FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual report pursuant to section 13 or 15(d) of
The Securities Exchange Act of 1934
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For the fiscal year ended
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Commission file |
December 31, 2006
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number 1-5805 |
JPMorgan Chase & Co.
(Exact name of registrant as specified in its charter)
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Delaware
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13-2624428 |
(State or other jurisdiction of
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(I.R.S. employer |
incorporation or organization)
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identification no.) |
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270 Park Avenue, New York, NY
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10017 |
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(Address of principal executive offices)
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(Zip code)
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Registrants telephone number, including area code: (212) 270-6000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
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Common stock
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JPMorgan Market Participation
Notes on the S&P 500® Index due |
61/8% subordinated notes due 2008
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March 12, 2008 |
6.75% subordinated notes due 2008
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Capped Quarterly Observation Notes Linked to S&P 500® Index due |
6.50% subordinated notes due 2009
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September 22, 2008 |
Guarantee of 7.00% Capital Securities, Series J, of J.P. Morgan
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Capped Quarterly Observation Notes Linked to S&P 500® Index due |
Chase Capital X
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October 30, 2008 |
Guarantee of 57/8% Capital Securities, Series K, of J.P. Morgan Chase
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Capped Quarterly Observation Notes Linked to S&P 500® Index due |
Capital XI
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January 21, 2009 |
Guarantee of 6.25% Capital Securities, Series L, of J.P. Morgan
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JPMorgan Market Participation Notes on the S&P 500® Index due |
Chase Capital XII
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March 31, 2009 |
Guarantee of 6.20% Capital Securities, Series N, of JPMorgan
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Capped Quarterly Observation Notes Linked to S&P 500® Index due |
Chase Capital XIV
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July 7, 2009 |
Guarantee of 6.35% Capital Securities, Series P, of JPMorgan
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Capped Quarterly Observation Notes Linked to S&P 500® Index due |
Chase Capital XVI
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September 21, 2009 |
Guarantee of 6.625% Capital Securities, Series S, of JPMorgan
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Consumer Price Indexed Securities due January 15, 2010 |
Chase Capital XIX
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Principal Protected Notes Linked to S&P 500® Index due |
Guarantee of 7.20% Preferred Securities of BANK ONE Capital VI
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September 30, 2010 |
Indexed Linked Notes on the S&P 500® Index due November 26, 2007 |
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The Indexed Linked Notes, JPMorgan Market Participation Notes, Capped Quarterly Observation Notes, Consumer Price
Indexed Securities and Principal Protected Notes are listed on the American Stock Exchange;
all other securities named above are listed on the New York Stock Exchange.
Securities registered pursuant to Section 12(g) of the Act: none
Indicate by check mark if the Registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. x Yes o No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. o Yes x No
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
x Large accelerated filer o Accelerated filer
o Non-accelerated filer
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). o Yes x No
The aggregate market value of JPMorgan Chase & Co. common stock held by non-affiliates of
JPMorgan Chase & Co. on June 30, 2006 was
approximately $144,956,714,582.
Number of shares of common stock outstanding on January 31, 2007: 3,473,349,593
Documents Incorporated by Reference: Portions of the Registrants Proxy Statement for the
annual meeting of stockholders to be held on May 15, 2007,
are incorporated by reference in this Form 10-K in response to Items 10, 11, 12, 13 and 14 of
Part III.
Form 10-K Index
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Part I |
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Page |
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Item 1 |
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Business |
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1 |
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Overview |
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1 |
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Business segments |
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1 |
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Competition |
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1 |
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Supervision and regulation |
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1 |
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Non-U.S. operations |
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4 |
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Distribution of assets, liabilities and stockholders equity; interest rates and interest differentials |
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148152 |
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Return on equity and assets |
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22, 143144, 148149 |
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Securities portfolio |
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153 |
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Loan portfolio |
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6574, 112113, 154156 |
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Summary of loan and lending-related commitments loss experience |
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7576, 113114, 157158 |
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Deposits |
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124, 158 |
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Short-term and other borrowed funds |
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159 |
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Item 1A |
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Risk factors |
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4 |
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Item 1B |
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Unresolved SEC Staff comments |
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6 |
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Item 2 |
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Properties |
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6 |
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Item 3 |
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Legal proceedings |
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7 |
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Item 4 |
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Submission of matters to a vote of security holders |
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10 |
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Executive officers of the registrant |
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10 |
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Part II |
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Item 5 |
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Market for Registrants common equity, related stockholder matters and issuer purchases of equity securities |
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11 |
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Item 6 |
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Selected financial data |
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11 |
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Item 7 |
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Managements discussion and analysis of financial condition and results of operations |
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11 |
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Item 7A |
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Quantitative and qualitative disclosures about market risk |
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11 |
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Item 8 |
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Financial statements and supplementary data |
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12 |
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Item 9 |
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Changes in and disagreements with accountants on accounting and financial disclosure |
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12 |
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Item 9A |
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Controls and procedures |
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12 |
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Item 9B |
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Other information |
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12 |
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Part III |
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Item 10 |
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Directors, executive officers and corporate governance |
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12 |
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Item 11 |
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Executive compensation |
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12 |
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Item 12 |
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Security ownership of certain beneficial owners and management and related stockholder matters |
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Item 13 |
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Certain relationships and related transactions, and Director independence |
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Item 14 |
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Principal accounting fees and services |
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13 |
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Part IV |
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Item 15 |
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Exhibits, financial statement schedules |
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13 |
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Part I
Overview
JPMorgan Chase & Co. (JPMorgan Chase or the Firm) is a financial holding company incorporated under Delaware law in 1968. JPMorgan Chase is
one of the largest banking institutions in the United States, with $1.4 trillion
in assets, $116 billion in stockholders equity and operations worldwide.
JPMorgan Chases principal bank subsidiaries are JPMorgan Chase Bank,
National Association (JPMorgan Chase Bank, N.A.), a national banking association with branches in 17 states, and Chase Bank USA, National Association
(Chase Bank USA, N.A.), a national banking association that is the Firms credit
card-issuing bank. JPMorgan Chases principal nonbank subsidiary is J.P.
Morgan Securities Inc. (JPMorgan Securities), its U.S. investment banking
firm. The bank and nonbank subsidiaries of JPMorgan Chase operate nationally as well as through overseas branches and subsidiaries, representative
offices and subsidiary foreign banks.
On July 1, 2004, Bank One Corporation (Bank One) merged with and into
JPMorgan Chase (the Merger). Bank Ones results of operations were
included in the Firms results beginning July 1, 2004. Therefore, the results of
operations for the 12 months ended December 31, 2004, reflect six months
of operations of heritage JPMorgan Chase only and six months of operations
of the combined Firm; results of operations for all periods prior to 2004
reflect the operations of heritage JPMorgan Chase only.
The Firms website is www.jpmorganchase.com. JPMorgan Chase makes
available free of charge, through its website, annual reports on Form
10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and
any amendments to those reports filed or furnished pursuant to Section 13(a)
or Section 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after it electronically files such material with, or furnishes such
material to, the Securities and Exchange Commission (the SEC). The Firm has
adopted, and posted on its website, a Code of Ethics for its Chairman
and Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer and
other senior financial officers.
Business segments
JPMorgan Chases activities are organized, for management reporting purposes,
into six business segments (Investment Bank, Retail Financial Services, Card
Services, Commercial Banking, Treasury & Securities Services and Asset
Management) and Corporate, which includes its Private Equity and Treasury
businesses, as well as corporate support functions. A description of the Firms
business segments and the products and services they provide to their respective client bases is provided in the Business segment results section of
Managements discussion and analysis (MD&A), beginning on page 34,
and in Note 33 on page 139.
Competition
JPMorgan Chase and its subsidiaries and affiliates operate in a highly
competitive environment. Competitors include other banks, brokerage firms,
investment banking companies, merchant banks, insurance companies, mutual
fund companies, credit card companies, mortgage banking companies, hedge
funds, trust companies, securities processing companies, automobile financing companies, leasing companies,
e-commerce and other Internet-based companies, and a variety of other
financial services and advisory companies. JPMorgan Chases businesses compete with these other firms with respect to the quality and range of products
and services offered and the types of clients, customers, industries and geogra-
phies served. With respect to some of its geographies and products, JPMorgan
Chase competes globally; with respect to others, the Firm competes on a
regional basis. JPMorgan Chases ability to compete effectively depends upon
the relative performance of its products, the degree to which the
features of its products appeal to customers, and the extent to which the
Firm is able to meet its clients objectives or needs. The Firms ability to
compete also depends upon its ability to attract and retain its professional
and other personnel, and on its reputation.
The financial services industry has experienced consolidation and convergence
in recent years, as financial institutions involved in a broad range of financial
products and services have merged. This convergence trend is expected
to continue. Consolidation could result in competitors of JPMorgan Chase
gaining greater capital and other resources, such as a broader range of products
and services and geographic diversity. It is possible that competition will
become even more intense as the Firm continues to compete with other
financial institutions that may be larger or better capitalized, or that may
have a stronger local presence in certain geographies. For a discussion of
certain risks relating to the Firms competitive environment, see the Risk
factors on page 4.
Supervision and regulation
Permissible business activities: The Firm is subject to regulation under
state and federal law, including the Bank Holding Company Act of 1956, as
amended (the BHCA). JPMorgan Chase elected to become a financial
holding company as of March 13, 2000, pursuant to the provisions of the
Gramm-Leach-Bliley Act (GLBA).
Under regulations implemented by the Board of Governors of the Federal
Reserve System (the Federal Reserve Board), if any depository institution
controlled by a financial holding company ceases to meet certain capital or
management standards, the Federal Reserve Board may impose corrective
capital and/or managerial requirements on the financial holding company
and place limitations on its ability to conduct the broader financial activities
permissible for financial holding companies. In addition, the Federal Reserve
Board may require divestiture of the holding companys depository institutions
if the deficiencies persist. The regulations also provide that if any depository
institution controlled by a financial holding company fails to maintain a
satisfactory rating under the Community Reinvestment Act (CRA), the
Federal Reserve Board must prohibit the financial holding company and its
subsidiaries from engaging in any additional activities other than those
permissible for bank holding companies that are not financial holding
companies. At December 31, 2006, the depository-institution subsidiaries of JPMorgan Chase met the capital, management and CRA
requirements necessary to permit the Firm to conduct the broader activities permitted under GLBA. However, there can be no assurance that
this will continue to be the case in the future.
Regulation by Federal Reserve Board under GLBA: Under GLBAs
system of functional regulation, the Federal Reserve Board acts as an
umbrella regulator, and certain of JPMorgan Chases subsidiaries are regulated directly by additional authorities based upon the particular activities of
those subsidiaries. JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A. are
regulated by the Office of the Comptroller of the Currency
(OCC). See Other Supervision and Regulation
below for a further description of the regulatory supervision to
which the Firms subsidiaries are subject.
1
Part I
Dividend restrictions: Federal law imposes limitations on the payment of dividends
by the subsidiaries of JPMorgan Chase that are national banks. Nonbank subsidiaries
of JPMorgan Chase are not subject to those limitations. The amount of dividends
that may be paid by national banks, such as JPMorgan Chase Bank, N.A. and
Chase Bank USA, N.A., is limited to the lesser of the amounts calculated under a recent
earnings test and an undivided profits test. Under the recent earnings test, a
dividend may not be paid if the total of all dividends declared by a bank in any calendar year is in excess of the current years net income combined with the retained
net income of the two preceding years, unless the national bank obtains the
approval of the OCC. Under the undivided profits test, a dividend may not be paid
in excess of a banks undivided profits. See Note 25 on page 129 for the
amount of dividends that the Firms principal bank subsidiaries could pay, at
January 1, 2007 and 2006, to their respective bank holding companies without the
approval of their banking regulators.
In addition to the dividend restrictions described above, the OCC, the Federal
Reserve Board and the Federal Deposit Insurance Corporation (the FDIC) have
authority to prohibit or to limit the payment of dividends by the banking organizations they supervise, including JPMorgan Chase and its bank and bank holding
company subsidiaries, if, in the banking regulators opinion, payment of a dividend
would constitute an unsafe or unsound practice in light of the financial condition
of the banking organization.
Capital requirements: Federal banking regulators have adopted risk-based capital
and leverage guidelines that require the Firms capital-to-assets ratios to meet
certain minimum standards.
The risk-based capital ratio is determined by allocating assets and specified
off-balance sheet financial instruments into four weighted categories, with higher
levels of capital being required for the categories perceived as representing
greater risk. Under the guidelines, capital is divided into two tiers: Tier 1 capital
and Tier 2 capital. The amount of Tier 2 capital may not exceed the amount of
Tier 1 capital. Total capital is the sum of Tier 1 capital and Tier 2 capital. Under
the guidelines, banking organizations are required to maintain a Total capital
ratio (total capital to risk-weighted assets) of 8% and a Tier 1 capital ratio of 4%.
The federal banking regulators also have established minimum leverage ratio
guidelines. The leverage ratio is defined as Tier 1 capital divided by average total
assets (net of the allowance for loan losses, goodwill and certain
intangible assets). The minimum leverage ratio is 3% for bank holding companies
that are considered strong under Federal Reserve Board guidelines or
which have implemented the Federal Reserve Boards risk-based capital
measure for market risk. Other bank holding companies must have a minimum leverage ratio of 4%. Bank holding companies may be expected to
maintain ratios well above the minimum levels, depending upon their
particular condition, risk profile and growth plans. See Regulatory
capital on page 58 and Note 26 on page 129.
The risk-based capital requirements explicitly identify concentrations of
credit risk, certain risks arising from non-traditional banking activities, and
the management of those risks as important factors to consider in assessing
an institutions overall capital adequacy. Other factors taken into consideration
by federal regulators include: interest rate exposure; liquidity, funding and
market risk; the quality and level of earnings; the quality of loans and
investments; the effectiveness of loan and investment policies; and
managements overall ability to monitor and control financial and operational
risks, including the risks presented by concentrations of credit and non-traditional banking activities. In addition, the risk-based capital rules
incorporate a measure for market risk in foreign exchange and commodity
activities and in the trading of debt and equity instruments. The market
risk-based capital
rules require banking organizations with large trading
activities (such as JPMorgan Chase) to maintain capital for market risk in
an amount calculated by using the banking organizations own internal
Value-at-Risk models (subject to parameters set by the regulators).
The minimum risk-based capital requirements adopted by the federal banking
agencies follow the Capital Accord of the Basel Committee on Banking
Supervision. The Basel Committee has proposed a revision to the Accord
(Basel II). U.S. banking regulators are in the process of incorporating the Basel
II Framework into the existing risk-based capital requirements. JPMorgan
Chase will be required to implement advanced measurement techniques in the
U.S., commencing in 2009, by employing internal estimates of certain key risk
drivers to derive capital requirements. Prior to its implementation of the new
Basel II Framework, JPMorgan Chase will be required to demonstrate to its U.S.
bank supervisors that its internal criteria meet the relevant supervisory standards. JPMorgan Chase expects to be in compliance within the established
timelines with all relevant Basel II rules. During 2007 and 2008, the Firm will
adopt Basel II rules in certain non-U.S. jurisdictions, as required.
FDICIA: The Federal Deposit Insurance Corporation Improvement Act of
1991 (FDICIA) provides a framework for regulation of depository institutions and their affiliates,
including parent holding companies, by their federal banking regulators; among other things, it requires the relevant federal
banking regulator to take prompt corrective action with respect to a
depository institution if that institution does not meet certain capital adequacy standards.
Supervisory actions by the appropriate federal banking regulator under the
prompt corrective action rules generally depend upon an institutions
classification within five capital categories. The regulations apply only to
banks and not to bank holding companies such as JPMorgan Chase; however, subject to limitations that may be imposed pursuant to GLBA, the
Federal Reserve Board is authorized to take appropriate action at the holding company level, based upon the undercapitalized status of the holding
companys subsidiary banking institutions. In certain instances relating to
an undercapitalized banking institution, the bank holding company would
be required to guarantee the performance of the undercapitalized subsidiary and might be liable for civil money damages for failure to fulfill its
commitments on that guarantee.
FDIC Insurance Assessments: In November 2006, the FDIC issued final regulations, as required by the Federal Deposit Insurance Reform Act of 2005, by
which the FDIC established a new base rate schedule for the assessment of
deposit insurance premiums and set new assessment rates which became effective in January 2007. Under these regulations, each depository institution is
assigned to a risk category based upon capital and supervisory measures.
Depending upon the risk category to which it is assigned, the depository institution
is then assessed insurance premiums based upon its deposits. Some depository
institutions are entitled to apply against these premiums a credit that
is designed to give effect to premium payments, if any, that the depository
institution may have made in certain prior years. The new assessment
schedule will not have a material adverse effect on the Firms earnings or financial condition.
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Powers of the FDIC upon insolvency of an insured depository institution: An FDIC-insured depository institution can be held liable for any loss
incurred or expected to be incurred by the FDIC in connection with another
FDIC-insured institution under common control with such institution being
in default or in danger of default (commonly referred to as cross-guarantee
liability). An FDIC cross-guarantee claim against a depository institution is
generally superior in right of payment to claims of the holding company and its
affiliates against such depository institution.
If the FDIC is appointed the conservator or receiver of an insured depository
institution upon its insolvency or in certain other events, the FDIC has the
power: (1) to transfer any of the depository institutions assets and liabilities to
a new obligor without the approval of the depository institutions creditors; (2)
to enforce the terms of the depository institutions contracts pursuant to their
terms; or (3) to repudiate or disaffirm any contract or lease to which the depository institution is a party, the performance of which is determined by the FDIC
to be burdensome and the disaffirmation or repudiation of which is determined
by the FDIC to promote the orderly administration of the depository institution.
The above provisions would be applicable to obligations and liabilities of
JPMorgan Chases subsidiaries that are insured depository institutions, such as
JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A., including, without limitation,
obligations under senior or subordinated debt issued by those banks to
investors (referenced below as public noteholders) in the public markets.
Under federal law, the claims of a receiver of an insured depository institution
for administrative expenses and the claims of holders of U.S. deposit liabilities
(including the FDIC, as subrogee of the depositors) have priority over the
claims of other unsecured creditors of the institution, including public note-holders and depositors in non-U.S. offices, in the event of the liquidation or
other resolution of the institution. As a result, whether or not the FDIC would
ever seek to repudiate any obligations held by public noteholders or depositors in non-U.S. offices of any subsidiary of the Firm that is an insured
depository institution, such as JPMorgan Chase Bank, N.A. or Chase Bank USA, N.A., such
persons would be treated differently from, and could receive, if anything, substantially less than the depositors of the depository institution.
The Bank Secrecy Act: The Bank Secrecy Act, which was amended by the
USA Patriot Act of 2001, requires all financial institutions, to establish
certain anti-money laundering compliance and due diligence programs. The
Act also requires financial institutions that maintain correspondent accounts
for non-U.S. institutions, or persons that are involved in private banking for
non-United States persons or their representatives, to establish appropriate, specific and, where necessary, enhanced due diligence policies, procedures, and controls that are reasonably designed to detect and report
instances of money laundering through those accounts.
Other supervision and regulation: Under current Federal Reserve Board
policy, JPMorgan Chase is expected to act as a source of financial strength to
its bank subsidiaries and to commit resources to support its bank subsidiaries
in circumstances where it might not do so absent such policy. However,
because GLBA provides for functional regulation of financial holding company
activities by various regulators, GLBA prohibits the Federal Reserve Board
from requiring payment by a holding company or subsidiary to a depository
institution if the functional regulator of the payor objects to such payment.
In such a case, the Federal Reserve Board could instead require the divestiture
of the depository institution and impose operating restrictions pending the
divestiture.
Any loans by a bank holding company to any of its subsidiary banks are
subordinate in right of payment to deposits and certain other indebtedness of
the subsidiary banks. In the event of a bank holding companys bankruptcy, any
commitment by the bank holding company to a federal bank regulatory agency to
maintain the capital of a subsidiary bank at a certain level would be assumed by
the bankruptcy trustee and entitled to a priority of payment.
The bank subsidiaries of JPMorgan Chase are subject to certain restrictions
imposed by federal law on extensions of credit to, and certain other transactions
with, the Firm and certain other affiliates, and on investments in stock or
securities of JPMorgan Chase and those affiliates. These restrictions prevent
JPMorgan Chase and other affiliates from borrowing from a bank subsidiary
unless the loans are secured in specified amounts. See Note 25 on page 129.
The Firms banks and certain of its nonbank subsidiaries are subject to direct
supervision and regulation by various other federal and state authorities (some
of which are considered functional regulators under GLBA). JPMorgan
Chases national bank subsidiaries, such as JPMorgan Chase Bank, N.A. and
Chase Bank USA, N.A., are subject to supervision and regulation by the OCC and, in
certain matters, by the Federal Reserve Board and the FDIC. Supervision and
regulation by the responsible regulatory agency generally includes comprehensive annual reviews of all major aspects of the relevant banks business and
condition, as well as the imposition of periodic reporting requirements and limitations on investments and other powers. The Firm also conducts securities
underwriting, dealing and brokerage activities through JPMorgan Securities and
other broker-dealer subsidiaries, all of which are subject to the regulations of
the SEC and the NASD Regulation, Inc. (NASD) and other self-regulatory organizations (SROs).
JPMorgan Securities is a member of the New York Stock Exchange (NYSE).
The operations of JPMorgan Chases mutual funds also are subject to regulation
by the SEC. The Firm has subsidiaries that are members of futures exchanges in
the U.S. and abroad. One subsidiary is registered as a futures commission merchant, and other subsidiaries are registered as commodity pool operators and
commodity trading advisors, all with the Commodity Futures Trading
Commission (CFTC). These CFTC-registered subsidiaries are also members of
the National Futures Association. The Firms energy business is also subject to
regulation by the Federal Energy Regulatory Commission. The types of activities
in which the non-U.S. branches of JPMorgan Chase Bank, N.A. and the international subsidiaries of JPMorgan Chase may engage are subject to various
restrictions imposed by the Federal Reserve Board. Those non-U.S. branches and
international subsidiaries also are subject to the laws and regulatory authorities
of the countries in which they operate.
The activities of JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A. as consumer
lenders also are subject to regulation under various U.S. federal laws, including the
Truth-in-Lending, Equal Credit Opportunity, Fair Credit Reporting, Fair
Debt Collection Practice and Electronic Funds Transfer acts, as well
as various state laws. These statutes impose requirements on the making, enforcement and
collection of consumer loans and on the types of disclosures that need to be
made in connection with such loans.
3
Part I
In addition, under the requirements imposed by GLBA, JPMorgan Chase and
its subsidiaries are required periodically to disclose to their retail customers
the Firms policies and practices with respect to (1) the
sharing of nonpublic
customer information with JPMorgan Chase affiliates and others; and
(2) the confidentiality and security of that information. Under GLBA, retail
customers also must be given the opportunity to opt out
of information-sharing arrangements with nonaffiliates, subject to certain exceptions set
forth in GLBA.
For a discussion of certain risks relating to the Firms regulatory environment, see Risk factors below.
Non-U.S. operations
For geographic distributions of total revenue, total expense, income before
income tax expense and net income, see Note 32 on page 138. For information
regarding non-U.S. loans, see Note 12 on page 112 and the sections entitled
Emerging markets country exposure in the MD&A on page 72, Loan portfolio on page 154 and
Cross-border outstandings on page 155.
Item 1A: Risk factors
The following discussion sets forth some of the more important risk factors that
could affect the Firms business and operations. Other factors that could affect
the Firms business and operations are discussed in the
Forward looking statements section on page 147. However, factors besides those discussed below, in the
MD&A or elsewhere in this or other of the Firms reports filed or furnished with
the SEC also could adversely affect the Firms business or results. The reader
should not consider any descriptions of such factors to be a complete set of all
potential risks that may face the Firm.
JPMorgan Chases results of operations could be adversely affected
by U.S. and international markets and economic conditions.
The Firms businesses are affected by conditions in the global financial markets
and economic conditions generally both in the U.S. and internationally. Factors
such as the liquidity of the global financial markets; the level and volatility of
equity prices, interest rates and commodities prices; investor sentiment; inflation; and the availability and cost of credit can affect significantly the activity
level of clients with respect to size, number and timing of transactions involving the Firms investment banking business, including its underwriting and
advisory businesses. These factors also may affect the realization of cash
returns from the Firms private equity business. A market downturn would likely lead to a decline in the volume of transactions that the Firm executes for its
customers and, therefore, lead to a decline in the revenues it receives from
trading commissions and spreads. In addition, lower market volatility will
reduce trading and arbitrage opportunities, which could lead to lower trading
revenues. Higher interest rates or weakness in the markets also could adversely affect the number or size of underwritings the Firm manages on behalf of
clients and affect the willingness of financial sponsors or investors to participate in loan syndications or underwritings managed by JPMorgan Chase.
The Firm generally maintains large trading portfolios in the fixed income, currency, commodity and equity markets and has significant investment positions,
including merchant banking investments held by its private equity business. The
revenues derived from mark-to-market values of the Firms business are affected
by many factors, including its credit standing; its success in
proprietary positioning; volatility in interest rates and equity and debt markets; and other economic and business factors. JPMorgan Chase anticipates that revenues relating to its
trading will experience volatility and there can be no assurance that such
volatility relating to the above factors or other conditions could not materially
adversely affect the Firms earnings.
The fees JPMorgan Chase earns for managing third-party assets are also
dependent upon general economic conditions. For example, a higher level of
U.S. or non-U.S. interest rates or a downturn in trading markets could affect the
valuations of the third-party assets managed by the Firm, which, in turn, could
affect the Firms revenues. Moreover, even in the absence of a market downturn,
below-market or sub-par performance by JPMorgan Chases investment management
businesses could result in outflows of assets under management and supervision
and, therefore, reduce the fees the Firm receives.
The credit
quality of JPMorgan Chases on-balance sheet and off-balance sheet
assets may be affected by business conditions. In a poor economic environment
there is a greater likelihood that more of the Firms customers or counterparties
could become delinquent on their loans or other obligations to JPMorgan Chase
which, in turn, could result in a higher level of charge-offs and provision for
credit losses, all of which would adversely affect the Firms earnings.
The Firms consumer businesses are particularly affected by domestic economic
conditions that can materially adversely affect such businesses and the Firm.
Such conditions include U.S. interest rates; the rate of unemployment; the level
of consumer confidence; changes in consumer spending; and the number of
personal bankruptcies, among others. Certain changes to these conditions can
diminish demand for businesses products and services, or increase the cost to
provide such products and services. In addition, a deterioration in consumers
credit quality could lead to an increase in loan delinquencies and higher net
charge-offs, which could adversely affect the Firms earnings.
There is increasing competition in the financial services industry which
may adversely affect JPMorgan Chases results of operations.
JPMorgan Chase operates in a highly competitive environment and expects
competitive conditions to continue to intensify as continued merger activity in
the financial services industry produces larger, better-capitalized and more
geographically diverse companies that are capable of offering a wider array of
financial products and services at more competitive prices.
The Firm also faces an increasing array of competitors. Competitors include other
banks, brokerage firms, investment banking companies, merchant banks, insurance
companies, mutual fund companies, credit card companies, mortgage banking
companies, hedge funds, trust companies, securities processing
companies, automobile financing companies,
leasing companies, e-commerce and other Internet-based companies, and a
variety of other financial services and advisory companies. Technological
advances and the growth of e-commerce have made it possible for nondepository institutions to offer products and services that traditionally were banking
products, and for financial institutions and other companies to provide electronic
and Internet-based financial solutions, including electronic securities trading.
JPMorgan Chases businesses generally compete on the basis of the quality and
variety of its products and services, transaction execution, innovation, technology,
reputation and price. Ongoing or increased competition in any one or all of these
areas may put downward pressure on prices for the Firms products and services
or may cause the Firm to lose market share. Increased competition
also may
require the Firm to make additional capital investment in its businesses in order
to remain competitive. These investments may increase expenses or may
require the Firm to extend more of its capital on behalf of clients in order to
execute larger, more competitive transactions. There can be no assurance that
the significant and increasing competition in the financial services industry will
not materially adversely affect JPMorgan Chases future results of operations.
4
Part I
JPMorgan Chases acquisitions and integration of acquired businesses
may not result in all of the benefits anticipated.
The Firm has in the past and may in the future seek to grow its business by
acquiring other businesses. There can be no assurance that the Firms acquisitions
will have the anticipated positive results, including results relating to: the total
cost of integration; the time required to complete the integration; the amount
of longer-term cost savings; or the overall performance of the combined entity.
Integration of an acquired business can be complex and costly, sometimes
including combining relevant accounting and data processing systems and
management controls, as well as managing relevant relationships with
employees, clients,
suppliers and other business partners.
There is no assurance that JPMorgan Chases most recent acquisitions or that
any businesses acquired in the future will be successfully integrated and will
result in all of the positive benefits anticipated. If JPMorgan Chase is not able
to integrate successfully its past and any future acquisitions, there is the risk the
Firms results of operations could be materially and adversely affected.
JPMorgan Chase relies on its systems, employees and certain
counterparties, and certain failures could materially adversely affect
the Firms operations.
The Firms businesses are dependent on its ability to process a large number of
increasingly complex transactions. If any of the Firms financial, accounting, or
other data processing systems fail or have other significant shortcomings, the
Firm could be materially adversely affected. The Firm is similarly dependent
on its employees. The Firm could be materially adversely affected if a Firm
employee causes a significant operational break down or failure, either as a
result of human error or where an individual purposefully sabotages or fraudulently manipulates the Firms operations or systems. Third parties with which
the Firm does business could also be sources of operational risk to the Firm,
including relating to break downs or failures of such parties own systems or
employees. Any of these occurrences could result in a diminished ability of
the Firm to operate one or more of its businesses, potential liability to clients,
reputational damage and regulatory intervention, which could materially
adversely affect the Firm.
The Firm also may be subject to disruptions of its operating systems arising
from events that are wholly or partially beyond its control, which may include,
for example, computer viruses or electrical or telecommunications outages or
natural disasters, such as Hurricane Katrina, or events arising from local or
regional politics, including terrorist acts. Such disruptions may give rise to
losses in service to customers and loss or liability to the Firm.
In a firm as large and complex as JPMorgan Chase, lapses or deficiencies
in internal control over financial reporting may occur from time to
time, and there is no assurance that significant deficiencies or material weaknesses in internal controls may not occur in the future.
In addition, there is the risk that the Firms controls and procedures as well as
business continuity and data security systems prove to be inadequate. Any
such failure could affect the Firms operations and could materially adversely
affect its results of operations by requiring the Firm to expend significant
resources to correct the defect, as well as by exposing the Firm to litigation or
losses not covered by insurance.
JPMorgan Chases non-U.S. trading activities and operations are
subject to risk of loss, particularly in emerging markets.
The Firm does business throughout the world, including in developing regions of
the world commonly known as emerging markets. In the past, many emerging
market countries have experienced severe economic and financial disruptions,
including devaluations of their currencies and capital and currency exchange
controls, as well as low or negative economic growth.
JPMorgan Chases businesses and revenues derived from non-U.S. operations
are subject to risk of loss from various unfavorable political, economic and legal
developments, including currency fluctuations, social instability, changes in
governmental policies or policies of central banks, expropriation, nationalization,
confiscation of assets and changes in legislation relating to non-U.S. ownership.
The Firm also invests in the securities of corporations located in non-U.S.
jurisdictions, including emerging markets. Revenues from the trading of non-U.S. securities also may be subject to negative fluctuations as a result of the
above considerations. The impact of these fluctuations could be accentuated
as non-U.S. trading markets (particularly in emerging markets) are usually
smaller, less liquid and more volatile than U.S. trading markets. There can be
no assurance the Firm will not suffer losses in the future arising from its non-U.S. trading activities or operations.
If JPMorgan Chase does not successfully handle issues that may arise
in the conduct of its business and operations, its reputation could be
damaged, which could in turn negatively affect its business.
The Firms ability to attract and retain customers and transact with its counter-parties could be adversely affected to the extent its reputation is damaged. The
failure of the Firm to deal, or to appear to fail to deal, with various issues that
could give rise to reputational risk could cause harm to the Firm and its business
prospects. These issues include, but are not limited to, appropriately dealing with
potential conflicts of interest, legal and regulatory requirements, ethical issues,
money-laundering, privacy, record-keeping, sales and trading practices, and the
proper identification of the legal, reputational, credit, liquidity and market risks
inherent in its products. The failure to address appropriately these issues could
make the Firms clients unwilling to do business with the Firm, which could
adversely affect the Firms results.
JPMorgan Chase operates within a highly regulated industry and its
business and results are significantly affected by the regulations to
which it is subject.
JPMorgan Chase operates within a highly regulated environment. The regulations
to which the Firm is subject will continue to have a significant impact on the
Firms operations and the degree to which it can grow and be profitable.
Certain regulators to which the Firm is subject have significant power in reviewing
the Firms operations and approving its business practices. Particularly in recent
years, the Firms businesses have experienced increased regulation and regulatory
scrutiny, often requiring additional Firm resources. In addition, as the Firm
expands its international operations, its activities will become subject to an
increasing range of non-U.S. laws and regulations that likely will impose new
requirements and limitations on certain of the Firms operations. There is no
assurance that any change to the current regulatory requirements to which
JPMorgan Chase is subject, or the way in which such regulatory requirements
are interpreted or enforced, will not have a negative effect on the Firms ability
to conduct its business or its results of operations.
JPMorgan Chase faces significant legal risks, both from regulatory
investigations and proceedings and from private actions brought
against the Firm.
JPMorgan Chase is named as a defendant or is otherwise involved in
various legal proceedings, including
class actions and other litigation or disputes with third parties, as well as
investigations or proceedings brought by regulatory agencies. These or other
future actions brought against the Firm may result in judgments, settlements,
fines, penalties or other results adverse to the Firm,
5
Part I
which could
materially adversely affect the Firms business, financial condition or results of operation,
or cause it serious reputational harm.
JPMorgan Chases ability to attract and retain qualified employees
is critical to the success of its business and failure to do so may
materially adversely affect its performance.
The Firms employees are its most important resource and, in many areas of the
financial services industry, competition for qualified personnel is intense. If JPMorgan
Chase is unable to continue to retain and attract qualified employees, its performance, including its competitive position, could be materially adversely affected.
Government monetary policies and economic controls may have a
significant adverse affect on JPMorgan Chases businesses and results
of operations.
The Firms businesses and earnings are affected by the fiscal and other policies
that are adopted by various regulatory authorities of the United States, non-U.S.
governments and international agencies. For example, policies and regulations of
the Federal Reserve Board influence, directly and indirectly, the rate of interest
paid by commercial banks on their interest-bearing deposits and also may affect
the value of financial instruments held by the Firm. The actions of the Federal
Reserve Board also determine to a significant degree the Firms cost of funds for
lending and investing. In addition, these policies and conditions can adversely
affect the Firms customers and counterparties, both in the United States and
abroad, which may increase the risk that such customers or counterparties
default on their obligations to JPMorgan Chase.
JPMorgan Chases framework for managing its risks may not be
effective in mitigating risk and loss to the Firm.
JPMorgan Chases risk management framework is made up of various processes
and strategies to manage the Firms risk exposure. Types of risk to which the
Firm is subject include liquidity risk, credit risk, market risk, interest rate risk,
operational risk, legal and reputational risk, fiduciary risk and private equity risk,
among others. There can be no assurance that the Firms framework to manage
risk, including such frameworks underlying assumptions, will be effective under
all conditions and circumstances.
As the Firms businesses grow and the markets in which they operate continue
to evolve, the Firms risk management framework may not always keep sufficient
pace with those changes. For example, as the derivatives markets continue to
grow and the Firms participation in these markets expands, there is the risk
that the credit and market risks associated with new products may not be appropriately identified, monitored or managed or that the documentation of these
trades by the Firm or its counterparties will not keep up with the increased pace
of settlements. In addition, in the case of credit derivatives that require physical
settlement of transactions, many market participants, including the Firm, do not
always hold the underlying securities or loans relating to such derivatives; if the
Firm is not able to obtain those securities or loans within the required timeframe
for delivery, this could cause the Firm to forfeit payments otherwise due to it.
If the Firms risk management framework proves ineffective, whether because it
does not keep pace with changing Firm or market circumstances or otherwise, the
Firm could suffer unexpected losses and could be materially adversely affected.
If JPMorgan Chase does not effectively manage its liquidity, its
business could be negatively affected.
The Firms liquidity is critical to its ability to operate its businesses, grow and be
profitable. A compromise to the Firms liquidity could therefore have a negative
effect on the Firm. Potential conditions that could negatively affect the Firms
liquidity include diminished access to capital markets, unforeseen cash or capital
requirements and an inability to sell assets.
The Firms credit ratings are an important part of maintaining its liquidity, and a
reduction in the Firms credit ratings would also negatively affect the Firms
liquidity. A credit ratings downgrade, depending on its severity, could potentially
increase borrowing costs, limit access to capital markets, require cash payments or
collateral posting, and permit termination of certain contracts to which the Firm is a party.
Future events may be different than those anticipated by JPMorgan
Chases management assumptions and estimates, which may cause
unexpected losses in the future.
Pursuant to U.S. GAAP, the Firm is required to use certain estimates in preparing
its financial statements, including accounting estimates to determine loan loss
reserves, reserves related to future litigation, and the fair value of certain assets
and liabilities, among other items. Should the Firms determined values for such
items prove substantially inaccurate, the Firm may experience unexpected losses
that could be material.
Item 1B: Unresolved SEC Staff comments
None.
Item 2: Properties
The headquarters of JPMorgan Chase is located in New York City at 270 Park
Avenue, which is a 50-story bank and office building owned by JPMorgan
Chase. This location contains approximately 1.3 million square feet of space.
In total, JPMorgan Chase owns or leases approximately 10.7 million square
feet of commercial office space and retail space in New York City.
Prior to the merger with Bank One on July 1, 2004, the headquarters of Bank
One was located in Chicago at 10 South Dearborn, which continues to be
used as an administrative and operational facility. This location is owned by
the Firm and contains approximately 2.0 million square feet of space. In total,
JPMorgan Chase owns or leases approximately 4.7 million square feet of
commercial office and retail space in Chicago.
JPMorgan Chase and its subsidiaries also own or lease significant administrative and operational facilities in Houston and Dallas, Texas (an aggregate 5.8
million square feet); Columbus, Ohio (2.8 million square feet); Phoenix,
Arizona (1.4 million square feet); Jersey City, New Jersey (1.2 million square
feet); and Wilmington, Delaware (1.0 million square feet).
In the United Kingdom, JPMorgan Chase leases approximately 2.3 million
square feet of office space and owns a 350,000 square-foot operations center.
In addition, JPMorgan Chase and its subsidiaries occupy offices and other
administrative and operational facilities throughout the world under various
types of ownership and leasehold agreements, including 3,079 retail branches in the United States. The properties occupied by JPMorgan Chase are used
across all of the Firms business segments and for corporate purposes.
JPMorgan Chase continues to evaluate its current and projected space requirements and may determine certain of its premises and facilities are no longer
necessary for its operations. There is no assurance that the Firm will be able to
dispose of any such excess premises or that it will not incur charges in connection with such dispositions. Such disposition costs may be material to the Firms
results of operations in a given period. For a discussion of occupancy expense,
see the Consolidated results of operations discussion on page 30.
6
Item 3: Legal proceedings
Enron litigation. JPMorgan Chase and certain of its officers and directors are
involved in a number of lawsuits arising out of its banking relationships with
Enron Corp. and its subsidiaries (Enron). Several actions and other proceedings against the Firm have been resolved, including adversary proceedings
brought by Enrons bankruptcy estate. In addition, as previously reported, the
Firm has reached an agreement to settle the lead class action litigation
brought on behalf of the purchasers of Enron securities, captioned Newby v.
Enron Corp., for $2.2 billion (pretax). On May 24, 2006, the United States
District Court for the Southern District of Texas approved a settlement in the
Newby action, and entered an order of final judgment and dismissal as to the
JPMorgan Chase defendants. Certain plaintiffs have appealed this final judgment to the United States Court of Appeals for the Fifth Circuit, and one such
appeal remains pending. The Newby settlement does not resolve Enron-related
actions filed separately by plaintiffs who opted out of the class action or by
certain plaintiffs who are asserting claims not covered by that action, including
some of the actions described below.
Enron-related actions, other than Newby, include individual actions against the
Firm by plaintiffs who were lenders or claim to be successors-in-interest to
lenders who participated in Enron credit facilities syndicated by the Firm; individual and putative class actions by Enron investors, creditors and counterparties; and third-party actions brought by defendants in Enron-related cases,
alleging federal and state law claims against JPMorgan Chase and many other
defendants. Fact and expert discovery in these actions is complete. Plaintiffs in
two of the bank lender cases have moved for partial summary judgment, and
were subsequently joined in that motion by plaintiffs in the other two cases.
The Firm opposed this motion, briefing has been completed, and the parties
await the courts ruling.
In addition, in March 2006, two plaintiffs filed complaints in New York
Supreme Court against JPMorgan Chase alleging breach of contract, breach of
implied duty of good faith and fair dealing and breach of fiduciary duty based
upon the Firms role as Indenture Trustee in connection with two indenture
agreements between JPMorgan Chase and Enron. The Firm removed both
actions to the United States District Court for the Southern District of New
York. The federal court dismissed one of these cases and remanded the other
to New York State court where it will now proceed.
In a purported, consolidated class action lawsuit by JPMorgan Chase stockholders alleging that the Firm issued false and misleading press releases and
other public documents relating to Enron in violation of Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder, the United States
District Court for the Southern District of New York dismissed the lawsuit in its
entirety without prejudice in March 2005. Plaintiffs filled an amended complaint in May 2005. The Firm has moved to dismiss the amended complaint,
and the motion has been submitted to the court for decision.
A shareholder derivative action was filed against current and former directors
of JPMorgan Chase asserting that the Board wrongfully refused plaintiffs
demand that it bring suit against current and former directors and senior officers of the company to recover losses allegedly suffered by JPMorgan Chase
and its affiliates as a result of various alleged activities, including but not limited to Enron. The complaint asserts derivative claims for breach of fiduciary
duty, gross mismanagement, and corporate waste and asserts a violation of
Section 14(a) of the Securities Exchange Act of 1934. On October 11, 2006,
defendants filed a motion to dismiss the complaint, and oral argument on the
motion was held on January 19, 2007. On February 14, 2007, the court granted defendants motion to dismiss the complaint without leave to replead.
A putative class action on behalf of JPMorgan Chase employees who participated in the Firms 401(k) plan alleged claims under the Employee Retirement
Income Security Act (ERISA) for alleged breaches of fiduciary duties and
negligence by JPMorgan Chase, its directors and named officers. In August
2005, the United States District Court for the Southern District of New York
denied plaintiffs motion for class certification and ordered some of plaintiffs
claims dismissed. In September 2005, the Firm moved for summary judgment
seeking dismissal of this ERISA lawsuit in its entirety and, in September 2006,
the court granted summary judgment in part, and ordered plaintiffs to show
cause as to why the remaining claims should not be dismissed. On December
27, 2006, the court dismissed the case with prejudice. On December 29,
2006, plaintiffs filed a notice of appeal, which is pending.
IPO allocation litigation. Beginning in May 2001, JPMorgan Chase and certain
of its securities subsidiaries were named, along with numerous other firms in
the securities industry, as defendants in a large number of putative class action
lawsuits filed in the United States District Court for the Southern District of
New York. These suits allege improprieties in the allocation of
securities in various
public offerings, including some offerings for which a JPMorgan Chase entity
served as an underwriter. The suits allege violations of securities and antitrust
laws arising from alleged material misstatements and omissions in registration
statements and prospectuses for the initial public offerings (IPOs) and
alleged market manipulation with respect to aftermarket transactions in the
offered securities. The securities lawsuits allege, among other things, misrepresentation and market manipulation of the aftermarket trading for these offerings by tying allocations of shares in IPOs to undisclosed excessive commissions
paid to the underwriter defendants, including JPMorgan Securities and to required aftermarket purchase transactions by
customers who received allocations of shares in the respective IPOs, as well as
allegations of misleading analyst reports. The antitrust lawsuits allege an illegal
conspiracy to require customers, in exchange for IPO allocations, to pay undisclosed and excessive commissions and to make aftermarket purchases of the
IPO securities at a price higher than the offering price as a precondition to
receiving allocations. The securities cases were all assigned to one judge for
coordinated pre-trial proceedings, and the antitrust cases were all assigned to
another judge. On February 13, 2003, the Court denied the motions of
JPMorgan Chase and others to dismiss the securities complaints. On October
13, 2004, the Court granted in part plaintiffs motion to certify classes in six
focus cases in the securities litigation. On December 5, 2006, the United
States Court of Appeals for the Second Circuit reversed and vacated the Courts
class certification ruling. On January 5, 2007, plaintiffs filed a petition for
rehearing en banc in the Second Circuit, which is currently pending.
On February 15, 2005, the Court in the securities cases preliminarily approved
a proposed settlement of plaintiffs claims against 298 of the issuer defendants in these cases and a fairness hearing on the proposed settlement was
held on April 24, 2006. Pursuant to the proposed issuer settlement, the insurers for the settling issuer defendants, among other things, (1) agreed to guarantee that the plaintiff classes will recover at least $1 billion from the underwriter defendants in the IPO securities and antitrust cases and to pay any
shortfall, and (2) conditionally assigned to the plaintiffs any claims related to
any excess compensation allegedly paid to the underwriters by their customers for allocations of stock in the offerings at issue in the IPO litigation. At
the request of the Court that the parties to the proposed issuer settlement
address the announced preliminary memorandum of understanding (MOU)
between plaintiffs and JPMorgan Chase described below, on November 15,
7
Part I
2006, the issuer defendants submitted to the Court a revised proposed order.
On November 29, 2006, the underwriter defendants submitted objections to
the revised proposed order. The Court has not yet approved the proposed
issuer settlement, and the issuer defendants have raised the question with the
Court as to whether the proposed settlement classes can be certified as a
result of the Second Circuits December 5, 2006 decision.
Joseph P. LaSala, the trustee designated by plaintiffs to act as assignee of such
issuer excess compensation claims, filed complaints purporting to allege state
law claims on behalf of certain issuers against certain underwriters, including JPMorgan Securities
(the LaSala Actions), together with motions to stay proceedings in each case. On August 30, 2005, the Court stayed until resolution of
the proposed issuer settlement the 55 LaSala Actions then pending against
JPMorgan Securities and other underwriter defendants at that time, as well as
all future-filed LaSala Actions pursuant to the parties stipulation that the
Courts decision would govern stay motions in all future LaSala Actions. On
October 12, 2005, the Court granted the underwriter defendants motion to
dismiss one LaSala Action, which by stipulation applied to the parallel motions
to dismiss in all other pending and future-filed LaSala Actions. Plaintiffs thereafter filed amended complaints in the lead and other LaSala Actions. On
November 21, 2005, the underwriter defendants moved to dismiss the
amended complaint in the lead LaSala Action and, by virtue of the stipulation
of the parties, thereby moved to dismiss the amended complaints in all other
pending and future-filed LaSala Actions. On February 28, 2006, judgment was
entered by the Court dismissing all pending LaSala Actions. On March 14,
2006, plaintiffs filed a motion for reconsideration, alteration or amendment of
the February 28 judgment. On April 28, 2006, the Court denied plaintiffs
motion for reconsideration.
On April 19, 2006,
counsel for JPMorgan Chase and counsel for the plaintiffs
in the IPO securities and antitrust litigations entered into a preliminary MOU
outlining the general terms of a proposed settlement providing that
JPMorgan Securities would pay a sum of $425 million to resolve the claims of
the plaintiffs against JPMorgan Chase and JPMorgan Securities in the securities and
antitrust cases. The MOU specified that the certification of the classes
alleged in the complaints was a condition precedent to any final, binding settlement.
By letter dated December 13, 2006, counsel for JPMorgan Chase
informed counsel for the plaintiffs in the IPO securities and antitrust litigations
that, among other things, due to the Second Circuits December 5, 2006, class
certification decision, the proposed settlement classes upon which the preliminary MOU
was conditioned can no longer be certified and, consequently, the
MOU is unenforceable. At a December 14, 2006, conference, the Court stayed
all proceedings in the IPO securities actions pending the Second Circuits decision
as to whether to grant plaintiffs petition for rehearing en banc.
With respect to the IPO antitrust lawsuits, on November 3, 2003, the Court
granted defendants motion to dismiss the claims relating to the IPO allocation
practices in the IPO Allocation Antitrust Litigation. On September 28, 2005,
the United States Court of Appeals for the Second Circuit reversed, vacated
and remanded the district courts November 3, 2003, dismissal decision.
Defendants thereafter filed a motion for rehearing en banc in the Second
Circuit, which was denied on January 11, 2006. Thereafter, defendants filed a
petition for writ of certiorari in the United States Supreme Court on March 8,
2006. The certiorari petition was granted by the Supreme Court on
December 7, 2006, and oral argument will be held in early 2007.
A wholly separate antitrust
class action lawsuit on behalf of purported classes
of IPO issuers and investors alleging that certain underwriters, including JPMorgan Securities,
conspired to fix their underwriting fees in IPOs is in discovery. On
April 18, 2006, the U.S. District Court for the Southern District of New York
denied class certification as to the issuer plaintiffs. The denial of class certification has been appealed to the United States Court of Appeals for the Second
Circuit. Further matters are currently stayed pending resolution of the Second
Circuit appeal.
National Century Financial Enterprises litigation. JPMorgan Chase, JPMorgan
Chase Bank, N.A., JPMorgan Partners, Beacon Group, LLC and three former Firm
employees have been named as defendants in more than a dozen actions filed
in or transferred to the United States District Court for the Southern District of
Ohio (the MDL Litigation). In the majority of these actions, Bank One, Bank
One, N.A., and Banc One Capital Markets, Inc. also are named as defendants.
JPMorgan Chase Bank, N.A. and Bank One, N.A. were also defendants in an action
brought by The Unencumbered Assets Trust (UAT), a trust created for the
benefit of the creditors of National Century Financial Enterprises, Inc.
(NCFE) as a result of NCFEs Plan of Liquidation in bankruptcy. These
actions arose out of the November 2002 bankruptcy of NCFE. Prior to bankruptcy,
NCFE provided financing to various healthcare providers through wholly owned special-purpose vehicles, including NPF VI and NPF XII, which purchased discounted accounts receivable to be paid under third-party insurance
programs. NPF VI and NPF XII financed the purchases of such receivables, primarily through private placements of notes (Notes) to institutional investors
and pledged the receivables for, among other things, the repayment of the
Notes. In the MDL Litigation, JPMorgan Chase Bank, N.A. is sued in its role as
indenture trustee for NPF VI, which issued approximately $1 billion in Notes.
Bank One, N.A. is sued in its role as indenture trustee for NPF XII, which
issued approximately $2 billion in Notes. The three former Firm employees are
sued in their roles as former members of NCFEs board of directors (the
Defendant Employees). JPMorgan Chase, JPMorgan Partners and Beacon
Group, LLC, are claimed to be vicariously liable for the alleged actions of the
Defendant Employees. Banc One Capital Markets, Inc. is sued in its role as co-manager for three note offerings made by NPF XII. Other defendants include
the founders and key executives of NCFE, its auditors and outside counsel, and
rating agencies and placement agents that were involved with the issuance of
the Notes. Plaintiffs in these actions include institutional investors who purchased more than $2.7 billion in original face amount of asset-backed notes
issued by NCFE. Plaintiffs allege that the trustees violated fiduciary and contractual duties, improperly permitted NCFE and its affiliates to violate the
applicable indentures and violated securities laws by (among other things) failing to disclose the true nature of the NCFE arrangements. Plaintiffs further
allege that the Defendant Employees controlled the Board and audit committees of the NCFE entities; were fully aware, or negligent in not knowing, of NCFEs
alleged manipulation of its books; and are liable for failing to disclose their
purported knowledge of the alleged fraud to the plaintiffs. Plaintiffs also allege
that Banc One Capital Markets, Inc. is liable for cooperating in the sale of
securities based upon false and misleading statements. Motions to dismiss the
complaints were filed on behalf of the Firm and its affiliates. In October 2006,
the MDL court issued rulings on some of the motions to dismiss, granting the
motions in part and denying the motions in part. Additional motions are still
pending, and limited discovery is underway. The Firm has reached settlements
with several of the plaintiffs: In February 2006, the JPMorgan Chase entities,
the Bank One entities, and the Defendant Employees reached a settlement of
$375 million with the holders of $1.6 billion face value of Notes (the Arizona
Noteholders) and reached a separate agreement with the UAT for $50 million; and in June 2006, the JPMorgan entities, the Bank One entities, and the
Defendant Employees reached a settlement of approximately $16 million with
holders of about $89 million face value of Notes (the New York Pension Fund
8
Noteholders.) In addition to the lawsuits described above, the SEC has served
subpoenas on JPMorgan Chase Bank, N.A. and Bank One, N.A. and
has interviewed certain current and former employees. On April 25, 2005, the
staff of the Midwest Regional Office of the SEC wrote to advise Bank
One, N.A. that
it is considering recommending that the SEC bring a civil injunctive
action against Bank One, N.A. and a former employee alleging violations of the
securities laws in connection with the role of Banc One, N.A. as indenture trustee for the
NPF XII note program. On July 8, 2005, the staff of the Midwest Regional
Office of the SEC wrote to advise that it is
considering recommending that the SEC bring a civil injunctive action
against two individuals, both former employees of the Firms affiliates, alleging
violations of certain securities laws in connection with their role as former
members of NCFEs board of directors. On July 13, 2005, the staff further
advised that it is considering recommending that the SEC also bring a
civil injunctive action against the Firm in connection with the alleged activities
of the two individuals as alleged agents of the Firm. Lastly, the United States
Department of Justice is also investigating the events surrounding the collapse
of NCFE, and the Firm is cooperating with that investigation.
In re JPMorgan Chase Cash Balance Litigation. In a putative consolidated class
action lawsuit, filed in the District Court for the Southern District of New York,
naming the JPMorgan Chase Retirement Plan (together with the predecessor
plans of the JPMorgan Chase & Co. predecessor companies, the Plans) and
the JPMorgan Chase & Co.s Director of Human Resources as defendants, current and former participants in the Plans allege various claims under the
Employee Retirement Income Security Act (ERISA). Plaintiffs claims are
based upon alleged violations of ERISA arising from the conversion to and use
of a cash balance formula under the Plans to calculate participants pension
benefits. Specifically, plaintiffs allege that: (1) the conversion to and use of a
cash balance formula under the Plans violated ERISAs proscription against age
discrimination (the age discrimination claim); (2) the conversion to a cash
balance formula violated ERISAs proscriptions against the backloading of pension benefits and created an impermissible forfeiture of accrued benefits (the
backloading and forfeiture claims); and (3) defendants failed to adequately
communicate to Plan participants the conversion to a cash balance formula
and in general the nature of the Plan (the notice claims). In October 2006,
the United States District Court for the Southern District of New York denied
the Firms motion to dismiss the age discrimination and notice claims, but
granted the Firms motion to dismiss the backloading and forfeiture claims.
Plaintiffs motion for class certification is fully briefed and remains pending
with the Court. Fact discovery is ongoing, but only as to the notice claims.
Discovery as to the age discrimination claims has been temporarily stayed,
pending resolution of a similar case that is now before the United States Court
of Appeals for the Second Circuit.
American Express Litigation. In 1998, the United States Department of Justice
(DOJ) commenced an action against VISA U.S.A., Inc., VISA International,
Inc. and MasterCard International Incorporated alleging that VISA
by-law
2.10(e) and MasterCards Competitive Programs Policy (the
Exclusionary Rules), which
precluded any member of either of the foregoing associations from issuing
payment cards over the Discover or American Express network (or any other
competitive network), violated the antitrust laws and were anticompetitive.
The United States District Court for the Southern District of New York held that
the Exclusionary Rules had an adverse impact on competition and could not be enforced by
the associations. The United States Court of Appeals for the Second Circuit
affirmed, and the United States Supreme Court denied review on October 4,
2004, resulting in the repeal of the Exclusionary Rules.
On November 15, 2004, American Express filed a complaint against VISA,
MasterCard, Chase Bank USA, N.A. JPMorgan Chase & Co., as well as certain other
credit card issuing banks, and their respective bank holding companies, in the
United States District Court for the Southern District of New York, alleging that
it suffered damages from the Exclusionary Rules. American Express claims
that, in addition to VISA and MasterCard, member banks were instrumental in
adopting and carrying out the Exclusionary Rules and that the Exclusionary
Rules were restrictions by and for the member banks; and that the member
banks agreed not to compete by means of offering American Express cards.
On August 30, 2005, the Court denied the defendants respective motions to
dismiss, finding that the allegations of the complaint satisfied pleading rules
and were therefore sufficient to withstand the motions. The Court also decided that, at this time, the bank defendants, which were not parties to the DOJ
action, are not bound by any of the prior findings and decisions in that case.
Discovery is ongoing.
Interchange Litigation. On June 22, 2005, a group of merchants filed a putative class action complaint in the United States District Court for the District of
Connecticut. The complaint alleges that VISA, MasterCard, Chase Bank
USA, N.A. and JPMorgan Chase & Co., as well as certain other banks, and their respective bank holding companies, conspired to set the price of interchange in violation of Section 1 of the Sherman Act. The complaint further alleges
tying/bundling and exclusive dealing. Since the filing of the Connecticut complaint, other complaints have been filed in different United States District
Courts challenging the setting of interchange, as well the associations respective rules. All cases have been consolidated in the Eastern District of New York
for pretrial proceedings. An amended consolidated complaint was filed on
April 24, 2006. Defendants have filed a motion to dismiss all claims that predate January 1, 2004. The motion has not yet been decided.
Plaintiffs subsequently filed a supplemental complaint challenging
MasterCards initial public offering in 2006, alleging that the offering violates
the Section 7 of the Clayton Act and that the offering was a fraudulent conveyance. Defendants filed a motion to dismiss both of those claims. The
motion has not yet been decided. Discovery is ongoing.
In addition to the various cases, proceedings and investigations discussed
above, JPMorgan Chase and its subsidiaries are named as defendants or
otherwise involved in a
number of other legal actions and governmental proceedings arising in connection with their businesses. Additional actions, investigations or proceedings
may be initiated from time to time in the future. In view of the inherent difficulty of predicting the outcome of legal matters, particularly where the
claimants seek very large or indeterminate damages, or where the cases present novel legal theories, involve a large number of parties or are in early
stages of discovery, the Firm cannot state with confidence what the eventual
outcome of these pending matters will be, what the timing of the
ultimate resolution of these matters will be or what the eventual
loss, fines, penalties or impact related to each pending matter may be. JPMorgan Chase believes, based upon
its current knowledge, after consultation with counsel and after taking into
account its current litigation reserves, that the outcome of the legal actions,
proceedings and investigations currently pending against it should not have a
material, adverse effect on the consolidated financial condition of the Firm.
However, in light of the uncertainties involved in such proceedings, actions
and investigations, there is no assurance that the ultimate resolution of these
matters will not significantly exceed the reserves currently accrued by the Firm;
as a result, the outcome of a particular matter may be material to JPMorgan
Chases operating results for a particular period, depending upon, among
other factors, the size of the loss or liability imposed and the level of
JPMorgan Chases income for that period.
9
Part I
Item 4: Submission of matters to a vote of security holders
None.
Executive officers of the registrant
|
|
|
|
|
|
|
Name |
|
Age |
|
Positions and offices |
|
|
(at December 31, 2006) |
|
|
James Dimon
|
|
|
50 |
|
|
Chairman of the Board since December 31, 2006, and President and Chief Executive Officer
since December 31, 2005. He had been President and Chief Operating Officer from July 1,
2004, until December 31, 2005. Prior to the Merger, he had been Chairman and Chief
Executive Officer of Bank One Corporation. |
|
|
|
|
|
|
|
William B. Harrison, Jr.
|
|
|
63 |
|
|
Chairman of the Board from
December 31, 2005, until December 31, 2006,
prior to which he had been Chairman and Chief Executive Officer from November 2001. |
|
|
|
|
|
|
|
Frank Bisignano
|
|
|
47 |
|
|
Chief Administrative Officer since December 2005. Prior to joining JPMorgan Chase, he had
been Chief Executive Officer of Citigroup Inc.s Global Transaction Services from 2002 until
December 2005 and Chief Administrative Officer of Citigroup Inc.s Global Corporate and
Investment Bank from 2000 until 2002. |
|
|
|
|
|
|
|
Steven D. Black
|
|
|
54 |
|
|
Co-Chief Executive Officer of the Investment Bank since March 2004, prior to
which he had been Deputy Head of the Investment Bank. |
|
|
|
|
|
|
|
John F. Bradley
|
|
|
46 |
|
|
Director of Human Resources since December 2005. He had been Head of Human
Resources for Europe and Asia regions from April 2003 until December 2005, prior to
which he was Human Resources executive for Technology and Operations since 2002 and
was responsible for human resources integration efforts in 2001. |
|
|
|
|
|
|
|
Michael J. Cavanagh
|
|
|
40 |
|
|
Chief Financial Officer since September 2004, prior to which he had been
Head of Middle Market Banking. Prior to the Merger, he had been Chief Administrative Officer of
Commercial Banking from February 2003, Chief Operating Officer for Middle Market
Banking from August 2003, and Treasurer from 2001 until 2003 at Bank One Corporation. |
|
|
|
|
|
|
|
Stephen M. Cutler
|
|
|
45 |
|
|
General Counsel since February 2007. Prior to joining JPMorgan Chase, he was a
partner and co-chair of the Securities Department at the law firm of WilmerHale since October
2005. Prior to joining WilmerHale, he had been Director of the Division of Enforcement at
the U.S. Securities and Exchange Commission since October 2001. |
|
|
|
|
|
|
|
Ina R. Drew
|
|
|
50 |
|
|
Chief Investment Officer since February 2005, prior to which she was Head of Global Treasury. |
|
|
|
|
|
|
|
Samuel Todd Maclin
|
|
|
50 |
|
|
Head of Commercial Banking since July 2004, prior to which he had been
Chairman and CEO of the Texas Region and Head of Middle Market Banking. |
|
|
|
|
|
|
|
Jay Mandelbaum
|
|
|
44 |
|
|
Head of Strategy and Business Development. Prior to the Merger, he had been Head
of Strategy and Business Development since September 2002 at Bank One Corporation. Prior
to joining Bank One Corporation, he had been Vice Chairman and Chief Executive Officer of
the Private Client Group of Citigroup Inc. subsidiary Salomon Smith Barney. |
|
|
|
|
|
|
|
Heidi Miller
|
|
|
53 |
|
|
Chief Executive Officer of Treasury & Securities Services. Prior to the Merger,
she had been Chief Financial Officer at Bank One Corporation since March 2002. Prior to joining Bank
One Corporation, she had been Vice Chairman of Marsh, Inc. |
|
|
|
|
|
|
|
Charles W. Scharf
|
|
|
41 |
|
|
Chief Executive Officer of Retail Financial Services. Prior to the Merger, he
had been Head of Retail Banking from May 2002, prior to which he
was Chief Financial Officer at Bank One Corporation. |
|
|
|
|
|
|
|
Richard J. Srednicki
|
|
|
59 |
|
|
Chief Executive Officer of Card Services. |
10
Part I
and II
|
|
|
|
|
|
|
James E. Staley
|
|
|
50 |
|
|
Chief Executive Officer of Asset Management. |
|
|
|
|
|
|
|
William T. Winters
|
|
|
45 |
|
|
Co-Chief Executive Officer of the Investment Bank since March 2004, prior to which he had
been Deputy Head of the Investment Bank and Head of Credit & Rate Markets. |
Unless otherwise noted, during the five fiscal years ended December 31, 2006, all of JPMorgan
Chases above-named executive officers have continuously
held senior-level positions with JPMorgan Chase or its predecessor institution, Bank One
Corporation. There are no family relationships among the foregoing executive officers.
Part II
Item 5: Market for registrants common equity, related stockholder matters and issuer purchases of equity securities
The outstanding shares of JPMorgan Chases common stock are listed and traded on the New York Stock Exchange, the London Stock Exchange Limited and
the Tokyo Stock Exchange. For the quarterly high and low prices of JPMorgan
Chases common stock on the New York Stock Exchange for the last two years,
see the section entitled Supplementary information
selected quarterly financial data (unaudited) on page 143. For
a comparison of the cumulative total return for JPMorgan Chase common
stock with the
S&P 500 Index and the S&P Financial Index
over the five-year period ended December 31, 2006, see
Five-year performance on page 22 of this Annual Report. JPMorgan Chase declared quarterly cash
dividends on its common stock in the amount of $0.34 per share for each quarter of 2006, 2005 and 2004. The common dividend payout ratio, based upon
reported net income, was: 34% for 2006; 57% for 2005; and 88% for 2004.
At January 31, 2007, there were 230,273 holders of record of JPMorgan Chases
common stock. For information regarding securities authorized for issuance under
the Firms employee stock-based compensation plans, see Item 12 on page 12.
On March 21, 2006, the Board of Directors approved a stock repurchase program
that authorizes the repurchase of up to $8 billion of the Firms common shares,
superceding a $6 billion stock repurchase program authorized in 2004. The $8 billion authorization includes shares to be purchased to offset issuances under the Firms
employee stock-based plans. The actual number of shares purchased is subject to
various factors, including: market conditions; legal considerations affecting the
amount and timing of repurchase activity; the Firms capital position (taking into
account goodwill and intangibles); internal capital generation; and alternative
potential investment opportunities. The repurchase program does not include specific price targets or timetables; may be executed through open market purchases
or privately negotiated transactions, or utilizing Rule 10b5-1 programs; and may
be suspended at any time.
The Firms repurchases of equity securities during 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar value of |
|
|
Total open |
|
Average |
|
remaining authorized |
Year ended |
|
market shares |
|
price paid |
|
repurchase program |
December 31, 2006 |
|
repurchased |
|
per share(a) |
|
(in millions) |
|
Repurchases under the $6 billion program: |
January 1 March 20 |
28,408,300 |
|
|
|
$ 40.39 |
|
|
$ |
|
|
Repurchases under the $8 billion program: |
March 21 31 |
|
|
3,420,300 |
|
|
|
41.77 |
|
|
|
7,857 |
|
|
First quarter |
|
|
31,828,600 |
|
|
|
40.54 |
|
|
|
7,857 |
|
Second quarter |
|
|
17,651,000 |
|
|
|
42.24 |
|
|
|
7,112 |
|
Third quarter |
|
|
20,052,729 |
|
|
|
44.88 |
|
|
|
6,212 |
|
|
October |
|
|
3,774,000 |
|
|
|
47.22 |
|
|
|
6,033 |
|
November |
|
|
9,080,000 |
|
|
|
47.44 |
|
|
|
5,603 |
|
December |
|
|
8,280,000 |
|
|
|
47.27 |
|
|
|
5,211 |
|
|
Fourth quarter |
|
|
21,134,000 |
|
|
|
47.33 |
|
|
|
5,211 |
|
|
Total for 2006 |
|
|
90,666,329 |
|
|
|
$ 43.41 |
|
|
$ |
5,211 |
|
|
|
|
|
(a) |
|
Excludes commission costs. |
In addition to the repurchases disclosed above, participants in the Firms
stock-based incentive plans may have shares withheld to cover income taxes.
Shares withheld to pay income taxes are repurchased pursuant to the terms
of the applicable plan and not under the Firms share repurchase program.
Shares repurchased pursuant to these plans during 2006 were as follows:
|
|
|
|
|
|
|
|
|
Year ended |
|
Total shares |
|
|
Average price |
|
December 31, 2006 |
|
repurchased |
|
|
paid per share |
|
|
First quarter |
|
|
7,724,733 |
|
|
|
$ 38.72 |
|
Second quarter |
|
|
165,464 |
|
|
|
42.62 |
|
Third quarter |
|
|
131,969 |
|
|
|
44.89 |
|
|
October |
|
|
18,422 |
|
|
|
45.46 |
|
November |
|
|
9,634 |
|
|
|
47.43 |
|
December |
|
|
19,310 |
|
|
|
47.32 |
|
|
Fourth quarter |
|
|
47,366 |
|
|
|
46.62 |
|
|
Total for 2006 |
|
|
8,069,532 |
|
|
|
$ 38.95 |
|
|
Item 6: Selected financial data
For five-year selected financial data, see Five-year summary of consolidated
financial highlights (unaudited) on page 22 and "Selected annual financial
data (unaudited)" on page 144.
11
Part II
and III
Item 7:
Managements discussion and analysis of financial condition
and
results of operations
Managements discussion and analysis of the financial condition and results
of operations, entitled Managements discussion and analysis, appears on
pages 23 through 87. Such information should be read in conjunction with
the Consolidated financial statements and Notes thereto, which appear on
pages 90 through 142.
Item 7A: Quantitative and qualitative disclosures about market risk
For information related to market risk, see the Market risk management
section on pages 77 through 80 and Note 28 on pages 131132.
Item 8:
Financial statements
and supplementary data
The Consolidated financial statements, together with the Notes thereto and
the report of PricewaterhouseCoopers LLP dated February 21, 2007 thereon,
appear on pages 89 through 142.
Supplementary financial data for each full quarter within the two years
ended December 31, 2006, are included on page 143 in the table entitled
Supplementary information Selected quarterly financial data (unaudited).
Also included is a Glossary of terms on pages
145146.
Item 9: Changes in and disagreements with accountants on accounting and financial disclosure
None.
Item 9A: Controls and procedures
As of the end of the period covered by this report, an evaluation was carried
out under the supervision and with the participation of the Firms management,
including its Chairman and Chief Executive Officer and its Chief Financial Officer, of
the effectiveness of its disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934). Based upon that
evalua-
tion, the Chairman and Chief Executive Officer and the Chief Financial Officer
concluded that these disclosure controls and procedures were effective. See Exhibits
31.1 and 31.2 for the Certification statements issued by the Chairman and Chief
Executive Officer, and Chief Financial Officer.
The Firm is committed to maintaining high standards of internal control over
financial reporting. Nevertheless, because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements.
In addition, in a firm as large and complex as JPMorgan Chase, lapses or
deficiencies in internal controls may occur from time to time, and there
can be no assurance that any such deficiencies will not result in significant
deficiencies or even material weaknesses in internal controls in the future.
See page 88 for Managements report on internal control over financial
reporting, and page 89 for the Report of independent registered public
accounting firm with respect to managements assessment of internal control.
There was no change in the Firms internal control over financial reporting (as
defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that
occurred during the fourth quarter of 2006 that has materially affected, or is
reasonably likely to materially affect, the Firms internal control over financial
reporting.
Item 9B: Other information
None.
Part III
Item 10: Directors, executive officers
and corporate governance
See Item 13 below.
Item 11: Executive compensation
See Item 13 below.
Item 12: Security ownership of certain beneficial owners and management and related stockholder matters
For security ownership of certain beneficial owners and management, see
Item 13 below.
The following table details the total number of shares available for issuance under JPMorgan
Chases employee stock-based incentive plans (including shares available
for issuance to nonemployee directors). The Firm is not authorized to grant stock-based incentive
awards to nonemployees other than to nonemployee directors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares to be |
|
|
Weighted-average |
|
|
Number of shares remaining |
|
December 31, 2006 |
|
issued upon exercise of |
|
|
exercise price of |
|
|
available for future issuance under |
|
(Shares in thousands) |
|
outstanding options/SARs |
|
|
outstanding options/SARs |
|
|
stock compensation plans |
|
|
Employee stock-based incentive plans approved by shareholders |
|
|
241,004 |
|
|
|
$ 38.29 |
|
|
|
207,924 |
|
Employee stock-based incentive plans not approved by shareholders |
|
|
133,907 |
|
|
|
43.90 |
|
|
|
|
|
|
Total |
|
|
374,911 |
|
|
|
$ 40.30 |
|
|
|
207,924 |
(a) |
|
|
|
|
(a) |
|
Future shares will be issued under the shareholder-approved 2005 Long-Term Incentive
Plan (2005 Plan). |
12
Parts
III and IV
Item 13: Certain relationships and related transactions, and Director independence
Information related to JPMorgan Chases Executive Officers is included in Part I,
Item 4, on pages 1011. Pursuant to Instruction G(3) to Form 10-K, the remainder of the information to be provided in Items 10, 11, 12, 13 and 14 of Form
10-K (other than information pursuant to Rule 402 (i), (k) and (l) of Regulation
S-K) is incorporated by reference to JPMorgan Chases definitive proxy statement
for the 2007 annual meeting of stockholders, which proxy statement will be filed
with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the close of JPMorgan Chases 2006 fiscal year.
Item 14: Principal accounting fees and services
See Item 13 above.
Part IV
Item 15: Exhibits, financial statement schedules
|
|
Exhibits, financial statement schedules |
|
1. |
|
Financial statements |
|
|
|
The Consolidated financial statements, the Notes thereto and
the report thereon listed in Item 8 are set forth commencing on
page 90. |
|
2. |
|
Financial statement schedules |
|
3. |
|
Exhibits |
|
3.1 |
|
Restated Certificate of Incorporation of JPMorgan Chase
& Co.,
effective April 5, 2006 (incorporated by reference to Exhibit 3.1
to the Current Report on Form 8-K of JPMorgan Chase & Co.
(File No. 1-5805) filed April 7, 2006). |
|
3.2 |
|
By-laws of JPMorgan Chase & Co., effective October 17, 2006
(incorporated by reference to Exhibit 3.1 to the Current Report
on Form 8-K of JPMorgan Chase & Co. (file No. 1-5805) filed
October 20, 2006). |
|
4.1 |
|
Indenture, dated as of December 1, 1989, between Chemical
Banking Corporation (now known as JPMorgan Chase & Co.) and
The Chase Manhattan Bank (National Association) (succeeded by
Deutsche Bank Trust Company Americas), as Trustee (incorporated by reference to Exhibit 4.2 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended
December 31, 2004). |
|
4.2(a) |
|
Indenture, dated as of April 1, 1987, as amended and restated as
of December 15, 1992, between Chemical Banking Corporation
(now known as JPMorgan Chase & Co.) and Morgan Guaranty
Trust Company of New York (succeeded by U.S. Bank Trust National
Association), as Trustee (incorporated by reference to Exhibit 4.3(a)
to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File
No. 1-5805) for the year ended December 31, 2005). |
4.2(b) |
|
Second Supplemental Indenture, dated as of October 8, 1996,
between The Chase Manhattan Corporation (now known as
JPMorgan Chase & Co.) and First Trust of New York, National
Association (succeeded by U.S. Bank Trust National Association),
as Trustee, to the Indenture, dated as of April 1, 1987, as
amended and restated as of December 15, 1992 (incorporated by
reference to Exhibit 4.3(b) to the Annual Report on Form 10-K of
JPMorgan Chase & Co. (File No. 1-5805) for the year ended
December 31, 2005). |
|
4.2(c) |
|
Third Supplemental Indenture, dated as of December 29, 2000,
between The Chase Manhattan Corporation (now known as
JPMorgan Chase & Co.) and U.S. Bank Trust National
Association, as Trustee, to the Indenture, dated as of April 1,
1987, as amended and restated as of December 15, 1992 (incorporated by reference to Exhibit 4.3(c) to the Annual Report on
Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the
year ended December 31, 2005). |
|
4.3(a) |
|
Amended and Restated Indenture, dated as of September 1,
1993, between The Chase Manhattan Corporation (succeeded
through merger by JPMorgan Chase & Co.) and Chemical Bank
(succeeded by U.S. Bank Trust National Association), as Trustee
(incorporated by reference to Exhibit 4.4(a) to the Annual Report
on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the
year ended December 31, 2005). |
|
4.3(b) |
|
First Supplemental Indenture, dated as of March 29, 1996,
among Chemical Banking Corporation (now known as JPMorgan
Chase & Co.), The Chase Manhattan Corporation, (succeeded
through merger by JPMorgan Chase & Co.), Chemical Bank, as
Resigning Trustee, and First Trust of New York, National
Association (succeeded by U.S. Bank Trust National Association),
as Successor Trustee, to the Amended and Restated Indenture,
dated as of September 1, 1993 (incorporated by reference to
Exhibit 4.4(b) to the Annual Report on Form 10-K of JPMorgan
Chase & Co. (File No. 1-5805) for the year ended December 31,
2005). |
|
4.3(c) |
|
Second Supplemental Indenture, dated as of October 8, 1996,
between The Chase Manhattan Corporation (now known as
JPMorgan Chase & Co.) and First Trust of New York, National
Association (succeeded by U.S. Bank Trust National Association),
as Trustee, to the Amended and Restated Indenture, dated as of
September 1, 1993 (incorporated by reference to Exhibit 4.4(c) to
the Annual Report on Form 10-K of JPMorgan Chase & Co. (File
No. 1-5805) for the year ended December 31, 2005). |
|
4.3(d) |
|
Third Supplemental Indenture, dated as of December 29, 2000,
between The Chase Manhattan Corporation (now known as
JPMorgan Chase & Co.) and U.S. Bank Trust National
Association, as Trustee, to the Amended and Restated Indenture,
dated as of September 1, 1993 (incorporated by reference to
Exhibit 4.4(d) to the Annual Report on Form 10-K of JPMorgan
Chase & Co. (File No. 1-5805) for the year ended December 31,
2005). |
13
Part IV
4.4(a) |
|
Indenture, dated as of August 15, 1982, between J.P. Morgan &
Co. Incorporated (succeeded through merger by JPMorgan Chase
& Co.) and Manufacturers Hanover Trust Company (succeeded by
U.S. Bank Trust National Association), as Trustee (incorporated by
reference to Exhibit 4.5(a) to the Annual Report on Form 10-K of
JPMorgan Chase & Co. (File No. 1-5805) for the year ended
December 31, 2005). |
|
4.4(b) |
|
First Supplemental Indenture, dated as of May 5, 1986, between
J.P. Morgan & Co. Incorporated (succeeded through merger by
JPMorgan Chase & Co.) and Manufacturers Hanover Trust
Company (succeeded by U.S. Bank Trust National Association), as
Trustee, to the Indenture, dated as of August 15, 1982 (incorporated by reference to Exhibit 4.5(b) to the Annual Report on Form
10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year
ended December 31, 2005). |
|
4.4(c) |
|
Second Supplemental Indenture, dated as of February 27, 1996,
between J.P. Morgan & Co. Incorporated (succeeded through
merger by JPMorgan Chase & Co.) and First Trust of New York,
National Association (succeeded by U.S. Bank Trust National
Association), as Trustee, to the Indenture, dated as of August 15,
1982 (incorporated by reference to Exhibit 4.5(c) to the Annual
Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805)
for the year ended December 31, 2005). |
|
4.4(d) |
|
Third Supplemental Indenture, dated as of January 30, 1997,
between J.P. Morgan & Co. Incorporated (succeeded through
merger by JPMorgan Chase & Co.) and First Trust of New York,
National Association (succeeded by U.S. Bank Trust National
Association), as Trustee, to the Indenture, dated as of August 15,
1982 (incorporated by reference to Exhibit 4.5(d) to the Annual
Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805)
for the year ended December 31, 2005). |
|
4.4(e) |
|
Fourth Supplemental Indenture, dated as of December 29, 2000,
among J.P. Morgan & Co. Incorporated (succeeded through merger by JPMorgan Chase & Co.), The Chase Manhattan Corporation
(now known as JPMorgan Chase & Co.) and U.S. Bank Trust
National Association, as Trustee, to the Indenture, dated as of
August 15, 1982 (incorporated by reference to Exhibit 4.5(e) to
the Annual Report on Form 10-K of JPMorgan Chase & Co. (File
No. 1-5805) for the year ended December 31, 2005). |
|
4.5(a) |
|
Indenture, dated as of March 1, 1993, between J.P. Morgan &
Co. Incorporated (succeeded through merger by JPMorgan Chase
& Co.) and Citibank, N.A. (succeeded by U.S. Bank Trust National
Association), as Trustee (incorporated by reference to Exhibit 4.6(a) to the Annual Report on Form 10-K of JPMorgan Chase &
Co. (File No. 1-5805) for the year ended December 31, 2005). |
|
4.5(b) |
|
First Supplemental Indenture, dated as of December 29, 2000,
among J.P. Morgan & Co. Incorporated (succeeded through merger by JPMorgan Chase & Co.), The Chase Manhattan Corporation
(now known as JPMorgan Chase & Co.) and U.S. Bank Trust
National Association, as Trustee, to the Indenture, dated as of
March 1, 1993 (incorporated by reference to Exhibit 4.6(b) to the
Annual Report on Form 10-K of JPMorgan Chase & Co. (File No.
1-5805) for the year ended December 31, 2005). |
4.6 |
|
Indenture, dated as of May 25, 2001, between J.P. Morgan
Chase & Co. and Bankers Trust Company (succeeded by Deutsche
Bank Trust Company Americas), as Trustee (incorporated by reference to Exhibit 4(a)(1) to the amended Registration Statement on
Form S-3 of J.P. Morgan Chase & Co. (File No. 333-52826) filed
June 13, 2001). |
|
4.7(a) |
|
Junior Subordinated Indenture, dated as of December 1, 1996,
between The Chase Manhattan Corporation (now known as
JPMorgan Chase & Co.) and The Bank of New York, as Trustee
(incorporated by reference to Exhibit 4.8(a) to the Annual Report
on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the
year ended December 31, 2004). |
|
4.7(b) |
|
Guarantee Agreement, dated as of January 24, 1997, between
The Chase Manhattan Corporation (now known as JPMorgan
Chase & Co.) and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.8(b) to the Annual Report on Form
10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year
ended December 31, 2004). |
|
4.7(c) |
|
Amended and Restated Trust Agreement, dated as of January 24,
1997, among The Chase Manhattan Corporation (now known as
JPMorgan Chase & Co.), The Bank of New York, as Property
Trustee, The Bank of New York (Delaware), as Delaware Trustee,
and the Administrative Trustees named therein (incorporated by
reference to Exhibit 4.8(c) to the Annual Report on Form 10-K of
JPMorgan Chase & Co. (File No. 1-5805) for the year ended
December 31, 2004). |
|
4.7(d) |
|
Replacement Capital Covenant, dated as of August 17, 2006,
by JPMorgan Chase & Co. for the benefit of specified debtholders
(incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K of
JPMorgan Chase & Co. (File No. 1-5805) filed on
August 17, 2006). |
|
4.7(e) |
|
Replacement Capital Covenant, dated as of February 2, 2007, by
JPMorgan Chase & Co. for the benefit of specified debtholders
(incorporated by reference to Exhibit 99.1 to the Current Report on
Form 8-K of JPMorgan Chase & Co. (File No. 1-5805) filed on
February 2, 2007). |
|
4.7(f) |
|
Amended and Restated Trust Agreement, dated as of
August 17,
2006, among JPMorgan Chase & Co., as Depositor, The Bank of New
York, as Property Trustee, The Bank of New York (Delaware), as
Delaware Trustee, and the Administrative Trustees and Holders
specified therein. |
|
4.7(g) |
|
Amended and Restated Trust Agreement, dated as of February 2,
2007, among JPMorgan Chase & Co., as Depositor, The Bank of New
York, as Property Trustee, The Bank of New York (Delaware), as
Delaware Trustee, and the Administrative Trustees and Holders
specified therein. |
|
4.8(a) |
|
Indenture, dated as of March 3, 1997, between Banc One
Corporation (succeeded through merger by JPMorgan Chase &
Co.) and The Chase Manhattan Bank (succeeded by Deutsche
Bank Trust Company Americas), as Trustee (incorporated by reference to Exhibit 4.9(a) to the Annual Report on Form 10-K of
JPMorgan Chase & Co. (File No. 1-5805) for the year ended
December 31, 2004). |
14
|
4.8(b) |
|
First Supplemental Indenture, dated as of October 2, 1998,
between Banc One Corporation (succeeded through merger by
JPMorgan Chase & Co.) and The Chase Manhattan Bank (succeeded by Deutsche Bank Trust Company Americas), as Trustee,
to the Indenture, dated as of March 3, 1997 (incorporated by reference to Exhibit 4.9(b) to the Annual Report on Form 10-K of
JPMorgan Chase & Co. (File No. 1-5805) for the year ended
December 31, 2004). |
|
4.8(c) |
|
Form of Second Supplemental Indenture, dated as of July 1,
2004, among J.P. Morgan Chase & Co., Bank One Corporation
(succeeded through merger by JPMorgan Chase & Co.),
JPMorgan Chase Bank, N.A. as Resigning Trustee, and Deutsche Bank
Trust Company Americas, as Successor Trustee, to the Indenture,
dated as of March 3, 1997 (incorporated by reference to Exhibit
4.22 to the Registration Statement on Form S-3 (File No. 333-116822) of JPMorgan Chase & Co. filed June 24, 2004). |
|
4.9(a) |
|
Indenture, dated as of March 3, 1997, between Banc One
Corporation (succeeded through merger by JPMorgan Chase &
Co.) and The Chase Manhattan Bank (succeeded by U.S. Bank
Trust National Association), as Trustee (incorporated by reference
to Exhibit 4.10(a) to the Annual Report on Form 10-K of
JPMorgan Chase & Co. (File No. 1-5805) for the year ended
December 31, 2004). |
|
4.9(b) |
|
First Supplemental Indenture, dated as of October 2, 1998,
between Banc One Corporation (succeeded through merger by
JPMorgan Chase & Co.) and The Chase Manhattan Bank (succeeded by U.S. Bank Trust National Association), as Trustee, to
the Indenture, dated as of March 3, 1997 (incorporated by reference to Exhibit 4.10(b) to the Annual Report on Form 10-K of
JPMorgan Chase & Co. (File No. 1-5805) for the year ended
December 31, 2004). |
|
4.9(c) |
|
Second Supplemental Indenture, dated as of July 1, 2004, among
J.P. Morgan Chase & Co., Bank One Corporation (succeeded
through merger by JPMorgan Chase & Co.), JPMorgan Chase
Bank, N.A. as Resigning Trustee, and U.S. Bank Trust National
Association, as Successor Trustee, to the Indenture, dated as of
March 3, 1997 (incorporated by reference to Exhibit 4.25 to the
Registration Statement on Form S-3 (File No. 333-116822) of
JPMorgan Chase & Co. filed June 24, 2004). |
|
4.10(a) |
|
Form of Indenture, dated as of July 1, 1995, between Banc One
Corporation (succeeded through merger by JPMorgan Chase &
Co.) and Citibank N.A, as Trustee (incorporated by reference to
Exhibit 4.11(a) to the Annual Report on Form 10-K of JPMorgan
Chase & Co. (File No. 1-5805) for the year ended December 31,
2004). |
|
4.10(b) |
|
Form of Supplemental Indenture, dated as of July 1, 2004,
among J.P. Morgan Chase & Co., Bank One Corporation (succeeded through merger by JPMorgan Chase & Co.) and Citibank
N.A., as Trustee, to the Indenture, dated as of July 1, 1995
(incorporated by reference to Exhibit 4.31 to the amended
Registration Statement on Form S-3 (File No. 333-116822) of
JPMorgan Chase & Co. filed July 1, 2004). |
10.1 |
|
Deferred Compensation Plan for Non-Employee Directors of The
Chase Manhattan Corporation (now known as JPMorgan Chase
& Co.) and The Chase Manhattan Bank (now known as
JPMorgan Chase Bank, N.A.), as amended and restated effective
December, 1996 (incorporated by reference to Exhibit 10.1 to the
Annual Report on Form 10-K of JPMorgan Chase & Co. (File No.
1-5805) for the year ended December 31, 2004). |
|
10.2 |
|
Post-Retirement Compensation Plan for Non-Employee Directors
of The Chase Manhattan Corporation (now known as JPMorgan
Chase & Co.), as amended and restated effective May 21, 1996
(incorporated by reference to Exhibit 10.2 to the Annual Report
on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the
year ended December 31, 2004). |
|
10.3 |
|
Deferred Compensation Program of JPMorgan Chase & Co. and
Participating Companies, effective as of January 1, 1996 (incorporated by reference to Exhibit 10.3 to the Annual Report on
Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the
year ended December 31, 2004). |
|
10.4 |
|
2005 Deferred Compensation Program of JPMorgan Chase &
Co., effective December 31, 2005 (incorporated by reference to
Exhibit 10.4 to the Annual Report on Form 10-K of JPMorgan
Chase & Co. (File No. 1-5805) for the year ended December 31,
2005). |
|
10.5 |
|
JPMorgan Chase & Co. 2005 Long-Term Incentive Plan (incorporated by reference to Appendix C of Schedule 14A of JPMorgan Chase & Co. (File No. 1-5805) filed April 4, 2005). |
|
10.6 |
|
JPMorgan Chase & Co. 1996 Long-Term Incentive Plan, as
amended (incorporated by reference to Exhibit 10.6 to the
Annual Report on Form 10-K of JPMorgan Chase & Co. (File No.
1-5805) for the year ended December 31, 2005). |
|
10.7 |
|
Key Executive Performance Plan of JPMorgan Chase & Co., as
restated as of January 1, 2005 (incorporated by reference to
Exhibit 10.7 to the Annual Report on Form 10-K of JPMorgan
Chase & Co. (File No. 1-5805) for the year ended December 31,
2005). |
|
10.8 |
|
Excess Retirement Plan of The Chase Manhattan Bank and
Participating Companies, restated effective January 1, 2005
(incorporated by reference to Exhibit 10.8 to the Annual Report
on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the
year ended December 31, 2005). |
|
10.9 |
|
JPMorgan Chase & Co. 2001 Stock Option Plan. |
|
10.10 |
|
1995 J.P. Morgan & Co. Incorporated Stock Incentive Plan, as
amended (incorporated by reference to Exhibit 10.12 to the
Annual Report on Form 10-K of JPMorgan Chase & Co. (File No.
1-5805) for the year ended December 31, 2004). |
|
10.11 |
|
Executive Retirement Plan of The Chase Manhattan Corporation
and Certain Subsidiaries (incorporated by reference to Exhibit
10.13 to the Annual Report on Form 10-K of JPMorgan Chase &
Co. (File No. 1-5805) for the year ended December 31, 2005). |
15
Part IV
10.12 |
|
Benefit Equalization Plan of The Chase Manhattan Corporation
and Certain Subsidiaries (incorporated by reference to Exhibit
10.14 to the Annual Report on Form 10-K of JPMorgan Chase &
Co. (File No. 1-5805) for the year ended December 31, 2005). |
|
10.13 |
|
Summary of Terms of JPMorgan Chase & Co. Severance Policy
(incorporated by reference to Exhibit 10.15 to the Annual Report
on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the
year ended December 31, 2005). |
|
10.14 |
|
Employment Agreement between J. P. Morgan Chase & Co. and
James Dimon dated January 14, 2004 (incorporated by reference
to Exhibit 10.1 of the Registration Statement on Form S-4 of J.P.
Morgan Chase & Co. (File No. 333-112967) filed February 20,
2004). |
|
10.15 |
|
Summary of Terms of Pension of William B. Harrison, Jr. (incorporated by
reference to Exhibit 10.17 to the Annual Report on Form 10-K of
JPMorgan Chase & Co. (File No. 1-5805) for the year ended
December 31, 2005). |
|
10.16 |
|
Bank One Corporation Director Stock Plan, as amended (incorporated by reference to Exhibit 10(B) to the Form 10-K of Bank One
Corporation (File No. 1-15323) for the year ended December 31,
2003). |
|
10.17 |
|
Summary of Bank One Corporation Director Deferred
Compensation Plan (incorporated by reference to Exhibit 10.19
to the Annual Report on Form 10-K of JPMorgan Chase & Co.
(File No. 1-5805) for the year ended December 31, 2005). |
|
10.18 |
|
Bank One Corporation Stock Performance Plan (incorporated by
reference to Exhibit 10(A) to the Form 10-K of Bank One
Corporation (File No. 1-15323) for the year ended December 31,
2002). |
|
10.19 |
|
Bank One Corporation Supplemental Savings and Investment
Plan, as amended (incorporated by reference to Exhibit 10(E) to
the Form 10-K of Bank One Corporation (File No. 1-15323) for
the year ended December 31, 2003). |
|
10.20 |
|
Bank One Corporation Supplemental Personal Pension Account
Plan, as amended (incorporated by reference to Exhibit 10(F) to
the Form 10-K of Bank One Corporation (File No. 1-15323) for
the year ended December 31, 2003). |
|
10.21 |
|
Bank One Corporation Investment Option Plan (incorporated by
reference to Exhibit 10.26 to the Annual Report on Form 10-K of
JPMorgan Chase & Co. (File No. 1-5805) for the year ended
December 31, 2005). |
|
10.22 |
|
Banc One Corporation Revised and Restated 1989 Stock
Incentive Plan (incorporated by reference to Exhibit 10.30 to the
Annual Report on Form 10-K of JPMorgan Chase & Co. (File No.
1-5805) for the year ended December 31, 2004). |
|
10.23 |
|
Banc One Corporation Revised and Restated 1995 Stock
Incentive Plan (incorporated by reference to Exhibit 10.31 to the
Annual Report on Form 10-K of JPMorgan Chase & Co. (File No.
1-5805) for the year ended December 31, 2004). |
|
10.24 |
|
Form of JPMorgan Chase & Co. Long-Term Incentive Plan Award
Agreement of January 2005 stock appreciation rights
(incorporated by reference to Exhibit 10.31 to the Annual Report on Form
10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year
ended December 31, 2005). |
|
10.25 |
|
JPMorgan Chase & Co. Long-Term Incentive Plan Award
Agreement of January 2005 restricted stock units (incorporated
by reference to Exhibit 10.1 to Form 8-K of JPMorgan Chase &
Co. (File No. 1-5805) filed April 11, 2005). |
|
10.26 |
|
Form of JPMorgan Chase & Co. Long-Term Incentive Plan Award
Agreement of October 2005 stock appreciation rights
(incorporated by reference to Exhibit 10.33 to the Annual Report on Form
10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year
ended December 31, 2005). |
|
10.27 |
|
Amendment and Restatement of Letter Agreement between
JPMorgan Chase & Co. and Charles W. Scharf, dated December
29, 2005 (incorporated by reference to Exhibit 10.34 to the
Annual Report on Form 10-K of JPMorgan Chase & Co. (File No.
1-5805) for the year ended December 31, 2005). |
|
12.1 |
|
Computation of ratio of earnings to fixed charges. |
|
12.2 |
|
Computation of ratio of earnings to fixed charges and preferred
stock dividend requirements. |
|
21.1 |
|
List of Subsidiaries of JPMorgan Chase & Co. |
|
22.1 |
|
Annual Report on Form 11-K of The JPMorgan Chase 401(k)
Savings Plan for the year ended December 31, 2006, (to be filed pursuant to Rule 15d-21 under the
Securities Exchange Act of 1934). |
|
23.1 |
|
Consent of independent registered public accounting firm. |
|
31.1 |
|
Certification. |
|
31.2 |
|
Certification. |
|
32 |
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pur-
suant to Section 906 of the Sarbanes-Oxley Act of 2002. |
Certain
instruments defining the rights of securities holders are not
included in Exhibits 4.1 4.7 pursuant to Item 601, Section
(b)(4)(iii), of Regulation S-K. JPMorgan Chase hereby agrees to
furnish the instruments not included to the SEC upon its request.
16
Table of contents
Financial:
22 |
|
Five-year summary of consolidated financial highlights |
|
22 |
|
Five-year stock performance |
Managements discussion and analysis:
23 |
|
Introduction |
|
25 |
|
Executive overview |
|
28 |
|
Consolidated results of operations |
|
32 |
|
Explanation and reconciliation of the Firms
use of non-GAAP financial measures |
|
34 |
|
Business segment results |
|
55 |
|
Balance sheet analysis |
|
57 |
|
Capital management |
|
59 |
|
Off-balance sheet arrangements and
contractual cash obligations |
|
61 |
|
Risk management |
|
62 |
|
Liquidity risk management |
|
64 |
|
Credit risk management |
|
77 |
|
Market risk management |
|
81 |
|
Private equity risk management |
|
81 |
|
Operational risk management |
|
82 |
|
Reputation and fiduciary risk management |
|
83 |
|
Critical accounting estimates used by the Firm |
|
85 |
|
Accounting and reporting developments |
|
87 |
|
Nonexchange-traded commodity derivative contracts
at fair value |
Audited financial statements:
88 |
|
Managements report on internal control
over financial reporting |
|
89 |
|
Report of independent registered public accounting firm |
|
90 |
|
Consolidated financial statements |
|
94 |
|
Notes to consolidated financial statements |
Supplementary information:
143 |
|
Selected quarterly financial data |
|
144 |
|
Selected annual financial data |
|
145 |
|
Glossary of terms |
|
147 |
|
Forward-looking statements |
|
|
|
|
|
|
|
|
|
JPMorgan Chase & Co. / 2006 Annual Report
|
|
21 |
Five-year summary of consolidated financial highlights
JPMorgan Chase & Co.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per share, headcount and ratio data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Heritage JPMorgan Chase only |
|
As of or for the year ended December 31, |
|
2006 |
|
|
2005 |
|
|
2004 |
(d) |
|
2003 |
|
|
2002 |
|
|
Selected income statement data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue |
|
$ |
61,437 |
|
|
$ |
53,748 |
|
|
$ |
42,372 |
|
|
$ |
32,803 |
|
|
$ |
$29,076 |
|
Provision for credit losses |
|
|
3,270 |
|
|
|
3,483 |
|
|
|
2,544 |
|
|
|
1,540 |
|
|
|
4,331 |
|
Total noninterest expense |
|
|
38,281 |
|
|
|
38,426 |
|
|
|
33,972 |
|
|
|
21,490 |
|
|
|
22,471 |
|
|
Income from continuing operations before income tax expense |
|
|
19,886 |
|
|
|
11,839 |
|
|
|
5,856 |
|
|
|
9,773 |
|
|
|
2,274 |
|
Income tax expense |
|
|
6,237 |
|
|
|
3,585 |
|
|
|
1,596 |
|
|
|
3,209 |
|
|
|
760 |
|
|
Income from continuing operations |
|
|
13,649 |
|
|
|
8,254 |
|
|
|
4,260 |
|
|
|
6,564 |
|
|
|
1,514 |
|
Income from discontinued operations(a) |
|
|
795 |
|
|
|
229 |
|
|
|
206 |
|
|
|
155 |
|
|
|
149 |
|
|
Net income |
|
$ |
14,444 |
|
|
$ |
8,483 |
|
|
$ |
4,466 |
|
|
$ |
6,719 |
|
|
$ |
$1,663 |
|
|
Per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
3.93 |
|
|
$ |
2.36 |
|
|
$ |
1.51 |
|
|
$ |
3.24 |
|
|
$ |
0.74 |
|
Net income |
|
|
4.16 |
|
|
|
2.43 |
|
|
|
1.59 |
|
|
|
3.32 |
|
|
|
0.81 |
|
Diluted earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
3.82 |
|
|
$ |
2.32 |
|
|
$ |
1.48 |
|
|
$ |
3.17 |
|
|
$ |
0.73 |
|
Net income |
|
|
4.04 |
|
|
|
2.38 |
|
|
|
1.55 |
|
|
|
3.24 |
|
|
|
0.80 |
|
Cash dividends declared per share |
|
|
1.36 |
|
|
|
1.36 |
|
|
|
1.36 |
|
|
|
1.36 |
|
|
|
1.36 |
|
Book value per share |
|
|
33.45 |
|
|
|
30.71 |
|
|
|
29.61 |
|
|
|
22.10 |
|
|
|
20.66 |
|
Common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average: Basic |
|
|
3,470 |
|
|
|
3,492 |
|
|
|
2,780 |
|
|
|
2,009 |
|
|
|
1,984 |
|
Diluted |
|
|
3,574 |
|
|
|
3,557 |
|
|
|
2,851 |
|
|
|
2,055 |
|
|
|
2,009 |
|
Common shares at period-end |
|
|
3,462 |
|
|
|
3,487 |
|
|
|
3,556 |
|
|
|
2,043 |
|
|
|
1,999 |
|
Share price(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
49.00 |
|
|
$ |
40.56 |
|
|
$ |
43.84 |
|
|
$ |
38.26 |
|
|
$ |
$39.68 |
|
Low |
|
|
37.88 |
|
|
|
32.92 |
|
|
|
34.62 |
|
|
|
20.13 |
|
|
|
15.26 |
|
Close |
|
|
48.30 |
|
|
|
39.69 |
|
|
|
39.01 |
|
|
|
36.73 |
|
|
|
24.00 |
|
Market capitalization |
|
|
167,199 |
|
|
|
138,387 |
|
|
|
138,727 |
|
|
|
75,025 |
|
|
|
47,969 |
|
Selected ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on common equity (ROE): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
12 |
% |
|
|
8 |
% |
|
|
6 |
% |
|
|
15 |
% |
|
|
4 |
% |
Net income |
|
|
13 |
|
|
|
8 |
|
|
|
6 |
|
|
|
16 |
|
|
|
4 |
|
Return on assets (ROA):(c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
1.04 |
|
|
|
0.70 |
|
|
|
0.44 |
|
|
|
0.85 |
|
|
|
0.21 |
|
Net income |
|
|
1.10 |
|
|
|
0.72 |
|
|
|
0.46 |
|
|
|
0.87 |
|
|
|
0.23 |
|
Tier 1 capital ratio |
|
|
8.7 |
|
|
|
8.5 |
|
|
|
8.7 |
|
|
|
8.5 |
|
|
|
8.2 |
|
Total capital ratio |
|
|
12.3 |
|
|
|
12.0 |
|
|
|
12.2 |
|
|
|
11.8 |
|
|
|
12.0 |
|
Overhead ratio |
|
|
62 |
|
|
|
71 |
|
|
|
80 |
|
|
|
66 |
|
|
|
77 |
|
Selected balance sheet data (period-end) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,351,520 |
|
|
$ |
1,198,942 |
|
|
$ |
1,157,248 |
|
|
$ |
770,912 |
|
|
$ |
758,800 |
|
Loans |
|
|
483,127 |
|
|
|
419,148 |
|
|
|
402,114 |
|
|
|
214,766 |
|
|
|
216,364 |
|
Deposits |
|
|
638,788 |
|
|
|
554,991 |
|
|
|
521,456 |
|
|
|
326,492 |
|
|
|
304,753 |
|
Long-term debt |
|
|
133,421 |
|
|
|
108,357 |
|
|
|
95,422 |
|
|
|
48,014 |
|
|
|
39,751 |
|
Total stockholders equity |
|
|
115,790 |
|
|
|
107,211 |
|
|
|
105,653 |
|
|
|
46,154 |
|
|
|
42,306 |
|
Headcount |
|
|
174,360 |
|
|
|
168,847 |
|
|
|
160,968 |
|
|
|
96,367 |
|
|
|
97,124 |
|
|
|
|
|
(a) |
|
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 being reported as discontinued operations for each of the
periods presented. |
(b) |
|
JPMorgan Chases common stock is listed and traded on the New York Stock
Exchange, the London Stock Exchange Limited and the Tokyo Stock Exchange. The high, low
and closing prices of JPMorgan Chases common stock are from The New York Stock Exchange
Composite Transaction Tape. |
(c) |
|
Represents Net income divided by Total average assets. |
(d) |
|
2004 results include six months of the combined Firms results and six months of
heritage JPMorgan Chase results. |
Five-year stock performance
The following table and graph compare the
five-year cumulative total return for JPMorgan
Chase & Co. (JPMorgan Chase or the Firm) common
stock with the cumulative return of the S&P 500
Stock Index and the S&P Financial Index. The S&P
500 Index is a commonly referenced U.S. equity
benchmark consisting of leading companies from
different economic sectors. The S&P Financial Index
is an index of 88 financial companies, all of which
are within the S&P 500. The Firm is a component of
both published industry indices.
The following table and graph assume $100 invested
on December 31, 2001, in JPMorgan Chase common
stock and $100 invested at that same time in each
of the S&P indices. The comparison assumes that all
dividends are reinvested.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 |
|
|
2002 |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
JPMorgan Chase |
|
$ |
100.00 |
|
|
$ |
69.29 |
|
|
$ |
111.06 |
|
|
$ |
122.13 |
|
|
$ |
129.15 |
|
|
$ |
162.21 |
|
S&P Financial Index |
|
|
100.00 |
|
|
|
85.00 |
|
|
|
111.38 |
|
|
|
123.50 |
|
|
|
131.53 |
|
|
|
156.82 |
|
S&P500 |
|
|
100.00 |
|
|
|
78.00 |
|
|
|
100.37 |
|
|
|
111.29 |
|
|
|
116.76 |
|
|
|
135.20 |
|
|
|
|
|
|
|
|
|
|
|
22
|
|
JPMorgan Chase & Co. / 2006 Annual Report |
Managements discussion and analysis
JPMorgan Chase & Co.
This section of the Annual Report provides
managements discussion and analysis (MD&A) of
the financial condition and results of operations
for JPMorgan Chase. See the Glossary of terms on
pages 145146 for definitions of terms used
throughout this Annual Report. The MD&A included in
this Annual Report contains statements that are
forward-looking within the meaning of the Private
Securities Litigation Reform Act of 1995. Such
statements are based upon the current beliefs and
expectations of JPMorgan Chases management and are
subject to significant
risks and uncertainties. These risks and
uncertainties could cause JPMorgan Chases results
to differ materially from those set forth in such
forward-looking statements. Certain of such risks
and uncertainties are described herein (see
Forward-looking statements on page 147 of this
Annual Report) and in the JPMorgan Chase Annual
Report on Form 10-K for the year ended December 31,
2006 (2006 Form 10-K), in Part I, Item 1A: Risk
factors, to which reference is hereby made.
INTRODUCTION
JPMorgan Chase & Co., a financial holding company incorporated under
Delaware law in 1968, is a leading global financial services firm and one of
the largest banking institutions in the United States, with $1.4 trillion in
assets, $115.8 billion in stockholders equity and operations worldwide. The
Firm is a leader in investment banking, financial services for consumers and
businesses, financial transaction processing, asset management and private
equity. Under the JPMorgan and Chase brands, the Firm serves millions of customers in the United States and many
of the worlds most prominent corporate, institutional and government clients.
JPMorgan Chases principal bank subsidiaries are JPMorgan Chase Bank,
National Association (JPMorgan Chase Bank, N.A.), a national banking
association with branches in 17 states; and Chase Bank USA, National
Association (Chase Bank USA, N.A.), a national bank that is the Firms
credit card issuing bank. JPMorgan Chases principal nonbank subsidiary is
J.P. Morgan Securities Inc., the Firms U.S. investment banking firm.
JPMorgan Chases activities are organized, for management reporting purposes,
into six business segments, as well as Corporate. The Firms wholesale businesses comprise the Investment Bank, Commercial Banking, Treasury &
Securities Services and Asset Management segments. The Firms consumer
businesses comprise the Retail Financial Services and Card Services segments.
A description of the Firms business segments, and the products and services
they provide to their respective client bases, follows.
Investment Bank
JPMorgan is one of the worlds leading investment banks, with deep client
relationships and broad product capabilities. The Investment Banks clients are
corporations, financial institutions, governments and institutional investors. The
Firm offers a full range of investment banking products and services in all
major capital markets, including advising on corporate strategy and structure,
capital raising in equity and debt markets, sophisticated risk management,
market-making in cash securities and derivative instruments, and research. The
Investment Bank (IB) also commits the Firms own capital to proprietary
investing and trading activities.
Retail Financial Services
Retail Financial Services (RFS), which includes Regional Banking, Mortgage
Banking and Auto Finance reporting segments, helps meet the financial needs
of consumers and businesses. RFS provides convenient consumer banking
through the nations fourth-largest branch network and third-largest ATM network. RFS is a top-five mortgage originator and servicer, the second-largest
home equity originator, the largest noncaptive originator of automobile loans
and one of the largest student loan originators.
RFS serves customers through more than 3,000 bank branches, 8,500 ATMs
and 270 mortgage offices, and through relationships with more than 15,000
auto dealerships and 4,300 schools and universities. More than 11,000 branch
salespeople assist customers, across a 17-state footprint from New York to
Arizona, with checking and savings accounts, mortgage, home equity and busi-
ness loans, investments and insurance. Over 1,200 additional mortgage officers provide home loans throughout the country.
Card Services
With more than 154 million cards in circulation and $152.8 billion in managed
loans, Chase Card Services (CS) is one of the nations largest credit card
issuers. Customers used Chase cards for over $339 billion worth of transactions in 2006.
Chase offers a wide variety of general-purpose cards to satisfy the needs of
individual consumers, small businesses and partner organizations, including
cards issued with AARP, Amazon, Continental Airlines, Marriott, Southwest
Airlines, Sony, United Airlines, Walt Disney Company and many other well-known brands and organizations. Chase also issues private-label cards with
Circuit City, Kohls, Sears Canada and BP.
Chase Paymentech Solutions, LLC, a joint venture with JPMorgan Chase and
First Data Corporation, is the largest processor of MasterCard and
Visa payments in the world, having handled over 18 billion transactions in 2006.
Commercial Banking
Commercial Banking (CB) serves more than 30,000 clients, including corporations, municipalities, financial institutions and not-for-profit entities. These
clients generally have annual revenues ranging from $10 million to $2 billion.
Commercial bankers serve clients nationally throughout the RFS footprint and
in offices located in other major markets.
Commercial Banking offers its clients industry knowledge, experience, a dedicated service model, comprehensive solutions and local expertise. The Firms
broad platform positions CB to deliver extensive product capabilities
including lending, treasury services, investment banking and asset management to meet its clients U.S. and international financial needs.
Treasury & Securities Services
Treasury & Securities Services (TSS) is a global leader in providing transaction, investment and information services to support the needs of institutional
clients worldwide. TSS is one of the largest cash management providers in the
world and a leading global custodian. Treasury Services (TS) provides a variety of
cash management products, trade finance and logistics solutions, wholesale card products, and liquidity management capabilities to small and midsized
companies, multinational corporations, financial institutions and government
entities. TS partners with the Commercial Banking, Retail Financial Services
and Asset Management businesses to serve clients firmwide. As a result, certain TS revenues are included in other segments results. Worldwide Securities
Services (WSS) stores, values, clears and services securities and alternative
investments for investors and broker-dealers; and manages Depositary Receipt
programs globally.
|
|
|
|
|
|
|
|
|
JPMorgan Chase & Co. / 2006 Annual Report
|
|
23 |
Managements discussion and analysis
JPMorgan Chase & Co.
Asset Management
With assets under supervision of $1.3 trillion,
Asset Management (AM) is a global leader in
investment and wealth management. AM clients
include institutions, retail investors and
high-net-worth individuals in every major market
throughout the world. AM offers global investment
management in equities, fixed income, real estate,
hedge funds, private equity and liquidity,
including both money market instruments and bank
deposits. AM also provides trust and estate and
banking services to high-net-worth clients, and
retirement services for corporations and
individuals. The majority of AMs client assets are
in actively managed portfolios.
Merger with Bank One Corporation
Effective July 1, 2004, Bank One Corporation
(Bank One) merged with and into JPMorgan Chase &
Co. (the Merger). As a result of the Merger, each
outstanding share of common stock of Bank One was
converted in a stock-for-stock exchange into 1.32
shares of common stock of JPMorgan Chase & Co. The
Merger was accounted for using the purchase method
of accounting. Accordingly, the Firms results of
operations for 2004 include six months of heritage
JPMorgan Chase results and six months of the
combined Firms results. For additional information
regarding the Merger, see Note 2 on pages 9596 of
this Annual Report.
2006 Business events
Acquisition of the consumer, business banking
and middle-market banking businesses of The Bank
of New York in exchange for selected corporate
trust businesses, including trustee, paying agent,
loan agency and document management services
On October 1, 2006, JPMorgan Chase completed the
acquisition of The Bank of New York Company, Inc.s
(The Bank of New York) consumer, business banking
and middle-market banking businesses in exchange
for selected corporate trust businesses plus a cash
payment of $150 million. This acquisition added 339
branches and more than 400 ATMs, and it significantly
strengthens RFSs 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; the Firms corporate trust businesses
that were transferred (i.e., trustee, paying agent,
loan agency and document management services) were
valued at a premium of $2.2 billion. The Firm also
may make a future payment to The Bank of New York
of up to $50 million depending on certain new
account openings. This transaction included the
acquisition of approximately $7.7 billion in loans
and $12.9 billion in deposits from The Bank of New
York. The Firm also recognized core deposit
intangibles of $485 million which will be amortized
using an accelerated method over a 10 year period.
JPMorgan Chase recorded
an after-tax gain of $622 million related to this
transaction in the fourth quarter of 2006.
JPMorgan Partners management
On August 1, 2006, the buyout and growth equity
professionals of JPMorgan Partners (JPMP) formed
an independent firm, CCMP Capital, LLC (CCMP),
and the venture professionals separately formed an
independent firm, Panorama Capital, LLC
(Panorama). The investment professionals of CCMP
and Panorama continue to manage the former JPMP
investments pursuant to a management agreement with
the Firm.
Sale of insurance underwriting business
On July 1, 2006, JPMorgan Chase completed the sale
of its life insurance and annuity underwriting
businesses to Protective Life Corporation for cash
proceeds of approximately $1.2 billion, consisting
of $900 million of cash received from Protective
Life Corporation and approximately $300 million of
preclosing dividends received from the entities
sold. The after-tax impact of this transaction was
negligible. The sale included both the heritage
Chase insurance business and the insurance business
that Bank One had bought from Zurich Insurance in
2003.
Acquisition
of private-label credit card portfolio from Kohls Corporation
On April 21, 2006, JPMorgan Chase completed the
acquisition of $1.6 billion of private-label credit
card receivables and approximately 21 million
accounts from Kohls Corporation (Kohls).
JPMorgan Chase and Kohls have also entered into an
agreement under which JPMorgan Chase will offer
private-label credit cards to both new and existing
Kohls customers.
Collegiate Funding Services
On March 1, 2006, JPMorgan Chase acquired, for
approximately $663 million, Collegiate Funding
Services, a leader in education loan servicing and
consolidation. This acquisition included $6
billion of education loans and will enable the
Firm to create a comprehensive education finance
business.
Acquisition of certain operations from Paloma Partners
On March 1, 2006, JPMorgan Chase acquired the
middle and back office operations of Paloma
Partners Management Company (Paloma), which was
part of a privately owned investment fund
management group. The parties also entered into a
multiyear contract under which JPMorgan Chase will
provide daily operational services to Paloma. The
acquired operations have been combined with
JPMorgan Chases current hedge fund administration
unit, JPMorgan Tranaut.
JPMorgan and Fidelity Brokerage Company
On February 28, 2006, the Firm announced a
strategic alliance with Fidelity Brokerage to
become the exclusive provider of new issue equity
securities and the primary provider of fixed income
products to Fidelitys brokerage clients and retail
customers, effectively expanding the Firms
existing distribution platform.
|
|
|
|
|
|
|
|
|
24
|
|
JPMorgan Chase & Co. / 2006 Annual Report |
EXECUTIVE OVERVIEW
This overview of managements discussion and analysis highlights selected information and may
not contain all of the information that is important to readers of this Annual Report. For a more
complete understanding of events, trends and uncertainties, as well as the capital, liquidity,
credit and market risks, and the Critical accounting estimates, affecting the Firm and its
various lines of business, this Annual Report should be read in its entirety.
Financial performance of JPMorgan Chase
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
|
|
|
|
|
|
(in millions, except per share and ratio data) |
|
2006 |
|
|
2005 |
|
|
Change |
|
|
Selected income statement data |
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
61,437 |
|
|
$ |
53,748 |
|
|
|
14 |
% |
Provision for credit losses |
|
|
3,270 |
|
|
|
3,483 |
|
|
|
(6 |
) |
Noninterest expense |
|
|
38,281 |
|
|
|
38,426 |
|
|
|
|
|
Income from continuing operations |
|
|
13,649 |
|
|
|
8,254 |
|
|
|
65 |
|
Income from discontinued operations |
|
|
795 |
|
|
|
229 |
|
|
|
247 |
|
Net income |
|
|
14,444 |
|
|
|
8,483 |
|
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
3.82 |
|
|
$ |
2.32 |
|
|
|
65 |
% |
Net income |
|
|
4.04 |
|
|
|
2.38 |
|
|
|
70 |
|
Return on common equity (ROE) |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
12 |
% |
|
|
8 |
% |
|
|
|
|
Net income |
|
|
13 |
|
|
|
8 |
|
|
|
|
|
|
Business overview
The Firm reported record 2006 net income of
$14.4 billion, or $4.04 per share, compared with
net income of $8.5 billion, or $2.38 per share, for
2005. The return on common equity was 13% compared
with 8% in 2005. Reported results include
discontinued operations related to the exchange of
selected corporate trust businesses for the consumer,
business banking and middle-market banking businesses of
The Bank of New York. Discontinued operations
produced $795 million of net income in 2006
compared with $229 million in the prior year. The
primary driver of the increase was a one-time gain
of $622 million related to the sale of the
corporate trust business (for further information
on discontinued operations see Note 3 on page 97 of
this Annual Report). Income from continuing
operations was a record $13.6 billion, or $3.82 per
share, compared with $8.3 billion, or $2.32 per
share, for 2005. For a detailed discussion of the
Firms consolidated results of operations, see
pages 2831 of this Annual Report.
Effective December 31, 2006, William B. Harrison,
Jr. retired as Chairman of the Board and was
succeeded as Chairman by Chief Executive Officer
James Dimon.
The Firms record 2006 results were affected
positively by global economic conditions,
investment in each line of business and the
successful completion of milestones in the
execution of its Merger integration plan. A key
milestone related to the Merger integration was the
New York Tri-state consumer conversion, which
linked the Firms more than 2,600 branches in 17
states on a common systems platform (excluding 339
branches acquired from The Bank of New York on
October 1, 2006). The Tri-state conversion, along
with many other merger integration activities,
resulted in continued efficiencies. As a result the
Firm made significant progress toward reaching its
annual merger-related savings target of
approximately $3.0 billion by the end of 2007. The
Firm realized approximately $675 million of
incremental merger savings in 2006, bringing estimated
cumulative savings for 2006 to $2.5 billion, and
the annualized run-rate of savings entering 2007 is
approximately $2.8 billion. In order to achieve
these savings, the Firm expensed Merger costs of
$305 million during the year (including a modest
amount of costs related to The Bank
of New York transaction), bringing the total
cumulative amount expensed since the Merger
announcement to approximately $3.4 billion (including capitalized
costs). Management currently estimates remaining
Merger costs of approximately $400 million, which
are expected to be incurred during 2007 and will
include a modest amount of expense related to the
acquisition of The Bank of New Yorks consumer,
business banking and middle-market banking
businesses.
The Firm also continued active management of its
portfolio of businesses during 2006. Actions
included: exchanging selected corporate trust
businesses for the consumer, business banking and
middle-market banking businesses of The Bank of New
York; divesting the insurance underwriting
business; purchasing Collegiate Funding Services to
develop further the education finance business;
acquiring Kohls private-label credit card
portfolio; acquiring the middle and back office
operations of Paloma Partners to expand the Firms
hedge fund administration capabilities; and
announcing a strategic alliance with Fidelity
Brokerage to provide new issue equity and fixed
income products.
In 2006, the global economy continued to expand,
which supported continued rapid growth in the
emerging market economies. Global gross domestic
product increased by an estimated 5%, with the
European economy gaining momentum, Japan making
steady progress and emerging Asian economies
expanding approximately 8%. The U.S. economy
rebounded early in the year from the prior-year
hurricane disruptions, but weakened in the second
half of the year as home construction declined,
automobile manufacturing weakened and the benefit
of reconstruction from hurricane disruptions
dissipated. The U.S. experienced rising interest
rates during the first half of the year, as the
Federal Reserve Board increased the federal funds
rate from 4.25% to 5.25%. With an anticipated
slowing of economic growth, lower inflation and
stabilizing energy prices, the federal funds rate
was held steady during the second half of the year.
The yield curve subsequently inverted as receding
inflation expectations pushed long-term interest
rates below the federal funds rate. Equity markets,
both domestic and international, reflected positive
performance, with the S&P 500 up 13% on average and
international indices increasing 16% on average
during 2006. Global capital markets activity was
strong during 2006, with debt and equity
underwriting and merger and acquisition activity
surpassing 2005 levels. Demand for wholesale loans
in the U.S. was strong with growth of approximately
14%, while U.S. consumer loans grew an estimated 4%
during 2006. U.S. consumer spending grew at a solid
pace, supported by strong equity markets, low
unemployment and income growth, and lower energy
prices in the second half of the year. This
strength came despite a significant decline in real
estate appreciation.
The 2006 economic environment was a contributing
factor to the performance of the Firm and each of
its businesses. The overall economic expansion,
strong level of capital markets activity and
positive performance in equity markets helped to
drive new business volume and organic growth within
each of the Firms businesses while also
contributing to the stable credit quality within
the loan portfolio. However, the interest rate
environment affected negatively wholesale loan
spread and consumer loan and deposit spreads.
Spreads related to wholesale liabilities widened
compared with the prior year, but this benefit
declined over the course of 2006.
|
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|
|
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|
|
JPMorgan Chase & Co. / 2006 Annual Report
|
|
25 |
Managements discussion and analysis
JPMorgan Chase & Co.
The discussion that follows highlights the
performance of each business segment compared with
the prior year, and discusses results on a managed
basis unless otherwise noted. For more information
about managed basis, See Explanation and
reconciliation of the Firms use of non-GAAP
financial measures on pages 3233 of this Annual
Report.
Investment Bank net income was flat compared with
the prior year, as record revenue was offset by
higher compensation expense and a provision for
credit losses compared with a benefit in the prior
year. Revenue benefited from investments in key
business initiatives, increased market share and
higher global capital markets activity. Record
investment banking fees were driven by record debt
and equity underwriting fees and strong advisory
fees. Fixed income markets revenue set a new record
with strength in credit markets, emerging markets
and currencies. Equity markets revenue was also at
a record level, reflecting strength in cash
equities and equity derivatives. The current-year
Provision for credit losses reflects portfolio
activity; credit quality remained stable. The
increase in expense was primarily the result of
higher performance-based compensation including the
impact of a higher ratio of compensation expense to
revenue and the adoption of SFAS 123R.
Retail Financial Services net income was down from
the prior year as lower results in Mortgage Banking
were offset partially by improved performance in
Regional Banking and Auto Finance. Revenue declined
due to lower revenue in Mortgage Banking, narrower
loan and deposit spreads in Regional Banking and
the sale of the insurance business on July 1, 2006.
Deposit and loan spreads reflected the current
interest rate and competitive environments. These
factors were offset partially by increases in
average deposit and loan balances and higher
deposit-related and branch production fees in
Regional Banking, which benefited from the
continued investment in the retail banking
distribution network and the overall strength of
the U.S. economy. The provision for credit losses
declined from the prior year due to the absence of
a special provision related to Hurricane Katrina in
2005, partially offset by the establishment of
additional allowance for loan losses related to
loans acquired from The Bank of New York. Expense
increased, reflecting the purchase of Collegiate
Funding Services in the first quarter of 2006 and
ongoing investments in the retail banking
distribution network, with the net addition during
the year of 438 branch offices (including 339 from
The Bank of New York), 1,194 ATMs and over 500
personal bankers. Partially offsetting these
increases were the sale of the insurance business
and merger-related and other operating
efficiencies.
Card Services net income was a record, increasing
significantly compared with the prior year,
primarily the result of a lower provision for
credit losses. Net revenue (excluding the impact of
the deconsolidation of Paymentech) declined
slightly from the prior year. Net interest income
was flat as the benefit of an increase in average
managed loan balances, partially due to portfolio
acquisitions as well as marketing initiatives, was
offset by the challenging interest rate and
competitive environments. Noninterest revenue
declined as increased interchange income related to
higher charge volume from increased consumer
spending was more than offset by higher
volume-driven payments to partners, including
Kohls, and increased rewards expense. The managed
provision for credit losses benefited from
significantly lower bankruptcy-related credit
losses following the new bankruptcy legislation
that became effective in October 2005. Underlying
credit quality remained strong. Expense (excluding
the impact of the deconsolidation of Paymentech)
increased driven by higher marketing spending and
acquisitions, partially offset by merger savings.
Commercial Banking net income was a record in 2006.
Record revenue benefited from higher liability
balances, higher loan volumes and increased
investment banking revenue, all of which benefited
from increased sales efforts and U.S. economic
growth. Partially offsetting these benefits were
loan spread compression and a shift to
narrower-spread liability products. The provision
for credit losses increased compared with the prior
year reflecting portfolio activity and the
establishment of additional allowances for loan
losses related to loans acquired from The Bank of
New York, partially offset by a release of the
unused portion of the special reserve established
in 2005 for Hurricane Katrina. Credit quality
remained stable. Expense increased due to higher
compensation expense related to the adoption of
SFAS 123R and increased expense related to higher
client usage of Treasury Services products.
Treasury & Securities Services net income was a
record and increased significantly over the prior
year. Revenue was at a record level driven by
higher average liability balances, business growth,
increased product usage by clients and higher
assets under custody, all of which benefited from
global economic growth and capital markets
activity. This growth was offset partially by a
shift to narrower-spread liability products.
Expense increased due to higher compensation
related to business growth, investments in new
products and the adoption of SFAS 123R. The expense
increase was offset partially by the absence of a
prior-year charge to terminate a client contract.
Asset Management net income was a record in 2006.
Record revenue benefited from increased assets
under management driven by net asset inflows and
strength in global equity markets, and higher
performance and placement fees. The Provision for
credit losses was a benefit reflecting net loan
recoveries. Expense increased due primarily to
higher performance-based compensation, incremental
expense from the adoption of SFAS 123R, and
increased minority interest expense related to
Highbridge Capital Management, LLC (Highbridge),
offset partially by the absence of BrownCo.
Corporate segment reported significantly improved
results (excluding the impact of discontinued
operations, as discussed further, below) driven by
lower expense, improved revenue and the benefit of
tax audit resolutions. Revenue benefited from lower
securities losses, improved net interest spread and
a higher level of available-for-sale securities
partially offset by the absence of the gain on the
sale of BrownCo and lower Private Equity results.
Expense benefited from the absence of prior-year
litigation reserve charges, higher insurance recoveries
relating to certain material litigation, lower
merger-related costs and other operating
efficiencies. These benefits were offset partially
by incremental expense related to the adoption of
SFAS 123R.
On October 1, 2006, the Firm completed the exchange
of selected corporate trust businesses, including
trustee, paying agent, loan agency and document
management services, for the consumer, business
banking and middle-market banking businesses of The
Bank of New York. The corporate trust businesses,
which were previously reported in TSS, were
reported as discontinued operations. The related
balance sheet and income statement activity is
reflected in the Corporate segment for all periods
presented. During 2006, these businesses produced
$795 million of net income compared with net income
of $229 million in the prior year. Net income from
discontinued operations was significantly higher in
2006 due to a one-time after-tax gain of $622
million related to the sale of these businesses. A
modest amount of costs associated with the
acquisition side of this transaction are included
in Merger costs.
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26
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JPMorgan Chase & Co. / 2006 Annual Report |
Credit costs for the Firm were $5.5 billion
compared with $7.3 billion in the prior year. The
$1.8 billion decrease was due primarily to lower
bankruptcy-related losses in Card Services and the
release in the current year of a portion of the
$400 million special provision related to Hurricane
Katrina that was taken in 2005. The decline was partially offset by an increase in the wholesale
provision. The wholesale provision was $321 million
compared with a benefit of $811 million in the
prior year. The increase was due primarily to
portfolio activity, partly offset by a decrease in
nonperforming loans. Credit quality in the
wholesale portfolio was stable. The benefit in 2005
was due to improvement in credit quality, reflected
by significant reductions in criticized exposures
and nonperforming loans. Consumer provision for
credit losses was $5.2 billion compared with $8.1
billion in the prior year. The reduction primarily
reflected the impact of significantly lower
bankruptcy-related credit losses and a special
provision for credit losses in 2005 related to
Hurricane Katrina.
The Firm
had, at year end, total stockholders
equity of $115.8 billion, and a Tier 1 capital
ratio of 8.7%. The Firm purchased $3.9 billion, or
91 million shares of common stock during the year.
2007 Business outlook
The following forward-looking statements are
based upon the current beliefs and expectations of
JPMorgan Chases management and are subject to
significant risks and uncertainties. These risks
and uncertainties could cause JPMorgan Chases
results to differ materially from those set forth
in such forward-looking statements.
JPMorgan Chases outlook for 2007 should be viewed
against the backdrop of the global economy,
financial markets activity and the geopolitical
environment, all of which are linked integrally.
While the Firm considers outcomes for, and has
contingency plans to respond to, stress
environments, the basic outlook for 2007 is
predicated on the interest rate movements implied
in the forward rate curve for U.S. Treasury
securities, the continuation of favorable U.S. and
international equity markets and continued
expansion of the global economy.
The Investment Bank enters 2007 with a strong
investment banking fee pipeline and remains
focused on developing new products and
capabilities. Asset Management anticipates growth
driven by continued net asset inflows. Commercial
Banking and Treasury & Securities Services expect
growth due to increased business activity and
product sales with some competitive and rate
pressures. However, the performance of the Firms
wholesale businesses will be affected by overall
global economic growth and by financial market
movements and activity levels in any given period.
Retail Financial Services anticipates benefiting
from the continued expansion of the branch network
and sales force, including the addition of The Bank
of New Yorks 339 branches, and improved sales
productivity and cross-selling in the branches.
Loan and deposit spreads are expected to experience
continued compression due to the interest rate and
competitive environments.
Card Services anticipates growth in managed
receivables and sales volume, both of which are
expected to benefit from marketing initiatives
and new partnerships. Expenditures on marketing
are expected to be lower than the 2006 level.
In the Corporate segment, the revenue outlook for
the Private Equity business is directly related to
the strength of the equity markets and the
performance of the underlying portfolio
investments. If current market conditions persist,
the Firm anticipates continued realization of
private equity gains in 2007, but results can be
volatile from quarter to quarter. Management
believes that the net loss in Treasury and Other
Corporate, on a combined basis, will be
approximately $50 to $100 million per quarter in
2007, reflecting merger savings and other expense
efficiency initiatives, such as less excess real
estate.
The Provision for credit losses in 2007 is
anticipated to be higher than in 2006, primarily
driven by a trend toward a more normal level of
provisioning for credit losses in both the
wholesale and consumer businesses. The consumer
Provision for credit losses should reflect a
higher level of net charge-offs as bankruptcy
filings continue to increase from the
significantly lower than normal levels experienced
in 2006 related to the change in bankruptcy law in
2005.
Firmwide expenses are anticipated to reflect
investments in each business, continued merger
savings and other operating efficiencies. Annual
Merger savings are expected to reach approximately
$3.0 billion by the end of 2007, upon the
completion of the last significant conversion
activity, the wholesale deposit conversion
scheduled for the second half of 2007. Offsetting
merger savings will be continued investment in
distribution enhancements and new product
offerings, and expenses related to recent
acquisitions including The Bank of New York
transaction. Merger costs of approximately $400
million are expected to be incurred during 2007
(including a modest amount related to The Bank of
New York transaction). These additions are expected
to bring total cumulative merger costs to $3.8
billion by the end of 2007.
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JPMorgan Chase & Co. / 2006 Annual Report
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27 |
Managements discussion and analysis
JPMorgan Chase & Co.
CONSOLIDATED RESULTS OF OPERATIONS
The following section provides a comparative
discussion of JPMorgan Chases consolidated results
of operations on a reported basis for the
three-year period ended December 31, 2006. Factors
that are related primarily to a single business
segment are discussed in more detail within that
business segment than they are in this consolidated
section. Total net revenue, Noninterest expense and
Income tax expense have been revised to reflect the
impact of discontinued operations. For a discussion
of the Critical accounting estimates used by the
Firm that affect the Consolidated results of
operations, see pages 8385 of this Annual Report.
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions) |
|
2006 |
|
|
2005 |
|
|
2004 |
(a) |
|
Investment banking fees |
|
$ |
5,520 |
|
|
$ |
4,088 |
|
|
$ |
3,536 |
|
Principal transactions |
|
|
10,346 |
|
|
|
7,669 |
|
|
|
5,148 |
|
Lending & deposit related fees |
|
|
3,468 |
|
|
|
3,389 |
|
|
|
2,672 |
|
Asset management, administration |
|
|
|
|
|
|
|
|
|
|
|
|
and commissions |
|
|
11,725 |
|
|
|
9,891 |
|
|
|
7,682 |
|
Securities gains (losses) |
|
|
(543 |
) |
|
|
(1,336 |
) |
|
|
338 |
|
Mortgage fees and related income |
|
|
591 |
|
|
|
1,054 |
|
|
|
803 |
|
Credit card income |
|
|
6,913 |
|
|
|
6,754 |
|
|
|
4,840 |
|
Other income |
|
|
2,175 |
|
|
|
2,684 |
|
|
|
826 |
|
|
Noninterest revenue |
|
|
40,195 |
|
|
|
34,193 |
|
|
|
25,845 |
|
Net interest income |
|
|
21,242 |
|
|
|
19,555 |
|
|
|
16,527 |
|
|
Total net revenue |
|
$ |
61,437 |
|
|
$ |
53,748 |
|
|
$ |
42,372 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of
heritage JPMorgan Chase results. |
2006 compared with 2005
Total net revenue for 2006 was $61.4 billion, up by
$7.7 billion, or 14%, from the prior year. The
increase was due to higher Principal transactions,
primarily from strong trading revenue results,
record Asset management, administration and
commissions revenue, and record Investment banking
fees. Also contributing to the increase was higher
Net interest income and lower securities portfolio
losses. These improvements were offset partially by
a decline in Other income partly as a result of the
gain recognized in 2005 on the sale of BrownCo, and
lower Mortgage fees and related income.
The increase in Investment banking fees was driven
by record debt and equity underwriting as well as
strong advisory fees. For a further discussion of
Investment banking fees, which are recorded
primarily in the IB, see the IB segment results on
pages 3637 of this Annual Report.
Principal transactions revenue 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, primarily in the IB, and
Private equity gains and losses, primarily in the
private equity business of Corporate. Trading
revenue increased compared with 2005 due to record
performance in Equity and Fixed income markets. For
a further discussion of Principal transactions
revenue, see the IB and Corporate segment results
on pages 3637 and 5354, respectively, of this
Annual Report.
Lending & deposit related fees rose slightly in
comparison with 2005 as a result of higher fee
income on deposit-related fees and, in part, from
The Bank of New York transaction. For a further
discussion of the change in Lending & deposit
related fees, which are recorded in RFS, see the
RFS segment results on pages 3842 of this
Annual Report.
The increase in Asset management, administration
and commissions revenue in 2006 was driven by
growth in assets under management in AM, which
exceeded $1 trillion at the end of 2006, higher
equity-related commissions in IB and higher
performance and placement fees. The growth in
assets under management reflected net asset inflows
in the institutional and retail segments. Also
contributing to the increase were higher assets
under custody in TSS driven by market value
appreciation and new business; and growth in
depositary receipts, securities lending and global
clearing, all of which were driven by a combination
of increased product usage by existing clients and
new business. In addition, commissions in the IB
rose as a result of strength across regions, partly
offset by the sale of the insurance business and
BrownCo. For additional information on these fees
and commissions, see the segment discussions for AM
on pages 5052, TSS on pages 4849 and RFS on
pages 3842, of this Annual Report.
The favorable variance in Securities gains (losses)
was due primarily to lower Securities losses in
Treasury in 2006 from portfolio repositioning
activities in connection with the management of the
Firms assets and liabilities. For a further
discussion of Securities gains (losses), which are
mostly recorded in the Firms Treasury business,
see the Corporate segment discussion on pages
5354 of this Annual Report.
Mortgage fees and related income declined in
comparison with 2005
reflecting a reduction in net mortgage servicing
revenue and higher losses on mortgage loans
transferred to held-for-sale. These declines were
offset partly by growth in production revenue as a
result of higher volume of loans sales and wider
gain on sale margins. Mortgage fees and related
income exclude the impact of NII and AFS securities
gains related to mortgage activities. For a
discussion of Mortgage fees and related income,
which is recorded primarily in RFSs Mortgage
Banking business, see the Mortgage Banking
discussion on page 41 of this Annual Report.
Credit card income increased from 2005, primarily
from higher customer charge volume that favorably
impacted interchange income and servicing fees
earned in connection with securitization
activities, which benefited from lower credit
losses incurred on securitized credit card loans.
These increases were offset partially by increases
in volume-driven payments to partners, expenses
related to reward programs, and interest paid to
investors in the securitized loans. Credit card
income also was impacted negatively by the
deconsolida-tion of Paymentech in the fourth
quarter of 2005.
The decrease in Other income compared with the
prior year was due to a $1.3 billion pretax gain
recognized in 2005 on the sale of BrownCo and lower
gains from loan workouts. Partially offsetting
these two items were higher automobile operating
lease revenue; an increase in equity investment
income, in particular, from Chase Paymentech
Solutions, LLC; and a pretax gain of $103 million
on the sale of MasterCard shares in its initial
public offering.
Net interest income rose due largely to improvement
in Treasurys net interest spread and increases in
wholesale liability balances, wholesale and
consumer loans, available-for-sale securities, and
consumer deposits. Increases in consumer and
wholesale loans and deposits included the impact of
The Bank of New York transaction. These increases
were offset partially by narrower spreads on both
trading-related assets and loans, a shift to
narrower-spread deposit products, RFSs sale of the
insurance business and the absence of BrownCo in
AM. The Firms total average interest-earning
assets for 2006 were $995.5 billion, up 11% from
the prior year, primarily as a result of an
increase in loans and other liquid earning assets,
partially offset by a decline in interests in
purchased receivables as a result of the
restructuring and deconsolidation during the second
quarter of 2006 of certain multi-seller con-
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28
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JPMorgan Chase & Co. / 2006 Annual Report |
duits that the Firm administered. The net yield
on interest-earning assets, on a fully
taxable-equivalent basis, was 2.16%, a decrease of
four basis points from the prior year. For a
further discussion of Net interest income, see the
Business Segment Results section on pages 3435 of
this Annual Report.
2005 compared with 2004
Total net revenue for 2005 was $53.7 billion, up
27% from 2004, primarily due to the Merger, which
affected every revenue category. The increase from
2004 also was affected by a $1.3 billion gain on
the sale of BrownCo; higher Principal transactions
revenue; and higher Asset management,
administration and commissions, which benefited
from several new investments and growth in Assets
under management and Assets under custody. These
increases were offset partly by available-for-sale
(AFS) securities losses as a result of
repositioning of the Firms Treasury investment
portfolio. The discussions that follow highlight
factors other than the Merger that affected the
2005 versus 2004 comparison.
The increase in Investment banking fees was driven
by strong growth
in advisory fees resulting in part from the
Cazenove business partnership. For a further
discussion of Investment banking fees, which are
primarily recorded in the IB, see the IB segment
results on pages 3637 and Note 2 on page 97 of
this Annual Report.
Revenue from Principal transactions increased
compared with 2004, driven by stronger, although
volatile, trading results across commodities,
emerging markets, rate markets and currencies.
Private equity gains were higher due to a
continuation of favorable capital markets
conditions. For a further discussion of Principal
transactions revenue, see the IB and Corporate
segment results on pages 3637 and 5354, respectively, of this
Annual Report.
The higher Lending & deposit related fees were
driven by the Merger; absent the effects of the
Merger, the deposit-related fees would have been
lower due to rising interest rates. In a higher
interest rate environment, the value of deposit
balances to a customer is greater, resulting in a
reduction of deposit-related fees. For a further
discussion of liability balances (including
deposits) see the CB and TSS segment discussions on
pages 4647 and 4849, respectively, of this
Annual Report.
The increase in Asset management, administration
and commissions revenue was driven by incremental
fees from several new investments, including the
acquisition of a majority interest in Highbridge,
the Cazenove business partnership and the
acquisition of Vastera. Also contributing to the
higher level of revenue was an increase in Assets
under management, reflecting net asset inflows in
equity-related products and global equity market
appreciation. In addition, Assets under custody
were up due to market value appreciation and new
business. Commissions rose as a result of a higher
volume of brokerage transactions. For additional
information on these fees and commissions, see the
segment discussions for IB on pages 3637, AM on
pages 5052 and TSS on pages 4849 of this Annual
Report.
The decline in Securities gains (losses) reflected
$1.3 billion of securities losses, as compared with
$338 million of gains in 2004. The losses were due
to repositioning of the Firms Treasury investment
portfolio, to manage exposure to interest rates.
For a further discussion of Securities gains
(losses), which are recorded primarily in the
Firms Treasury business, see the Corporate segment
discussion on pages 5354 of this Annual Report.
Mortgage fees and related income increased due to
improved MSR risk-management results. For a
discussion of Mortgage fees and related income,
which is recorded primarily in RFSs Mortgage
Banking business, see the segment discussion for
RFS on pages 3842 of this Annual Report.
Credit card income rose as a result of higher
interchange income associated with the increase in
charge volume. This increase was offset partially
by higher
volume-driven payments to partners and rewards
expense. For a further discussion of Credit card
income, see CS segment results on pages 4345 of
this Annual Report.
The increase in Other income primarily reflected a
$1.3 billion pretax gain on the sale of BrownCo;
higher gains from loan workouts and loan sales; and
higher automobile operating lease income.
Net interest income rose as a result of higher
average volume of, and wider spreads on, liability
balances. Also contributing to the increase was
higher average volume of wholesale and consumer
loans, in particular, real estate and credit card loans,
which partly reflected a private label portfolio
acquisition by CS. These increases were offset
partially by narrower spreads on consumer and
wholesale loans and on trading-related assets, as
well as the impact of the repositioning of the
Treasury investment portfolio, and the reversal of
revenue related to increased bankruptcies in CS.
The Firms total average interest-earning assets in
2005 were $899.1 billion, up 23% from the prior
year. The net interest yield on these assets, on a
fully taxable-equivalent basis, was 2.20%, a
decrease of seven basis points from the prior year.
Provision for credit losses
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
|
|
|
|
|
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
2004 |
(a) |
|
Provision for credit losses |
|
$ |
3,270 |
|
|
$ |
3,483 |
|
|
$ |
2,544 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of
heritage JPMorgan Chase results. |
2006 compared with 2005
The Provision for credit losses in 2006 declined
$213 million from the prior year due to a $1.3
billion decrease in the consumer Provision for
credit losses, partly offset by a $1.1 billion
increase in wholesale Provision for credit losses.
The decrease in the consumer provision was driven
by CS, reflecting lower bankruptcy-related losses,
partly offset by higher contractual net
charge-offs. The 2005 consumer provision also
reflected $350 million of a special provision
related to Hurricane Katrina, a portion of which
was released in the current year. The increase in
the wholesale provision was due primarily to
portfolio activity, partly offset by a decrease in
nonperforming loans. The benefit in 2005 was due to
strong credit quality, reflected in significant
reductions in criticized exposure and nonperforming
loans. Credit quality in the wholesale portfolio
was stable. For a more detailed discussion of the
loan portfolio and the Allowance for loan losses,
refer to Credit risk management on pages 6476 of
this Annual Report.
2005 compared with 2004
The Provision for credit losses was $3.5 billion,
an increase of $939 million, or 37%, from 2004,
reflecting the full-year impact of the Merger. The
wholesale Provision for credit losses was a benefit
of $811 million for the year compared with a
benefit of $716 million in the prior year,
reflecting continued strength in credit quality.
The wholesale loan net recovery rate was 0.06% in
2005, an improvement from a net charge-off rate of
0.18% in the prior year. The total consumer
Provision for credit losses was $4.3 billion, $1.9
billion higher than the prior year, primarily due
to the Merger, higher bankruptcy-related net
charge-offs in Card Services and a $350 million
special provision for Hurricane Katrina. Also
included in 2004 were accounting policy conformity
adjustments as a result of the Merger. Excluding
these items, the consumer portfolio continued to
show strength in credit quality.
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JPMorgan Chase & Co. / 2006 Annual Report
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29 |
Managements discussion and analysis
JPMorgan Chase & Co.
Noninterest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
|
|
|
|
|
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
2004 |
(a) |
|
Compensation expense |
|
$ |
21,191 |
|
|
$ |
18,065 |
|
|
$ |
14,291 |
|
Occupancy expense |
|
|
2,335 |
|
|
|
2,269 |
|
|
|
2,058 |
|
Technology, communications and |
|
|
|
|
|
|
|
|
|
|
|
|
equipment expense |
|
|
3,653 |
|
|
|
3,602 |
|
|
|
3,687 |
|
Professional & outside services |
|
|
3,888 |
|
|
|
4,162 |
|
|
|
3,788 |
|
Marketing |
|
|
2,209 |
|
|
|
1,917 |
|
|
|
1,335 |
|
Other expense |
|
|
3,272 |
|
|
|
6,199 |
|
|
|
6,537 |
|
Amortization of intangibles |
|
|
1,428 |
|
|
|
1,490 |
|
|
|
911 |
|
Merger costs |
|
|
305 |
|
|
|
722 |
|
|
|
1,365 |
|
|
Total noninterest expense |
|
$ |
38,281 |
|
|
$ |
38,426 |
|
|
$ |
33,972 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of
heritage JPMorgan Chase results. |
2006 compared with 2005
Total noninterest expense for 2006 was $38.3
billion, down slightly from the prior year. The
decrease was due to material litigation-related insurance
recoveries of $512 million in 2006 compared with a
net charge of $2.6 billion (includes $208 million material
litigation-related insurance recoveries) in 2005, primarily
associated with the settlement of the Enron and
WorldCom class action litigations and for certain
other material legal proceedings. Also contributing
to the decrease were lower Merger costs, the
deconsolidation of Paymentech, the sale of the
insurance business, and merger-related savings and
operating efficiencies. These items were offset
mostly by higher performance-based compensation and
incremental expense of $712 million related to SFAS
123R, the impact of acquisitions and investments in
businesses, as well as higher Marketing
expenditures.
The increase in Compensation expense from 2005 was
primarily a result of higher performance-based
incentives, incremental expense related to SFAS
123R of $712 million for 2006, and additional
headcount in connection with growth in business
volume, acquisitions, and investments in the
businesses. These increases were offset partially
by merger-related savings and other expense
efficiencies throughout the Firm. For a detailed
discussion of the adoption of SFAS 123R and
employee stock-based incentives see Note 8 on pages
105107 of this Annual Report.
The increase in Occupancy expense from 2005 was due
to ongoing investments in the retail distribution
network, which included the incremental expense
from The Bank of New York branches, partially
offset by merger-related savings and other
operating efficiencies.
The slight increase in Technology, communications
and equipment expense for 2006 was due primarily to
higher depreciation expense on owned automobiles
subject to operating leases and higher technology
investments to support business growth, partially
offset by merger-related savings and operating
efficiencies.
Professional & outside services decreased from
2005 due to merger-related savings and operating
efficiencies, lower legal fees associated with several legal
matters settled in 2005 and the Paymentech
deconsolidation. The decrease was offset partly by
acquisitions and business growth.
Marketing expense was higher compared with 2005,
reflecting the costs of campaigns for credit
cards.
Other expense was lower due to significant
litigation-related charges of $2.8 billion in 2005,
associated with the settlement of the Enron and
WorldCom class action litigations and certain other
material legal proceedings. In addition, the Firm
recognized insurance recoveries of $512 million and
$208 million, in 2006 and 2005, respectively,
pertaining to certain material litigation matters.
For a fur-
ther discussion of litigation, refer to Note 27 on
pages 130131 of this Annual Report. Also
contributing to the decline from the prior year
were charges of $93 million in connection with the
termination of a client contract in TSS in 2005;
and in RFS, the sale of the insurance business in
the third quarter of 2006. These items were offset
partially by higher charges related to other
litigation, and the impact of growth in business
volume, acquisitions and investments in the
businesses.
For discussion of Amortization of intangibles and
Merger costs, refer to Note 16 and Note 9 on pages
121123 and 108, respectively, of this Annual
Report.
2005 compared with 2004
Noninterest expense for 2005 was $38.4 billion, up
13% from 2004, primarily due to the full-year
impact of the Merger. Excluding Litigation reserve
charges and Merger costs, Noninterest expense would
have been $35.1 billion, up 22%. In addition to the
Merger, expenses increased as a result of higher
performance-based incentives, continued investment
spending in the Firms businesses and incremental
marketing expenses related to launching the new
Chase brand, partially offset by merger-related
savings and operating efficiencies throughout the
Firm. Each category of Noninterest expense was
affected by the Merger. The discussions that follow
highlight factors other than the Merger that
affected the 2005 versus 2004 comparison.
Compensation expense rose as a result of higher
performance-based incentives; additional headcount
due to the insourcing of the Firms global
technology infrastructure (effective December 31,
2004, when JPMorgan Chase terminated the Firms
outsourcing agreement with IBM); the impact of
several investments, including Cazenove, Highbridge
and Vastera; the accelerated vesting of certain
employee stock options; and business growth. The
effect of the termination of the IBM outsourcing
agreement was to shift expenses from Technology and
communications expense to Compensation expense. The
increase in Compensation expense was offset
partially by merger-related savings throughout the
Firm. For a detailed discussion of employee
stock-based incentives, see Note 8 on pages
105107 of this Annual Report.
The increase in Occupancy expense was due primarily
to the Merger, partially offset by lower charges
for excess real estate and a net release of excess
property tax accruals, as compared with $103
million of charges for excess real estate in 2004.
Technology and communications expense was down
slightly. This reduction reflects the offset of six
months of the combined Firms results for 2004
against the full-year 2005 impact from termination
of the JPMorgan Chase outsourcing agreement with
IBM. The reduction in Technology and communications
expense due to the outsourcing agreement
termination is offset mostly by increases in
Compensation expense related to additional
headcount and investments in the Firms hardware
and software infrastructure.
Professional and outside services were higher
compared with the prior year as a result of the
insourcing of the Firms global technology
infrastructure, upgrades to the Firms systems and
technology, and business growth. These expenses
were offset partially by operating efficiencies.
Marketing expense was higher compared with the
prior year, primarily as a result of the Merger and
the cost of advertising campaigns to launch the new
Chase brand.
|
|
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|
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|
|
|
|
30
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|
JPMorgan Chase & Co. / 2006 Annual Report |
The decrease in Other expense reflected lower
litigation reserve charges for certain material
legal proceedings in 2005: $1.9 billion related to
the settlement of the Enron class action litigation
and for certain other material legal proceedings,
and $900 million for the settlement of the WorldCom
class action litigation; and in 2004, $3.7 billion
to increase litigation reserves. Also contributing
to the decrease were a $208 million insurance
recovery related to certain material litigation,
lower software impairment write-offs,
merger-related savings and operating efficiencies.
These were offset partially by $93 million in
charges taken by TSS to terminate a client contract
and a $40 million charge taken by RFS related to
the dissolution of a student loan joint venture.
For a discussion of Amortization of intangibles
and Merger costs, refer to Note 16 and Note 9 on
pages 121123 and 108, respectively, of this
Annual Report.
Income tax expense
The Firms Income from continuing operations
before income tax expense, Income tax expense
and Effective tax rate were as follows for each
of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
|
|
|
|
|
|
(in millions, except rate) |
|
2006 |
|
|
2005 |
|
|
2004 |
(a) |
|
Income from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
before income tax expense |
|
$ |
19,886 |
|
|
$ |
11,839 |
|
|
$ |
5,856 |
|
Income tax expense |
|
|
6,237 |
|
|
|
3,585 |
|
|
|
1,596 |
|
Effective tax rate |
|
|
31.4 |
% |
|
|
30.3 |
% |
|
|
27.3 |
% |
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of
heritage JPMorgan Chase results. |
2006 compared with 2005
The increase in the effective tax rate for 2006, as
compared with the prior year, was primarily the
result of higher reported pretax income combined
with changes in the proportion of income subject to
federal, state and local taxes. Also contributing
to the increase in the effective tax rate were the
litigation charges in 2005 and lower Merger costs,
reflecting a tax benefit at a 38% marginal tax
rate, partially offset by benefits related to tax
audit resolutions of $367 million in 2006.
2005 compared with 2004
The increase in the effective tax rate was
primarily the result of higher reported pretax
income combined with changes in the proportion of
income subject to federal, state and local taxes.
Also contributing to the increase were lower 2005
litigation charges and a gain on the sale of
BrownCo, which were taxed at marginal tax rates of
38% and 40%, respectively. These increases were
offset partially by a tax benefit in 2005 of $55
million recorded in connection with the
repatriation of foreign earnings.
Income from discontinued operations
As a result of the transaction with The Bank of
New York on October 1, 2006, the results of
operations of the selected corporate trust
businesses (i.e., trustee, paying agent, loan
agency and document management services) were
reported as discontinued operations.
The Firms Income from discontinued operations
(after-tax) were as follows for each of the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
|
|
|
|
|
|
(in millions) |
|
2006 |
|
|
2005 |
|
|
2004 |
(a) |
|
Income from discontinued operations |
|
$ |
795 |
|
|
$ |
229 |
|
|
$ |
206 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of
heritage JPMorgan Chase results. |
The increases from the prior two periods in
Income from discontinued operations were due
primarily to a gain of $622 million from exiting
the corporate trust business in the fourth quarter
of 2006.
|
|
|
|
|
|
|
|
|
JPMorgan Chase & Co. / 2006 Annual Report
|
|
31 |
Managements discussion and analysis
JPMorgan Chase & Co.
EXPLANATION
AND RECONCILIATION OF THE FIRMS USE OF NON-GAAP FINANCIAL MEASURES
The Firm prepares its Consolidated financial
statements using accounting principles generally
accepted in the United States of America (U.S.
GAAP); these financial statements appear on pages
9093 of this Annual Report. That presentation,
which is referred to as reported basis, provides
the reader with an understanding of the Firms
results that can be tracked consistently from year
to year and enables a comparison of the Firms
performance with other companies U.S. GAAP
financial statements.
Effective January 1, 2006, JPMorgan Chases
presentation of operating earnings, which
excluded merger costs and material litigation
reserve charges and recoveries from reported
results, was eliminated. These items had been
excluded previously from operating results because
they were deemed nonrecurring; they are included
now in the Corporate segments results. In
addition, trading-related net interest income no
longer is reclassified from Net interest income to
Principal transactions.
In addition to analyzing the Firms results on a
reported basis, management reviews the Firms and
the lines of business results on a managed
basis, which is a non-GAAP financial measure. The
Firms definition of managed basis starts with the
reported U.S. GAAP results and includes certain
reclassifications that assumes credit card loans
securitized by CS remain on the balance sheet and
presents revenue on a fully taxable-equivalent
(FTE) basis. These adjustments do not have any
impact on Net income as reported by the lines of
business or by the Firm as a whole.
The presentation of CS results on a managed basis
assumes that credit card loans that have been
securitized and sold in accordance with SFAS 140
still remain on the balance sheet and that the
earnings on the securitized loans are classified in
the same manner as the earnings on retained loans
recorded on the balance sheet. JPMorgan Chase uses
the concept of managed basis to evaluate the credit
performance and overall financial performance of
the entire
The following summary table provides a reconciliation from the Firms reported U.S. GAAP results to managed basis:
(Table continues on next page)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
2006 |
|
|
2005 |
|
(in millions, except |
|
Reported |
|
|
Credit |
|
|
Tax-equivalent |
|
|
Managed |
|
|
Reported |
|
|
Credit |
|
|
Tax-equivalent |
|
|
Managed |
|
per share and ratio data) |
|
results |
|
|
card |
(b) |
|
adjustments |
|
|
basis |
|
|
results |
|
|
card |
(b) |
|
adjustments |
|
|
basis |
|
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking fees |
|
$ |
5,520 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,520 |
|
|
$ |
4,088 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,088 |
|
Principal transactions |
|
|
10,346 |
|
|
|
|
|
|
|
|
|
|
|
10,346 |
|
|
|
7,669 |
|
|
|
|
|
|
|
|
|
|
|
7,669 |
|
Lending & deposit related fees |
|
|
3,468 |
|
|
|
|
|
|
|
|
|
|
|
3,468 |
|
|
|
3,389 |
|
|
|
|
|
|
|
|
|
|
|
3,389 |
|
Asset management, administration and
commissions |
|
|
11,725 |
|
|
|
|
|
|
|
|
|
|
|
11,725 |
|
|
|
9,891 |
|
|
|
|
|
|
|
|
|
|
|
9,891 |
|
Securities gains (losses) |
|
|
(543 |
) |
|
|
|
|
|
|
|
|
|
|
(543 |
) |
|
|
(1,336 |
) |
|
|
|
|
|
|
|
|
|
|
(1,336 |
) |
Mortgage fees and related income |
|
|
591 |
|
|
|
|
|
|
|
|
|
|
|
591 |
|
|
|
1,054 |
|
|
|
|
|
|
|
|
|
|
|
1,054 |
|
Credit card income |
|
|
6,913 |
|
|
|
(3,509 |
) |
|
|
|
|
|
|
3,404 |
|
|
|
6,754 |
|
|
|
(2,718 |
) |
|
|
|
|
|
|
4,036 |
|
Other income |
|
|
2,175 |
|
|
|
|
|
|
|
676 |
|
|
|
2,851 |
|
|
|
2,684 |
|
|
|
|
|
|
|
571 |
|
|
|
3,255 |
|
|
|
|
Noninterest revenue |
|
|
40,195 |
|
|
|
(3,509 |
) |
|
|
676 |
|
|
|
37,362 |
|
|
|
34,193 |
|
|
|
(2,718 |
) |
|
|
571 |
|
|
|
32,046 |
|
Net interest income |
|
|
21,242 |
|
|
|
5,719 |
|
|
|
228 |
|
|
|
27,189 |
|
|
|
19,555 |
|
|
|
6,494 |
|
|
|
269 |
|
|
|
26,318 |
|
|
|
|
Total net revenue |
|
|
61,437 |
|
|
|
2,210 |
|
|
|
904 |
|
|
|
64,551 |
|
|
|
53,748 |
|
|
|
3,776 |
|
|
|
840 |
|
|
|
58,364 |
|
Provision for credit losses |
|
|
3,270 |
|
|
|
2,210 |
|
|
|
|
|
|
|
5,480 |
|
|
|
3,483 |
|
|
|
3,776 |
|
|
|
|
|
|
|
7,259 |
|
Noninterest expense |
|
|
38,281 |
|
|
|
|
|
|
|
|
|
|
|
38,281 |
|
|
|
38,426 |
|
|
|
|
|
|
|
|
|
|
|
38,426 |
|
|
|
|
Income from continuing operations
before income tax expense |
|
|
19,886 |
|
|
|
|
|
|
|
904 |
|
|
|
20,790 |
|
|
|
11,839 |
|
|
|
|
|
|
|
840 |
|
|
|
12,679 |
|
Income tax expense |
|
|
6,237 |
|
|
|
|
|
|
|
904 |
|
|
|
7,141 |
|
|
|
3,585 |
|
|
|
|
|
|
|
840 |
|
|
|
4,425 |
|
|
|
|
Income from continuing
operations |
|
|
13,649 |
|
|
|
|
|
|
|
|
|
|
|
13,649 |
|
|
|
8,254 |
|
|
|
|
|
|
|
|
|
|
|
8,254 |
|
Income from discontinued
operations |
|
|
795 |
|
|
|
|
|
|
|
|
|
|
|
795 |
|
|
|
229 |
|
|
|
|
|
|
|
|
|
|
|
229 |
|
|
|
|
Net income |
|
$ |
14,444 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
14,444 |
|
|
$ |
8,483 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
8,483 |
|
|
|
|
Income
from continuing operations diluted
earnings per share |
|
$ |
3.82 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3.82 |
|
|
$ |
2.32 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2.32 |
|
|
|
|
Return on
common equity (a) |
|
|
12 |
% |
|
|
|
% |
|
|
|
% |
|
|
12 |
% |
|
|
8 |
% |
|
|
|
% |
|
|
|
% |
|
|
8 |
% |
Return on
common equity less
goodwill(a) |
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
20 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
13 |
|
Return on
assets (a) |
|
|
1.04 |
|
|
|
NM |
|
|
|
NM |
|
|
|
1.00 |
|
|
|
0.70 |
|
|
|
NM |
|
|
|
NM |
|
|
|
0.67 |
|
Overhead
ratio |
|
|
62 |
|
|
|
NM |
|
|
|
NM |
|
|
|
59 |
|
|
|
71 |
|
|
|
NM |
|
|
|
NM |
|
|
|
66 |
|
|
|
|
LoansPeriod-end |
|
$ |
483,127 |
|
|
$ |
66,950 |
|
|
$ |
|
|
|
$ |
550,077 |
|
|
$ |
419,148 |
|
|
$ |
70,527 |
|
|
|
|
|
|
$ |
489,675 |
|
Total assets average |
|
|
1,313,794 |
|
|
|
65,266 |
|
|
|
|
|
|
|
1,379,060 |
|
|
|
1,185,066 |
|
|
|
67,180 |
|
|
|
|
|
|
|
1,252,246 |
|
|
|
|
|
|
|
(a) |
|
Based on Income from continuing operations |
(b) |
|
The impact of credit card securitizations affects CS. See pages 4345 of this
Annual Report for further information. |
(c) |
|
2004 results include six months of the combined Firms results and six months of
heritage JPMorgan Chase results. |
|
|
|
|
|
|
|
|
|
32
|
|
JPMorgan Chase & Co. / 2006 Annual Report |
managed credit card portfolio. Operations are
funded and decisions are made about allocating
resources, such as employees and capital, based
upon managed financial information. In addition,
the same underwriting standards and ongoing risk
monitoring are used for both loans on the balance
sheet and securitized loans. Although
securitizations result in the sale of credit card
receivables to a trust, JPMorgan Chase retains the
ongoing customer relationships, as the customers
may continue to use their credit cards;
accordingly, the customers credit performance will
affect both the securitized loans and the loans
retained on the balance sheet. JPMorgan Chase
believes managed basis information is useful to
investors, enabling them to
understand both the credit risks associated with
the loans reported on the balance sheet and the
Firms retained interests in securitized loans. For
a reconciliation of reported to managed basis of CS
results, see Card Services segment results on pages
4345 of this Annual Report. For information
regarding the securitization process, and loans and
residual interests sold and securitized, see Note
14 on pages 114118 of this Annual Report.
Total net revenue for each of the business
segments and the Firm is presented on an FTE basis.
Accordingly, revenue from tax-exempt securities and
investments that receive tax credits is presented
in the managed results on a basis comparable to
taxable securities and investments. This non-GAAP
financial measure allows management to assess the
comparability of revenues arising from both taxable
and tax-exempt sources. The corresponding income
tax impact related to these items is recorded
within Income tax expense.
Management also uses certain non-GAAP financial
measures at the segment level because it believes
these non-GAAP financial measures provide
information to investors about the underlying
operational performance and trends of the
particular business segment and therefore
facilitate a comparison of the business segment
with the performance of its competitors.
(Table continued from previous page)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004(c) |
|
|
|
Reported |
|
|
Credit |
|
|
Tax-equivalent |
|
|
Managed |
|
|
|
results |
|
|
card |
(b) |
|
adjustments |
|
|
basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,536 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,536 |
|
|
|
|
5,148 |
|
|
|
|
|
|
|
|
|
|
|
5,148 |
|
|
|
|
2,672 |
|
|
|
|
|
|
|
|
|
|
|
2,672 |
|
|
|
|
7,682 |
|
|
|
|
|
|
|
|
|
|
|
7,682 |
|
|
|
|
338 |
|
|
|
|
|
|
|
|
|
|
|
338 |
|
|
|
|
803 |
|
|
|
|
|
|
|
|
|
|
|
803 |
|
|
|
|
4,840 |
|
|
|
(2,267 |
) |
|
|
|
|
|
|
2,573 |
|
|
|
|
826 |
|
|
|
(86 |
) |
|
|
317 |
|
|
|
1,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,845 |
|
|
|
(2,353 |
) |
|
|
317 |
|
|
|
23,809 |
|
|
|
|
16,527 |
|
|
|
5,251 |
|
|
|
6 |
|
|
|
21,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,372 |
|
|
|
2,898 |
|
|
|
323 |
|
|
|
45,593 |
|
|
|
|
2,544 |
|
|
|
2,898 |
|
|
|
|
|
|
|
5,442 |
|
|
|
|
33,972 |
|
|
|
|
|
|
|
|
|
|
|
33,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,856 |
|
|
|
|
|
|
|
323 |
|
|
|
6,179 |
|
|
|
|
1,596 |
|
|
|
|
|
|
|
323 |
|
|
|
1,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,260 |
|
|
|
|
|
|
|
|
|
|
|
4,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
206 |
|
|
|
|
|
|
|
|
|
|
|
206 |
|
|
|
|
|
|
$ |
4,466 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.48 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1.48 |
|
|
|
|
|
|
|
6 |
% |
|
|
|
% |
|
|
|
% |
|
|
6 |
% |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
|
0.44 |
|
|
|
NM |
|
|
|
NM |
|
|
|
0.43 |
|
|
|
|
80 |
|
|
|
NM |
|
|
|
NM |
|
|
|
75 |
|
|
|
|
|
|
$ |
402,114 |
|
|
$ |
70,795 |
|
|
|
|
|
|
$ |
472,909 |
|
|
|
|
962,556 |
|
|
|
51,084 |
|
|
|
|
|
|
|
1,013,640 |
|
|
|
|
Calculation of Certain GAAP and Non-GAAP Metrics
The table below reflects the formulas used to
calculate both the following GAAP and non-GAAP
measures:
Return on common equity
Net income* / Average common stockholders equity
Return on common equity less goodwill(a)
Net income* / Average common stockholders equity less goodwill
Return on assets
|
|
|
Reported |
|
Net income / Total average assets |
|
|
|
Managed |
|
Net income / Total average managed assets (b)
(including average securitized credit card receivables) |
Overhead ratio
Total noninterest expense / Total net revenue
* Represents Net income applicable to common stock
|
|
|
(a) |
|
The Firm uses Return on common equity less goodwill, a non-GAAP
financial measure, to evaluate the operating performance of the Firm and to
facilitate comparisons to competitors. |
(b) |
|
The Firm uses Return on managed assets, a non-GAAP financial measure, to
evaluate the overall performance of the managed credit card portfolio, including
securitized credit card loans. |
|
|
|
|
|
|
|
|
|
JPMorgan Chase & Co. / 2006 Annual Report
|
|
33 |
Managements discussion and analysis
JPMorgan Chase & Co.
BUSINESS SEGMENT RESULTS
The Firm is managed on a line-of-business
basis. The business segment financial results
presented reflect the current organization of
JPMorgan Chase. There are six major reportable
business segments: the Investment Bank, Retail
Financial Services, Card Services, Commercial
Banking, Treasury & Securities Services and Asset
Management, as well as a Corporate segment. The
seg-
ments are based upon the products and services
provided, or the type of customer served, and they
reflect the manner in which financial information
is currently evaluated by management. Results of
these lines of business are presented on a managed
basis. Segment results for 2004 include six months
of the combined Firms results and six months of
heritage JPMorgan Chase only.
Description of business segment reporting methodology
Results of the business segments are intended to
reflect each segment as if it were essentially a
stand-alone business. During 2006, JPMorgan Chase
modified certain of its segment disclosures to
reflect more closely the manner in which the Firms
business segments are managed and to provide
improved comparability with competitors. These
financial disclosure modifications are reflected in
this Annual Report and, except as indicated, the
financial information for prior periods has been
revised to reflect the changes as if they had been
in effect throughout all periods reported. A
summary of the changes follows:
|
|
The presentation of operating earnings in 2005 and 2004 that excluded from reported
results merger costs and material litigation reserve charges and recoveries was eliminated
effective January 1, 2006. These items had been excluded previously from operating results
because they were deemed nonrecurring; they are included now in the Corporate business
segments results. |
|
|
|
Trading-related net interest income is no longer reclassified from Net interest
income to Principal transactions. |
|
|
|
Various wholesale banking clients, together with the related balance sheet and
income statement items, were transferred among CB, the IB and TSS.
The primary client transfer was corporate mortgage finance from CB to the IB and TSS. |
|
|
|
TSS firmwide disclosures have been adjusted to reflect a refined set of TSS products
as well as a revised allocation of liability balances and lending- related revenue related
to certain client transfers. |
|
|
|
As result of the transaction with The Bank of New York, selected corporate rate trust businesses
have been transferred from TSS to the Corporate segment and reported in discontinued operations for all
periods reported. |
The management reporting process that derives
business segment results allocates income and
expense using market-based methodologies. The Firm
continues to assess the assumptions, methodologies
and reporting classifications used for segment
reporting, and further refinements may be
implemented in future periods. Segment reporting
methodologies used by the Firm are discussed below.
Revenue sharing
When business segments join efforts to sell
products and services to the Firms clients, the
participating business segments agree to share
revenues from those transactions. The segment
results reflect these revenue-sharing agreements.
Funds transfer pricing
Funds transfer pricing (FTP) is used to allocate
interest income and expense to each business and
transfer the primary interest rate risk exposures
to the Corporate business segment. The allocation
process is unique to each business segment and
considers the interest rate risk, liquidity risk
and regulatory requirements of that segments
stand-alone peers. This process is overseen by the
Firms Asset-Liability Committee (ALCO). Business
segments may retain certain interest rate
exposures, subject to management approval, that
would be expected in the normal operation of a
similar peer business.
|
|
|
|
|
|
|
|
|
34
|
|
JPMorgan Chase & Co. / 2006 Annual Report |
Capital allocation
Each business segment is allocated capital by
taking into consideration stand-alone peer
comparisons, economic risk measures and regulatory
capital requirements. The amount of capital
assigned to each business is referred to as equity.
Effective January 1, 2006, the Firm refined its
methodology for allocating capital to the business
segments. As prior periods have not been revised to
reflect the new capital allocations, certain
business metrics, such as ROE, are not comparable
to the current presentations. For a further
discussion of this change, see Capital
managementLine of business equity on page 57 of
this
Annual Report.
Expense allocation
Where business segments use services provided by
support units within the Firm, the costs of those
support units are allocated to the business
segments. Those expenses are allocated based upon
their actual cost or the lower of actual cost or
market, as well as upon usage of the services
provided. In contrast, certain other expenses
related to certain corporate functions, or to cer-
tain technology and operations, are not allocated
to the business segments and are retained in
Corporate. These retained expenses include: parent
company costs that would not be incurred if the
segments were stand-alone businesses; adjustments
to align certain corporate staff, technology and
operations allocations with market prices; and
other one-time items not aligned with the business
segments.
During 2005, the Firm refined cost allocation
methodologies related to certain corporate,
technology and operations expenses in order to
improve transparency, consistency and
accountability with regard to costs allocated
across business segments. Prior periods were not
revised to reflect this methodology change.
Credit reimbursement
TSS reimburses the IB for credit portfolio
exposures managed by the IB on behalf of clients
that the segments share. At the time of the Merger,
the reimbursement methodology was revised to be
based upon pretax earnings, net of the cost of
capital related to those exposures.
Segment results Managed basis(a)
The following table summarizes the business segment results for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
Total net revenue |
|
|
Noninterest expense |
|
(in millions, except ratios) |
|
|
2006 |
|
|
|
2005 |
|
|
|
2004 |
(c) |
|
|
2006 |
|
|
|
2005 |
|
|
|
2004 |
(c) |
|
Investment Bank |
|
$ |
18,277 |
|
|
$ |
14,613 |
|
|
$ |
12,633 |
|
|
$ |
12,304 |
|
|
$ |
9,749 |
|
|
$ |
8,709 |
|
Retail Financial Services |
|
|
14,825 |
|
|
|
14,830 |
|
|
|
10,791 |
|
|
|
8,927 |
|
|
|
8,585 |
|
|
|
6,825 |
|
Card Services |
|
|
14,745 |
|
|
|
15,366 |
|
|
|
10,745 |
|
|
|
5,086 |
|
|
|
4,999 |
|
|
|
3,883 |
|
Commercial Banking |
|
|
3,800 |
|
|
|
3,488 |
|
|
|
2,278 |
|
|
|
1,979 |
|
|
|
1,856 |
|
|
|
1,326 |
|
Treasury & Securities
Services |
|
|
6,109 |
|
|
|
5,539 |
|
|
|
4,198 |
|
|
|
4,266 |
|
|
|
4,050 |
|
|
|
3,726 |
|
Asset Management |
|
|
6,787 |
|
|
|
5,664 |
|
|
|
4,179 |
|
|
|
4,578 |
|
|
|
3,860 |
|
|
|
3,133 |
|
Corporate(b) |
|
|
8 |
|
|
|
(1,136 |
) |
|
|
769 |
|
|
|
1,141 |
|
|
|
5,327 |
|
|
|
6,370 |
|
|
Total |
|
$ |
64,551 |
|
|
$ |
58,364 |
|
|
$ |
45,593 |
|
|
$ |
38,281 |
|
|
$ |
38,426 |
|
|
$ |
33,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
Net income (loss) |
|
|
Return on equity |
|
(in millions, except ratios) |
|
|
2006 |
|
|
|
2005 |
|
|
|
2004 |
(c) |
|
|
2006 |
|
|
|
2005 |
|
|
|
2004 |
(c) |
|
Investment Bank |
|
$ |
3,674 |
|
|
$ |
3,673 |
|
|
$ |
2,956 |
|
|
|
18 |
% |
|
|
18 |
% |
|
|
17 |
% |
Retail Financial Services |
|
|
3,213 |
|
|
|
3,427 |
|
|
|
2,199 |
|
|
|
22 |
|
|
|
26 |
|
|
|
24 |
|
Card Services |
|
|
3,206 |
|
|
|
1,907 |
|
|
|
1,274 |
|
|
|
23 |
|
|
|
16 |
|
|
|
17 |
|
Commercial Banking |
|
|
1,010 |
|
|
|
951 |
|
|
|
561 |
|
|
|
18 |
|
|
|
28 |
|
|
|
27 |
|
Treasury & Securities
Services |
|
|
1,090 |
|
|
|
863 |
|
|
|
277 |
|
|
|
48 |
|
|
|
57 |
|
|
|
14 |
|
Asset Management |
|
|
1,409 |
|
|
|
1,216 |
|
|
|
681 |
|
|
|
40 |
|
|
|
51 |
|
|
|
17 |
|
Corporate(b) |
|
|
842 |
|
|
|
(3,554 |
) |
|
|
(3,482 |
) |
|
|
NM |
|
|
|
NM |
|
|
|
NM |
|
|
Total |
|
$ |
14,444 |
|
|
$ |
8,483 |
|
|
$ |
4,466 |
|
|
|
13 |
% |
|
|
8 |
% |
|
|
6 |
% |
|
|
|
|
(a) |
|
Represents reported results on a tax-equivalent basis and excludes the impact of
credit card securitizations. |
(b) |
|
Net income includes Income from discontinued operations (after-tax) of $795
million, $229 million and $206 million for 2006, 2005 and 2004, respectively. |
(c) |
|
2004 results include six months of the combined Firms results and six months of
heritage JPMorgan Chase results. |
|
|
|
|
|
|
|
|
|
JPMorgan Chase & Co. / 2006 Annual Report
|
|
35 |
Managements discussion and analysis
JPMorgan Chase & Co.
INVESTMENT BANK
JPMorgan is one of the worlds leading
investment banks, with deep client relationships
and broad product capabilities. The Investment
Banks clients are corporations, financial
institutions, governments and institutional
investors. The Firm offers a full range of
investment banking products and services in all
major capital markets, including advising on
corporate strategy and structure, capital
raising in equity and debt markets,
sophisticated risk management, market-making in
cash securities and derivative instruments, and
research. The IB also commits the Firms own
capital to proprietary investing and trading
activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except ratios) |
|
|
2006 |
|
|
|
2005 |
|
|
|
2004 |
(e) |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking fees |
|
$ |
5,537 |
|
|
$ |
4,096 |
|
|
$ |
3,572 |
|
Principal transactions |
|
|
9,086 |
|
|
|
6,059 |
|
|
|
3,548 |
|
Lending & deposit related fees |
|
|
517 |
|
|
|
594 |
|
|
|
539 |
|
Asset management, administration
and commissions |
|
|
2,110 |
|
|
|
1,727 |
|
|
|
1,401 |
|
All other income |
|
|
528 |
|
|
|
534 |
|
|
|
277 |
|
|
Noninterest revenue |
|
|
17,778 |
|
|
|
13,010 |
|
|
|
9,337 |
|
Net interest income(a) |
|
|
499 |
|
|
|
1,603 |
|
|
|
3,296 |
|
|
Total net revenue(b) |
|
|
18,277 |
|
|
|
14,613 |
|
|
|
12,633 |
|
Provision for credit losses |
|
|
191 |
|
|
|
(838 |
) |
|
|
(640 |
) |
Credit reimbursement from TSS(c) |
|
|
121 |
|
|
|
154 |
|
|
|
90 |
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
8,190 |
|
|
|
5,792 |
|
|
|
4,896 |
|
Noncompensation expense |
|
|
4,114 |
|
|
|
3,957 |
|
|
|
3,813 |
|
|
Total noninterest expense |
|
|
12,304 |
|
|
|
9,749 |
|
|
|
8,709 |
|
|
Income before income tax expense |
|
|
5,903 |
|
|
|
5,856 |
|
|
|
4,654 |
|
Income tax expense |
|
|
2,229 |
|
|
|
2,183 |
|
|
|
1,698 |
|
|
Net income |
|
$ |
3,674 |
|
|
$ |
3,673 |
|
|
$ |
2,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial ratios |
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
18 |
% |
|
|
18 |
% |
|
|
17 |
% |
ROA |
|
|
0.57 |
|
|
|
0.61 |
|
|
|
0.62 |
|
Overhead ratio |
|
|
67 |
|
|
|
67 |
|
|
|
69 |
|
Compensation expense as
% of total net revenue(d) |
|
|
43 |
|
|
|
40 |
|
|
|
39 |
|
|
|
|
|
(a) |
|
The decline in net interest income for the periods shown is largely driven by a
decline in trading-related net interest income caused by a higher proportion of
noninterest-bearing net trading assets to total net trading assets, higher funding costs
compared with prior-year periods, and spread compression due to the inverted yield curve
in place for most of the current year. |
(b) |
|
Total Net revenue includes tax-equivalent adjustments, primarily due to
tax-exempt income from municipal bond investments and income tax credits related to
affordable housing investments, of $802 million, $752 million and $274 million for 2006,
2005 and 2004, respectively. |
(c) |
|
TSS is charged a credit reimbursement related to certain exposures managed
within the IB credit portfolio on behalf of clients shared with TSS. For a further
discussion, see Credit reimbursement on page 35 of this Annual Report. |
(d) |
|
Beginning in 2006, the Compensation expense to Total net revenue ratio is
adjusted to present this ratio as if SFAS 123R had always been in effect. IB management
believes that adjusting the Compensation expense to Total net revenue ratio for the
incremental impact of adopting SFAS 123R provides a more meaningful measure of IBs
Compensation expense to Total net revenue ratio. |
(e) |
|
2004 results include six months of the combined Firms results and six months of
heritage JPMorgan Chase results. |
2006 compared with 2005
Net income of $3.7 billion was flat, as record
revenue of $18.3 billion was offset largely by
higher compensation expense, including the impact
of SFAS 123R, and a provision for credit losses
compared with a benefit in the prior year.
Total net revenue of $18.3 billion was up $3.7
billion, or 25%, from the prior year. Investment
banking fees of $5.5 billion were a record, up 35%
from the prior year, driven by record debt and
equity underwriting as well as strong advisory
fees, which were the highest since 2000. Advisory
fees of $1.7 billion
The following table provides the IBs total Net revenue by business segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
2006 |
|
|
|
2005 |
|
|
|
2004 |
(d) |
|
Revenue by business |
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking fees: |
|
|
|
|
|
|
|
|
|
|
|
|
Advisory |
|
$ |
1,659 |
|
|
$ |
1,263 |
|
|
$ |
938 |
|
Equity underwriting |
|
|
1,178 |
|
|
|
864 |
|
|
|
781 |
|
Debt underwriting |
|
|
2,700 |
|
|
|
1,969 |
|
|
|
1,853 |
|
|
Total investment banking fees |
|
|
5,537 |
|
|
|
4,096 |
|
|
|
3,572 |
|
Fixed income markets(a) |
|
|
8,369 |
|
|
|
7,277 |
|
|
|
6,342 |
|
Equity markets(b) |
|
|
3,264 |
|
|
|
1,799 |
|
|
|
1,491 |
|
Credit portfolio(c) |
|
|
1,107 |
|
|
|
1,441 |
|
|
|
1,228 |
|
|
Total net revenue |
|
$ |
18,277 |
|
|
$ |
14,613 |
|
|
$ |
12,633 |
|
|
|
|
|
(a) |
|
Fixed income markets includes client and portfolio management revenue related to
both market-making and proprietary risk-taking across global fixed income markets,
including foreign exchange, interest rate, credit and commodities markets. |
(b) |
|
Equities markets includes client and portfolio management revenue related to
market- making and proprietary risk-taking across global equity products, including cash
instruments, derivatives and convertibles. |
(c) |
|
Credit portfolio revenue includes Net interest income, fees and loan sale
activity, as well as gains or losses on securities received as part of a loan
restructuring, for the IBs credit portfolio. Credit portfolio revenue also includes the
results of risk management related to the Firms lending and derivative activities, and
changes in the credit valuation adjustment (CVA), which is the component of the fair
value of a derivative that reflects the credit quality of the counterparty. See pages
7072 of the Credit risk management section of this Annual Report for further discussion. |
(d) |
|
2004 results include six months of the combined Firms results and six months of
heritage JPMorgan Chase results. |
were up 31% over the prior year driven
primarily by strong performance in the Americas.
Debt underwriting fees of $2.7 billion were up 37%
from the prior year driven by record performance in
both loan syndications and bond underwriting.
Equity underwriting fees of
$1.2 billion were up 36% from the prior year driven
by global equity markets. Fixed Income Markets
revenue of $8.4 billion was also a record, up 15%
from the prior year driven by strength in credit
markets, emerging markets and currencies. Record
Equity Markets revenue of $3.3 billion increased
81%, and was driven by strength in cash equities
and equity derivatives. Credit Portfolio revenue of
$1.1 billion was down 23%, primarily reflecting
lower gains from loan workouts.
Provision for credit losses was $191 million
compared with a benefit of $838 million in the
prior year. The current-year provision reflects
portfolio activity; credit quality remained stable.
The prior-year benefit reflected strong credit
quality, a decline in criticized and nonperforming
loans, and a higher level of recoveries.
Total noninterest expense of $12.3 billion was up
by $2.6 billion, or 26%, from the prior year. This
increase was due primarily to higher
performance-based compensation, including the
impact of an increase in the ratio of compensation
expense to total net revenue, as well as the
incremental expense related to SFAS 123R.
Return on equity was 18% on $20.8 billion of
allocated capital compared with 18% on $20.0
billion in 2005.
2005 compared with 2004
Net income of $3.7 billion was up 24%, or $717
million, from the prior year. The increase was
driven by the Merger, higher revenues and an
increased benefit from the Provision for credit
losses. These factors were offset partially by
higher compensation expense. Return on equity was
18%.
Total net revenue of $14.6 billion was up $2.0
billion, or 16%, over the prior year, driven by
strong Fixed Income and Equity Markets and
Investment banking fees. Investment banking fees of
$4.1 billion increased 15% from the prior year
driven by strong growth in advisory fees resulting
in part from the Cazenove business partnership.
Advisory revenues of $1.3 billion were up 35% from
the prior year, reflecting higher market volumes.
Debt underwriting revenues of $2.0
|
|
|
|
|
|
|
|
|
36
|
|
JPMorgan Chase & Co. / 2006 Annual Report |
billion increased by 6% driven by strong loan
syndication fees. Equity underwriting fees of $864
million were up 11% from the prior year driven by
improved market share. Fixed Income Markets revenue
of $7.3 billion increased 15%, or $935 million,
driven by stronger, although volatile, trading
results across commodities, emerging markets, rate
markets and currencies. Equity Markets revenues
increased 21% to $1.8 billion, primarily due to
increased commissions, which were offset partially
by lower trading results, which also experienced a
high level of volatility. Credit Portfolio revenues
were $1.4 billion, up $213 million from the prior
year due to higher gains from loan workouts and
sales as well as higher trading revenue from credit
risk management activities.
The Provision for credit losses was a benefit of
$838 million compared with a benefit of $640
million in 2004. The increased benefit was due
primarily to the improvement in the credit quality
of the loan portfolio and reflected net recoveries.
Nonperforming assets of $645 million decreased by
46% since the end of 2004.
Total noninterest expense increased 12% to $9.7
billion, largely reflecting higher
performance-based incentive compensation related to
growth in revenue. Noncompensation expense was up
4% from the prior year primarily due to the impact
of the Cazenove business
partnership, while the overhead ratio declined to
67% for 2005, from 69% in 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected metrics |
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except headcount and ratio data) |
|
|
2006 |
|
|
|
2005 |
|
|
|
2004 |
(f) |
|
Revenue by region |
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
9,227 |
|
|
$ |
8,258 |
|
|
$ |
6,898 |
|
Europe/Middle East/Africa |
|
|
7,320 |
|
|
|
4,627 |
|
|
|
4,082 |
|
Asia/Pacific |
|
|
1,730 |
|
|
|
1,728 |
|
|
|
1,653 |
|
|
Total net revenue |
|
$ |
18,277 |
|
|
$ |
14,613 |
|
|
$ |
12,633 |
|
|
Selected average balances |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
647,569 |
|
|
$ |
599,761 |
|
|
$ |
474,436 |
|
Trading assetsdebt and
equity instruments |
|
|
275,077 |
|
|
|
231,303 |
|
|
|
190,119 |
|
Trading assetsderivative receivables |
|
|
54,541 |
|
|
|
55,239 |
|
|
|
58,735 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans retained(a) |
|
|
58,846 |
|
|
|
44,813 |
|
|
|
37,804 |
|
Loans held-for-sale(b) |
|
|
21,745 |
|
|
|
11,755 |
|
|
|
6,124 |
|
|
Total loans |
|
|
80,591 |
|
|
|
56,568 |
|
|
|
43,928 |
|
Adjusted assets(c) |
|
|
527,753 |
|
|
|
456,920 |
|
|
|
394,961 |
|
Equity |
|
|
20,753 |
|
|
|
20,000 |
|
|
|
17,290 |
|
Headcount |
|
|
23,729 |
|
|
|
19,802 |
|
|
|
17,501 |
|
Credit data and quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs (recoveries) |
|
$ |
(31 |
) |
|
$ |
(126 |
) |
|
$ |
47 |
|
Nonperforming assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans(d) |
|
|
231 |
|
|
|
594 |
|
|
|
954 |
|
Other nonperforming assets |
|
|
38 |
|
|
|
51 |
|
|
|
242 |
|
Allowance for loan losses |
|
|
1,052 |
|
|
|
907 |
|
|
|
1,547 |
|
Allowance for lending related commitments |
|
|
305 |
|
|
|
226 |
|
|
|
305 |
|
Net charge-off (recovery) rate(b) |
|
|
(0.05 |
)% |
|
|
(0.28 |
)% |
|
|
0.12 |
% |
Allowance for loan losses to average loans(b) |
|
|
1.79 |
|
|
|
2.02 |
|
|
|
4.09 |
|
Allowance for loan losses to
nonperforming loans(d) |
|
|
461 |
|
|
|
187 |
|
|
|
163 |
|
Nonperforming loans to average loans |
|
|
0.29 |
|
|
|
1.05 |
|
|
|
2.17 |
|
Market riskaverage trading and
credit portfolio VAR(e) |
|
|
|
|
|
|
|
|
|
|
|
|
Trading activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income |
|
$ |
56 |
|
|
$ |
67 |
|
|
$ |
74 |
|
Foreign exchange |
|
|
22 |
|
|
|
23 |
|
|
|
17 |
|
Equities |
|
|
31 |
|
|
|
34 |
|
|
|
28 |
|
Commodities and other |
|
|
45 |
|
|
|
21 |
|
|
|
9 |
|
Less: portfolio diversification |
|
|
(70 |
) |
|
|
(59 |
) |
|
|
(43 |
) |
|
Total trading VAR |
|
|
84 |
|
|
|
86 |
|
|
|
85 |
|
Credit portfolio VAR |
|
|
15 |
|
|
|
14 |
|
|
|
14 |
|
Less: portfolio diversification |
|
|
(11 |
) |
|
|
(12 |
) |
|
|
(9 |
) |
|
Total trading and credit portfolio VAR |
|
$ |
88 |
|
|
$ |
88 |
|
|
$ |
90 |
|
|
|
|
|
(a) |
|
Loans retained include Credit Portfolio, conduit loans, leveraged leases, bridge
loans for underwriting and other accrual loans. |
|
|
|
(b) |
|
Loans held-for-sale, which include loan syndications, and warehouse loans held
as part of the IBs mortgage-backed, asset-backed and other securitization businesses, are
excluded from Total loans for the allowance coverage ratio and net charge-off rate. |
(c) |
|
Adjusted assets, a non-GAAP financial measure, equals total average assets minus
(1) securities purchased under resale agreements and securities borrowed less securities
sold, not yet purchased; (2) assets of variable interest entities (VIEs) consolidated
under FIN 46R; (3) cash and securities segregated and on deposit for regulatory and other
purposes; and (4) goodwill and intangibles. The amount of adjusted assets is presented to
assist the reader in comparing the IBs asset and capital levels to other investment banks in the
securities industry. Asset-to-equity leverage ratios are commonly used as one measure to
assess a companys capital adequacy. The IB believes an adjusted asset amount that excludes
the assets discussed above, which are considered to have a low risk profile, provides a
more meaningful measure of balance sheet leverage in the securities industry. |
(d) |
|
Nonperforming loans include loans held-for-sale of $3 million, $109 million and
$2 million as of December 31, 2006, 2005 and 2004, respectively, which are excluded from
the allowance coverage ratios. Nonperforming loans exclude distressed HFS loans purchased as part of IBs proprietary activities. |
(e) |
|
For a more complete description of VAR, see page 77 of this Annual Report. |
(f) |
|
2004 results include six months of the combined Firms results and six months of
heritage JPMorgan Chase results. |
Total average loans of $80.6 billion increased
by $24.0 billion, or 42%, from the prior year.
Average loans retained of $58.8 billion increased
by $14.0 billion, or 31%, from the prior year
driven by higher levels of capital markets
activity. Average loans held-for-sale of $21.7
billion were up by $10.0 billion, or 85%, from the
prior year driven primarily by growth in the IB
securitization businesses.
IBs average Total trading and credit portfolio VAR
was $88 million for both 2006 and 2005. The
Commodities and other VAR category has increased
from $21 million on average for 2005 to $45 million
on average for 2006, reflecting the build-out of
the IB energy business, which has also increased
the effect of portfolio diversification such that
Total IB Trading VAR was down slightly compared
with the prior year.
According to Thomson Financial, in 2006, the Firm
maintained its #2 position in Global Debt, Equity
and Equity-related, its #1 position in Global
Syndicated Loans, and its #6 position in Global
Equity & Equity-related transactions. The Firm
improved its position in Global Long-term Debt to
#3 from #4.
According to Dealogic, the Firm was ranked #1 in
Investment Banking fees generated during 2006,
based upon revenue.
Market shares and rankings(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
Market |
|
|
|
|
|
|
Market |
|
|
|
|
|
|
Market |
|
|
|
|
December 31, |
|
Share |
|
|
Rankings |
|
|
Share |
|
|
Rankings |
|
|
Share |
|
|
Rankings |
|
|
Global debt, equity and
equity-related |
|
|
7 |
% |
|
|
#2 |
|
|
|
7 |
% |
|
|
#2 |
|
|
|
7 |
% |
|
|
#3 |
|
Global syndicated loans |
|
|
14 |
|
|
|
1 |
|
|
|
15 |
|
|
|
1 |
|
|
|
19 |
|
|
|
1 |
|
Global long-term debt |
|
|
6 |
|
|
|
3 |
|
|
|
6 |
|
|
|
4 |
|
|
|
7 |
|
|
|
2 |
|
Global equity and equity-related |
|
|
7 |
|
|
|
6 |
|
|
|
7 |
|
|
|
6 |
|
|
|
6 |
|
|
|
6 |
|
Global announced M&A |
|
|
23 |
|
|
|
4 |
|
|
|
23 |
|
|
|
3 |
|
|
|
22 |
|
|
|
3 |
|
U.S. debt, equity and
equity-related |
|
|
9 |
|
|
|
2 |
|
|
|
8 |
|
|
|
3 |
|
|
|
8 |
|
|
|
5 |
|
U.S. syndicated loans |
|
|
26 |
|
|
|
1 |
|
|
|
28 |
|
|
|
1 |
|
|
|
32 |
|
|
|
1 |
|
U.S. long-term debt |
|
|
12 |
|
|
|
2 |
|
|
|
11 |
|
|
|
2 |
|
|
|
12 |
|
|
|
2 |
|
U.S. equity and equity-related(b) |
|
|
8 |
|
|
|
6 |
|
|
|
9 |
|
|
|
6 |
|
|
|
9 |
|
|
|
4 |
|
U.S. announced M&A |
|
|
27 |
|
|
|
3 |
|
|
|
26 |
|
|
|
3 |
|
|
|
28 |
|
|
|
2 |
|
|
|
|
|
(a) |
|
Source: Thomson Financial Securities data. Global announced M&A is based upon
rank value; all other rankings are based upon proceeds, with full credit to each book
manager/equal if joint. Because of joint assignments, market share of all participants
will add up to more than 100%. The market share and rankings for December 31, 2004 are
presented on a combined basis, as if the merger of JPMorgan Chase and Bank One had been in
effect for the entire period. |
(b) |
|
References U.S. domiciled equity and equity-related transactions, per Thomson
Financial. |
|
|
|
|
|
|
|
|
|
JPMorgan Chase & Co. / 2006 Annual Report
|
|
37 |
Managements discussion and analysis
JPMorgan Chase & Co.
RETAIL FINANCIAL SERVICES
Retail Financial Services, which includes
Regional Banking, Mortgage Banking and Auto
Finance reporting segments, helps meet the
financial needs of consumers and businesses. RFS
provides convenient consumer banking through the
nations fourth-largest branch network and
third-largest ATM network. RFS is a top-five
mortgage originator and servicer, the
second-largest home equity originator, the
largest noncaptive originator of automobile loans
and one of the largest student loan originators.
RFS serves customers through more than 3,000
bank branches, 8,500 ATMs and 270 mortgage
offices, and through relationships with more
than 15,000 auto dealerships and 4,300 schools
and universities. More than 11,000 branch
salespeople assist customers, across a 17-state
footprint from New York to Arizona, with
checking and savings accounts, mortgage, home
equity and business loans, investments and
insurance. Over 1,200 additional mortgage
officers provide home loans throughout the
country.
During the first quarter of 2006, RFS completed
the purchase of Collegiate Funding Services, which
contributed an education loan servicing capability
and provided an entry into the Federal Family
Education Loan Program consolidation market. On
July 1, 2006, RFS sold its life insurance and
annuity underwriting businesses to Protective Life
Corporation. On October 1, 2006, JPMorgan Chase
completed The Bank of New York transaction,
significantly strengthening RFSs distribution
network in the New York Tri-state area.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except ratios) |
|
|
2006 |
|
|
|
2005 |
|
|
|
2004 |
(b) |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Lending & deposit related fees |
|
$ |
1,597 |
|
|
$ |
1,452 |
|
|
$ |
1,013 |
|
Asset management, administration
and commissions |
|
|
1,422 |
|
|
|
1,498 |
|
|
|
1,020 |
|
Securities gains (losses) |
|
|
(57 |
) |
|
|
9 |
|
|
|
(83 |
) |
Mortgage fees and related income |
|
|
618 |
|
|
|
1,104 |
|
|
|
866 |
|
Credit card income |
|
|
523 |
|
|
|
426 |
|
|
|
230 |
|
Other income |
|
|
557 |
|
|
|
136 |
|
|
|
31 |
|
|
Noninterest revenue |
|
|
4,660 |
|
|
|
4,625 |
|
|
|
3,077 |
|
Net interest income |
|
|
10,165 |
|
|
|
10,205 |
|
|
|
7,714 |
|
|
Total net revenue |
|
|
14,825 |
|
|
|
14,830 |
|
|
|
10,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
561 |
|
|
|
724 |
|
|
|
449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
3,657 |
|
|
|
3,337 |
|
|
|
2,621 |
|
Noncompensation expense |
|
|
4,806 |
|
|
|
4,748 |
|
|
|
3,937 |
|
Amortization of intangibles |
|
|
464 |
|
|
|
500 |
|
|
|
267 |
|
|
Total noninterest expense |
|
|
8,927 |
|
|
|
8,585 |
|
|
|
6,825 |
|
|
Income before income tax expense |
|
|
5,337 |
|
|
|
5,521 |
|
|
|
3,517 |
|
Income tax expense |
|
|
2,124 |
|
|
|
2,094 |
|
|
|
1,318 |
|
|
Net income |
|
$ |
3,213 |
|
|
$ |
3,427 |
|
|
$ |
2,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial ratios |
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
22 |
% |
|
|
26 |
% |
|
|
24 |
% |
ROA |
|
|
1.39 |
|
|
|
1.51 |
|
|
|
1.18 |
|
Overhead ratio |
|
|
60 |
|
|
|
58 |
|
|
|
63 |
|
Overhead ratio excluding core
deposit intangibles(a) |
|
|
57 |
|
|
|
55 |
|
|
|
61 |
|
|
|
|
|
(a) |
|
Retail Financial Services uses the overhead ratio (excluding the amortization of
core deposit intangibles (CDI)), a non-GAAP financial measure, to evaluate the
underlying expense trends of the business. Including CDI amortization expense in the
overhead ratio calculation |
|
|
|
|
|
results in a higher overhead ratio in the earlier years and a lower overhead ratio in
later years; this method would result in an improving overhead ratio over time, all things
remaining equal. This non-GAAP ratio excludes Regional Bankings core deposit intangible
amortization expense related to The Bank of New York transaction and the Bank One merger of
$458 million, $496 million and $264 million for the years ended December 31, 2006, 2005 and
2004, respectively. |
(b) |
|
2004 results include six months of the combined Firms results and six months of
heritage JPMorgan Chase results. |
2006 compared with 2005
Net income of $3.2 billion was down by $214
million, or 6%, from the prior year. A decline in
Mortgage Banking was offset partially by improved
results in Regional Banking and Auto Finance.
Total net revenue of $14.8 billion was flat
compared with the prior year. Net interest income
of $10.2 billion was down slightly due to narrower
spreads on loans and deposits in Regional Banking,
lower auto loan and lease balances and the sale of
the insurance business. These declines were offset
by the benefit of higher deposit and loan balances
in Regional Banking, wider loan spreads in Auto
Finance and The Bank of New York transaction.
Noninterest revenue of $4.7 billion was up $35
million, or 1%, from the prior year. Results
benefited from increases in deposit-related and
branch production fees, higher automobile operating
lease revenue and The Bank of New York transaction.
This benefit was offset by lower net mortgage
servicing revenue, the sale of the insurance
business and losses related to loans transferred to
held-for-sale. In 2006, losses of $233 million,
compared with losses of $120 million in 2005, were
recognized in Regional Banking related to mortgage
loans transferred to held-for-sale; and losses of
$50 million, compared with losses of $136 million
in the prior year, were recognized in Auto Finance
related to automobile loans transferred to
held-for-sale.
The provision for credit losses of $561 million was
down by $163
million from the prior-year provision due to the
absence of a $250 million special provision for
credit losses related to Hurricane Katrina in the
prior year, partially offset by the establishment
of additional allowance for loan losses related to
loans acquired from The Bank of New York.
Noninterest expense of $8.9 billion was up by $342
million, or 4%, primarily due to The Bank of New
York transaction, the acquisition of Collegiate
Funding Services, investments in the retail
distribution network and higher depreciation
expense on owned automobiles subject to operating
leases. These increases were offset partially by
the sale of the insurance business and
merger-related and other operating efficiencies and
the absence of a $40 million prior-year charge
related to the dissolution of a student loan joint
venture.
2005 compared with 2004
Net income was $3.4 billion, up $1.2 billion from
the prior year. The increase was due largely to the
Merger but also reflected increased deposit
balances and wider spreads, higher home equity and
subprime mortgage balances, and expense savings in
all businesses. These benefits were offset
partially by narrower spreads on retained loan
portfolios, the special provision for Hurricane
Katrina and net losses associated with portfolio
loan sales in Regional Banking and Auto Finance.
Total net revenue increased to $14.8 billion, up
$4.0 billion, or 37%, due primarily to the Merger.
Net interest income of $10.2 billion increased by
$2.5 billion as a result of the Merger, increased
deposit balances and wider spreads, and growth in
retained consumer real estate loans. These benefits
were offset partially by narrower spreads on loan
balances and the absence of loan portfolios sold in
late 2004 and early 2005. Noninterest revenue of
$4.6 billion increased by $1.5 billion due to the
Merger, improved MSR risk management results,
higher automobile operating lease income and
increased
|
|
|
|
|
|
|
|
|
38
|
|
JPMorgan Chase & Co. / 2006 Annual Report |
deposit-related fees. These benefits were offset in part by losses on portfolio
loan sales in Regional Banking and Auto Finance.
The Provision for credit losses totaled $724 million, up $275 million, or 61%,
from 2004. Results included a special provision in 2005 for Hurricane Katrina
of $250 million and a release in 2004 of $87 million in the Allowance for
loan losses related to the sale of the manufactured home loan portfolio.
Excluding these items, the Provision for credit losses would have been down
$62 million, or 12%. The decline reflected reductions in the Allowance for
loan losses due to improved credit trends in most consumer lending portfolios
and the benefit of certain portfolios in run-off. These reductions were offset
partially by the Merger and higher provision expense related to subprime
mortgage loans retained on the balance sheet.
Total noninterest expense rose to $8.6 billion, an increase of $1.8 billion from
the prior year, due primarily to the Merger. The increase also reflected
continued investment in retail banking distribution and sales, increased depreciation
expense on owned automobiles subject to operating leases and a $40 million
charge related to the dissolution of a student loan joint venture. Expense
savings across all businesses provided a favorable offset.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected metrics |
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except headcount and ratios) |
|
|
2006 |
|
|
|
2005 |
|
|
|
2004 |
(e) |
|
Selected ending balances |
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
237,887 |
|
|
$ |
224,801 |
|
|
$ |
226,560 |
|
Loans(a) |
|
|
213,504 |
|
|
|
197,299 |
|
|
|
202,473 |
|
Deposits |
|
|
214,081 |
|
|
|
191,415 |
|
|
|
182,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected average balances |
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
231,566 |
|
|
$ |
226,368 |
|
|
$ |
185,928 |
|
Loans(b) |
|
|
203,882 |
|
|
|
198,153 |
|
|
|
162,768 |
|
Deposits |
|
|
201,127 |
|
|
|
186,811 |
|
|
|
137,404 |
|
Equity |
|
|
14,629 |
|
|
|
13,383 |
|
|
|
9,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount |
|
|
65,570 |
|
|
|
60,998 |
|
|
|
59,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit data and quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs(c) |
|
$ |
576 |
|
|
$ |
572 |
|
|
$ |
990 |
|
Nonperforming loans(d) |
|
|
1,677 |
|
|
|
1,338 |
|
|
|
1,161 |
|
Nonperforming assets |
|
|
1,902 |
|
|
|
1,518 |
|
|
|
1,385 |
|
Allowance for loan losses |
|
|
1,392 |
|
|
|
1,363 |
|
|
|
1,228 |
|
Net charge-off rate(b) |
|
|
0.31 |
% |
|
|
0.31 |
% |
|
|
0.67 |
% |
Allowance for loan losses to
ending loans(a) |
|
|
0.77 |
|
|
|
0.75 |
|
|
|
0.67 |
|
Allowance for loan losses to
nonperforming loans(d) |
|
|
89 |
|
|
|
104 |
|
|
|
107 |
|
Nonperforming loans to total loans |
|
|
0.79 |
|
|
|
0.68 |
|
|
|
0.57 |
|
|
|
|
|
(a) |
|
Includes loans held-for-sale of $32,744 million, $16,598 million and $18,022 million at
December 31, 2006, 2005 and 2004, respectively. These amounts are not included in the
allowance coverage ratios. |
(b) |
|
Average loans include loans held-for-sale of $16,129 million, $15,675 million and $14,736
million for 2006, 2005 and 2004, respectively. These amounts are not included in the net
charge-off rate. |
(c) |
|
Includes $406 million of charge-offs related to the manufactured home loan portfolio in 2004. |
(d) |
|
Nonperforming loans include loans held-for-sale of $116 million, $27 million and $13 mil-
lion at December 31, 2006, 2005 and 2004, respectively. These amounts are not included in
the allowance coverage ratios. |
(e) |
|
2004 results include six months of the combined Firms results and six months of heritage
JPMorgan Chase results. |
Regional Banking
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except ratios) |
|
|
2006 |
|
|
|
2005 |
|
|
|
2004 |
(b) |
|
Noninterest revenue |
|
$ |
3,204 |
|
|
$ |
3,138 |
|
|
$ |
1,975 |
|
Net interest income |
|
|
8,768 |
|
|
|
8,531 |
|
|
|
5,949 |
|
|
Total net revenue |
|
|
11,972 |
|
|
|
11,669 |
|
|
|
7,924 |
|
Provision for credit losses |
|
|
354 |
|
|
|
512 |
|
|
|
239 |
|
Noninterest expense |
|
|
6,825 |
|
|
|
6,675 |
|
|
|
4,978 |
|
|
Income before income tax expense |
|
|
4,793 |
|
|
|
4,482 |
|
|
|
2,707 |
|
|
Net income |
|
$ |
2,884 |
|
|
$ |
2,780 |
|
|
$ |
1,697 |
|
|
ROE |
|
|
27 |
% |
|
|
31 |
% |
|
|
34 |
% |
ROA |
|
|
1.79 |
|
|
|
1.84 |
|
|
|
1.53 |
|
Overhead ratio |
|
|
57 |
|
|
|
57 |
|
|
|
63 |
|
Overhead ratio excluding core
deposit intangibles(a) |
|
|
53 |
|
|
|
53 |
|
|
|
59 |
|
|
|
|
|
(a) |
|
Regional Banking uses the overhead ratio (excluding the amortization of core
deposit intangibles (CDI)), a non-GAAP financial measure, to evaluate the underlying
expense trends of the business. Including CDI amortization expense in the overhead ratio
calculation results in a higher overhead ratio in the earlier years and a lower overhead
ratio in later years; this inclusion would result in an improving overhead ratio over
time, all things remaining equal.
This non-GAAP ratio excludes Regional Bankings core deposit intangible amortization
expense related to The Bank of New York transaction and the Bank One merger of $458 million, $496 million and $264 million for the years ended December 31, 2006, 2005 and 2004,
respectively. |
(b) |
|
2004 results include six months of the combined Firms results and six months of
heritage JPMorgan Chase results. |
2006 compared with 2005
Regional Banking Net income of $2.9 billion was up
by $104 million from the prior year. Total net
revenue of $12.0 billion was up by $303 million, or
3%, including the impact of a $233 million
current-year loss resulting from $13.3 billion of
mortgage loans transferred to held-for-sale and a
prior-year loss of $120 million resulting from $3.3
billion of mortgage loans transferred to
held-for-sale. Results benefited from The Bank of
New York transaction; the acquisition of Collegiate
Funding Services; growth in deposits and home
equity loans; and increases in deposit-related fees
and credit card sales. These benefits were offset
partially by the sale of the insurance business,
narrower spreads on loans, and a shift to
narrower-spread deposit products. The Provision for
credit losses decreased by $158 million, primarily
the result of a $230 million special provision in
the prior year related to Hurricane Katrina, which
was offset partially by additional Allowance for
loan losses related to the acquisition of loans
from The Bank of New York and increased net
charge-offs due to portfolio seasoning and
deterioration in subprime mortgages. Noninterest
expense of $6.8 billion was up by $150 million, or
2%, from the prior year. The increase was due to
investments in the retail distribution network, The
Bank of New York transaction and the acquisition of
Collegiate Funding Services, partially offset by
the sale of the insurance business, merger savings
and operating efficiencies, and the absence of a
$40 million prior-year charge related to the
dissolution of a student loan joint venture.
2005 compared with 2004
Regional Banking Net income of $2.8 billion was up
by $1.1 billion from the prior year, including the
impact of the Merger, and a current-year loss of
$120 million resulting from $3.3 billion of
mortgage loans transferred to held-for-sale
compared with a prior-year loss of $52 million
resulting from $5.2 billion of mortgage loans
transferred to held-for-sale. Growth related to the
Merger was offset partially by the impact of a $230
million special provision for credit losses related
to Hurricane Katrina. Total net revenue of $11.7
billion was up by $3.7 billion, benefiting from the
Merger, wider spreads on increased deposit
balances, higher deposit-related fees and increased
loan balances. These benefits were offset partially
by mortgage loan spread compression due
|
|
|
|
|
|
|
|
|
JPMorgan Chase & Co. / 2006 Annual Report
|
|
39 |
Managements discussion and analysis
JPMorgan Chase & Co.
to rising short-term interest rates and a flat
yield curve, which contributed to accelerated home
equity loan payoffs. The Provision for credit
losses increased by $273 million, primarily the
result of the $230 million special provision
related to Hurricane Katrina, a prior-year $87
million benefit associated with the Firms exit of
the manufactured home loan business and the Merger.
These increases were offset partially by the impact
of lower net charge-offs and
improved credit trends. Noninterest expense of $6.7
billion was up by $1.7 billion as a result of the
Merger, the continued investment in branch
distribution and sales, and a $40 million charge
related to the dissolution of a student loan joint
venture, partially offset by merger savings and
operating efficiencies.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected metrics |
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except ratios and |
|
|
|
|
|
|
|
|
|
|
|
|
where otherwise noted) |
|
|
2006 |
|
|
|
2005 |
|
|
|
2004 |
(h) |
|
Business metrics (in billions) |
|
|
|
|
|
|
|
|
|
|
|
|
Selected ending balances |
|
|
|
|
|
|
|
|
|
|
|
|
Home equity origination volume |
|
$ |
51.9 |
|
|
$ |
54.1 |
|
|
$ |
41.8 |
|
End-of-period loans owned |
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
|
85.7 |
|
|
|
73.9 |
|
|
|
67.6 |
|
Mortgage |
|
|
30.1 |
|
|
|
44.6 |
|
|
|
41.4 |
|
Business banking |
|
|
14.1 |
|
|
|
12.8 |
|
|
|
12.5 |
|
Education |
|
|
10.3 |
|
|
|
3.0 |
|
|
|
3.8 |
|
Other loans(a) |
|
|
2.7 |
|
|
|
2.6 |
|
|
|
3.6 |
|
|
Total end of period loans |
|
|
142.9 |
|
|
|
136.9 |
|
|
|
128.9 |
|
End-of-period deposits |
|
|
|
|
|
|
|
|
|
|
|
|
Checking |
|
|
68.7 |
|
|
|
64.9 |
|
|
|
60.8 |
|
Savings |
|
|
92.4 |
|
|
|
87.7 |
|
|
|
86.9 |
|
Time and other |
|
|
43.3 |
|
|
|
29.7 |
|
|
|
24.2 |
|
|
Total end-of-period deposits |
|
|
204.4 |
|
|
|
182.3 |
|
|
|
171.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans owned |
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
|
78.3 |
|
|
|
69.9 |
|
|
|
42.9 |
|
Mortgage |
|
|
45.1 |
|
|
|
45.4 |
|
|
|
40.6 |
|
Business banking |
|
|
13.2 |
|
|
|
12.6 |
|
|
|
7.3 |
|
Education |
|
|
8.3 |
|
|
|
2.8 |
|
|
|
2.1 |
|
Other loans(a) |
|
|
2.6 |
|
|
|
3.1 |
|
|
|
6.5 |
|
|
Total average loans(b) |
|
|
147.5 |
|
|
|
133.8 |
|
|
|
99.4 |
|
Average deposits |
|
|
|
|
|
|
|
|
|
|
|
|
Checking |
|
|
62.8 |
|
|
|
61.7 |
|
|
|
43.7 |
|
Savings |
|
|
89.9 |
|
|
|
87.5 |
|
|
|
66.5 |
|
Time and other |
|
|
37.5 |
|
|
|
26.1 |
|
|
|
16.6 |
|
|
Total average deposits |
|
|
190.2 |
|
|
|
175.3 |
|
|
|
126.8 |
|
Average assets |
|
|
160.8 |
|
|
|
150.8 |
|
|
|
110.9 |
|
Average equity |
|
|
10.5 |
|
|
|
9.1 |
|
|
|
5.0 |
|
|
Credit data and quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
30+ day delinquency rate(c)(d) |
|
|
2.02 |
% |
|
|
1.68 |
% |
|
|
1.47 |
% |
Net charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
$ |
143 |
|
|
$ |
141 |
|
|
$ |
79 |
|
Mortgage |
|
|
56 |
|
|
|
25 |
|
|
|
19 |
|
Business banking |
|
|
91 |
|
|
|
101 |
|
|
|
77 |
|
Other loans |
|
|
48 |
|
|
|
28 |
|
|
|
552 |
|
|
Total net charge-offs |
|
|
338 |
|
|
|
295 |
|
|
|
727 |
|
Net charge-off rate |
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
|
0.18 |
% |
|
|
0.20 |
% |
|
|
0.18 |
% |
Mortgage |
|
|
0.12 |
|
|
|
0.06 |
|
|
|
0.05 |
|
Business banking |
|
|
0.69 |
|
|
|
0.80 |
|
|
|
1.05 |
|
Other loans |
|
|
0.59 |
|
|
|
0.93 |
|
|
|
8.49 |
|
Total net charge-off rate(b) |
|
|
0.23 |
|
|
|
0.23 |
|
|
|
0.75 |
|
Nonperforming assets(e)(f)(g) |
|
$ |
1,725 |
|
|
$ |
1,282 |
|
|
$ |
1,145 |
|
|
|
|
|
(a) |
|
Includes commercial loans derived from community development activities and,
prior to July 1, 2006, insurance policy loans. |
(b) |
|
Average loans include loans held-for-sale of $2.8 billion, $2.9 billion and $3.1
billion for the years ended December 31, 2006, 2005 and 2004, respectively. These amounts
are not |
|
|
|
|
|
included in the net charge-off rate. |
(c) |
|
Excludes delinquencies related to loans eligible for repurchase as well as loans
repurchased from Governmental National Mortgage Association (GNMA) pools that are
insured by government agencies of $1.0 billion, $0.9 billion, and $0.9 billion at December
31, 2006, 2005 and 2004, respectively. These amounts are excluded as reimbursement is
proceeding normally. |
(d) |
|
Excludes loans that are 30 days past due and still accruing, which are insured
by government agencies under the Federal Family Education Loan Program of $0.5 billion at
December 31, 2006. The education loans past due 30 days were insignificant at December 31,
2005 and 2004. These amounts are excluded as reimbursement is proceeding normally. |
(e) |
|
Excludes nonperforming assets related to loans eligible for repurchase as well
as loans repurchased from GNMA pools that are insured by government agencies of $1.2
billion, $1.1 billion, and $1.5 billion at December 31, 2006, 2005, and 2004,
respectively. These amounts are excluded as reimbursement is proceeding normally. |
(f) |
|
Excludes loans that are 90 days past due and still accruing, which are insured
by government agencies under the Federal Family Education Loan Program of $0.2 billion at
December 31, 2006. The Education loans past due 90 days were insignificant at December 31,
2005 and 2004. These amounts are excluded as reimbursement is proceeding normally. |
(g) |
|
Includes nonperforming loans held-for-sale related to mortgage banking
activities of $11 million, $27 million, and $13 million at December 31, 2006, 2005 and
2004, respectively. |
(h) |
|
2004 results include six months of the combined Firms results and six months
heritage JPMorgan Chase results. |
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail branch business metrics |
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except |
|
|
|
|
|
|
|
|
|
|
|
|
where otherwise noted) |
|
|
2006 |
|
|
|
2005 |
|
|
|
2004 |
(c) |
|
Investment sales volume |
|
$ |
14,882 |
|
|
$ |
11,144 |
|
|
$ |
7,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of: |
|
|
|
|
|
|
|
|
|
|
|
|
Branches |
|
|
3,079 |
|
|
|
2,641 |
|
|
|
2,508 |
|
ATMs |
|
|
8,506 |
|
|
|
7,312 |
|
|
|
6,650 |
|
Personal bankers(a) |
|
|
7,573 |
|
|
|
7,067 |
|
|
|
5,750 |
|
Sales specialists(a) |
|
|
3,614 |
|
|
|
3,214 |
|
|
|
2,638 |
|
Active online customers (in thousands)(b) |
|
|
5,715 |
|
|
|
4,231 |
|
|
|
3,359 |
|
Checking accounts (in thousands) |
|
|
9,995 |
|
|
|
8,793 |
|
|
|
8,124 |
|
|
|
|
|
(a) |
|
Excludes employees acquired as part of The Bank of New York transaction. Mapping
of the existing Bank of New York acquired base is expected to be completed over the next
year. |
(b) |
|
Includes Mortgage Banking and Auto Finance online customers. |
(c) |
|
2004 results include six months of the combined Firms results and six months
heritage JPMorgan Chase results. |
The following is a brief description of
selected terms used by Regional Banking.
|
|
Personal bankers Retail branch office personnel who acquire, retain and expand
new and existing customer relationships by assessing customer needs and recommending and
selling appropriate banking products and services. |
|
|
|
Sales specialists Retail branch product-specific experts who are licensed or
specifically trained to assist in the sale of investments, mortgages, home equity lines
and loans, and products tailored to small businesses. |
|
|
|
|
|
|
|
|
|
40
|
|
JPMorgan Chase & Co. / 2006 Annual Report |
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
Banking |
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, (in millions, |
|
|
|
|
|
|
|
|
|
|
|
|
except ratios and where otherwise noted) |
|
|
2006 |
|
|
|
2005 |
|
|
|
2004 |
(a) |
|
Production revenue |
|
$ |
833 |
|
|
$ |
744 |
|
|
$ |
916 |
|
Net mortgage servicing revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Servicing revenue |
|
|
2,300 |
|
|
|
2,115 |
|
|
|
2,070 |
|
Changes in MSR asset fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
Due to inputs or assumptions in
model |
|
|
165 |
|
|
|
770 |
|
|
|
(248 |
) |
Other changes in fair value |
|
|
(1,440 |
) |
|
|
(1,295 |
) |
|
|
(1,309 |
) |
Derivative valuation adjustments
and other |
|
|
(544 |
) |
|
|
(494 |
) |
|
|
361 |
|
|
Total net mortgage servicing revenue |
|
|
481 |
|
|
|
1,096 |
|
|
|
874 |
|
|
Total net revenue |
|
|
1,314 |
|
|
|
1,840 |
|
|
|
1,790 |
|
Noninterest expense |
|
|
1,341 |
|
|
|
1,239 |
|
|
|
1,364 |
|
|
Income (loss) before income tax expense |
|
|
(27 |
) |
|
|
601 |
|
|
|
426 |
|
|
Net income (loss) |
|
$ |
(17 |
) |
|
$ |
379 |
|
|
$ |
269 |
|
|
ROE |
|
NM |
|
|
24 |
% |
|
|
17 |
% |
ROA |
|
NM |
|
|
1.69 |
|
|
|
1.10 |
|
Business metrics (in billions) |
|
|
|
|
|
|
|
|
|
|
|
|
Third-party mortgage loans serviced
(ending) |
|
$ |
526.7 |
|
|
$ |
467.5 |
|
|
$ |
430.9 |
|
MSR net carrying value (ending) |
|
|
7.5 |
|
|
|
6.5 |
|
|
|
5.1 |
|
Average mortgage loans held-for-sale |
|
|
12.8 |
|
|
|
12.1 |
|
|
|
11.4 |
|
Average assets |
|
|
25.8 |
|
|
|
22.4 |
|
|
|
24.4 |
|
Average equity |
|
|
1.7 |
|
|
|
1.6 |
|
|
|
1.6 |
|
Mortgage origination volume by
channel (in billions) |
|
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
$ |
40.4 |
|
|
$ |
46.3 |
|
|
$ |
47.9 |
|
Wholesale |
|
|
32.8 |
|
|
|
34.2 |
|
|
|
33.5 |
|
Correspondent (including negotiated
transactions) |
|
|
45.9 |
|
|
|
48.5 |
|
|
|
64.2 |
|
|
Total |
|
$ |
119.1 |
|
|
$ |
129.0 |
|
|
$ |
145.6 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months
heritage JPMorgan Chase results. |
2006 compared with 2005
Mortgage Banking Net loss was $17 million compared
with net income of $379 million in the prior year.
Total net revenue of $1.3 billion was down by $526
million from the prior year due to a decline in net
mortgage servicing revenue offset partially by an
increase in production revenue. Production revenue
was $833 million, up by $89 million, reflecting
increased loan sales and wider gain on sale margins
that benefited from a shift in the sales mix. Net
mortgage servicing revenue, which includes loan
servicing revenue, MSR risk management results and
other changes in fair value, was $481 million
compared with $1.1 billion in the prior year. Loan
servicing revenue of $2.3 billion increased by $185
million on a 13% increase in third-party loans
serviced. MSR risk management revenue of negative
$379 million was down by $655 million from the
prior year, including the impact of a $235 million
negative valuation adjustment to the MSR asset in
the third quarter of 2006 due to changes and
refinements to assumptions used in the MSR
valuation model. This result also reflected a fully
hedged position in the current year. Other changes
in fair value of the MSR asset, representing runoff
of the asset against the realization of servicing
cash flows, were negative $1.4 billion. Noninterest
expense was $1.3 billion, up by $102 million, or
8%, due primarily to higher compensation expense
related to an increase in the number of loan
officers.
2005 compared with 2004
Mortgage Banking Net income was $379 million compared
with $269 million in the prior year. Net revenue of
$1.8 billion was up by $50 million from the prior
year. Revenue comprises production revenue and net
mortgage servicing revenue. Production revenue was
$744 million, down by $172 million, due to an 11%
decrease in mortgage originations. Net mortgage
servicing revenue, which includes loan servicing
revenue, MSR risk management results and other
changes in fair value, was $1.1 billion compared with
$874 million in the prior year. Loan servicing
revenue of $2.1 billion increased by $45 million on
an 8% increase in third-party loans serviced. MSR
risk management revenue of $276 million was up by
$163 million from the prior year, reflecting positive
risk management results. Other changes in fair value
of the MSR asset, representing runoff of the asset
against the realization of servicing cash flows, were
negative $1.3 billion. Noninterest expense of $1.2
billion was down by $125 million, or 9%, reflecting
lower production volume and operating efficiencies.
Mortgage Banking origination channels comprise
the following:
Retail Borrowers who are
buying or refinancing a home work directly with
a mortgage banker employed by the Firm using a
branch office, the Internet or by phone.
Borrowers are frequently referred to a mortgage
banker by real estate brokers, home builders or
other third parties.
Wholesale A third-party
mortgage broker refers loan applications to a
mortgage banker at the Firm. Brokers are
independent loan originators that specialize in
finding and counseling borrowers but do not
provide funding for loans.
Correspondent Banks, thrifts, other
mortgage banks and other financial
institutions sell closed loans to the Firm.
Correspondent negotiated transactions (CNT)
Mid- to large-sized mortgage lenders, banks and
bank-owned mortgage companies sell servicing to
the Firm on an as-originated basis. These
transactions supplement traditional production
channels and provide growth opportunities in the
servicing portfolio in stable and rising rate
periods.
Net
Mortgage servicing revenue components:
Production income Includes net gain or loss
on sales of mortgage loans, and other
production related fees.
Servicing revenue Represents all revenues
earned from servicing mortgage loans for third
parties, including stated service fees, excess
service fees, late fees, and other ancillary
fees.
Changes in MSR asset fair value due to inputs or
assumptions in model Represents MSR asset
fair value adjustments due to changes in
market-based inputs, such as interest rates and
volatility, as well as updates to valuation
assumptions used in the valuation model.
Changes in MSR asset fair value due to other
changes Includes changes in the MSR value due
to servicing portfolio runoff (or time decay).
Effective January 1, 2006, the Firm implemented
SFAS 156, adopting fair value for the MSR asset.
For the years ended December 31, 2005 and 2004,
this amount represents MSR asset amortization
expense calculated in accordance with SFAS 140.
Derivative valuation adjustments and other
Changes in the fair value of derivative
instruments used to offset the impact of
changes in market-based inputs to the MSR
valuation model.
MSR risk management results Includes Changes
in MSR asset fair value due to inputs or
assumptions in model and Derivative valuation
adjustments and other.
|
|
|
|
|
|
|
|
|
JPMorgan Chase & Co. / 2006 Annual Report
|
|
41 |
Managements discussion and analysis
JPMorgan Chase & Co.
Auto Finance
Selected income statement data
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except ratios and |
|
|
|
|
|
|
|
|
|
|
|
|
where otherwise noted) |
|
|
2006 |
|
|
|
2005 |
|
|
|
2004 |
(b) |
|
Noninterest revenue |
|
$ |
368 |
|
|
$ |
86 |
|
|
$ |
68 |
|
Net interest income |
|
|
1,171 |
|
|
|
1,235 |
|
|
|
1,009 |
|
|
Total net revenue |
|
|
1,539 |
|
|
|
1,321 |
|
|
|
1,077 |
|
Provision for credit losses |
|
|
207 |
|
|
|
212 |
|
|
|
210 |
|
Noninterest expense |
|
|
761 |
|
|
|
671 |
|
|
|
483 |
|
|
Income before income tax expense |
|
|
571 |
|
|
|
438 |
|
|
|
384 |
|
|
Net income |
|
$ |
346 |
|
|
$ |
268 |
|
|
$ |
233 |
|
|
ROE |
|
|
14 |
% |
|
|
10 |
% |
|
|
9 |
% |
ROA |
|
|
0.77 |
|
|
|
0.50 |
|
|
|
0.46 |
|
Business metrics (in billions) |
|
|
|
|
|
|
|
|
|
|
|
|
Auto originations volume |
|
$ |
19.3 |
|
|
$ |
18.1 |
|
|
$ |
23.5 |
|
End-of-period loans and lease related
assets |
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding |
|
$ |
39.3 |
|
|
$ |
41.7 |
|
|
$ |
50.9 |
|
Lease financing receivables |
|
|
1.7 |
|
|
|
4.3 |
|
|
|
8.0 |
|
Operating lease assets |
|
|
1.6 |
|
|
|
0.9 |
|
|
|
|
|
|
Total end-of-period loans and
lease related assets |
|
|
42.6 |
|
|
|
46.9 |
|
|
|
58.9 |
|
Average loans and lease related assets |
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding(a) |
|
$ |
39.8 |
|
|
$ |
45.5 |
|
|
$ |
42.3 |
|
Lease financing receivables |
|
|
2.9 |
|
|
|
6.2 |
|
|
|
9.0 |
|
Operating lease assets |
|
|
1.3 |
|
|
|
0.4 |
|
|
|
|
|
|
Total average loans and lease
related assets |
|
|
44.0 |
|
|
|
52.1 |
|
|
|
51.3 |
|
Average assets |
|
|
44.9 |
|
|
|
53.2 |
|
|
|
52.0 |
|
Average equity |
|
|
2.4 |
|
|
|
2.7 |
|
|
|
2.5 |
|
|
Credit quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
30+ day delinquency rate |
|
|
1.72 |
% |
|
|
1.66 |
% |
|
|
1.64 |
% |
Net charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
231 |
|
|
$ |
257 |
|
|
$ |
219 |
|
Lease financing receivables |
|
|
7 |
|
|
|
20 |
|
|
|
44 |
|
|
Total net charge-offs |
|
|
238 |
|
|
|
277 |
|
|
|
263 |
|
Net charge-off rate |
|
|
|
|
|
|
|
|
|
|
|
|
Loans(a) |
|
|
0.59 |
% |
|
|
0.57 |
% |
|
|
0.52 |
% |
Lease financing receivables |
|
|
0.24 |
|
|
|
0.32 |
|
|
|
0.49 |
|
Total net charge-off rate(a) |
|
|
0.56 |
|
|
|
0.54 |
|
|
|
0.51 |
|
Nonperforming assets |
|
$ |
177 |
|
|
$ |
236 |
|
|
$ |
240 |
|
|
|
|
|
(a) |
|
Average loans include loans held-for-sale of $0.5 billion, $0.7 billion and $0.2
billion for 2006, 2005 and 2004, respectively. These amounts are not included in the net
charge-off rate. |
(b) |
|
2004 results include six months of the combined Firms results and six months of
heritage JPMorgan Chase results. |
2006 compared with 2005
Total net income of $346 million was up by $78
million from the prior year, including the impact
of a $50 million current-year loss and a $136
million prior-year loss related to loans
transferred to held-for-sale. Total net revenue of
$1.5 billion was up by $218 million, or 17%,
reflecting higher automobile operating lease
revenue and wider loan spreads on lower loan and
direct finance lease balances. The provision for
credit losses of $207 million decreased by $5
million from the prior year. Noninterest expense of
$761 million increased by $90 million, or 13%,
driven by increased depreciation expense on owned
automobiles subject to operating leases, partially
offset by operating efficiencies.
2005 compared with 2004
Total net income of $268 million was up by $35
million from the prior year, including the impact
of a $136 million current-year loss related to
loans transferred to held-for-sale. Total net
revenue of $1.3 billion was up by $244 million, or
23%, reflecting higher automobile operating lease
revenue and a benefit of $34 million from the sale
of the $2 billion recreational vehicle loan
portfolio. These increases were offset partially by
narrower spreads. Noninterest expense of $671
million increased by $188, or 39%, driven by
increased depreciation expense on owned automobiles
subject to operating leases, offset partially by
operating efficiencies.
|
|
|
|
|
|
|
|
|
42
|
|
JPMorgan Chase & Co. / 2006 Annual Report |
CARD SERVICES
With more than 154 million cards in
circulation and $153 billion in managed loans,
Chase Card Services is one of the nations
largest credit card issuers. Customers used Chase
cards for over $339 billion worth of transactions
in 2006.
Chase offers a wide variety of general-purpose
cards to satisfy the needs of individual
consumers, small businesses and partner
organizations, including cards issued with AARP,
Amazon, Continental Airlines, Marriott, Southwest
Airlines, Sony, United Airlines, Walt Disney Company and
many other well-known brands and organizations.
Chase also issues private-label cards with
Circuit City, Kohls, Sears Canada and BP.
Chase Paymentech Solutions, LLC, a joint venture
with JPMorgan Chase and First Data Corporation,
is the largest processor of MasterCard and Visa
payments in the world, having handled over 18
billion transactions in 2006.
JPMorgan Chase uses the concept of managed
receivables to evaluate the credit performance of
its credit card loans, both loans on the balance
sheet and loans that have been securitized. For
further information, see Explanation and
reconciliation of the Firms use of non-GAAP
financial measures on pages 3233 of this Annual
Report. Managed results exclude the impact of
credit card securitizations on Total net revenue,
the Provision for credit losses, net charge-offs
and loan receivables. Securitization does not
change reported Net income; however, it does affect
the classification of items on the Consolidated
statements of income and Consolidated balance
sheets.
Selected income statement data managed basis
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except ratios) |
|
|
2006 |
|
|
|
2005 |
|
|
|
2004 |
(c) |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Credit card income |
|
$ |
2,587 |
|
|
$ |
3,351 |
|
|
$ |
2,179 |
|
All other income |
|
|
357 |
|
|
|
212 |
|
|
|
192 |
|
|
Noninterest revenue |
|
|
2,944 |
|
|
|
3,563 |
|
|
|
2,371 |
|
Net interest income |
|
|
11,801 |
|
|
|
11,803 |
|
|
|
8,374 |
|
|
Total net revenue(a) |
|
|
14,745 |
|
|
|
15,366 |
|
|
|
10,745 |
|
|
Provision for credit losses(b) |
|
|
4,598 |
|
|
|
7,346 |
|
|
|
4,851 |
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
1,003 |
|
|
|
1,081 |
|
|
|
893 |
|
Noncompensation expense |
|
|
3,344 |
|
|
|
3,170 |
|
|
|
2,485 |
|
Amortization of intangibles |
|
|
739 |
|
|
|
748 |
|
|
|
505 |
|
|
Total noninterest expense(a) |
|
|
5,086 |
|
|
|
4,999 |
|
|
|
3,883 |
|
|
Income before income tax expense(a) |
|
|
5,061 |
|
|
|
3,021 |
|
|
|
2,011 |
|
Income tax expense |
|
|
1,855 |
|
|
|
1,114 |
|
|
|
737 |
|
|
Net income |
|
$ |
3,206 |
|
|
$ |
1,907 |
|
|
$ |
1,274 |
|
|
Memo: Net securitization gains/
(amortization) |
|
$ |
82 |
|
|
$ |
56 |
|
|
$ |
(8 |
) |
Financial metrics |
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
23 |
% |
|
|
16 |
% |
|
|
17 |
% |
Overhead ratio |
|
|
34 |
|
|
|
33 |
|
|
|
36 |
|
|
|
|
|
(a) |
|
As a result of the integration of Chase Merchant Services and Paymentech
merchant processing businesses into a joint venture, beginning in the fourth quarter of
2005, Total net revenue, Total noninterest expense and Income before income tax expense
have been reduced to reflect the deconsolidation of Paymentech. There was no impact to Net
income. |
(b) |
|
2005 includes a $100 million special provision related to Hurricane Katrina; the
remaining unused portion was released in 2006. |
(c) |
|
2004 results include six months of the combined Firms results and six months of
heritage JPMorgan Chase results. |
To illustrate underlying business trends, the
following discussion of CS performance assumes
that the deconsolidation of Paymentech had
occurred as of the beginning of 2004. The effect of
the deconsolidation would have reduced Total net
revenue, primarily in Noninterest revenue, and
Total noninterest expense, but would not have had
any impact on Net income for each period. The
following table presents a reconciliation of CS
managed basis to an adjusted basis to disclose the
effect of the deconsolidation of Paymentech on CS
results for the periods presented.
Reconciliation of Card Services managed results
to an adjusted basis to disclose the effect of
the Paymentech deconsolidation
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
2006 |
|
|
|
2005 |
|
|
|
2004 |
(a) |
|
Noninterest revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Managed for the period |
|
$ |
2,944 |
|
|
$ |
3,563 |
|
|
$ |
2,371 |
|
Adjustment for Paymentech |
|
|
|
|
|
|
(422 |
) |
|
|
(276 |
) |
|
Adjusted Noninterest revenue |
|
$ |
2,944 |
|
|
$ |
3,141 |
|
|
$ |
2,095 |
|
|
Total net revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Managed for the period |
|
$ |
14,745 |
|
|
$ |
15,366 |
|
|
$ |
10,745 |
|
Adjustment for Paymentech |
|
|
|
|
|
|
(435 |
) |
|
|
(283 |
) |
|
Adjusted Total net revenue |
|
$ |
14,745 |
|
|
$ |
14,931 |
|
|
$ |
10,462 |
|
|
Total noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Managed for the period |
|
$ |
5,086 |
|
|
$ |
4,999 |
|
|
$ |
3,883 |
|
Adjustment for Paymentech |
|
|
|
|
|
|
(389 |
) |
|
|
(252 |
) |
|
Adjusted Total noninterest expense |
|
$ |
5,086 |
|
|
$ |
4,610 |
|
|
$ |
3,631 |
|
|
|
|
|
(a) |
|
2004 results include six months of the combined Firms results and six months of
heritage JPMorgan Chase results. |
2006 compared with 2005
Net income of $3.2 billion was up by $1.3 billion,
or 68%, from the prior year. Results were driven
by a lower provision for credit losses due to
significantly lower bankruptcy filings.
End-of-period managed loans of $152.8 billion
increased by $10.6 billion, or 7%, from the prior
year. Average managed loans of $141.1 billion
increased by $4.7 billion, or 3%, from the prior
year. Compared with the prior year, both average
managed and end-of-period managed loans continued
to be affected negatively by higher customer
payment rates. Management believes that
contributing to the higher payment rates are the
new minimum payment rules and a higher proportion
of customers in rewards-based programs.
The current year benefited from organic growth and
reflected acquisitions of two loan portfolios. The
first portfolio was the Sears Canada credit card
business, which closed in the fourth quarter of
2005. The Sears Canada portfolios average managed
loan balances were $2.1 billion in the current year
and $291 million in the prior year. The second
purchase was the Kohls private label portfolio,
which closed in the second quarter of 2006. The
Kohls portfolio average and period-end managed
loan balances for 2006 were $1.2 billion and $2.5
billion, respectively.
Total net managed revenue of $14.7 billion was down
by $186 million, or 1% from the prior year. Net
interest income of $11.8 billion was flat to the
prior year. Net interest income benefited from an
increase in average managed loan balances and lower
revenue reversals associated with lower charge-offs. These
increases were offset by attrition of mature,
higher spread balances as a result of higher
payment rates and higher cost of funds on balance
growth in promotional, introductory and transactor
loan balances, which increased due to continued
investment in marketing. Noninterest revenue of
$2.9 billion was down
|
|
|
|
|
|
|
|
|
JPMorgan Chase & Co./2006 Annual Report
|
|
43 |
Managements discussion and analysis
JPMorgan Chase & Co.
by $197 million, or 6%. Interchange income
increased, benefiting from 12% higher charge
volume, but was more than offset by higher
volume-driven payments to partners, including
Kohls, and increased rewards expense (both of
which are netted against interchange income).
The managed provision for credit losses was $4.6
billion, down by $2.7 billion, or 37%, from the
prior year. This benefit was due to a significant
decrease in net charge-offs of $2.4 billion,
reflecting the continued low level of bankruptcy
losses, partially offset by an increase in
contractual net charge-offs. The provision also
benefited from a release in the Allowance for loan
losses in the current year of unused reserves related to Hurricane
Katrina, compared with an increase
in the Allowance for loan losses in the prior year.
The managed net charge-off rate decreased to 3.33%,
down from 5.21% in the prior year. The 30-day
managed delinquency rate was 3.13%, up from 2.79% in
the prior year.
Noninterest expense of $5.1 billion was up $476
million, or 10%, from the prior year due largely
to higher marketing spending and acquisitions
offset partially by merger savings.
2005 compared with 2004
Net income of $1.9 billion was up $633 million, or
50%, from the prior year due to the Merger. In
addition, lower expenses driven by merger savings,
stronger underlying credit quality and higher
revenue from increased loan balances and charge
volume were offset partially by the impact of
increased bankruptcies.
Net managed revenue was $14.9 billion, up $4.5
billion, or 43%. Net interest income was $11.8
billion, up $3.4 billion, or 41%, primarily due to
the Merger, and the acquisition of a private label
portfolio. In addition, higher loan balances were
offset partially by narrower loan spreads and the
reversal of revenue related to increased bankruptcy
losses. Noninterest revenue of $3.1 billion was up
$1.0 billion, or 50%, due to the Merger and higher
interchange income from higher charge volume,
partially offset by higher volume-driven payments to
partners and higher expense related to rewards
programs.
The Provision for credit losses was $7.3 billion, up
$2.5 billion, or 51%, primarily due to the Merger,
and included the acquisition of a private label
portfolio. The provision also increased due to
record bankruptcy-related net charge-offs resulting
from bankruptcy legislation which became effective
on October 17, 2005. Finally, the Allowance for loan
losses was increased in part by the special
Provision for credit losses related to Hurricane
Katrina. These factors were offset partially by
lower contractual net charge-offs. Despite a record
level of bankruptcy losses, the net charge-off rate
improved. The managed net charge-off rate was 5.21%,
down from 5.27% in the prior year. The 30-day
managed delinquency rate was 2.79%, down from 3.70%
in the prior year, driven primarily by accelerated
loss recognition of delinquent accounts as a result
of the bankruptcy reform legislation and strong
underlying credit quality.
Noninterest expense of $4.6 billion increased by
$1.0 billion, or 27%, primarily due to the Merger,
which included the acquisition of a private label
portfolio. Merger savings, including lower
processing and compensation costs were offset
partially by higher spending on marketing.
Selected metrics
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except headcount, ratios |
|
|
|
|
|
|
|
|
|
|
|
|
and where otherwise noted) |
|
|
2006 |
|
|
|
2005 |
|
|
|
2004 |
(d) |
|
% of average managed outstandings: |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
8.36 |
% |
|
|
8.65 |
% |
|
|
9.16 |
% |
Provision for credit losses |
|
|
3.26 |
|
|
|
5.39 |
|
|
|
5.31 |
|
Noninterest revenue |
|
|
2.09 |
|
|
|
2.61 |
|
|
|
2.59 |
|
Risk adjusted margin(a) |
|
|
7.19 |
|
|
|
5.88 |
|
|
|
6.45 |
|
Noninterest expense |
|
|
3.60 |
|
|
|
3.67 |
|
|
|
4.25 |
|
Pretax income (ROO) |
|
|
3.59 |
|
|
|
2.21 |
|
|
|
2.20 |
|
Net income |
|
|
2.27 |
|
|
|
1.40 |
|
|
|
1.39 |
|
|
Business metrics |
|
|
|
|
|
|
|
|
|
|
|
|
Charge volume (in billions) |
|
$ |
339.6 |
|
|
$ |
301.9 |
|
|
$ |
193.6 |
|
Net accounts opened (in thousands)(b) |
|
|
45,869 |
|
|
|
21,056 |
|
|
|
7,523 |
|
Credit cards issued (in thousands) |
|
|
154,424 |
|
|
|
110,439 |
|
|
|
94,285 |
|
Number of registered |
|
|
|
|
|
|
|
|
|
|
|
|
Internet customers |
|
|
22.5 |
|
|
|
14.6 |
|
|
|
13.6 |
|
Merchant acquiring business(c) |
|
|
|
|
|
|
|
|
|
|
|
|
Bank card volume (in billions) |
|
$ |
660.6 |
|
|
$ |
563.1 |
|
|
$ |
396.2 |
|
Total transactions |
|
|
18,171 |
|
|
|
15,499 |
|
|
|
9,049 |
|
|
Selected ending balances |
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans on balance sheets |
|
$ |
85,881 |
|
|
$ |
71,738 |
|
|
$ |
64,575 |
|
Securitized loans |
|
|
66,950 |
|
|
|
70,527 |
|
|
|
70,795 |
|
|
Managed loans |
|
$ |
152,831 |
|
|
$ |
142,265 |
|
|
$ |
135,370 |
|
|
Selected average balances |
|
|
|
|
|
|
|
|
|
|
|
|
Managed assets |
|
$ |
148,153 |
|
|
$ |
141,933 |
|
|
$ |
94,741 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans on balance sheets |
|
$ |
73,740 |
|
|
$ |
67,334 |
|
|
$ |
38,842 |
|
Securitized loans |
|
|
67,367 |
|
|
|
69,055 |
|
|
|
52,590 |
|
|
Managed loans |
|
$ |
141,107 |
|
|
$ |
136,389 |
|
|
$ |
91,432 |
|
|
Equity |
|
$ |
14,100 |
|
|
$ |
11,800 |
|
|
$ |
7,608 |
|
|
Headcount |
|
|
18,639 |
|
|
|
18,629 |
|
|
|
19,598 |
|
|
Managed credit quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
Managed Net charge-offs |
|
$ |
4,698 |
|
|
$ |
7,100 |
|
|
$ |
4,821 |
|
Net charge-off rate |
|
|
3.33 |
% |
|
|
5.21 |
% |
|
|
5.27 |
% |
|
Managed delinquency ratios |
|
|
|
|
|
|
|
|
|
|
|
|
30+ days |
|
|
3.13 |
% |
|
|
2.79 |
% |
|
|
3.70 |
% |
90+ days |
|
|
1.50 |
|
|
|
1.27 |
|
|
|
1.72 |
|
|
Allowance for loan losses |
|
$ |
3,176 |
|
|
$ |
3,274 |
|
|
$ |
2,994 |
|
Allowance for loan losses to
period-end loans |
|
|
3.70 |
% |
|
|
4.56 |
% |
|
|
4.64 |
% |
|
|
|
|
(a) |
|
Represents Total net revenue less Provision for credit losses. |
(b) |
|
2006 includes approximately 21 million accounts from the acquisition of the
Kohls private label portfolio in the second quarter of 2006 and approximately 9 million
accounts from the acquisition of the BP and Pier 1 Imports, Inc. private label portfolios
in the fourth quarter of 2006. Fourth quarter of 2005 includes approximately 10 million
accounts from the acquisition of the Sears Canada portfolio. |
(c) |
|
Represents 100% of the merchant acquiring business. |
(d) |
|
2004 results include six months of the combined Firms results and six months of
heritage JPMorgan Chase results. |
The following is a brief description of selected business metrics within Card Services.
|
|
Charge volume Represents the dollar amount of cardmember purchases, balance transfers and cash advance activity. |
|
|
|
Net accounts opened Includes originations, purchases and sales. |
|
|
|
Merchant acquiring business Represents an entity that processes payments for
merchants. JPMorgan Chase is a partner in Chase Paymentech Solutions, LLC. |
|
- |
|
Bank card volume Represents the dollar amount of transactions processed for merchants. |
|
|
- |
|
Total transactions Represents the number of transactions and authorizations processed for merchants. |
|
|
|
|
|
|
|
|
|
44
|
|
JPMorgan Chase & Co./2006 Annual Report |
The financial information presented below reconciles reported basis and managed basis to
disclose the effect of securitizations.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
2006 |
|
|
|
2005 |
|
|
|
2004 |
(c) |
|
Income
statement data(a) |
|
|
|
|
|
|
|
|
|
|
|
|
Credit card income |
|
|
|
|
|
|
|
|
|
|
|
|
Reported basis for the period |
|
$ |
6,096 |
|
|
$ |
6,069 |
|
|
$ |
4,446 |
|
Securitization adjustments |
|
|
(3,509 |
) |
|
|
(2,718 |
) |
|
|
(2,267 |
) |
|
Managed credit card income |
|
$ |
2,587 |
|
|
$ |
3,351 |
|
|
$ |
2,179 |
|
|
All other income |
|
|
|
|
|
|
|
|
|
|
|
|
Reported basis for the period |
|
$ |
357 |
|
|
$ |
212 |
|
|
$ |
278 |
|
Securitization adjustments |
|
|
|
|
|
|
|
|
|
|
(86 |
) |
|
Managed All other income |
|
$ |
357 |
|
|
$ |
212 |
|
|
$ |
192 |
|
|
Net interest income |
|
|
|
|
|
|
|
|
|
|
|
|
Reported basis for the period |
|
$ |
6,082 |
|
|
$ |
5,309 |
|
|
$ |
3,123 |
|
Securitization adjustments |
|
|
5,719 |
|
|
|
6,494 |
|
|
|
5,251 |
|
|
Managed net interest income |
|
$ |
11,801 |
|
|
$ |
11,803 |
|
|
$ |
8,374 |
|
|
Total net revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Reported basis for the period |
|
$ |
12,535 |
|
|
$ |
11,590 |
|
|
$ |
7,847 |
|
Securitization adjustments |
|
|
2,210 |
|
|
|
3,776 |
|
|
|
2,898 |
|
|
Managed Total net revenue |
|
$ |
14,745 |
|
|
$ |
15,366 |
|
|
$ |
10,745 |
|
|
Provision for credit losses |
|
|
|
|
|
|
|
|
|
|
|
|
Reported data for the period(b) |
|
$ |
2,388 |
|
|
$ |
3,570 |
|
|
$ |
1,953 |
|
Securitization adjustments |
|
|
2,210 |
|
|
|
3,776 |
|
|
|
2,898 |
|
|
Managed
Provision for credit losses(b) |
|
$ |
4,598 |
|
|
$ |
7,346 |
|
|
$ |
4,851 |
|
|
Balance
sheet average balances(a) |
|
|
|
|
|
|
|
|
|
|
|
|
Total average assets |
|
|
|
|
|
|
|
|
|
|
|
|
Reported data for the period |
|
$ |
82,887 |
|
|
$ |
74,753 |
|
|
$ |
43,657 |
|
Securitization adjustments |
|
|
65,266 |
|
|
|
67,180 |
|
|
|
51,084 |
|
|
Managed average assets |
|
$ |
148,153 |
|
|
$ |
141,933 |
|
|
$ |
94,741 |
|
|
Credit
quality statistics(a) |
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
Reported net charge-offs data for the period |
|
$ |
2,488 |
|
|
$ |
3,324 |
|
|
$ |
1,923 |
|
Securitization adjustments |
|
|
2,210 |
|
|
|
3,776 |
|
|
|
2,898 |
|
|
Managed net charge-offs |
|
$ |
4,698 |
|
|
$ |
7,100 |
|
|
$ |
4,821 |
|
|
|
|
|
(a) |
|
For a discussion of managed basis, see the non-GAAP financial measures
discussion on pages 3233 of this Annual Report. |
(b) |
|
2005 includes a $100 million special provision related to Hurricane Katrina,
which was released in 2006. |
(c) |
|
2004 results include six months of the combined Firms results and six months of
heritage JPMorgan Chase results. |
|
|
|
|
|
|
|
|
|
JPMorgan Chase & Co./2006 Annual Report
|
|
45 |
Managements discussion and analysis
JPMorgan Chase & Co.
COMMERCIAL BANKING
Commercial Banking serves more than 30,000
clients, including corporations, municipalities,
financial institutions and not-for-profit
entities. These clients generally have annual
revenues ranging from $10 million to $2 billion.
Commercial bankers serve clients nationally
throughout the RFS footprint and in offices
located in other major markets.
Commercial Banking offers its clients industry
knowledge, experience, a dedicated service model,
comprehensive solutions and local expertise. The
Firms broad platform positions CB to deliver
extensive product capabilities including
lending, treasury services, investment banking
and asset management to meet its clients U.S.
and international financial needs.
On October 1, 2006, JPMorgan Chase completed the
acquisition of The Bank of New Yorks consumer,
business banking and middle-market banking
businesses, adding approximately $2.3 billion in
loans and $1.2 billion in deposits.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except ratios) |
|
|
2006 |
|
|
|
2005 |
|
|
|
2004 |
(c) |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Lending & deposit related fees |
|
$ |
589 |
|
|
$ |
572 |
|
|
$ |
438 |
|
Asset management, administration
and commissions |
|
|
67 |
|
|
|
57 |
|
|
|
30 |
|
All other income(a) |
|
|
417 |
|
|
|
357 |
|
|
|
217 |
|
|
Noninterest revenue |
|
|
1,073 |
|
|
|
986 |
|
|
|
685 |
|
Net interest income |
|
|
2,727 |
|
|
|
2,502 |
|
|
|
1,593 |
|
|
Total net revenue |
|
|
3,800 |
|
|
|
3,488 |
|
|
|
2,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses(b) |
|
|
160 |
|
|
|
73 |
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
740 |
|
|
|
654 |
|
|
|
461 |
|
Noncompensation expense |
|
|
1,179 |
|
|
|
1,137 |
|
|
|
831 |
|
Amortization of intangibles |
|
|
60 |
|
|
|
65 |
|
|
|
34 |
|
|
Total noninterest expense |
|
|
1,979 |
|
|
|
1,856 |
|
|
|
1,326 |
|
|
Income before income tax expense |
|
|
1,661 |
|
|
|
1,559 |
|
|
|
911 |
|
Income tax expense |
|
|
651 |
|
|
|
608 |
|
|
|
350 |
|
|
Net income |
|
$ |
1,010 |
|
|
$ |
951 |
|
|
$ |
561 |
|
|
Financial ratios |
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
18 |
% |
|
|
28 |
% |
|
|
27 |
% |
ROA |
|
|
1.75 |
|
|
|
1.82 |
|
|
|
1.72 |
|
Overhead ratio |
|
|
52 |
|
|
|
53 |
|
|
|
58 |
|
|
|
|
|
(a) |
|
IB-related and commercial card revenues are included in All other income.
|
(b) |
|
2005 includes a $35 million special provision related to Hurricane Katrina. |
(c) |
|
2004 results include six months of the combined Firms results and six months of
heritage JPMorgan Chase results. |
Commercial Banking operates in 14 of the top 15
U.S. metropolitan areas and is divided into three
businesses: Middle Market Banking, Mid-Corporate
Banking and Real Estate Banking. General coverage
for corporate clients is provided by Middle Market
Banking, which covers clients with annual revenues
generally ranging between $10 million and $500
million. Mid-Corporate Banking covers clients with
annual revenues generally ranging between $500
million and $2 billion and focuses on clients that
have broader investment-banking needs. The third
segment, Real Estate Banking, serves large regional
and national real estate customers across the
United States. In addition to these three customer
segments, CB offers several products to the Firms
entire customer base:
|
|
Asset-based financing, syndications and collateral analysis through Chase Business
Credit. |
|
|
|
A variety of equipment finance and leasing products, with specialties in aircraft
finance, public sector, healthcare and information technology through Chase Equipment
Leasing. |
|
|
|
Alternative capital strategies that provide a broader range of financing options,
such as mezzanine and second lien loans and preferred equity, through Chase Capital
Corporation. |
With a large customer base across these segments
and products, management believes the CB loan
portfolio is highly diversified across a broad
range of industries and geographic locations.
2006 compared with 2005
Net income of $1.0 billion increased by $59
million, or 6%, from the prior year due to higher
revenue, partially offset by higher expense and
provision for credit losses.
Record net revenue of $3.8 billion increased 9%, or
$312 million. Net interest income increased to $2.7
billion, primarily driven by higher liability
balances and loan volumes, partially offset by loan
spread compression and a shift to narrower-spread
liability products. Noninterest revenue was $1.1
billion, up $87 million, or 9%, due to record
IB-related revenue and higher commercial card
revenue.
Revenue grew for each CB business compared with the
prior year, driven by increased treasury services,
investment banking and lending revenue. Compared
with the prior year, Middle Market Banking revenue
of $2.5 billion increased by $177 million, or 8%.
Mid-Corporate Banking revenue of $656 million
increased by $105 million, or 19%, and Real Estate
Banking revenue of $458 million increased by $24
million, or 6%.
Provision for credit losses was $160 million, up
from $73 million in the prior year, reflecting
portfolio activity and the establishment of
additional allowance for loan losses related to
loans acquired from The Bank of New York, partially
offset by a release of the unused portion of the
special reserve established in 2005 for Hurricane
Katrina. Net charge-offs were flat compared with
the prior year. Nonperforming loans declined 56%,
to $121 million.
Total noninterest expense of $2.0 billion increased
by $123 million, or 7%, from last year, primarily
related to incremental Compensation expense related
to SFAS 123R and increased expense resulting from
higher client usage of Treasury Services products.
2005 compared with 2004
Net income of $951 million was up $390 million,
or 70%, from the prior year, primarily due to
the Merger.
Total net revenue of $3.5 billion increased by $1.2
billion, or 53%, primarily as a result of the
Merger. In addition to the overall increase from
the Merger, Net interest income of $2.5 billion was
positively affected by wider spreads on higher
volume related to liability balances and increased
loan volumes, partially offset by narrower loan
spreads. Noninterest revenue of $986 million was
positively impacted by the Merger and higher IB
revenue, partially offset by lower deposit-related
fees due to higher interest rates.
Each business within CB demonstrated revenue growth
over the prior year, primarily due to the Merger.
Middle Market Banking revenue was $2.4 billion, an
increase of $861 million, or 58%, over the prior
year; Mid-Corporate Banking revenue was $551
million, an increase of $183 million, or 50%; and
|
|
|
|
|
|
|
|
|
46
|
|
JPMorgan Chase & Co. / 2006 Annual Report |
Real Estate Banking revenue was $434 million,
up $162 million, or 60%. In addition to the
Merger, revenue was higher for each business due
to wider spreads and higher volume related to
liability balances and increased investment
banking revenue, partially offset by narrower loan
spreads.
Provision for credit losses of $73 million
increased by $32 million, primarily due to a
special provision related to Hurricane Katrina,
increased loan balances and refinements in the
data used to estimate the allowance for credit
losses. The credit quality of the portfolio was
strong with net charge-offs of $26 million, down
$35 million from the prior year, and nonperforming
loans of $272 million were down $255 million, or
48%.
Total noninterest expense of $1.9 billion
increased by $530 million, or 40%, primarily due
to the Merger and to an increase in allocated unit
costs for Treasury Services products.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected metrics |
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except headcount and ratios) |
|
|
2006 |
|
|
|
2005 |
|
|
|
2004 |
(d) |
|
Revenue by product: |
|
|
|
|
|
|
|
|
|
|
|
|
Lending |
|
$ |
1,344 |
|
|
$ |
1,215 |
|
|
$ |
805 |
|
Treasury services |
|
|
2,243 |
|
|
|
2,062 |
|
|
|
1,335 |
|
Investment banking |
|
|
253 |
|
|
|
206 |
|
|
|
118 |
|
Other |
|
|
(40 |
) |
|
|
5 |
|
|
|
20 |
|
|
Total Commercial Banking revenue |
|
$ |
3,800 |
|
|
$ |
3,488 |
|
|
$ |
2,278 |
|
IB revenue, gross(a) |
|
|
716 |
|
|
|
552 |
|
|
|
NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by business: |
|
|
|
|
|
|
|
|
|
|
|
|
Middle Market Banking |
|
$ |
2,535 |
|
|
$ |
2,358 |
|
|
$ |
1,497 |
|
Mid-Corporate Banking |
|
|
656 |
|
|
|
551 |
|
|
|
368 |
|
Real Estate Banking |
|
|
458 |
|
|
|
434 |
|
|
|
272 |
|
Other |
|
|
151 |
|
|
|
145 |
|
|
|
141 |
|
|
Total Commercial Banking revenue |
|
$ |
3,800 |
|
|
$ |
3,488 |
|
|
$ |
2,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected average balances |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
57,754 |
|
|
$ |
52,358 |
|
|
$ |
32,547 |
|
Loans and leases(b) |
|
|
53,596 |
|
|
|
48,117 |
|
|
|
28,914 |
|
Liability balances(c) |
|
|
73,613 |
|
|
|
66,055 |
|
|
|
47,646 |
|
Equity |
|
|
5,702 |
|
|
|
3,400 |
|
|
|
2,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans by business: |
|
|
|
|
|
|
|
|
|
|
|
|
Middle Market Banking |
|
$ |
33,225 |
|
|
$ |
31,193 |
|
|
$ |
17,500 |
|
Mid-Corporate Banking |
|
|
8,632 |
|
|
|
6,388 |
|
|
|
4,354 |
|
Real Estate Banking |
|
|
7,566 |
|
|
|
6,909 |
|
|
|
4,047 |
|
Other |
|
|
4,173 |
|
|
|
3,627 |
|
|
|
3,013 |
|
|
Total Commercial Banking loans |
|
$ |
53,596 |
|
|
$ |
48,117 |
|
|
$ |
28,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount |
|
|
4,459 |
|
|
|
4,418 |
|
|
|
4,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit data and quality statistics: |
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
$ |
27 |
|
|
$ |
26 |
|
|
$ |
61 |
|
Nonperforming loans |
|
|
121 |
|
|
|
272 |
|
|
|
527 |
|
Allowance for loan losses |
|
|
1,519 |
|
|
|
1,392 |
|
|
|
1,322 |
|
Allowance for lending-related commitments |
|
|
187 |
|
|
|
154 |
|
|
|
169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-off rate(b) |
|
|
0.05 |
% |
|
|
0.05 |
% |
|
|
0.21 |
% |
Allowance for loan losses to average loans(b) |
|
|
2.86 |
|
|
|
2.91 |
|
|
|
4.57 |
|
Allowance for loan losses to
nonperforming loans |
|
|
1,255 |
|
|
|
512 |
|
|
|
251 |
|
Nonperforming loans to average loans |
|
|
0.23 |
|
|
|
0.57 |
|
|
|
1.82 |
|
|
|
|
|
(a) |
|
Represents the total revenue related to investment banking products sold to CB
clients. |
(b) |
|
Average loans include loans held-for-sale of $442 million and $283 million for
2006 and 2005, respectively. This information is not available for 2004. Loans
held-for-sale amounts are not included in the net charge-off rate or allowance coverage
ratios. |
(c) |
|
Liability balances include deposits and deposits swept to onbalance sheet
liabilities. |
(d) |
|
2004 results include six months of the combined Firms results and six months of
heritage JPMorgan Chase results. |
Commercial Banking revenues comprise the following:
Lending includes a variety of financing
alternatives, which are often provided on a
basis secured by receivables, inventory,
equipment, real estate or other assets.
Products include:
|
|
Term loans |
|
|
|
Revolving lines of credit |
|
|
|
Bridge financing |
|
|
|
Asset-based structures |
|
|
|
Leases |
Treasury services includes a broad range of
products and services enabling clients to
transfer, invest and manage the receipt and
disbursement of funds, while providing the
related information reporting. These products
and services include:
|
|
U.S. dollar and multi-currency clearing |
|
|
|
ACH |
|
|
|
Lockbox |
|
|
|
Disbursement and reconciliation services |
|
|
|
Check deposits |
|
|
|
Other check and currency-related services |
|
|
|
Trade finance and logistics solutions |
|
|
|
Commercial card |
|
|
|
Deposit products, sweeps and money market mutual funds |
Investment banking provides clients with
sophisticated capital-raising alternatives, as
well as balance sheet and risk management
tools, through:
|
|
Advisory |
|
|
|
Equity underwriting |
|
|
|
Loan syndications |
|
|
|
Investment-grade debt |
|
|
|
Asset-backed securities |
|
|
|
Private placements |
|
|
|
High-yield bonds |
|
|
|
Derivatives |
|
|
|
Foreign exchange hedges |
|
|
|
Securities sales |
|
|
|
|
|
|
|
|
|
JPMorgan Chase & Co. / 2006 Annual Report
|
|
47 |
Managements discussion and analysis
JPMorgan Chase & Co.
TREASURY & SECURITIES SERVICES
Treasury & Securities Services is a global
leader in providing transaction, investment and
information services to support the needs of
institutional clients worldwide. TSS is one of
the largest cash management providers in the
world and a leading global custodian. Treasury
Services provides a variety of cash management
products, trade finance and logistics solutions,
wholesale card products, and short-term liquidity
management capabilities to small and mid-sized
companies, multinational corporations, financial
institutions and government entities. TS partners
with the Commercial Banking, Retail Financial
Services and Asset Management businesses to serve
clients firmwide. As a result, certain TS
revenues are included in other segments results.
Worldwide Securities Services stores, values, clears and services securities and
alternative investments for investors and
broker-dealers; and manages Depositary Receipt
programs globally.
As a result of the transaction with The Bank of New
York on October 1, 2006, selected corporate trust
businesses were transferred from TSS to the
Corporate segment and are reported in discontinued
operations for all periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
|
|
|
|
|
|
|
|
|
|
|
Year ending December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except ratios) |
|
|
2006 |
|
|
|
2005 |
|
|
|
2004 |
(c) |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Lending & deposit related fees |
|
$ |
735 |
|
|
$ |
731 |
|
|
$ |
649 |
|
Asset management, administration
and commissions |
|
|
2,692 |
|
|
|
2,409 |
|
|
|
1,963 |
|
All other income |
|
|
612 |
|
|
|
519 |
|
|
|
361 |
|
|
Noninterest revenue |
|
|
4,039 |
|
|
|
3,659 |
|
|
|
2,973 |
|
Net interest income |
|
|
2,070 |
|
|
|
1,880 |
|
|
|
1,225 |
|
|
Total net revenue |
|
|
6,109 |
|
|
|
5,539 |
|
|
|
4,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
(1 |
) |
|
|
|
|
|
|
7 |
|
Credit reimbursement to IB(a) |
|
|
(121 |
) |
|
|
(154 |
) |
|
|
(90 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
2,198 |
|
|
|
1,874 |
|
|
|
1,414 |
|
Noncompensation expense |
|
|
1,995 |
|
|
|
2,095 |
|
|
|
2,254 |
|
Amortization of intangibles |
|
|
73 |
|
|
|
81 |
|
|
|
58 |
|
|
Total noninterest expense |
|
|
4,266 |
|
|
|
4,050 |
|
|
|
3,726 |
|
|
Income before income tax expense |
|
|
1,723 |
|
|
|
1,335 |
|
|
|
375 |
|
Income tax expense |
|
|
633 |
|
|
|
472 |
|
|
|
98 |
|
|
Net income |
|
$ |
1,090 |
|
|
$ |
863 |
|
|
$ |
277 |
|
|
Financial ratios |
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
48 |
% |
|
|
57 |
% |
|
|
14 |
% |
Overhead ratio |
|
|
70 |
|
|
|
73 |
|
|
|
89 |
|
Pretax margin ratio(b) |
|
|
28 |
|
|
|
24 |
|
|
|
9 |
|
|
|
|
|
(a) |
|
TSS is charged a credit reimbursement related to certain exposures managed
within the IB credit portfolio on behalf of clients shared with TSS. For a further
discussion, see Credit reimbursement on page 35 of this Annual Report. |
(b) |
|
Pretax margin represents Income before income tax expense divided by Total net
revenue, which is a measure of pretax performance and another basis by which management
evaluates its performance and that of its competitors. |
(c) |
|
2004 results include six months of the combined Firms results and six months of
heritage JPMorgan Chase results. |
2006 compared with 2005
Net income was $1.1 billion, an increase of $227
million, or 26%, from the prior year. Earnings
benefited from increased revenue, and was offset by
higher compensation expense and the absence of
prior-year charges of $58 million (after-tax)
related to the termination of a client contract.
Total net revenue was $6.1 billion, an increase of
$570 million, or 10%. Noninterest revenue was $4.0
billion, up by $380 million, or 10%. The
improvement was due primarily to an increase in
assets under custody to $13.9 trillion, which was
driven by market value appreciation and new business. Also contributing to
the improvement was growth in depositary receipts,
securities lending, and global clearing, all of
which were driven by a combination of increased
product usage by existing clients and new business.
Net interest income was $2.1 billion, an increase
of $190 million, or 10%, benefiting from a 22%
increase in average liability balances, partially
offset by the impact of growth in narrower-spread
liability products.
Treasury Services Total net revenue of $2.8
billion was up 4%. Worldwide Securities Services
Total net revenue of $3.3 billion grew by $473
million, or 17%. TSS firmwide Total net revenue,
which includes Treasury Services Total net revenue
recorded in other lines of business, grew to $8.6
billion, up by $778 million, or 10%. Treasury
Services firmwide Total net revenue grew to $5.2
billion, an increase of $305 million, or 6%.
Total noninterest expense was $4.3 billion, up $216
million, or 5%. The increase was due to higher
compensation expense related to increased client
activity, business growth, investment in new
product platforms and incremental expense related
to SFAS 123R, partially offset by the absence of
prior-year charges of $93 million related to the
termination of a client contract.
2005 compared with 2004
Net income was $863 million, an increase of $586
million, or 212%. Primarily driving the improvement
in revenue were the Merger, business growth, and
widening spreads on and growth in average liability
balances. Noninterest expense increased primarily
due to the Merger and higher compensation expense.
Results for 2005 also included charges of $58
million (after-tax) to terminate a client contract.
Results for 2004 also included software-impairment
charges of $97 million (after-tax) and a gain of
$10 million (after-tax) on the sale of a business.
Total net revenue of $5.5 billion increased $1.3
billion, or 32%. Net interest income grew to $1.9
billion, up $655 million, due to wider spreads on
liability balances, a change in the corporate
deposit pricing methodology in 2004 and growth in
average liability balances. Noninterest revenue of
$3.7 billion increased by $686 million, or 23%, due
to product growth across TSS, the Merger and the
acquisition of Vastera. Leading the product revenue
growth was an increase in assets under custody to
$10.7 trillion, primarily driven by market value
appreciation and new business, along with growth in
wholesale card, securities lending, foreign
exchange, trade, clearing and ACH revenues.
Partially offsetting this growth in noninterest
revenue was a decline in deposit-related fees due
to higher interest rates and the absence, in the
current period, of a gain on the sale of a
business.
|
|
|
|
|
|
|
|
|
48
|
|
JPMorgan Chase & Co. / 2006 Annual Report |
TS Total net revenue of $2.7 billion grew by
$635 million, and WSS Total net revenue of $2.8
billion grew by $706 million. TSS firmwide Total
net revenue, which includes TS Total net revenue
recorded in other lines of business, grew to $7.8
billion, up $2.1 billion, or 38%. Treasury Services
firmwide Total net revenue grew to $4.9 billion, up
$1.4 billion, or 41%.
Credit reimbursement to the Investment Bank was
$154 million, an increase of $64 million,
primarily as a result of the Merger. TSS is
charged a credit reimbursement related to certain
exposures managed within the Investment Bank
credit portfolio on behalf of clients shared with
TSS.
Total noninterest expense of $4.1 billion was up
$324 million, or 9%, due to the Merger, increased
compensation expense resulting from new business growth and the Vastera acquisition,
and charges of $93 million to terminate a client
contract. Partially offsetting these increases were
higher product unit costs charged to other lines of
business, primarily Commercial Banking, lower
allocations of Corporate segment expenses, merger
savings and business efficiencies. The prior year
included software-impairment charges of $155
million.
Treasury & Securities Services firmwide metrics
include certain TSS product revenues and
liability balances reported in other lines of
business for customers who are also customers of
those lines of business.
Management reviews firmwide metrics such as
liability balances, revenues and overhead ratios
in assessing financial performance for TSS as
such firmwide metrics capture the firmwide
impact of TS and TSS products and services.
Management believes such firmwide metrics are
necessary in order to understand the aggregate
TSS business.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected metrics |
|
|
|
|
|
|
|
|
|
|
|
|
Year ending December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except headcount, ratio data |
|
|
|
|
|
|
|
|
|
|
|
|
and where otherwise noted) |
|
|
2006 |
|
|
|
2005 |
|
|
|
2004 |
(g) |
|
Revenue by business |
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Services |
|
$ |
2,792 |
|
|
$ |
2,695 |
|
|
$ |
2,060 |
|
Worldwide Securities Services |
|
|
3,317 |
|
|
|
2,844 |
|
|
|
2,138 |
|
|
Total net revenue |
|
$ |
6,109 |
|
|
$ |
5,539 |
|
|
$ |
4,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business metrics |
|
|
|
|
|
|
|
|
|
|
|
|
Assets under custody (in billions) |
|
$ |
13,903 |
|
|
$ |
10,662 |
|
|
$ |
9,300 |
|
Number of: |
|
|
|
|
|
|
|
|
|
|
|
|
US$ ACH transactions originated (in millions) |
|
|
3,503 |
|
|
|
2,966 |
|
|
|
1,994 |
|
Total US$ clearing volume (in thousands) |
|
|
104,846 |
|
|
|
95,713 |
|
|
|
81,162 |
|
International electronic funds transfer
volume (in thousands)(a) |
|
|
145,325 |
|
|
|
89,537 |
|
|
|
45,654 |
|
Wholesale check volume (in millions) |
|
|
3,409 |
|
|
|
3,735 |
|
|
|
NA |
|
Wholesale cards issued (in thousands)(b) |
|
|
17,228 |
|
|
|
13,206 |
|
|
|
11,787 |
|
Selected balance sheets (average) |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
31,760 |
|
|
$ |
28,206 |
|
|
$ |
24,815 |
|
Loans |
|
|
15,564 |
|
|
|
12,349 |
|
|
|
9,840 |
|
Liability balances(c) |
|
|
189,540 |
|
|
|
154,731 |
|
|
|
115,514 |
|
Equity |
|
|
2,285 |
|
|
|
1,525 |
|
|
|
1,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount |
|
|
25,423 |
|
|
|
22,207 |
|
|
|
20,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TSS firmwide metrics |
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Services firmwide revenue(d) |
|
$ |
5,242 |
|
|
$ |
4,937 |
|
|
$ |
3,508 |
|
Treasury & Securities Services
firmwide revenue(d) |
|
|
8,559 |
|
|
|
7,781 |
|
|
|
5,646 |
|
Treasury Services firmwide overhead ratio(e) |
|
|
56 |
% |
|
|
58 |
% |
|
|
65 |
% |
Treasury & Securities Services
firmwide overhead ratio(e) |
|
|
62 |
|
|
|
65 |
|
|
|
78 |
|
Treasury Services firmwide liability
balances (average)(f) |
|
$ |
162,020 |
|
|
$ |
139,579 |
|
|
$ |
102,785 |
|
Treasury & Securities Services firmwide
liability balances(f) |
|
|
262,678 |
|
|
|
220,781 |
|
|
|
163,169 |
|
|
|
|
|
(a) |
|
International electronic funds transfer includes non-US$ ACH and clearing
volume. |
(b) |
|
Wholesale cards issued include domestic commercial card, stored value card,
prepaid card, and government electronic benefit card products. |
(c) |
|
Liability balances include deposits and deposits swept to on-balance sheet
liabilities. |
(d) |
|
Firmwide revenue includes TS revenue recorded in the CB, Regional Banking and AM
lines of business (see below) and excludes FX revenues recorded in the IB for TSS-related
FX activity. |
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
2006 |
|
|
|
2005 |
|
|
|
2004 |
(g) |
|
Treasury Services revenue reported in CB |
|
$ |
2,243 |
|
|
$ |
2,062 |
|
|
$ |
1,335 |
|
Treasury Services revenue reported in
other lines of business |
|
|
207 |
|
|
|
180 |
|
|
|
113 |
|
|
|
|
|
|
|
TSS firmwide FX revenue, which includes FX revenue recorded in TSS and FX revenue
associated with TSS customers who are FX customers of the IB, was $445 million, $382
million and $320 million for the years ended December 31, 2006, 2005 and 2004,
respectively. |
(e) |
|
Overhead ratios have been calculated based upon firmwide revenues and TSS and TS
expenses, respectively, including those allocated to certain other lines of business. FX
revenues and expenses recorded in the IB for TSS-related FX activity are not included in
this ratio. |
(f) |
|
Firmwide liability balances include TS liability balances recorded in certain
other lines of business. Liability balances associated with TS customers who are also
customers of the CB line of business are not included in TS liability balances. |
(g) |
|
2004 results include six months of the combined Firms results and six months of
heritage JPMorgan Chase results. |
|
|
|
|
|
|
|
|
|
JPMorgan Chase & Co. / 2006 Annual Report
|
|
49 |
Managements discussion and analysis
JPMorgan Chase & Co.
ASSET MANAGEMENT
With assets under supervision of $1.3
trillion, AM is a global leader in investment and
wealth management. AM clients include
institutions, retail investors and high-net-worth
individuals in every major market throughout the
world. AM offers global investment management in
equities, fixed income, real estate, hedge funds,
private equity and liquidity, including both
money-market instruments and bank deposits. AM
also provides trust and estate and banking
services to high-net-worth clients, and retirement
services for corporations and individuals. The
majority of AMs client assets are in actively
managed portfolios.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except ratios) |
|
|
2006 |
|
|
|
2005 |
|
|
|
2004 |
(b) |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Asset management, administration
and commissions |
|
$ |
5,295 |
|
|
$ |
4,189 |
|
|
$ |
3,140 |
|
All other income |
|
|
521 |
|
|
|
394 |
|
|
|
243 |
|
|
Noninterest revenue |
|
|
5,816 |
|
|
|
4,583 |
|
|
|
3,383 |
|
Net interest income |
|
|
971 |
|
|
|
1,081 |
|
|
|
796 |
|
|
Total net revenue |
|
|
6,787 |
|
|
|
5,664 |
|
|
|
4,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
(28 |
) |
|
|
(56 |
) |
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
2,777 |
|
|
|
2,179 |
|
|
|
1,579 |
|
Noncompensation expense |
|
|
1,713 |
|
|
|
1,582 |
|
|
|
1,502 |
|
Amortization of intangibles |
|
|
88 |
|
|
|
99 |
|
|
|
52 |
|
|
Total noninterest expense |
|
|
4,578 |
|
|
|
3,860 |
|
|
|
3,133 |
|
|
Income before income tax expense |
|
|
2,237 |
|
|
|
1,860 |
|
|
|
1,060 |
|
Income tax expense |
|
|
828 |
|
|
|
644 |
|
|
|
379 |
|
|
Net income |
|
$ |
1,409 |
|
|
$ |
1,216 |
|
|
$ |
681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial ratios |
|
|
|
|
|
|
|
|
|
|
|
|
ROE |
|
|
40 |
% |
|
|
51 |
% |
|
|
17 |
% |
Overhead ratio |
|
|
67 |
|
|
|
68 |
|
|
|
75 |
|
Pretax margin ratio(a) |
|
|
33 |
|
|
|
33 |
|
|
|
25 |
|
|
|
|
|
(a) |
|
Pretax margin represents Income before income tax expense divided by Total net
revenue, which is a measure of pretax performance and another basis by which management
evaluates its performance and that of its competitors. |
(b) |
|
2004 results include six months of the combined Firms results and six months of
heritage JPMorgan Chase results. |
2006 compared with 2005
Net income was a record $1.4 billion, up by $193
million, or 16%, from the prior year. Improved
results were driven by increased revenue offset
partially by higher performance-based compensation
expense, incremental expense from the adoption of
SFAS 123R and the absence of a tax credit
recognized in the prior year.
Total net revenue was a record $6.8 billion, up by
$1.1 billion, or 20%, from the prior year.
Noninterest revenue, principally fees and
commissions, of $5.8 billion was up by $1.2
billion, or 27%. This increase was due largely to
increased assets under management and higher
performance and placement fees. Net interest
income was $971 million, down by $110 million, or
10%, from the prior year. The decline was due
primarily to narrower spreads on deposit products
and the absence of BrownCo, partially offset by
higher deposit and loan balances.
Institutional revenue grew 41%, to $2.0 billion,
due to net asset inflows and higher performance
fees. Private Bank revenue grew 13%, to $1.9
billion, due to increased placement activity,
higher asset management fees and higher deposit
balances, partially offset by narrower average
spreads on deposits. Retail revenue grew 22%, to
$1.9 billion, primarily due to net asset inflows,
partially offset by the sale of BrownCo. Private
Client Services revenue decreased 1%, to $1.0
billion, as higher deposit and loan balances were
more than offset by narrower average deposit and
loan spreads.
Provision for credit losses was a benefit of $28
million compared with a benefit of $56 million in
the prior year. The current-year benefit reflects a
high level of recoveries and stable credit quality.
Total noninterest expense of $4.6 billion was up
by $718 million, or 19%, from the prior year. The
increase was due to higher performance-based
compensation, incremental expense related to SFAS
123R, increased salaries and benefits related to
business growth, and higher minority interest
expense related to Highbridge, partially offset by
the absence of BrownCo.
2005 compared with 2004
Net income of $1.2 billion was up $535 million
from the prior year due to the Merger and
increased revenue, partially offset by higher
compensation expense.
Total net revenue was $5.7 billion, up $1.5
billion, or 36%. Noninterest revenue, primarily
fees and commissions, of $4.6 billion was up $1.2
billion, principally due to the Merger, the
acquisition of a majority interest in Highbridge in
2004, net asset inflows and global equity market
appreciation. Net interest income of $1.1 billion
was up $285 million, primarily due to the Merger,
higher deposit and loan balances, partially offset
by narrower deposit spreads.
Private Bank revenue grew 9%, to $1.7 billion.
Retail revenue grew 30%, to $1.5 billion.
Institutional revenue grew 57%, to $1.4 billion,
due to the acquisition of a majority interest in
Highbridge. Private Client Services revenue grew
88%, to $1.0 billion.
Provision for credit losses was a benefit of $56
million, compared with a benefit of $14 million
in the prior year, due to lower net charge-offs
and refinements in the data used to estimate the
allowance for credit losses.
Total noninterest expense of $3.9 billion increased
by $727 million, or 23%, reflecting the Merger, the
acquisition of Highbridge and increased
compensation expense related primarily to higher
performance-based incentives.
|
|
|
|
|
|
|
|
|
50
|
|
JPMorgan Chase & Co. / 2006 Annual Report |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected metrics |
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except headcount, ranking |
|
|
|
|
|
|
|
|
|
|
|
|
data, and where otherwise noted) |
|
|
2006 |
|
|
|
2005 |
|
|
|
2004 |
(e) |
|
Revenue by client segment |
|
|
|
|
|
|
|
|
|
|
|
|
Institutional |
|
$ |
1,972 |
|
|
$ |
1,395 |
|
|
$ |
891 |
|
Retail |
|
|
1,885 |
|
|
|
1,544 |
|
|
|
1,184 |
|
Private Bank |
|
|
1,907 |
|
|
|
1,689 |
|
|
|
1,554 |
|
Private Client Services |
|
|
1,023 |
|
|
|
1,036 |
|
|
|
550 |
|
|
Total net revenue |
|
$ |
6,787 |
|
|
$ |
5,664 |
|
|
$ |
4,179 |
|
|
Business metrics |
|
|
|
|
|
|
|
|
|
|
|
|
Number of: |
|
|
|
|
|
|
|
|
|
|
|
|
Client advisors |
|
|
1,506 |
|
|
|
1,484 |
|
|
|
1,377 |
|
Retirement planning services participants |
|
|
1,362,000 |
|
|
|
1,299,000 |
|
|
|
918,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of customer assets in 4 & 5 Star
Funds(a) |
|
|
58 |
% |
|
|
46 |
% |
|
|
48 |
% |
% of AUM in 1st and 2nd
quartiles:(b) |
|
|
|
|
|
|
|
|
|
|
|
|
1 year |
|
|
83 |
|
|
|
69 |
|
|
|
66 |
|
3 years |
|
|
77 |
|
|
|
68 |
|
|
|
71 |
|
5 years |
|
|
79 |
|
|
|
74 |
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected average balance sheets data |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
43,635 |
|
|
$ |
41,599 |
|
|
$ |
37,751 |
|
Loans(c) |
|
|
26,507 |
|
|
|
26,610 |
|
|
|
21,545 |
|
Deposits(c)(d) |
|
|
50,607 |
|
|
|
42,123 |
|
|
|
32,431 |
|
Equity |
|
|
3,500 |
|
|
|
2,400 |
|
|
|
3,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount |
|
|
13,298 |
|
|
|
12,127 |
|
|
|
12,287 |
|
|
Credit data and quality statistics |
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs (recoveries) |
|
$ |
(19 |
) |
|
$ |
23 |
|
|
$ |
72 |
|
Nonperforming loans |
|
|
39 |
|
|
|
104 |
|
|
|
79 |
|
Allowance for loan losses |
|
|
121 |
|
|
|
132 |
|
|
|
216 |
|
Allowance for lending-related commitments |
|
|
6 |
|
|
|
4 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-off (recovery) rate |
|
|
(0.07 |
)% |
|
|
0.09 |
% |
|
|
0.33 |
% |
Allowance for loan losses to average loans |
|
|
0.46 |
|
|
|
0.50 |
|
|
|
1.00 |
|
Allowance for loan losses to nonperforming loans |
|
|
310 |
|
|
|
127 |
|
|
|
273 |
|
Nonperforming loans to average loans |
|
|
0.15 |
|
|
|
0.39 |
|
|
|
0.37 |
|
|
|
|
|
(a) |
|
Derived from Morningstar for the United States; Micropal for the United Kingdom,
Luxembourg, Hong Kong and Taiwan; and Nomura for Japan. |
(b) |
|
Quartile rankings sourced from Lipper for the United States and Taiwan; Micropal
for the United Kingdom, Luxembourg, Hong Kong and Taiwan; and Nomura for Japan. |
(c) |
|
The sale of BrownCo, which closed on November 30, 2005, included $3.0 billion in
both loans and deposits. |
(d) |
|
Reflects the transfer in 2005 of certain consumer deposits from RFS to AM. |
(e) |
|
2004 results include six months of the combined Firms results and six months of
heritage JPMorgan Chase results. |
AMs client segments comprise the following:
Institutional brings comprehensive global
investment services including asset
management, pension analytics, asset-liability
management and active risk budgeting strategies
to corporate and public institutions,
endowments, foundations, not-for-profit
organizations and governments worldwide.
Retail provides worldwide investment management
services and retirement planning and
administration through third-party and direct
distribution of a full range of investment
vehicles.
The Private Bank addresses every facet of wealth
management for ultra-high-net-worth individuals
and families worldwide, including investment
management, capital markets and risk management,
tax and estate planning, banking, capital raising
and specialty-wealth advisory services.
Private Client Services offers high-net-worth
individuals, families and business owners in the
United States comprehensive wealth management
solutions, including investment management,
capital markets and risk management, tax and
estate planning, banking, and specialty-wealth
advisory services.
|
|
|
|
|
|
|
|
|
JPMorgan Chase & Co. / 2006 Annual Report
|
|
51 |
Managements discussion and analysis
JPMorgan Chase & Co.
Assets under supervision
2006 compared with 2005
Assets under supervision (AUS) were $1.3
trillion, up 17%, or $198 billion, from the prior
year. Assets under management (AUM) were $1.0
trillion, up 20%, or $166 billion, from the prior
year. The increase was the result of net asset
inflows in the Retail segment, primarily in
equity-related products, Institutional segment
flows, primarily in liquidity products, and market
appreciation. Custody, brokerage, administration
and deposit balances were $334 billion, up by $32 billion. The Firm also has a 43% interest in
American Century Companies, Inc., whose AUM totaled
$103 billion and $101 billion at December 31, 2006
and 2005, respectively.
2005 compared with 2004
AUS at December 31, 2005, were $1.1 trillion, up
4%, or $43 billion, from the prior year despite a
$33 billion reduction due to the sale of BrownCo.
AUM were $847 billion, up 7%. The increase was
primarily the result of net asset inflows in
equity-related products and global equity market
appreciation. Custody, brokerage, administration,
and deposits were $302 billion, down $13 billion
due to a $33 billion reduction from the sale of
BrownCo. The Firm also has a 43% interest in
American Century Companies, Inc., whose AUM
totaled $101 billion and $98 billion at December
31, 2005 and 2004, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets under supervision(a)(in billions) |
|
|
|
|
|
|
|
|
|
As of or for the year ended December 31, |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Assets by asset class |
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity(b) |
|
$ |
311 |
|
|
$ |
238 |
|
|
$ |
232 |
|
Fixed income |
|
|
175 |
|
|
|
165 |
|
|
|
171 |
|
Equities & balanced |
|
|
427 |
|
|
|
370 |
|
|
|
326 |
|
Alternatives |
|
|
100 |
|
|
|
74 |
|
|
|
62 |
|
|
Total Assets under management |
|
|
1,013 |
|
|
|
847 |
|
|
|
791 |
|
Custody/brokerage/administration/deposits |
|
|
334 |
|
|
|
302 |
|
|
|
315 |
|
|
Total Assets under supervision |
|
$ |
1,347 |
|
|
$ |
1,149 |
|
|
$ |
1,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets by client segment |
|
|
|
|
|
|
|
|
|
|
|
|
Institutional(c) |
|
$ |
538 |
|
|
$ |
481 |
|
|
$ |
466 |
|
Retail(c) |
|
|
259 |
|
|
|
169 |
|
|
|
133 |
|
Private Bank |
|
|
159 |
|
|
|
145 |
|
|
|
139 |
|
Private Client Services |
|
|
57 |
|
|
|
52 |
|
|
|
53 |
|
|
Total Assets under management |
|
$ |
1,013 |
|
|
$ |
847 |
|
|
$ |
791 |
|
|
Institutional(c) |
|
$ |
539 |
|
|
$ |
484 |
|
|
$ |
487 |
|
Retail(c) |
|
|
343 |
|
|
|
245 |
|
|
|
221 |
|
Private Bank |
|
|
357 |
|
|
|
318 |
|
|
|
304 |
|
Private Client Services |
|
|
108 |
|
|
|
102 |
|
|
|
94 |
|
|
Total Assets under supervision |
|
$ |
1,347 |
|
|
$ |
1,149 |
|
|
$ |
1,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets by geographic region |
|
|
|
|
|
|
|
|
|
|
|
|
U.S./Canada |
|
$ |
630 |
|
|
$ |
562 |
|
|
$ |
554 |
|
International |
|
|
383 |
|
|
|
285 |
|
|
|
237 |
|
|
Total Assets under management |
|
$ |
1,013 |
|
|
$ |
847 |
|
|
$ |
791 |
|
|
U.S./Canada |
|
$ |
889 |
|
|
$ |
805 |
|
|
$ |
815 |
|
International |
|
|
458 |
|
|
|
344 |
|
|
|
291 |
|
|
Total Assets under supervision |
|
$ |
1,347 |
|
|
$ |
1,149 |
|
|
$ |
1,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual fund assets by asset class |
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity |
|
$ |
255 |
|
|
$ |
182 |
|
|
$ |
183 |
|
Fixed income |
|
|
46 |
|
|
|
45 |
|
|
|
41 |
|
Equities |
|
|
206 |
|
|
|
150 |
|
|
|
104 |
|
|
Total mutual fund assets |
|
$ |
507 |
|
|
$ |
377 |
|
|
$ |
328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets under management rollforward(d) |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1 |
|
$ |
847 |
|
|
$ |
791 |
|
|
$ |
561 |
|
Flows: |
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity |
|
|
44 |
|
|
|
8 |
|
|
|
3 |
|
Fixed income |
|
|
11 |
|
|
|
|
|
|
|
(8 |
) |
Equities, balanced and alternative |
|
|
34 |
|
|
|
24 |
|
|
|
14 |
|
Acquisitions/divestitures(e) |
|
|
|
|
|
|
|
|
|
|
183 |
|
Market/performance/other impacts |
|
|
77 |
|
|
|
24 |
|
|
|
38 |
|
|
Ending balance, December 31 |
|
$ |
1,013 |
|
|
$ |
847 |
|
|
$ |
791 |
|
|
Assets under supervision rollforward(d) |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1 |
|
$ |
1,149 |
|
|
$ |
1,106 |
|
|
$ |
764 |
|
Net asset flows |
|
|
102 |
|
|
|
49 |
|
|
|
42 |
|
Acquisitions /divestitures(f) |
|
|
|
|
|
|
(33 |
) |
|
|
221 |
|
Market/performance/other impacts |
|
|
96 |
|
|
|
27 |
|
|
|
79 |
|
|
Ending balance, December 31 |
|
$ |
1,347 |
|
|
$ |
1,149 |
|
|
$ |
1,106 |
|
|
|
|
|
(a) |
|
Excludes Assets under management of American Century Companies, Inc. |
(b) |
|
2006 data reflects the reclassification of $19 billion of assets under
management into liquidity from other asset classes. Prior period data were not restated. |
(c) |
|
In 2006, assets under management of $22 billion from Retirement planning
services has been reclassified from the Institutional client segment to the Retail client
segment in order to be consistent with the revenue by client segment reporting. |
(d) |
|
2004 results include six months of the combined Firms results and six months of
heritage JPMorgan Chase results. |
(e) |
|
Reflects the Merger with Bank One ($176 billion) and the acquisition of a
majority interest in Highbridge ($7 billion) in 2004. |
(f) |
|
Reflects the sale of BrownCo ($33 billion) in 2005, and the Merger with Bank One
($214 billion) and the acquisition of a majority interest in Highbridge ($7 billion) in
2004. |
|
|
|
|
|
|
|
|
|
52
|
|
JPMorgan Chase & Co. / 2006 Annual Report |
CORPORATE
The Corporate sector comprises Private
Equity, Treasury, corporate staff units and
expenses that are centrally managed. Private
Equity includes the JPMorgan Partners and ONE
Equity Partners businesses. Treasury manages the
structural interest rate risk and investment
portfolio for the Firm. The corporate staff units
include Central Technology and Operations,
Internal Audit, Executive Office, Finance, Human
Resources, Marketing & Communications, Office of
the General Counsel, Corporate Real Estate and
General Services, Risk Management, and Strategy
and Development. Other centrally managed expenses
include the Firms occupancy and pension-related
expenses, net of allocations to the business.
On August 1, 2006, the buyout and growth equity
professionals of JPMorgan Partners (JPMP) formed
an independent firm, CCMP Capital, LLC (CCMP), and the venture
professionals separately formed an independent
firm, Panorama Capital, LLC (Panorama). The
investment professionals of CCMP and Panorama
continue to manage the former JPMP investments
pursuant to a management agreement with the Firm.
On October 1, 2006, the Firm completed the exchange
of selected corporate trust businesses, including
trustee, paying agent, loan agency and document
management services, for the consumer, business
banking and middle-market banking businesses of The
Bank of New York. These corporate trust businesses,
which were previously reported in TSS, are now
reported as discontinued operations for all periods
presented within Corporate. The related balance
sheet and income statement activity were
transferred to the Corporate segment commencing
with the second quarter of 2006. Periods prior to
the second quarter of 2006 have been revised to
reflect this transfer.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected income statement data |
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
2006 |
|
|
|
2005 |
|
|
|
2004 |
(f) |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Principal transactions |
|
$ |
1,175 |
|
|
$ |
1,524 |
|
|
$ |
1,542 |
|
Securities gains (losses) |
|
|
(608 |
) |
|
|
(1,487 |
) |
|
|
332 |
|
All other income(a) |
|
|
485 |
|
|
|
1,583 |
|
|
|
109 |
|
|
Noninterest revenue |
|
|
1,052 |
|
|
|
1,620 |
|
|
|
1,983 |
|
Net interest income |
|
|
(1,044 |
) |
|
|
(2,756 |
) |
|
|
(1,214 |
) |
|
Total net revenue |
|
|
8 |
|
|
|
(1,136 |
) |
|
|
769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses(b) |
|
|
(1 |
) |
|
|
10 |
|
|
|
748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense |
|
|
2,626 |
|
|
|
3,148 |
|
|
|
2,426 |
|
Noncompensation expense(c) |
|
|
2,351 |
|
|
|
5,962 |
|
|
|
7,418 |
|
Merger costs |
|
|
305 |
|
|
|
722 |
|
|
|
1,365 |
|
|
Subtotal |
|
|
5,282 |
|
|
|
9,832 |
|
|
|
11,209 |
|
Net expenses allocated to other businesses |
|
|
(4,141 |
) |
|
|
(4,505 |
) |
|
|
(4,839 |
) |
|
Total noninterest expense |
|
|
1,141 |
|
|
|
5,327 |
|
|
|
6,370 |
|
|
Income (loss) from continuing operations
before income tax expense |
|
|
(1,132 |
) |
|
|
(6,473 |
) |
|
|
(6,349 |
) |
Income tax expense (benefit)(d) |
|
|
(1,179 |
) |
|
|
(2,690 |
) |
|
|
(2,661 |
) |
|
Income (loss) from continuing
operations |
|
|
47 |
|
|
|
(3,783 |
) |
|
|
(3,688 |
) |
Income from discontinued
operations (e) |
|
|
795 |
|
|
|
229 |
|
|
|
206 |
|
|
Net income (loss) |
|
$ |
842 |
|
|
$ |
(3,554 |
) |
|
$ |
(3,482 |
) |
|
|
|
|
(a) |
|
Includes a gain of $103 million in 2006 related to the initial public offering
of Mastercard, and a gain of $1.3 billion on the sale of BrownCo in 2005. |
(b) |
|
2004 includes $858 million related to accounting policy conformity adjustments
in connection with the Merger. |
(c) |
|
Includes insurance recoveries related to material legal proceedings of $512
million and $208 million in 2006 and 2005, respectively. Includes litigation reserve
charges of $2.8 billion and $3.7 billion in 2005 and 2004, respectively. |
(d) |
|
Includes tax benefits recognized upon resolution of tax audits. |
(e) |
|
Includes a $622 million gain from exiting the corporate trust business in the
fourth quarter of 2006. |
(f) |
|
2004 results include six months of the combined Firms results and six months of
heritage JPMorgan Chase results. |
2006 compared with 2005
Net income was $842 million compared with a net
loss of $3.6 billion in the prior year. In
comparison with the prior year, Private Equity
earnings was $627 million, down from $821 million;
Treasury net loss was $560 million compared with a
net loss of $2.0 billion; the net loss in Other
Corporate (including Merger costs) was $20 million compared with a net loss
of $2.6 billion; and the Net income from
discontinued operations was $795 million compared
with $229 million.
Total net revenue was $8 million, as compared with
a negative $1.1 billion in the prior year. Net
interest income was a negative $1.0 billion
compared with negative $2.8 billion in the prior
year. Treasury was the primary driver of the
improvement, with Net interest income of negative
$140 million compared with negative $1.7 billion in
the prior year, benefiting primarily from an
improvement in Treasurys net interest spread and
an increase in available-for-sale securities.
Noninterest revenue was $1.1 billion compared with
$1.6 billion, reflecting the absence of the $1.3
billion gain on the sale of BrownCo last year and
lower Private Equity gains of $1.3 billion compared
with gains of $1.7 billion in the prior year. These
declines were offset by $619 million in securities
losses in Treasury compared with securities losses
of $1.5 billion in the prior year and a gain of
$103 million related to the sale of Mastercard
shares in its initial public offering in the
current year.
Total noninterest expense was $1.1 billion, down by
$4.2 billion from $5.3 billion in the prior year.
Insurance recoveries relating to certain material
litigation were $512 million in the current year,
while the prior-year results included a material
litigation charge of $2.8 billion, and related
insurance recoveries of $208 million. Prior-year
expense included a $145 million cost due to the
accelerated vesting of stock options. Merger costs
were $305 million compared with $722 million in the
prior year.
Discontinued operations include the results of
operations of selected corporate trust businesses
sold to The Bank of New York on October 1, 2006.
Prior to the sale, the selected corporate trust
businesses produced $173 million of Net income in
the current year compared with Net income of $229
million in the prior year. Net income from
discontinued operations for 2006 also included a
one-time gain of $622 million related to the sale
of these businesses.
2005 compared with 2004
Total net revenue was a negative $1.1 billion
compared with Total net revenue of $769 million in
the prior year. Noninterest revenue of $1.6 billion
decreased by $363 million and included securities
losses of $1.5 billion due to the following:
repositioning of the Treasury investment portfolio
to manage exposure to interest rates; the gain on
the sale of BrownCo of $1.3 billion; and the
increase in private equity gains of $262 million.
For further discussion on the sale of BrownCo, see
Note 2 on page 97 of this Annual Report.
|
|
|
|
|
|
|
|
|
JPMorgan Chase & Co. / 2006 Annual Report
|
|
53 |
Managements discussion and analysis
JPMorgan Chase & Co.
Net interest income was a loss of $2.8
billion compared with a loss of $1.2 billion in
the prior year. Actions and policies adopted in
conjunction with the Merger and the repositioning
of the Treasury investment portfolio were the
main drivers of the increased loss.
Total noninterest expense was $5.3 billion, down
$1.1 billion from $6.4 billion in the prior year. Material litigation
charges were $2.8 billion compared with $3.7
billion in the prior year. Merger costs were $722
million compared with $1.4 billion in the prior
year. These decreases were offset primarily by the
cost of accelerated vesting of certain employee
stock options.
On September 15, 2004, JPMorgan Chase and IBM
announced the Firms plans to reintegrate the
portions of its technology infrastructure
including data centers, help desks, distributed
computing, data networks and voice networks that
were previously outsourced to IBM. In January 2005,
approximately 3,100 employees and 800 contract
employees were transferred to the Firm.
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected metrics |
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except headcount) |
|
|
2006 |
|
|
|
2005 |
|
|
|
2004 |
(e) |
|
Total net revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Private equity $ |
|
$ |
1,142 |
|
|
$ |
1,521 |
|
|
$ |
1,211 |
|
Treasury |
|
|
(797 |
) |
|
|
(3,278 |
) |
|
|
81 |
|
Corporate other(a) |
|
|
(337 |
) |
|
|
621 |
|
|
|
(523 |
) |
|
Total net revenue |
|
$ |
8 |
|
|
$ |
(1,136 |
) |
|
$ |
769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
Private equity |
|
$ |
627 |
|
|
$ |
821 |
|
|
$ |
602 |
|
Treasury |
|
|
(560 |
) |
|
|
(2,028 |
) |
|
|
(106 |
) |
Corporate other(a)(b)(c) |
|
|
169 |
|
|
|
(2,128 |
) |
|
|
(3,337 |
) |
Merger costs |
|
|
(189 |
) |
|
|
(448 |
) |
|
|
(847 |
) |
|
Income (loss) from continuing operations |
|
|
47 |
|
|
|
(3,783 |
) |
|
|
(3,688 |
) |
Income from discontinued operations
(d) |
|
|
795 |
|
|
|
229 |
|
|
|
206 |
|
|
Total net income (loss) |
|
$ |
842 |
|
|
$ |
(3,554 |
) |
|
$ |
(3,482 |
) |
|
Headcount |
|
|
23,242 |
|
|
|
30,666 |
|
|
|
26,956 |
|
|
|
|
|
(a) |
|
Includes a gain of $64 million ($103 million pretax) in 2006 related to the
initial public offering of Mastercard, and a gain of $752 million ($1.3 billion pretax) on
the sale of BrownCo in 2005. |
(b) |
|
Includes insurance recoveries (after-tax) related to material legal proceedings of $317
million and $129 million in 2006 and 2005, respectively. Includes litigation reserve
charges (after-tax) of $1.7 billion and $2.3 billion in 2005 and 2004, respectively. |
(c) |
|
Includes tax benefits recognized upon resolution of tax audits. |
(d) |
|
Includes a $622 million gain from exiting the corporate trust business in the
fourth quarter of 2006. |
(e) |
|
2004 results include six months of the combined Firms results and six months of
heritage JPMorgan Chase results. |
Private equity portfolio
2006 compared with 2005
The carrying value of the private equity portfolio
declined by $95 million to $6.1 billion as of
December 31, 2006. This decline was due primarily
to sales offset partially by new investment activity. The portfolio represented 8.6%
of the Firms stockholders equity less goodwill
at December 31, 2006, down from 9.7% at December
31, 2005.
2005 compared with 2004
The carrying value of the private equity portfolio
declined by $1.3 billion to $6.2 billion as of
December 31, 2005. This decline was primarily the result of sales and recapitalizations
of direct investments. The portfolio represented
9.7% and 12% of JPMorgan Chases stockholders
equity less goodwill at December 31, 2005 and 2004,
respectively.
Selected income statement and
balance sheet data
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
2006 |
|
|
|
2005 |
|
|
|
2004 |
(d) |
|
Treasury |
|
|
|
|
|
|
|
|
|
|
|
|
Securities gains (losses)(a) |
|
$ |
(619 |
) |
|
$ |
(1,486 |
) |
|
$ |
339 |
|
Investment portfolio (average) |
|
|
63,361 |
|
|
|
46,520 |
|
|
|
57,776 |
|
Investment portfolio (ending) |
|
|
82,091 |
|
|
|
30,741 |
|
|
|
64,949 |
|
|
Private equity gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains |
|
$ |
1,223 |
|
|
$ |
1,969 |
|
|
$ |
1,423 |
|
Write-ups / (write-downs) |
|
|
(73 |
) |
|
|
(72 |
) |
|
|
(192 |
) |
Mark-to-market gains (losses) |
|
|
72 |
|
|
|
(338 |
) |
|
|
164 |
|
|
Total direct investments |
|
|
1,222 |
|
|
|
1,559 |
|
|
|
1,395 |
|
Third-party fund investments |
|
|
77 |
|
|
|
132 |
|
|
|
34 |
|
|
Total private equity gains (losses)(b) |
|
|
1,299 |
|
|
|
1,691 |
|
|
|
1,429 |
|
|
Private equity portfolio information(c) |
|
|
|
|
|
|
|
|
|
|
|
|
Direct investments |
|
|
|
|
|
|
|
|
|
|
|
|
Public securities |
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value |
|
$ |
587 |
|
|
$ |
479 |
|
|
$ |
1,170 |
|
Cost |
|
|
451 |
|
|
|
403 |
|
|
|
744 |
|
Quoted public value |
|
|
831 |
|
|
|
683 |
|
|
|
1,758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private direct securities |
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value |
|
|
4,692 |
|
|
|
5,028 |
|
|
|
5,686 |
|
Cost |
|
|
5,795 |
|
|
|
6,463 |
|
|
|
7,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party fund investments |
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value |
|
|
802 |
|
|
|
669 |
|
|
|
641 |
|
Cost |
|
|
1,080 |
|
|
|
1,003 |
|
|
|
1,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total private equity portfolio |
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value |
|
$ |
6,081 |
|
|
$ |
6,176 |
|
|
$ |
7,497 |
|
Cost |
|
$ |
7,326 |
|
|
$ |
7,869 |
|
|
$ |
8,964 |
|
|
|
|
|
(a) |
|
Gains/losses reflect repositioning of the Treasury investment securities
portfolio. Excludes gains/losses on securities used to manage risk associated with MSRs. |
(b) |
|
Included in Principal transactions. |
(c) |
|
For further information on the Firms policies regarding the valuation of the
private equity portfolio, see Critical accounting estimates used by the Firm on pages
8485 and Note 4 on pages 9899 of this Annual Report, respectively. |
(d) |
|
2004 results include six months of the combined Firms results and six months of
heritage JPMorgan Chase results. |
|
|
|
|
|
|
|
|
|
54
|
|
JPMorgan Chase & Co. / 2006 Annual Report |
BALANCE SHEET ANALYSIS
|
|
|
|
|
|
|
|
|
Selected balance sheet data |
|
|
|
|
|
|
December 31, (in millions) |
|
2006 |
|
|
2005 |
|
|
Assets |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
40,412 |
|
|
$ |
36,670 |
|
Deposits with banks |
|
|
13,547 |
|
|
|
21,661 |
|
Federal funds sold and securities purchased
under resale agreements |
|
|
140,524 |
|
|
|
133,981 |
|
Securities borrowed |
|
|
73,688 |
|
|
|
74,604 |
|
Trading assets: |
|
|
|
|
|
|
|
|
Debt and equity instruments |
|
|
310,137 |
|
|
|
248,590 |
|
Derivative receivables |
|
|
55,601 |
|
|
|
49,787 |
|
Securities: |
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
91,917 |
|
|
|
47,523 |
|
Held-to-maturity |
|
|
58 |
|
|
|
77 |
|
Interests in purchased receivables |
|
|
|
|
|
|
29,740 |
|
Loans, net of Allowance for loan losses |
|
|
475,848 |
|
|
|
412,058 |
|
Other receivables |
|
|
27,585 |
|
|
|
27,643 |
|
Goodwill |
|
|
45,186 |
|
|
|
43,621 |
|
Other intangible assets |
|
|
14,852 |
|
|
|
14,559 |
|
All other assets |
|
|
62,165 |
|
|
|
58,428 |
|
|
Total assets |
|
$ |
1,351,520 |
|
|
$ |
1,198,942 |
|
|
Liabilities |
|
|
|
|
|
|
|
|
Deposits |
|
$ |
638,788 |
|
|
$ |
554,991 |
|
Federal funds purchased and securities sold
under repurchase agreements |
|
|
162,173 |
|
|
|
125,925 |
|
Commercial paper and other borrowed funds |
|
|
36,902 |
|
|
|
24,342 |
|
Trading liabilities: |
|
|
|
|
|
|
|
|
Debt and equity instruments |
|
|
90,488 |
|
|
|
94,157 |
|
Derivative payables |
|
|
57,469 |
|
|
|
51,773 |
|
Long-term debt and trust preferred capital debt securities |
|
|
145,630 |
|
|
|
119,886 |
|
Beneficial interests issued by consolidated VIEs |
|
|
16,184 |
|
|
|
42,197 |
|
All other liabilities |
|
|
88,096 |
|
|
|
78,460 |
|
|
Total liabilities |
|
|
1,235,730 |
|
|
|
1,091,731 |
|
Stockholders equity |
|
|
115,790 |
|
|
|
107,211 |
|
|
Total liabilities and stockholders equity |
|
$ |
1,351,520 |
|
|
$ |
1,198,942 |
|
|
Balance sheet overview
At December 31, 2006, the Firms total assets were
$1.4 trillion, an increase of $152.6 billion, or
13%, from December 31, 2005. Total liabilities
were $1.2 trillion, an increase of $144.0 billion,
or 13%, from December 31, 2005. Stockholders
equity was $115.8 billion, an increase
of $8.6 billion, or 8% from December 31, 2005. The
following is a discussion of the significant
changes in balance sheet items during 2006.
Federal funds sold and securities purchased under
resale agreements; Securities borrowed; Federal
funds purchased and securities sold under
repurchase agreements; and Commercial paper and Other borrowed funds
The Firm utilizes Federal funds sold and securities
purchased under resale agreements, Securities
borrowed, Federal funds purchased and securities
sold under repurchase agreements and Commercial
paper and other borrowed funds as part of its
liquidity management activities, in order to manage
the Firms cash positions, risk-based capital
requirements, and to maximize liquidity access and
minimize funding costs. In 2006, Federal funds sold
increased in connection with higher levels of funds
that were available for short-term investments.
Securities sold under repurchase agreements and
Commercial paper and other borrowed funds
increased primarily due to short-term requirements
to fund trading positions and AFS securities
inventory levels, as well as the result of growth
in volume related to sweeps and other cash
management products. For additional information on
the Firms Liquidity risk management, see pages
6263 of this Annual Report.
Trading assets and liabilities debt and equity instruments
The Firm uses debt and equity trading instruments
for both market-making and proprietary risk-taking
activities. These instruments consist primarily of
fixed income securities (including government and
corporate debt), equity securities and convertible
cash instruments, as well as physical commodities.
The increase in trading assets over December 31,
2005, was due primarily to the more favorable
capital markets environment, with growth in
client-driven market-making activities across both
products (such as interest rate, credit and equity
markets) and regions. For additional information,
refer to Note 4 on page 98 of this Annual Report.
Trading assets and liabilities derivative receivables and payables
The Firm utilizes various interest rate, foreign
exchange, equity, credit and commodity derivatives
for market-making, proprietary risk-taking and
risk-management purposes. The increases in
derivative receivables and payables from December
31, 2005, primarily stemmed from an increase in
credit derivatives and equity contracts. For
additional information, refer to Derivative contracts and Note 4 on
pages 69-72 and 98,
respectively, of this Annual Report.
Securities
The Firms securities portfolio, almost all of
which is classified as AFS, is used primarily to
manage the Firms exposure to interest rate
movements. The AFS portfolio increased by $44.4
billion from the 2005 year end, primarily due to
net purchases in the Treasury investment securities
portfolio, in connection with repositioning the
Firms portfolio to manage exposure to interest
rates. For additional information related to
securities, refer to the Corporate segment
discussion and to Note 10 on pages 5354 and
108111, respectively, of this Annual Report.
Interests in purchased receivables and Beneficial
interests issued by consolidated VIEs
Interests in purchased receivables and Beneficial
interests issued by consolidated VIEs declined from
December 2005, as a result of the restructuring
during the second quarter of 2006 of
Firm-administered multi-seller conduits. The
restructuring resulted in the deconsolidation of
$29 billion of Interests in purchased receivables,
$3 billion of Loans and $1 billion of AFS
securities, as well as a corresponding decrease in Beneficial interests issued by
consolidated VIEs. For additional information
related to multi-seller conduits, refer to
Offbalance sheet arrangements and contractual
cash obligations on pages 5960 and Note 15 on
pages 118120 of this Annual Report.
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JPMorgan Chase & Co. / 2006 Annual Report
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55 |
Managements discussion and analysis
JPMorgan Chase & Co.
Loans
The Firm provides loans to customers of all sizes,
from large corporate clients to individual
consumers. The Firm manages the risk/reward
relationship of each portfolio and discourages the
retention of loan assets that do not generate a
positive return above the cost of risk-adjusted
capital. The $63.8 billion increase in loans, net of the allowance for loan losses, from
December 31, 2005, was due primarily to an increase
of $33.6 billion in the wholesale portfolio, mainly
in the IB, reflecting an increase in capital
markets activity, including financings associated
with client acquisitions, securitizations and loan
syndications. CB loans also increased as a result
of organic growth and The Bank of New York
transaction. The $30.3 billion increase in consumer
loans was due largely to increases in CS
(reflecting strong organic growth, a reduction in
credit card securitization activity, and the
acquisitions of private-label credit card
portfolios), increases in education loans resulting
from the 2006 first-quarter acquisition of
Collegiate Funding Services, and as a result of The
Bank of New York transaction. These increases were
offset partially by a decline in auto loans and
leases. The Allowance for loan losses increased
$189 million, or 3%, from December 31, 2005. For a
more detailed discussion of the loan portfolio and
the Allowance for loan losses, refer to Credit risk
management on pages 6476 of this Annual Report.
Goodwill
Goodwill arises from business combinations and
represents the excess of the cost of an acquired
entity over the net fair value amounts assigned to
assets acquired and liabilities assumed. The $1.6
billion increase in Goodwill primarily resulted
from the addition of $1.8 billion of goodwill from
The Bank of New York transaction in the 2006
fourth quarter and from the 2006 first-quarter
acquisition of Collegiate Funding Services.
Partially offsetting the increase in Goodwill were
reductions of $402 million resulting from the sale
of selected corporate trust businesses to The Bank
of New York; purchase accounting adjustments
associated with the 2005 fourth-quarter
acquisition of the Sears Canada credit card
business; the 2006 second quarter sale of the
insurance business; and a reduction related to
reclassifying net assets of a subsidiary as
held-for-sale. For additional information, see
Notes 3 and 16 on pages 97 and 121123 of this
Annual Report.
Other intangible assets
The Firms other intangible assets consist of
mortgage servicing rights (MSRs), purchased
credit card relationships, other credit
cardrelated intangibles, core deposit
intangibles, and all other intangibles. The $293
million increase in Other intangible assets
primarily reflects higher MSRs due to growth in the
servicing portfolio, the addition of core deposit
intangibles from The Bank of New York transaction
and purchase accounting adjustments related to the
Sears Canada credit card business. Partially
offsetting these increases were the amortization of
intangibles and a $436 million reduction in Other
intangible assets as a result of the sale of
selected corporate trust businesses to The Bank of
New York. For additional information on MSRs and
other intangible assets, see Notes 3 and 16 on
pages 97 and 121123 of this Annual Report.
Deposits
The Firms deposits represent a liability to
customers, both retail and wholesale, for funds
held on their behalf. Deposits are generally
classified by location (U.S. and non-U.S.), whether
they are interest- or noninterest-bearing, and by
type (demand, money market deposit accounts
(MMDAs), savings, time, negotiable order of
withdrawal (NOW) accounts), and help provide a
stable and consistent source of funding to the
Firm. Deposits increased by 15% from December 31,
2005. Growth in retail deposits reflected The Bank
of New York transaction, new account acquisitions,
and the ongoing expansion of the retail branch
distribution network. Wholesale deposits increased
driven by growth in business volumes. Partially
offsetting the growth in wholesale deposits was a
$24.0 billion decline as a result of the sale of
selected corporate trust businesses to The Bank of
New York. For more information on deposits, refer
to the RFS segment discussion and the Liquidity
risk management discussion on pages 3842 and
6263, respectively, of this Annual Report. For
more information on wholesale liability balances,
including deposits, refer to the CB and TSS segment
discussions on pages 4647 and 4849,
respectively, of this Annual Report.
Long-term debt and trust preferred capital debt securities
The Firm utilizes Long-term debt and trust
preferred capital debt securities as part of its
liquidity and capital management activities.
Long-term debt and trust preferred capital debt
securities increased by $25.7 billion, or 21%, from
December 31, 2005, primarily due to net new
issuances. Continued strong foreign investor
participation in the global corporate markets
allowed JPMorgan Chase to identify attractive
opportunities globally to further diversify its
funding and capital sources. During 2006, JPMorgan
Chase issued approximately $56.7 billion of
long-term debt and trust preferred capital debt
securities. These issuances were offset partially
by $34.3 billion of long-term debt and trust
preferred capital debt securities that matured or
were redeemed. For additional information on the
Firms long-term debt activities, see the Liquidity
risk management discussion on pages 6263 and Note
19 on pages 124125 of this Annual Report.
Stockholders equity
Total stockholders equity increased by $8.6
billion, or 8%, from year-end 2005 to $115.8 billion
at December 31, 2006. The increase was primarily
the result of Net income for 2006 and net shares
issued under the Firms employee stock-based
compensation plans, offset partially by the
declaration of cash dividends, stock repurchases, a
charge of $1.1 billion to Accumulated other
comprehensive income (loss) related to the
prospective adoption, as required on December 31,
2006, of SFAS 158 for the Firms defined benefit
pension and OPEB plans, and the redemption of
preferred stock. For a further discussion of
capital, see the Capital management section that
follows. For a further discussion of SFAS 158, see
Note 7 on pages 100105 of this Annual Report.
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56
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JPMorgan Chase & Co. / 2006 Annual Report |
CAPITAL MANAGEMENT
The Firms capital management framework is
intended to ensure that there is capital sufficient
to support the underlying risks of the Firms
business activities, as measured by economic risk
capital, and to maintain well-capitalized status
under regulatory requirements. In addition, the
Firm holds capital above these requirements in
amounts deemed appropriate to achieve managements
regulatory and debt rating objectives. The process
of assigning equity to the lines of business is
integrated into the Firms capital framework and is
overseen by ALCO.
Line of business equity
The Firms framework for allocating capital is based upon the following objectives:
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integrate firmwide capital management activities with capital management activities
within each of the lines of business; |
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|
measure performance consistently across all lines of business; and |
|
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|
provide comparability with peer firms for each of the lines of business. |
Equity for a line of business represents the amount
the Firm believes the business would require if it
were operating independently, incorporating
sufficient capital to address economic risk
measures, regulatory capital requirements and
capital levels for similarly rated peers. Return on
equity is measured and internal targets for
expected returns are established as a key measure
of a business segments performance.
Effective January 1, 2006, the Firm refined its
methodology for allocating capital to the lines of
business. As a result of this refinement, RFS, CS,
CB, TSS and AM had higher amounts of capital
allocated to them commencing in the first quarter
of 2006. The revised methodology considers for each
line of business, among other things, goodwill
associated with such line of business acquisitions
since the Merger. In managements view, the revised
methodology assigns responsibility to the lines of
business to generate returns on the amount of
capital supporting acquisition-related goodwill. As
part of this refinement in the capital allocation
methodology, the Firm assigned to the Corporate
segment an amount of equity capital equal to the
then-current book value of goodwill from and prior
to the Merger. As prior periods have not been
revised to reflect the new capital allocations,
capital allocated to the respective lines of
business for 2006 is not comparable to prior
periods; and certain business metrics, such as ROE,
are not comparable to the current presentation. The
Firm may revise its equity capital-allocation
methodology again in the future.
In accordance with SFAS 142, the lines of business
perform the required goodwill impairment testing.
For a further discussion of goodwill and impairment
testing, see Critical accounting estimates and Note
16 on pages 8385 and 121123, respectively, of
this Annual Report.
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|
|
|
|
|
|
|
Line of business equity |
|
Yearly Average |
|
(in billions) |
|
2006 |
|
|
2005 |
|
|
Investment Bank |
|
$ |
20.8 |
|
|
$ |
20.0 |
|
Retail Financial Services |
|
|
14.6 |
|
|
|
13.4 |
|
Card Services |
|
|
14.1 |
|
|
|
11.8 |
|
Commercial Banking |
|
|
5.7 |
|
|
|
3.4 |
|
Treasury & Securities Services |
|
|
2.3 |
|
|
|
1.5 |
|
Asset Management |
|
|
3.5 |
|
|
|
2.4 |
|
Corporate(a) |
|
|
49.7 |
|
|
|
53.0 |
|
|
Total common stockholders equity |
|
$ |
110.7 |
|
|
$ |
105.5 |
|
|
|
|
|
(a) |
|
2006 and 2005 include $41.7 billion and $43.1 billion, respectively, of equity
to offset goodwill and $8.0 billion and $9.9 billion, respectively, of equity, primarily
related to Treasury, Private Equity and the Corporate Pension Plan. |
Economic risk capital
JPMorgan Chase assesses its capital adequacy
relative to the risks underlying the Firms
business activities, utilizing internal
risk-assessment methodologies. The Firm assigns
economic capital primarily based upon four risk
factors: credit risk, market risk, operational risk
and private equity risk, principally for the Firms
private equity business.
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|
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|
|
Economic risk capital |
|
Yearly Average |
|
(in billions) |
|
2006 |
|
|
2005 |
|
|
Credit risk |
|
$ |
22.1 |
|
|
$ |
22.6 |
|
Market risk |
|
|
9.9 |
|
|
|
9.8 |
|
Operational risk |
|
|
5.7 |
|
|
|
5.5 |
|
Private equity risk |
|
|
3.4 |
|
|
|
3.8 |
|
|
Economic risk capital |
|
|
41.1 |
|
|
|
41.7 |
|
Goodwill |
|
|
43.9 |
|
|
|
43.1 |
|
Other(a) |
|
|
25.7 |
|
|
|
20.7 |
(b) |
|
Total common stockholders equity |
|
$ |
110.7 |
|
|
$ |
105.5 |
|
|
|
|
|
(a) |
|
Reflects additional capital required, in managements view, to meet its
regulatory and debt rating objectives. |
(b) |
|
Includes $2.1 billion of capital previously reported as business risk capital. |
Credit risk capital
Credit risk capital is estimated separately for
the wholesale businesses (IB, CB, TSS and AM) and
consumer businesses (RFS and CS).
Credit risk capital for the overall wholesale
credit portfolio is defined in terms of unexpected
credit losses, both from defaults and declines in
market value due to credit deterioration, measured
over a one-year period at a confidence level
consistent with the level of capitalization
necessary to achieve a targeted AA solvency
standard. Unexpected losses are in excess of those
for which provisions for credit losses are
maintained. In addition to maturity and
correlations, capital allocation is based upon
several principal drivers of credit risk: exposure
at default (or loan-equivalent amount), likelihood
of default, loss severity and market credit spread.
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Loan-equivalent amount for counterparty exposure in an over-the-counter derivative
transaction is represented by the expected positive exposure based upon potential
movements of underlying market rates. The loan-equivalent amount for unused revolving
credit facilities represents the portion of the unused commitment or other contingent
exposure that is expected, based upon average portfolio historical experience, to become
outstanding in the event of a default by an obligor. |
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Default likelihood is based upon current market conditions for all Investment Bank
clients by referencing equity and credit derivatives markets, as well as certain other
publicly traded entities that are not IB clients. This methodology facilitates, in the Firms view, more active risk management by utilizing
a dynamic, forward-looking measure of credit. This measure changes with the credit cycle
over time, impacting the level of credit risk capital. For privately held firms and
individuals in the Commercial Bank and Asset Management, default likelihood is based upon
longer-term averages through the credit cycles. |
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|
Loss severity of exposure is based upon the Firms average historical experience
during workouts, with adjustments to account for collateral or subordination. |
Credit risk capital for the consumer portfolio is
based upon product and other relevant risk
segmentation. Actual segment level default and
severity experience are used to estimate unexpected
losses for a one-year horizon at a confidence level
equivalent to the AA solvency standard.
Statistical results for certain segments or
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JPMorgan Chase & Co. / 2006 Annual Report
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57 |
Managements discussion and analysis
JPMorgan Chase & Co.
portfolios are adjusted to ensure that capital
is consistent with external benchmarks, such as
subordination levels on market transactions or
capital held at representative monoline
competitors, where appropriate.
Market risk capital
The Firm calculates market risk capital guided by
the principle that capital should reflect the risk
of loss in the value of portfolios and financial
instruments caused by adverse movements in market
variables, such as interest and foreign exchange
rates, credit spreads, securities prices and
commodities prices. Daily Value-at-Risk (VAR),
monthly stress-test results and other factors are
used to determine appropriate capital levels. The
Firm allocates market risk capital to each business
segment according to a formula that weights that
segments VAR and stress-test exposures. See Market
risk management on pages 7780 of this Annual
Report for more information about these market risk
measures.
Operational risk capital
Capital is allocated to the lines of business for
operational risk using a risk-based capital
allocation methodology which estimates operational
risk on a bottom-up basis. The operational risk
capital model is based upon actual losses and
potential scenario-based stress losses, with
adjustments to the capital calculation to reflect
changes in the quality of the control environment
or the use of risk-transfer products. The Firm
believes the model is consistent with the new Basel
II Framework and expects to propose it eventually
for qualification under the advanced measurement
approach for operational risk.
Private equity risk capital
Capital is allocated to privately- and
publicly-held securities, third-party fund
investments and commitments in the Private Equity
portfolio to cover the potential loss associated
with a decline in equity markets and related asset
devaluations.
Regulatory capital
The Firms federal banking regulator, the
Federal Reserve Board, establishes capital
requirements, including well-capitalized standards
for the consolidated financial holding company. The
Office of the Comptroller of the Currency (OCC)
establishes similar capital requirements and
standards for the Firms national banks, including
JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A.
On December 14, 2006, the federal banking
regulatory agencies announced an interim decision
that SFAS 158 will not impact regulatory capital.
Until further guidance is issued, any amounts
included in Accumulated other comprehensive income
(loss) within Stockholders equity related to the
adoption of SFAS 158 will be excluded from
regulatory capital. For further discussion of SFAS
158, refer to Note 7 on pages 100105 of this
Annual Report.
In the first quarter of 2006, the federal banking
regulatory agencies issued a final rule that
provides regulatory capital relief for certain cash-collateralized, securities-borrowed
transactions. The final rule, which became
effective February 22, 2006, also broadens the
types of transactions qualifying for regulatory
capital relief under the interim rule. Adoption of
the rule did not have a material effect on the
Firms capital ratios.
On March 1, 2005, the Federal Reserve Board issued
a final rule, which became effective April 11,
2005, that continues the inclusion of trust
preferred capital debt securities in Tier 1 capital, subject to
stricter quantitative limits and revised
qualitative standards, and broadens the definition
of restricted core capital elements. The rule
provides for a five-year transition period. As an
internationally active bank holding company,
JPMorgan Chase is subject to the rules limitation
on restricted core capital elements, including
trust preferred capital debt securities, to 15% of total core
capital elements, net of goodwill less any
associated deferred tax liability. At December 31,
2006, JPMorgan Chases restricted core capital
elements were 15.1% of total core capital elements.
The following tables show that JPMorgan Chase
maintained a well-capitalized position based upon
Tier 1 and Total capital ratios at December 31, 2006
and 2005.
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|
|
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|
|
Capital ratios |
|
|
|
|
|
|
|
|
|
Well-capitalized |
|
December 31, |
|
2006 |
|
|
2005 |
|
|
ratios |
|
|
Tier 1 capital ratio |
|
|
8.7 |
% |
|
|
8.5 |
% |
|
|
6.0 |
% |
Total capital ratio |
|
|
12.3 |
|
|
|
12.0 |
|
|
|
10.0 |
|
Tier 1 leverage ratio |
|
|
6.2 |
|
|
|
6.3 |
|
|
|
NA |
|
Total stockholders equity to assets |
|
|
8.6 |
|
|
|
8.9 |
|
|
|
NA |
|
|
|
|
|
|
|
|
|
|
|
Risk-based capital components and assets |
|
|
|
|
December 31, (in millions) |
|
2006 |
|
|
2005 |
|
|
Total Tier 1 capital |
|
$ |
81,055 |
|
|
$ |
72,474 |
|
Total Tier 2 capital |
|
|
34,210 |
|
|
|
29,963 |
|
|
Total capital |
|
$ |
115,265 |
|
|
$ |
102,437 |
|
|
Risk-weighted assets |
|
$ |
935,909 |
|
|
$ |
850,643 |
|
Total adjusted average assets |
|
|
1,308,699 |
|
|
|
1,152,546 |
|
|
Tier 1 capital was $81.1 billion at December
31, 2006, compared with $72.5 billion at December
31, 2005, an increase of $8.6 billion. The increase
was due primarily to Net income of $14.4 billion,
net issuances of common stock under the Firms
employee stock based compensation plans of $3.8
billion and $873 million of additional qualifying
trust preferred capital debt securities. Partially offsetting
these increases were changes in stockholders' equity net of
Accumulated other comprehensive income (loss) due
to dividends declared of $4.9 billion, common share
repurchases of $3.9 billion, the redemption of
preferred stock of $139 million, a $1.2 billion
increase in the deduction for goodwill and other
nonqualifying intangibles and a $563 million
reduction in qualifying minority interests.
Additional information regarding the Firms capital
ratios and the federal regulatory capital standards
to which it is subject is presented in Note 26 on
pages 129130 of this Annual Report.
Basel II
The Basel Committee on Banking Supervision
published the new Basel II Framework in 2004 in an
effort to update the original international bank
capital accord (Basel I), which has been in
effect since 1988. The goal of the Basel II
Framework is to make regulatory capital more risk-sensitive, and promote enhanced
risk management practices among large,
internationally active banking organizations.
U.S. banking regulators are in the process of
incorporating the Basel II Framework into the
existing risk-based capital requirements. JPMorgan
Chase will be required to implement advanced
measurement techniques in the U.S., commencing in
2009, by employing internal estimates of certain
key risk drivers to derive capital requirements.
Prior to its implementation of the new Basel II
Framework, JPMorgan Chase will be required to
demonstrate to its U.S. bank supervisors that its
internal criteria meet the relevant supervisory
standards. JPMorgan Chase expects to be in
compliance within the established timelines with
all relevant Basel II rules. During 2007 and 2008,
the Firm will adopt Basel II rules in certain
non-U.S. jurisdictions, as required.
Dividends
The Firms common stock dividend policy
reflects JPMorgan Chases earnings outlook, desired
dividend payout ratios, need to maintain an
adequate capital level and alternative investment
opportunities. In 2006, JPMorgan Chase declared
quarterly cash dividends on its common stock of
$0.34 per share. The Firm continues to target a
dividend payout ratio of 30-40% of net income over
time.
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58
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JPMorgan Chase & Co. / 2006 Annual Report |
The following table shows the common
dividend payout ratio based upon reported Net
income:
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|
|
|
|
|
|
|
|
|
|
Common dividend payout ratio |
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Common dividend payout ratio |
|
|
34 |
% |
|
|
57 |
% |
|
|
88 |
% |
|
For information regarding restrictions on
JPMorgan Chases ability to pay dividends, see
Note 25 on page 129 of this Annual Report.
Stock repurchases
On March 21, 2006, the Board of Directors
approved a stock repurchase program that authorizes
the repurchase of up to $8 billion of the Firms
common shares, which supercedes a $6 billion stock
repurchase program approved in 2004. The $8 billion
authorization includes shares to be repurchased to
offset issuances under the Firms employee
stock-based plans. The actual number of shares
repurchased is subject to various factors,
including: market conditions; legal considerations
affecting the amount and timing of repurchase
activity; the Firms capital position (taking into
account goodwill and intangibles); internal capital
generation; and alternative potential investment
opportunities. The repurchase program does not
include specific price targets or timetables; may
be executed through open market purchases or
privately negotiated transactions, or utilizing
Rule 10b5-1 programs; and may be suspended at any
time.
For the year ended December 31, 2006, under the
respective stock repurchase programs then in
effect, the Firm repurchased a total of 91 million
shares for $3.9 billion at an average price per
share of $43.41. Under the original $6 billion
stock repurchase program, during 2005, the Firm
repurchased 94 million shares for $3.4 billion at
an average price per share of $36.46.
As of December 31, 2006, $5.2 billion of authorized
repurchase capacity remained under the current stock
repurchase program.
The Firm has determined that it may, from time to
time, enter into written trading plans under Rule
10b5-1 of the Securities Exchange Act of 1934 to
facilitate the repurchase of common stock in
accordance with the repurchase program. A Rule
10b5-1 repurchase plan would allow the Firm to
repurchase shares during periods when it would not
otherwise be repurchasing common stock for
example, during internal trading black-out
periods. All purchases under a Rule 10b5-1 plan
must be made according to a predefined plan that is
established when the Firm is not aware of material
nonpublic information.
For additional information regarding repurchases
of the Firms equity securities, see Part II, Item
5, Market for registrants common equity, related
stockholder matters and issuer purchases of equity
securities, on page 11 of JPMorgan Chases 2006
Form 10-K.
OFFBALANCE SHEET ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS
Special-purpose entities
JPMorgan Chase is involved with several types
of offbalance sheet arrangements, including
special purpose entities (SPEs), lines of credit
and loan commitments. The principal uses of SPEs
are to obtain sources of liquidity for JPMorgan
Chase and its clients by securitizing financial
assets, and to create other investment products for
clients. These arrangements are an important part
of the financial markets, providing market
liquidity by facilitating investors access to
specific portfolios of assets and risks. For
example, SPEs are integral to the markets for
mortgage-backed securities, commercial paper and
other asset-backed securities.
The basic SPE structure involves a company selling
assets to the SPE. The SPE funds the purchase of
those assets by issuing securities to investors. To
insulate investors from creditors of other
entities, including the seller of assets, SPEs are
generally structured to be bankruptcy-remote.
JPMorgan Chase is involved with SPEs in three broad
categories: loan securitizations, multi-seller
conduits and client intermediation. Capital is
held, as deemed appropriate, against all
SPE-related transactions and related exposures,
such as derivative transactions and lending-related
commitments. For further discussion of SPEs and the
Firms accounting for these types of exposures, see
Note 1 on page 94, Note 15 on pages 118120 and
Note 16 on pages 121123 of this Annual Report.
The Firm has no commitments to issue its own stock
to support any SPE transaction, and its policies
require that transactions with SPEs be conducted at
arms length and reflect market pricing. Consistent
with this policy, no JPMorgan Chase employee is
permitted to invest in SPEs with which the Firm is
involved where such investment would violate the
Firms Code of Conduct. These rules prohibit
employees from self-dealing and acting on behalf of
the Firm in transactions with which they or their
family have any significant financial interest.
For certain liquidity commitments to SPEs, the
Firm could be required to provide funding if the
short-term credit rating of JPMorgan Chase Bank,
N.A. were downgraded below specific levels,
primarily P-1, A-1 and F1 for Moodys, Standard &
Poors and Fitch, respectively. The amount of
these liquidity commitments was $74.4 billion and
$71.3 billion at December 31, 2006 and 2005, respectively. Alternatively, if JPMorgan Chase
Bank, N.A. were downgraded, the Firm could be
replaced by another liquidity provider in lieu of
providing funding
under the liquidity commitment, or, in certain
circumstances, could facilitate the sale or
refinancing of the assets in the SPE in order to
provide liquidity.
Of the $74.4 billion in liquidity commitments to
SPEs at December 31, 2006, $74.0 billion was
included in the Firms other unfunded commitments
to extend credit and asset purchase agreements, as
shown in the table on the following page. Of the $71.3 billion
of liquidity commitments to SPEs at December 31,
2005, $38.9 billion was included in the Firms
other unfunded commitments to extend credit and
asset purchase agreements. Of these commitments,
$356 million and $32.4 billion have been excluded
from the table at December 31, 2006 and 2005,
respectively, as the underlying assets of the SPEs
have been included on the Firms Consolidated
balance sheets due to the consolidation of certain
multi-seller conduits as required under FIN 46R.
The decrease from the 2005 year end is due to the
deconsolidation during the 2006 second quarter of
several multi-seller conduits administrated by the
Firm. For further information, refer to Note 15 on
pages 118120 of this Annual Report.
The Firm also has exposure to certain SPEs
arising from derivative transactions; these
transactions are recorded at fair value on the
Firms Consolidated balance sheets with changes
in fair value (i.e., mark-to-market (MTM) gains
and losses) recorded in Principal transactions.
Such MTM gains and losses are not included in the
revenue amounts reported in the following table.
The following table summarizes certain revenue
information related to consolidated and
nonconsolidated variable interest entities (VIEs)
with which the Firm has significant involvement,
and qualifying SPEs (QSPEs). The revenue reported
in the table below primarily represents servicing
and credit fee income. For further discussion of
VIEs and QSPEs, see Note 1, Note 14 and Note 15, on
pages 94, 114118 and 118120, respectively, of
this Annual Report.
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from VIEs and QSPEs |
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
|
|
|
|
|
|
(in millions) |
|
VIEs |
(c) |
|
QSPEs |
|
|
Total |
|
|
2006 |
|
$ |
209 |
|
|
$ |
3,183 |
|
|
$ |
3,392 |
|
2005(a) |
|
|
222 |
|
|
|
2,940 |
|
|
|
3,162 |
|
2004(a)(b) |
|
|
154 |
|
|
|
2,732 |
|
|
|
2,886 |
|
|
|
|
|
(a) |
|
Prior-period results have been restated to reflect current methodology. |
(b) |
|
2004 results include six months of the combined Firms results and six months of
heritage JPMorgan Chase results. |
(c) |
|
Includes VIE-related revenue (i.e., revenue associated with consolidated and
significant nonconsolidated VIEs). |
|
|
|
|
|
|
|
|
|
JPMorgan Chase & Co. / 2006 Annual Report
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|
59 |
Managements discussion and analysis
JPMorgan Chase & Co.
Offbalance sheet lending-related financial instruments and guarantees
JPMorgan Chase utilizes lending-related
financial instruments (e.g., 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 counterparty draw
down the commitment or the Firm be required to
fulfill its obligation under the guarantee, and the
counterparty subsequently fail to perform according to the terms of the contract.
Most of these commitments and guarantees expire
without a default occurring or without being drawn.
As a result, the total contractual amount of these
instruments is not, in the Firms view,
representative of its actual future credit exposure
or funding requirements. Further, certain
commitments, primarily related to consumer
financings, are cancelable, upon notice, at the
option of the Firm. For further discussion of
lending-related commitments and guarantees and the
Firms accounting for them, see Credit risk
management on pages 6476 and Note 29 on pages
132134 of this Annual Report.
Contractual cash obligations
In the normal course of business, the Firm
enters into various contractual obligations that
may require future cash payments. Commitments for
future cash expenditures primarily include
contracts to purchase future services and capital
expenditures related to real estaterelated
obligations and equipment.
The accompanying table summarizes, by remaining
maturity, JPMorgan Chases offbalance sheet
lending-related financial instruments and
significant contractual cash obligations at
December 31, 2006. Contractual purchases and
capital expenditures in the table below reflect the
minimum contractual obligation under legally
enforceable contracts with terms that are both
fixed and determinable. Excluded from the following
table are a number of obligations to be settled in
cash, primarily in under one year. These
obligations are reflected on the Firms
Consolidated balance sheets and include Federal
funds purchased and securities sold under
repurchase agreements; Other borrowed funds;
purchases of Debt and equity instruments;
Derivative payables; and certain purchases of
instruments that resulted in settlement failures.
For discussion regarding Long-term debt and trust
preferred capital securities, see Note 19 on pages
124125 of this Annual Report. For discussion
regarding operating leases, see Note 27 on page 130
of this Annual Report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet lending-related financial instruments and guarantees |
|
|
|
2006 |
|
|
|
|
By remaining maturity at December 31, |
|
Under |
|
|
1<3 |
|
|
35 |
|
|
Over |
|
|
|
|
|
|
2005 |
|
(in millions) |
|
1 year |
|
|
years |
|
|
years |
|
|
5 years |
|
|
Total |
|
|
Total |
|
|
Lending-related |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer(a) |
|
$ |
677,784 |
|
|
$ |
3,807 |
|
|
$ |
3,604 |
|
|
$ |
62,340 |
|
|
$ |
747,535 |
|
|
$ |
655,596 |
|
Wholesale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other unfunded commitments to extend
credit(b)(c)(d) |
|
|
92,829 |
|
|
|
52,465 |
|
|
|
67,250 |
|
|
|
16,660 |
|
|
|
229,204 |
|
|
|
208,469 |
|
Asset purchase agreements(e) |
|
|
20,847 |
|
|
|
38,071 |
|
|
|
7,186 |
|
|
|
1,425 |
|
|
|
67,529 |
|
|
|
31,095 |
|
Standby letters of credit and
guarantees(c)(f)(g) |
|
|
23,264 |
|
|
|
21,286 |
|
|
|
38,812 |
|
|
|
5,770 |
|
|
|
89,132 |
|
|
|
77,199 |
|
Other letters of credit(c) |
|
|
4,628 |
|
|
|
823 |
|
|
|
101 |
|
|
|
7 |
|
|
|
5,559 |
|
|
|
4,346 |
|
|
Total wholesale |
|
|
141,568 |
|
|
|
112,645 |
|
|
|
113,349 |
|
|
|
23,862 |
|
|
|
391,424 |
|
|
|
321,109 |
|
|
Total lending-related |
|
$ |
819,352 |
|
|
$ |
116,452 |
|
|
$ |
116,953 |
|
|
$ |
86,202 |
|
|
$ |
1,138,959 |
|
|
$ |
976,705 |
|
|
Other guarantees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities lending guarantees(h) |
|
$ |
318,095 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
318,095 |
|
|
$ |
244,316 |
|
Derivatives qualifying as guarantees(i) |
|
|
13,542 |
|
|
|
10,656 |
|
|
|
24,414 |
|
|
|
22,919 |
|
|
|
71,531 |
|
|
|
61,759 |
|
|
Contractual cash obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
$ |
195,187 |
|
|
$ |
5,314 |
|
|
$ |
2,329 |
|
|
$ |
1,519 |
|
|
$ |
204,349 |
|
|
$ |
147,381 |
|
Long-term debt |
|
|
28,272 |
|
|
|
41,015 |
|
|
|
28,189 |
|
|
|
35,945 |
|
|
|
133,421 |
|
|
|
108,357 |
|
Trust preferred capital debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,209 |
|
|
|
12,209 |
|
|
|
11,529 |
|
FIN 46R long-term beneficial interests(j) |
|
|
70 |
|
|
|
63 |
|
|
|
413 |
|
|
|
7,790 |
|
|
|
8,336 |
|
|
|
2,354 |
|
Operating leases(k) |
|
|
1,058 |
|
|
|
1,995 |
|
|
|
1,656 |
|
|
|
6,320 |
|
|
|
11,029 |
|
|
|
9,734 |
|
Contractual purchases and capital expenditures |
|
|
770 |
|
|
|
524 |
|
|
|
154 |
|
|
|
136 |
|
|
|
1,584 |
|
|
|
2,324 |
|
Obligations under affinity and co-brand programs |
|
|
1,262 |
|
|
|
2,050 |
|
|
|
1,906 |
|
|
|
897 |
|
|
|
6,115 |
|
|
|
6,877 |
|
Other liabilities(l) |
|
|
638 |
|
|
|
718 |
|
|
|
769 |
|
|
|
3,177 |
|
|
|
5,302 |
|
|
|
11,646 |
|
|
Total |
|
$ |
227,257 |
|
|
$ |
51,679 |
|
|
$ |
35,416 |
|
|
$ |
67,993 |
|
|
$ |
382,345 |
|
|
$ |
300,202 |
|
|
|
|
|
(a) |
|
Includes Credit card lending-related commitments of $657 billion and $579
billion at December 31, 2006 and 2005, respectively, that represent the total available
credit to the Firms cardholders. The Firm has not experienced, and does not anticipate,
that all of its cardholders will utilize their entire available lines of credit at the
same time. The Firm can reduce or cancel a credit card commitment by providing the
cardholder prior notice or, in some cases, without notice as permitted by law. |
(b) |
|
Includes unused advised lines of credit totaling $39.0 billion and $28.3 billion
at December 31, 2006 and 2005, respectively, which are not legally binding. In regulatory
filings with the Federal Reserve Board, unused advised lines are not reportable. |
(c) |
|
Represents contractual amount net of risk participations totaling $32.8 billion
and $29.3 billion at December 31, 2006 and 2005, respectively. |
(d) |
|
Excludes unfunded commitments to private third-party equity funds of $589
million and $242 million at December 31, 2006 and 2005, respectively. |
(e) |
|
The maturity is based upon the weighted-average life of the underlying assets in
the SPE, which are primarily multi-seller asset-backed commercial paper conduits.
Represents asset purchase agreements with the Firms administered multi-seller
asset-backed commercial paper conduits, which excludes $356 million and $32.4 billion at
December 31, 2006 and 2005, respectively, related to conduits that were consolidated in
accordance with FIN 46R, as the underlying assets of the conduits are reported in the
Firms Consolidated balance sheets. It also includes $1.4 billion and $1.3 billion of
asset purchase agreements to other third-party entities at December 31, 2006 and 2005,
respectively. Certain of the Firms administered multi-seller conduits were deconsolidated
as of June 2006; the assets deconsolidated were approximately $33 billion. |
(f) |
|
JPMorgan Chase held collateral relating to $13.5 billion and $9.0 billion of
these arrangements at December 31, 2006 and 2005, respectively. |
(g) |
|
Includes unused commitments to issue standby letters of credit of $45.7 billion
and $37.5 billion at December 31, 2006 and 2005, respectively. |
(h) |
|
Collateral held by the Firm in support of securities lending indemnification
agreements was $317.9 billion and $245.0 billion at December 31, 2006 and 2005,
respectively. |
(i) |
|
Represents notional amounts of derivatives qualifying as guarantees. For further
discussion of guarantees, see Note 29 on pages 132134 of this Annual Report. |
(j) |
|
Included on the Consolidated balance sheets in Beneficial interests issued by
consolidated VIEs. |
(k) |
|
Excludes benefit of noncancelable sublease rentals of $1.2 billion and $1.3
billion at December 31, 2006 and 2005, respectively. |
(l) |
|
Includes deferred annuity contracts. Excludes contributions for pension and other
postretirement benefits plans, if any, as these contributions are
not reasonably estimatable at this time. |
|
|
|
|
|
|
|
|
|
60
|
|
JPMorgan Chase & Co. / 2006 Annual Report |
RISK MANAGEMENT
Risk is an inherent part of JPMorgan Chases
business activities. The Firms risk management
framework and governance structure are intended to
provide comprehensive controls and ongoing
management of the major risks inherent in its
business activities. The Firms ability to
properly identify, measure, monitor and report
risk is critical to both its soundness and
profitability.
|
|
Risk identification: The Firms exposure to risk through its daily business
dealings, including lending, trading and capital markets activities, is identified and
aggregated through the Firms risk management infrastructure. |
|
|
|
Risk measurement: The Firm measures risk using a variety of methodologies, including
calculating probable loss, unexpected loss and value-at-risk, and by conducting stress
tests and making comparisons to external benchmarks. Measurement models and related
assumptions are routinely reviewed with the goal of ensuring that the Firms risk
estimates are reasonable and reflect underlying positions. |
|
|
|
Risk monitoring/control: The Firms risk management policies and procedures
incorporate risk mitigation strategies and include approval limits by customer, product,
industry, country and business. These limits are monitored on a daily, weekly and monthly
basis, as appropriate. |
|
|
|
Risk reporting: Risk reporting is executed on a line of business and consolidated
basis. This information is reported to management on a daily, weekly and monthly basis, as
appropriate. |
There are eight major risk types identified in the
business activities of the Firm: liquidity risk,
credit risk, market risk, interest rate risk,
private equity risk, operational risk, legal and
reputation risk, and fiduciary risk.
Risk governance
The Firms risk governance structure starts with
each line of business being responsible for
managing its own risk. Each line of business
works closely with Risk Management of the Firm,
through its own risk committee and, in most
cases, its own chief risk officer. Each risk
committee is responsible for decisions regarding
the business risk strategy, policies and
controls.
Overlaying the line of business risk management
are five corporate functions with risk
managementrelated responsibilities, including
the Asset-Liability Committee, Treasury, Chief
Investment Office, Office of the General Counsel
and Risk Management.
The Asset-Liability Committee is responsible for
approving the Firms liquidity policy, including
contingency funding planning and exposure to SPEs
(and any required liquidity support by the Firm of
such SPEs). The committee also oversees the Firms
capital management and funds transfer pricing
policy (through which lines of business transfer
interest and foreign exchange risk to Treasury in
the Corporate segment). The Committee is composed
of the Firms Chief Financial Officer, Chief Risk
Officer, Chief Investment Officer, Corporate
Treasurer and the Chief Financial Officers of each
line of business.
Treasury and the Chief Investment Office are
responsible for measuring, monitoring, reporting
and managing the Firms liquidity, interest rate
and foreign exchange risk.
The Office of the General Counsel has oversight
for legal and reputation and fiduciary risks.
Risk Management is responsible for providing a
firmwide function of risk management and controls.
Within Risk Management are units responsible for
credit risk, market risk, operational risk and
private equity risk, as well as Risk Management
Services and Risk Technology and Operations. Risk
Management Services is responsible for risk policy
and methodology, risk reporting and risk education;
and Risk Technology and Operations is responsible
for building the information technology
infrastructure used to monitor and manage risk.
Risk Management is headed by the Firms Chief Risk
Officer, who is a member of the Operating Committee
and reports to the Chief Executive Officer and the
Board of Directors, primarily through the Boards
Risk Policy Committee and Audit Committee. The
person who filled the position of Chief Risk
Officer during 2006 retired at the end of the year.
Until his replacement is named, the Firms Chief
Executive Officer is acting as the interim Chief
Risk Officer.
In addition to the risk committees of the lines of
business and the above-referenced corporate
functions, the Firm also has an Investment
Committee, which oversees global merger and
acquisition activities undertaken by JPMorgan
Chase for its own investment account, that fall
outside the scope of the Firms private equity and
other principal finance activities.
|
|
|
|
|
|
|
|
|
JPMorgan Chase & Co. / 2006 Annual Report
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|
61 |
Managements discussion and analysis
JPMorgan Chase & Co.
The Board of Directors exercises its oversight
of risk management, principally through the Boards
Risk Policy Committee and Audit Committee. The Risk
Policy Committee oversees senior management
risk-related responsibilities, including reviewing
management policies and performance against these
policies and related benchmarks. The Audit
Committee is responsible for oversight
of guidelines and policies that govern the process
by which risk assessment and management is
undertaken. In addition, the Audit Committee
reviews with management the system of internal
controls and financial reporting that is relied
upon to provide reasonable assurance of compliance
with the Firms operational risk management
processes.
LIQUIDITY RISK MANAGEMENT
Liquidity risk arises from the general funding
needs of the Firms activities and in the
management of its assets and liabilities. JPMorgan
Chases liquidity management framework is intended
to maximize liquidity access and minimize funding
costs. Through active liquidity management the Firm
seeks to preserve stable, reliable and
cost-effective sources of funding. This access
enables the Firm to replace maturing obligations
when due and fund assets at appropriate maturities
and rates. To accomplish this, management uses a
variety of measures to mitigate liquidity and
related risks, taking into consideration market
conditions, prevailing interest rates, liquidity
needs and the desired maturity profile of
liabilities, among other factors.
The three primary measures of the Firms liquidity position include the following:
|
|
Holding company short-term position: Holding company short-term position measures
the parent holding companys ability to repay all obligations with a maturity of less than
one year at a time when the ability of the Firms subsidiaries to pay dividends to the
parent company is constrained. |
|
|
|
Cash capital position: Cash capital position is a measure intended to ensure the
illiquid portion of the balance sheet can be funded by equity, long-term debt, trust
preferred capital debt securities and deposits the Firm believes to be core. |
|
|
|
Basic surplus: Basic surplus measures the Banks ability to sustain a 90- day stress
event that is specific to the Firm where no new funding can be raised to meet obligations
as they come due. |
Liquidity is managed so that, based upon the
measures described above, management believes
there is sufficient surplus liquidity.
An extension of liquidity management is the Firms
contingency funding plan. The goal of the plan is
to ensure appropriate liquidity during normal and
stress periods. The plan considers numerous
temporary and long-term stress scenarios where
access to unsecured funding is severely limited or
nonexistent, taking into account both on and
offbalance sheet exposures, separately evaluating
access to funds by the parent holding company,
JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A.
Part of the Firms contingency funding plan is its
ratings downgrade analysi