalent basis. (b) Weighted-average expected life for each asset type is based on the remaining term of each conduit transaction’s committed liquidity, plus either

the expected weighted-average life of the assets should the committed liquidity expire without renewal, or the expected time to sell the underlying assets in the securitization market.

The assets held by the multi-seller conduits are structured so that if they were rated, JPMorgan Chase Bank, N.A. believes the majority of them would receive an “A” rating or better by external rating agencies. However, it is unusual for the assets held by the conduits to be explicitly rated by an external rating agency. Instead, JPMorgan Chase Bank, N.A.’s Credit Risk group assigns each asset purchase liquidity facility an internal risk-rating based on its assessment of the probability of default for the transaction. The ratings provided in the above table reflect the S&P-equivalent ratings of the internal rating grades assigned by JPMorgan Chase Bank, N.A.

The risk ratings are periodically reassessed as information becomes available. As of March 31, 2009, and December 31, 2008, 91% and 90%, respectively, of the assets in the conduits were risk-rated “A” or better.

Commercial paper issued by multi-seller conduits The weighted-average life of commercial paper issued by multi-seller conduits at March 31, 2009, and December 31, 2008, was 24 days and 27 days, respectively, and the average yield on the commercial paper at March 31, 2009, and December 31, 2008, was 0.4% and 0.6%, respectively. In the normal course of business, JPMorgan Chase Bank, N.A. trades and invests in commercial paper, including paper issued by JPMorgan Chase Bank, N.A.-administered conduits. JPMorgan Chase Bank, N.A. did not purchase commercial paper from any JPMorgan Chase Bank, N.A.-administered conduits during the quarter ended March 31, 2009. JPMorgan Chase Bank, N.A. is not obligated under any agreement (contractual or noncontractual) to purchase the commercial paper issued by JPMorgan Chase Bank, N.A.–administered conduits.

50

Consolidation analysis The multi-seller conduits administered by JPMorgan Chase Bank, N.A. were not consolidated at either March 31, 2009, or December 31, 2008, as each conduit had issued expected loss notes (“ELNs”), the holders of which are committed to absorbing the majority of the expected loss of each respective conduit. The total amounts of ELNs outstanding at March 31, 2009, and December 31, 2008, were $139 million and $136 million, respectively.

Consolidated sensitivity analysis on capital The table below shows the impact on JPMorgan Chase Bank, N.A.’s reported assets, liabilities, Tier 1 capital ratio and Tier 1 leverage ratio if JPMorgan Chase Bank, N.A. were required to consolidate all of the multi-seller conduits that it administers at their current carrying value.

March 31, 2009 (in billions, except ratios) Reported Pro forma(a)(b) Assets $ 1,688.2 $ 1,724.2 Liabilities 1,557.6 1,593.6 Tier 1 capital ratio 9.0% 9.0% Tier 1 leverage ratio 6.1 6.0 (a) The table shows the impact of consolidating the assets and liabilities of the multi-seller conduits at their current carrying value; as such, there

would be no income statement or capital impact at the date of consolidation. If JPMorgan Chase Bank, N.A. were required to consolidate the assets and liabilities of the conduits at fair value at March 31, 2009, the Tier 1 capital ratio would be 9.0%. The fair value of the assets is primarily based on pricing of comparable transactions. The fair value of these assets could change significantly, because the pricing of conduit transactions is renegotiated with the client, generally on an annual basis and due to changes in current market conditions.

(b) Consolidation is assumed to occur on the first day of the quarter, at the quarter-end levels, in order to provide a meaningful adjustment to average assets in the denominator of the leverage ratio.

JPMorgan Chase Bank, N.A. could fund purchases of assets from JPMorgan Chase Bank, N.A.-administered multi-seller conduits should it become necessary.

Investor intermediation Municipal bond vehicles Exposure to nonconsolidated municipal bond VIEs at March 31, 2009, and December 31, 2008, including the ratings profile of the VIEs’ assets, was as follows. March 31, 2009 December 31, 2008

(in billions)




Maximum exposure




Maximum exposure

Nonconsolidated municipal bond vehicles(a)(b) $ 10.7 $ 7.0 $ 3.7 $ 7.0 $ 10.0 $ 6.9 $ 3.1 $ 6.9

Ratings profile of VIE assets(e)

Investment-grade

Noninvestment-

grade Fair value of assets held

Wt. avg. expected

life of assets(in billions) AAA to AAA- AA+ to AA- A+ to A- BBB to BBB- BB+ and below by VIEs (years)


March 31, 2009 $ 3.7 $ 6.7 $ 0.2 $ 0.1 $ — $ 10.7 20.1 December 31, 2008 3.8 5.9 0.2 0.1 $ — 10.0 22.3

(a) Excluded $234 million and $340 million at March 31, 2009, and December 31, 2008, respectively, which were consolidated due to JPMorgan Chase Bank, N.A. owning the residual interests.

(b) Certain of the municipal bond vehicles are structured to meet the definition of a QSPE (as discussed in Note 1 on page 7 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements); accordingly, the assets and liabilities of QSPEs are not reflected in JPMorgan Chase Bank, N.A.’s Consolidated Balance Sheets (except for retained interests that are reported at fair value). Excluded nonconsolidated amount of $603 million at December 31, 2008, related to QSPE municipal bond vehicles in which JPMorgan Chase Bank, N.A. owned the residual interests. JPMorgan Chase Bank, N.A. did not own residual interests in QSPE municipal bond vehicles at March 31, 2009.

(c) JPMorgan Chase Bank, N.A. may serve as credit enhancement provider in municipal bond vehicles in which it serves as liquidity provider. JPMorgan Chase Bank, N.A. provided insurance on underlying municipal bonds, in the form of letters of credit, of $10 million at both March 31, 2009, and December 31, 2008.

(d) Represents the excess/(deficit) of municipal bond asset fair value available to repay the liquidity facilities, if drawn. (e) The ratings scale is based on JPMorgan Chase Bank, N.A.’s internal risk ratings and presented on an S&P-equivalent basis.

In the first quarter of 2009, JPMorgan Chase Bank, N.A. did not experience a drawdown on its liquidity facilities. In addition, the municipal bond vehicles did not experience any bankruptcy or downgrade termination events during the first quarter of 2009.

51

At March 31, 2009, and December 31, 2008, 98% and 97%, respectively, of the municipal bonds held by vehicles to which JPMorgan Chase Bank, N.A. served as liquidity provider were rated “AA-” or better, based upon either the rating of the underlying municipal bond itself, or the rating including any credit enhancement. At March 31, 2009, and December 31, 2008, $2.4 billion and $2.6 billion, respectively, of the bonds were insured by monoline bond insurers.

Credit-linked note vehicles Exposure to nonconsolidated credit-linked note VIEs at March 31, 2009, and December 31, 2008, was as follows. March 31, 2009 December 31, 2008

Derivative Trading Total Par value of

collateral held Derivative Trading Total Par value of

collateral held(in billions) receivables assets(c) exposure(d) by VIEs(e) receivables assets(c) exposure(d) by VIEs(e) Credit-linked notes(a)

Static structure $ 4.0 $ 0.7 $ 4.7 $ 13.6 $ 3.5 $ 0.7 $ 4.2 $ 13.6 Managed structure(b) 7.2 0.5 7.7 15.3 6.4 0.3 6.7 12.4

Total $ 11.2 $ 1.2 $ 12.4 $ 28.9 $ 9.9 $ 1.0 $ 10.9 $ 26.0

(a) Excluded collateral with a fair value of $2.1 billion and $2.0 billion at March 31, 2009, and December 31, 2008, respectively, which was consolidated as JPMorgan Chase Bank, N.A., in its role as secondary market-maker, held a majority of the issued credit-linked notes of certain vehicles.

(b) Included synthetic collateralized debt obligation vehicles, which have similar risk characteristics to managed credit-linked note vehicles. At March 31, 2009, and December 31, 2008, trading assets included $2 million and $7 million, respectively, of transactions with subprime collateral.

(c) Trading assets principally comprise notes issued by VIEs, which from time to time are held as part of the termination of a deal or to support limited market-making.

(d) On–balance sheet exposure that includes derivative receivables and trading assets. (e) JPMorgan Chase Bank, N.A.’s maximum exposure arises through the derivatives executed with the VIEs; the exposure varies over time with


Asset swap vehicles Exposure to nonconsolidated asset swap VIEs at March 31, 2009, and December 31, 2008, was as follows. March 31, 2009 December 31, 2008





(in billions) (payables) assets(a) exposure(b) by VIEs(c) (payables) assets(a) exposure(b) by VIEs(c) Nonconsolidated asset swap

vehicles(d) $ (0.7) $ — $ (0.7) $ 6.6 $ (0.2) $ — $ (0.2) $ 7.0

(a) Trading assets principally comprise notes issued by VIEs, which from time to time are held as part of the termination of a deal or to support limited market-making.

(b) On–balance sheet exposure that includes derivative receivables and trading assets. (c) JPMorgan Chase Bank, N.A.’s maximum exposure arises through the derivatives executed with the VIEs; the exposure varies over time with


(d) Excluded collateral with a fair value of $1.3 billion and $1.0 billion at March 31, 2009, and December 31, 2008, respectively, which was consolidated as JPMorgan Chase Bank, N.A., in its role as secondary market-maker, held a majority of the issued notes of certain vehicles.

Collateralized debt obligation vehicles For further information on JPMorgan Chase Bank, N.A.’s involvement with collateralized debt obligations (“CDOs”), see Note 18 on pages 64-65 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements.

As of March 31, 2009, and December 31, 2008, JPMorgan Chase Bank, N.A. had noninvestment-grade funded loans of $350 million and $401 million, respectively, to nonconsolidated CDO warehouse VIEs. These funded loans are considered to be assets of the VIEs. Additionally, JPMorgan Chase Bank, N.A. had unfunded commitments of $126 million and $747 million as of March 31, 2009, and December 31, 2008, respectively. These unfunded commitments are typically contingent upon certain asset-quality conditions being met by the asset managers. JPMorgan Chase Bank, N.A.’s maximum exposure to loss related to the nonconsolidated CDO warehouse VIEs was $476 million and $1.1 billion as of March 31, 2009, and December 31, 2008, respectively.

52

Once the CDO vehicle closes and issues securities, JPMorgan Chase Bank, N.A. has no obligation to provide further support to the vehicle. At the time of closing, JPMorgan Chase Bank, N.A. may hold unsold securities that it was not able to place with third-party investors. In addition, JPMorgan Chase Bank, N.A. may on occasion hold some of the CDO vehicles’ securities as a secondary market-maker or as a principal investor, or it may be a derivative counterparty to the vehicles. At March 31, 2009, and December 31, 2008, these amounts were not significant.

VIEs sponsored by third parties Investment in a third-party credit card securitization trust JPMorgan Chase Bank, N.A. holds a note in a third-party-sponsored VIE, which is a credit card securitization trust that owns credit card receivables issued by a national retailer. The note is structured so that the principal amount can float up to 47% of the principal amount of the receivables held by the trust, not to exceed $4.2 billion. JPMorgan Chase Bank, N.A. is not the primary beneficiary of the trust and accounts for its investment at fair value within AFS investment securities. At March 31, 2009, and December 31, 2008, the amortized cost of the note was $3.6 billion for both periods, and the fair value was $3.0 billion and $2.6 billion, respectively. For more information on AFS securities, see Note 13 on pages 32–37 of these Consolidated Financial Statements.

Other VIEs sponsored by third parties JPMorgan Chase Bank, N.A. enters into transactions with VIEs structured by other parties. These transactions include, for example, acting as a derivative counterparty, liquidity provider, investor, underwriter, placement agent, trustee or custodian. These transactions are conducted at arm’s-length, and individual credit decisions are based on the analysis of the specific VIE, taking into consideration the quality of the underlying assets. Where these activities do not cause JPMorgan Chase Bank, N.A. to absorb a majority of the expected losses, or to receive a majority of the residual returns, JPMorgan Chase Bank, N.A. records and reports these positions on its Consolidated Balance Sheets similarly to the way it would record and report positions from any other third-party transaction. These transactions are not considered significant for disclosure purposes under FIN 46(R).

Consolidated VIE assets and liabilities The following table presents information on assets, liabilities and commitments related to VIEs that are consolidated by JPMorgan Chase Bank, N.A.

Consolidated VIEs Assets March 31, 2009 (in billions)


VIE program type Municipal bond vehicles $ 0.2 $ — $ — $ 0.2 Credit-linked notes 1.5 — 0.6 2.1 CDO warehouses 0.1 — — 0.1 Student loans — 3.9 0.1 4.0 Employee funds — — — — Energy investments — — — — Other 1.1 0.6 0.2 1.9 Total $ 2.9 $ 4.5 $ 0.9 $ 8.3

Liabilities March 31, 2009 (in billions)


VIE program type Municipal bond vehicles $ — $ 0.2 $ 0.2 Credit-linked notes 0.6 0.1 0.7 CDO warehouses — — — Student loans 2.7 1.1 3.8 Employee funds — — — Energy investments — — — Other 0.4 0.2 0.6 Total $ 3.7 $ 1.6 $ 5.3

53

Consolidated VIEs Assets December 31, 2008 (in billions)


VIE program type Municipal bond vehicles $ 0.3 $ — $ — $ 0.3 Credit-linked notes 1.9 — 0.1 2.0 CDO warehouses — — — — Student loans — 4.0 0.1 4.1 Employee funds — — — — Energy investments — — — — Other 1.5 0.7 0.1 2.3 Total $ 3.7 $ 4.7 $ 0.3 $ 8.7 Liabilities December 31, 2008 (in billions)


VIE program type Municipal bond vehicles $ — $ 0.3 $ 0.3 Credit-linked notes 1.0 2.0 3.0 CDO warehouses — — — Student loans 2.8 1.1 3.9 Employee funds — — — Energy investments — — — Other 0.4 1.1 1.5 Total $ 4.2 $ 4.5 $ 8.7 (a) Included assets classified as resale agreements and other assets within the Consolidated Balance Sheets. (b) Assets of each consolidated VIE included in the program types above are generally used to satisfy the liabilities to third parties. The difference

between total assets and total liabilities recognized for consolidated VIEs represents JPMorgan Chase Bank, N.A.’s interest in the consolidated VIEs for each program type.

(c) 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 Bank, N.A. Included in beneficial interests in VIE assets are long-term beneficial interests of $3.7 billion and $4.2 billion at March 31, 2009, and December 31, 2008.

(d) Included liabilities classified as other borrowed funds, long-term debt and other liabilities in the Consolidated Balance Sheets.

NOTE 19 – GOODWILL AND OTHER INTANGIBLE ASSETS For a discussion of accounting policies related to goodwill and other intangible assets, see Note 19 on pages 66–69 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements.

Goodwill and other intangible assets consist of the following.

(in millions) March 31, 2009 December 31, 2008 Goodwill $ 27,355 $ 27,371 Mortgage servicing rights 10,486 9,236 Purchased credit card relationships 118 128

All other intangibles:

Other credit card–related intangibles $ 668 $ 698 Core deposit intangibles 1,498 1,597 Other intangibles 1,047 1,051

Total all other intangible assets $ 3,213 $ 3,346 Goodwill Goodwill decreased $16 million from December 31, 2008 predominantly as a result of currency translation adjustments related to the Canadian credit card operations.

Goodwill was not impaired at March 31, 2009, or December 31, 2008, nor was any goodwill written off due to impairment during either of the three months ended March 31, 2009 or 2008.

54

Mortgage servicing rights For a further description of the MSR asset, interest rate risk management, and the valuation methodology of MSRs, see Notes 5 and 19 on pages 16–17 and 66–69 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements, respectively.

The fair value of MSRs is sensitive to changes in interest rates, including their effect on prepayment speeds. JPMorgan Chase Bank, N.A. uses or has used combinations of derivatives 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 instruments. MSRs decrease in value when interest rates decline. Conversely, securities (such as mortgage-backed securities), principal-only certificates and certain derivatives (when JPMorgan Chase Bank, N.A. receives fixed-rate interest payments) increase in value when interest rates decline.

The following table summarizes MSR activity for the three months ended March 31, 2009 and 2008.

Three months ended March 31, (in millions, except where otherwise noted) 2009 2008 Fair value at January 1 $ 9,236 $ 8,632 MSR activity

Originations of MSRs 994 737 Purchase of MSRs 2 107

Total additions 996 844 Change in valuation due to inputs and assumptions(a) 1,305 (632) Other changes in fair value(b) (1,051) (425)

Total change in fair value of MSRs 254(c) (1,057)

Fair value at March 31 $ 10,486(d) $ 8,419

Change in unrealized gains/(losses) included in income related to MSRs held at March 31 $ 1,305 $ (632)

Contractual service fees, late fees and other ancillary fees included in income $ 1,119 $ 628

Third-party mortgage loans serviced at March 31 (in billions) $ 1,090.7 $ 627.1 (a) Represents MSR asset fair value adjustments due to changes in inputs, such as interest rates and volatility, as well as updates to assumptions used

in the valuation model. Also represents total realized and unrealized gains/(losses) included in net income per the SFAS 157 disclosure for fair value measurement using significant unobservable inputs (level 3).

(b) Includes changes in the MSR value due to modeled servicing portfolio runoff (or time decay), which represents the impact of cash settlements per the SFAS 157 disclosure for fair value measurement using significant unobservable inputs (level 3).

(c) Includes $(2) million related to commercial real estate. (d) Includes $53 million related to commercial real estate.

The table below outlines the key economic assumptions used to determine the fair value of JPMorgan Chase Bank, N.A.’s MSRs at March 31, 2009, and December 31, 2008; and it outlines the sensitivities of those fair values to immediate 10% and 20% adverse changes in those assumptions.

(in millions, except rates and where otherwise noted) March 31, 2009 December 31, 2008 Weighted-average prepayment speed assumption (CPR) 25.51% 35.10%

Impact on fair value of 10% adverse change $ (1,032) $ (1,021) Impact on fair value of 20% adverse change (1,951) (1,936)

Weighted-average option adjusted spread 3.89% 3.80% Impact on fair value of 100 basis points adverse change $ (354) $ (308) Impact on fair value of 200 basis points adverse change (681) (601)


The sensitivity analysis in the preceding table is hypothetical and should be used with caution. 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 changing any other assumption. In reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities.

55

Purchased credit card relationships and all other intangible assets For the quarter ended March 31, 2009, purchased credit card relationships and all other intangibles decreased by $143 million, primarily reflecting amortization expense associated with credit card-related intangibles, core deposit intangibles, and other intangibles.

Except for $315 million of indefinite-lived intangibles related to asset management advisory contracts, which are not amortized but are tested for impairment at least annually, the remainder of JPMorgan Chase Bank, N.A.’s other acquired intangible assets are subject to amortization.

Purchased credit card relationships and the components of all other intangible assets were as follows.


Gross Accumulated Net

carrying Gross Accumulated Net

carrying (in millions) amount amortization value amount amortization value Purchased credit card relationships $ 219 $ 101 $ 118 $ 224 $ 96 $ 128 All other intangibles:

Other credit card–related intangibles $ 763 $ 95 $ 668 $ 773 $ 75 $ 698 Core deposit intangibles 4,280 2,782 1,498 4,280 2,683 1,597 Other intangibles 1,492 445(a) 1,047 1,539 488(a) 1,051

(a) Includes amortization expense related to servicing assets on securitized automobile loans, which is recorded in lending & deposit–related fees, of $1 million for the three months ended for both March 31, 2009 and 2008.


Three months ended March 31, (in millions) 2009 2008 Purchased credit card relationships $ 5 $ 8 All other intangibles:

Other credit card–related intangibles 20 2 Core deposit intangibles 99 119 Other intangibles 26 22

Total amortization expense $ 150 $ 151

Future amortization expense The following table presents estimated future amortization expense related to credit card relationships, core deposits and all other intangible assets.

For the year: (in millions) Purchased credit card relationships

Other credit card–related intangibles

Core deposit intangibles

All other intangible assets Total

2009(a) $ 22 $ 82 $ 389 $ 80 $ 573 2010 21 87 329 68 505 2011 19 88 284 59 450 2012 18 90 240 57 405 2013 16 89 195 55 355 (a) Includes $5 million, $20 million, $99 million and $26 million of amortization expense related to purchased credit card relationships, other

credit card–related intangibles, core deposit intangibles and all other intangibles, respectively, recognized during the first three months of 2009.

56

NOTE 20 – DEPOSITS For further discussion of deposits, see Note 21 on page 70 in JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements.

At March 31, 2009, and December 31, 2008, noninterest-bearing and interest-bearing deposits were as follows. (in millions) March 31, 2009 December 31, 2008 U.S. offices:

Noninterest-bearing $ 202,159 $ 213,115 Interest-bearing (included $1,508 and $1,849 at fair value at March 31, 2009, and

December 31, 2008, respectively) 435,370 482,382 Non-U.S. offices:

Noninterest-bearing 7,493 8,026 Interest-bearing (included $3,606 and $3,756 at fair value at March 31, 2009, and

December 31, 2008, respectively) 334,674 352,242 Total $ 979,696 $ 1,055,765

On May 20, 2009, the Helping Families Save Their Homes Act of 2009 was signed into law. The Act extends through December 31, 2013, the FDIC's temporary standard maximum deposit insurance amount, which was increased on October 3, 2008, from $100,000 to $250,000 per depositor per institution.

NOTE 21 – RELATED PARTY TRANSACTIONS JPMorgan Chase Bank, N.A. regularly enters into transactions with JPMorgan Chase and its various subsidiaries. Significant revenue- and expense-related transactions with related parties are listed below. Three months ended March 31, (in millions) 2009 2008 Interest income from affiliates Deposits with affiliated banks $ 2 $ 7 Federal funds sold and securities purchased under resale agreements, and securities borrowed with

affiliates 15 673 Loans to affiliates 8 14 Interest expense to affiliates Interest-bearing deposits of affiliates 149 647 Federal funds purchased and securities loaned or sold under repurchase agreements, and other borrowed

funds due to affiliates 141 724 Long-term debt payable to JPMorgan Chase and affiliates 191 225 Junior subordinated deferred interest debentures held by trusts that issued guaranteed capital debt

securities to nonbank affiliates 12 12 Servicing agreements with affiliates Noninterest revenue 907 821 Noninterest expense 1,042 1,044 Significant balances with related parties are listed below. (in millions) March 31, 2009 December 31, 2008 Assets Deposits with affiliated banks $ 742 $ 661 Federal funds sold and securities purchased under resale agreements, and securities

borrowed with affiliates 64,535 65,948 Loans to affiliates 1,556 87 Accrued interest and accounts receivable, and other assets due from affiliates 10,922 13,623 Liabilities Noninterest-bearing deposits of affiliates 5,915 3,151 Interest-bearing deposits of affiliates 106,785 86,481 Federal funds purchased and securities loaned or sold with affiliates under repurchase

agreements, and other borrowed funds due to affiliates 146,860 121,049 Accounts payable and other liabilities payable to affiliates 5,265 6,365 Long-term debt payable to JPMorgan Chase and affiliates 18,527 18,526 Junior subordinated deferrable interest debentures held by trusts that issued guaranteed

capital debt securities to nonbank affiliates 600 600

57

At March 31, 2009, and December 31, 2008, net derivative payables to affiliates were $4.3 billion and $2.8 billion, respectively.

NOTE 22 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Accumulated other comprehensive income (loss) includes the after-tax change in unrealized gains and losses on AFS securities, SFAS 52 foreign currency translation adjustments (including the impact of related derivatives), SFAS 133 cash flow hedging activities and SFAS 158 net loss and prior service cost (credit) related to JPMorgan Chase Bank, N.A.’s defined benefit pension and OPEB plans.



securities(a)




Accumulated other

comprehensive income (loss)

Balance at January 1, 2009 $ (1,815) $ (220) $ (239) $ (307) $ (2,581) Net change 1,051(b) (119)(c) 151(d) (1)(e) 1,082

Balance at March 31, 2009 $ (764) $ (339) $ (88) $ (308) $ (1,499)



securities(a)




Accumulated other

comprehensive income (loss)

Balance at January 1, 2008 $ 376 $ 17 $ (816) $ (263) $ (686) Net change 77(b) 198(c) 119(d) 11(e) 405

Balance at March 31, 2008 $ 453 $ 215 $ (697) $ (252) $ (281)

(a) Represents the after-tax difference between the fair value and amortized cost of the AFS securities portfolio and retained interests in securitizations recorded in other assets.

(b) The net change for the quarter ended March 31, 2009, was due primarily to the narrowing of spreads on U.S. government agency mortgage-backed securities. The net change for the quarter ended March 31, 2008, was due primarily to declining interest rates, partially offset by recognition of gains from sales of investment securities.

(c) March 31, 2009 and 2008, included $(180) million and $231 million, respectively, of after-tax gains/(losses) on foreign currency translation from operations for which the functional currency is other than the U.S. dollar, partially offset by $61 million and $(33) million, respectively, of after-tax gains/(losses) on hedges. JPMorgan Chase Bank, N.A. may not hedge its entire exposure to foreign currency translation on net investments in foreign operations.

(d) The net change for the quarter ended March 31, 2009, included $52 million of after-tax gains recognized in income and $203 million of after-tax gains, representing the net change in derivative fair value that was reported in comprehensive income. The net change for the quarter ended March 31, 2008, included $82 million of after-tax losses recognized in income and $37 million of after-tax gains representing the net change in derivative fair value that was reported in comprehensive income.

(e) The net change for the three months ended March 31, 2009 and 2008 was primarily due to after tax adjustments based upon the respective 2008 and 2007 final year-end actuarial valuations for the U.S. and non-U.S. defined benefit pension plans, and the amortization of net loss and prior service credit into net periodic benefit cost.

NOTE 23 – CAPITAL JPMorgan Chase Bank, N.A.’s banking regulator, the OCC, establishes capital requirements, including well-capitalized standards, for national banks. For additional information regarding JPMorgan Chase Bank, N.A.’s capital ratios and the federal regulatory capital standards to which it is subject, see Note 28 on pages 78–79 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements. As of March 31, 2009, and December 31, 2008, JPMorgan Chase Bank, N.A. was well-capitalized and met all capital requirements to which it was subject.

The OCC granted JPMorgan Chase Bank, N.A., for a period of 18 months ending October 1, 2009, relief up to a certain specified amount and subject to certain conditions from the OCC’s risk-based capital and leverage requirements with respect to Bear Stearns’ risk-weighted assets (and other exposures) acquired by JPMorgan Chase Bank, N.A. in connection with the Bear Stearns merger. The amount of such relief is subject to reduction in each quarter such that the total benefit of the relief expires on October 1, 2009.

58

The following table presents the risk-based capital ratios for JPMorgan Chase Bank, N.A. at March 31, 2009, and December 31, 2008:

(in millions, except ratios) Tier 1 capital Total capital

Risk-weighted assets(b)

Adjusted average assets(c)

Tier 1 capital ratio

Total capital ratio

Tier 1 leverage

ratio March 31, 2009 $ 100,437 $ 143,038 $ 1,113,618 $ 1,651,574 9.0% 12.8% 6.1% December 31, 2008 100,594 143,854 1,153,039 1,705,750 8.7 12.5 5.9 Well-capitalized ratios(a) 6.0% 10.0% 5.0%(d) Minimum capital ratios(a) 4.0 8.0 3.0(e) (a) As defined by the regulations issued by the OCC, the Federal Deposit Insurance Corporation and the Federal Reserve (“FRB”). (b) Includes off–balance sheet risk-weighted assets in the amounts of $315.5 billion at March 31, 2009, and $332.2 billion at December 31,

2008. (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 certain subsidiaries and the total adjusted carrying value of nonfinancial equity investments that are subject to deductions from Tier 1 capital.

(d) Represents requirements for banking subsidiaries pursuant to regulations issued under the Federal Deposit Insurance Corporation Improvement Act.

(e) The minimum Tier 1 leverage ratio for banks is 3% or 4% depending on factors specified in regulations issued by the OCC and the FRB. Note: Rating agencies allow measures of capital to be adjusted upward for deferred tax liabilities, which have resulted from both nontaxable

business combinations and from tax-deductible goodwill. JPMorgan Chase Bank, N.A. had deferred tax liabilities resulting from nontaxable business combinations totaling $814 million at March 31, 2009, and $965 million at December 31, 2008. Additionally, JPMorgan Chase Bank, N.A had deferred tax liabilities resulting from tax-deductible goodwill of $763 million at March 31, 2009, and $838 million at December 31, 2008.

NOTE 24 – COMMITMENTS AND CONTINGENCIES For a discussion of JPMorgan Chase Bank, N.A.’s commitments and contingencies, see Note 29 on page 79 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements.

Litigation reserve JPMorgan Chase Bank, N.A. maintains litigation reserves for certain of its outstanding litigation. In accordance with the provisions of SFAS 5, JPMorgan Chase Bank, N.A. accrues for a litigation-related liability when it is probable that such a liability has been incurred and the amount of the loss can be reasonably estimated. When JPMorgan Chase Bank, N.A. is named as a defendant in a litigation and may be subject to joint and several liability and a judgment sharing agreement is in place, JPMorgan Chase Bank, N.A. recognizes expense and obligations net of amounts expected to be paid by other signatories to the judgment sharing agreement.

While the outcome of litigation is inherently uncertain, management believes, in light of all information known to it at March 31, 2009, JPMorgan Chase Bank, N.A.’s litigation reserves were adequate at such date. Management reviews litigation reserves at least quarterly, and the reserves may be increased or decreased in the future to reflect further relevant developments. JPMorgan Chase Bank, N.A. believes it has meritorious defenses to the claims asserted against it in its currently outstanding litigation and, with respect to such litigation, intends to continue to defend itself vigorously, litigating or settling cases according to management’s judgment as to what is in the best interests of JPMorgan Chase and its stockholders.

NOTE 25 – OFF–BALANCE SHEET LENDING-RELATED FINANCIAL INSTRUMENTS AND GUARANTEES JPMorgan Chase Bank, N.A. utilizes lending-related financial instruments, such as commitments and guarantees, to meet the financing needs of its customers. The contractual amount of these financial instruments represents the maximum possible credit risk should the counterparties draw down on these commitments or JPMorgan Chase Bank, N.A. fulfills its obligation under these guarantees, and the counterparties subsequently fail to perform according to the terms of these contracts. For a discussion of off-balance sheet lending-related financial instruments and guarantees, and JPMorgan Chase Bank, N.A.’s related accounting policies, see Note 31 on pages 83–87 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements.

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 16 on page 41 of these Consolidated Financial Statements for further discussion regarding the allowance for credit losses on lending-related commitments.

59

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 March 31, 2009, and December 31, 2008.

Off–balance sheet lending-related financial instruments and guarantees

Contractual amount Allowance for lending-related commitments

(in millions) March 31,

2009 December 31,

2008 March 31,

2009 December 31,

2008 Lending-related Consumer(a) $ 121,972 $ 143,547 $ 22 $ 25 Wholesale: Other unfunded commitments to extend credit(b)(c)(d)(e)(f) 217,749 222,236 306 348 Asset purchase agreements(g) 47,360 53,729 6 9 Standby letters of credit and other financial guarantees(c)(h)(i) 89,065 94,796 299 272 Other letters of credit(c)(h) 4,107 4,927 2 2 Total wholesale 358,281 375,688 613 631

Total lending-related $ 480,253 $ 519,235 $ 635 $ 656 Other guarantees Securities lending guarantees(j) $ 174,816 $ 182,204 NA NA Derivatives qualifying as guarantees(k) 85,569 83,730 NA NA (a) Includes credit card and home equity lending-related commitments of $21.2 billion and $79.4 billion, respectively, at March 31, 2009;

and $25.7 billion and $95.7 billion, respectively, at December 31, 2008. These amounts for credit card and home equity lending–related commitments represent the total available credit for these products. JPMorgan Chase Bank, N.A. has not experienced, and does not anticipate, that all available lines of credit for these products will be utilized at the same time. JPMorgan Chase Bank, N.A. can reduce or cancel these lines of credit by providing the borrower prior notice or, in some cases, without notice as permitted by law.

(b) Includes unused advised lines of credit totaling $36.8 billion and $36.1 billion at March 31, 2009, and December 31, 2008, respectively, which are not legally binding. In regulatory filings with the Federal Reserve, unused advised lines are not reportable.

(c) Includes contractual amount of risk participations totaling $27.8 billion and $28.2 billion at March 31, 2009, and December 31, 2008. (d) Includes commitments to affiliates of $83 million and $84 million at March, 31, 2009, and December 31, 2008, respectively. (e) Excludes unfunded commitments for other equity investments of $577 million and $627 million at March 31, 2009, and December 31,

2008, respectively. (f) Includes commitments to investment- and noninvestment-grade counterparties in connection with leveraged acquisitions of $3.2 billion

and $3.6 billion at March 31, 2009, and December 31, 2008, respectively. (g) Largely represents asset purchase agreements with JPMorgan Chase Bank, N.A.’s administered multi-seller, asset-backed commercial

paper conduits. It also includes $96 million of asset purchase agreements to other third-party entities at both March 31, 2009, and December 31, 2008.

(h) JPMorgan Chase Bank, N.A. held collateral on standby letters of credit and other letters of credit of $28.0 billion and $1.0 billion, respectively, at March 31, 2009, and $30.8 billion and $1.0 billion, respectively, at December 31, 2008.

(i) Includes unissued standby letters of credit commitments of $37.0 billion and $39.3 billion at March 31, 2009, and December 31, 2008, respectively.

(j) Collateral held by JPMorgan Chase Bank, N.A. in support of securities lending indemnification agreements was $175.1 billion and $182.7 billion at March 31, 2009, and December 31, 2008, respectively. Securities lending collateral comprises primarily cash, securities issued by governments that are members of the Organisation for Economic Co-operation and Development (“OECD”) and U.S. government agencies.

(k) Represents notional amounts of derivatives qualifying as guarantees.

Other unfunded commitments to extend credit Other unfunded commitments to extend credit include commitments to U.S. domestic states and municipalities, hospitals and other not-for-profit entities to provide funding for periodic tenders of their variable-rate demand bond obligations or commercial paper. Performance by JPMorgan Chase Bank, N.A. is required in the event that the variable-rate demand bonds or commercial paper cannot be remarketed to new investors. The amount of commitments related to variable-rate demand bonds and commercial paper of U.S. domestic states and municipalities, hospitals and not-for-profit entities at March 31, 2009, and December 31, 2008, was $22.3 billion and $23.5 billion, respectively. Similar commitments exist to extend credit in the form of liquidity facility agreements with nonconsolidated municipal bond VIEs. For further information, see Note 18 on pages 48–53 of these Consolidated Financial Statements.

60

Also included in other unfunded commitments to extend credit are commitments to investment- and noninvestment-grade counterparties in connection with leveraged acquisitions. These commitments are dependent on whether the acquisition by the borrower is successful, tend to be short-term in nature and, in most cases, are subject to certain conditions based on the borrower’s financial condition or other factors. The amount of commitments related to leveraged acquisitions at March 31, 2009, and December 31, 2008, was $3.2 billion and $3.6 billion, respectively. For further information, see Note 4 and Note 5 on pages 10–17 and 17–19, respectively, of these Consolidated Financial Statements. FIN 45 guarantees JPMorgan Chase Bank, N.A. considers the following off-balance sheet lending-related arrangements to be guarantees under FIN 45: certain asset purchase agreements, standby letters of credit and financial guarantees, securities lending indemnifications, certain indemnification agreements included within third-party contractual arrangements and certain derivative contracts. For a further discussion of the off–balance sheet lending-related arrangements JPMorgan Chase Bank, N.A. considers to be guarantees under FIN 45, and the related accounting policies, see Note 31 on pages 83–87 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements. The amount of the liability related to FIN 45 guarantees recorded at March 31, 2009, and December 31, 2008, excluding the allowance for credit losses on lending-related commitments and derivative contracts discussed below was $516 million and $535 million, respectively.

Asset purchase agreements The majority of JPMorgan Chase Bank, N.A.’s unfunded commitments are not guarantees as defined in FIN 45, except for certain asset purchase agreements that are principally used as a mechanism to provide liquidity to SPEs, predominantly multi-seller conduits, as described in Note 18 on pages 48–53 of these Consolidated Financial Statements.

The carrying value of asset purchase agreements of $145 million and $147 million at March 31, 2009, and December 31, 2008, respectively, which is classified in accounts payable and other liabilities on the Consolidated Balance Sheets, includes $6 million and $9 million at March 31, 2009, and December 31, 2008, respectively, for the allowance for lending-related commitments and $139 million and $138 million at March 31, 2009, and December 31, 2008, respectively, for the fair value of the FIN 45 guarantee liability.

Standby letters of credit Standby letters of credit (“SBLC”) and other financial guarantees are conditional lending commitments issued by JPMorgan Chase Bank, N.A. to guarantee the performance of a customer to a third party under certain arrangements, such as commercial paper facilities, bond financings, acquisition financings, trade and similar transactions. The carrying value of SBLC and other letters of credit of $678 million and $671 million at March 31, 2009, and December 31, 2008, respectively, which is classified in accounts payable and other liabilities in the Consolidated Balance Sheets, includes $301 million and $274 million at March 31, 2009, and December 31, 2008, respectively, for the allowance for lending-related commitments, and $377 million and $397 million at March 31, 2009, and December 31, 2008, respectively, for the fair value of the FIN 45 guarantee.

The following table summarizes the type of facilities under which standby letters of credit and other financial guarantees, and other letters of credit arrangements are outstanding by the ratings profiles of JPMorgan Chase Bank, N.A.’s customers as of March 31, 2009, and December 31, 2008. The ratings scale is representative of the payment or performance risk to JPMorgan Chase Bank, N.A.’s internal risk ratings, which generally correspond to ratings defined by S&P and Moody’s.

Standby letters of credit and other financial guarantees and other letters of credit March 31, 2009 December 31, 2008

(in millions)


financial guaranteesOther letters

of credit


financial guarantees Other letters

of credit Contractual amount:

Investment-grade(a) $ 67,621 $ 2,942 $ 73,032 $ 3,772 Noninvestment-grade(a) 21,444 1,165 21,764 1,155

Total contractual amount $ 89,065(b) $ 4,107 $ 94,796(b) $ 4,927 Allowance for lending-related commitments $ 299 $ 2 $ 272 $ 2 Commitments with collateral 28,045 1,011 30,831 1,000 (a) Ratings scale is based on JPMorgan Chase Bank, N.A.’s internal ratings, which generally correspond to ratings defined by S&P and Moody’s. (b) Represents contractual amount net of risk participations totaling $27.8 billion and $28.2 billion at March 31, 2009, and December 31, 2008.

61

Derivatives qualifying as guarantees In addition to the contracts described above, JPMorgan Chase Bank, N.A. transacts certain derivative contracts that meet the characteristics of a guarantee under FIN 45. The total notional value of the derivatives that JPMorgan Chase Bank, N.A. deems to be guarantees was $85.6 billion and $83.7 billion at March 31, 2009, and December 31, 2008, respectively. The notional value generally represents JPMorgan Chase Bank, N.A.’s maximum exposure to derivatives qualifying as guarantees, although exposure to certain stable value derivatives is contractually limited to a substantially lower percentage of the notional value. The fair value of the contracts reflects the probability of whether JPMorgan Chase Bank, N.A. will be required to perform under the contract. The fair value related to derivative guarantees was a derivative receivable of $203 million and $183 million, and a derivative payable of $5.5 billion and $5.6 billion at March 31, 2009, and December 31, 2008, respectively. JPMorgan Chase Bank, N.A. reduces exposures to these contracts by entering into offsetting transactions, or by entering into contracts that hedge the market risk related to the derivative guarantees.

In addition to derivative contracts that meet the characteristics of a guarantee under FIN 45, JPMorgan Chase Bank, N.A. is both a purchaser and seller of credit protection in the credit derivatives market. For a further discussion of credit derivatives, see Note 7 on pages 22–29 of these Consolidated Financial Statements, and Note 30 on pages 80–83 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements.

Loan sale and securitization-related indemnifications Indemnifications for breaches of representations and warranties As part of JPMorgan Chase Bank, N.A.’s loan sale and securitization activities, as described in Note 15 and Note 17 on pages 42–46 and 47–56, respectively, of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements, JPMorgan Chase Bank, N.A. generally makes representations and warranties in its loan sale and securitization agreements that the loans sold meet certain requirements. These agreements may require JPMorgan Chase Bank, N.A. (including in its role as a servicer) to repurchase the loans and/or indemnify the purchaser of the loans against losses due to any breaches of such representations or warranties. Generally, the maximum amount of future payments JPMorgan Chase Bank, N.A. would be required to make for breaches under these representations and warranties would be equal to the current amount of assets held by such securitization-related SPEs plus, in certain circumstances, accrued and unpaid interest on such loans and certain expense.

During the first quarter of 2009, JPMorgan Chase Bank, N.A. resolved certain current and future claims for certain loans originated and sold by Washington Mutual. At March 31, 2009, and December 31, 2008, JPMorgan Chase Bank, N.A. had recorded a repurchase liability of $539 million and $1.0 billion, respectively.

Loans sold with recourse JPMorgan Chase Bank, N.A. provides servicing for mortgages and certain commercial lending products on both a recourse and nonrecourse basis. In nonrecourse servicing, the principal credit risk to JPMorgan Chase Bank, N.A. is the cost of temporary servicing advances of funds (i.e., normal servicing advances). In recourse servicing, the servicer agrees to share credit risk with the owner of the mortgage loans, such as the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation or a private investor, insurer or guarantor. Losses on recourse servicing predominantly occur when foreclosure sales proceeds of the property underlying a defaulted loan are less than the sum of the outstanding principal balance, plus accrued interest on the loan and the cost of holding and disposing of the underlying property. JPMorgan Chase Bank, N.A.’s loan sale transactions have primarily been executed on a nonrecourse basis, thereby effectively transferring the risk of future credit losses to the purchaser of the mortgage-backed securities issued by the trust. At March 31, 2009, and December 31, 2008, the unpaid principal balance of loans sold with recourse totaled $13.7 billion and $13.9 billion, respectively. The carrying value of the related liability that JPMorgan Chase Bank, N.A. had recorded, which is representative of JPMorgan Chase Bank, N.A.’s view of the likelihood it will have to perform under this guarantee, was $214 million and $230 million at March 31, 2009, and December 31, 2008, respectively.

NOTE 26 – BUSINESS SEGMENTS SFAS 131 defines the criteria by which management determines the number and nature of its “operating segments” (i.e., business segments) and sets forth the financial information that is required to be disclosed about these business segments. This information is accumulated, managed and discussed at the JPMorgan Chase level and not at the subsidiary level (i.e., JPMorgan Chase Bank, N.A.). For financial reporting purposes, JPMorgan Chase Bank, N.A. is viewed by JPMorgan Chase as a legal entity only; business segment financial information is not prepared for JPMorgan Chase Bank, N.A.

62

SUPPLEMENTARY INFORMATION Selected quarterly financial data (unaudited) (in millions, except ratio data) 2009 2008(c) As of or for the period ended 1st 4th 3rd 2nd 1st Selected income statement data Noninterest revenue $ 10,756 $ 8,176 $ 8,352 $ 8,329 $ 8,372 Net interest income 10,463 10,858 7,111 6,965 6,583 Total net revenue 21,219 19,034 15,463 15,294 14,955 Provision for credit losses 6,078 5,497 2,936 2,533 3,738 Provision for credit losses – accounting conformity(a) — (442) 1,976 — — Total noninterest expense 11,391 10,404 9,010 10,077 7,793 Income before income tax expense (benefit) and

extraordinary gain 3,750 3,575 1,541 2,684 3,424 Income tax expense (benefit) 1,247 1,352 (519) 674 1,204 Income before extraordinary gain 2,503 2,223 2,060 2,010 2,220 Extraordinary gain(b) — 1,325 581 — — Net income $ 2,503 $ 3,548 $ 2,641 $ 2,010 $ 2,220

Tier 1 capital ratio 9.0% 8.7% 7.9% 8.2% 8.2%Total capital ratio 12.8 12.5 11.4 12.0 12.0 Tier 1 leverage ratio 6.1 5.9 7.3 6.1 6.1

Selected balance sheet data (period-end) Trading assets $ 299,428 $ 365,365 $ 376,888 $ 368,829 $ 380,248 Securities 323,980 199,744 145,439 114,837 98,549 Loans 628,358 662,312 701,664 481,213 484,585 Allowance for credit losses (20,977) (17,809) (17,086) (11,425) (10,338) Total assets 1,688,164 1,746,242 1,765,128 1,378,468 1,407,568 Deposits 979,696 1,055,765 1,013,390 797,676 806,319 Long-term debt 65,774 71,862 79,102 81,399 82,077 Total stockholder’s equity 130,548 128,767 125,639 108,929 108,960 (a) The third and fourth quarters of 2008 included an accounting conformity loan loss reserve provision related to the acquisition of Washington

Mutual Bank’s banking operations. (b) For a discussion of the extraordinary gain, see Note 3 on pages 10–12 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements. (c) On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual Bank. The transaction was accounted for as a

purchase and Washington Mutual’s results of operations are included in JPMorgan Chase Bank, N.A.’s results from the transaction date. For additional information on the Washington Mutual transaction, see Note 3 on pages 10–12 of these Consolidated Financial Statements.

63

SUPPLEMENTARY INFORMATION

Selected annual financial data (unaudited) (in millions, except ratio data) As of or for the year ended December 31, 2008(e) 2007 2006 2005 2004(f) Selected income statement data Noninterest revenue(a) $ 33,229 $ 31,630 $ 29,191 $ 23,065 $ 16,979 Net interest income 31,517 23,137 18,135 15,283 11,962 Total net revenue 64,746 54,767 47,326 38,348 28,941 Provision for credit losses 14,704 4,672 1,809 1,101 198 Provision for credit losses – accounting

conformity(b) 1,534 — — — 336 Total noninterest expense 37,284 33,998 31,909 29,799 25,488 Income from continuing operations before income tax expense (benefit)

11,224

16,097

13,608

7,448

2,919

Income tax expense 2,711 5,365 4,487 2,563 937 Income from continuing operations 8,513 10,732 9,121 4,885 1,982 Income from discontinued operations(c) — — 798 207 196 Income before extraordinary gain 8,513 10,732 9,919 5,092 2,178 Extraordinary gain(d) 1,906 — — — — Net income $ 10,419 $ 10,732 $ 9,919 $ 5,092 $ 2,178

Tier 1 capital ratio 8.7% 8.3% 8.2% 8.1% 8.3% Total capital ratio 12.5 11.8 11.4 11.2 11.7 Tier 1 leverage ratio 5.9 6.2 5.9 6.1 6.0

Selected balance sheet data (period-end) Trading assets $ 365,365 $ 390,459 $ 284,282 $ 221,837 $ 236,768 Securities 199,744 82,511 88,487 37,113 81,033 Loans 662,312 461,662 421,833 365,991 334,323 Allowance for credit losses (17,809) (7,864) (5,693) (5,254) (5,804) Total assets 1,746,242 1,318,888 1,179,390 1,013,985 967,365 Deposits 1,055,765 772,087 640,466 552,610 517,710 Long-term debt 71,862 87,575 71,256 55,612 46,406 Total stockholder’s equity 128,767 106,346 96,010 86,350 80,640 (a) JPMorgan Chase Bank, N.A. adopted SFAS 157 in the first quarter of 2007. See Note 5 on pages 13–24 of JPMorgan Chase Bank, N.A.’s 2008

Annual Financial Statements. (b) Results for 2008 and 2004 included an accounting conformity loan loss reserve provision related to the acquisition of Washington Mutual’s

banking operations and the merger with Bank One Corporation, respectively. (c) On October 1, 2006, JPMorgan Chase & Co. completed the exchange of selected corporate trust businesses for the consumer, business banking

and middle-market banking businesses of The Bank of New York Company Inc. The results of operations of these corporate trust businesses are reported as discontinued operations for each period prior to 2007.

(d) For a discussion of the extraordinary gain, see Note 3 on pages 10–12 of JPMorgan Chase Bank, N.A.’s 2008 Annual Financial Statements. (e) On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual Bank. The transaction was accounted for as a

purchase and Washington Mutual’s results of operations are included in JPMorgan Chase Bank, N.A.’s results from the transaction date. For additional information on the Washington Mutual transaction, see Note 3 on pages 10–12 of these Consolidated Financial Statements.

(f) On July 1, 2004, Bank One Corporation merged with and into JPMorgan Chase Bank, N.A. Accordingly, 2004 results include six months of the combined JPMorgan Chase Bank, N.A.’s results and six months of heritage JPMorgan Chase Bank, N.A. results.

64

GLOSSARY OF TERMS

Advised lines of credit: An authorization which specifies the maximum amount of a credit facility JPMorgan Chase Bank, N.A. has made available to an obligor on a revolving but non-binding basis. The borrower receives written or oral advice of this facility. JPMorgan Chase Bank, N.A. may cancel this facility at any time.


AICPA Statement of Position (“SOP”) 03-3: “Accounting for Certain Loans or Debt Securities Acquired in a Transfer.”

Beneficial interests issued by consolidated VIEs: Represents the interests of third-party holders of debt/equity securities, or other obligations, issued by VIEs that JPMorgan Chase Bank, N.A. consolidates under FIN 46R. The underlying obligations of the VIEs consist of short-term borrowings, commercial paper and long-term debt. The related assets consist of trading assets, available-for-sale securities, loans and other assets.

Benefit obligation: Refers to the projected benefit obligation for pension plans and the accumulated postretirement benefit obligation for OPEB plans.

Commodities contracts: Exchange-traded futures and over-the-counter forwards are contracts to deliver specified commodities (e.g., gold, electricity, natural gas, other precious and base metals, oil, farm products, livestock) on an agreed-upon future settlement date in exchange for cash. Exchange-traded commodities swaps and over-the-counter commodities swap contracts are contracts to deliver fixed cash payments in exchange for cash payments that float based on changes in an underlying commodities index.

Credit derivatives: Contractual agreements that provide protection against a credit event on one or more referenced credits. The nature of a credit event is established by the protection buyer and protection seller at the inception of a transaction, and such events include bankruptcy, insolvency or failure to meet payment obligations when due. The buyer of the credit derivative pays a periodic fee in return for a payment by the protection seller upon the occurrence, if any, of a credit event.


EITF Issue 07-5: “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock.”

EITF Issue 99-20: “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets.”


FIN 39: FASB Interpretation No. 39, “Offsetting of Amounts Related to Certain Contracts – an interpretation of APB Opinion No. 10 and FASB Statement No. 105.”

FIN 45: FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others – an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34.”

FIN 46R: FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities – an interpretation of ARB No. 51.”

Foreign exchange contracts: Includes foreign exchange forward contracts and cross-currency swaps. Foreign exchange forward contracts are contracts to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon future settlement date. Cross-currency swaps are contracts between two parties to exchange interest and principal payments in one currency for the same in another currency.

Forward points: Represents the interest rate differential between two currencies, which is either added to or subtracted from the current exchange rate (i.e., “spot rate”) to determine the forward exchange rate.


FSP FAS 107-1 and APB 28-1: “Interim Disclosures about Fair Value of Financial Instruments.”

FSP FAS 115-2 and FAS 124-2: “Recognition and Presentation of Other-Than-Temporary Impairments.”

FSP FAS 132(R)-1: “Employers’ Disclosures about Postretirement Benefit Plan Assets.”

65

FSP FAS 140-3: “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.”

FSP FAS 141(R)-1: “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.”

FSP FAS 157-4: “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.”

Interest rate contracts: Includes interest rate swaps, forwards and futures contracts. Interest rate swap contracts involve the exchange of fixed- and variable-rate interest payments based on a contracted notional amount. Interest rate forward contracts are primarily arrangements to exchange cash in the future based on price movements of specified financial instruments. Interest rate futures contracts are financial futures which provide for cash payments based on interest rate changes on an underlying interest-bearing instrument or index.

Investment-grade: An indication of credit quality based on JPMorgan Chase Bank, N.A.’s internal risk assessment system. “Investment grade” generally represents a risk profile similar to a rating of a “BBB-”/”Baa3” or better, as defined by independent rating agencies.

LIBOR: London Interbank Offered Rate.

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 Bank, N.A. and, therefore, creates a repayment risk for JPMorgan Chase Bank, N.A. When the mark-to-market value is negative, JPMorgan Chase Bank, N.A. owes the counterparty; in this situation, JPMorgan Chase Bank, N.A. 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.


Alt-A Alt-A loans are generally higher in credit quality than subprime loans but have characteristics that would disqualify the borrower from a traditional prime loan. Alt-A lending characteristics may include one or more of the following: (i) limited documentation; (ii) high combined-loan-to-value (“CLTV”) ratio; (iii) loans secured by non-owner occupied properties; or (iv) debt-to-income ratio above normal limits. Perhaps the most important characteristic is limited documentation. A substantial proportion of traditional Alt-A loans are those where a borrower does not provide complete documentation of his or her assets or the amount or source of his or her income.

Option ARMs The option ARM home loan product is an adjustable-rate mortgage loan that provides the borrower with the option each month to make a fully amortizing, interest-only, or minimum payment. The minimum payment on an option ARM loan is based on the interest rate charged during the introductory period. This introductory rate has usually been significantly below the fully indexed rate. The fully indexed rate is calculated using an index rate plus a margin. Once the introductory period ends, the contractual interest rate charged on the loan increases to the fully indexed rate and adjusts monthly to reflect movements in the index. The minimum payment is typically insufficient to cover interest accrued in the prior month, and will “negatively amortize” as any unpaid interest is deferred and added to the principal balance of the loan. Option ARMs typically become fully amortizing loans upon reaching a negative amortization cap or on dates specified in the borrowing agreement, at which time the required payment generally increases substantially.

Prime Prime mortgage loans are made to borrowers with good credit records and a monthly income that is at least three to four times greater than their monthly housing expense (mortgage payments plus taxes and other debt payments). These borrowers provide full documentation and generally have reliable payment histories.

Subprime Subprime loans are designed for customers with one or more high risk characteristics, including but not limited to: (i) unreliable or poor payment histories; (ii) high loan-to-value (“LTV”) ratio of greater than 80% (without borrower-paid mortgage insurance); (iii) high debt-to-income ratio; (iv) the occupancy type for the loan is other than the borrower’s primary residence; or (v) a history of delinquencies or late payments on the loan.


66


Principal transactions: Realized and unrealized gains and losses from trading activities (including physical commodities inventories that are accounted for at the lower of cost or fair value) and changes in fair value associated with financial instruments held by the investment banking business for which the SFAS 159 fair value option was elected. Principal transactions revenue also includes private equity gains and losses.

Purchased credit-impaired loans: Purchased loans for which the credit quality has deteriorated since origination, but prior to purchase. These loans are accounted for at fair value as of the purchase date, which includes the impact of estimated credit losses for the loans over the life of loan.

Receivables from customers: Primarily represents margin loans to prime and retail brokerage customers which are included in accrued interest and accounts receivable on the Consolidated Balance Sheets for the wholesale lines of business.





SFAS 114: “Accounting by Creditors for Impairment of a Loan – an amendment of FASB Statements No. 5 and 15.”


SFAS 140: “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities – a replacement of FASB Statement No. 125.”

SFAS 141: “Business Combinations.”

SFAS 141R: “Business Combinations.”

SFAS 155: “Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and 140.”


SFAS 158: “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R).”

SFAS 159: “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115.”

SFAS 160: “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51.”

SFAS 161: “Disclosures About Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133.”

Troubled debt restructuring: Occurs when JPMorgan Chase Bank, N.A. modifies the original terms of a loan agreement by granting a concession to a borrower that is experiencing financial difficulty.

Unaudited: Financial statements and information that have not been subjected to auditing procedures sufficient to permit an independent certified public accountant to express an opinion.

U.S. GAAP: Accounting principles generally accepted in the United States of America.

U.S. government and federal agency obligations: Obligations of the U.S. government or an instrumentality of the U.S. government whose obligations are fully and explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the U.S. government.

U.S. government-sponsored enterprise obligations: Obligations of agencies originally established or chartered by the U.S. government to serve public purposes as specified by the U.S. Congress; these obligations are not explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the U.S. government.

CCOONNSSOOLLIIDDAATTEEDDFFIINNAANNCCIIAALLSSTTAATTEEMMEENNTTSSFor the three years ended December 31, 2008

JPMORGAN CHASE BANK, NATIONAL ASSOCIATION(a wholly-owned subsidiary of JPMorgan Chase & Co.)

JPMorgan Chase Bank, National Association/ 2008 Consolidated Financial Statements

Table of contentsJPMorgan Chase Bank, National Association(a wholly-owned subsidiary of JPMorgan Chase & Co.)

FOR THE THREE YEARS ENDED DECEMBER 31, 2008

Page(s)

Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Consolidated Financial Statements:

Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Consolidated Statements of Changes in Stockholder’s Equity and Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6–88

Supplementary Information:

Selected Quarterly Financial Data (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

Selected Annual Financial Data (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

Glossary of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91–93

JPMorgan Chase Bank, National Association/ 2008 Consolidated Financial Statements 1

Report of independent registered public accounting firm

As discussed in Note 5, Note 6, and Note 26 to the consolidatedfinancial statements, effective January 1, 2007 the Bank adoptedStatement of Financial Accounting Standards No. 157, “Fair ValueMeasurement,” Statement of Financial Accounting Standards No.159, “Fair Value Option for Financial Assets and FinancialLiabilities,” and FASB Interpretation No. 48, “Accounting forUncertainty in Income Taxes.”

March 31, 2009

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholder of JPMorgan ChaseBank, National Association:

In our opinion, the accompanying consolidated balance sheets andthe related consolidated statements of income, changes in stock-holder’s equity and comprehensive income and cash flows presentfairly, in all material respects, the financial position of JPMorganChase Bank, National Association and its subsidiaries (the “Bank”)at December 31, 2008 and 2007, and the results of their opera-tions and their cash flows for each of the three years in the periodended December 31, 2008 in conformity with accounting principlesgenerally accepted in the United States of America. These financialstatements are the responsibility of the Bank’s management. Ourresponsibility is to express an opinion on these financial statementsbased on our audits. We conducted our audits of these statementsin accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of mate-rial misstatement. An audit includes examining, on a test basis, evi-dence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and signifi-cant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audits pro-vide a reasonable basis for our opinion.

PRICEWATERHOUSECOOPERS LLP • 300 MADISON AVENUE • NEW YORK, NY 10017

Consolidated statements of incomeJPMorgan Chase Bank, National Association(a wholly-owned subsidiary of JPMorgan Chase & Co.)

2 JPMorgan Chase Bank, National Association/ 2008 Consolidated Financial Statements

Year ended December 31, (in millions) 2008 2007 2006

RevenueInvestment banking fees $ 2,675 $ 3,468 $ 3,026Principal transactions 5,016 7,691 9,277Lending & deposit-related fees 5,073 3,877 3,415Asset management, administration and commissions 9,594 9,776 7,833Securities gains (losses) 1,328 50 (550)Mortgage fees and related income 3,557 2,094 565Credit card income 3,569 3,123 2,935Other income 2,417 1,551 2,690

Noninterest revenue 33,229 31,630 29,191

Interest income 57,437 58,840 49,284Interest expense 25,920 35,703 31,149

Net interest income 31,517 23,137 18,135

Total net revenue 64,746 54,767 47,326

Provision for credit losses 16,238 4,672 1,809

Noninterest expenseCompensation expense 17,122 16,126 15,165Occupancy expense 2,659 2,378 2,151Technology, communications and equipment expense 3,663 3,361 3,231Professional & outside services 4,277 3,620 3,030Marketing 631 643 561Other expense 8,091 6,997 6,805Amortization of intangibles 612 679 695Merger costs 229 194 271

Total noninterest expense 37,284 33,998 31,909

Income from continuing operations before income tax expense 11,224 16,097 13,608Income tax expense 2,711 5,365 4,487

Income from continuing operations 8,513 10,732 9,121Income from discontinued operations — — 798

Income before extraordinary gain 8,513 10,732 9,919Extraordinary gain 1,906 — —

Net income $10,419 $ 10,732 $ 9,919

The Notes to Consolidated Financial Statements are an integral part of these statements.


Consolidated balance sheetsJPMorgan Chase Bank, National Association(a wholly-owned subsidiary of JPMorgan Chase & Co.)

December 31, (in millions, except share data) 2008 2007

AssetsCash and due from banks $ 25,502 $ 38,696Deposits with banks 127,623 11,751Federal funds sold and securities purchased under resale agreements (included $19,865 and $18,063 at fair value

at December 31, 2008 and 2007, respectively) 199,716 192,145Securities borrowed (included $3,381 and zero at fair value at December 31, 2008 and 2007, respectively) 42,658 44,051Trading assets (included assets pledged of $118,079 and $91,607 at December 31, 2008 and 2007, respectively) 365,365 390,459Securities (included $199,710 and $82,467 at fair value at December 31, 2008 and 2007, respectively,

and assets pledged of $26,376 and $10,094 at December 31, 2008 and 2007, respectively) 199,744 82,511Loans (included $6,038 and $8,156 at fair value at December 31, 2008 and 2007, respectively) 662,312 461,662Allowance for loan losses (17,153) (7,015)


Accrued interest and accounts receivable 44,345 25,921Premises and equipment 9,161 8,448Goodwill 27,371 25,819Other intangible assets:

Mortgage servicing rights 9,236 8,632Purchased credit card relationships 128 189All other intangibles 3,346 3,342

Other assets (included $1,780 and $1,632 at fair value at December 31, 2008 and 2007, respectively) 46,888 32,277

Total assets $ 1,746,242 $1,318,888

LiabilitiesDeposits (included $5,605 and $6,456 at fair value at December 31, 2008 and 2007, respectively) $ 1,055,765 $ 772,087Federal funds purchased and securities loaned or sold under repurchase agreements (included $2,968 and $5,768 at

fair value at December 31, 2008 and 2007, respectively) 180,716 118,555Other borrowed funds (included $2,714 and $10,326 at fair value at December 31, 2008 and 2007, respectively) 94,953 23,276Trading liabilities 142,409 143,509Accounts payable and other liabilities (including the allowance for lending-related

commitments of $656 and $849 at December 31, 2008 and 2007, respectively, and zero and $25 at fair value at December 31, 2008 and 2007, respectively) 67,014 60,011

Beneficial interests issued by consolidated variable interest entities (included $1,364 and $2,727 at fair value at December 31, 2008 and 2007, respectively) 4,156 6,929

Long-term debt (included $34,924 and $56,932 at fair value at December 31, 2008 and 2007, respectively) 71,862 87,575Junior subordinated deferrable interest debentures held by trusts that issued guaranteed capital debt securities 600 600

Total liabilities 1,617,475 1,212,542

Commitments and contingencies (see Note 29 on page 79 of these Consolidated Financial Statements)

Stockholder’s equityPreferred stock ($1 par value; authorized 15,000,000 shares at December 31, 2008 and 2007; issued

0 shares at December 31, 2008 and 2007, respectively) — —Common stock ($12 par value; authorized 150,000,000 shares and 148,765,000 at December 31, 2008 and

2007; respectively, issued 148,761,243 shares at December 31, 2008 and 2007, respectively) 1,785 1,785Capital surplus 77,254 62,439Retained earnings 52,309 42,808Accumulated other comprehensive income (loss) (2,581) (686)

Total stockholder’s equity 128,767 106,346

Total liabilities and stockholder’s equity $ 1,746,242 $1,318,888


Consolidated statements of changes in stockholder’s equity and comprehensive incomeJPMorgan Chase Bank, National Association(a wholly-owned subsidiary of JPMorgan Chase & Co.)


Year ended December 31, (in million) 2008 2007 2006

Common stockBalance at beginning and end of year $ 1,785 $ 1,785 $ 1,785

Capital surplusBalance at beginning of year 62,439 60,431 59,504Cash capital contribution from JPMorgan Chase 14,485 2,004 14Adjustments to capital due to transactions with JPMorgan Chase 330 4 913

Balance at end of year 77,254 62,439 60,431

Retained earningsBalance at beginning of year 42,808 34,721 25,711Cumulative effect of change in accounting principles — 956 172

Balance at beginning of year, adjusted 42,808 35,677 25,883Net income 10,419 10,732 9,919Cash dividends paid to JPMorgan Chase (1,000) (3,500) (1,000)Net internal legal entity mergers 82 (101) (81)


Accumulated other comprehensive income (loss)Balance at beginning of year (686) (927) (650)Cumulative effect of change in accounting principles — (1) —

Balance at beginning of year, adjusted (686) (928) (650)Other comprehensive income (loss) (1,895) 242 154Adjustment to initially apply SFAS 158 — — (431)

Balance at end of year (2,581) (686) (927)

Total stockholder’s equity $ 128,767 $ 106,346 $ 96,010

Comprehensive incomeNet income $ 10,419 $ 10,732 $ 9,919Other comprehensive income (loss) (1,895) 242 154

Comprehensive income $ 8,524 $ 10,974 $ 10,073



Consolidated statements of cash flowsJPMorgan Chase Bank, National Association(a wholly-owned subsidiary of JPMorgan Chase & Co.)


Operating activitiesNet income $ 10,419 $ 10,732 $ 9,919Adjustments to reconcile net income to net cash (used in) provided by operating activities:

Provision for credit losses 16,238 4,672 1,809Depreciation and amortization 2,482 2,302 2,080Amortization of intangibles 612 679 695Deferred tax benefit (2,930) (113) (1,555)Investment securities (gains) losses (1,328) (50) 550Gains on disposition of businesses (199) — (1,123)

Originations and purchases of loans held-for-sale (34,749) (115,295) (174,379)Proceeds from sales, securitizations and paydowns of loans held-for-sale 37,345 106,148 170,562Net change in:

Trading assets (29,251) (104,271) (55,089)Securities borrowed 1,504 (1,267) 1,058Accrued interest and accounts receivable (8,353) (3,473) (8,385)Other assets (44,437) (11,711) 2,944Trading liabilities 40,806 21,223 (5,696)Accounts payable and other liabilities (9,937) (1,944) 9,391

Other operating adjustments (5,288) 4,729 762

Net cash used in operating activities (27,066) (87,639) (46,457)

Investing activitiesNet change in:

Deposits with banks (112,355) 1,661 7,763Federal funds sold and securities purchased under resale agreements (3,909) 9,853 (24,837)

Held-to-maturity securities:Proceeds 10 14 19

Available-for-sale securities:Proceeds from maturities 44,168 29,985 23,509Proceeds from sales 94,703 95,761 120,830Purchases (242,086) (119,129) (197,374)

Proceeds from sales and securitizations of loans held-for-investment 16,230 22,229 14,466Other changes in loans, net (37,533) (70,775) (52,342)Net cash received (used) in business acquisitions or dispositions 16,521 444 (5,330)Net purchases of asset-backed commercial paper guaranteed by the FRBB (130) — —All other investing activities, net (4,320) (6,355) 1,014

Net cash used in investing activities (228,701) (36,312) (112,282)

Financing activitiesNet change in:

Deposits 192,117 142,796 86,165Federal funds purchased and securities loaned or sold under repurchase agreements 57,415 (38,812) 52,587Other borrowed funds (9,055) 8,269 4,561

Proceeds from the issuance of long-term debt and trust preferred capital debt securities 23,120 50,507 34,639Repayments of long-term debt and trust preferred capital debt securities (34,246) (38,425) (22,031)Cash capital contribution from JPMorgan Chase 14,485 2,004 14Cash dividends paid (1,000) (3,500) (1,000)All other financing activities, net 51 1,561 6,166

Net cash provided by financing activities 242,887 124,400 161,101

Effect of exchange rate changes on cash and due from banks (314) 406 199

Net (decrease) increase in cash and due from banks (13,194) 855 2,561Cash and due from banks at the beginning of the year 38,696 37,841 35,280

Cash and due from banks at the end of the year $ 25,502 $ 38,696 $ 37,841

Cash interest paid $ 29,023 $ 34,433 $ 29,599Cash income taxes paid(a) 5,803 5,381 4,088

Note: In 2008, the fair values of noncash assets acquired and liabilities assumed in the Washington Mutual transaction were $260.0 billion and $259.8 billion, respectively. In 2006,JPMorgan Chase Bank, N.A. exchanged selected corporate trust businesses for The Bank of New York’s consumer, business banking and middle-market banking businesses. The fair values of the noncash assets exchanged were $2.12 billion.

(a) Includes $4.1 billion, $3.5 billion and $2.7 billion paid to JPMorgan Chase & Co. in 2008, 2007 and 2006, respectively.


Note 1 – Basis of presentation JPMorgan Chase Bank, National Association (“JPMorgan Chase Bank,N.A.”) is a wholly-owned bank subsidiary of JPMorgan Chase & Co.(“JPMorgan Chase”), which is a leading global financial services firmand one of the largest banking institutions in the United States ofAmerica (“U.S.”), with operations in more than 60 countries. JPMorganChase Bank, N.A. offers a wide range of banking services to its cus-tomers both domestically in the U.S. and internationally, includinginvestment banking, financial services for consumers and businesses,financial transactions processing and asset management. Under theJ.P. Morgan and Chase brands, JPMorgan Chase Bank, N.A. serves mil-lions of customers in the U.S. and many of the world’s most prominentcorporate, institutional and governmental clients.

JPMorgan Chase Bank, N.A. is chartered by the Office of theComptroller of the Currency (“OCC”), a bureau of the United StatesDepartment of the Treasury. JPMorgan Chase Bank, N.A.’s main officeis located in Columbus, Ohio, and it has branches in 23 states.

The accounting and financial reporting policies of JPMorgan ChaseBank, N.A. and its subsidiaries conform to accounting principles gen-erally accepted in the United States of America (“U.S. GAAP”).Additionally, where applicable, the policies conform to the accountingand reporting guidelines prescribed by bank regulatory authorities.

Certain amounts in prior periods have been reclassified to conformto the current presentation.

Consolidation The Consolidated Financial Statements include the accounts ofJPMorgan Chase Bank, N.A. and other entities in which JPMorganChase Bank, N.A. has a controlling financial interest. All materialintercompany balances and transactions have been eliminated.

The usual condition for a controlling financial interest is the owner-ship of a majority of the voting interests of the entity. However, acontrolling financial interest also may be deemed to exist withrespect to entities, such as special purpose entities (“SPEs”), througharrangements that do not involve controlling voting interests.

SPEs are an important part of the financial markets, providing marketliquidity by facilitating investors’ access to specific portfolios ofassets and risks. For example, they are critical to the functioning ofthe mortgage- and asset-backed securities and commercial papermarkets. SPEs may be organized as trusts, partnerships or corpora-tions and are typically established for a single, discrete purpose. SPEsare not typically operating entities and usually have a limited life andno employees. The basic SPE structure involves a company sellingassets to the SPE. The SPE funds the purchase of those assets byissuing securities to investors. The legal documents that govern thetransaction specify how the cash earned on the assets must be allo-cated to the SPE’s investors and other parties that have rights tothose cash flows. SPEs are generally structured to insulate investorsfrom claims on the SPE’s assets by creditors of other entities, includ-ing the creditors of the seller of the assets.

There are two different accounting frameworks applicable to SPEs:The qualifying SPE (“QSPE”) framework under Statement of FinancialAccounting Standards (“SFAS”) 140 and the variable interest entity(“VIE”) framework under FASB Interpretation No. (“FIN”) 46R. Theapplicable framework depends on the nature of the entity andJPMorgan Chase Bank, N.A.’s relation to that entity. The QSPE frame-work is applicable when an entity transfers (sells) financial assets toan SPE meeting certain criteria defined in SFAS 140. These criteriaare designed to ensure that the activities of the entity are essentiallypredetermined at the inception of the vehicle and that the transferorof the financial assets cannot exercise control over the entity and theassets therein. Entities meeting these criteria are not consolidated bythe transferor or other counterparties as long as they do not havethe unilateral ability to liquidate or to cause the entity to no longermeet the QSPE criteria. JPMorgan Chase Bank, N.A. primarily followsthe QSPE model for securitizations of its residential and commercialmortgages, and credit card, automobile and student loans. For fur-ther details, see Note 17 on pages 47–56 of these ConsolidatedFinancial Statements.

When an SPE does not meet the QSPE criteria, consolidation isassessed pursuant to FIN 46R. Under FIN 46R, a VIE is defined as anentity that: (1) lacks enough equity investment at risk to permit theentity to finance its activities without additional subordinated finan-cial support from other parties; (2) has equity owners that lack theright to make significant decisions affecting the entity’s operations;and/or (3) has equity owners that do not have an obligation toabsorb the entity’s losses or the right to receive the entity’s returns.

FIN 46R requires a variable interest holder (i.e., a counterparty to aVIE) to consolidate the VIE if that party will absorb a majority of theexpected losses of the VIE, receive the majority of the expected resid-ual returns of the VIE, or both. This party is considered the primarybeneficiary. In making this determination, JPMorgan Chase Bank,N.A. thoroughly evaluates the VIE’s design, capital structure and rela-tionships among the variable interest holders. When the primary ben-eficiary cannot be identified through a qualitative analysis, JPMorganChase Bank, N.A. performs a quantitative analysis, which computesand allocates expected losses or residual returns to variable interestholders. The allocation of expected cash flows in this analysis isbased upon the relative rights and preferences of each variable inter-est holder in the VIE’s capital structure. JPMorgan Chase Bank, N.A.reconsiders whether it is the primary beneficiary of a VIE when cer-tain events occur as required by FIN 46R. For further details, seeNote 18 on pages 56–66 of these Consolidated FinancialStatements.

All retained interests and significant transactions between JPMorganChase Bank, N.A., QSPEs and nonconsolidated VIEs are reflected onJPMorgan Chase Bank, N.A.’s Consolidated Balance Sheets and inthe Notes to consolidated financial statements.


NNootteess ttoo ccoonnssoolliiddaatteedd ffiinnaanncciiaall ssttaatteemmeennttss JPMorgan Chase Bank, National Association(a wholly-owned subsidiary of JPMorgan Chase & Co.)

Investments in companies that are considered to be voting-interestentities under FIN 46R in which JPMorgan Chase Bank, N.A. has sig-nificant influence over operating and financing decisions are eitheraccounted for in accordance with the equity method of accounting orat fair value if elected under SFAS 159 (“Fair Value Option”). Theseinvestments are generally included in other assets, with income orloss included in other income.

Assets held for clients in an agency or fiduciary capacity byJPMorgan Chase Bank, N.A. are not assets of JPMorgan Chase Bank,N.A. and are not included in the Consolidated Balance Sheets.

Use of estimates in the preparation of consolidated finan-cial statements The preparation of Consolidated Financial Statements requires man-agement to make estimates and assumptions that affect the reportedamounts of assets and liabilities, revenue and expense, and disclo-sures of contingent assets and liabilities. Actual results could be differ-ent from these estimates.

Foreign currency translation JPMorgan Chase Bank, N.A. revalues assets, liabilities, revenue andexpense denominated in non-U.S. currencies into U.S. dollars usingapplicable exchange rates.

Gains and losses relating to translating functional currency financialstatements for U.S. reporting are included in other comprehensiveincome (loss) within stockholder’s equity. Gains and losses relating tononfunctional currency transactions, including non-U.S. operationswhere the functional currency is the U.S. dollar, are reported in theConsolidated Statements of Income.

Foreclosed propertyJPMorgan Chase Bank, N.A. acquires property from borrowersthrough loan restructurings, workouts, and foreclosures. Propertyacquired may include real property (e.g., land, buildings, and fixtures)and personal property (e.g., aircraft, railcars, and ships). Acquiredproperty is valued at fair value less costs to sell at acquisition. Eachquarter the fair value of the acquired property is reviewed andadjusted, if necessary. Any adjustments to fair value in the first 90days are generally credited/charged to the allowance for loan lossesand thereafter to other expense.

Statements of cash flows For JPMorgan Chase Bank, N.A.’s Consolidated Statements of CashFlows, cash is defined as those amounts included in cash and duefrom banks.

Significant accounting policies The following table identifies JPMorgan Chase Bank, N.A.’s other sig-nificant accounting policies and the Note and page where a detaileddescription of each policy can be found.

Note 2 – Accounting and reporting developmentsDerivatives netting – amendment of FASB InterpretationNo. 39 In April 2007, the FASB issued FSP FIN 39-1, which permits offset-ting of cash collateral receivables or payables with net derivativepositions under certain circumstances. JPMorgan Chase Bank, N.A.adopted FSP FIN 39-1 effective January 1, 2008. The FSP did nothave a material impact on JPMorgan Chase Bank, N.A.’sConsolidated Balance Sheets.

Fair value measurements – written loan commitments In November 2007, the Securities and Exchange Commission(“SEC”) issued Staff Accounting Bulletin (“SAB”) 109, which revisesand rescinds portions of SAB 105. Specifically, SAB 109 states thatthe expected net future cash flows related to the associated servicingof the loan should be included in the measurement of all writtenloan commitments that are accounted for at fair value through earn-ings. The provisions of SAB 109 are applicable to written loan com-mitments issued or modified beginning on January 1, 2008.JPMorgan Chase Bank, N.A. adopted SAB 109 on January 1, 2008.The adoption of this pronouncement did not have a material impacton JPMorgan Chase Bank, N.A.’s Consolidated Balance Sheets orfinancial performance.


Fair value measurement Note 5 Page 13Fair value option Note 6 Page 25Principal transactions activities Note 7 Page 27Other noninterest revenue Note 8 Page 28Pension and other postretirement employee

benefit plans Note 10 Page 30Employee stock-based incentives Note 11 Page 34Noninterest expense Note 12 Page 37Securities Note 13 Page 38Securities financing activities Note 14 Page 42Loans Note 15 Page 42 Allowance for credit losses Note 16 Page 46Loan securitizations Note 17 Page 47Variable interest entities Note 18 Page 56Goodwill and other intangible assets Note 19 Page 66Premises and equipment Note 20 Page 69Other borrowed funds Note 22 Page 70Income taxes Note 26 Page 75Commitments and contingencies Note 29 Page 79Accounting for derivative instruments

and hedging activities Note 30 Page 80Off-balance sheet lending-related financial

instruments and guarantees Note 31 Page 83

Business combinations/noncontrolling interests in consoli-dated financial statements In December 2007, the FASB issued SFAS 141R and SFAS 160, whichamend the accounting and reporting of business combinations, aswell as noncontrolling (i.e., minority) interests. For JPMorgan ChaseBank, N.A., SFAS 141R is effective for business combinations thatclose on or after January 1, 2009. SFAS 160 is effective for JPMorganChase Bank, N.A. for fiscal years beginning on or after December 15,2008.

SFAS 141R will generally only impact the accounting for future busi-ness combinations and will impact certain aspects of business combi-nation accounting, such as transaction costs and certain merger-relat-ed restructuring reserves, as well as the accounting for partial acquisi-tions where control is obtained by JPMorgan Chase Bank, N.A. Oneexception to the prospective application of SFAS 141R relates toaccounting for income taxes associated with business combinationsthat closed prior to January 1, 2009. Once the purchase accountingmeasurement period closes for these acquisitions, any further adjust-ments to income taxes recorded as part of these business combina-tions will impact income tax expense. Previously, further adjustmentswere predominately recorded as adjustments to goodwill. JPMorganChase Bank, N.A. will continue to evaluate the impact that SFAS141R will have on its consolidated financial statements.

SFAS 160 requires that noncontrolling interests be accounted for andpresented as equity, rather than as a liability or mezzanine equity.Changes to how the income statement is presented will also result.SFAS 160 presentation and disclosure requirements are to be appliedretrospectively. The adoption of this pronouncement is not expectedto have a material impact on JPMorgan Chase Bank, N.A.’sConsolidated Balance Sheets, financial performance or ratios.

Accounting for transfers of financial assets and repurchasefinancing transactionsIn February 2008, the FASB issued FSP Financial Accounting Standard(“FAS”) 140-3, which requires an initial transfer of a financial assetand a repurchase financing that was entered into contemporaneouslywith, or in contemplation of, the initial transfer to be evaluatedtogether as a linked transaction under SFAS 140, unless certain crite-ria are met. JPMorgan Chase Bank, N.A. adopted FSP FAS 140-3 onJanuary 1, 2009, for new transactions entered into after the date ofadoption. The adoption of FSP FAS 140-3 is not expected to have amaterial impact on JPMorgan Chase Bank, N.A.’s ConsolidatedBalance Sheets or financial performance.

Disclosures about derivative instruments and hedging activ-ities – FASB Statement No. 161In March 2008, the FASB issued SFAS 161, which amends the disclo-sure requirements of SFAS 133. SFAS 161 requires increased disclo-sures about derivative instruments and hedging activities and theireffects on an entity’s financial position, financial performance andcash flows. SFAS 161 is effective for fiscal years beginning afterNovember 15, 2008, with early adoption permitted. SFAS 161 willonly affect JPMorgan Chase Bank, N.A.’s disclosures of derivativeinstruments and related hedging activities, and not its ConsolidatedBalance Sheets, Consolidated Statements of Income or ConsolidatedStatements of Cash Flows.

Disclosures about credit derivatives and certain guaranteesIn September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4. TheFSP requires enhanced disclosures about credit derivatives and guar-antees to address the potential adverse effects of changes in creditrisk on the financial position, financial performance and cash flowsof the sellers of these instruments. The FSP is effective for reportingperiods ending after November 15, 2008, with earlier applicationpermitted. The disclosures required by this FSP are incorporated with-in these Consolidated Financial Statements. FSP FAS 133-1 and FIN45-4 will only affect JPMorgan Chase Bank, N.A.’s disclosures ofcredit derivatives and guarantees and not its Consolidated BalanceSheets, Consolidated Statements of Income or ConsolidatedStatements of Cash Flows.

Determining whether an instrument (or embedded feature)is indexed to an entity’s own stockIn September 2008, the EITF issued EITF 07-5, which establishes atwo-step process for evaluating whether equity-linked financialinstruments and embedded features are indexed to a company’s ownstock for purposes of determining whether the derivative scopeexception in SFAS 133 should be applied. EITF 07-5 is effective forfiscal years beginning after December 2008. The adoption of thisEITF is not expected to have a material impact on JPMorgan ChaseBank, N.A.’s Consolidated Balance Sheets or financial performance.



Determining the fair value of an asset when the market forthat asset is not active In October 2008, the FASB issued FSP FAS 157-3, which clarifies theapplication of SFAS 157 in a market that is not active and provides anexample to illustrate key considerations in determining the fair valueof a financial instrument when the market for that financial asset isnot active. The FSP was effective upon issuance, including prior peri-ods for which financial statements have not been issued. The applica-tion of this FSP did not have an impact on JPMorgan Chase Bank,N.A.’s Consolidated Balance Sheets or financial performance.

Disclosure about transfers of financial assets and interestsin VIEsOn December 11, 2008, the FASB issued FSP FAS 140-4 and FIN46(R)-8, which requires additional disclosures relating to transfers offinancial assets and interests in securitization entities and other vari-able interest entities. The purpose of this FSP is to require improveddisclosure by public enterprises prior to the effective dates of theproposed amendments to SFAS 140 and FIN 46(R). The effective datefor the FSP will be for reporting periods (interim and annual) begin-ning with the first reporting period that ends after December 15,2008. The disclosures required by this FSP are incorporated in theseConsolidated Financial Statements. FSP SFAS 140-4 and FIN 46(R)-8will only affect JPMorgan Chase Bank, N.A.’s disclosure of transfersof financial assets and interests in securitization entities and othervariable interest entities and not its Consolidated Balance Sheets,Consolidated Statements of Income or Consolidated Statements ofCash Flows.

Employers’ disclosures about postretirement benefit planassetsIn December 2008, the FASB issued FSP FAS 132(R)-1, whichrequires more detailed disclosures about employers’ plan assets,including investment strategies, major categories of plan assets, con-centrations of risk within plan assets, and valuation techniques usedto measure the fair value of plan assets. This FSP is effective for fiscalyears ending after December 15, 2009. JPMorgan Chase Bank, N.A.intends to adopt these additional disclosure requirements on theeffective date.

Amendments to the impairment guidance of EITF Issue No.99-20In January 2009, the FASB issued FSP EITF 99-20-1, which amendsthe impairment guidance in EITF 99-20 to make the securitiesimpairment model in EITF 99-20 more consistent with the securitiesimpairment model in SFAS 115. FSP EITF 99-20-1 removes therequirement that a holder’s best estimate of cash flows be basedexclusively upon those that a market participant would use andallows for reasonable judgment to be applied in considering whetheran adverse change in cash flows has occurred based on all availableinformation relevant to the collectibility of the securities. FSP EITF 99-20-1 is effective for interim and annual periods ending afterDecember 15, 2008, and therefore JPMorgan Chase Bank, N.A. hasapplied FSP EITF 99-20-1 as of December 31, 2008. The adoption ofthis FSP did not have a material impact on JPMorgan Chase Bank,N.A.’s Consolidated Balance Sheets or financial performance.


Note 3 – Business changes and developments JPMorgan Chase capital contribution During the third quarter of 2008, JPMorgan Chase made a $14.4 bil-lion capital contribution to JPMorgan Chase Bank, N.A. The fundswere used for general banking purposes.

Acquisition of the banking operations of WashingtonMutual Bank On September 25, 2008, JPMorgan Chase Bank, N.A. acquired thebanking operations of Washington Mutual Bank (“WashingtonMutual”) from the Federal Deposit Insurance Corporation (“FDIC”) for$1.9 billion. The acquisition expands JPMorgan Chase Bank, N.A.’sconsumer branch network into several states, including California,Florida and Washington, among others. The acquisition also extendsthe reach of JPMorgan Chase Bank, N.A.’s business banking, commer-cial banking, credit card, consumer lending and wealth managementbusinesses. The acquisition was accounted for under the purchasemethod of accounting in accordance with SFAS 141.

The $1.9 billion purchase price was allocated to the WashingtonMutual assets acquired and liabilities assumed using preliminaryallocated values as of September 25, 2008, which resulted in nega-tive goodwill. The initial allocation of the purchase price was pre-sented on a preliminary basis at September 30, 2008, due to theshort time period between the closing of the transaction (whichoccurred simultaneously with its announcement on September 25,2008) and the end of the third quarter. In accordance with SFAS141, noncurrent nonfinancial assets that are not held-for-sale, suchas the premises and equipment and other intangibles, acquired inthe Washington Mutual transaction were written down against thenegative goodwill. The negative goodwill that remained after writingdown the nonfinancial assets was recognized as an extraordinarygain. As a result of the refinement of the purchase price allocationduring the fourth quarter of 2008, the initial extraordinary gain of$581 million was increased $1.3 billion to $1.9 billion. The compu-tation of the purchase price and the allocation of the purchase priceto the net assets acquired in the Washington Mutual transaction –based upon their respective values as of September 25, 2008, andthe resulting negative goodwill – are presented below. The alloca-tion of the purchase price may be modified through September 25,2009, as more information is obtained about the fair value of assetsacquired and liabilities assumed.

(in millions)

Purchase pricePurchase price $ 1,938Direct acquisition costs 3Total purchase price 1,941Net assets acquired

Washington Mutual’s net assets before fair value adjustments $ 38,766

Washington Mutual’s goodwill and other intangible assets (7,566)

Subtotal 31,200

Adjustments to reflect assets acquired at fair value:

Securities (20)Trading assets (591)Loans (31,018)Allowance for loan losses 8,216Premises and equipment 680Accrued interest and accounts receivable (295)Other assets 4,125

Adjustments to reflect liabilities assumed at fair value:

Deposits (683)Other borrowed funds 68Accounts payable and other liabilities (900)Long-term debt 1,127

Fair value of net assets acquired 11,909Negative goodwill before allocation to nonfinancial assets (9,968)Negative goodwill allocated to nonfinancial assets(a) 8,062Negative goodwill resulting from the acquisition(b) $ (1,906)

(a) The acquisition was accounted for as a purchase business combination in accordance with SFAS 141. SFAS 141 requires the assets (including identifiable intangible assets)and liabilities (including executory contracts and other commitments) of an acquiredbusiness as of the effective date of the acquisition to be recorded at their respective fair values and consolidated with those of JPMorgan Chase Bank, N.A. The fair value of the net assets of Washington Mutual’s banking operations exceeded the $1.9 billionpurchase price, resulting in negative goodwill. In accordance with SFAS 141, noncurrent,nonfinancial assets not held-for-sale, such as premises and equipment and other intan-gibles, were written down against the negative goodwill. The negative goodwill thatremained after writing down transaction related core deposit intangibles of approxi-mately $4.9 billion and premises and equipment of approximately $3.2 billion was recognized as an extraordinary gain of $1.9 billion.

(b) The extraordinary gain was recorded in JPMorgan Chase Bank, N.A.’s ConsolidatedFinancial Statements.




The following condensed statement of net assets acquired reflects thevalue assigned to the Washington Mutual net assets as of September25, 2008.

(in millions) September 25, 2008

AssetsCash and due from banks $ 3,680Deposits with banks 3,517Federal funds sold and securities purchased under resale

agreements 1,700Trading assets 5,691Securities 17,220Loans (net of allowance for loan losses) 206,436Accrued interest and accounts receivable 3,201Mortgage servicing rights 5,874All other assets 16,330

Total assets $ 263,649

LiabilitiesDeposits $ 159,869Federal funds purchased and securities loaned or sold under

repurchase agreements 4,549Other borrowed funds 81,622Trading liabilities 585Accounts payable and other liabilities 6,523Long-term debt 6,654

Total liabilities 259,802

Washington Mutual net assets acquired $ 3,847

Unaudited pro forma condensed combined financial infor-mation reflecting the Washington Mutual transactionThe following unaudited pro forma condensed combined financialinformation presents the financial performance of JPMorgan ChaseBank, N.A. as they may have appeared if the Washington Mutualtransaction had been completed on January 1, 2008, and January 1,2007.

Year ended December 31,(in millions) 2008 2007

Total net revenue $ 73,833 $ 69,899Income before extraordinary gain 243 12,982Net income 2,149 12,982

The unaudited pro forma combined financial information is presentedfor illustrative purposes only and does not indicate the financialresults of the combined company had the companies actually beencombined as of January 1, 2008, or as of January 1, 2007, nor is itindicative of the results of operations in future periods. Included in theunaudited pro forma combined financial information for the yearsended December 31, 2008 and 2007, were pro forma adjustments toreflect Washington Mutual’s banking operations, considering the pur-chase accounting, valuation and accounting conformity adjustmentsrelated to the transaction. For the Washington Mutual transaction, theamortization of purchase accounting adjustments to report interest-earning assets acquired and interest-bearing liabilities assumed atcurrent interest rates is reflected in all periods presented. Valuationadjustments and the adjustment to conform allowance methodologiesin the Washington Mutual transaction are reflected in the results forthe years ended December 31, 2008 and 2007.

Other business eventsTermination of Chase Paymentech Solutions joint venture The dissolution of Chase Paymentech Solutions joint venture, a globalpayments and merchant acquiring joint venture between JPMorganChase Bank, N.A. and First Data Corporation, was completed onNovember 1, 2008. JPMorgan Chase Bank, N.A. retained approxi-mately 51% of the business and will operate the business under thename Chase Paymentech Solutions. The dissolution of ChasePaymentech Solutions joint venture was accounted for as a stepacquisition in accordance with SFAS 141, and JPMorgan Chase Bank,N.A. recognized an after-tax gain of $627 million in the fourth quarterof 2008 as a result of the dissolution. The gain represents the amountby which the fair value of the net assets acquired (predominantlyintangible assets and goodwill) exceeded JPMorgan Chase Bank,N.A.’s book basis in the net assets transferred to First DataCorporation. Upon dissolution, JPMorgan Chase Bank, N.A. began toconsolidate the retained Chase Paymentech Solutions business.

Sale of Washington Mutual’s credit card assets to ChaseBank, USA, N.A.On October 3, 2008, JPMorgan Chase Bank, N.A. sold net creditcard-related assets acquired, in the Washington Mutual transaction,to Chase Bank USA, N.A. for $14.7 billion in cash. The sale included$15.0 billion and $251 million of credit card-related assets and lia-bilities, respectively.

Merger with The Bear Stearns Companies Inc.Effective May 30, 2008, BSC Merger Corporation, a wholly-ownedsubsidiary of JPMorgan Chase, merged with The Bear StearnsCompanies Inc. (“Bear Stearns”) pursuant to the Agreement andPlan of Merger, dated as of March 16, 2008, as amended March 24,2008, and Bear Stearns became a wholly-owned subsidiary ofJPMorgan Chase (the “Merger”). The Merger provides JPMorganChase with a leading global prime brokerage platform; strengthensthe equities and asset management businesses; enhances capabilitiesin mortgage origination, securitization and servicing; and expandsthe platform of the energy business. The Merger was accounted forunder the purchase method of accounting, which requires that theassets and liabilities of Bear Stearns be fair valued. The total pur-chase price to complete the Merger was $1.5 billion. Additionalinformation regarding the Merger is provided in Note 2 on pages125–127 of JPMorgan Chase’s Annual Report on Form 10-K for theyear ended December 31, 2008.

Following the Merger, JPMorgan Chase Bank, N.A. acquired in a cashtransaction, four wholly-owned subsidiaries of Bear Stearns thatengage in various derivative and mortgage lending activities, whichare permissible activities for national banks and their operating sub-sidiaries. JPMorgan Chase Bank, N.A. accounted for the acquisitionof the four Bear Stearns subsidiaries in accordance with SFAS 141,and the results of operations of the Bear Stearns subsidiaries werereported in JPMorgan Chase Bank, N.A.’s results beginning in thethird quarter of 2008.

In connection with the transactions described in the preceding para-graph, JPMorgan Chase agreed to indemnify JPMorgan Chase Bank,



N.A. for specified losses and related expenditures related to any loanassets owned or held by the Bear Stearns subsidiaries on July 1,2008, or derivatives entered into, owned or held by the Bear Stearns’subsidiaries on July 1, 2008, or to be transferred to JPMorgan ChaseBank, N.A., and any losses, judgments, costs or expenses incurred byJPMorgan Chase Bank, N.A. arising out of any conduct or breach ofany covenant or agreement by or on behalf of the Bear Stearns sub-sidiaries. These indemnities are effective until June 30, 2013.

JPMorgan Chase made a capital contribution of $4.6 billion, anamount equal to the estimated additional amount of capital requiredto ensure that JPMorgan Chase Bank, N.A.’s regulatory capital ratios(i.e., Tier 1; total capital and leverage) do not decline from the levelsfor the quarter ended June 30, 2008, as a result of the aforemen-tioned indemnified transactions. To the extent that any capital con-tribution by JPMorgan Chase exceeds the actual regulatory capitalimpact of these transactions, JPMorgan Chase Bank, N.A. will payJPMorgan Chase the difference.

Acquisition of the consumer, business banking and middle-market banking businesses of The Bank of New York inexchange for selected corporate trust businesses, includingtrustee, paying agent, loan agency and document manage-ment services On October 1, 2006, JPMorgan Chase Bank, N.A. completed theacquisition of The Bank of New York Company, Inc.’s (“The Bank ofNew York”) consumer, business and middle-market banking busi-nesses in exchange for selected corporate trust businesses plus acash payment of $150 million. The transaction also included a con-tingent payment payable to The Bank of New York; the amount dueof $25 million was paid in 2008. The acquisition added 339 branchesand more than 400 ATMs, and it significantly strengthened JPMorganChase Bank, N.A.’s retail business distribution network in the NewYork tri-state area. The Bank of New York businesses acquired werevalued at a premium of $2.3 billion; JPMorgan Chase Bank, N.A.’scorporate trust businesses that were transferred (i.e., trustee, payingagent, loan agency and document management services) were val-ued at a premium of $1.7 billion. This transaction included the acqui-sition of approximately $7.7 billion in loans net of allowance for loanlosses and $12.9 billion in deposits from The Bank of New York.JPMorgan Chase Bank, N.A. also recognized core deposit intangiblesof $485 million, which are being amortized using an acceleratedmethod over a 10-year period. JPMorgan Chase Bank, N.A. recordedan after-tax gain of $647 million on this transaction in the fourthquarter of 2006. For additional discussion related to the transaction,see Note 4 on page 13 of these Consolidated Financial Statements.

Collegiate Funding Services On March 1, 2006, JPMorgan Chase Bank, N.A. acquired, for approx-imately $663 million, Collegiate Funding Services, a leader in studentloan servicing and consolidation. This acquisition included $6.0 bil-lion of student loans.

Other internal transfers of legal entities under commoncontrol On July 30, 2007, JPMorgan Chase Bank, N.A. sold its wholly-ownedsubsidiary, J.P. Morgan Partners (23A Manager), Inc., a venture capi-tal subsidiary, to JPMorgan Chase for $514 million in cash. At thetime of the transfer J.P. Morgan Partners (23A Manager) had approx-imately $725 million of assets, primarily consisting of $388 million ofdeposits with banks and $218 million of private equity investments.

On October 20, 2006, JPMorgan Chase contributed its wholly-ownedbanking subsidiary, Banc One Trust Company, National Association(“BOTC”), to JPMorgan Chase Bank, N.A. At the time of the transferBOTC had approximately $1.3 billion of assets, primarily consisting of$665 million of goodwill and $469 million of loans.

On March 20, 2006, JPMorgan Chase sold its wholly-owned sub-sidiary, DNT Asset Trust (“DNT”), to JPMorgan Chase Bank, N.A., for$4.2 billion in cash. DNT’s principal activities are trust, fiduciary andcustody activities, and investments in real estate investment trusts. Atthe time of the transfer DNT had approximately $5.0 billion of assets,primarily consisting of $4.1 billion of intercompany loans.

In addition to the above transfers, in 2008, 2007 and 2006JPMorgan Chase transferred various other wholly-owned subsidiariesto JPMorgan Chase Bank, N.A. In 2008, the total assets for thesesubsidiaries were $280 million, which were largely loans and federalfunds sold. In 2007, the total assets for these subsidiaries were $12million, which were deposits with banks. In 2006, the total assets forthese subsidiaries were $111 million, which were largely loans andgoodwill.

In 2007 and 2006, JPMorgan Chase Bank, N.A. transferred variouswholly-owned subsidiaries to JPMorgan Chase. The total assets forthese subsidiaries were $67 million and $77 million in 2007 and2006, respectively. In 2007, these assets were predominantly good-will and deposits with banks and in 2006, these assets were largelyloans. There were no wholly-owned subsidiaries transferred fromJPMorgan Chase Bank, N.A. to JPMorgan Chase in 2008.

The internal transfers of the above legal entities were accounted for athistorical cost in accordance with SFAS 141. However, all of the transferswere reflected in the Consolidated Financial Statements prospectively,and not as of the beginning of all periods presented, because the impactof these transfers was not material to JPMorgan Chase Bank, N.A’sConsolidated Financial Statements for any of the years ended December31, 2008, 2007 or 2006.

Note 4 – Discontinued operations On October 1, 2006, JPMorgan Chase Bank, N.A. completed theacquisition of The Bank of New York’s consumer, small-business andmiddle-market banking businesses in exchange for selected corpo-rate trust businesses. Refer to Note 3 on pages 10–12 of theseConsolidated Financial Statements for additional information.

In anticipation of the close of the transaction on October 1, 2006,effective with the second quarter of 2006, the results of operationsof these corporate trust businesses were reported as discontinuedoperations. Condensed financial information of the selected corpo-rate trust businesses follows.

Selected income statements data(a)

Year ended December 31, (in millions) 2006Other noninterest revenue $ 310Net interest income 264Gain on sale of discontinued operations 1,122Total net revenue 1,696Noninterest expense 324Income from discontinued operations

before income taxes 1,372Income tax expense 574Income from discontinued operations $ 798

(a) There was no income from discontinued operations during 2008 or 2007.

The following is a summary of the assets and liabilities associatedwith the selected corporate trust businesses related to The Bank ofNew York transaction that closed on October 1, 2006.

Selected balance sheet data(in millions) October 1, 2006

Goodwill and other intangibles $ 305Other assets 547

Total assets $ 852

Deposits $ 24,011Other liabilities 547

Total liabilities $ 24,558

JPMorgan Chase Bank, N.A. provides certain transitional services toThe Bank of New York for a defined period of time after the closingdate. The Bank of New York compensates JPMorgan Chase Bank,N.A. for these transitional services.

Note 5 – Fair value measurement In September 2006, the FASB issued SFAS 157 (“Fair ValueMeasurements”), which was effective for fiscal years beginning afterNovember 15, 2007, with early adoption permitted. JPMorgan ChaseBank, N.A. chose early adoption for SFAS 157 effective January 1,2007. SFAS 157:

• Defines fair value as the price that would be received to sell anasset or paid to transfer a liability in an orderly transactionbetween market participants at the measurement date, andestablishes a framework for measuring fair value;

• Establishes a three-level hierarchy for fair value measurementsbased upon the transparency of inputs to the valuation of anasset or liability as of the measurement date;

• Nullifies the guidance in EITF 02-3, which required the deferral ofprofit at inception of a transaction involving a derivative financialinstrument in the absence of observable data supporting the val-uation technique;

• Eliminates large position discounts for financial instruments quot-ed in active markets and requires consideration of JPMorganChase Bank, N.A.’s creditworthiness when valuing liabilities; and

• Expands disclosures about instruments measured at fair value.

JPMorgan Chase Bank, N.A. also chose early adoption for SFAS 159effective January 1, 2007. SFAS 159 provides an option to elect fairvalue as an alternative measurement for selected financial assets,financial liabilities, unrecognized firm commitments and written loancommitments not previously recorded at fair value. JPMorgan ChaseBank, N.A. elected fair value accounting for certain assets and liabili-ties not previously carried at fair value. For more information, seeNote 6 on pages 25–27 of these Consolidated Financial Statements.

The following is a description of JPMorgan Chase Bank, N.A.’s valua-tion methodologies for assets and liabilities measured at fair value.

JPMorgan Chase Bank, N.A. has an established and well-document-ed process for determining fair values. Fair value is based upon quot-ed market prices, where available. If listed prices or quotes are notavailable, fair value is based upon internally developed models thatprimarily use, as inputs, market-based or independently sourced mar-ket parameters, including but not limited to yield curves, interestrates, volatilities, equity or debt prices, foreign exchange rates andcredit curves. In addition to market information, models also incorpo-rate transaction details, such as maturity of the instrument. Valuationadjustments may be made to ensure that financial instruments arerecorded at fair value. These adjustments include amounts to reflectcounterparty credit quality, JPMorgan Chase Bank, N.A.’s creditwor-thiness, constraints on liquidity and unobservable parameters.Valuation adjustments are applied consistently over time.

• Credit valuation adjustments (“CVA”) are necessary when themarket price (or parameter) is not indicative of the credit qualityof the counterparty. As few classes of derivative contracts are list-ed on an exchange, the majority of derivative positions are val-ued using internally developed models that use as their basisobservable market parameters. Market practice is to quoteparameters equivalent to an “AA” credit rating whereby all coun-terparties are assumed to have the same credit quality. Therefore,an adjustment is necessary to reflect the credit quality of eachderivative counterparty to arrive at fair value. The adjustment alsotakes into account contractual factors designed to reduceJPMorgan Chase Bank, N.A.’s credit exposure to each counter-party, such as collateral and legal rights of offset.


• Debit valuation adjustments (“DVA”) are necessary to reflect thecredit quality of JPMorgan Chase Bank, N.A. in the valuation ofliabilities measured at fair value. This adjustment was incorporat-ed into JPMorgan Chase Bank, N.A.’s valuations commencingJanuary 1, 2007, in accordance with SFAS 157. The methodologyto determine the adjustment is consistent with CVA and incorpo-rates JPMorgan Chase Bank, N.A.’s credit spread as observedthrough the credit default swap market.

• Liquidity valuation adjustments are necessary when JPMorganChase Bank, N.A. may not be able to observe a recent marketprice for a financial instrument that trades in inactive (or lessactive) markets or to reflect the cost of exiting larger-than-normalmarket-size risk positions (liquidity adjustments are not taken forpositions classified within level 1 of the fair value hierarchy).JPMorgan Chase Bank, N.A. tries to ascertain the amount ofuncertainty in the initial valuation based upon the degree of liq-uidity of the market in which the financial instrument trades andmakes liquidity adjustments to the carrying value of the financialinstrument. JPMorgan Chase Bank, N.A. measures the liquidityadjustment based upon the following factors: (1) the amount oftime since the last relevant pricing point; (2) whether there wasan actual trade or relevant external quote; and (3) the volatility ofthe principal risk component of the financial instrument. Costs toexit larger-than-normal market-size risk positions are determinedbased upon the size of the adverse market move that is likely tooccur during the period required to bring a position down to anonconcentrated level.

• Unobservable parameter valuation adjustments are necessarywhen positions are valued using internally developed models thatuse as their basis unobservable parameters – that is, parametersthat must be estimated and are, therefore, subject to manage-ment judgment. These positions are normally traded less actively.Examples include certain credit products where parameters suchas correlation and recovery rates are unobservable. Unobservableparameter valuation adjustments are applied to mitigate the pos-sibility of error and revision in the estimate of the market priceprovided by the model.

JPMorgan Chase Bank, N.A. has numerous controls in place intendedto ensure that its fair valuations are appropriate. An independentmodel review group reviews JPMorgan Chase Bank, N.A.’s valuationmodels and approves them for use for specific products. All valuationmodels within JPMorgan Chase Bank, N.A. are subject to this reviewprocess. A price verification group, independent from the risk-takingfunction, ensures observable market prices and market-based parame-ters are used for valuation wherever possible. For those products withmaterial parameter risk for which observable market levels do not exist,an independent review of the assumptions made on pricing is per-formed. Additional review includes deconstruction of the model valua-tions for certain structured instruments into their components, andbenchmarking valuations, where possible, to similar products; validatingvaluation estimates through actual cash settlement; and detailedreview and explanation of recorded gains and losses, which are ana-lyzed daily and over time. Valuation adjustments, which are also deter-

mined by the independent price verification group, are based uponestablished policies and are applied consistently over time. Any changesto the valuation methodology are reviewed by management to confirmthe changes are justified. As markets and products develop and thepricing for certain products becomes more or less transparent,JPMorgan Chase Bank, N.A. continues to refine its valuation method-ologies. During 2008, no material changes were made to JPMorganChase Bank, N.A.’s valuation models.

The methods described above to estimate fair value may produce afair value calculation that may not be indicative of net realizable valueor reflective of future fair values. Furthermore, while JPMorgan ChaseBank, N.A. believes its valuation methods are appropriate and consis-tent with other market participants, the use of different methodolo-gies or assumptions to determine the fair value of certain financialinstruments could result in a different estimate of fair value at thereporting date.

Valuation Hierarchy SFAS 157 establishes a three-level valuation hierarchy for disclosureof fair value measurements. The valuation hierarchy is based uponthe transparency of inputs to the valuation of an asset or liability asof the measurement date. The three levels are defined as follows.

• Level 1 – inputs to the valuation methodology are quoted prices(unadjusted) for identical assets or liabilities in active markets.

• Level 2 – inputs to the valuation methodology include quotedprices for similar assets and liabilities in active markets, andinputs that are observable for the asset or liability, either directlyor indirectly, for substantially the full term of the financial instru-ment.

• Level 3 – inputs to the valuation methodology are unobservableand significant to the fair value measurement. For a level 3 analy-sis, see page 22 of this Note.

A financial instrument’s categorization within the valuation hierarchyis based upon the lowest level of input that is significant to the fairvalue measurement.

Following is a description of the valuation methodologies used forinstruments measured at fair value, including the general classifica-tion of such instruments pursuant to the valuation hierarchy.

Assets

Securities purchased under resale agreements (“resaleagreements”) To estimate the fair value of resale agreements, cash flows are evalu-ated taking into consideration any derivative features of the resaleagreement and are then discounted using the appropriate marketrates for the applicable maturity. As the inputs into the valuation areprimarily based upon readily observable pricing information, suchresale agreements are generally classified within level 2 of the valua-tion hierarchy.



Loans and unfunded lending-related commitments The majority of JPMorgan Chase Bank, N.A.’s loans and lending-related commitments are not carried at fair value on a recurringbasis on the Consolidated Balance Sheets, nor are they actively trad-ed. The fair value of such loans and lending-related commitments isincluded in the disclosures required by SFAS 107 on pages 23–24 ofthis Note. Loans carried at fair value on a recurring and nonrecurringbasis are included in the applicable tables that follow.

WholesaleThe fair value of loans and lending-related commitments is calculat-ed using observable market information, including pricing from actu-al market transactions or broker quotations where available. Wherepricing information is not available for the specific loan, the valuationis generally based upon quoted market prices of similar instruments,such as loans and bonds. These comparable instruments share char-acteristics that typically include industry, rating, capital structure, sen-iority, and consideration of counterparty credit risk. In addition, gen-eral market conditions, including prevailing market spreads for creditand liquidity risk, are also considered in the valuation process.

For certain loans that are expected to be securitized, such as com-mercial and residential mortgages, fair value is estimated based uponobservable pricing of asset-backed securities (“ABS”) with similarcollateral and incorporates adjustments (i.e., reductions) to theseprices to account for securitization uncertainties including portfoliocomposition, market conditions and liquidity to arrive at the wholeloan price. When data from recent market transactions is available itis incorporated as appropriate. If particular loans are not expected tobe securitized they are marked for individual sale taking into consid-eration potential liquidation proceeds and property repossession/liq-uidation information, as appropriate.

JPMorgan Chase Bank, N.A.’s loans carried at fair value and reportedin trading assets are largely classified within level 3 due to the lack ofobservable pricing. Loans carried at fair value and reported in loansincluding leveraged lending funded loans, high-yield bridge financingand purchased nonperforming loans held in the investment bankingbusiness are classified within level 2 or 3 of the valuation hierarchydepending on the level of liquidity and activity in the markets for aparticular product.

ConsumerFair values for consumer installment loans (including automobilefinancings and consumer real estate not expected to be securitized),for which market rates for comparable loans are readily available, arebased upon discounted cash flows adjusted for prepayment assump-tions. The discount rates used for consumer installment loans arebased on current market rates for new originations of comparableloans. Fair value for credit card receivables is based upon discountedexpected cash flows. The discount rates used for credit card receiv-ables incorporate only the effects of interest rate changes, since theexpected cash flows already reflect an adjustment for credit risk.Consumer installment loans and credit card receivables that are notcarried on the balance sheet at fair value are not classified withinthe fair value hierarchy.

Securities Where quoted prices for identical securities are available in anactive market, securities are classified in level 1 of the valuationhierarchy. Level 1 securities include highly liquid government bonds,mortgage products for which there are quoted prices in active mar-kets (such as U.S. government agency or U.S. government-sponsoredenterprise pass-through mortgage-backed securities) and exchange-traded equities.

If quoted market prices are not available for the specific security,JPMorgan Chase Bank, N.A. may estimate the value of such instru-ments using a combination of observed transaction prices, independ-ent pricing services and relevant broker quotes. Consideration is givento the nature of the quotes (e.g., indicative or firm) and the relation-ship of recently evidenced market activity to the prices provided fromindependent pricing services. JPMorgan Chase Bank, N.A. may alsouse pricing models or discounted cash flows. In cases where there islimited activity or less transparency around inputs to the valuation,securities are classified within level 3 of the valuation hierarchy.

For certain collateralized mortgage and debt obligations, asset-backed securities and high-yield debt securities, the determination offair value may require benchmarking to similar instruments or analyz-ing default and recovery rates. For “cash” collateralized debt obliga-tions (“CDOs”), external price information is not available. Therefore,cash CDOs are valued using market-standard models, such as Intex,to model the specific collateral composition and cash flow structureof each deal; key inputs to the model are market spread data foreach credit rating, collateral type and other relevant contractual fea-tures. Asset-backed securities are valued based on external prices ormarket spread data, using current market assumptions on prepay-ments and defaults. For those asset-backed securities where theexternal price data is not observable or the limited available data isopaque, the collateral performance is monitored and the value of thesecurity is assessed. To benchmark its valuations, JPMorgan ChaseBank, N.A. looks to transactions for similar instruments and utilizesindependent pricing provided by third-party vendors, broker quotesand relevant market indices such as the ABX index, as applicable.While none of those sources are solely indicative of fair value, theyserve as directional indicators for the appropriateness of JPMorganChase Bank, N.A.’s estimates. The majority of collateralized mortgageand debt obligations, high-yield debt securities and asset-backedsecurities are currently classified in level 3 of the valuation hierarchy.

Commodities Commodities inventory is carried at the lower of cost or fair value.The fair value for commodities inventory is determined primarilyusing pricing and data derived from the markets on which the under-lying commodities are traded. Market prices may be adjusted for liq-uidity. JPMorgan Chase Bank, N.A. also has positions in commodity-based derivatives that can be traded on an exchange or over-the-counter. The pricing inputs to these derivatives include forward curvesof underlying commodities, basis curves, volatilities, correlations, andoccasionally other model parameters. The valuation of these deriva-tives is based upon calibrating to market transactions, as well as to


independent pricing information from sources such as brokers anddealer consensus pricing services. Where inputs are unobservable,they are benchmarked to observable market data based upon historicand implied correlations, then adjusted for uncertainty where appro-priate. The majority of commodities inventory and commodities-basedderivatives are classified within level 2 of the valuation hierarchy.

Derivatives Exchange-traded derivatives valued using quoted prices are classifiedwithin level 1 of the valuation hierarchy. However, few classes ofderivative contracts are listed on an exchange; thus, the majority ofJPMorgan Chase Bank, N.A.’s derivative positions are valued usinginternally developed models that use as their basis readily observablemarket parameters – that is, parameters that are actively quoted andcan be validated to external sources, including industry pricing servic-es. Depending on the types and contractual terms of derivatives, fairvalue can be modeled using a series of techniques, such as theBlack-Scholes option pricing model, simulation models or a combina-tion of various models, which are consistently applied. Where deriva-tive products have been established for some time, JPMorgan ChaseBank, N.A. uses models that are widely accepted in the financialservices industry. These models reflect the contractual terms of thederivatives, including the period to maturity, and market-basedparameters such as interest rates, volatility, and the credit quality ofthe counterparty. Further, many of these models do not contain ahigh level of subjectivity, as the methodologies used in the modelsdo not require significant judgment, and inputs to the model arereadily observable from actively quoted markets, as is the case for“plain vanilla” interest rate swaps and option contracts and creditdefault swaps (“CDS”). Such instruments are generally classifiedwithin level 2 of the valuation hierarchy.

Derivatives that are valued based upon models with significant unob-servable market parameters and that are normally traded less active-ly, have trade activity that is one way, and/or are traded in less-developed markets are classified within level 3 of the valuation hier-archy. Level 3 derivatives, for example, include credit default swapsreferenced to mortgage-backed securities, certain types of CDOtransactions, options on baskets of single-name stocks, and callableexotic interest rate options. Such derivatives are primarily used forrisk management purposes.

For certain derivative products, such as credit default swaps refer-enced to mortgage-backed securities, the value is based on theunderlying mortgage risk. As these instruments are not actively quot-ed, the estimate of fair value considers the valuation of the underly-ing collateral (mortgage loans). Inputs to the valuation will includeavailable information on similar underlying loans or securities in thecash market. The prepayments and loss assumptions on the underly-ing loans or securities are estimated using a combination of histori-cal data, prices on market transactions, and other prepayment anddefault scenarios and analysis. Relevant observable market indicessuch as the ABX or CMBX, are considered, as well as any relevanttransaction activity.

Other complex products, such as those sensitive to correlationbetween two or more underlyings, also fall within level 3 of thehierarchy. Such instruments include complex credit derivative prod-ucts which are illiquid and non-standard in nature, including CDOsand CDO-squared. A CDO is a debt security collateralized by a vari-ety of debt obligations, including bonds and loans of different matu-rities and credit qualities. The repackaging of such securities andloans within a CDO results in the creation of tranches, which areinstruments with differing risk profiles. In a CDO-squared, the instru-ment is a CDO where the underlying debt instruments are alsoCDOs. For CDO-squared transactions, while inputs such as CDSspreads and recovery rates may be observable, the correlationbetween the underlying debt instruments is unobservable. The corre-lation levels are not only modeled on a portfolio basis but are alsocalibrated at a transaction level to liquid benchmark tranches. For allcomplex credit derivative products, actual transactions, where avail-able, are used to regularly recalibrate all unobservable parameters.

Correlation sensitivity is also material to the overall valuation ofoptions on baskets of single-name stocks; the valuation of these bas-kets is typically not observable due to their non-standardized struc-turing. Correlation for products such as these are typically estimatedbased on an observable basket of stocks and then adjusted to reflectthe differences between the underlying equities.

For callable exotic interest rate options, while most of the assump-tions in the valuation can be observed in active markets (e.g. interestrates and volatility), the callable option transaction flow is essentiallyone-way, and as such, price observability is limited. As pricing infor-mation is limited, assumptions are based upon the dynamics of theunderlying markets (e.g. the interest rate markets) including therange and possible outcomes of the applicable inputs. In addition,the models used are calibrated, as relevant, to liquid benchmarksand valuation is tested against monthly independent pricing servicesand actual transactions.

Mortgage servicing rights and certain retained interests insecuritizations Mortgage servicing rights (“MSRs”) and certain retained interestsfrom securitization activities do not trade in an active, open marketwith readily observable prices. While sales of MSRs do occur, the pre-cise terms and conditions typically are not readily available.Accordingly, JPMorgan Chase Bank, N.A. estimates the fair value ofMSRs and certain other retained interests in securitizations using dis-counted cash flow (“DCF”) models.

• For MSRs, JPMorgan Chase Bank, N.A. uses an option-adjustedspread (“OAS”) valuation model in conjunction with JPMorganChase Bank, N.A.’s proprietary prepayment model to project MSRcash flows over multiple interest rate scenarios, which are thendiscounted at risk-adjusted rates to estimate an expected fairvalue of the MSRs. The OAS model considers portfolio characteris-tics, contractually specified servicing fees, prepayment assump-tions, delinquency rates, late charges, other ancillary revenue, costs



to service and other economic factors. JPMorgan Chase Bank,N.A. reassesses and periodically adjusts the underlying inputs andassumptions used in the OAS model to reflect market conditionsand assumptions that a market participant would consider in valu-ing the MSR asset. Due to the nature of the valuation inputs,MSRs are classified within level 3 of the valuation hierarchy.

• For certain retained interests in securitizations (such as interest-only strips), a single interest rate path discounted cash flow modelis used and generally includes assumptions based upon projectedfinance charges related to the securitized assets, estimated netcredit losses, prepayment assumptions and contractual interestpaid to third-party investors. Changes in the assumptions used mayhave a significant impact on JPMorgan Chase Bank, N.A.’s valua-tion of retained interests, and such interests are therefore typicallyclassified within level 3 of the valuation hierarchy.

For both MSRs and certain other retained interests in securitizations,JPMorgan Chase Bank, N.A. compares its fair value estimates andassumptions to observable market data where available and torecent market activity and actual portfolio experience. For further dis-cussion of the most significant assumptions used to value retainedinterests in securitizations and MSRs, as well as the applicable stresstests for those assumptions, see Note 17 and Note 19 on pages47–56 and 66–69, respectively, of these Consolidated FinancialStatements.

Other assets The fair value of asset-backed commercial paper (“ABCP”) invest-ments purchased under the Federal Reserve Bank’s Asset-BackedCommercial Paper Money Market Mutual Fund Liquidity Facility(“AML Facility”) for U.S. money market mutual funds is determinedbased on observable market information and is classified in level 2 ofthe valuation hierarchy.

Liabilities

Securities sold under repurchase agreements (“repurchaseagreements”) To estimate the fair value of repurchase agreements, cash flows areevaluated taking into consideration any derivative features and arethen discounted using the appropriate market rates for the applica-ble maturity. Generally, for these types of agreements, there is arequirement that collateral be maintained with a market value equalto, or in excess of, the principal amount loaned; as a result, therewould be no adjustment, or an immaterial adjustment, to reflect thecredit quality of JPMorgan Chase Bank, N.A. (i.e., DVA) related tothese agreements. As the inputs into the valuation are primarilybased upon observable pricing information, repurchase agreementsare classified within level 2 of the valuation hierarchy.

Beneficial interests issued by consolidated VIEs The fair value of beneficial interests issued by consolidated VIEs(“beneficial interests”) is estimated based upon the fair value of theunderlying assets held by the VIEs. The valuation of beneficial inter-ests does not include an adjustment to reflect the credit quality ofJPMorgan Chase Bank, N.A., as the holders of these beneficial inter-ests do not have recourse to the general credit of JPMorgan ChaseBank, N.A. As the inputs into the valuation are generally based uponreadily observable market pricing information, the majority of benefi-cial interests issued by consolidated VIEs are classified within level 2of the valuation hierarchy.

Deposits, other borrowed funds and long-term debt Included within deposits, other borrowed funds and long-term debtare structured notes issued by JPMorgan Chase Bank, N.A. that arefinancial instruments containing embedded derivatives. To estimatethe fair value of structured notes, cash flows are evaluated takinginto consideration any derivative features and are then discountedusing the appropriate market rates for the applicable maturities. Inaddition, the valuation of structured notes includes an adjustment toreflect the credit quality of JPMorgan Chase Bank, N.A. (i.e., theDVA). Where the inputs into the valuation are primarily based uponreadily observable market pricing information, the structured notesare classified within level 2 of the valuation hierarchy. Where signifi-cant inputs are unobservable, structured notes are classified withinlevel 3 of the valuation hierarchy.




The following table presents the financial instruments carried at fair value as of December 31, 2008 and 2007, by caption on the ConsolidatedBalance Sheets and by SFAS 157 valuation hierarchy (as described above).

Assets and liabilities measured at fair value on a recurring basis

Quoted market Internal models with Internal models with Total carrying valueprices in active significant observable significant unobservable FIN 39 in the Consolidated

December 31, 2008 (in millions) markets (Level 1) market parameters (Level 2) market parameters (Level 3) netting(c) Balance Sheets

Federal funds sold and securities purchased under resale agreements $ — $ 19,865 $ — $ — $ 19,865

Securities borrowed — 3,381 — — 3,381

Trading assets:Debt and equity instruments:

U.S. government, agency, sponsored enterprise and non-U.S. governments 35,109 23,046 12 — 58,167

State and municipal securities — 1,709 353 — 2,062Certificates of deposit, bankers’

acceptances and commercial paper 1,180 1,204 — — 2,384Corporate debt and other 22 49,088 4,859 — 53,969Equity securities 64,867 2,218 235 — 67,320Loans — 14,254 14,481 — 28,735Mortgage- and asset-backed securities — 1,367 6,329 — 7,696Physical commodities(a) — 3,455 — — 3,455

Total debt and equity instruments: 101,178 96,341 26,269 — 223,788Derivative receivables 1,759 2,661,825 50,663 (2,572,670) 141,577


Available-for-sale securities 117,467 70,985 11,258 — 199,710Loans — 4,641 1,397 — 6,038Mortgage servicing rights — — 9,236 — 9,236Other assets — 130 1,650 — 1,780

Total assets at fair value $ 220,404 $ 2,857,168 $ 100,473 $ (2,572,670) $ 605,375

Deposits $ — $ 4,370 $ 1,235 $ — $ 5,605Federal funds purchased and securities

loaned or sold under repurchase agreements — 2,968 — — 2,968

Other borrowed funds — 2,658 56 — 2,714

Trading liabilities:Debt and equity instruments 21,595 9,030 287 — 30,912Derivative payables 1,211 2,610,277 41,731 (2,541,722) 111,497

Total trading liabilities 22,806 2,619,307 42,018 (2,541,722) 142,409

Accounts payable and other liabilities — — — — —

Beneficial interests issued by consolidated VIEs — 1,364 — — 1,364

Long-term debt — 20,399 14,525 — 34,924

Total liabilities at fair value $ 22,806 $ 2,651,066 $ 57,834 $ (2,541,722) $ 189,984




December 31, 2007 (in millions) markets (Level 1) market parameters (Level 2) market parameters (Level 3) netting(c) Balance Sheets


Trading assets:Debt and equity instruments:

U.S. government, agency, sponsored enterprise and non-U.S. governments 79,703 33,510 258 — 113,471

State and municipal securities 39 131 — — 170Certificates of deposit, bankers’

acceptances and commercial paper 3,019 899 — — 3,918Corporate debt and other 6 39,799 7,393 — 47,198Equity securities 77,654 8,211 367 — 86,232Loans — 44,854 10,350 — 55,204Mortgage- and asset-backed securities — 6,720 447 — 7,167Physical commodities(a) — 4,220 — — 4,220

Total debt and equity instruments: 160,421 138,344 18,815 — 317,580Derivative receivables 18,033 868,188 19,389 (832,731) 72,879

Total trading assets 178,454 1,006,532 38,204 (832,731) 390,459

Available-for-sale securities 70,639 11,818 10 — 82,467Loans — 359 7,797 — 8,156Mortgage servicing rights — — 8,632 — 8,632Other assets — 835 797 — 1,632

Total assets at fair value $249,093 $ 1,037,607 $ 55,440 $ (832,731) $ 509,409


loaned or sold under repurchase agreements — 5,768 — — 5,768

Other borrowed funds — 10,225 101 — 10,326

Trading liabilities:Debt and equity instruments 59,408 13,407 480 — 73,295Derivative payables 18,875 854,614 19,183 (822,458) 70,214

Total trading liabilities 78,283 868,021 19,663 (822,458) 143,509

Accounts payable and other liabilities(b) — — 25 — 25

Beneficial interests issued by consolidated VIEs — 2,645 82 — 2,727

Long-term debt — 35,734 21,198 — 56,932

Total liabilities at fair value $ 78,283 $ 927,621 $ 42,297 $ (822,458) $ 225,743

(a) Physical commodities inventories are accounted for at the lower of cost or fair value.(b) Includes the fair value adjustment for unfunded lending-related commitments accounted for at fair value.(c) As permitted under FIN 39, JPMorgan Chase Bank, N.A. has elected to net derivative receivables and derivative payables and the related cash collateral received and paid when a

legally enforceable master netting agreement exists. The increase in FIN 39 netting from December 31, 2007, primarily relates to the decline in interest rates, widening credit spreadsand volatile foreign exchange rates reflected in interest rate, credit and foreign exchange derivatives, respectively.

Changes in level 3 recurring fair value measurements The tables below include a rollforward of the balance sheet amountsfor the years ended December 31, 2008 and 2007 (including thechange in fair value), for financial instruments classified by JPMorganChase Bank, N.A. within level 3 of the valuation hierarchy. When adetermination is made to classify a financial instrument within level3, the determination is based upon the significance of the unobserv-able parameters to the overall fair value measurement. However,level 3 financial instruments typically include, in addition to theunobservable or level 3 components, observable components (that is,components that are actively quoted and can be validated to exter-

nal sources); accordingly, the gains and losses in the table belowinclude changes in fair value due in part to observable factors thatare part of the valuation methodology. Also, JPMorgan Chase Bank,N.A. risk manages the observable components of level 3 financialinstruments using securities and derivative positions that are classi-fied within level 1 or 2 of the valuation hierarchy; as these level 1and level 2 risk management instruments are not included below,the gains or losses in the tables do not reflect the effect of JPMorganChase Bank, N.A.’s risk management activities related to such level 3instruments.



Fair value measurements using significant unobservable inputsChange in unrealized

For the year ended Total Purchases, Transfers into gains and (losses) related toDecember 31, 2008 Fair value, realized/unrealized issuances and/or Fair value, financial instruments held(in millions) January 1, 2008 gains/(losses)(b) settlements, net out of level 3(b) December 31, 2008 at December 31, 2008

Assets:Trading assets:

Debt and equity instruments $ 18,815 $ (4,969)(c)(d) $ (1,063) $ 13,486 $ 26,269 $ (4,229)(c)(d)

Net derivative receivables 206 1,846(c) 5,645 1,235 8,932 (1,670)(c)

Available-for-sale securities 10 (895)(e) 3,439 8,704 11,258 (187)(e)

Loans 7,797 (1,091)(c) (1,181) (4,128) 1,397 (1,159)(c)

Mortgage servicing rights 8,632 (6,772)(d) 7,376 — 9,236 (6,772)(d)

Other assets 797 (159)(f) 1,031 (19) 1,650 (131)(f)

Liabilities(a):Deposits $ (1,228) $ 72(c) $ (28) $ (51) $ (1,235) $ 69(c)

Other borrowed funds (101) (19)(c) — 64 (56) 5(c)

Trading liabilities:Debt and equity instruments (480) 78(c) 27 88 (287) 127(c)

Accounts payable and other liabilities (25) 25(c) — — — —(c)

Beneficial interests issued by consolidated VIEs (82) 53(c) 5 24 — —(c)

Long-term debt (21,198) 3,968(c) 3,604 (899) (14,525) 3,227(c)

Assets and liabilities measured at fair value on a nonrecurring basisCertain assets, liabilities and unfunded lending-related commitmentsare measured at fair value on a nonrecurring basis; that is, theinstruments are not measured at fair value on an ongoing basis butare subject to fair value adjustments only in certain circumstances

(for example, when there is evidence of impairment). The followingtables present the financial instruments carried on the ConsolidatedBalance Sheets by caption and level within the SFAS 157 valuationhierarchy (as described above) as of December 31, 2008 and 2007,for which a nonrecurring change in fair value has been recorded dur-ing the reporting period.


Fair value measurements using significant unobservable inputsChange in unrealized

For the year ended Total Purchases, Transfers into gains and (losses) related toDecember 31, 2007 Fair value, realized/unrealized issuances and/or Fair value, financial instruments held(in millions) January 1, 2007 gains/(losses)(b) settlements, net out of level 3(b) December 31, 2007 at December 31, 2007


Debt and equity instruments $ 6,691 $ 366(c)(d) $ 3,373 $ 8,385 $ 18,815 $ 370(c)(d)

Net derivative receivables (2,478) 1,240(c) (40) 1,484 206 1,554(c)

Available-for-sale securities 71 41(e) (11) (91) 10 (1)(e)

Loans 435 (344)(c) 7,715 (9) 7,797 (32)(c)

Mortgage servicing rights 7,546 (516)(d) 1,602 — 8,632 (516)(d)

Other assets 1,004 37(f) (280) 36 797 (5)(f)

Liabilities(a):Deposits $ (445) $ (50)(c) $ (667) $ (66) $ (1,228) $ (41)(c)

Other borrowed funds — (67)(c) (34) — (101) (135)(c)

Trading liabilities:Debt and equity instruments (16) 382(c) (140) (706) (480) (734)(c)

Accounts payable and other liabilities — (460)(c) 435 — (25) (25)(c)

Beneficial interests issued by consolidated VIEs (8) 6(c) 1 (81) (82) —

Long-term debt (11,046) (968)(c) (6,484) (2,700) (21,198) (371)(c)

(a) Level 3 liabilities as a percentage of total JPMorgan Chase Bank, N.A. liabilities accounted for at fair value (including liabilities carried at fair value on a nonrecurring basis) were 30% and19% at December 31, 2008 and 2007, respectively. JPMorgan Chase Bank, N.A. does not allocate the FIN 39 netting adjustment across the levels of the fair value hierarchy. As such, thelevel 3 derivative payables balance included in the level 3 total balance is gross of any netting adjustments.

(b) Beginning January 1, 2008, all transfers in and out of level 3 are assumed to occur at the beginning of the reporting period.(c) Reported in principal transactions revenue.(d) Changes in fair value for retail business mortgage loans originated with the intent to sell and MSRs are measured at fair value and reported in mortgage fees and related income.(e) Realized gains (losses) are reported in securities gains (losses). Unrealized gains (losses) are reported in accumulated other comprehensive income (loss).(f) Reported in other income.

Internal models with Internal models with Quoted market prices significant observable significant unobservable Total carrying value

in active markets market parameters market parameters in the Consolidated December 31, 2008 (in millions) (Level 1) (Level 2) (Level 3) Balance Sheets

Loans(a) $ — $ 4,975 $ 3,685 $ 8,660Other assets — 263 138 401

Total assets at fair value on a nonrecurring basis $ — $ 5,238 $ 3,823 $ 9,061

Accounts payable and other liabilities(b) $ — $ 207 $ 81 $ 288

Total liabilities at fair value on a nonrecurring basis $ — $ 207 $ 81 $ 288




in active markets market parameters market parameters in the Consolidated December 31, 2007 (in millions) (Level 1) (Level 2) (Level 3) Balance Sheets

Loans(a)(c) $ — $ 2,784 $ 15,895 $ 18,679Other assets — 7 19 26


Accounts payable and other liabilities(b) $ — $ — $ 103 $ 103

Total liabilities at fair value on a nonrecurring basis $ — $ — $ 103 $ 103

(a) Includes leveraged lending and other loan warehouses held-for-sale.(b) Represents the fair value adjustment associated with $1.4 billion and $3.2 billion of unfunded held-for-sale lending-related commitments within the leveraged lending portfolio at

December 31, 2008 and 2007, respectively.(c) Includes $4.5 billion of level 3 held-for-sale loans reclassified to held-for-investment during 2007.

Nonrecurring fair value changes The following table presents the total change in value of financialinstruments for which a fair value adjustment has been included inthe Consolidated Statements of Income for the years endedDecember 31, 2008 and 2007, related to financial instruments heldat December 31, 2008 and 2007.

Year ended December 31, (in millions) 2008 2007

Loans $ (3,786) $ (677)Other assets (211) (5)Accounts payable and other liabilities (263) 2

Total nonrecurring fair value gains (losses) $ (4,260) $ (680)

In the above table, loans predominantly include the change in fairvalue for the investment banking business’ leveraged lending andwarehouse loans carried on the balance sheet at the lower of cost orfair value; and accounts payable and other liabilities predominantlyinclude the change in fair value for unfunded lending-related com-mitments within the leveraged lending portfolio.

Level 3 analysis Level 3 assets (including assets measured at fair value on a nonre-curring basis) were 6% of total assets and 17% of total assetsmeasured at fair value at December 31, 2008, compared with 5%and 13%, respectively, at December 31, 2007. The followingdescribes significant changes to level 3 assets during the year.

Level 3 assets increased $32.9 billion in 2008, largely due to thefollowing:

• Acquisition of $5.9 billion of MSRs related to the WashingtonMutual transaction.

• Purchase of approximately $4.4 billion of reverse mortgages inthe first quarter of 2008, for which there is limited pricing infor-mation and a lack of market liquidity.

• Transfers of $13.6 billion of AAA-rated CLOs backed by corporateloans, based upon a significant reduction in new deal issuanceand price transparency; $8.9 billion largely of mortgage-relatedassets, including commercial mortgage-backed securities with arating below “AAA”, other noninvestment grade mortgage securi-ties and certain prime mortgages.

• Positions resulting from Bear Stearns.

The increases in level 3 assets described above were partially offset by:

• Approximately $7.6 billion of sales and markdowns of residentialmortgage-backed securities, prime residential mortgage loansand Alt-A residential mortgage loans.

• $11.3 billion of sales and markdowns of leveraged loans, as wellas transfers of similar loans to level 2 due to the increased pricetransparency for such assets.

• $3.5 billion of transfers of bridge loans to level 2 due toincreased price transparency for such assets.

Gains and LossesGains and losses in the tables above for 2008 include:

• Losses on trading and debt and equity instruments of approxi-mately $5.0 billion, principally from mortgage-related transac-tions.

• A $6.8 billion decline in the fair value of the MSR asset.

• Losses of approximately $3.2 billion on leveraged loans.Leveraged loans are typically classified as held-for-sale and meas-ured at the lower of cost or fair value and therefore included inthe nonrecurring fair value assets.

• Gains of $4.0 billion related to structured notes, principally dueto significant volatility in the equity markets.

• Net gains of $1.8 billion related to derivatives, principally due tochanges in credit spreads and rate curves.

JPMorgan Chase Bank, N.A. risk manages level 3 financial instru-ments using securities and derivative positions classified within level1 or 2 of the valuation hierarchy; the effect of these risk manage-ment activities is not reflected in the level 3 gains and losses includ-ed in the tables above.

For further information on changes in the fair value of the MSRs,see Note 19 on pages 66–69 of these Consolidated FinancialStatements.


SFAS 157 TransitionIn connection with the initial adoption of SFAS 157, JPMorganChase Bank, N.A. recorded the following on January 1, 2007:

• a cumulative effect increase to retained earnings of $252 mil-lion, primarily related to the release of profit previously deferredin accordance with EITF 02-3;

• an increase to pretax income of $165 million ($103 millionafter-tax) related to the incorporation of JPMorgan Chase Bank,N.A.’s creditworthiness in the valuation of liabilities recorded atfair value.

Prior to the adoption of SFAS 157, JPMorgan Chase Bank, N.A.applied the provisions of EITF 02-3 to its derivative portfolio. EITF02-3 precluded the recognition of initial trading profit in theabsence of: (a) quoted market prices, (b) observable prices of othercurrent market transactions or (c) other observable data supportinga valuation technique. In accordance with EITF 02-3, JPMorganChase Bank, N.A. recognized the deferred profit in principal trans-actions revenue on a systematic basis (typically straight-line amorti-zation over the life of the instruments) and when observable mar-ket data became available.

Prior to the adoption of SFAS 157 JPMorgan Chase Bank, N.A. didnot incorporate an adjustment into the valuation of liabilities carriedat fair value on the Consolidated Balance Sheets. CommencingJanuary 1, 2007, in accordance with the requirements of SFAS 157,an adjustment was made to the valuation of liabilities measured atfair value to reflect the credit quality of JPMorgan Chase Bank, N.A.

Financial disclosures required by SFAS 107 Many but not all of the financial instruments held by JPMorganChase Bank, N.A. are recorded at fair value on the ConsolidatedBalance Sheets. SFAS 107 requires disclosure of the estimated fairvalue of certain financial instruments and the methods and signifi-cant assumptions used to estimate their fair value. Financial instru-ments within the scope of SFAS 107 are included in the table

below. Additionally, certain financial instruments and all nonfinan-cial instruments are excluded from the scope of SFAS 107.Accordingly, the fair value disclosures required by SFAS 107 provideonly a partial estimate of the fair value of JPMorgan Chase Bank,N.A. For example, JPMorgan Chase Bank, N.A. has developed long-term relationships with its customers through its deposit base andcredit card accounts, commonly referred to as core deposit intangi-bles and credit card relationships. In the opinion of management,these items, in the aggregate, add significant value to JPMorganChase Bank, N.A., but their fair value is not disclosed in this Note.

Financial instruments for which fair value approximatescarrying value Certain financial instruments that are not carried at fair value on theConsolidated Balance Sheets are carried at amounts that approxi-mate fair value due to their short-term nature and generally negligi-ble credit risk. These instruments include cash and due from banks,deposits with banks, federal funds sold and securities purchasedunder resale agreements and securities borrowed with short-datedmaturities, short-term receivables and accrued interest receivable,commercial paper, federal funds purchased and securities loaned orsold under repurchase agreements with short-dated maturities, otherborrowed funds (excluding advances from Federal Home LoanBanks), accounts payable and accrued liabilities. In addition, SFAS107 requires that the fair value for deposit liabilities with no statedmaturity (i.e., demand, savings and certain money market deposits)be equal to their carrying value. SFAS 107 does not allow for therecognition of the inherent funding value of these instruments.



The following table presents the carrying value and estimated fair value of financial assets and liabilities as required by SFAS 107 (a discussion ofthe valuation of the individual instruments can be found at the beginning of this Note or following the table below).

2008 2007

Carrying Estimated Appreciation/ Carrying Estimated Appreciation/December 31, (in billions) value fair value (depreciation) value fair value (depreciation)Financial assetsAssets for which fair value approximates carrying value $ 197.4 $ 197.4 $ — $ 76.4 $ 76.4 $ —Federal funds sold and securities purchased under resale

agreements (included $19.9 and $18.1 at fair value at December 31, 2008 and 2007, respectively) 199.7 199.7 — 192.1 192.1 —

Securities borrowed (including $3.4 and zero at fair value atDecember 31, 2008 and 2007, respectively) 42.7 42.7 — 44.0 44.0 —

Trading assets 365.4 365.4 — 390.5 390.5 —Securities 199.7 199.7 — 82.5 82.5 —Loans (included $6.0 and $8.2 at fair value at

December 31, 2008 and 2007, respectively) 645.2 620.4 (24.8) 454.6 454.3 (0.3)Mortgage servicing rights at fair value 9.2 9.2 — 8.6 8.6 —Other (included $1.8 and $1.6 at fair value at

December 31, 2008 and 2007, respectively) 42.9 43.1 0.2 28.4 28.9 0.5

Total financial assets $ 1,702.2 $1,677.6 $(24.6) $ 1,277.1 $ 1,277.3 $ 0.2

Financial liabilitiesDeposits (included $5.6 and $6.5 at fair value at

December 31, 2008 and 2007, respectively)(a) $ 1,055.8 $1,056.7 $ (0.9) $ 772.1 $ 772.7 $ (0.6)Federal funds purchased and securities loaned or sold under

repurchase agreements (included $3.0 and $5.8 at fair value at December 31, 2008 and 2007, respectively) 180.7 180.7 — 118.6 118.6 —

Other borrowed funds (included $2.7 and $10.3 at fair value at December 31, 2008 and 2007, respectively) 95.0 96.7 (1.7) 23.3 23.3 —

Trading liabilities 142.4 142.4 — 143.5 143.5 —Accounts payable and other liabilities 64.7 64.7 — 57.4 57.4 —Beneficial interests issued by consolidated VIEs (included $1.4 and

$2.7 at fair value at December 31, 2008 and 2007, respectively) 4.2 4.1 0.1 6.9 6.9 —Long-term debt and junior subordinated deferrable interest debentures

(included $34.9 and $56.9 at fair value at December 31, 2008and 2007, respectively)(b) 72.5 66.4 6.1 88.2 87.9 0.3

Total financial liabilities $ 1,615.3 $1,611.7 $ 3.6 $ 1,210.0 $ 1,210.3 $ (0.3)

Net (depreciation) appreciation $(21.0) $ (0.1)

(a) The fair value of interest-bearing deposits are estimated by discounting cash flows using the appropriate market rates for the applicable maturity.(b) Fair value for long-term debt, including junior subordinated deferrable interest debentures held by trusts that issued guaranteed capital debt securities, is based upon current market

rates and adjusted for JPMorgan Chase Bank N.A.’s credit quality.

The majority of JPMorgan Chase Bank, N.A.’s unfunded lending-related commitments are not carried at fair value on a recurring basison the Consolidated Balance Sheets nor are they actively traded.Although there is no liquid secondary market for wholesale commit-ments, JPMorgan Chase Bank, N.A. estimates the fair value of itswholesale lending-related commitments primarily using the cost ofcredit derivatives (which is adjusted to account for the difference inrecovery rates between bonds, upon which the cost of credit deriva-tives is based, and loans) and loan equivalents (which represent the

portion of an unused commitment expected, based upon JPMorganChase Bank, N.A.’s average portfolio historical experience, to becomeoutstanding in the event an obligor defaults). On this basis, the esti-mated fair value of JPMorgan Chase Bank, N.A.’s lending-relatedcommitments at December 31, 2008 and 2007, was a liability of$7.5 billion and $1.9 billion, respectively. JPMorgan Chase Bank,N.A. does not estimate the fair value of consumer lending-relatedcommitments. In many cases, JPMorgan Chase Bank, N.A. can reduceor cancel these commitments by providing the borrower prior notice,or, in some cases, without notice as permitted by law.


Note 6 – Fair value optionIn February 2007, the FASB issued SFAS 159, which was effective forfiscal years beginning after November 15, 2007, with early adoptionpermitted. JPMorgan Chase Bank, N.A. chose early adoption for SFAS159 effective January 1, 2007. SFAS 159 provides an option to electfair value as an alternative measurement for selected financial assets,financial liabilities, unrecognized firm commitments, and written loancommitments not previously carried at fair value.

ElectionsThe following is a discussion of the primary financial instruments forwhich fair value elections were made and the basis for those elections:

Loans and unfunded lending-related commitmentsOn January 1, 2007, JPMorgan Chase Bank, N.A. elected to record,at fair value, the following:

• Loans and unfunded lending-related commitments that areextended as part of the investment banking business’ principalinvesting activities. The transition amount related to these loansincluded a reversal of the allowance for loan losses of $56 mil-lion.

• Certain loans held-for-sale. These loans were reclassified to trad-ing assets – debt and equity instruments. This election enabledJPMorgan Chase Bank, N.A. to record loans purchased as part ofthe investment banking business’ commercial mortgage securiti-zation activity and proprietary activities at fair value and discon-tinue SFAS 133 fair value hedge relationships for certain originat-ed loans.

Beginning on January 1, 2007, JPMorgan Chase Bank, N.A. chose toelect fair value as the measurement attribute for the following loansoriginated or purchased after that date:

• Loans purchased or originated as part of the investment bankingbusiness’ securitization warehousing activities.

• Prime mortgage loans originated with the intent to sell within theretail business.

The election to fair value the above loans did not include loanswithin these portfolios that existed on January 1, 2007, based uponthe short holding period of the loans and/or the negligible impact ofthe elections.

Warehouse loans elected to be reported at fair value are classified astrading assets – debt and equity instruments. For additional informa-tion regarding warehouse loans, see Note 17 on pages 47–56 ofthese Consolidated Financial Statements.

Beginning in the third quarter of 2007, JPMorgan Chase Bank, N.A.elected the fair value option for newly originated bridge financingactivity in the investment banking business. These elections weremade to align further the accounting basis of the bridge financingactivities with their related risk management practices. For theseactivities, the loans continue to be classified within loans on theConsolidated Balance Sheets; the fair value of the unfunded commit-ments is recorded within accounts payable and other liabilities.

Securities Financing ArrangementsOn January 1, 2007, JPMorgan Chase Bank, N.A. elected to recordat fair value resale and repurchase agreements with an embeddedderivative or a maturity of greater than one year. The intent of thiselection was to mitigate volatility due to the differences in themeasurement basis for the agreements (which were previouslyaccounted for on an accrual basis) and the associated risk manage-ment arrangements (which are accounted for on a fair value basis).An election was not made for short-term agreements, as the carry-ing value for such agreements generally approximates fair value. Foradditional information regarding these agreements, see Note 14 onpage 42 of these Consolidated Financial Statements.

In the second quarter of 2008, JPMorgan Chase Bank, N.A. beganelecting the fair value option for newly transacted securities bor-rowed and securities lending agreements with a maturity of greaterthan one year. An election was not made for any short-term agree-ments, as the carrying value for such agreements generally approxi-mates fair value.

Structured NotesThe investment banking business issues structured notes as part ofits client-driven activities. Structured notes are financial instrumentsthat contain embedded derivatives and are included in long-termdebt. On January 1, 2007, JPMorgan Chase Bank, N.A. elected torecord at fair value all structured notes not previously elected or eli-gible for election under SFAS 155. The election was made to mitigatethe volatility due to the differences in the measurement basis forstructured notes and the associated risk management arrangementsas well as to eliminate the operational burdens of having differentaccounting models for the same type of financial instrument.

OtherIn the third quarter of 2008, JPMorgan Chase Bank, N.A. elected thefair value option for the ABCP investments purchased under theFederal Reserve’s AML Facility for U.S. money market mutual funds,as well as the related nonrecourse advances from the FederalReserve Bank of Boston (“FRBB”). At December 31, 2008, ABCPinvestments of $130 million were recorded in other assets; the corre-sponding nonrecourse liability to the FRBB in the same amount wasrecorded in other borrowed funds. For further discussion, see Note22 on page 70 of these Consolidated Financial Statements.

In 2008, JPMorgan Chase Bank, N.A. elected the fair value optionfor certain loans acquired as part of the Bear Stearns merger thatwere included in the trading portfolio and for prime mortgages pre-viously designated as held-for-sale by Washington Mutual as part ofthe Washington Mutual transaction. In addition, JPMorgan ChaseBank, N.A. elected the fair value option for certain tax credit andother equity investments acquired as part of the Washington Mutualtransaction.



Determination of instrument-specific credit risk for itemsfor which a fair value election was madeThe following describes how the gains and losses included in earn-ings during 2008 and 2007, which were attributable to changes ininstrument-specific credit risk, were determined.

• Loans and lending-related commitments: For floating-rate instru-ments, all changes in value are attributed to instrument-specificcredit risk. For fixed-rate instruments, an allocation of thechanges in value for the period is made between those changesin value that are interest rate-related and changes in value thatare credit-related. Allocations are generally based upon an analy-sis of borrower-specific credit spread and recovery information,where available, or benchmarking to similar entities or industries.

• Long-term debt: Changes in value attributable to instrument-spe-cific credit risk were derived principally from observable changesin JPMorgan Chase Bank, N.A.’s credit spread. The gain for 2008and 2007 was attributable to the widening of JPMorgan ChaseBank, N.A.’s credit spread.

• Resale and repurchase agreements, securities borrowed agree-ments and securities lending agreements: Generally, for thesetypes of agreements, there is a requirement that collateral bemaintained with a market value equal to or in excess of the prin-cipal amount loaned; as a result, there would be no adjustmentor an immaterial adjustment for instrument-specific credit riskrelated to these agreements.

Difference between aggregate fair value and aggregateremaining contractual principal balance outstanding The following table reflects the difference between the aggregate fairvalue and the aggregate remaining contractual principal balance out-standing as of December 31, 2008 and 2007, for loans and long-term debt for which the SFAS 159 fair value option has been elected.The loans were classified in trading assets – debt and equity instru-ments or in loans.

2008 2007

Principal Other Total changes in Principal Other Total changes inDecember 31, (in millions) transactions(c) income(c) fair value recorded transactions(c) income(c) fair value recorded

Federal funds sold and securities purchased under resale agreements $ 1,116 $ — $ 1,116 $ 564 $ — $ 564

Securities borrowed 29 — 29 — — —

Trading assets:Debt and equity instruments, excluding loans (558) (15)(d) (573) 312 (1)(d) 311Loans reported as trading assets:

Changes in instrument-specific credit risk (8,869) (283)(d) (9,152) (394) (157)(d) (551)Other changes in fair value 786 1,178(d) 1,964 103 1,033(d) 1,136

Loans:Changes in instrument-specific credit risk (1,210) — (1,210) 102 — 102Other changes in fair value (44) — (44) 41 — 41

Other assets — (168)(e) (168) — 10(e) 10

Deposits(a) (117) — (117) (913) — (913)Federal funds purchased and securities loaned or

sold under repurchase agreements (121) — (121) (78) — (78)Other borrowed funds(a) 1,243 — 1,243 (400) — (400)Trading liabilities 14 — 14 (17) — (17)Accounts payable and other liabilities — — — (460) — (460)Beneficial interests issued by consolidated VIEs 421 — 421 (236) — (236)Long-term debt:

Changes in instrument-specific credit risk(a) 797 — 797 698 — 698Other changes in fair value(b) 11,990 — 11,990 (2,165) — (2,165)

(a) Total changes in instrument-specific credit risk related to structured notes were $834 million and $732 million for the years ended December 31, 2008 and 2007, respectively, whichincludes adjustments for structured notes classified within deposits and other borrowed funds, as well as long-term debt.

(b) Structured notes are debt instruments with embedded derivatives that are tailored to meet a client’s need for derivative risk in funded form. The embedded derivative is the primarydriver of risk. The 2008 gain included in “Other changes in fair value” results from a significant decline in the value of certain structured notes where the embedded derivative is prin-cipally linked to either equity indices or commodity prices, both of which declined sharply during the second half of 2008. Although the risk associated with the structured notes isactively managed, the balance reported in this table does not include the income statement impact of such risk management instruments.

(c) Included in the amounts are gains and losses related to certain financial instruments previously carried at fair value by JPMorgan Chase Bank, N.A., such as structured liabilities elect-ed pursuant to SFAS 155 and loans purchased as part of the trading activities of the investment banking business.

(d) Reported in mortgage fees and related income.(e) Reported in other income.

Changes in fair value under the fair value option electionThe following table presents the changes in fair value included in the Consolidated Statements of Income for the years ended December 31, 2008and 2007, for items for which the fair value election was made. The profit and loss information presented below only includes the financial instru-ments that were elected to be measured at fair value; related risk management instruments, which are required to be measured at fair value, arenot included in the table.

The contractual amount of unfunded lending-related commitmentsfor which the fair value option was elected was negligible atDecember 31, 2008. At December 31, 2007, the contractual amountof unfunded lending-related commitments for which the fair valueoption was elected was $1.0 billion with a corresponding fair valueof $25 million. Such commitments are reflected as liabilities andincluded in accounts payable and other liabilities.

Note 7 – Principal transactionsPrincipal transactions revenue predominantly consists of realized andunrealized gains and losses from trading activities (including physicalcommodities inventories that are accounted for at the lower of costor fair value), changes in fair value associated with financial instru-ments held by the investment banking business for which the SFAS159 fair value option was elected, and loans held-for-sale within thewholesale lines of business. For loans measured at fair value underSFAS 159, origination costs are recognized in the associated expensecategory as incurred.

Trading assets and liabilitiesTrading assets include debt and equity instruments held for tradingpurposes that JPMorgan Chase Bank, N.A. owns (“long” positions),certain loans for which JPMorgan Chase Bank, N.A. manages on afair value basis and has elected the SFAS 159 fair value option, andphysical commodities inventories that are accounted for at the lowerof cost or fair value. Trading liabilities include debt and equity instru-ments that JPMorgan Chase Bank, N.A. has sold to other parties butdoes not own (“short” positions). JPMorgan Chase Bank, N.A. isobligated to purchase instruments at a future date to cover the shortpositions. Included in trading assets and trading liabilities are thereported receivables (unrealized gains) and payables (unrealized loss-es) related to derivatives. Trading assets and liabilities are carried atfair value on the Consolidated Balance Sheets. For a discussion ofthe valuation of trading assets and trading liabilities, see Note 5 onpages 13–24 of these Consolidated Financial Statements.


2008 2007Fair value Fair value

Remaining over (under) Remaining over (under) aggregate remaining aggregate remainingcontractual aggregate contractual aggregateprincipal contractual principal contractualamount principal amount amount principal amount

December 31, (in millions) outstanding Fair value outstanding outstanding Fair value outstanding

LoansPerforming loans 90 days or more past due

Loans reported as trading assets $ — $ — $ — $ — $ — $ —Loans — — — 11 11 —

Nonaccrual loansLoans reported as trading assets 2,653 894 (1,759) 2,769 991 (1,778)Loans 22 10 (12) — — —

Subtotal 2,675 904 (1,771) 2,780 1,002 (1,778)All other performing loans

Loans reported as trading assets 34,240 27,841 (6,399) 53,620 54,213 593Loans 7,189 6,028 (1,161) 8,562 8,145 (417)

Total loans $ 44,104 $ 34,773 $ (9,331) $ 64,962 $ 63,360 $ (1,602)

Long-term debtPrincipal protected debt $ (10,411)(b) $ (10,377) $ (34) $ (17,935)(b) $ (17,859) $ (76)Nonprincipal protected debt(a) NA (24,547) NA NA (39,073) NA

Total long-term debt NA $ (34,924) NA NA $ (56,932) NA

FIN 46R long-term beneficial interestsPrincipal protected debt $ — $ — $ — $ (58) $ (58) $ —Nonprincipal protected debt(a) NA (1,364) NA NA (2,669) NA

Total FIN 46R long-term beneficial interests NA $ (1,364) NA NA $ (2,727) NA

(a) Remaining contractual principal is not applicable to nonprincipal protected notes. Unlike principal protected notes for which JPMorgan Chase Bank, N.A. is obligated to return a statedamount of principal at the maturity of the note, nonprincipal protected notes do not obligate JPMorgan Chase Bank, N.A. to return a stated amount of principal at maturity but toreturn an amount based upon the performance of an underlying variable or derivative feature embedded in the note.

(b) Where JPMorgan Chase Bank, N.A. issues principal protected zero coupon or discount notes, the balance reflected as the remaining contractual principal is the final principal paymentat maturity.

The following table presents the fair value of trading assets and trad-ing liabilities for the dates indicated.

December 31, (in millions) 2008 2007

Trading assetsDebt and equity instruments:(a)

U.S. government and federal agency obligations:U.S. treasuries $ 6,419 $ 20,750Mortgage-backed securities 2,462 588Agency obligations — 989

U.S. government-sponsored enterprise obligations:Mortgage-backed securities 8,128 22,282Direct obligations 2,438 944

Obligations of state and political subdivisions 2,062 170Certificates of deposit, bankers’ acceptances

and commercial paper 2,384 3,918Debt securities issued by non-U.S. governments 38,720 67,918Corporate debt securities 52,226 41,940Equity securities 67,320 86,232Loans 28,735 55,204Mortgage-backed securities:

Prime 268 207Alt-A 2 —Subprime 101 —Non-U.S. residential 389 872Commercial 314 229

Asset-backed securities:Credit card receivables 457 99Automobile loans 63 36Other consumer loans 534 298Commercial and industrial loans 1,584 151Collateralized debt obligations 3,745 4,733Other 239 542

Physical commodities 3,455 4,220Other 1,743 5,258


Derivative receivables:Interest rate 63,096 36,876Credit 34,172 20,146Commodity 7,586 7,481Foreign exchange 24,784 5,621Equity 11,939 2,755

Total derivative receivables 141,577 72,879

Total trading assets $ 365,365 $ 390,459


Trading liabilitiesDebt and equity instruments(b) $ 30,912 $ 73,295Derivative payables:

Interest rate 52,642 25,436Credit 14,217 10,601Commodity 4,869 5,301Foreign exchange 23,999 11,820Equity 15,770 17,056

Total derivative payables 111,497 70,214

Total trading liabilities $142,409 $ 143,509

(a) Prior periods have been revised to reflect the current presentation.(b) Primarily represents securities sold, not yet purchased.

Included in trading assets and trading liabilities are the reportedreceivables (unrealized gains) and payables (unrealized losses) relat-ed to derivatives. As permitted under FIN 39, JPMorgan Chase Bank,N.A. has elected to net derivative receivables and derivative payablesand the related cash collateral received and paid when a legallyenforceable master netting agreement exists. The netted amount ofcash collateral received and paid was $102.2 billion and $71.2 bil-lion, respectively, at December 31, 2008, and $34.9 billion and $24.6billion, respectively, at December 31, 2007. JPMorgan Chase Bank,N.A. received and paid excess collateral of $22.2 billion and $3.7 bil-lion, respectively, at December 31, 2008, and $17.4 billion and $2.4billion, respectively, at December 31, 2007. This additional collateralreceived and paid secures potential exposure that could arise in thederivatives portfolio should the mark-to-market of the transactionsmove in JPMorgan Chase Bank, N.A.’s favor or the client’s favor,respectively, and is not nettable against the derivative receivables orpayables in the table above. The above amounts also exclude liquidsecurities held and posted as collateral by JPMorgan Chase Bank,N.A. to secure derivative receivables and derivative payables.Collateral amounts held and posted in securities form are not record-ed on JPMorgan Chase Bank, N.A.’s balance sheet, and are thereforenot nettable against derivative receivables. JPMorgan Chase Bank,N.A. held securities collateral of $19.8 billion and $9.8 billion atDecember 31, 2008 and 2007, respectively, related to derivativereceivables. JPMorgan Chase Bank, N.A. posted $11.7 billion and$5.9 billion of securities collateral at December 31, 2008 and 2007,respectively, related to derivative payables.

Average trading assets and liabilities were as follows for the periodsindicated.


Trading assets – debt and equity instruments $ 268,986 $ 287,089 $211,828

Trading assets – derivative receivables 106,225 60,916 54,603

Trading liabilities – debt and equity instruments(a) $ 55,921 $ 70,341 $ 81,297

Trading liabilities – derivative payables 84,411 63,829 55,206

(a) Primarily represent securities sold, not yet purchased.

Note 8 – Other noninterest revenue Investment banking feesThis revenue category includes advisory and equity and debt under-writing fees. Advisory fees are recognized as revenue when the relatedservices have been performed. Underwriting fees are recognized asrevenue when JPMorgan Chase Bank, N.A. has rendered all services tothe issuer and is entitled to collect the fee from the issuer, as long asthere are no other contingencies associated with the fee (e.g., the feeis not contingent upon the customer obtaining financing).Underwriting fees are net of syndicate expense; JPMorgan ChaseBank, N.A. recognizes credit arrangement and syndication fees as rev-enue after satisfying certain retention, timing and yield criteria.



The following table presents the components of Investment banking fees.


Underwriting:Equity $ 708 $ 999 $ 699Debt 1,171 1,531 1,643

Total underwriting 1,879 2,530 2,342Advisory 796 938 684

Total investment banking fees $ 2,675 $ 3,468 $ 3,026

Lending & deposit-related fees This revenue category includes fees from loan commitments, stand-by letters of credit, financial guarantees, deposit-related fees in lieuof compensating balances, cash management-related activities ortransactions, deposit accounts and other loan-servicing activities.These fees are recognized over the period in which the relatedservice is provided.

Asset management, administration and commissions This revenue category includes fees from investment managementand related services, custody, brokerage services, insurance premiumsand commissions, and other products. These fees are recognized overthe period in which the related service is provided.

The following table presents components of asset management,administration and commissions.

Year ended December 31,(in millions) 2008 2007 2006

Total asset management fees $ 1,509 $ 1,556 $ 877Total administration fees(a) 2,263 2,188 1,801Commission and other fees:

Brokerage commissions 1,780 1,846 1,393All other commissions and fees 4,042 4,186 3,762

Total commissions and fees 5,822 6,032 5,155

Total asset management,administration and commissions $ 9,594 $ 9,776 $ 7,833

(a) Includes fees for custody, securities lending, funds services and broker-dealer clearance.

Mortgage fees and related incomeThis revenue category primarily reflects the retail business’ mortgagebanking revenue, including: fees and income derived from mort-gages originated with the intent to sell; mortgage sales and servic-ing; the impact of risk management activities associated with themortgage pipeline, warehouse loans and MSRs; and revenue relatedto any residual interests held from mortgage securitizations. Thisrevenue category also includes gains and losses on sales and lowerof cost or fair value adjustments for mortgage loans held-for-sale, aswell as changes in fair value for mortgage loans originated with theintent to sell and measured at fair value under SFAS 159. For loansmeasured at fair value under SFAS 159, origination costs are recog-nized in the associated expense category as incurred. Costs to origi-nate loans held-for-sale and accounted for at the lower of cost orfair value are deferred and recognized as a component of the gainor loss on sale. Net interest income from mortgage loans and securi-ties gains and losses on available-for-sale (“AFS”) securities used inmortgage-related risk management activities are recorded in interest

income and securities gains (losses), respectively. For a further discus-sion of MSRs, see Note 19 on pages 66–69 of these ConsolidatedFinancial Statements.

Credit card incomeThe revenue related to credit cards primarily results from a participa-tion arrangement with a bank affiliate of JPMorgan Chase Bank,N.A. and from the acquired Sears credit card business.

This revenue category includes interchange income from credit anddebit cards and servicing fees earned in connection with securitiza-tion activities. Volume-related payments to partners and expense forrewards programs is netted against interchange income; expenserelated to rewards programs is recorded when the rewards areearned by the customer. Other fee revenue is recognized as earned,except for annual fees, which are deferred and recognized on astraight-line basis over the 12-month period to which they pertain.Direct loan origination costs are also deferred and recognized over a12-month period. In addition, due to the consolidation of ChasePaymentech Solutions in the fourth quarter of 2008, this categorynow includes net fees earned for processing card transactions formerchants.

Note 9 – Interest income and Interest expenseDetails of interest income and interest expense were as follows.


Interest income(a)

Loans(b) $31,049 $ 29,784 $ 27,155Securities(b) 6,213 5,145 3,901Trading assets 11,071 11,597 7,015Federal funds sold and securities

purchased under resale agreements 5,805 8,519 7,544Securities borrowed 1,436 2,410 1,794Deposits with banks 1,765 1,385 1,223Interests in purchased receivables(b) — — 652Other assets(c) 98 — —

Total interest income 57,437 58,840 49,284

Interest expense(a)

Interest-bearing deposits 15,705 21,862 16,939Short-term and other liabilities(d) 8,234 11,573 10,966Long-term debt 1,729 1,878 2,101Beneficial interests issued by

consolidated VIEs 252 390 1,143

Total interest expense 25,920 35,703 31,149


Provision for credit losses 14,704 4,672 1,809Provision for credit losses –

accounting conformity(e) 1,534 — —

Total provision for credit losses 16,238 4,672 1,809

Net interest income after provision for credit losses $15,279 $ 18,465 $ 16,326

(a) Interest income and interest expense include the current period interest accruals forfinancial instruments measured at fair value except for financial instruments containingembedded derivatives that would be separately accounted for in accordance with SFAS133 absent the SFAS 159 fair value election; for those instruments, all changes in fairvalue, including any interest elements, are reported in principal transactions revenue.

(b) As a result of restructuring certain multi-seller conduits JPMorgan Chase Bank, N.A.administers, JPMorgan Chase Bank, N.A. deconsolidated $29 billion of interests in pur-




chased receivables, $3 billion of loans and $1 billion of securities and recorded $33billion of lending-related commitments during 2006.

(c) Predominantly margin loans.(d) Includes brokerage customer payables.(e) Includes accounting conformity loan loss reserve provision related to the acquisition of

Washington Mutual’s banking operations.

Note 10 – Pension and other postretirementemployee benefit plansJPMorgan Chase Bank, N.A.’s defined benefit pension plans areaccounted for in accordance with SFAS 87 and SFAS 88, and the U.K.OPEB plan is accounted for in accordance with SFAS 106. InSeptember 2006, the FASB issued SFAS 158, which requires compa-nies to recognize on their Consolidated Balance Sheets the overfund-ed or underfunded status of their defined benefit postretirementplans, measured as the difference between the fair value of planassets and the benefit obligation. SFAS 158 requires unrecognizedamounts (e.g., net loss and prior service costs) to be recognized inaccumulated other comprehensive income (loss) (“AOCI”) and thatthese amounts be adjusted as they are subsequently recognized ascomponents of net periodic benefit cost based upon the currentamortization and recognition requirements of SFAS 87 and SFAS106. JPMorgan Chase Bank, N.A. prospectively adopted SFAS 158 asrequired on December 31, 2006, which resulted in an after-taxcharge to AOCI of $431 million at that date.

SFAS 158 also eliminates the provisions of SFAS 87 and SFAS 106that allow plan assets and obligations to be measured as of a datenot more than three months prior to the reporting entity’s balancesheet date. JPMorgan Chase Bank, N.A. uses a measurement date ofDecember 31 for its defined benefit pension and OPEB plans; there-fore, this provision of SFAS 158 had no effect on JPMorgan ChaseBank, N.A.’s financial statements.

For JPMorgan Chase Bank, N.A.’s defined benefit pension plans, fairvalue is used to determine the expected return on plan assets.Amortization of net gains and losses is included in annual net peri-odic benefit cost if, as of the beginning of the year, the net gain orloss exceeds 10 percent of the greater of the projected benefit obli-gation or the fair value of the plan assets. Any excess, as well asprior service costs, are amortized over the average future serviceperiod of defined benefit pension plan participants, which for theExcess Retirement Plan is currently nine years (the decrease of oneyear from the prior year in the assumptions is related to pension plandemographic assumption revisions at December 31, 2007, to reflectrecent experience relating to form and timing of benefit distributionsand rates of turnover) and for the non-U.S. defined benefit pensionplans is the period appropriate for the affected plan. For the U.K.OPEB plan, any excess net gains and losses also are amortized overthe average remaining life expectancy of benefit recipients, which iscurrently 16 years.

Defined benefit pension plans and OPEB planSubstantially all of JPMorgan Chase Bank, N.A.’s U.S. employees areeligible to participate in JPMorgan Chase’s consolidated, qualified,noncontributory, U.S. defined benefit pension plan. In addition,JPMorgan Chase Bank, N.A. provides postretirement medical and life

insurance benefits to certain retirees and postretirement medicalbenefits to qualifying U.S. employees through JPMorgan Chase. TheseJPMorgan Chase plans are discussed in the JPMorgan Chase pensionand other postretirement employee benefits (“OPEB”) plans sectionbelow.

JPMorgan Chase Bank, N.A. provides pension benefits to qualifyingemployees in various non-U.S. locations and OPEB to qualifyingUnited Kingdom (“U.K.”) employees. The U.K. OPEB plan is unfunded.JPMorgan Chase Bank, N.A. also offers certain qualifying employeesin the U.S. the ability to participate in a number of defined benefitpension plans not subject to Title IV of the Employee RetirementIncome Security Act. The most significant of these plans is the U.S.Excess Retirement Plan, pursuant to which certain employees earnpay and interest credits on compensation amounts above the maxi-mum stipulated by law under a qualified pension plan. The U.S. ExcessRetirement Plan had an unfunded projected benefit obligation in theamount of $191 million and $176 million, at December 31, 2008 and2007, respectively. Effective May 1, 2009, JPMorgan Chase will dis-continue future pay credits under this plan which is expected toreduce 2009 pension expense by approximately $2 million.

It is JPMorgan Chase Bank, N.A.’s policy to fund the U.S. definedbenefit pension plan in amounts sufficient to meet the requirementsfor benefit payments. The estimated amount of 2009 contributions tothe U.S. Excess Retirement Plan is $33 million. It is JPMorgan ChaseBank, N.A.’s policy to fund the non-U.S. defined benefit pensionplans in amounts sufficient to meet the requirements under applica-ble employee benefit and local tax laws. The estimated amount of2009 contributions to the non-U.S. defined benefit plans and U.K.OPEB plan is $46 million.

Defined contribution plansJPMorgan Chase Bank, N.A.’s employees may also participate in sev-eral defined contribution plans offered by JPMorgan Chase in theU.S. and by JPMorgan Chase Bank, N.A. in certain non-U.S. locations,all of which are administered in accordance with applicable locallaws and regulations. The most significant of these plans is TheJPMorgan Chase 401(k) Savings Plan (the “401(k) Savings Plan”),which covers substantially all U.S. employees. The 401(k) SavingsPlan allows employees to make pretax and Roth 401(k) contributionsto tax-deferred investment portfolios. The JPMorgan Chase CommonStock Fund, which is an investment option under the 401(k) SavingsPlan, is a nonleveraged employee stock ownership plan. JPMorganChase Bank, N.A. matches eligible employee contributions up to acertain percentage of benefits-eligible compensation per pay period,subject to plan and legal limits. Employees begin to receive matchingcontributions after completing a one-year-of-service requirement andare immediately vested in JPMorgan Chase Bank, N.A.’s contribu-tions when made. Employees with total annual cash compensation of$250,000 or more are not eligible for matching contributions. The401(k) Savings Plan also permits discretionary profit-sharing contri-butions by participating companies for certain employees, subject toa specified vesting schedule.


The following table presents the changes in benefit obligations and plan assets and funded status amounts reported on the Consolidated BalanceSheets for JPMorgan Chase Bank, N.A.’s U.S. and non-U.S. defined benefit pension plans and U.K. OPEB plan.

Defined benefit pension plans

As of or for the year ended December 31, U.S. Non-U.S. U.K. OPEB plan

(in millions) 2008 2007 2008 2007 2008 2007

Change in benefit obligationBenefit obligation, beginning of year $ (276) $ (301) $ (2,743) $ (2,917) $ (49) $ (52)Benefits earned during the year (5) (7) (29) (36) — —Interest cost on benefit obligations (18) (16) (142) (144) (3) (3)Plan amendments — — — 2 — —Liabilities of newly material plans — — — (5) — —Employee contributions NA NA (3) (3) — —Net gain (loss) (23) 25 214 327 4 4Benefits paid 27 30 105 90 3 3Curtailments — — — 4 — —Settlements — — — 24 — —Special termination benefits — — (3) (1) — —Foreign exchange impact and other — (7) 594 (84) 13 (1)

Benefit obligation, end of year $ (295) $ (276) $ (2,007) $ (2,743) $ (32) $ (49)

Change in plan assetsFair value of plan assets, beginning of year $ — $ — $ 2,933 $ 2,813 $ — $ —Actual return on plan assets — — (298) 57 — —JPMorgan Chase Bank N.A. contributions 27 30 88 92 3 3Employee contributions — — 3 3 — —Assets of newly material plans — — — 3 — —Benefits paid (27) (30) (105) (90) (3) (3)Settlements — — — (24) — —Foreign exchange impact and other — — (613) 79 — —

Fair value of plan assets, end of year $ — $ — $ 2,008 $ 2,933 $ — $ —

Funded (unfunded) status(a) $ (295) $ (276) $ 1 $ 190 $ (32) $ (49)

Accumulated benefit obligation, end of year $ (291) $ (273) $ (1,977) $ (2,708) NA NA

(a) Represents overfunded plans with an aggregate balance of $59 million and $260 million at December 31, 2008 and 2007, respectively, and underfunded plans with an aggregate bal-ance of $385 million and $395 million at December 31, 2008 and 2007, respectively.

The following table presents pretax pension and OPEB amounts recorded in AOCI.


As of the year ended December 31, U.S. Non-U.S. U.K. OPEB plan

(in millions) 2008 2007 2008 2007 2008 2007

Net (loss) gain $ (36) $ (14) $ (487) $ (434) $ 9 $ 8Prior service cost (credit) (2) (2) 2 2 — —

Accumulated other comprehensive income(loss), pretax, end of year $ (38) $ (16) $ (485) $ (432) $ 9 $ 8

JPMorgan Chase has made changes to the 401(k) Savings Plan with respect to the level and frequency of the employer match basedon eligible compensation levels, which will become effective on

May 1, 2009. Since these changes provide for discretion in the leveland frequency of the employer match, the impact on 2009 definedcontribution plan expense is indeterminable at this time.



The following table presents the components of net periodic benefit costs reported in the Consolidated Statements of Income and other compre-hensive income for JPMorgan Chase Bank, N.A.’s U.S. and non-U.S. defined benefit pension plans and U.K. OPEB plan.


U.S. Non-U.S. U.K. OPEB plan

Year ended December 31, (in millions) 2008 2007 2006 2008 2007 2006 2008 2007 2006

Components of net periodic benefit costBenefits earned during the year $ 5 $ 7 $ 3 $ 29 $ 36 $ 37 $ — $ — $ —Interest cost on benefit obligations 18 16 15 142 144 120 3 3 2Expected return on plan assets — — — (152) (153) (122) — — —Amortization of net loss — — — 25 55 45 — — —Curtailment loss — — — — — 1 — — —Settlement (gain) loss — — — — (1) 4 — — —Special termination benefits — — — 3 1 1 — — —

Net periodic benefit cost 23 23 18 47 82 86 3 3 2Other defined benefit pension plans(a) 14 8 — 14 19 11 NA NA NA

Total defined benefit plans 37 31 18 61 101 97 3 3 2Total defined contribution plans 209 217 203 286 196 198 NA NA NA

Total pension and OPEB cost included incompensation expense $ 246 $ 248 $ 221 $ 347 $ 297 $ 295 $ 3 $ 3 $ 2

Changes in plan assets and benefitobligations recognized in other comprehensive incomeNet (gain) loss arising during the year $ 22 $ (25) NA $ 230 $(175) NA $ (1) $ (4) NAPrior service credit arising during the year — — NA — (2) NA — — NAAmortization of net loss — — NA (27) (55) NA — — NACurtailment gain — — NA — (5) NA — — NASettlement loss — — NA — 1 NA — — NAForeign exchange impact and other — (8) NA (150) — NA — — NA

Total recognized in other comprehensive income 22 (33) NA 53 (236) NA (1) (4) NA

Total recognized in net periodic benefit cost and other comprehensive income $ 45 $ (10) NA $ 100 $(154) NA $ 2 $ (1) NA

(a) Includes various defined benefit pension plans, which are individually immaterial.

It is expected that $42 million, pretax, of net loss related to non-U.S.defined benefit pension plans recorded in AOCI at December 31,2008, will be recognized in earnings during 2009.

Plan assumptionsJPMorgan Chase Bank, N.A.’s expected long-term rate of return forits non-U.S. defined benefit pension plans’ assets is a blended aver-age of the investment advisor’s projected long-term (10 years ormore) returns for the various asset classes, weighted by the assetallocation. Returns on asset classes are developed using a forward-looking building-block approach and are not strictly based upon his-torical returns. For the U.K. defined benefit pension plans, which rep-resent the most significant of JPMorgan Chase Bank, N.A.’s non-U.S.defined benefit pension plans, procedures are used to develop theexpected long-term rate of return on defined benefit plan assets tak-ing into consideration local market conditions and the specific alloca-tion of plan assets. The expected long-term rate of return on planassets is an average of projected long-term returns for each assetclass. The return on equities has been selected by reference to theyield on long-term U.K. government bonds plus an equity risk premi-um above the risk-free rate. The return on “AA”-rated long-term cor-

porate bonds has been taken as the average yield on such bonds,adjusted for the expected downgrades and the expected narrowingof credit spreads over the long-term.

The discount rate used in determining the benefit obligation underthe U.S. Excess Retirement Plan was selected by reference to theyields on portfolios of bonds with maturity dates and coupons thatclosely match the plan’s projected cash flows; such portfolios arederived from a broad-based universe of high-quality corporate bondsas of the measurement date. In years in which these hypotheticalbond portfolios generates excess cash, such excess is assumed to bereinvested at the one-year forward rates implied by the CitigroupPension Discount Curve published as of the measurement date. Thediscount rate for the U.K. defined benefit pension and OPEB plansrepresents a rate implied from the yield curve of the year-end iBoxx £corporate “AA” 15-year-plus bond index (adjusted for expecteddowngrades in the underlying bonds comprising the index) with aduration corresponding to that of the underlying benefit obligations.


The following tables present the weighted-average annualized actuarial assumptions for the projected and accumulated postretirement benefitobligations and the components of net periodic benefit costs for the U.S. and non-U.S. defined benefit pension and U.K. OPEB plans, as of and forthe periods indicated.

Weighted-average assumptions used to determine benefit obligationsU.S. Non-U.S.

December 31, 2008 2007 2008 2007

Discount rate:Defined benefit pension plans 6.65% 6.60% 2.00-6.20% 2.25-5.80%OPEB plan NA NA 6.20 5.80

Rate of compensation increase 4.00 4.00 3.00-4.00 3.00-4.25Health care cost trend rate:

Assumed for next year NA NA 7.00 5.75Ultimate NA NA 5.50 4.00Year when rate will reach ultimate NA NA 2012 2010

Weighted-average assumptions used to determine net periodic benefit costsU.S. Non-U.S.

Year ended December 31, 2008 2007 2006 2008 2007 2006

Discount rate:Defined benefit pension plans 6.60% 5.95% 5.70% 2.25-5.80% 2.25-5.10% 2.00-4.70%OPEB plan NA NA NA 5.80 5.10 4.70

Expected long-term rate of return on plan assets:Defined benefit pension plans NA NA NA 3.25-5.75 3.25-5.60 3.25-5.50OPEB plan NA NA NA NA NA NA

Rate of compensation increase 4.00 4.00 4.00 3.00-4.25 3.00-4.00 3.00-3.75Health care cost trend rate:

Assumed for next year NA NA NA 5.75 6.63 7.50Ultimate NA NA NA 4.00 4.00 4.00Year when rate will reach ultimate NA NA NA 2010 2010 2010

The following table presents the effect of a one-percentage-pointchange in the assumed health care cost trend rate on JPMorganChase Bank, N.A.’s total service and interest cost and accumulatedpostretirement benefit obligation.

For the year ended 1-Percentage- 1-Percentage-December 31, 2008 point point (in millions) increase decrease

Effect on total service and interest cost $ — $ —Effect on accumulated postretirement

benefit obligation 3 (3)

At December 31, 2008, JPMorgan Chase Bank, N.A. increased thediscount rates used to determine its benefit obligations for the U.S.Excess Retirement Plan based upon current market interest rates,which will result in an immaterial decrease in expense for 2009. Asof December 31, 2008, the interest crediting rate assumption andthe assumed rate of compensation increase remained at 5.25% and4.00%, respectively.

A 25-basis point decline in the discount rate for the U.S ExcessRetirement Plan would result in an immaterial increase in expensefor 2009. JPMorgan Chase Bank, N.A.’s non-U.S. defined benefitpension plans expense is sensitive to changes in the discount rate. A25-basis point decline in the discount rates for the non-U.S. planswould result in an increase in the 2009 non-U.S. defined benefit pen-sion and OPEB plan expense of approximately $10 million. A 25-

point basis point increase in the interest crediting rate for the U.S.Excess Retirement Plan would result in an immaterial increase in2009 U.S. defined benefit pension expense and an immaterialincrease in the related projected benefit obligation.

Investment strategy and asset allocation The investment policy for JPMorgan Chase Bank, N.A.’s employeebenefit plan assets is to optimize the risk-return relationship asappropriate to the respective plan’s needs and goals, using a globalportfolio of various asset classes diversified by market segment, eco-nomic sector, and issuer. Specifically, the goal is to optimize theasset mix for future benefit obligations, while managing various riskfactors and each plan’s investment return objectives. Plan assets aremanaged by a combination of internal and external investment man-agers and are rebalanced within approved ranges on a continuousbasis. JPMorgan Chase reviews the allocation daily and all factorsthat impact portfolio changes to ensure the Plan stays within theseranges, rebalancing when deemed necessary. Assets of the non-U.S.defined benefit pension plans are held in various trusts and areinvested in well-diversified portfolios of equity, fixed income andother securities. As of December 31, 2008, assets held by JPMorganChase Bank, N.A.’s non-U.S. defined benefit pension plans do notinclude JPMorgan Chase common stock, except in connection withinvestments in third-party stock-index funds.

The following table presents the weighted-average asset allocationof the fair values of plan assets at December 31 for the years indicat-ed, and the respective approved target allocation by asset category.

Non-U.S. defined benefit pension plans

Target % of plan assetsDecember 31, Allocation 2008 2007

Asset categoryDebt securities 68% 73% 70%Equity securities 27 21 25Real estate 1 1 1Alternatives 4 5 4

Total 100% 100% 100%

The following table presents the actual rate of return on plan assetsfor the non-U.S. defined benefit pension plans.

Non-U.S. defined benefit pension plans

December 31, 2008 2007 2006

Actual rate of return (21.58)-5.06% 0.06-7.51% 2.80-7.30%

Estimated future benefit payments The following table presents benefit payments expected to be paid,which include the effect of expected future service, for the yearsindicated.

Year ended U.S. Non-U.S.December 31, defined benefit defined benefit U.K.(in millions) pension plans pension plans OPEB plan

2009 $ 28 $ 88 $ 22010 25 94 22011 23 99 22012 24 102 22013 24 107 2Years 2014–2018 130 571 13

JPMorgan Chase pension and OPEB plans JPMorgan Chase Bank, N.A.’s U.S. employees are eligible to partici-pate in JPMorgan Chase’s U.S. consolidated, qualified, noncontribu-tory defined benefit pension plan. In addition, qualifying U.S. employ-ees may receive medical and life insurance benefits that are providedthrough JPMorgan Chase’s U.S. OPEB plan. Benefits vary with lengthof service and date of hire and provide for limits on JPMorgan ChaseBank, N.A.’s share of covered medical benefits. The medical benefitsare contributory, while the life insurance benefits are noncontributo-ry. Pension expense and postretirement medical benefit expense isdetermined based upon participation and effected through an inter-company charge from JPMorgan Chase.

JPMorgan Chase Bank, N.A. was charged $215 million, $213 millionand $211 million in 2008, 2007 and 2006, respectively, for its shareof the U.S. qualified defined benefit pension plan expense; and it wascharged $8 million, $10 million and $6 million in 2008, 2007 and2006, respectively, for its share of the U.S. OPEB plan expense.

On January 15, 2009, JPMorgan Chase made a discretionary cashcontribution to its U.S. defined benefit pension plan of $1.3 billion,funding the plan to the maximum allowable amount under applica-

ble tax law. JPMorgan Chase Bank, N.A. was not allocated any por-tion of this discretionary cash contribution.

Consolidated disclosures of information about the pension and OPEBplans of JPMorgan Chase, including the funded status of the plans,components of benefit cost and weighted-average actuarial assump-tions are included in Note 9 on pages 149–155 of JPMorgan Chase’s2008 Annual Report on Form 10-K.

Note 11 – Employee stock-based incentives JPMorgan Chase Bank, N.A.’s employees receive annual incentivecompensation based on their performance, the performance of theirbusiness and JPMorgan Chase’s consolidated operating results.JPMorgan Chase Bank, N.A.’s employees participate, to the extentthey meet minimum eligibility requirements, in various benefit planssponsored by JPMorgan Chase. For additional information regardingJPMorgan Chase’s employee stock-based incentives, see Note 10 onpages 155–158 of JPMorgan Chase’s Annual Report on Form 10-Kfor the year ended December 31, 2008.

Effective January 1, 2006, JPMorgan Chase Bank, N.A., adopted SFAS123R and all related interpretations using the modified prospectivetransition method. SFAS 123R requires all share-based payments toemployees, including employee stock options and stock appreciationrights (“SARs”), to be measured at their grant date fair values.JPMorgan Chase also adopted the transition election provided by FSPFAS 123(R)-3. The pool of tax benefits calculated under FSP 123(R)-3was allocated to JPMorgan Chase Bank, N.A. by JPMorgan Chasebased on the percentage of stock compensation expense incurred byJPMorgan Chase Bank, N.A. in relation to the total.

Upon adopting SFAS 123R, JPMorgan Chase Bank, N.A. began to rec-ognize in the Consolidated Statements of Income compensationexpense for unvested stock options previously accounted for underAPB 25. Additionally, JPMorgan Chase Bank, N.A. recognized as com-pensation expense an immaterial cumulative effect adjustment result-ing from the SFAS 123R requirement to estimate forfeitures at thegrant date instead of recognizing them as incurred. Finally, JPMorganChase Bank, N.A. revised its accounting policies for share-based pay-ments granted to employees eligible for continued vesting under spe-cific age and service or service-related provisions (“full-career eligibleemployees”) under SFAS 123R. Prior to adopting SFAS 123R,JPMorgan Chase Bank, N.A.’s accounting policy for share-based pay-ment awards granted to full-career eligible employees was to recog-nize compensation cost over the award’s stated service period.Beginning with awards granted to full-career eligible employees in2006, JPMorgan Chase Bank, N.A. recognized compensation expenseon the grant date without giving consideration to the impact of postemployment restrictions. In the first quarter of 2006, JPMorgan ChaseBank, N.A. also began to accrue the estimated cost of stock awardsgranted to full-career eligible employees in the following year.

In June 2007, the FASB ratified EITF 06-11, which requires that real-ized tax benefits from dividends or dividend equivalents paid onequity-classified share-based payment awards that are charged toretained earnings should be recorded as an increase to additionalpaid-in capital and included in the pool of excess tax benefits avail-



In January 2008, JPMorgan Chase awarded to its Chairman and ChiefExecutive Officer up to two million SARs. The terms of this award aredistinct from, and more restrictive than, other equity grants regularlyawarded by JPMorgan Chase. The SARs, which have a ten-year term,will become exercisable no earlier than January 22, 2013, and havean exercise price of $39.83, the price of JPMorgan Chase commonstock on the date of the award. The number of SARs that willbecome exercisable (ranging from none to the full two million) andtheir exercise date or dates will be determined by JPMorgan Chase’sBoard of Directors based on an assessment of the performance ofboth the CEO and JPMorgan Chase. That assessment will be made byJPMorgan Chase’s Board in the year prior to the fifth anniversary ofthe date of the award, relying on such factors that in its sole discre-tion the Board deems appropriate. Due to the substantial uncertaintysurrounding the number of SARs that will ultimately be granted andtheir exercise dates, a grant date has not been established foraccounting purposes. However, since the service inception date pre-cedes the grant date, JPMorgan Chase Bank, N.A. will recognize thisaward ratably over an assumed five-year service period, subject to arequirement to recognize changes in the fair value of the awardthrough the grant date. JPMorgan Chase Bank, N.A. recognized $1 million in compensation expense in 2008 for this award.

RSU activityCompensation expense for RSUs is measured based upon the num-ber of shares granted multiplied by JPMorgan Chase’s stock price atthe grant date, and is recognized in net income as previouslydescribed. The following table summarizes JPMorgan Chase Bank,N.A.’s RSU activity for 2008.

Year ended December 31, 2008Weighted-

(in thousands, except weighted Number of average grantaverage data) shares date fair value

Outstanding, January 1 62,542 $ 43.05Granted 48,967 40.06Vested (22,811) 38.76Forfeited (4,060) 42.93Transferred 1,465 42.36

Outstanding, December 31 86,103 $ 42.48

The total fair value of shares that vested during the years endedDecember 31, 2008, 2007 and 2006 was $1.0 billion, $1.0 billionand $871 million, respectively.


able to absorb tax deficiencies on share-based payment awards. Priorto the issuance of EITF 06-11, JPMorgan Chase did not include thesetax benefits as part of this pool of excess tax benefits. JPMorganChase adopted EITF 06-11 on January 1, 2008. The adoption of thisconsensus did not have an impact on JPMorgan Chase’sConsolidated Balance Sheets or results of operations.

Employee stock-based awardsIn 2008, 2007 and 2006, JPMorgan Chase granted long-term stock-based awards to certain key employees under the 2005 Long-TermIncentive Plan (the “2005 Plan”). The 2005 Plan, plus priorJPMorgan Chase plans and plans assumed as the result of acquisi-tions, constitute JPMorgan Chase’s stock-based incentive plans (“LTIPlan”). The 2005 Plan became effective on May 17, 2005, afterapproval by shareholders at the 2005 annual meeting. In May 2008,the 2005 Plan was amended and under the terms of the amendedplan as of December 31, 2008, 348 million shares of common stockare available for issuance through May 2013. The amended 2005Plan is the only active plan under which JPMorgan Chase is currentlygranting stock-based incentive awards.

Restricted stock units (“RSUs”) are awarded at no cost to the recipi-ent in connection with JPMorgan Chase’s annual incentive grant.RSUs generally vest 50 percent after two years and 50 percent afterthree years and convert to shares of JPMorgan Chase common stockat the vesting date. In addition, RSUs typically include full-career eli-gibility provisions, which allow employees to continue to vest uponvoluntary termination, subject to post-employment and other restric-tions. All of these awards are subject to forfeiture until the vestingdate. An RSU entitles the recipient to receive cash payments equiva-lent to any dividends paid on the underlying common stock duringthe period the RSU is outstanding.

Under the LTI Plan, stock options and SARs have been granted withan exercise price equal to the fair value of JPMorgan Chase’s com-mon stock on the grant date. JPMorgan Chase typically awards SARsto certain key employees once per year, and it also periodically grantsdiscretionary stock-based incentive awards to individual employees,primarily in the form of both employee stock options and SARs. The2008 and 2007 grants of SARs to key employees vests ratably overfive years (i.e., 20 percent per year) and the 2006 awards vest one-third after each of years three, four and five. These awards do notinclude any full-career eligibility provisions and all awards generallyexpire ten years after the grant date.

JPMorgan Chase Bank, N.A. separately recognizes compensationexpense for each tranche of each award as if it were a separateaward with its own vesting date. For each tranche granted (otherthan grants to employees who are full-career eligible at the grantdate), compensation expense is recognized on a straight-line basisfrom the grant date until the vesting date of the respective tranche,provided that the employees will not become full-career eligible dur-ing the vesting period. For each tranche granted to employees whowill become full-career eligible during the vesting period, compensa-tion expense is recognized on a straight-line basis from the grantdate until the earlier of the employee’s full-career eligibility date orthe vesting date of the respective tranche.

Impact of adoption of SFAS 123RDuring 2006, the incremental expense related to JPMorgan ChaseBank, N.A.’s adoption of SFAS123R was $506 million. This amountrepresents an accelerated recognition of costs that would otherwisehave been incurred in future periods. Also as a result of adopting SFAS123R, JPMorgan Chase Bank, N.A.’s income from continuing opera-tions (pretax) for the year ended December 31, 2006, was lower by$506 million, and income from continuing operations (after-tax), aswell as net income, for the year ended December 31, 2006, was lowerby $314 million, than if JPMorgan Chase Bank, N.A. had continued toaccount for share-based incentives under APB 25 and SFAS 123.

Compensation expenseJPMorgan Chase Bank, N.A. recognized compensation expense relat-ed to its various employee stock-based incentive awards of $1.6 bil-lion, $1.3 billion and $1.6 billion (including the $506 million incre-mental impact of adopting SFAS 123R) for the years endedDecember 31, 2008, 2007 and 2006, respectively, in its ConsolidatedStatements of Income. These amounts included an accrual for theestimated cost of stock awards to be granted to full-career eligibleemployees of $259 million, $324 million and $355 million for theyears ended December 31, 2008, 2007 and 2006 respectively. At



Employee stock option and SARs activityCompensation expense, which is measured at the grant date as the fair value of employee stock options and SARs, is recognized in net income asdescribed above.

The following table summarizes JPMorgan Chase Bank, N.A.’s employee stock option and SARs activity for the year ended December 31, 2008,including awards granted to key employees and awards granted in prior years under broad-based plans.

Year ended December 31, 2008(in thousands, except Number of Weighted-average Weighted-average Aggregateweighted-average data) options/SARs exercise price remaining contractual life (in years) intrinsic value

Outstanding, January 1 262,694 $ 41.53Granted 6,614 40.89Exercised (28,143) 33.61Forfeited (2,192) 42.82Canceled (13,920) 43.96Transferred(a) (262) 193.78

Outstanding, December 31 224,791 $ 42.61 3.5 $ 189,898Exercisable, December 31 192,343 42.46 2.7 189,898

(a) Includes a transfer in of Bear Stearns awards of 139,936 options/SARs with a weighted-average exercise price of $461.81.

The weighted-average grant date per share fair value of stock options and SARs granted during the years ended December 31, 2008, 2007 and2006 was $9.94, $13.32 and $10.86, respectively. The total intrinsic value of options exercised during the years ended December 31, 2008, 2007and 2006 was $315 million, $740 million and $778 million, respectively.

December 31, 2008, approximately $1.0 billion (pretax) of compen-sation cost related to unvested awards has not yet been charged tonet income. That cost is expected to be amortized into compensationexpense over a weighted-average period of 1.3 years. JPMorganChase Bank, N.A. does not capitalize any compensation cost relatedto share-based compensation awards to employees.

Tax benefitsThe total income tax benefit related to stock-based incentivearrangements recognized in JPMorgan Chase Bank, N.A.’sConsolidated Statements of Income for the years ended December31, 2008, 2007 and 2006, was $651 million, $524 million and $622million, respectively. Pursuant to an informal tax sharing agreementbetween JPMorgan Chase Bank, N.A. and its parent, JPMorganChase, excess tax benefits related to share-based incentive awards,determined in accordance with SFAS 123R, are recorded byJPMorgan Chase. In addition, the above compensation expense allo-cated to JPMorgan Chase Bank, N.A. was cash-settled in accordancewith the aforementioned tax sharing arrangement through cash pay-ments made by JPMorgan Chase Bank, N.A. to JPMorgan Chase.

Valuation assumptionsThe following table presents the assumptions used by JPMorganChase to value employee stock options and SARs granted during theperiod under the Black-Scholes valuation model.

Year ended December 31, 2008 2007 2006

Weighted-average annualizedvaluation assumptionsRisk-free interest rate 3.80% 4.78% 5.11%Expected dividend yield 3.53 3.18 2.89Expected common stock

price volatility 34 33 23Expected life (in years) 6.8 6.8 6.8

Prior to the adoption of SFAS 123R, JPMorgan Chase used the his-torical volatility of its common stock price as the expected volatilityassumption in valuing options. JPMorgan Chase completed a reviewof its expected volatility assumption in 2006. Effective October 1,2006, JPMorgan Chase Bank, N.A. began to value its employee stockoptions granted or modified after that date using an expected

volatility assumption derived from the implied volatility of JPMorganChase’s publicly traded stock options.

The expected life assumption is an estimate of the length of timethat an employee might hold an option or SAR before it is exercisedor canceled. The expected life assumption was developed using his-toric experience.

Note 12 – Noninterest expenseMerger costsCosts associated with the Bear Stearns merger and the WashingtonMutual transaction in 2008, the 2004 merger with Bank OneCorporation, and The Bank of New York transaction in 2006 arereflected in the merger costs caption of the Consolidated Statementsof Income. For a further discussion of the Bear Stearns merger andthe Washington Mutual transaction, see Note 3 on pages 10–12 ofthese Consolidated Financial Statements. A summary of merger-relatedcosts is shown in the following table.


2008

Year ended December 31, (in millions) Bear Stearns Washington Mutual Total 2007(b) 2006(b)

Expense categoryCompensation $ 32 $ 113 $ 145 $ (20) $ 51Occupancy 40 — 40 17 24Technology and communications and other 34 10 44 175 182The Bank of New York transaction — — — 22 14

Total(a) $ 106 $ 123 $ 229 $ 194 $ 271

(a) With the exception of occupancy and technology-related write-offs, all of the costs in the table required the expenditure of cash.(b) The 2007 and 2006 activity reflect the 2004 merger with Bank One Corporation and 2006 The Bank of New York transaction.


2008

Year ended December 31, (in millions) Bear Stearns Washington Mutual Total 2007(a) 2006(a)

Merger reserve balance, beginning of period $ — $ — $ — $ 155 $ 306Recorded as merger costs 106 123 229 172 257Included in net assets acquired — 430 430 (44) —Utilization of merger reserve (42) (112) (154) (283) (408)

Merger reserve balance, end of period $ 64 $ 441 $ 505 $ —(b) $ 155(b)

(a) The 2007 and 2006 activity reflect the 2004 merger with Bank One Corporation.(b) Excludes $10 million and $21 million at December 31, 2007 and 2006, respectively, related to The Bank of New York transaction.

Note 13 – Securities Securities are classified as AFS, held-to-maturity (“HTM”) or trading.Trading securities are discussed in Note 6 on pages 25–27 of theseConsolidated Financial Statements. Securities are classified primarilyas AFS when used to manage JPMorgan Chase Bank, N.A.’s expo-sure to interest rate movements, as well as to make strategic longer-term investments. AFS securities are carried at fair value on theConsolidated Balance Sheets. Unrealized gains and losses, after anyapplicable SFAS 133 hedge accounting adjustments, are reported asnet increases or decreases to accumulated other comprehensiveincome (loss). The specific identification method is used to determinerealized gains and losses on AFS securities, which are included insecurities gains (losses) on the Consolidated Statements of Income.Securities that JPMorgan Chase Bank, N.A. has the positive intent

and ability to hold to maturity are classified as HTM and are carriedat amortized cost on the Consolidated Balance Sheets. JPMorganChase Bank, N.A. has not classified new purchases of securities asHTM for the past several years.



Realized gains $ 1,569 $ 525 $ 375Realized losses (241) (475) (925)

Net realized securities gains (losses)(a) $ 1,328 $ 50 $ (550)

(a) Proceeds from securities sold were within approximately 2% of amortized cost.




2008 2007

Gross Gross Gross GrossAmortized unrealized unrealized Fair Amortized unrealized unrealized Fair

December 31, (in millions) cost gains losses value cost gains losses value

Available-for-sale securitiesU.S. government and federal agency obligations:

U.S. treasuries $ 537 $ 2 $ 7 $ 532 $ 2,374 $ 14 $ 2 $ 2,386Mortgage-backed securities 6,281 148 5 6,424 8 1 — 9Agency obligations 69 13 — 82 73 9 — 82Collateralized mortgage obligations 557 9 8 558 — — — —

U.S. government-sponsored enterprise obligations:Mortgage-backed securities 108,360 2,257 214 110,403 62,505 641 55 63,091Direct obligations(a) 9,717 37 90 9,664 6 2 — 8

Obligations of state and political subdivisions 931 13 31 913 52 — 1 51Certificates of deposit 17,226 64 8 17,282 2,040 — — 2,040Debt securities issued by non-U.S. governments 8,173 173 2 8,344 6,804 18 28 6,794Corporate debt securities 9,310 256 61 9,505 1,927 1 4 1,924Equity securities 1,794 1 7 1,788 2,005 53 1 2,057Mortgage-backed securities:

Prime 7,762 4 1,739 6,027 3,551 7 5 3,553Subprime — — — — — — — —Alt-A 1,064 — 196 868 — — — —Non-U.S. residential 2,233 24 182 2,075 — — — —Commercial 4,623 — 684 3,939 — — — —

Asset-backed securities:Credit card receivables 11,446 8 1,986 9,468 475 — 32 443Other consumer loans 730 2 106 626 — — — —Commercial and industrial loans 11,847 168 820 11,195 — — — —Other 18 — 1 17 29 — — 29

Total available-for-sale securities $ 202,678 $3,179 $ 6,147 $ 199,710 $ 81,849 $ 746 $ 128 $ 82,467

Held-to-maturity securities(b) $ 34 $ 1 $ — $ 35 $ 44 $ 1 $ — $ 45

(a) Consists primarily of mortgage-related obligations.(b) Consists primarily of mortgage-backed securities issued by U.S. government-sponsored entities.


The following table presents the fair value and gross unrealized losses for AFS securities by aging category at December 31.

Securities with gross unrealized losses

Less than 12 months 12 months or more TotalGross Gross Total Gross

Fair unrealized Fair unrealized Fair unrealized2008 (in millions) value losses value losses value losses


U.S. treasuries $ 249 $ 7 $ — $ — $ 249 $ 7Mortgage-backed securities 2,043 5 — — 2,043 5Agency obligations — — — — — —Collateralized mortgage obligations 427 8 — — 427 8

U.S. government-sponsored enterprise obligations:Mortgage-backed securities 3,547 211 468 3 4,015 214Direct obligations 7,410 90 — — 7,410 90

Obligations of state and political subdivisions 312 25 16 6 328 31Certificates of deposit 382 8 — — 382 8Debt securities issued by non-U.S. governments 308 1 74 1 382 2Corporate debt securities 532 54 30 7 562 61Equity securities 19 7 — — 19 7Mortgage-backed securities:

Prime 5,386 1,642 333 97 5,719 1,739Subprime — — — — — —Alt-A 868 196 — — 868 196Non-U.S. residential 1,908 182 — — 1,908 182Commercial 3,939 684 — — 3,939 684

Asset-backed securities:Credit card receivables 8,191 1,792 282 194 8,473 1,986Other consumer loans 558 106 — — 558 106Commercial and industrial loans 9,059 820 — — 9,059 820Other — — 17 1 17 1

Total securities with gross unrealized losses $45,138 $ 5,838 $ 1,220 $ 309 $ 46,358 $ 6,147







U.S. treasuries $ 163 $ 2 $ — $ — $ 163 $ 2Mortgage-backed securities — — — — — —Agency obligations — — — — — —Collateralized mortgage obligations — — — — — —

U.S. government-sponsored enterprise obligations:Mortgage-backed securities — — 1,345 55 1,345 55Direct obligations — — — — — —

Obligations of state and political subdivisions 21 1 — — 21 1Certificates of deposit 1,102 — — — 1,102 —Debt securities issued by non-U.S. governments 335 3 1,928 25 2,263 28Corporate debt securities 1,126 3 183 1 1,309 4Equity securities — — 4 1 4 1Mortgage-backed securities:

Prime 1,313 5 — — 1,313 5Subprime — — — — — —Alt-A — — — — — —Non-U.S. residential — — — — — —Commercial — — — — — —

Asset-backed securities:Credit card receivables 443 32 — — 443 32Other consumer loans — — — — — —Commercial and industrial loans — — — — — —Other 29 — — — 29 —

Total securities with gross unrealized losses $ 4,532 $ 46 $ 3,460 $ 82 $ 7,992 $ 128

AFS securities in unrealized loss positions are analyzed in depth aspart of JPMorgan Chase Bank, N.A.’s ongoing assessment of other-than-temporary impairment. Potential other-than-temporary impair-ment of AFS securities is considered using a variety of factors, includ-ing the length of time and extent to which the market value hasbeen less than cost; the financial condition and near-term prospectsof the issuer or underlying collateral of a security; and JPMorganChase Bank, N.A.’s intent and ability to retain the security in order toallow for an anticipated recovery in fair value. Where applicableunder EITF Issue 99-20, JPMorgan Chase Bank, N.A. estimates thecash flows over the life of the security to determine if any adversechanges have occurred that require an other-than-temporary impair-ment charge. JPMorgan Chase Bank, N.A. applies EITF Issue 99-20 tobeneficial interests in securitizations that are rated below “AA” atacquisition or that can be contractually prepaid or otherwise settled

in such a way that JPMorgan Chase Bank, N.A. would not recover sub-stantially all of its recorded investment. JPMorgan Chase Bank, N.A.considers a decline in fair value to be other-than-temporary if it is prob-able that JPMorgan Chase Bank, N.A. will not recover its recordedinvestment, including as applicable under EITF Issue 99-20, when anadverse change in cash flows has occurred.

JPMorgan Chase Bank, N.A.’s analysis of the financial condition andnear term prospects of the issuer or underlying collateral of a securitynoted above includes analysis of performance indicators relevant to thespecific investment. For asset-backed investments, such relevant perform-ance indicators may include ratings, valuation of subordinated positionsin current and/or stress scenarios, excess spread or overcollateralizationlevels, and whether certain protective triggers have been reached. Formortgage-backed investments, such relevant performance indicators may


include ratings, prepayment speeds, delinquencies, default rates, lossseverities, geographic concentration, and forecasted performanceunder various home price decline stress scenarios.

As of December 31, 2008, approximately $309 million of the unreal-ized losses relate to securities that have been in an unrealized lossposition for longer than 12 months, and primarily relate to prime mort-gage-backed securities and credit card-related asset-backed securities.The prime mortgage-backed securities are primarily rated “AAA”, whilethe credit card-related asset-backed securities are rated “BBB”. Basedupon the analyses described above, which have been applied to thesesecurities, JPMorgan Chase Bank, N.A. believes that the unrealizedlosses result from liquidity conditions in the current market environ-ment and not from concerns regarding the credit of the issuers orunderlying collateral. JPMorgan Chase Bank, N.A. does not believe it isprobable that it will not recover its investments, given the current lev-els of collateral and credit enhancements that exist to protect theinvestments. For securities analyzed for impairment under EITF 99-20,the collateral and credit enhancement features are at levels sufficientto ensure that an adverse change in expected future cash flows hasnot occurred.

As of December 31, 2008, approximately $5.8 billion of the unreal-ized losses relate to securities that have been in an unrealized lossposition for less than 12 months; these losses largely relate to creditcard-related asset-backed securities, mortgage-backed securitiesissued by private issuers and commercial and industrial asset-backedsecurities. Of the $1.7 billion of unrealized losses related to creditcard-related asset-backed securities, $1.6 billion relates to purchasedcredit card-related asset-backed securities, and $133 million relates to

retained interests in JPMorgan Chase Bank, N.A.’s own credit cardreceivable securitizations. The credit card-related asset-backed securi-ties include “AAA”, “A” and “BBB” ratings. Based on the levels ofexcess spread available to absorb credit losses, and based on thevalue of interests subordinate to JPMorgan Chase Bank, N.A.’s inter-ests where applicable, JPMorgan Chase Bank, N.A. does not believe itis probable that it will not recover its investments. Where applicableunder EITF 99-20, the collateral and credit enhancement features areat levels sufficient to ensure that an adverse change in expectedfuture cash flows has not occurred. Of the remaining unrealized lossesas of December 31, 2008, related to securities that have been in anunrealized loss position for less than 12 months, $2.7 billion relatesto mortgage-backed securities issued by private issuers and $820 mil-lion relates to commercial and industrial asset-backed securities. Themortgage-backed securities and commercial and industrial asset-backed securities are predominantly rated “AAA”. Based on an analy-sis of the performance indicators noted above for mortgage-backedsecurities and asset-backed securities, which have been applied to theloans underlying these securities, JPMorgan Chase Bank, N.A. doesnot believe it is probable that it will not recover its investments inthese securities.

JPMorgan Chase Bank, N.A. intends to hold the securities in an unreal-ized loss position for a period of time sufficient to allow for an antici-pated recovery in fair value or maturity. JPMorgan Chase Bank, N.A.has sufficient capital and liquidity to hold these securities until recoveryin fair value or maturity. Based on JPMorgan Chase Bank, N.A.’s evalu-ation of the factors and other objective evidence described above,JPMorgan Chase Bank, N.A. believes that the securities are not other-than-temporarily impaired as of December 31, 2008.

The following table presents the amortized cost, estimated fair value and average yield at December 31, 2008, of JPMorgan Chase Bank, N.A.’sAFS and HTM securities by contractual maturity.

By remaining maturity at Available-for-sale securities Held-to-maturity securities

December 31, 2008 Amortized Fair Average Amortized Fair Average(in millions, except ratios) cost value yield(b) cost value yield(b)

Due in one year or less $ 22,108 $ 22,178 2.57% $ — $ — —%Due after one year through five years 25,569 24,601 2.43 — — —Due after five years through ten years 12,887 12,255 3.78 31 32 6.88Due after ten years(a) 142,114 140,676 5.25 3 3 5.70

Total securities $ 202,678 $ 199,710 4.51% $ 34 $ 35 6.78%

(a) Includes securities with no stated maturity. Substantially all of JPMorgan Chase Bank, N.A.’s mortgage-backed securities and collateralized mortgage obligations are due in ten years ormore based upon contractual maturity. The estimated duration, which reflects anticipated future prepayments based upon a consensus of dealers in the market, is approximately fouryears for mortgage-backed securities and collateralized mortgage obligations.

(b) The average yield is based upon amortized cost balances at year-end. Yields are derived by dividing interest income by total amortized cost. Taxable-equivalent yields are used whereapplicable.

Note 14 – Securities financing activitiesJPMorgan Chase Bank, N.A. enters into resale agreements, repur-chase agreements, securities borrowed transactions and securitiesloaned transactions, primarily to finance JPMorgan Chase Bank,N.A.’s inventory positions, acquire securities to cover short positionsand settle other securities obligations. JPMorgan Chase Bank, N.A.also enters into these transactions to accommodate customers’needs.

Resale agreements and repurchase agreements are generally treatedas collateralized financing transactions carried on the ConsolidatedBalance Sheets at the amounts the securities will be subsequentlysold or repurchased, plus accrued interest. On January 1, 2007, pur-suant to the adoption of SFAS 159, JPMorgan Chase Bank, N.A.elected fair value measurement for certain resale and repurchaseagreements. In 2008, JPMorgan Chase Bank, N.A. elected fair valuemeasurement for certain newly transacted securities borrowed andsecurities lending agreements. For a further discussion of SFAS 159,see Note 6 on pages 25–27 of these Consolidated FinancialStatements. The securities financing agreements for which the fairvalue option was elected continue to be reported within securitiespurchased under resale agreements; securities loaned or sold underrepurchase agreements; securities borrowed; and other borrowedfunds on the Consolidated Balance Sheets. Generally, for agreementscarried at fair value, current-period interest accruals are recordedwithin interest income and interest expense, with changes in fairvalue reported in principal transactions revenue. However, for finan-cial instruments containing embedded derivatives that would be sep-arately accounted for in accordance with SFAS 133, all changes infair value, including any interest elements, are reported in principaltransactions revenue. Where appropriate, resale and repurchaseagreements with the same counterparty are reported on a net basisin accordance with FIN 41. JPMorgan Chase Bank, N.A. takes pos-session of securities purchased under resale agreements. On a dailybasis, JPMorgan Chase Bank, N.A. monitors the market value of theunderlying collateral, primarily U.S. and non-U.S. government andagency securities, that it has received from its counterparties, andrequests additional collateral when necessary.

Transactions similar to financing activities that do not meet the SFAS140 definition of a repurchase agreement are accounted for as“buys” and “sells” rather than financing transactions. These transac-tions are accounted for as a purchase (sale) of the underlying securi-ties with a forward obligation to sell (purchase) the securities. Theforward purchase (sale) obligation, a derivative, is recorded on theConsolidated Balance Sheets at its fair value, with changes in fairvalue recorded in principal transactions revenue.

Securities borrowed and securities lent are recorded at the amountof cash collateral advanced or received. Securities borrowed consistprimarily of government and equity securities. JPMorgan Chase Bank,N.A. monitors the market value of the securities borrowed and lenton a daily basis and calls for additional collateral when appropriate.Fees received or paid in connection with securities borrowed and lentare recorded in interest income or interest expense.

The following table details the components of collateralized financings.


Securities purchased under resale agreements(a) $ 196,867 $ 185,680Securities borrowed(b) 42,658 44,051

Securities sold under repurchase agreements(c) $ 158,655 $ 90,756Securities loaned 8,896 8,628

(a) Includes resale agreements of $19.9 billion and $18.1 billion accounted for at fairvalue at December 31, 2008 and 2007, respectively.

(b) Includes securities borrowed of $3.4 billion accounted for at fair value at December31, 2008.

(c) Includes repurchase agreements of $3.0 billion and $5.8 billion accounted for at fairvalue at December 31, 2008 and 2007, respectively.

JPMorgan Chase Bank, N.A. pledges certain financial instruments itowns to collateralize repurchase agreements and other securitiesfinancings. Pledged securities that can be sold or repledged by thesecured party are identified as financial instruments owned (pledgedto various parties) on the Consolidated Balance Sheets.

At December 31, 2008, JPMorgan Chase Bank, N.A. received securi-ties as collateral that could be repledged, delivered or otherwiseused with a fair value of approximately $275.9 billion. This collateralwas generally obtained under resale or securities borrowing agree-ments. Of these securities, approximately $249.0 billion wererepledged, delivered or otherwise used, generally as collateral underrepurchase agreements, securities lending agreements or to covershort sales.

Note 15 – LoansThe accounting for a loan may differ based upon whether it is origi-nated or purchased and as to whether the loan is used in an invest-ing or trading strategy. For purchased loans held-for-investment, theaccounting also differs depending on whether a loan is credit-impaired at the date of acquisition. Purchased loans with evidence ofcredit deterioration since the origination date and for which it isprobable, at acquisition, that all contractually required paymentsreceivable will not be collected are considered to be credit-impaired.The measurement framework for loans in these ConsolidatedFinancial Statements is one of the following:

• At the principal amount outstanding, net of the allowance forloan losses, unearned income and any net deferred loan fees orcosts, for loans held for investment (other than purchased credit-impaired loans);

• At the lower of cost or fair value, with valuation changes record-ed in noninterest revenue, for loans that are classified as held-for-sale; or




• At fair value, with changes in fair value recorded in noninterestrevenue, for loans classified as trading assets or risk managed ona fair value basis;

• Purchased credit-impaired loans held for investment are account-ed for under SOP 03-3 and initially measured at fair value, whichincludes estimated future credit losses. Accordingly, an allowancefor loan losses related to these loans is not recorded at theacquisition date.

See Note 6 on pages 25–27 of these Consolidated FinancialStatements for further information on JPMorgan Chase Bank, N.A.’selections of fair value accounting under SFAS 159. See Note 7 onpages 27–28 of these Consolidated Financial Statements for furtherinformation on loans carried at fair value and classified as tradingassets.

For loans held for investment, other than purchased credit-impairedloans, interest income is recognized using the interest method or on abasis approximating a level rate of return over the term of the loan.

Loans within the held-for-investment portfolio that managementdecides to sell are transferred to the held-for-sale portfolio. Transfersto held-for-sale are recorded at the lower of cost or fair value on thedate of transfer. Credit-related losses are charged off to theallowance for loan losses, and losses due to changes in interestrates, or exchange rates, are recognized in noninterest revenue.

Loans within the held-for-sale portfolio that management decides toretain are transferred to the held-for-investment portfolio at thelower of cost or fair value. These loans are subsequently assessed forimpairment based on JPMorgan Chase Bank, N.A.’s allowancemethodology. For a further discussion of the methodologies used inestablishing JPMorgan Chase Bank, N.A.’s allowance for loan losses,see Note 16 on pages 46–47 of these Consolidated FinancialStatements.

Nonaccrual loans are those on which the accrual of interest is dis-continued. Loans (other than certain consumer and purchased credit-impaired loans discussed below) are placed on nonaccrual statusimmediately if, in the opinion of management, full payment of princi-pal or interest is in doubt, or when principal or interest is 90 days ormore past due and collateral, if any, is insufficient to cover principaland interest. Loans are charged off to the allowance for loan losseswhen it is highly certain that a loss has been realized. Interestaccrued but not collected at the date a loan is placed on nonaccrualstatus is reversed against interest income. In addition, the amortiza-tion of net deferred loan fees is suspended. Interest income onnonaccrual loans is recognized only to the extent it is received incash. However, where there is doubt regarding the ultimate col-lectibility of loan principal, all cash thereafter received is applied toreduce the carrying value of such loans (i.e., the cost recoverymethod). Loans are restored to accrual status only when future pay-ments of interest and principal are reasonably assured.

Consumer loans, other than purchased credit-impaired loans, aregenerally charged to the allowance for loan losses upon reachingspecified stages of delinquency, in accordance with the FederalFinancial Institutions Examination Council policy. For example, creditcard loans are charged off by the end of the month in which theaccount becomes 180 days past due or within 60 days from receiv-ing notification of the filing of bankruptcy, whichever is earlier.Residential mortgage products are generally charged off to net real-izable value at no later than 180 days past due. Other consumerproducts, if collateralized, are generally charged off to net realizablevalue at 120 days past due. Accrued interest on residential mortgageproducts, automobile financings, student loans and certain other con-sumer loans are accounted for in accordance with the nonaccrualloan policy discussed in the preceding paragraph. Interest and feesrelated to credit card loans continue to accrue until the loan ischarged off or paid in full. Accrued interest on all other consumerloans is generally reversed against interest income when the loan ischarged off. A collateralized loan is reclassified to assets acquired inloan satisfactions, within other assets, only when JPMorgan ChaseBank, N.A. has taken physical possession of the collateral, regardlessof whether formal foreclosure proceedings have taken place.

For purchased credit-impaired loans, the excess of the loan’s cashflows expected to be collected over the initial fair value (i.e., the acc-retable yield) is accreted into interest income at a level rate of returnover the term of the loan, provided that the timing and amount offuture cash flows is reasonably estimable. On a periodic basis,JPMorgan Chase Bank, N.A. updates the amount of cash flowsexpected to be collected for these loans, incorporating assumptionsregarding default rates, loss severities, the amounts and timing ofprepayments and other factors that are reflective of current marketconditions. Probable and significant increases in cash flows previouslyexpected to be collected would first be used to reverse any relatedvaluation allowance; any remaining increases are recognizedprospectively as interest income. Probable decreases in expected cashflows after the acquisition date, excluding decreases related torepricings of variable rate loans, are recognized through theallowance for loan losses. Disposals of loans, which may includesales of loans, receipt of payments in full by the borrower, or foreclo-sure, result in removal of the loan from the SOP 03-3 portfolio.

With respect to purchased credit-impaired loans, when the timingand/or amounts of expected cash flows on such loans are not rea-sonably estimable, no interest is accreted and the loan is reported asa nonperforming loan; otherwise, if the timing and amounts ofexpected cash flows for purchased credit-impaired loans are reason-ably estimable, then interest is accreted and the loans are reportedas performing loans.

The composition of JPMorgan Chase Bank, N.A.’s aggregate loanportfolio at each of the dates indicated was as follows.


U.S. wholesale loans:Commercial and industrial $ 66,592 $ 53,924Real estate 63,944 16,628Financial institutions 19,902 14,593Government agencies 4,725 4,881Other 20,883 25,653Loans held-for-sale and at fair value 3,225 13,840

Total U.S. wholesale loans 179,271 129,519

Non-U.S. wholesale loans:Commercial and industrial 27,168 27,026Real estate 2,673 3,559Financial institutions 16,413 16,691Government agencies 403 520Other 18,516 21,850Loans held-for-sale and at fair value 8,743 8,889

Total non-U.S. wholesale loans 73,916 78,535

Total wholesale loans:(a)

Commercial and industrial 93,760 80,950Real estate(b) 66,617 20,187Financial institutions 36,315 31,284Government agencies 5,128 5,401Other 39,399 47,503Loans held-for-sale and at fair value(c) 11,968 22,729

Total wholesale loans 253,187 208,054

Total consumer loans:Home equity 114,335 94,832Prime mortgage 72,168 39,875Subprime mortgage 15,326 15,467Option ARMs 9,018 —Auto loans 42,603 42,349Credit card(d) 31,141 31,824Other 33,693 25,272Loans held-for-sale(e) 2,028 3,989

Total consumer loans – excluding purchased credit-impaired 320,312 253,608

Consumer loans – purchased credit-impaired 88,813 NA

Total consumer loans 409,125 253,608

Total loans(a)(f) $ 662,312 $ 461,662

(a) Includes purchased credit-impaired loans of $224 million at December 31, 2008,acquired in the Washington Mutual transaction.

(b) Represents credits extended for real estate-related purposes to borrowers who areprimarily in the real estate development or investment businesses and for which therepayment is predominantly from the sale, lease, management, operations or refi-nancing of the property.

(c) Includes loans for commercial & industrial, real estate, financial institutions and other of$9.2 billion, $423 million, $1.4 billion and $995 million at December 31, 2008, respec-tively, and $18.9 billion, $513 million, $732 million and $2.5 billion at December 31,2007 respectively.

(d) Includes billed finance charges and fees net of an allowance for uncollectible amounts.(e) Includes loans for prime mortgage and other (largely student loans) of $206 million and

$1.8 billion at December 31, 2008, respectively, and $570 million and $3.4 billion atDecember 31, 2007, respectively.

(f) Loans (other than purchased loans and those for which the SFAS 159 fair value optionhas been elected) are presented net of deferred loan costs (which includes unearnedincome) of $152 million and $199 million at December 31, 2008 and 2007, respectively.

The following table reflects information about JPMorgan ChaseBank, N.A.’s loan sales.


Net gains/(losses) on sales of loans (includinglower of cost or fair value adjustments)(a) $ (2,664) $ (81) $ 631

(a) Excludes sales related to loans accounted for at fair value.

Purchased credit-impaired loansIn connection with the Washington Mutual transaction, JPMorganChase Bank, N.A. acquired certain loans that it deemed to be credit-impaired under SOP 03-3. Wholesale loans with a carrying amountof $224 million at December 31, 2008, were determined to be cred-it-impaired at the date of acquisition in accordance with SFAS 114.These wholesale loans are being accounted for individually (not on apooled basis) and are reported as nonperforming loans since cashflows for each individual loan are not reasonably estimable. Suchloans are excluded from the remainder of the following discussion,which relates solely to purchased credit-impaired consumer loans.

Purchased credit-impaired consumer loans were determined to becredit-impaired based upon specific risk characteristics of the loan,including product type, loan-to-value ratios, FICO scores, and pastdue status. SOP 03-3 allows purchasers to aggregate credit-impairedloans acquired in the same fiscal quarter into one or more pools,provided that the loans have common risk characteristics. A pool isthen accounted for as a single asset with a single composite interestrate and an aggregate expectation of cash flows. With respect to theWashington Mutual transaction, all of the consumer loans wereaggregated into pools of loans with common risk characteristics.

The table below sets forth information about these purchased credit-impaired consumer loans at the acquisition date.

(in millions) September 25, 2008(a)(b)

Contractually required payments receivable(including interest) $ 168,460Less: Nonaccretable difference (45,690)

Cash flows expected to be collected(c) 122,770Less: Accretable yield(d) (32,662)

Fair value of loans acquired $ 90,108

(a) Date of the Washington Mutual transaction.(b) The amounts in the table above were revised in the fourth quarter of 2008 due to

JPMorgan Chase Bank, N.A.’s refinement of both estimates and its application of certain provisions of SOP 03-3.

(c) Represents undiscounted principal and interest cash flows expected at acquisition.(d) This amount is recognized into interest income over the estimated life of the underly-

ing loans.

JPMorgan Chase Bank, N.A. determined the fair value of the pur-chased credit-impaired consumer loans by discounting the cash flowsexpected to be collected at a market observable discount rate, whenapplicable, adjusted for factors that a market participant would con-sider in determining fair value. In determining the cash flows expect-ed to be collected, management incorporated assumptions regardingdefault rates, loss severities and the amounts and timing of prepay-ments. Contractually required payments were determined followingthe same process used to estimate cash flows expected to be collect-ed, but without incorporating assumptions related to default ratesand loss severities.



Purchased credit-impaired loans acquired in the Washington Mutualtransaction are reported in loans on JPMorgan Chase Bank, N.A.’sConsolidated Balance Sheets. Following the initial acquisition date ofthese loans, the allowance for loan losses, if any is required, wouldbe reported as a reduction of the carrying amount of the loans. Noallowance has been recorded for these loans as of December 31,2008. The outstanding balance and the carrying value of the pur-chased credit-impaired consumer loans were as follows.

December 31, (in millions) 2008

Outstanding balance(a) $ 118,180Carrying amount 88,813

(a) Represents the sum of principal and earned interest at the reporting date.

Interest income is being accreted on the purchased credit-impairedconsumer loans based on JPMorgan Chase Bank, N.A.’s belief thatboth the timing and amount of cash flows expected to be collectedis reasonably estimable. For variable rate loans, expected future cashflows are based on the current contractual rate of the underlyingloans.

The table below sets forth the accretable yield activity for these loansfor the year ended December 31, 2008.

Accretable Yield Activity(in millions)

Balance, September 30, 2008 $ 32,662Accretion into interest income (1,292)Changes in interest rates on variable rate loans (4,877)

Balance, December 31, 2008 $ 26,493

Impaired loansA loan is considered impaired when, based upon current informationand events, it is probable that JPMorgan Chase Bank, N.A. will beunable to collect all amounts due (including principal and interest)according to the contractual terms of the loan agreement. Impairedloans include certain nonaccrual wholesale loans and loans for whicha charge-off has been recorded based upon the fair value of theunderlying collateral. Impaired loans also include loans that havebeen modified in troubled debt restructurings as a concession to bor-rowers experiencing financial difficulties. Troubled debt restructuringstypically result from JPMorgan Chase Bank, N.A.’s loss mitigationactivities and could include rate reductions, principal forgiveness, for-bearance and other actions intended to minimize the economic lossand to avoid foreclosure or repossession of collateral. WhenJPMorgan Chase Bank, N.A. modifies home equity lines of credit introubled debt restructurings, future lending commitments related tothe modified loans are canceled as part of the terms of the modifica-tion. Accordingly, JPMorgan Chase Bank, N.A. does not have futurecommitments to lend additional funds related to these modifiedloans. Purchased credit-impaired loans are not required to be report-ed as impaired loans as long as it is probable that JPMorgan ChaseBank, N.A. expects to collect all cash flows expected at acquisition,plus additional cash flows expected to be collected arising fromchanges in estimates after acquisition. Accordingly, none of the cred-it-impaired loans acquired in the Washington Mutual transaction arereported in the following tables.

Interest income on impaired loans is recognized based on JPMorganChase Bank, N.A.’s policy for recognizing interest on accrual andnonaccrual loans. Certain loans that have been modified throughtroubled debt restructurings accrue interest under this policy.

The tables below set forth information about JPMorgan Chase’simpaired loans, excluding credit card loans which are discussedbelow. JPMorgan Chase Bank, N.A. primarily uses the discountedcash flow method for valuing impaired loans.


Impaired loans with an allowance:Wholesale $ 1,999 $ 429Consumer(a) 2,252 322

Total impaired loans with an allowance(b) 4,251 751

Impaired loans without an allowance:(c)

Wholesale 62 28Consumer(a) — —

Total impaired loans without an allowance 62 28

Total impaired loans(b) $ 4,313 $ 779

Allowance for impaired loans under SFAS 114:Wholesale $ 712 $ 108Consumer(a) 379 116

Total allowance for impaired loans under SFAS 114(d) $ 1,091 $ 224


Average balance of impaired loans during the period:

Wholesale $ 887 $ 316 $ 696Consumer(a) 1,211 317 300

Total impaired loans(b) $ 2,098 $ 633 $ 996

Interest income recognized on impaired loans during the period:

Wholesale $ — $ — $ 2Consumer(a) 57 — —

Total interest income recognized on impaired loans during the period $ 57 $ — $ 2

(a) Excludes credit card loans.(b) In 2008, methodologies for calculating impaired loans have changed. Prior periods

have been revised to conform to current presentation.(c) 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 underSFAS 114.

(d) The allowance for impaired loans under SFAS 114 is included in JPMorgan ChaseBank, N.A.’s allowance for loan losses. The allowance for certain consumer impairedloans has been categorized in the allowance for loan losses as formula-based.

During 2008, loss mitigation efforts related to delinquent mortgageand home equity loans increased substantially, resulting in a signifi-cant increase in consumer troubled debt restructurings. In the fourthquarter of 2008, JPMorgan Chase Bank, N.A. announced plans tofurther expand loss mitigation efforts related to these portfolios,including plans to open regional counseling centers, hire additionalloan counselors, introduce new financing alternatives, proactivelyreach out to borrowers to offer pre-qualified modifications, and com-mence a new process to independently review each loan before mov-ing it into the foreclosure process. These loss mitigation efforts,which generally represent various forms of term extensions, rate


recorded for purchased credit-impaired loans accounted for in accor-dance with SOP 03-3 if there are probable decreases in expectedfuture cash flows other than decreases related to repricing of vari-able rate loans. Any required allowance would be measured basedon the present value of expected cash flows discounted at the loan’s(or pool’s) effective interest rate. For additional information on pur-chased credit-impaired loans, see Note 15 on pages 42–46 of theseConsolidated Financial Statements.

The formula-based component covers performing wholesale and con-sumer loans. For risk-rated loans (generally loans originated by thewholesale business), it is based on a statistical calculation, which isadjusted to take into consideration model imprecision, external factorsand current economic events that have occurred but are not yetreflected in the factors used to derive the statistical calculation. Thestatistical calculation is the product of probability of default (“PD”)and loss given default (“LGD”). These factors are differentiated by riskrating and expected maturity. PD estimates are based on observableexternal data, primarily credit-rating agency default statistics. LGDestimates are based on a study of actual credit losses over more thanone credit cycle. For scored loans (generally loans originated by theconsumer lines of business), loss is primarily determined by applyingstatistical loss factors, including loss frequency and severity factors, topools of loans by asset type. In developing loss frequency and severityassumptions, known and anticipated changes in the economic envi-ronment, including changes in housing prices, unemployment ratesand other risk indicators, are considered. Multiple forecasting meth-ods are used to estimate statistical losses, including credit loss fore-casting models and vintage-based loss forecasting.

Management applies its judgment within specified ranges to adjustthe statistical calculation. Where adjustments are made to the statis-tical calculation for the risk-rated portfolios, the determination of theappropriate point within the range are based upon management’squantitative and qualitative assessment of the quality of underwrit-ing standards; relevant internal factors affecting the credit quality ofthe current portfolio; and external factors such as current macroeco-nomic and political conditions that have occurred but are not yetreflected in the loss factors. Factors related to concentrated anddeteriorating industries are also incorporated into the calculation,where relevant. Adjustments to the statistical calculation for thescored loan portfolios are accomplished in part by analyzing the his-torical loss experience for each major product segment. The specificranges and the determination of the appropriate point within therange are based upon management’s view of uncertainties thatrelate to current macroeconomic and political conditions, the qualityof underwriting standards, and other relevant internal and externalfactors affecting the credit quality of the portfolio.

The allowance for lending-related commitments represents manage-ment’s estimate of probable credit losses inherent in JPMorganChase Bank, N.A.’s process of extending credit. Management estab-lishes an asset-specific allowance for lending-related commitmentsthat are considered impaired and computes a formula-basedallowance for performing wholesale lending-related commitments.



reductions and forbearances, are expected to result in additionalincreases in the balance of modified loans carried on JPMorgan ChaseBank, N.A.’s balance sheet, including loans accounted for as troubleddebt restructurings, while minimizing the economic loss to JPMorganChase Bank, N.A. and providing alternatives to foreclosure.

JPMorgan Chase Bank, N.A. may modify the terms of its credit cardloan agreements with borrowers who have experienced financial dif-ficulty. Such modifications may include canceling the customer’savailable line of credit on the credit card, reducing the interest rateon the card, and placing the customer on a fixed payment plan notexceeding 60 months. If the cardholder does not comply with themodified terms, then the credit card loan agreement will revert backto its original terms, with the amount of any loan outstandingreflected in the appropriate delinquency “bucket” and the loanamounts then charged-off in accordance with JPMorgan Chase Bank,N.A.’s standard charge-off policy. Under these procedures, $842 mil-lion and $563 million of on-balance sheet credit card loan outstand-ings have been modified at December 31, 2008 and 2007, respec-tively. In accordance with JPMorgan Chase Bank, N.A.’s methodologyfor determining its consumer allowance for loan losses, JPMorganChase Bank, N.A. had already provisioned for these credit card loans;the modifications to these credit card loans had no incrementalimpact on JPMorgan Chase Bank, N.A.’s allowance for loan losses.

Note 16 – Allowance for credit lossesDuring 2008, in connection with the Washington Mutual transaction,JPMorgan Chase Bank, N.A. recorded adjustments to its provision forcredit losses in the aggregate amount of $1.5 billion to conform theWashington Mutual loan loss reserve methodologies to the appropri-ate JPMorgan Chase Bank, N.A. methodology, based upon the natureand characteristics of the underlying loans. This amount included anadjustment of $646 million to the wholesale provision for credit loss-es and an adjustment of $888 million to the consumer provision forcredit losses. JPMorgan Chase Bank, N.A.’s methodologies for deter-mining its allowance for credit losses, which have been applied to theWashington Mutual loans, are described more fully below.

JPMorgan Chase Bank, N.A.’s allowance for loan losses covers thewholesale (risk-rated) and consumer (scored) loan portfolios and rep-resents management’s estimate of probable credit losses inherent inJPMorgan Chase Bank, N.A.’s loan portfolio. Management also com-putes an allowance for wholesale lending-related commitmentsusing a methodology similar to that used for the wholesale loans.

The allowance for loan losses includes an asset-specific componentand a formula-based component. The asset-specific componentrelates to provisions for losses on loans considered impaired andmeasured pursuant to SFAS 114. An allowance is established whenthe discounted cash flows (or collateral value or observable marketprice) of the loan is lower than the carrying value of that loan. Tocompute the asset-specific component of the allowance, largerimpaired loans are evaluated individually, and smaller impaired loansare evaluated as a pool using historical loss experience for therespective class of assets. An allowance for loan losses will also be


These are computed using a methodology similar to that used for thewholesale loan portfolio, modified for expected maturities and proba-bilities of drawdown.

Determining the appropriateness of the allowance is complex andrequires judgment by management about the effect of matters thatare inherently uncertain. Subsequent evaluations of the loan portfo-lio, in light of the factors then prevailing, may result in significantchanges in the allowances for loan losses and lending-related com-mitments in future periods.

At least quarterly, the allowance for credit losses is reviewed by theChief Risk Officer, the Chief Financial Officer and the Controller ofJPMorgan Chase and discussed with the Risk Policy and AuditCommittees of the Board of Directors of JPMorgan Chase. As ofDecember 31, 2008, JPMorgan Chase Bank, N.A. deemed theallowance for credit losses to be appropriate (i.e., sufficient to absorblosses that are inherent in the portfolio, including those not yet iden-tifiable).



Allowance for loan losses at January 1 $ 7,015 $ 5,170 $ 4,857

Cumulative effect of change inaccounting principles(a) — (56) —

Allowance for loan losses at January 1, adjusted 7,015 5,114 4,857

Gross charge-offs 7,425 2,956 2,025Gross (recoveries) (539) (487) (565)

Net charge-offs 6,886 2,469 1,460Provision for loan losses

Provision excluding accounting conformity 14,922 4,346 1,690

Provision for loan losses – accounting conformity(b) 1,577 — —

Total provision for loan losses 16,499 4,346 1,690Addition resulting from

Washington Mutual transaction 2,535 — —Other(c) (2,010) 24 83

Allowance for loan losses at December 31 $ 17,153 $ 7,015 $ 5,170

Components:Asset-specific $ 786 $ 188 $ 118Formula-based 16,367 6,827 5,052

Total Allowance for loan losses $ 17,153 $ 7,015 $ 5,170

(a) Reflects the effect of the adoption of SFAS 159 at January 1, 2007. For a further discussion of SFAS 159, see Note 6 on pages 25–27 of these Consolidated FinancialStatements.

(b) Relates to the Washington Mutual transaction in 2008.(c) The 2008 amount primarily represents the sale by JPMorgan Chase Bank, N.A. of

credit card-related assets, acquired in the Washington Mutual transaction, to ChaseBank USA, N.A. of $(1,996) million (see Note 3 on pages 10–12 of theseConsolidated Financial Statements) and foreign exchange translation of $(16) million.The 2007 amount represents the transfer of auto-related assets from JPMorganChase to JPMorgan Chase Bank, N.A. of $19 million and foreign exchange transla-tion of $11 million, partly offset by a transfer of loans to trading assets of $6 million.The 2006 amount represents The Bank of New York transaction.

The table below summarizes the changes in the allowance for lend-ing-related commitments.


Allowance for lending-related commitments at January 1 $ 849 $ 523 $ 397

Provision for lending-related commitments Provision excluding accounting

conformity (218) 326 119Provision for lending-related commitments

– accounting conformity(a) (43) — —

Total provision for lending-relatedcommitments (261) 326 119

Addition resulting from Washington Mutual 66 — —Other(b) 2 — 7

Allowance for lending-related commitments at December 31 $ 656 $ 849 $ 523

Components:Asset-specific $ 29 $ 28 $ 33Formula-based 627 821 490

Total allowance for lending-related commitments $ 656 $ 849 $ 523

(a) Related to the Washington Mutual transaction.(b) The 2006 amount represents The Bank of New York transaction.

Note 17 – Loan securitizations JPMorgan Chase Bank, N.A. securitizes and sells a variety of loans,including residential mortgage, credit card, automobile, student, andcommercial loans (primarily related to real estate). JPMorgan ChaseBank, N.A.-sponsored securitizations utilize SPEs as part of the securi-tization process. These SPEs are structured to meet the definition of aQSPE (as discussed in Note 1 on page ## of these ConsolidatedFinancial Statements); accordingly, the assets and liabilities of securiti-zation-related QSPEs are not reflected on JPMorgan Chase Bank,N.A.’s Consolidated Balance Sheets (except for retained interests, asdescribed below). The primary purpose of these securitization vehiclesis to meet investor needs and to generate liquidity for JPMorganChase Bank, N.A. through the sale of loans to the QSPEs. TheseQSPEs are financed through the issuance of fixed- or floating-rateasset-backed securities.

JPMorgan Chase Bank, N.A. records a loan securitization as a salewhen the accounting criteria for a sale are met. Those criteria are:(1) the transferred assets are legally isolated from JPMorgan ChaseBank, N.A.’s creditors; (2) the entity can pledge or exchange thefinancial assets, or if the entity is a QSPE, its investors can pledge orexchange their interests; and (3) JPMorgan Chase Bank, N.A. doesnot maintain effective control to repurchase the transferred assetsbefore their maturity or have the ability to unilaterally cause theholder to return the transferred assets.



For loan securitizations that meet the accounting sales criteria, thegains or losses recorded depend, in part, on the carrying amount ofthe loans sold except for servicing assets which are initially recordedat fair value. At the time of sale, any retained servicing asset is initiallyrecognized at fair value. The remaining carrying amount of the loanssold is allocated between the loans sold and the other interestsretained, based upon their relative fair values on the date of sale.Gains on securitizations are reported in noninterest revenue.

When quoted market prices are not available, JPMorgan Chase Bank,N.A. estimates the fair value for these retained interests by calculatingthe present value of future expected cash flows using modeling tech-niques. Such models incorporate management’s best estimates of keyvariables, such as expected credit losses, prepayment speeds and thediscount rates appropriate for the risks involved. See Note 5 on pages16–17 of these Consolidated Financial Statements for further infor-mation on the valuation of retained interests.

JPMorgan Chase Bank, N.A. may retain interests in the securitizedloans in the form of undivided seller’s interest, senior or subordinatedinterest-only strips, debt and equity tranches, escrow accounts andservicing rights. The classification of retained interests is dependentupon several factors, including the type of interest, whether or not theretained interest is represented by a security certificate and when itwas retained. Interests retained by the investment banking businessare classified as trading assets. See the credit card securitizations andmortgage securitizations sections of this note for further informationon the classification of their related retained interests. Retained inter-ests classified as AFS that are rated below “AA” by an external ratingagency are subject to the impairment provisions of EITF 99-20, as dis-cussed in Note 13 on page 38 of these Consolidated FinancialStatements.

The following table presents the total unpaid principal amount ofassets held in JPMorgan Chase Bank, N.A.-sponsored securitizationentities, for which sale accounting was achieved and to whichJPMorgan Chase Bank, N.A. has continuing involvement, atDecember 31, 2008 and 2007. Continuing involvement includesservicing the loans, holding senior or subordinated interests, recourseor guarantee arrangements and derivative transactions. In certaininstances, JPMorgan Chase Bank, N.A.’s only continuing involvementis servicing the loans. Certain of JPMorgan Chase Bank, N.A.’sretained interests (trading assets, AFS securities and other assets) arereflected at their fair value.


also retains a participation interest in the undivided seller's interestin receivables and certain senior securities resulting from securitiza-tions sponsored by an affiliate (“participating securitizations”).JPMorgan Chase Bank, N.A maintains servicing responsibilities for allcredit card securitizations that it sponsors and also receives servicingfees from participating securitizations. As servicer and transferor,JPMorgan Chase Bank, N.A. receives contractual servicing fees basedupon the securitized loan balance plus excess servicing fees, whichare recorded in credit card income as discussed in Note 8 on pages28–29 of these Consolidated Financial Statements.

Securitization activity by major product typeThe following discussion describes the nature of JPMorgan ChaseBank, N.A.’s securitization activities by major product type.

Credit Card SecuritizationsThe credit card business securitizes originated and purchased creditcard loans. JPMorgan Chase Bank, N.A.’s primary continuing involve-ment includes servicing the receivables, retaining an undivided sell-er’s interest in the receivables, retaining certain senior securities andthe maintenance of escrow accounts. JPMorgan Chase Bank, N.A.

Principal amount outstanding JPMorgan Chase Bank, N.A. interest in securitized assets(f)(g)(h)

Total assets Assets held Total interestsheld by JPMorgan in QSPEs held by

December 31, 2008 Chase Bank, N.A.- with continuing Trading AFS Other JPMorgan(in billions) sponsored QSPEs involvement assets securities Loans assets Chase Bank, N.A.

Securitized related:Credit card $ 41.2 $ 41.2(e) $ 0.1 $ 3.6 $ 8.4 $ 1.4 $ 13.5Residential mortgage:

Prime(a) 122.6 122.4 0.4 0.7 — — 1.1Subprime 43.7 42.1 — — — — —Option ARMs 48.3 48.3 0.1 0.3 — — 0.4

Commercial and other(b) 113.5 39.8 0.1 0.5 — — 0.6Student loans 1.1 1.1 — — — 0.1 0.1Auto 0.7 0.7 — — — — —

Total(c)(d) $ 371.1 $ 295.6 $ 0.7 $ 5.1 $ 8.4 $ 1.5 $ 15.7

Principal amount outstanding JPMorgan Chase Bank, N.A. interest in securitized assets(f)(h)

Total assets Assets held Total interestsheld by JPMorgan in QSPEs held by

December 31, 2007 Chase Bank, N.A.- with continuing Trading AFS Other JPMorgan(in billions) sponsored QSPEs involvement assets securities Loans assets Chase Bank, N.A.

Securitized related:Credit card $ 37.6 $ 37.6(e) $ — $ — $ 7.7 $ 1.9 $ 9.6Residential mortgage:

Prime(a) 78.3 77.5 0.1 — — — 0.1Subprime 23.7 22.7 — — — — —Option ARMs — — — — — — —

Commercial and other(b) 108.8 2.7 — — — — —Student loans 1.1 1.1 — — — 0.1 0.1Auto 1.8 1.8 — — — 0.1 0.1

Total(c) $ 251.3 $ 143.4 $ 0.1 $ — $ 7.7 $ 2.1 $ 9.9

(a) Includes Alt-A loans.(b) Includes co-sponsored commercial securitizations and, therefore, includes non-JPMorgan Chase Bank, N.A. originated commercial mortgage loans. Commercial and other consists of securities

backed by commercial loans (predominantly real estate) and non-mortgage related consumer receivables purchased from third parties. JPMorgan Chase Bank, N.A. generally does not retain aresidual interest in the JPMorgan Chase Bank, N.A.’s sponsored commercial mortgage securitization transactions.

(c) Includes securitized loans where JPMorgan Chase Bank, N.A. owns less than a majority of the subordinated or residual interests in the securitizations.(d) Includes securitization-related QSPEs sponsored by heritage Bear Stearns and heritage Washington Mutual at December 31, 2008.(e) Includes credit card loans, accrued interest and fees, and cash amounts on deposit.(f) Excludes retained servicing (for a discussion of MSRs, see Note 19 on pages 66–69 of these Consolidated Financial Statements).(g) Includes investments acquired in the secondary market, but predominantly held-for-investment purposes of $1.8 billion as of December 31, 2008. This is comprised of $1.4 billion of invest-

ments classified as available-for-sale, including $172 million in credit cards, $693 million of residential mortgages and $495 million of commercial and other; and $452 million of investmentsclassified as trading, including $112 million of credit cards, $303 million of residential mortgages, and $37 million of commercial and other.

(h) Excludes interest rate and foreign exchange derivatives that are primarily used to manage the interest rate and foreign exchange risks of the securitization entities. See Note 7 and Note 30 onpages 27–28 and 80–83, respectively, of these Consolidated Financial Statements for further information on derivatives.



The agreements with the credit card securitization trust requireJPMorgan Chase Bank, N.A. to maintain a minimum undivided inter-est in the trust it sponsors of 12%. The undivided interests in thereceivables transferred to the trust have not been securitized and arenot represented by security certificates; these undivided interests arecarried at historical cost and classified within loans. At December 31,2008 and 2007, JPMorgan Chase Bank, N.A. had $8.4 billion and$7.7 billion, respectively, related to undivided interests in securitiza-tion trusts (including participating securitizations).

Additionally, JPMorgan Chase Bank, N.A. retained subordinatedinterest in accrued interest and fees on the securitized receivablestotaling $1.2 billion and $1.1 billion (net of an allowance for uncol-lectible amounts) as of December 31, 2008 and 2007, respectively,which are classified in other assets.

JPMorgan Chase Bank N.A. retained senior securities totaling $3.5billion at December 31, 2008, which were classified as AFS securitiesat December 31, 2008, were also used as collateral for a securedfinancing transaction.

JPMorgan Chase Bank, N.A. also maintains escrow accounts up topredetermined limits for some credit card securitizations to coverdeficiencies in cash flows owed to investors. The amounts availablein such escrow accounts related to credit cards are recorded in otherassets and amounted to $17 million and $46 million as of December31, 2008 and 2007, respectively.

Mortgage Securitizations JPMorgan Chase Bank, N.A. securitizes originated and purchasedresidential mortgages and originated commercial mortgages.

The retail business securitizes residential mortgage loans that itoriginates and purchases and it typically retains servicing for all ofits originated and purchased residential mortgage loans.Additionally, the retail business may retain servicing for certainmortgage loans purchased by the investment banking business. Asservicer, JPMorgan Chase Bank, N.A. receives servicing fees basedupon the securitized loan balance plus ancillary fees. JPMorganChase Bank, N.A. also retains the right to service the residentialmortgage loans it sells to the Government National MortgageAssociation (“GNMA”), Federal National Mortgage Association(“Fannie Mae”) and Federal Home Loan Mortgage Corporation(“Freddie Mac”) in accordance with their servicing guidelines andstandards. For a discussion of MSRs, see Note 19 on pages 66–69of these Consolidated Financial Statements. In a limited number ofsecuritizations, the retail business may retain an interest in additionto servicing rights. The amount of interest retained related to thesesecuritizations totaled $588 million and $67 million at December31, 2008 and 2007, respectively. These retained interests areaccounted for as trading or AFS securities; the classification dependson whether the retained interest is represented by a security certifi-cate, has an embedded derivative, and when it was retained (i.e.,prior to the adoption of SFAS 155).

The investment banking business securitizes residential mortgageloans (including those that it purchased and certain mortgage loansoriginated by the retail business) and commercial mortgage loansthat it originated. Upon securitization, the investment banking busi-ness may engage in underwriting and trading activities of the securi-ties issued by the securitization trust. The investment banking busi-ness may retain unsold senior and/or subordinated interests (includ-ing residual interests) in both residential and commercial mortgagesecuritizations at the time of securitization. These retained interestsare accounted for at fair value and classified as trading assets. Theinvestment banking business retained $4 million of senior and sub-ordinated interests as of December 31, 2008; these securities wereretained at securitization in connection with JPMorgan Chase Bank,N.A.’s underwriting activity.

In addition to the amounts reported in the securitization activitytables below, JPMorgan Chase Bank, N.A. sold residential mortgageloans totaling $122.0 billion, $81.8 billion and $53.7 billion duringthe years ended December 31, 2008, 2007 and 2006, respectively.The majority of these loan sales were for securitization by theGNMA, Fannie Mae and Freddie Mac. These sales resulted in pretaxgains of $32 million, $47 million and $251 million, respectively.

JPMorgan Chase Bank, N.A.’s mortgage loan sales are primarily non-recourse, thereby effectively transferring the risk of future credit lossesto the purchaser of the loans. However, for a limited number of loansales, JPMorgan Chase Bank, N.A. is obligated to share up to 100%of the credit risk associated with the sold loans with the purchaser.See Note 31 on pages 83–87 of these Consolidated FinancialStatements for additional information on loans sold with recourse.

Other SecuritizationsJPMorgan Chase Bank, N.A. also securitizes automobile and studentloans originated by the retail business and purchased consumer loans(including automobile and student loans). JPMorgan Chase Bank,N.A. retains servicing responsibilities for all originated and certainpurchased student and automobile loans. It may also hold a retainedinterest in these securitizations; such residual interests are classifiedas other assets. At December 31, 2008 and 2007, JPMorgan ChaseBank, N.A. held $30 million and $66 million, respectively, of retainedinterests in securitized automobile loans and $52 million and $55 mil-lion, respectively, of retained interests in securitized student loans.

JPMorgan Chase Bank, N.A. also maintains escrow accounts up topredetermined limits for some automobile and student loan securiti-zations to cover deficiencies in cash flows owed to investors. Theseescrow accounts are classified within other assets and carried at fair value. The amounts available in such escrow accounts as ofDecember 31, 2008, were $2 million for automobile and $3 millionfor student loan securitizations; as of December 31, 2007, theseamounts were $14 million and $3 million for automobile and stu-dent loan securitizations, respectively.


Securitization activityThe following tables provide information related to JPMorgan Chase Bank, N.A.’s securitization activities for the years ended December 31, 2008,2007 and 2006. For the periods presented there were no cash flows from JPMorgan Chase Bank, N.A. to the QSPEs related to recourse or guar-antee arrangements.

Year ended December 31, 2008 Residential mortgage(f)

(in millions, except for ratios and where Option Commercial Studentotherwise noted) Credit card Prime(g) Subprime ARMs and other loans Auto

Principal securitized $ 10,716 $ — $ — $ — $ 1,023 $ — $ —Pretax gains 60 — — — — — —All cash flows during the period:Proceeds from new securitizations $ 10,716(e) $ — $ — $ — $ 989 $ — $ —Servicing fees collected 459 192 107 129 11 4 12Other cash flows received(a) 2,056 — — — — — —Proceeds from collections reinvested

in revolving securitizations 62,998 — — — — — —Purchases of previously transferred

financial assets (or the underlyingcollateral)(b) — 217 13 6 — — 234

Cash flows received on the intereststhat continue to be held by JPMorgan Chase Bank, N.A.(c) 45 165 8 53 368 — 31

Key assumptions used to measure retained interests originated during the year (rates per annum):

Prepayment rate(d) 17.9-20.0% 1.5%PPR CPR

Weighted-average life (in years) 0.4 2.1Expected credit losses 4.2-4.8% 1.5%Discount rate 12.0-13.0% 25.0%

Year ended December 31, 2007 Residential mortgage


Principal securitized $ 8,464 $ 32,084 $ 6,763 $ — $ 12,797 $ 1,168 $ —Pretax gains 71 28(h) 43 — — 51 —All cash flows during the period:Proceeds from new securitizations $ 8,464 $ 31,918 $ 6,844 $ — $ 13,038 $ 1,168 $ —Servicing fees collected 402 124 246 — 7 2 27Other cash flows received(a) 2,006 — — — — — —Proceeds from collections reinvested


financial assets (or the underlyingcollateral)(b) — 58 598 — — — 373

Cash flows received on the intereststhat continue to be held by JPMorgan Chase Bank, N.A.(c) 1 138 240 — 256 — 65

Key assumptions used to measure retained interests originated during the year (rates per annum):Prepayment rate(d) 20.4% 14.8-24.2% 1.5-8.0% 1.0-8.0%

PPR CPR CPR CPR

Weighted-average life (in years) 0.4 3.2-4.0 1.3-10.2 9.3Expected credit losses 3.5-3.9% —%(i) 0.9% —%(i)

Discount rate 12.0% 5.8-13.8% 12.0-14.0% 9.0%



Year ended December 31, 2006 Residential mortgage


Principal securitized $ 3,894 $ 30,254 $ 17,359 $ — $ 13,858 $ — $ 2,027Pretax gains 27 53 193 — 129 — 2All cash flows during the period:Proceeds from new securitizations $ 3,894 $ 30,202 $ 17,635 $ — $ 14,343 $ — $ 1,487Servicing fees collected 389 76 29 — 1 — 37Other cash flows received(a) 2,152 — — — — — —Proceeds from collections reinvested


financial assets (or the underlyingcollateral)(b) — 31 31 — — — 123

Cash flows received on the intereststhat continue to be held by JPMorgan Chase Bank, N.A.(c) 24 48 144 — 73 — 67

Key assumptions used to measure retained interests originated during the year (rates per annum):Prepayment rate(d) 20.0-22.2% 18.2-24.6% 0.0-36.2% 1.4-1.5%

PPR CPR CPR ABS

Weighted-average life (in years) 0.4 3.0-3.6 1.5-6.1 1.4-1.9Expected credit losses 3.3-4.2% —%(i) 0.0-0.9% 0.3-0.7%Discount rate 12.0% 8.4-12.7% 3.8-14.0% 7.6-7.8%

(a) Other cash flows received include excess servicing fees and other ancillary fees received.(b) Includes cash paid by JPMorgan Chase Bank, N.A. to reacquire assets from the QSPEs, for example, servicer clean-up calls.(c) Includes cash flows received on retained interests including, for example, principal repayments, and interest payments.(d) PPR: principal payment rate; CPR: constant prepayment rate; ABS: absolute prepayment speed.(e) Includes $3.6 billion of securities retained by JPMorgan Chase Bank, N.A.(f) Includes securitizations sponsored by Washington Mutual as of their respective acquisition dates.(g) Includes Alt-A loans.(h) As of January 1, 2007, JPMorgan Chase Bank, N.A. adopted the fair value election for the investment banking business warehouse and the retail business prime mortgage warehouse.

The carrying value of these loans accounted for at fair value approximates the proceeds received from securitization.(i) Expected credit losses for consumer prime residential mortgage, and student and certain other securitizations are minimal and are incorporated into other assumptions.

Retained securitization interests

The following table summarizes JPMorgan Chase Bank, N.A.’s retained securitization interests, which are carried at fair value on JPMorgan ChaseBank, N.A.’s Consolidated Balance Sheets at December 31, 2008. As of December 31, 2008, 72% of the JPMorgan Chase Bank, N.A.’s retainedsecuritization interests, which are carried at fair value, were risk rated “A” or better.

Ratings profile of retained interests(c)(d)

2008

Investment Noninvestment RetainedDecember 31, (in billions) grade grade interest

Asset types:Credit card(a) $ 3.5 $ 1.3 $ 4.8Residential mortgage:

Prime(b) 0.1 0.1 0.2Subprime — — —Option ARMs 0.4 — 0.4

Commercial and other — — —Student loans — 0.1 0.1Auto — — —

Total $ 4.0 $ 1.5 $ 5.5

(a) Includes retained subordinated interests carried at fair value, including the credit card business’ accrued interests and fees, escrow accounts, and other residual interests. Excludes undividedseller interest in the trusts of $8.4 billion at December 31, 2008, which is carried at historical cost, and unencumbered cash amounts on deposit of $62 million at December 31, 2008.

(b) Includes Alt-A loans.(c) The ratings scale is presented on an S&P-equivalent basis.(d) Excludes $1.8 billion of investments acquired in the secondary market, but predominantly held for investment purposes. Of this amount $1.7 billion is classified as investment grade.


The table below outlines the key economic assumptions used at December 31, 2008 and 2007, to determine the fair value as of December 31, 2008and 2007, respectively, of JPMorgan Chase Bank, N.A.’s retained interests, other than MSRs, that are valued using modeling techniques; it excludessecurities that are valued using quoted market prices. The table below also outlines the sensitivities of those fair values to immediate 10% and 20%adverse changes in assumptions used to determine fair value. For a discussion of residential MSRs, see Note 19 on pages 66–69 of theseConsolidated Financial Statements.

December 31, 2008 Residential mortgage

(in millions, except rates and where Option Commercial Studentotherwise noted) Credit card Prime(c) ARMs and other loans Auto

Retained interests $ 1,348(b) $ 153 $ 436 $ 30 $ 55 $ 32

Weighted-average life (in years) 0.5 6.6 7.3 5.9 8.2 0.7

Prepayment rates(a) 15.4-16.7% 10.0-10.2% 5.0-15.0% 0.0-100% 5.0% 1.2-1.4%Weighted-average prepayment rate 16.6 17.9 7.6 3.0 5.0 1.3

PPR CPR CPR CPR CPR ABSImpact of 10% adverse change $ (18) $ (5) $ (4) $ — $ (1) $ —Impact of 20% adverse change (36) (11) (11) — (2) (1)

Loss assumptions 4.7-7.6% 2.3-17.0% 0.0-26.3% 0.0-3.4% —%(d) 0.4-0.7%Weighted-average loss assumption 7.0 3.3 0.3 2.7 — 0.5

Impact of 10% adverse change $ (101) $ (1) $ — $ — $ — $ —Impact of 20% adverse change (177) (2) (1) — — (1)

Discount rates 18.0% 9.1-52.5% 3.6-71.7% 0.0-43.3% 9.0% 4.1-4.2%Weighted-average discount rate 18.0 30.5 17.3 31.2 9.0 4.1

Impact of 10% adverse change $ (4) $ (6) $ (16) $ (1) $ (2) $ —Impact of 20% adverse change (8) (13) (28) (1) (4) —

December 31, 2007 Residential mortgage

(in millions, except rates and where Option Commercial Studentotherwise noted) Credit card Prime(c) ARMs and other loans Auto

Retained interests $ 1,348 $ 67 $ — $ 8 $ 58 $ 80

Weighted-average life (in years) 0.4-0.5 3.7 — 0.9-3.7 8.8 0.9

Prepayment rates(a) 15.6-18.9% 21.1% —% 0.0-1.5% 1.0-8.0% 1.4%PPR CPR CPR CPR CPR ABS

Impact of 10% adverse change $ (25) $ (8) $ — $ — $ (1) $ (1)Impact of 20% adverse change (50) (13) — — (2) (1)

Loss assumptions 3.3-4.6% —%(d) —% 0.0-0.9% —%(d) 0.6%Impact of 10% adverse change $ (47) $ — $ — $ — $ — $ (1)Impact of 20% adverse change (94) — — — — (2)

Discount rates 12.0% 12.2% —% 5.2-14.0% 9.0% 6.8%Impact of 10% adverse change $ (1) $ (5) $ — $ — $ (3) $ —Impact of 20% adverse change (2) (10) — — (5) (1)

(a) PPR: principal payment rate; ABS: absolute prepayment speed; CPR: constant prepayment rate.(b) Excludes certain interests that are not valued using modeling techniques.(c) Includes Alt-A loans.(d) Expected losses for prime residential mortgage, student loans and certain wholesale securitizations are minimal and are incorporated into other assumptions.

The sensitivity analysis in the preceding table is hypothetical.Changes in fair value based upon a 10% or 20% variation inassumptions generally cannot be extrapolated easily because therelationship of the change in the assumptions to the change in fairvalue may not be linear. Also, in the table, the effect that a change ina particular assumption may have on the fair value is calculated

without changing any other assumption. In reality, changes in onefactor may result in changes in another, which might counteract ormagnify the sensitivities. The above sensitivities also do not reflectJPMorgan Chase Bank, N.A.’s risk management practices that maybe undertaken to mitigate such risks.



The table below includes information about delinquencies, net charge-offs (recoveries) and components of reported and securitized financial assets atDecember 31, 2008 and 2007.

90 days past due Nonaccrual

Year ended Total Loans and still accruing assets(g)(h) Net loan charge-offs

December 31, (in millions) 2008 2007 2008 2007 2008 2007 2008 2007

Home Equity $ 114,335 $ 94,832 $ — $ — $ 1,394 $ 786 $ 2,391 $ 563Prime mortgage(a) 72,168 39,875 — — 1,888 493 526 33Subprime mortgage 15,326 15,467 — — 2,689 1,015 933 154Option ARMs 9,018 — — — — — — —Auto loans 42,603 42,349 — — 148 116 568 353Credit card 31,141 31,824 703 564 — — 1,617 1,094All other loans 33,693 25,272 463 421 430 341 459 242Loans held-for-sale(b) 2,028 3,989 — — — — NA NA

Total consumer loans – excluding purchasedcredit-impaired 320,312 253,608 1,166 985 6,549 2,751 6,494 2,439

Consumer loans – purchasedcredit-impaired(c) 88,813 — — — — — — —

Total consumer loans 409,125 253,608 1,166 985 6,549 2,751 6,494 2,439Total wholesale loans 253,187 208,054 162 73 2,354(i) 511(i) 393 30

Total loans reported 662,312 461,662 1,328 1,058 8,903 3,262 6,887 2,469

Securitized loans:Residential mortgage:

Prime mortgage(a) 122,419 77,588 — — 6,081 1,215 344 7Subprime mortgage 42,142 22,692 — — 9,230 3,238 2,804 413Option ARMs 48,328 — — — 6,440 — 270 —

Automobile 668 1,739 — — 1 5 12 9Credit card 32,470 29,312 609 422 — — 1,335 958Student 1,074 1,141 66 — — — 1 —Commercial and other 39,812 2,662 28 — 156 — 8 11

Total loans securitized(d) $ 286,913 $ 135,134 $ 703 $ 422 $ 21,908 $ 4,458 $ 4,774 $ 1,398

Total loans reportedand securitized(e) $ 949,225(f) $ 596,796(f) $ 2,031 $ 1,480 $ 30,811 $ 7,720 $ 11,661 $ 3,867

(a) Includes Alt-A loans.(b) Includes loans for prime mortgage and other (largely student loans) of $206 million and $1.8 billion at December 31, 2008, respectively, and $570 million and $3.4 billion at December

31, 2007, respectively.(c) Purchased credit-impaired loans represent loans acquired in the Washington Mutual transaction that were considered credit-impaired under SOP 03-3, and include $6.4 billion of loans

that were nonperforming immediately prior to the acquisition. Under SOP 03-3, these loans are considered to be performing loans as of the acquisition date; they accrete interest incomeover the estimated life of the loan when cash flows are reasonably estimable, even if the underlying loans are contractually past due. For additional information, see Note 15 on pages42–46 of these Consolidated Financial Statements.

(d) Total assets held in securitization-related SPEs were $371.1 billion and $251.3 billion at December 31, 2008 and 2007, respectively. The $286.9 billion and $135.1 billion of loans secu-ritized at December 31, 2008 and 2007, respectively, excludes $75.5 billion and $107.9 billion of securitized loans, respectively, in which JPMorgan Chase Bank, N.A. has no continu-ing involvement; $8.4 billion and $7.7 billion of seller’s interests in credit card master trusts, respectively; and $262 million and $619 million of cash amounts on deposit and escrowaccounts.

(e) Represents both loans on the Consolidated Balance Sheets and loans that have been securitized.(f) Includes securitized loans that were previously recorded at fair value and classified as trading assets.(g) During the second quarter of 2008, the policy for classifying subprime mortgage and home equity loans as nonperforming was changed to conform to all other home lending products.

Amounts for 2007 have been revised to reflect this change.(h) Excludes nonperforming assets related to (i) loans eligible for repurchase, as well as loans repurchased from GNMA pools that are insured by U.S. government agencies, of $3.3 billion

and $1.5 billion at December 31, 2008 and 2007, respectively, and (ii) student loans that are 90 days past due and still accruing, which are insured by U.S. government agencies underthe Federal Family Education Loan Program, of $437 million and $417 million at December 31, 2008 and 2007, respectively. These amounts for GNMA and student loans are excluded,as reimbursement is proceeding normally.

(i) Includes nonperforming loans held-for-sale and loans at fair value of $32 million and $47 million at December 31, 2008 and 2007, respectively.


Subprime adjustable-rate mortgage loan modifications See the Glossary of Terms on pages 91–93 of these ConsolidatedFinancial Statements for JPMorgan Chase Bank, N.A.’s definition ofsubprime loans. Within the confines of the limited decision-makingabilities of a QSPE under SFAS 140, the operating documents thatgovern existing subprime securitizations generally authorize the ser-vicer to modify loans for which default is reasonably foreseeable,provided that the modification is in the best interests of the QSPE’sbeneficial interest holders and would not result in a REMIC violation.

In December 2007, the American Securitization Forum (“ASF”) issuedthe “Streamlined Foreclosure and Loss Avoidance Framework forSecuritized Subprime Adjustable Rate Mortgage Loans” (the“Framework”). The Framework provides guidance for servicers tostreamline evaluation procedures for borrowers with certain subprimeadjustable rate mortgage (“ARM”) loans to more efficiently providemodifications of such loans with terms that are more appropriate forthe individual needs of such borrowers. The Framework applies to allfirst-lien subprime ARM loans that have a fixed rate of interest for aninitial period of 36 months or less, are included in securitized pools,were originated between January 1, 2005, and July 31, 2007, andhave an initial interest rate reset date between January 1, 2008, andJuly 31, 2010 (“ASF Framework Loans”).

The Framework categorizes the population of ASF Framework Loansinto three segments: Segment 1 includes loans where the borroweris current and is likely to be able to refinance into any readily avail-able mortgage product; Segment 2 includes loans where the bor-rower is current, is unlikely to be able to refinance into any readilyavailable mortgage industry product and meets certain defined crite-ria; and Segment 3 includes loans where the borrower is not cur-rent, as defined, and does not meet the criteria for Segments 1 or 2.

ASF Framework Loans in Segment 2 of the Framework are eligiblefor fast-track modification under which the interest rate will be keptat the existing initial rate, generally for five years following theinterest rate reset date. The Framework indicates that for Segment 2loans, JPMorgan Chase Bank, N.A., as servicer, may presume thatthe borrower will be unable to make payments pursuant to the orig-inal terms of the borrower’s loan after the initial interest rate resetdate. Thus, JPMorgan Chase Bank, N.A. may presume that a defaulton that loan by the borrower is reasonably foreseeable unless theterms of the loan are modified. JPMorgan Chase Bank, N.A. hasadopted the loss mitigation approaches under the Framework forsecuritized subprime ARM loans that meet the specific Segment 2criteria and began modifying Segment 2 loans during the first quar-ter of 2008. The adoption of the Framework did not affect the off-balance sheet accounting treatment of JPMorgan Chase Bank, N.A.-sponsored QSPEs that hold Segment 2 subprime loans.

The total dollar amount of assets owned by JPMorgan Chase Bank,N.A.-sponsored QSPEs that hold subprime adjustable rate mortgageloans as of December 31, 2008 and 2007, was $18.3 billion and$20.0 billion, respectively. Of these amounts, $8.0 billion and $9.7billion, respectively, are related to ASF Framework Loans serviced byJPMorgan Chase Bank, N.A. Included within the assets owned byJPMorgan Chase Bank, N.A.-sponsored QSPEs was foreclosure-relat-ed real estate owned, for which JPMorgan Chase Bank, N.A. is theservicer, in the amount of $2.8 billion and $637 million at December31, 2008 and 2007, respectively. The growth in real estate owned in2008 is attributable to the Washington Mutual transaction andincreased foreclosures resulting from current housing market condi-tions. The following table presents the principal amounts of ASFFramework Loans, serviced by JPMorgan Chase Bank, N.A., that areowned by JPMorgan Chase Bank, N.A.-sponsored QSPEs that fellwithin Segments 1, 2 and 3 as of December 31, 2008 and 2007,respectively.

December 31, 2008 2007(in millions, except ratios) Amount % Amount %

Segment 1 $ 1,671 21% $ 1,940 20%Segment 2 2,068 26 970 10Segment 3 4,237 53 6,790 70

Total $ 7,976 100% $ 9,700 100%

The estimates of segment classification could change substantially inthe future as a result of future changes in housing values, economicconditions, borrower/investor behavior and other factors.

The total principal amount of beneficial interests issued by JPMorganChase Bank, N.A.-sponsored securitizations that hold ASF FrameworkLoans as of December 31, 2008 and 2007, was as follows.


Third-party $ 32,173 $ 19,636Retained interest held by

JPMorgan Chase and/or affiliates 74 412

Total $ 32,247 $ 20,048

For those ASF Framework Loans serviced by JPMorgan Chase Bank,N.A. and owned by JPMorgan Chase Bank, N.A.-sponsored QSPEs,JPMorgan Chase Bank, N.A. modified principal amounts of $1.5 bil-lion of Segment 2 subprime mortgages during the year endedDecember 31, 2008. There were no Segment 2 subprime mortgagesmodified during the year ended December 31, 2007. For Segment 3loans, JPMorgan Chase Bank, N.A. has adopted a loss mitigationapproach, without employing the fast-track modifications prescribedfor Segment 2 subprime mortgages, that is intended to maximize therecoveries of the securitization trust. The loss mitigation approachchosen by JPMorgan Chase Bank, N.A. is consistent with the applica-ble servicing agreements and could include rate reductions, principalforgiveness, forbearance and other actions intended to minimize eco-nomic loss and avoid foreclosure. The table below presents selectedinformation relating to the principal amount of Segment 3 loans forthe year ended December 31, 2008, including those that have beenmodified, subjected to other loss mitigation activities or have beenprepaid by the borrower.



For the year endedDecember 31, (in millions) 2008

Loan modifications $ 1,392Other loss mitigation activities 454Prepayments 182

The impact of loss mitigation efforts on the fair value of JPMorganChase Bank, N.A.’s retained interests in ASF Framework loans wasnot material at December 31, 2008.

Note 18 – Variable interest entitiesRefer to Note 1 on pages 6–7 of these Consolidated FinancialStatements for a further description of JPMorgan Chase Bank, N.A.’spolicies regarding consolidation of variable interest entities.

JPMorgan Chase Bank, N.A.’s principal involvement with VIEs occursin the following business segments:

• Investment banking business: Utilizes VIEs to assist clients inaccessing the financial markets in a cost-efficient manner. Theinvestment banking business is involved with VIEs through multi-seller conduits and for investor intermediation purposes, as dis-cussed below. The investment banking business also securitizesloans through QSPEs, to create asset-backed securities, as fur-ther discussed in Note 17 on pages 47–56 of theseConsolidated Financial Statements.

• Asset management business: Provides investment managementservices to a limited number of JPMorgan Chase Bank, N.A.’sfunds deemed VIEs. The asset management business earns afixed fee based upon assets managed; the fee varies with eachfund’s investment objective and is competitively priced. For thelimited number of funds that qualify as VIEs, the asset manage-ment business’ relationships with such funds are not consideredsignificant variable interests under FIN 46(R).

• Treasury and securities services business: Provides services to anumber of VIEs that are similar to those provided to non-VIEs.The treasury and securities services business earns market-basedfees for the services it provides. The relationships resulting fromtreasury and securities services business’ services are not consid-ered to be significant variable interests under FIN 46(R).

• Commercial banking business: Utilizes VIEs to assist clients inaccessing the financial markets in a cost-efficient manner. This isoften accomplished through the use of products similar to thoseoffered in the investment banking business. The commercial bank-ing business may assist in the structuring and/or ongoing adminis-

tration of these VIEs and may provide liquidity, letters of creditand/or derivative instruments in support of the VIEs. The relation-ships resulting from the commercial banking business’ services arenot considered to be significant variable interests under FIN 46(R).

• Corporate/private equity business: Corporate utilizes VIEs to issueguaranteed capital debt securities. See Note 23 on pages 71–72for further information.

As noted above, the investment banking business is predominantlyinvolved with multi-seller conduits and VIEs associated with investorintermediation activities. These nonconsolidated VIEs that are spon-sored by JPMorgan Chase Bank, N.A. are discussed below. JPMorganChase Bank, N.A. considers a “sponsored” VIE to include any entitywhere: (1) JPMorgan Chase Bank, N.A. is the principal beneficiary ofthe structure; (2) the VIE is used by JPMorgan Chase Bank, N.A. tosecuritize JPMorgan Chase Bank, N.A. assets; (3) the VIE issues finan-cial instruments associated with the JPMorgan Chase Bank, N.A.brand name; or (4) the entity is a JPMorgan Chase Bank, N.A.-admin-istered asset-backed commercial paper (“ABCP”) conduit.

Multi-seller conduitsFunding and liquidityJPMorgan Chase Bank, N.A. is an active participant in the asset-backed securities business, and it helps customers meet their financ-ing needs by providing access to the commercial paper marketsthrough VIEs known as multi-seller conduits. Multi-seller conduit enti-ties are separate bankruptcy-remote entities that purchase interestsin, and make loans secured by, pools of receivables and other finan-cial assets pursuant to agreements with customers of JPMorgan ChaseBank, N.A. The conduits fund their purchases and loans through theissuance of highly rated commercial paper to third-party investors. Theprimary source of repayment of the commercial paper is the cash flowfrom the pools of assets. In most instances, the assets are structuredwith deal-specific credit enhancements provided by the customers (i.e.,sellers) to the conduits or other third parties. Deal-specific creditenhancements are generally structured to cover a multiple of historicallosses expected on the pool of assets, and are typically in the form ofovercollateralization provided by the seller, but also may include anycombination of the following: recourse to the seller or originator, cashcollateral accounts, letters of credit, excess spread, retention of subor-dinated interests or third-party guarantees. The deal-specific creditenhancements mitigate JPMorgan Chase Bank, N.A.’s potential losseson its agreements with the conduits.


JPMorgan Chase Bank, N.A. receives fees related to the structuringof multi-seller conduit transactions and compensation from themulti-seller conduits for its role as administrative agent, liquidityprovider, and provider of program-wide credit enhancement.

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. Deal-specific liquidityfacilities are the primary source of liquidity support for the conduits.The deal-specific liquidity facilities are typically in the form of assetpurchase agreements and generally structured so the liquidity thatwill be provided by JPMorgan Chase Bank, N.A. as liquidity providerwill be effected by JPMorgan Chase Bank, N.A. purchasing, or lend-ing against, a pool of nondefaulted, performing assets.

The conduit’s administrative agent can require the liquidity providerto perform under its asset purchase agreement with the conduit atany time. These agreements may cause the liquidity provider, includ-ing JPMorgan Chase Bank, N.A., to purchase an asset from the con-duit at an amount above the asset’s then current fair value – ineffect providing a guarantee of the initial value of the referenceasset as of the date of the agreement. In limited circumstances,JPMorgan Chase Bank, N.A. may provide unconditional liquidity.

JPMorgan Chase Bank, N.A. also provides the multi-seller conduitvehicles with program-wide liquidity facilities in the form of uncom-mitted short-term revolving facilities that can be accessed by theconduits to handle funding increments too small to be funded bycommercial paper and in the form of uncommitted liquidity facilitiesthat can be accessed by the conduits only in the event of short-termdisruptions in the commercial paper market.

Because the majority of the deal-specific liquidity facilities will onlyfund nondefaulted assets, program-wide credit enhancement isrequired to absorb losses on defaulted receivables in excess of loss-es absorbed by any deal-specific credit enhancement. Program-widecredit enhancement may be provided by JPMorgan Chase Bank, N.A.in the form of standby letters of credit or by third-party surety bondproviders. The amount of program-wide credit enhancementrequired varies by conduit and ranges between 5% and 10% ofapplicable commercial paper outstanding.

The following table summarizes JPMorgan Chase Bank, N.A.’sinvolvement with nonconsolidated JPMorgan Chase Bank, N.A.-administered multi-seller conduits. There were no consolidatedJPMorgan Chase Bank, N.A.-administered multi-seller conduits as ofDecember 31, 2008 or 2007.

December 31, (in billions) 2008 2007

Total assets held by conduits $ 42.9 $ 61.2

Total commercial paper issued by conduits 43.1 62.6

Liquidity and credit enhancements(a)

Deal-specific liquidity facilities (primarily asset purchase agreements) 55.4 87.3

Program-wide liquidity facilities 17.0 13.2Program-wide credit enhancements 3.0 2.5

Maximum exposure to loss(b) 56.9 88.9

(a) The accounting for these agreements is further discussed in Note 31 on pages83–87. The carrying value related to asset purchase agreements was $147 million atDecember 31, 2008, of which $138 million represented the remaining fair value ofthe guarantee under FIN 45. JPMorgan Chase Bank, N.A. has recognized this guaran-tee in other liabilities with an offsetting entry recognized in other assets for the netpresent value of the future premium receivable under the contracts.

(b) JPMorgan Chase Bank, N.A.’s maximum exposure to loss is limited to the amount ofdrawn commitments (i.e., sellers’ assets held by the multi-seller conduits for whichJPMorgan Chase Bank, N.A. provides liquidity support) of $42.9 billion and $61.2 bil-lion at December 31, 2008 and 2007, respectively, plus contractual but undrawncommitments of $14.0 billion and $27.7 billion at December 31, 2008 and 2007,respectively. Since JPMorgan Chase Bank, N.A. provides credit enhancement and liq-uidity to JPMorgan Chase Bank, N.A.-administered, multi-seller conduits, the maxi-mum exposure is not adjusted to exclude exposure that would be absorbed by third-party liquidity providers.

Assets funded by the multi-seller conduitsJPMorgan Chase Bank, N.A.’s administered multi-seller conduits funda variety of asset types for JPMorgan Chase Bank, N.A.’s clients.Asset types primarily include credit card receivables, auto loans, tradereceivables, student loans, commercial loans, residential mortgages,capital commitments (e.g., loans to private equity, mezzanine andreal estate opportunity funds secured by capital commitments ofhighly rated institutional investors), and various other asset types. Itis JPMorgan Chase Bank, N.A.’s intention that the assets funded byits administered multi-seller conduits be sourced only from JPMorganChase Bank, N.A.’s clients and not originated by, or transferred from,JPMorgan Chase Bank, N.A.



The following table presents information on the commitments and assets held by JPMorgan Chase Bank, N.A.’s administered multi-seller conduitsas of December 31, 2008 and 2007.

Summary of exposure to Chase Bank, N.A.-administered nonconsolidated multi-seller conduits

2008 2007

Unfunded Liquidity Unfunded Liquiditycommitments to Commercial Liquidity provided by commitments to Commercial Liquidity provided by

December 31, JPMorgan Chase paper funded provided by JPMorgan Chase JPMorgan Chase paper funded provided by JPMorgan Chase(in billions) Bank, N.A.’s clients assets third parties Bank, N.A. Bank, N.A.’s clients assets third parties Bank, N.A.

Asset types:Credit card $ 3.0 $ 8.9 $ 0.1 $ 11.8 $ 3.3 $ 14.2 $ — $ 17.5Vehicle loans and leases 1.4 10.0 — 11.4 4.5 10.2 — 14.7Trade receivables 3.8 5.5 — 9.3 6.0 6.6 — 12.6Student loans 0.7 4.6 — 5.3 0.8 9.2 — 10.0Commercial 1.5 4.0 0.4 5.1 2.1 4.8 0.4 6.5Residential mortgage — 0.7 — 0.7 4.6 3.1 — 7.7Capital commitments 1.3 3.9 0.6 4.6 2.0 5.1 0.6 6.5Rental car finance 0.2 0.4 — 0.6 0.6 0.7 — 1.3Equipment loans and leases 0.7 1.6 — 2.3 1.1 2.5 — 3.6Floorplan – vehicle 0.7 1.8 — 2.5 1.3 1.3 — 2.6Floorplan – other — — — — — 0.5 — 0.5Consumer 0.1 0.7 0.1 0.7 0.7 1.7 0.2 2.2Other 0.6 0.8 0.3 1.1 0.7 1.3 0.4 1.6

Total $ 14.0 $ 42.9 $ 1.5 $ 55.4 $ 27.7 $ 61.2 $ 1.6 $ 87.3

Ratings profile of VIE assets of the multi-seller conduits(a) Commercial Wt. avg.December 31, 2008 Investment-grade Noninvestment-grade paper funded expected(in billions) AAA to AAA- AA+ to AA- A+ to A- BBB to BBB- BB+ and below assets life (years)(b)

Asset types:Credit card $ 4.8 $ 3.9 $ 0.1 $ 0.1 $ — $ 8.9 1.5Vehicle loans and leases 4.1 4.1 1.8 — — 10.0 2.5Trade receivables — 4.0 1.5 — — 5.5 1.0Student loans 3.6 0.9 — 0.1 — 4.6 1.8Commercial 1.1 2.0 0.6 0.3 — 4.0 2.7Residential mortgage — 0.6 — 0.1 — 0.7 4.0Capital commitments — 3.6 0.3 — — 3.9 2.4Rental car finance — — 0.4 — — 0.4 1.5Equipment loans and leases 0.4 1.2 — — — 1.6 2.2Floorplan – vehicle 0.1 1.0 0.7 — — 1.8 1.1Floorplan – other — — — — — — —Consumer 0.1 0.4 0.2 — — 0.7 1.6Other 0.5 0.3 — — — 0.8 3.7

Total $ 14.7 $ 22.0 $ 5.6 $ 0.6 $ — $ 42.9 2.0


The assets held by the multi-seller conduits are structured so that ifthey were rated, JPMorgan Chase Bank, N.A. believes the majority ofthem would receive an “A” rating or better by external rating agen-cies. However, it is unusual for the assets held by the conduits to beexplicitly rated by an external rating agency. Instead, JPMorgan ChaseBank, N.A.’s Credit Risk group assigns each asset purchase liquidityfacility an internal risk-rating based upon its assessment of the proba-bility of default for the transaction. The ratings provided in the abovetable reflect the S&P-equivalent ratings of the internal rating gradesassigned by JPMorgan Chase Bank, N.A.

The risk ratings are periodically reassessed as information becomesavailable. As of December 31, 2008 and 2007, 90% and 93%, respec-tively, of the assets in the conduits were risk-rated “A” or better.

Commercial paper issued by the multi-seller conduits The weighted average life of commercial paper issued by the multi-seller conduits at December 31, 2008 and 2007, was 27 days and 26days, respectively, and the average yield on the commercial paper atDecember 31, 2008 and 2007, was 0.6% and 5.7%, respectively.

In the normal course of business, JPMorgan Chase Bank, N.A. tradesand invests in commercial paper, including paper issued byJPMorgan Chase Bank, N.A. -administered conduits. The percentageof commercial paper purchased by JPMorgan Chase Bank, N.A.across all JPMorgan Chase Bank, N.A.-administered conduits duringthe year ended December 31, 2008, ranged from 0% to approxi-mately 16% on any given day. The largest daily amount of commer-cial paper outstanding held by JPMorgan Chase Bank, N.A. in anyone multi-seller conduit during the years ended December 31, 2008and 2007, was approximately $2.0 billion, or 23%, for 2008, and$2.2 billion, or 13%, for 2007, of the conduit’s commercial paperoutstanding. On average, JPMorgan Chase Bank, N.A. held approxi-mately 2% of daily JPMorgan Chase Bank, N.A.-administered con-duits issued commercial paper outstanding during 2008. JPMorganChase Bank, N.A. did not hold any commercial paper issued byJPMorgan Chase Bank, N.A.- administered conduits at December31, 2008 and 2007, respectively. JPMorgan Chase Bank, N.A. is not

obligated under any agreement (contractual or noncontractual) topurchase the commercial paper issued by JPMorgan Chase Bank, N.A.-administered conduits.

Consolidation analysis The multi-seller conduits administered by JPMorgan Chase Bank,N.A. were not consolidated at December 31, 2008 and 2007,because each conduit had issued expected loss notes (“ELNs”), theholders of which are committed to absorbing the majority of theexpected loss of each respective conduit.

Implied support JPMorgan Chase Bank, N.A. did not have and continues not to haveany intent to protect any ELN holders from potential losses on anyof the conduits’ holdings and has no plans to remove any assetsfrom any conduit unless required to do so in its role as administra-tor. Should such a transfer occur, JPMorgan Chase Bank, N.A. wouldallocate losses on such assets between itself and the ELN holders inaccordance with the terms of the applicable ELN.

Expected loss modelingIn determining the primary beneficiary of the conduits JPMorganChase Bank, N.A. uses a Monte Carlo–based model to estimate theexpected losses of each of the conduits and considers the relativerights and obligations of each of the variable interest holders.JPMorgan Chase Bank, N.A.’s expected loss modeling treats all vari-able interests, other than the ELNs, as its own to determine consoli-dation. The variability to be considered in the modeling of expectedlosses is based on the design of the entity. JPMorgan Chase Bank,N.A.’s traditional multi-seller conduits are designed to pass creditrisk, not liquidity risk, to its variable interest holders, as the assetsare intended to be held in the conduit for the longer term.

Under FIN 46(R), JPMorgan Chase Bank, N.A. is required to run theMonte Carlo-based expected loss model each time a reconsiderationevent occurs. In applying this guidance to the conduits, the followingevents, are considered to be reconsideration events, as they couldaffect the determination of the primary beneficiary of the conduits:

Ratings profile of VIE assets of the multi-seller conduits(a)Commercial Wt. avg.

December 31, 2007 Investment-grade Noninvestment-grade paper funded expected(in billions) AAA to AAA- AA+ to AA- A+ to A- BBB to BBB- BB+ and below assets life (years)(b)

Asset types:Credit card $ 4.2 $ 9.4 $ 0.6 $ — $ — $ 14.2 1.5Vehicle loans and leases 1.8 6.9 1.4 — 0.1 10.2 2.3Trade receivables — 4.7 1.7 0.2 — 6.6 1.3Student loans 1.0 8.1 0.1 — — 9.2 0.5Commercial 0.5 3.5 0.7 0.1 — 4.8 2.8Residential mortgage 1.5 0.8 0.8 — — 3.1 1.5Capital commitments — 5.1 — — — 5.1 3.4Rental car finance — 0.7 — — — 0.7 1.1Equipment loans and leases 0.4 1.9 — 0.2 — 2.5 2.2Floorplan – vehicle 0.4 0.7 0.2 — — 1.3 0.8Floorplan – other — 0.5 — — — 0.5 0.7Consumer — 1.4 0.2 — 0.1 1.7 1.8Other 1.2 0.1 — — — 1.3 3.7

Total $ 11.0 $ 43.8 $ 5.7 $ 0.5 $ 0.2 $ 61.2 1.8

(a) The ratings scale is presented on an S&P equivalent basis.(b) Weighted average expected life for each asset type is based upon the remaining term of each conduit transaction’s committed liquidity plus either the expected weighted average life

of the assets should the committed liquidity expire without renewal or the expected time to sell the underlying assets in the securitization market.



• New deals, including the issuance of new or additional variableinterests (credit support, liquidity facilities, etc);

• Changes in usage, including the change in the level of outstand-ing variable interests (credit support, liquidity facilities, etc);

• Modifications of asset purchase agreements; and

• Sales of interests held by the primary beneficiary.

From an operational perspective, JPMorgan Chase Bank, N.A. doesnot run its Monte Carlo-based expected loss model every time there isa reconsideration event due to the frequency of their occurrence.Instead, JPMorgan Chase Bank, N.A. runs its expected loss modeleach quarter and includes a growth assumption for each conduit toensure that a sufficient amount of ELNs exists for each conduit at anypoint during the quarter.

As part of its normal quarterly modeling, JPMorgan Chase Bank, N.A.updates, when applicable, the inputs and assumptions used in theexpected loss model. Specifically, risk ratings and loss given defaultassumptions are continually updated. The total amount of ELNs out-standing at December 31, 2008 and 2007, were $136 million and$130 million, respectively. Management has concluded that the modelassumptions used were reflective of market participants’ assumptionsand appropriately considered the probability of changes to risk ratingsand loss given defaults.

Qualitative considerations The multi-seller conduits are primarily designed to provide an effi-cient means for clients to access the commercial paper market.JPMorgan Chase Bank, N.A. believes the conduits effectively dis-perse risk among all parties and that the preponderance of the eco-nomic risk in JPMorgan Chase Bank, N.A.’s multi-seller conduits isnot held by JPMorgan Chase Bank, N.A.

Consolidated sensitivity analysis on capital The table below shows the impact on JPMorgan Chase Bank, N.A.’sreported assets, liabilities, Tier 1 capital ratio and Tier 1 leverageratio if JPMorgan Chase Bank, N.A. were required to consolidate allof the multi-seller conduits that it administers at their current carry-ing value.

December 31, 2008(in billions, except ratios) Reported Pro forma(a)(b)

Assets $ 1,746.2 $ 1,789.3Liabilities 1,617.5 1,660.6Tier 1 capital ratio 8.7% 8.7%Tier 1 leverage ratio 5.9 5.8

(a) The table shows the impact of consolidating the assets and liabilities of the multi-seller conduits at their current carrying value; as such, there would be no incomestatement or capital impact at the date of consolidation. If JPMorgan Chase Bank,N.A. were required to consolidate the assets and liabilities of the conduits at fairvalue, the Tier 1 capital ratio would be approximately 8.6%. The fair value of theassets is primarily based upon pricing for comparable transactions. The fair value ofthese assets could change significantly because the pricing of conduit transactions isrenegotiated with the client, generally, on an annual basis and due to changes in cur-rent market conditions.

(b) Consolidation is assumed to occur on the first day of the quarter, at the quarter-endlevels, in order to provide a meaningful adjustment to average assets in the denomi-nator of the leverage ratio.

JPMorgan Chase Bank, N.A. could fund purchases of assets fromVIEs should it become necessary.

2007 activityIn July 2007, a reverse repurchase agreement collateralized byprime residential mortgages held by a JPMorgan Chase Bank, N.A.-administered multi-seller conduit was put to JPMorgan Chase Bank,N.A. under its deal-specific liquidity facility. The asset was trans-ferred to and recorded by JPMorgan Chase Bank, N.A. at its parvalue based on the fair value of the collateral that supported thereverse repurchase agreement. During the fourth quarter of 2007,additional information regarding the value of the collateral, includ-ing performance statistics, resulted in the determination byJPMorgan Chase Bank, N.A. that the fair value of the collateral wasimpaired. Impairment losses were allocated to the ELN holder (theparty that absorbs the majority of the expected loss from the con-duit) in accordance with the contractual provisions of the ELN note.

On October 29, 2007, certain structured CDO assets originated inthe second quarter of 2007 and backed by subprime mortgageswere transferred to JPMorgan Chase Bank, N.A. from two JPMorganChase Bank, N.A.-administered multi-seller conduits. It became clearin October that commercial paper investors and rating agencieswere becoming increasingly concerned about CDO assets backed bysubprime mortgage exposures. Because of these concerns, and toensure the continuing viability of the two conduits as financingvehicles for clients and as investment alternatives for commercialpaper investors, JPMorgan Chase Bank, N.A., in its role as adminis-trator, transferred the CDO assets out of the multi-seller conduits.The structured CDO assets were transferred to JPMorgan ChaseBank, N.A. at their par value of $1.4 billion. As of December 31,2008 and 2007, the CDO assets were valued on the ConsolidatedBalance Sheets at $5 million and $291 million, respectively.

There were no other structured CDO assets backed by subprimemortgages remaining in JPMorgan Chase Bank, N.A.-administeredmulti-seller conduits as of December 31, 2008 and 2007.

JPMorgan Chase Bank, N.A. does not consider the October 2007transfer of the structured CDO assets from the multi-seller conduits toJPMorgan Chase Bank, N.A. to be an indicator of JPMorgan ChaseBank, N.A.’s intent to provide implicit support to the ELN holders. Thistransfer was a one-time, isolated event, limited to a specific type ofasset that is not typically funded in JPMorgan Chase Bank, N.A.’sadministered multi-seller conduits. In addition, JPMorgan Chase Bank,N.A. has no plans to permit multi-seller conduits to purchase suchassets in the future.

Investor intermediation As a financial intermediary, JPMorgan Chase Bank, N.A. creates cer-tain types of VIEs and also structures transactions, typically derivativestructures, with these VIEs to meet investor needs. JPMorgan ChaseBank, N.A. may also provide liquidity and other support. The risksinherent in the derivative instruments or liquidity commitments aremanaged similarly to other credit, market or liquidity risks to whichJPMorgan Chase Bank, N.A. is exposed. The principal types of VIEs


for which JPMorgan Chase Bank, N.A. is engaged in these structur-ing activities are municipal bond vehicles, credit-linked note vehicles,asset swap vehicles and collateralized debt obligation vehicles.

Municipal bond vehiclesJPMorgan Chase Bank, N.A. has created a series of secondary markettrusts that provide short-term investors with qualifying tax-exemptinvestments, and that allow investors in tax-exempt securities tofinance their investments at short-term tax-exempt rates. In a typicaltransaction, the vehicle purchases fixed-rate longer-term highly ratedmunicipal bonds and funds the purchase by issuing two types of secu-rities: (1) putable floating-rate certificates and (2) inverse floating-rateresidual interests (“residual interests”). The maturity of each of theputable floating-rate certificates and the residual interests is equal tothe life of the vehicle, while the maturity of the underlying municipalbonds is longer. Holders of the putable floating-rate certificates may“put,” or tender, the certificates if the remarketing agent cannot suc-cessfully remarket the floating-rate certificates to another investor. Aliquidity facility conditionally obligates the liquidity provider to fundthe purchase of the tendered floating-rate certificates. Upon termina-tion of the vehicle, if the proceeds from the sale of the underlyingmunicipal bonds are not sufficient to repay the liquidity facility, theliquidity provider has recourse either to excess collateralization in thevehicle or the residual interest holders for reimbursement.

The third-party holders of the residual interests in these vehicles couldexperience losses if the face amount of the putable floating-rate cer-tificates exceeds the market value of the municipal bonds upon termi-nation of the vehicle. Certain vehicles require a smaller initial invest-ment by the residual interest holders and thus do not result in excesscollateralization. For these vehicles there exists a reimbursement obli-gation which requires the residual interest holders to post, during thelife of the vehicle, additional collateral to the vehicle on a daily basisas the market value of the municipal bonds declines.

JPMorgan Chase Bank, N.A. often serves as the sole liquidityprovider of the putable floating-rate certificates. As the liquidityprovider, JPMorgan Chase Bank, N.A. has an obligation to fund thepurchase of the putable floating-rate certificates; this obligation istriggered by the failure to remarket the putable floating-rate certifi-cates. The liquidity provider’s obligation to perform is conditional andis limited by certain termination events, which include bankruptcy orfailure to pay by the municipal bond issuer or credit enhancementprovider, and the immediate downgrade of the municipal bond tobelow investment grade. A downgrade of JPMorgan Chase Bank,N.A.’s short-term rating does not affect JPMorgan Chase Bank, N.A.’sobligation under the liquidity facility. However, in the event of adowngrade in JPMorgan Chase Bank, N.A.’s credit ratings, holders ofthe putable floating-rate instruments supported by those liquidityfacility commitments might choose to sell their instruments, whichcould increase the likelihood that the liquidity commitments could bedrawn. In vehicles in which third-party investors own the residualinterests, in addition to the termination events, JPMorgan ChaseBank, N.A.’s exposure as liquidity provider is further limited by the

high credit quality of the underlying municipal bonds, and the excesscollateralization in the vehicle or the reimbursement agreements withthe residual interest holders. In the fourth quarter of 2008, a draw-down occurred on one liquidity facility as a result of a failure toremarket putable floating-rate certificates. JPMorgan Chase Bank,N.A. was required to purchase $19 million of putable floating-ratecertificates. Subsequently, the municipal bond vehicle was terminatedand the proceeds from the sales of the municipal bonds, togetherwith the collateral posted by the residual interest holder, were suffi-cient to repay the putable floating-rate certificates. In 2007,JPMorgan Chase Bank, N.A. did not experience a drawdown on theliquidity facilities.

The long-term credit ratings of the putable floating-rate certificatesare directly related to the credit ratings of the underlying municipalbonds, and to the credit rating of any insurer of the underlyingmunicipal bond. A downgrade of a bond insurer would result in adowngrade of the insured municipal bonds, which would affect therating of the putable floating-rate certificates. This could causedemand for these certificates by investors to decline or disappear, asputable floating-rate certificate holders typically require an “AA-”bond rating. At December 31, 2008 and 2007, 97% and 99%,respectively, of the municipal bonds held by vehicles to whichJPMorgan Chase Bank, N.A. served as liquidity provider were rated“AA-” or better, based upon either the rating of the underlyingmunicipal bond itself, or the rating including any credit enhancement.At December 31, 2008 and 2007, $2.6 billion and $12.0 billion,respectively, of the bonds were insured by monoline bond insurers. Inaddition, the municipal bond vehicles did not experience any bank-ruptcy or downgrade termination events during 2008 and 2007.

JPMorgan Chase Bank, N.A. sometimes invests in the residual inter-ests of municipal bond vehicles. For VIEs in which JPMorgan ChaseBank, N.A. owns the residual interests, JPMorgan Chase Bank, N.A.consolidates the VIEs.

The likelihood that JPMorgan Chase Bank, N.A. would have to con-solidate VIEs where JPMorgan Chase Bank, N.A. does not own theresidual interests and that are currently off-balance sheet is remote.



Credit-linked note vehiclesJPMorgan Chase Bank, N.A. structures transactions with credit-linkednote (“CLN”) vehicles in which the VIE purchases highly rated assets,such as asset-backed securities, and enters into a credit derivativecontract with JPMorgan Chase Bank, N.A. to obtain exposure to a ref-erenced credit which the VIE otherwise does not hold. The VIE thenissues CLNs with maturities predominantly ranging from one to tenyears in order to transfer the risk of the referenced credit to the VIE’sinvestors. Clients and investors often prefer using a CLN vehicle sincethe CLNs issued by the VIE generally carry a higher credit rating thansuch notes would if issued directly by JPMorgan Chase Bank, N.A.JPMorgan Chase Bank, N.A.’s exposure to the CLN vehicles is general-ly limited to its rights and obligations under the credit derivative con-tract with the VIE, as JPMorgan Chase Bank, N.A. does not provideany additional contractual financial support to the VIE. In addition,JPMorgan Chase Bank, N.A. has not historically provided any financialsupport to the CLN vehicles over and above its contractual obliga-tions. Accordingly, JPMorgan Chase Bank, N.A. typically does not con-

solidate the CLN vehicles. As a derivative counterparty in a credit-linked note structure, JPMorgan Chase Bank, N.A. has a senior claimon the collateral of the VIE and reports such derivatives on its balancesheet at fair value. The collateral purchased by such VIEs is largelyinvestment-grade, with a majority being rated “AAA”. JPMorganChase Bank, N.A. divides its credit-linked note structures broadly intotwo types: static and managed.

In a static credit-linked note structure, the CLNs and associated creditderivative contract either reference a single credit (e.g., a multination-al corporation) or all or part of a fixed portfolio of credits. JPMorganChase Bank, N.A. generally buys protection from the VIE under thecredit derivative. As a net buyer of credit protection, JPMorgan ChaseBank, N.A. pays a premium to the VIE in return for the receipt of apayment (up to the notional amount of the derivative) if one or moreof the reference credits defaults, or if the losses resulting from thedefault of the reference credits exceed specified levels.

Exposure to nonconsolidated municipal bond VIEs at December 31, 2008 and 2007, including the ratings profile of the VIEs’ assets, were as follows.

2008 2007

Fair value of Fair value ofDecember 31, assets held Liquidity Excess/ Maximum assets held Liquidity Excess/ Maximum(in billions) by VIEs facilities(d) (deficit)(e) exposure by VIEs facilities(d) (deficit)(e) exposure

Nonconsolidatedmunicipal bond vehicles(a)(b)(c) $ 10.0 $ 6.9 $ 3.1 $ 6.9 $ 19.2 $ 18.1 $ 1.1 $ 18.1

Fair value Wt. avg.Ratings profile of VIE assets(f) of assets expected

December 31, Investment-grade Noninvestment-grade held by life of assets(in billions) AAA to AAA- AA+ to AA- A+ to A- BBB to BBB- BB+ and below VIEs (years)


2008 $ 3.8 $ 5.9 $ 0.2 $ 0.1 $ — $ 10.0 22.32007 14.6 4.4 0.2 — — 19.2 10.0

(a) Excluded $340 million and $467 million at December 31, 2008 and 2007, respectively, which were consolidated due to JPMorgan Chase Bank, N.A. owning the residual interests.(b) Certain of the municipal bond vehicles are structured to meet the definition of a QSPE (as discussed in Note 1 on pages 6–7 of these Consolidated Financial Statements); accordingly,

the assets and liabilities of QSPEs are not reflected in JPMorgan Chase Bank, N.A.’s Consolidated Balance Sheets (except for retained interests that are reported at fair value). Excludednonconsolidated amounts of $603 million and $7.1 billion at December 31, 2008 and 2007, respectively, related to QSPE municipal bond vehicles in which JPMorgan Chase Bank, N.A.owned the residual interests.

(c) The decline in balances at December 31, 2008, compared with December 31, 2007, was due to third-party residual interest holders exercising their right to terminate the municipal bondvehicles. The proceeds from the sales of municipal bonds were sufficient to repay the putable floating-rate certificates, and JPMorgan Chase Bank, N.A. did not incur losses as a result ofthese terminations.

(d) JPMorgan Chase Bank, N.A. may serve as credit enhancement provider in municipal bond vehicles in which it serves as liquidity provider. JPMorgan Chase Bank, N.A. provided insur-ance on underlying municipal bonds in the form of letters of credit of $10 million and $103 million at December 31, 2008 and 2007, respectively.

(e) Represents the excess (deficit) of municipal bond asset fair value available to repay the liquidity facilities, if drawn.(f) The ratings scale is based upon JPMorgan Chase Bank, N.A.’s internal risk ratings and presented on an S&P equivalent basis.


In a managed credit-linked note structure, the CLNs and associatedcredit derivative generally reference all or part of an actively managedportfolio of credits. An agreement exists between a portfolio managerand the VIE that gives the portfolio manager the ability to substituteeach referenced credit in the portfolio for an alternative credit. By par-ticipating in a structure where a portfolio manager has the ability tosubstitute credits within pre-agreed terms, the investors who own theCLNs seek to reduce the risk that any single credit in the portfolio will

default. JPMorgan Chase Bank, N.A. does not act as portfolio manag-er; its involvement with the VIE is generally limited to being a deriva-tive counterparty. As a net buyer of credit protection, JPMorgan ChaseBank, N.A. pays a premium to the VIE in return for the receipt of apayment (up to the notional of the derivative) if one or more of thecredits within the portfolio defaults, or if the losses resulting from thedefault of reference credits exceed specified levels.

Exposure to nonconsolidated credit-linked note VIEs at December 31, 2008 and 2007, was as follows.

2008 2007

Par value of Par value ofDecember 31, Derivative Trading Total collateral held Derivative Trading Total collateral held(in billions) receivables assets(c) exposure(d) by VIEs(e) receivables assets(c) exposure(d) by VIEs(e)

Credit-linked notes(a)

Static structure $ 3.5 $ 0.7 $ 4.2 $ 13.6 $ 0.8 $ 0.4 $ 1.2 $ 13.5Managed structure(b) 6.4 0.3 6.7 12.4 4.5 0.9 5.4 12.8

Total $ 9.9 $ 1.0 $ 10.9 $ 26.0 $ 5.3 $ 1.3 $ 6.6 $ 26.3

(a) Excluded fair value of collateral of $2.0 billion and $2.5 billion at December 31, 2008 and 2007, respectively, which was consolidated, as JPMorgan Chase Bank, N.A., in its role assecondary market maker, held a majority of the issued CLNs of certain vehicles.

(b) Includes synthetic collateralized debt obligation vehicles, which have similar risk characteristics to managed credit-linked note vehicles. At December 31, 2008 and 2007, trading assetsincluded $7 million and $291 million, respectively, of transactions with subprime collateral.

(c) Trading assets principally comprise notes issued by VIEs, which from time to time are held as part of the termination of a deal or to support limited market-making.(d) On-balance sheet exposure that includes derivative receivables and trading assets.(e) JPMorgan Chase Bank, N.A.’s maximum exposure arises through the derivatives executed with the VIEs; the exposure varies over time with changes in the fair value of the derivatives.

JPMorgan Chase Bank, N.A. relies upon the collateral held by the VIEs to pay any amounts due under the derivatives; the vehicles are structured at inception so that the par value ofthe collateral is expected to be sufficient to pay amounts due under the derivative contracts.

Asset Swap VehiclesJPMorgan Chase Bank, N.A. also structures and executes transac-tions with asset swap vehicles on behalf of investors. In such trans-actions, the VIE purchases a specific asset or assets and then entersinto a derivative with JPMorgan Chase Bank, N.A. in order to tailorthe interest rate or currency risk, or both, of the assets according toinvestors’ requirements. Generally, the assets are held by the VIE tomaturity, and the tenor of the derivatives would match the maturityof the assets. Investors typically invest in the notes issued by suchVIEs in order to obtain exposure to the credit risk of the specificassets as well as exposure to foreign exchange and interest rate riskthat is tailored to their specific needs; for example, an interest ratederivative may add additional interest rate exposure into the VIE inorder to increase the return on the issued notes; or to convert aninterest-bearing asset into a zero-coupon bond.

JPMorgan Chase Bank, N.A.’s exposure to the asset swap vehicles isgenerally limited to its rights and obligations under the interest rateand/or foreign exchange derivative contracts, as JPMorgan ChaseBank, N.A. does not provide any contractual financial support to theVIE. In addition, JPMorgan Chase Bank, N.A. historically has not pro-vided any financial support to the asset swap vehicles over and aboveits contractual obligations. Accordingly, JPMorgan Chase Bank, N.A.typically does not consolidate the asset swap vehicles. As a derivativecounterparty, JPMorgan Chase Bank, N.A. has a senior claim on thecollateral of the VIE and reports such derivatives on its balance sheetat fair value. Substantially all of the assets purchased by such VIEs areinvestment-grade.



Exposure to nonconsolidated asset swap VIEs at December 31, 2008 and 2007, was as follows.

2008 2007

Derivative Par value of Derivative Par value ofDecember 31, receivables Trading Total collateral held receivables Trading Total collateral held(in billions) (payables) assets(a) exposure(b) by VIEs(c) (payables) assets(a) exposure(b) by VIEs(c)

NonconsolidatedAsset swap vehicles(d) $ (0.2) $ — $ (0.2) $ 7.0 $ 0.2 $ — $ 0.2 $ 5.6

(a) Trading assets principally comprise notes issued by VIEs, which from time to time are held as part of the termination of a deal or to support limited market-making.(b) On-balance sheet exposure that includes derivative receivables (payables) and trading assets.(c) JPMorgan Chase Bank, N.A.’s maximum exposure arises through the derivatives executed with the VIEs; the exposure varies over time with changes in the fair value of the derivatives.

JPMorgan Chase Bank, N.A. relies upon the collateral held by the VIEs to pay any amounts due under the derivatives; the vehicles are structured at inception so that the par value ofthe collateral is expected to be sufficient to pay amounts due under the derivative contracts.

(d) Excluded fair value of collateral of $1.0 billion and $976 million at December 31, 2008 and 2007, respectively, which was consolidated as JPMorgan Chase Bank, N.A., in its role assecondary market maker, held a majority of the issued notes of certain vehicles.

Collateralized Debt Obligations vehiclesA CDO typically refers to a security that is collateralized by a pool ofbonds, loans, equity, derivatives or other assets. JPMorgan ChaseBank, N.A.’s involvement with a particular CDO vehicle may take oneor more of the following forms: arranger, warehouse fundingprovider, placement agent or underwriter, secondary market-makerfor securities issued, or derivative counterparty.

Prior to the formal establishment of a CDO vehicle, there is a ware-housing period where a VIE may be used to accumulate the assetswhich will be subsequently securitized and serve as the collateral forthe securities to be issued to investors. During this warehousing peri-od, JPMorgan Chase Bank, N.A. may provide all or a portion of thefinancing to the VIE, for which JPMorgan Chase Bank, N.A. earnsinterest on the amounts it finances. A third-party asset manager thatwill serve as the manager for the CDO vehicle uses the warehousefunding provided by JPMorgan Chase Bank, N.A. to purchase thefinancial assets. The funding commitments generally are one year induration. In the event that the securitization of assets does not occurwithin the committed financing period, the warehoused assets aregenerally liquidated.

Because of the varied levels of support provided by JPMorgan ChaseBank, N.A. during the warehousing period, which typically averagessix to nine months, each CDO warehouse VIE is assessed in accor-dance with FIN 46(R) to determine whether JPMorgan Chase Bank,N.A. is considered the primary beneficiary that should consolidate the

VIE. In general, JPMorgan Chase Bank, N.A. would consolidate thewarehouse VIE unless another third party, typically the asset manag-er, provides significant protection for potential declines in the valueof the assets held by the VIE. In those cases, the third party that pro-vides the protection to the warehouse VIE would consolidate the VIE.

Once the portfolio of warehoused assets is large enough, the VIE willissue securities where market conditions permit. The proceeds fromthe issuance of securities will be used to repay the warehousefinancing obtained from JPMorgan Chase Bank, N.A. and other coun-terparties. In connection with the establishment of the CDO vehicle,JPMorgan Chase Bank, N.A. typically earns a fee for arranging theCDO vehicle and distributing the securities (as placement agentand/or underwriter) and does not typically own any equity tranchesissued. Once the CDO vehicle closes and issues securities, JPMorganChase Bank, N.A. has no further obligation to provide further sup-port to the vehicle. At the time of closing, JPMorgan Chase Bank,N.A. may hold unsold securities that JPMorgan Chase Bank, N.A. wasnot able to place with third-party investors. The amount of unsoldsecurities at December 31, 2008 and 2007, was insignificant. Inaddition, JPMorgan Chase Bank, N.A. may on occasion hold some ofthe CDO vehicles’ securities including equity interests, as a secondarymarket-maker or as a principal investor, or it may be a derivativecounterparty to the vehicles. At December 31, 2008 and 2007, theseamounts were not significant. Exposures to CDO warehouse VIEs atDecember 31, 2008 and 2007, were as follows.


VIEs sponsored by third partiesInvestment in a third-party credit card securitization trustJPMorgan Chase Bank, N.A. holds a note in a third-party-sponsoredVIE, which is a credit card securitization trust (the “Trust”), that ownscredit card receivables issued by a national retailer. The note is struc-tured so that the principal amount can float up to 47% of the princi-pal amount of the receivables held by the Trust not to exceed $4.2 bil-lion. JPMorgan Chase Bank, N.A. is not the primary beneficiary of theTrust and accounts for its investment as an AFS security, which isrecorded at fair value. At December 31, 2008, the amortized cost ofthe note was $3.6 billion and the fair value was $2.6 billion. For moreinformation on accounting for AFS securities, see Note 13 on pages38–41 of these Consolidated Financial Statements.

Other VIEs sponsored by third partiesJPMorgan Chase Bank, N.A. enters into transactions with VIEs struc-tured by other parties. These transactions include, for example, actingas a derivative counterparty, liquidity provider, investor, underwriter,placement agent, trustee or custodian. These transactions are con-ducted at arm’s length, and individual credit decisions are basedupon the analysis of the specific VIE, taking into consideration thequality of the underlying assets. Where these activities do not causeJPMorgan Chase Bank, N.A. to absorb a majority of the expectedlosses of the VIEs or to receive a majority of the residual returns ofthe VIEs, JPMorgan Chase Bank, N.A. records and reports these posi-tions on its Consolidated Balance Sheets similar to the way it wouldrecord and report positions from any other third-party transaction.These transactions are not considered significant for disclosure pur-poses under FIN 46(R).

December 31, 2008 Funded Unfunded Maximum(in billions) loans commitments(a) exposure(b)

CDO warehouse VIEsConsolidated $ 0.2 $ — $ 0.2Nonconsolidated 0.4 0.7 1.1

Total $ 0.6 $ 0.7 $ 1.3

December 31, 2007 Funded Unfunded Maximum(in billions) loans commitments(a) exposure(b)

CDO warehouse VIEsConsolidated $ 1.8 $ 1.2 $ 3.0Nonconsolidated 2.2 3.0 5.2

Total $ 4.0 $ 4.2 $ 8.2

Ratings profile of VIE assets(c)

December 31, Investment-grade Noninvestment-grade Total(in billions) AAA to AAA- AA+ to AA- A+ to A- BBB to BBB- BB+ and below exposure

Nonconsolidated CDO warehouse VIEs2008 $ — $ — $ — $ — $ 0.4 $ 0.42007 — — — — 2.2 2.2

(a) Typically contingent upon certain asset-quality conditions being met by asset managers.(b) The aggregate of the fair value of loan exposure and any unfunded, contractually committed financing.(c) The ratings scale is based upon JPMorgan Chase Bank, N.A.’s internal risk ratings and presented on an S&P equivalent basis.



Note 19 – Goodwill and other intangible assets Goodwill is not amortized. Instead, it is tested for impairment inaccordance with SFAS 142. Goodwill is tested annually (during thefourth quarter) or more often if events or circumstances, such asadverse changes in the business climate, indicate there may beimpairment. Intangible assets determined to have indefinite lives arenot amortized but are tested for impairment at least annually, ormore frequently if events or changes in circumstances indicate that

the asset might be impaired. The impairment test compares the fairvalue of the indefinite-lived intangible asset to its carrying amount.Other acquired intangible assets determined to have finite lives, suchas core deposits and credit card relationships, are amortized overtheir estimated useful lives in a manner that best reflects the eco-nomic benefits of the intangible asset; impairment testing is per-formed periodically on these amortizing intangible assets.

Consolidated VIEs

Assets

December 31,2008 Trading debt Total(in billions) and equity Loans Other(b) assets(c)

VIE program typeMunicipal bond

vehicles $ 0.3 $ — $ — $ 0.3Credit-linked notes 1.9 — 0.1 2.0CDO warehouses(a) — — — —Student loans — 4.0 0.1 4.1Employee funds — — — —Energy investments — — — —Other 1.5 0.7 0.1 2.3

Total $ 3.7 $ 4.7 $ 0.3 $ 8.7

Liabilities

December 31,2008 Beneficial interests Total(in billions) in VIE Assets(d) Other(e) liabilities


vehicles $ — $ 0.3 $ 0.3Credit-linked notes 1.0 2.0 3.0CDO warehouses — — —Student loans 2.8 1.1 3.9Employee funds — — —Energy investments — — —Other 0.4 1.1 1.5

Total $ 4.2 $ 4.5 $ 8.7

Liabilities

December 31,2007 Beneficial interests Total(in billions) in VIE Assets(d) Other(e) liabilities


vehicles $ — $ 0.5 $ 0.5Credit-linked notes 2.1 1.3 3.4CDO warehouses — — —Student loans 4.1 — 4.1Employee funds — — —Energy investments — — —Other 0.7 1.2 1.9

Total $ 6.9 $ 3.0 $ 9.9

Consolidated VIEs

Assets

December 31,2007 Trading debt Total(in billions) and equity Loans Other(b) assets(c)


vehicles $ 0.5 $ — $ — $ 0.5Credit-linked notes 2.3 — 0.2 2.5CDO warehouses(a) 1.5 0.3 — 1.8Student loans — 4.1 — 4.1Employee funds — — — —Energy investments — — — —Other 2.9 — 0.5 3.4

Total $ 7.2 $ 4.4 $ 0.7 $ 12.3

Consolidated VIE assets and liabilitiesThe following table presents information on assets, liabilities and commitments related to VIEs that are consolidated by JPMorgan Chase Bank, N.A.

(a) Excluded from total assets was $1.2 billion of unfunded commitments at December 31, 2007. There were no unfunded commitments at December 31, 2008.(b) Included assets classified as resale agreements and other assets within the Consolidated Balance Sheets.(c) Assets of each consolidated VIE included in the program types above are generally used to satisfy the liabilities to third parties. The difference between total assets and total liabilities

recognized for consolidated VIEs represents JPMorgan Chase Bank, N.A.’s interest in the consolidated VIEs for each program type.(d) 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 Bank, N.A. Included in beneficial interestsin VIE assets are long-term beneficial interests of $4.2 billion and $6.9 billion at December 31, 2008 and 2007, respectively. See Note 23 on page 71 of these Consolidated FinancialStatements for the maturity profile of FIN 46 long-term beneficial interests.

(e) Included liabilities classified as other borrowed funds, long-term debt and other liabilities in the Consolidated Balance Sheets.




Goodwill $ 27,371 $25,819Mortgage servicing rights 9,236 8,632Purchased credit card relationships 128 189

All other intangibles:Other credit card–related intangibles $ 698 $ 291Core deposit intangibles 1,597 2,066Other intangibles 1,051 985

Total all other intangible assets $ 3,346 $ 3,342

Goodwill The $1.6 billion increase in goodwill from the prior year primarilyresulted from the dissolution of the Chase Paymentech Solutionsjoint venture and the tax-related purchase accounting adjustmentsassociated with the Bank One merger. Goodwill was not impaired atDecember 31, 2008, or 2007, nor was any goodwill written off dueto impairment during 2008 and 2007.

Mortgage servicing rights JPMorgan Chase Bank, N.A. recognizes as intangible assets mort-gage servicing rights, which represent the right to perform specifiedmortgage servicing activities (predominantly with respect to residen-tial mortgages) for others. MSRs are either purchased from third par-ties or retained upon sale or securitization of mortgage loans.Servicing activities include collecting principal, interest, and escrowpayments from borrowers; making tax and insurance payments onbehalf of borrowers; monitoring delinquencies and executing foreclo-sure proceedings; and accounting for and remitting principal andinterest payments to the investors of the mortgage-backed securities.

As permitted by SFAS 156, JPMorgan Chase Bank, N.A. elected to fairvalue MSRs as one class of servicing assets. JPMorgan Chase Bank,N.A. defined MSRs as one class based on the availability of marketinputs to measure MSR fair value and its treatment of MSRs as oneaggregate pool for risk management purposes.

JPMorgan Chase Bank, N.A. initially capitalizes MSRs based on theestimated fair value at the time of initial recognition. JPMorganChase Bank, N.A. estimates the fair value of MSRs for initial capital-ization and ongoing valuation using an option-adjusted spreadmodel, which projects MSR cash flows over multiple interest rate sce-narios in conjunction with JPMorgan Chase Bank, N.A.’s proprietaryprepayment model and then discounts these cash flows at risk-adjusted rates. The model considers portfolio characteristics, contrac-tually specified servicing fees, prepayment assumptions, delinquencyrates, late charges, other ancillary revenue and costs to service, andother economic factors. JPMorgan Chase Bank, N.A. reassesses andperiodically adjusts the underlying inputs and assumptions used inthe OAS model to reflect market conditions and assumptions that amarket participant would consider in valuing the MSR asset. During2007 and 2008, JPMorgan Chase Bank, N.A. continued to refine itsproprietary payment model based upon a number of market-relatedfactors, including a downward trend in home prices, general tighten-ing of credit underwriting standards and the associated impact onrefinancing activity. JPMorgan Chase Bank, N.A. compares fair valueestimates and assumptions to observable market data where avail-able and to recent market activity and actual portfolio experience.

The fair value of MSRs is sensitive to changes in interest rates,including their effect on prepayment speeds. JPMorgan Chase Bank,N.A. uses or has used combinations of derivatives and trading instru-ments to manage changes in the fair value of MSRs. The intent is tooffset any changes in the fair value of MSRs with changes in the fairvalue of the related risk management instruments. MSRs decrease invalue when interest rates decline. Conversely, securities (such asmortgage-backed securities), principal-only certificates and certainderivatives (when JPMorgan Chase Bank, N.A. receives fixed-rateinterest payments) increase in value when interest rates decline.



The table below outlines the key economic assumptions used todetermine the fair value of JPMorgan Chase Bank, N.A.’s MSRs atDecember 31, 2008 and 2007, respectively; and it outlines the sen-sitivities of those fair values to immediate 10% and 20% adversechanges in those assumptions.

Year ended December 31 (in millions, except rates) 2008 2007

Weighted-average prepayment speed assumption (CPR) 35.10% 12.49%Impact on fair value of 10% adverse change $ (1,021) $ (481)Impact on fair value of 20% adverse change (1,936) (926)

Weighted-average option adjusted spread 3.80% 3.00%Impact on fair value of 100 basis points

adverse change $ (308) $ (311)Impact on fair value of 200 basis points

adverse change (601) (599)


The sensitivity analysis in the preceding table is hypothetical andshould be used with caution. Changes in fair value based upon a10% and 20% variation in assumptions generally cannot be easilyextrapolated 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 thefair value is calculated without changing any other assumption. Inreality, changes in one factor may result in changes in another, whichmight magnify or counteract the sensitivities.

Purchased credit card relationships and all other intangible assets During 2008, purchased credit card relationships and all other intan-gibles decreased $57 million, primarily as a result of amortizationexpense, partially offset by an increase in intangibles recognizedrelated to the dissolution of the Chase Paymentech Solutions jointventure as well as the acquisition of an institutional global custodyportfolio.

Except for $315 million of indefinite-lived intangibles related to assetmanagement advisory contracts, which are not amortized but aretested for impairment at least annually, the remainder of JPMorganChase Bank, N.A.’s other acquired intangible assets are subject toamortization.

The following table summarizes MSR activity for the years endedDecember 31, 2008, 2007 and 2006.

Year ended December 31,(in millions, except where otherwise noted) 2008 2007 2006

Balance at beginning of period after valuation allowance $ 8,632 $ 7,546 $ 6,452

Cumulative effect of change in accounting principle — — 230

Fair value at beginning of period 8,632 7,546 6,682MSR activity

Originations of MSRs 3,021 2,335 1,512Purchase of MSRs 6,382(c) 798 627

Total additions 9,403 3,133 2,139

Change in valuation due to inputs and assumptions(a) (6,772) (516) 165

Other changes in fair value(b) (2,027) (1,531) (1,440)

Total change in fair value of MSRs (8,799)(d) (2,047) (1,275)

Fair value at December 31 $ 9,236 $ 8,632 $ 7,546

Change in unrealized gains (losses)included in income related to MSRs

held at December 31 $ (6,772) $ (516) NA

Contractual service fees, late fees and other ancillary fees included in income $ 3,111 $ 2,429 $ 2,038

Third-party mortgage loans serviced at December 31, (in billions) $ 1,112.0 $ 614.7 $ 526.7

(a) Represents MSR asset fair value adjustments due to changes in inputs, such asinterest rates and volatility, as well as updates to assumptions used in the valu-ation model. This caption also represents total realized and unrealized gains(losses) included in net income per the SFAS 157 disclosure for fair value meas-urement using significant unobservable inputs (level 3).

(b) Includes changes in the MSR value due to modeled servicing portfolio runoff (ortime decay). This caption represents the impact of cash settlements per the SFAS157 disclosure for fair value measurement using significant unobservable inputs(level 3).

(c) Includes MSRs acquired as a result of the Washington Mutual transaction (ofwhich $59 million related to commercial real estate). For further discussion, seeNote 3 on pages 10–12 of these Consolidated Financial Statements.

(d) Includes $4 million related to commercial real estate.


Note 20 – Premises and equipmentPremises and equipment, including leasehold improvements, are carried at cost less accumulated depreciation and amortization.JPMorgan Chase Bank, N.A. computes depreciation using thestraight-line method over the estimated useful life of an asset. Forleasehold improvements, JPMorgan Chase Bank, N.A. uses thestraight-line method computed over the lesser of the remaining termof the leased facility or the estimated useful life of the leased asset.

JPMorgan Chase Bank, N.A. has recorded immaterial asset retire-ment obligations related to asbestos remediation under SFAS 143and FIN 47 in those cases where it has sufficient information to esti-mate the obligations’ fair value.

JPMorgan Chase Bank, N.A. capitalizes certain costs associated withthe acquisition or development of internal-use software under SOP98-1. Once the software is ready for its intended use, these costs areamortized on a straight-line basis over the software’s expected usefullife and reviewed for impairment on an ongoing basis.

Purchased credit card relationships and the components of all other intangible assets were as follows.

2008 2007

Net NetGross Accumulated carrying Gross Accumulated carrying

December 31, (in millions) amount amortization value amount amortization value

Purchased credit card relationships $ 224 $ 96 $ 128 $ 256 $ 67 $ 189All other intangibles:

Other credit card-related intangibles $ 773 $ 75 $ 698 $ 343 $ 52 $ 291Core deposit intangibles 4,280 2,683 1,597 4,280 2,214 2,066Other intangibles 1,539 488(a) 1,051 1,378 393(a) 985

(a) Includes amortization expense related to servicing assets on securitized automobile loans, which is recorded in lending & deposit-related fees, of $4 million and $8 million for the yearsended December 31, 2008 and 2007, respectively.



Purchased credit card relationships $ 29 $ 32 $ 33All other intangibles:

Other credit card-related intangibles 23 3 (1)Core deposit intangibles 469 554 568Other intangibles 91 90 95(a)

Total amortization expense $ 612 $ 679 $ 695

(a) Amortizing expense related to the aforementioned selected corporate trust businesses were reported in income from discontinued operations for 2006.

Future amortization expenseThe following table presents estimated future amortization expense related to credit card relationships, core deposits and all other intangibleassets at December 31, 2008.

Other credit Purchased credit card-related Core deposit All other

Year ended December 31, (in millions) card relationships intangibles intangibles intangible assets Total

2009 $ 23 $ 83 $ 390 $ 83 $ 5792010 21 89 329 70 5092011 19 89 285 61 4542012 19 91 239 58 4072013 17 91 196 57 361



Note 22 – Other borrowed funds The following table details the components of other borrowed funds.


Advances from Federal Home Loan Banks(a) $ 70,187 $ 450Nonrecourse advances – FRBB(b) 130 —Other 24,636(c) 22,826

Total $ 94,953 $ 23,276

(a) Maturities of advances from the Federal Home Loan Banks were $47.4 billion,$18.5 billion, $2.6 billion, and $714 million in each of the 12-month periods endingDecember 31, 2009, 2010, 2011, and 2013, respectively, and $1.0 billion maturingafter December 31, 2013. Maturities for the 12-month period ending December 31,2012 were not material.

(b) On September 19, 2008, the Federal Reserve Board established a temporary lendingfacility, the AML Facility, to provide liquidity to eligible U.S. money market mutualfunds (“MMMFs”). Under the AML Facility, banking organizations must use the loanproceeds to finance their purchases of eligible high-quality asset-backed commercialpaper (“ABCP”) investments from MMMFs, which are pledged to secure nonrecourseadvances from the Federal Reserve Bank of Boston (“FRBB”). Participating bankingorganizations do not bear any credit or market risk related to the ABCP investmentsthey hold under this facility; therefore, the ABCP investments held are not assessedany regulatory capital. The AML Facility will be in effect until October 30, 2009. Thenonrecourse advances from the FRBB were elected under the fair value option andrecorded in other borrowed funds; the corresponding ABCP investments were alsoelected under the fair value option and recorded in other assets.

(c) Includes $15.0 billion of advances from the Federal Reserve under the FederalReserve’s Term Auction Facility (“TAF”), pursuant to which the Federal Reserve auc-tions term funds to depository institutions that are eligible to borrow under the pri-mary credit program. The TAF allows all eligible depository institutions to place a bidfor an advance from its local Federal Reserve Bank at an interest rate set by an auc-tion. All advances are required to be fully collateralized. The TAF is designed toimprove liquidity by making it easier for sound institutions to borrow when the mar-kets are not operating efficiently. The TAF does not have a fixed expiration date.

Note 21 – DepositsAt December 31, 2008 and 2007, noninterest-bearing and interest-bearing deposits were as follows.


U.S. offices:Noninterest-bearing $ 213,115 $ 131,357Interest-bearing (included $1,849 and

$1,909 at fair value at December 31,2008 and 2007,respectively) 482,382 335,907

Non-U.S. offices:Noninterest-bearing 8,026 6,475Interest-bearing (included $3,756 and

$4,547 at fair value at December 31,2008 and 2007, respectively) 352,242 298,348

Total $ 1,055,765 $ 772,087

At December 31, 2008 and 2007, time deposits in denominations of$100,000 or more were as follows.


U.S. $ 120,502 $ 95,583

Non-U.S. 72,376 79,058

Total $ 192,878 $174,641

At December 31, 2008, the maturities of time deposits were as follows.

December 31, 2008(in millions) U.S. Non-U.S. Total

2009 $ 172,230 $ 78,573 $ 250,8032010 5,388 1,623 7,0112011 4,299 5,054 9,3532012 4,418 1,800 6,2182013 2,767 4,202 6,969After 5 years 802 3,762 4,564

Total $ 189,904 $ 95,014 $ 284,918

On October 3, 2008, the Emergency Economic Stabilization Act of2008 was signed into law. The Act increased FDIC deposit insurancefrom $100,000 to $250,000 per depositor through December 31,2009. In addition, on November 21, 2008, the FDIC released theFinal Rule for the FDIC Temporary Liquidity Guarantee Program (“TLG Program”), which provides unlimited deposit insurancethrough December 31, 2009, for noninterest-bearing transactiondeposit accounts at FDIC-insured participating institutions. JPMorganChase Bank, N.A. elected to continue to participate in the TLGProgram and, as a result, will be required to pay additional insurancepremiums to the FDIC in an amount equal to an annualized 10-basispoints on balances in noninterest-bearing transaction accounts thatexceed the $250,000 FDIC deposit insurance limits, as determinedon a quarterly basis.


Note 23 – Long-term debtJPMorgan Chase Bank, N.A. issues long-term debt denominated in various currencies, although predominantly U.S. dollars, with both fixed andvariable interest rates. The following table is a summary of long-term debt carrying values (including unamortized original issue discount, SFAS133 valuation adjustments and fair value adjustments, where applicable) by contractual maturity as of December 31, 2008.

By remaining maturity at 2008December 31, Under After 2007(in millions, except rates) 1 year 1–5 years 5 years Total Total

Long-term debt issued to unrelated partiesSenior debt:(a) Fixed rate $ 862 $ 1,247 $ 2,196 $ 4,305 $ 6,288

Variable rate(c) 4,588 22,041 12,552 39,181 54,575Interest rates(b) 4.38% 0.42% 0.44-14.21% 0.42-14.21% 3.70-14.21%

Subordinated debt: Fixed rate $ — $ 2 $ 8,698 $ 8,700 $ 9,169Variable rate — — 1,150 1,150 1,150Interest rates(b) —% 6.25% 2.33-8.25% 2.33-8.25% 4.38-8.25%

Subtotal $ 5,450 $ 23,290 $ 24,596 $ 53,336 $ 71,182

Long-term debt payable to JPMorgan Chase and affiliatesFixed rate $ — $ — $ 4,517 $ 4,517 $ 4,493

Variable rate — — 14,009 14,009 11,900Interest rates(b) —% —% 2.48-5.75% 2.48-5.75% 5.27-6.03%

Subtotal $ — $ — $ 18,526 $ 18,526 $ 16,393

Total long-term debt(d) $ 5,450 $ 23,290 $ 43,122 $ 71,862(f)(g)(h) $ 87,575(h)

FIN 46R long-term beneficial interests:Fixed rate $ — $ 319 $ 55 $ 374 $ 514

Variable rate 33 908 2,841 3,782 6,359Interest rates 3.51-4.45% 4.04-8.75% 3.40-9.16% 3.40-9.16% 1.73-12.79%

Total FIN 46R long-term beneficial interests(e) $ 33 $ 1,227 $ 2,896 $ 4,156 $ 6,873

(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 andshown net with the host contract on the Consolidated Balance Sheets. Changes in fair value of separated derivatives are recorded in principal transactions revenue. Hybrid securitieswhich JPMorgan Chase Bank, N.A. has elected to measure at fair value are classified in the line item of the host contract on the Consolidated Balance Sheets; changes in fair value arerecorded in principal transactions revenue in the Consolidated Statements of Income.

(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 the associat-ed derivative instruments used in SFAS 133 hedge accounting relationships, if applicable. The use of these derivative instruments modifies JPMorgan Chase Bank, N.A.’s exposure to thecontractual interest rates disclosed in the table above. Including the effects of the SFAS 133 hedge accounting derivatives, the range of modified rates in effect at December 31, 2008,for total long-term debt of 0.42% to 14.21%, was the same as the contractual range presented in the table above. The interest rate ranges shown exclude structured notes accountedfor at fair value under SFAS 155 or SFAS 159.

(c) Included $7.8 billion principal amount of U.S. dollar-denominated floating-rate mortgage bonds issued to an unaffiliated statutory trust, which in turn issued C=6.0 billion in coveredbonds secured by mortgage loans at December 31, 2008.

(d) Included $34.9 billion and $56.9 billion of outstanding structured notes accounted for at fair value at December 31, 2008 and 2007, respectively.(e) Included on the Consolidated Balance Sheets in beneficial interests issued by consolidated VIEs. Also included $1.4 billion and $2.7 billion of outstanding structured notes accounted

for at fair value at December 31, 2008 and 2007, respectively. Excluded $56 million of short-term beneficial interests issued by consolidated VIEs that are reported on the ConsolidatedBalance Sheet at December 31, 2007.

(f) At December 31, 2008, long-term debt aggregating $3.5 billion was redeemable at the option of JPMorgan Chase Bank, N.A., in whole or in part, prior to maturity, based upon theterms specified in the respective notes.

(g) The aggregate principal amount of debt that matures in each of the five years subsequent to 2008 is $5.5 billion in 2009, $6.8 billion in 2010, $7.4 billion in 2011, $5.4 billion in2012 and $3.6 billion in 2013.

(h) Included $2.8 billion and $3.8 billion of outstanding zero-coupon notes at December 31, 2008 and 2007, respectively. The aggregate principal amount of these notes at their respec-tive maturities was $5.8 billion and $6.3 billion, respectively.

instruments modifies JPMorgan Chase Bank, N.A.’s interest expense onthe associated debt. The modified weighted-average interest rate fortotal long-term debt, including the effects of related derivative instru-ments, was 3.47% and 5.52% as of December 31, 2008 and 2007,respectively.

The weighted-average contractual interest rate for total long-term debtwas 3.84% and 5.49% as of December 31, 2008 and 2007, respec-tively. In order to modify exposure to interest rate and currencyexchange rate movements, JPMorgan Chase Bank, N.A. utilizes deriva-tive instruments, primarily interest rate and cross-currency interest rateswaps, in conjunction with some of its debt issues. The use of these



JPMorgan Chase Bank, N.A. has guaranteed certain debt of its sub-sidiaries, including both long-term debt and structured notes sold aspart of JPMorgan Chase Bank, N.A.’s market-making activities. Theseguarantees rank on a parity with all of JPMorgan Chase Bank, N.A.’sother unsecured and unsubordinated indebtedness. Guaranteed liabili-ties totaled $23.5 billion and $42.7 billion at December 31, 2008 and2007, respectively.

Junior subordinated deferrable interest debentures held bytrusts that issued guaranteed capital debt securities At December 31, 2008, JPMorgan Chase Bank, N.A. had establishedtwo wholly-owned Delaware statutory business trusts (“issuer trusts”)that had issued guaranteed capital debt securities.

The junior subordinated deferrable interest debentures issued byJPMorgan Chase Bank, N.A. to the issuer trusts were reflected inJPMorgan Chase Bank, N.A.’s Consolidated Balance Sheets in the lia-bilities section under the caption “Junior subordinated deferrableinterest debentures held by trusts that issued guaranteed capitaldebt securities” (i.e., trust preferred capital debt securities).JPMorgan Chase Bank, N.A. also records the common capital securi-ties issued by the issuer trusts in other assets in its ConsolidatedBalance Sheets at December 31, 2008 and 2007.

The debentures issued to the issuer trusts by JPMorgan Chase Bank,N.A., less the common capital securities of the issuer trusts, qualifyas Tier 1 capital. The following is a summary of the outstanding trustpreferred capital debt securities, including unamortized original issuediscount, issued by each trust, and the junior subordinated deferrableinterest debenture issued to each trust as of December 31, 2008.

Amount of Stated maturitycapital debt of capital

securities securities Earliest Interest rate of Interestissued Issue and redemption capital securities payment/

December 31, 2008 (in millions) by trust(a) date debentures date and debentures distribution dates

Bank One Capital I, LLC $ 300 2000 2030 Any time 8.20% SemiannuallyBank One Capital II, LLC 300 2002 2032 Any time 7.00% Semiannually

Total $ 600

(a) Represents the amount of capital securities issued to the public by each trust, including unamortized original issue discount.


Note 24 – Related party transactionsJPMorgan Chase Bank, N.A. regularly enters into transactions with JPMorgan Chase and its various subsidiaries.

Significant revenue- and expense-related transactions with related parties are listed below.


Interest income from affiliatesDeposits with affiliated banks $ 18 $ 18 $ 9Federal funds sold and securities purchased under resale agreements, and securities borrowed

with affiliates 1,759 4,810 4,849Loans to affiliates 53 101 181

Interest expense to affiliatesInterest-bearing deposits of affiliates 2,117 2,020 1,507Federal funds purchased and securities loaned or sold under repurchase agreements,

and other borrowed funds due to affiliates 2,415 3,283 2,865Long-term debt payable to JPMorgan Chase and affiliates 772 1,017 975Junior subordinated deferred interest debentures held by trusts that issued

guaranteed capital debt securities to nonbank affiliates 46 47 47

Servicing agreements with affiliatesNoninterest revenue 3,534 3,198 3,028Noninterest expense 4,638 4,606 4,386

Significant balances with related parties are listed below.


AssetsDeposits with affiliated banks $ 661 $ 651Federal funds sold and securities purchased under resale agreements, and securities

borrowed with affiliates 65,948 80,397Loans to affiliates 87 475Accrued interest and accounts receivable, and other assets due from affiliates 13,623 9,699

LiabilitiesNoninterest-bearing deposits of affiliates 3,151 2,417Interest-bearing deposits of affiliates 86,481 74,606Federal funds purchased and securities loaned or sold with affiliates under repurchase agreements,

and other borrowed funds due to affiliates 121,049 53,374Accounts payable and other liabilities payable to affiliates 6,365 4,939Long-term debt payable to JPMorgan Chase and affiliates 18,526 16,393Junior subordinated deferrable interest debentures held by trusts that issued guaranteed capital

debt securities to nonbank affiliates 600 600

At December 31, 2008 and 2007, net derivative payables to affiliates were $2.8 billion and $4.3 billion, respectively.



Note 25 – Accumulated other comprehensive income (loss)Accumulated other comprehensive income (loss) includes the after-tax change in unrealized gains and losses on AFS securities, SFAS 52 foreigncurrency translation adjustments (including the impact of related derivatives), SFAS 133 cash flow hedging activities and SFAS 158 net loss andprior service cost (credit) related to JPMorgan Chase Bank, N.A.’s defined benefit pension and OPEB plans.

Net loss and prior AccumulatedTranslation service costs (credit) of other

Unrealized gains (losses) adjustments, Cash defined benefit pension comprehensive(in millions) on AFS securities(a) net of hedges flow hedges and OPEB plans(e) income (loss)

Balance at December 31, 2005 $ (225) $ 1 $ (426) $ — $ (650)Net change 201(b) 16 (63) — 154

Adjustment to initially apply SFAS 158, net of taxes — — — (431) (431)

Balance at December 31, 2006 (24) 17 (489) (431) (927)

Cumulative effect of changes in accounting principles (SFAS 159) (1) — — — (1)

Balance at January 1, 2007, adjusted (25) 17 (489) (431) (928)Net change 401(c) — (327) 168 242

Balance at December 31, 2007 376 17 (816) (263) (686)

Net change (2,191)(d) (237) 577 (44) (1,895)

Balance at December 31, 2008 $ (1,815) $ (220) $ (239) $ (307) $ (2,581)

(a) Represents the after-tax difference between the fair value and amortized cost of the AFS securities portfolio and retained interests in securitizations recorded in other assets.(b) The net change during 2006 was due primarily to the reversal of unrealized losses from securities sales.(c) The net change during 2007 was due primarily to a decline in interest rates.(d) The net change during 2008 was due primarily to spread widening in credit card asset-backed securities, non-agency mortgage-backed securities and collateralized loan obligations.(e) For further discussion of SFAS 158, see Note 10 on pages 30–34 of these Consolidated Financial Statements.

The following table presents the after-tax changes in net unrealized gains (losses); and reclassification adjustments for realized (gains) losses onAFS securities and cash flow hedges; changes resulting from foreign currency translation adjustments (including the impact of related derivatives);net gains (losses) and prior service costs from pension and OPEB plans; and amortization of pension and OPEB amounts into net income. Thetable also reflects the adjustment to accumulated other comprehensive income (loss) resulting from the initial application of SFAS 158 toJPMorgan Chase Bank, N.A.’s defined benefit pension and OPEB plans. Reclassification adjustments include amounts recognized in net incomethat had been recorded previously in other comprehensive income (loss).


Note 26 – Income taxes The results of operations of JPMorgan Chase Bank, N.A. are included inthe consolidated federal, combined New York State and New York City,and certain other state income tax returns filed by JPMorgan Chase. Aninformal tax sharing arrangement between JPMorgan Chase andJPMorgan Chase Bank, N.A. requires intercompany payments to or fromJPMorgan Chase for outstanding current tax assets and liabilities.JPMorgan Chase allocates to JPMorgan Chase Bank, N.A. its share ofthe consolidated and combined income tax expense or benefit basedupon statutory rates applied to JPMorgan Chase Bank, N.A.’s earningsas if it were filing separate income tax returns.

JPMorgan Chase Bank, N.A. uses the asset-and-liability methodrequired by SFAS 109 as amended by FIN 48 to provide income taxeson all transactions recorded in the consolidated financial statements.This method requires that income taxes reflect the expected futuretax consequences of temporary differences between the carryingamounts of assets or liabilities for book and tax purposes.

2008 2007 2006Before Tax After Before Tax After Before Tax After

Year ended December 31, (in millions) tax effect tax tax effect tax tax effect tax

Unrealized gains (losses) on AFS securities:Net unrealized gains (losses) arising during

the period $ (2,599) $ 996 $ (1,603) $ 714 $ (283) $ 431 $ (240) $ 98 $ (142)Reclassification adjustment for realized (gains) losses

included in net income (977) 389 (588) (50) 20 (30) 576 (233) 343

Net change (3,576) 1,385 (2,191) 664 (263) 401 336 (135) 201

Translation adjustments:Translation (1,109) 416 (693) 585 (219) 366 450 (181) 269Hedges 758 (302) 456 (608) 242 (366) (416) 163 (253)

Net change (351) 114 (237) (23) 23 — 34 (18) 16

Cash flow hedges:Net unrealized gains (losses) arising during

the period 570 (227) 343 (750) 300 (450) (184) 73 (111)Reclassification adjustment for realized (gains) losses

included in net income 389 (155) 234 204 (81) 123 79 (31) 48

Net change 959 (382) 577 (546) 219 (327) (105) 42 (63)

Net loss and prior service cost (credit) of definedbenefit pension and OPEB plans:(a)

Net gains (losses) and prior service credits arising during the period (101) 41 (60) 214 (83) 131 NA NA NA

Reclassification adjustment for net loss and prior servicecredit included in net income 27 (11) 16 59 (22) 37 NA NA NA

Net change (74) 30 (44) 273 (105) 168 NA NA NA

Total other comprehensive income (loss) $ (3,042) $ 1,147 $ (1,895) $ 368 $ (126) $ 242 $ 265 $ (111) $ 154

Net loss and prior service cost (credit) of definedbenefit pension and OPEB plans:

Adjustments to initially apply SFAS 158(a) NA NA NA NA NA NA $ (713) $ 282 $ (431)

(a) For further discussion of SFAS 158 and details of changes to accumulated other comprehensive income (loss), see Note 10 on pages 30–34 of these Consolidated Financial Statements.

Accordingly, a deferred tax liability or asset for each temporary differ-ence is determined based upon the tax rates that JPMorgan ChaseBank, N.A. expects to be in effect when the underlying items ofincome and expense are realized. JPMorgan Chase Bank, N.A.’sexpense for income taxes includes the current and deferred portionsof that expense. A valuation allowance is established to reducedeferred tax assets to the amount JPMorgan Chase Bank, N.A.expects to realize.

Due to the inherent complexities arising from the nature of JPMorganChase Bank, N.A.’s businesses, and from conducting business andbeing taxed in a substantial number of jurisdictions, significant judg-ments and estimates are required to be made. Agreement of tax liabil-ities between JPMorgan Chase Bank, N.A. and the many tax jurisdic-tions in which JPMorgan Chase Bank, N.A. files tax returns may notbe finalized for several years. Thus, JPMorgan Chase Bank, N.A.’s finaltax-related assets and liabilities may ultimately be different than thosecurrently reported.



The components of income tax expense (benefit) included in theConsolidated Statements of Income were as follows.


Current income tax expense U.S. federal $ 4,034 $ 2,328 $ 4,150Non-U.S. 792 2,591 1,354U.S. state and local 815 559 538

Total current income tax expense 5,641 5,478 6,042

Deferred income tax expense (benefit) U.S. federal (3,164) 325 (1,516)Non-U.S. 10 (184) 194U.S. state and local 224 (254) (233)

Total deferred income tax expense (benefit) (2,930) (113) (1,555)

Total income tax expense (benefit)from continuing operations 2,711 5,365 4,487

Total income tax expense from discontinued operations — — 574

Total income tax expense (benefit) $ 2,711 $ 5,365 $ 5,061

Total income tax expense includes $55 million, $74 million, and $367million of tax benefits recorded in 2008, 2007 and 2006, respectively,as a result of tax audit resolutions.

The preceding table does not reflect the tax effect of certain items thatare recorded each period directly in stockholder’s equity. The table doesnot reflect the cumulative tax effects of initially implementing newaccounting pronouncements in 2007 and 2006. The tax effect of allitems recorded directly to stockholder’s equity was an increase in stock-holder’s equity of $1.1 billion, $149 million and $89 million in 2008,2007 and 2006, respectively.

U.S. federal income taxes have not been provided on the undistributedearnings of certain non-U.S. subsidiaries, to the extent that such earn-ings have been reinvested abroad for an indefinite period of time.During 2008, as part of JPMorgan Chase Bank, N.A.’s periodic reviewof the business requirements and capital needs of its non-U.S. sub-sidiaries, combined with the formation of specific strategies and stepstaken to fulfill these requirements and needs, JPMorgan Chase Bank,N.A. determined that the undistributed earnings of certain of its sub-sidiaries, for which U.S. federal income taxes had been provided, willremain indefinitely reinvested to fund the current and future growth ofthe related businesses. As management does not intend to use theearnings of these subsidiaries as a source of funding for its U.S. opera-tions, such earnings will not be distributed to the U.S. in the foresee-able future. This determination resulted in the release of deferred taxliabilities and the recognition of an income tax benefit of $1.1 billionassociated with these undistributed earnings. For 2008, pretax earn-ings of approximately $2.5 billion were generated that will remainindefinitely invested in these subsidiaries. At December 31, 2008, thecumulative amount of undistributed pretax earnings in these sub-sidiaries approximated $12.9 billion. If JPMorgan Chase Bank, N.A.were to record a deferred tax liability associated with these undistrib-uted earnings, the amount would be $2.9 billion at December 31,2008.

The tax expense (benefit) applicable to securities gains and losses forthe years 2008, 2007 and 2006 was $529 million, $19 million and$(221) million, respectively.

A reconciliation of the applicable statutory U.S. income tax rate tothe effective tax rate for continuing operations for the past threeyears is shown in the following table.


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, netof federal income tax benefit 6.0 3.0 2.5

Tax-exempt income (0.8) (1.1) (0.9)Non-U.S. subsidiary earnings (13.2) (1.6) (0.8)Business tax credits (3.4) (1.7) (1.6)Other, net 0.6 (0.3) (1.2)

Effective tax rate 24.2% 33.3% 33.0%

Deferred income tax expense (benefit) results from differencesbetween assets and liabilities measured for financial reporting andfor income-tax return purposes. The significant components ofdeferred tax assets and liabilities are reflected in the following table.


Deferred tax assetsAllowance for loan losses $ 6,415 $ 3,013Fair value adjustments 2,379 169Allowance for other than loan losses 1,806 2,127Non-U.S. operations 1,473 217Employee benefits 1,215 1,175Tax attribute carryforwards 155 —

Gross deferred tax assets $13,443 $ 6,701

Deferred tax liabilitiesDepreciation and amortization $ 3,790 $ 2,260Leasing transactions 1,441 1,741Non-U.S. operations 835 1,335Fee income 764 381Other, net 162 301

Gross deferred tax liabilities $ 6,992 $ 6,018

Valuation allowance 615 220

Net deferred tax asset $ 5,836 $ 463


A valuation allowance has been recorded relating to losses associatedwith non-U.S. subsidiaries and losses associated with certain portfo-lio investments.

JPMorgan Chase Bank, N.A. adopted and applied FIN 48, whichaddresses the recognition and measurement of tax positions taken orexpected to be taken, and also provides guidance on derecognition,classification, interest and penalties, accounting in interim periodsand disclosure, to all of its income tax positions at the required effec-tive date of January 1, 2007, resulting in a $531 million cumulativeeffect increase to retained earnings, a reduction in goodwill of $113million and a $644 million decrease in the liability for income taxes.

At December 31, 2008 and 2007, JPMorgan Chase Bank, N.A.’sunrecognized tax benefits, excluding related interest expense andpenalties, were $3.7 billion and $3.3 billion, respectively, of which$1.5 billion and $900 million, if recognized, would reduce the annu-al effective tax rate. As JPMorgan Chase Bank, N.A. is presentlyunder audit by a number of tax authorities, it is reasonably possiblethat unrecognized tax benefits could significantly change over thenext 12 months, which could also significantly impact JPMorganChase Bank, N.A.’s quarterly and annual effective tax rates.

The following table presents a reconciliation of the beginning and end-ing amount of unrecognized tax benefits for the years 2008 and 2007.

Unrecognized tax benefitsYear ended December 31, (in millions) 2008 2007

Balance at January 1, $ 3,255 $ 2,564Increases based on tax positions related to

the current period 676 355Decreases based on tax positions related to the

current period (57) —Increases based on tax positions related to

prior periods 319 790Decreases based on tax positions related to

prior periods (501) (287)Decreases related to settlements with taxing

authorities (19) (154)Decreases related to a lapse of applicable

statute of limitations (12) (13)

Balance at December 31, $ 3,661 $ 3,255

Pretax interest expense and penalties related to income tax liabilitiesrecognized in income tax expense were $347 million ($209 millionafter-tax) in 2008 and $303 million ($182 million after-tax) in 2007.Included in accounts payable and other liabilities at December 31,2008 and 2007, in addition to JPMorgan Chase Bank, N.A.’s liabilityfor unrecognized tax benefits, was $1.2 billion and $800 million,respectively, for income tax-related interest and penalties, of whichthe penalty component was insignificant.

JPMorgan Chase is subject to ongoing tax examinations by the taxauthorities of the various jurisdictions in which it operates, includingU.S. federal and state and non-U.S. jurisdictions. JPMorgan Chase’sconsolidated federal income tax returns are presently under examina-tion by the Internal Revenue Service (“IRS”) for the years 2003,2004 and 2005. The consolidated federal income tax returns of BankOne Corporation, which merged with and into JPMorgan Chase on

July 1, 2004, are under examination for the years 2000 through2003, and for the period January 1, 2004, through July 1, 2004.The examinations are expected to conclude in 2009. The IRS auditsof the consolidated federal income tax returns of JPMorgan Chasefor the years 2006 and 2007 are expected to commence in 2009.Administrative appeals are pending with the IRS relating to priorexamination periods. For 2002 and prior years, refund claims relatingto income and credit adjustments, and to tax attribute carrybacks, forJPMorgan Chase and its predecessor entities, including Bank One,have been filed.

The following table presents the U.S. and non-U.S. components ofincome from continuing operations before income tax expense (benefit).


U.S. $ 4,218 $ 9,391 $ 8,054Non-U.S.(a) 7,006 6,706 5,554

Income from continuing operationsbefore income tax

expense (benefit) $ 11,224 $ 16,097 $ 13,608

(a) For purposes of this table, non-U.S. income is defined as income generated fromoperations located outside the U.S.

Note 27 – Restrictions on cash and intercom-pany funds transfersThe business of JPMorgan Chase Bank, N.A. is subject to examina-tion and regulation by the OCC. JPMorgan Chase Bank, N.A. is amember of the U.S. Federal Reserve System, and its deposits areinsured by the Federal Deposit Insurance Corporation (“FDIC”) asdiscussed in Note 21 on page 70 of these Consolidated FinancialStatements.

The Board of Governors of the Federal Reserve System (the “FederalReserve Board” or the “FRB”) requires depository institutions tomaintain cash reserves with a Federal Reserve Bank. The averageamount of reserve balances deposited by JPMorgan Chase Bank,N.A. with various Federal Reserve Banks was approximately $1.6 bil-lion in 2008 and 2007.

Restrictions imposed by U.S. federal law prohibit JPMorgan ChaseBank, N.A. and certain of its affiliates from borrowing from bankingsubsidiaries unless the loans are secured in specified amounts. Suchsecured loans are generally limited to 10% of the banking sub-sidiary’s total capital, as determined by the risk-based capital guide-lines; the aggregate amount of all such loans is limited to 20% ofthe banking subsidiary’s total capital.



In addition to dividend restrictions set forth in statutes and regulations,the OCC, FDIC and the Federal Reserve have authority under theFinancial Institutions Supervisory Act to prohibit or to limit the paymentof dividends by the banking organizations they supervise, includingJPMorgan Chase Bank, N.A., if, in the banking regulator’s opinion,payment of a dividend would constitute an unsafe or unsound practicein light of the financial condition of the banking organization.

At January 1, 2009 and 2008, JPMorgan Chase Bank, N.A. couldpay, in the aggregate, $16.7 billion and $16.2 billion, respectively, individends to JPMorgan Chase without the prior approval of its rele-vant banking regulators. The capacity to pay dividends in 2009 willbe supplemented by JPMorgan Chase Bank, N.A.’s earnings duringthe year.

In compliance with rules and regulations established by U.S. andnon-U.S. regulators, as of December 31, 2008 and 2007, cash in theamount of $18.3 billion and $16.0 billion, respectively, and securitieswith a fair value of $2.1 million and $2.1 million, respectively, weresegregated in special bank accounts for the benefit of securities andfutures brokerage customers.

Note 28 – CapitalJPMorgan Chase Bank, N. A.’s banking regulator, the OCC, establishescapital requirements, including well-capitalized standards for nationalbanks.

There are two categories of risk-based capital: Tier 1 capital and Tier 2capital. Tier 1 capital includes common stockholder’s equity, qualifyingpreferred stock and minority interest less goodwill and other adjust-ments. Tier 2 capital consists of preferred stock not qualifying as Tier1, subordinated long-term debt and other instruments qualifying asTier 2, and the aggregate allowance for credit losses up to a certainpercentage of risk-weighted assets. Total regulatory capital is subjectto deductions for investments in certain subsidiaries. Under the risk-based capital guidelines, JPMorgan Chase Bank, N.A. is required tomaintain minimum ratios of Tier 1 and Total (Tier 1 plus Tier 2) capital

to risk weighted assets, as well as minimum leverage ratios (whichare defined as Tier 1 capital to average adjusted on–balance sheetassets). Failure to meet these minimum requirements could cause theOCC to take action. As of December 31, 2008 and 2007, JPMorganChase Bank, N.A. was well-capitalized and met all capital require-ments to which it was subject.

The OCC granted JPMorgan Chase Bank, N.A., for a period of 18months ending October 1, 2009, relief up to a certain specifiedamount and subject to certain conditions from the OCC’s risk-basedcapital and leverage requirements with respect to Bear Stearns’ risk-weighted assets (and other exposures) acquired by JPMorgan ChaseBank, N.A. in connection with the Bear Stearns’ merger. The amountof such relief is subject to reduction in each quarter such that thetotal benefit of the relief expires on October 1, 2009.

Basel II The minimum risk-based capital requirements adopted by the U.S. feder-al banking agencies follow the Capital Accord of the Basel Committeeon Banking Supervision. In 2004, the Basel Committee published a revi-sion to the Accord (“Basel II”). The goal of the new Basel II Frameworkis to provide more risk-sensitive regulatory capital calculations and pro-mote enhanced risk management practices among large, internationallyactive banking organizations. U.S. banking regulators published a finalBasel II rule in December 2007, which will require JPMorgan ChaseBank, N. A. to implement Basel II.

Prior to full implementation of the new Basel II Framework, JPMorganChase will be required to complete a qualification period of four con-secutive quarters during which it will need to demonstrate that itmeets the requirements of the new rule to the satisfaction of its pri-mary U.S. banking regulators. The U.S. implementation timetable con-sists of the qualification period, starting any time between April 1,2008, and April 1, 2010, followed by a minimum transition period ofthree years. During the transition period, Basel ll risk-based capitalrequirements cannot fall below certain floors based on current (“Basell”) regulations. JPMorgan Chase Bank, N. A. expects to be in compli-ance with all relevant Basel II rules within the established timelines.

The following table presents the risk-based capital ratios for JPMorgan Chase Bank, N.A. at December 31, 2008 and 2007.

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, 2008 $100,594 $ 143,854 $ 1,153,039 $ 1,705,750 8.7% 12.5% 5.9%December 31, 2007 78,453 112,253 950,001 1,268,304 8.3 11.8 6.2

Well-capitalized ratios(a) 6.0% 10.0% 5.0%(d)

Minimum capital ratios(a) 4.0 8.0 3.0(e)

(a) As defined by the regulations issued by the OCC, FDIC and FRB.(b) Includes off-balance sheet risk-weighted assets in the amount of $332.2 billion and $336.8 billion at December 31, 2008 and 2007, respectively.(c) Adjusted average assets, for purposes of calculating the leverage ratio, includes total average assets adjusted for unrealized gains/losses on securities, less deductions for disallowed

goodwill and other intangible assets, investments in certain subsidiaries and the total adjusted carrying value of nonfinancial equity investments that are subject to deductions fromTier 1 capital.

(d) Represents requirements for banking subsidiaries pursuant to regulations issued under the Federal Deposit Insurance Corporation Improvement Act.(e) The minimum Tier 1 leverage ratio for banks is 3% or 4% depending on factors specified in regulations issued by the OCC and FRB.Note: Rating agencies allow measures of capital to be adjusted upward for deferred tax liabilities which have resulted from both nontaxable business combinations and from tax-

deductible goodwill. JPMorgan Chase Bank, N.A. had deferred tax liabilities resulting from nontaxable business combinations totaling $965 million and $1.2 billion at December 31,2008 and 2007, respectively. Additionally, JPMorgan Chase Bank, N.A. had deferred tax liabilities resulting from tax-deductible goodwill of $838 million and $299 million atDecember 31, 2008 and 2007, respectively.


Total rental expense was as follows.


Gross rental expense $1,395 $1,212 $1,163Sublease rental income (138) (147) (178)

Net rental expense $1,257 $1,065 $ 985

At December 31, 2008, assets were pledged to secure publicdeposits and for other purposes. The significant components of theassets pledged were as follows.


Reverse repurchase/securities borrowing agreements $ 249.0 $ 253.4

Securities 31.3 10.6Loans 304.7 111.2Trading assets and other 119.8 93.3

Total assets pledged(a) $ 704.8 $ 468.5

(a) Total assets pledged do not include assets of consolidated VIEs. These assets are gen-erally used to satisfy liabilities to third parties. See Note 18 on pages 56–66 of theseConsolidated Financial Statements for additional information on assets and liabilitiesof consolidated VIEs.

JPMorgan Chase Bank, N.A. has resolved with the IRS issues related tocompliance with reporting and withholding requirements for certainaccounts transferred to The Bank of New York in connection withJPMorgan Chase Bank, N.A.’s sale to The Bank of New York of its cor-porate trust business. The resolution of these issues did not have amaterial effect on JPMorgan Chase Bank, N.A.

Litigation reserveJPMorgan Chase Bank, N.A. maintains litigation reserves for certainof its outstanding litigation. In accordance with the provisions ofSFAS 5, JPMorgan Chase Bank, N.A. accrues for a litigation-relatedliability when it is probable that such a liability has been incurredand the amount of the loss can be reasonably estimated. WhenJPMorgan Chase Bank, N.A. is named a defendant in a litigation andmay be subject to joint and several liability and a judgment sharingagreement is in place, JPMorgan Chase Bank, N.A. recognizesexpense and obligations net of amounts expected to be paid byother signatories to the judgment sharing agreement.

While the outcome of litigation is inherently uncertain, managementbelieves, in light of all information known to it at December 31,2008, JPMorgan Chase Bank, N.A.’s litigation reserves were adequateat such date. Management reviews litigation reserves periodically,and the reserves may be increased or decreased in the future toreflect further relevant developments. JPMorgan Chase Bank, N.A.believes it has meritorious defenses to the claims asserted against itin its currently outstanding litigation and, with respect to such litiga-tion, intends to continue to defend itself vigorously, litigating or set-tling cases according to management’s judgment as to what is in thebest interests of JPMorgan Chase and its stockholders.

The following table shows the components of JPMorgan Chase Bank,N.A.’s Tier 1 and Total capital.


Tier 1 capitalTotal stockholder’s equity $128,767 $ 106,346Effect of certain items in accumulated

other comprehensive income (loss) excluded from Tier 1 capital 2,355 702

Adjusted stockholder’s equity 131,122 107,048Minority interest(a) 1,023 1,127Less: Goodwill 27,371 25,819

SFAS 157 DVA 1,802 783Investments in certain subsidiaries 1 15Nonqualifying intangible assets 2,377 3,105

Tier 1 capital 100,594 78,453

Tier 2 capitalLong-term debt and other instruments

qualifying as Tier 2 28,469 25,913Qualifying allowance for credit losses 14,791 7,864Adjustment for investments in certain

subsidiaries and other — 23

Tier 2 capital 43,260 33,800

Total qualifying capital $143,854 $ 112,253

(a) Primarily includes trust preferred capital debt securities of certain business trusts.

Note 29 – Commitments and contingenciesAt December 31, 2008, JPMorgan Chase Bank, N.A. and its sub-sidiaries were obligated under a number of noncancelable operatingleases for premises and equipment used primarily for banking pur-poses. Certain leases contain renewal options or escalation clausesproviding for increased rental payments based upon maintenance,utility and tax increases or require JPMorgan Chase Bank, N.A. toperform restoration work on leased premises. No lease agreementimposes restrictions on JPMorgan Chase Bank, N.A.’s ability to paydividends, engage in debt or equity financing transactions or enterinto further lease agreements.

The following table presents required future minimum rental pay-ments under operating leases with noncancelable lease terms thatexpire after December 31, 2008.

Year ended December 31, (in millions)

2009 $ 1,2432010 1,2422011 1,1282012 1,0442013 972After 2013 6,500Total minimum payments required(a) 12,129Less: Sublease rentals under noncancelable subleases (1,089)

Net minimum payment required $ 11,040

(a) Lease restoration obligations are accrued in accordance with SFAS 13, and are notreported as a required minimum lease payment.



Note 30 – Accounting for derivative instru-ments and hedging activitiesDerivative instruments enable end-users to increase, reduce or alterexposure to credit or market risks. The value of a derivative is derivedfrom its reference to an underlying variable or combination of vari-ables such as equity, foreign exchange, credit, commodity or interestrate prices or indices. JPMorgan Chase Bank, N.A. makes markets inderivatives for customers and also is an end-user of derivatives inorder to hedge or manage risks of market exposures, modify theinterest rate characteristics of related balance sheet instruments ormeet longer-term investment objectives. The majority of JPMorganChase Bank, N.A.’s derivatives are entered into for market-makingpurposes. SFAS 133, as amended by SFAS 138, SFAS 149, SFAS 155and FSP FAS 133-1, establishes accounting and reporting standardsfor derivative instruments, including those used for trading and hedg-ing activities and derivative instruments embedded in other con-tracts. All free-standing derivatives are required to be recorded onthe Consolidated Balance Sheets at fair value. The accounting forchanges in value of a derivative depends on whether or not the con-tract has been designated and qualifies for hedge accounting.Derivative receivables and payables, whether designated for hedgingrelationships or not, are recorded in trading assets and trading liabili-ties as set forth in Note 7 on pages 27–28 of these ConsolidatedFinancial Statements.

Derivatives used for trading purposesJPMorgan Chase Bank, N.A. makes markets in derivatives for cus-tomers seeking to modify, or reduce interest rate, credit, foreignexchange, equity and commodity and other market risks or for risk-taking purposes. JPMorgan Chase Bank, N.A. typically manages itsexposure from such derivatives by entering into derivatives or otherfinancial instruments that partially or fully offset the exposure fromthe client transaction. JPMorgan Chase Bank, N.A. actively managesany residual exposure and seeks to earn a spread between the clientderivatives and offsetting positions. For JPMorgan Chase Bank, N.A.’sown account, JPMorgan Chase Bank, N.A. uses derivatives to takerisk positions or to benefit from differences in prices between deriva-tive markets and markets for other financial instruments.

Derivatives used for risk management purposesInterest rate contracts, which are generally interest rate swaps, for-wards and futures are utilized in JPMorgan Chase Bank, N.A.’s riskmanagement activities to minimize fluctuations in earnings causedby interest rate volatility. As a result of interest rate fluctuations,fixed-rate assets and liabilities appreciate or depreciate in marketvalue. Gains or losses on the derivative instruments that are linked tofixed-rate assets and liabilities and forecasted transactions areexpected to offset substantially this unrealized appreciation or depre-ciation. Interest income and interest expense on variable-rate assetsand liabilities and on forecasted transactions increase or decrease asa result of interest rate fluctuations. Gains and losses on the deriva-tive instruments that are linked to assets and liabilities and forecast-ed transactions are expected to offset substantially this variability inearnings. Interest rate swaps involve the exchange of fixed-rate andvariable-rate interest payments based on the contracted notional

amount. Forward contracts used for JPMorgan Chase Bank, N.A.’sinterest rate risk management activities are primarily arrangementsto exchange cash in the future based on price movements of speci-fied financial instruments. Futures contracts used are primarily indexfutures which provide for cash payments based upon the movementsof an underlying rate index.

JPMorgan Chase Bank, N.A. uses foreign currency contracts to man-age the foreign exchange risk associated with certain foreign curren-cy-denominated (i.e., non-U.S.) assets and liabilities and forecastedtransactions denominated in a foreign currency, as well as JPMorganChase Bank, N.A.’s equity investments in foreign subsidiaries. As aresult of foreign currency fluctuations, the U.S. dollar equivalent valuesof the foreign currency-denominated assets and liabilities or forecast-ed transactions change. Gains or losses on the derivative instrumentsthat are linked to the foreign currency denominated assets or liabili-ties or forecasted transactions are expected to offset substantially thisvariability. Foreign exchange forward contracts represent agreementsto exchange the currency of one country for the currency of anothercountry at an agreed-upon price on an agreed-upon settlement date.

JPMorgan Chase Bank, N.A. uses forward contracts to manage theoverall price risk associated with the gold inventory in its commodi-ties portfolio. As a result of gold price fluctuations, the fair value ofthe gold inventory changes. Gains or losses on the derivative instru-ments that are linked to gold inventory are expected to substantiallyoffset this unrealized appreciation or depreciation. Forward contractsused for JPMorgan Chase Bank, N.A.’s gold inventory risk manage-ment activities are arrangements to deliver gold in the future.

JPMorgan Chase Bank, N.A. uses credit derivatives to manage thecredit risk associated with loans, lending-related commitments andderivative receivables, as well as exposure to residential and com-mercial mortgages. Credit derivatives compensate the purchaserwhen the entity referenced in the contract experiences a credit eventsuch as bankruptcy or a failure to pay an obligation when due. For afurther discussion of credit derivatives, see the discussion below.

In order to qualify for hedge accounting, a derivative must be consid-ered highly effective at reducing the risk associated with the expo-sure being hedged. In order for a derivative to be designated as ahedge, there must be documentation of the risk management objec-tive and strategy, including identification of the hedging instrument,the hedged item and the risk exposure, and how effectiveness is tobe assessed prospectively and retrospectively. To assess effectiveness,JPMorgan Chase Bank, N.A. uses statistical methods such as regres-sion analysis, as well as nonstatistical methods including dollar valuecomparisons of the change in the fair value of the derivative to thechange in the fair value or cash flows of the hedged item. The extentto which a hedging instrument has been and is expected to continueto be effective at achieving offsetting changes in fair value or cashflows must be assessed and documented at least quarterly. Any inef-fectiveness must be reported in current-period earnings. If it is deter-mined that a derivative is not highly effective at hedging the desig-nated exposure, hedge accounting is discontinued.

For qualifying fair value hedges, all changes in the fair value of thederivative and in the fair value of the hedged item for the risk being


hedged are recognized in earnings. If the hedge relationship is termi-nated, then the fair value adjustment to the hedged item continuesto be reported as part of the basis of the item and continues to beamortized to earnings as a yield adjustment. For qualifying cash flowhedges, the effective portion of the change in the fair value of thederivative is recorded in other comprehensive income (loss) and rec-ognized in the Consolidated Statements of Income when the hedgedcash flows affect earnings. The ineffective portions of cash flowhedges are immediately recognized in earnings. If the hedge relation-ship is terminated, then the change in fair value of the derivativerecorded in accumulated other comprehensive income (loss) is recog-nized when the cash flows that were hedged occur, consistent withthe original hedge strategy. For hedge relationships that are discon-tinued because the forecasted transaction is not expected to occuraccording to the original strategy, any related derivative amountsrecorded in accumulated other comprehensive income (loss) areimmediately recognized in earnings. For qualifying net investmenthedges, changes in the fair value of the derivative or the revaluationof the foreign currency–denominated debt instrument are recordedin the translation adjustments account within accumulated othercomprehensive income (loss).

JPMorgan Chase Bank, N.A.’s fair value hedges primarily includehedges of the interest rate risk inherent in fixed-rate long-term debt,warehouse loans, AFS securities, and the overall price of gold inven-tory. All changes in the hedging derivative’s fair value are included inearnings consistent with the classification of the hedged item, prima-rily net interest income for long-term debt and AFS securities; otherincome for warehouse loans; and principal transactions revenue forgold inventory. JPMorgan Chase Bank, N.A. did not recognize anygains or losses during 2008, 2007 or 2006 on firm commitmentsthat no longer qualified as fair value hedges.

JPMorgan Chase Bank, N.A. also enters into derivative contracts tohedge exposure to variability in cash flows from floating-rate finan-cial instruments and forecasted transactions, primarily the rollover ofshort-term assets and liabilities, and foreign currency–denominatedrevenue and expense. All hedging derivative amounts affecting earn-ings are recognized consistent with the classification of the hedgeditem, primarily net interest income.

JPMorgan Chase Bank, N.A. uses forward foreign exchange contractsand foreign currency–denominated debt instruments to protect thevalue of net investments in subsidiaries whose functional currency isnot the U.S. dollar. The portion of the hedging derivative excludedfrom the assessment of hedge effectiveness (i.e., forward points) isrecorded in net interest income.

JPMorgan Chase Bank, N.A. does not seek to apply hedge account-ing to all of JPMorgan Chase Bank, N.A.’s economic hedges. Forexample, JPMorgan Chase Bank, N.A. does not apply hedge account-ing to purchased credit default swaps used to manage the credit riskof loans and commitments because of the difficulties in qualifyingsuch contracts as hedges under SFAS 133. Similarly, JPMorgan ChaseBank, N.A. does not apply hedge accounting to certain interest ratederivatives used as economic hedges.

The following table presents derivative instrument hedging-relatedactivities for the periods indicated.


Fair value hedge ineffective net gains/(losses)(a) $ 1 $ 38 $ (44)

Cash flow hedge ineffective net gains(a) 18 29 2Cash flow hedging net gains/(losses) on

forecasted transactions that failed to occur — 15(b) —

(a) Includes ineffectiveness and the components of hedging instruments that have beenexcluded from the assessment of hedge effectiveness.

(b) During the second half of 2007, JPMorgan Chase Bank, N.A. did not issue short-termfixed rate Canadian dollar denominated notes due to the weak credit market forCanadian short-term debt.

Over the next 12 months, it is expected that $348 million (after-tax)of net losses recorded in accumulated other comprehensive income(loss) at December 31, 2008, will be recognized in earnings. Themaximum length of time over which forecasted transactions arehedged is ten years, and such transactions primarily relate to corelending and borrowing activities.

Credit derivatives Credit derivatives are financial instruments whose value is derived fromthe credit risk associated with the debt of a third party issuer (the ref-erence entity) and which allow one party (the protection purchaser) totransfer that risk to another party (the protection seller). Credit deriva-tives expose the protection purchaser to the creditworthiness of theprotection seller, as the protection seller is required to make paymentsunder the contract when the reference entity experiences a creditevent, such as a bankruptcy, failure to pay its obligation, or a restruc-turing. The seller of credit protection receives a premium for providingprotection, but has the risk that the underlying instrument referencedin the contract will be subjected to a credit event.

JPMorgan Chase Bank, N.A. is both a purchaser and seller of creditprotection in the credit derivatives market and uses credit derivativesfor two primary purposes. First, in its capacity as a market-maker inthe dealer/client business, JPMorgan Chase Bank, N.A. actively riskmanages a portfolio of credit derivatives by purchasing and sellingcredit protection, predominantly on corporate debt obligations, tomeet the needs of customers. As a seller of protection, JPMorganChase Bank, N.A.’s exposure to a given reference entity may be off-set partially, or entirely, with a contract to purchase protection fromanother counterparty on the same or similar reference entity.Second, JPMorgan Chase Bank, N.A. uses credit derivatives in orderto mitigate JPMorgan Chase Bank, N.A.’s credit risk associated withthe overall derivative receivables and traditional commercial creditlending exposures (loans and unfunded commitments) as well as tomanage its exposure to residential and commercial mortgages. Inaccomplishing the above, JPMorgan Chase Bank, N.A. uses differenttypes of credit derivatives. Following is a summary of various types ofcredit derivatives.

Credit default swapsCredit derivatives may reference the credit of either a single refer-ence entity (“single-name”) or a broad-based index, as describedfurther below. JPMorgan Chase Bank, N.A. purchases and sells pro-tection on both single-name and index-reference obligations.Single-name credit default swaps (“CDS”) and index CDS contractsare both OTC derivative contracts. Single-name CDS are used tomanage the default risk of a single reference entity, while CDSindex are used to manage credit risk associated with the broadercredit markets or credit market segments. Like the S&P 500 andother market indices, a CDS index is comprised of a portfolio ofCDS across many reference entities. New series of CDS indices areestablished approximately every six months with a new underlyingportfolio of reference entities to reflect changes in the credit mar-kets. If one of the reference entities in the index experiences acredit event, then the reference entity that defaulted is removedfrom the index and is replaced with another reference entity. CDScan also be referenced against specific portfolios of referencenames or against customized exposure levels based on specificclient demands: for example, to provide protection against the first$1 million of realized credit losses in a $10 million portfolio ofexposure. Such structures are commonly known as tranche CDS.

For both single-name CDS contracts and index CDS, upon theoccurrence of a credit event, under the terms of a CDS contractneither party to the CDS contract has recourse to the referenceentity. The protection purchaser has recourse to the protection sell-er for the difference between the face value of the CDS contractand the fair value of the reference obligation at the time of settlingthe credit derivative contract, also known as the recovery value. Theprotection purchaser does not need to hold the debt instrument ofthe underlying reference entity in order to receive amounts dueunder the CDS contract when a credit event occurs.

Credit-linked notesA credit linked note (“CLN”) is a funded credit derivative where theissuer of the CLN purchases credit protection on a referenced entityfrom the note investor. Under the contract, the investor pays theissuer par value of the note at the inception of the transaction, andin return, the issuer pays periodic payments to the investor, basedon the credit risk of the referenced entity. The issuer also repaysthe investor the par value of the note at maturity unless the refer-ence entity experiences a specified credit event. In that event, theissuer is not obligated to repay the par value of the note, butrather, the issuer pays the investor the difference between the parvalue of the note and the fair value of the defaulted reference obli-gation at the time of settlement. Neither party to the CLN hasrecourse to the defaulting reference entity. For a further discussionof CLNs, see Note 18 on pages 62–63 of these ConsolidatedFinancial Statements.

The following table presents a summary of the notional amounts ofcredit derivatives and credit-linked notes JPMorgan Chase Bank,N.A. sold and purchased, and the net position as of December 31,2008. Upon a credit event, JPMorgan Chase Bank, N.A. as seller ofprotection would typically pay out only a percentage of the fullnotional of net protection sold; as the amount that is actuallyrequired to be paid on the contracts take into account the recoveryvalue of the reference obligation at the time of settlement.JPMorgan Chase Bank, N.A. manages the credit risk on contracts tosell protection by purchasing protection with identical or similarunderlying reference entities; as such other protection purchasedreferenced in the following table includes credit derivatives boughton related, but not identical reference positions, including indices,portfolio coverage and other reference points, which further miti-gates the risk associated with the net protection sold.



Total credit derivatives and credit-linked notes

Maximum payout/Notional amount

Protection purchased with Net protection Other protectionDecember 31, 2008 (in millions) Protection sold identical underlyings(b) (sold)/purchased(c) purchased(d)

Credit derivativesCredit default swaps $ (4,199,104) $ 3,887,412 $ (311,692) $ 291,119Other credit derivatives(a) (3,726) — (3,726) 10,268

Total credit derivatives (4,202,830) 3,887,412 (315,418) 301,387Credit-linked notes (1,263) 141 (1,122) 1,792

Total $ (4,204,093) $ 3,887,553 $ (316,540) $ 303,179

(a) Primarily consists of total return swaps and options to enter into credit default swap contracts.(b) Represents the notional amount of purchased credit derivatives where the underlying reference instrument is identical to the reference instrument on which JPMorgan Chase Bank,

N.A. has sold credit protection.(c) Does not take into account the fair value of the reference obligation at the time of settlement, which would generally reduce the amount the seller of protection pays to the buyer of

protection in determining settlement value.(d) Represents single-name and index CDS protection JPMorgan Chase Bank, N.A. purchased primarily to risk manage the net protection sold.

The following table summarizes the notional and fair value amounts of credit derivatives and credit-linked notes as of December 31, 2008, whereJPMorgan Chase Bank, N.A. is the seller of protection. The maturity profile presents the years to maturity based upon the remaining contractualmaturity of the credit derivative contracts. The ratings profile is based on the rating of the reference entity on which the credit derivative contractis based. The ratings and maturity profile of protection purchased is comparable to the profile reflected in the following table.


Protection sold – credit derivatives and credit-linked notes ratings/maturity profile(a)

TotalDecember 31, 2008 (in millions) < 1 year 1-5 years > 5 years notional amount Fair value(c)

Risk rating of reference entityInvestment grade (AAA to BBB-)(b) $ (179,396) $ (1,769,127) $ (710,642) $ (2,659,165) $ (215,638)Noninvestment grade (BB+ and below)(b) (123,200) (1,000,602) (421,126) (1,544,928) (245,455)

Total $ (302,596) $ (2,769,729) $ (1,131,768) $ (4,204,093) $ (461,093)

(a) The contractual maturity for single-name CDS contract generally ranges from three months to ten years and the contractual maturity for index CDS is generally five years. The contractualmaturity for CLNs typically ranges from three to five years.

(b) Ratings scale is based upon JPMorgan Chase Bank, N.A.’s internal ratings, which generally correspond to ratings defined by S&P and Moody’s.(c) Amounts are shown on a gross basis, before the benefit of legally enforceable master netting agreements and cash collateral held by JPMorgan Chase Bank, N.A.

Note 31 – Off-balance sheet lending-relatedfinancial instruments and guaranteesJPMorgan Chase Bank, N.A. utilizes lending-related financial instru-ments (e.g., commitments and guarantees) to meet the financingneeds of its customers. The contractual amount of these financialinstruments represents the maximum possible credit risk should thecounterparties draw down on these commitments or JPMorganChase Bank, N.A. fulfills its obligation under these guarantees, andthe counterparties subsequently fail to perform according to theterms of these contracts. Most of these commitments and guaranteesexpire without a default occurring or without being drawn. As aresult, the total contractual amount of these instruments is not, inJPMorgan Chase Bank, N.A.’s view, representative of its actual future

credit exposure or funding requirements. Further, certain commit-ments, predominantly related to consumer financings, are cancelable,upon notice, at the option of JPMorgan Chase Bank, N.A.

To provide for the risk of loss inherent in wholesale related contracts,an allowance for credit losses on lending-related commitments ismaintained. See Note 16 on pages 46–47 of these ConsolidatedFinancial Statements for further discussion of the allowance for creditlosses on lending-related commitments.

The following table summarizes the contractual amounts of off-bal-ance sheet lending-related financial instruments and guarantees andthe related allowance for credit losses on lending-related commit-ments at December 31, 2008 and 2007.

Off-balance sheet lending-related financial instruments and guaranteesAllowance for

Contractual amount lending-related commitments

December 31, (in millions) 2008 2007 2008 2007

Lending-relatedConsumer(a) $ 143,547 $ 132,157 $ 25 $ 15

Wholesale:Other unfunded commitments to extend credit(b)(c)(d)(e)(f) 222,236 248,393 348 570Asset purchase agreements(g) 53,729 90,105 9 9Standby letters of credit and financial guarantees(c)(h)(i) 94,796 98,627 272 254Other letters of credit(c) 4,927 5,371 2 1

Total wholesale 375,688 442,496 631 834

Total lending-related $ 519,235 $ 574,653 $ 656 $ 849

Other guaranteesSecurities lending guarantees(j) $ 182,204 $ 388,326 NA NADerivatives qualifying as guarantees(k) 83,730 85,153 NA NA

(a) Includes credit card and home equity lending-related commitments of $25.7 billion and $95.7 billion, respectively, at December 31, 2008; and $31.1 billion and $74.2 billion, respec-tively, at December 31, 2007. These amounts for credit card and home equity lending-related commitments represent the total available credit for these products. JPMorgan ChaseBank, N.A. has not experienced, and does not anticipate, that all available lines of credit for these products will be utilized at the same time. JPMorgan Chase Bank, N.A. can reduce orcancel these lines of credit by providing the borrower prior notice or, in some cases, without notice as permitted by law.

(b) Includes unused advised lines of credit totaling $36.1 billion and $38.2 billion at December 31, 2008 and 2007, respectively, which are not legally binding. In regulatory filings withthe Federal Reserve, unused advised lines are not reportable.

(c) Represents contractual amount net of risk participations totaling $28.2 billion and $28.3 billion at December 31, 2008 and 2007, respectively.(d) Includes commitments to affiliates of $84 million and $159 million at December 31, 2008 and 2007, respectively.(e) Excludes unfunded commitments for other equity investments of $627 million and $517 million at December 31, 2008 and 2007, respectively.(f) Includes commitments to investment and noninvestment grade counterparties in connection with leveraged acquisitions of $3.6 billion and $8.2 billion at December 31, 2008 and

2007, respectively.(g) Largely represents asset purchase agreements with JPMorgan Chase Bank, N.A.’s administered multi-seller, asset-backed commercial paper conduits. It also includes $96 million and

$1.1 billion of asset purchase agreements to other third-party entities at December 31, 2008 and 2007, respectively.(h) JPMorgan Chase Bank, N.A. held collateral relating to $30.8 billion and $31.4 billion of these arrangements at December 31, 2008 and 2007, respectively. Prior periods have been

revised to conform to the current presentation.(i) Includes unissued standby letters of credit commitments of $39.3 billion and $50.5 billion at December 31, 2008 and 2007, respectively.(j) Collateral held by JPMorgan Chase Bank, N.A. in support of securities lending indemnification agreements was $182.7 billion and $393.0 billion at December 31, 2008 and 2007,

respectively. Securities lending collateral comprises primarily cash, securities issued by governments that are members of the Organisation for Economic Co-operation and Developmentand U.S. government agencies.

(k) Represents notional amounts of derivatives qualifying as guarantees.



Other unfunded commitments to extend creditUnfunded commitments to extend credit are agreements to lend orto purchase securities only when a customer has complied with pre-determined conditions, and they generally expire on fixed dates.

Other unfunded commitments to extend credit include commitmentsto U.S. domestic states and municipalities, hospitals and other not-for-profit entities to provide funding for periodic tenders of their variable-rate demand bond obligations or commercial paper. Performance byJPMorgan Chase Bank, N.A. is required in the event that the variable-rate demand bonds or commercial paper cannot be remarketed tonew investors. The performance required of JPMorgan Chase Bank,N.A. under these agreements is conditional and limited by certain ter-mination events, which include bankruptcy and the credit ratingdowngrade of the issuer of the variable-rate demand bonds or com-mercial paper to below certain predetermined thresholds. The commit-ment period is generally one to three years. The amount of commit-ments related to variable-rate demand bonds and commercial paperof U.S. domestic states and municipalities, hospitals and not-for-profitentities at December 31, 2008 and 2007, was $23.5 billion and$24.1 billion, respectively.

Included in other unfunded commitments to extend credit are com-mitments to investment and noninvestment grade counterparties inconnection with leveraged acquisitions. These commitments aredependent on whether the acquisition by the borrower is successful,tend to be short-term in nature and, in most cases, are subject to cer-tain conditions based on the borrower’s financial condition or otherfactors. Additionally, JPMorgan Chase Bank, N.A. often syndicates por-tions of the commitment to other investors, depending on marketconditions. These commitments often contain flexible pricing featuresto adjust for changing market conditions prior to closing. Alternatively,the borrower may turn to the capital markets for required fundinginstead of drawing on the commitment provided by JPMorgan ChaseBank, N.A., and the commitment may expire unused. As such, thesecommitments may not necessarily be indicative of JPMorgan ChaseBank, N.A.’s actual risk, and the total commitment amount may notreflect actual future cash flow requirements. The amount of commit-ments related to leveraged acquisitions at December 31, 2008 and2007, was $3.6 billion and $8.2 billion, respectively. For further infor-mation, see Note 5 and Note 6 on pages 13–24 and 25–27, respec-tively, of these Consolidated Financial Statements.

FIN 45 guaranteesFIN 45 establishes accounting and disclosure requirements for guaran-tees, requiring that a guarantor recognize, at the inception of a guar-antee, a liability in an amount equal to the fair value of the obligationundertaken in issuing the guarantee. FIN 45 defines a guarantee as acontract that contingently requires the guarantor to pay a guaranteedparty, based upon: (a) changes in an underlying asset, liability or equitysecurity of the guaranteed party; or (b) a third party’s failure to performunder a specified agreement. JPMorgan Chase Bank, N.A. considersthe following off-balance sheet lending-related arrangements to beguarantees under FIN 45: certain asset purchase agreements, standbyletters of credit and financial guarantees, securities lending indemnifi-cations, certain indemnification agreements included within third-party

contractual arrangements and certain derivative contracts. These guar-antees are described in further detail below.

The fair value at inception of the obligation undertaken when issuingthe guarantees and commitments that qualify under FIN 45 is typical-ly equal to the net present value of the future amount of premiumreceivable under the contract. JPMorgan Chase Bank, N.A. has record-ed this amount in other liabilities with an offsetting entry recorded inother assets. As cash is received under the contract, it is applied tothe premium receivable recorded in other assets, and the fair value ofthe liability recorded at inception is amortized into income as lending& deposit-related fees over the life of the guarantee contract. Theamount of the liability related to FIN 45 guarantees recorded atDecember 31, 2008 and 2007, excluding the allowance for lending-related commitments and derivative contracts discussed below, wasapproximately $535 million and $335 million, respectively.

Asset purchase agreementsThe majority of JPMorgan Chase Bank, N.A.’s unfunded commitmentsare not guarantees as defined in FIN 45, except for certain asset pur-chase agreements that are principally used as a mechanism to provideliquidity to SPEs, predominantly multi-seller conduits, as described inNote 18 on pages 56–66 of these Consolidated Financial Statements.The conduit’s administrative agent can require the liquidity provider toperform under their asset purchase agreement with the conduit at anytime. These agreements may cause JPMorgan Chase Bank, N.A. to pur-chase an asset from the SPE at an amount above the asset’s then fairvalue, in effect providing a guarantee of the initial value of the refer-ence asset as of the date of the agreement. In most instances, third-party credit enhancements of the SPE mitigate JPMorgan Chase Bank,N.A.’s potential losses on these agreements.

The carrying value of asset purchase agreements of $147 million atDecember 31, 2008, classified in accounts payable and other liabili-ties on the Consolidated Balance Sheets, includes $9 million for theallowance for lending-related commitments and $138 million for theFIN 45 guarantee liability.

Standby letters of credit Standby letters of credit (“SBLC”) and financial guarantees are condi-tional lending commitments issued by JPMorgan Chase Bank, N.A. toguarantee the performance of a customer to a third party under cer-tain arrangements, such as commercial paper facilities, bond financ-ings, acquisition financings, trade and similar transactions. The majori-ty of SBLCs mature in 5 years or less; as of December 31, 2008 and2007, 64% and 52%, respectively, of these arrangements maturewithin three years. JPMorgan Chase Bank, N.A. has recourse to recov-er from the customer any amounts paid under these guarantees; inaddition, JPMorgan Chase Bank, N.A. may hold cash or other highlyliquid collateral to support these guarantees. The carrying value ofstandby letters of credit of $671 million and $590 million atDecember 31, 2008 and 2007, respectively, which is classified inaccounts payable and other liabilities in the Consolidated BalanceSheets, includes $274 million and $255 million at December 31, 2008and 2007, respectively, for the allowance for lending-related commit-ments, and $397 million and $335 million at December 31, 2008 and2007, respectively, for the FIN 45 guarantee.

848484

The following table summarizes the type of facilities under which standby letters of credit and other letters of credit arrangements are outstandingby the ratings profiles of JPMorgan Chase Bank, N.A.’s customers as of December 31, 2008 and 2007. The ratings scale is representative of thepayment or performance risk to JPMorgan Chase Bank, N.A. under the guarantee and is based upon JPMorgan Chase Bank, N.A.’s internal risk ratings, which generally correspond to ratings defined by S&P and Moody’s.

2008 2007

Standby letters Standby lettersof credit and other Other letters of credit and other Other letters

December 31, (in millions) financial guarantees of credit financial guarantees of credit

Investment-grade(a) $ 73,032 $ 3,772 $ 70,388 $ 4,153Noninvestment-grade(a) 21,764 1,155 28,239 1,218

Total contractual amount $ 94,796(b) $ 4,927 $ 98,627(b) $ 5,371

Allowance for lending-related commitments $ 272 $ 2 $ 254 $ 1Commitments with collateral 30,831 1,000 31,355 809

(a) Ratings scale is based upon JPMorgan Chase Bank, N.A.’s internal ratings which generally correspond to ratings defined by S&P and Moody’s.(b) Represents contractual amount net of risk participations totaling $28.2 billion and $28.3 billion at December 31, 2008 and 2007, respectively.

Derivatives qualifying as guarantees In addition to the contracts described above, JPMorgan Chase Bank,N.A. transacts certain derivative contracts that meet the characteristicsof a guarantee under FIN 45. These contracts include written putoptions that require JPMorgan Chase Bank, N.A. to purchase assetsupon exercise by the option holder at a specified price by a specifieddate in the future. JPMorgan Chase Bank, N.A. may enter into writtenput option contracts in order to meet client needs, or for trading pur-poses. The terms of written put options are typically five years or less.Derivative guarantees also include contracts such as stable valuederivatives that require JPMorgan Chase Bank, N.A. to make a pay-ment of the difference between the market value and the book valueof a counterparty’s reference portfolio of assets in the event that mar-ket value is less than book value and certain other conditions havebeen met. Stable value derivatives, commonly referred to as “stablevalue wraps”, are transacted in order to allow investors to realizeinvestment returns with less volatility than an unprotected portfolio,and typically have a longer-term maturity or allow either party to ter-minate the contract subject to contractually specified terms.

Derivative guarantees are recorded on the Consolidated BalanceSheets at fair value in trading assets and trading liabilities. The totalnotional value of the derivatives that JPMorgan Chase Bank, N.A.deems to be guarantees was $83.7 billion and $85.2 billion atDecember 31, 2008 and 2007, respectively. The notional value gen-erally represents JPMorgan Chase Bank, N.A.’s maximum exposure toderivatives qualifying as guarantees, although exposure to certainstable value derivatives is contractually limited to a substantiallylower percentage of the notional value. The fair value of the con-tracts reflects the probability of whether JPMorgan Chase Bank, N.A.will be required to perform under the contract. The fair value relatedto derivative guarantees was a derivative receivable of $183 millionand $211 million, and a derivative payable of $5.6 billion and $2.5billion at December 31, 2008 and 2007, respectively. JPMorganChase Bank, N.A. reduces exposures to these contracts by enteringinto offsetting transactions, or by entering into contracts that hedgethe market risk related to the derivative guarantees.

In addition to derivative contracts that meet the characteristics of a guar-antee under FIN 45, JPMorgan Chase Bank, N.A. is both a purchaserand seller of credit protection in the credit derivatives market. For a fur-ther discussion of credit derivatives, see Note 30 on pages 80–83 ofthese Consolidated Financial Statements.

Securities lending indemnification Through JPMorgan Chase Bank, N.A.’s securities lending program,customers’ securities, via custodial and non-custodial arrangements,may be lent to third parties. As part of this program, JPMorganChase Bank, N.A. provides an indemnification in the lending agree-ments which protects the lender against the failure of the third-partyborrower to return the lent securities in the event JPMorgan ChaseBank, N.A. did not obtain sufficient collateral. To minimize its liabilityunder these indemnification agreements, JPMorgan Chase Bank, N.A.obtains cash or other highly liquid collateral with a market valueexceeding 100% of the value of the securities on loan from the bor-rower. Collateral is marked to market daily to help assure that collat-eralization is adequate. Additional collateral is called from the bor-rower if a shortfall exists, or collateral may be released to the bor-rower in the event of overcollateralization. If a borrower defaults,JPMorgan Chase Bank, N.A. would use the collateral held to pur-chase replacement securities in the market or to credit the lendingcustomer with the cash equivalent thereof.

Also, as part of this program, JPMorgan Chase Bank, N.A. investscash collateral received from the borrower in accordance withapproved guidelines.

Based upon historical experience, management believes that risk ofloss under its indemnification obligations is remote.




Indemnification agreements – generalIn connection with issuing securities to investors, JPMorgan ChaseBank, N.A. may enter into contractual arrangements with third par-ties that may require JPMorgan Chase Bank, N.A. to make a paymentto them in the event of a change in tax law or an adverse interpreta-tion of tax law. In certain cases, the contract also may include a ter-mination clause, which would allow JPMorgan Chase Bank, N.A. tosettle the contract at its fair value in lieu of making a payment underthe indemnification clause. JPMorgan Chase Bank, N.A. may alsoenter into indemnification clauses in connection with the licensing ofsoftware to clients (“software licensees”) or when it sells a businessor assets to a third party (“third-party purchasers”), pursuant towhich it indemnifies software licensees for claims of liability or dam-ages that may occur subsequent to the licensing of the software, orthird-party purchasers for losses they may incur due to actions takenby JPMorgan Chase Bank, N.A. prior to the sale of the business orassets. It is difficult to estimate JPMorgan Chase Bank, N.A.’s maxi-mum exposure under these indemnification arrangements, since thiswould require an assessment of future changes in tax law and futureclaims that may be made against JPMorgan Chase Bank, N.A. thathave not yet occurred. However, based upon historical experience,management expects the risk of loss to be remote.

Loan sale and securitization-related indemnificationsIndemnifications for breaches of representations and warrantiesAs part of JPMorgan Chase Bank, N.A.’s loan sale and securitizationactivities, as described in Note 15 and Note 17 on pages 42–46 and47–56, respectively, of these Consolidated Financial Statements,JPMorgan Chase Bank, N.A. generally makes representations andwarranties in its loan sale and securitization agreements that theloans sold meet certain requirements. These agreements may requireJPMorgan Chase Bank, N.A. (including in its roles as a servicer) torepurchase the loans and/or indemnify the purchaser of the loansagainst losses due to any breaches of such representations or war-ranties. Generally, the maximum amount of future paymentsJPMorgan Chase Bank, N.A. would be required to make for breachesunder these representations and warranties would be equal to thecurrent amount of assets held by such securitization-related SPEsplus, in certain circumstances, accrued and unpaid interest on suchloans and certain expense.

At December 31, 2008 and 2007, JPMorgan Chase Bank, N.A. hadrecorded a repurchase liability of $1.0 billion and $15 million,respectively.

Loans sold with recourseJPMorgan Chase Bank, N.A. provides servicing for mortgages andcertain commercial lending products on both a recourse and nonre-course basis. In nonrecourse servicing, the principal credit risk toJPMorgan Chase Bank, N.A. is the cost of temporary servicingadvances of funds (i.e., normal servicing advances). In recourse serv-icing, the servicer agrees to share credit risk with the owner of themortgage loans, such as the Federal National Mortgage Associationor the Federal Home Loan Mortgage Corporation or a privateinvestor, insurer or guarantor. Losses on recourse servicing predomi-nantly occur when foreclosure sales proceeds of the property under-lying a defaulted loan are less than the sum of the outstanding prin-cipal balance, plus accrued interest on the loan and the cost of hold-ing and disposing of the underlying property. JPMorgan Chase Bank,N.A.’s loan sale transactions have primarily been executed on a non-recourse basis, thereby effectively transferring the risk of future creditlosses to the purchaser of the mortgage-backed securities issued bythe trust. At December 31, 2008 and 2007, the unpaid principal bal-ance of loans sold with recourse totaled $13.9 billion and $557 mil-lion, respectively. The increase in loans sold with recourse betweenDecember 31, 2008 and 2007, was driven by the WashingtonMutual transaction. The carrying value of the related liability thatJPMorgan Chase Bank, N.A. had recorded, which is representative ofJPMorgan Chase Bank, N.A.’s view of the likelihood it will have toperform under this guarantee, was $230 million and zero atDecember 31, 2008 and 2007, respectively.

Credit card charge-backs Prior to November 1, 2008, JPMorgan Chase Bank, N.A. was a part-ner with one of the leading companies in electronic payment servicesin a joint venture operating under the name of Chase PaymentechSolutions, LLC (the “joint venture”). The joint venture was formed inOctober 2005, as a result of an agreement by JPMorgan Chase Bank,N.A. and First Data Corporation, its joint venture partner, to integratethe companies’ jointly-owned Chase Merchant Services andPaymentech merchant businesses. The joint venture provided mer-chant processing services in the United States and Canada. The disso-lution of the joint venture was completed on November 1, 2008, andJPMorgan Chase Bank, N.A. retained approximately 51% of the busi-ness under the Chase Paymentech Solutions name.

86868686

Under the rules of Visa USA, Inc., and MasterCard International,JPMorgan Chase Bank, N.A., is liable primarily for the amount of eachprocessed credit card sales transaction that is the subject of a disputebetween a cardmember and a merchant. If a dispute is resolved in thecardmember’s favor, Chase Paymentech Solutions will (through thecardmember’s issuing bank) credit or refund the amount to the cardmember and will charge back the transaction to the merchant.If Chase Paymentech Solutions is unable to collect the amount fromthe merchant, Chase Paymentech Solutions will bear the loss for theamount credited or refunded to the cardmember. Chase PaymentechSolutions mitigates this risk by withholding future settlements, retain-ing cash reserve accounts or by obtaining other security. However, inthe unlikely event that: (1) a merchant ceases operations and is unableto deliver products, services or a refund; (2) Chase PaymentechSolutions does not have sufficient collateral from the merchant to pro-vide customer refunds; and (3) Chase Paymentech Solutions does nothave sufficient financial resources to provide customer refunds,JPMorgan Chase Bank, N.A., would be liable for the amount of thetransaction. For the year ended December 31, 2008, Chase PaymentechSolutions incurred aggregate credit losses of $13 million on $713.9 bil-lion of aggregate volume processed, and at December 31, 2008, it held$222 million of collateral. For the year ended December 31, 2007, thejoint venture incurred aggregate credit losses of $10 million on $719.1billion of aggregate volume processed, and at December 31, 2007, thejoint venture held $779 million of collateral. JPMorgan Chase Bank,N.A. believes that, based upon historical experience and the collateralheld by Chase Paymentech Solutions, the amount of JPMorgan ChaseBank, N.A.’s charge back-related obligations, which is representative ofthe payment or performance risk to JPMorgan Chase Bank, N.A., isimmaterial.

Exchange and clearinghouse guaranteesJPMorgan Chase Bank, N.A. is a member of several securities andfutures exchanges and clearinghouses, both in the United States andother countries. Membership in some of these organizations requiresJPMorgan Chase Bank, N.A. to pay a pro rata share of the lossesincurred by the organization as a result of the default of anothermember. Such obligations vary with different organizations. Theseobligations may be limited to members who dealt with the default-ing member or to the amount (or a multiple of the amount) ofJPMorgan Chase Bank, N.A.’s contribution to a member’s guaranteefund, or, in a few cases, the obligation may be unlimited. It is difficultto estimate JPMorgan Chase Bank, N.A.’s maximum exposure underthese membership agreements, since this would require an assess-ment of future claims that may be made against JPMorgan ChaseBank, N.A. that have not yet occurred. However, based upon histori-cal experience, management expects the risk of loss to be remote.

Note 32 – Credit risk concentrationsConcentrations of credit risk arise when a number of customers areengaged in similar business activities or activities in the same geo-graphic region, or when they have similar economic features thatwould cause their ability to meet contractual obligations to be simi-larly affected by changes in economic conditions.

JPMorgan Chase Bank, N.A. regularly monitors various segments ofits credit portfolio to assess potential concentration risks and toobtain collateral when deemed necessary. Senior management is sig-nificantly involved in the credit approval and review process, and risklevels are adjusted as needed to reflect management’s risk tolerance.

In JPMorgan Chase Bank, N.A.’s wholesale portfolio, risk concen-trations are evaluated primarily by industry and geographic region,and monitored regularly on both an aggregate portfolio level andon an individual customer basis. Management of JPMorgan ChaseBank, N.A.’s wholesale exposure is accomplished through loan syn-dication and participation, loan sales, securitizations, credit deriva-tives, use of master netting agreements, and collateral and otherrisk-reduction techniques. In the consumer portfolio, concentrationsare evaluated primarily by product and by U.S. geographic region,with a key focus on trends and concentrations at the portfoliolevel, where potential risk concentrations can be remedied throughchanges in underwriting policies and portfolio guidelines.

JPMorgan Chase Bank, N.A. does not believe exposure to any one loanproduct with varying terms (e.g., interest-only payments for an intro-ductory period, option ARMs) or exposure to loans with high loan-to-value ratios would result in a significant concentration of credit risk.Terms of loan products and collateral coverage are included inJPMorgan Chase Bank, N.A.’s assessment when extending credit andestablishing its allowance for loan losses.

For further information regarding on-balance sheet credit concentra-tions by major product and geography, see Note 15 on pages 42–46and Note 16 on pages 46–47 of these Consolidated FinancialStatements. For information regarding concentrations of off-balancesheet lending-related financial instruments by major product, seeNote 31 on pages 83–87 of these Consolidated Financial Statements.


Note 33 – International operations Financial information regarding international operations is accumu-lated, managed and discussed at the JPMorgan Chase level and notat the subsidiary level (i.e., JPMorgan Chase Bank, N.A.). For financialreporting purposes, JPMorgan Chase Bank, N.A. is viewed byJPMorgan Chase as a legal entity only; financial information forinternational operations is not used to manage JPMorgan ChaseBank, N.A.

Note 34 – Business segments SFAS 131 defines the criteria by which management determines thenumber and nature of its “operating segments” (i.e., business seg-ments) and sets forth the financial information that is required to bedisclosed about these business segments. This information is accu-mulated, managed and discussed at the JPMorgan Chase level andnot at the subsidiary level (i.e., JPMorgan Chase Bank, N.A.). Forfinancial reporting purposes, JPMorgan Chase Bank, N.A. is viewedby JPMorgan Chase as a legal entity only; business segment financialinformation is not prepared for JPMorgan Chase Bank, N.A.



The table below presents both on- and off-balance sheet wholesale- and consumer-related credit exposure as of December 31, 2008 and 2007.

2008 2007

On-balance sheet On-balance sheet

Credit Off-balance Credit Off-balanceDecember 31, (in millions) exposure Loans Derivatives sheet(c) exposure Loans Derivatives sheet(c)

Wholesale-related:Real estate $ 83,430 $ 66,617 $ 2,187 $ 14,626 $ 38,153 $ 20,187 $ 845 $ 17,121Banks and finance companies 70,003 18,723 28,236 23,044 64,519 16,745 11,777 35,997Asset managers 46,780 9,316 17,125 20,339 37,902 8,394 7,272 22,236Healthcare 36,862 6,453 3,184 27,225 30,281 5,404 837 24,040Utilities 32,585 8,766 3,431 20,388 27,501 4,996 1,769 20,736Retail & consumer services 32,252 8,200 2,903 21,149 23,774 6,522 488 16,764State & municipal governments 32,172 4,528 6,892 20,752 29,901 4,731 3,032 22,138Consumer products 29,295 10,017 2,138 17,140 29,813 8,846 1,026 19,941Oil & gas 23,658 8,631 1,980 13,047 25,091 10,130 1,485 13,476Securities firms & exchanges 23,368 6,348 11,978 5,042 23,134 5,108 11,006 7,020Insurance 17,446 1,927 5,210 10,309 16,624 1,041 2,310 13,273Technology 17,218 4,745 1,311 11,162 18,228 4,638 1,238 12,352Media 17,087 7,514 1,206 8,367 16,085 4,861 1,200 10,024Metals/mining 14,887 6,460 1,918 6,509 17,551 7,264 2,529 7,758Central government 14,347 507 9,673 4,167 8,737 462 3,771 4,504All other wholesale 267,095 72,467 42,205 152,423 293,406 75,996 22,294 195,116

Loans held-for-sale and loans atfair value 11,968 11,968 — — 22,729 22,729 — —

Receivables from customers(a) 202 — — — — — — —

Total wholesale-related 770,655 253,187 141,577 375,689 723,429 208,054 72,879 442,496

Consumer-related:Home equity 238,633 142,890 — 95,743 169,023 94,832 — 74,191Prime mortgage 99,102 94,023 — 5,079 47,269 39,875 — 7,394Subprime mortgage 22,086 22,086 — — 15,468 15,467 — 1Option ARMs 40,661 40,661 — — — — — —Auto loans 47,329 42,603 — 4,726 50,407 42,349 — 8,058Credit card(b) 56,883 31,141 — 25,742 62,928 31,824 — 31,104All other loans 45,950 33,693 — 12,257 36,681 25,272 — 11,409

Loans held-for-sale 2,028 2,028 — — 3,989 3,989 — —

Total consumer-related 552,672 409,125 — 143,547 385,765 253,608 — 132,157

Total exposure $ 1,323,327 $ 662,312 $ 141,577 $ 519,236 $1,109,194 $ 461,662 $ 72,879 $ 574,653

(a) Primarily represents margin loans to prime and retail brokerage customers which are included in accrued interest and accounts receivable on the Consolidated Balance Sheets.(b) Excludes $32.5 billion and $29.3 billion of securitized credit card receivables at December 31, 2008 and 2007, respectively.(c) Represents lending-related financial instruments.


Supplementary informationJPMorgan Chase Bank, National Association(a wholly-owned subsidiary of JPMorgan Chase & Co.)

Selected quarterly financial data (unaudited)(in millions, except ratio data) 2008(c) 2007

As of or for the period ended 4th 3rd 2nd 1st 4th 3rd 2nd 1st

Selected income statement dataNoninterest revenue(a) $ 8,176 $ 8,352 $ 8,329 $ 8,372 $ 7,962 $ 6,419 $ 8,610 $ 8,639Net interest income 10,858 7,111 6,965 6,583 6,291 6,066 5,459 5,321

Total net revenue 19,034 15,463 15,294 14,955 14,253 12,485 14,069 13,960Provision for credit losses 5,497 2,936 2,533 3,738 1,743 1,284 1,028 617Provision for credit losses – accounting conformity (442) 1,976 — — — — — —Total noninterest expense 10,404 9,010 10,077 7,793 8,629 7,703 8,968 8,698

Income (loss) before income tax expense (benefit) and extraordinary gain 3,575 1,541 2,684 3,424 3,881 3,498 4,073 4,645

Income tax expense (benefit) 1,352 (519) 674 1,204 1,099 1,185 1,402 1,679

Income (loss) before extraordinary gain 2,223 2,060 2,010 2,220 2,782 2,313 2,671 2,966Extraordinary gain(b) 1,325 581 — — — — — —

Net income $ 3,548 $ 2,641 $ 2,010 $ 2,220 $ 2,782 $ 2,313 $ 2,671 $ 2,966

Tier 1 capital ratio 8.7% 7.9% 8.2% 8.2% 8.3% 8.2% 7.8% 8.0%Total capital ratio 12.5 11.4 12.0 12.0 11.8 11.8 11.0 11.2Tier 1 leverage ratio 5.9 7.3 6.1 6.1 6.2 6.2 5.9 6.0

Selected balance sheet data (period-end)Trading assets $ 365,365 $ 376,888 $ 368,829 $ 380,248 $ 390,459 $ 357,540 $ 350,718 $ 318,876Securities 199,744 145,439 114,837 98,549 82,511 94,002 92,661 93,641Loans 662,312 701,664 481,213 484,585 461,662 431,859 410,214 393,382Allowance for credit losses (17,809) (17,086) (11,425) (10,338) (7,864) (6,986) (6,364) (5,830)Total assets 1,746,242 1,765,128 1,378,468 1,407,568 1,318,888 1,244,049 1,252,369 1,224,104Deposits 1,055,765 1,013,390 797,676 806,319 772,087 698,109 663,305 632,598Long-term debt 71,862 79,102 81,399 82,077 87,575 87,943 81,697 73,798Total stockholder’s equity 128,767 125,639 108,929 108,960 106,346 102,879 98,388 97,876

(a) JPMorgan Chase Bank, N.A. adopted SFAS 157 in the first quarter of 2007. See Note 5 on pages 13–24 of these Consolidated Financial Statements for additional information.(b) For a discussion of the extraordinary gain, see Note 3 on pages 10–12.(c) On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual Bank. The transaction was accounted for as a purchase and Washington Mutual’s

results of operations are included in JPMorgan Chase Bank, N.A.’s results from the transaction date. For additional information on the Washington Mutual transaction, see Note 3 onpages 10–12 of these Consolidated Financial Statements.

90 JPMorgan Chase Bank, National Association/ 2008 Consolidated Financial Statements909090

Selected annual financial data (unaudited)(in millions, except ratio data)As of or for the year ended December 31, 2008(d) 2007 2006 2005 2004(e)

Selected income statement dataNoninterest revenue(a) $ 33,229 $ 31,630 $ 29,191 $ 23,065 $ 16,979Net interest income 31,517 23,137 18,135 15,283 11,962

Total net revenue 64,746 54,767 47,326 38,348 28,941Provision for credit losses 14,704 4,672 1,809 1,101 534Provision for credit losses – accounting conformity 1,534 — — — —Total noninterest expense 37,284 33,998 31,909 29,799 25,488

Income from continuing operations before income tax expense (benefit) 11,224 16,097 13,608 7,448 2,919

Income tax expense 2,711 5,365 4,487 2,563 937

Income from continuing operations 8,513 10,732 9,121 4,885 1,982Income from discontinued operations(b) — — 798 207 196

Income before extraordinary gain 8,513 10,732 9,919 5,092 2,178Extraordinary gain(c) 1,906 — — — —

Net income $ 10,419 $ 10,732 $ 9,919 $ 5,092 $ 2,178

Tier 1 capital ratio 8.7% 8.3% 8.2% 8.1% 8.3%Total capital ratio 12.5 11.8 11.4 11.2 11.7Tier 1 leverage ratio 5.9 6.2 5.9 6.1 6.0

Selected balance sheet data (period-end)Trading assets $ 365,365 $ 390,459 $ 284,282 $ 221,837 $ 236,768Securities 199,744 82,511 88,487 37,113 81,033Loans 662,312 461,662 421,833 365,991 334,323Allowance for credit losses (17,809) (7,864) (5,693) (5,254) (5,804)Total assets 1,746,242 1,318,888 1,179,390 1,013,985 967,365Deposits 1,055,765 772,087 640,466 552,610 517,710Long-term debt 71,862 87,575 71,256 55,612 46,406Total stockholder’s equity 128,767 106,346 96,010 86,350 80,640

(a) JPMorgan Chase Bank, N.A. adopted SFAS 157 in the first quarter of 2007. See Note 5 on pages 13–24 of these Consolidated Financial Statements for additional information.(b) On October 1, 2006, JPMorgan Chase & Co. completed the exchange of selected corporate trust businesses for the consumer, business banking and middle-market banking businesses

of The Bank of New York Company Inc. The results of operations of these corporate trust businesses are reported as discontinued operations for each period prior to 2007.(c) For a discussion of the extraordinary gain, see Note 3 on pages 10–12.(d) On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual Bank. The transaction was accounted for as a purchase and Washington Mutual’s

results of operations are included in JPMorgan Chase Bank, N.A.’s results from the transaction date. For additional information on the Washington Mutual transaction, see Note 3 onpages 10–12 of these Consolidated Financial Statements.

(e) On July 1, 2004, Bank One Corporation merged with and into JPMorgan Chase Bank, N.A. Accordingly, 2004 results include six months of the combined JPMorgan Chase Bank, N.A.’sresults and six months of heritage JPMorgan Chase Bank, N.A. results.

Supplementary informationJPMorgan Chase Bank, National Association(a wholly-owned subsidiary of JPMorgan Chase & Co.)


Advised lines of credit: An authorization which specifies the max-imum amount of a credit facility JPMorgan Chase Bank, N.A. hasmade available to an obligor on a revolving but non-binding basis.The borrower receives written or oral advice of this facility. JPMorganChase Bank, N.A. may cancel this facility at any time.


AICPA Statement of Position (“SOP”) 03-3: “Accounting forCertain Loans or Debt Securities Acquired in a Transfer.”

AICPA SOP 98-1: “Accounting for the Costs of Computer SoftwareDeveloped or Obtained for Internal Use.”

APB 25: Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees.”

Beneficial interest issued by consolidated VIEs: Representsthe interest of third-party holders of debt/equity securities, or otherobligations, issued by VIEs that JPMorgan Chase Bank, N.A. consoli-dates under FIN 46R. The underlying obligations of the VIEs consistof short-term borrowings, commercial paper and long-term debt. Therelated assets consist of trading assets, available-for-sale securities,loans and other assets.

Benefit obligation: Refers to the projected benefit obligation forpension plans and the accumulated postretirement benefit obligationfor OPEB plans.

Credit cycle: A period of time over which credit quality improves,deteriorates and them improves again. The duration of a credit cyclecan vary from a couple of years to several years.

Credit derivatives: Contractual agreements that provide protectionagainst a credit event on one or more referenced credits. The natureof a credit event is established by the protection buyer and protec-tion seller at the inception of a transaction, and such events includebankruptcy, insolvency or failure to meet payment obligations whendue. The buyer of the credit derivative pays a periodic fee in returnfor a payment by the protection seller upon the occurrence, if any, ofa credit event.

Discontinued operations: A component of an entity that is classi-fied as held-for-sale or that has been disposed of from ongoing oper-ations in its entirety or piecemeal, and for which the entity will nothave any significant, continuing involvement. A discontinued opera-tion may be a separate major business segment, a component of amajor business segment or a geographical area of operations of theentity that can be separately distinguished operationally and forfinancial reporting purposes.


EITF Issue 99-20: “Recognition of Interest Income and Impairmenton Purchased and Retained Beneficial Interests in SecuritizedFinancial Assets.”


FICO: Fair Isaac Corporation.

FIN 39: FASB Interpretation No. 39, “Offsetting of Amounts Relatedto Certain Contracts – an interpretation of APB Opinion No. 10 andFASB Statement No. 105.”

FIN 41: FASB Interpretation No. 41, “Offsetting of Amounts Relatedto Certain Repurchase and Reverse Repurchase Agreements – aninterpretation of APB Opinion No. 10 and a Modification of FASBInterpretation No. 39.”

FIN 45: FASB Interpretation No. 45, “Guarantor’s Accounting andDisclosure Requirements for Guarantees, including IndirectGuarantees of Indebtedness of Others – an interpretation of FASBStatements No. 5, 57 and 107 and a rescission of FASBInterpretation No. 34.”

FIN 46R: FASB Interpretation No. 46 (revised December 2003),“Consolidation of Variable Interest Entities – an interpretation ofARB No. 51.”

FIN 47: FASB Interpretation No. 47, “Accounting for ConditionalAsset Retirement Obligations – an interpretation of FASB StatementNo. 143.”

FIN 48: FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes – an interpretation of FASB Statement No. 109.”

Forward points: Represents the interest rate differential betweencurrencies, which is either added to or subtracted from the currentexchange rate (i.e., “spot rate”) to determine the forward exchangerate.


FSP FAS 123(R)-3: “Transition Election Related to Accounting forthe Tax Effects of Share-Based Payment Awards.”

FSP FAS 132(R)-1: “Employers’ Disclosures about PostretirementBenefit Plan Assets.”

FSP FAS 133-1 and FIN 45-4: “Disclosures about CreditDerivatives and Certain Guarantees: An Amendment of FASBStatement No. 133 and FASB Interpretation No. 45; and Clarificationof the Effective Date of FASB Statement No. 161.”

FSP FAS 140-4 and FIN 46(R)-8: “Disclosures by Public Entities(Enterprises) about Transfers of Financial Assets and Interests inVariable Interest Entities.”

FSP FAS 140-3: “Accounting for Transfers of Financial Assets andRepurchase Financing Transactions.”

FSP FIN 39-1: “Amendment of FASB Interpretation No. 39.”

Interchange income: A fee that is paid to a credit card issuer inthe clearing and settlement of a sales or cash advance transaction.

GGlloossssaarryy ooff tteerrmmssJPMorgan Chase Bank, National Association(a wholly-owned subsidiary of JPMorgan Chase & Co.)

92 JPMorgan Chase Bank, National Association/ 2008 Consolidated Financial Statements929292

Interests in purchased receivables: Represent an ownership inter-est in cash flows of an underlying pool of receivables transferred by athird-party seller into a bankruptcy-remote entity, generally a trust.

Investment-grade: An indication of credit quality based uponJPMorgan Chase Bank, N.A.’s internal risk assessment system.“Investment-grade” generally represents a risk profile similar to arating of a “BBB-”/”Baa3” or better, as defined by independent rat-ing agencies.

Master netting agreement: An agreement between two counter-parties that have multiple derivative contracts with each other thatprovides for the net settlement of all contracts through a single pay-ment, in a single currency, in the event of default on or terminationof any one contract. See FIN 39 above.


Alt-AAlt-A loans are generally higher in credit quality than subprime loansbut have characteristics that would disqualify the borrower from atraditional prime loan. Alt-A lending characteristics may include oneor more of the following: (i) limited documentation; (ii) high com-bined-loan-to-value (“CLTV”) ratio; (iii) loans secured by non-owneroccupied properties; or (iv) debt-to-income ratio above normal limits.Perhaps the most important characteristic is limited documentation.A substantial proportion of traditional Alt-A loans are those where aborrower does not provide complete documentation of his or herassets or the amount or source of his or her income.

Option ARMsThe option ARM home loan product is an adjustable-rate mortgageloan that provides the borrower with the option each month to makea fully amortizing, interest-only, or minimum payment. The minimumpayment on an option ARM loan is based upon the interest ratecharged during the introductory period. This introductory rate has usu-ally been significantly below the fully indexed rate. The fully indexedrate is calculated using an index rate plus a margin. Once the intro-ductory period ends, the contractual interest rate charged on the loanincreases to the fully indexed rate and adjusts monthly to reflectmovements in the index. The minimum payment is typically insufficientto cover interest accrued in the prior month, and any unpaid interestis deferred and added to the principal balance of the loan.

PrimePrime mortgage loans generally have low default risk and are madeto borrowers with good credit records and a monthly income that isat least three to four times greater than their monthly housingexpense (mortgage payments plus taxes and other debt payments).These borrowers provide full documentation and generally have reli-able payment histories.

SubprimeSubprime loans are designed for customers with one or more highrisk characteristics, including but not limited to: (i) unreliable or poorpayment histories; (ii) high loan-to-value (“LTV”) ratio of greaterthan 80% (without borrower-paid mortgage insurance); (iii) highdebt-to-income ratio; (iv) the occupancy type for the loan is otherthan the borrower’s primary residence; or (v) a history of delinquen-cies or late payments on the loan.



Principal transactions: Realized and unrealized gains and lossesfrom trading activities (including physical commodities inventoriesthat are accounted for at the lower of cost or fair value) and changesin fair value associated with financial instruments held by the invest-ment banking business for which the SFAS 159 fair value option waselected. Principal transactions revenue also include private equitygains and losses.

Purchased credit-impaired loans: Acquired loans deemed to becredit-impaired under SOP 03-3. SOP 03-3 allows purchasers toaggregate credit-impaired loans acquired in the same fiscal quarterinto one or more pools, provided that the loans have common riskcharacteristics (e.g., FICO score, geographic location). A pool is thenaccounted for as a single asset with a single composite interest rateand an aggregate expectation of cash flows. Wholesale loans weredetermined to be credit-impaired if they met the definition of animpaired loan under SFAS 114 at the acquisition date. Consumerloans are determined to be purchased credit-impaired based uponspecific risk characteristics of the loan, including product type, loan-to-value ratios, FICO scores, and past due status.

Receivables from customers: Primarily represents margin loansto prime and retail brokerage customers which are included inaccrued interest and accounts receivable on the ConsolidatedBalance Sheets for the wholesale business.

REMIC: Investment vehicles that hold commercial and residentialmortgages in trust and issues securities representing an undividedinterest in these mortgages. A REMIC, which can be a corporation,trust, association, or partnership, assembles mortgages into poolsand issues pass-through certificates, multiclass bonds similar to acollateralized mortgage obligation (“CMO”) or other securities toinvestors in the secondary mortgage market.

SAB: Staff Accounting Bulletin.

SAB 105: “Application of Accounting Principles to LoanCommitments.”

SAB 109: “Written Loan Commitments Recorded at Fair ValueThrough Earnings.”





SFAS 13: “Accounting for Leases.”


SFAS 87: “Employers’ Accounting for Pensions.”

SFAS 88: “Employers’ Accounting for Settlements and Curtailmentsof Defined Benefit Pension Plans and for Termination Benefits.”

SFAS 106: “Employers’ Accounting for Postretirement Benefits OtherThan Pensions.”


SFAS 109: “Accounting for Income Taxes.”

SFAS 114: “Accounting by Creditors for Impairment of a Loan – anamendment of FASB Statements No. 5 and 15.”

SFAS 115: “Accounting for Certain Investments in Debt and Equity Securities.”

SFAS 123: “Accounting for Stock-Based Compensation.”

SFAS 123R: “Share-Based Payment.”


SFAS 138: “Accounting for Certain Derivative Instruments and CertainHedging Activities – an amendment of FASB Statement No. 133.”

SFAS 140: “Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities – a replacement of FASBStatement No. 125.”

SFAS 141: “Business Combinations.”


SFAS 142: “Goodwill and Other Intangible Assets.”

SFAS 143: “Accounting for Asset Retirement Obligations.”

SFAS 149: “Amendment of Statement No. 133 on DerivativeInstruments and Hedging Activities.”

SFAS 155: “Accounting for Certain Hybrid Financial Instruments –an amendment of FASB Statements No. 133 and 140.”

SFAS 156: “Accounting for Servicing of Financial Assets – anamendment of FASB Statement No. 140.”


SFAS 158: “Employers’ Accounting for Defined Benefit Pension andOther Postretirement Plans – an amendment of FASB Statements No.87, 88, 106, and 132(R).”

SFAS 159: “The Fair Value Option for Financial Assets and FinancialLiabilities – Including an amendment of FASB Statement No. 115.”

SFAS 160: “Noncontrolling Interests in Consolidated FinancialStatements – an amendment of ARB No. 51.”

SFAS 161: “Disclosures About Derivative Instruments and HedgingActivities – an amendment of FASB Statement No. 133.”

Unaudited: Financial statements and information that have notbeen subjected to auditing procedures sufficient to permit an inde-pendent certified public accountant to express an opinion.

U.S. GAAP: Accounting principles generally accepted in the UnitedStates of America.

U.S. government and federal agency obligations: Obligationsof the U.S. government or an instrumentality of the U.S. governmentwhose obligations are fully and explicitly guaranteed as to the timelypayment of principal and interest by the full faith and credit of theU.S. government.

U.S. government-sponsored enterprise obligations:Obligations of agencies originally established or chartered by the U.S.government to serve public purposes as specified by the U.S.Congress; these obligations are not explicitly guaranteed as to thetimely payment of principal and interest by the full faith and credit ofthe U.S. government.


CONSOLIDATEDFINANCIALSTATEMENTSF O R T H E T H R E E Y E A R S E N D E D D E C E M B E R 3 1 , 2 0 0 7

JPMORGAN CHASE BANK, NATIONAL ASSOCIATION( a w h o l l y - o w n e d s u b s i d i a r y o f J P M O R G A N C H A S E & C O . )

xx2 JPMorgan Chase Bank, National Association/ 2007 Consolidated Financial Statements

TABLE OF CONTENTSJPMorgan Chase Bank, National Association(a wholly-owned subsidiary of JPMorgan Chase & Co.)

FOR THE THREE YEARS ENDED DECEMBER 31, 2007

Page(s)

Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Consolidated Financial Statements

Consolidated statements of income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Consolidated balance sheets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Consolidated statements of changes in stockholder’s equity and comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Consolidated statements of cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Notes to consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6–73


Selected quarterly financial data (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

Selected annual financial data (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

Glossary of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76–77


Report of Independent Registered Public Accounting FirmTo the Board of Directors and Stockholder of JPMorgan Chase Bank, National Association:

PRICEWATERHOUSECOOPERS LLP • 300 MADISON AVENUE • NEW YORK, NY 10017

perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, andevaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

As discussed in Note 5, Note 6, and Note 25 to the consolidatedfinancial statements, effective January 1, 2007 the Bank adoptedStatement of Financial Accounting Standards No. 157, “Fair ValueMeasurement,” Statement of Financial Accounting Standards No.159, “Fair Value Option for Financial Assets and Financial Liabilities,”and FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes.”

April 25, 2008

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMJPMorgan Chase Bank, National Association(a wholly-owned subsidiary of JPMorgan Chase & Co.)

In our opinion, the accompanying consolidated balance sheets and therelated consolidated statements of income, changes in stockholder’sequity and comprehensive income and cash flows present fairly, in all material respects, the financial position of JPMorgan Chase Bank,National Association and its subsidiaries (the “Bank”) at December31, 2007 and 2006, and the results of their operations and theircash flows for each of the three years in the period ended December31, 2007 in conformity with accounting principles generally acceptedin the United States of America. These financial statements are theresponsibility of the Bank’s management. Our responsibility is toexpress an opinion on these financial statements based on ouraudits. We conducted our audits of these statements in accordancewith the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and


CONSOLIDATED STATEMENTS OF INCOMEJPMorgan Chase Bank, National Association(a wholly-owned subsidiary of JPMorgan Chase & Co.)


RevenueInvestment banking fees $ 3,468 $ 3,026 $ 2,290Principal transactions 7,691 9,277 5,960Lending & deposit-related fees 3,877 3,415 3,345Asset management, administration and commissions 9,776 7,833 7,532Securities gains (losses) 50 (550) (1,463)Mortgage fees and related income 2,094 565 1,053Credit card income 3,123 2,935 3,064Other income 1,551 2,690 1,284

Noninterest revenue 31,630 29,191 23,065

Interest income 58,840 49,284 35,273Interest expense 35,703 31,149 19,990


Total net revenue 54,767 47,326 38,348

Provision for credit losses 4,672 1,809 1,101

Noninterest expenseCompensation expense 16,126 15,165 12,649Occupancy expense 2,378 2,151 1,927Technology, communications and equipment expense 3,361 3,231 3,139Professional & outside services 3,620 3,030 3,218Marketing 643 561 497Other expense 6,997 6,805 7,157Amortization of intangibles 679 695 751Merger costs 194 271 461

Total noninterest expense 33,998 31,909 29,799

Income from continuing operations before income tax expense 16,097 13,608 7,448Income tax expense 5,365 4,487 2,563

Income from continuing operations 10,732 9,121 4,885Income from discontinued operations — 798 207

Net income $ 10,732 $ 9,919 $ 5,092

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


CONSOLIDATED BALANCE SHEETSJPMorgan Chase Bank, National Association(a wholly-owned subsidiary of JPMorgan Chase & Co.)

December 31, (in millions, except share data) 2007 2006

AssetsCash and due from banks $ 38,696 $ 37,841Deposits with banks 11,751 13,412Federal funds sold and securities purchased under resale agreements (included $18,063 at fair value

at December 31, 2007) 192,145 201,458Securities borrowed 44,051 42,784Trading assets (included assets pledged of $91,607 at December 31, 2007, and $62,581 at

December 31, 2006) 390,459 284,282Securities (included $82,467 and $88,429 at fair value at December 31, 2007 and 2006, respectively, and

assets pledged of $10,094 and $45,032 at December 31, 2007 and 2006, respectively) 82,511 88,487Loans (included $8,156 at fair value at December 31, 2007) 461,662 421,833Allowance for loan losses (7,015) (5,170)

Loans, net of Allowance for loan losses 454,647 416,663

Accrued interest and accounts receivable 25,921 22,564Premises and equipment 8,448 7,986Goodwill 25,819 25,939Other intangible assets:

Mortgage servicing rights 8,632 7,546Purchased credit card relationships 189 190All other intangibles 3,342 3,887

Other assets (included $1,632 at fair value at December 31, 2007) 32,277 26,351

Total assets $ 1,318,888 $1,179,390

LiabilitiesDeposits (included $6,456 at fair value at December 31, 2007) $ 772,087 $ 640,466Federal funds purchased and securities sold under repurchase agreements (included $5,768 at fair value at

December 31, 2007) 118,555 157,309Other borrowed funds (included $10,326 at fair value at December 31, 2007) 23,276 14,664Trading liabilities 143,509 125,035Accounts payable, accrued expense and other liabilities (including the Allowance for lending-related

commitments of $849 and $523 at December 31, 2007 and 2006, respectively, and $25 at fair value at December 31, 2007) 60,011 62,235

Beneficial interests issued by consolidated variable interest entities (included $2,727 at fair value at December 31, 2007) 6,929 11,802

Long-term debt (included $56,932 and $24,149 at fair value at December 31, 2007 and 2006, respectively) 87,575 71,256Junior subordinated deferrable interest debentures held by trusts that issued guaranteed capital debt securities 600 613

Total liabilities 1,212,542 1,083,380

Commitments and contingencies (see Note 28 on pages 67–68 of these consolidated financial statements)

Stockholder’s equityPreferred stock ($1 par value; authorized 15,000,000 shares at December 31, 2007 and 2006;

issued 0 shares at December 31, 2007 and 2006) — —Common stock ($12 par value; authorized 148,765,000 shares at December 31, 2007 and 2006;

issued 148,761,243 shares at December 31, 2007 and 2006) 1,785 1,785Capital surplus 62,439 60,431Retained earnings 42,808 34,721Accumulated other comprehensive income (loss) (686) (927)

Total stockholder’s equity 106,346 96,010

Total liabilities and stockholder’s equity $ 1,318,888 $1,179,390



CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY AND COMPREHENSIVE INCOMEJPMorgan Chase Bank, National Association(a wholly-owned subsidiary of JPMorgan Chase & Co.)


Common stockBalance at beginning and end of year $ 1,785 $ 1,785 $ 1,785

Capital surplusBalance at beginning of year 60,431 59,504 58,290Cash capital contribution from JPMorgan Chase & Co. 2,004 14 789Adjustments to capital due to transactions with JPMorgan Chase & Co. 4 913 425


Retained earningsBalance at beginning of year 34,721 25,711 20,968Cumulative effect of change in accounting principles 956 172 —

Balance at beginning of year, adjusted 35,677 25,883 20,968Net income 10,732 9,919 5,092Cash dividends paid to JPMorgan Chase & Co. (3,500) (1,000) (500)Net internal legal entity mergers (101) (81) 151


Accumulated other comprehensive income (loss)Balance at beginning of year (927) (650) (403)Cumulative effect of change in accounting principles (1) — —

Balance at beginning of year, adjusted (928) (650) (403)Other comprehensive income (loss) 242 154 (247)Adjustment to initially apply SFAS 158 — (431) —

Balance at end of year (686) (927) (650)

Total stockholder’s equity $ 106,346 $96,010 $ 86,350

Comprehensive incomeNet income $ 10,732 $ 9,919 $ 5,092Other comprehensive income (loss) 242 154 (247)

Comprehensive income $ 10,974 $10,073 $ 4,845



CONSOLIDATED STATEMENTS OF CASH FLOWSJPMorgan Chase Bank, National Association(a wholly-owned subsidiary of JPMorgan Chase & Co.)


Operating activities

Net income $ 10,732 $ 9,919 $ 5,092Adjustments to reconcile net income to net cash (used in) provided by operating activities:

Provision for credit losses 4,672 1,809 1,101Depreciation and amortization 2,302 2,080 3,187Amortization of intangibles 679 695 751Deferred tax benefit (113) (1,555) (1,324)Investment securities (gains) losses (50) 550 1,463Gains on disposition of businesses — (1,123) —

Originations and purchases of loans held-for-sale (115,295) (174,379) (108,611)Proceeds from sales and securitizations of loans held-for-sale 104,944 167,988 102,602Net change in:

Trading assets (104,271) (55,089) 20,365Securities borrowed (1,267) 1,058 (20,196)Accrued interest and accounts receivable (3,473) (8,385) 1,512Other assets (11,711) 2,944 (4,652)Trading liabilities 21,223 (5,696) (23,733)Accounts payable, accrued expense and other liabilities (1,944) 9,391 (216)

Other operating adjustments 5,933 3,336 (114)

Net cash used in operating activities (87,639) (46,457) (22,773)

Investing activitiesNet change in:

Deposits with banks 1,661 7,763 11,827Federal funds sold and securities purchased under resale agreements 9,853 (24,837) (62,174)

Held-to-maturity securities:Proceeds 14 19 33

Available-for-sale securities:Proceeds from maturities 29,985 23,509 28,624Proceeds from sales 95,761 120,830 80,160Purchases (119,129) (197,374) (76,388)

Proceeds from sales and securitizations of loans held-for-investment 22,229 14,466 13,432Other changes in loans, net (70,775) (52,342) (39,413)Net cash received (used) in business acquisitions or dispositions 444 (5,330) (2,517)All other investing activities, net (6,355) 1,014 2,748

Net cash used in investing activities (36,312) (112,282) (43,668)

Financing activitiesNet change in:

Deposits 142,796 86,165 29,343Federal funds purchased and securities sold under repurchase agreements (38,812) 52,587 18,586Other borrowed funds 8,269 4,561 5,256

Proceeds from the issuance of long-term debt and trust preferred capital debt securities 50,507 34,639 32,203Repayments of long-term debt and capital debt securities (38,425) (22,031) (21,895)Cash capital contribution from JPMorgan Chase & Co. 2,004 14 789Cash dividends paid (3,500) (1,000) (500)All other financing activities, net 1,561 6,166 4,444

Net cash provided by financing activities 124,400 161,101 68,226

Effect of exchange rate changes on cash and due from banks 406 199 (385)

Net increase in cash and due from banks 855 2,561 1,400Cash and due from banks at the beginning of the year 37,841 35,280 33,880

Cash and due from banks at the end of the year $ 38,696 $ 37,841 $ 35,280

Cash interest paid $ 34,433 $ 29,599 $ 19,064Cash income taxes paid(a) 5,381 4,088 4,357

Note: In 2006, JPMorgan Chase Bank, N.A. exchanged selected corporate trust businesses for The Bank of New York’s consumer, business banking and middle-market banking businesses.The fair values of the noncash assets exchanged was $2.12 billion.

(a) Includes $3.5 billion and $2.7 billion paid to JPMorgan Chase & Co. in 2007 and 2006, respectively. No payment was made to JPMorgan Chase & Co. in 2005.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTSJPMorgan Chase Bank, National Association(a wholly-owned subsidiary of JPMorgan Chase & Co.)


issuing securities to investors. The legal documents that govern thetransaction describe how the cash earned on the assets must beallocated to the SPE’s investors and other parties that have rights tothose cash flows. SPEs are generally structured to insulate investorsfrom claims on the SPE’s assets by creditors of other entities, includ-ing the creditors of the seller of the assets.

There are two different accounting frameworks applicable to SPEs:the qualifying SPE (“QSPE”) framework under SFAS 140 and thevariable interest entity (“VIE”) framework under FIN 46R. The appli-cable framework depends on the nature of the entity and JPMorganChase Bank, N.A.’s relation to that entity. The QSPE framework isapplicable when an entity transfers (sells) financial assets to an SPEmeeting certain criteria defined in SFAS 140. These criteria aredesigned to ensure that the activities of the entity are essentially pre-determined at the inception of the vehicle and that the transferor ofthe financial assets cannot exercise control over the entity and theassets therein. Entities meeting these criteria are not consolidated bythe transferor or other counterparties as long as they do not havethe unilateral ability to liquidate or to cause the entity to no longermeet the QSPE criteria. JPMorgan Chase Bank, N.A. primarily followsthe QSPE model for securitizations of its residential and commercialmortgages, and credit card, automobile and education loans. For fur-ther details, see Note 17 on pages 39–45 of these consolidatedfinancial statements.

When an SPE does not meet the QSPE criteria, consolidation isassessed pursuant to FIN 46R. Under FIN 46R, a VIE is defined as anentity that: (1) lacks enough equity investment at risk to permit theentity to finance its activities without additional subordinated finan-cial support from other parties; (2) has equity owners that lack theright to make significant decisions affecting the entity’s operations;and/or (3) has equity owners that do not have an obligation toabsorb the entity’s losses or the right to receive the entity’s returns.

FIN 46R requires a variable interest holder (i.e., a counterparty to aVIE) to consolidate the VIE if that party will absorb a majority of theexpected losses of the VIE, receive the majority of the expected resid-ual returns of the VIE, or both. This party is considered the primarybeneficiary. In making this determination, JPMorgan Chase Bank, N.A.thoroughly evaluates the VIE’s design, capital structure and relation-ships among the variable interest holders. When the primary benefici-ary cannot be identified through a qualitative analysis, JPMorganChase Bank, N.A. performs a quantitative analysis, which computesand allocates expected losses or residual returns to variable interestholders. The allocation of expected cash flows in this analysis isbased upon the relative rights and preferences of each variable inter-est holder in the VIE’s capital structure. JPMorgan Chase Bank, N.A.reconsiders whether it is the primary beneficiary of a VIE when cer-tain events occur as required by FIN 46R. For further details, seeNote 18 on pages 46–54 of these consolidated financial statements.

See Glossary of Terms on pages 76–77 of these consolidated finan-cial statements for definitions of terms used throughout the Notes toconsolidated financial statements.

Note 1 – Basis of presentation JPMorgan Chase Bank, National Association (“JPMorgan Chase Bank,N.A.”), is a wholly-owned bank subsidiary of JPMorgan Chase & Co.(“JPMorgan Chase”), which is a leading global financial services firmand one of the largest banking institutions in the United States ofAmerica (“U.S.”), with operations worldwide. JPMorgan Chase Bank,N.A. offers a wide range of banking services to its customers bothdomestically in the U.S. and internationally, including investment bank-ing, financial services for consumers and businesses, financial transac-tions processing and asset management. Under the JPMorgan andChase brands, JPMorgan Chase Bank, N.A. serves millions of customersin the U.S. and many of the world’s most prominent corporate, institu-tional and governmental clients.

JPMorgan Chase Bank, N.A. is chartered by the Office of theComptroller of the Currency (“OCC”), a bureau of the United StatesDepartment of the Treasury. JPMorgan Chase Bank, N.A. ‘s main officeis located in Columbus, Ohio, and it has branches in 17 states.JPMorgan Chase Bank, N.A. was organized in the legal form of a bank-ing corporation under the laws of the State of New York on November26, 1968, for an unlimited duration. On November 13, 2004, JPMorganChase Bank, N.A. converted from a New York State banking corporationto a national banking association.

The accounting and financial reporting policies of JPMorgan ChaseBank, N.A. and its subsidiaries conform to accounting principles gen-erally accepted in the United States of America (“U.S. GAAP”).Additionally, where applicable, the policies conform to the accountingand reporting guidelines prescribed by bank regulatory authorities.

Certain amounts in the prior periods have been reclassified to con-form to the current presentation.

ConsolidationThe consolidated financial statements include the accounts ofJPMorgan Chase Bank, N.A. and other entities in which it has a con-trolling financial interest. All material intercompany balances andtransactions have been eliminated.

The most usual condition for a controlling financial interest is theownership of a majority of the voting interests of the entity. However,a controlling financial interest also may be deemed to exist withrespect to entities, such as special purpose entities (“SPEs”), througharrangements that do not involve controlling voting interests.

SPEs are an important part of the financial markets, providing marketliquidity by facilitating investors’ access to specific portfolios ofassets and risks. For example, they are critical to the functioning ofthe mortgage- and asset-backed securities and commercial papermarkets. SPEs may be organized as trusts, partnerships or corpora-tions and are typically established for a single, discrete purpose. SPEsare not typically operating entities and usually have a limited life andno employees. The basic SPE structure involves a company sellingassets to the SPE. The SPE funds the purchase of those assets by


All retained interests and significant transactions between JPMorganChase Bank, N.A., QSPEs and nonconsolidated VIEs are reflected onJPMorgan Chase Bank, N.A.’s Consolidated balance sheets and in theNotes to consolidated financial statements.

Investments in companies that are considered to be voting-interestentities under FIN 46R in which JPMorgan Chase Bank, N.A. has sig-nificant influence over operating and financing decisions are eitheraccounted for in accordance with the equity method of accounting orat fair value if elected under SFAS 159. These investments are gener-ally included in Other assets with income or loss included in Otherincome.

Assets held for clients in an agency or fiduciary capacity by JPMorganChase Bank, N.A. are not assets of JPMorgan Chase Bank, N.A. andare not included in the Consolidated balance sheets.

Use of estimates in the preparation of consolidated financial statementsThe preparation of consolidated financial statements requires man-agement to make estimates and assumptions that affect the reportedamounts of assets and liabilities, of revenue and expense, and of dis-closures of contingent assets and liabilities. Actual results could bedifferent from these estimates.

Foreign currency translationJPMorgan Chase Bank, N.A. revalues assets, liabilities, revenue andexpense denominated in foreign (i.e., non-U.S.) currencies into U.S.dollars using applicable exchange rates.

Gains and losses relating to translating functional currency financialstatements for U.S. reporting are included in Other comprehensiveincome (loss) within Stockholder’s equity. Gains and losses relatingto nonfunctional currency transactions, including non-U.S. operationswhere the functional currency is the U.S. dollar, are reported in theConsolidated statements of income.

Statements of cash flowsFor JPMorgan Chase Bank, N.A.’s Consolidated statements of cashflows, cash is defined as those amounts included in Cash and duefrom banks.

Significant accounting policiesThe following table identifies JPMorgan Chase Bank, N.A.’s other signifi-cant accounting policies and the Note and page where a detaileddescription of each policy can be found.

Fair value measurement Note 5 Page 10Fair value option Note 6 Page 19Principal transactions activities Note 7 Page 22Other noninterest revenue Note 8 Page 23Pension and other postretirement employee

benefit plans Note 10 Page 24Employee stock-based incentives Note 11 Page 30Noninterest expense Note 12 Page 33Securities Note 13 Page 34Securities financing activities Note 14 Page 36Loans Note 15 Page 37Allowance for credit losses Note 16 Page 38Loan securitizations Note 17 Page 39Variable interest entities Note 18 Page 46Goodwill and other intangible assets Note 19 Page 54Premises and equipment Note 20 Page 58Long-term debt Note 22 Page 59Income taxes Note 25 Page 63Commitments and contingencies Note 28 Page 67Accounting for derivative instruments

and hedging activities Note 29 Page 68Off–balance sheet lending-related financial

instruments and guarantees Note 30 Page 69



Note 2 – Accounting and reporting developmentsAccounting for uncertainty in income taxes In June 2006, the FASB issued FIN 48, which clarifies the accountingfor uncertainty regarding income taxes recognized under SFAS 109.FIN 48 addresses the recognition and measurement of tax positionstaken or expected to be taken, and also provides guidance on dere-cognition, classification, interest and penalties, accounting in interimperiods and disclosure. JPMorgan Chase Bank, N.A. adopted andapplied FIN 48 under the transition provisions to all of its income taxpositions at the required effective date of January 1, 2007, resultingin a $531 million cumulative effect increase to Retained earnings, areduction in Goodwill of $113 million and a $644 million decrease inthe liability for income taxes. For additional information related toJPMorgan Chase Bank, N.A.’s adoption of FIN 48, see Note 25 onpages 63–65 of these consolidated financial statements.

Changes in timing of cash flows related to income taxesgenerated by a leveraged leaseIn July 2006, the FASB issued FSP FAS 13-2. FSP FAS 13-2 requiresthe recalculation of returns on leveraged leases if there is a change orprojected change in the timing of cash flows relating to income taxesgenerated by a leveraged lease. JPMorgan Chase Bank, N.A. adoptedFSP FAS 13-2 at the required effective date of January 1, 2007.Implementation of FSP FAS 13-2 did not have a significant impact onJPMorgan Chase Bank, N.A.’s Consolidated balance sheet and resultsof operations.

Fair value measurements – adoption of SFAS 157In September 2006, the FASB issued SFAS 157, which is effective forfiscal years beginning after November 15, 2007, with early adoptionpermitted. SFAS 157 defines fair value, establishes a framework formeasuring fair value, and expands disclosures about assets and liabil-ities measured at fair value. JPMorgan Chase Bank, N.A. chose earlyadoption for SFAS 157 effective January 1, 2007, and recorded acumulative effect increase to Retained earnings of $252 million, pri-marily related to the release of profit previously deferred in accor-dance with EITF 02-3. The adoption of SFAS 157 primarily affectedinvestment banking activities. For additional information related toJPMorgan Chase Bank, N.A.’s adoption of SFAS 157, see Note 5 onpages 10–18 of these consolidated financial statements.

Fair value option for financial assets and financial liabilities– adoption of SFAS 159In February 2007, the FASB issued SFAS 159, which is effective for fis-cal years beginning after November 15, 2007, with early adoption per-mitted. SFAS 159 provides the option to elect fair value as an alterna-tive measurement for selected financial assets, financial liabilities,unrecognized firm commitments and written loan commitments.JPMorgan Chase Bank, N.A. chose early adoption for SFAS 159 effectiveJanuary 1, 2007, and as a result, it recorded a cumulative effectincrease to Retained earnings of $176 million. For additional informa-tion related to JPMorgan Chase Bank, N.A.’s adoption of SFAS 159, seeNote 6 on pages 19–21 of these consolidated financial statements.

Derivatives netting – amendment of FASB Interpretation No. 39In April 2007, the FASB issued FSP FIN 39-1, which permits offsettingof cash collateral receivables or payables with net derivative positionsunder certain circumstances. JPMorgan Chase Bank, N.A. adopted FSPFIN 39-1 effective January 1, 2008. The FSP did not have a materialimpact on JPMorgan Chase Bank, N.A.’s Consolidated balance sheet.

Fair value measurements – written loan commitmentsOn November 5, 2007, the U.S. Securities and Exchange Commission(“SEC”) issued SAB 109, which revises and rescinds portions of SAB 105,“Application of Accounting Principles to Loan Commitments.” Specifically,SAB 109 states that the expected net future cash flows related to theassociated servicing of the loan should be included in the measurementof all written loan commitments that are accounted for at fair valuethrough earnings. The provisions of SAB 109 are applicable to writtenloan commitments issued or modified beginning on January 1, 2008.JPMorgan Chase Bank, N.A. does not expect the impact of adopting SAB109 to be material.

Business combinations / Noncontrolling interests in consoli-dated financial statementsOn December 4, 2007, the FASB issued SFAS 141R and SFAS 160,which amend the accounting and reporting of business combina-tions, as well as noncontrolling (i.e., minority) interests. JPMorganChase Bank, N.A. is currently evaluating the impact that SFAS 141Rand SFAS 160 will have on its consolidated financial statements. ForJPMorgan Chase Bank, N.A., SFAS 141R is effective for business com-binations that close on or after January 1, 2009. SFAS 160 is effec-tive for JPMorgan Chase Bank, N. A. for fiscal years beginning on orafter December 15, 2008.

Disclosures about derivative instruments and hedging activities – SFAS 161On March 19, 2008, the FASB issued SFAS 161, which amends the dis-closure requirements of SFAS 133. SFAS 161 requires increased disclo-sures about derivative instruments and hedging activities and theireffects on an entity’s financial position, financial performance, and cashflows. SFAS 161 is effective for fiscal years beginning after November15, 2008, with early adoption permitted. SFAS 161 will only affectJPMorgan Chase Bank, N.A.’s disclosures of derivative instruments andrelated hedging activities, and not its consolidated financial position,financial performance or cash flows.

Accounting for Transfers of Financial Assets and RepurchaseFinancing Transactions – FSP FAS 140-3In February 2008, the FASB issued FSP 140-3, which requires an initialtransfer of a financial asset and a repurchase financing that wasentered into contemporaneously or in contemplation of the initialtransfer to be evaluated together as a linked transaction under SFAS140 unless certain criteria are met. FSP 140-3 is effective for fiscalyears beginning after November 15, 2008, and will be applied to newtransactions entered into after the date of adoption. JPMorgan ChaseBank, N.A. is currently evaluating the impact, if any, the adoption ofFSP 140-3 will have on the its consolidated financial statements.


Note 3 – Business changes and developmentsOther business eventsAcquisition of the consumer, business banking and middle-mar-ket banking businesses of The Bank of New York in exchangefor selected corporate trust businesses, including trustee, pay-ing agent, loan agency and document management servicesOn October 1, 2006, JPMorgan Chase Bank, N.A. completed the acquisi-tion of The Bank of New York Company, Inc.’s (“The Bank of New York”) consumer, business banking and middle-market banking businesses inexchange for selected corporate trust businesses plus a cash payment of$150 million. JPMorgan Chase Bank, N.A. also may make a future pay-ment to The Bank of New York of up to $50 million depending on certainnew account openings. The acquisition added 339 branches and morethan 400 ATMs, and it significantly strengthened JPMorgan Chase Bank,N.A.’s retail business distribution network in the New York tri-state area.The Bank of New York businesses acquired were valued at a premium of$2.3 billion; JPMorgan Chase Bank, N.A.’s corporate trust businesses thatwere transferred (i.e., trustee, paying agent, loan agency and documentmanagement services) were valued at a premium of $1.7 billion. Thistransaction included the acquisition of approximately $7.7 billion in loansnet of Allowance for loan losses and $12.9 billion in deposits from TheBank of New York. JPMorgan Chase Bank, N.A. also recognized coredeposit intangibles of $485 million which will be amortized using anaccelerated method over a 10-year period. JPMorgan Chase Bank, N.A.recorded an after-tax gain of $647 million related to this transaction inthe fourth quarter of 2006. For additional discussion related to the trans-action, see Note 4 on page 10 of these consolidated financial statements.

Collegiate Funding ServicesOn March 1, 2006, JPMorgan Chase Bank, N.A. acquired, for approxi-mately $663 million, Collegiate Funding Services, a leader in educa-tion loan servicing and consolidation. This acquisition included $6billion of education loans and will enable JPMorgan Chase Bank, N.A.to create a comprehensive education finance business.

Sears Canada credit card business On November 15, 2005, JPMorgan Chase Bank, N.A. purchased SearsCanada Inc.’s credit card operation, including both private-label cardaccounts and co-branded Sears MasterCard® accounts, aggregatingapproximately 10 million accounts with $2.2 billion (CAD$2.5 billion)in managed loans. Sears Canada and JPMorgan Chase Bank, N.A.entered into an ongoing arrangement under which JPMorgan ChaseBank, N.A. will offer private-label and co-branded credit cards to bothnew and existing customers of Sears Canada.

Chase Merchant Services, Paymentech integrationOn October 5, 2005, JPMorgan Chase Bank, N.A. and First Data Corp.completed the integration of the companies’ jointly owned ChaseMerchant Services and Paymentech merchant businesses, to be oper-ated under the name Chase Paymentech Solutions, LLC. The joint ven-ture is a financial transaction processor for businesses accepting cred-it card payments via traditional point of sale, Internet, catalog andrecurring billing. As a result of the integration into a joint venture,Paymentech has been deconsolidated and JPMorgan Chase Bank,N.A.’s ownership interest in this joint venture is accounted for inaccordance with the equity method of accounting.

CazenoveOn February 28, 2005, JPMorgan Chase Bank, N.A. and CazenoveGroup plc (“Cazenove”) formed a business partnership which com-bined Cazenove’s investment banking business and JPMorgan ChaseBank, N.A.’s U.K.-based investment banking business in order to pro-vide investment banking services in the United Kingdom and Ireland.The new company is called JPMorgan Cazenove Holdings.

Other internal transfers of legal entities under commoncontrol On July 30, 2007, JPMorgan Chase Bank, N.A. sold its wholly-ownedsubsidiary, J.P. Morgan Partners (23A Manager), Inc., a venture capi-tal subsidiary, to JPMorgan Chase & Co. for $514 million in cash.At the time of the transfer J.P. Morgan Partners (23A Manager) hadapproximately $725 million of assets, primarily consisting of $388million of deposits with banks and $218 million of private equityinvestments.

On October 20, 2006, JPMorgan Chase & Co. contributed its wholly-owned subsidiary, Banc One Trust Company, National Association(“BOTC”), to JPMorgan Chase Bank, N.A. BOTC is a banking subsidiary.At the time of the transfer BOTC had approximately $1.3 billion ofassets, primarily consisting of $665 million of goodwill and $469 million of loans.

On March 20, 2006, JPMorgan Chase & Co. sold its wholly-ownedsubsidiary, DNT Asset Trust (“DNT”), to JPMorgan Chase Bank, N.A.,for $4.2 billion in cash. DNT’s principal activities are trust, fiduciaryand custody activities, and investments in real estate investmenttrusts. At the time of the transfer DNT had approximately $5.0 billionof assets, primarily consisting of $4.1 billion of intercompany loans.

On March 18, 2005, JPMorgan Chase & Co. contributed its wholly-owned subsidiary, Banc One Management Corporation (“BOMC”), toJPMorgan Chase Bank, N.A. BOMC’s principal activity is managementservices. At the time of the transfer BOMC had approximately $542million of assets, which were primarily premises and equipment.

In addition to the above transfers, in 2007, 2006 and 2005JPMorgan Chase & Co. transferred various other wholly-owned sub-sidiaries to JPMorgan Chase Bank, N.A. For 2007 the total assets forthese subsidiaries were $12 million, which were largely deposits withbanks. The total assets for these subsidiaries in 2006 were $111 mil-lion, which were primarily loans and goodwill. In 2005 total assetsfor these subsidiaries were $339 million, which were primarily avail-able-for-sale securities.

In 2007, 2006 and 2005 JPMorgan Chase Bank, N.A. transferredvarious wholly-owned subsidiaries to JPMorgan Chase & Co. Thetotal assets for these subsidiaries were $67 million, $77 million and$148 million in 2007, 2006 and 2005, respectively. In 2007 theseassets were primarily goodwill and deposits with banks, in 2006 and2005 these assets were primarily loans.

The internal transfers of the above legal entities were accounted for athistorical cost in accordance with SFAS 141. However, all of the transferswere reflected in the financial statements prospectively, and not as of thebeginning of all periods presented, because the impact of these transferswas not material to JPMorgan Chase Bank, N.A’s financial statements forany of the years ended December 31, 2007, 2006 or 2005.



Subsequent eventsMerger with The Bear Stearns Companies Inc.On March 16, 2008, JPMorgan Chase and The Bear StearnsCompanies Inc. (“Bear Stearns”) entered into an agreement tomerge; the agreement was amended on March 24, 2008. The mergeragreement, as amended, has been approved by the boards of direc-tors of both companies. It provides for a stock-for-stock exchange inwhich 0.21753 shares of JPMorgan Chase common stock will beexchanged for each share of Bear Stearns common stock. The mergerwill be accounted for using the purchase method of accounting. Thepurchase price is currently estimated to be $1.4 billion. The merger,which is expected to be completed by June 30, 2008, is subject tothe approval of the stockholders of Bear Stearns. The impact of themerger on JPMorgan Chase Bank, N.A. is currently being assessed.

Note 4 – Discontinued operations On October 1, 2006, JPMorgan Chase Bank, N.A. completed the acqui-sition of The Bank of New York’s consumer, small-business and middle-market banking businesses in exchange for selected corporate trustbusinesses plus a cash payment of $150 million. JPMorgan ChaseBank, N.A. may also make a future payment to The Bank of New Yorkof up to $50 million depending on certain new account openings.

The transfer of selected corporate trust businesses to The Bank of NewYork (see Note 3 of the previous page) included the trustee, payingagent, loan agency and document management services businesses.JPMorgan Chase Bank, N.A. recognized an after-tax gain of $647 mil-lion on this transaction. The results of operations of these corporatetrust businesses are reported as discontinued operations. Condensedfinancial information of the selected corporate trust businesses follows.

Selected income statements data(a)

Year ended December 31, (in millions) 2006 2005Other noninterest revenue $ 310 $ 390Net interest income 264 276Gain on sale of discontinued operations 1,122 —Total net revenue 1,696 666Noninterest expense 324 325Income from discontinued operations

before income taxes 1,372 341Income tax expense 574 134Income from discontinued operations $ 798 $ 207

(a) There was no income from discontinued operations during 2007.

The following is a summary of the assets and liabilities associatedwith the selected corporate trust businesses related to the Bank ofNew York transaction that closed on October 1, 2006.

Selected balance sheet data (in millions) October 1, 2006Goodwill and other intangibles $ 305Other assets 547

Total assets $ 852

Deposits $ 24,011Other liabilities 547

Total liabilities $ 24,558

JPMorgan Chase Bank, N.A. provides certain transitional services to TheBank of New York for a defined period of time after the closing date.The Bank of New York compensates JPMorgan Chase Bank, N.A. forthese transitional services.

Note 5 – Fair value measurement In September 2006, the FASB issued SFAS 157 (“Fair ValueMeasurements”), which is effective for fiscal years beginning afterNovember 15, 2007, with early adoption permitted. JPMorgan ChaseBank, N. A. chose early adoption for SFAS 157 effective January 1,2007. SFAS 157:

• Defines fair value as the price that would be received to sell anasset or paid to transfer a liability in an orderly transactionbetween market participants at the measurement date, andestablishes a framework for measuring fair value;

• Establishes a three-level hierarchy for fair value measurementsbased upon the transparency of inputs to the valuation of anasset or liability as of the measurement date;

• Nullifies the guidance in EITF 02-3, which required the deferral ofprofit at inception of a transaction involving a derivative financialinstrument in the absence of observable data supporting the valuation technique;

• Eliminates large position discounts for financial instruments quotedin active markets and requires consideration of JPMorgan ChaseBank, N. A.’s creditworthiness when valuing liabilities; and

• Expands disclosures about instruments measured at fair value.

JPMorgan Chase Bank, N. A. also chose early adoption for SFAS 159effective January 1, 2007. SFAS 159 provides an option to elect fairvalue as an alternative measurement for selected financial assets,financial liabilities, unrecognized firm commitments and written loancommitments not previously recorded at fair value. JPMorgan ChaseBank, N. A. elected fair value accounting for certain assets and liabil-ities not previously carried at fair value. For more information, seeNote 6 on pages 19–21 of these consolidated financial statements.

Following is a description of JPMorgan Chase Bank, N. A.’s valuationmethodologies for assets and liabilities measured at fair value. Suchvaluation methodologies were applied to all of the assets and liabili-ties carried at fair value effective January 1, 2007, whether as aresult of the adoption of SFAS 159 or previously carried at fair value.

JPMorgan Chase Bank, N. A. has an established and well-documentedprocess for determining fair values. Fair value is based upon quotedmarket prices, where available. If listed prices or quotes are not avail-able, fair value is based upon internally developed models that primarilyuse, as inputs, market-based or independently sourced market param-eters, including but not limited to yield curves, interest rates, volatili-ties, equity or debt prices, foreign exchange rates and credit curves.In addition to market information, models also incorporate transactiondetails, such as maturity. Valuation adjustments may be made to ensurethat financial instruments are recorded at fair value. These adjustmentsinclude amounts to reflect counterparty credit quality, JPMorganChase Bank, N. A.’s creditworthiness, constraints on liquidity and


unobservable parameters that are applied consistently over time.

• Credit valuation adjustments (“CVA”) are necessary when themarket price (or parameter) is not indicative of the credit qualityof the counterparty. As few classes of derivative contracts are listedon an exchange, the majority of derivative positions are valuedusing internally developed models that use as their basis observablemarket parameters. Market practice is to quote parameters equivalent to an “AA” credit rating; thus, all counterparties areassumed to have the same credit quality. Therefore, an adjustmentis necessary to reflect the credit quality of each derivative counterparty to arrive at fair value.

• Debit valuation adjustments (“DVA”) are necessary to reflect thecredit quality of JPMorgan Chase Bank, N. A. in the valuation ofliabilities measured at fair value. This adjustment was incorporat-ed into JPMorgan Chase Bank, N. A.’s valuations commencingJanuary 1, 2007, in accordance with SFAS 157. The methodologyto determine the adjustment is consistent with CVA and incorpo-rates JPMorgan Chase Bank, N. A.’s credit spread as observedthrough the credit default swap market.

• Liquidity valuation adjustments are necessary when JPMorganChase Bank, N. A. may not be able to observe a recent marketprice for a financial instrument that trades in inactive (or lessactive) markets or to reflect the cost of exiting larger-than-normalmarket-size risk positions (liquidity adjustments are not taken forpositions classified within level 1 of the fair value hierarchy).JPMorgan Chase Bank, N. A. tries to ascertain the amount ofuncertainty in the initial valuation based upon the degree of liq-uidity of the market in which the financial instrument trades andmakes liquidity adjustments to the carrying value of the financialinstrument. JPMorgan Chase Bank, N. A. measures the liquidityadjustment based upon the following factors: (1) the amount oftime since the last relevant pricing point; (2) whether there was anactual trade or relevant external quote; and (3) the volatility of theprincipal risk component of the financial instrument. Costs to exitlarger-than-normal market-size risk positions are determined basedupon the size of the adverse market move that is likely to occurduring the period required to bring a position down to a noncon-centrated level.

• Unobservable parameter valuation adjustments are necessarywhen positions are valued using internally developed models thatuse as their basis unobservable parameters – that is, parametersthat must be estimated and are, therefore, subject to managementjudgment. These positions are normally traded less actively.Examples include certain credit products where parameters such ascorrelation and recovery rates are unobservable. Unobservableparameter valuation adjustments are applied to mitigate the possi-bility of error and revision in the estimate of the market price pro-vided by the model.

JPMorgan Chase Bank, N. A. has numerous controls in place intendedto ensure that its fair valuations are appropriate. An independentmodel review group reviews JPMorgan Chase Bank, N. A.’s valuationmodels and approves them for use for specific products. All valuation

models within JPMorgan Chase Bank, N. A. are subject to this reviewprocess. A price verification group, independent from the risk takingfunction, ensures observable market prices and market-based param-eters are used for valuation wherever possible. For those productswith material parameter risk for which observable market levels donot exist, an independent review of the assumptions made on pricingis performed. Additional review includes deconstruction of the modelvaluations for certain structured instruments into their components,and benchmarking valuations, where possible, to similar products;validating valuation estimates through actual cash settlement; anddetailed review and explanation of recorded gains and losses, whichare analyzed daily and over time. Valuation adjustments, which arealso determined by the independent price verification group, arebased upon established policies and are applied consistently overtime. Any changes to the valuation methodology are reviewed bymanagement to confirm the changes are justified. As markets andproducts develop and the pricing for certain products becomes moreor less transparent, JPMorgan Chase Bank, N. A. continues to refineits valuation methodologies.

The methods described above may produce a fair value calculation thatmay not be indicative of net realizable value or reflective of future fairvalues. Furthermore, while JPMorgan Chase Bank, N. A. believes its val-uation methods are appropriate and consistent with other market partici-pants, the use of different methodologies or assumptions to determinethe fair value of certain financial instruments could result in a differentestimate of fair value at the reporting date.

Valuation HierarchySFAS 157 establishes a three-level valuation hierarchy for disclosureof fair value measurements. The valuation hierarchy is based uponthe transparency of inputs to the valuation of an asset or liability asof the measurement date. The three levels are defined as follows.

• Level 1 – inputs to the valuation methodology are quoted prices(unadjusted) for identical assets or liabilities in active markets.

• Level 2 – inputs to the valuation methodology include quotedprices for similar assets and liabilities in active markets, and inputsthat are observable for the asset or liability, either directly or indirectly,for substantially the full term of the financial instrument.

• Level 3 – inputs to the valuation methodology are unobservableand significant to the fair value measurement.

A financial instrument’s categorization within the valuation hierarchyis based upon the lowest level of input that is significant to the fairvalue measurement.

Following is a description of the valuation methodologies used forinstruments measured at fair value, including the general classificationof such instruments pursuant to the valuation hierarchy.

Assets

Securities purchased under resale agreements (“resale agreements”)To estimate the fair value of resale agreements, cash flows areevaluated taking into consideration any derivative features of theresale agreement and are then discounted using the appropriate



market rates for the applicable maturity. As the inputs into the val-uation are primarily based upon readily observable pricing infor-mation, such resale agreements are generally classified withinlevel 2 of the valuation hierarchy.

Loans and unfunded lending-related commitments The fair value of corporate loans and unfunded lending-related com-mitments is calculated using observable market information includingpricing from actual market transactions or broker quotations whereavailable. Where pricing information is not available for the specificloan, the valuation is generally based upon quoted market prices ofsimilar instruments, such as loans and bonds. These comparableinstruments share characteristics that typically include industry, rat-ing, capital structure, seniority, and consideration of counterpartycredit risk. In addition, general market conditions, including prevailingmarket spreads for credit and liquidity risk, are also considered in thevaluation process.

For certain loans that are expected to be securitized, such as com-mercial and residential mortgages, fair value is estimated based uponobservable pricing of asset-backed securities with similar collateraland incorporates adjustments (i.e., reductions) to these prices toaccount for securitization uncertainties including portfolio composi-tion, market conditions and liquidity to arrive at the whole loan price.When data from recent market transactions is available it is incorpo-rated as appropriate. If particular loans are determined to beimpaired because of poor borrower performance and hence are notqualified for securitization, they are marked for individual sale withconsideration of potential liquidation proceeds and property repos-session/liquidation information, as appropriate.

JPMorgan Chase Bank, N. A.’s loans carried at fair value and reportedin Trading assets are generally classified within level 2 of the valua-tion hierarchy, although subprime loans reside in level 3. Loans car-ried at fair value and reported within Loans are predominantly classi-fied within level 3 due to the lack of observable pricing. These loansinclude leveraged lending funded loans, high-yield bridge financingand purchased nonperforming loans.

SecuritiesWhere quoted prices are available in an active market, securities are classified in level 1 of the valuation hierarchy. Level 1 securities includedhighly liquid government bonds, mortgage products for which there arequoted prices in active markets and exchange-traded equities. If quotedmarket prices are not available for the specific security, then fair valuesare estimated by using pricing models, quoted prices of securities withsimilar characteristics or discounted cash flows. Examples of such instru-ments are collateralized mortgage obligations and high-yield debt securi-ties which would generally be classified within level 2 of the valuation hier-archy. In certain cases where there is limited activity or less transparencyaround inputs to the valuation, securities are classified within level 3 ofthe valuation hierarchy. For instance, in the valuation of certain collateral-ized mortgage and debt obligations and high-yield debt securities the determination of fair value may require benchmarking to similar instrumentsor analyzing default and recovery rates. For cash collateralized debt obli-gations (“CDOs”), external price information is not available. Therefore,cash CDOs are valued using market-standard models, such as Intex, to

model the specific collateral composition and cash flow structure of eachdeal; key inputs to the model are market spreads data for each credit rat-ing, collateral type and other relevant contractual features. Asset-backedsecurities are valued based on external prices or spread data, using cur-rent market assumptions on prepayments and defaults. For those asset-backed securities where the external price data is not observable or thelimited available data is opaque, the collateral performance is monitoredand the value of the security is reviewed versus the ABX index, an indexof mortgage-backed securities backed by subprime mortgages.

CommoditiesCommodities inventory is carried at the lower of cost or fair value.The fair value for commodities inventory is determined primarily usingpricing and data derived from the markets on which the underlyingcommodities are traded. Market prices may be adjusted for liquidity.JPMorgan Chase Bank, N. A. also has positions in commodity-basedderivatives that can be traded on an exchange or over-the-counter.The pricing inputs to these derivatives include forward curves ofunderlying commodities, basis curves, volatilities, correlations, andoccasionally other model parameters. The valuation of these deriva-tives is based upon calibrating to market transactions, as well as toindependent pricing information from sources such as brokers anddealer consensus pricing services. Where inputs are unobservable,they are benchmarked to observable market data based upon historicand implied correlations, then adjusted for uncertainty where appro-priate. The majority of commodities inventory and commodities-basedderivatives are classified within level 2 of the valuation hierarchy.

DerivativesExchange-traded derivatives valued using quoted prices are classifiedwithin level 1 of the valuation hierarchy. However, few classes ofderivative contracts are listed on an exchange; thus, the majority ofJPMorgan Chase Bank, N. A.’s derivative positions are valued usinginternally developed models that use as their basis readily observablemarket parameters – that is, parameters that are actively quoted andcan be validated to external sources, including industry pricing servic-es. Depending on the types and contractual terms of derivatives, fairvalue can be modeled using a series of techniques, such as the Black-Scholes option pricing model, simulation models or a combination ofvarious models, which are consistently applied. Where derivative prod-ucts have been established for some time, JPMorgan Chase Bank, N. A.uses models that are widely accepted in the financial services industry.These models reflect the contractual terms of the derivatives, includingthe period to maturity, and market-based parameters such as interestrates, volatility, and the credit quality of the counterparty. Further,many of these models do not contain a high level of subjectivity asthe methodologies used in the models do not require significant judg-ment, and inputs to the model are readily observable from activelyquoted markets, as is the case for “plain vanilla” interest rate swapsand option contracts and credit default swaps. Such instruments aregenerally classified within level 2 of the valuation hierarchy.

Derivatives that are valued based upon models with significantunobservable market parameters and that are normally traded lessactively, have trade activity that is one way, and/or are traded in less-developed markets are classified within level 3 of the valuation


hierarchy. Level 3 derivatives include credit default swaps referencedto mortgage-backed securities, where valuations are benchmarked to implied spreads from similar underlying loans in the cash market,as well as relevant observable market indices. In addition, the pre-payment and loss assumptions on the underlying loans are pricedusing a combination of historical data, prices on market transactions,and other prepayment and default scenarios and analysis. Othercomplex products, such as those sensitive to correlation between twoor more underlyings, also fall within level 3 of the hierarchy. Forinstance, the correlation sensitivity is material to the overall valuationof options on baskets of single name stocks; the valuation of theseinstruments are typically not observable due to the customizednature. Correlation for products such as these are typically estimatedbased on an observable basket of stocks, then adjusted to reflect thedifferences between the underlying equities.

Mortgage servicing rights and certain retained interests in securitizationsMortgage servicing rights (“MSRs”) and certain retained interestsfrom securitization activities do not trade in an active, open marketwith readily observable prices. While sales of MSRs do occur, the precise terms and conditions typically are not readily available.Accordingly, JPMorgan Chase Bank, N. A. estimates the fair value ofMSRs and certain other retained interests in securitizations using dis-counted cash flow (“DCF”) models.

• For MSRs, JPMorgan Chase Bank, N. A. uses an option adjustedspread (“OAS”) valuation model in conjunction with JPMorganChase Bank, N. A.’s proprietary prepayment model to project MSRcash flows over multiple interest rate scenarios, which are then dis-counted at risk-adjusted rates to estimate an expected fair value ofthe MSRs. The OAS model considers portfolio characteristics, con-tractually specified servicing fees, prepayment assumptions, delin-quency rates, late charges, other ancillary revenue, costs to serviceand other economic factors. JPMorgan Chase Bank, N. A. reassess-es and periodically adjusts the underlying inputs and assumptionsused in the OAS model to reflect market conditions and assump-tions that a market participant would consider in valuing the MSRasset. Due to the nature of the valuation inputs, MSRs are classi-fied within level 3 of the valuation hierarchy.

• For certain retained interests in securitizations (such as interest-only strips), a single interest rate path DCF model is used andgenerally includes assumptions based upon projected financecharges related to the securitized assets, estimated net credit losses,prepayment assumptions and contractual interest paid to third-party investors. Changes in the assumptions used may havea significant impact on JPMorgan Chase Bank, N. A.’s valuation ofretained interests and such interests are therefore typically classi-fied within level 3 of the valuation hierarchy.

For both MSRs and certain other retained interests in securitizations,JPMorgan Chase Bank, N. A. compares its fair value estimates andassumptions to observable market data where available and torecent market activity and actual portfolio experience. For further dis-cussion of the most significant assumptions used to value retainedinterests in securitizations and MSRs, as well as the applicable stress

tests for those assumptions, see Note 17 on pages 39–45 and Note19 on pages 54–57 of these consolidated financial statements.

Liabilities

Securities sold under repurchase agreements (“repurchaseagreements”)To estimate the fair value of repurchase agreements, cash flows areevaluated taking into consideration any derivative features and arethen discounted using the appropriate market rates for the applica-ble maturity. As the inputs into the valuation are primarily basedupon observable pricing information, repurchase agreements areclassified within level 2 of the valuation hierarchy.

Beneficial interests issued by consolidated VIEsThe fair value of beneficial interests issued by consolidated VIEs (beneficial interests) is estimated based upon the fair value of theunderlying assets held by the VIEs. The valuation of beneficial interestsdoes not include an adjustment to reflect the credit quality ofJPMorgan Chase Bank, N. A. as the holders of these beneficial inter-ests do not have recourse to the general credit of JPMorgan ChaseBank, N. A. As the inputs into the valuation are generally based uponreadily observable pricing information, the majority of beneficial inter-ests issued by consolidated VIEs are classified within level 2 of thevaluation hierarchy.

Deposits, Other borrowed funds and Long-term debtIncluded within Deposits, Other borrowed funds and Long-term debtare structured notes issued by JPMorgan Chase Bank, N. A. that arefinancial instruments containing embedded derivatives. To estimate thefair value of structured notes, cash flows are evaluated taking into con-sideration any derivative features and are then discounted using theappropriate market rates for the applicable maturities. In addition, thevaluation of structured notes includes an adjustment to reflect thecredit quality of JPMorgan Chase Bank, N. A. (i.e., the DVA). Where theinputs into the valuation are primarily based upon readily observablepricing information, the structured notes are classified within level 2 ofthe valuation hierarchy. Where significant inputs are unobservable, struc-tured notes are classified within level 3 of the valuation hierarchy.



The following table presents the financial instruments carried at fair value as of December 31, 2007, by caption on the Consolidated balance sheetand by SFAS 157 valuation hierarchy (as described above).



December 31, 2007 (in millions) markets (Level 1) market parameters (Level 2) market parameters (Level 3) netting(d) balance sheet


Trading assets:Debt and equity instruments(a)(b) 163,268 135,497 18,815 — 317,580Derivative receivables 18,033 868,188 19,389 (832,731) 72,879

Total trading assets 181,301 1,003,685 38,204 (832,731) 390,459

Available-for-sale securities 70,639 11,818 10 — 82,467Loans — 359 7,797 — 8,156Mortgage servicing rights — — 8,632 — 8,632Other assets — 835 797 — 1,632

Total assets at fair value $ 251,940 $ 1,034,760 $ 55,440 $ (832,731) $ 509,409


sold under repurchase agreements — 5,768 — — 5,768Other borrowed funds — 10,225 101 — 10,326Trading liabilities:

Debt and equity instruments 59,408 13,407 480 — 73,295Derivative payables 18,875 854,614 19,183 (822,458) 70,214

Total trading liabilities 78,283 868,021 19,663 (822,458) 143,509

Accounts payable, accrued expense and other liabilities(c) — — 25 — 25

Beneficial interests issued by consolidated VIEs — 2,645 82 — 2,727

Long-term debt — 35,734 21,198 — 56,932

Total liabilities at fair value $ 78,283 $ 927,621 $ 42,297 $ (822,458) $ 225,743

(a) Included loans classified as Trading assets. For additional detail, see Note 7 on page 22.(b) Included physical commodities inventory that are accounted for at the lower of cost or fair value.(c) Included within Accounts payable, accrued expense and other liabilities is the fair value adjustment for unfunded lending-related commitments.(d) FIN 39 permits the netting of Derivative receivables and Derivative payables when a legally enforceable master netting agreement exists between JPMorgan Chase Bank, N. A. and a

derivative counterparty. A master netting agreement is an agreement between two counterparties who have multiple derivative contracts with each other that provide for the net settle-ment of all contracts, as well as cash collateral, through a single payment, in a single currency, in the event of default on or termination of any one contract.


Changes in level 3 recurring fair value measurements The table below includes a rollforward of the balance sheet amountsfor the year ended December 31, 2007 (including the change in fairvalue), for financial instruments classified by JPMorgan Chase Bank,N. A. within level 3 of the valuation hierarchy. When a determinationis made to classify a financial instrument within level 3, the determi-nation is based upon the significance of the unobservable parame-ters to the overall fair value measurement. However, level 3 financialinstruments typically include, in addition to the unobservable or level3 components, observable components (that is, components that are

actively quoted and can be validated to external sources); accordingly,the gains and losses in the table below include changes in fair valuedue in part to observable factors that are part of the valuationmethodology. Also, JPMorgan Chase Bank, N. A. risk manages theobservable components of level 3 financial instruments using securi-ties and derivative positions that are classified within level 1 or 2 ofthe valuation hierarchy; as these level 1 and level 2 risk managementinstruments are not included below, the gains or losses in the tablesdo not reflect the effect of JPMorgan Chase Bank, N. A.’s risk man-agement activities related to such level 3 instruments.

Fair value measurements using significant unobservable inputs(a)

Change in unrealized For the year ended Total Purchases, gains and (losses) related toDecember 31, 2007 Fair value, realized/unrealized issuances Transfers in and/or Fair value, financial instruments(in millions) January 1, 2007 gains/(losses) settlements, net out of Level 3 December 31, 2007 held at December 31, 2007


Debt and equity instruments $ 6,691 $ 366(b)(c) $ 3,373 $ 8,385 $ 18,815 $ 370(b)(c)

Net derivative receivables (2,478) 1,240(b) (40) 1,484 206 1,554Available-for-sale securities 71 41(d) (11) (91) 10 (1)(d)

Loans 435 (344)(b) 7,715 (9) 7,797 (32)(b)

Other assets 1,004 37(e) (280) 36 797 (5)(e)

Liabilities:Deposits $ (445) $ (50)(b) $ (667) $ (66)(f) $ (1,228) $ (41)(b)

Other borrowed funds — (67) (34) — (101) (135)Trading liabilities:

Debt and equity instruments (16) 382(b) (140) (706)(f) (480) (734)(b)

Accounts payable, accrued expense and other liabilities — (460)(b) 435 — (25) (25)(b)

Beneficial interests issued by consolidated VIEs (8) 6 1 (81)(f) (82) —

Long-term debt (11,046) (968)(b) (6,484) (2,700)(f) (21,198) (371)(b)

(a) MSRs are classified within level 3 of the valuation hierarchy. For a rollforward of balance sheet amounts related to MSRs, see Note 19 on pages 54–57 of these consolidated financial statements.

(b) Reported in Principal transactions revenue.(c) Changes in fair value for retail business mortgage loans originated with the intent to sell are measured at fair value under SFAS 159 and reported in Mortgage fees and

related income.(d) Realized gains (losses) are reported in Securities gains (losses). Unrealized gains (losses) are reported in Accumulated other comprehensive income (loss).(e) Reported in Other income.(f) Represents a net transfer of a liability balance.



Assets and liabilities measured at fair value on a nonrecurring basisCertain assets, liabilities and unfunded lending-related commitmentsare measured at fair value on a nonrecurring basis; that is, theinstruments are not measured at fair value on an ongoing basis butare subject to fair value adjustments only in certain circumstances

(for example, when there is evidence of impairment). The followingtable presents the financial instruments carried on the Consolidatedbalance sheet by caption and by level within the SFAS 157 valuationhierarchy (as described above) as of December 31, 2007, for which anonrecurring change in fair value has been recorded during the yearended December 31, 2007.


in active markets market parameters market parameters in the Consolidated December 31, 2007 (in millions) (Level 1) (Level 2) (Level 3) balance sheet

Loans(a) $ — $ 2,784 $ 15,895 $ 18,679Other assets — 7 19 26


Accounts payable, accrued expense and other liabilities $ — $ — $ 103 $ 103(b)

Total liabilities at fair value on a nonrecurring basis $ — $ — $ 103 $ 103

(a) Includes debt financing and other loan warehouses held-for-sale.(b) Represents the fair value adjustment associated with $3.2 billion of unfunded held-for-sale lending-related commitments.

Nonrecurring fair value changesThe following table presents the total change in value of financialinstruments for which a fair value adjustment has been included in the Consolidated statement of income for the year ended December31, 2007, related to financial instruments held at December 31, 2007.

Year ended December 31, 2007

(in millions) 2007

Loans $ (677)

Other assets (5)

Accounts payable, accrued expense

and other liabilities 2

Total nonrecurring fair value gains (losses) $ (680)

In the above table, Loans principally include changes in fair value forloans carried on the balance sheet at the lower of cost or fair value;and Accounts payable, accrued expense and other liabilities principallyincludes the change in fair value for unfunded lending-related commitments within the leveraged lending portfolio.

Level 3 assets analysis Level 3 assets (including assets measured at the lower of cost or fairvalue) were 5% of total JPMorgan Chase Bank, N. A.’s assets atDecember 31, 2007. These assets increased during 2007 principallyduring the second half of the year, when liquidity in mortgages andother credit products fell dramatically. The increase was primarily dueto an increase in leveraged loan balances within level 3 as the abilityof JPMorgan Chase Bank, N. A. to syndicate this risk to third partiesbecame limited by the credit environment. In addition, there weretransfers from level 2 to level 3 during 2007. These transfers wereprincipally for instruments within the mortgage market where inputswhich are significant to their valuation became unobservable duringthe year. Subprime and Alt-A whole loans, subprime home equity secu-rities, commercial mortgage-backed mezzanine loans and creditdefault swaps referenced to asset-backed securities constituted themajority of the affected instruments, reflecting a significant decline in

liquidity in these instruments in the third and fourth quarters of 2007,as new issue activity was nonexistent and independent pricing infor-mation was no longer available for these assets.

TransitionIn connection with the initial adoption of SFAS 157, JPMorgan Chase Bank, N. A. recorded the following on January 1, 2007:

• A cumulative effect increase to Retained earnings of $252 million,primarily related to the release of profit previously deferred inaccordance with EITF 02-3; and

• An increase to pretax income of $165 million ($103 million after-tax)related to the incorporation of JPMorgan Chase Bank, N. A.’s cred-itworthiness in the valuation of liabilities recorded at fair value.

Prior to the adoption of SFAS 157, JPMorgan Chase Bank, N. A.applied the provisions of EITF 02-3 to its derivative portfolio. EITF 02-3 precluded the recognition of initial trading profit in the absence of:(a) quoted market prices, (b) observable prices of other current markettransactions or (c) other observable data supporting a valuation tech-nique. In accordance with EITF 02-3, JPMorgan Chase Bank, N. A. rec-ognized the deferred profit in Principal transactions revenue on a sys-tematic basis (typically straight-line amortization over the life of theinstruments) and when observable market data became available.

Prior to the adoption of SFAS 157, JPMorgan Chase Bank, N. A. did notincorporate an adjustment into the valuation of liabilities carried at fairvalue on the Consolidated balance sheet. Commencing January 1, 2007,in accordance with the requirements of SFAS 157, an adjustment wasmade to the valuation of liabilities measured at fair value to reflect thecredit quality of JPMorgan Chase Bank, N. A.

Financial disclosures required by SFAS 107SFAS 107 requires disclosure of the estimated fair value of certainfinancial instruments and the methods and significant assumptionsused to estimate their fair values. Many but not all of the financialinstruments held by JPMorgan Chase Bank, N. A. are recorded at fair


value on the Consolidated balance sheets. Financial instruments with-in the scope of SFAS 107 that are not carried at fair value on theConsolidated balance sheets are discussed below. Additionally, certainfinancial instruments and all nonfinancial instruments are excludedfrom the scope of SFAS 107. Accordingly, the fair value disclosuresrequired by SFAS 107 provide only a partial estimate of the fair valueof JPMorgan Chase Bank, N. A. For example, JPMorgan Chase Bank,N. A. has developed long-term relationships with its customersthrough its deposit base, commonly referred to as core deposit intan-gibles. In the opinion of management, this item, in the aggregate, addsignificant value to JPMorgan Chase Bank, N. A. but the fair value isnot disclosed in this Note.

Financial instruments for which fair value approximatescarrying valueCertain financial instruments that are not carried at fair value on theConsolidated balance sheets are carried at amounts that approxi-mate fair value due to their short-term nature and generally negligi-ble credit risk. These instruments include cash and due from banks,deposits with banks, federal funds sold, securities purchased underresale agreements with short-dated maturities, securities borrowed,short-term receivables and accrued interest receivable, commercialpaper, federal funds purchased, securities sold under repurchaseagreements with short-dated maturities, other borrowed funds,accounts payable and accrued liabilities. In addition, SFAS 107requires that the fair value for deposit liabilities with no stated matu-rity (i.e., demand, savings and certain money market deposits) beequal to their carrying value. SFAS 107 does not allow for the recog-nition of the inherent funding value of these instruments.

Financial instruments for which fair value does not approxi-mate carrying valueLoansThe majority of JPMorgan Chase Bank, N. A.’s loans are not carried atfair value on a recurring basis on the Consolidated balance sheetsnor are they actively traded. The following describes the inputs andassumptions that JPMorgan Chase Bank, N. A. considers in arriving atan estimate of fair value for the following portfolios of loans.

WholesaleFair value for the wholesale loan portfolio is estimated, primarilyusing the cost of credit derivatives, which is adjusted to account forthe differences in recovery rates between bonds, upon which the costof credit derivatives is based, and loans.

Consumer• Fair values for consumer installment loans (including automobile

financings and consumer real estate), for which market rates forcomparable loans are readily available, are based upon discountedcash flows adjusted for prepayments. The discount rates used forconsumer installment loans are based on the current market ratesadjusted for credit, liquidity and other risks that are applicable to aparticular asset class.

• Fair value for credit card receivables is based upon discounted

expected cash flows. The discount rates used for credit card receiv-ables incorporate only the effects of interest rate changes, since theexpected cash flows already reflect an adjustment for credit risk.

Interest-bearing depositsFair values of interest-bearing time deposits are estimated by dis-counting cash flows using the appropriate market rates for the appli-cable maturity.

Long-term debt related instrumentsFair value for long-term debt, including the junior subordinateddeferrable interest debentures held by trusts that issued guaranteedcapital debt securities, is based upon current market rates and isadjusted for JPMorgan Chase Bank, N. A.’s credit quality.

Lending-related commitmentsThe majority of JPMorgan Chase Bank, N.A.’s unfunded lending-relatedcommitments are not carried at fair value on a recurring basis on theConsolidated balance sheets nor are they actively traded. Althoughthere is no liquid secondary market for wholesale commitments,JPMorgan Chase Bank, N.A. estimates the fair value of its wholesalelending-related commitments primarily using the cost of credit deriva-tives (which is adjusted to account for the difference in recovery ratesbetween bonds, upon which the cost of credit derivatives is based, andloans) and loan equivalents (which represent the portion of an unusedcommitment expected, based upon JPMorgan Chase Bank, N.A.’s aver-age portfolio historical experience, to become outstanding in the eventan obligor defaults). JPMorgan Chase Bank, N.A. estimates the fairvalue of its consumer commitments to extend credit based upon theprimary market prices to originate new commitments. It is the changein current primary market prices that provides the estimate of the fairvalue of these commitments. On this basis, the estimated fair value ofJPMorgan Chase Bank, N.A.’s lending-related commitments atDecember 31, 2007 and 2006, was a liability of $1.9 billion and $210million, respectively.



The following table presents the carrying value and estimated fair value of financial assets and liabilities as required by SFAS 107.

2007 2006

Carrying Estimated Appreciation/ Carrying Estimated Appreciation/December 31, (in billions) value fair value (depreciation) value fair value (depreciation)Financial assetsAssets for which fair value approximates carrying value $ 120.4 $ 120.4 $ — $ 116.6 $ 116.6 $ —Federal funds sold and securities purchased under resale

agreements (included $18.1 at fair value at December 31, 2007) 192.1 192.1 — 201.5 201.5 —Trading assets 390.5 390.5 — 284.3 284.3 —Securities 82.5 82.5 — 88.5 88.5 —Loans, net of Allowance for loan losses (included $8.2 at fair value

at December 31, 2007) 454.6 454.3 (0.3) 416.7 420.0 3.3Mortgage servicing rights at fair value 8.6 8.6 — 7.5 7.5 —Other (included $1.6 at fair value at December 31, 2007) 28.4 28.9 0.5 24.0 24.4 0.4

Total financial assets $ 1,277.1 $ 1,277.3 $ 0.2 $ 1,139.1 $1,142.8 $ 3.7

Financial liabilitiesDeposits (included $6.5 at fair value at December 31, 2007) $ 772.1 $ 772.7 $ (0.6) $ 640.5 $ 640.5 $ —Federal funds purchased and securities sold under repurchase

agreements (included $5.8 at fair value at December 31, 2007) 118.6 118.6 — 157.3 157.3 —Other borrowed funds (included $10.3 at fair value at December 31, 2007) 23.3 23.3 — 14.7 14.7 —Trading liabilities 143.5 143.5 — 125.0 125.0 —Accounts payable, accrued expense and other liabilities 57.4 57.4 — 59.7 59.7 —Beneficial interests issued by consolidated VIEs (included $2.7

at fair value at December 31, 2007) 6.9 6.9 — 11.8 11.8 —Long-term debt and Junior subordinated deferrable interest debentures

(included $56.9 and $24.1 at fair value at December 31, 2007and 2006, respectively) 88.2 87.9 0.3 71.9 71.9 —

Total financial liabilities $ 1,210.0 $ 1,210.3 $ (0.3) $ 1,080.9 $1,080.9 $ —

Net (depreciation) appreciation $ (0.1) $ 3.7


Note 6 – Fair value optionIn February 2007, the FASB issued SFAS 159, which is effective forfiscal years beginning after November 15, 2007, with early adoptionpermitted. JPMorgan Chase Bank, N. A. chose early adoption forSFAS 159 effective January 1, 2007. SFAS 159 provides an option toelect fair value as an alternative measurement for selected financialassets, financial liabilities, unrecognized firm commitments, and writ-ten loan commitments not previously carried at fair value.

Carrying value Transition gain/(loss) Adjusted carrying value of financial instruments recorded in of financial instruments

(in millions) as of January 1, 2007(c) Retained earnings(d) as of January 1, 2007

Federal funds sold and securities purchased under resale agreements $ 11,717 $ (24) $ 11,693Trading assets – Debt and equity instruments 27,751 32 27,783Loans 552 55 607Other assets(a) 596 11 607Deposits(b) (4,486) 21 (4,465)Federal funds purchased and securities sold under repurchase agreements (6,325) 20 (6,305)Other borrowed funds (5,179) (4) (5,183)Beneficial interests issued by consolidated VIEs (2,339) 5 (2,334)Long-term debt (36,706) 165 (36,541)

Pretax cumulative effect of adoption of SFAS 159 281Deferred income taxes (106)Reclassification from Accumulated other comprehensive income (loss) 1

Cumulative effect of adoption of SFAS 159 $ 176

(a) Included in Other assets are items, such as receivables, that are eligible for the fair value option election but were not elected by JPMorgan Chase Bank, N. A. as these assets are notmanaged on a fair value basis.

(b) Included within Deposits are structured deposits that are carried at fair value pursuant to the fair value option. Other time deposits which are eligible for election, but are not man-aged on a fair value basis, continue to be carried on an accrual basis. Demand deposits are not eligible for election under the fair value option.

(c) Included in the January 1, 2007, carrying values are certain financial instruments previously carried at fair value by JPMorgan Chase Bank, N. A. such as structured liabilities electedpursuant to SFAS 155 and loans purchased as part of the trading activities of the investment banking business.

(d) When fair value elections were made, certain financial instruments were reclassified on the Consolidated balance sheet (for example, warehouse loans were moved from Loans toTrading assets). The transition adjustment for these financial instruments has been included in the line item in which they were classified subsequent to the fair value election.

JPMorgan Chase Bank, N. A.’s fair value elections were intended tomitigate the volatility in earnings that had been created by recordingfinancial instruments and the related risk management instrumentson a different basis of accounting or to eliminate the operationalcomplexities of applying hedge accounting. The following table pro-vides detail regarding JPMorgan Chase Bank, N. A.’s elections byconsolidated balance sheet line as of January 1, 2007.

ElectionsThe following is a discussion of the primary financial instruments forwhich fair value elections were made and the basis for those elections:

Loans and unfunded lending-related commitmentsOn January 1, 2007, JPMorgan Chase Bank, N. A. elected to record,at fair value, the following:

• Loans and unfunded lending-related commitments that areextended as part of the investment banking business’ principalinvesting activities. The transition amount related to these loansincluded a reversal of the Allowance for loan losses of $56 million.

• Certain loans held-for-sale. These loans were reclassified to Tradingassets – Debt and equity instruments. This election enabledJPMorgan Chase Bank, N. A. to record loans purchased as part ofthe investment banking business’ commercial mortgage securitiza-tion and proprietary activities at fair value and discontinue SFAS 133fair value hedge relationships for certain originated loans.

Beginning on January 1, 2007, JPMorgan Chase Bank, N. A. chose toelect fair value as the measurement attribute for the following loansoriginated or purchased after that date:

• Loans purchased or originated as part of the investment bankingbusiness’ securitization warehousing activities

• Prime mortgage loans originated with the intent to sell within theretail business

Warehouse loans elected to be reported at fair value are classified as Trading assets – Debt and equity instruments. For additional infor-mation regarding warehouse loans, see Note 17 on pages 39–45 ofthese consolidated financial statements.

The election to fair value the above loans did not include loans withinthese portfolios that existed on January 1, 2007, based upon the shortholding period of the loans and/or the negligible impact of the elections.

Beginning in the third quarter of 2007, JPMorgan Chase Bank, N. A.elected the fair value option for newly originated bridge financingactivities in the investment banking business. These elections weremade to align further the accounting basis of the bridge financingactivities with their related risk management practices. For theseactivities the loans continue to be classified within Loans on theConsolidated balance sheet; the fair value of the unfunded commit-ments is recorded within Accounts payable, accrued expense andother liabilities.

Resale and Repurchase AgreementsOn January 1, 2007, JPMorgan Chase Bank, N. A. elected to record atfair value resale and repurchase agreements with an embedded deriv-ative or a maturity greater than one year. The intent of this election



was to mitigate volatility due to the differences in the measurementbasis for the agreements (which were previously accounted for on anaccrual basis) and the associated risk management arrangements(which are accounted for on a fair value basis). An election was notmade for short-term agreements as the carrying value for such agree-ments generally approximates fair value. For additional informationregarding these agreements, see Note 14 on page 36 of these consoli-dated financial statements.

Structured NotesThe investment banking business issues structured notes as part of itsclient-driven activities. Structured notes are financial instruments thatcontain embedded derivatives and are included in Long-term debt. OnJanuary 1, 2007, JPMorgan Chase Bank, N. A. elected to record at fairvalue all structured notes not previously elected or eligible for electionunder SFAS 155. The election was made to mitigate the volatility dueto the differences in the measurement basis for structured notes andthe associated risk management arrangements and to eliminate theoperational burdens of having different accounting models for the sametype of financial instrument.

Changes in Fair Value under the Fair Value option electionThe following table presents the changes in fair value included in theConsolidated statement of income for the year ended December 31,2007, for items for which the fair value election was made. The profitand loss information presented below only includes the financialinstruments that were elected to be measured at fair value; relatedrisk management instruments, which are required to be measured atfair value, are not included in the table.

Year endedDecember 31, 2007 Principal Total changes in (in millions) transactions(b) Other fair value recorded

Federal funds sold and securities purchased under resale agreements $ 564 $ — $ 564

Trading assets:Debt and equity instruments,

excluding loans 312 (1)(c) 311Loans reported as trading assets:

Changes in instrument-specific credit risk (394) (157)(c) (551)

Other changes in fair value 103 1,033(c) 1,136Loans:

Changes in instrument-specific credit risk 102 — 102

Other changes in fair value 41 — 41Other assets — 10(d) 10

Deposits(a) (913) — (913)Federal funds purchased and

securities sold under repurchase agreements (78) — (78)

Other borrowed funds(a) (400) — (400)Trading liabilities (17) — (17)Accounts payable, accrued

expense and other liabilities (460) — (460)Beneficial interests issued by

consolidated VIEs (236) — (236)Long-term debt:

Changes in instrument-specific credit risk(a) 698 — 698

Other changes in fair value (2,165) — (2,165)

(a) Total changes in instrument-specific credit risk related to structured notes was $732 million for the year ended December 31, 2007, which includes adjustments forstructured notes classified within Deposits and Other borrowed funds as well asLong-term debt.

(b) Included in the amounts are gains and losses related to certain financial instrumentspreviously carried at fair value by JPMorgan Chase Bank, N. A. such as structured lia-bilities elected pursuant to SFAS 155 and loans purchased as part of the tradingactivities of the investment banking business.

(c) Reported in Mortgage fees and related income.(d) Reported in Other income.


Determination of instrument-specific credit risk for itemsfor which a fair value election was madeThe following describes how the gains and losses included in earningsduring 2007 that were attributable to changes in instrument-specificcredit risk were determined:

• Loans: for floating-rate instruments, changes in value are all attrib-uted to instrument-specific credit risk. For fixed-rate instruments,an allocation of the changes in value for the period is madebetween those changes in value that are interest rate-related andchanges in value that are credit-related. Allocations are generallybased upon an analysis of borrower-specific credit spread andrecovery information, where available, or benchmarking to similarentities or industries.

• Long-term debt: changes in value attributable to instrument-specific credit risk were derived principally from observablechanges in JPMorgan Chase Bank, N. A.’s credit spread. The gainfor 2007, was attributable to the widening of JPMorgan ChaseBank, N. A.’s credit spread.

• Resale and repurchase agreements: generally, with a resale orrepurchase agreement, there is a requirement that collateral bemaintained with a market value equal to or in excess of the prin-cipal amount loaned. As a result, there would be no adjustmentor an immaterial adjustment for instrument-specific credit relatedto these agreements.

Difference between aggregate fair value and aggregateremaining contractual principal balance outstanding The following table reflects the difference between the aggregate fairvalue and the aggregate remaining contractual principal balance out-standing as of December 31, 2007, for Loans and Long-term debt forwhich the SFAS 159 fair value option has been elected. The loans wereclassified in Trading assets – debt and equity instruments or Loans.

Remaining aggregate Fair value over (under) contractual principal remaining aggregate contractual

December 31, 2007 (in millions) amount outstanding Fair value principal amount outstanding

LoansPerforming loans 90 days or more past due

Loans reported as Trading assets $ — $ — $ —Loans 11 11 —

Nonaccrual loansLoans reported as Trading assets 2,769 991 (1,778)Loans — — —

Subtotal 2,780 1,002 (1,778)All other performing loans

Loans reported as Trading assets 53,620 54,213 593Loans 8,562 8,145 (417)

Total loans $ 64,962 $ 63,360 $ (1,602)

Long-term debtPrincipal protected debt $ (17,935) $ (17,859) $ (76)Nonprincipal protected debt(a) NA (39,073) NA

Total Long-term debt NA $ (56,932) NA

FIN 46R long-term beneficial interestsPrincipal protected debt $ (58) $ (58) $ —Nonprincipal protected debt(a) NA (2,669) NA

Total FIN 46R long-term beneficial interests NA $ (2,727) NA

(a) Remaining contractual principal not applicable as the return of principal is based upon performance of an underlying variable, and therefore may not occur in full.

At December 31, 2007, the fair value of unfunded lending-related commitments for which the fair value option was elected was a $25 million liability, which is included in Accounts payable, accrued expense and other liabilities. The contractual amount of such commitments was $1.0 billion.



Note 7 – Principal transactionsPrincipal transactions revenue largely consists of realized and unreal-ized gains and losses from trading activities (including physical com-modities inventories that are accounted for at the lower of cost orfair value), changes in fair value associated with financial instru-ments held by the investment banking business for which the SFAS159 fair value option was elected, and loans held-for-sale within thewholesale lines of business. For loans measured at fair value underSFAS 159, origination costs are recognized in the associated expensecategory as incurred.

Trading assets and liabilitiesTrading assets include debt and equity instruments held for trading pur-poses that JPMorgan Chase Bank, N.A. owns (“long” positions), certainloans for which JPMorgan Chase Bank, N.A. manages on a fair valuebasis and has elected the SFAS 159 fair value option and physical com-modities inventories that are accounted for at the lower of cost or fairvalue. Trading liabilities include debt and equity instruments thatJPMorgan Chase Bank, N.A. has sold to other parties but does not own(“short” positions). JPMorgan Chase Bank, N.A. is obligated to pur-chase instruments at a future date to cover the short positions. Includedin Trading assets and Trading liabilities are the reported receivables(unrealized gains) and payables (unrealized losses) related to deriva-tives. Trading positions are carried at fair value on the Consolidated bal-ance sheets. For a discussion of the valuation of Trading assets andTrading liabilities, see Note 5 on pages 10–18 of these consolidatedfinancial statements.

The following table presents the fair value of Trading assets andTrading liabilities for the dates indicated.


Trading assetsDebt and equity instruments:

U.S. government and federal agency obligations $ 24,442 $ 12,885U.S. government-sponsored enterprise obligations 23,226 7,029Obligations of state and political subdivisions 170 27Certificates of deposit, bankers’ acceptances

and commercial paper 3,918 4,860Debt securities issued by non-U.S. governments 69,606 58,388Corporate debt securities 38,136 44,285Equity securities 86,232 79,785Loans(a) 55,204 16,507Other(b) 16,646 9,358


Derivative receivables:(c)

Interest rate 36,876 26,673Credit derivatives 20,146 6,027Commodity 7,481 8,487Foreign exchange 5,621 4,231Equity 2,755 5,740

Total derivative receivables 72,879 51,158

Total trading assets $390,459 $284,282


Trading liabilitiesDebt and equity instruments(d) $ 73,295 $ 69,689

Derivative payables:(c)

Interest rate 25,436 21,673Credit derivatives 10,601 6,233Commodity 5,301 5,837Foreign exchange 11,820 5,561Equity 17,056 16,042

Total derivative payables 70,214 55,346

Total trading liabilities $143,509 $125,035

(a) The increase from December 31, 2006, is primarily related to loans for which theSFAS 159 fair value option has been elected.

(b) Consists primarily of private-label mortgage-backed securities and asset-backedsecurities.

(c) Included in Trading assets and Trading liabilities are the reported receivables (unreal-ized gains) and payables (unrealized losses) related to derivatives. These amounts arereported net of cash received and paid of $34.9 billion and $24.6 billion, respective-ly, at December 31, 2007, and $23.0 billion and $18.8 billion, respectively, atDecember 31, 2006, under legally enforceable master netting agreements.

(d) Primarily represents securities sold, not yet purchased.

Average Trading assets and liabilities were as follows for the periodsindicated.


Trading assets – debt and equity instruments $287,089 $ 211,828 $176,106

Trading assets – derivative receivables 60,916 54,603 54,242

Trading liabilities – debt and equity instruments(a) $ 70,341 $ 81,297 $ 77,501

Trading liabilities – derivative payables 63,829 55,206 52,983

(a) Primarily represents securities sold, not yet purchased.


Note 8 – Other noninterest revenue Investment banking feesThis revenue category includes advisory and equity and debt underwritingfees. Advisory fees are recognized as revenue when the related serviceshave been performed. Underwriting fees are recognized as revenue whenJPMorgan Chase Bank, N.A. has rendered all services to the issuer and isentitled to collect the fee from the issuer, as long as there are no othercontingencies associated with the fee (e.g., the fee is not contingentupon the customer obtaining financing). Underwriting fees are net of syn-dicate expense. JPMorgan Chase Bank, N.A. 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.


Underwriting:Equity $ 999 $ 699 $ 443Debt 1,531 1,643 1,223

Total Underwriting 2,530 2,342 1,666Advisory 938 684 624

Total $ 3,468 $ 3,026 $ 2,290

Lending & deposit-related fees This revenue category includes fees from loan commitments, standbyletters of credit, financial guarantees, deposit-related fees in lieu ofcompensating balances, cash management-related activities or trans-actions, deposit accounts and other loan servicing activities. Thesefees are recognized over the period in which the related service isprovided.

Asset management, administration and commissions This revenue category includes fees from investment managementand related services, custody, brokerage services, insurance premiumsand commissions and other products. These fees are recognized overthe period in which the related service is provided.

Mortgage fees and related incomeThis revenue category primarily reflects retail mortgage banking rev-enue, including fees and income derived from mortgages originatedwith the intent to sell; mortgage sales and servicing; the impact ofrisk management activities associated with the mortgage pipeline,warehouse and MSRs; and revenue related to any residual interestsheld from mortgage securitizations. This revenue category alsoincludes gains and losses on sales and lower of cost or fair valueadjustments for mortgage loans held-for-sale, as well as changes infair value for mortgage loans originated with the intent to sell andmeasured at fair value under SFAS 159. For loans measured at fairvalue under SFAS 159, origination costs are recognized in the associ-ated expense category as incurred. Costs to originate loans held-for-

sale and accounted for at the lower of cost or fair value are deferredand recognized as a component of the gain or loss on sale. Net inter-est income from mortgage loans and securities gains and losses onavailable-for-sale (“AFS”) securities used in mortgage-related risk man-agement activities are not included in Mortgage fees and relatedincome. For a further discussion of MSRs, see Note 19 on pages 54–57of these consolidated financial statements.

Credit card incomeThe revenue related to credit cards primarily results from a participa-tion arrangement with a bank affiliate of JPMorgan Chase Bank, N.A.and from the acquired Sears credit card business. This revenue categoryincludes interchange income from credit and debit cards and servicingfees earned in connection with securitization activities. Volume-relatedpayments to partners and expense for rewards programs are nettedagainst interchange income. Expense related to rewards programs arerecorded when the rewards are earned by the customer. Other fee rev-enue is recognized as earned, except for annual fees, which aredeferred and recognized on a straight-line basis over the 12-monthperiod to which they pertain. Direct loan origination costs are alsodeferred and recognized over a 12-month period.



Note 9 – Interest income and Interest expenseDetails of Interest income and Interest expense were as follows.


Interest income(a)

Loans $ 29,784 $ 27,155 $ 20,386Securities 5,145 3,901 2,678Trading assets 11,597 7,015 5,832Federal funds sold and securities

purchased under resale agreements 8,519 7,544 3,718Securities borrowed 2,410 1,794 966Deposits with banks 1,385 1,223 760Interests in purchased receivables(b) — 652 933

Total interest income 58,840 49,284 35,273

Interest expense(a)

Interest-bearing deposits 21,862 16,939 10,050Short-term and other liabilities 11,573 10,966 6,967Long-term debt 1,878 2,101 1,764Beneficial interests issued by

consolidated VIEs 390 1,143 1,209

Total interest expense 35,703 31,149 19,990

Net interest income 23,137 18,135 15,283Provision for credit losses 4,672 1,809 1,101

Net interest income after Provision for credit losses $ 18,465 $ 16,326 $ 14,182

(a) Interest income and Interest expense include the current period interest accruals forfinancial instruments measured at fair value except for financial instruments containingembedded derivatives that would be separately accounted for in accordance with SFAS133 absent the SFAS 159 fair value election; for those instruments, all changes invalue, including any interest elements, are reported in Principal transactions revenue.

(b) As a result of restructuring certain multi-seller conduits JPMorgan Chase Bank, N.A.administers, JPMorgan Chase Bank, N.A. deconsolidated $29 billion of Interests inpurchased receivables, $3 billion of Loans and $1 billion of Securities, and recorded$33 billion of lending-related commitments during the second quarter of 2006.

Note 10 – Pension and other postretirementemployee benefit plansDefined benefit pension plans and OPEB planSubstantially all of JPMorgan Chase Bank, N.A.’s U.S. employees areeligible to participate in JPMorgan Chase & Co.’s consolidated, quali-fied, noncontributory, U.S. defined benefit pension plan. In addition,JPMorgan Chase Bank, N.A. provides postretirement medical and lifeinsurance benefits to certain retirees and postretirement medicalbenefits to qualifying U.S. employees through JPMorgan Chase & Co.These JPMorgan Chase & Co. plans are discussed in the JPMorganChase & Co. pension and OPEB plans section below.

JPMorgan Chase Bank, N.A. provides pension benefits to qualifyingemployees in various non-U.S. locations and other postretirementemployee benefits (“OPEB”) to qualifying U.K. employees. The U.K.OPEB plan is unfunded. JPMorgan Chase Bank, N.A. also offers cer-tain qualifying employees the ability to participate in a number ofdefined benefit pension plans not subject to Title IV of the EmployeeRetirement Income Security Act. The most significant of these plans isthe Excess Retirement Plan, pursuant to which certain employeesearn pay and interest credits on compensation amounts above themaximum stipulated by law under a qualified pension plan. TheExcess Retirement Plan is a nonqualified, noncontributory U.S.defined benefit pension plan. The plan is unfunded.

JPMorgan Chase Bank, N.A.’s defined benefit pension plans areaccounted for in accordance with SFAS 87 and SFAS 88, and the U.K.OPEB plan is accounted for in accordance with SFAS 106. InSeptember 2006, the FASB issued SFAS 158, which requires compa-nies to recognize on their Consolidated balance sheets the overfund-ed or underfunded status of their defined benefit postretirementplans, measured as the difference between the fair value of planassets and the benefit obligation. SFAS 158 requires unrecognizedamounts (e.g., net loss and prior service costs) to be recognized inAccumulated other comprehensive income (“AOCI”) and that theseamounts be adjusted as they are subsequently recognized as compo-nents of net periodic benefit cost based upon the current amortiza-tion and recognition requirements of SFAS 87 and SFAS 106.JPMorgan Chase Bank, N.A. prospectively adopted SFAS 158 asrequired on December 31, 2006, which resulted in an after-taxcharge to AOCI of $431 million.


SFAS 158 also eliminates the provisions of SFAS 87 and SFAS 106that allow plan assets and obligations to be measured as of a datenot more than three months prior to the reporting entity’s balancesheet date. JPMorgan Chase Bank, N.A. uses a measurement date ofDecember 31 for its defined benefit pension and OPEB plans; there-fore, this provision of SFAS 158 had no effect on JPMorgan ChaseBank, N.A.’s financial statements.

For JPMorgan Chase Bank, N.A.’s defined benefit pension plans, fairvalue is used to determine the expected return on plan assets.Amortization of net gains and losses is included in annual net peri-odic benefit cost if, as of the beginning of the year, the net gain orloss exceeds 10 percent of the greater of the projected benefit obli-gation or the fair value of the plan assets. Any excess, as well asprior service costs, are amortized over the average future serviceperiod of defined benefit pension plan participants, which for theExcess Retirement Plan is currently 10 years and for the non-U.S.defined benefit pension plans is the period appropriate for the affect-ed plan. For the U.K. OPEB plan, any excess net gains and losses alsoare amortized over the average remaining life expectancy of benefitrecipients, which is currently 17 years.

It is JPMorgan Chase Bank, N.A.’s policy to fund the U.S. definedbenefit pension plan in amounts sufficient to meet the requirementsfor benefit payments. The estimated amount of 2008 contributions tothe U.S. Excess Retirement Plan is $35 million. It is JPMorgan ChaseBank, N.A.’s policy to fund the non-U.S. defined benefit pensionplans in amounts sufficient to meet the requirements under applica-ble employee benefit and local tax laws. The estimated amount of2008 contributions to the non-U.S. defined benefit plans and U.K.OPEB plan is $36 million.

Defined contribution plansJPMorgan Chase Bank, N.A.’s employees may also participate in sev-eral defined contribution plans offered by JPMorgan Chase & Co. inthe U.S. and by JPMorgan Chase Bank, N.A. in certain non-U.S. loca-tions, all of which are administered in accordance with applicablelocal laws and regulations. The most significant of these plans is TheJPMorgan Chase 401(k) Savings Plan (the “401(k) Savings Plan”),which covers substantially all U.S. employees. The 401(k) SavingsPlan allows employees to make pretax and Roth 401(k) contributionsto tax-deferred investment portfolios. The JPMorgan Chase CommonStock Fund, which is an investment option under the 401(k) SavingsPlan, is a nonleveraged employee stock ownership plan. JPMorganChase Bank, N.A. matches eligible employee contributions up to acertain percentage of benefits-eligible compensation per pay period,subject to plan and legal limits. Employees begin to receive matchingcontributions after completing a one-year-of-service requirement andare immediately vested in JPMorgan Chase Bank, N.A.’s contributionswhen made. Employees with total annual cash compensation of$250,000 or more are not eligible for matching contributions. The401(k) Savings Plan also permits discretionary profit-sharing contri-butions by participating companies for certain employees, subject toa specified vesting schedule.

The following table presents pension and OPEB amounts recorded in Accumulated other comprehensive income (loss), before tax.


As of or for the year ended December 31, U.S. Non-U.S. U. K. OPEB plan

(in millions) 2007 2006 2007 2006 2007 2006

Net (loss) gain $ (14) $ (49) $ (434) $ (668) $ 8 $ 4Prior service (cost) credit (2) — 2 — — —

Accumulated other comprehensive income(loss), before tax, end of year $ (16) $ (49) $ (432) $ (668) $ 8 $ 4



The following table presents the changes in benefit obligations and plan assets, funded status and accumulated benefit obligations amounts report-ed on the Consolidated balance sheets for JPMorgan Chase Bank, N.A.’s U.S. and non-U.S. defined benefit pension plans and U.K. OPEB plan.


As of and for the year ended December 31, U.S. Non-U.S. U. K. OPEB plan

(in millions) 2007 2006 2007 2006 2007 2006

Change in benefit obligationBenefit obligation, beginning of year $ (301) $ (277) $ (2,917) $ (2,378) $ (52) $ (44)Benefits earned during the year (7) (3) (36) (37) — —Interest cost on benefit obligations (16) (15) (144) (120) (3) (2)Plan amendments — — 2 2 — —Liabilities of newly material plans — — (5) (154)(b) — —Employee contributions NA NA (3) (2) — —Net gain (loss) 25 (45) 327 (23) 4 (2)Benefits paid 30 39 90 68 3 2Curtailments — — 4 2 — —Settlements — — 24 37 — —Special termination benefits — — (1) (1) — —Foreign exchange impact and other (7) — (84) (311) (1) (6)

Benefit obligation, end of year $ (276) $ (301) $ (2,743) $ (2,917) $ (49) $ (52)

Change in plan assetsFair value of plan assets, beginning of year $ — $ — $ 2,813 $ 2,223 $ — $ —Actual return on plan assets — — 57 94 — —Employer contributions 30 39 92 241 3 2Employee contributions — — 3 2 — —Assets of newly material plans — — 3 67(b) — —Benefits paid (30) (39) (90) (68) (3) (2)Settlements — — (24) (37) — —Foreign exchange impact and other — — 79 291 — —

Fair value of plan assets, end of year $ — $ — $ 2,933 $ 2,813 $ — $ —

Funded (unfunded) status(a) $ (276) $ (301) $ 190 $ (104) $ (49) $ (52)

Accumulated benefit obligation, end of year $ (273) $ (293) $ (2,708) $ (2,849) NA NA

(a) Overfunded plans with an aggregate balance of $260 million and $49 million at December 31, 2007 and 2006, respectively, are recorded in Other assets. Underfunded plans with anaggregate balance of $395 million and $506 million at December 31, 2007 and 2006, respectively, are recorded in Accounts payable, accrued expense and other liabilities.

(b) Reflects adjustments related to pension plans in Germany and Switzerland, which have defined benefit pension obligations that were not previously measured under SFAS 87 due toimmateriality.


The following table presents the components of Net periodic benefit costs reported in the Consolidated statements of income and Othercomprehensive income for JPMorgan Chase Bank, N.A.’s U.S. and non-U.S. defined benefit pension plans and U.K. OPEB plan.


U.S. Non-U.S. U. K. OPEB plan

Year ended December 31, (in millions) 2007 2006 2005 2007 2006 2005 2007 2006 2005

Components of Net periodic benefit costBenefits earned during the year $ 7 $ 3 $ 4 $ 36 $ 37 $ 25 $ — $ — $ —Interest cost on benefit obligations 16 15 17 144 120 104 3 2 2Expected return on plan assets — — — (153) (122) (109) — — —Amortization:

Net loss (gain) — — — 55 45 38 — — (1)Prior service cost — — — — — 1 — — —

Curtailment loss — — — — 1 — — — —Settlement (gain) loss — — — (1) 4 — — — —Special termination benefits — — — 1 1 — — — —

Net periodic benefit cost 23 18 21 82 86 59 3 2 1Other defined benefit pension plans(a) 8 — — 19 11 23 NA NA NA

Total defined benefit plans 31 18 21 101 97 82 3 2 1Total defined contribution plans 217 203 185 196 198 147 NA NA NA

Total pension and OPEB cost included inCompensation expense $ 248 $ 221 $ 206 $ 297 $ 295 $ 229 $ 3 $ 2 $ 1

Changes in plan assets and benefitobligations recognized in Other comprehensive incomeNet gain arising during the year $ (25) NA NA $ (175) NA NA $ (4) NA NAPrior service credit arising during the year — NA NA (2) NA NA — NA NAAmortization of net loss — NA NA (55) NA NA — NA NACurtailment gain — NA NA (5) NA NA — NA NASettlement loss — NA NA 1 NA NA — NA NAOther (8) NA NA — NA NA — NA NA

Total recognized in Other comprehensive income (33) NA NA (236) NA NA (4) NA NA

Total recognized in Net periodic benefit cost and Other comprehensive income $ (10) NA NA $ (154) NA NA $ (1) NA NA

(a) Includes various defined benefit pension plans, which are individually immaterial.

It is expected that $27 million, before tax, of the net loss related to non-U.S. defined benefit pension plans recorded in Accumulated other com-prehensive income at December 31, 2007, will be recognized in earnings during 2008.



Plan assumptionsJPMorgan Chase Bank, N.A.’s expected long-term rate of return for itsnon-U.S. defined benefit pension plans’ assets is a blended average ofthe investment advisor’s projected long-term (10 years or more)returns for the various asset classes, weighted by the portfolio allo-cation. Returns on asset classes are developed using a forward-look-ing building-block approach and are not strictly based upon historical returns. For the U.K. defined benefit pension plans, whichrepresent the most significant of JPMorgan Chase Bank, N.A.’s non-U.S. defined benefit pension plans, the expected long-term rateof return on plan assets is an average of projected long-term returnsfor each asset class, selected by reference to the yield on long-termU.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 underthe Excess Retirement Plan was selected by reference to the yield on

Weighted-average assumptions used to determine benefit obligationsU.S. Non-U.S.

December 31, 2007 2006 2007 2006

Discount rate:Defined benefit pension plans 6.60% 5.95% 2.25-5.80% 2.25-5.10%OPEB plan NA NA 5.80 5.10

Rate of compensation increase 4.00 4.00 3.00-4.25 3.00-4.00Health care cost trend rate:

Assumed for next year NA NA 5.75 6.63Ultimate NA NA 4.00 4.00Year when rate will reach ultimate NA NA 2010 2010

a portfolio of bonds with redemption dates and coupons that closelymatch the plan’s projected cash flows; such portfolio is derived froma broad-based universe of high-quality corporate bonds as of themeasurement date. In years in which this hypothetical bond portfoliogenerates excess cash, such excess is assumed to be reinvested atthe one-year forward rates implied by the Citigroup Pension DiscountCurve published as of the measurement date. The discount rate forthe U.K. defined benefit pension and OPEB plans represent a rateimplied from the yield curve of the year-end iBoxx £ corporate “AA”15-year-plus bond index with a duration corresponding to that of theunderlying benefit obligations.

The following tables present the weighted-average annualized actu-arial assumptions for the projected and accumulated postretirementbenefit obligations and the components of Net periodic benefit costsfor the U.S. and non-U.S. defined benefit pension and U.K. OPEBplans, as of and for the periods indicated.

Weighted-average assumptions used to determine Net periodic benefit costsU.S. Non-U.S.

Year ended December 31, 2007 2006 2005 2007 2006 2005

Discount rate:Defined benefit pension plans 5.95% 5.70% 5.75% 2.25-5.10% 2.00-4.70% 2.00-5.30%OPEB plan NA NA NA 5.10 4.70 5.30

Expected long-term rate of return on plan assets:Defined benefit pension plans NA NA NA 3.25-5.60 3.25-5.50 3.25-5.75OPEB plan NA NA NA NA NA NA

Rate of compensation increase 4.00 4.00 4.00 3.00-4.00 3.00-3.75 1.75-3.75Health care cost trend rate:

Assumed for next year NA NA NA 6.63 7.50 7.50Ultimate NA NA NA 4.00 4.00 4.00Year when rate will reach ultimate NA NA NA 2010 2010 2010


The following table presents the effect of a one-percentage-pointchange in the assumed health care cost trend rate on JPMorganChase Bank, N. A.’s total service and interest cost and accumulatedpostretirement benefit obligation.

For the year ended 1-Percentage- 1-Percentage-December 31, 2007 point point (in millions) increase decrease

Effect on total service and interest costs $ — $ —Effect on accumulated postretirement

benefit obligation 6 (5)

At December 31, 2007, JPMorgan Chase Bank, N.A. increased thediscount rates used to determine its benefit obligations for theExcess Retirement Plan based upon current market interest rates,which will result in a decrease in expense of approximately $1 millionfor 2008. As of December 31, 2007, the interest crediting rateassumption and the assumed rate of compensation increase remainedat 5.25% and 4.00%, respectively. At December 31, 2007, pensionplan demographic assumptions were revised to reflect recent experi-ence relating to form and timing of benefit distributions, and rates of turnover, which will result in a net increase in expense of approxi-mately $1 million for 2008.

JPMorgan Chase Bank, N.A.’s non-U.S. defined benefit pension plansexpense is sensitive to changes in the discount rate. A 25-basis pointdecline in the discount rates for the non-U.S. plans would result in anincrease in the 2008 non-U.S. defined benefit pension and OPEBplan expense of approximately $21 million.

Investment strategy and asset allocation The investment policy for JPMorgan Chase Bank, N.A.’s employeebenefit plan assets is to optimize the risk-return relationship asappropriate to the respective plan's needs and goals, using a globalportfolio of various asset classes diversified by market segment, eco-nomic sector, and issuer. Specifically, the goal is to optimize theasset mix for future benefit obligations, while managing various riskfactors and each plan’s investment return objectives. Plan assets aremanaged by a combination of internal and external investment man-agers and are rebalanced to within approved ranges, to the extenteconomically practical. Assets of the non-U.S. defined benefit pensionplans are held in various trusts and are invested in a well-diversifiedportfolio of equities, fixed income and other securities. As ofDecember 31, 2007, the assets used to fund the non-U.S. definedbenefit pension plans do not include JPMorgan Chase commonstock, except in connection with investments in third-party stock-index funds.

The following table presents the weighted-average asset allocation ofthe fair values of plan assets at December 31 for the years indicated,and the respective approved target allocation by asset category.

Non-U.S.Defined benefit pension plans

Target % of plan assetsDecember 31, Allocation 2007 2006

Asset categoryDebt securities 69% 70% 70%Equity securities 26 25 26Real estate 1 1 1Alternatives 4 4 3

Total 100% 100% 100%

The following table presents JPMorgan Chase Bank, N.A.’s actual rateof return on plan assets.

Non-U.S.Defined benefit pension plans

December 31, 2007 2006 2005

Actual rate of return 0.06-7.51% 2.80-7.30% 2.70-15.90%



JPMorgan Chase Bank, N.A. had previously adopted SFAS 123,effective January 1, 2003, using the prospective transition method.Under SFAS 123, JPMorgan Chase Bank, N.A. accounted for itsstock-based compensation awards at fair value, similar to the SFAS123R requirements. However, under the prospective transitionmethod, JPMorgan Chase Bank, N.A. continued to account forunmodified stock options that were outstanding as of December 31,2002, using the APB 25 intrinsic value method. Under this method,no expense was recognized for stock options granted at an exerciseprice equal to the stock price on the grant date, since such optionshave no intrinsic value.

Upon adopting SFAS 123R, JPMorgan Chase Bank, N.A. began torecognize in the Consolidated statements of income compensationexpense for unvested stock options previously accounted for underAPB 25. Additionally, JPMorgan Chase Bank, N.A. recognized ascompensation expense an immaterial cumulative effect adjustmentresulting from the SFAS 123R requirement to estimate forfeitures atthe grant date instead of recognizing them as incurred. Finally,JPMorgan Chase Bank, N.A. revised its accounting policies for share-based payments granted to employees eligible for continued vestingunder specific age and service or service-related provisions (“fullcareer eligible employees”) under SFAS 123R. Prior to adopting SFAS 123R, JPMorgan Chase Bank, N.A.’s accounting policy forshare-based payment awards granted to full career eligible employeeswas to recognize compensation cost over the award’s stated serviceperiod. Beginning with awards granted to full career eligible employ-ees in 2006, JPMorgan Chase Bank, N.A. recognized compensationexpense on the grant date without giving consideration to theimpact of post employment restrictions. In the first quarter of 2006,JPMorgan Chase Bank, N.A. also began to accrue the estimated cost of stock awards granted to full career eligible employees in thefollowing year.

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.

Year ended December 31,(in millions) U.S. defined benefit pension plans Non-U.S. defined benefit pension plans U.K. OPEB plan

2008 $ 28 $ 89 $ 32009 25 93 32010 22 97 32011 22 105 32012 24 111 3Years 2013–2017 124 626 18

JPMorgan Chase & Co. pension and OPEB plansJPMorgan Chase Bank, N.A.’s U.S. employees are eligible to participatein JPMorgan Chase & Co.’s consolidated, qualified, noncontributorydefined benefit pension plan. In addition, qualifying U.S. employeesmay receive medical and life insurance benefits that are providedthrough JPMorgan Chase & Co.’s U.S. OPEB plan. Benefits vary withlength of service and date of hire and provide for limits on JPMorganChase Bank, N.A.’s share of covered medical benefits. The medicalbenefits are contributory, while the life insurance benefits are non-contributory. Pension expense and postretirement medical benefitexpense is determined based upon participation and effected throughan intercompany charge from JPMorgan Chase & Co.

JPMorgan Chase Bank, N.A. was charged $213 million, $211 millionand $218 million in 2007, 2006 and 2005, for its share of the U.S.qualified defined benefit pension plan expense; and it was charged$10 million, $6 million and $(10) million in 2007, 2006 and 2005,for its share of the U.S. OPEB plan expense. Consolidated disclosuresof information about the pension and OPEB plans of JPMorganChase & Co., including funded status, components of benefit costand weighted-average actuarial assumptions are included in Note 9of JPMorgan Chase & Co.’s 2007 Annual Report on Form 10-K.

Note 11 – Employee stock-based incentivesJPMorgan Chase Bank, N.A.’s employees receive annual incentivecompensation based on their performance, the performance of theirbusiness and JPMorgan Chase’s consolidated operating results.JPMorgan Chase Bank, N.A.’s employees participate, to the extentthey meet minimum eligibility requirements, in various benefit planssponsored by JPMorgan Chase. Information in addition to that whichis presented below is provided in JPMorgan Chase’s Annual Reporton Form 10-K for the year ended December 31, 2007.

Effective January 1, 2006, JPMorgan Chase Bank, N.A., adoptedSFAS 123R and all related interpretations using the modifiedprospective transition method. SFAS 123R requires all share-basedpayments to employees, including employee stock options and stockappreciation rights (“SARs”), to be measured at their grant date fair values. Results for prior periods have not been retrospectivelyadjusted. JPMorgan Chase also adopted the transition election provided by FSP FAS 123(R)-3. The pool of tax benefits calculatedunder FSP 123(R)-3 was allocated to JPMorgan Chase Bank, N.A.by JPMorgan Chase based on the percentage of stock compensationexpense incurred by JPMorgan Chase Bank, N.A. in relation to thetotal.


In June 2007, the FASB ratified EITF 06-11, which requires that real-ized tax benefits from dividends or dividend equivalents paid onequity-classified share-based payment awards that are charged toretained earnings should be recorded as an increase to additionalpaid-in capital and included in the pool of excess tax benefits avail-able to absorb tax deficiencies on share-based payment awards. Priorto the issuance of EITF 06-11, JPMorgan Chase did not include thesetax benefits as part of this pool of excess tax benefits. JPMorganChase adopted EITF 06-11 on January 1, 2008. The adoption of thisconsensus did not have an impact on JPMorgan Chase’sConsolidated balance sheet or results of operations.

Employee stock-based awardsIn 2007 and 2006, JPMorgan Chase granted long-term stock-basedawards under the 2005 Long-Term Incentive Plan (the “2005 Plan”).In 2005, JPMorgan Chase granted long-term stock-based awardsunder the 1996 Long-Term Incentive Plan as amended (the “1996plan”) until May 2005 and under the 2005 Plan thereafter to certainkey employees of JPMorgan Chase Bank, N.A. These two plans, plusprior JPMorgan Chase plans and plans assumed as the result ofacquisitions, constitute JPMorgan Chase’s stock-based compensationplans (“LTI Plans”). The 2005 Plan became effective on May 17,2005, after approval by JPMorgan Chase’s shareholders at its 2005annual meeting. The 2005 Plan replaced three existing stock-basedcompensation plans – the 1996 Plan and two nonshareholder-approved plans – all of which expired in May 2005. Under the termsof the 2005 Plan, 275 million shares of common stock are availablefor issuance during its five-year term. The 2005 Plan is the onlyactive plan under which JPMorgan Chase is currently granting stock-based incentive awards.

Restricted stock units (“RSUs”) are awarded at no cost to the recipi-ent in connection with JPMorgan Chase’s annual incentive grant.RSUs generally vest 50 percent after two years and 50 percent afterthree years and convert to shares of JPMorgan Chase common stockat the vesting date. In addition, RSUs typically include full career eli-gibility provisions, which allow employees to continue to vest uponvoluntary termination, subject to employment and other restrictions.All of these awards are subject to forfeiture until the vesting date. AnRSU entitles the recipient to receive cash payments equivalent to anydividends paid on the underlying common stock during the periodthe RSU is outstanding.

Under the LTI Plans, stock options and SARs have been granted withan exercise price equal to the fair value of JPMorgan Chase’s com-mon stock on the grant date. JPMorgan Chase typically awards SARsto certain key employees once per year, and it also periodically grantsdiscretionary stock-based payment awards to individual employees,primarily in the form of both employee stock options and SARs. The2007 grant of SARs to key employees vests ratably over five years(i.e., 20 percent per year) and the 2006 and 2005 awards vest one-third after each of years 3, 4 and 5. These awards do not includeany full career eligibility provisions and all awards generally expire10 years after the grant date.

JPMorgan Chase Bank, N.A. separately recognizes compensationexpense for each tranche of each award as if it were a separateaward with its own vesting date. For each tranche granted (otherthan grants to employees who are full career eligible at the grantdate), compensation expense is recognized on a straight-line basisfrom the grant date until the vesting date of the respective tranche,provided that the employees will not become full career eligible dur-ing the vesting period. For each tranche granted to employees whowill become full career eligible during the vesting period, compensa-tion expense is recognized on a straight-line basis from the grantdate until the earlier of the employee's full career eligibility date orthe vesting date of the respective tranche.

In December 2005, JPMorgan Chase accelerated the vesting ofapproximately 41 million unvested, out-of-the-money employee stockoptions granted in 2001 under the Growth and PerformanceIncentive Program (“GPIP”), which were scheduled to vest in January2007. These options were not modified other than to accelerate vest-ing. The related expense for JPMorgan Chase Bank, N.A. was approx-imately $98 million, and was recognized as compensation expense in2005. JPMorgan Chase believed that at the time the options wereaccelerated they had limited economic value since the exercise priceof the accelerated options was $51.22 and the closing price ofJPMorgan Chase’s common stock on the effective date of the accel-eration was $39.69.

RSU activityCompensation expense for RSUs is measured based upon the num-ber of shares granted multiplied by JPMorgan Chase’s stock price atthe grant date, and is recognized in Net income as previouslydescribed. The following table summarizes JPMorgan Chase Bank,N.A.’s RSU activity for 2007.

Year ended December 31, 2007 Weighted-(in thousands, except weighted Number of average grantaverage data) Shares date fair value

Outstanding, January 1 56,614# $ 38.43Granted 30,234 48.30Vested (20,503) 37.99Forfeited (5,146) 42.50Transfers 1,343 40.26

Outstanding, December 31 62,542# $ 43.05

The total fair value of shares that vested during the years endedDecember 31, 2007, 2006 and 2005 was $1.0 billion, $871 millionand $731 million, respectively.

Employee stock option and SARs activityCompensation expense, which is measured at the grant date as thefair value of employee stock options and SARs, is recognized in Netincome as described above.

The following table summarizes JPMorgan Chase Bank, N.A.’semployee stock option and SARs activity for the year endedDecember 31, 2007, including awards granted to key employees andawards granted in prior years under broad-based plans.



The weighted-average grant date per share fair value of stock options and SARs granted during the years ended December 31, 2007, 2006 and2005, was $13.32, $10.86 and $10.50, respectively. The total intrinsic value of options exercised during the years ended December 31, 2007,2006 and 2005, was $740 million, $778 million and $310 million, respectively.

Year ended December 31, 2007(in thousands, except Number of Weighted-average Weighted-average Aggregateweighted-average data) options/SARs exercise price remaining contractual life (in years) intrinsic value

Outstanding, January 1 289,558# $ 40.31Granted 17,760 46.76Exercised (51,518) 34.90Forfeited (1,361) 40.14Canceled (5,246) 48.04Transfers 13,501 37.95

Outstanding, December 31 262,694# $ 41.53 4.0 $ 1,320,631Exercisable, December 31 225,983 41.24 3.2 1,234,350

Tax benefitsThe total income tax benefit related to stock-based compensationarrangements recognized in JPMorgan Chase Bank, N.A.’sConsolidated statements of income for the years ended December 31,2007, 2006 and 2005, was $524 million, $622 million and $414 mil-lion, respectively. Pursuant to an informal tax sharing agreementbetween JPMorgan Chase Bank, N.A. and its parent, JPMorgan Chase,excess tax benefits related to share-based compensation awards,determined in accordance with SFAS 123R, are recorded by JPMorganChase. In addition, the above compensation expense allocated toJPMorgan Chase Bank, N.A. was cash-settled in accordance with theaforementioned tax sharing arrangement through cash payments madeby JPMorgan Chase Bank, N.A. to JPMorgan Chase.

Impact of adoption of SFAS 123RDuring 2006, the incremental expense related to JPMorgan ChaseBank, N.A.’s adoption of SFAS123R was $506 million. This amountrepresents an accelerated recognition of costs that would otherwisehave been incurred in future periods. Also as a result of adoptingSFAS 123R, JPMorgan Chase Bank, N.A.’s Income from continuingoperations (pretax) for the year ended December 31, 2006, waslower by $506 million, and Income from continuing operations (after-tax), as well as Net income, for the year ended December 31, 2006,was lower by $314 million, than if JPMorgan Chase Bank, N.A. hadcontinued to account for share-based compensation under APB 25and SFAS 123.

JPMorgan Chase Bank, N.A. recognized compensation expense relat-ed to its various employee stock-based incentive awards of $1.3 bil-lion, $1.6 billion (including the $506 million incremental impact ofadopting SFAS 123R) and $1.0 billion for the years ended December31, 2007, 2006 and 2005, respectively, in its Consolidated state-ments of income. These amounts included an accrual for the estimat-ed cost of stock awards to be granted to full career eligible employ-ees of $324 million and $355 million for the years ended December31, 2007 and 2006 respectively. At December 31, 2007, approxi-mately $897 million (pretax) of compensation cost related to unvest-ed awards has not yet been charged to Net income. That cost isexpected to be amortized into compensation expense over a weight-ed-average period of 1.5 years. JPMorgan Chase Bank, N.A. does notcapitalize any compensation cost related to share-based compensa-tion awards to employees.


Comparison of the fair and intrinsic value measurementmethodsThe following table presents Net income as reported, and as if all2005 share-based payment awards were accounted for at fair value.All 2007 and 2006 awards were accounted for at fair value.

Year ended December 31,(in millions, except per share data) 2005

Net income as reported $ 5,092Add: Employee stock-based compensation

expense included in reported Net income,net of related tax effects 620

Deduct: Employee stock-based compensationexpense determined under the fair value method for all awards, net of relatedtax effects (679)

Pro forma Net income $ 5,033

The following table presents the assumptions used by JPMorgan Chaseto value employee stock options and SARs granted during the periodunder the Black-Scholes valuation model.


Weighted-average annualizedvaluation assumptionsRisk-free interest rate 4.78% 5.11% 4.25%Expected dividend yield 3.18 2.89 3.79Expected common stock

price volatility 33 23 37Expected life (in years) 6.8 6.8 6.8

Prior to the adoption of SFAS 123R, JPMorgan Chase used the his-torical volatility of its common stock price as the expected volatilityassumption in valuing options. JPMorgan Chase completed a reviewof its expected volatility assumption in 2006. Effective October 1,2006, JPMorgan Chase Bank, N.A. began to value its employee stockoptions granted or modified after that date using an expectedvolatility assumption derived from the implied volatility of JPMorganChase’s publicly traded stock options.

The expected life assumption is an estimate of the length of timethat an employee might hold an option or SAR before it is exercisedor canceled. The expected life assumption was developed using his-toric experience.

Note 12 – Noninterest expenseMerger costsOn July 1, 2004, Bank One Corporation merged with and intoJPMorgan Chase (the “Merger”). JPMorgan Chase Bank, N.A.’s costsassociated with the Merger and the Bank of New York transaction arereflected in the Merger costs caption of the Consolidated statements ofincome. A summary of such costs, by expense category, is shown in thefollowing table for 2007, 2006 and 2005.


Expense categoryCompensation $ (20) $ 51 $ 220Occupancy 17 24 (87)Technology and communications and other 175 182 328Bank of New York transaction(a) 22 14 —

Total(b) $ 194 $ 271 $ 461

(a) Represents Compensation and Technology and communications and other.(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 thecosts associated with the Merger.


Liability balance, beginning of period $ 155 $ 306 $ 552Recorded as merger costs 172 257 461Recorded as goodwill (44) — —Liability utilized (283) (408) (707)

Liability balance, end of period(a) $ — $ 155 $ 306

(a) Excludes $10 million and $21 million at December 31, 2007 and 2006, respectively,related to the Bank of New York transaction.


2007 2006

Gross Gross Gross GrossAmortized unrealized unrealized Fair Amortized unrealized unrealized Fair

December 31, (in millions) cost gains losses value cost gains losses value


U.S. treasuries $ 2,374 $ 14 $ 2 $ 2,386 $ 2,038 $ — $ 23 $ 2,015Mortgage-backed securities 8 1 — 9 32 2 1 33Agency obligations 73 9 — 82 78 8 — 86

U.S. government-sponsored enterprise obligations 62,511 643 55 63,099 75,410 334 460 75,284Obligations of state and political subdivisions 52 — 1 51 381 13 1 393Debt securities issued by non-U.S. governments 6,804 18 28 6,794 6,150 7 52 6,105Corporate debt securities 1,927 1 4 1,924 610 1 3 608Equity securities 2,005 53 1 2,057 1,278 125 1 1,402Other(a) 6,095 7 37 6,065 2,502 3 2 2,503

Total available-for-sale securities $ 81,849 $746 $ 128 $ 82,467 $ 88,479 $ 493 $ 543 $ 88,429

Held-to-maturity securities(b)

Total held-to-maturity securities $ 44 $ 1 $ — $ 45 $ 58 $ 2 $ — $ 60

(a) Primarily includes privately issued mortgage-backed securities and negotiable certificates of deposit.(b) Consists primarily of mortgage-backed securities issued by U.S. government-sponsored entities.



Note 13 – Securities Securities are classified as AFS, Held-to-maturity (“HTM”) or Trading.Trading securities are discussed in Note 7 on page 22 of these con-solidated financial statements. Securities are classified primarily asAFS when purchased as part of JPMorgan Chase Bank, N.A.’s man-agement of its structural interest rate risk. AFS securities are carriedat fair value on the Consolidated balance sheets. Unrealized gainsand losses after any applicable SFAS 133 hedge accounting adjust-ments are reported as net increases or decreases to Accumulatedother comprehensive income (loss). The specific identification methodis used to determine realized gains and losses on AFS securities,which are included in Securities gains (losses) on the Consolidatedstatements of income. Securities that JPMorgan Chase Bank, N.A. hasthe positive intent and ability to hold to maturity are classified asHTM and are carried at amortized cost on the Consolidated balancesheets. JPMorgan Chase Bank, N.A. has not classified new purchasesof securities as HTM for the past several years.



Realized gains $ 525 $ 375 $ 99Realized losses (475) (925) (1,562)

Net realized Securities gains (losses)(a) $ 50 $ (550) $ (1,463)

(a) Proceeds from securities sold were within approximately 2% of amortized cost.





U.S. treasuries $ 2,013 $ 23 $ — $ — $ 2,013 $ 23Mortgage-backed securities 8 1 — — 8 1Agency obligations — — — — — —

U.S. government-sponsored enterprise obligations 17,877 262 6,930 198 24,807 460Obligations of state and political subdivisions — — 100 1 100 1Debt securities issued by non-U.S. governments 3,141 13 2,354 39 5,495 52Corporate debt securities 387 3 — — 387 3Equity securities 17 1 — — 17 1Other 1,556 1 82 1 1,638 2


Impairment of AFS securities is evaluated considering numerous fac-tors, and their relative significance varies case-by-case. Factors con-sidered include the length of time and extent to which the marketvalue has been less than cost; the financial condition and near-termprospects of the issuer of a security; and JPMorgan Chase Bank,N.A.’s intent and ability to retain the security in order to allow for ananticipated recovery in fair value. If, based upon an analysis of eachof the above factors, it is determined that the impairment is other-than-temporary, the carrying value of the security is written down tofair value, and a loss is recognized through earnings.

Included in the $128 million of gross unrealized losses on AFS securitiesat December 31, 2007, was $82 million of unrealized losses that haveexisted for a period greater than 12 months. These securities are pre-dominately rated AAA and the unrealized losses are primarily due to

overall increases in market interest rates and not concerns regarding theunderlying credit of the issuers. The majority of the securities with unre-alized losses aged greater than 12 months are obligations of U.S. gov-ernment-sponsored enterprises and have a fair value at December 31,2007, that is within 4% of their amortized cost basis.

Due to the issuers’ continued satisfaction of their obligations under thecontractual terms of the securities, JPMorgan Chase Bank, N.A.’s evalua-tion of the fundamentals of the issuers’ financial condition and otherobjective evidence, and JPMorgan Chase Bank, N.A.’s consideration of itsintent and ability to hold the securities for a period of time sufficient toallow for the anticipated recovery in the market value of the securities,JPMorgan Chase Bank,N.A. believes that these securities were not other-than-temporarily impaired as of December 31, 2007 and 2006.

The following table presents the fair value and gross unrealized losses for AFS securities by aging category at December 31.





U.S. treasuries $ 163 $ 2 $ — $ — $ 163 $ 2Mortgage-backed securities — — — — — —Agency obligations — — — — — —

U.S. government-sponsored enterprise obligations — — 1,345 55 1,345 55Obligations of state and political subdivisions 21 1 — — 21 1Debt securities issued by non-U.S. governments 335 3 1,928 25 2,263 28Corporate debt securities 1,126 3 183 1 1,309 4Equity securities — — 4 1 4 1Other 2,887 37 — — 2,887 37





The following table presents the amortized cost, estimated fair value and average yield at December 31, 2007, of JPMorgan Chase Bank, N. A.’sAFS and HTM securities by contractual maturity.

By remaining maturity at Available-for-sale securities Held-to-maturity securitiesDecember 31, 2007 Amortized Fair Average Amortized Fair Average(in millions, except rates) cost value yield(b) cost value yield(b)

Due in one year or less $ 6,510 $ 6,509 4.28% $ — $ — —%Due after one year through five years 5,900 5,899 3.56 — — —Due after five years through 10 years 1,241 1,216 4.62 40 41 6.87Due after 10 years(a) 68,198 68,843 5.73 4 4 6.02

Total securities $ 81,849 $ 82,467 5.45% $ 44 $ 45 6.80%

(a) Includes securities with no stated maturity. Substantially all of JPMorgan Chase Bank, N.A.’s mortgage-backed securities and collateralized mortgage obligations are due in 10 years ormore based upon contractual maturity. The estimated duration, which reflects anticipated future prepayments based upon a consensus of dealers in the market, is approximately fouryears for mortgage-backed securities and collateralized mortgage obligations.

(b) The average yield is based upon amortized cost balances at year-end. Yields are derived by dividing interest income by total amortized cost. Taxable-equivalent yields are used whereapplicable.

Note 14 – Securities financing activitiesJPMorgan Chase Bank, N. A. enters into resale agreements, repur-chase agreements, securities borrowed transactions and securitiesloaned transactions, primarily to finance JPMorgan Chase Bank,N.A.’s inventory positions, acquire securities to cover short positionsand settle other securities obligations. JPMorgan Chase Bank, N.A.also enters into these transactions to accommodate customers’needs.

Resale agreements and repurchase agreements are generally treatedas collateralized financing transactions carried on the Consolidatedbalance sheets at the amounts the securities will be subsequentlysold or repurchased, plus accrued interest. On January 1, 2007, pur-suant to the adoption of SFAS 159, JPMorgan Chase Bank, N.A.elected fair value measurement for certain resale and repurchaseagreements. For a further discussion of SFAS 159, see Note 6 onpages 19–21 of these consolidated financial statements. Theseagreements continue to be reported within Securities purchasedunder resale agreements and Securities sold under repurchase agree-ments on the Consolidated balance sheets. Generally for agreementscarried at fair value, current period interest accruals are recordedwithin Interest income and Interest expense with changes in fairvalue reported in Principal transactions revenue. However, for finan-cial instruments containing embedded derivatives that would be sep-arately accounted for in accordance with SFAS 133, all changes infair value, including any interest elements, are reported in Principaltransactions revenue. Where appropriate, resale and repurchaseagreements with the same counterparty are reported on a net basisin accordance with FIN 41. JPMorgan Chase Bank, N.A. takes posses-sion of securities purchased under resale agreements. On a daily basis,JPMorgan Chase Bank, N.A., monitors the market value of the underly-ing collateral, primarily U.S. and non-U.S. government and agencysecurities that it has received from its counterparties, and requestsadditional collateral when necessary.

Transactions similar to financing activities that do not meet the SFAS140 definition of a repurchase agreement are accounted for as“buys” and “sells” rather than financing transactions. These transac-tions are accounted for as a purchase (sale) of the underlying securi-ties with a forward obligation to sell (purchase) the securities. Theforward purchase (sale) obligation, a derivative, is recorded on theConsolidated balance sheets at its fair value, with changes in fairvalue recorded in Principal transactions revenue.

Securities borrowed and securities lent are recorded at the amountof cash collateral advanced or received. Securities borrowed consistprimarily of government and equity securities. JPMorgan ChaseBank, N.A. monitors the market value of the securities borrowed andlent on a daily basis and calls for additional collateral when appro-priate. Fees received or paid are recorded in Interest income orInterest expense.


Securities purchased under resale agreements(a) $185,680 $ 160,896Securities borrowed 44,051 42,784

Securities sold under repurchase agreements(b) $ 90,756 $ 137,918Securities loaned 8,628 7,601

(a) Included resale agreements of $18.1 billion accounted for at fair value at December 31, 2007.

(b) Included repurchase agreements of $5.8 billion accounted for at fair value atDecember 31, 2007.

JPMorgan Chase Bank, N.A. pledges certain financial instruments itowns to collateralize repurchase agreements and other securitiesfinancings. Pledged securities that can be sold or repledged by thesecured party are identified as financial instruments owned (pledged tovarious parties) on the Consolidated balance sheets.

At December 31, 2007, JPMorgan Chase Bank, N.A. had receivedsecurities as collateral that could be repledged, delivered or other-wise used with a fair value of approximately $275.2 billion. This col-lateral was generally obtained under resale or securities borrowingagreements. Of these securities, approximately $253.4 billion wererepledged, delivered or otherwise used, generally as collateral underrepurchase agreements, securities lending agreements or to covershort sales.


Note 15 – LoansThe accounting for a loan may differ based upon the type of loanand/or its use in an investing or trading strategy. The measurementframework for Loans in the consolidated financial statements is oneof the following:

• At the principal amount outstanding, net of the Allowance forloan losses, unearned income and any net deferred loan fees forloans held-for-investment;

• At the lower of cost or fair value, with valuation changes recordedin Noninterest revenue for loans that are classified as held-for-sale; or

• At fair value, with changes in fair value recorded in Noninterestrevenue for loans classified as Trading assets or risk managed on afair value basis.

See Note 6 on pages 19–21 of these consolidated financial state-ments for further information on JPMorgan Chase Bank, N.A.’s elec-tions of fair value accounting under SFAS 159. See Note 7 on page22 of these consolidated financial statements for further informationon loans carried at fair value and classified as trading assets.

Interest income is recognized using the interest method, or on a basis approximating a level rate of return over the term of the loan.

Loans within the held-for-investment portfolio that managementdecides to sell are transferred to the held-for-sale portfolio. Transfersto held-for-sale are recorded at the lower of cost or fair value on thedate of transfer. Losses attributed to credit losses are charged off tothe Allowance for loan losses and losses due to changes in interestrates, or exchange rates, are recognized in Noninterest revenue.

Nonaccrual loans are those on which the accrual of interest is dis-continued. Loans (other than certain consumer loans discussedbelow) are placed on nonaccrual status immediately if, in the opinionof management, full payment of principal or interest is in doubt, orwhen principal or interest is 90 days or more past due and collateral,if any, is insufficient to cover principal and interest. Interest accruedbut not collected at the date a loan is placed on nonaccrual status isreversed against Interest income. In addition, the amortization of netdeferred loan fees is suspended. Interest income on nonaccrual loansis recognized only to the extent it is received in cash. However, wherethere is doubt regarding the ultimate collectibility of loan principal, allcash thereafter received is applied to reduce the carrying value ofsuch loans. Loans are restored to accrual status only when interestand principal payments are brought current and future payments arereasonably assured. Loans are charged off to the Allowance for loanlosses when it is highly certain that a loss has been realized.

Consumer loans are generally charged to the Allowance for loanlosses upon reaching specified stages of delinquency, in accordancewith the Federal Financial Institutions Examination Council policy. Forexample, credit card loans are charged off by the end of the month inwhich the account becomes 180 days past due or within 60 daysfrom receiving notification of the filing of bankruptcy, whichever isearlier. Residential mortgage products are generally charged off tonet realizable value at no later than180 days past due. Other con-sumer products, if collateralized, are generally charged off to netrealizable value at 120 days past due. Accrued interest on residentialmortgage products, automobile financings, education financings and

certain other consumer loans are accounted for in accordance with thenonaccrual loan policy discussed in the preceding paragraph. Interestand fees related to credit card loans continue to accrue until the loanis charged off or paid in full. Accrued interest on all other consumerloans is generally reversed against Interest income when the loan ischarged off. A collateralized loan is considered an in-substance fore-closure and is reclassified to assets acquired in loan satisfactions,within Other assets, only when JPMorgan Chase Bank, N.A. has takenphysical possession of the collateral, regardless of whether formalforeclosure proceedings have taken place.

The composition of the loan portfolio at each of the dates indi-cated was as follows.


U.S. wholesale loans:Commercial and industrial $ 94,558 $ 75,664Real estate 13,292 14,153Financial institutions 14,531 14,183Lease financing 1,696 1,989Other 5,405 9,935

Total U.S. wholesale loans 129,482 115,924

Non-U.S. wholesale loans:Commercial and industrial 58,541 42,007Real estate 2,109 1,146Financial institutions 17,205 19,191Lease financing 581 601Other 136 145

Total non-U.S. wholesale loans 78,572 63,090

Total wholesale loans:Commercial and industrial 153,099 117,671Real estate(a) 15,401 15,299Financial institutions 31,736 33,374Lease financing 2,277 2,590Other 5,541 10,080

Total wholesale loans 208,054 179,014

Total consumer loans:Home equity 94,832 85,730Mortgage 55,912 59,114Auto loans and leases 42,349 38,648Credit card(b) 31,824 32,264Other 28,691 27,063

Total consumer loans 253,608 242,819

Total loans(c)(d) $461,662 $ 421,833

Memo:Loans held-for-sale $ 18,561 $ 53,680Loans at fair value 8,156 —

Total loans held-for-saleand loans at fair value $ 26,717 $ 53,680

(a) Represents credits extended for real estate–related purposes to borrowers who areprimarily in the real estate development or investment businesses and for which theprimary repayment is from the sale, lease, management, operations or refinancing ofthe property.

(b) Includes billed finance charges and fees net of an allowance for uncollectible amounts.(c) Loans (other than those for which the SFAS 159 fair value option has been elected) are

presented net of deferred loan costs (which includes unearned income) of $199 millionand $119 million at December 31, 2007 and 2006, respectively.

(d) As a result of the adoption of SFAS 159, certain loans are accounted for at fair valueand reported in Trading assets and therefore, such loans are no longer included inloans at December 31, 2007.



The following table reflects information about JPMorgan ChaseBank, N.A.’s loan sales.

Year ended December 31, (in millions) 2007 2006(b) 2005(b)

Net gains/(losses) on sales of loans (includinglower of cost or fair value adjustments)(a) $ (81) $ 631 $ 438

(a) Excludes sales related to loans accounted for at fair value.(b) Prior periods have been revised to reflect the current presentation.

Impaired loansJPMorgan Chase Bank, N.A. accounts for and discloses nonaccrualloans as impaired loans and recognizes their interest income as dis-cussed previously for nonaccrual loans. The following are excludedfrom impaired loans: small-balance, homogeneous consumer loans;loans carried at fair value or the lower of cost or fair value; debtsecurities; and leases.

The table below sets forth information about JPMorgan Chase Bank,N.A.’s impaired loans. JPMorgan Chase Bank, N.A. primarily uses thediscounted cash flow method for valuing impaired loans.


Impaired loans with an allowance $ 782 $ 622Impaired loans without an allowance(a) 28 66

Total impaired loans $ 810 $ 688Allowance for impaired loans under SFAS 114(b) 224 153

(a) When the discounted cash flows, collateral value or market price equals or exceedsthe carrying value of the loan, then the loan does not require an allowance underSFAS 114.

(b) The allowance for impaired loans under SFAS 114 is included in JPMorgan ChaseBank, N. A.’s Allowance for loan losses.


Average balance of impaired loans during the period $ 644 $ 989 $ 1,473

Interest income recognized on impaired loans during the period — 2 5

Note 16 – Allowance for credit lossesJPMorgan Chase Bank, N.A.’s Allowance for loan losses covers thewholesale (risk-rated) and consumer (scored) loan portfolios and rep-resents management’s estimate of probable credit losses inherent inJPMorgan Chase Bank, N.A.’s loan portfolio. Management also com-putes an allowance for wholesale lending-related commitments using amethodology similar to that used for the wholesale loans.

The Allowance for loan losses includes an asset-specific componentand a formula-based component. The asset-specific component relatesto provisions for losses on loans considered impaired and measuredpursuant to SFAS 114. An allowance is established when the discount-ed cash flows (or collateral value or observable market price) of theloan is lower than the carrying value of that loan. To compute theasset-specific component of the allowance, larger impaired loans areevaluated individually, and smaller impaired loans are evaluated as apool using historical loss experience for the respective class of assets.

The formula-based component covers performing wholesale and consumer loans. It is based on a statistical calculation, which is adjustedto take into consideration model imprecision, external factors and cur-rent economic events that have occurred but are not yet reflected in thefactors used to derive the statistical calculation. The statistical calculationis the product of probability of default (“PD”) and loss given default(“LGD”). For risk-rated loans (generally loans originated by the whole-sale lines of business), these factors are differentiated by risk rating andmaturity. PD estimates are based on observable external data, primarilycredit-rating agency default statistics. LGD estimates are based on astudy of actual credit losses over more than one credit cycle. For scoredloans (generally loans originated by the consumer business), loss is pri-marily determined by applying statistical loss factors and other risk indi-cators to pools of loans by asset type.

Management applies its judgment within estimated ranges to adjustthe statistical calculation. Where adjustments are made to the statisticalcalculation for the risk-rated portfolios, the estimated ranges and thedetermination of the appropriate point within the range are based uponmanagement’s view of the quality of underwriting standards, relevantinternal factors affecting the credit quality of the current portfolio andexternal factors such as current macroeconomic and political conditionsthat have occurred but are not yet reflected in the loss factors. Factorsrelated to concentrated and deteriorating industries are also incorporat-ed into the calculation where relevant. Adjustments to the statisticalcalculation for the scored loan portfolios are accomplished in part byanalyzing the historical loss experience for each major product segment.The estimated ranges and the determination of the appropriate pointwithin the range are based upon management’s view of uncertaintiesthat relate to current macroeconomic and political conditions, the quali-ty of underwriting standards, and other relevant internal and externalfactors affecting the credit quality of the portfolio.

The Allowance for lending-related commitments represents manage-ment’s estimate of probable credit losses inherent in JPMorgan ChaseBank, N.A.’s process of extending credit. Management establishes anasset-specific allowance for lending-related commitments that are con-sidered impaired and computes a formula-based allowance for perform-ing wholesale lending-related commitments. These are computed usinga 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 ChiefRisk Officer, the Chief Financial Officer and the Controller of JPMorganChase & Co. and discussed with the Risk Policy and Audit Committees ofthe Board of Directors of JPMorgan Chase & Co. As of December 31,2007, JPMorgan Chase Bank, N.A. deemed the allowance for credit loss-es to be appropriate (i.e., sufficient to absorb losses that are inherent inthe portfolio, including those not yet identifiable).


The table below summarizes the changes in the Allowance for loan losses.


Allowance for loan losses at January 1 $ 5,170 $ 4,857 $ 5,313

Cumulative effect of change inaccounting principles(a) (56) — —

Allowance for loan losses at January 1, adjusted 5,114 4,857 5,313

Gross charge-offs (2,956) (2,025) (2,366)Gross recoveries 487 565 714

Net charge-offs (2,469) (1,460) (1,652)

Provision for loan losses 4,346 1,690 1,193Other(b) 24 83 3

Allowance for loan losses at December 31 $ 7,015 $ 5,170 $ 4,857

Components:Asset-specific(c) $ 188 $ 118 $ 247Formula-based(c) 6,827 5,052 4,610

Total Allowance for loan losses $ 7,015 $ 5,170 $ 4,857

(a) Reflects the effect of the adoption of SFAS 159 at January 1, 2007. For a further discussion of SFAS 159, see Note 6 on pages 19–21 of these consolidated financial statements.

(b) 2006 amount primarily relates to loans acquired in the Bank of New York transaction.(c) Prior periods have been revised to reflect current presentation.

The table below summarizes the changes in the Allowance for lend-ing-related commitments.


Allowance for lending-related commitments at January 1 $ 523 $ 397 $ 491

Provision for lending-related commitments 326 119 (92)Other(a) — 7 (2)

Allowance for lending-related commitments at December 31 $ 849 $ 523 $ 397

Components:Asset-specific $ 28 $ 33 $ 60Formula-based 821 490 337

Total Allowance for lending-related commitments $ 849 $ 523 $ 397

(a) 2006 amount relates to the Bank of New York transaction.

Note 17 – Loan securitizations JPMorgan Chase Bank, N.A. securitizes and sells a variety of its consumerand wholesale loans, including warehouse loans that are classified inTrading assets. Consumer activities include securitizations of residential realestate, credit card, automobile and education loans that are originated orpurchased by JPMorgan Chase Bank, N.A.’s retail and credit card businesses.Wholesale activities include securitizations of purchased residential realestate loans and commercial loans (primarily real estate–related) originatedby the investment banking business.

JPMorgan Chase Bank, N.A.–sponsored securitizations utilize SPEs aspart of the securitization process. These SPEs are structured to meetthe definition of a QSPE (as discussed in Note 1 on page 6 of theseconsolidated financial statements); accordingly, the assets and liabili-ties of securitization-related QSPEs are not reflected in JPMorganChase Bank, N.A.’s Consolidated balance sheets (except for retainedinterests, as described below) but are included on the balance sheetof the QSPE purchasing the assets. The primary purpose of these vehi-cles is to meet investor needs and to generate liquidity for JPMorganChase Bank, N.A. through the sale of loans to the QSPEs. Assets heldby JPMorgan Chase Bank, N.A.-sponsored securitization-related QSPEsas of December 31, 2007 and 2006, were as follows.


Consumer activitiesCredit card(a) $ 37.6 $ 35.3Auto(a) 1.8 3.8Residential mortgage:

Prime(b) 51.1 34.3Subprime 10.6 6.4

Education loans 1.1 —Wholesale activities

Residential mortgage:Prime(b) 20.5 17.2Subprime 13.1 25.7

Commercial and other(c)(d) 108.8 87.1

Total $ 244.6 $ 209.8

(a) For credit card receivables and automobile loans, the amounts reflected represent thepercentage of JPMorgan Chase Bank, N.A.’s sponsorship of the total assets held bythe QSPEs.

(b) Includes Alt-A loans.(c) Cosponsored securitizations include non-JPMorgan Chase Bank, N.A. originated

assets.(d) Commercial and other consists of commercial loans (primarily real estate) and

non-mortgage consumer receivables purchased from third parties.

2007, 2006 and 2005 Securitization activityThe following tables summarize new securitization transactions that were completed during 2007, 2006 and 2005; the resulting gains arising fromsuch securitizations; certain cash flows received from such securitizations; and the key economic assumptions used in measuring the retained interests(if any) other than residential MSRs (for a discussion of residential MSRs, see Note 19 on pages 54–57 of these consolidated financial statements), asof the dates of such sales.

Year ended December 31, 2007 Consumer activities Wholesale activities

(in millions, except rates and where Residential mortgage Education Residential mortgage Commercialotherwise noted) Credit card Auto Prime(c) Subprime loans Prime(c) Subprime and other

Principal securitized $ 8,464 $ — $ 22,778 $ 6,150 $ 1,168 $ 9,306 $ 613 $ 12,797Pretax gains 71 — 26(d) 43 51 2(d) —(d) —(d)

Cash flow information:Proceeds from securitizations $ 8,464 $ — $ 22,572 $ 6,236 $ 1,168 $ 9,346 $ 608 $ 13,038Servicing fees collected 72 — 36 17 2 — — 7Other cash flows received 374 — — — — — — — Proceeds from collections reinvested

in revolving securitizations 59,970 — — — — — — —

Key assumptions (rates per annum):Prepayment rate(a) 20.4% 14.8-24.2% 1.0-8.0% 1.5-8.0%

PPR CPR CPR CPR

Weighted-average life (in years) 0.4 3.2-4.0 9.3 1.3-10.2Expected credit losses 3.5-3.9% —%(e) —%(e) 0.9%Discount rate 12.0% 5.8-13.8% 9.0% 12.0-14.0%



JPMorgan Chase Bank, N.A. records a loan securitization as a salewhen the accounting criteria for a sale are met. Those criteria are: (1)the transferred assets are legally isolated from JPMorgan Chase Bank,N.A.’s creditors; (2) the entity can pledge or exchange the financialassets or, if the entity is a QSPE, its investors can pledge or exchangetheir interests; and (3) JPMorgan Chase Bank, N.A. does not maintaineffective control to repurchase the transferred assets before theirmaturity or have the ability to unilaterally cause the holder to returnthe transferred assets.

For loan securitizations that meet the accounting sales criteria, thegains or losses recorded depend, in part, on the carrying amount ofthe loans sold and are allocated between the loans sold and theretained interests, based upon their relative fair values at the date ofsale. Gains on securitizations are reported in Noninterest revenue.When quoted market prices for the retained interests are not avail-able, JPMorgan Chase Bank, N.A. estimates the fair value for theseretained interests by determining the present value of future expectedcash flows using modeling techniques. Such models incorporate man-agement’s best estimates of key variables, such as expected creditlosses, prepayment speeds and the discount rates appropriate for therisks involved.

Interests in the securitized loans may be retained by JPMorgan ChaseBank, N.A. in the form of senior or subordinated interest-only strips,senior and subordinated tranches and escrow accounts. The classifi-cation of retained interests is dependent upon several factors, includ-

ing the type of interest (e.g., whether the retained interest is repre-sented by a security certificate) and when it was retained, due to theadoption of SFAS 155. JPMorgan Chase Bank, N.A. has elected tofair value all interests in securitized loans retained after December31, 2005, that have an embedded derivative required to be bifurcat-ed under SFAS 155; these retained interests are classified primarilyas Trading assets. Retained interests related to wholesale securitiza-tion activities are classified as Trading assets. Prior to the adoption ofSFAS 155, for consumer activities, senior and subordinated retainedinterests represented by a security certificate were classified as AFS;retained interests not represented by a security certificate were clas-sified in Other assets.

For those retained interests that are subject to prepayment risk (suchthat JPMorgan Chase Bank, N.A. may not recover substantially all ofits investment) but are not required to be bifurcated under SFAS 155,the retained interests are recorded at fair value; subsequent adjust-ments are reflected in earnings or in Other comprehensive income(loss). Retained interests classified as AFS are subject to the impair-ment provisions of EITF 99-20.

Credit card securitization trusts require JPMorgan Chase Bank, N.A. tomaintain a minimum undivided interest in the trusts, representingJPMorgan Chase Bank, N.A.’s interests in the receivables transferred tothe trust that have not been securitized. These seller’s interests are notrepresented by security certificates. JPMorgan Chase Bank, N.A.’s undi-vided interests are carried at historical cost and are classified in Loans.



Principal securitized $ 3,894 $ 2,027 $ 14,179 $ 2,624 $ — $ 16,075 $ 14,735 $ 13,858Pretax gains 27 2 42 43 — 11 150 129Cash flow information:Proceeds from securitizations $ 3,894 $ 1,487 $ 14,102 $ 2,652 $ — $ 16,100 $ 14,983 $ 14,343Servicing fees collected 35 2 16 2 — — — 1Other cash flows received 160 — — — — — — — Proceeds from collections reinvested


Key assumptions (rates per annum):Prepayment rate(a) 20.0–22.2% 1.4-1.5% 18.2-24.6% 0.0–36.2%

PPR ABS CPR CPR

Weighted-average life (in years) 0.4 1.4–1.9 3.0-3.6 1.5–6.1Expected credit losses 3.3–4.2% 0.3–0.7% —%(e) 0.0–0.9%(e)

Discount rate 12.0% 7.6–7.8% 8.4-12.7% 3.8–14.0%



Principal securitized $ 6,058 $ 2,445 $ 18,125 $ — $ — $ 5,447 $ 5,952 $ 11,118Pretax gains (losses) 46 8(b) 21 — — 3 (14) 109Cash flow information:Proceeds from securitizations $ 6,058 $ 1,704 $ 18,093 $ — $ — $ 5,434 $ 6,060 $ 11,211Servicing fees collected 37 2 17 — — — — —Other cash flows received 119 — — — — — — 3 Proceeds from collections reinvested


Key assumptions (rates per annum):Prepayment rate(a) 16.7–20.0% 1.5% 9.1-12.1% 0.0–50.0%

PPR ABS CPR CPR

Weighted-average life (in years) 0.4–0.5 1.4–1.5 5.6-6.7 1.0–4.4Expected credit losses 4.7–5.7% 0.6–0.7% —%(e) —%(e)

Discount rate 12.0% 6.3–7.3% 13.0-13.3% 0.6–0.9%

(a) PPR: principal payment rate; ABS: absolute prepayment speed; CPR: constant prepayment rate.(b) The auto securitization gain of $8 million does not include the write-down of loans transferred to held-for-sale in 2005 and risk management activities intended to protect the

economic value of the loans while held-for-sale.(c) Includes Alt-A loans.(d) As of January 1, 2007, JPMorgan Chase Bank, N.A. adopted the fair value election for the investment banking business warehouse and a portion of the retail business mortgage ware-

house. The carrying value of these loans accounted for at fair value approximates the proceeds received from securitization.(e) Expected credit losses for prime residential mortgage, education and certain wholesale securitizations are minimal and are incorporated into other assumptions.



In addition to the amounts reported for securitization activity in thepreceding table, JPMorgan Chase Bank, N.A. sold residential mort-gage loans totaling $81.8 billion, $53.7 billion and $52.5 billion dur-ing 2007, 2006 and 2005, respectively, primarily for securitization bythe Government National Mortgage Association (“GNMA”), FederalNational Mortgage Association (“FNMA”) and Federal Home LoanMortgage Corporation (“Freddie Mac”); these sales resulted in pretaxgains of $47 million, $251 million and $293 million, respectively.

Retained servicingJPMorgan Chase Bank, N. A. retains servicing responsibilities for alloriginated and for certain purchased residential mortgage, creditcard and automobile loan securitizations and for certain commercialactivity securitizations it sponsors, and receives servicing fees basedupon the securitized loan balance plus certain ancillary fees.JPMorgan Chase Bank, N.A. also retains the right to service the resi-dential mortgage loans it sells to GNMA, FNMA and Freddie Mac.For a discussion of mortgage servicing rights, see Note 19 on pages54–57 of these consolidated financial statements.

JPMorgan Chase Bank, N.A. provides mortgage servicing on arecourse and nonrecourse basis. In nonrecourse servicing, the princi-pal credit risk to JPMorgan Chase Bank, N.A. is the cost of temporaryservicing advances of funds (i.e., normal servicing advances). Inrecourse servicing, the servicer agrees to share credit risk with theowner of the mortgage loans such as FNMA or Freddie Mac or with aprivate investor, insurer or guarantor. Losses on recourse servicingoccur primarily when foreclosure sale proceeds of the property under-lying a defaulted mortgage are less than the outstanding principalbalance and accrued interest of the loan and the cost of holding anddisposing of the underlying property. JPMorgan Chase Bank, N.A.’smortgage loan securitizations are primarily nonrecourse, therebyeffectively transferring the risk of future credit losses to the purchaserof the securities issued by the trust. As of December 31, 2007 and2006, the amount of recourse obligations totaled $557 million and$649 million, respectively.

Retained securitizations interestAt both December 31, 2007 and 2006, JPMorgan Chase Bank,N.A. had, with respect to its credit card master trusts, $7.7 billionand $8.2 billion, respectively, related to undivided interests, and$1.1 billion and $1.0 billion, respectively, related to subordinatedinterests in accrued interest and fees on the securitized receivables,net of an allowance for uncollectible amounts. Credit card securiti-zation trusts require JPMorgan Chase Bank, N.A. to maintain aminimum undivided interest of 4% to 12% of the principal receiv-ables in the trusts. JPMorgan Chase Bank, N.A. maintained anaverage undivided interest in principal receivables in the trusts ofapproximately 20% for 2007 and 22% for 2006. JPMorgan ChaseBank, N.A. also maintains escrow accounts up to predeterminedlimits for some credit card, automobile and education securitiza-tions to cover the unlikely event of deficiencies in cash flows owedto investors. The amounts available in such escrow accounts arerecorded in Other assets and, as of December 31, 2007, amountedto $46 million, $14 million and $3 million for credit card, automo-bile and education securitizations, respectively; as of December 31,2006, these amounts were $68 million and $44 million for creditcard and automobile securitizations, respectively.

The following table summarizes other retained securitization inter-ests, which are primarily subordinated or residual interests, and arecarried at fair value on JPMorgan Chase Bank, N.A.’s Consolidatedbalance sheets.


Consumer activitiesCredit card(a) $ 253 $ 221Auto(a)(b) 66 128Residential mortgage(a):

Prime(c) 67 36Education loans 55 —

Wholesale activitiesCommercial and other 8 6

Total $ 449 $ 391

(a) Pretax unrealized gains/(losses) recorded in Stockholder’s equity that relate to retainedsecuritization interests on consumer activities totaled $1 million and $1 million forcredit card; $2 million and $3 million for automobile and $2 million and $2 millionfor residential mortgage at December 31, 2007 and 2006, respectively.

(b) In addition to these auto retained interests, JPMorgan Chase Bank, N.A. had $167million of senior securities at December 31, 2006, that were classified as AFS securi-ties. These securities were valued using quoted market prices and therefore were not included in the key economic assumption and sensitivities table that follows.JPMorgan Chase Bank, N.A. did not have any such securities at December 31, 2007.

(c) Includes Alt-A loans.


The table below outlines the key economic assumptions used to determine the fair value of JPMorgan Chase Bank, N.A.’s retained interests otherthan residential MSRs (for a discussion of residential MSRs, see Note 19 on pages 54–57 of these consolidated financial statements) in its securiti-zations at December 31, 2007 and 2006, respectively; and it outlines the sensitivities of those fair values to immediate 10% and 20% adversechanges in those assumptions.

December 31, 2007 Consumer activities Wholesale activities

(in millions, except rates and where Residential mortgage Education Commercial

otherwise noted) Credit card Auto Prime(c) loans and other

Weighted-average life (in years) 0.4–0.5 0.9 3.7 8.8 0.9–3.7

Prepayment rate(a) 15.6-18.9% 1.4% 21.1% 1.0–8.0% 0.0–1.5%(d)

PPR ABS CPR CPR CPRImpact of 10% adverse change $ (25) $ (1) $ (8) $ (1) $ —Impact of 20% adverse change (50) (1) (13) (2) —

Loss assumption 3.3-4.6% 0.6% —%(b) —%(b) 0.0–0.9%(b)

Impact of 10% adverse change $ (47) $ (1) $ — $ — $ —Impact of 20% adverse change (94) (2) — — —

Discount rate 12.0% 6.8% 12.2% 9.0% 5.2–14.0%Impact of 10% adverse change $ (1) $ — $ (5) $ (3) $ —Impact of 20% adverse change (2) (1) (10) (5) —

December 31, 2006 Consumer activities Wholesale activities

(in millions, except rates and where Residential mortgage Education Commercial

otherwise noted) Credit card Auto Prime(c) loans and other

Weighted-average life (in years) 0.4–0.5 1.1 3.4 — 3.8

Prepayment rate(a) 17.5–20.4% 1.4% 19.3% — —%(d)

PPR ABS CPR CPRImpact of 10% adverse change $ (22) $ (1) $ (3) $ — $ —Impact of 20% adverse change (43) (2) (5) — —

Loss assumption 3.5–4.1% 0.7% —%(b) — —%(b)

Impact of 10% adverse change $ (35) $ (3) $ — $ — $ —Impact of 20% adverse change (70) (5) — — —

Discount rate 12.0% 7.6% 8.4% — 4.7%Impact of 10% adverse change $ (1) $ (1) $ (2) $ — $ —Impact of 20% adverse change (1) (2) (3) — —

(a) PPR: principal payment rate; ABS: absolute prepayment speed; CPR: constant prepayment rate.(b) Expected credit losses for prime residential mortgage, education loans and certain wholesale securitizations are minimal and are incorporated into other assumptions.(c) Includes Alt-A loans.(d) Prepayment risk on certain wholesale retained interests for commercial and other are minimal and are incorporated into other assumptions.


The sensitivity analysis in the preceding table is hypothetical.Changes in fair value based upon a 10% or 20% variation inassumptions generally cannot be extrapolated easily because therelationship of the change in the assumptions to the change in fairvalue may not be linear. Also, in the table, the effect that a change ina particular assumption may have on the fair value is calculatedwithout changing any other assumption. In reality, changes in onefactor may result in changes in another, which might counteract ormagnify the sensitivities.

Expected static-pool net credit losses include actual incurred losses plusprojected net credit losses, divided by the original balance of the out-standings comprising the securitization pool. The table below displays theexpected static-pool net credit losses for 2007, 2006 and 2005, basedupon auto securitizations occurring in that year.

Loans securitized in:(a)

Auto 2007 2006 2005

December 31, 2007 NA 0.7% 0.5%December 31, 2006 NA 0.6 0.7December 31, 2005 NA NA 0.9

(a) Static-pool losses are not applicable to credit card securitizations due to their revolvingnature. Expected losses for prime residential mortgage and education loans securitiza-tions are minimal for consumer activities and do not have a material impact onJPMorgan Chase Bank, N.A.’s retained interests.



The table below presents information about delinquencies, net charge-offs (recoveries) and components of reported and securitized financial assets atDecember 31, 2007 and 2006 (see footnote (c) below).

Nonaccrual and 90 days or Net loan charge-offsTotal Loans more past due(e) (recoveries) Year ended

December 31, (in millions) 2007 2006 2007 2006 2007 2006

Home Equity $ 94,832 $ 85,730 $ 810 $ 423 $ 563 $ 143Mortgage 55,912 59,114 1,789 769 187 52Auto loans and leases 42,349 38,648 116 118 353 226Credit card 31,824 32,264 564 488 1,094 918All other loans 28,691 27,063 341 322 242 139

Total consumer loans 253,608 242,819 3,620(f) 2,120(f) 2,439 1,478Total wholesale loans 208,054 179,014 584 418 30 (18)

Total loans reported 461,662 421,833 4,204 2,538 2,469 1,460

Securitized consumer loans:Residential mortgage:

Prime(a) 8,781 4,180 64 1 — 1Subprime — — — — — —

Automobile 1,739 3,706 5 7 9 11Credit card 29,312 26,977 422 386 958 894Other loans 1,141 — — — — —

Total consumer loans securitized 40,973 34,863 491 394 967 906

Securitized wholesale activitiesResidential mortgage:

Prime(a) 8,791 11,619 419 63 2 —Subprime 12,156 14,747 2,710 481 361 13

Commercial and other 2,662 13,756 — 6 11 3

Total securitized wholesale activities 23,609 40,122 3,129 550 374 16

Total loans securitized(b) 64,582 74,985 3,620 944 1,341 922

Total loans reported and securitized(c) $ 526,244(d) $ 496,818 $ 7,824 $ 3,482 $ 3,810 $ 2,382

(a) Includes Alt-A loans.(b) Total assets held in securitization-related SPEs were $244.6 billion and $209.8 billion at December 31, 2007 and 2006, respectively. The $64.6 billion and $75.0 billion of loans securitized

at December 31, 2007 and 2006, respectively, excludes $171.6 billion and $126.3 billion of securitized loans, in which JPMorgan Chase Bank, N.A.’s only continuing involvement is theservicing of the assets; $7.7 billion and $8.2 billion of seller’s interests in credit card master trusts; and $753 million and $157 million of escrow accounts and other assets, respectively.

(c) Represents both loans on the Consolidated balance sheets and loans that have been securitized, but excludes loans for which JPMorgan Chase Bank, N.A.’s only continuing involvement isservicing of the assets.

(d) Includes securitized loans that were previously recorded at fair value and classified as Trading assets.(e) Includes nonperforming loans held-for-sale of $45 million and $120 million at December 31, 2007 and 2006, respectively.(f) Excludes nonperforming assets related to (i) loans eligible for repurchase as well as loans repurchased from GNMA pools that are insured by U.S. government agencies of $1.5 billion

and $1.2 billion at December 31, 2007 and 2006, respectively, and (ii) education loans that are 90 days past due and still accruing, which are insured by U.S. government agenciesunder the Federal Family Education Loan Program of $279 million and $219 million at December 31, 2007 and 2006, respectively. These amounts for GNMA and education loans areexcluded, as reimbursement is proceeding normally.


Subprime adjustable-rate mortgage loan modificationsSee the Glossary of Terms on page 77 of these consolidated financialstatements for JPMorgan Chase Bank, N.A.’s definition of subprimeloans. Within the confines of the limited decision-making abilities ofa QSPE under SFAS 140, the operating documents that govern exist-ing subprime securitizations generally authorize the servicer to modifyloans for which default is reasonably foreseeable, provided that themodification is in the best interests of the QSPE’s beneficial interestholders, and would not result in a REMIC violation.

In December 2007, the American Securitization Forum (“ASF”) issuedthe “Streamlined Foreclosure and Loss Avoidance Framework forSecuritized Subprime Adjustable Rate Mortgage Loans” (“theFramework”). The Framework provides guidance for servicers to stream-line evaluation procedures for borrowers with certain subprimeadjustable rate mortgage (“ARM”) loans to more efficiently providemodifications of such loans with terms that are more appropriate forthe individual needs of such borrowers. The Framework applies to allfirst-lien subprime ARM loans that have a fixed rate of interest for aninitial period of 36 months or less, are included in securitized pools,were originated between January 1, 2005, and July 31, 2007, and havean initial interest rate reset date between January 1, 2008, and July 31,2010 (“ASF Framework Loans”).

The Framework categorizes the population of ASF Framework Loansinto three segments. Segment 1 includes loans where the borrower iscurrent and is likely to be able to refinance into any available mortgageproduct. Segment 2 includes loans where the borrower is current, isunlikely to be able to refinance into any readily available mortgageindustry product and meets certain defined criteria. Segment 3 includesloans where the borrower is not current, as defined, and does not meetthe criteria for Segments 1 or 2.

ASF Framework Loans in Segment 2 of the Framework are eligible forfast-track modification under which the interest rate will be kept at theexisting initial rate, generally for five years following the interest ratereset date. The Framework indicates that for Segment 2 loans,JPMorgan Chase Bank, N.A., as servicer, may presume that the borrow-er will be unable to make payments pursuant to the original terms of theborrower’s loan after the initial interest rate reset date. Thus, JPMorganChase Bank, N.A. may presume that a default on that loan by the bor-

rower is reasonably foreseeable unless the terms of the loan are modi-fied. JPMorgan Chase Bank, N.A. has adopted the loss mitigationapproaches under the Framework for securitized subprime loans thatmeet the specific Segment 2 screening criteria, and it expects to beginmodifying Segment 2 loans by the end of the first quarter of 2008.JPMorgan Chase Bank, N.A. believes that the adoption of theFramework will not affect the off-balance sheet accounting treatment ofJPMorgan Chase Bank, N.A.-sponsored QSPEs that hold Segment 2subprime loans.

The total amount of assets owned by JPMorgan Chase Bank, N.A.-sponsored QSPEs that hold ASF Framework Loans (including those loansthat are not serviced by the JPMorgan Chase Bank, N.A.) as ofDecember 31, 2007, was $20.0 billion. Of this amount, $9.7 billionrelates to ASF Framework Loans serviced by JPMorgan Chase Bank,N.A. Based on current economic conditions, JPMorgan Chase Bank,N.A. estimates that approximately 20%, 10% and 70% of the ASFFramework Loans it services that are owned by JPMorgan Chase Bank,N.A.-sponsored QSPEs will fall within Segments 1, 2 and 3, respectively.This estimate could change substantially as a result of unanticipatedchanges in housing values, economic conditions, investor/borrowerbehavior and other factors.

The total principal amount of beneficial interests issued by JPMorganChase Bank, N.A.-sponsored securitizations that hold ASF FrameworkLoans as of December 31, 2007, was as follows.

December 31, 2007 (in millions) 2007

Third-party $ 19,636Retained interests held by JPMorgan Chase & Co.

and/or affiliates 412Retained interests held by JPMorgan Chase Bank, N.A. —

Total $ 20,048



Note 18 – Variable interest entitiesRefer to Note 1 on page 6 of these consolidated financial statementsfor a further description of JPMorgan Chase Bank, N. A.’s policiesregarding consolidation of variable interest entities.

JPMorgan Chase Bank, N. A.’s principal involvement with VIEs occursin the following manner:

• Investment banking business: Utilizes VIEs to assist clients inaccessing the financial markets in a cost-efficient manner. Theinvestment banking business is involved with VIEs through multi-seller conduits and for investor intermediation purposes as dis-cussed below. The investment banking business also securitizesloans through QSPEs, to create asset-backed securities, as furtherdiscussed in Note 17 on pages 39–45 of these consolidated finan-cial statements.

• Asset management business: Provides investment managementservices to a limited number of JPMorgan Chase Bank, N. A.’smutual funds deemed VIEs. JPMorgan Chase Bank, N. A. earns afixed fee based upon assets managed; the fee varies with eachfund’s investment objective and is competitively priced. For thelimited number of funds that qualify as VIEs, JPMorgan ChaseBank, N. A.’s relationships with such funds are not considered sig-nificant variable interests under FIN 46R.

• Treasury and securities services business: Provides services to anumber of VIEs which are similar to those provided to non-VIEs.JPMorgan Chase Bank, N. A. earns market-based fees for the serv-ices it provides. The relationships resulting from the services it pro-vides are not considered to be significant variable interests underFIN 46R.

• Commercial banking business: Utilizes VIEs to assist clients inaccessing the financial markets in a cost-efficient manner. This isoften accomplished through the use of products similar to thoseoffered in connection with JPMorgan Chase Bank, N. A.’s invest-ment banking business. JPMorgan Chase Bank, N. A.’s commercialbanking business may assist in the structuring and/or ongoingadministration of these VIEs and may provide liquidity, letters ofcredit and/or derivative instruments in support of the VIE. The rela-tionships resulting from JPMorgan Chase Bank, N. A.’s commercialbanking services are not considered to be significant variableinterests under FIN 46R.

As noted above, the investment banking business is primarilyinvolved with multi-seller conduits and VIEs associated with investorintermediation activities. A discussion of these VIEs follows:

Multi-seller conduitsFunding and liquidityJPMorgan Chase Bank, N. A. is an active participant in the asset-backed securities business, and it helps customers meet their financingneeds by providing access to the commercial paper markets throughVIEs known as multi-seller conduits. Multi-seller conduit entities areseparate bankruptcy-remote entities that purchase interests in, andmake loans secured by, pools of receivables and other financial assetspursuant to agreements with customers of JPMorgan Chase Bank, N. A.The conduits fund their purchases and loans through the issuance ofhighly rated commercial paper to third-party investors. The primarysource of repayment of the commercial paper is the cash flow fromthe pools of assets. In most instances, the assets are structured withdeal-specific credit enhancements provided by the customers (i.e.,sellers) to the conduits or other third parties. Deal-specific creditenhancements are generally structured to cover a multiple of histori-cal losses expected on the pool of assets, and are typically in theform of overcollateralization provided by the seller, but also mayinclude any combination of the following: recourse to the seller ororiginator, cash collateral accounts, letters of credit, excess spread,retention of subordinated interests or third-party guarantees. The deal-specific credit enhancements mitigate JPMorgan Chase Bank, N. A.’spotential losses on its agreements with the conduits.

JPMorgan Chase Bank, N. A. receives fees related to the structuring ofmulti-seller conduit transactions and receives compensation from themulti-seller conduits for its role as administrative agent, liquidityprovider, and provider of program-wide credit enhancement.

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. Deal-specific liquidityfacilities are the primary source of liquidity support for the conduits.The deal-specific liquidity facilities are typically in the form of assetpurchase agreements and are generally structured so that the liquiditythat will be provided by JPMorgan Chase Bank, N. A. as liquidityprovider will be effected by JPMorgan Chase Bank, N. A. purchasing,or lending against, a pool of nondefaulted, performing assets. In lim-ited circumstances JPMorgan Chase Bank, N. A. may provide uncon-ditional liquidity.

The conduit’s administrative agent can require the liquidity providerto perform under its asset purchase agreement with the conduit atany time. These agreements may cause the liquidity provider, includ-ing JPMorgan Chase Bank, N. A., to purchase an asset from the con-duit at an amount above the asset’s then current fair value – ineffect providing a guarantee of the initial value of the reference assetas of the date of the agreement.

JPMorgan Chase Bank, N. A. also provides the multi-seller conduitvehicles with program-wide liquidity facilities, in the form of uncom-mitted short-term revolving facilities that can be accessed by theconduits to handle funding increments too small to be funded bycommercial paper, and in the form of uncommitted liquidity facilitiesthat can be accessed by the conduits only in the event of short-termdisruptions in the commercial paper market.


Because the majority of the liquidity facilities will only fund nonde-faulted assets, program-wide credit enhancement is required toabsorb losses on defaulted receivables in excess of losses absorbedby deal-specific credit enhancement. Program-wide credit enhance-ment may be provided by JPMorgan Chase Bank, N.A. in the form ofstandby letters of credit or by a third-party surety bond provider. The

amount of program-wide credit enhancement required varies by con-duit and ranges between 5% and 10% of total assets.

The following table summarizes JPMorgan Chase Bank, N.A.’sinvolvement with JPMorgan Chase Bank, N.A.-administered multi-seller conduits.

Assets funded by the multi-seller conduitsJPMorgan Chase Bank, N.A.’s administered multi-seller conduits funda variety of asset types for JPMorgan Chase Bank, N.A.’s clients. Assettypes primarily include credit card receivables, auto loans and leases,trade receivables, education loans, commercial loans, residential mort-gages, capital commitments (e.g., loans to private equity, mezzanine

and real estate opportunity funds secured by capital commitments ofhighly rated institutional investors), and various other asset types. It isJPMorgan Chase Bank, N.A.’s intention that the assets funded by itsadministered multi-seller conduits be sourced only from JPMorganChase Bank, N.A.’s clients and not be originated by or transferredfrom JPMorgan Chase Bank, N.A.

Consolidated Nonconsolidated Total

December 31, (in billions) 2007 2006 2007 2006 2007 2006

Total assets held by conduits $ — $ 3.4 $ 61.2 $ 43.6 $ 61.2 $ 47.0

Total commercial paper issued by conduits — 3.4 62.6 44.1 62.6 47.5

Liquidity and credit enhancementsDeal-specific liquidity facilities (Asset purchase agreements) — 0.5 87.3 66.0 87.3 66.5Program-wide liquidity facilities — 1.0 13.2 4.0 13.2 5.0Program-wide limited credit enhancements — — 2.5 1.6 2.5 1.6

Maximum exposure to loss(a) — 1.0 88.9 67.0 88.9 68.0

(a) JPMorgan Chase Bank, N. A.’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 JPMorganChase Bank, N. A. provides liquidity support) of $61.2 billion and $43.9 billion at December 31, 2007 and 2006, respectively, plus contractual but undrawn commitments of $27.7 bil-lion and $24.1 billion at December 31, 2007 and 2006, respectively. Since JPMorgan Chase Bank, N. A. provides credit enhancement and liquidity to JPMorgan Chase Bank, N. A.-administered, multi-seller conduits, the maximum exposure is not adjusted to exclude exposure that would be absorbed by third-party liquidity providers.



Ratings profile of VIE assets(b) Wt. avg.December 31, 2006 Investment-grade Noninvestment-grade Funded expected(in billions) AAA to AAA- AA+ to AA- A+ to A- BBB to BBB- BB+ and below assets life (years)(c)

Asset types:Credit card $ 1.0 $ 9.1 $ 0.4 $ 0.1 $ — $ 10.6 1.1Automobile 1.1 6.8 0.3 — — 8.2 2.3Trade receivables 0.1 5.0 1.7 0.2 — 7.0 1.1Education loans 0.5 — 0.4 — — 0.9 1.0Commercial 0.7 2.2 0.9 — — 3.8 3.0Residential mortgage — 5.1 0.6 — — 5.7 0.9Capital commitments — 1.8 0.2 — — 2.0 3.0Other 2.0 3.1 0.1 0.2 — 5.4 2.0

Total $ 5.4 $ 33.1 $ 4.6 $ 0.5 $ — $ 43.6 1.7

(a) Unfunded commitments held by the conduits represent asset purchase agreements between the conduits and JPMorgan Chase Bank, N. A.(b) The ratings scale is presented on an S&P equivalent basis.(c) Weighted average expected life for each asset type is based upon the remainder of each conduit transaction’s committed liquidity plus the expected weighted average life of the assets

should the committed liquidity expire without renewal, or the expected time to sell the underlying assets in the securitization market.

Summary of exposure to JPMorgan Chase Bank, N. A.-administered nonconsolidated multi-seller conduits

2007 2006

December 31, Unfunded Funded Liquidity provided Total Unfunded Funded Liquidity provided Total(in billions) commitments(a) assets by third parties exposure commitments(a) assets by third parties exposure

Asset types:Credit card $ 3.3 $ 14.2 $ — $ 17.5 $ 3.8 $ 10.6 $ — $ 14.4Automobile 4.5 10.2 — 14.7 4.2 8.2 — 12.4Trade receivables 6.0 6.6 — 12.6 5.6 7.0 — 12.6Education loans 0.8 9.2 — 10.0 0.3 0.9 — 1.2Commercial 2.7 5.5 (0.4) 7.8 2.3 3.8 (0.5) 5.6Residential mortgage 4.6 3.1 — 7.7 4.1 5.7 — 9.8Capital commitments 2.0 5.1 (0.6) 6.5 0.8 2.0 (0.2) 2.6Other 3.8 7.3 (0.6) 10.5 2.3 5.4 (0.3) 7.4

Total $ 27.7 $ 61.2 $ (1.6) $ 87.3 $ 23.4 $ 43.6 $ (1.0) $ 66.0

Ratings profile of VIE assets(b) Wt. avg.December 31, 2007 Investment-grade Noninvestment-grade Funded expected(in billions) AAA to AAA- AA+ to AA- A+ to A- BBB to BBB- BB+ and below assets life (years)(c)

Asset types:Credit card $ 4.2 $ 9.4 $ 0.6 $ — $ — $ 14.2 1.5Automobile 1.8 6.9 1.4 — 0.1 10.2 2.3Trade receivables — 4.7 1.7 0.2 — 6.6 1.3Education loans 1.0 8.1 0.1 — — 9.2 0.5Commercial 0.5 4.2 0.7 0.1 — 5.5 2.6Residential mortgage 1.5 0.8 0.8 — — 3.1 1.5Capital commitments — 5.1 — — — 5.1 3.4Other 2.0 4.6 0.4 0.2 0.1 7.3 2.0

Total $ 11.0 $ 43.8 $ 5.7 $ 0.5 $ 0.2 $ 61.2 1.8

The following table presents information on the commitments and assets held by JPMorgan Chase Bank, N.A’s administered multi-seller conduitsas of December 31, 2007 and 2006.


The assets held by the multi-seller conduits are structured so that ifthe assets were rated, JPMorgan Chase Bank, N. A. believes themajority of them would receive an “A” rating or better by externalrating agencies. However, it is unusual for the assets held by the con-duits to be explicitly rated by an external rating agency. Instead,JPMorgan Chase Bank, N. A.’s Credit Risk group assigns each assetpurchase liquidity facility an internal risk-rating based on its assess-ment of the probability of default for the transaction. The ratings pro-vided in the above table reflect the S&P-equivalent ratings of theinternal rating grades assigned by JPMorgan Chase Bank, N. A.

The risk ratings are periodically reassessed as information becomesavailable. As a result of the deterioration in the credit markets duringthe second half of 2007, a number of asset purchase liquidity facili-ties had internal ratings downgrades. These downgrades involvedfacilities across various asset types. The largest concentration ofdowngrades related to residential mortgage and education loanexposures. As of December 31, 2007, 99% of the assets in the con-duits were risk rated “A-” or better.

Commercial paper issued by the multi-seller conduitsThe weighted average life of commercial paper issued by the multi-seller conduits was 51 days in 2007, compared with 36 days in2006, and the average yield on the commercial paper was 5.3% in2007, compared with 5.0% in 2006.

In the second half of 2007, the asset-backed commercial paper marketwas challenging as investors were concerned about potential subprimemortgage exposures. These concerns negatively affected the ability ofmany VIEs to reissue maturing commercial paper. However, investorshave continued to purchase the commercial paper issued byJPMorgan Chase Bank, N. A.-administered multi-seller conduits,although at higher yields and shorter maturities. Commercial paperspreads widened most significantly in December 2007, reflectingcommercial paper investors’ concerns about year-end redemptionsand their need to have cash available.

In the normal course of business, JPMorgan Chase Bank, N. A. tradesand invests in commercial paper, including commercial paper issuedby JPMorgan Chase Bank, N. A.-administered conduits. The percent-age of commercial paper purchased by JPMorgan Chase Bank, N. A.across all JPMorgan Chase Bank, N. A.-administered conduits during2007 ranged from less than 1% to approximately 9% on any givenday. The largest daily amount held by JPMorgan Chase Bank, N. A. inany one multi-seller conduit during 2007 was approximately $2.2 bil-lion, or 13%, of the conduit’s commercial paper outstanding.JPMorgan Chase Bank, N. A. did not hold any commercial paperissued by JPMorgan Chase Bank, N. A.-administered conduits atDecember 31, 2007 and 2006, respectively. JPMorgan Chase Bank,N. A. is not obligated under any agreement (contractual or noncon-tractual) to purchase the commercial paper issued by JPMorganChase Bank, N. A.-administered conduits.

Significant 2007 activityIn July 2007, a reverse repurchase agreement collateralized by prime residential mortgages held by a JPMorgan Chase Bank, N. A.-adminis-tered multi-seller conduit was put to JPMorgan Chase Bank, N. A.under its deal-specific liquidity facility. The asset was transferred to and

recorded by JPMorgan Chase Bank, N. A. at its par value based on thefair value of the collateral that supported the reverse repurchase agree-ment. During the fourth quarter of 2007, additional informationregarding the value of the collateral, including performance statistics,resulted in the determination by JPMorgan Chase Bank, N. A. that thefair value of the collateral was impaired. Impairment losses will be allo-cated to the expected loss note (“ELN”) holder (the party that absorbsthe majority of the expected loss from the conduit) in accordance withthe contractual provisions of the ELN note.

On October 29, 2007, certain structured CDO assets originated inthe second quarter of 2007 and backed by subprime mortgages weretransferred to JPMorgan Chase Bank, N. A. from two JPMorganChase Bank, N. A.-administered multi-seller conduits. It became clearin October that commercial paper investors and rating agencies werebecoming increasingly concerned about CDO assets backed by sub-prime mortgage exposures. Because of these concerns, and to ensurethe continuing viability of the two conduits as financing vehicles forclients and as investment alternatives for commercial paper investors,JPMorgan Chase Bank, N. A., in its role as administrator, transferredthe CDO assets out of the multi-seller conduits. The structured CDOassets were transferred to JPMorgan Chase Bank, N. A. at their parvalue of $1.4 billion. Prior to year end these assets were transferredto a nonbank affiliate at their fair value of $291 million. As ofDecember 31, 2007, there were no CDO assets on the Consolidatedbalance sheet of JPMorgan Chase Bank, N. A.

There are no other structured CDO assets backed by subprime mortgages remaining in JPMorgan Chase Bank, N. A.-administeredmulti-seller conduits as of December 31, 2007. In addition, JPMorganChase Bank, N. A. has no plans to permit the multi-seller conduits topurchase such assets in the future.

Consolidation analysisThe multi-seller conduits administered by JPMorgan Chase Bank, N. A.are not consolidated at December 31, 2007, because each conduithad issued ELNs, the holders of which are committed to absorbingthe majority of the expected loss of each respective conduit.

Implied supportJPMorgan Chase Bank, N. A.’s expected loss modeling treats all vari-able interests, other than the ELNs, as its own to determine consoli-dation. JPMorgan Chase Bank, N. A. does not consider the October2007 transfer of the structured CDO assets from the multi-seller con-duits to JPMorgan Chase Bank, N. A. to be an indicator of JPMorganChase Bank, N. A.’s intent to provide implicit support to the ELNholders. Instead, this action was a one-time, isolated event, limited toa specific type of asset that is not typically funded in JPMorganChase Bank, N. A.’s administered multi-seller conduits and for whichJPMorgan Chase Bank, N. A. has no plans (in its capacity as adminis-trator) to allow the conduits to purchase in the future.

JPMorgan Chase Bank, N. A. did not have and continues not to haveany intent to protect any ELN holders from potential losses on any ofthe conduits’ holdings and has no plans to remove any assets fromany conduit unless required to do so in its role as administrator.Should such a transfer occur, JPMorgan Chase Bank, N. A. wouldallocate losses on such assets between itself and the ELN holders inaccordance with the terms of the applicable ELN.



Expected loss modelingIn 2006, JPMorgan Chase Bank, N. A. restructured four multi-sellerconduits that it administers. The restructurings included enhancingJPMorgan Chase Bank, N. A.’s expected loss model. In determiningthe primary beneficiary of the conduits it administers, JPMorganChase Bank, N. A. uses a Monte Carlo–based model to estimate theexpected losses of each of the conduits and considers the relativerights and obligations of each of the variable interest holders. Thevariability to be considered in the modeling of expected losses isbased on the design of the entity. JPMorgan Chase Bank, N. A.'s tra-ditional multi-seller conduits are designed to pass credit risk, not liq-uidity risk, to its variable interest holders, as the assets are intendedto be held in the conduit for the longer term.

Under FIN 46R, JPMorgan Chase Bank, N. A. is required to run theMonte Carlo-based expected loss model each time a reconsiderationevent occurs. In applying this guidance to the conduits, the followingevents are considered to be reconsideration events as they couldaffect the determination of the primary beneficiary of the conduits:

• New deals, including the issuance of new or additional variableinterests (credit support, liquidity facilities, etc);

• Changes in usage, including the change in the level of outstand-ing variable interests (credit support, liquidity facilities, etc);

• Modifications of asset purchase agreements; and

• Sales of interests held by the primary beneficiary.

From an operational perspective, JPMorgan Chase Bank, N. A. doesnot run its Monte Carlo-based expected loss model every time thereis a reconsideration event due to the frequency of their occurrence.Instead, JPMorgan Chase Bank, N. A. runs its expected loss modeleach quarter and includes a growth assumption for each conduit toensure that a sufficient amount of ELNs exists for each conduit atany point during the quarter.

As part of its normal quarterly model review, JPMorgan Chase Bank,N. A. reassesses the underlying assumptions and inputs of theexpected loss model. During the second half of 2007, certainassumptions used in the model were adjusted to reflect the then cur-rent market conditions. Specifically, risk ratings and loss given defaultassumptions relating to residential subprime mortgage exposureswere modified. For other nonmortgage-related asset classes,JPMorgan Chase Bank, N. A. determined that the assumptions in themodel required little adjustment. As a result of the updates to themodel, during the fourth quarter of 2007 the terms of the ELNs wererenegotiated to increase the level of commitment and fundedamounts to be provided by the ELN holders. The total amount ofexpected loss notes outstanding at December 31, 2007 and 2006,were $130 million and $54 million, respectively. Management con-cluded that the model assumptions used were reflective of marketparticipant’s assumptions and appropriately considered the probabilityof a recurrence of recent market events.

Qualitative considerationsThe multi-seller conduits are primarily designed to provide an efficientmeans for clients to access the commercial paper market. JPMorganChase Bank, N. A. believes the conduits effectively disperse riskamong all parties and that the preponderance of economic risk inJPMorgan Chase Bank, N. A.’s multi-seller conduits is not held by

JPMorgan Chase Bank, N. A. The percentage of assets in the multi-seller conduits that JPMorgan Chase Bank, N. A. views as client-relatedrepresent 99% and 98% of the total conduits’ holdings at December31, 2007 and 2006, respectively.

Consolidated sensitivity analysis on capitalIt is possible that JPMorgan Chase Bank, N. A. could be required to con-solidate a VIE if it were determined that JPMorgan Chase Bank, N. A.became the primary beneficiary of the VIE under the provisions of FIN46R. The factors involved in making the determination of whether or nota VIE should be consolidated are discussed above and in Note 1 onpages 6–7 of these consolidated financial statements. The table belowshows the impact on JPMorgan Chase Bank, N. A.’s reported assets, liabili-ties, Net income, Tier 1 capital ratio and Tier 1 leverage ratio if JPMorganChase Bank, N. A. were required to consolidate all of the multi-seller con-duits that it administers.

As of or for the year endingDecember 31, 2007(in billions, except ratios) Reported Pro forma

Assets $ 1,318.9 $ 1,380.7Liabilities 1,212.5 1,274.5Net income 10.7 10.6Tier 1 capital ratio 8.3% 8.2%Tier 1 leverage ratio 6.2 5.9

JPMorgan Chase Bank, N. A. could fund purchases of assets from VIEsshould it become necessary.

Investor intermediationAs a financial intermediary, JPMorgan Chase Bank, N. A. creates cer-tain types of VIEs and also structures transactions, typically derivativestructures, with these VIEs to meet investor needs. JPMorgan ChaseBank, N. A. may also provide liquidity and other support. The risksinherent in the derivative instruments or liquidity commitments aremanaged similarly to other credit, market or liquidity risks to whichJPMorgan Chase Bank, N. A. is exposed. The principal types of VIEsfor which JPMorgan Chase Bank, N. A. is engaged in these structur-ing activities are municipal bond vehicles, credit-linked note vehiclesand collateralized debt obligation vehicles.

Municipal bond vehiclesJPMorgan Chase Bank, N. A. has created a series of secondary markettrusts that provide short-term investors with qualifying tax-exemptinvestments, and that allow investors in tax-exempt securities tofinance their investments at short-term tax-exempt rates. In a typicaltransaction, the vehicle purchases fixed-rate longer-term highly ratedmunicipal bonds and funds the purchase by issuing two types of secu-rities: (1) putable floating-rate certificates and (2) inverse floating-rateresidual interests (“residual interests”). The maturity of each of theputable floating-rate certificates and the residual interests is equal tothe life of the vehicle, while the maturity of the underlying municipalbonds is longer. Holders of the putable floating-rate certificates may“put”, or tender, the certificates if the remarketing agent cannot suc-cessfully remarket the floating-rate certificates to another investor. Aliquidity facility conditionally obligates the liquidity provider to fundthe purchase of the tendered floating-rate certificates. Upon termina-tion of the vehicle, if the proceeds from the sale of the underlyingmunicipal bonds are not sufficient to repay the liquidity facility, the liq-uidity provider has recourse either to excess collateralization in thevehicle or the residual interest holders for reimbursement.


The third-party holders of the residual interests in these vehicles couldexperience losses if the face amount of the putable floating-rate cer-tificates exceeds the market value of the municipal bonds upon termi-nation of the vehicle. Certain vehicles require a smaller initial invest-ment by the residual interest holders and thus do not result in excesscollateralization. For these vehicles there exists a reimbursement obli-gation which requires the residual interest holders to post, during thelife of the vehicle, additional collateral to the vehicle on a daily basisas the market value of the municipal bonds declines.

JPMorgan Chase Bank, N. A. often serves as the sole liquidity providerof the putable floating-rate certificates. As the liquidity provider,JPMorgan Chase Bank, N. A. has an obligation to fund the purchase ofthe putable floating-rate certificates; this obligation is triggered by thefailure to remarket the putable floating-rate certificates. The liquidityprovider’s obligation to perform is conditional and is limited by certaintermination events which include bankruptcy or failure to pay by themunicipal bond issuer or credit enhancement provider, and the immedi-ate downgrade of the municipal bond to below investment grade. Invehicles in which third-party investors own the residual interests, inaddition to the termination events, JPMorgan Chase Bank, N. A.’s expo-sure as liquidity provider is further limited by the high credit quality ofthe underlying municipal bonds, and the excess collateralization in thevehicle or the reimbursement agreements with the residual interestholders. During 2007 and 2006, JPMorgan Chase Bank, N. A. did notexperience a draw on the liquidity facilities.

The long-term credit ratings of the putable floating-rate certificates aredirectly related to the credit ratings of the underlying municipal bonds,and to the credit rating of any insurer of the underlying municipalbond. A downgrade of a bond insurer would result in a downgrade ofthe insured municipal bonds, which would affect the rating of theputable floating-rate certificates. This could cause demand for thesecertificates by investors to decline or disappear, as putable floating-rate certificate holders typically require an “AA-” bond rating. AtDecember 31, 2007 and 2006, 99% of the underlying municipalbonds held by vehicles to which JPMorgan Chase Bank, N. A. servedas liquidity provider were rated “AA-” or better. At December 31, 2007and 2006, $702 million and $606 million, respectively, of the bondswere insured by a third party. During 2007 and 2006, the municipalbond vehicles did not experience any bankruptcy or downgrade termi-nation events.

JPMorgan Chase Bank, N. A. sometimes invests in the residual inter-ests of municipal bond vehicles. For VIEs in which JPMorgan ChaseBank, N. A. owns the residual interests, JPMorgan Chase Bank, N. A.consolidates the VIEs. The likelihood that JPMorgan Chase Bank, N. A.would have to consolidate VIEs where JPMorgan Chase Bank, N. A.does not own the residual interests and that are currently off-balancesheet is remote.

Exposure to nonconsolidated municipal bond VIEs at December 31,2007 and 2006, including the ratings profile of the VIE’s assets, were as follows.

2007 2006

Fair value of Fair value ofDecember 31, assets held Liquidity Excess/ Total assets held Liquidity Excess/ Total(in billions) by VIEs facilities(c) (deficit)(d) exposure by VIEs facilities(c) (deficit)(d) exposure

NonconsolidatedMunicipal bond vehicles(a)(b) $ 18.0 $ 16.9 $ 1.1 $ 16.9 $ 9.8 $ 9.0 $ 0.8 $ 9.0

Fair value Wt. avg.Ratings profile of VIE assets(e)

of assets expectedDecember 31, Investment-grade Noninvestment-grade held by life of assets(in billions) AAA to AAA- AA+ to AA- A+ to A- BBB to BBB- BB+ and below by VIEs (years)


2007 $ 13.4 $ 4.4 $ 0.2 $ — $ — $ 18.0 10.02006 8.1 1.6 0.1 — — 9.8 10.0

(a) Excluded $467 million and $460 million at December 31, 2007 and 2006, respectively, which were consolidated due to JPMorgan Chase Bank, N. A. owning the residual interests.(b) Certain of the municipal bond vehicles are structured to meet the definition of a QSPE (as discussed in Note 1 on pages 6–7 of these consolidated financial statements); accordingly,

the assets and liabilities of QSPEs are not reflected in JPMorgan Chase Bank, N. A.’s Consolidated balance sheets (except for retained interests that are reported at fair value). Excludednonconsolidated amounts of $4.9 billion and $3.0 billion at December 31, 2007 and 2006, respectively, related to QSPE municipal bond vehicles in which JPMorgan Chase Bank, N. A.owned the residual interests.

(c) JPMorgan Chase Bank, N. A. may serve as credit enhancement provider in municipal bond vehicles in which it serves as liquidity provider. JPMorgan Chase Bank, N. A. provided insur-ance on underlying municipal bonds in the form of letters of credit in the amount of $103 million and $82 million at December 31, 2007 and 2006, respectively.

(d) Represents the excess (deficit) of municipal bond asset fair value available to repay the liquidity facilities if drawn.(e) The ratings scale is presented on an S&P equivalent basis.



Credit-linked note vehiclesJPMorgan Chase Bank, N. A. structures transactions with credit-linkednote (“CLN”) vehicles in which the VIE purchases highly rated assets(such as asset-backed securities) and enters into a credit derivative con-tract with JPMorgan Chase Bank, N. A. to obtain exposure to a refer-enced credit which the VIE otherwise does not hold. The VIE then issuesCLNs with maturities predominantly ranging from one to 10 years inorder to transfer the risk of the referenced credit to the VIE’s investors.Clients and investors often prefer using a CLN vehicle since the CLNsissued by the VIE generally carry a higher credit rating than such noteswould if issued directly by JPMorgan Chase Bank, N. A. JPMorganChase Bank, N. A.’s exposure to the CLN vehicles is generally limited toits rights and obligations under the credit derivative contract with theVIE as JPMorgan Chase Bank, N. A. does not provide any additionalfinancial support to the VIE. Accordingly, JPMorgan Chase Bank, N. A.typically does not consolidate the CLN vehicles. As a derivative counter-party in a credit-linked note structure, JPMorgan Chase Bank, N. A. hasa senior claim on the collateral of the VIE and reports such derivativeson its balance sheet at fair value. Substantially all of the collateral pur-chased by such VIEs is investment-grade, with a significant majoritybeing rated “AAA”. JPMorgan Chase Bank, N. A. divides its credit-linkednote structures broadly into two types: static and managed.

In a static credit-linked note structure, the CLNs and associated creditderivative contract either reference a single credit (e.g., a multinational

corporation) or all or part of a fixed portfolio of credits. JPMorganChase Bank, N. A. generally buys protection from the VIE under thecredit derivative. As a net buyer of credit protection, JPMorgan ChaseBank, N. A. pays a premium to the VIE in return for the receipt of apayment (up to the notional amount of the derivative) if one or morereference credits defaults, or if the losses resulting from the default ofthe reference credits exceed specified levels.

In a managed credit-linked note structure, the CLNs and associated creditderivative generally reference all or part of an actively managed portfolioof credits. An agreement exists between a portfolio manager and the VIEthat gives the portfolio manager the ability to substitute each referencedcredit in the portfolio for an alternative credit. By participating in a struc-ture where a portfolio manager has the ability to substitute credits with-in pre-agreed terms, the investors who own the CLNs seek to reduce therisk that any single credit in the portfolio will default. JPMorgan ChaseBank, N. A. does not act as portfolio manager; its involvement with theVIE is generally limited to being a derivative counterparty. As a net buyerof credit protection, JPMorgan Chase Bank, N. A. pays a premium to theVIE in return for the receipt of a payment (up to the notional of thederivative) if one or more credits within the portfolio defaults, or if thelosses resulting from the default of reference credits exceed specified lev-els. Exposure to nonconsolidated credit-linked note VIEs at December 31,2007 and 2006, was as follows.

Collateralized Debt Obligations vehiclesA CDO typically refers to a security that is collateralized by a pool ofbonds, loans, equity, derivatives or other assets. JPMorgan ChaseBank, N. A.’s involvement with a particular CDO vehicle may take oneor more of the following forms: arranger, warehouse funding provider,placement agent or underwriter, secondary market-maker for securitiesissued, or derivative counterparty.

Prior to the formal establishment of a CDO vehicle, there is a warehousingperiod where a VIE may be used to accumulate the assets which will besubsequently securitized and will serve as the collateral for the securitiesto be issued to investors. During this warehousing period, JPMorganChase Bank, N. A. may provide all or a portion of the financing to theVIE, for which JPMorgan Chase Bank, N. A. earns interest on theamounts it finances. A third-party asset manager that will serve as themanager for the CDO vehicle uses the warehouse funding provided by

JPMorgan Chase Bank, N. A. to purchase the financial assets. The fund-ing commitments generally are one year in duration. In the event thatthe securitization of assets does not occur within the committed financ-ing period, the warehoused assets are generally liquidated.

Because of the varied levels of support provided by JPMorgan ChaseBank, N. A. during the warehousing period, which typically averagessix to nine months, each CDO warehouse VIE is assessed in accordancewith FIN 46(R) to determine whether JPMorgan Chase Bank, N. A. isconsidered the primary beneficiary that should consolidate the VIE. Ingeneral, JPMorgan Chase Bank, N. A. would consolidate the ware-house VIE unless another third party, typically the asset manager, pro-vides significant protection for potential declines in the value of theassets held by the VIE. In those cases, the third party that provides theprotection to the warehouse VIE would consolidate the VIE.

2007 2006Par value of Par value of

December 31, Derivative Trading Total collateral held Derivative Trading Total collateral held(in billions) receivables assets(c) exposure(d) by VIEs receivables assets(c) exposure(d) by VIEs

Credit-linked notes(a)

Static structure $ 0.8 $ 0.4 $ 1.2 $ 13.5 $ 0.2 $ 0.1 $ 0.3 $ 15.9Managed structure(b) 4.5 0.9 5.4 12.8 0.4 0.2 0.6 8.9

Total $ 5.3 $ 1.3 $ 6.6 $ 26.3 $ 0.6 $ 0.3 $ 0.9 $ 24.8

(a) Excluded fair value of collateral of $2.5 billion and $2.0 billion at December 31, 2007 and 2006, respectively, which were consolidated.(b) Includes synthetic CDO vehicles, which have similar risk characteristics to managed CLN vehicles; 2006 amounts have been revised to reflect this presentation. 2007 trading assets

amounts include $291 million of transactions with subprime collateral.(c) Trading assets principally comprise notes issued by VIEs, which from time to time are held as part of the termination of a deal or to support limited market-making.(d) On-balance sheet exposure that includes Derivative receivables and trading assets.


Once the portfolio of warehoused assets is large enough, the VIE willissue securities. The proceeds from the securities issuance will be usedto repay the warehouse financing obtained from JPMorgan ChaseBank, N. A. and other counterparties. In connection with the estab-lishment of the CDO vehicle, JPMorgan Chase Bank, N. A. typicallyearns a fee for arranging the CDO vehicle and distributing the securi-ties (as placement agent and/or underwriter) and does not typicallyown any equity tranches issued. Once the CDO vehicle closes andissues securities, JPMorgan Chase Bank, N. A. has no further obliga-tion to provide further support to the vehicle.

At the time of closing, JPMorgan Chase Bank, N. A. may hold unsoldpositions that JPMorgan Chase Bank, N. A. was not able to place withthird-party investors. The amount of unsold positions at December 31,2007, was insignificant. In addition, JPMorgan Chase Bank, N. A. mayon occasion hold some of the CDO vehicles’ securities as a secondarymarket-maker or as a principal investor, or it may be a derivativecounterparty to the vehicles. At December 31, 2007 and 2006, theseamounts were not significant.

Exposures to CDO warehouse VIEs at December 31, 2007 and 2006, were as follows.

December 31, 2007 Funded Unfunded Total(in billions) loans commitments(a) exposure(b)


Total $ 4.0 $ 4.2 $ 8.2

December 31, 2006 Funded Unfunded Total(in billions) loans commitments(a) exposure(b)


Total $ 5.4 $ 6.8 $ 12.2

Ratings profile of VIE assets(c)

December 31, Investment-grade Noninvestment-grade Total(in billions) AAA to AAA- AA+ to AA- A+ to A- BBB to BBB- BB+ and below exposure

Nonconsolidated CDO warehouse VIEs2007 $ — $ — $ — $ — $ 2.2 $ 2.22006 — — — 0.7 2.4 3.1

(a) Typically contingent upon certain asset-quality conditions being met by asset managers.(b) The aggregate of the fair value of loan exposure and any unfunded contractually committed financing.(c) The ratings scale is based upon JPMorgan Chase Bank, N. A.’s internal risk ratings and is presented on an S&P equivalent basis.



Consolidated VIE assetsThe following table summarizes JPMorgan Chase Bank, N. A.’s totalconsolidated VIE assets, by classification, on the Consolidated bal-ance sheets, as of December 31, 2007 and 2006.


Consolidated VIE assetsSecurities purchased under resale

agreements(a) $ — $ 8.0Trading assets(b) 7.2 5.5Investment securities — 0.2Loans(a) 4.4 15.9Other assets 0.7 2.9

Total consolidated assets $12.3 $ 32.5

(a) Included activity conducted by JPMorgan Chase Bank, N. A. in a principal capacity,primarily in investment banking.

(b) Included the fair value of securities and derivative receivables.

The interest-bearing beneficial interest liabilities issued by consolidatedVIEs are classified in the line item titled, “Beneficial interests issuedby consolidated variable interest entities” on the Consolidated bal-ance sheets. The holders of these beneficial interests do not haverecourse to the general credit of JPMorgan Chase Bank, N. A. SeeNote 22 on page 59 of these consolidated financial statements forthe maturity profile of FIN 46 long-term beneficial interests.

Other topics related to VIEsVIEs Structured by Unrelated PartiesJPMorgan Chase Bank, N. A. enters into transactions with VIEs struc-tured by other parties. These transactions include, for example, actingas a derivative counterparty, liquidity provider, investor, underwriter,placement agent, trustee or custodian. These transactions are con-ducted at arm’s length, and individual credit decisions are basedupon the analysis of the specific VIE, taking into consideration thequality of the underlying assets. Where these activities do not causeJPMorgan Chase Bank, N. A. to absorb a majority of the expectedlosses of the VIEs or to receive a majority of the residual returns ofthe VIEs, JPMorgan Chase Bank, N. A. records and reports these posi-tions on its balance sheet similar to the way it would record andreport positions from any other third-party transaction. These trans-actions are not considered significant for disclosure purposes underFIN 46(R).

Note 19 – Goodwill and other intangible assetsGoodwill is not amortized. It is instead tested for impairment in accor-dance with SFAS 142. Goodwill is tested annually (during the fourthquarter) or more often if events or circumstances, such as adversechanges in the business climate, indicate there may be impairment.Intangible assets determined to have indefinite lives are not amortizedbut instead are tested for impairment at least annually, or more fre-quently if events or changes in circumstances indicate that the assetmight be impaired. The impairment test compares the fair value of theindefinite-lived intangible asset to its carrying amount. Other acquiredintangible assets determined to have finite lives, such as core depositsand credit card relationships, are amortized over their estimated useful

lives in a manner that best reflects the economic benefits of the intan-gible asset. In addition, impairment testing is performed periodically onthese amortizing intangible assets.



Goodwill $25,819 $25,939Mortgage servicing rights 8,632 7,546Purchased credit card relationships 189 190

All other intangibles:Other credit card–related intangibles $ 291 $ 251Core deposit intangibles 2,066 2,621Other intangibles 985 1,015

Total All other intangible assets $ 3,342 $ 3,887

GoodwillThe $120 million decline in Goodwill from 2006 primarily resultedfrom a decrease of $183 million in connection with the internal trans-fer of legal entities under common control, and reductions from theadoption of FIN 48. These declines were partially offset by the impactof certain acquisitions by treasury and securities services business andcurrency translation adjustments on the Sears Canada credit cardacquisition. For additional information related to FIN 48 see Note 25on pages 63–65 of these consolidated financial statements.

Goodwill was not impaired at December 31, 2007, or 2006, nor wasany goodwill written off due to impairment during 2007 and 2006.

Mortgage servicing rights JPMorgan Chase Bank, N.A. recognizes as intangible assets mortgageservicing rights, which represent the right to perform specified residen-tial mortgage servicing activities for others. MSRs are either purchasedfrom third parties or retained upon sale or securitization of mortgageloans. Servicing activities include collecting principal, interest, andescrow payments from borrowers; making tax and insurance paymentson behalf of the borrowers; monitoring delinquencies and executingforeclosure proceedings; and accounting for and remitting principal andinterest payments to the investors of the mortgage-backed securities.

The amount initially capitalized as MSRs represents the amount paidto third parties to acquire MSRs or is the estimate of fair value, ifretained upon the sale or securitization of mortgage loans. JPMorganChase Bank, N.A. estimates the fair value of MSRs for initial capitaliza-tion and ongoing valuation using an option-adjusted spread model,which projects MSR cash flows over multiple interest rate scenarios inconjunction with JPMorgan Chase Bank, N.A.’s proprietary prepaymentmodel, and then discounts these cash flows at risk-adjusted rates. Themodel considers portfolio characteristics, contractually specified servic-ing fees, prepayment assumptions, delinquency rates, late charges,other ancillary revenue and costs to service, and other economic fac-tors. JPMorgan Chase Bank, N.A. reassesses and periodically adjuststhe underlying inputs and assumptions used in the OAS model toreflect market conditions and assumptions that a market participantwould consider in valuing the MSR asset. During the fourth quarter of2007, JPMorgan Chase Bank, N.A.’s proprietary prepayment modelwas refined to reflect a decrease in estimated future mortgage prepay-

benchmark rate had on the prepayment speed estimates in determin-ing the fair value of the MSRs. Hedge effectiveness was assessedusing a regression analysis of the change in fair value of the MSRs asa result of changes in benchmark interest rates and of the change inthe fair value of the designated derivatives. The valuation adjustmentsto both the MSRs and SFAS 133 derivatives were recorded inMortgage fees and related income. With the election to apply fairvalue accounting to the MSRs under SFAS 156, SFAS 133 hedgeaccounting is no longer necessary. For a further discussion on deriva-tive instruments and hedging activities, see Note 29 on pages 68–69of these consolidated financial statements.

The following table summarizes MSR activity, certain key assumptions,and the sensitivity of the fair value of MSRs to adverse changes inthose key assumptions for the years ended December 31, 2007 and2006, during which period MSRs were accounted for under SFAS 156.

Year ended December 31,(in millions) 2007 2006

Balance at beginning of period after valuation allowance $ 7,546 $ 6,452

Cumulative effect of change in accounting principle — 230

Fair value at beginning of period 7,546 6,682

Originations of MSRs 2,335 1,512Purchase of MSRs 798 627

Total additions 3,133 2,139

Change in valuation due to inputs and assumptions(a) (516) 165Other changes in fair value(b) (1,531) (1,440)

Total change in fair value (2,047) (1,275)

Fair value at December 31 $ 8,632 $ 7,546

Change in unrealized (losses) gains included in income related to MSRs held at December 31 $ (516) NA

(a) Represents MSR asset fair value adjustments due to changes in market-basedinputs, such as interest rates and volatility, as well as updates to assumptionsused in the MSR valuation model. This caption also represents total realized andunrealized gains (losses) included in Net income per the SFAS 157 disclosure forfair value measurement using significant unobservable inputs (level 3). Thesechanges in fair value are recorded in Mortgage fees and related income.

(b) Includes changes in the MSR value due to modeled servicing portfolio runoff (or timedecay). This caption represents the impact of cash settlements per the SFAS 157 disclosure for fair value measurement using significant unobservable inputs (level 3).These changes in fair value are recorded in Mortgage fees and related income.


ments based upon a number of market related factors including adownward trend in home prices, general tightening of credit under-writing standards and the associated impact on refinancing activity.JPMorgan Chase Bank, N.A. compares fair value estimates andassumptions to observable market data where available and to recentmarket activity and actual portfolio experience.

The fair value of MSRs is sensitive to changes in interest rates, includ-ing their effect on prepayment speeds. JPMorgan Chase Bank, N.A.uses or has used combinations of derivatives, AFS securities and trad-ing instruments to manage changes in the fair value of MSRs. Theintent is to offset any changes in the fair value of MSRs with changesin the fair value of the related risk management instruments. MSRsdecrease in value when interest rates decline. Conversely, securities(such as mortgage-backed securities), principal-only certificates andcertain derivatives (when JPMorgan Chase Bank, N.A. receives fixed-rate interest payments) increase in value when interest rates decline.

In March 2006, the FASB issued SFAS 156, which permits an entity aone-time irrevocable election to adopt fair value accounting for a classof servicing assets. JPMorgan Chase Bank, N.A. elected to adopt thestandard effective January 1, 2006, and defined MSRs as one class ofservicing assets for this election. At the transition date, the fair valueof the MSRs exceeded their carrying amount, net of any related valu-ation allowance, by $150 million net of taxes. This amount wasrecorded as a cumulative-effect adjustment to retained earnings as ofJanuary 1, 2006. MSRs are recognized in the Consolidated balancesheet at fair value, and changes in their fair value are recorded incurrent-period earnings. Revenue amounts related to MSRs and thefinancial instruments used to manage the risk of MSRs are recordedin Mortgage fees and related income.

For the year ended December 31, 2005, MSRs were accounted for underSFAS 140, using a lower of cost or fair value approach. Under thisapproach, MSRs were amortized as a reduction of the actual servicingincome received in proportion to, and over the period of, the estimatedfuture net servicing income stream of the underlying mortgage loans. Forpurposes of evaluating and measuring impairment of MSRs, JPMorganChase Bank, N.A. stratified the portfolio on the basis of the predominantrisk characteristics, which are loan type and interest rate. Any indicatedimpairment was recognized as a reduction in revenue through a valuationallowance, which represented the extent to which the carrying value of anindividual stratum exceeded its estimated fair value. Any gross carryingvalue and related valuation allowance amounts which were not expectedto be recovered in the foreseeable future, based upon the interest ratescenario, were considered to be other-than-temporary.

Prior to the adoption of SFAS 156, JPMorgan Chase Bank, N.A. desig-nated certain derivatives used to risk manage MSRs (e.g., a combina-tion of swaps, swaptions and floors) as SFAS 133 fair value hedges ofbenchmark interest rate risk. SFAS 133 hedge accounting allowed thecarrying value of the hedged MSRs to be adjusted through earningsin the same period that the change in value of the hedging deriva-tives was recognized through earnings. The designated hedge periodwas daily. In designating the benchmark interest rate, JPMorganChase Bank, N.A. considered the impact that the change in the



The table below outlines the key economic assumptions used todetermine the fair value of JPMorgan Chase Bank, N.A.’s MSRsat December 31, 2007 and 2006, respectively; and it outlines thesensitivities of those fair values to immediate 10% and 20%adverse changes in those assumptions.

Year ended December 31,(in millions, except rates and where otherwise noted) 2007 2006

Weighted-average prepayment speed assumption (CPR) 12.49% 17.02%Impact on fair value of 10% adverse change $ (481) $ (381)Impact on fair value of 20% adverse change (926) (726)

Weighted-average discount rate 10.53% 9.32%Impact on fair value of 10% adverse change $ (345) $ (254)Impact on fair value of 20% adverse change (664) (491)

Contractual service fees, late fees and other ancillaryfees included in Mortgage fees and related income $ 2,429 $ 2,038

Third-party Mortgage loans serviced at December 31 (in billions) $614.7 $ 526.7


The sensitivity analysis in the preceding table is hypothetical andshould be used with caution. Changes in fair value based upon a10% and 20% variation in assumptions generally cannot be easilyextrapolated 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 thefair value is calculated without changing any other assumption. Inreality, changes in one factor may result in changes in another, whichmight magnify or counteract the sensitivities.

The following table summarizes MSR activity for the year endedDecember 31, 2005, during which period MSRs were accounted forunder SFAS 140.

Year ended December 31,(in millions, except rates and where otherwise noted) 2005(c)

Balance at January 1 $ 6,111

Originations of MSRs 1,301Purchase of MSRs 596

Total additions 1,897

Other-than-temporary impairment (1)Amortization (1,295)SFAS 133 hedge valuation adjustments 90

Balance at December 31 6,802Less: valuation allowance(a) 350

Balance at December 31, after valuation allowance $ 6,452

Estimated fair value at December 31 $ 6,682Weighted-average prepayment speed assumption (CPR) 17.56%Weighted-average discount rate 9.68%

Valuation allowance at January 1 $ 1,031Other-than-temporary impairment(b) (1)SFAS 140 impairment (recovery) adjustment (680)

Valuation allowance at December 31 $ 350

Contractual service fees, late fees and other ancillary fees included in Mortgage fees and related income $ 1,769

Third-party Mortgage loans serviced at December 31 (in billions) $ 467.5

(a) The valuation allowance in the preceding table at December 31, 2005, representedthe extent to which the carrying value of MSRs exceeded the estimated fair value for its applicable SFAS 140 strata. Changes in the valuation allowance were theresult of the recognition of impairment or the recovery of previously recognizedimpairment charges due to changes in market conditions during the period.

(b) JPMorgan Chase Bank, N.A. recorded an other-than-temporary impairment of itsMSRs of $1 million in 2005, which permanently reduced the gross carrying value ofthe MSRs and the related valuation allowance. The permanent reduction precludedsubsequent reversals. This write-down had no impact on the results of operations orfinancial condition of JPMorgan Chase Bank, N.A.

(c) During the fourth quarter of 2005, JPMorgan Chase Bank, N.A. began valuing MSRsusing an OAS valuation model. Prior to the fourth quarter of 2005, MSRs were val-ued using cash flows and discount rates determined by a “static” or single interestrate path valuation model.

CPR: Constant prepayment rate

Purchased credit card relationships and All other intangible assets During 2007, Purchased credit card relationships and all other intangible assets decreased $546 million, primarily as a result ofamortization expense.

Except for $315 million of indefinite-lived intangibles related toasset management advisory contracts which are not amortized, butinstead are tested for impairment at least annually, the remainder of JPMorgan Chase Bank, N.A.‘s other acquired intangible assetsare subject to amortization.


The components of credit card relationships, core deposits and other intangible assets were as follows.

2007 2006

Net NetGross Accumulated carrying Gross Accumulated carrying

December 31, (in millions) amount amortization value amount amortization value

Purchased credit card relationships $ 256 $ 67 $ 189 $ 225 $ 35 $ 190All other intangibles:

Other credit card–related intangibles 343 52 291 300 49 251Core deposit intangibles 4,280 2,214 2,066 4,281 1,660 2,621Other intangibles 1,378 393(a) 985 1,310 295(a) 1,015

(a) Includes amortization expense related to servicing assets on securitized automobile loans, which is recorded in Lending & deposit-related fees, of $8 million for both of the years endedDecember 31, 2007 and 2006, respectively.

Amortization expenseThe following table presents amortization expense related to credit card relationships, core deposits and All other intangible assets.


Purchased credit card relationships $ 32 $ 33 $ 2All other intangibles:

Other credit card–related intangibles 3 (1) 30Core deposit intangibles 554 568 623Other intangibles(a) 90 95 96

Total amortization expense $ 679 $ 695 $ 751

(a) Amortization expense related to the aforementioned selected corporate trust businesses were reported in Income from discontinued operations for 2006 and 2005.

Future amortization expenseThe following table presents estimated future amortization expense related to credit card relationships, core deposits and All other intangible assets atDecember 31, 2007.

Other credit Purchased credit card-related Core deposit All other

Year ended December 31, (in millions) card relationships intangibles intangibles intangible assets Total

2008 $ 32 $ 13 $ 479 $ 87 $ 6112009 30 19 397 78 5242010 27 28 336 65 4562011 25 35 293 56 4092012 25 44 251 53 373



Note 20 – Premises and equipmentPremises and equipment, including leasehold improvements, are carriedat cost less accumulated depreciation and amortization. JPMorganChase Bank, N.A. computes depreciation using the straight-line methodover the estimated useful life of an asset. For leasehold improvements,JPMorgan Chase Bank, N.A. uses the straight-line method computedover the lesser of the remaining term of the leased facility or the esti-mated useful life of the leased asset. JPMorgan Chase Bank, N.A. hasrecorded immaterial asset retirement obligations related to asbestosremediation under SFAS 143 and FIN 47 in those cases where it hassufficient information to estimate the obligations’ fair value.

JPMorgan Chase Bank, N.A. capitalizes certain costs associated withthe acquisition or development of internal-use software under SOP98-1. Once the software is ready for its intended use, these costs areamortized on a straight-line basis over the software’s expected usefullife, and reviewed for impairment on an ongoing basis.

Note 21 – DepositsAt December 31, 2007 and 2006, Noninterest-bearing and Interest-bearing deposits were as follows.


U.S. offices:Noninterest-bearing $ 131,357 $ 139,234Interest-bearing (included $1,909 at

fair value at December 31, 2007) 335,907 307,836Non-U.S. offices:

Noninterest-bearing 6,475 7,773Interest-bearing (included $4,547 at

fair value at December 31, 2007) 298,348 185,623

Total $ 772,087 $ 640,466

At December 31, 2007 and 2006, time deposits in denominations of$100,000 or more were as follows.


U.S. $ 95,583 $ 81,243

Non-U.S. 79,058 53,743

Total $ 174,641 $ 134,986

At December 31, 2007, the maturities of time deposits were as follows.

December 31, 2007 (in millions) U.S. Non-U.S. Total

2008 $ 119,516 $ 82,992 $ 202,5082009 2,040 485 2,5252010 819 815 1,6342011 530 156 6862012 1,211 2,702 3,913After 5 years 280 7,970 8,250

Total $ 124,396 $ 95,120 $ 219,516


Note 22 – Long-term debtJPMorgan Chase Bank, N.A. issues long-term debt denominated in various currencies, although predominantly U.S. dollars, with both fixed and variableinterest rates. The following table is a summary of long-term debt carrying values (including unamortized original issue discount, SFAS 133 valua-tion adjustments and fair value adjustments, where applicable) by contractual maturity for the current year.

By remaining maturity at 2007December 31, 2007 Under After 2006(in millions, except rates) 1 year 1–5 years 5 years Total Total

Long-term debt issued to unrelated partiesSenior debt:(a) Fixed rate $ 1,486 $ 2,522 $ 2,280 $ 6,288 $ 8,987

Variable rate 7,903 35,665 11,007 54,575 39,485Interest rates(b) 3.70–6.67% 4.38% 3.85–14.21% 3.70–14.21% 1.76–17.00%

Subordinated debt: Fixed rate $ 801 $ 9 $ 8,359 $ 9,169 $ 4,025Variable rate — — 1,150 1,150 1,150Interest rates(b) 6.13–6.70% 6.25% 4.38–8.25% 4.38–8.25% 4.38–8.25%

Subtotal $ 10,190 $ 38,196 $ 22,796 $ 71,182 $ 53,647

Long-term debt payable to JPMorgan Chase & Co. and affiliatesFixed rate $ — $ — $ 4,493 $ 4,493 $ 7,434

Variable rate — — 11,900 11,900 10,175Interest rates(b) —% —% 5.27–6.03% 5.27–6.03% 1.51–9.00%

Subtotal $ — $ — $ 16,393 $ 16,393 $ 17,609

Total long-term debt(c) $ 10,190 $ 38,196 $ 39,189 $ 87,575(e)(f)(g) $ 71,256

FIN 46R long-term beneficial interests:Fixed rate $ 26 $ 316 $ 172 $ 514 $ 432

Variable rate 9 1,646 4,704 6,359 7,559Interest rates 3.63–6.50% 1.73–8.75% 3.40–12.79% 1.73–12.79% 1.73–12.79%

Total FIN 46R long-term beneficial interests(d) $ 35 $ 1,962 $ 4,876 $ 6,873 $ 7,991

(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 shownnet with the host contract on the Consolidated balance sheets. Changes in fair value of separated derivatives are recorded in Principal transactions revenue. Hybrid securities whichJPMorgan Chase Bank, N.A. has elected to measure at fair value are classified in the line item of the host contract on the Consolidated balance sheets; changes in fair values are recordedin Principal transactions revenue in the Consolidated statements of income.

(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 the associatedderivative instruments used in SFAS 133 hedge accounting relationships, if applicable. The use of these derivative instruments modifies JPMorgan Chase Bank, N.A.’s exposure to the con-tractual interest rates disclosed in the table above. Including the effects of the SFAS 133 hedge accounting derivatives, the range of modified rates in effect at December 31, 2007, fortotal long-term debt was 2.96% to 14.21%, versus the contractual range of 3.70% to 14.21% presented in the table above.

(c) Included $56.9 billion and $24.1 billion of outstanding structured notes accounted for at fair value at December 31, 2007 and 2006, respectively.(d) Included on the Consolidated balance sheets in Beneficial interests issued by consolidated variable interest entities. Also, included $2.7 billion of outstanding structured notes accounted

for at fair value at December 31, 2007.(e) At December 31, 2007, long-term debt aggregating $3.6 billion was redeemable at the option of JPMorgan Chase Bank, N.A., in whole or in part, prior to maturity, based upon the

terms specified in the respective notes.(f) The aggregate principal amount of debt that matures in each of the five years subsequent to 2007 is $10.2 billion in 2008, $13.1 billion in 2009, $11.4 billion in 2010, $5.6 billion in 2011 and

$8.1 billion in 2012.(g) Included $3.8 billion and $1.9 billion of outstanding zero-coupon notes at December 31, 2007 and 2006, respectively. The aggregate principal amount of these notes at their respective maturi-

ties was $6.3 billion and $3.2 billion, respectively.



The weighted-average contractual interest rate for total Long-termdebt was 5.49% and 4.80% as of December 31, 2007 and 2006,respectively. In order to modify exposure to interest rate and currencyexchange rate movements, JPMorgan Chase Bank, N.A. utilizes deriv-ative instruments, primarily interest rate and cross-currency interestrate swaps, in conjunction with some of its debt issues. The use ofthese instruments modifies JPMorgan Chase Bank, N.A.’s interestexpense on the associated debt. The modified weighted-average inter-est rate for total long-term debt, including the effects of related deriva-tive instruments, was 5.52% and 3.34% as of December 31, 2007 and2006, respectively.

JPMorgan Chase Bank, N.A. has guaranteed certain debt of its sub-sidiaries, including both long-term debt and structured notes sold as part ofJPMorgan Chase Bank, N.A.’s trading activities. These guarantees rank on a parity with all of JPMorgan Chase Bank, N.A.’s other unsecured andunsubordinated indebtedness. Guaranteed liabilities totaled $42.7 billionand $29.8 billion at December 31, 2007 and 2006, respectively.

Junior subordinated deferrable interest debentures held bytrusts that issued guaranteed capital debt securities At December 31, 2007, JPMorgan Chase Bank, N.A. had established2 wholly owned Delaware statutory business trusts (“issuer trusts”)that had issued guaranteed capital debt securities.

The junior subordinated deferrable interest debentures issued byJPMorgan Chase Bank, N.A. to the issuer trust were reflected inJPMorgan Chase Bank, N.A.’s Consolidated balance sheets in theLiabilities section under the caption “Junior subordinated deferrableinterest debentures held by trusts that issued guaranteed capital debtsecurities” (i.e., trust preferred capital debt securities). JPMorganChase Bank, N.A. also records the common capital securities issuedby the issuer trusts in Other assets in its Consolidated balance sheets.

The debentures issued to the issuer trusts by JPMorgan Chase Bank,N.A., less the common capital securities of the issuer trusts, qualify asTier1 capital. The following is a summary of the outstanding trust pre-ferred capital debt securities, including unamortized original issuediscount, issued by each trust and the junior subordinated deferrableinterest debenture issued by JPMorgan Chase Bank, N.A. to eachtrust as of December 31, 2007.

Amount of Stated maturitycapital debt of capital

securities securities Earliest Interest rate of Interestissued Issue and redemption capital securities payment/

December 31, 2007 (in millions) to trust(a) date debentures date and debentures distribution dates

Bank One Capital I, LLC $ 300 2000 2030 Anytime 8.20% SemiannuallyBank One Capital II, LLC 300 2002 2032 2008 7.00% Semiannually

Total $ 600

(a) Represents the amount of capital securities issued to the public by each trust, including unamortized original issue discount.


Note 23 – Related party transactionsJPMorgan Chase Bank, N.A. regularly enters into transactions with JPMorgan Chase and its various subsidiaries.

Significant revenue- and expense-related transactions with related parties are listed below.


Interest income from affiliatesDeposits with affiliated banks $ 18 $ 9 $ 14Federal funds sold and securities purchased under resale agreements, and Securities borrowed

from affiliates 4,810 4,849 2,212Loans to affiliates 101 181 258

Interest expense to affiliatesInterest-bearing deposits of affiliates 2,020 1,507 552Federal funds purchased and securities sold under repurchase agreements, and Other borrowed funds

due to affiliates 3,283 2,865 1,071Long-term debt payable to JPMorgan Chase & Co. and affiliates 1,017 975 915Guaranteed capital debt securities issued to nonbank affiliates 47 47 46

Servicing agreements with affiliatesNoninterest revenue 3,198 3,028 2,147Noninterest expense 4,606 4,386 3,647

Significant balances with related parties are listed below.


AssetsDeposits with affiliated banks $ 651 $ —Federal funds sold and securities purchased under resale agreements, and Securities borrowed from affiliates 80,397 111,879Loans to affiliates 475 298Accrued interest and accounts receivable, and Other assets due from affiliates 9,699 9,356

LiabilitiesNoninterest-bearing deposits of affiliates 2,417 6,944Interest-bearing deposits of affiliates 74,606 26,982Federal funds purchased and securities sold to affiliates under repurchase agreements, and Other borrowed funds

due to affiliates 53,374 60,044Accounts payable, accrued expense and other liabilities payable to affiliates 4,939 4,459Long-term debt payable to JPMorgan Chase & Co. and affiliates 16,393 17,609Junior subordinated deferrable interest debentures held by trusts that issued guaranteed capital debt securities 600 613

At December 31, 2007 and 2006, net derivative payables to affiliates were $4.3 billion and $1.3 billion, respectively.



Note 24 – Accumulated other comprehensive income (loss)Accumulated other comprehensive income (loss) includes the after-tax change in SFAS 115 unrealized gains and losses on AFS securities, SFAS 52foreign currency translation adjustments (including the impact of related derivatives), SFAS 133 cash flow hedging activities and SFAS 158 net lossand prior service cost (credit) related to JPMorgan Chase Bank, N.A.’s defined benefit pension and OPEB plans.

Net loss and AccumulatedTranslation prior service (credit) of other

Unrealized gains (losses) adjustments, Cash defined benefit pension comprehensive(in millions) on AFS securities(a) net of hedges flow hedges and OPEB plans(e) income (loss)

Balance at December 31, 2004 $ (271) $ (4) $ (128) $ — $ (403)Net change 46(b) 5 (298) — (247)

Balance at December 31, 2005 (225) 1 (426) — (650)Net change 201(c) 16 (63) — 154

Adjustment to initially apply SFAS 158, net of taxes — — — (431) (431)

Balance at December 31, 2006 (24) 17 (489) (431) (927)

Cumulative effect of changes in accounting principles (SFAS 159) (1) — — — (1)

Balance at January 1, 2007, adjusted (25) 17 (489) (431) (928)Net change 401(d) — (327) 168 242

Balance at December 31, 2007 $ 376 $ 17 $ (816) $ (263) $ (686)

(a) Represents the after-tax difference between the fair value and amortized cost of the AFS securities portfolio and retained interests in securitizations recorded in Other assets.(b) The net change during 2005 was due primarily to the reversal of unrealized losses from securities sales, partially offset by higher interest rates.(c) The net change during 2006 was due primarily to the reversal of unrealized losses from securities sales.(d) The net change during 2007 was due primarily to a decline in interest rates.(e) For further discussion of SFAS 158, see Note 10 on pages 24–30 of these consolidated financial statements.


The following table presents the after-tax changes in net unrealized holdings gains (losses) and reclassification adjustments for realized gains andlosses on AFS securities and cash flow hedges; changes resulting from foreign currency translation adjustments (including the impact of relatedderivatives); and net gains and losses and prior service costs from pension and OPEB plans, and amortization of pension and OPEB amounts intoNet income. The table also reflects the adjustment to Accumulated other comprehensive income (loss) resulting from the initial application of SFAS158 to JPMorgan Chase Bank, N.A.’s defined benefit pension and OPEB plans. Reclassification adjustments include amounts recognized in Netincome that had been recorded previously in Other comprehensive income (loss).

2007 2006 2005Before Tax After Before Tax After Before Tax After

Year ended December 31, (in millions) tax effect tax tax effect tax tax effect tax

Unrealized gains (losses) on AFS securities:Net unrealized holdings gains (losses) arising during

the period $ 614 $ (243) $ 371 $ (240) $ 98 $ (142) $(1,378) $ 565 $ (813)Reclassification adjustment for realized (gains) losses

included in Net income 50 (20) 30 576 (233) 343 1,456 (597) 859

Net change 664 (263) 401 336 (135) 201 78 (32) 46

Translation adjustments:Translation 585 (219) 366 450 (181) 269 (441) 175 (266)Hedges (608) 242 (366) (416) 163 (253) 450 (179) 271

Net change (23) 23 — 34 (18) 16 9 (4) 5

Cash flow hedges:Net unrealized holdings gains (losses) arising during

the period (750) 300 (450) (184) 73 (111) (579) 230 (349)Reclassification adjustment for realized (gains) losses

included in Net income 204 (81) 123 79 (31) 48 84 (33) 51

Net change (546) 219 (327) (105) 42 (63) (495) 197 (298)

Net loss and prior service cost (credit) of defined benefit pension and OPEB plans:(a)

Net gains and prior service credits arising during the period 214 (83) 131 NA NA NA NA NA NA

Reclassification adjustment for net loss and prior servicecredit included in Net income 59 (22) 37 NA NA NA NA NA NA

Net change 273 (105) 168 NA NA NA NA NA NA

Total Other comprehensive income (loss) $ 368 $ (126) $ 242 $ 265 $ (111) $ 154 $ (408) $ 161 $ (247)

Net loss and prior service cost (credit) of defined benefit pension and OPEB plans:

Adjustments to initially apply SFAS 158(a) NA NA NA $ (713) $ 282 $ (431) NA NA NA

(a) For further discussion of SFAS 158 and details of changes to Accumulated other comprehensive income (loss), see Note 10 on pages 24–30 of these consolidated financial statements.

Note 25 – Income taxesIn June 2006, the FASB issued FIN 48, which clarifies the accounting foruncertainty in income taxes recognized under SFAS 109. FIN 48 address-es the recognition and measurement of tax positions taken or expectedto be taken, and also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods and disclosure.JPMorgan Chase Bank, N.A. adopted and applied FIN 48 under thetransition provisions to all of its income tax positions at the requiredeffective date of January 1, 2007, resulting in a $531 million cumulativeeffect increase to Retained earnings, a reduction in Goodwill of $113million and a $644 million decrease in the liability for income taxes.

The results of operations of JPMorgan Chase Bank, N.A. are included inthe consolidated federal, combined New York State and New York City,and certain other state income tax returns filed by JPMorgan Chase &Co. An informal tax sharing arrangement between JPMorgan Chase &Co. and JPMorgan Chase Bank, N.A. requires intercompany payments toor from JPMorgan Chase & Co. for outstanding current tax assets andliabilities. JPMorgan Chase & Co. allocates to JPMorgan Chase Bank,N.A. its share of the consolidated and combined income tax expense orbenefit based upon statutory rates applied to JPMorgan Chase Bank,N.A.’s earnings as if it were filing separate income tax returns.



JPMorgan Chase Bank, N.A. uses the asset-and-liability methodrequired by SFAS 109 to provide income taxes on all transactionsrecorded in the Consolidated financial statements. This methodrequires that income taxes reflect the expected future tax conse-quences of temporary differences between the carrying amounts ofassets or liabilities for book and tax purposes. Accordingly, a deferredtax liability or asset for each temporary difference is determined basedupon the tax rates that JPMorgan Chase Bank, N.A. expects to be ineffect when the underlying items of income and expense are realized.JPMorgan Chase Bank, N.A.’s expense for income taxes includes thecurrent and deferred portions of that expense. A valuation allowanceis established to reduce deferred tax assets to the amount JPMorganChase Bank, N.A. expects to realize.

Due to the inherent complexities arising from the nature ofJPMorgan Chase Bank, N.A.’s businesses, and from conducting busi-ness and being taxed in a substantial number of jurisdictions, signifi-cant judgments and estimates are required to be made. Agreementof tax liabilities between JPMorgan Chase Bank, N.A. and the manytax jurisdictions in which JPMorgan Chase Bank, N.A. files taxreturns may not be finalized for several years. Thus, JPMorgan ChaseBank, N.A.’s final tax-related assets and liabilities may ultimately bedifferent than those currently reported.

At December 31, 2007, and January 1, 2007, JPMorgan Chase Bank,N. A.’s unrecognized tax benefits, excluding related interest expenseand penalties, was $3.3 billion and $2.6 billion, respectively, of which$900 million and $700 million, if recognized, would reduce the annualeffective tax rate. As JPMorgan Chase Bank, N.A. is presently underaudit by a number of tax authorities, it is reasonably possible thatunrecognized tax benefits could change significantly over the next 12months. JPMorgan Chase Bank, N.A. does not expect that any suchchanges would have a material impact on its annual effective tax rate.

The following table presents a reconciliation of the beginning andending amount of unrecognized tax benefits for the year endedDecember 31, 2007.

Unrecognized tax benefitsYear ended December 31, 2007 (in millions)

Balance at January 1, 2007 $ 2,564Increases based on tax positions related

to the current period 355Increases based on tax positions related to prior periods 790Decreases based on tax positions related to prior periods (287)Decreases related to settlements with taxing authorities (154)Decreases related to a lapse of applicable statute

of limitations (13)

Balance at December 31, 2007 $ 3,255

Pretax interest expense and penalties related to income tax liabilitiesrecognized in Income tax expense was $303 million ($182 millionafter-tax) in 2007. Included in Accounts payable, accrued expense andother liabilities at December 31, 2007, and January 1, 2007, in addi-tion to JPMorgan Chase Bank, N.A.’s liability for unrecognized taxbenefits, was $800 million and $700 million, respectively, for incometax-related interest and penalties, of which the penalty componentwas insignificant.

JPMorgan Chase & Co. is subject to ongoing tax examinations by thetax authorities of the various jurisdictions in which it operates,including U.S. federal, state and non-U.S. jurisdictions. JPMorganChase & Co.’s consolidated federal income tax returns are presentlyunder examination by the Internal Revenue Service (IRS) for the years2003, 2004 and 2005. The consolidated federal income tax returnsof heritage Bank One Corporation, which merged with and intoJPMorgan Chase & Co. on July 1, 2004, are under examination forthe years 2000 through 2003, and for the period January 1, 2004,through July 1, 2004. Both examinations are expected to conclude inthe latter part of 2008. The IRS audit of the 2006 consolidated feder-al income tax return has not yet commenced. Certain administrativeappeals are pending with the IRS relating to prior examination peri-ods, for JPMorgan Chase & Co. for the years 2001 and 2002, and forBank One and its predecessor entities for various periods from 1996through 1999. For years prior to 2001, refund claims relating toincome and credit adjustments, and to tax attribute carrybacks, forJPMorgan Chase & Co. and its predecessor entities, including BankOne, either have been or will be filed. Also, interest rate swap valua-tions by a Bank One predecessor entity for the years 1990 through1993 are, and have been, the subject of litigation in both the TaxCourt and the U.S. Court of Appeals.

Deferred income tax expense (benefit) results from differencesbetween assets and liabilities measured for financial reporting andfor income-tax return purposes. The significant components ofdeferred tax assets and liabilities are reflected in the following table.


Deferred tax assetsAllowance for loan losses $ 3,013 $ 2,148Allowance for other than loan losses 2,127 2,147Employee benefits 1,175 1,903Non-U.S. operations 217 540Fair value adjustments 169 432

Gross deferred tax assets $ 6,701 $ 7,170

Deferred tax liabilitiesDepreciation and amortization $ 2,260 $ 2,816Leasing transactions 1,741 2,175Non-U.S. operations 1,335 1,368Fee income 381 373Other, net 301 116

Gross deferred tax liabilities $ 6,018 $ 6,848

Valuation allowance $ 220 $ 210

Net deferred tax asset $ 463 $ 112

A valuation allowance has been recorded in accordance with SFAS109, primarily relating to capital losses associated with certain port-folio investments.


The components of income tax expense included in the Consolidatedstatements of income were as follows.


Current income tax expense U.S. federal $ 2,328 $4,150 $3,195Non-U.S. 2,591 1,354 589U.S. state and local 559 538 103

Total current income tax expense 5,478 6,042 3,887

Deferred income tax expense (benefit) U.S. federal 325 (1,516) (1,664)Non-U.S. (184) 194 319U.S. state and local (254) (233) 21

Total deferred income tax expense (benefit) (113) (1,555) (1,324)

Total income tax expensefrom continuing operations 5,365 4,487 2,563

Total income tax expensefrom discontinued operations — 574 134

Total income tax expense $ 5,365 $5,061 $2,697

Total income tax expense includes $367 million of tax benefitsrecorded in 2006 as a result of tax audit resolutions.

The preceding table does not reflect the tax effect of certain itemsthat are recorded each period directly in Stockholder’s equity as pre-scribed by SFAS 52, SFAS 115, SFAS 133 and SFAS 158, and certaintax benefits associated with JPMorgan Chase Bank, N.A.’s employeestock-based compensation plans. Also not reflected are the cumula-tive tax effects of initially implementing in 2007, SFAS 157, SFAS 159and FIN 48, and in 2006, SFAS 155, SFAS 156 and SFAS 158. The taxeffects of all items recorded directly to Stockholder’s equity was anincrease in Stockholder’s equity of $149 million, $89 million, and$154 million in 2007, 2006, and 2005, respectively.

U.S. federal income taxes have not been provided on the undistrib-uted earnings of certain non-U.S. subsidiaries, to the extent that suchearnings have been reinvested abroad for an indefinite period oftime. For 2007, such earnings approximated $1.4 billion on a pretaxbasis. At December 31, 2007, the cumulative amount of undistrib-uted pretax earnings in these subsidiaries approximated $3.4 billion.It is not practicable at this time to determine the income tax liabilitythat would result upon repatriation of these earnings.

On October 22, 2004, the American Jobs Creation Act of 2004 (the“Act”) was signed into law. The Act created a temporary incentive forU.S. companies to repatriate accumulated foreign earnings at a sub-stantially reduced U.S. effective tax rate by providing a dividendsreceived deduction on the repatriation of certain foreign earnings tothe U.S. taxpayer (the “repatriation provision”). The deduction wassubject to a number of limitations and requirements. In the fourthquarter of 2005, JPMorgan Chase Bank, N.A. applied the repatriationprovision to $1.7 billion of cash from foreign earnings, resulting in anet tax expense of $6 million. The $1.7 billion of cash was investedin accordance with JPMorgan Chase Bank, N.A.’s domestic reinvest-ment plan pursuant to the guidelines set forth in the Act.

The tax expense (benefit) applicable to securities gains and losses forthe years 2007, 2006 and 2005 was $19 million, $(221) million and$(584) million, respectively.

A reconciliation of the applicable statutory U.S. income tax rate tothe effective tax rate for continuing operations for the past threeyears is shown in the following table.


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 3.0 2.5 0.8Tax-exempt income (1.1) (0.9) (1.0)Non-U.S. subsidiary earnings (1.6) (0.8) (1.0)Business tax credits (1.7) (1.6) (0.9)Other, net (0.3) (1.2) 1.5

Effective tax rate 33.3% 33.0% 34.4%

The following table presents the U.S. and non-U.S. components ofIncome from continuing operations before income tax expense.


U.S. $ 9,391 $ 8,054 $ 4,918Non-U.S.(a) 6,706 5,554 2,530

Income from continuing operationsbefore income tax expense $ 16,097 $13,608 $ 7,448

(a) For purposes of this table, non-U.S. income is defined as income generated from operations located outside the United States.

Note 26 – Restrictions on cash and intercompany funds transfersThe business of JPMorgan Chase Bank, N.A. is subject to examinationand regulation by the OCC. JPMorgan Chase Bank, N.A. is a memberof the U.S. Federal Reserve System and its deposits are insured by theFederal Deposit Insurance Corporation (“FDIC”).

The Board of Governors of the Federal Reserve System (the “FederalReserve Board” or the “FRB”) requires depository institutions tomaintain cash reserves with a Federal Reserve Bank. The averageamount of reserve balances deposited by JPMorgan Chase Bank, N.A.with various Federal Reserve Banks was approximately $1.6 billion in2007 and $2.2 billion in 2006.

Restrictions imposed by U.S. federal law prohibit JPMorgan Chase &Co. and certain of its affiliates from borrowing from banking sub-sidiaries unless the loans are secured in specified amounts. Suchsecured loans are generally limited to 10% of the banking sub-sidiary’s total capital, as determined by the risk-based capital guide-lines; the aggregate amount of all such loans is limited to 20% ofthe banking subsidiary’s total capital.

In addition to dividend restrictions set forth in statutes and regula-tions, the OCC, FDIC and Federal Reserve Board have authority underthe Financial Institutions Supervisory Act to prohibit or to limit thepayment of dividends by the banking organizations they supervise,including JPMorgan Chase Bank, N.A., if, in the banking regulator’sopinion, payment of a dividend would constitute an unsafe or unsoundpractice in light of the financial condition of the banking organization.



At January 1, 2008 and 2007, JPMorgan Chase Bank, N.A. could pay, inthe aggregate, $16.2 billion and $13.5 billion, respectively, in dividendsto JPMorgan Chase & Co. without the prior approval of their relevantbanking regulators. The capacity to pay dividends in 2008 will be sup-plemented by JPMorgan Chase Bank, N.A.’s earnings during the year.

In compliance with rules and regulations established by U.S. andnon-U.S. regulators, as of December 31, 2007 and 2006, cash in theamount of $16.0 billion and $8.6 billion, respectively, and securitieswith a fair value of $2.1 million and $2.0 million, respectively, weresegregated in special bank accounts for the benefit of securities andfutures brokerage customers.

Note 27 – CapitalJPMorgan Chase Bank, N. A.’s banking regulator, the OCC, establishescapital requirements, including well-capitalized standards for nationalbanks. It is the intent of JPMorgan Chase Bank, N.A. to maintain a“well-capitalized” status under the capital requirements to which it issubject.

There are two categories of risk-based capital: Tier 1 capital and Tier 2capital. Tier 1 capital includes common stockholder’s equity, qualifyingpreferred stock and minority interest less goodwill and other adjust-ments. Tier 2 capital consists of preferred stock not qualifying as Tier1, subordinated long-term debt and other instruments qualifying asTier 2, and the aggregate allowance for credit losses up to a certainpercentage of risk-weighted assets. Total regulatory capital is subjectto deductions for investments in certain subsidiaries. Under the risk-based capital guidelines, JPMorgan Chase Bank, N.A. is required tomaintain minimum ratios of Tier 1 and Total (Tier 1 plus Tier 2) capital

to risk weighted assets, as well as minimum leverage ratios (whichare defined as Tier 1 capital to average adjusted on–balance sheetassets). Failure to meet these minimum requirements could cause theOCC to take action. As of December 31, 2007 and 2006, JPMorganChase Bank, N.A. was well-capitalized and met all capital require-ments to which it was subject.

Basel II The minimum risk-based capital requirements adopted by the federalbanking agencies follow the Capital Accord of the Basel Committee onBanking Supervision. In 2004, the Basel Committee published a revisionto the Accord (“Basel II”). The goal of the new Basel II Framework is toprovide more risk-sensitive regulatory capital calculations and promoteenhanced risk management practices among large, internationally activebanking organizations. U.S. banking regulators published a final Basel IIrule in December 2007, which will require JPMorgan Chase Bank, N. A.to implement Basel II.

Prior to full implementation of the new Basel II Framework, JPMorganChase & Co. will be required to complete a qualification period of fourconsecutive quarters during which it will need to demonstrate that itmeets the requirements of the new rule to the satisfaction of its primaryU.S. banking regulators. The U.S. implementation timetable consists of thequalification period, starting any time between April 1, 2008, and April 1,2010, followed by a minimum transition period of three years. During thetransition period, Basel ll risk-based capital requirements cannot fallbelow certain floors based on current (“Basel l”) regulations. JPMorganChase Bank, N. A. expects to be in compliance with all relevant Basel IIrules within the established timelines.

The following table presents the risk-based capital ratios for JPMorgan Chase Bank, N.A. at December 31, 2007 and 2006.

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, 2007 $ 78,453 $ 112,253 $ 950,001 $ 1,268,304 8.3% 11.8% 6.2%December 31, 2006 68,726 96,103 840,057 1,157,449 8.2 11.4 5.9

Well-capitalized ratios(a) 6.0% 10.0% 5.0%(d)

Minimum capital ratios(a) 4.0 8.0 3.0(e)

(a) As defined by the regulations issued by the OCC, FDIC and the FRB.(b) Includes off–balance sheet risk-weighted assets in the amounts of $336.8 billion at December 31, 2007, and $290.1 billion at December 31, 2006.(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 certain subsidiaries and the total adjusted carrying value of nonfinancial equity investments that are subject to deductions from Tier 1 capital.(d) Represents requirements for banking subsidiaries pursuant to regulations issued under the Federal Deposit Insurance Corporation Improvement Act.(e) The minimum Tier 1 leverage ratio for banks is 3% or 4% depending on factors specified in regulations issued by the OCC and the FRB.


The following table shows the components of JPMorgan Chase Bank,N.A.’s Tier 1 and Total capital.


Tier 1 capitalTotal Stockholder’s equity $106,346 $ 96,010Effect of certain items in Accumulated

other comprehensive income (loss) excluded from Tier 1 capital 702 944

Adjusted Stockholder’s equity 107,048 96,954Minority interest(a) 1,127 1,003Less: Goodwill 25,819 25,939

SFAS 157 DVA 783 —Investments in certain subsidiaries 15 4Nonqualifying intangible assets 3,105 3,288

Tier 1 capital 78,453 68,726

Tier 2 capitalLong-term debt and other instruments

qualifying as Tier 2 25,913 21,684Qualifying allowance for credit losses 7,864 5,693Adjustment for investments in certain

subsidiaries and other 23 —

Tier 2 capital 33,800 27,377

Total qualifying capital $112,253 $ 96,103

(a) Primarily includes trust preferred capital debt securities of certain business trusts.

Note 28 – Commitments and contingenciesAt December 31, 2007, JPMorgan Chase Bank, N.A. and its sub-sidiaries were obligated under a number of noncancelable operatingleases for premises and equipment used primarily for banking purpos-es. Certain leases contain renewal options or escalation clauses pro-viding for increased rental payments based upon maintenance, utilityand tax increases or require JPMorgan Chase Bank, N.A. to performrestoration work on leased premises. No lease agreement imposesrestrictions on JPMorgan Chase Bank, N.A.’s ability to pay dividends,engage in debt or equity financing transactions or enter into furtherlease agreements.

The following table presents required future minimum rental paymentsunder operating leases with noncancelable lease terms that expire afterDecember 31, 2007.

Year ended December 31, (in millions)

2008 $ 9342009 9132010 8502011 7692012 715After 2012 5,754

Total minimum payments required(a) 9,935Less: Sublease rentals under noncancelable subleases (1,228)

Net minimum payment required $ 8,707

(a) Lease restoration obligations are accrued in accordance with SFAS 13, and are notreported as a required minimum lease payment.

Total rental expense was as follows.


Gross rental expense $1,212 $1,163 $ 1,142Sublease rental income (147) (178) (170)

Net rental expense $1,065 $ 985 $ 972

At December 31, 2007, assets were pledged to secure public depositsand for other purposes. The significant components of the assets pledgedwere as follows.


Reverse repurchase/securities borrowing agreements $ 253 $ 199

Securities 11 45Loans 111 62Trading assets and other 93 65

Total assets pledged $ 468 $ 371

The Bank of New York Mellon Corporation (“BNYM”), formerly knownas The Bank of New York, has informed JPMorgan Chase Bank, N.A. ofdifficulties in locating certain documentation, including IRS Forms W-8and W-9, related to certain accounts transferred to BNYM in connec-tion with JPMorgan Chase Bank, N.A.’s sale of its corporate trust busi-ness. JPMorgan Chase Bank, N.A. could have liability to the IRS if it isdetermined that there was noncompliance with IRS tax reporting andwithholding requirements, and to BNYM if it is determined that therewas noncompliance with the sales agreements. JPMorgan Chase Bank,N.A. is working with BNYM to locate and verify documents, and toobtain replacement documentation where necessary. JPMorgan ChaseBank, N.A. and BNYM have jointly notified the IRS of the matter andare working cooperatively to address the issues and resolve any out-standing reporting and withholding issues with the IRS. AlthoughJPMorgan Chase Bank, N.A. currently does not expect that anyamounts payable would be material, it is too early to precisely deter-mine the extent of any potential liability relating to this matter.

Litigation reserveInsurance recoveries related to certain material legal proceedings were$12 million, $194 million and $79 million in 2007, 2006 and 2005,respectively. Charges related to certain material legal proceedings were$1.2 billion in 2005. There were no charges in 2007 and 2006 relatedto certain material legal proceedings.

JPMorgan Chase Bank, N.A. maintains litigation reserves for certainof its outstanding litigation. In accordance with the provisions of SFAS5, JPMorgan Chase Bank, N.A. accrues for a litigation-related liabilitywhen it is probable that such a liability has been incurred and theamount of the loss can be reasonably estimated. When JPMorganChase Bank, N.A. is named a defendant in a litigation and may besubject to joint and several liability and a judgment sharing agree-ment is in place, JPMorgan Chase Bank, N.A. recognizes expense andobligations net of amounts expected to be paid by other signatoriesto the judgment sharing agreement.



While the outcome of litigation is inherently uncertain, managementbelieves, in light of all information known to it at December 31,2007, JPMorgan Chase Bank, N.A.’s litigation reserves were adequateat such date. Management reviews litigation reserves periodically, andthe reserves may be increased or decreased in the future to reflectfurther relevant developments. JPMorgan Chase Bank, N.A. believes ithas meritorious defenses to the claims asserted against it in its cur-rently outstanding litigation and, with respect to such litigation,intends to continue to defend itself vigorously, litigating or settlingcases according to management’s judgment as to what is in the bestinterests of JPMorgan Chase & Co. and its stockholders.

Note 29 – Accounting for derivative instruments and hedging activitiesDerivative instruments enable end users to increase, reduce or alterexposure to credit or market risks. The value of a derivative is derivedfrom its reference to an underlying variable or combination of vari-ables such as equity, foreign exchange, credit, commodity or interestrate prices or indices. JPMorgan Chase Bank, N.A. makes markets inderivatives for customers and also is an end-user of derivatives inorder to hedge market exposures, modify the interest rate characteris-tics of related balance sheet instruments or meet longer-term invest-ment objectives. The majority of JPMorgan Chase Bank, N.A.’s deriva-tives are entered into for trading purposes. Both trading and end-userderivatives are recorded at fair value in Trading assets and Trading lia-bilities as set forth in Note 7 on page 22 of these consolidated finan-cial statements.

Interest rate contracts, which are generally interest rate swaps, for-wards and futures are utilized in JPMorgan Chase Bank, N.A.’s riskmanagement activities in order to minimize significant fluctuations inearnings that are caused by interest rate volatility. As a result of inter-est rate fluctuations, fixed-rate assets and liabilities appreciate ordepreciate in market value. Gains or losses on the derivative instru-ments that are linked to the fixed-rate assets and liabilities beinghedged are expected to substantially offset this unrealized apprecia-tion or depreciation. Interest income and Interest expense on variable-rate assets and liabilities increase or decrease as a result of interestrate fluctuations. Gains and losses on the derivative instruments thatare linked to the assets and liabilities being hedged are expected tosubstantially offset this variability in earnings. Interest rate swapsinvolve the exchange of fixed-rate and variable-rate interest paymentsbased on the contractual underlying notional amount. Forward con-tracts used for JPMorgan Chase Bank, N.A.’s interest rate risk man-agement activities are primarily arrangements to exchange cash in thefuture based on price movements in securities. Futures contracts usedare primarily index futures providing for cash payments based uponthe movements of an underlying rate index.

JPMorgan Chase Bank, N.A. uses foreign currency contracts to managethe foreign exchange risk associated with certain foreign currency-denominated assets and liabilities, forecasted transactions denominatedin a foreign currency, as well as JPMorgan Chase Bank, N.A.’s equityinvestments in foreign subsidiaries. As a result of foreign currency fluctu-ations, the U.S. dollar equivalent values of the foreign currency-denomi-nated assets and liabilities or forecasted transactions change. Gains orlosses on the derivative instruments that are linked to the foreign currencydenominated assets or liabilities or forecasted transactions being hedgedare expected to substantially offset this variability. Foreign exchange for-ward contracts represent agreements to exchange the currency of onecountry for the currency of another country at an agreed-upon price onan agreed-upon settlement date.

JPMorgan Chase Bank, N.A. uses forward contracts to manage theoverall price risk associated with its gold inventory. As a result of goldprice fluctuations, the fair value of the gold inventory changes. Gainsor losses on the derivative instruments that are linked to the goldinventory being hedged are expected to offset this unrealized appreci-ation or depreciation. Forward contracts used for JPMorgan ChaseBank, N.A.’s gold inventory risk management activities are arrange-ments to deliver gold in the future.

SFAS 133, as amended by SFAS 138, SFAS 149, and SFAS 155, estab-lishes accounting and reporting standards for derivative instruments,including those used for trading and hedging activities, and derivativeinstruments embedded in other contracts. All free-standing deriva-tives, whether designated for hedging relationships or not, arerequired to be recorded on the Consolidated balance sheets at fairvalue. The accounting for changes in value of a derivative depends onwhether the contract is for trading purposes or has been designatedand qualifies for hedge accounting.

In order to qualify for hedge accounting, a derivative must be consideredhighly effective at reducing the risk associated with the exposure beinghedged. In order for a derivative to be designated as a hedge, there mustbe documentation of the risk management objective and strategy, includ-ing identification of the hedging instrument, the hedged item and the riskexposure, and how effectiveness is to be assessed prospectively and retro-spectively. To assess effectiveness, JPMorgan Chase Bank, N.A. uses statis-tical methods such as regression analysis, as well as nonstatistical meth-ods including dollar value comparisons of the change in the fair value ofthe derivative to the change in the fair value or cash flows of the hedgeditem. The extent to which a hedging instrument has been and is expectedto continue to be effective at achieving offsetting changes in fair value orcash flows must be assessed and documented at least quarterly. Any inef-fectiveness must be reported in current-period earnings. If it is determinedthat a derivative is not highly effective at hedging the designated expo-sure, hedge accounting is discontinued.


For qualifying fair value hedges, all changes in the fair value of thederivative and in the fair value of the hedged item for the risk beinghedged are recognized in earnings. If the hedge relationship is termi-nated, then the fair value adjustment to the hedged item continues tobe reported as part of the basis of the item and continues to be amor-tized to earnings as a yield adjustment. For qualifying cash flowhedges, the effective portion of the change in the fair value of thederivative is recorded in Other comprehensive income and recognizedin the Consolidated statement of income when the hedged cash flowsaffect earnings. The ineffective portions of cash flow hedges are imme-diately recognized in earnings. If the hedge relationship is terminated,then the change in fair value of the derivative recorded in Other com-prehensive income is recognized when the cash flows that werehedged occur, consistent with the original hedge strategy. For hedgerelationships discontinued because the forecasted transaction is notexpected to occur according to the original strategy, any related deriva-tive amounts recorded in Other comprehensive income are immediatelyrecognized in earnings. For qualifying net investment hedges, changesin the fair value of the derivative or the revaluation of the foreign cur-rency–denominated debt instrument are recorded in the translationadjustments account within Other comprehensive income.

JPMorgan Chase Bank, N.A.’s fair value hedges primarily includehedges of fixed-rate long-term debt, warehouse loans, AFS securities,MSRs and gold inventory. Interest rate swaps are the most commontype of derivative contract used to modify exposure to interest raterisk, converting fixed-rate assets and liabilities to a floating-rate. Priorto the adoption of SFAS 156, interest rate options, swaptions andforwards were also used in combination with interest rate swaps tohedge the fair value of JPMorgan Chase Bank, N.A.’s MSRs in SFAS133 hedge relationships. For a further discussion of MSR risk manage-ment activities, see Note 19 on pages 54–57 of these consolidatedfinancial statements. All amounts have been included in earnings con-sistent with the classification of the hedged item, primarily Net inter-est income for Long-term debt and AFS securities, Mortgage fees andrelated income for MSRs, Other income for warehouse loans; andPrincipal transactions for gold inventory. JPMorgan Chase Bank, N.A.did not recognize any gains or losses during 2007, 2006 or 2005 onfirm commitments that no longer qualify as fair value hedges.

JPMorgan Chase Bank, N.A. also enters into derivative contracts tohedge exposure to variability in cash flows from floating-rate financialinstruments and forecasted transactions, primarily the rollover ofshort-term assets and liabilities, and foreign currency–denominatedrevenue and expense. Interest rate swaps, futures and forward con-tracts are the most common instruments used to reduce the impact ofinterest rate and foreign exchange rate changes on future earnings.All amounts affecting earnings have been recognized consistent withthe classification of the hedged item, primarily Net interest income.

JPMorgan Chase Bank, N.A. uses forward foreign exchange contractsand foreign currency–denominated debt instruments to protect thevalue of net investments in subsidiaries, the functional currency ofwhich is not the U.S. dollar. The portion of the hedging instrumentsexcluded from the assessment of hedge effectiveness (forwardpoints) is recorded in Net interest income.

The following table presents derivative instrument hedging-relatedactivities for the periods indicated.


Fair value hedge ineffective net gains/(losses)(a) $ 38 $ (44) $ (73)

Cash flow hedge ineffective net gains/(losses)(a) 29 2 (2)

Cash flow hedging net gains/(losses) on forecasted transactions that failed to occur(b) 15 — —

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

(b) During the second half of 2007, JPMorgan Chase Bank, N.A. did not issue short-termfixed rate Canadian dollar denominated notes due to the weak credit market forCanadian short-term debt.

Over the next 12 months, it is expected that $254 million (after-tax)of net losses recorded in Other comprehensive income at December31, 2007, will be recognized in earnings. The maximum length of timeover which forecasted transactions are hedged is 10 years, and suchtransactions primarily relate to core lending and borrowing activities.

JPMorgan Chase Bank, N.A. does not seek to apply hedge account-ing to all of JPMorgan Chase Bank, N.A.’s economic hedges. Forexample, JPMorgan Chase Bank, N.A. does not apply hedge account-ing to standard credit derivatives used to manage the credit risk ofloans and commitments because of the difficulties in qualifying suchcontracts as hedges under SFAS 133. Similarly, JPMorgan ChaseBank, N.A. does not apply hedge accounting to certain interest ratederivatives used as economic hedges.

Note 30 – Off–balance sheet lending-relatedfinancial instruments and guaranteesJPMorgan Chase Bank, N.A. utilizes lending-related financial instru-ments (e.g., commitments and guarantees) to meet the financingneeds of its customers. The contractual amount of these financialinstruments represents the maximum possible credit risk should thecounterparty draw down the commitment or JPMorgan Chase Bank,N.A. fulfill its obligation under the guarantee, and the counterpartysubsequently fails to perform according to the terms of the contract.Most of these commitments and guarantees expire without a defaultoccurring or without being drawn. As a result, the total contractualamount of these instruments is not, in JPMorgan Chase Bank, N.A.’sview, representative of its actual future credit exposure or fundingrequirements. Further, certain commitments, primarily related to con-sumer financings, are cancelable, upon notice, at the option ofJPMorgan Chase Bank, N.A.

To provide for the risk of loss inherent in wholesale-related contracts,an allowance for credit losses on lending-related commitments ismaintained. See Note 16 on pages 38–39 of these consolidated finan-cial statements for further discussion of the allowance for credit losseson lending-related commitments.



The following table summarizes the contractual amounts of off–balance sheet lending-related financial instruments and guarantees and the relat-ed allowance for credit losses on lending-related commitments at December 31, 2007 and 2006.

Off–balance sheet lending-related financial instruments and guaranteesAllowance for

Contractual amount lending-related commitments

December 31, (in millions) 2007 2006 2007 2006

Lending-relatedConsumer(a) $ 132,157 $ 112,249 $ 15 $ 25

Wholesale:Other unfunded commitments to extend credit(b)(c)(d)(e)(f) 248,393 230,826 570 304Asset purchase agreements(g) 90,105 67,529 9 6Standby letters of credit and financial guarantees(c)(h)(i) 98,627 87,495 254 187Other letters of credit(c) 5,371 5,559 1 1

Total wholesale 442,496 391,409 834 498

Total lending-related $ 574,653 $ 503,658 $ 849 $ 523

Other guaranteesSecurities lending guarantees(j) $ 388,326 $ 318,095 NA NADerivatives qualifying as guarantees(k) 85,153 71,422 NA NA

(a) Includes credit card and home equity lending-related commitments of $31.1 billion and $74.2 billion, respectively, at December 31, 2007; and $22.1 billion and $69.5 billion, respec-tively, at December 31, 2006. These amounts for credit card and home equity lending–related commitments represent the total available credit for these products. JPMorgan ChaseBank, N.A. has not experienced, and does not anticipate, that all available lines of credit for these products will be utilized at the same time. JPMorgan Chase Bank, N.A. can reduce orcancel these lines of credit by providing the borrower prior notice or, in some cases, without notice as permitted by law.

(b) Includes unused advised lines of credit totaling $38.2 billion and $39.0 billion at December 31, 2007 and 2006, respectively, which are not legally binding. In regulatory filings withthe Federal Reserve Board, unused advised lines are not reportable.

(c) Represents contractual amount net of risk participations totaling $28.3 billion and $32.8 billion at December 31, 2007 and 2006, respectively.(d) Includes commitments to affiliates of $159 million and $2.4 billion at December 31, 2007 and 2006, respectively.(e) Included in Other unfunded commitments to extend credit are commitments to investment and noninvestment grade counterparties in connection with leveraged acquisitions of $8.2 billion at

December 31, 2007.(f) Excludes unfunded commitments for other equity investments of $517 and $429 million at December 31, 2007 and 2006, respectively.(g) Largely represents asset purchase agreements to JPMorgan Chase Bank, N.A.’s administered multi-seller, asset-backed commercial paper conduits. It also includes $1.1 billion and

$1.4 billion of asset purchase agreements to other third-party entities at December 31, 2007 and 2006, respectively.(h) JPMorgan Chase Bank, N. A. held collateral relating to $15.8 billion and $13.5 billion of these arrangements at December 31, 2007 and 2006, respectively.(i) Included unused commitments to issue standby letters of credit of $50.5 billion and $45.5 billion at December 31, 2007 and 2006, respectively.(j) Collateral held by JPMorgan Chase Bank, N.A. in support of securities lending indemnification agreements was $393.0 billion and $317.9 billion at December 31, 2007 and 2006, respectively.(k) Represents notional amounts of derivatives qualifying as guarantees.

FIN 45 guaranteesFIN 45 establishes accounting and disclosure requirements for guaran-tees, requiring that a guarantor recognize, at the inception of a guaran-tee, a liability in an amount equal to the fair value of the obligationundertaken in issuing the guarantee. FIN 45 defines a guarantee as acontract that contingently requires the guarantor to pay a guaranteedparty, based upon: (a) changes in an underlying asset, liability or equi-ty security of the guaranteed party; or (b) a third party’s failure to per-form under a specified agreement. JPMorgan Chase Bank, N. A. consid-ers the following off–balance sheet lending arrangements to be guar-antees under FIN 45: certain asset purchase agreements, standby lettersof credit and financial guarantees, securities lending indemnifications,certain indemnification agreements included within third-party contrac-tual arrangements and certain derivative contracts. These guaranteesare described in further detail below.

The fair value at inception of the obligation undertaken when issuingthe guarantees and commitments that qualify under FIN 45 is typi-cally equal to the net present value of the future amount of premiumreceivable under the contract. JPMorgan Chase Bank, N. A. hasrecorded this amount in Other Liabilities with an offsetting entryrecorded in Other Assets. As cash is received under the contract, it isapplied to the premium receivable recorded in Other Assets, and thefair value of the liability recorded at inception is amortized into

Other unfunded commitments to extend creditUnfunded commitments to extend credit are agreements to lend onlywhen a customer has complied with predetermined conditions, andthey generally expire on fixed dates.

Included in Other unfunded commitments to extend credit are com-mitments to investment and noninvestment grade borrowers in con-nection with leveraged acquisitions. These commitments are depend-ent on whether the acquisition by the borrower is successful, tend tobe short-term in nature and, in most cases, are subject to certainconditions based on the borrower’s financial condition or other fac-tors. Additionally, JPMorgan Chase Bank, N.A. often syndicates por-tions of the initial position to other investors, depending on marketconditions. These commitments generally contain flexible pricing fea-tures to adjust for changing market conditions prior to closing.Alternatively, the borrower may turn to the capital markets for requiredfunding instead of drawing on the commitment provided by JPMorganChase Bank, N.A., and the commitment may expire unused. As such,these commitments are not necessarily indicative of JPMorgan ChaseBank, N.A.’s actual risk and the total commitment amount may notreflect actual future cash flow requirements. The amount of these com-mitments at December 31, 2007, was $8.2 billion. For further informa-tion, see Note 5 and Note 6 on pages 10–18 and 19–21, respective-ly, of these consolidated financial statements.


income as Lending & deposit-related fees over the life of the guaran-tee contract. The amount of the liability related to FIN 45 guaranteesrecorded at December 31, 2007 and 2006, excluding the allowancefor credit losses on lending-related commitments and derivative con-tracts discussed below, was approximately $335 million and $297million, respectively.

Asset purchase agreementsThe majority of JPMorgan Chase Bank, N.A.’s unfunded commitmentsare not guarantees as defined in FIN 45, except for certain asset pur-chase agreements that are principally used as a mechanism to pro-vide liquidity to SPEs, primarily multi-seller conduits, as described inNote 18 on pages 46–54 of these consolidated financial statements.The conduit’s administrative agent can require the liquidity provider toperform under their asset purchase agreement with the conduit at anytime. These agreements may cause JPMorgan Chase Bank, N.A. topurchase an asset from the SPE at an amount above the asset’s thenfair value, in effect providing a guarantee of the initial value of thereference asset as of the date of the agreement. In most instances,third-party credit enhancements of the SPE mitigate JPMorgan ChaseBank, N.A.’s potential losses on these agreements.

Standby letters of credit and financial guaranteesStandby letters of credit and financial guarantees are conditionallending commitments issued by JPMorgan Chase Bank, N.A. to guar-antee the performance of a customer to a third party under certainarrangements, such as commercial paper facilities, bond financings,acquisition financings, trade and similar transactions. Approximately50% of these arrangements mature within three years. JPMorganChase Bank, N.A. typically has recourse to recover from the customerany amounts paid under these guarantees; in addition, JPMorganChase Bank, N.A. may hold cash or other highly liquid collateral tosupport these guarantees.

Securities lending indemnification Through JPMorgan Chase Bank, N.A.’s securities lending program, cus-tomers’ securities, via custodial and non-custodial arrangements, maybe lent to third parties. As part of this program, JPMorgan Chase Bank,N.A. issues securities lending indemnification agreements to the lenderwhich protects it principally against the failure of the third-party bor-rower to return the lent securities. To support these indemnificationagreements, JPMorgan Chase Bank, N.A. obtains cash or other highlyliquid collateral with a market value exceeding 100% of the value of thesecurities on loan from the borrower. Collateral is marked to market dailyto help assure that collateralization is adequate. Additional collateral iscalled from the borrower if a shortfall exists or released to the borrowerin the event of overcollateralization. If an indemnifiable default by aborrower occurs, JPMorgan Chase Bank, N.A. would expect to use thecollateral held to purchase replacement securities in the market or tocredit the lending customer with the cash equivalent thereof.

Also, as part of this program, JPMorgan Chase Bank, N.A. investscash collateral received from the borrower in accordance withapproved guidelines. On an exception basis, JPMorgan Chase Bank,N.A. may indemnify the lender against this investment risk when cer-tain types of investments are made.

Based upon historical experience, management believes that theserisks of loss are remote.

Indemnification agreements – generalIn connection with issuing securities to investors, JPMorgan ChaseBank, N.A. may enter into contractual arrangements with third partiesthat may require JPMorgan Chase Bank, N.A. to make a payment tothem in the event of a change in tax law or an adverse interpretationof tax law. In certain cases, the contract also may include a terminationclause, which would allow JPMorgan Chase Bank, N.A. to settle thecontract at its fair value; thus, such a clause would not requireJPMorgan Chase Bank, N.A. to make a payment under the indemnifica-tion agreement. Even without the termination clause, management doesnot expect such indemnification agreements to have a material adverseeffect on the consolidated financial condition of JPMorgan ChaseBank, N.A. See below for more information regarding JPMorgan ChaseBank, N.A.’s loan securitization activities. JPMorgan Chase Bank, N.A.may also enter into indemnification clauses in connection with thelicensing of software to clients (“software licensees”) or when it sells abusiness or assets to a third party (“third-party purchasers”), pursuantto which it indemnifies software licensees for claims of liability or dam-age that may occur subsequent to the licensing of the software, orthird-party purchasers for losses they may incur due to actions takenby JPMorgan Chase Bank, N.A. prior to the sale of the business orassets. It is difficult to estimate JPMorgan Chase Bank, N.A.’s maxi-mum exposure under these indemnification arrangements, since thiswould require an assessment of future changes in tax law and futureclaims that may be made against JPMorgan Chase Bank, N.A. that havenot yet occurred. However, based upon historical experience, manage-ment expects the risk of loss to be remote.

Securitization-related indemnificationsAs part of JPMorgan Chase Bank, N.A.’s loan securitization activities,as described in Note 17 on pages 39–45 of these consolidated finan-cial statements, JPMorgan Chase Bank, N.A. provides representationsand warranties that certain securitized loans meet specific require-ments. JPMorgan Chase Bank, N.A. may be required to repurchasethe loans and/or indemnify the purchaser of the loans against lossesdue to any breaches of such representations or warranties. Generally,the maximum amount of future payments JPMorgan Chase Bank,N.A. would be required to make under such repurchase and/or indem-nification provisions would be equal to the current amount of assetsheld by such securitization-related SPEs as of December 31, 2007,plus, in certain circumstances, accrued and unpaid interest on suchloans and certain expense. The potential loss due to such repurchaseand/or indemnity is mitigated by the due diligence JPMorgan ChaseBank, N.A. performs before the sale to ensure that the assets complywith the requirements set forth in the representations and warranties.Historically, losses incurred on such repurchases and/or indemnifica-tions have been insignificant, and therefore management expects therisk of material loss to be remote.

Credit card charge-backs JPMorgan Chase Bank, N.A. is a partner with one of the leading com-panies in electronic payment services in a joint venture operatingunder the name of Chase Paymentech Solutions, LLC (the “joint ven-ture”). The joint venture was formed in October 2005, as a result ofan agreement by JPMorgan Chase Bank, N.A. and First DataCorporation, its joint venture partner, to integrate the companies’jointly owned Chase Merchant Services and Paymentech merchantbusinesses. The joint venture provides merchant processing services in



the United States and Canada. Under the rules of Visa USA, Inc., andMastercard International, JPMorgan Chase Bank, N.A., is liable prima-rily for the amount of each processed credit card sales transactionthat is the subject of a dispute between a cardmember and a mer-chant. The joint venture is contractually liable to JPMorgan ChaseBank, N.A., for these disputed transactions. If a dispute is resolved inthe cardmember’s favor, the joint venture will (through the cardmem-ber’s issuing bank) credit or refund the amount to the cardmemberand will charge back the transaction to the merchant. If the joint ven-ture is unable to collect the amount from the merchant, the joint ven-ture will bear the loss for the amount credited or refunded to thecardmember. The joint venture mitigates this risk by withholdingfuture settlements, retaining cash reserve accounts or by obtainingother security. However, in the unlikely event that: (1) a merchantceases operations and is unable to deliver products, services or arefund; (2) the joint venture does not have sufficient collateral fromthe merchant to provide customer refunds; and (3) the joint venturedoes not have sufficient financial resources to provide customerrefunds, JPMorgan Chase Bank, N.A., would be liable for the amountof the transaction, although it would have a contractual right torecover from its joint venture partner an amount proportionate tosuch partner’s equity interest in the joint venture. For the year endedDecember 31, 2007, the joint venture incurred aggregate credit lossesof $10 million on $719.1 billion of aggregate volume processed. AtDecember 31, 2007, the joint venture held $779 million of collateral.For the year ended December 31, 2006, the joint venture incurredaggregate credit losses of $9 million on $660.6 billion of aggregatevolume processed. At December 31, 2006, the joint venture held $893million of collateral. JPMorgan Chase Bank, N.A. believes that, basedupon historical experience and the collateral held by the joint venture,the fair value of JPMorgan Chase Bank, N.A.’s chargeback-relatedobligations would not be different materially from the credit lossallowance recorded by the joint venture; therefore, JPMorgan ChaseBank, N.A. has not recorded any allowance for losses in excess of theallowance recorded by the joint venture.

Exchange, clearinghouse and credit card association guaranteesJPMorgan Chase Bank, N.A. is a member of several securities andfutures exchanges and clearinghouses, both in the United States andother countries. Membership in some of these organizations requiresJPMorgan Chase Bank, N.A. to pay a pro rata share of the lossesincurred by the organization as a result of the default of anothermember. Such obligations vary with different organizations. These obli-gations may be limited to members who dealt with the defaultingmember or to the amount (or a multiple of the amount) of JPMorganChase Bank, N.A.’s contribution to a members’ guaranty fund, or, in afew cases, the obligation may be unlimited. It is difficult to estimateJPMorgan Chase Bank, N.A.’s maximum exposure under these mem-bership agreements, since this would require an assessment of futureclaims that may be made against JPMorgan Chase Bank, N.A. thathave not yet occurred. However, based upon historical experience,management expects the risk of loss to be remote.

Derivative guaranteesIn addition to the contracts described above, there are certain derivativecontracts to which JPMorgan Chase Bank, N.A. is a counterparty thatmeet the characteristics of a guarantee under FIN 45. These derivativesare recorded on the Consolidated balance sheets at fair value. Thesecontracts include written put options that require JPMorgan ChaseBank, N.A. to purchase assets from the option holder at a specified priceby a specified date in the future, as well as derivatives that effectivelyguarantee the return on a counterparty’s reference portfolio of assets. Thetotal notional value of the derivatives that JPMorgan Chase Bank, N.A.deems to be guarantees was $85.2 billion and $71.4 billion at December31, 2007 and 2006, respectively. JPMorgan Chase Bank, N.A. reducesexposures to these contracts by entering into offsetting transactions or byentering into contracts that hedge the market risk related to these con-tracts. The fair value related to these contracts was a derivative receivableof $211 million and $229 million, and a derivative payable of $2.5 billionand $987 million at December 31, 2007 and 2006, respectively.

Finally, certain written put options and credit derivatives permit cash set-tlement and do not require the option holder or the buyer of credit pro-tection to own the reference asset. JPMorgan Chase Bank, N.A. doesnot consider these contracts to be guarantees under FIN 45.

Note 31 – Credit risk concentrations Concentrations of credit risk arise when a number of customers are engaged in similar business activities or activities in the samegeographic region, or when they have similar economic features that would cause their ability to meet contractual obligations to besimilarly affected by changes in economic conditions.

JPMorgan Chase Bank, N.A. has developed policies and practicesthat are designed to preserve the independence and integrity ofextending credit and are included to ensure credit risks are assessedaccurately, approved properly, monitored regularly and managedactively at both the transaction and portfolio levels. The policy frame-work establishes credit approval authorities, concentration limits,risk-rating methodologies, portfolio review parameters and guidelinesfor management of distressed exposure. JPMorgan Chase Bank,N.A. regularly monitors various segments of its credit portfolio toassess potential concentration risks and to obtain collateral whendeemed necessary.

JPMorgan Chase Bank, N.A.’s risk reporting process enables monitor-ing of credit risk and decision-making, aggregate credit exposure,credit metric forecasts, hold-limit exceptions and risk profile changesand are reported regularly to senior credit risk management. Detailedportfolio reporting of industry, customer and geographic concentra-tions occurs monthly, and the appropriateness of the allowance for credit losses is reviewed by senior management at least on aquarterly basis. Through the risk reporting and governance structure,credit risk trends and limit exceptions are provided regularly to, anddiscussed with, senior management.


Wholesale credit portfolioIn JPMorgan Chase Bank, N.A.’s wholesale portfolio, risk concentra-tions are evaluated primarily by industry and by geographic region.Wholesale credit risk is monitored regularly on both an aggregateportfolio level and on an individual customer basis. JPMorgan ChaseBank, N.A. focuses on the management and the diversification of itsindustry concentrations, with particular attention paid to industrieswith actual or potential credit concerns.

Management of JPMorgan Chase Bank, N.A.’s wholesale exposure isaccomplished through loan syndication and participations, loan salesand securitizations, which occur primarily in the investment bankingand commercial banking businesses. Management of wholesaleexposure is also accomplished through credit derivatives, use of mas-ter netting agreements and collateral, and other risk-reduction tech-niques. In managing its wholesale credit exposure, JPMorgan ChaseBank, N.A. purchases single-name and portfolio credit derivatives;this activity does not reduce the reported level of assets on the bal-ance sheet or the level of reported off–balance sheet commitments.JPMorgan Chase Bank, N.A. also diversifies its exposures by provid-ing (i.e., selling) credit protection, which increases exposure to indus-tries or clients where JPMorgan Chase Bank, N.A. has little or noclient-related exposure. This activity is not material to JPMorganChase Bank, N.A.’s overall credit exposure..

At December 31, 2007, the top 10 industries to which JPMorganChase Bank, N.A. is exposed remained unchanged from December31, 2006. The increases across all industries were primarily due toportfolio growth. The notable rise in Asset managers was a result ofportfolio growth and JPMorgan Chase Bank, N.A. revising its industryclassification during the third quarter of 2007 to better reflect riskcorrelations and enhance JPMorgan Chase Bank, N.A.’s managementof industry risk. The table below summarizes the top 10 industry con-centrations in the wholesale credit portfolio as of December 31,2007 and 2006.

In the normal course of business, JPMorgan Chase Bank, N.A. usesderivative instruments to meet the needs of customers; to generaterevenue through trading activities; to manage exposure to fluctua-tions in interest rates, currencies and other markets; and to manageJPMorgan Chase Bank, N.A.’s credit exposure. JPMorgan ChaseBank, N.A. actively pursues the use of collateral agreements to mitigate counterparty credit risk in derivatives. The percentage ofJPMorgan Chase Bank, N.A.’s derivatives transactions subject to collateral agreements increased slightly to 82% as of December 31,2007, from 80% at December 31, 2006.

JPMorgan Chase Bank, N.A. has a comprehensive internal process formeasuring and managing exposures to emerging markets countries.There is no common definition of emerging markets but JPMorganChase Bank, N.A. generally, though not exclusively, includes in its def-inition those countries whose sovereign debt ratings are equivalent to“A+” or lower. Exposures to a country include all credit-related lend-ing, trading and investment activities, whether cross-border or locallyfunded. In addition to monitoring country exposures, JPMorgan ChaseBank, N.A. uses stress tests to measure and manage the risk ofextreme loss associated with sovereign crises.

Consumer credit portfolioIn JPMorgan Chase Bank, N.A.’s consumer portfolio, risk concentra-tions are evaluated primarily by product and by U.S. geographicregion. For consumer credit risk, the key focus items are trends andconcentrations at the portfolio level, where potential problems canbe remedied through changes in underwriting policies and portfolioguidelines. Consumer Credit Risk Management monitors trendsagainst business expectations and industry benchmarks. In order tomeet credit risk management objectives, JPMorgan Chase Bank, N.A.seeks to maintain a risk profile that is diverse in terms of borrower,product type, industry and geographic concentration. JPMorgan ChaseBank, N.A.’s consumer portfolio consists primarily of residential mortgages, home equity loans, credit cards, auto loans and leases,education loans and business banking loans, and reflects the benefitof diversification from both a product and a geographic perspective.The primary focus is serving the prime consumer credit market. Thetable below summarizes the product concentrations in the consumercredit portfolio as of December 31, 2007 and 2006.

The retail banking business offers home equity lines of credit andmortgage loans with interest-only payment options to predominantlyprime borrowers; there are no products in the real estate portfoliosthat result in negative amortization. Within the mortgage business,originated loans are either retained in the mortgage portfolio, orsecuritized and sold selectively to U.S. government agencies and U.S.government-sponsored enterprises.

JPMorgan Chase Bank, N.A. does not believe exposure to any oneloan product with varying terms (e.g., interest-only payments for anintroductory period) or exposure to loans with high loan-to-valueratios would result in a significant concentration of credit risk. Termsof loan products and collateral coverage are included in JPMorganChase Bank, N.A.’s assessment when extending credit and establish-ing its Allowance for loan losses.

During 2007, significant actions have been taken to tighten creditunderwriting and loan qualification standards, especially related toreal estate lending. Maximum loan-to-value and debt-to-incomeratios have been reduced, minimum required credit risk scores forloan qualification have been increased and collateral valuation methods have been tightened. These actions have resulted in significant reductions in new loan originations of risk layered loans,and improved alignment of loan pricing with the embedded risk.


The table below presents both on–balance sheet and off–balance sheet wholesale- and consumer-related credit exposure as of December 31, 2007and 2006.

2007 2006

Credit On-balance Off-balance Credit On-balance Off-balanceDecember 31, (in billions) exposure(b) sheet(b)(c) sheet(d) exposure(b) sheet(b)(c) sheet(d)

Wholesale-related:Banks and finance companies $ 64.8 $ 28.8 $ 36.0 $ 63.1 $ 25.2 $ 37.9Real estate 38.8 21.7 17.1 35.8 21.5 14.3Asset managers 38.0 15.8 22.2 24.6 11.6 13.0Healthcare 31.4 7.3 24.1 29.9 6.1 23.8Consumer products 31.3 11.4 19.9 26.9 8.9 18.0State & Municipal Govt 29.9 7.8 22.1 26.4 6.2 20.2Utilities 28.8 8.1 20.7 24.2 4.9 19.3Retail & Consumer Services 27.5 10.7 16.8 22.1 5.2 16.9Oil & Gas 25.5 12.0 13.5 18.3 6.3 12.0Securities Firms & Exchanges 23.4 16.4 7.0 22.2 14.4 7.8All other wholesale 384.0 140.9 243.1 328.1 119.9 208.2

Total wholesale-related 723.4 280.9 442.5 621.6 230.2 391.4

Consumer-related:Home equity 169.0 94.8 74.2 155.2 85.7 69.5Mortgage 63.3 55.9 7.4 65.6 59.1 6.5Auto loans and leases 50.5 42.4 8.1 46.5 38.6 7.9Credit card – reported(a) 62.9 31.8 31.1 54.4 32.3 22.1Other 40.1 28.7 11.4 33.4 27.1 6.3

Total consumer–related 385.8 253.6 132.2 355.1 242.8 112.3

Total exposure $1,109.2 $ 534.5 $ 574.7 $ 976.7 $ 473.0 $ 503.7

(a) Excludes $29.3 billion and $27.0 billion of securitized credit card receivables at December 31, 2007 and 2006, respectively.(b) Includes loans held-for-sale and loans at fair value.(c) Represents loans and derivative receivables.(d) Represents lending-related financial instruments.

Note 32 – International operations Financial information regarding international operations is accumu-lated, managed and discussed at the JPMorgan Chase & Co. leveland not at the subsidiary level (i.e., JPMorgan Chase Bank, N.A.). Forfinancial reporting purposes, JPMorgan Chase Bank, N.A. is viewedby JPMorgan Chase & Co. as a legal entity only; financial informationfor international operations is not used to manage JPMorgan ChaseBank, N.A.

Note 33 – Business segments SFAS 131 defines the criteria by which management determines thenumber and nature of its “operating segments” (i.e., business seg-ments) and sets forth the financial information that is required to bedisclosed about these business segments. This information is accumu-lated, managed and discussed at the JPMorgan Chase & Co. leveland not at the subsidiary level (i.e., JPMorgan Chase Bank, N.A.). Forfinancial reporting purposes, JPMorgan Chase Bank, N.A. is viewedby JPMorgan Chase & Co. as a legal entity only; business segmentfinancial information is not prepared for JPMorgan Chase Bank, N.A.



Selected quarterly financial data (unaudited)(in millions, except ratios) 2007 2006

As of or for the period ended 4th 3rd 2nd 1st 4th 3rd 2nd 1st

Selected income statement dataNoninterest revenue(a)(b) $ 7,962 $ 6,419 $ 8,610 $ 8,639 $ 7,485 $ 7,170 $ 6,800 $ 7,736Net interest income(b) 6,291 6,066 5,459 5,321 4,902 4,582 4,439 4,212

Total net revenue 14,253 12,485 14,069 13,960 12,387 11,752 11,239 11,948Provision for credit losses 1,743 1,284 1,028 617 700 393 262 454Total noninterest expense 8,629 7,703 8,968 8,698 8,044 8,081 7,857 7,927

Income from continuing operations before income tax expense 3,881 3,498 4,073 4,645 3,643 3,278 3,120 3,567Income tax expense 1,099 1,185 1,402 1,679 901 1,172 1,124 1,290

Income from continuing operations 2,782 2,313 2,671 2,966 2,742 2,106 1,996 2,277Income from discontinued operations(c) — — — — 649 55 49 45

Net income $ 2,782 $ 2,313 $ 2,671 $ 2,966 $ 3,391 $ 2,161 $ 2,045 $ 2,322

Selected ratiosTier 1 capital ratio 8.3% 8.2% 7.8% 8.0% 8.2% 8.0% 8.2% 8.1%Total capital ratio 11.8 11.8 11.0 11.2 11.4 11.0 11.3 11.1Tier 1 leverage ratio 6.2 6.2 5.9 6.0 5.9 6.0 5.7 5.9

Selected balance sheet data (period-end)Total assets $ 1,318,888 $ 1,244,049 $1,252,369 $1,224,104 $ 1,179,390 $1,173,732 $1,144,680 $1,093,394Securities 82,511 94,002 92,661 93,641 88,487 83,387 68,332 57,339Loans 461,662 431,859 410,214 393,382 421,833 406,800 401,395 384,156Allowance for credit losses (7,864) (6,986) (6,364) (5,830) (5,693) (5,417) (5,386) (5,425)Deposits 772,087 689,109 663,305 632,598 640,466 589,245 602,089 581,311Long-term debt 87,575 87,943 81,697 73,798 71,256 65,733 61,390 59,808Total stockholder’s equity 106,346 102,879 98,388 97,876 96,010 92,025 89,362 87,395

(a) JPMorgan Chase Bank, N.A. adopted SFAS 157 in the first quarter of 2007. See Note 5 on pages 10–18 of these consolidated financial statements.(b) For certain trading-related positions, amounts have been revised between Noninterest revenue and Net interest income; there is no impact to Net revenue as a result of these revisions.(c) On October 1, 2006, JPMorgan Chase Bank, N.A. completed the exchange of selected corporate trust businesses including trustee, paying agent, loan agency and document management services for

the consumer, business banking and middle-market banking businesses of The Bank of New York. The results of operations of these corporate trust businesses are being reported as discontinuedoperations for each 2006 period presented.

Selected annual financial data (unaudited) HeritageJPMorgan Chase

(in millions, except ratios) Bank, N.A. onlyAs of or for the year ended December 31, 2007 2006 2005 2004(c) 2003

Selected income statement dataNoninterest revenue(a) $ 31,630 $ 29,191 $ 23,065 $ 16,979 $ 15,299Net interest income 23,137 18,135 15,283 11,962 9,497

Total net revenue 54,767 47,326 38,348 28,941 24,796Provision for credit losses 4,672 1,809 1,101 534 473Total noninterest expense 33,998 31,909 29,799 25,488 16,734

Income from continuing operations before income tax expense 16,097 13,608 7,448 2,919 7,589Income tax expense 5,365 4,487 2,563 937 2,560

Income from continuing operations 10,732 9,121 4,885 1,982 5,029Income from discontinued operations(b) — 798 207 196 149

Net income $ 10,732 $ 9,919 $ 5,092 $ 2,178 $ 5,178

Selected ratiosTier 1 capital ratio 8.3% 8.2% 8.1% 8.3% 8.1%Total capital ratio 11.8 11.4 11.2 11.7 10.4Tier 1 leverage ratio 6.2 5.9 6.1 6.0 5.6

Selected balance sheet data (period-end)Total assets $ 1,318,888 $ 1,179,390 $1,013,985 $ 967,365 $ 628,662Securities 82,511 88,487 37,113 81,033 54,362Loans 461,662 421,833 365,991 334,323 179,471Allowance for credit losses (7,864) (5,693) (5,254) (5,804) (3,475)Deposits 772,087 640,466 552,610 517,710 326,745Long-term debt 87,575 71,256 55,612 46,406 16,007Total stockholder’s equity 106,346 96,010 86,350 80,640 37,491

(a) JPMorgan Chase Bank, N.A. adopted SFAS 157 in the first quarter of 2007. See Note 5 on pages 10–18 of these consolidated financial statements.(b) On October 1, 2006, JPMorgan Chase Bank, N.A. completed the exchange of selected corporate trust businesses including trustee, paying agent, loan agency and document management services

for the consumer, business banking and middle-market banking businesses of The Bank of New York. The results of operations of these corporate trust businesses are being reported as discontinuedoperations for each period prior to 2007.

(c) On July 1, 2004, Bank One Corporation merged with and into JPMorgan Chase & Co. On November 13, 2004, Bank One, National Association, Columbus, Ohio, and Bank One, National Association,Chicago, Illinois, were merged with and into JPMorgan Chase Bank, N.A., effective July 1, 2004. Accordingly, 2004 results include six months of the combined JPMorgan Chase Bank, N.A.’s resultsand six months of heritage JPMorgan Chase Bank, N.A.’s results.

SUPPLEMENTARY INFORMATIONJPMorgan Chase Bank, National Association(a wholly-owned subsidiary of JPMorgan Chase & Co.)



AICPA Statement of Position (“SOP”) 98-1: “Accounting for theCosts of Computer Software Developed or Obtained for Internal Use.”

APB 25: Accounting Principles Board Opinion No. 25. “Accounting forStock Issued to Employees.”

Advised lines of credit: An authorization which specifies the maxi-mum amount of a credit facility JPMorgan Chase Bank, N.A. has madeavailable to an obligor on a revolving but non-binding basis. The bor-rower receives written or oral advice of this facility. JPMorgan ChaseBank, N.A. may cancel this facility at any time.

Beneficial interest issued by consolidated VIEs: Represents theinterest of third-party holders of debt/equity securities, or other obliga-tions, issued by VIEs that JPMorgan Chase consolidates under FIN 46R.The underlying obligations of the VIEs consist of short-term borrowings,commercial paper and long-term debt. The related assets consist of trad-ing assets, available-for-sale securities, loans and other assets.

Benefit obligation: Refers to the projected benefit obligation forpension plans and the accumulated postretirement benefit obligationfor OPEB plans.

Contractual credit card charge-off: In accordance with the FederalFinancial Institutions Examination Council policy, credit card loans arecharged off by the end of the month in which the account becomes180 days past due or within 60 days from receiving notification of thefiling of bankruptcy, whichever is earlier.

Credit derivatives: Contractual agreements that provide protectionagainst a credit event on one or more referenced credits. The nature of acredit event is established by the protection buyer and protection seller atthe inception of a transaction, and such events include bankruptcy, insol-vency or failure to meet payment obligations when due. The buyer of thecredit derivative pays a periodic fee in return for a payment by the protec-tion seller upon the occurrence, if any, of a credit event.

Discontinued operations: A component of an entity that is classi-fied as held-for-sale or that has been disposed of from ongoing opera-tions in its entirety or piecemeal, and for which the entity will not haveany significant, continuing involvement. A discontinued operation maybe a separate major business segment, a component of a major busi-ness segment or a geographical area of operations of the entity thatcan be separately distinguished operationally and for financial report-ing purposes.


EITF Issue 02-3: “Issues Involved in Accounting for DerivativeContracts Held for Trading Purposes and Contracts Involved in EnergyTrading and Risk Management Activities.”

EITF Issue 99-20: “Recognition of Interest Income and Impairmenton Purchased and Retained Beneficial Interests in Securitized FinancialAssets.”


FIN 39: FASB Interpretation No. 39, “Offsetting of Amounts Related toCertain Contracts – an interpretation of APB Opinion No. 10 and FASBStatement No. 105.”

FIN 41: FASB Interpretation No. 41, “Offsetting of Amounts Related toCertain Repurchase and Reverse Repurchase Agreements – an inter-pretation of APB Opinion No. 10 and a Modification of FASBInterpretation No. 39.”

FIN 45: FASB Interpretation No. 45, “Guarantor’s Accounting andDisclosure Requirements for Guarantees, including Indirect Guaranteesof Indebtedness of Others – an interpretation of FASB Statements No.5, 57 and 107 and a rescission of FASB Interpretation No. 34.”

FIN 46R: FASB Interpretation No. 46 (revised December 2003),“Consolidation of Variable Interest Entities – an interpretation of ARBNo. 51.”

FIN 47: FASB Interpretation No. 47, “Accounting for Conditional AssetRetirement Obligations – an interpretation of FASB Statement No.143.”

FIN 48: FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes – an interpretation of FASB Statement No. 109.”

Foward points: Represents the interest rate differential between two currencies, which is either added to or subtracted from the currentexchange rate (i.e., “spot rate”) to determine the forward exchangerate.


FSP FAS 13-2: “Accounting for a Change or Projected Change inthe Timing of Cash Flows Relating to Income Taxes Generated by aLeveraged Lease Transaction.”

FSP FAS 123(R)-3: “Transition Election Related to Accounting for theTax Effects of Share-Based Payment Awards.”

FSP FAS 140-3: “Accounting for Transfers of Financial Assets andRepurchase Financing Transactions.”

FSP FIN 39-1: “Amendment of FASB Interpretation No. 39.”

Interchange income: A fee that is paid to a credit card issuer in theclearing and settlement of a sales or cash advance transaction.

Interests in purchased receivables: Represent an ownership inter-est in cash flows of an underlying pool of receivables transferred by athird-party seller into a bankruptcy-remote entity, generally a trust.

Investment-grade: An indication of credit quality based upon JPMorganChase Bank, N. A.’s internal risk assessment system. “Investment-grade”generally represents a risk profile similar to a rating of a “BBB-”/”Baa3”or better, as defined by independent rating agencies.

Master netting agreement: An agreement between two counter-parties that have multiple derivative contracts with each other thatprovides for the net settlement of all contracts through a single pay-ment, in a single currency, in the event of default on or termination ofany one contract. See FIN 39.

MSR risk management revenue: Includes changes in MSR assetfair value due to inputs or assumptions in model and derivative valua-tion adjustments.

Material legal proceedings: Refers to certain specific litigationoriginally discussed in the section “Legal Proceedings” in JPMorganChase & Co.’s Annual Report on Form 10-K for the year endedDecember 31, 2002. Of such legal proceedings, some lawsuits relatedto Enron, WorldCom and the IPO allocation allegations remain out-standing as of the date of these consolidated financial statements, asdiscussed in Part I, Item 3, Legal proceedings in JPMorgan Chase &Co.’s Annual Report on Form 10-K for the year ended December 31,2007, to which reference is hereby made; other such legal proceedingshave been resolved.


GLOSSARY OF TERMSJPMorgan Chase Bank, National Association(a wholly-owned subsidiary of JPMorgan Chase & Co.)



Principal transactions (revenue): Realized and unrealized gainsand losses from trading activities (including physical commoditiesinventories that are accounted for at the lower of cost or fair value)and changes in fair value associated with financial instruments held bythe investment banking business for which the SFAS 159 fair valueoption was elected. Principal transactions revenue also include privateequity gains and losses.

REMIC: Investment vehicles that hold commercial and residentialmortgages in trust, and issues securities representing an undividedinterest in these mortgages. A REMIC, which can be a corporation,trust, association, or partnership, assembles mortgages into pools andissues pass-through certificates, multiclass bonds similar to a collateral-ized mortgage obligation (CMO), or other securities to investors in thesecondary mortgage market.

SAB: Staff Accounting Bulletin.

SAB 105: “Application of Accounting Principles to Loan Commitments.”

SAB 109: “Written Loan Commitments Recorded at Fair ValueThrough Earnings.”



SFAS 13: “Accounting for Leases.”


SFAS 87: “Employers’ Accounting for Pensions.”

SFAS 88: “Employers’ Accounting for Settlements and Curtailments ofDefined Benefit Pension Plans and for Termination Benefits.”

SFAS 106: “Employers’ Accounting for Postretirement Benefits OtherThan Pensions.”


SFAS 109: “Accounting for Income Taxes.”

SFAS 114: “Accounting by Creditors for Impairment of a Loan – anamendment of FASB Statements No. 5 and 15.”

SFAS 115: “Accounting for Certain Investments in Debt and EquitySecurities.”

SFAS 123: “Accounting for Stock-Based Compensation.”

SFAS 123R: “Share-Based Payment.”

SFAS 133: “Accounting for Derivative Instruments and HedgingActivities.”

SFAS 138: “Accounting for Certain Derivative Instruments and CertainHedging Activities – an amendment of FASB Statement No. 133.”

SFAS 140: “Accounting for Transfers and Servicing of Financial Assetsand Extinguishments of Liabilities – a replacement of FASB StatementNo. 125.”


SFAS 142: “Goodwill and Other Intangible Assets.”

SFAS 143: “Accounting for Asset Retirement Obligations.”

SFAS 149: “Amendment of Statement No. 133 on DerivativeInstruments and Hedging Activities.”

SFAS 155: “Accounting for Certain Hybrid Financial Instruments – anamendment of FASB Statements No. 133 and 140.”

SFAS 156: “Accounting for Servicing of Financial Assets – an amend-ment of FASB Statement No. 140.”


SFAS 158: “Employers’ Accounting for Defined Benefit Pension andOther Postretirement Plans – an amendment of FASB Statements No.87, 88, 106, and 132(R).”

SFAS 159: “The Fair Value Option for Financial Assets and FinancialLiabilities – Including an amendment of FASB Statement No. 115.”

SFAS 160: “Noncontrolling Interests in Consolidated FinancialStatements – an amendment of ARB No. 51.”

SFAS 161: “Disclosures about Derivative Instruments and HedgingActivities.”

Subprime loans: Although a standard definition for subprime loans(including subprime mortgage loans) does not exist, JPMorgan ChaseBank, N.A. defines subprime loans as specific product offerings forhigher risk borrowers, including individuals with one or a combinationof high credit risk factors, such as low FICO scores (generally less than620 for secured products and 660 for unsecured products) and highdebt to income ratios. JPMorgan Chase Bank, N.A. also evaluates thetypes and severity of historical delinquencies in evaluating whether asubprime product is appropriate for a particular customer. Higher inter-est rates and additional fees are typically assessed for subprime loansto compensate for the increased credit risk associated with these typesof products.

Unaudited: Financial statements and information that have not beensubjected to auditing procedures sufficient to permit an independentcertified public accountant to express an opinion.

U.S. GAAP: Accounting principles generally accepted in the UnitedStates of America.

U.S. government and federal agency obligations: Obligations ofthe U.S. government or an instrumentality of the U.S. governmentwhose obligations are fully and explicitly guaranteed as to the timelypayment of principal and interest by the full faith and credit of the U.S.government.

U.S. government-sponsored enterprise obligations: Obligationsof agencies originally established or chartered by the U.S. governmentto serve public purposes as specified by the U.S. Congress; these obli-gations are not explicitly guaranteed as to the timely payment of prin-cipal and interest by the full faith and credit of the U.S. government.

jpmorgan chase bank, national association · consolidated financial statements should be read in...

Documents